As
filed
with the Securities and Exchange Commission on April 14, 2008
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
(
Exact
name of registrant as specified in its charter
)
Nevada
(
State
or other jurisdiction of incorporation or organization
)
3433
(
Primary
Standard Industrial Classification Code Number
)
95-3819300
(
I.R.S.
Employer Identification Number
)
Building
3 No 28, Feng Tai North Road,
Beijing
China 100071
+86-10-63850516
(
Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices
)
United
Corporate Services, Inc.
202
South Minnesota Street
Carson
City, Nevada 89703
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to
:
Darren
Ofsink, Esq.
GUZOV
OFSINK LLC
600
Madison Avenue, 14
th
Floor,
New
York, NY 10022
Approximate
date of commencement of proposed sale to the public
:
From
time to time after the Registration Statement has been declared effective.
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
x
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of earlier effective registration statement
for the same offering
.
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
definitions of a “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated
filer
o
(Do
not check if a smaller reporting company)
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Smaller
reporting company
x
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CALCULATION
OF REGISTRATION FEE
Title
of each class of securities to be registered
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Amount
to be registered (1)
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Proposed
maximum offering price per share (2)
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Proposed
maximum aggregate offering price
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Amount
of
registration
fee
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Common
stock, par value $.001 per share
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4,691,499
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$
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1.93
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$
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9,054,593
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$
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356
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Common
stock, par value $.001 per share, underlying warrants
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469,150
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(3
)
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$
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1.93
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$
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905,460
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$
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36
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Total
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5,160,649
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1.93
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$
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9,960,053
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$
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392
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(1)
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Pursuant
to Rule 416 promulgated under the Securities Act of 1933, as amended,
there are also registered hereunder such indeterminate number of
additional shares as may be issued to the selling stockholders to
prevent
dilution resulting from stock splits, stock dividends or similar
transactions
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(2)
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The
registration fee was calculated pursuant to Rule 457(c). As of the
date of
this prospectus, our common stock is quoted under the symbol "CSOL.OB"
on
the NASD's Over-the-Counter Bulletin Board (“OTCBB”). On April 7, 2008,
the last reported bid price was $1.91 per share and the last reported
asked price was $1.95 per share. The average of the bid and asked
price
was $1.93 per share. Accordingly, the registration fee is $392 based
on
$1.93 per share.
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(3)
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Includes
shares of common stock underlying five year warrants to
purchase 469,150 shares of common stock with an exercise price of
$2.88 per share (subject to as
adjustment).
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The
Registrant amends this registration statement on such date or dates as may
be
necessary to delay its effective date until the registrant shall file a further
amendment which specifically states that this registration statement shall
hereafter become effective in accordance with Section 8(a) of the Securities
Act
of 1933, or until the registration statement shall become effective on such
date
as the Commission, acting pursuant to Section 8(a), may
determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT
TO COMPLETION, DATED APRIL 14, 2008
PRELIMINARY
PROSPECTUS
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
4,691,499
Shares
of Common Stock
469,150
Shares
of Common Stock
(underlying
Warrants)
Offered
by Selling Stockholders
This
prospectus relates to the sale by the selling stockholders identified in this
prospectus of up to 5,160,649 shares of our common stock including 469,150
shares they may acquire on exercise of warrants. The shares of common stock
were
issued to the selling stockholders in a private placement completed on February
29, 2008. The warrants were issued to the placement agent in connection with
the
private placement, have an exercise price of $2.88 per share (subject to
adjustment) and expire on February 29, 2013.
The
selling stockholders may offer all or part of their shares for resale from
time
to time through public or private transactions, at either prevailing market
prices or at privately negotiated prices. We will not receive any of the
proceeds from the sale of the shares by the selling stockholders. To the extent
the placement agent warrants are exercised for cash, if at all, we will receive
the exercise price for those warrants. Under the terms of the warrants cashless
exercise is permitted but not until after February 28, 2009 and only then if
the
underlying shares have not been registered. We will pay all of the registration
expenses incurred in connection with this offering (estimated to be
approximately $86,000) but the selling stockholders will pay all of the selling
commissions, brokerage fees and related expenses.
Our
common stock is quoted on the National Association of Securities Dealers
Over-the-Counter Bulletin Board under the symbol "CSOL.OB". As of April 7,
2008, the closing price was $1.91 per share.
There
is
a limited trading market for our common stock. We cannot give you any assurance
that a more active trading market in our common stock will develop, or if such
a
market does develop, that it will continue.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 6
for a discussion of certain risk factors that you should consider.
You
should read the entire prospectus before making an investment
decision.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is April __, 2008
TABLE
OF CONTENTS
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About
This Prospectus
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1
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Cautionary
Note Regarding Forward Looking Statements and Other Information Contained
in this Prospectus
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1
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Prospectus
Summary
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2
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Risk
Factors
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6
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Selling
Stockholders
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20
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Plan
of Distribution
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24
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Use
of Proceeds
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25
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Market
Price of and Dividends of our Common Stock and Related Stockholder
Matters
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25
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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28
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Business
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34
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Properties
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52
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S
Security Ownership of Certain Beneficial Owners and Management
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54
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Directors
and Executive Officers
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55
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Executive
Compensation
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57
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Certain
Relationships and Related Transactions
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59
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Description
of Securities to be Registered
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59
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Legal
Matters
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60
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Interests
of Named Experts and Counsel
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Changes
in and Disagreements with Accountants
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Financial
Statements
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Where
You Can Find More Information
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62
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ABOUT
THIS PROSPECTUS
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information other than that contained
in
this prospectus. The selling stockholders are offering to sell and seeking
offers to buy shares of our common stock, including shares they acquire on
exercise of their warrants, only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as
of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. The prospectus will be updated
and updated prospectuses made available for delivery to the extent required
by
the federal securities laws.
No
person
is authorized in connection with this prospectus to give any information or
to
make any representations about us, the selling stockholders, the securities
or
any matter discussed in this prospectus, other than the information and
representations contained in this prospectus. If any other information or
representation is given or made, such information or representation may not
be
relied upon as having been authorized by us or any selling stockholder. This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy the securities in any circumstances under which the offer or solicitation
is unlawful. Neither the delivery of this prospectus nor any distribution of
securities in accordance with this prospectus shall, under any circumstances,
imply that there has been no change in our affairs since the date of this
prospectus. The prospectus will be updated and updated prospectuses made
available for delivery to the extent required by the federal securities laws.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS
This
prospectus contains some forward-looking statements. Forward-looking statements
give our current expectations or forecasts of future events. You can identify
these statements by the fact that they do not relate strictly to historical
or
current facts. Forward
-looking
statements involve risks and uncertainties. Forward-looking statements include
statements regarding, among other things, (a) our projected sales, profitability
and cash flows, (b) our growth strategies, (c) anticipated trends in our
industries, (d) our future financing plans and (e) our anticipated needs for
working capital. They are generally identifiable by use of the words "may,"
"will," "should," "anticipate," "estimate," "plans," “potential," "projects,"
"continuing," "ongoing," "expects," "management believes," "we believe," "we
intend" or the negative of these words or other variations on these words or
comparable terminology. These statements may be found under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as in this prospectus generally.
In
particular, these include statements relating to future actions, prospective
products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies
such
as legal proceedings, and financial results.
Any
or
all of our forward-looking statements in this prospectus may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or
by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially
as
a
result of various factors, including, without limitation, the risks outlined
under "Risk Factors" and matters described in this prospectus generally. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur. You
should not place undue reliance on these forward-looking statements.
Currency
Unless
otherwise noted, all currency figures in this filing are in U.S.dollars.
References to "yuan" or "RMB" are to the Chinese yuan (also known as the
Renminbi). According to xe.com as of April 7, 2008, $1 = 7.0100
yuan.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. This
summary does not contain all of the information you should consider before
investing in our common stock. You should read the entire prospectus, including
"Risk Factors" and the consolidated financial statements and the related notes
before making an investment decision. Except as otherwise specifically stated
or
unless the context otherwise requires, the “Company,” we," "our" and "us" refers
collectively to
(i)
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China
Solar & Clean Energy Solutions, Inc. ("China Solar") formerly known
as Deli Solar (USA)
Inc.;
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(ii)
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Deli
Solar Holding Ltd. ("Deli Solar (BVI)"), a wholly-owned subsidiary
of China Solar and a limited liability company organized under the
International Business Companies Act of the British Virgin Islands;
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(iii)
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Bazhou
Deli Solar Energy Heating Co., Ltd. ("Deli Solar Bazhou”), a wholly-owned
subsidiary of Deli Solar (BVI) and a limited liability company organized
under the laws of the PRC;
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(iv)
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Beijing
Deli Solar Technology Development Co. (“Deli Solar
(Beijing)”
),
a
wholly-owned subsidiary of China Solar and a limited liability
company organized under the laws of the
PRC;
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(v)
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Shenzhen PengSangPu
Solar Industrial Products Corporation
(“
SZPSP”),
a wholly - owned subsidiary of Deli Solar (Beijing); and
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(vi)
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Tianjin
Huaneng Group Energy Equipment Co., Ltd. (“Tianjin Huaneng”), a majority -
owned subsidiary of Deli Solar (Beijing).
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The
Company
Business
Overview
We
are
engaged in the solar and renewable energy business in the People's Republic
of
China (“PRC”).
Our
business is conducted through our wholly-owned PRC based operating subsidiaries,
Deli Solar (Bazhou) and Deli Solar (Beijing) and our recently acquired indirect
operating subsidiaries SZPSP and Tianjin Huaneng.
Deli
Solar (Bazhou), founded in 1997, designs, manufactures and sells renewable
energy systems to produce hot water and for space heating in the PRC. Deli
Solar
(Bazhou)’s principal products are solar hot water heaters and multifunctional
space heating products, including coal-fired boilers for residential use. Deli
Solar (Bazhou) also sells component parts for its systems, and provides
after-sales maintenance and repair services.
Most
end
users of Deli Solar (Bazhou)’s products use them to heat water for their homes,
with a concentration in rural areas where electricity is in short supply. Deli
Solar (Bazhou)’s coal-fired boilers, furnaces and heating stoves are also used
as primary household space heaters during cold weather and as cooking stoves.
Deli
Solar (Beijing), established during the second quarter of 2006, is
principally engaged in the installation of large solar water heaters in
construction projects in major cities in the PRC, including Beijing.
Tianjin
Huaneng, acquired in July 2007, manufactures and installs waste heat recovery
systems primarily for use in manufacturing facilities whose manufacturing
processes require the generation of large amounts of heat, such as steel and
chemical plants. The waste heat can be used to generate hot water at the
manufacturing facilities Tianjin Huaneng’s products include heating pipes, heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators. Products and systems manufactured and sold by Tianjin
Huaneng during the period from July 1, 2007 (the date of acquisition) through
December 31, 2007 represented 19% of our sales revenues for the fiscal year
ended December 31, 2007. Tianjin Huaneng’s products are sold in more than 28
provinces in the PRC as well as Singapore, Indonesia, and North
Korea.
SZPSP,
which we acquired effective March 31, 2008, is principally engaged in the resale
of energy-saving heating products such as heat pipes, heat exchangers, pressure
water boilers, solar energy water heaters and radiators. Currently, SZPSP
is also operating a distribution facility in Shenzhen, PRC. This acquisition
will add to the assortment of solar water products which we have available
for
sale.
For
the
fiscal year ended December 31, 2007 approximately 47% of our sales revenues
were
derived from sales of our solar water heaters, 34%
were
derived
from sales of our coal-fired boilers, space heating and other products and
19%
were derived from sales of heat exchange equipment.
For
the
fiscal year ended December 31, 2007, approximately 88% of our sales revenues
were derived from sales made to PRC based customers and approximately 12% were
derived from the international market.
Products
Solar
Hot Water Heaters
We
manufacture two types of solar hot water heaters: evacuated tubular solar water
heaters and flat plate solar water heaters. Our solar water heaters are
primarily used to generate hot water for residential use. Among evacuated
tubular solar water heaters, regular evacuated tubular solar water heaters
using
all-glass vacuum collectors are our best selling product, comprising
approximately 85% of our total solar water heater revenues for 2007. This type
of solar water heater can generate hot water even in cold weather and therefore
can be used throughout the year. Further, these water heaters are relatively
easy and inexpensive to produce compared to other solar hot water heaters using
other types of vacuum collectors. Because our primary market is in rural areas
of the PRC, our regular evacuated tubular solar water heaters annually account
for most of our sales.
Boilers
We
also
manufacture boilers, furnaces, stove heating, and space heating products. Most
of our boilers and space heating products are coal-fired, small scale units
for
residential space heating and cooking.
Sales
of
our hot water heaters and boilers comprised approximately 72% of our total
sales
revenues in 2007.
Heat
Pipe Related Products
We
also
manufacture waste heat recovery systems, heating products such as heating pipes,
heat exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators.
Sales
of
these products and systems comprised approximately 19% of our total sales
revenues in 2007.
Employees
As
of
March 24, 2008 we had approximately 815 full time employees and 250 part time
employees.
Executive
Offices
Our
executive offices are located at Building 3, No. 28 Feng Tai North Road,
Beijing, China, 100071 and our telephone number is +86-10-63850516.
The
Offering
Offering
by Selling Stockholders
This
prospectus relates to the resale by the selling stockholders identified in
this
prospectus of up to 5,160,649 shares of our common stock including 469,150
shares which may be acquired on exercise of the warrants issued to the placement
agent. The shares of common stock were purchased by the selling stockholders
in
a private placement made exclusively to accredited investors on February 25,
2008. The warrants were acquired by the placement agent for services rendered
in
connection with the private placement. The shares may be offered for sale by
the
selling stockholders from time to time. No shares are being offered for sale
by
the Company.
Common
stock outstanding prior to Offering
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13,136,305
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Common
stock offered by the Company
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0
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Total
shares of common stock offered by selling stockholders
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5,160,649
representing 37.9% of the shares of common stock currently
outstanding.
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Common
stock to be outstanding after the offering (assuming all placement
agent
warrants being registered have been exercised)
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13,605,455
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Total dollar
value of common stock and placement agent warrants being
registered
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The
closing market price for the common stock on February 29, 2008, the
date
of the sale of the shares of common stock in the private placement
was
$2.71. Using this value the dollar value of the 5,160,649 shares
of common
stock (including the 469,150 shares underlying the warrants) being
registered is $13,985,358.
The
closing market price for the common stock on April 7, 2008 was $1.91.
Using this value the total dollar value of the 5,160,649 shares of
common
stock (including 469,150 shares underlying the warrants) being registered
is $9,856,839.
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Use
of Proceeds
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We
will not receive any of the proceeds from the sales of the shares
by the
selling stockholders. To the extent the placement agent warrants
are
exercised for cash, if at all, we will receive the exercise price
for
those warrants. Under the terms of the placement agent warrants cashless
exercise is permitted but only after one year and then only if the
underlying shares have not been registered. We intend to use any
cash
proceeds received from the exercise of the placement agent warrants
for
working capital and other general corporate purposes. We cannot assure
you
that any of those warrants will ever be exercised for cash or at
all.
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Our
OTC Bulletin Board Trading Symbol
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CSOL.OB
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Risk
Factors
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See
"Risk Factors" beginning on page 6
and
other information included in this prospectus for a discussion of
factors
you should consider before deciding to invest in shares of our common
stock.
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Background
On
February 29, 2008, we completed a private placement of 4,691,499 shares of
our
common stock for an aggregate purchase price of approximately $11,300,000.
We
received $9,995,156 as net proceeds from this financing.
In
connection with the transaction we agreed to issue to Roth Capital Partners
LLC
as placement agent, warrants to purchase 469,150 shares of common stock
exercisable for a period of five years at an exercise price equal to $2.88
per
share and we paid them a transaction fee of approximately $790,000 (7% of the
gross proceeds of the transaction).
Roth
paid
vFinancing $153,000 as a selling agent fee and transferred to them and their
affiliates warrants to purchase 106,250 shares of common stock. On February
29,
2008, the closing price of the common stock as quoted on the OTCBB was $2.71.
For more information relating to the terms of this private placement, reference
is made to “Selling Stockholders - Background.”
In
connection with the private placement we entered into a registration rights
agreement with the investors on February 25, 2008 which requires us to file
with
the SEC a "resale" registration statement providing for the resale of (i) all
of
the 4,691,499
shares
of common stock sold to the investors, (ii) the 2,000,000 “make good shares” and
(iii) the 469,150 shares underlying the placement agent warrants (collectively,
the “registrable securities”) for an offering to be made on a continuous basis
pursuant to Rule 415 of the Securities Act of 1933, as amended.
We
have
agreed, among other things, to prepare and file an initial registration
statement within 45 days of the closing date (i.e. April 14, 2008) to register
for resale all of the registrable securities (other than the 2,000,000 make
good
shares) and to cause that registration statement to be declared effective by
the
earlier to occur of (i) 150 days after the closing date, or (ii) the fifth
trading day following the day we receive notice from the SEC that
the
initial registration statement will not be reviewed or is no longer subject
to
further review and comments.
We
have
also agreed to file additional registration statements covering all of the
remaining registrable securities (or such lesser number as the SEC deems
appropriate) if any registrable securities could not be registered in the
initial registration statement,
by
the
15th
day following the date we are
able
to
effect the registration of such securities in accordance with any SEC
restrictions.
Our
failure to meet this schedule and other timetables provided in the registration
rights agreement could result in the imposition of liquidated damages. No
liquidated damages will accrue on any registrable securities which the SEC
has
requested (due to the application of Rule 415) us to remove from the
registration statement and the required effectiveness date for such securities
will be tolled until such time as we are able to effect the registration of
those securities in accordance with any SEC restrictions.
Reference
is made to
“Selling
Stockholders - Background
”
in
this prospectus for disclosure of the material terms of the other agreements
entered into by us on February 25, 2008 in connection with the private
placement.
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus before deciding to invest in our common
stock.
The
risks
and uncertainties described below are not the only ones we may face. Additional
risks and uncertainties not currently known to us or that we currently deem
immaterial may also adversely affect our business, financial condition, and/or
operating results. If any of the following risks, or any other risks not
described below, actually occur, it is likely that our business, financial
condition, and operating results could be seriously harmed. As a result, the
trading price of our common stock could decline and you could lose
part
or
all of your investment.
Risks
Related to our Business
Our
profit margins on sales of our solar water heaters have been declining and
our
operating income as a percentage of sales has been decreasing
Although
our gross profits have been increasing due to increased sales, our profit
margins have been decreasing. Gross profit for the fiscal year ended December
31, 2007 increased to $8,300,268 or 22.39% of revenues, compared to
gros
s
profit
for the
fiscal
year ended December 31, 2006 of $4,625,319 or 21.5% of revenues and
gros
s
profit
for the fiscal year ended December 31, 2005 of approximately $3.71 million
or
24% of revenues and as compared to gross profit of approximately $2.73 million
or 29% of revenues for the year ended December 31, 2004.
Excluding
Tianjin Huaneng our gross profit for 2007 was $5,681,565 or 21% of revenues.
The
increase in gross profit resulted primarily from the increase in sales revenue
and the acquisition of Tianjin Huaneng whose products have better profit
margins. Our overall profit margin increased to 22.39% from 21.5% for 2006
(but
excluding Tianjin Huaneng decreased from 21.5 5% to 21%.) The profit margins
on
sales of our solar water heaters has been decreasing due to market pressure
to
keep our prices competitive.
Consequently,
we expect the profit margin on the sale of our solar water heaters to continue
to decrease going forward. We are attempting to introduce new products with
higher gross profit margins, such as those products sold by Tianjin Huaneng.
We
may be unsuccessful in our attempts to upgrade our product mix, which would
have
a material adverse impact on our business and financial condition.
Operating
income was $3,185,634 for 2007 compared to operating income of $1,210,612 for
2006 an increase of $1,975,022 or 163%. As a percentage of sales, operating
income was 8.59% in 2007 as compared to 5.64% for 2006. Excluding Tianjin
Huaneng our operating income was $2,288,660 or 8.2% of sales. The increased
operating income was due to our acquisition of Tianjin Huaneng and the increased
sales revenue and our budget control on operating expenses in 2007. If we are
unable to pass on to the consumer our additional costs on our solar heaters
our
operating income as percentage of net sales of our solar heaters will continue
to decline.
The
solar water heater industry is a highly-competitive industry and our failure
to
compete effectively may hurt our ability to generate revenue.
We
manufacture and market solar hot water heaters and other products. According
to
statistics from the Chinese Energy Research Association, there are currently
over 3,500 solar hot water heater manufacturers producing products under more
than 3,000 brands. Many of our competitors are better capitalized and more
experienced, and have deeper ties in the PRC marketplace. While most solar
hot
water manufacturers focus on the urban markets, we have always focused on the
rural markets. While there are relatively fewer competitors in the rural market
at present, there can be no assurance that our competitors will not focus their
marketing efforts on rural customers in the future.
We
rely on our sales agents to distribute our solar water heater products and
to
expand our business we must attract new sales agents; we could lose a
substantial portion of our sales if we are not able to effectively monitor
the
activities of our sales agents.
We
believe that our success relies, to a large degree, on our distribution network.
The PRC is a geographically vast country and it is critical that we market
our
products in a number of different regions.
Presently,
we sell our products primarily in the rural areas of the north-east part of
the
PRC including Hebei, Beijing, Tianjin, Heilongjiang, and Liaoning.
In
order
to expand our business into others regions, we will need to increase our
distribution network by adding more sales agents, distributors, wholesalers
and
retailers who will carry our products. We may not be able to grow our
distribution network, as our competitors may offer better products and
commissions to distributors and sales agents, and, even if we can grow our
distribution network, we may not be able to operate it efficiently or manage
it
effectively, as our internal resources are limited.
We
may not be able to effectively control and manage our
growth
Our
sales
revenues have increased from $9,504,394 for 2004 to $
37,072,346
for 2007
.
Our
sales revenues for 2007 increased by approximately 73% over sales revenues
of
$
21,468,313
for
2006.
Excluding
Tianjin Huaneng our sales revenues increased to $27,480,290 an increase of
about
28% over the prior year.
If
our
business and markets continues to grow and develop, it will be necessary for
us
to finance and manage our expansion in an orderly fashion. In addition, we
may
face challenges in managing expanding product offerings and in integrating
any
acquired businesses with our own. This will increase demands on our existing
management, workforce and facilities. Failure to effectively deal with these
increased demands could interrupt or adversely affect our operations and cause
production backlogs, longer product development time frames, and administrative
inefficiencies.
The
protection of intellectual property rights in the PRC is not as effective as
in
the United States or other countries.
Our
trademarked brands have gained recognition in the northeast part of the PRC.
The
protection of intellectual property rights in the PRC however is not as
effective or enforced to the same degree as in the United States or other
countries. The unauthorized use of our brands could enable other manufacturers
to take unfair advantage, which could harm our business and competitive
position.
We
do not have any long-term supply contracts with our suppliers of raw materials;
any significant fluctuation in the price of raw materials may have a material
adverse effect on our manufacturing costs.
Stainless
steel and glass tubing are two major raw materials that we use to manufacture
our solar water heaters. The prices of these are subject to market conditions.
We do not have long-term contracts or arrangements with our suppliers. While
these raw materials are generally available and we have not experienced any
raw
material shortage in the past, we cannot assure you that prices will not rise
because of changes in market conditions. An increase in component or raw
material costs relative to our product prices could have a material adverse
effect on our gross margins and earnings.
We
have to outsource our production to third party manufacturers during the peak
sales season due to our limited manufacturing capacity.
Our
manufacturing capacity is not able to meet the demand for our products during
the peak season. Accordingly, we are required to have products representing
between 30% to 40% of our total sales revenues during our peak season
manufactured through Original Equipment Manufacturer ("OEM") arrangements.
Under
an OEM arrangement, we contract with other manufacturers to produce our products
and authorize these manufacturers to put our brand names or trademarks on these
products. We cannot assure you that we will continue to find qualified
manufacturers on acceptable terms in the areas where our customers are located
and, if we do, we cannot assure you that product quality will continue to be
acceptable.
We
may engage in future acquisitions that could dilute the ownership interests
of
our stockholders, cause us to incur debt and assume contingent
liabilities.
On
March
31, 2008 Deli Solar (Beijing) completed the acquisition of 100% of the
outstanding equity interests of Shenzhen PengSangPu Solar Industrial Products
Corporation (“SZPSP”) from its three shareholders. SZPSP is principally engaged
in the resale of energy-saving heating products such as heat pipes, heat
exchangers, pressure water boilers, solar energy water heaters and radiators.
$4,087,832 (RMB 28,800,000) of the purchase price was paid in cash. In addition
to the cash purchase price, the parties agreed to an appraised value of RMB
20
million for SZPSP’s intangible assets. The purchase price for these intangible
assets was paid in 1,419,729 shares of our common stock. If on March 31, 2009
(the first anniversary of the closing) our common stock price is lower than
$2,
we will make up the difference. In addition, as part of the purchase price
the
sellers were issued five year warrants to purchase 141,973 shares of common
stock at an exercise price of $2.50 per share (subject to
adjustment).
On
July
1, 2007 Deli Solar (Beijing) purchased 51% of the equity in Tianjin Huaneng
Group Energy Equipment Co., Ltd. (“Tianjin Huaneng”) for a purchase price of
approximately $1,689,741. In addition to the purchase price we paid a finder’s
fee of approximately $769,418. Deli Solar (Beijing) assumed 51% of the
liabilities of Tianjin Huaneng and contributed RMB 20,000,000
(approximately $2,613,400) as working capital to the acquired company. Deli
Solar (Beijing) also agreed to employ the 550 current Tianjin Huaneng employees
pursuant to new three year employment contract
As
part
of our growth strategy, we review acquisition and strategic investment prospects
that we believe would complement our current product offerings, increase our
market coverage or enhance our technical capabilities, or otherwise offer growth
opportunities. From time to time we review investments in new businesses and
we
expect to make investments in, and to acquire, businesses, products, or
technologies in the future. In the event of any future acquisitions, we could:
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issue
equity securities which would dilute current stockholders’ percentage
ownership;
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incur
substantial debt;
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assume
contingent liabilities; or
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expend
significant cash.
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These
actions could harm our operating results or the price of our common stock.
Moreover, even if we do obtain benefits in the form of increased sales and
earnings, there may be a lag between the time when the expenses associated
with
an acquisition are incurred and the time when we recognize such benefits.
Acquisitions and investment activities also entail numerous risks,
including:
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difficulties
in the assimilation of acquired operations, technologies and/or
products;
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unanticipated
costs associated with the acquisition or investment transaction;
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the
diversion of management’s attention from other business concerns;
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adverse
effects on existing business relationships with suppliers and customers;
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risks
associated with entering markets in which we have no or limited prior
experience;
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the
potential loss of key employees of acquired organizations; and
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substantial
charges for the amortization of certain purchased intangible assets,
deferred stock compensation or similar items.
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We
cannot
ensure that we will be able to successfully integrate any businesses, products,
technologies, or personnel that we have acquired or might acquire in the future,
and our failure to do so could harm our business, operating results and
financial condition.
We
may need additional capital to fund our future operations and, if it is not
available when needed, we may need to reduce our planned development and
marketing efforts, which may reduce our sales revenues
.
We
believe that our existing working capital and cash available from operations
will enable us to meet our working capital requirements for at least the next
12
months. However, if cash from future operations is insufficient, or if cash
is
used for acquisitions or other currently unanticipated uses, we may need
additional capital. Under the terms of the securities purchase agreement entered
into on June 13, 2007 with the investors in the June private placement we
cannot, prior to June 13, 2010, issue any convertible debt or any shares of
convertible preferred stock, have any debt outstanding in an amount greater
than
twice EBITDA from continuing operations for the prior four quarters. Those
investors also have right of first refusal with respect to any subsequent
financing. There are also restrictive covenants in the securities purchase
agreements entered into with the investors in the February 2008 private
placement. These restrictive covenants may inhibit our ability to raise
additional financing. The development and marketing of new products and the
expansion of distribution channels and associated support personnel requires
a
significant commitment of resources. In addition, if the markets for our
products develop more slowly than anticipated, or if we fail to establish
significant market share and achieve sufficient net revenues, we may continue
to
consume significant amounts of capital. As a result, we could be required to
raise additional capital. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution of the shares held by existing stockholders.
If additional funds are raised through the issuance of debt securities, such
securities may provide the holders certain rights, preferences, and privileges
senior to those of common stockholders, and the terms of such debt could impose
restrictions on our operations. We cannot assure you that additional capital,
if
required, will be available on acceptable terms, or at all. If we are unable
to
obtain sufficient amounts of additional capital, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our business, financial condition and operating results.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The
PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. In the past we have had difficulties in hiring and
retaining qualified senior management and we may have continue to have
difficulty in hiring and retaining a sufficient number of senior management
and
other qualified employees. As a result of these factors, we may experience
difficulty in establishing management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and
corporate records and instituting business practices that meet Western
standards.
Our
internal controls over financial reporting may not be effective, and our
independent auditors may not be able to certify as to their effectiveness,
which
could have a significant and adverse effect on our
business.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting,
and
attestation of this assessment by our company's independent registered public
accountants. The SEC extended the compliance dates for “non-accelerated filers,”
as defined by the SEC. Accordingly, the annual assessment of our internal
controls requirement first applied to our annual report for the 2007 fiscal
year
and the attestation requirement of management's assessment by our independent
registered public accountants will first apply to our annual report for the
2008
fiscal year.
The
standards that had to be met for management to assess the internal control
over
financial reporting as effective are new and complex, and require significant
documentation, testing and possible remediation to meet the detailed standards.
Our
lack
of familiarity with Section 404 may have diverted management’s time and
resources in executing the business plan. If, in the future, management
identifies one or more material weaknesses, or our external auditors are unable
to attest that our management’s report is fairly stated or to express an opinion
on the effectiveness of our internal controls, this could result in a loss
of
investor confidence in our financial reports, have an adverse effect on our
stock price and/or subject us to sanctions or investigation by regulatory
authorities.
We
do not have key man insurance on our President and CEO, Mr. Du, on whom we
rely
for the management of our business.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Deli Du, our CEO.
The
loss of the services of Mr. Du, for any reason, may have a material adverse
effect on our business and prospects. We cannot assure you that we will be
able
to find a suitable replacement for Mr. Du. We do not carry key man life
insurance for any of our key personnel.
We
may not be able to hire and retain qualified personnel to support our growth
and
if we are unable to retain or hire these personnel in the future, our ability
to
improve our products and implement our business objectives could be adversely
affected
.
Competition
for senior management and senior technology personnel in the PRC is intense,
the
pool of qualified candidates in the PRC is very limited, and we have had
difficulty in attracting and retaining the services of senior executives and
may
continue to do so in the future. This failure could harm our future growth
and
financial condition.
We
do not presently maintain fire, theft, product liability or any other property
insurance, which leaves us with exposure in the event of loss or damage to
our
properties or claims filed against us.
We
do not
maintain fire, theft, product liability or other insurance of any kind. We
bear
the economic risk with respect to loss of or damage or destruction to our
property and to the interruption of our business as well as liability to third
parties for personal injury or damage or destruction to their property that
may
be caused by our personnel or products. This liability could be substantial
and
the occurrence of such loss or liability may have a material adverse effect
on
our business, financial condition and prospects. However product liability
lawsuits in the PRC are rare, and we have never experienced significant failure
of our products.
Rapid
technological changes in our industry could render our products non-competitive
or obsolete and consequently affect our ability to generate
revenues.
The
solar
hot water industry is subject to rapid technological change. Our future success
will depend on our ability to respond to rapidly changing technologies and
improve the quality of our products. Our failure to adapt to these changes
could
harm our business. Our future plans to market our products to urban areas
require our products to be innovative. If we are slow to develop new products
and technologies that are attractive to people in these urban areas, we may
not
be successful in capturing a significant share of this market. For example,
most
of our current products rely on a tubular structure while urban customers prefer
a flat plate collector for aesthetic purposes. If we fail to keep up with rapid
technological changes to remain competitive in our rapidly evolving industry,
our future marketing and expansion may be adversely affected.
Most
of our warranty services are performed by our independent sales agents and
distributors whose deposit may not cover total warranty claims.
We
typically offer a three-year warranty for our products. During the first year
of
this warranty program, we cover any defects and product malfunctions. Most
of
our warranty services are performed by our independent sales agents and
distributors in return for a 1-2% discount of the purchase price they pay for
our products. We normally require our new sales agents and distributors to
pay
us a deposit (varying from RMB5,000 to 20,000 depending on their represented
areas) which we believe will ensure their performance of the necessary warranty
services. Although we have not experienced any significant product returns
or
repairs, we cannot assure you that these sales agents and distributors will
perform the warranty services when required, and if they fail to do so, we
cannot assure you that the agents' deposits will be sufficient to cover the
costs associated with the warranty services to be performed on the products
sold
by these sales agents and distributors.
We
lease some of the real property on which our business center and exhibition
center and other facilities are located and there is no guarantee that our
lease
will be renewed.
All
land
in the PRC is owned by the government and cannot be sold to any individual
or
entity. Instead, the PRC government grants landholders a "land use right."
Our
business center in Bazhou City and our exhibition center in Beijing are located
on leased land as are our manufacturing facilities. There is no assurance that
we may renew the leases on acceptable terms. The failure to obtain the renewal
of the leases on reasonable terms could cause us to incur extra expenses and
costs for alternative land and for the reconstruction of our
buildings.
Our
acquisition of the land use rights from villagers is subject to announcement
and
approval procedures and we cannot assure you that they will be successful.
On
March
16, 2006,
Deli Solar (Bazhou) entered into an agreement
with the Governance Commission of Beijiahe Village Chaheji County Bazhou City
(the "Village Governance Commission") to acquire land use rights to a piece
of
land comprising 61,530 square meters (the "Land") at a price of approximately
$919,858, subject to the procedures as mentioned below. The previous users
of
the Land were villagers and the Land was used for agricultural purposes.
According to the relevant PRC regulations, the Village Governance Commission
is
required to announce its intention to transfer the land use rights to Deli
Solar
(Bazhou) (the "Announcement Procedure") and provide the villagers with
reasonable compensation to acquire the land use rights from them. The conversion
of land use from agricultural to non-agricultural purposes requires the approval
of the local government. In addition, once the approval from the local
government has been obtained, the new holder of the land use rights will have
to
be registered with the land administration bureau. We cannot guarantee that
the
Village Governance Commission will carry out the Announcement Procedure and
provide reasonable compensation to the villagers as prescribed. We cannot
guarantee that the application to change the purpose of land use will be
approved by the local government or that the new holder of the land use rights
would be able to be registered with the land administration bureau.
Effect
of the Issuance of the Preferred Stock and Warrants in June 2007 and Common
Stock in February 2008
The
resale in the public market of the shares underlying the Preferred Stock and
Warrants acquired in the June 2007 financing and the resale in the public market
of the common stock acquired in the February 2008 private placement may have
an
adverse impact on the market value of our common stock.
On
February 7, 2008, our registration statement was declared effective by the
SEC.
In that registration statement we registered for resale by the investors in
the
June 2007 private placement
508,734
shares of common stock and 508,734 shares underlying class A warrants. In
addition under new Rule 144, which became effective in February 14, 2008, non
affiliates may sell their shares without any volume restrictions if they hold
their shares for at least 6 months. Under the “tacking” rules in Rule 144 the
holding period for the all of the shares of common stock underlying the
preferred stock issued in June 2007 commenced in June 2007. Accordingly, all
of
those 1,774,194 shares may now be sold under Rule 144 to the extent held by
non-affiliates. In addition, after June 2008, the 1,774,194 class A warrants
and
the 1,774,194 class B warrants may be exercised by a cashless exercise and
the
3,548,388 shares underlying those warrants may be resold immediately if held
by
non affiliates.
The
resale of the 1,774,194 shares of common stock issuable on conversion of the
Series A Preferred Stock and the
3,548,388
shares
of
common stock issuable on exercise of those warrants, or even the possibility
of
their resale, may adversely affect the trading market for our common stock
and adversely affect the prevailing market price of our common stock.
T
he
resale
of the 5,160,649 shares of common stock being registered in this prospectus
(including 469,150 shares issuable on exercise of the placement agent warrants),
or even the possibility of their resale, may adversely affect the trading
market for our common stock and adversely affect the prevailing market price
of
our common stock.
On
February 29, 2008 the closing sale price of our common stock was $2.71 per
share. On April 7, 2008 the closing sale price of the common stock was
$1.91
The
Series A Preferred Stock and the Warrants may have an adverse impact on the
market value of our common stock.
The
existence of full ratchet anti-dilution clauses may prove a hindrance to
our efforts to raise future equity and debt funding, and the exercise of such
rights will dilute the percentage ownership interest of our stockholders and
will dilute the value of their stock.
The
Series A Preferred Stock and Warrants may adversely affect our financial
and operational flexibility.
The
terms
of the June 13, 2007 financing imposed restrictions on us that may affect
our ability to successfully operate our business. The transaction
documents contain a number of covenants that may restrict our ability to
operate, including, among other things, covenants that restrict our
ability:
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to
incur additional indebtedness;
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pay
dividends on our capital stock;
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to
redeem or repurchase our common stock or any class or series of capital
stock that is junior or on a parity with the Series A Preferred
Stock;
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to
enter into any transaction that has any reset feature that could
result in
additional shares being issued.
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to
enter into any subsequent financing.
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Risk
Related to Our Industry
A
drop in the retail price of conventional energy or non-solar alternative energy
or any improvement to the rural household's electricity supply system in the
PRC
may have a negative effect on our business.
A
customer's decision to purchase our solar power products is primarily driven
by
the poor electricity supply system in the rural areas of the PRC, as well as
the
energy savings from our solar power products. An improvement in the power supply
infrastructure in the rural areas of the PRC could adversely affect the demand
for our products. In addition, fluctuations in economic and market conditions
that impact the viability of conventional and non-solar alternative energy
sources, such as decreases in the prices of oil and other fossil fuels could
cause the demand for our solar power heaters to decline. Although we believe
that current retail energy prices support a reasonable return on investment
for
our products, there can be no assurance that future retail pricing of
conventional energy and non-solar alternative energy will remain at such
levels.
Existing
regulations and changes to existing regulations may present technical,
regulatory and economic barriers to the purchase and use of solar power
products, which may significantly reduce demand for our
products
Our
solar
power products and their installation are subject to oversight and regulation
in
accordance with national and local ordinances relating to building codes,
safety, environmental protection, utility interconnection and metering and
related matters. We are responsible for knowing the requirements of individual
cities and must design equipment to comply with varying standards. Any new
government regulations or utility policies that relate to our solar power
products may result in significant additional expenses to us, our resellers
and
their customers and, as a result, could cause a significant reduction in demand
for our solar power products.
If
solar power technology is not suitable for widespread adoption or sufficient
demand for solar power products does not develop or takes longer to develop
than
we anticipate, our sales would not significantly increase and we would be unable
to sustain profitability.
The
market for solar power products is emerging and rapidly evolving, and its future
success is uncertain. If solar power proves to be unsuitable for widespread
commercial or residential use or if demand for solar power products fails to
develop sufficiently, we would be unable to generate enough revenues to sustain
profitability. In addition, demand for solar powered products in the new markets
and geographic regions that we target may not develop at all or may develop
more
slowly than we anticipate. Many factors will influence the widespread adoption
of solar power technology and demand for solar power products,
including:
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cost-effectiveness
of solar power technologies as compared with conventional and non-solar
alternative energy technologies;
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performance
and reliability of solar power products as compared with conventional
and
non-solar alternative energy technologies; and
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capital
expenditures by customers that tend to decrease if the PRC or global
economy slows down.
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Risks
Related to Doing Business in the PRC.
Changes
in the policies of the PRC government could have a significant impact upon
the
business we may be able to conduct in the PRC and the profitability of our
business.
The
PRC's
economy is in a transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on the economic conditions of the PRC. The PRC government
has confirmed that economic development will follow the model of a market
economy. Under this direction, we believe that the PRC will continue to
strengthen its economic and trading relationships with foreign countries and
business development in the PRC will follow market forces. While we believe
that
this trend will continue, there can be no assurance that this will be the case.
A
change
in policies by the PRC government could adversely affect our interests by,
among
other factors: changes in laws, regulations or the interpretation thereof,
confiscatory taxation, restrictions on currency conversion, imports or sources
of supplies, or the expropriation or nationalization of private enterprises.
Although the PRC government has been pursuing economic reform policies for
more
than two decades, there is no assurance that the government will continue to
pursue such policies or that such policies may not be significantly altered,
especially in the event of a change in leadership, social or political
disruption, or other circumstances affecting the PRC's political, economic
and
social life.
PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in these PRC laws and regulations may harm
our business.
The
PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain.
There
are substantial uncertainties regarding the interpretation and application
of
PRC laws and regulations, including the laws and regulations governing our
business, or the enforcement and performance of our arrangements with customers
in the event of the imposition of statutory liens, death, bankruptcy and
criminal proceedings. We and any future subsidiaries are considered foreign
persons or foreign funded enterprises under PRC laws, and as a result, we are
required to comply with PRC laws and regulations. These laws and regulations
are
sometimes vague and may be subject to future changes, and their official
interpretation and enforcement involves substantial uncertainty. New laws and
regulations that affect existing and new businesses may also be applied
retroactively. We cannot predict what effect the interpretation of existing
or
new PRC laws or regulations may have on our businesses.
A
slowdown or other adverse developments in the PRC economy may harm our customers
and the demand for our services and our products.
All
of
our operations are conducted in the PRC and a significant portion of our
revenues are generated from sales in the PRC. Although the PRC economy has
grown
significantly in recent years, we cannot assure you that this growth will
continue. The solar hot water and renewable energy industry in the PRC is
relatively new and growing, but we do not know how sensitive we are to a
slowdown in economic growth or other adverse changes in the PRC economy which
may affect demand for solar hot water heaters and boilers and our other
products. A slowdown in overall economic growth, an economic downturn, a
recession or other adverse economic developments in the PRC could significantly
reduce the demand for our products and harm our business.
Inflation
in the PRC could negatively affect our profitability and
growth
.
While
the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth could lead to growth in the money supply and
rising inflation. If prices for our products rise at a rate that is insufficient
to compensate for the rise in the costs of supplies, it may harm our
profitability. In order to control inflation in the past, the PRC government
has
imposed controls on bank credit, limits on loans for fixed assets and
restrictions on state bank lending. Such an austere policy can lead to a slowing
of economic growth. In October 2004, the People's Bank of China, the PRC's
central bank, raised interest rates for the first time in nearly a decade and
indicated in a statement that the measure was prompted by inflationary concerns
in the Chinese economy. Repeated rises in interest rates by the central bank
would likely slow economic activity in China which could, in turn, materially
increase our costs and also reduce demand for our products.
Governmental
control of currency conversion may affect the value of your
investment.
The
PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
We
receive substantially all of our revenues in Renminbi, which is currently not
a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations. Under existing
PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where Renminbi is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies.
The
PRC
government may also in the future restrict access to foreign currencies for
current account transactions. If the foreign exchange control system prevents
us
from obtaining sufficient foreign currency to satisfy our currency demands,
we
may not be able to pay certain of our expenses as they come due.
The
fluctuation of the Renminbi may harm your investment.
The
value
of the Renminbi against the U.S. dollar and other currencies may fluctuate
and
is affected by, among other things, changes in the PRC's political and economic
conditions. As we rely almost entirely on revenues earned in the PRC, any
significant revaluation of the Renminbi may materially and adversely affect
our
cash flows, revenues and financial condition. For example, to the extent that
we
need to convert U.S. dollars we receive from an offering of our securities
into
Renminbi for our operations, appreciation of the Renminbi against the U.S.
dollar would diminish the value of the proceeds of the offering and this could
harm our business, financial condition and results of operations. Conversely,
if
we decide to convert our Renminbi into U.S. dollars for the purpose of making
payments for dividends on our common shares or for other business purposes
and
the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent
of
the Renminbi we convert would be reduced. In addition, the depreciation of
significant U.S. dollar denominated assets could result in a charge to our
income statement and a reduction in the value of these assets.
On
July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in significant
appreciation of the Renminbi against the U.S. dollar. While the international
reaction to the Renminbi revaluation has generally been positive, there remains
significant international pressure on the PRC government to adopt an even more
flexible currency policy, which could result in a further and more significant
appreciation of the Renminbi against the U.S. dollar.
PRC
State Administration of Foreign Exchange ("SAFE") Regulations regarding offshore
financing activities by PRC residents may increase the administrative burden
we
face. The failure by our shareholders who are PRC residents to make any required
applications and filings required by such regulations may prevent us from being
able to distribute profits and could expose us and our PRC resident shareholders
to liability under PRC law.
SAFE,
issued a public notice ("SAFE #75") effective from November 1, 2005, which
requires our PRC resident shareholders to register with SAFE. If they do not
register the PRC entity cannot remit any of its profits out of the PRC as
dividends or otherwise. Our PRC resident largest shareholder, Mr. Du, has taken
all necessary steps required by the local SAFE branch at Bazhou City to comply
with SAFE #75 by filing a disclosure form regarding his ownership status;
however, we cannot assure you that this disclosure document will be sufficient.
It is also unclear exactly whether our other PRC resident shareholders must
make
disclosure to SAFE. While our PRC counsel has advised us that only the PRC
resident shareholders who receive ownership of the foreign holding company
in
exchange for ownership in the PRC operating company are subject to SAFE #75,
there can be no assurance that SAFE will not require our three other PRC
resident shareholders to register and make the applicable disclosure. In
addition, SAFE #75 requires that any monies remitted to PRC residents outside
of
the PRC be returned within 180 days; however, there is no indication of what
the
penalty will be for failure to comply or if shareholder non-compliance will
be
considered to be a violation of SAFE #75 by us or otherwise affect
us.
In
the
event that the proper procedures are not followed under SAFE #75, we could
lose
the ability to remit monies outside of the PRC and would therefore be unable
to
pay dividends or make other distributions. Our PRC resident shareholders could
be subject to fines, other sanctions and even criminal liabilities under the
PRC
Foreign Exchange Administrative Regulations promulgated January 29, 1996, as
amended.
The
PRC’s legal and judicial system may not adequately protect our business and
operations and the rights of foreign investors
The
PRC
legal and judicial system may negatively impact foreign investors. In 1982,
the
National People's Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in the PRC. However, the PRC's system of laws is not yet
comprehensive. The legal and judicial systems in the PRC are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in the PRC lack
the depth of legal training and experience that would be expected of a judge
in
a more developed country. Because the PRC judiciary is relatively inexperienced
in enforcing the laws that do exist, anticipation of judicial decision-making
is
more uncertain than would be expected in a more developed country. It may be
impossible to obtain swift and equitable enforcement of laws that do exist,
or
to obtain enforcement of the judgment of one court by a court of another
jurisdiction. The PRC's legal system is based on the civil law regime, that
is,
it is based on written statutes; a decision by one judge does not set a legal
precedent that is required to be followed by judges in other cases. In addition,
the interpretation of Chinese laws may be varied to reflect domestic political
changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced
the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. There can be no assurance that
a
change in leadership, social or political disruption, or unforeseen
circumstances affecting the PRC's political, economic or social life, will
not
affect the PRC government's ability to continue to support and pursue these
reforms. Such a shift could have a material adverse effect on our business
and
prospects.
The
practical effect of the PRC legal system on our business operations in the
PRC
can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate Articles and contracts
to Foreign Invested Enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are qualitatively
different from the general corporation laws of the United States. Similarly,
the
PRC accounting laws mandate accounting practices, which are not consistent
with
U.S. generally accepted accounting principles. PRC’s accounting laws require
that an annual "statutory audit" be performed in accordance with PRC accounting
standards and that the books of account of Foreign Invested Enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the
People's Republic of China Wholly Foreign-Owned Enterprise Law requires a wholly
foreign-owned enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation. While the enforcement of substantive rights may appear
less
clear than United States procedures, the Foreign Invested Enterprises and Wholly
Foreign-Owned Enterprises are Chinese registered companies, which enjoy the
same
status as other Chinese registered companies in business-to-business dispute
resolution. Any award rendered by an arbitration tribunal is enforceable in
accordance with the United Nations Convention on the Recognition and Enforcement
of Foreign Arbitral Awards (1958). Therefore, as a practical matter, although
no
assurances can be given, the Chinese legal infrastructure, while different
in
operation from its United States counterpart, should not present any significant
impediment to the operation of Foreign Invested Enterprises.
Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could harm our operations.
A
renewed
outbreak of SARS or another widespread public health problem (such as bird
flu)
in the PRC, where all of our revenues are derived, could significantly harm
our
operations. Our operations may be impacted by a number of health-related
factors, including quarantines or closures of some of our offices that would
adversely disrupt our operations. Any of the foregoing events or other
unforeseen consequences of public health problems could significantly harm
our
operations.
Because
our principal assets are located outside of the United States and most of our
directors and officers reside outside the United States, it may be difficult
for
you to enforce your rights based on U.S. Federal Securities Laws against us
and
our officers and some directors in the U.S. or to enforce U.S. court judgment
against us or them in the PRC.
All
of
our directors and officers, except Kevin Randolph, reside outside the United
States. In addition, our operating subsidiaries, Deli Solar (Bazhou), Deli
Solar
(Beijing) and Tianjin Huaneng are located in the PRC and substantially all
of
their assets are located outside of the United States. It may therefore be
difficult for investors in the United States to enforce their legal rights
based
on the civil liability provisions of the U.S. Federal securities laws against
us
in the courts of either the U.S. or the PRC and, even if civil judgments are
obtained in U.S. courts, to enforce such judgments in PRC courts. Further,
it is
unclear if extradition treaties now in effect between the United States and
the
PRC would permit effective enforcement against us or our officers and directors
of criminal penalties, under the U.S. Federal securities laws or otherwise.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
We
have
in the past and may continue to have difficulty in hiring and retaining a
sufficient number of qualified employees to work for us. Accordingly, we may
experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet western
standards.
The
relative lack of public company experience of our management team may put us
at
a competitive disadvantage.
Our
management
team lacks public company experience, which could impair our ability to comply
with legal and regulatory requirements such as those imposed by Sarbanes-Oxley
Act of 2002. The individuals who now constitute our senior management have
never
had responsibility for managing a publicly traded company. Such responsibilities
include complying with federal securities laws and making required disclosures
on a timely basis. Our senior management may not be able to implement programs
and policies in an effective and timely manner that adequately respond to such
increased legal, regulatory compliance and reporting requirements. Our failure
to comply with all applicable requirements could lead to the imposition of
fines
and penalties and distract our management from attending to the growth of our
business.
Risks
Related to Our Common Stock.
We
are not likely to pay cash dividends in the foreseeable
future.
We
intend
to retain any future earnings for use in the operation and expansion of our
business. We do not expect to pay any cash dividends in the foreseeable future
as we are contractually restricted from doing so. As a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt
of
dividends or other payments from our operating subsidiaries based in the PRC.
Our PRC based operating subsidiaries are subject to restrictions on their
ability to make distributions to us, including restrictions on the conversion
of
local currency into U.S. dollars.
Our
common stock is thinly traded, so you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
Prior
to
the reverse merger our shares were not publicly traded although shares of the
shell into whom we merged were thinly traded. Through the reverse merger, we
have essentially become public without the typical initial public offering
procedures which usually include a large selling group of broker-dealers who
may
provide market support after going public. We have undertaken efforts to develop
market recognition for our stock, including through the retention of Hayden
Communications International, Inc. on July 23, 2007. As of March 24, 2008,
there
were 13,136,305 shares of our common stock issued and outstanding, and there
were approximately 2,533 holders of record of our outstanding shares of common
stock. Our market capitalization (excluding shares held by our affiliates)
was
approximately $12,476,711. As a result, there is limited market activity in
our
stock and we are too small to attract the interest of many brokerage firms
and
analysts. We cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained. Currently
our
common stock is quoted in the OTC Bulletin Board market and the trading volume
we will develop may be limited by the fact that many major institutional
investment funds, including mutual funds, as well as individual investors follow
a policy of not investing in Bulletin Board stocks and certain major brokerage
firms restrict their brokers from recommending Bulletin Board stocks because
they are considered speculative, volatile and thinly traded. The OTC Bulletin
Board market is an inter-dealer market much less regulated than the major
exchanges and our common stock is subject to abuses and volatilities and
shorting. Thus there is currently no broadly followed and established trading
market for our common stock. An established trading market may never develop
or
be maintained. Active trading markets generally result in less price volatility
and more efficient execution of buy and sell orders. Absence of an active
trading market reduces the liquidity of the shares traded there.
The
trading volume of our common stock has been limited and sporadic. As a result
of
this trading activity, the quoted price for our common stock on the OTC Bulletin
Board may not necessarily be a reliable indicator of its fair market value.
Further, if we cease to be quoted, holders would find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of our
common stock and as a result, the market value of our common stock likely would
decline.
Our
common stock is currently subject to the "penny stock" rules which require
delivery of a schedule explaining the penny stock market and the associated
risks before any sale.
Our
common stock is currently subject to regulations prescribed by the SEC relating
to “penny stocks.” The SEC has adopted regulations that generally define a penny
stock to be any equity security that has a market price (as defined in such
regulations) of less than $5 per share, subject to certain exceptions. On
April
7,
2008 the last sale price of our common stock was $1.91per share. These
regulations impose additional sales practice requirements on broker-dealers
who
sell such securities to persons other than established customers and accredited
investors (generally institutions with assets in excess of $5,000,000 and
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 (individually) or $300,000 (jointly with their spouse)). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of these securities and have received
the purchaser's prior written consent to the transaction. Additionally, for
any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the SEC relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell the common stock and may affect the ability of investors to sell their
common stock in the secondary market.
Our
common stock is illiquid and subject to price volatility unrelated to our
operations.
The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or
us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
A
large number of shares will be eligible for future sale and this may depress
our
stock price.
This
is
an offering of 5,160,649 shares of our common stock by the selling stockholders,
among which 469,150 shares may be acquired on exercise of the placement agent
warrants. As of March 31, 2008, there were 13,136,305 shares of our common
stock
issued and outstanding and 2,509,678 shares of Series A Preferred Stock (900,000
of which are held in escrow to be delivered pro rata to the June 07 investors
if
we fail to achieve certain income levels for 2008). Assuming (i) exercise of
the
469,150 shares that may be acquired on exercise of the placement agent warrants,
(ii) conversion of the
1,609,678
shares of Series A Preferred Stock issued in June 13, 2007 financing which
have
not been converted, (ii) the exercise of the other outstanding warrants to
purchase an aggregate of
5,505,559
shares
of common stock, there will be
20,720,692
shares
of common stock outstanding. Of these
20,720,692
shares
(i) 5,160,649 shares are being registered for resale in this prospectus, (ii)
all of the 1,609,678 shares of Series A Preferred Stock outstanding may be
sold
under Rule 144 by non affiliates, (iii) 3,952,025 shares were registered for
resale in a registration statement declared effective on July 18, 2006, (iv)
the
4,067,964 issued in the reverse merger may be sold subject to the requirements
of Rule 144, (v) 508,734 shares of the 1,774,194 of the Class A Warrants were
registered for resale in the registration statement declared effective on
February 7, 2008 and the remainder and all of the 1,774,194 shares underlying
the Class B Warrants may be sold after June 2008 if purchased by way of a
cashless exercise.
Sales
of
substantial amounts of common stock, or a perception that such sales could
occur, and the existence of options or warrants to purchase shares of common
stock at prices that may be below the then current market price of the common
stock, could adversely affect the market price of our common stock and could
impair our ability to raise capital through the sale of our equity
securities.
We
are authorized to issue "blank check" preferred stock, which can be issued
without stockholder approval and may adversely affect the rights of holders
of
our common stock.
We
are
authorized to issue 25,000,000 shares of preferred stock, of which 3,500,000
shares have been designated as Series A Preferred Stock. As of March 31,
2008 there were 2,509,678 shares of Series A Preferred Stock (900,000 of
which are held in escrow to be delivered pro rata to the June 07 investors
if we
fail to achieve certain income levels for 2008). The Board of Directors is
authorized under our Restated Articles of Incorporation to provide for the
issuance of additional shares of preferred stock by resolution, and by filing
a
certificate of designations under Nevada law, to fix the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof without any further vote or action by the
stockholders. Any shares of preferred stock so issued are likely to have
priority over the common stock (but not the Series A Preferred Stock) with
respect to dividend or liquidation rights. In the event of issuance, the
preferred stock could be utilized, under certain circumstances, as a method
of
discouraging, delaying or preventing a change in control, which could have
the
effect of discouraging bids for our company and thereby prevent stockholders
from receiving the maximum value for their shares. We have no present intention
to issue any shares of its preferred stock in order to discourage or delay
a
change of control. However, there can be no assurance that preferred stock
will
not be issued at some time in the future.
SELLING
STOCKHOLDERS
This
prospectus relates to the offer and sale of our common stock by the selling
stockholders identified in the table below. Each of the selling stockholders
acquired the shares of our common stock pursuant to our private placement
transaction completed on February 29, 2008. Each investor was an “accredited
investor” within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act. The placement agent warrants were issued to Roth Capital
Partners, LLC for services rendered in connection with the private
placement.
None
of
the selling stockholders has held a position as an officer or director of the
Company, nor has any selling stockholder had a material relationship of any
kind
with the Company.
The
table
set forth below lists the names of the selling stockholders as well as (1)
the
number of shares of common stock acquired by the selling stockholder in the
February 29, 2008 private placement which are being registered, and (2) the
number of shares underlying the placement agent warrants issued to the placement
agent (and its assignees) in the February 29, 2008 private placement which
are
being registered.
Each
selling stockholder may offer for sale all or part of the shares from time
to
time. The table below assumes that the selling stockholders will sell all of
the
shares offered for sale. A selling stockholder is under no obligation, however,
to sell any shares pursuant to this prospectus.
We
have
not in the past been engaged in any prior securities transaction with any of
the
selling stockholders, any affiliates of the selling stockholders, or, after
due
inquiry and investigation, to the knowledge of the Company’s management, any
person with whom any selling stockholder has a contractual relationship
regarding the transaction (or any predecessors of those persons
).
After
due
inquiry and investigation and based on information provided by the selling
stockholders, none of the selling stockholders has an existing short position
in
our stock.
Other
than as described in this prospectus, the Company has not in the past three
years engaged in any securities transaction with any of the selling
stockholders, any affiliates of the selling stockholders, or, after due inquiry
and investigation, to the knowledge of the management of the Company, any person
with whom any selling stockholder has a contractual relationship regarding
the
transaction (or any predecessors of those persons). In addition, other than
in
connection with the contractual obligations set forth in (i) the securities
purchase agreement (and the related registration rights agreement) entered
into
between the Company on one hand and each of the selling stockholders on the
other hand, (ii) the placement agent agreement between the Company and Roth
Capital Partners, LLC entered into on January 17, 2008, we do not have any
agreement or arrangement with any selling stockholder with respect to the
performance of any current or future obligations.
Name
and Address of Selling Stockholder
|
|
Number
of
Shares
of Common Stock owned prior to the Offering
|
|
Percentage
Of Shares Beneficially Owned Prior to Offering (1)
(2)
|
|
Maximum
Number of Shares of Common Stock to be resold
|
|
Total
Number
Of
Shares Beneficially Owned after resale
|
|
Percentage
Ownership after resale
|
|
David
Gelbaum and Monica Chavez as trustees of
The
Quercus Trust,
1235
Newport Blvd
Costa
Mesa, CA 92627
|
|
|
2,449,283
(3
|
)
|
|
18.64
|
%
|
|
2,083,333
|
|
|
365,950
|
|
|
2.8
|
%
|
Peter
Corsell
450
Alton Road, Apt 4002
Miami
Beach, FL 33139
|
|
|
41,667
|
|
|
*
|
|
|
41,667
|
|
|
0
|
|
|
0
|
|
Hua-Mei
21
st
Century Partners, LP
c/o
Guerrilla Capital Management, LLC
237
Park Avenue, 9
th
Floor
New
York, NY 10017 (4)
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
0
|
|
|
0
|
|
Guerrilla
Partners, LP
c/o
Guerrilla Capital Management, LLC
237
Park Avenue, 9
th
Floor
New
York, NY 10017 (4)
|
|
|
25,000
|
|
|
*
|
|
|
25,000
|
|
|
0
|
|
|
0
|
|
Ancora
Greater China Fund, LP
Ancora
Advisors, LLC
One
Chagrin Highlands
2000
Auburn Drive
Suite
300
Cleveland,
OH 44122
|
|
|
166,666
|
|
|
1.2
|
%
|
|
166,666
|
|
|
0
|
|
|
0
|
|
Ardsley
Offshore Fund, Ltd.
c/o
Ardsley Partners
262
Harbor Drive
Stamford
CT 06902 (5)
|
|
|
491,500
|
|
|
3.74
|
%
|
|
491,500
|
|
|
0
|
|
|
0
|
|
Marion
Lynton
c/o
Ardsley Partners
262
Harbor Drive
Stamford
CT 06902 (5)
|
|
|
17,500
|
|
|
*
|
|
|
17,500
|
|
|
0
|
|
|
0
|
|
Ardsley
Partners Institutional Fund, L.P.
c/o
Ardsley Partners
262
Harbor Drive
Stamford
CT 06902 (5)
|
|
|
455,000
|
|
|
3.46
|
%
|
|
455,000
|
|
|
0
|
|
|
0
|
|
Ardsley
Partners Fund II, L.P
c/o
Ardsley Partners
262
Harbor Drive
Stamford
CT 06902 (5)
|
|
|
702,500
|
|
|
5.3
|
%
|
|
702,500
|
|
|
0
|
|
|
0
|
|
Chestnut
Ridge Partners, LP
c/o
Chestnut Ridge Capital, LLC
50
Tice Boulevard
Woodcliff
Lake, NJ 07677
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
0
|
|
|
0
|
|
Jayhawk
Private Equity Fund, LP
5410
West 61
st
Place
Suite
100
Mission
KS 66205 (6)
|
|
|
195,993
|
|
|
1.5
|
%
|
|
195,993
|
|
|
0
|
|
|
0
|
|
Jayhawk
Private Equity Co-Invest Fund, LP
5410
West 61
st
Place
Suite
100
Mission
KS 66205 (7)
|
|
|
12,340
|
|
|
*
|
|
|
12,340
|
|
|
0
|
|
|
0
|
|
The
USX China Fund
c/o
Parr Financial Group
5100
Poplar Avenue
Suite
3117
Memphis,
TN 38137
|
|
|
200,000
|
|
|
1.5
|
%
|
|
200,000
|
|
|
0
|
|
|
0
|
|
Punch
Micro Cap Partners, LLC
c/o
Punch Associates Investment Management
3610
W 76
th
St, Ste 225
Edina,
MN 55435
|
|
|
155,000
|
|
|
1.2
|
%
|
|
100,000
|
|
|
55,000
|
|
|
*
|
|
Roth
Capital Partners LLC
24
Corporate Plaza
Newport
Beach, CA 92660 (8 )
|
|
|
362,900
|
|
|
2.76
|
%
|
|
362,900
|
|
|
0
|
|
|
0
|
|
vFinance
Investments
880
Third Avenue, 12
th
floor
New
York, NY 10022 (9)
|
|
|
19,921
|
|
|
*
|
|
|
19,921
|
|
|
0
|
|
|
0
|
|
Jeffrey
H Auerbach
c/o
vFinance Investments
880
Third Avenue, 12
th
floor
New
York, NY 10022 (9)
|
|
|
83,672
|
|
|
*
|
|
|
83,672
|
|
|
0
|
|
|
0
|
|
Jonathan
Rich
vFinance
Investments
880
Third Avenue, 12
th
floor
New
York, NY 10022 (9)
|
|
|
2,657
|
|
|
*
|
|
|
2,657
|
|
|
0
|
|
|
0
|
|
*
Less
than 1%.
(1)
Under
applicable SEC rules, a person is deemed to beneficially own securities which
the person as the right to acquire within 60 days through the exercise of any
option or warrant or through the conversion of another security. Also under
applicable SEC rules, a person is deemed to be the “beneficial owner” of a
security with regard to which the person directly or indirectly, has or shares
(a) the voting power, which includes the power to vote or direct the voting
of
the security, or (b) the investment power, which includes the power to dispose,
or direct the disposition, of the security, in each case, irrespective of the
person’s economic interest in the security. Each listed selling stockholder has
the sole investment and voting power with respect to all shares of common stock
shown as beneficially owned by such selling stockholder, except as otherwise
indicated in the table.
(2)
As of
April 4, 2008 there were 13,136,305 shares of our common sock issued and
outstanding. In determining the percent of common stock beneficially owned
by a
selling stockholder on April 4, 2008, (a) the numerator is the number of shares
of common stock beneficially owned by such selling stockholder, and (b) the
denominator is the sum of (i) the 13,136,305 shares outstanding on April 4,
2008
and (ii) the number of shares of common stock which each of the selling
stockholders has the right to acquire within 60 days of April 4,
2008.
(3)
Based
on information set forth in Amendment No 1. to a Schedule 13D filed on March
04,
2008.
(4)
These
entities are affiliated with each other. Peter Siris and Leigh S. Curry have
shared joint voting and dispositive power over these shares.
(5)
These
entities are affiliated with each other.
(6)
Kent
C. McCarthy is the Managing Member of Jayhawk Capital Management LLC, which
is
the General Partner of Jayhawk Private Equity GP, LP, which is the General
Partner of Jayhawk Private Equity Fund, L.P. and has voting power and investment
power over securities held by Jayhawk Private Equity Fund, L.P.
(7)
Kent
C. McCarthy is the Managing Member of Jayhawk Capital Management LLC, which
is
the General Partner of Jayhawk Private Equity GP, LP, which is the General
Partner of Jayhawk Private Equity Co-Invest Fund, L.P. and has voting power
and
investment power over securities held by Jayhawk Private Equity Co-Invest Fund,
L.P.
(8)
Represents shares of common stock issuable upon exercise of placement agent
warrants. Byron Roth, the chief executive officer, and Gordon Roth, the chief
financial officer, share voting and investment power over the securities
held by
Roth
Capital Partners, LLC.
(9)
Represents shares of common stock issuable upon exercise of placement agent
warrants which were assigned by Roth.
Background
On
February 25, 2008 we entered into a securities purchase agreement with the
selling stockholders providing for the sale of 4,691,499
shares
of common stock for an aggregate purchase price of approximately $11,300,000
(or
$2.40 per share).
In
connection with that transaction we issued to the placement agent warrants
to
purchase 469,150 shares of common stock exercisable for a period of five years
at an exercise price equal to $2.88 per share and a paid them a transaction
fee
of approximately $791,000 (representing 7% of the gross proceeds of the
transaction).
As
of
February 29, 2007 the closing sale price of our common stock was $2.71. As
of April 7, 2008 the last sale price of our common stock was $1.91.
The
agreements entered into with the investors include a securities purchase
agreement, and a registration rights agreement and various ancillary agreements
each dated February 25, 2007. The following is a summary of the material terms.
Securities
Purchase Agreement
Representations;
Warranties; Indemnification
:
The
securities purchase agreement contains representations and warranties by us
and
the investors which are customary for transactions of this type. The securities
purchase agreement also obligates us to indemnify the investors for any losses
arising
out of any breach of the agreement or failure by us to perform with respect
to
the representations, warranties or covenants in the agreement.
Covenants
:
The
securities purchase agreement contains certain covenants on our part, including
the following:
|
·
|
we
are required to deliver 1,000,000 additional shares of common stock
to the
investors on a pro rata basis for no additional consideration in
the event
that the Company’s after-tax net income for the fiscal year ending
December 31, 2008 is less than $4.8
million;
|
|
·
|
we
are required to deliver 1,000,000 additional shares of common stock
to the
investors on a pro rata basis for no additional consideration in
the event
that the Company’s after-tax net income for the fiscal year ending
December 31, 2009 is less than $8
million;
|
|
·
|
we
must use the proceeds of the financing for working capital purposes
and
not to repay any outstanding debt or to redeem or repurchase any
equity
securities;
|
|
·
|
we
are required to hire a new full-time chief financial officer who
is fluent
in English and an expert in (x) GAAP and (y) auditing procedures
and
compliance for United States public companies within 45 days of the
closing;
|
|
·
|
during
the six months following the closing date, we may not issue any “future
priced securities” as such term is described by NASD
IM-4350-1.
|
Registration
Rights Agreement
For
a
description of the material terms of the registration rights agreement reference
is made “Summary - Offering by Selling Stockholders - Background.”
Plan
of Distribution
The
selling stockholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or quoted or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any
one
or more of the following methods when selling shares:
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits investors;
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
·
|
privately
negotiated transactions;
|
·
|
to
cover short sales made after the date that this registration statement
is
declared effective by the SEC;
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
·
|
a
combination of any such methods of sale;
and
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of common stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
Upon
us
being notified in writing by a selling stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of common stock through
a block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, a supplement to this prospectus will be
filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing
(i) the name of each such selling stockholder and of the participating
broker-dealer(s), (ii) the number of shares involved, (iii) the price at which
such the shares of common stock were sold, (iv) the commissions paid or
discounts or concessions allowed to such broker-dealer(s), where applicable,
(v)
that such broker-dealer(s) did not conduct any investigation to verify the
information set out in this prospectus, and (vi) other facts material to the
transaction. In addition, upon the Company being notified in writing by a
selling stockholder that a donee or pledgee intends to sell more than 500 shares
of common stock, a supplement to this prospectus will be filed if then required
in accordance with applicable securities law.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of
the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
securities will be paid by the selling stockholder and/or the purchasers. Each
selling stockholder has represented and warranted to us that it acquired the
securities subject to this registration statement in the ordinary course of
such
selling stockholder’s business and, at the time of its purchase of such
securities such selling stockholder had no agreements or understandings,
directly or indirectly, with any person to distribute any such securities.
We
have
advised each selling stockholder that it may not use shares registered on this
registration statement to cover short sales of common stock made prior to the
date on which this registration statement shall have been declared effective
by
the SEC. If a selling stockholder uses this prospectus for any sale of the
common stock, it will be subject to the prospectus delivery requirements of
the
Securities Act. The selling stockholders will be responsible to comply with
the
applicable provisions of the Securities Act and Exchange Act, and the rules
and
regulations thereunder promulgated, including, without limitation, Regulation
M,
as applicable to such selling stockholders in connection with resales of their
respective shares under this registration statement.
We
are
required to pay all fees and expenses incident to the registration of the shares
(estimated to be approximately $86,000), but we will not receive any proceeds
from the sale of the shares of common stock. The selling stockholders will
pay
all of the selling commissions, brokerage fees and related expenses. We have
agreed to indemnify the selling stockholders against certain liabilities,
including liabilities under the Securities Act.
USE
OF PROCEEDS
We
will
not receive any of the proceeds from the sales of the shares of the common
stock
by the selling stockholders. To the extent the placement agent warrants are
exercised for cash, if at all, we will receive the exercise price for those
warrants. Under the terms of the placement agent warrants cashless exercise
is
permitted but only after one year and then only if the underlying shares have
not been registered. We intend to use any cash proceeds received from the
exercise of the placement agent warrants for working capital and other general
corporate purposes. We cannot assure you that any of the warrants will ever
be
exercised for cash or at all.
MARKET
PRICE OF AND DIVIDENDS OF COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market
Information
Our
common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under
the symbol "CSOL.OB". There has never been any active public market for shares
of our common stock and it is characterized by low volume and high volatility.
The
following table sets forth the high and low bid prices, in the over-the-counter
market, as reported and summarized by the OTCBB, for each fiscal quarter during
each of the fiscal years ended December 31, 2005, December 31, 2006 and December
31, 2007 and for the quarter ended March 31, 2008. These prices are based on
inter-dealer prices, without retail markup, markdown or commission and may
not
represent actual transactions.
Quarter
Ended
|
|
High
|
|
Low
|
|
03/31/2006
|
|
|
11
|
|
|
7.5
|
|
06/30/2006
|
|
|
11
|
|
|
11
|
|
09/30/2006
|
|
|
6.50
|
|
|
1.3
|
|
12/31/2006
|
|
|
2.50
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
03/31/2007
|
|
|
3.73
|
|
|
3.50
|
|
06/30/2007
|
|
|
2.60
|
|
|
1.81
|
|
09/30/2007
|
|
|
3.45
|
|
|
1.75
|
|
12/31/2007
|
|
|
4.50
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
03/31/2008
|
|
|
3.70
|
|
|
1.50
|
|
As
of
April 7, 2008, the last reported sale price of our common stock was $1.91 per
share.
Since
the
completion of the reverse merger, our common stock has traded sporadically
and
with high volatility. Consequently, our historical prices may not be an accurate
indication of the future prices of our common stock.
Holders
As
of
March 24, 2008, there were 13,136,305 shares of our common stock issued and
outstanding, and there were approximately 2,533 holders of record of our
outstanding shares of common stock. This does not reflect the number of persons
or entities who held stock in nominee or "street" name through various brokerage
firms.
Dividends
We
have
never declared or paid any cash dividends on our common stock and are restricted
from paying dividends both contractually and by virtue of the fact that we
are a
holding company. We currently intend to retain all earnings, if any, for use
in
business operations and we do not anticipate declaring any dividends in the
near
future.
The
payment of dividends is contingent on the ability of our PRC based operating
subsidiaries Deli Solar (Bazhou), Deli Solar (Beijing) and Tianjin Huaneng
to
obtain approval to send monies out of the PRC.
The
PRC's
national currency, the Yuan, is not a freely convertible currency. The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
Shortages in the availability of foreign currency may restrict our ability
to
remit sufficient foreign currency to pay dividends.
In
addition, under the terms of the certificate of designation which was filed
in
the office of Secretary of State for the State of Nevada on June 12, 2007 in
connection with the issuance of the Series A Preferred Stock, we are restricted
in paying dividends on our common stock.
Securities
Authorized for Issuance Under Equity Compensation
Plans.
We
currently do not have any equity compensation plans.
Penny
Stock Regulations
The
SEC
has adopted regulations which generally define "penny stock" to be an equity
security that has a market price of less than $5.00 per share. Our common stock
falls within the definition of penny stock and is subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000, or annual incomes
exceeding $200,000 or $300,000, together with their spouse).
For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's prior written consent to the transaction. Additionally, for
any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell the common stock and may affect the ability of investors to sell their
common stock in the secondary market.
Shares
Eligible for Future Sale
There
is
no established trading market for our common stock. Future sales of substantial
amounts of our common stock in the trading market could adversely affect market
prices.
This
is
an offering of 5,160,649 shares of our common stock by the selling stockholders,
among which 469,150 shares may be acquired on exercise of the placement agent
warrants. As of March 31, 2008, there were 13,136,305 shares of our common
stock
issued and outstanding and 2,509,678 shares of Series A Preferred Stock (900,000
of which are held in escrow to be delivered pro rata to the June 07 investors
if
we fail to achieve certain income levels for 2008). Assuming (i) exercise of
the
469,150 shares that may be acquired on exercise of the placement agent warrants,
(ii) conversion of the 1,609,678 shares of Series A Preferred Stock issued
in
June 13, 2007 financing which have not been converted, (ii) the exercise of
the
other outstanding warrants to purchase an aggregate of 5,505,559 shares of
common stock, there will be 20,720,692 shares of common stock outstanding.
Of
these 20,720,692 shares (i) 5,160,649 shares are being registered for resale
in
this prospectus, (ii) all of the 1,609,678 shares of Series A Preferred Stock
outstanding may be sold under Rule 144 by non affiliates, (iii) 3,952,025 shares
were registered for resale in a registration statement declared effective on
July 18, 2006, (iv) the 4,067,964 issued in the reverse merger may be sold
subject to the requirements of Rule 144, (v) 508,734 shares of the 1,774,194
of
the Class A Warrants were registered for resale in the registration statement
declared effective on February 7, 2008 and the remainder and all of the
1,774,194 shares underlying the Class B Warrents shares may be sold after June
2008 if purchased by way of a cashless exercise.
Rule
144
In
general, under Rule 144 as currently in effect, a person other than an affiliate
who has beneficially owned shares of common stock of a reporting issuer for
at
least six months is entitled to sell such shares without further limitations,
provided,
that
current
public information is available for such issuer for at least another six months.
Other
Registration Rights
Other
than the registration rights set forth in the registration rights agreement
entered into on February 25, 2008 with the selling stockholders and the
registration rights agreement entered into on June 13, 2007 with the investors
in that transaction under which we remain all of the 1,265,460 shares underlying
the obligated to selling stockholders we have no other obligation to register
under the Securities Act any of our shares of common stock.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
INFORMATION - Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") includes "forward-looking statements." All
statements, other than statements of historical facts, included in this report
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 that 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 prospects for future
acquisitions; the competition in the solar hot water product market, the
competition in the solar water heaters and boilers industry and the impact
of
such competition on pricing, revenues and margins; 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 and indirect subsidiary SZPSP.
Deli
Solar (Bazhou), founded in 1997, designs, manufactures and sells renewable
energy systems to produce hot water and for space heating in the PRC. Deli
Solar
(Bazhou)’s principal products are solar hot water heaters and multifunctional
space heating products, including coal-fired boilers for residential use. Deli
Solar (Bazhou) also sells component parts for its systems, and provides
after-sales maintenance and repair services.
Most
end
users of our products use them to heat water for their homes, with a
concentration in rural areas where electricity is in short supply. Our
coal-fired boilers, furnaces and heating stoves are also used as primary
household space heaters during cold weather and as cooking stoves.
Deli
Solar (Beijing), established during the second quarter of 2006, is
principally engaged in the installation of large solar water heaters in
construction projects in major cities in the PRC, including Beijing.
Tianjin
Huaneng 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 resale of energy-saving heating products such as
heat
pipes, heat exchangers, pressure water boilers, solar energy water heaters
and
radiators. Currently, SZPSP is also operating a distribution facility in
Shenzhen, PRC.
Approximately
47% of our sales revenues for the fiscal year ended December 31, 2007 were
derived from sales of our solar water heaters, 19% derived from sales of heat
exchange equipment with the balance of approximately 34%
derived
from sales of our coal-fired boilers, space heating and other products.
88%
of
our sales revenues for the fiscal year ended December 31, 2007 were derived
from
sales made to PRC based customers. Approximately 12% of our sales revenues
were
derived from the international market.
Recent
Developments
Additional
Capital
February
2008 Private Placement
On
February 29, 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.
June
2007 Private Placement
On
June
13, 2007 we raised gross proceeds of approximately $2,750,000 in a private
placement
providing
for the sale to investors for a purchase price of $1.55 per share of
(i)
|
1,774,194
shares of Series A Preferred Stock (with each share convertible into
one
(1) share of common stock, subject to
adjustment)
|
(ii)
|
five
year class A warrants to purchase 1,774,194 shares of common stock
at an
exercise price $1.90 per share (subject to adjustment), and
|
(iii)
|
five
year class B warrants to purchase an additional 1,774,194 shares
of common
stock at an exercise price of $2.40 per share (subject to adjustment).
|
Acquisitions
As
part
of our business strategy, we review acquisition and strategic investment
prospects that we believe would complement our current product offerings,
increase our market coverage or enhance our technical capabilities, or otherwise
offer growth opportunities. From time to time we consider investing in new
businesses and we expect to make investments in, and to acquire businesses,
products, or technologies in the future. We are currently considering a number
of possible investments of this kind but we have not made any definitive
investment or acquisition decisions.
Acquisition
of Shenzhen PengSangPu Solar Industrial Products
Corporation
On
March
31, 2008 Deli Solar (Beijing) completed the acquisition of 100% of the
outstanding equity interests of Shenzhen PengSangPu Solar Industrial Products
Corporation (“SZPSP”) from its three shareholders. SZPSP was incorporated as a
limited liability company under the laws of the PRC on September 23, 1993.
SZPSP
is
principally engaged in the resale of energy-saving heating products such as
heat
pipes, heat exchangers, pressure water boilers, solar energy water heaters
and
radiators. Currently, SZPSP is also operating a distribution facility in
Shenzhen, PRC.
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 the Deli Solar (Beijing) which will 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 purchase price, the parties agreed to an appraised value
of
RMB 20 million for SZPSP’s intangible assets. The purchase price for these
intangible assets was paid in 1,419,729 shares of our common stock. If on March
31, 2009 (the first anniversary of the closing) our common stock price is lower
than $2, we will make up the difference. Fifty percent (50%) of these shares
shall be transferable and unrestricted within one (1) year after the closing
and
the remaining fifty percent (50%) transferable within two (2) years.
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 Tianjin Huaneng
On
July
1, 2007 Deli Solar (Beijing) purchased 51% of the equity in Tianjin Huaneng
Group Energy Equipment Co., Ltd. (“Tianjin Huaneng”) for a purchase price of
approximately $1,689,741. In addition to the purchase price we paid a finder’s
fee of approximately $769,418. Deli Solar (Beijing) assumed 51% of the
liabilities of Tianjin Huaneng and contributed RMB 20,000,000
(approximately $2,613,400) as working capital to the acquired company. Deli
Solar (Beijing) also agreed to employ the 550 current Tianjin Huaneng employees
pursuant to new three year employment contracts.
Tianjin
Huaneng, incorporated in 1987, was a state-owned enterprise with 51% of its
equity formerly- owned by SAAC and 49% owned by the employees. Tianjin Huaneng
manufactures heating products such as heating pipes, heat exchangers, specialty
heating pipes and tubes, high temperature hot blast stoves, heating filters,
normal pressure water boilers, solar energy water heaters and
radiators.
Tianjin
is a city in the PRC which is approximately 50 miles from Beijing with a
population of 10.24 million (as of 12/31/04), and is one of only four municipal
cities directly governed by the central government in China.
Shenzhen
Xiongri
In
December 2006 we signed a memorandum of understanding with Shenzhen Xiongri
Solar Power Co., Ltd. (“Shenzhen Xiongri”) to acquire 60% of its equity for a
purchase price of approximately $250,000 and additional contingent consideration
of up to $5 million consisting of shares of our common stock. Shenzhen Xiongri
is located in Shenzhen, PRC. Its local government provides strong support for
the solar water heater industry which could help us grow business in that area.
We paid an initial deposit of $258,592 to Shenzhen Xiongri. Management has
decided not to complete this acquisition due to the fact that Shenzhen Xiongri’s
sales revenues were significantly less than our management had expected. We
have
asked that our deposit be returned, and Shenzens Xiongri’s management has agreed
to return it to us by the end of 2008. There can be assurance that it will
in
fact be returned.
Critical
Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in conformity with
U.S. generally accepted accounting principles requires us to make judgments,
estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Note 2 to the consolidated
financial statements describes the significant accounting policies and methods
used in the preparation of the consolidated financial statements. The areas
described below are affected by critical accounting estimates and are impacted
significantly by judgments and assumptions in the preparation of the
consolidated financial statements. Actual results could differ materially from
the amounts reported based on these critical accounting estimates.
Revenue
Recognition
Product
sales are recognized when the products are delivered to and inspected by
customers and title has passed. Deli Solar (Bazhou) provides a three-year
standard warranty on all of the products it manufactures. Under this standard
warranty program, repair and replacement of defective component parts are free
of any charge during the first year following the purchase. In the second and
third year, replacement parts must be paid for by the customer but not the
labor. Most of our warranty services are performed by our independent sales
agents and distributors in return for a 1-2% discount of the purchase price
they
pay for our products. Accordingly, we have recorded no liability for warranty
reserve. We also allow our sales agents and distributors to return any defective
product for exchange.
Allowance
for Doubtful Accounts
Our
business operations are conducted in the PRC. We extend unsecured trade credit
to our relatively large customers according to their sales volume and historical
payment records. The allowance for doubtful accounts is established through
charges to the provision for bad debts. We regularly evaluate the adequacy
of
the allowance for doubtful accounts based on historical trends in collections
and write-offs, our judgment as to the probability of collecting accounts and
our evaluation of business risk. This evaluation is inherently subjective,
as it
requires estimates that are susceptible to revision as more information becomes
available. Accounts are determined to be uncollectible when the debt is deemed
to be worthless or only recoverable in part and are written off at that time
through a charge against the allowance.
Property,
Plant and Equipment
Building,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization are recorded utilizing the
straight-line method over the estimated original useful lives of the assets.
Amortization of leasehold improvements is calculated on a straight-line basis
over the life of the asset or the term of the lease, whichever is shorter.
Major
renewals and betterments are capitalized and depreciated; maintenance and
repairs that do not extend the life of the respective assets are charged to
expense as incurred. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included
in
income. Depreciation related to property and equipment used in production is
reported in cost of sales.
Long-term
assets of the Company are reviewed annually as to whether their carrying value
has become impaired. We consider assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. We also
re-evaluate the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. As of December
31,
2007, we expect these assets to be fully recoverable.
Because
our fiscal year is the calendar year, throughout this section we refer to the
fiscal years ended December 31, 2007, 2006 and 2005 as “2007,” “2006,” and
“2005,” respectively.
Key
Items in 2007
Significant
financial items during 2007 include:
|
·
|
|
Completed
acquisition of Tianjin Huaneng.
|
|
|
|
Overall
net sales increased 73% to $37,072,346 in 2007.
|
|
|
|
Excluding
sales attributable to Tianjin Huaneng net sales increased 28% to
$27,480,290 in 2007.
|
|
|
|
Net
income for 2007 increased by 104% to $2,525,141 compared to 2006.
|
|
|
|
Operating
income for 2007 increased by 163% compared to
2006.
|
|
|
|
Excluding
Tianjin Huaneng, operating income for 2007 increased 89% compared
to
2006.
|
RESULTS
OF OPERATIONS
Fiscal
year ended December 31, 2007 compared to fiscal year ended December 31, 2006
Sales
Sales
increased to $37,072,346 for 2007 as compared to $21,468,313 for 2006, an
increase of approximately $15,604,033 or 73%. Excluding Tianjin Huaneng our
sales revenues increased to $27,480,290 an increase of about 28% of our sales
revenues. Approximately $17 million were derived from sales of solar hot water
heaters, a 35% increase from 2006; approximately $9 million was derived from
sales of coal-fired boilers and space heating products, about a 9% increase
as
compared to 2006. The increase in sales is attributed to the acquisition of
Tianjin Huaneng and from sales of its energy-saving boilers and environmental
protection equipment and due to our continued investment in brand marketing,
sales promotion and our development of a more extensive sales distribution
network. We continued to develop new sales agents to expand our sales network
in
rural areas in 2008. We recruited 10 additional sales agents and expanded our
sales coverage. The increase in the average household income, particularly
in
the rural areas and small and medium size cities, continues to drive up the
demand of our products.
Gross
Profit
Gross
profit for 2007 was $8,300,268 or 22.39% of revenues as compared to gross profit
of $4,625,319 or 21.5% of revenues for 2006. Excluding Tianjin Huaneng our
gross
profit for 2007 was $5,681,565 or 21% of revenues. The increase in gross profit
resulted primarily from the increase in sales revenue. In 2007, we sold
approximately 147,500 solar water heater products and 108,800 units of boiler
heater products compared to 133,000 solar water heaters and 99,000 boiler heater
products in 2006. The profit margin in 2007 increased slightly due to the
acquisition of Tianjin Huaneng whose products have higher profit margins than
our other products. The profit margins on our solar heaters have been falling
because of market pressure to keep our prices competitive. We are facing severe
price competition in the traditional solar water heater market. We expect price
competition to continue through the end of 2008. As a result, we expect our
gross profit margin for our solar water heaters to continue to decrease.
However, we anticipate that Tianjin Huaneng’s energy saving boilers and
environmental protection equipment will generate better gross profit margins
to
offset the decline in our profit margins for solar water heaters and residential
boilers.
Cost
of Sales
In
line
with the 73% increase in our overall sales, our costs of goods sold were
$28,772,078 for 2007, an increase of $11,929,084 or 71% from $16,842,994 for
2006. Excluding Tianjin Huaneng our cost of sales increased to $21,798,724
or
79% of sales. Management is continuing to focus on cost controls for raw
materials. The supply of raw materials is currently a buyer’s market and
management believes this trend will continue, which will provide us with the
opportunity to be more selective in our purchase of raw materials. We try to
minimize our product costs and keep our product prices competitive.
Operating
Expenses
Operating
expenses increased to $5,114,634 for 2007 as compared to $3,414,707 for 2006
an
increase of $1,699,927 or about 50%. Excluding Tianjin Huaneng our operating
expenses decreased to $3,392,905 or 12.35% of sales.
Among
the
increase of operating expenses, selling and distribution expenses increased
to
$827,839 from $459,746 for 2006, an increase of $368,093, or 80%. These selling
expenses consisted primarily of sales promotions, distribution transportation
expenses, agency administration expenses and after sales services, such as
expenses for installation and replacements. The increase in selling expenses
was
primarily due to our acquisition of Tianjin Huaneng and due to the increase
in
sales volume and increase in sales promotion activities.
Advertising
expenses for 2007 were $1,415,493 as compared to $1,106,488 for 2006, an
increase of $309,005 or approximately 28%. The increase in advertising expense
was a result of our continued emphasis on advertising to increase our product
awareness, branding and sales. We believe that through marketing, we will able
to face down competition and generate greater market share for our products.
General
and administrative expenses were $4,003,973 for 2007, or approximately 11%
of
sales, compared to $ 2,800,015 or approximately 13% of sales, for 2006. The
increase was mainly due to the acquisition of Tianjin Huaneng which incurred
general and administrative expenses of approximately $1,486,751; Deli Solar
(Bazhou) and Deli Solar (Beijing)’s expenses incurred approximately $1,852,430
and the Company at the U.S. level incurred a total of $664,792 which included
legal fees of approximately $340,197.
Salaries
and benefits increased from $279,069 for 2006 to $454,012 for 2007, an increase
of $174,943 or 63% from the same corresponding period last year. The increase
reflects the addition of 550 employees as a result if the Tianjin Huaneng
acquisition. Per employee, salaries and benefits decreased from $1,188 for
2006
to $890 for 2007, a decrease of $ 298 or 25% from the same corresponding period
last year.
Income
from Operations
Operating
income was $3,185,634 for 2007 as compared to operating income of $1,210,612
for
2006, an increase of $1,975,022 or 163%. The increased operating income was
due
to our acquisition of Tianjin Huaneng and the increased sales revenue and our
budget control on operating expenses in 2007. As a percentage of sales,
operating income was 8.59% in 2007 as compared to 5.64% for 2006. Excluding
Tianjin Huaneng our operating income was $2,288,660 or 8% of sales. The increase
in operating income as a percentage of sales was substantially due to the
increase in sales and controlling selling expenses in 2007.
Income
Taxes
We
did
not carry on any business or maintain any branch office in the United States
during 2007 or 2006. Therefore, no provision for U.S. federal income taxes
or
tax benefits on the undistributed earnings and/or losses has been
made.
Normally
a PRC company is subject to enterprise income tax at the rate of 33%, value
added tax at the rate of 17% for most of the goods sold, and business tax on
services at a rate ranging from 3% to 5% annually. However, pursuant to the
applicable laws and regulations in the PRC, Deli Solar (Bazhou), and Deli Solar
(Beijing) as wholly foreign owned enterprises (“WFOEs”) in the PRC, are entitled
to an exemption from the PRC enterprise income tax for two years commencing
from
its first profitable year, after loss carry-forwards from the previous five
years have been recovered. Since Deli Solar (Bazhou) was converted into a WFOE
in March 2005, it enjoyed a two-year tax-exempt treatment in the PRC which
ended
on March 31, 2007. Since then it has been subject to 50% of its enterprise
income tax from 2007 until 2010. Our direct subsidiary, Deli Solar (Beijing),
had a net loss for 2007. Consequently, it did not incur income tax. Tianjin
Huaneng is domestically owned and subject to the Corporate Income Tax governed
by the Income Tax Law of the People’s Republic of China, at a statutory rate of
33%, which is comprised of a 30% national income tax and 3% local income
tax.
Minority
Interests
Minority
interests of $199,744 arise as of December 31, 2007 primarily due to share
of
profits by minority interests from consolidation with Tianjin
Huaneng.
Net
Income
Net
income was $2,525,141 in 2007, an increase of $1,285,640 or about 104% from
$1,239,501 for 2006. Excluding Tianjin Huaneng our net income was $2,134,129
in
2007, an increase of 72% from 2006. The increase was primarily due to an
increase in our revenue and our acquisition of Tianjin Huaneng and resultant
sales of its products.
BUSINESS
Business
Overview
We
are
engaged in the solar and renewable energy business in the People's Republic
of
China (“PRC”).
Our
business is conducted through our wholly-owned PRC based operating subsidiaries,
Deli Solar (Bazhou), Deli Solar (Beijing) and our recently acquired indirect
majority owned subsidiary Tianjin Huaneng.
Deli
Solar (Bazhou), founded in 1997, designs, manufactures and sells renewable
energy systems to produce hot water and for space heating in the PRC. Deli
Solar
(Bazhou)’s principal products are solar hot water heaters and multifunctional
space heating products, including coal-fired boilers for residential use. Deli
Solar (Bazhou) also sells component parts for its systems, and provides
after-sales maintenance and repair services.
Most
end
users of Deli Solar (Bazhou)’s products use them to heat water for their homes,
with a concentration in rural areas where electricity is in short supply. Deli
Solar (Bazhou)’s coal-fired boilers, furnaces and heating stoves are also used
as primary household space heaters during cold weather and as cooking stoves.
Deli
Solar (Beijing), established during the second quarter of 2006, is
principally engaged in the installation of large solar water heaters in
construction projects in major cities in the PRC, including Beijing.
Tianjin
Huaneng, acquired in July 2007, manufactures and installs waste heat recovery
systems primarily for use in manufacturing facilities whose manufacturing
processes require the generation of large amounts of heat, such as steel and
chemical plants. The waste heat can be used to generate hot water at the
manufacturing facilities Tianjin Huaneng’s products include heating pipes, heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators. Products and systems manufactured and sold by Tianjin
Huaneng during the period from July 1, 2007 (the date of acquisition) through
December 31, 2007 represented 19% of our sales revenues for the fiscal year
ended December 31, 2007. Tianjin Huaneng’s products are sold in more than 28
provinces in the PRC as well as Singapore, Indonesia, and North Korea.
SZPSP,
which we acquired effective March 31, 2008, is principally engaged in the resale
of energy-saving heating products such as heat pipes, heat exchangers, pressure
water boilers, solar energy water heaters and radiators. Currently, SZPSP
is also operating a distribution facility in Shenzhen, PRC. This acquisition
will add to the assortment of solar water products which we have available
for
sale.
For
the
fiscal year ended December 31, 2007 approximately 47% of our sales revenues were
derived from sales of our solar water heaters, 34%
were
derived
from sales of our coal-fired boilers, space heating and other products and
19%
were derived from sales of heat exchange equipment.
For
the
fiscal year ended December 31, 2007, approximately 88% of our sales revenues
were derived from sales made to PRC based customers and approximately 12% were
derived from the international market
Products
Solar
Hot Water Heaters
We
manufacture two types of solar hot water heaters: evacuated tubular solar water
heaters and flat plate solar water heaters. Our solar water heaters are
primarily used to generate hot water for residential use. Among evacuated
tubular solar water heaters, regular evacuated tubular solar water heaters
using
all-glass vacuum collectors are our best selling product, comprising
approximately 85% of our total solar water heater revenues for 2007. This type
of solar water heater can generate hot water even in cold weather and therefore
can be used throughout the year. Further, these water heaters are relatively
easy and inexpensive to produce compared to other solar hot water heaters using
other types of vacuum collectors. Because our primary market is in rural areas
of the PRC, our regular evacuated tubular solar water heaters annually account
for most of our sales.
Boilers
We
also
manufacture boilers, furnaces, stove heating, and space heating products. Most
of our boilers and space heating products are coal-fired, small scale units
for
residential space heating and cooking.
Sales
of
our hot water heaters and boilers comprised approximately 72% of our total
sales
revenues in 2007.
Heat
Pipe Related Products
We
also
manufacture waste heat recovery systems, heating products such as heating pipes,
heat exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators.
Sales
of
these products and systems comprised approximately 19% of our total sales
revenues in 2007.
Recent
Developments.
February
2008 Private Placement
On
February 29, 2008 we raised gross proceeds of approximately $
11,300,000
in a
private placement
providing
for the sale of 4,691,499 shares of common stock at a price of $2.40 per
share.
In
connection with the transaction we agreed to issue to Roth Capital Partners
LLC
as placement agent, warrants to purchase 469,150 shares of common stock
exercisable for a period of five years at an exercise price equal to $2.88
per
share and we paid them a transaction fee of 7% of the gross proceeds of the
transaction or approximately $790,000.
On
February 25, 2008, the closing price of the common stock as quoted on the OTCBB
was $2.69. For more information relating to the terms of this private placement,
reference is made to “Selling Stockholders - Background.”
Acquisition
of Shenzhen PengSangPu Solar Industrial Products
Corporation
On
January 9, 2008 Deli Solar (Beijing) entered into an equity purchase agreement
and a complementary agreement with Shenzhen PengSangPu Solar Industrial Products
Corporation (“SZPSP”) and its shareholders to acquire 100% of the outstanding
equity interests of SZPSP from its three shareholders. The closing occurred
on
March 31, 2008.
SZPSP
was
incorporated as a limited liability company under the laws of the PRC on
September 23, 1993. Its registered capital was Renminbi Yuan (“RMB”)
2,650,000 (equivalent to $365,916) which was contributed by its three
shareholders. On July 13, 2006, the registered capital increased to $1,767,443
(RMB 12,800,000).
SZPSP
specializes in the manufacture of solar hot water systems for commercial use.
Its customers include factories, hospitals, schools and hotels. SZPSP’s solar
energy products include flat plate solar collectors, solar water heater systems,
central solar water heater system and solar energy photovoltaic technology,
etc.
It acquired ISO9001: 2000 international quality system accreditation in 2004.
SZPSP
is
principally engaged in the manufacture and distribution of solar heating
products such as heat pipes, heat exchangers, pressure water boilers, solar
energy water heaters and radiators. Currently, SZPSP is also operating a
distribution facility in Shenzhen, PRC. SZPSP had sales revenues of
RMB73,885,035 ($10,114,864) for 2007.
The
purchase price consisted of $4,087,832 (RMB 28,800,000) in cash, 1,419,729
shares of our common stock, and five year warrants to purchase 141,973 shares
of
common stock at an exercise price of $2.50 per share (subject to adjustment).
The cash portion was based on the net asset value of SZPSP. The three
shareholders agreed to loan the cash purchase price back to the Deli Solar
(Beijing) to be used as working capital. Fifty (50%) of the principal amount
of
this loan is required to be repaid within one year and the remaining balance
is
required to be repaid within two years. In addition to the payment of the
cash purchase price, we paid RMB 20 million for SZPSP’s trademarks and other
intangible assets which was paid in 1,419,729 shares of our common stock. We
agreed that if on the first anniversary of the closing our common stock price
is
lower than the share price ($2), we will pay the difference.
SZPSP
warranted that if (i) for the year ended December 31, 2008 its sales
revenues are less than RMB 99 million (approximately $13,670,068) or its
after-tax net profits are less than RMB 9.43 million (approximately $1,302,108);
or (ii) for the year ended December 31, 2009, sales revenues are less than
RMB
143.9 million (approximately $19,868,336) or its after-tax net profits are
less
than RMB 12.13 million (approximately $1,674,789), SZPSP will pay the difference
between the revenue and the targeted revenue of the year specified by reducing
the amount payable on the shareholders’ loan. If the shareholders’ loan is not
sufficient to pay the difference, the common shares held by SZPSP will be
returned to us to the extent necessary for the remaining balance.
The
current shareholders of SZPSP, being the management of SZPSP, have entered
into
employment contracts with us for a term of three years to remain in their
current managing positions of SZPSP.
Deli
Solar (Beijing) has the right to elect a majority of the board members of
SZPSP
Acquisition
of Tianjin Huaneng
On
May
18, 2007, Deli Solar (Beijing) entered into an agreement with Tianjin Municipal
Ji County State-owned Assets Administration Commission (the “SAAC”) to purchase
51% of the equity interests in Tianjin Huaneng Group Energy Equipment Co.,
Ltd.
(“Tianjin Huaneng”) for a purchase price of RMB24,100,000 (approximately
$3,149,147). The transaction closed on July 1, 2007 and we paid approximately
$1,575,600 in July 2007. By supplemental agreement between the parties dated
August 8, 2007, the purchase price was reduced to approximately $1,689,741.
However in addition to the purchase price we are required to pay a finder’s fee
of approximately $769,418. At the closing Deli Solar (Beijing) assumed 51%
of
the liabilities of Tianjin Huaneng. In addition, we
contributed RMB20,000,000 (approximately $2,613,400) as working capital to
the acquired company. Deli Solar (Beijing) also agreed to employ the 550 current
Tianjin Huaneng employees pursuant to new three year employment contracts.
Tianjin
Huaneng had sales revenues of approximately $11 million for 2006.
Tianjin
Huaneng, incorporated in 1987, is a state-owned enterprise with 51% of its
equity formerly-owned by SAAC and 49% owned by the employees.
Tianjin
Huaneng manufactures heating products such as heating pipes, heat exchangers,
specialty heating pipes and tubes, high temperature hot blast stoves, heating
filters, normal pressure water boilers, solar energy water heaters and
radiators.
Tianjin
is a city in the PRC which is approximately 50 miles from Beijing and has a
population of approximately 10.24 million (as of December 31, 2004), and is
one
of only four municipal cities directly governed by the central government in
China.
June
2007 Private Placement
On
June
13, 2007 we raised $2,750,000 in a private placement
providing
for the sale to the investors for an aggregate purchase price of $2,750,000
(or
$1.55 per share) of
(i)
|
1,774,194
shares of Series A Preferred Stock (with each share convertible into
one
(1) share of common stock, subject to
adjustment)
|
(ii)
|
five
year class A warrants to purchase 1,774,194 shares of common stock
at an
exercise price $1.90 per share (subject to adjustment), and
|
(iii)
|
five
year class B warrants to purchase an additional 1,774,194 shares
of common
stock at an exercise price of $2.40 per share (subject to adjustment).
|
On
June
13, 2007, the closing price of the common stock as quoted on the OTCBB was
$2.10.
Change
of Name
Effective
October 29, 2007, we changed our name from Deli Solar (USA), Inc. to China
Solar
& Clean Energy Solutions, Inc. We believe that the new name better reflects
the direction of the business. The name change was completed by means of a
short
form merger under the Nevada law under which Du Solar, Inc., our wholly
owned subsidiary, merged into us. We survived as the surviving corporation
and
we effected the name change in connection with that merger. No shareholder
approval was required for the short form merger and the related name change.
The
name change became effective with the OTCBB at the opening of trading on
November 5, 2007 under the new stock symbol “CSOL.OB.” Our new CUSIP number is
16943E 105.
Resignation
of Mr. Jianmin Li as Chief Financial Officer and as a Director;
Effective
November 1, 2007, Mr. Jianmin Li resigned as our Chief Financial Officer to
pursue other interests. Mr. Li's resignation was not the result of any
disagreement with us on any matter relating to our operations, policies or
practices. Following his resignation as the Chief Financial Officer, Mr.
Li continued to serve as a director until March 31, 2008 when he resigned as
a
director. Mr. Li's resignation as director was not the result of any
disagreement with us on any matter relating to our operations, policies or
practices.
Appointment
of Gary Lam as Chief Financial Officer and Subsequent Resignation as Chief
Financial Officer.
Effective
November 1, 2007, Mr. Gary Lam was appointed to serve as our Chief Financial
Officer. Effective March 14, 2008, Mr. Lam resigned as our Chief Financial
Officer to pursue other interests. Mr. Lam’s resignation was not the
result of any disagreement with us on any matter relating to our operations,
policies or practices.
Appointment
of Yihai Yang as Acting Chief Financial Officer
Effective
March 14, 2008, Mr. Yihai Yang was appointed to serve as our Acting Chief
Financial Officer.
Appointment
of Kevin Randolph as a Director
Effective
November 1, 2007, Mr. Kevin Randolph was appointed as a director. Mr.
Randolph is qualified as an "independent director" as defined by the rules
of
the Nasdaq Stock Market and as a result of his appointment we have a majority
of
independent directors.
Corporate
History
China
Solar & Clean Energy Solutions, Inc. was formerly known as Deli Solar (USA),
Inc., which was formerly known as Meditech Pharmaceuticals, Inc.
(“Meditech”).
Meditech
was incorporated in Nevada on March 21, 1983.
Organization
of Holding Company and Acquisition of Deli Solar (Bazhou)
In
2004,
Deli Solar (BVI), was organized as a limited liability company
under
the
International Business Companies Act of the British Virgin Islands by Mr.
Deli
Du
of Bazhou City, Hebei Province, PRC
and
others (with Mr. Du owning 80% )
as
a
holding company for Deli Solar (Bazhou).
On
August
1, 2004, Deli Solar (BVI) purchased all the capital stock of Deli Solar (Bazhou)
from Messrs. Deli Du, his brother Xiaosan Du and Xiao'er Du, for RMB 6,800,000
(approximately $879,920). As a result of that transaction, Deli Solar (Bazhou)
became a wholly foreign-owned enterprise ("WFOE") under PRC law, by virtue
of
its status as a wholly-owned subsidiary of a foreign company, Deli Solar
(BVI).
Reverse
Merger and Financing
On
March
31, 2005, Meditech entered into a stock contribution agreement with the
shareholders of Deli Solar (BVI) under which Meditech acquired all of the issued
and outstanding shares of capital stock of Deli Solar (BVI) in exchange for
the
issuance to the shareholders of Deli Solar (BVI) of 4,067,964 shares of
Meditech’s common stock.
Also
on
March 31, 2005 in connection with the stock contribution, we received net
proceeds of $5,748,015 from the sale of 1,642,990 shares of common stock
and warrants to a number of accredited investors in a private placement. (The
number and the price of the shares as described in this and the prior paragraph
have been adjusted to give effect to the one-for-six reverse stock split of
the
common stock, which became effective on August 15, 2005.)
As
a
result of foregoing transactions, the former shareholders (including Mr. Du)
of
Deli Solar (BVI) became holders of a majority of the common stock of Meditech
and Deli Solar (BVI) became a wholly-owned subsidiary of Meditech. Following
(i)
Mr. Du's purchase of the 56,259 shares from a third party for $500,000, (ii)
the
issuance to him of 3,254,371 shares in exchange for his 80% of the outstanding
shares of Deli Solar (BVI) and (iii) the simultaneous issuance by the Company
of
an additional 1,642,290 shares to accredited investors in the private placement,
Mr. Du then owned,
of
record, 57% of the issued and outstanding common stock of the Company. On
February 25, 2008 the Company issued approximately 4.7 million shares of its
common stock in a private placement for gross proceeds of approximately $11.3
million. As a result of this issuance, Mr. Du ceased to own a majority of the
outstanding shares of common stock.
On
August
15, 2005, Meditech changed its name from Meditech to Deli Solar (USA), Inc.
and
completed a one for six reverse stock split of the common stock.
On
August
29, 2005 Meditech completed a spin-off of its drug development business to
East
West Distributors, Inc., its wholly owned subsidiary.
During
the quarter ended June 30, 2006, Deli Solar (USA) set up a new wholly-owned
subsidiary, Deli Solar (Beijing) to further develop our business in Beijing.
Deli Solar (USA) contributed $1 million into Deli Solar (Beijing) as registered
capital.
Corporate
Structure
The
following diagram sets forth our current corporate structure:
Neither
China Solar nor Deli Solar (BVI) has any operations or currently intends to
have any operations in the future other than acting as a holding company and
management company for Deli Solar (Bazhou) and Deli Solar (Beijing) and raising
capital for their operations.
Employees
As
of
March 24, 2008 we had approximately 815 full time employees and 250 part time
employees.
Deli
Solar (Bazhou) requires each employee to enter into a one-year standard
employment agreement. Tianjin employees have three year agreements. The standard
employment agreement contains a confidentiality clause and a
covenant-not-to-compete clause, under which an employee must keep confidential
all manufacturing technology including drawings and other technology materials,
sales and financial information, and trade secrets obtained through his or
her
employment with us. Breach of this confidentiality clause will result in
termination of employment. Further, each employee may not compete against us
for
a certain period of time following the termination of employment with us. We
purchase group workers' compensation policy on behalf of our employees, and
the
premium is deducted from each employee's paycheck.
Executive
Offices
Our
executive office is located at Building 3, No. 28 Feng Tai North Road, Beijing,
China, 100071 and our telephone number is +86-10-63850516. Our factory
facilities are located outside of the city of Bazhou in the Hebei Province
of
the PRC.
Products
We
manufacture solar water heaters, boilers as well as heat pipe products.
Solar
Hot Water Heater Products
Our
solar
water heaters are primarily used to generate hot water for residential
use.
Approximately
47% of our total revenues for 2007 were derived from sales of our solar hot
water heaters compared to 60% of our total revenues for 2006.
We
manufacture two types of solar hot water heaters: evacuated tubular solar water
heaters and flat plate solar water heaters.
Among
evacuated tubular solar water heaters, regular evacuated tubular solar water
heaters using all-glass vacuum collectors are our best selling product,
comprising approximately 85%
of
our
total solar water heater revenues for 2007. This type of solar water heater
can
generate hot water even in cold weather and therefore, can be used throughout
the year. Further, they are relatively easy and inexpensive to produce compared
to other solar hot water heaters using other types of vacuum collectors. Because
our primary market is in rural areas of the PRC, our regular evacuated tubular
solar water heaters account for most of our sales of solar water heaters.
Solar
hot
water heaters use sunlight to heat either water or a heat-transfer fluid in
collectors. The solar collector is mounted on or near a house facing south.
As
sunlight passes through the collector's glazing, it strikes an absorbing
material. This material converts sunlight into heat, and the glazing prevents
the heat from escaping. The two most common types of solar collectors used
in
solar water heaters in the PRC market are evacuated tube collectors and glazed
flat plates.
Solar-heated
water is stored in an insulated tank until use. Hot water is drawn off the
tank
when tap water is used, and cold make-up water enters at the bottom of the
tank.
Solar water heaters tend to have a slightly larger hot water storage capacity
than conventional water heaters. This is because solar heat is available only
during the day and sufficient hot water must be collected to meet evening and
morning requirements.
We
produce and sell solar hot water heaters using both evacuated tube collectors
and glazed flat plate. Evacuated tubular solar water heaters are our principal
solar products. There are two major types of evacuated tubular solar water
heaters: standard evacuated tubular solar water heaters and evacuated heat
pipe
solar water heaters.
The
following table sets forth our product types and the approximate percentage
of
the sales of each type:
Types
|
|
Approx.
% of water heater revenues
|
|
Sub-types
|
|
Approx.
% of total solar product revenue
|
|
|
|
|
|
|
|
|
|
Evacuated
Tubular Solar Water Heaters
|
|
|
90
|
%
|
Regular
Evacuated Tubular Solar Water Heaters
|
|
|
85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evacuated
Heat Pipe Solar Water Heaters
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Flat
Plate Solar Water Heaters
|
|
|
10
|
%
|
|
|
|
|
N/A
|
|
Evacuated
Tubular Solar Water Heaters
This
line
of products represents about 5% of our sales revenues from solar water heaters
in 2007. They can generate hot water all year round for homes, whether or not
they are located in a cold climate. There are two types of vacuum tube water
heaters currently available: (i) the regular evacuated tubular solar water
heaters; and (ii) evacuated heat-pipe solar water heaters. Our regular evacuated
tubular solar water heaters use all-glass vacuum tubes, and our evacuated heat
pipe solar water heaters use heat pipe vacuum tubes. The primary use of our
evacuated tubular solar water heaters is to generate hot water for household
use. However, solar thermal energy can also be employed in industrial processes,
timber treatment, agricultural processes, cooling and space heating.
All
glass:
Our
regular evacuated products use all-glass evacuated tubular collectors. These
collectors consist of rows of parallel transparent glass tubes, which are double
layered and made of borosilicate glass. Each tube contains an absorber and
is
covered with a selective coating. Sunlight enters the tube, strikes the
absorber, and heats the water flowing through the absorber. The space between
the glass tubes and the absorber is "evacuated," or is a "vacuum". This vacuum
helps the collectors achieve extremely high temperatures (170-350 degrees F).
Because all-glass evacuated tubular collectors are relatively easy and cheap
to
make as compared to heat pipe vacuum tubes, our regular evacuated tubular solar
water heaters are our best selling solar hot water heater and comprise
approximately 85% of our solar water heaters sales.
Heat
Pipe:
Our
evacuated heat pipe solar water heaters comprise approximately 5% of our solar
hot water heaters sales. These solar water heaters use heat pipe vacuum tubes
to
convert solar energy into thermal energy. A heat pipe vacuum tube is a
hermetically sealed evacuated tube containing a mesh or sintered powder wick
and
a working fluid in both the liquid and vapor phase. When one end of the tube
is
heated the liquid turns to vapor absorbing the latent heat of vaporization.
The
hot vapor flows to the colder end of the tube where it condenses and gives
off
heat. The use of the latent heat of the fluid enables heat to be transferred
at
500 to 1000 times the rate compared with a solid metal rod and at temperature
differences between the ends of the pipe as low as 2 °C (i.e. 3.6°F difference).
The heat-pipe vacuum tube is a combined pipe and vacuum technology. This product
line features fast heating, minimum thermal loss, high temperature resistance,
anti-freeze and good pressure resistance. Evacuated heat pipe solar water
heaters, if pressurized, can produce high pressure hot water which provides
a
solution where uneven temperature is a problem. Our pressurized evacuated heat
pipe solar water haters can be customized according to actual needs of our
customers. Moreover, heat pipe vacuum tubes are more difficult to manufacture
and have higher production costs than all-glass vacuum tubes. Given our targeted
residential household market, we only sell a limited amount of evacuated heat
pipe solar water heaters.
Flat
Plate Solar Water Heaters
Our
sales
of this product comprise approximately 10% of our total solar hot water heater
sales.
This
type
of solar water heater consists of a flat-plate solar collector and a hot water
tank with natural circulation (thermosyphon). The collector is constructed
from
either a copper-aluminum mix, all copper, or anti-corrosive aluminum. The
collector is a rectangular box with a transparent cover and a back side
insulation layer. Small tubes run through the box and carry fluid-either water
or other fluid, such as an antifreeze solution. The tubes attach to the
collector.
As
heat
builds up in the collector, it heats the fluid passing through the tubes. The
hot water or liquid goes to a storage tank. Flat plate solar water heaters
made
by foreign manufacturers typically can provide a household with 70-100 liters
of
hot water (at 40-60°C) per day all year round. However, the anti-freeze
technology for the flat plate has not fully developed in the PRC. Our flat
plate
solar hot water heaters, and to our knowledge, other flat plate solar hot water
heaters that are currently available in China, can be used only during the
spring, summer and fall seasons.
Integrated
Solar Heating Packages
A
number
of our products are being used in complete building integrated solar heating
packages, which integrate our solar hot water and space heating systems directly
into the construction of new multi-family dwellings, commercial office buildings
and industrial developments. In August 2005 we entered into a construction
agreement with Beijing Municipal Mengtougou District Yingtaogou Village
Committee to install our solar hot water and space heating systems in 83
detached houses by March 30, 2007. As of December 31, 2006 we completed the
installation of our solar hot water and space heating systems in 16 of such
houses. The project continues to be suspended due to a payment default.
Boilers
and Space Heating Products
We
also
manufacture boilers, furnaces, stove heating, and space heating products,
comprising approximately 27% of our total sales revenues in the year of 2007.
Most
of
our boilers and space heating products are coal-fired, small scale units for
residential space heating and cooking.
We
manufacture more than 80 types of boilers, furnaces, space heating and stove
cooking products. Separated by functions and use, our boilers, furnaces and
stove heating products can be divided into three types: 1) combined cooking
and
space heating, comprising approximately 60% of our sales of boilers and space
heating products, 2) combined shower and space heating, comprising approximately
10% of our sales of boiler and space heating products, and 3) multifunctional
shower, cooking and space heating, comprising approximately 30% of our sales
of
boilers and space heating products.
We
have
also developed two environmentally friendly boilers: smokeless coal-fired
boilers and bio-materials furnaces. The former does not produce smoke and the
latter utilizes waste materials such as dry hay to generate heat. The
development of these products has been completed and we have sent samples of
these products to our distributors. As of the date of this report we have not
made significant sales of these environmentally friendly new
products.
New
Product Pipeline
We
have
the following products in the product planning and developing stage:
Photovoltaic
powered water heaters
.
We are
in the process of improving the physical performance of photovoltaic powered
water heaters. Photovoltaic technology (PV) is a technology that converts solar
energy into electricity. Photovoltaic modules or panels are made of
semiconductors that allow sunlight to be converted directly into electricity.
These modules can provide customers with a safe, reliable, maintenance-free
and
environmentally friendly source of power for a very long time. This system
consists of a photovoltaic array connected to several resistive heating elements
within a water storage tank. The PV array produces electrical power during
periods of solar irradiation and this power is immediately dissipated in the
resistive elements.
We
believe that the following factors make photovoltaic powered water heaters
an
attractive addition to our existing product line:
·
|
severe
electricity shortages for the PRC's grid-connected residents,
|
·
|
the
complete absence of grid electricity for millions of others and the
poor
prospect of improvement via incremental central station capacity
and grid
development in the near future,
|
·
|
the
abundance of solar energy resource in the PRC and an active rural
banking
system.
|
Our
sales
of photovoltaic powered water heaters have not been significant thus far.
Densely
Covered Regular Tubular Heaters
.
We have
developed a new solar water heater which is designed with densely covered
evacuated tubes to improve heating efficiency with only a small cost increase.
As an updated regular evacuated tubular heater, this product installs more
tubes
in one square meter than normal products do. For instance, it has ten tubes
on
one collector while others only have eight. We began marketing this product
in
June 2007 and we had sales through December 31, 2007 of RMB30
million.
Raw
Materials and Principal Suppliers
The
primary raw materials for manufacturing our products are stainless steel plate,
vacuum tubes, iron and regular steel plate. These raw materials are generally
available on the market and Deli Solar (Bazhou) has not experienced any raw
material shortage in the past. Because of the general availability of these
raw
materials, it has not been our standard practice to enter into long-term
contracts or arrangements with most of our raw materials suppliers. We believe
that this gives us the flexibility to select the most suitable suppliers based
on product quality and price terms provided by suppliers each year. We generally
have at least three suppliers that are pre-approved for each raw material
supply. However, this arrangement does not provide any guarantee that necessary
raw materials will continue to be available at prices or delivery terms
acceptable to us.
During
the past three years, we have purchased stainless steel plate primarily from
Lingyi Co. in Shangdong Province. Our three principal suppliers of vacuum tubes
have been Shangdong Taian Co., Beijing Linuo Co. and Beijing Tianpu Co. Our
principal supplier of steel and iron plate has been the local market in Bazhou
City, where Deli Solar (Bazhou) is located, which has approximately 100 steel
suppliers. We do not rely on any particular suppliers to procure other raw
materials.
Manufacturing
Process, Cost, and Capacity
Deli
Solar (Bazhou) assembles and manufactures most of its products in its own
production facility in Bazhou. Tianjin Huaneng assembles and manufactures most
of its products in its own production facility in Tianjin. SZPSP assembles
and
manufactures most of its products in its own production facility in Shenzhen.
Our senior manufacturing personnel include a number of professional engineers
and senior technology consultants. We primarily use manual labor for our product
because of availability of cheap labor in the Bazhou area. However, Deli Solar
(Bazhou) is in the process of automating some of its production processes.
In
February 2006, Deli Solar (Bazhou) purchased an automated production line for
the manufacture of water tanks. That production line has been assembled, tested
and validated and is expected to be in use by the end of the second quarter
of
2008.
As
of
March 24, 2008, we employed approximately 815 permanent manufacturing employees
and also 250 contract temporary workers. We added 550 employees as a result
of
the Tianjin acquisition and will be adding an additional 185 employees as a
result of the SZPSP acquisition. During manufacturing peak season for solar
hot
water heaters, which normally are the second and third calendar quarters of
the
year, we have at least approximately 300 workers working 3 shifts and 7 days
per
week. Because of the strategic location of our manufacturing facilities, we
are
able to take advantage of low labor cost in the Bazhou, Tianjin and Shenzhen
areas, which we estimate to be approximately 40% lower than that in the Beijing
or Shanghai areas. We have not experienced a great deal of worker turnover
because there are relatively few manufacturing employment positions in the
Bazhou and Tianjin areas and believe that we have achieved a high level of
employee loyalty. Set forth below is certain information regarding our current
manufacturing capacity:
Current
Manufacturing Capacity
|
|
Daily
Production (Approximate Units)
|
|
Annual
Production (Approximate Units)
|
|
|
|
|
|
|
|
Solar
Hot Water Heaters
|
|
|
500
|
|
|
133,000
|
|
|
|
|
|
|
|
|
|
Boilers
and Space Heating Products
|
|
|
120
|
|
|
26,000
|
|
Quality
Control
Our
manufacturing processes follow strict guidelines and standard operating
procedures that we believe are compliant with ISO 14000. Our products are
routinely tested as are individual aspects of our production. Deli Solar
(Bazhou) is in the process of applying for ISO 14000 certification and
anticipates that the certification will be issued by the end of
2008.
SZPSP
has
been issued
ISO9001:
2000 certification.
Because
of our stringent quality control system, most of our products are certified
by
governmental quality control testing centers, such as the Institute of China
Product Quality Association, Hebei Province New Energy Products and Projects
Quality Control and Testing Center, and Beijing Technology Supervisory Bureau.
We also received awards from Hebei Province Consumers Organization and Hebei
Province Administration of Industry and Commerce, as well as endorsement from
the China Rural Areas Energy Industry Association. The following table sets
forth the brands of our products that are certified by Beijing Technology
Supervisory Bureau to have met the National Industry Standard NY-T 343-1998,
which is the testing standard for solar hot water heaters' thermal
power:
Brands
|
|
Products
|
|
Model
Numbers
|
|
|
|
|
|
|
|
Deli
Solar Brand
|
|
|
Solar
Water Heaters
|
|
|
DLYG-12/75
|
|
|
|
|
|
|
|
|
|
Ailiyang
Brand
|
|
|
Solar
Water Heaters
|
|
|
ALY-12/75
|
|
|
|
|
|
|
|
|
|
Dudeli
Brand
|
|
|
Solar
Water Heaters
|
|
|
DDL-12/75
|
|
|
|
|
|
|
|
|
|
Deyu
Brand
|
|
|
Solar
Water Heaters
|
|
|
DY-12/75
|
|
Original
Equipment Manufacturer (OEM) Arrangement
Our
sales
peak season normally occurs in the second and third calendar quarters of the
year for solar hot water heaters and the third and fourth calendar quarters
of
the year for boilers and space heating products. During the peak season when
our
production capacity falls short of the market demand, we assemble and
manufacture products through OEM arrangements. Under a typical OEM arrangement,
we authorize an OEM to manufacture products under our brand names and/or
trademarks. We achieve quality control over products manufactured under such
OEM
arrangement by sending our technicians on site to supervise the production
and
test the products. During fiscal year 2007, we contracted with two OEMs,
Shandong Xin Xing Solar Power Heater Co., Ltd. and Lian Yun Gang Solar Power
Heating Co Ltd.
Manufacturing
through OEM arrangements comprises approximately 30% to 40% of our total sales
during the peak season. For 2007, the two OEM generated an aggregate of 40%
of
our annual revenues. The OEM manufacturers typically receive approximately
1% of
the gross sales from the products they manufacture for us. Most of the OEM
manufacturers we select are located near areas where products are demanded,
thereby minimizing transportation costs.
Demand
for Our Products
The
majority of the demand for our solar water heaters and space heaters is from
residential households in the PRC, particularly in rural areas. Presently,
we
sell our solar water heaters and space heaters primarily in the rural areas
of
the north-east part of the PRC including Hebei, Beijing, Tianjin, Heilongjiang,
and Liaoning, where there is prolonged sunny and dry weather.
We
believe the rural residential market has additional growth potential because
it
is an emerging market where we have encountered relatively little competition.
Historically, the PRC's rural households have used primitive means of generating
hot water and space heating by using biomass, local agricultural wastes, and/or
kerosene. As the PRC's rural population has been earning incremental
discretionary income in recent years, modern hot water and space heating systems
have become increasingly affordable and a priority for discretionary spending.
Seasonality
of Business
Our
sales
fluctuate, reflecting seasonal variations in solar energy supply during the
four
seasons. We have higher sales of solar hot water products in the spring because
solar hot water heaters perform the best during the summer when solar energy
is
abundant. High sales volumes for coal boilers occur in the fall because
customers purchase our space heating products for the winter. Sales volumes
for
our products tend to be lower between January and March.
The
PRC Solar Hot Water and Space Heating Market
The
PRC's Economic Growth, Energy Shortage and Renewable Energy Policy
The
rapid
economic growth of the PRC in recent years has fueled a massive demand for
coal,
oil and gas, which has caused a depletion in the country’s coal and oil reserves
and a resulting shortage in supply, as well as serious environmental problems.
Recognizing that accelerating the country's transition to efficient and
renewable energy would ease this depletion and the environmental concerns,
the
National People's Congress, the PRC's parliament, passed the China Renewable
Energy Promotion Act, which became effective on January 1, 2006. The Act aims
to
promote the use of renewable energy as an alternative source of energy to the
more polluting fuels. Renewable energy currently accounts for a negligible
percentage of the country’s total energy supply. The Act, however, does not
provide for any incentive schemes for purchasers.
Urban
and Rural Market Segmentation for Hot Water and Space Heating Systems in China
Recently
the market for hot water and space heating systems in the PRC has shown
substantial growth. According to a research conducted by the China Hardware
Products Association and the China Information Center in 2002, only 71.5% of
urban households had modern hot water systems. We do not know the number of
rural households that currently have hot water systems but believe that it
significantly less due to the fact that modern hot water and heating
systems have still not become available to and are not affordable in many
households in the country. Only recently have some of these households started
to earn the disposable income required to purchase the hot water and space
heating systems.
In
the
rural areas of the PRC the infrastructure is insufficient to facilitate delivery
of conventional energy solutions that are available in more developed countries.
The infrastructure to deliver natural gas or propane, two of the most common
energy sources used in the United States, for example, are not well developed
in
the PRC, even in larger cities. As to electrical energy, while it has become
more available in the urban areas of the PRC, it remains much less available
in
rural areas. Large portions of the PRC's rural areas are not electrified or
connected to the electric grid and approximately 60% of rural communities that
are grid-connected experience serious shortages of electricity. According to
the
National Renewable Energy Laboratories Eleven rural counties with a population
of approximately 70 million have no electricity at all. In addition, the cost
of
electricity is high in many rural areas, making it impractical for hot water
and
space heating purposes.
We
believe that in most provinces of the PRC, solar-generated hot water for rural
home use is the most available and economical solution. Compared with
electricity, natural gas or propane, we believe that solar hot water is more
available, less expensive and more suitable to rural household needs as shown
in
the following table.
Cost
Economics of Solar Hot Water Heaters
(in
$USD)
|
|
Solar
|
|
Gas
|
|
Electric
|
|
|
|
|
|
|
|
|
|
Initial
Equipment Cost
|
|
|
241
|
|
|
120
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
Life (Years)
|
|
|
15
|
|
|
6
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
Cost (15 years)
|
|
|
241
|
|
|
300
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Additional Energy Cost
|
|
|
0
|
|
|
98
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Cost (15 years)
|
|
|
241
|
|
|
1,770
|
|
|
1,431
|
|
Projected
Growth of Solar Hot Water Industry
The
PRC
solar hot water industry is an emerging, but fast growing industry. It has
experienced an annual growth rate of approximately 30% since 1999 as measured
by
the square meters of systems installed. The Solar Energy Usage Commission of
the
PRC Rural Energy Industry Association and the PRC Renewable Energy Industries
Association project such growth to continue at an annual average rate of 27.36%
until2015 as shown in the following table:
Aggregate
Solar Hot Water Industry Sales
|
|
Annual
Sales
|
|
|
|
|
|
1999
A
|
|
|
5.0
million m(2
|
)
|
|
|
|
|
|
2000
A
|
|
|
6.0
million m(2
|
)
|
|
|
|
|
|
2001
A
|
|
|
8.0
million m(2
|
)
|
|
|
|
|
|
2002
A
|
|
|
10.0
million m(2
|
)
|
|
|
|
|
|
2003
A
|
|
|
12.0
million m(2
|
)
|
|
|
|
|
|
2004
F
|
|
|
16.2
million m(2
|
)
|
|
|
|
|
|
2015
F
|
|
|
232.0
million m(2
|
)
|
A
=
actual. F = forecast.
Source
:
China
Solar Hot Water Industries Development and Research Report (2001-2003), jointly
published by the solar energy association and commission described above.
Because
of the rapid growth in solar hot water industry, solar hot water heaters have
become one of the three major hot water sources along with gas-fired heaters
and
electric heaters for PRC households and the PRC has become the world's largest
producer and consumer of solar hot water heaters.
Boiler
and Space Heating Industry
The
PRC
space heating industry is not new, but the modern systems that we sell are
new
for our customers. While many rural PRC households have considered hot water
a
luxury, heat generating facilities for cooking and space heating purposes in
one
form or another are considered basic necessities. These heat generating
facilities are generally extremely primitive and inefficient, and usually
consist of hearths and biomass stoves, which are dirty, unsafe and difficult
to
handle with respect to fuel. As many rural households have started to earn
disposable income in recent years, many of them can afford to modernize their
cooking and space heating facilities by using coal-fired boilers, which have
become one of the principal means for such modernization among the PRC rural
households.
Our
Product Warranty
We
provide a three-year standard warranty to our end users for all of the products
we manufacture. Under this standard warranty program, we provide free repair
and
exchange of component parts in the first year following the purchase, and we
charge labor costs for repair and maintenance but provide free exchange of
component parts in the second and third years following the purchase.
Thereafter, end users are required to pay for any repair and maintenance
services, as well as exchange of component parts. Most of our warranty services
are performed by our independent sales agents and distributors in return for
a
1-2% discount of the purchase price they pay for our products. According to
the
standard terms of our agreement with sales agents, we allow our sales agents
and
distributors to return any defective product for exchange.
Our
Growth Strategy:
Acquisition
Strategy
As
part
of our business strategy, we review acquisition and strategic investment
prospects that we believe would complement our current product offerings,
increase our market coverage or enhance our technical capabilities, or otherwise
offer growth opportunities.
In
July
2005 we acquired a 51% interest in Tianjin Huaneng and in March 2008 we acquired
a 100% interest in SZSP.
From
time
to time we consider investing in new businesses and we expect to make
investments in, and to acquire businesses, products, or technologies in the
future.
Our
Organic Growth Strategies
We
are
seeking to grow and expand our business through the following strategies:
·
|
focus
on rural market segment.
|
·
|
extensive
and targeted advertising.
|
·
|
a larger
distribution and agency network.
|
·
|
after-sales
services network.
|
Our
focus on rural market segment
We
market
our products in both the urban and the rural markets in the PRC. While most
solar hot water manufacturers focus on the urban market, we have always focused
on the rural market because the size of the rural market in the PRC is about
eight times larger than that of the urban market. Further, our rural customers
regard purchasing a hot water heater as a long term investment in a durable
good, more so than urban customers.
We
have
eight years of experience in operating marketing and sales organizations in
rural areas. Our marketing and sales team works with our agents to educate
our
end users and inform them of the utility, functionality and comparative cost
advantages of our products as compared to electricity and gas water heaters.
We
have also received a great deal of feedback from rural customers and have
designed our products and marketing to meet their needs and concerns.
Our
Advertising
Based
on
various advertising effectiveness studies in the PRC, we believe that large
scale advertising on TV and other mass media can have a significant impact
on
rural residential purchase decisions. Accordingly, we spent approximately
$1,415,493, or 3.8% of sales, on advertising in 2007 compared to $1.1 million,
or 5.2% of sales in 2006. In 2005 and 2004, we spent over $646,000 and $278,000,
respectively, or 4.2% and 4.6% of sales, respectively, on
advertising.
Our
Multi-Brand Strategy
In
order
to position our products in different tiers of markets, we have utilized a
multi-brand approach. Our solar hot water brands include: "Ailiyang", "DeYu"
and
"Deli Solar", among which, Ailiyang is not a registered trademark; our space
heating brands include "De Yu" and "Du Deli". Each of these brands targets
a
different type of customer. We classify the brand names of the solar hot heaters
into three types: Premium, Standard, and Economy, and space heating products
into two types: Premium and Standard. Below are some of our products and related
brand names and classifications:
Solar
Hot Water Heater Series
|
|
|
Our
Brand Name
|
|
Our
Classification of Products
|
|
|
|
Deli
Solar
|
|
Premium
|
|
|
|
DeYu
|
|
Standard
|
|
|
|
AiliYang
|
|
Economy
|
Space
Heating Series
|
|
|
Our
Brand Name
|
|
Our
Classification of Products
|
|
|
|
Du
Deli
|
|
Premium
|
|
|
|
DeYu
|
|
Standard
|
We
intend
to achieve the following objectives through the Multi-Brand Strategy:
·
|
to
target different products in different tiers of the same geographical
market.
|
·
|
to
eliminate agency dominance in a regional market by granting non-exclusive
agencies to more than one distributor in a region.
|
·
|
to
create competition among agents by assigning only one specific brand
of
our products to one distributor in a sales region so that each different
distributor will be responsible for selling a brand different from
other
distributors in the same geographical region. We periodically evaluate
the
performance of distributors in the same region, and then provide
suggestions to help them perform better. In addition, we also encourage
them to increase sales of our premium products.
|
·
|
to
increase the market share of our products.
|
Our
brand
logos are the following:
Our
distribution and agency network
We
use a
network of wholesalers, dealers and retailers to distribute our products. After
we manufacture and assemble our products, we sell them to our wholesalers,
generally located in major cities or provincial hubs, who then sell our products
on to a network of smaller distributors, or dealers, in outlying areas.
Sometimes when the dealers are closer to our warehouse, we also sell directly
to
dealers to simplify the payment process and reduce transportation costs. Because
these dealers are usually developed by the wholesalers, each direct sale to
a
dealer will be recorded on the account of the wholesaler who developed the
business relationship with such dealer. Our end users purchase their products
from either wholesalers or dealers, who also handle the installation and
warranty service of the systems for the end users.
We
also
have a Marketing Department consisting of approximately 87 marketing and sales
personnel who collect feedback from our customers and other market information
for our management and our product development team.
Distribution
Channels for Solar Water Heater Systems
The
PRC
is a vast country geographically and the market for our products covers many
regions. To penetrate the market effectively, especially the less-developed
rural areas, we have established a vast distribution and sales network that
includes approximately 604 distributors and wholesalers and approximately 2,000
local appliance retailers covering 27 provinces in China, with a focus on the
northern PRC area, north-eastern PRC area, Beijing metropolitan area, and
Tianjin metropolitan area. The northern PRC area includes Hebei Province, Henan
Province, Shangdong Province, Shanxi Province, and An'hui Province. The
north-eastern PRC area includes Liaoning Province and Heilongjiang Province.
Sales
to
these areas consist of approximately 70% of our total sales revenues. We believe
that our comprehensive distribution and sales network enables us to efficiently
service the rural communities without having to rely on any particular agent
or
distributor for our sales. In the past five years, no single agent or
distributor has generated more than 5% of our total annual sales.
We
are
able to attract a large number of distributors, sales agents, and retailers
for
the following reasons:
|
·
|
We
produce both solar hot water heaters and boilers, while the majority
of
manufacturers in the PRC normally produce only one type of product.
Sales
of solar hot water heaters and boilers are both affected by seasonality.
As described elsewhere in this report, solar hot water heaters
are in high
demand in the spring and boilers are in high demand in the fall.
Therefore, the combined production of solar hot water heaters and
boilers
allows us to provide our distributors, wholesalers and retailers
with
products for sale throughout the year.
|
|
·
|
We
carefully select our distributors and provide support to them.
Our
contracts with our wholesalers and distributors normally have a
three- to
five-year term. While most of our agency and distributor contracts
are
non-exclusive, we are seeking to establish exclusive distribution
relationships with some strong distributors. We require new sales
agents
to deposit a significant amount of cash as a down payment towards
the
purchase of our systems. We consider the following factors in our
selection of a new distributor or wholesaler:
|
|
·
|
Local
solar energy status and market potential
|
|
·
|
Sales
and market potential in the covered
area
|
|
·
|
Presence
of alternatives, such as gas or electricity
|
|
·
|
Credibility
of the candidate
|
For
each
candidate we select, we enter into an agency contract with it, under which
we
provide warranty cards, product testing certificates, product brochures, and
other promotional materials. In addition, we help them design store logos and
show rooms, provide them with uniforms, and assist them to make marketing plans.
Our
After-Sales Services Network
We
are in
the process of implementing an after-sales services network in parallel with
our
national sales and distribution network. Our after-sales services are primarily
performed by our sales agents and distributors. We have begun to provide
technical training to our 300 distributors in order to provide after-sales
services to our end users. The local distributors are very enthusiastic about
having the ability to provide after-sales services to the end users, which
also
provides the distributors with a new source of revenue. One additional benefit
to us provided by the after-sales services network is the ability to receive
product feedback from our end users on a constant basis. We can use this
information to continuously adjust our production plans, product designs,
inventory control and marketing and sales strategies.
COMPETITION
The
solar
hot water market in the PRC is highly fragmented. According to statistics from
the Chinese Energy Research Association, there are currently over 3,500 solar
hot water heater manufacturers producing products under more than 3,000 brands.
The top 51 companies have, on average, over 10 million RMB in sales
(approximately $1.2 million), with the top ten companies together controlling
17% of the domestic market.
We
believe our success lies in our quality control, brand recognition strategy,
comprehensive distribution network and advertising.
RESEARCH
AND DEVELOPMENT ACTIVITIES
Our
research and development ("R&D") expenses have historically been
approximately 1% to 2% of our annual sales revenues. Most of these expenses
were
spent in designing and manufacturing new products. In 2005, our R&D expenses
consisted of approximately 0.5% of our annual sales revenues, which we used
to
improve the functions and appearance of our current products instead of
developing new products. In 2006, we spent approximately $51,741 in R&D on
the development of pressurized evacuated heat pipe solar water heaters. In
2007,
we spent approximately $1.8 million in R&D on biomass fuel system program,
multi-source energy program. We also conduct other R&D activities based on
our customers' specific request for certain new functions or improvements on
our
existing products. The R&D expenses associated with such R&D activities
are generally borne by the requesting customers.
Currently,
we have a R&D team of three full time members and part time research
assistants. Our senior engineer members include: Luo Yunjun, who also serves
as
the chairman of Beijing Solar Industry Association, and Hao Fangzhou, who also
serves as the chairman of the Chinese Economic Boiler Association.
In
February 2006, we executed a non binding Cooperation Memorandum (the “Memo”)
with the Key Laboratory of Heat Transmission and Energy Saving Education of
Beijing University of Industry (“BUI”) in February 2006 for cooperation on
research and development of renewable energy technologies. The Memo sets forth
a
general cooperation framework between the two parties: we make available funding
for certain renewable energy research and development projects undertaken by
BUI. Further details of each party’ rights and obligations will be on a project
by project basis with specific agreements. To date we have not incurred any
expenses under this arrangement.
INTELLECTUAL
PROPERTY
Trademarks
Deli
Solar (Bazhou) is the holder of the following trademarks registered with the
Trademark Offices of the PRC National Industrial and Commerce Administrative
Bureau (the “PRC Trademark Offices”):
Trademark
|
|
Authorized
Scope
|
|
Valid
Term
|
|
Certificate
Number
|
|
|
|
|
|
|
|
Deli
Solar
|
|
Boiler
(Space Heating Utility);
|
|
03/14/2003
|
|
to
1978396
|
|
|
Solar
Hot Water Utility;
|
|
03/13/2013
|
|
|
|
|
Solar
Stove and Solar Energy
|
|
|
|
|
|
|
Collection
Heater
|
|
|
|
|
|
|
|
|
|
|
|
Du
Deli
|
|
The
same as the above
|
|
01/28/2003
|
|
to
1978532
|
|
|
|
|
01/27/2013
|
|
|
|
|
|
|
|
|
|
De
Yu
|
|
Solar
Energy Collection Heat
|
|
07/28/1998
|
|
to
1195609
|
|
|
and
Boiler (Not machine accessory)
|
|
07/27/2008
|
|
|
|
|
|
|
|
|
|
Aili
Solar (to replace our brand "Ailiyang")
|
|
Approved,
pending the trademark certificate
delivery
|
A
registered trademark is protected for a term of ten years, renewable for another
term of ten years under the trademark law of the PRC, so long as an application
for renewal is submitted to the PRC Trademark Offices within six months prior
to
the expiration of the initial term.
Patents.
SZPSP
has
obtained
the following patents in the PRC for its unique solar energy selective absorbing
coat and manufacturing technology:
|
|
|
|
|
Authorized
Scope
|
|
Valid
Term
|
|
Certificate
Number
|
|
|
|
|
|
Cold
water recovery system in solar heating
|
|
2015
|
|
ZL200620016815X
|
Recycle
Heating Product in different temperature system
|
|
n/a
|
|
Application
submitted 7/4/06
|
Domain
names.
We
own
and operate a website under the internet domain name
http://www.cn-sce.com
.
Traffic
to our other internet domain names www.AiLiYang.com are directed to that
website. SZPSP owns and operates a website under the internet domain name
http://www.szpsp.com
.
Government
Regulation
We
are
not subject to any requirements for governmental permits or approvals or any
self regulatory professional associations for the manufacture and sale of solar
hot water heaters. We are required to obtain a production approval from the
Quality and Technology Supervisory and Control Bureau at the provincial level
for the manufacture and sale of boilers and space heating products. Deli Solar
(Bazhou) obtained the approval to manufacture, install and repair small and
regular size pressure boilers and space heating products from Hebei Provincial
Quality and Technology Supervisory and Control Bureau on August 28, 2002
effective for five years. We are currently in the process of renewing the
certificate. Other than the foregoing, Deli Solar (Bazhou) is not subject to
any
other significant government regulation of its business or production, or any
other government permits or approval requirements, except for the laws and
regulations of general applicability for corporations formed under the laws
of
the PRC.
Compliance
with Environmental Laws
To
our
knowledge, neither the production nor the sale of our products constitute
activities or generate materials, in a material manner, which causes our
operation to be subject to the PRC environmental laws.
Executive
Offices
Our
executive office is located at Building 3, No. 28 Feng Tai North Road, Beijing,
China, 100071 and our telephone number is +86-10-63850516.
Deli
Solar (Bazhou)’s factory facilities are located outside of the city of Bazhou in
the Hebei Province of the PRC. Deli Solar (Bazhou) utilizes one factory in
Bazhou with a total of over 10,000 square meters of production, warehouse,
and
office space and space for use as a distribution center and approximately 2,000
square meters of office space and exhibition center in Beijing
Tianjin
Huaneng’s factory facilities are located outside of the Tianjin municipalities
of the PRC. Tianjin Huaneng’s utilizes one factory in Tianjin with over
51,000 square meters of production, warehouse, and office space and space for
use as a distribution center.
SZPSP’s
factory facilities are located outside of the city of Shenzhen in the Guangdong
Province of the PRC. SZPSP utilizes two factories in Shenzhen with a total
of over 2,000 square meters of production, warehouse, and office space and
space
for use as a distribution center
Employees
As
of
March 24, 2008 we had approximately 815 full time employees and 250 part time
employees.
Deli
Solar (Bazhou) requires each employee to enter into a one-year standard
employment agreement. Tianjin employees have three year agreements. The standard
employment agreement contains a confidentiality clause and a
covenant-not-to-compete clause, under which an employee must keep confidential
all manufacturing technology including drawings and other technology materials,
sales and financial information, and trade secrets obtained through his or
her
employment with us. Breach of this confidentiality clause will result in
termination of employment. Further, each employee may not compete against us
for
a certain period of time following the termination of employment with us. We
purchase group workers' compensation policy on behalf of our employees, and
the
premium is deducted from each employee's paycheck.
Risk
of Loss and Product Liability Insurance
Delivery
of our products can be arranged by our sales agents and distributors, or by
us.
In the latter case, we deliver our products primarily through trucks,
supplemented with trains and cargo ships. Our standard agency contract generally
requires our sales agents to pay for the transportation cost. Although the
agency contract has not specifically provided for the issue of risk of loss,
our
customary practice is that sales agents bear the risk of loss in shipping and
purchase shipping insurance at their expense.
We
currently do not carry any product liability or other similar insurance, nor
do
we have property insurance covering our plants, manufacturing equipment and
office buildings. While product liability lawsuits in the PRC are rare and
Deli
Solar (Bazhou) has never experienced significant failures of its products,
we
cannot assure you that Deli Solar (Bazhou) would not face liability in the
event
of any failure of any of its products. We plan to purchase property insurance
to
cover our manufacturing plants, equipment and office buildings by the end of
the
second quarter of 2008.
PROPERTY
All
land
in the PRC is owned by the government and cannot be sold to any individual
or
entity. Instead, the government grants landholders a "land use right." The
following are the details regarding our land use rights with regard to the
two
pieces of land that we use in our business. The land use rights owned by Deli
Du, our Chief Executive Officer, President and Director, were transferred to
us
in October 2005 for a price of RMB20,000 (approximately $2,588). The application
for the change of the land use right certificate for this piece of land was
submitted to Bazhou City National Land Resources Bureau on January 16, 2006.
Once the application is approved, the registered holder for this land will
be
Deli Solar (Bazhou). As of April 14, 2008, the application has not yet been
approved and the registered holder is still Mr. Du.
Deli
Solar (Bazhou)’s factory facilities are located outside of the city of Bazhou in
the Hebei Province of the PRC. Deli Solar (Bazhou) utilizes one factory in
Bazhou with a total of over 10,000 square meters of production, warehouse,
and
office space and space for use as a distribution center and an approximately
2,000 square meters of office space and exhibition center in
Beijing
On
March
17, 2006, Deli Solar (Bazhou) entered into an agreement with the local
government to acquire land use rights of a land of 61,530 square meters at
the
price of approximately $919,858. This piece of land is close to the present
Bazhou factory and is used to enlarge the present manufacturing base at Bazhou
City. The land use right has been approved by the local government after payment
of approximately $919,858. An official certificate evidencing the land lease
has
not yet been delivered from the government to the Company.
Registered
Holder
|
|
Location
& Deed Number
|
|
Usage
and Nature
|
|
Square
meters
|
|
Construction/building
on the land
|
|
Term
of use right
|
|
Transfer
price
|
Deli
Solar (Bazhou)
|
|
Bazhou,
Ningnan Village; #98060026
|
|
Industrial
Transferred Land
|
|
10,244.05
Sq. M
|
|
Plant,
warehouses, accessories room, convention center
|
|
50
years (from March 25, 1998 to March 25, 2048
|
|
RMB
615,000
(approximately
$79,581) was paid to the Langfang Municipal Land Administration Bureau,
plus annual land use fee of RMB 5122 (approximately $
662.79)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr.
Deli Du
|
|
Eighty
kilometers from
Bazhou
Jingbao Road North; #20010700405
|
|
Office
space for Deli Solar (Bazhou) Granted Land
|
|
816
Sq. M
|
|
Office
building, accessories room
|
|
50
years (from June 11, 2001 to June 3, 2051
|
|
RMB
20,000 (approximately $ 2,588) was paid to the Langfang Municipal
Land
Administration Bureau
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deli
Solar (Bazhou) -
|
|
Close
to Bazhou Jingbao Road
|
|
Factory
|
|
61,530
Sq. M
|
|
Factory
facilities
|
|
Pending
the Land Use Right Certificate
|
|
approximately
$919,858 was paid to Bazhou local government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Huaneng
Group
Energy Equipment
Co.
Ltd.
|
|
No.
119 Yuyang South Road
Ji
County, Tianjin
|
|
Factory
|
|
51,000
Sq. M
|
|
|
|
50
years from September 2004 to September 2054
|
|
Approximately
528,000 was paid to Ji county
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
72,590.05
Sq. M
|
|
|
|
|
|
|
We
lease
19,140 square meters of land (“Leased Land”) from Bazhou County Credit Union
Lianshe Branch ("Credit Union") for an office building pursuant to a 20 year
renewal lease at an annual rent of RMB 120,000 (approximately $15,528) which
commenced on May 1, 2003. The lease is automatically renewable for another
20
year term subject to terms to be negotiated at the expiration of the first
20-year term. We are retaining a majority of the building's usable space for
our
business and seeking to sublease the rest to parties with business related
to
ours such as our sales agents, distributors, accessory parts dealers, and
after-sales service agents. We also constructed a business center on the Leased
Land. The business center is to be used for show rooms, retail stores, and
a
distribution center for solar related products and space heating
products.
We
lease
our Beijing office facility of approximately 2,000 square meters at No. 28,
Fengtai Bei Road, Fengtai District from Beijing Dajiangxia Technology and Trade
Co., Ltd. pursuant to a renewable lease commencing October 1, 2005 to August
8,
2011 for an annual rent of RMB370,000 (approximately $47,878) for the first
year
and RMB400,000 (approximately $ 51,760) for the second year, and the following
years pending a possible increase. We paid annual rent of RMB 400,000 in
2007.
Legal
Proceedings
Neither
we nor any of our subsidiaries is a party to any pending legal proceedings,
nor
are we aware of any material proceedings threatened against us or our
subsidiaries. Neither we nor any of our subsidiaries is a party to any pending
legal proceedings, nor are we aware of the threat of any material proceedings
against us.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information with respect to the beneficial
ownership of the voting securities by (i) any person or group with more than
5%
of the Company's securities, (ii) each director, (iii) each executive officer
and (iv) all executive officers and directors as a group, as of March 24,
2008.
Named
and Address of Beneficial Owner
|
|
|
Amount
and Nature of Beneficial Ownership
|
|
|
Percent
(%)of Class (1
|
)
|
5%
Owners
|
|
|
|
|
|
|
|
David
Gelbaum and Monica Chavez as trustees of
The
Quercus Trust,
2309
Santiago Drive
Newport
Beach, CA 92660 (2)
|
|
|
2,449,283
|
|
|
18.64
|
%
|
|
|
|
|
|
|
|
|
Ardsley
Partners (3)
|
|
|
1,666,500
|
|
|
12.69
|
%
|
|
|
|
|
|
|
|
|
Executive
Officers
|
|
|
|
|
|
|
|
Deli
Du,
President,
CEO and director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
2,837,282
|
|
|
21.6
|
%
|
|
|
|
|
|
|
|
|
Yihai
Yang,
Acting
Chief Financial Officer
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
Deli
Du,
President,
CEO and director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
2,837,282
|
|
|
21.6
|
%
|
Zhaolin
Ding, director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
|
|
Jianmin
Li, director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
|
|
Zhenhang
Jia, director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
|
|
Kevin
Randolph, director
309
3rd Ave SE
Ephrata,
WA 98823-2245 (4)
|
|
|
3,236
|
|
|
*
|
|
Less
that
1%.
|
(1)
|
As
of March 24, 2008 we had 13,136,305 outstanding shares of common
stock. In
determining the percent of common stock owned by a stockholder on
March
24, 2008, (a) the numerator is the number of shares of common stock
beneficially owned by such stockholder, including shares the beneficial
ownership of which may be acquired, within 60 days upon the conversion
of
convertible securities or the exercise of warrants held by such
stockholder, and (b) the denominator is the sum of (i) 13,136,305,
the
number of shares outstanding on March 24, 2008, and (ii) the total
number
of shares underlying the convertible securities and warrants, which
such
stockholders has the right to acquire within 60 days following March
24,
2008.
|
|
(2)
|
Based
on information set forth in Amendment No 1. to a Schedule 13D filed
on
March 04, 2008.
|
(2)
|
These
shares are held by affiliates of Ardsley as set forth
below:
|
Name
|
|
Number
of Shares
|
|
Ardsley
Partners Fund II, L.P.
|
|
|
702,500
|
|
Ardsley
Offshore Fund, Ltd.
|
|
|
491,500
|
|
Ardsley
Partners Institutional Fund, L.P.
|
|
|
455,000
|
|
Marion
Lynton
|
|
|
17,500
|
|
(4)
Mr.
Randolph
is
entitled to receive common stock at the amount of 0.36% of our total outstanding
common stock vested monthly over 3 years. As of March 24, 2008, Mr. Randolph
is
entitled to receive 3,236 shares.
DIRECTORS
AND EXECUTIVE OFFICERS
Our
executive officers and directors as of the date of this prospectus are as
follows:
Name
|
|
Position
|
|
Age
|
|
|
|
|
|
Deli
Du
|
|
President,
CEO and a director
|
|
43
|
Yihai
Yang
|
|
Acting
Chief Financial Officer
|
|
43
|
Zhaolin
Ding
|
|
director
|
|
40
|
Zhenhang
Jia
|
|
director
|
|
61
|
Kevin
Randolph
|
|
director
|
|
58
|
Our
board
of directors currently consists of four members. We also have an audit committee
and a compensation committee. Mssrs. Zhenghang Jia and Zhaolin Ding serve on
both of those committees. The directors serve until our next annual meeting
or
until their successors are duly elected and qualified. The officers serve at
the
pleasure of the Board.
Effective
March 14, 2008, Mr. Yihai Yang was appointed to serve as Acting Chief Financial
Officer.
Effective
November 1, 2007, Mr. Kevin Randolph was appointed as a director. Mr. Randolph
is qualified as an “independent director” as defined by the rules of the Nasdaq
Stock Market and as a result of his appointment we have a majority of
“independent directors,” as three of our directors, namely Mssrs. Ding, Jia
and Randolph, are “independent directors” under the Rules of NASDAQ,
Marketplace Rule 4200(a)(15).
Under
the
terms securities purchase agreement entered into on June 13, 2007 with the
investors in that financing, we were required, prior to July 13, 2007, to
increase the size of our Board to five or seven and cause the appointment of
a
majority of the Board of Directors to be “independent directors,” as defined by
the rules of the Nasdaq Stock Market. Prior to November 1, 2007 our Board
consisted of four members two of whom were “independent.” Under the terms of the
securities purchase agreement we are required to pay those investors
liquidated damages equal to one percent (1%) per month of the purchase price
of
the then outstanding shares of Series A Preferred Stock, in cash or in Series
A
Preferred Stock at the option of the investors, based on the number of days
that such obligation is not met beyond certain grace periods.
Accordingly, we were delinquent by 110 days in meeting this obligation and
we are required to pay the investors a total of $99,000 as of that date.
Effective March 31, 2008 Mr. Jianmin Li resigned from our board of directors
as
a result of which our board again consists of four members.
In
addition, under the terms of the securities purchase agreement, we were
required, prior to August 12, 2007 to appoint (i) an audit committee comprised
solely of at least three independent directors and a (ii) compensation committee
comprised of at least three directors, a majority of whom are independent
directors. Our audit and compensation currently each currently consists of
two
members both of whom are independent, namely Mssrs. Zhaolin Ding and Zhenghang
Jia. Accordingly, we are currently delinquent in this obligation. However,
under
the terms of the securities purchase agreement no liquidated damages are
required to be paid for this breach during any period for which liquidated
damages are payable for failing to have an independent board. Accordingly,
damages began to accrue for breach of this provision on November 1, 2007. As
of
March 31, 2008 we were delinquent by 152 days in meeting this obligation and
we
are required to pay investors a total of approximately $137,500.
Deli
Du,
age 43, was appointed as President, CEO and as a director on March 31, 2005.
Mr.
Du founded Deli Solar (Bazhou) in 1997 and has been its controlling equity
holder, chairman and chief executive officer during the past five (5) years.
Since June 2004 he has also been a director and manager of Deli Solar (BVI).
He
is a standing member of the China Solar Energy Utilization Association, the
China Efficiency Boiler Association and the Beijing New Energy and Renewable
Energy Union.
Yihai
Yang, age 43, was appointed as our Acting Chief Financial Officer effective
March 14, 2008. From September 2006 until the present Mr. Yang, served as
Financial Controller of China Diagnostics Medical Corporation, a company engaged
in the business of pharmaceutical research and development. From April 2005
to
August 2006, Mr. Yang served as the Chief Financial Officer of Beijing
Tanglewood Tour Development, Ltd., a company engaged in the business of real
estate investment and development. From March 2000 to July 2003 Mr. Yang worked
for CE Accountancy Ltd. as a project manager. In 1990 Mr. Yang graduated from
Shenyang Industrial University with a BA in Financial Accounting and in March
2005, he obtained his Masters Degree in Finance and Accounting from London
South
Bank University
Zhaolin
Ding, age 40, was appointed as a director on August 3, 2007. Mr. Ding is
currently the director of Everbright International Executive Management
Education Center, an adjunct professor of the Executive Program, School of
Continuing Education, Tsinghua University and a visiting professor of executive
program of Peking University and Renmin University of China. He is an officially
appointed news commentator of China National Radio. He also worked as research
associate in the Center for International Communication Studies of Tsinghua
University. He holds an MBA degree from Harvard University, a Master’s degree in
International Journalism from China School of Journalism, a bachelor degree
of
Law in International Affairs from the University of International Relations.
Zhenhang
Jia, age 61, was appointed as our director on August 3, 2007. He has been a
director on Beijing Mechanic Engineering and Reusable Energies and Vice
Secretary-in-Chief of China Rural Energy Association Energy Saving Space Heating
Professional Society from April 1994. He also has been vice chairman, vice
secretary-in-chief of Beijing Municipal New Energy and director in Beijing
Mechanics and Engineering Committee, Energy Resourses and Engineering Branch
from 1995. Mr. Jia has been lecturing in his field of profession in colleges
and
universities for over ten years and has published two professional books such
as
Enterprise Energy Saving Technology and 70 papers.
Kevin
Randolph, age 58, was appointed as a director effective November 1, 2007.
In 1992 he founded and has served as president and CEO of Randolphs.com, LLC,
a
company that provides interim management, strategic/market/product planning
and
other services. From 1998 to 2000, he was President and CEO of Asia Online,
Ltd., headquartered in Hong Kong. Asia Online provided Internet service, web
development, web hosting and system integration services in 12 countries through
Asia Pacific. He is a graduate of Washington State University with a degree
in
Business Administration, majoring in marketing and electrical
engineering.
The
following are the officers and directors of Deli Solar (Bazhou) as of the date
of this report:
Name
|
|
Positions
|
|
Age
|
|
|
|
|
|
Deli
Du
|
|
Chairman
and Director
|
|
43
|
Yunjin
Luo
|
|
Director
|
|
72
|
Hao
Dong
|
|
CEO
|
|
33
|
Xueling
Wu
|
|
Controller
|
|
27
|
Yunjun
Luo was appointed a director in June 2005. He holds a Bachelor's degree in
Pyrology from the Southeast University (Bazhou) with further studies and
research within the PRC at The Academy of Social Sciences (structural
mechanics), the Commission of Science, Technology and Industry for National
Defense (space satellites) and the Beijing Solar Energy Research Institute
(solar heaters). For over five (5) years he has been associated with the Beijing
New Energy and Renewable Energy Association, serving as a director and associate
professor. He also serves as a director and chief consultant for Ailiyang.
Hao
Dong
was appointed as CEO of Deli Solar (Bazhou) in January 2005. He has been working
for Deli Solar (Bazhou) since 1997, holding positions in the technology
department (from 1997 to 1999), manufacturing department (from 1999 to 2004)
and
sales department. Mr. Dong graduated from Bazhou Municipal Technical College
in
1995 and worked as technical staff for Bazhou Municipal Hua Xin Construction
Co., Ltd. before joining Deli Solar (Bazhou). Mr. Dong is an assistant engineer
on mechanics, a certification recognized by Bazhou Municipal Government
Technology Department.
Xueling
Wu was appointed as controller of Deli Solar (Bazhou) in January 2005. Prior
to
that, Ms. Wu had worked for Deli Solar (Bazhou) since 2001 as a staff
accountant, inventory controller and sales person. She graduated from Hebei
Provincial Fisheries College and is a PRC Certified Accountant.
There
are
no family relationships among our directors or executive officers. We currently
do not have directors and officers insurance.
EXECUTIVE
COMPENSATION
The
following table reflects the compensation paid to our principal executive
officer during each of our fiscal years ending December 31, 2007, 2006 and
2005.
None of our other executive officers was paid a salary and bonus of more than
$100,000 in 2007 and so none are included in this
table.
Name
and Principal Position
|
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
|
Non-Qualified
Deferred Compensation Earnings
($)
|
|
|
All
Other Compensation
($)
|
|
|
Total
($)
|
|
Deli
Du (1)
|
|
|
2007
|
|
|
80,000
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
80,000
|
|
|
|
|
2006
|
|
|
80,000
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
60,000
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60,000
|
|
(1)
Commencing March 31, 2005, Mr. Du receives an annual salary of $80,000.
Outstanding
Equity Awards at 2007 Fiscal Year End
There
were no option exercises or options outstanding in 2007.
Employment
Agreements
We
have
no employment agreements with any of our executive officers. We plan to enter
into an employment agreement with Mr. Yang shortly but no such agreement has
yet
been executed. In the absence of written employment agreements, the PRC labor
laws provide the terms of employment such as the term of employment, the
provision of labor-related insurance, termination for cause, termination on
30
days’ notice and termination without notice and the labor-related benefits.
Compensation
Discussion and Analysis
Overview
of Compensation Program and Philosophy
The
Company’s compensation committee currently has two members both of whom are
independent, namely Zhenhang Jia and Zhaolin Ding. Under the terms of the June
2007 securities purchase agreement with Barron Partners and the other investors,
we were required, prior to August 12, 2007 to appoint an audit committee
comprised solely of at least three independent directors and damages began
to
accrue for breach of this provision on November 1, 2007. As of March 31, 2008
we
were delinquent by 152 days in meeting this obligation and we are required
to
pay investors a total of approximately $137,500.
The
Compensation Committee’s goal in determining compensation levels is to
adequately reward the efforts and achievements of executive officers for the
management of the Company. The Company currently has no pension plan, stock
option plan, non-equity incentive plan or deferred compensation arrangement.
The
Company has not used a compensation consultant in any capacity but believes
that
it's executive compensation package is comparable to similar businesses in
the
location of its operations.
None
of
the executive officers currently has an employment agreement with the Company.
Director
Compensation
Our
standard arrangement with our directors provides that we pay each director
annual compensation of $20,000 for serving as a director. There are no other
elements of compensation paid to our directors but it is expected that in the
future, we may create a remuneration and expense reimbursement plan. It is
anticipated that such a plan would be primarily based on stock options. Mr.
Randolph has a different arrangement. Mr. Randolph receives an annual director’s
fee of $5,000, and he will be compensated with $5,000 for each full Board of
Directors meeting held at Beijing, China and $2,500 for each board meeting
by
conference call. In addition, he is entitled to receive shares of our common
stock at the amount of 0.36% of our total outstanding common stock to be vested
monthly over 3 years. As of December 31, 2007, Mr. Randolph had earned 1,242
shares of common stock with a value of $4,285, based on a closing price on
December 31, 2007 of $3.45.
The
following table reflects the compensation of directors for our fiscal year
ended
December 31, 2007:
Name
of Director
|
|
Fees
Earned or
Paid
in Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
Change
in
Pension
value
and
Nonqualified
Deferred Compensation Earnings
|
|
All
Other Compensation
($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhaolin
Ding
|
|
|
8,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deli
Du
|
|
|
20,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin
Randolph(1)
|
|
|
1,250
|
|
|
4,285
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhenhang
Jia
|
|
|
8,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jianmin
Li
|
|
|
8,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,400
|
|
(1)
Effective November 1, 2007, Mr. Kevin Randolph was appointed as a director.
Under the terms of the securities purchase agreement, dated June 13, 2007,
by
and among Barron Partners, L.P. and two other investors, we were obligated
to
appoint independent directors to constitute the majority of the board. Mr.
Randolph has not had any relationship with us (either as a partner, stockholder
or employee) in the past three years and he is qualified as an independent
director as defined by rules of the Nasdaq Stock Market. With Kevin Randolph
appointed as a director we have a majority of independent directors.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since
January 1, 2007 we have not engaged in any transactions with any related persons
which would require disclosure under Item 404 of Regulation S-K.
DESCRIPTION
OF SECURITIES TO BE REGISTERED
The
following is a summary description of our capital stock and certain provisions
of our Restated Articles of Incorporation and By-laws, as amended, and of
certain applicable provisions of Nevada law.
General
We
are
authorized to issue 66,666,667 shares of common stock, par value $.001 per
share
and 25,000,000 shares of preferred stock, par value $.001 per share, of which
3,500,000 shares have been designated as Series A Preferred Stock. As of March
31, 2008 there were 13,136,305 shares of common stock issued and outstanding
and
2,509,678 shares of Series A Preferred Stock issued and outstanding. The
following is a summary of the material terms of the common stock.
Common
Stock
Voting:
The
holders of common stock are entitled to one vote per share on all matters to
be
voted on by the stockholders and are not entitled to cumulate their votes in
the
election of directors.
Dividends
:
Holders
of common stock are entitled to any dividends that may be declared from time
to
time by the Board of Directors in its discretion out of funds legally available
therefore subject to the prior rights, if any, of holders of any outstanding
shares of preferred stock and any contractual restrictions against the payment
of dividends on common stock.
The
payment of dividends is contingent on the ability of our PRC based operating
subsidiaries Deli Solar (Bazhou), Deli Solar (Beijing) and Tianjin Huaneng
to
obtain approval to send monies out of the PRC.
The
PRC's
national currency, the Yuan, is not a freely convertible currency. The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
Shortages in the availability of foreign currency may restrict our ability
to
remit sufficient foreign currency to pay dividends.
In
addition, under the terms of the certificate of designation which was filed
in
the office of Secretary of State for the State of Nevada on June 12, 2007 in
connection with the issuance of the Series A Preferred Stock, we are restricted
in paying dividends on our common stock.
Liquidation:
In the
event of our liquidation or dissolution, holders of common stock are entitled
to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock.
No
Preemptive Rights
.
Holders
of common stock have no preemptive or other subscription rights and no right
to
convert their common stock into any other
securities.
Preferred
Stock
The
Board
of Directors is authorized under our Restated Articles of Incorporation to
issue
‘blank check” preferred stock by resolution and by filing a certificate of
designations under Nevada law, to fix the designation, powers, preferences
and
rights of the shares of each such series and the qualifications, limitations
or
restrictions thereof without any further vote or action by the stockholders.
Any
shares of preferred stock so issued are likely to have priority over the common
stock with respect to dividend or liquidation rights.
Anti-takeover
provisions
As
discussed above, our Board of Directors can issue shares of "blank check"
preferred stock, with any rights or preferences, including the right to approve
or not approve an acquisition or other change in control. The issuance of such
"blank check" preferred stock could be used to discourage a transaction
involving an actual or potential change in control of us or our management,
including a transaction in which our stockholders might otherwise receive a
premium for their shares over then current prices.
The
Placement Agent Warrants
The
placement agent warrants granted to Roth Capital in connection with the February
29, 2008 private placement entitle the holder to purchase up to an aggregate
of
469,150 shares of common stock at an exercise price of $2.88 per share, subject
to adjustment. The warrants expire on February 29, 2013.
The
holders may make a cashless exercise but not until February 29, 2009 and
then only if the shares underlying the warrants have not been registered.
The
exercise price and number of shares to be issued on exercise are subject to
customary adjustments in the event of the payment of stock dividends and stock
splits and fundamental transactions..
LEGAL
MATTERS
Our
counsel, Guzov Ofsink, LLC, located at 600 Madison Avenue, 14th Floor, New
York,
New York 10022, is passing upon the validity of the issuance of the common
stock
that we are offering under this prospectus.
EXPERTS
Cordovano
and Honeck LLP, Independent Registered Public Accountants, located in Englewood,
Colorado, have audited our financial statements included in this Registration
Statement to the extent and for the periods set forth in their report. We
have
relied on such reports given upon the authority of such firm as experts in
accounting and auditing.
Child,
Van Wagoner & Bradshaw, PLLC, independent certified public accountants,
located at 5296 S. Commerce Drive, Suite 300, Salt Lake City, Utah, have audited
our financial statements included in this registration statement to the extent,
and for the periods set forth in their reports. We have relied upon such
reports, given upon the authority of such firm as experts in accounting and
auditing.
INTEREST
OF NAMED EXPERTS AND COUNSEL
No
"expert" or "counsel" as defined by Item 509 of Regulation S-K promulgated
under
the Securities Act, whose services were used in the preparation of this Form
S-1, was hired on a contingent basis or will receive a direct or indirect
interest in us or our parents or subsidiaries, nor was any of them a promoter,
underwriter, voting trustee, director, officer or employee of the Company.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION
FOR
SECURITIES ACT LIABILITIES
Our
bylaws provide that we will indemnify our directors and officers from all
liabilities incurred by them in connection with any action, suit or proceeding
in which they are involved by reason of their acting as our directors and
officers.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons, we have been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In
the event that a claim for indemnification against such liabilities (other
than
the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with
the securities being registered, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us
is
against public policy as expressed in the Securities Act and will be governed
by
the final adjudication of such issue.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
On
January 24, 2008, our Board of Directors approved the termination of Child,
Van
Wagoner & Bradshaw, PLLC (“CVWB”) as our independent certified public
accounting firm.
Concurrently
with this action, our Board of Directors appointed Cordovano and Honeck,
LLP
(“C&H”) as our new independent certified public accounting firm. C&H is
located at 88 Inverness Circle East, Building M Englewood, Colorado 801,
USA.
C&H’s affiliated firm in Asia, Zhong Yi (Hong Kong) C.P.A. Company Limited
(“Zhong Yi”), has been auditing the financial statements of Tianjin Huaneng
Group Energy Equipment Co., Ltd (“Tianjin Huaneng”), which we acquired effective
July 1, 2007. Accordingly, management elected to continue this existing
relationship with C&H and Zhong Yi and engage them as the Company’s
independent auditors.
Our
consolidated financial statements for the years ended December 31, 2006 and
2005
were audited by CVWB. CVWB’s reports on our financial statements for two most
recent fiscal years did not contain an adverse opinion, a disclaimer of opinion,
nor was it qualified or modified as to uncertainty, audit scope or accounting
principles.
During
the years ended December 31, 2006 and 2005 and through January 24, 2007 there
were no disagreements with CVWB on any matter of accounting principles or
practices, financial statement disclosure, auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of CVWB, would have caused
it
to make reference to the subject matter of the disagreement in connection
with
its report.
The
Company provided CVWB with a copy of a Current Report on Form 8-K prior to
its
filing with the SEC on January 30 2008 and requested them to furnish a letter
addressed to the SEC stating whether it agrees with the statements made above.
That letter of CVWB’s letter to the SEC, dated January 30, 2008
was
filed
as Exhibit 16.1 to the 8-K.
During
the period the Company engaged CVWB, neither the Company nor anyone on the
Company's behalf consulted with C&H regarding either (i) the application of
accounting principles to a specified transaction, either contemplated or
proposed, or the type of audit opinion that might be rendered on the Company's
financial statements or (ii) any matter that was either the subject of a
disagreement or a reportable event. The Company has authorized CVWB to respond
fully to all inquiries of C&H.
FINANCIAL
STATEMENTS
Our
consolidated audited financial statements for the fiscal years ended December
31, 2007 and 2006, together with the report of the independent certified public
accounting firm thereon and the notes thereto, are presented beginning at page
F-1.
Tianjin
Huaneng Group Energy Equipment Co., Ltd’s
unaudited
financial statements for the nine months ended September 30, 2007 and September
30, 2006 and
audited financial statements for the fiscal years ended
December 31, 2006 and 2005, together with the report of the independent
certified public accounting firm thereon and the notes thereto, are presented
beginning at page F-28.
Our
unaudited pro forma financial statements, giving effect to the acquisition
of Tianjin Huaneng Group Energy Equipment Co., Ltd, are presented
beginning at page F-64.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the U.S. Securities and Exchange Commission, 100 F. Street,
N.E., Washington, D.C. 20549, a registration statement on Form S-1 under the
Securities Act for the common stock offered by this prospectus. We have not
included in this prospectus all the information contained in the registration
statement and you should refer to the registration statement and its exhibits
for further information.
The
registration statement and other information may be read and copied at the
SEC's
Public Reference Room at 100 F. Street N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room
by
calling the SEC at 1-800-SEC-0330. The SEC maintains a web site
(HTTP://WWW.SEC.GOV.) that contains the registration statements, reports, proxy
and information statements and other information regarding registrants that
file
electronically with the SEC such as us.
You
may
also read and copy any reports, statements or other information that we have
filed with the SEC at the addresses indicated above and you may also access
them
electronically at the web site set forth above. These SEC filings are also
available to the public from commercial document retrieval
services.
PART
II:
INFORMATION
NOT REQUIRED IN PROSPECTUS
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
Although
we will not receive any of the proceeds from the sale of the shares being
registered in this registration statement, we have agreed to bear the costs
and
expenses of the registration of those shares. Our expenses in connection with
the issuance and distribution of the securities being registered, other than
the
underwriting discount, are as follows:
SEC
Registration Fee
|
|
$
|
392
|
|
Professional
Fees and Expenses*
|
|
$
|
75,000
|
|
Printing
and Engraving Expenses *
|
|
$
|
5,000
|
|
Transfer
Agent's Fees*
|
|
$
|
2,500
|
|
Miscellaneous
Expenses*
|
|
$
|
3,000
|
|
Total
|
|
$
|
85,892*
|
|
*
Estimates
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Pursuant
to Article VI, Sections 1 and 2 of our By-Laws, we may indemnify any person
who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or proceeding, whether civil, criminal, administrative
or
investigative (other than an action by or in the right of the Company) by reason
of the fact that such person is or was a director, officer, employee or agent
of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with such action or proceeding if such person acted
in
good faith and in a manner such person reasonably believed to be in the best
interests of the Company and, in the case of a criminal action or proceeding,
had no reasonable cause to believe the conduct of such person was
unlawful.
RECENT
SALES OF UNREGISTERED SECURITIES
The
following sets forth recent sales by the Company of unregistered securities
during the fiscal year ending December 31, 2007:
On
June
13, 2007, we entered into a number of agreements with Barron Partners L.P.,
a
Delaware limited partnership, and two other investors (all accredited investors)
pursuant to a private placement transaction providing for the sale to the
investors for an aggregate purchase price of $2,750,000 (or $1.55 per share)
of
(i) 1,774,194 shares of Series A Preferred Stock (with each share of Series
A
Preferred Stock being convertible into one (1) share of common stock), subject
to adjustment; (ii) five year warrants to purchase 1,774,194 shares of common
stock at an exercise price $1.90 per share, subject to adjustment; and (iii)
five year warrants to purchase an additional 1,774,194 shares of common stock
at
an exercise price of $2.40 per share, subject to adjustment.
Additional
shares of Series A Preferred Stock (not to exceed 900,000) are required to
be
delivered to the investors in the event that we fail to achieve certain pre
tax
income targets for the fiscal years ended December 31, 2007 and 2008. The
private placement qualified as an exempt transaction under Section 4(2) of
the
Securities Act, as amended, and Rule 506 of Regulation D
thereunder.
In
connection with the placement we issued Trenwith Securities, LLC
warrants
to purchase 106,452 shares exercisable for a period of five years at an exercise
price of $1.17 ( subject to adjustment) and a transaction fee of $165,000.
In
connection with their appointment we had previously issued Trenwith five year
warrants to purchase 75,000 shares of common sock at an exercise price of $2.81,
subject to adjustment.
The
following sets forth recent sales by the Company of unregistered securities
during the fiscal year ended December 31, 2006:
None.
The
following sets forth recent sales by the Company of unregistered securities
during the fiscal year ended December 31, 2005:
On
March
31, 2005, pursuant to the Stock Contribution Agreement, the former shareholders
of Deli Solar (BVI) contributed all the shares of capital stock of Deli Solar
(BVI) in exchange for 4,067,968 shares of our common stock. The exchange
qualified as an exempt transaction under Section 4(2) and/or Regulation S under
the Securities Act of 1933, as amended.
On
March
31, 2005, pursuant to subscriptions executed by seventeen accredited investors,
the Company issued a total of 1,714,290 shares of common stock, accompanied
by
warrants to purchase 1,825,719 shares of common stock, in a private placement
qualifying as an exempt transaction under Section 4(2) of the Securities Act,
as
amended, and Rule 506 of Regulation D thereunder. The total purchase price
paid
for the common shares and warrants was $6,000,015. The exercise price of the
warrants was $3.85 per share. (The number and the price of shares described
in
these two paragraphs has been adjusted to give effect to the one-for-six reverse
stock split of all issued and outstanding shares of our common stock, which
became effective on August 15, 2005.).
The
offering to the seventeen accredited investors was accomplished through Kuhns
Brothers Securities Corporation, an NASD member and SEC registered broker
dealer, as placement agent. John Kuhns, the Chairman and 95% shareholder of
Kuhns Brother Securities Corporation, is a former Chairman of our Board.
The
following sets forth recent sales by the Company of unregistered securities
during the fiscal year ended May 31, 2004 and the seven months ended December
31, 2004:
During
the fiscal year ended May 31, 2004 and the seven months ended December 31,
2004,
we issued 500,000 shares of our common stock as payment for a loan given to
Meditech. The loan of $30,000 was paid off through this stock issuance.
During
the fiscal year ended May 31, 2004 and the seven months ended December 31,
2004,
we issued an aggregate of 1,633,333 shares of our common stock for cash of
$142,222. (The number and the price of shares described in these two paragraphs
has been adjusted to give effect to the one-for-six reverse stock split of
all
issued and outstanding shares of our common stock, which became effective on
August 15, 2005.).
No
underwriter was involved in any of the above issuances of securities. All of
the
above securities were issued in reliance upon the exemption set forth in Section
4(2) of the Securities Act on the basis that they were issued under
circumstances not involving a public offering.
Other
than the securities mentioned above, we have not issued or sold any securities
without registration for the past three years from the date of this registration
statement.
EXHIBITS
3.1
|
Certificate
of Incorporation. (1)
|
3.2-2
|
Amendment
to Bylaws dated October 17, 2005
(3)
|
3.2-3
|
Articles of
Merger of Du Solar, Inc. into the Company
(10)
|
4.1
|
Common
Stock Specimen (4)
|
4.3
|
Certificate
of Designation as filed with the Secretary of State of Nevada on
June 12 ,
2007 (8)
|
4.4
|
Series
A Preferred Stock Specimen (8)
|
4.5
|
Form
of Class A Warrant (8)
|
4.6
|
Form
of Class B Warrant (8)
|
|
|
4.7
|
Form
of Placement Agent Warrant
|
5.1
|
Legal
Opinion of Guzov Ofsink, LLC re legality of the common stock being
registered.
|
10.1
|
Stock
Contribution Agreement, dated March 28, 2005, entered into by and
between
the Company and Deli Du (5)
|
10.2
|
Stock
Purchase Agreement, dated March 30, 2005, by and among Deli Du, Halter
Capital Corporation, and the Company
(5)
|
10.3
|
Form
of Unit Purchase Agreement (1)
|
10.4
|
Form
of Engagement Agreement (1)
|
10.5
|
Form
of Lock Up Agreement between the Company and the members of the Financial
Advisor Group (1)
|
10.6
|
Land
Purchase Agreement by and between Deli Solar (Bazhou) and Deli Du
(English Translation) (4)
|
10.7
|
Stock
Purchase Agreement by and between Deli Solar (Bazhou) and Ailiyang
Shareholders (6).
|
10.8
|
Land
Use Rights Purchase Agreement by and between Deli Solar (Bazhou)
and the
Governance Commission of Beijiahe Village Chaheji County Bazhou City
dated
March 16, 2006 (English Translation)
(7)
|
10.9
|
Securities
Purchase Agreement dated June 13, 2007 by and among the Company,
Barron
Partners LP and the other investors named therein
(8)
|
10.10
|
Registration
Rights Agreement dated June 13, 2007 by and among the Company, Barron
Partners LP and the other investors named (8)
|
10.11
|
Stock
Escrow Agreement dated June 13, 2007 by and between the Company and
Tri-State Title & Escrow, LLC, as escrow agent (8)
|
10.12
|
Closing
Escrow Agreement dated June 13, 2007 by and between the Company and
Barron
Partners, L.P., and the other investors named therein and Tri-State
Title
& Escrow, LLC, as escrow agent (8)
|
10.13
|
Investor Relations
Consulting Agreement dated July 23, 2007 between the Company and
Hayden Communications International, Inc. (9)
|
10.14
|
Securities
Purchase Agreement dated as of February 25, 2008 by and among the
Company
and the investors named therein (10)
|
10.15
|
Registration
Rights Agreement dated as of February 25, 2008 by and among the Company
and the investors named therein
(10)
|
10.16
|
Make
Good Escrow Agreement dated as of February 25, 2008 by and between
the
Company, the investors named therein, Roth Capital Partners, LLC
and
Tri-State Title & Escrow, LLC, as escrow agent,
(10)
|
10.17
|
Escrow
Agreement dated as of February 25, 2008 by and between the Company,
Roth
Capital Partners, LLC and Tri-State Title & Escrow, LLC, as escrow
agent (10)
|
21.1
|
List
of subsidiaries. (11)
|
23.1
|
Consent
of counsel to the use of the opinion annexed at Exhibit 5.1 (contained
in
the opinion annexed at Exhibit 5.1)
|
23.2
|
Consent
of accountants (Zhong Yi (Hong Kong) C.P.A. Company Limited for use
of their report.
|
23.3
|
Consent
of accountants (Child, Van Wagoner & Bradshaw, PLLC) for use of their
report
|
(1)
|
Incorporated
herein by reference to the Registration Statement on Form SB-2 filed
with
the SEC on November 2, 2005.
|
(2)
|
Incorporated
herein by reference to the Registration Statement on Form S-1 filed
with
the SEC in August 2003.
|
(3)
|
Incorporated
herein by reference to the Registration Statement on Form SB-2 filed
with
the SEC on March 26, 2001.
|
(4)
|
Incorporated
herein by reference to the Registration Statement Amendment No. 1
on Form
SB-2 filed with the SEC on February 6,
2006.
|
(5)
|
Incorporated
herein by reference to Schedule 13D filed by the Company on April
18,
2005.
|
(6)
|
Incorporated
herein by reference to the Current Report on Form 8-K filed by the
Company
on November 28, 2005.
|
(7)
|
Incorporated
herein by reference to the Registration Statement Amendment No. 2
on Form
SB-2 filed with the SEC on May 22,
2006.
|
(8)
|
Incorporated
herein by reference to the Current Report on Form 8-K filed by the
Company
on June 19, 2007.
|
(9)
|
Incorporated
herein by reference to Amendment No. 2 to the Registration Statement
on
Form SB-2 filed with the SEC on January 1,
2008..
|
(10)
|
Incorporated
by reference to our Current Report on Form 8-K filed by the Company
with
the SEC on February 29, 2008.
|
(11)
|
Incorporated
herein by reference to the Annual Report on Form 10-KSB filed by
the
Company on April 10, 2008.
|
UNDERTAKINGS
The
undersigned Registrant hereby undertakes:
(1)
To
file,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement:
i.
To
include any prospectus required by Section 10(a)(3) of the Securities
Act;
ii.
To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement(or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement;
iii.
To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2)
That,
for
the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(3)
File
a
post-effective amendment to remove from registration any of the securities
that
remain unsold at the end of the offering.
(4)
Insofar
as indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer
will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and
will be governed by the final adjudication of such issue.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned thereunto duly authorized in Beijing, PRC, on April 14,
2008.
|
|
|
|
DELI
SOLAR (USA), INC.
|
|
|
|
|
/s/
Deli Du
|
|
By:
Deli Du,
|
|
Chief
Executive Officer, President and Director
(principal
executive officer)
|
In
accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and
on the dates indicated.
Name
and Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Deli Du
|
|
April
14, 2008
|
|
|
|
|
|
|
|
Deli
Du,
Chief
Executive Officer, President and Director
(principal
executive officer)
|
|
|
|
|
/s/
Yihai Yang
|
|
April
14, 2008
|
|
|
|
|
|
|
|
Yihai
Yang
Acting
Chief Financial Officer
(principal
financial officer and accounting officer)
|
|
|
|
|
/s/
Zhaolin Ding
|
|
April
14, 2008
|
|
|
|
|
|
|
|
Zhaolin
Ding
Director
|
|
|
|
|
/s/ Zhenhang
Jia
|
|
April
14, 2008
|
|
|
|
|
|
|
|
Zhenhang
Jia
Director
|
|
|
|
|
INDEX
TO FINANCIAL STATEMENTS
|
|
|
1.
|
Audited
Consolidated Financial Statements for the Year ended December 31,
2007 and December 31, 2006
|
|
|
|
|
|
|
i.
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
|
|
|
ii
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
|
|
|
iii.
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
F-3
|
|
|
|
|
|
iv.
|
Consolidated
Statements of Income for the Years ended December 31, 2007 and 2006
|
F-4
|
|
|
|
|
|
v.
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007 and
2006
|
F-5
|
|
|
|
|
|
vi.
|
Consolidated
Statement of Changes in Shareholders' Equity and Comprehensive
Income from
January 1, 2005
through
December 31, 2007
|
F-6
|
|
|
|
|
|
vii.
|
Notes
to Consolidated Financial Statements
|
F-7
|
|
|
|
|
2.
|
Unaudited
Condensed Financial Statements of Tianjin Huaneng Group Energy Equipment
Co. Ltd. for the Nine Months Ended September 30, 2007 and September
30,
2006
|
F-28
|
|
|
|
|
|
i.
|
Condensed
Balance Sheet as of September 30, 2007 and December 31,
2006
|
F-29
|
|
|
|
|
|
ii.
|
Condensed
Statements of Operations and Comprehensive Income for the three months
ended September 30, 2007 and 2006 and for the nine months ended September
30, 2007 and 2006
|
F-30
|
|
|
|
|
|
iii.
|
Condensed Statements
of Cash Flows for the
nine
months ended September 30, 2007 and 2006
|
F-31
|
|
|
|
|
|
iv.
|
Condensed Statement
of Changes in Owners’ Equity for the nine months ended September 30,
2007
|
F-32
|
|
|
|
|
|
v.
|
Notes
to Condensed Financial Statements
|
F-33
|
|
|
|
|
3.
|
Audited
Financial Statements of Tianjin Huaneng Group Energy Equipment Co.
Ltd.
for the Years ended December 31, 2006 and December 31,
2005
|
F-45
|
|
|
|
|
|
i.
|
Report
of Independent Public Accounting Firm
|
F-46
|
|
|
|
|
|
ii.
|
Balance
Sheets as of December 31, 2006 and 2005
|
F-47
|
|
|
|
|
|
iii.
|
Statements
of Operations and Comprehensive Income for the Years ended December
31,
2006 and 2005
|
F-48
|
|
|
|
|
|
iv.
|
Statements
of Cash Flows for the Years Ended December 31, 2006 and
2005
|
F-49
|
|
v.
|
Statements
of Changes of Owners Equity for the Years ended December 2006
and 2005
|
F-50
|
|
|
|
|
|
vi.
|
Notes
to Audited Financial Statements
|
F-51
|
|
|
|
|
4.
|
Unaudited
Pro Forma Financial Information of China Solar & Clean Energy
Solutions, Inc.
|
F-64
|
|
|
|
|
i.
|
Notes
to Unaudited Pro forma Condensed Financial
Statements
|
F-65
|
|
|
|
|
|
ii.
|
Unaudited
Pro Forma Condensed, Combined Balance Sheet as of September 30,
2007
|
F-66
- F-67
|
|
|
|
|
|
iii.
|
Unaudited
Pro Forma Condensed, Combined Statements of Operations for the Nine
Months
Ended September 30, 2007
|
F-68
|
|
|
|
|
|
iv.
|
Unaudited
Pro Forma Condensed, Combined Statements of Operations for the
Year Ended
December 31, 2007
|
F-69
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
China
Solar & Clean Energy Solutions, Inc. (fka Deli Solar (USA),
Inc.)
Beijing,
People’s Republic of China
We
have
audited the consolidated balance sheet of China Solar & Clean Energy
Solutions, Inc. (fka Deli Solar (USA), Inc.) (the Company) as of December 31,
2006, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for the years ended December 31, 2006 and
2005. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Solar & Clean
Energy Solutions, Inc. (fka Deli Solar (USA), Inc.) as of December 31, 2006,
and
the results of its operations and its cash flows for the years ended December
31, 2006 and 2005, in conformity with accounting principles generally accepted
in the United States of America.
/s/
Child, Van
Wagoner & Bradshaw, PLLC
|
|
|
|
|
|
|
|
Child,
Van Wagoner & Bradshaw, PLLC
Salt
Lake City, Utah
March
31, 2007
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and stockholders of
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
We
have
audited the accompanying consolidated balance sheet of China Solar & Clean
Energy Solutions, Inc. (the “Company”) as of December 31, 2007 and the related
consolidated statements of income, cash flows and changes in stockholders’
equity and comprehensive income for the year ended December 31, 2007. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits include consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe
that our audit provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of the Company as of December
31, 2007 and the results of their operations and their cash flows for the
year
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
/s/
Cordovano and Honeck LLP
Englewood,
Colorado USA
March
28,
2008
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
BALANCE
SHEETS
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,466,637
|
|
$
|
3,212,065
|
|
Accounts
receivable, net
|
|
|
7,453,009
|
|
|
870,446
|
|
Inventories
|
|
|
3,875,658
|
|
|
315,765
|
|
Other
receivables and prepayments
|
|
|
1,637,948
|
|
|
1,387,911
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
18,433,252
|
|
|
5,786,187
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
8,819,216
|
|
|
5,926,468
|
|
Goodwill
|
|
|
1,789,324
|
|
|
-
|
|
Intangible
assets, net
|
|
|
1,597,921
|
|
|
1,003,530
|
|
TOTAL
ASSETS
|
|
|
30,639,713
|
|
|
12,716,185
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$
|
2,111,028
|
|
$
|
147,901
|
|
Income
tax payables
|
|
|
1,108,433
|
|
|
-
|
|
Other
payables and accrued liabilities
|
|
|
8,552,452
|
|
|
342,811
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
11,771,913
|
|
|
490,712
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
935,825
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Convertible
preferred stock: par value $0.001;
25,000,000
shares authorized, 1,774,194 and -0- shares issued and outstanding,
respectively
|
|
|
1,774
|
|
|
-
|
|
Common
stock, $0.001 par value; 66,666,667 shares authorized; 6,205,290
and
6,205,290 shares issued and outstanding, respectively
|
|
|
6,205
|
|
|
6,205
|
|
Additional
paid-in capital
|
|
|
9,260,607
|
|
|
5,705,574
|
|
Accumulated
other comprehensive income
|
|
|
1,134,270
|
|
|
533,909
|
|
Retained
earnings
|
|
|
7,529,119
|
|
|
5,979,785
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
17,931,975
|
|
|
12,225,473
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
30,639,713
|
|
|
12,716,185
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS
OF INCOME
(Currency
expressed in United States Dollars (“US$”))
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
$
|
15,577,447
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
28,772,078
|
|
|
16,842,994
|
|
|
11,868,459
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,300,268
|
|
|
4,625,319
|
|
|
3,708,988
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
282,822
|
|
|
154,946
|
|
|
14,631
|
|
Selling
and distribution
|
|
|
827,839
|
|
|
459,746
|
|
|
256,634
|
|
General
and administrative
|
|
|
4,003,973
|
|
|
2,800,015
|
|
|
2,117,920
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
5,114,634
|
|
|
3,414,707
|
|
|
2,389,185
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,185,634
|
|
|
1,210,612
|
|
|
1,319,803
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
220,057
|
|
|
45,606
|
|
|
-
|
|
Interest
expense
|
|
|
(65,481
|
)
|
|
(16,717
|
)
|
|
(20,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
154,576
|
|
|
28,889
|
|
|
(20,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,340,210
|
|
|
1,239,501
|
|
|
1,298,974
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(615,325
|
)
|
|
-
|
|
|
-
|
|
Minority
interests
|
|
|
(199,744
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
1,549,334
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – basic
|
|
$
|
0.25
|
|
$
|
0.20
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – diluted
|
|
$
|
0.14
|
|
$
|
0.18
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
6,205,290
|
|
|
6,205,290
|
|
|
5,732,616
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
11,233,026
|
|
|
6,957,876
|
|
|
7,558,335
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Currency
expressed in United States Dollars)
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
324,157
|
|
|
178,437
|
|
|
100,171
|
|
Provision
for allowance on accounts receivable
|
|
|
650,432
|
|
|
(77,267
|
)
|
|
105,030
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(7,232,995
|
)
|
|
(238,334
|
)
|
|
(476,106
|
)
|
Inventories
|
|
|
(3,559,893
|
)
|
|
67,418
|
|
|
(8,279
|
)
|
Other
receivables and prepayments
|
|
|
(250,037
|
)
|
|
(238,268
|
)
|
|
(566,989
|
)
|
Accounts
payable, trade
|
|
|
1,963,127
|
|
|
58,526
|
|
|
(79,124
|
)
|
Income
tax payable
|
|
|
1,108,433
|
|
|
-
|
|
|
-
|
|
Other
payables and accrued liabilities
|
|
|
8,209,641
|
|
|
262,885
|
|
|
(300,621
|
)
|
Minority
interest
|
|
|
935,825
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
4,673,831
|
|
|
1,252,898
|
|
|
73,056
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of a subsidiary
|
|
|
(489,459
|
)
|
|
-
|
|
|
-
|
|
Deposits
made to acquire subsidiary
|
|
|
-
|
|
|
(256,278
|
)
|
|
-
|
|
Purchase
of intangible assets
|
|
|
(635,726
|
)
|
|
(932,732
|
)
|
|
(2,711
|
)
|
Purchase
of property, plant and equipment
|
|
|
(4,294,741
|
)
|
|
(2,815,398
|
)
|
|
(845,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(5,419,926
|
)
|
|
(4,004,408
|
)
|
|
(847,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repayment
of short-term borrowings
|
|
|
(180,694
|
)
|
|
(130,112
|
)
|
|
(403,101
|
)
|
Capital
contribution received from shareholders
|
|
|
-
|
|
|
-
|
|
|
4,882,389
|
|
Proceeds
from issuance of preferred stock (net of offering costs of $169,000
paid
in cash)
|
|
|
2,581,000
|
|
|
-
|
|
|
-
|
|
Related
receivable
|
|
|
-
|
|
|
82,639
|
|
|
518,637
|
|
Related
payables
|
|
|
-
|
|
|
22,528
|
|
|
(10,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
2,400,306
|
|
|
(24,945
|
)
|
|
4,987,584
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
600,361
|
|
|
359,352
|
|
|
174,557
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
2,254,572
|
|
|
(2,417,103
|
)
|
|
4,387,360
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
3,212,065
|
|
|
5,629,168
|
|
|
1,241,808
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS,
END
OF YEAR
|
|
$
|
5,466,637
|
|
$
|
3,212,065
|
|
|
5,629,168
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
939,798
|
|
$
|
-
|
|
$
|
-
|
|
Cash
paid for interest expenses
|
|
$
|
95,446
|
|
$
|
16,717
|
|
$
|
20,884
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS
|
|
|
|
|
|
|
|
|
|
|
Warrant
shares granted for offering costs
|
|
$
|
138,338
|
|
$
|
-
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
Preferred
stock
|
|
Common
stock
|
|
Additional
paid-in
|
|
Accumulated
other
comprehensive
|
|
Retained
|
|
Total
stockholders’
|
|
|
|
No.
of shares
|
|
Par
value
|
|
No.
of shares
|
|
Par
value
|
|
Capital
|
|
income
|
|
earnings
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2005
|
|
|
-
|
|
|
-
|
|
|
4,431,000
|
|
|
4,430
|
|
|
824,960
|
|
|
-
|
|
|
3,441,310
|
|
|
4,270,700
|
|
Shares
issued for private placement, net of offering costs of $1,348,626
in
cash
|
|
|
-
|
|
|
-
|
|
|
1,714,290
|
|
|
1,715
|
|
|
4,649,674
|
|
|
-
|
|
|
-
|
|
|
4,651,389
|
|
Warrants
exercised
|
|
|
-
|
|
|
-
|
|
|
60,000
|
|
|
60
|
|
|
230,940
|
|
|
-
|
|
|
-
|
|
|
231,000
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,298,974
|
|
|
1,298,974
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
174,557
|
|
|
-
|
|
|
174,557
|
|
Comprehensive
income:
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,473,531
|
|
Balance
as of December 31, 2005
|
|
|
-
|
|
|
-
|
|
|
6,205,290
|
|
|
6,205
|
|
|
5,705,574
|
|
|
174,557
|
|
|
4,740,284
|
|
|
10,626,620
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,239,501
|
|
|
1,239,501
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
359,352
|
|
|
-
|
|
|
359,352
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,598,853
|
|
Balance
as of December 31, 2006
|
|
|
-
|
|
|
-
|
|
|
6,205,290
|
|
|
6,205
|
|
|
5,705,574
|
|
|
533,909
|
|
|
5,979,785
|
|
|
12,225,473
|
|
Shares
issued for private placement, net of offering costs of $169,000
in cash
and $138,338 in warrants.
|
|
|
1,774,194
|
|
|
1,774
|
|
|
|
|
|
|
|
|
2,579,226
|
|
|
|
|
|
|
|
|
2,581,000
|
|
Preferred
share dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975,807
|
|
|
|
|
|
(975,807
|
)
|
|
-
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,525,141
|
|
|
2,525,141
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600,361
|
|
|
|
|
|
600,361
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,125,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
|
1,774,194
|
|
$
|
1,774
|
|
|
6,205,290
|
|
$
|
6,205
|
|
$
|
9,260,607
|
|
$
|
1,134,270
|
|
$
|
7,529,119
|
|
$
|
17,931,975
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
1.
|
ORGANIZATION
AND BUSINESS BACKGROUND
|
China
Solar & Clean Energy Solutions, Inc. (“China Solar”), formerly known as Deli
Solar (USA) Inc. was incorporated in the State of Nevada on March 21, 1983
as
Meditech Pharmaceuticals, Inc. (“Meditech”). In late 2004, the Board of
Directors of Meditech contemplated a strategic reorganization with Deli Solar
Holding Ltd., a corporation organized in the British Virgin Islands (“Deli Solar
(BVI)”). In contemplation of the reorganization, the Board of Directors resolved
to spin off Meditech's drug development business to the shareholders of Meditech
of record on February 17, 2005, through a pro rata distribution in the form
of a
stock dividend. The spin-off was completed on August 29, 2005. The acquisition
of Deli Solar (BVI) was accounted for as a recapitalization of Deli Solar
(BVI).
Deli
Solar (BVI) was formed in June 2004. On August 1, 2004, Deli Solar (BVI)
purchased Bazhou Deli Solar Energy Heating Co., Ltd. (“Deli Solar (Bazhou)”), a
corporation duly organized under the laws of the People’s Republic of China
(“PRC”) from Messrs. Deli Du, Xiao'er Du, and Xiaosan Du for RMB 6,800,000. As
a
result of this transaction, Deli Solar (Bazhou) became a wholly-foreign owned
enterprise ("WFOE") under PRC law on March 30, 2005. This acquisition was
accounted for as a transfer of entities under common control.
Deli
Solar (Bazhou) was incorporated on August 19, 1997 under the laws of the
PRC. In
the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the United
States (“US”).
The
result of the above transactions is that Deli Solar (BVI) is now our direct,
wholly-owned subsidiary and Deli Solar (Bazhou) remains a wholly-owned
subsidiary of Deli Solar (BVI).
On
November 21, 2005 Deli Solar (Bazhou) acquired Ailiyang Solar Energy Technology
Co., Ltd. (“Ailiyang”), an entity formerly controlled by the owners of Deli
Solar (Bazhou). The transaction was accounted for as a transfer of entities
under common control.
Beijing
Deli Solar Technology Development Co., Ltd. (“Deli Solar (Beijing)”) was founded
in 2006 and is principally engaged in solar power heater integrated construction
projects in major cities in the PRC.
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.
The
transaction was accounted for under the purchase method. See Note
2.
China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng are hereinafter referred to as (“the Company”).
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US
GAAP”).
The
consolidated financial statements include the financial statements of
China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng
and the
VIE.
The
Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 46R, “Consolidation of Variable Interest Entities ” (“FIN
46R”). The sole-proprietorship business in the name of Mr. Deli Du is regarded
a
VIE of the Company and is consolidated in the Company’s financial
statements.
All
significant intercompany balances and transactions within the Company have
been
eliminated upon consolidation.
In
preparing these financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities in the balance sheets
and revenues and expenses during the years reported. Actual results may differ
from these estimates.
|
Cash
and cash equivalents
|
The
Company considers all highly liquid securities with original maturities of
three
months or less when acquired to be cash equivalents. At December 31, 2007 and
2006, the Company had $5,466,637 and $3,212,065, respectively, in cash
equivalents.
|
Accounts
receivable and allowance for doubtful
accounts
|
Accounts
receivable consists of amounts due from customers. The Company extends unsecured
credit to its customers in the ordinary course of business but mitigates the
associated risks by performing credit checks and actively pursuing past due
accounts. An allowance for doubtful accounts is established and determined
based
on management’s assessment of known requirements, aging of receivables, payment
history, the customer’s current credit worthiness and the economic environment.
Inventories
include direct materials, labor and factory overhead and are stated at lower
of
cost or market value, cost being determined on a first-in, first-out basis.
The
Company periodically reviews historical sales activity to determine excess,
slow
moving items and potentially obsolete items and also evaluates the impact of
any
anticipated changes in future demand. The Company provides inventory allowances
based on excess and obsolete inventories determined principally by customer
demand. As of December 31, 2007, 2006 and 2005, the Company did not record
an
allowance for obsolete inventories, nor have there been any
write-offs.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date
on
which they become fully operational and after taking into account their
estimated residual values. Property, plant and equipment are depreciated over
their estimated useful lives as follows:
|
|
Depreciable life
|
|
Residual value
|
|
Buildings
|
|
|
6-50
years
|
|
|
10%
|
|
Plant
and machinery
|
|
|
10
years
|
|
|
10%
|
|
Office
equipments
|
|
|
7
years
|
|
|
10%
|
|
Motor
vehicles
|
|
|
7
years
|
|
|
10%
|
|
Computer
equipment
|
|
|
3
years
|
|
|
10%
|
|
All
facilities purchased for installation, self-made or subcontracted are accounted
for under construction-in-progress. Construction-in-progress is recorded at
acquisition cost, including cost of facilities, installation expenses and the
interest capitalized during the course of construction for the purpose of
financing the project. Upon completion and readiness for use of the project,
the
cost of construction-in-progress is to be transferred to fixed
assets.
|
Goodwill
and intangible assets
|
Goodwill
and intangibles, including intellectual property, were generally acquired in
acquisitions in 2007. Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, or SFAS No. 142, requires goodwill to
be tested for impairment on an annual basis and between annual tests in certain
circumstances, and written down when impaired. We perform this analysis during
the fourth quarter of each year. No impairment of goodwill has been identified
since the date of acquisition.
Furthermore,
SFAS No. 142 requires purchased intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined to be
indefinite. Purchased intangible assets are carried at cost less accumulated
amortization. No impairment of intangibles has been identified since the date
of
acquisition. All lands in the PRC are owned by the PRC government. The
government in the PRC, according to the relevant PRC law, may sell the right
to
use the land for a specified period of time. Thus, all of the Company’s land
purchases in the PRC are considered to be leasehold land and are stated at
amortized cost. Amortization is provided over the term of the land use right
agreements on a straight-line basis, which is 50 years and they will expire
in
2048, 2051 and 2054.
|
Impairment
of long-lived assets
|
In
accordance with SFAS No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets”
,
a
long-lived assets and certain identifiable intangible assets held and used
by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Recoverability
of assets to be held and used is evaluated by a comparison of the carrying
amount of assets to estimated undiscounted net cash flows expected to be
generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets. There has been no
impairment as of December 31, 2007, 2006 and 2005.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
Company sells their products and services under a bundled sales arrangement,
which typically include equipment, installation, testing and maintenance
components. The components of equipment, installation and testing are
non-separable and considered as a single unit of deliverables, namely product
revenue. Hence, the product and maintenance are considered separate units of
accounting in the arrangement. Revenues under these bundled arrangements are
allocated considering the relative fair values of two separate deliverables:
(a)
product deliverable and (b) maintenance deliverable, included in the bundled
arrangement based on the estimated relative fair values of each element in
accordance with EITF 00-21, “Accounting for Multiple Element Revenue
Arrangements” and recognized when the applicable revenue recognition criteria
for each element are met.
Revenue
from product deliverables are recognized upon final acceptance, which is signed
by the customer when installation is completed. Revenue from maintenance support
for the Company’s products are deferred and recognized ratably over the term of
the service period upon the acceptance of the products, which is generally
12
months.
Revenue
from the provision of energy-saving projects are recognized when persuasive
evidence of an arrangement exists, transfer of title has occurred or services
have been rendered, the selling price is fixed or determinable and
collectibility is reasonably assured.
T
he
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of the products at the rate
of
17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition
to the invoiced value of purchases to the extent not refunded for export
sales.
Cost
of
revenue consists primarily of material costs, direct labor, shipping and
handling fee, depreciation and manufacturing overheads, which are directly
attributable to the manufactured products and the provision of the energy-saving
projects.
Advertising
costs are expensed as incurred in accordance with the American Institute of
Certified Public Accountants (“AICPA”) Statement of Position 93-7,
“Reporting
for Advertising Costs”
.
Advertising expenses for the years ended December 31, 2007, 2006 and 2005 were
$1,415,493, $1,106,488 and $646,667, respectively.
Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the accompanying consolidated statements
of operations as the related employee service is provided.
SFAS
No.
130,
“Reporting
Comprehensive Income”,
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income as defined includes
all changes in equity during a period from non-owner sources. Accumulated other
comprehensive income, as presented in the accompanying statement of changes
in
owners’ equity consists of changes in unrealized gains and losses on foreign
currency translation. This comprehensive income is not included in the
computation of income tax expense or benefit.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
Company accounts for income tax using SFAS No. 109
“Accounting
for Income Taxes”
,
which
requires the asset and liability approach for financial accounting and reporting
for income taxes. Under this approach, deferred income taxes are provided for
the estimated future tax effects attributable to temporary differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery or
reversal and the effect from a change in tax rates is recognized in the
statement of operations and comprehensive (loss) income in the period of
enactment. A valuation allowance is provided to reduce the amount of deferred
tax assets if it is considered more likely than not that some portion of, or
all
of the deferred tax assets will not be realized.
The
Company calculates net income per share in accordance with SFAS
No. 128,
“Earnings
per Share.”
Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have
been
outstanding if the potential common stock equivalents had been issued and if
the
additional common shares were dilutive.
|
Foreign
currency translation
|
The
reporting currency of the Company is United States dollar (“US$”). Transactions
denominated in currency other than US$ are translated into US$ at the average
rate for the period. Monetary assets and liabilities denominated in currency
other than US$ are translated into US$ at the rates of exchange ruling at the
balance sheet date. The resulting exchange differences are recorded in other
expenses in the accompanying statements of operations.
The
financial records of the Company’s operating subsidiaries are maintained in
their local currency, the Renminbi (“RMB”), which is the functional currency.
Assets and liabilities are translated at the exchange rates at the balance
sheet
date, equity accounts are translated at historical exchange rates, and income
and expenses items are translated using the average rate for the period. The
translation adjustments are recorded in accumulated other comprehensive income
in the statements of changes in stockholders’ equity and comprehensive
income.
Prior
to
January 1, 2006, we accounted for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Bulletin No. 25,
Accounting
for Stock Issued to Employees
, or APB
No. 25 and related interpretations. Compensation expense for stock options
was recognized ratably over the vesting period.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Effective
January 1, 2006, we adopted the fair value recognition provisions of
Financial Accounting Standards Board, or FASB, Statement of Financial Accounting
Standards,
Share-Based
Payment
, or
SFAS No. 123(R) using the modified prospective application method. Under
SFAS No. 123R, stock-based compensation expense is measured at the
grant date based on the value of the option or restricted stock and is
recognized as expense, less expected forfeitures, over the requisite service
period.
The
Company provides a three-year standard warranty to all Deli Solar (Bazhou)
manufactured products. Repair and replacement of defective component parts
during the first year following purchase are covered under the standard warranty
program. In the second and third year, repair services are covered under the
warranty program but customers pay for the purchase of the replacement parts.
Warranty services on the products manufactured by Deli Solar (Bazhou) are
performed by independent sales agents and distributors in exchange for 1%-2%
discount off the purchase price of our products.
Under
the
terms of the contracts for energy-saving projects, the Company provides a
product warranty on the equipment to its customers for a period of twelve months
upon the completion of installation at the Company’s expense. The Company has
not experienced any material returns where it was under obligation to honor
this
standard warranty provision. As such, no reserve for product warranty has been
provided in the statements of operations
for
the
years ended December 31, 2007, 2006 and 2005, respectively.
SFAS
No.
131
“Disclosures
about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments on
a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
financial statements. The Company operates in two principal reportable segments:
Sales
of
solar heater or boiler related products and sales of heat pipe related
products.
|
Fair
value of financial instruments
|
The
Company values its financial instruments as required by SFAS No. 107,
“Disclosures
about Fair Value of Financial Instruments”
.
The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. The
estimates presented herein are not necessarily indicative of amounts that the
Company could realize in a current market exchange.
The
Company’s financial instruments primarily include cash and cash equivalents,
accounts receivable, other receivables and prepayments, accounts payable, other
payables and accrued liabilities. As of the balance sheet date, the estimated
fair values of financial instruments were not materially different from their
carrying values as presented due to short maturities of these
instruments.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
|
Registration
payment arrangements
|
The
Company accounts for registration payment arrangement in accordance with FASB
Staff Position EITF 00-19-2,
Accounting
for
Registration
Payment
Ar
ra
ngements
("FSP
EITF 00-19-2") which provides guidance on the
accounting
for
registration
payment
arrangements
.
FSP
EITF 00-19-2 specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with FASB Statement No. 5,
Accounting
for Contingencies
.
A
registration payment arrangement is defined in FSP EITF 00-19-2 as an
arrangement with both of the following characteristics: (1) the arrangement
specifies that the issuer will endeavor (a) to file a registration
statement for the resale of specified financial instruments and/or for the
resale of equity shares that are issuable upon exercise or conversion of
specified financial instruments and for that registration statement to be
declared effective by the Securities and Exchange Commission within a specified
grace period, and/or (b) to maintain the effectiveness of the registration
statement for a specified period of time (or in perpetuity); and(2) the
arrangement requires the issuer to transfer consideration to the counterparty
if
the registration statement for the resale of the financial instrument or
instruments subject to the arrangement is not declared effective or if
effectiveness of the registration statement is not maintained.
The
Company adopted Financial Accounting Standards Board Interpretation No. 48,
“Accounting
for Uncertainty in Income Taxes”
(“FIN
48”), on January 1, 2007. FIN 48 prescribes a more likely than not
threshold for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition of income tax assets and liabilities, classification
of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, accounting for income
taxes in interim periods, and income tax disclosures. The Company did not have
any adjustment to the opening balance of retained earnings as of January 1,
2007 as a result of the implementation of FIN 48. For the year ended
December 31, 2007, the Company did not have any interest and penalties
associated with tax positions. As of December 31, 2007, the Company did not
have any significant unrecognized uncertain tax positions.
|
Recently
issued accounting standards
|
In
2008,
the Securities and Exchange Commission (the “SEC”) adopted rule amendments that
replace the category of “Small Business Issuers” with a broader category of
“Smaller Reporting Companies.” Under these rules, a "Smaller Reporting
Company" is a company with a public float less than $75,000,000 (measured at
end
of Q2). Companies that meet this definition are able to elect "scaled
disclosure standards" on an item-by-item or "a-la-carte" basis. With this
change, the SEC has streamlined and simplified reporting for many companies,
and
has not added any significant disclosure requirements.
In
February 2007, the
FASB
issued Statement of Financial Accounting Standard No. 159,
“The
Fair Value Option for Financial Assets and Financial
Liabilities”
,
or SFAS
159. SFAS 159 permits companies to choose to measure many financial instruments
and certain other items at fair value. It is expected to expand the use of
fair
value measurements which is consistent with the Financial Accounting Standards
Board’s long-term measurement objectives for accounting for financial
instruments. SFAS 159 is effective for our first fiscal year that begins after
November 15, 2007, which is our fiscal year 2008 that begins in January 2008.
The Company is currently evaluating the impact of this statement to its
financial position and results of operations.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
‘’Business
Combinations’’
,
or SFAS
No. 141R. SFAS No. 141R will change the accounting for business combinations.
Under SFAS No. 141R, an acquiring entity will be required to recognize all
the
assets acquired and liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS No. 141R will change the accounting
treatment and disclosure for certain specific items in a business combination.
SFAS No. 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Accordingly, any business
combinations we engage in will be recorded and disclosed following existing
GAAP
until January 1, 2009. We expect SFAS No. 141R will have an impact on accounting
for business combinations once adopted but the effect is dependent upon
acquisitions at that time. We are still assessing the impact of this
pronouncement.
In
December 2007, the FASB issued SFAS No. 160,
"Noncontrolling Interests in Consolidated Financial Statements--An Amendment
of
ARB No. 51’’
,
or SFAS
No. 160. SFAS No. 160 establishes new accounting and reporting standards for
the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. We believe that SFAS 160 should not have a material impact
on
our financial position or results of operations.
Acquisition
On
May
18, 2007, the Company’s wholly owned subsidiary, Beijing Deli Solar Technology
Development Co., Ltd. entered into a purchase agreement to acquire 51% equity
interest in Tianjin Huaneng held by Tianjin Municipal Ji County State-owned
Assets Administration Commission for a total purchase price of $3,149,147.
By
supplemental agreement dated August 8, 2007, the purchase price was reduced
to
approximately $1,689,741. The Company also incurred additional cost of $769,418
related to finder’s fee, which has been included in the total cost of the
acquisition of $2,459,159. As of December 31, 2007, the Company paid
approximately $2,345,018 of the purchase price and the finder’s fee. The
remaining balance as of the date of this report was $114,141. In addition,
the
Company agreed to provide working capital of approximately $2.6 million to
Tianjin Huaneng. The accounting date of the acquisition was July 1, 2007 and
was
accounted for under the purchase method. Tianjin Huaneng results of operations
have been included in our consolidated financial statements since the date
of
acquisition. Tianjin Huaneng is principally engaged in the design, development
and manufacturing and marketing of energy-saving related heating products such
as heat pipes, heat exchangers, specialty heating pipes and tubes, high
temperature hot blast stoves, heating filters, normal pressure water boilers,
solar energy water heaters and radiators. These products are distributed in
the
PRC and Southeast Asia. Goodwill recorded as part of the purchase price
allocation was $1,789,324. Identifiable intangible assets acquired as part
of
the acquisition included definite-lived intangibles such as land use rights
which totaled $256,157, with a weighted average amortization period of
approximately 50 years. We continue to evaluate the purchase price allocation
for the Tianjin Huaneng acquisition, including intangible assets, contingent
liabilities and property, plant and equipment.
The
aggregate purchase price was $2,459,159, including $1,689,741 of cash and costs
related to the acquisition of $769,418. Below is a summary of the total purchase
price:
Cash
|
|
$
|
1,689,741
|
|
Direct
acqusition costs
|
|
|
769,418
|
|
|
|
|
|
|
Total
purchase price
|
|
$
|
2,459,159
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
total
purchase price was allocated to the estimated fair value of the assets acquired
and liabilities assumed as follows:
Fair
value of tangible net assets acquired
|
|
$
|
5,256,426
|
|
Fair
value of intangible net assets acquired
|
|
|
256,157
|
|
Goodwill
|
|
|
1,789,324
|
|
Trade
accounts payable, accrued expenses and other liabilities
|
|
|
(4,842,748
|
)
|
|
|
$
|
2,459,159
|
|
The
following unaudited pro forma financial information for the Company gives effect
to the 2007 acquisition as if they had occurred on January 1, 2006. These
pro forma results do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on such date
or
to project the Company’s results of operations for any future
period.
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Pro
forma net sales
|
|
$
|
43,552,104
|
|
$
|
34,981,140
|
|
Pro
forma net income
|
|
|
2,558,974
|
|
|
1,445,425
|
|
|
|
|
|
|
|
|
|
Pro
forma earnings per common share — net income
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
$
|
0.23
|
|
Diluted
|
|
$
|
0.14
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
6,206,290
|
|
|
6,205,290
|
|
Diluted
|
|
|
11,233,026
|
|
|
6,957,876
|
|
3.
|
ACCOUNTS
RECEIVABLE, NET
|
The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible.
If
actual collections experience changes, revisions to the allowance may be
required.
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Accounts
receivable, cost
|
|
$
|
8,219,804
|
|
$
|
986,809
|
|
Less:
allowance for doubtful accounts
|
|
|
(766,795
|
)
|
|
(116,363
|
)
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
7,453,009
|
|
$
|
870,446
|
|
For
the
year ended December 31, 2006, the Company recorded the reversal of the allowance
for doubtful accounts of $77,267. For the year ended December 31, 2007, the
Company recorded allowance for doubtful accounts of $650,432.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Inventories
consisted of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
656,605
|
|
$
|
150,748
|
|
Consumables
|
|
|
5,359
|
|
|
5,970
|
|
Work-in-process
|
|
|
2,464,441
|
|
|
-
|
|
Finished
goods
|
|
|
749,253
|
|
|
159,047
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
3,875,658
|
|
$
|
315,765
|
|
5.
|
OTHER
RECEIVABLES AND
PREPAYMENTS
|
Other
receivables and prepayments consisted of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Advance
to suppliers
|
|
$
|
493,421
|
|
$
|
1,007,709
|
|
Prepaid
expenses
|
|
|
249,598
|
|
|
58,203
|
|
Deposits
|
|
|
894,268
|
|
|
256,278
|
|
Other
receivables
|
|
|
661
|
|
|
65,721
|
|
|
|
|
|
|
|
|
|
Other
receivables and prepayments
|
|
$
|
1,637,948
|
|
$
|
1,387,911
|
|
6.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property,
plant and equipment, net, consisted of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
5,573,982
|
|
$
|
3,528,180
|
|
Plant
and machinery
|
|
|
1,836,914
|
|
|
71,131
|
|
Office
equipments
|
|
|
1,004,118
|
|
|
65,749
|
|
Motor
vehicles
|
|
|
81,497
|
|
|
76,176
|
|
Computer
equipment
|
|
|
13,507
|
|
|
12,625
|
|
Construction
in progress
|
|
|
2,118,615
|
|
|
2,580,031
|
|
|
|
|
10,628,633
|
|
|
6,333,892
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(1,809,417
|
)
|
|
(407,424
|
)
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$
|
8,819,216
|
|
$
|
5,926,468
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Depreciation
expenses for the years ended December 31, 2007, 2006 and 2005 were $282,822,
$162,695 and $100,171, respectively.
7.
|
INTANGIBLE
ASSETS, NET
|
Intangible
assets consisted of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Land
use rights, at cost
|
|
$
|
1,654,998
|
|
$
|
1,019,272
|
|
Less:
accumulated amortization
|
|
|
(57,077
|
)
|
|
(15,742
|
)
|
|
|
|
|
|
|
|
|
Land
use rights, net
|
|
$
|
1,597,921
|
|
$
|
1,003,530
|
|
All
lands
in the PRC are owned by the PRC government. The government in the PRC, according
to the relevant PRC law, may sell the right to use the land for a specified
period of time. Thus, all of the Company’s land purchases in the PRC are
considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided over
the term of the land use right agreement which is 50 years, on a straight-line
basis.
Amortization
expenses for the years ended December 31, 2007, 2006 and 2005 were $41,335,
$15,742 and $-0-, respectively.
8.
|
OTHER
PAYABLES AND ACCRUED
LIABILITIES
|
Other
payables and accrued liabilities consisted of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Related
party payable
|
|
$
|
-
|
|
$
|
22,528
|
|
Accrued
expenses
|
|
|
608,315
|
|
|
22,080
|
|
Customer
deposits
|
|
|
2,281,909
|
|
|
262,269
|
|
Other
payables
|
|
|
3,508,066
|
|
|
35,934
|
|
Taxes
payables
|
|
|
1,359,140
|
|
|
-
|
|
Deferred
revenue
|
|
|
795,022
|
|
|
-
|
|
|
|
$
|
8,552,452
|
|
$
|
342,811
|
|
Authorized
Capital
The
Company’s authorized
capital
stock consists of 66,666,667 shares of $0.001 par value per share common stock
and 25,000,000 shares of $0.001 par value per share preferred stock
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Class
A Preferred stock
The
Company has designated 3,500,000 of its Preferred Shares as Class A Convertible
Preferred Shares. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the corporation, Class A Convertible Preferred
Shareholders
shall
be
entitled to receive out of the assets of the Corporation, an amount equal to
$1.55 per share. Each share of Series A Preferred Stock shall be initially
convertible into one (1) share of Common Stock at the conversion price of $1.55,
subject to adjustment for stock dividend and stock splits, sale or issuance
of
common stock at a price which is less than the conversion price and pro rata
distribution, at the option of the investors, at any time after the original
issue date.
The
Class
A
Convertible Preferred Shares
contain
a
beneficial conversion feature in favor of the holder. The beneficial conversion
feature was measured at its intrinsic value at the date of issuance of the
shares and is recognized immediately as a return to the preferred shareholders
through a charge to retained earnings, since the conversion feature is
immediately exercisable by the holders. The charge during the current year
was
$975,807. Although there is no impact on net income, the charge to retained
earnings affects the computation of both basic and diluted EPS for US GAAP
in
the same way that dividends on the preferred shares do.
Sale
of Units
On
June
13, 2007, the Company entered into a Securities Purchase Agreement with Barron
Partners L.P., and two accredited investors in a private placement (“Private
Placement) providing for the sale of: (i) 1,774,194 shares of our Series A
Convertible Preferred Stock; (ii) stock purchase warrants to purchase an
aggregate of 1,774,194 shares of common stock at a price of $1.90 per share;
and
(iii) stock purchase warrants to purchase an aggregate of 1,774,194 shares
of
common stock at a price of $2.40 per share.
In
connection with the Private Placement, the Company deposited 900,000 shares
of
Series A Convertible Preferred Stock into escrow as security in the event (i)
the earnings target for 2007 is not met and (ii) the earnings target for 2008
is
not met.
The
900,000 shares held in escrow were included in the diluted earnings per share
calculation. Net proceeds of $2,581,000 were used to finance business
acquisitions.
Registration
Rights
On
June
13, 2007, the Company also entered into a registration rights
agreement
for the
common stock underlying the convertible preferred shares and all warrants
related to the Private Placement, under which it agreed to use its commercially
reasonable efforts to cause the initial registration statement to be declared
effective by the SEC at the earlier of (i) 150 days following the filing date
with respect to the registration statement, (ii) 10 days following the receipt
of a “No Review” or similar letter from the SEC or (iii) the third business day
following the day the Company receives notice from the SEC that the SEC has
determined that the registration statement eligible to be declared effective
without further comments by the SEC. The Company is subject to monthly
liquidated damages of 17,742 shares of Series A Preferred Stock, up to a maximum
of 266,129 shares of Series A Preferred Stock in aggregate, for failing to
register the shares timely. The Company is under the obligation to have the
Registration Statement effective on January 10, 2008. However, it was not
effective until 28 days later on February 7, 2008 being the effectiveness date
of SB-2. 17,742 shares of preferred stock per month prorated per 28 days means
16,559 shares of preferred stock will be issued to
investors.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Common
stock
On
March
30, 2005, the Company issued 4,067,968 shares of its common stock in the
recapitalization transaction with Deli Solar (BVI).
On
March
30, 2005, the Company issued 1,714,290 shares of its common stock at $3.50
per
share in a private placement transaction along with five year warrants to
purchase 1,714,290 additional common shares at $3.85 per share. Gross proceeds
to the Company totaled $6,000,015 and costs of issuance totaled
$1,348,626.
On
August
15, 2005 the Company effected a 1:6 reverse stock split. Fractional shares
were
rounded up the nearest whole share. These financial statements have been
retroactively restated to give effect to the reverse split for all periods
presented. Immediately prior to the reverse stock split there were 36,850,379
common shares outstanding and following the split there were 6,145,290 shares
outstanding.
In
October 2005, the Company issued 60,000 shares of its common stock in exercise
of warrants.
Warrants
for services
In
connection with the Private Placement on June 13, 2007, the Board of Directors
granted to consultants and agents warrants to purchase an aggregate of 181,452
shares of the Company’s common stock, of which 75,000 warrants are exercisable
at US$2.90 per share and 106,452 warrants are exercisable at US$2.71 per share,
or on a cashless exercise basis. The warrants vested immediately and expire
on
June 13, 2012. The market price of the stock was US$2.10 per share on the grant
date. The Company valued the 75,000 warrants at US$0.74 per share and the
106,452 warrants at US$0.78 per share, or $138,338 in aggregate in accordance
with SFAS 123R, which were recorded as offering cost in additional paid-in
capital in the accompanying consolidated financial statements for the year
ended
December 31, 2007.
The
fair
value of the warrants was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
Risk
free interest rate (%)
|
|
|
5.00
|
%
|
Dividend
yield (%)
|
|
|
0.00
|
%
|
Expected
life of warrant grants (years)
|
|
|
5
years
|
|
Expected
volatility of warrant grants (%)
|
|
|
43.79
|
%
|
On
March
30, 2005,
in
conjunction with a private placement sale of common stock the Company issued
five year warrants to purchase 1,714,290 shares of common stock at a price
of
$3.85 per share to investors.
Concurrently, the Company issued five year warrants to purchase 171,429 common
shares at $3.85 per share to financial advisers and others. No share-based
compensation expense was recorded, as management determined this transaction
to
be a cost of issuance.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
A
summary
of the status of the Company’s outstanding common stock warrants as of December
31, 2007 and 2006:
|
|
Number of
Shares
|
|
Weighted-
average
Exercise Price
|
|
Weighted-
average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2005
|
|
|
1,825,719
|
|
$
|
3.85
|
|
|
—
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding
at December 31, 2006
|
|
|
1,825,719
|
|
|
3.85
|
|
|
2.25
years
|
|
|
—
|
|
Granted
|
|
|
3,729,840
|
|
|
2.18
|
|
|
4.50
years
|
|
|
354,839
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding
and Exercisable at December 31, 2007
|
|
|
5,555,559
|
|
$
|
2.73
|
|
|
3.76
years
|
|
$
|
354,839
|
|
The
Company is registered in the United States of America and has operations in
three tax jurisdictions: the United States of America, British Virgin Island
(“BVI”) and the PRC. The operations in the United States of America and British
Virgin Island have incurred net operating losses for income tax purposes. The
Company generated substantially its net income from the operation of its
subsidiary in the PRC and subject to the PRC tax jurisdiction. The Company
has
recorded income tax provision for the years ended December 31, 2007 and
2006.
The
components of (loss) income before income taxes separating U.S., BVI and PRC
tax
jurisdictions are as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Tax
jurisdictions from:
|
|
|
|
|
|
|
|
Loss
subject to U.S.
|
|
$
|
(461,433
|
)
|
$
|
(693,745
|
)
|
$
|
-
|
|
Loss
subject to BVI
|
|
|
(184,056
|
)
|
|
(73,691
|
)
|
|
-
|
|
Income
subject to the PRC
|
|
|
3,985,699
|
|
|
2,006,937
|
|
|
1,298,974
|
|
Income
before income taxes
|
|
$
|
3,340,210
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
United
States of America
China
Solar is registered in the State of
Nevada
and
is
subject to the tax laws of United States of America.
As
of
December 31, 2007, the operation in the United States of America incurred
$461,433 of net operating losses available for federal tax purposes, which
are
available to offset future taxable income. The net operating loss carry forwards
will to expire through 2028, if unutilized. The Company has provided for a
full
valuation allowance against the deferred tax assets of $461,433 on the expected
future tax benefits from the net operating loss carryforwards as the management
believes it is more likely than not that these assets will not be realized
in
the future.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
British
Virgin Island
Under
the
current BVI law, the Company is not subject to tax on income.
The
PRC
The
Company's subsidiary operating in the PRC, Ailiyang and Tianjin Huaneng are
domestically owned and
subject
to the Corporate Income Tax governed by the Income Tax Law of the People’s
Republic of China, at a statutory rate of 33%, which is comprised of a 30%
national income tax and 3% local income tax.
In
March
2005, the Deli Solar (Bazhou) became a foreign investment enterprise. Hence,
effective from the year ended 2005, Deli Solar (Bazhou) is entitled to a
two-year exemption from enterprise income tax and a reduced enterprise income
tax rate of 15% for the following three years.
In
September 2006, the Deli Solar (Beijing) was founded as a foreign investment
enterprise. Hence, effective from the year ended 2006, Deli Solar (Beijing)
is
entitled to a two-year exemption from enterprise income tax and a reduced
enterprise income tax rate of 15% for the following three years.
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law, among
other things, imposes a unified income tax rate of 25% for both domestic and
foreign invested enterprises with effect from January 1, 2008. Deli Solar
(Bazhou) and Deli Solar (Beijing) are considered a foreign invested enterprise
and its ultimate applicable effective tax rate in 2008 and beyond will depend
on
many factors, including but not limited to whether certain of its legal entity
will be subject to a transitional policy under the Corporate Income Tax Law,
whether Deli Solar (Bazhou) and Deli Solar (Beijing) can continue to enjoy
the
unexpired tax holidays.
The
reconciliation of income tax rate to the effective income tax rate based on
income before income taxes stated in the statements of operations for the years
ended December 31, 2007, 2006 and 2005 is as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
3,340,210
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
15
|
%
|
|
15
|
%
|
|
|
|
1,102,269
|
|
|
185,925
|
|
|
194,846
|
|
Less:
items not subject to taxes
|
|
|
|
|
|
|
|
|
|
|
Effect
for tax holiday
|
|
|
(486,944
|
)
|
|
(185,925
|
)
|
|
(194,846
|
)
|
Income
tax expenses
|
|
$
|
615,325
|
|
$
|
-
|
|
$
|
-
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
following table sets forth the significant components of the aggregate deferred
tax assets of the Company as of December 31, 2007 and 2006:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
-
Net operating loss carried forward
|
|
$
|
1,432,326
|
|
|
767,436
|
|
Less:
valuation allowance
|
|
|
(1,432,326
|
)
|
|
(767,436
|
)
|
Deferred
tax assets
|
|
$
|
-
|
|
$
|
-
|
|
Basic
net
income per share is computed using the weighted average number of the ordinary
shares outstanding during the year. Diluted net income per share is computed
using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year less number of warrants issued during
the year in note 10.
The
following table sets forth the
computation
of basic and diluted net income per share for the years ended December 31,
2007,
2006 and 2005:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Basic
and diluted net income per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income
|
|
|
2,525,141
|
|
|
1,239,501
|
|
|
1,298,974
|
|
Less:
Preferred stock dividends
|
|
|
(975,807
|
)
|
|
-
|
|
|
-
|
|
Net
income available to common stockholders in computing basic net income
per
share
|
|
$
|
1,549,334
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
- Weighted average ordinary shares outstanding
|
|
|
6,205,290
|
|
|
6,205,290
|
|
|
5,732,616
|
|
-
Weighted average preferred stock outstanding
|
|
|
1,337,097
|
|
|
-
|
|
|
-
|
|
-
Weighted average warrant shares outstanding
|
|
|
3,690,639
|
|
|
752,586
|
|
|
1,825,719
|
|
|
|
|
11,233,026
|
|
|
6,957,876
|
|
|
7,558,335
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.25
|
|
$
|
0.20
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.14
|
|
$
|
0.18
|
|
$
|
0.17
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
12.
|
SEGMENT
REPORTING, GEOGRAPHICAL
INFORMATION
|
The
Company has two reportable segments namely solar heater/boiler related products
and heat pipe related products for the three year ended December 31, 2007,
2006
and 2005. The solar heater/boiler related products are mainly under the
management of Deli Solar (Bazhou) while the heat pipe related products are
energy-savings projects under the management of Tianjin Huaneng.
An
analysis of the Company’s revenue and total assets are as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
26,693,850
|
|
$
|
21,468,313
|
|
$
|
15,577,447
|
|
Heat
Pipe related products
|
|
|
7,002,015
|
|
|
-
|
|
|
-
|
|
Unallocated
|
|
|
3,376,481
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
$
|
15,577,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
5,672,443
|
|
$
|
4,625,319
|
|
$
|
3,708,988
|
|
Heat
Pipe related products
|
|
|
1,820,524
|
|
|
-
|
|
|
-
|
|
Unallocated
|
|
|
807,301
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,300,268
|
|
$
|
4,625,319
|
|
$
|
3,708,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
18,690,225
|
|
$
|
12,716,185
|
|
$
|
10,903,506
|
|
Heat
Pipe related products
|
|
|
9,029,994
|
|
|
-
|
|
|
-
|
|
Unallocated
|
|
|
2,919,494
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
$
|
10,903,506
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
goodwill:
|
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Heat
Pipe related products
|
|
|
1,789,324
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,789,324
|
|
$
|
-
|
|
$
|
-
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(b)
|
Geographic
information
|
The
Company operates in the PRC and all of the company’s long lived assets are
located in the PRC.
In
respect of geographical segment reporting, sales are based on the country in
which the customer is located and total assets and capital expenditure are
based
on the country where the assets are located.
The
Company’s operations are located in PRC, which is the main geographical areas.
The Company’s sales and total assets by geographical market are analyzed as
follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
PRC
|
|
$
|
32,623,664
|
|
$
|
19,321,482
|
|
$
|
14,331,251
|
|
Others
|
|
|
4,448,682
|
|
|
2,146,831
|
|
|
1,246,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
$
|
15,577,447
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
6,806,220
|
|
$
|
4,070,281
|
|
$
|
3,338,089
|
|
Others
|
|
|
1,494,048
|
|
|
555,038
|
|
|
370,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,300,268
|
|
$
|
4,625,319
|
|
$
|
3,708,988
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
29,107,727
|
|
$
|
11,445,134
|
|
$
|
9,704,120
|
|
Others
|
|
|
1,531,986
-
|
|
|
1,271,051
|
|
|
1,199,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
$
|
10,903,506
|
|
13.
|
CHINA
CONTRIBUTION PLAN
|
Under
the
PRC Law, full-time employees of the Company’s subsidiaries, Deli Solar (Bazhou),
Ailiyang, Deli Solar (Beijing) and Tianjin Huaneng are entitled to staff welfare
benefits including medical care, welfare subsidies, unemployment insurance
and
pension benefits through a China government-mandated multi-employer defined
contribution plan. The Company is required to accrue for these benefits based
on
certain percentages of the employees’ salaries. The total contributions made for
such employee benefits were $327,257, $201,072 and $199,472 for the years ended
December 31, 2007, 2006 and 2005, respectively.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
14.
|
CONCENTRATION
OF
RISK
|
No
revenue from customers that individually represent greater than 10% of the
total
revenue for each of the years ended December 31, 2007, 2006 and 2005.
The
following is a table summarizing the purchases from vendors that individually
represent greater than 10% of the total purchases for each of the years ended
December 31, 2007, 2006 and 2005 and their outstanding balances as at year-end
date:
|
|
Year ended December 31, 2007
|
|
Vendor
|
|
Purchases
|
|
Percentage of
total purchases
|
|
Accounts
payable, trade
|
|
Vendor
A
|
|
$
|
5,475,372
|
|
|
50.4
|
%
|
$
|
667,718
|
|
|
|
|
|
|
Year ended December 31, 2006
|
Vendor
|
|
|
Purchases
|
|
|
Percentage of
total purchases
|
|
|
Accounts
payable, trade
|
|
Vendor
A
|
|
$
|
3,800,242
|
|
|
49.0
|
%
|
$
|
379,215
|
|
|
|
|
|
|
Year ended December 31, 2005
|
Vendor
|
|
|
Purchases
|
|
|
Percentage of
total purchases
|
|
|
Accounts
payable, trade
|
|
Vendor
A
|
|
$
|
3,669,748
|
|
|
55.2
|
%
|
$
|
390,678
|
|
Financial
instruments that are potentially subject to credit risk consist principally
of
cash and trade receivables. All cash held in financial institutions are not
insured and therefore subject to credit risk. The Company believes the
concentration of credit risk in its trade receivables is substantially mitigated
by its ongoing credit evaluation process and relatively short collection terms.
The Company does not generally require collateral from customers. The Company
evaluates the need for an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
The
Company’s interest-rate risk arises from short-term borrowings. Borrowings
issued at floating rates expose the Company to cash flow and fair value
interest-rate risk. Company policy is to maintain approximately all of its
borrowings in floating rate instruments. At the year end, all of borrowings
were
at floating rates.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
15.
|
COMMITMENTS
AND CONTINGENCIES
|
(a)
|
Operating
lease commitment
|
The
Company leases land and buildings under non-cancelable operating lease
agreements. Based on the current rental lease agreements, the future minimum
rental payments required for the coming years are as follows:
Years
ending December 31:
|
|
|
|
2008
|
|
$
|
20,015
|
|
2009
|
|
|
20,015
|
|
2010
|
|
|
20,015
|
|
2011
|
|
|
20,014
|
|
|
|
|
|
|
Total
future minimum operating lease payments
|
|
$
|
80,059
|
|
For
the
years ended December 31, 2007, 2006 and 2005, rental expenses were $101,780,
$77,246, and $21,985, respectively.
On
January 9, 2008
and
March
25, 2008 Beijing Deli Solar Technology Development Co., Ltd., the Company’s
wholly-owned subsidiary (“Deli Solar (Beijing)”), entered into an Equity
Purchase Agreement, a Complementary Agreement and a Supplementary, with Shenzhen
PengSangPu Solar Industrial Products Corporation (“SZPSP”) and its shareholders
to acquire 100% of the outstanding equity interests of SZPSP from its three
current shareholders. The closing will be effective March 31, 2008.
Under
the
agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest
of
SZPSP from its current three shareholders. Part of the consideration of
the transaction is RMB 28.8 million ($4,087,832) payable in cash. This purchase
price is based on an appraisal of SZPSP. The three shareholders have agreed
to
loan the proceeds back to the Deli Solar (Beijing) and will be used as working
capital (the “Shareholders’ Loan”). Fifty (50%) of the principal of the
Shareholders’ Loan shall be paid within one year upon the entry of the
Complementary Agreement (the “Closing”) and the remaining balance be paid off
within two years.
In
addition to the payment of the cash purchase price under the Complementary
Agreement the parties agreed to an appraisal value of RMB 20 million of SZPSP’s
intangible assets which was paid in 1,419,729 shares of common stock. Provided
that if on the first anniversary of the closing the common stock price is
lower
than $2, the Company will pay the difference. Fifty percent (50%) of these
shares shall be transferable and unrestricted within one year after the Closing
and the remaining Fifty percent (50%) transferable within two years. The
shares
shall be transferred to SZPSP within 180 days of the closing. In addition,
as part of the purchase price, the shareholders of SZPSP will receive five
years
warrants to purchase a total of 141,973 shares of common stock at an exercise
price of $2.5 per share, subject to future adjustments.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
SZPSP
warranted in the Complementary Agreement that if (i) its sales revenue is
less
than RMB 99 million (approximately $13,670,068) with an after-tax net profit
of
less than RMB 9.43 million (approximately $1,302,108) for the year ended
December 31, 2008; or (ii) if in the year ended December 31, 2009, it
does
not
reach the targeted sales revenue of RMB 143.9 million (approximately
$19,868,336) or the after-tax net profit of RMB 12.13 million (approximately
$1,674,789), SZPSP will pay the difference between the revenue and the targeted
revenue of the year specified by reducing the amount payable on the
shareholders’ loan. If the shareholders’ loan is not sufficient to pay the
difference, the common shares held by SZPSP will be returned to us to the
extent
necessary for the remaining balance.
The
current shareholders of SZPSP, being the management of SZPSP, will enter
into
employment contracts with the Company for a term of three years to remain
in
their current managing positions of SZPSP, subject to further amendments
of such
employment arrangement.
After
the
Closing, Deli Solar (Beijing) has the right to a majority of the board seats
of
SZPSP.
On
February 25, 2008 the Company raised gross proceeds of approximately $11,300,000
in a private placement providing for the sale of 4,691,499 shares of common
stock at a price of $2.40 per share.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
INDEX
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Page
|
|
|
|
Condensed
Balance Sheets
|
|
F-29
|
|
|
|
Condensed
Statements of Operations And Comprehensive Income
|
|
F-30
|
|
|
|
Condensed
Statements of Cash Flows
|
|
F-31
|
|
|
|
Condensed
Statement of Owners’ Equity
|
|
F-32
|
|
|
|
Notes
to Condensed Financial Statements
|
|
F-33
to F-44
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
CONDNESED
BALANCE SHEETS
AS
OF SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Currency
expressed in United States Dollars (“US$”))
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
|
(unaudited)
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
333,515
|
|
$
|
282,148
|
|
Accounts
receivable, net
|
|
|
5,384,146
|
|
|
4,129,068
|
|
Inventories
|
|
|
3,642,557
|
|
|
3,136,141
|
|
Prepayments
and other receivables
|
|
|
1,101,348
|
|
|
569,416
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
10,461,566
|
|
|
8,116,773
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,317,675
|
|
|
1,151,521
|
|
Intangible
assets, net
|
|
|
536,308
|
|
|
507,556
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
12,315,549
|
|
$
|
9,775,850
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND OWNERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$
|
596,474
|
|
$
|
1,154,703
|
|
Accounts
payable, trade
|
|
|
1,416,353
|
|
|
614,355
|
|
Deferred
revenue
|
|
|
678,486
|
|
|
696,813
|
|
Advances
from customers
|
|
|
3,178,932
|
|
|
2,513,511
|
|
Amount
due to related party
|
|
|
2,177,019
|
|
|
-
|
|
Value-added
tax payable
|
|
|
498,476
|
|
|
875,750
|
|
Income
taxes payable
|
|
|
201,625
|
|
|
835,860
|
|
Deferred
tax liabilities
|
|
|
32,754
|
|
|
79,038
|
|
Accrued
liabilities and other payables
|
|
|
1,315,498
|
|
|
1,148,560
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
10,095,617
|
|
|
7,918,590
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
Long-term
payables
|
|
|
778,474
|
|
|
748,412
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
10,874,091
|
|
|
8,667,002
|
|
|
|
|
|
|
|
|
|
Owners’
equity:
|
|
|
|
|
|
|
|
Registered
capital
|
|
|
720,786
|
|
|
720,786
|
|
Accumulated
other comprehensive income
|
|
|
93,704
|
|
|
66,449
|
|
Statutory
reserve
|
|
|
257,466
|
|
|
257,466
|
|
Retained
earnings
|
|
|
369,502
|
|
|
64,147
|
|
|
|
|
|
|
|
|
|
Total
owners’ equity
|
|
|
1,441,458
|
|
|
1,108,848
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND OWNERS’ EQUITY
|
|
$
|
12,315,549
|
|
$
|
9,775,850
|
|
See
accompanying notes to condensed financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
CONDENSED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
3,791,419
|
|
$
|
3,485,607
|
|
$
|
9,735,722
|
|
$
|
7,083,384
|
|
Maintenance
|
|
|
4,135
|
|
|
2,288
|
|
|
709,701
|
|
|
482,514
|
|
|
|
|
3,795,554
|
|
|
3,487,895
|
|
|
10,445,423
|
|
|
7,565,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
3,020,048
|
|
|
2,544,860
|
|
|
8,149,145
|
|
|
5,628,748
|
|
Maintenance
|
|
|
1,087
|
|
|
137
|
|
|
43,421
|
|
|
28,951
|
|
|
|
|
3,021,135
|
|
|
2,544,997
|
|
|
8,192,566
|
|
|
5,657,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
774,419
|
|
|
942,898
|
|
|
2,252,857
|
|
|
1,908,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
345,750
|
|
|
389,951
|
|
|
946,279
|
|
|
744,761
|
|
Depreciation
and amortization
|
|
|
64,092
|
|
|
42,767
|
|
|
183,974
|
|
|
128,301
|
|
Research
and development
|
|
|
31,457
|
|
|
29,968
|
|
|
92,998
|
|
|
89,061
|
|
General
and administrative
|
|
|
133,034
|
|
|
134,968
|
|
|
477,138
|
|
|
380,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
574,333
|
|
|
597,654
|
|
|
1,700,389
|
|
|
1,342,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
200,086
|
|
|
345,244
|
|
|
552,468
|
|
|
565,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(11,796
|
)
|
|
(98,321
|
)
|
|
(98,488
|
)
|
|
(169,201
|
)
|
Interest
income
|
|
|
549
|
|
|
167
|
|
|
1,729
|
|
|
727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
(11,247
|
)
|
|
(98,154
|
)
|
|
(96,759
|
)
|
|
(168,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
188,839
|
|
|
247,090
|
|
|
455,709
|
|
|
396,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(62,318
|
)
|
|
(81,558
|
)
|
|
(129,617
|
)
|
|
(134,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
126,521
|
|
$
|
165,532
|
|
$
|
326,092
|
|
$
|
262,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
27,255
|
|
|
(21,037
|
)
|
|
27,255
|
|
|
25,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
153,776
|
|
$
|
144,495
|
|
$
|
353,347
|
|
$
|
287,196
|
|
See
accompanying notes to condensed financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
CONDENSED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Nine
months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
326,092
|
|
$
|
262,155
|
|
Adjustments
to reconcile net income to net cash (used in) provided by operating
activities:
|
Gain
on disposal of plant and equipment
|
|
|
(2,066
|
)
|
|
-
|
|
Depreciation
and amortization
|
|
|
183,974
|
|
|
128,301
|
|
Allowance
for doubtful accounts
|
|
|
104,189
|
|
|
-
|
|
Deferred
tax liabilities
|
|
|
(46,284
|
)
|
|
-
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(1,359,266
|
)
|
|
(282,091
|
)
|
Inventories
|
|
|
(506,416
|
)
|
|
(1,288,724
|
)
|
Prepayments
and other receivables
|
|
|
(531,934
|
)
|
|
(124,176
|
)
|
Accounts
payable
|
|
|
801,998
|
|
|
344,530
|
|
Deferred
revenue
|
|
|
(18,327
|
)
|
|
(75,700
|
)
|
Advances
from customers
|
|
|
665,421
|
|
|
971,107
|
|
Value-added
tax payable
|
|
|
(377,274
|
)
|
|
(318,027
|
)
|
Income
taxes payable
|
|
|
(634,235
|
)
|
|
(607,877
|
)
|
Accrued
liabilities and other payables
|
|
|
166,851
|
|
|
1,044,088
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(1,227,277
|
)
|
|
53,586
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(345,814
|
)
|
|
(71,306
|
)
|
Proceeds
from disposal of plant and equipment
|
|
|
5,739
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(340,075
|
)
|
|
(71,306
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Dividends
paid to owners
|
|
|
(20,915
|
)
|
|
-
|
|
Advances
from a related party
|
|
|
2,177,019
|
|
|
-
|
|
Repayment
of short-term bank loan
|
|
|
(558,229
|
)
|
|
-
|
|
Repayment
of long-term payables
|
|
|
30,062
|
|
|
(25,411
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
1,627,937
|
|
|
(25,411
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(9,218
|
)
|
|
(18,494
|
)
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
51,367
|
|
|
(61,625
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
282,148
|
|
|
258,737
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
333,515
|
|
$
|
197,112
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
Cash
paid for income taxes
|
|
$
|
896,067
|
|
$
|
741,886
|
|
Cash
paid for interest expenses
|
|
$
|
133,966
|
|
$
|
-
|
|
See
accompanying notes to condensed financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
CONDENSED
STATEMENT OF OWNERS’ EQUITY
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Registered
capital
|
|
Accumulated
other comprehensive income
|
|
Statutory
reserve
|
|
Retained
earnings
|
|
Total
owner’s
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2007
|
|
$
|
720,786
|
|
$
|
66,449
|
|
$
|
257,466
|
|
$
|
64,147
|
|
$
|
1,108,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
27,255
|
|
|
-
|
|
|
-
|
|
|
27,255
|
|
Net
income for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
326,092
|
|
|
326,092
|
|
Dividends
paid to owners
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(20,737
|
)
|
|
(20,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of September 30, 2007
|
|
$
|
720,786
|
|
$
|
93,704
|
|
$
|
257,466
|
|
$
|
369,502
|
|
$
|
1,441,458
|
|
See
accompanying notes to condensed financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
1.
BASIS
OF PRESENTATION
The
accompanying unaudited condensed financial statements have been prepared
in
accordance with both generally accepted accounting principles for interim
financial information, and the instructions to Form 10-QSB and Item 310(b)
of
Regulation S-B. Accordingly, they do not include all of the information
and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited condensed financial
statements
reflect all adjustments (consisting of normal recurring accruals) that
are, in
the opinion of management, considered necessary for a fair presentation
of the
results for the interim periods presented. Interim results are not necessarily
indicative of results for a full year.
The
condensed financial statements and related disclosures have been prepared
with
the presumption that users of the interim financial information have
read or
have access to our annual audited financial statements for the preceding
fiscal
year. Accordingly, these condensed financial statements should be read
in
conjunction with the financial statements for the year ended December
31,
2006.
2.
ORGANIZATION
AND BUSINESS BACKGROUND
Tianjin
Huaneng Group Energy Equipment Co., Ltd. (“the Company”) was established in 1987
as a state-owned enterprise and then was restructured in July 2004 as
a limited
liability company with 51% of its equity interest owned by Tianjin Municipal
Ji
County State-owned Assets Administration Commission (“SAAC”) and 49% of equity
interest owned by employees in the People’s Republic of China (“PRC”). Its
principal place of business is located in No.119 Yuyang South Road, Ji
County,
Tianjin Municipality, the PRC. The registered capital of the Company
is
US$720,786 (equivalent to Renminbi Yuan (“RMB”) 5,940,000).
The
Company is principally engaged in the design, development and manufacturing
and
marketing of energy-saving related heating products such as heat pipes,
heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy
water
heaters and radiators. These products are distributed in the PRC and
Southeast
Asia.
3.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
These
accompanying unaudited condensed financial statements have been prepared
in
accordance with generally accepted accounting principles in the United
States of
America.
In
preparing these financial statements, management makes estimates and
assumptions
that affect the reported amounts of assets and liabilities in the balance
sheets
and revenues and expenses during the period reported. Actual results
may differ
from these estimates.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company derives revenues from the provision of energy-saving projects.
The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of the products at the
rate of
17% on the invoiced value of sales. Output VAT is borne by customers
in addition
to the invoiced value of sales and input VAT is borne by the Company
in addition
to the invoiced value of purchases to the extent not refunded for export
sales.
In
accordance with the SEC’s Staff Accounting Bulletin No. 104,
Revenue
Recognition
,
the
Company recognizes revenue when persuasive evidence of an arrangement
exists,
transfer of title has occurred or services have been rendered, the selling
price
is fixed or determinable and collectibility is reasonably assured.
The
Company sells their products and services under a bundled sales arrangement,
which typically include equipment, installation, testing and maintenance
components. The components of equipment, installation and testing are
non-separable and considered as a single unit of deliverables, namely
product
revenue. Hence, the product and maintenance are considered separate units
of
accounting in the arrangement.
Revenues
under these bundled arrangements are allocated considering the relative
fair
values of two separate deliverables: (a) product deliverable and (b)
maintenance
deliverable, included in the bundled arrangement based on the estimated
relative
fair values of each element in accordance with
EITF
00-21,
“Accounting
for Multiple Element Revenue Arrangements”
and
recognized when the applicable revenue recognition criteria for each
element are
met.
(a)
Product
Revenue
Revenue
from these product deliverables are recognized upon final acceptance,
which is
signed by the customer when installation is completed.
In
accordance with EITF 00-10,
“Accounting
for Shipping and Handling Fees and Costs,”
the
Company records shipping and handling costs incurred for inbound and
outbound
freight as a component of cost of revenues.
(b)
Maintenance
Revenue
Revenue
from maintenance support for the Company’s products are deferred and recognized
ratably over the term of the service period upon the acceptance of the
products,
which is generally 12 months.
(c)
Interest
Income
Interest
income is recognized on a time apportionment basis, taking into account
the
principal amounts outstanding and the interest rates applicable.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Cost
of
revenue consists primarily of material costs, direct labor, shipping
and
handling fee, depreciation and manufacturing overheads, which are directly
attributable to the manufacture of products and the provision of the
energy-saving projects.
l
|
Cash
and Cash Equivalents
|
Cash
and
cash equivalents are carried at cost and represent cash on hand, demand
deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the
purchase
date of such investments.
l
|
Accounts
Receivable and
Allowance
for
Doubtful
Accounts
|
The
Company carries accounts receivable at their face amounts less an
allowance
for
doubtful
accounts
.
On a
regular basis, an allowance for uncollectible receivables is established
and
determined based upon past transaction history with customers, customer
payment
practices and economic conditions. Actual collection experience may differ
from
the current estimate of net receivables. A change to the allowance for
uncollectible amounts may be required if a future event or other change
in
circumstances results in a change in the estimate of the ultimate collectibility
of a specific account. The Company does not require collateral for the
accounts
receivable balances. For the nine months ended September 30, 2007 and
2006, the
Company recorded an allowance for doubtful accounts of $104,189 and $Nil,
respectively.
Inventories
consist primarily of finished goods, work in process and raw materials
and are
stated at the lower of cost or net realizable value, with cost being
determined
on a weighted average basis. Allowance for slow-moving and obsolescence
is an
estimate amount based on an analysis of current business and economic
risks, the
duration of the inventories held and other specific identifiable risks
that may
indicate a potential loss. The allowance is reviewed regularly to ensure
that it
adequately provides for all reasonable expected losses. For the nine
months
ended September 30, 2007 and 2006, the Company did not record any allowance
for
obsolescence.
l
|
Property,
Plant and Equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation
and
accumulated impairment losses, if any. Depreciation is calculated on
the
straight-line basis over the following expected useful lives from the
date on
which they become fully operational and after taking into account their
estimated residual values:
|
Depreciable
life
|
|
Residual
value
|
|
|
|
|
Building
|
20
years
|
|
5%
|
Plant
and machinery
|
10
years
|
|
5%
|
Motor
vehicles
|
5
years
|
|
5%
|
Office
equipment
|
10
years
|
|
5%
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Expenditure
for maintenance and repairs is expensed as incurred. The gain or loss
on the
disposal of property, plant and equipment is the difference between the
net
sales proceeds and the carrying amount of the relevant assets and is
recognized
in the statements of operations.
All
lands
in the PRC are owned by the PRC government. The government in the PRC,
according
to the relevant PRC law, may sell the right to use the land for a specified
period of time. Thus, all of the Company’s land purchases in the PRC are
considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided
over
the term of the land use right agreements on a straight-line basis, which
is 50
years and they will expire in 2054.
Amortization
expense totaled $7,930 and $7,930 for the nine months ended September
30, 2007
and 2006, respectively.
l
|
Valuation
of Long-lived Assets
|
In
accordance with SFAS No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets,”
the
Company reviews its long-lived assets, including property, plant and
equipment,
for impairment whenever events or changes in circumstances indicate that
the
carrying amounts of the assets may not be fully recoverable. If the total
of the
expected undiscounted future net cash flows is less than the carrying
amount of
the asset, a loss is recognized for the difference between the fair value
and
carrying amount of the asset. There has been no impairment as of September
30,
2007.
SFAS
No.
130,
“Reporting
Comprehensive Income”
,
establishes standards for reporting and display of comprehensive income,
its
components and accumulated balances. Comprehensive income as defined
includes
all changes in equity during the period from non-owner sources. Accumulated
comprehensive income, as presented in the accompanying statement of owners’
equity consists of changes in unrealized gains and losses on foreign
currency
translation. This comprehensive income is not included in the computation
of
income tax expense or benefit.
The
Company accounts for income tax using SFAS No. 109
“Accounting
for Income Taxes”
,
which
requires the asset and liability approach for financial accounting and
reporting
for income taxes. Under this approach, deferred income taxes are provided
for
the estimated future tax effects attributable to temporary differences
between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery
or
reversal and the effect from a change in tax rates is recognized in the
statements of operations and comprehensive income in the period of enactment.
A
valuation allowance is provided to reduce the amount of deferred tax
assets if
it is considered more likely than not that some portion of, or all of
the
deferred tax assets will not be realized.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
l
|
Foreign
Currencies Translation
|
The
functional currency of the Company is Renminbi Yuan (“RMB”). The accompanying
financial statements have been expressed in United States dollars, the
reporting
currency of the Company. The balance sheet is translated into United
States
dollars based on the rates of exchange ruling at the balance sheet date.
The
statements of operations and comprehensive income are translated using
a
weighted average rate for the period. Translation adjustments are reflected
as
cumulative translation adjustments in owners’ equity.
l
|
Research
and Development Costs
|
Research
and development costs are expensed when incurred in the development of
new
processes including significant improvements and refinements of existing
products. Such costs mainly relate to labor and material cost.
The
Company incurred $92,998 and $89,061 for the nine months ended September
30,
2007 and 2006
,
respectively.
Under
the
terms of the contracts, the Company provides a product warranty on the
equipment
to its customers for a period of twelve months upon the completion of
installation at the Company’s expense. The Company has not experienced any
material returns where it was under obligation to honor this standard
warranty
provision. As such, no reserve for product warranty has been provided
in the
statements of operations for the nine months ended September 30, 2007
and 2006.
Parties,
which can be a corporation or individual, are considered to be related
if the
Company has the ability, directly or indirectly, to control the other
party or
exercise significant influence over the other party in making financial
and
operating decisions. Companies are also considered to be related if they
are
subject to common control or common significant influence.
SFAS
No.
131
“Disclosures
about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments
on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
financial statements. The Company operates in one principal reportable
business
segment. All the customers are located in the PRC and the South East
Asia
region.
l
|
Fair
Value of Financial Instruments
|
The
Company values its financial instruments as required by SFAS No. 107,
“Disclosures
about Fair Value of Financial Instruments”
.
The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies.
The
estimates presented herein are not necessarily indicative of amounts
that the
Company could realize in a current market exchange.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company’s financial instruments primarily include cash and cash equivalents,
trade accounts receivable, inventories, prepayments and other receivables,
short-term bank loan, trade accounts payable, deferred revenue, advances
from
customers, value-added tax payable, income taxes payable, accrued liabilities
and other payable.
As
of the
balance sheet dates, the estimated fair values of financial instruments
were not
materially different from their carrying values as presented due to short
maturities of these instruments.
l
|
Recently
Issued Accounting Standards
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition
or the
results of its operations.
In
June
2006, the FASB issued Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in the Company’s financial statements in accordance with SFAS No. 109. FIN 48
prescribes a recognition threshold and measurement attributes for the
financial
statement recognition and measurement of a tax position taken or expected
to be
taken in a tax return. The Company adopted FIN48 on January 1, 2007.
The
adoption of FIN 48 did not have an effect on the results of operations
or
financial condition. The Company did not have any unrecognized tax benefits
as
of September 30, 2007.
On
February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 159,
“The
Fair Value Option for Financial Assets and Financial Liabilities — Including an
Amendment of FASB Statement No. 115”
(“SFAS
159”). This standard permits an entity to measure financial instruments and
certain other items at estimated fair value. Most of the provisions of
SFAS No.
159 are elective; however, the amendment to FASB No. 115,
“Accounting
for Certain Investments in Debt and Equity Securities,”
applies
to all entities that own trading and available-for-sale securities. The
fair
value option created by SFAS 159 permits an entity to measure eligible
items at
fair value as of specified election dates. The fair value option (a)
may
generally be applied instrument by instrument, (b) is irrevocable unless
a new
election date occurs, and (c) must be applied to the entire instrument
and not
to only a portion of the instrument. SFAS 159 is effective as of the
beginning
of the first fiscal year that begins after November 15, 2007. Early
adoption is permitted as of the beginning of the previous fiscal year
provided
that the entity (i) makes that choice in the first 120 days of that
year, (ii) has not yet issued financial statements for any interim period
of
such year, and (iii) elects to apply the provisions of FASB 157. Management
is
currently evaluating the impact of SFAS 159, if any, on the Company’s financial
statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
4.
ACCOUNTS
RECEIVABLE, NET
The
majority of the Company’s sales are on credit terms and in accordance with terms
specified in the contracts governing the relevant transactions. The Company
evaluates the need of an allowance for doubtful accounts based on specifically
identified amounts that management believes to be uncollectible. If actual
collections experience changes, revisions to the allowance may be required.
Based upon the aforementioned criteria, the allowances for doubtful accounts
are
provided as $104,189 and $Nil for the nine months ended September 30,
2007 and
2006, respectively.
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
Accounts
receivable, gross
|
|
$
|
6,064,857
|
|
$
|
4,706,360
|
|
|
|
|
|
|
|
|
|
Less:
allowance
for doubtful accounts
|
|
|
(680,711
|
)
|
|
(577,292
|
)
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
5,384,146
|
|
$
|
4,129,068
|
|
5.
INVENTORIES
Inventories
consisted of the following:
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
(audited)
|
|
Raw
materials
|
|
$
|
512,798
|
|
$
|
508,161
|
|
Work
in process
|
|
|
480,743
|
|
|
245,082
|
|
Finished
goods
|
|
|
2,649,016
|
|
|
2,382,898
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,642,557
|
|
$
|
3,136,141
|
|
As
of
September 30, 2007 and December 31, 2006, the Company recorded no allowance
for
obsolete inventories and write-offs.
6.
PREPAYMENTS
AND OTHER RECEIVABLES
A
summary
of prepayments and other receivables was:
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
(audited)
|
|
Advances
to employees
|
|
$
|
521,977
|
|
$
|
206,661
|
|
Deposits
paid to suppliers
|
|
|
571,950
|
|
|
345,024
|
|
Other
receivables
|
|
|
7,421
|
|
|
17,731
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,101,348
|
|
$
|
569,416
|
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
7.
PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net, consisted of the following:
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
(audited)
|
|
Building
|
|
$
|
760,927
|
|
$
|
721,753
|
|
Plant
and machinery
|
|
|
1,343,724
|
|
|
1,157,166
|
|
Motor
vehicles
|
|
|
249,106
|
|
|
199,606
|
|
Office
equipment
|
|
|
104,074
|
|
|
109,806
|
|
Foreign
translation difference
|
|
|
39,998
|
|
|
-
|
|
|
|
|
2,497,829
|
|
|
2,188,331
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(1,180,154
|
)
|
|
(1,036,810
|
)
|
|
|
|
|
|
|
|
|
Net
book value
|
|
$
|
1,317,675
|
|
$
|
1,151,521
|
|
Depreciation
expense for the nine months ended September 30, 2007 and 2006 were $176,044
and
$120,371, respectively.
8.
INTANGIBLE
ASSETS, NET
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
(audited)
|
|
Land
use rights, cost
|
|
$
|
528,704
|
|
$
|
528,704
|
|
Foreign
translation difference
|
|
|
36,682
|
|
|
-
|
|
|
|
|
565,386
|
|
|
528,704
|
|
|
|
|
|
|
|
|
|
Less:
accumulated amortization
|
|
|
(29,078
|
)
|
|
(21,148
|
)
|
|
|
|
|
|
|
|
|
Land
use rights, net
|
|
$
|
536,308
|
|
$
|
507,556
|
|
Amortization
expense for the nine months ended September 30, 2007 and 2006 were
$7,930 and
$7,930, respectively.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
9.
SHORT-TERM
BANK LOAN
As
of
September 30, 2007, the Company has a short-term bank loan of $596,474
with the
Agricultural Bank of China, which is secured with interest rate at 5.84%
per
annum payable quarterly. It is collateralized by building and certain
plant and
machinery of the Company.
10.
ACCRUED
LIABILITIES AND OTHER PAYABLES
Accrued
liabilities and other payables consisted of the following:
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
(audited)
|
|
Welfare
payable
|
|
$
|
370,999
|
|
$
|
523,566
|
|
Salary
payable
|
|
|
233,180
|
|
|
393,869
|
|
Accrued
expenses
|
|
|
695,148
|
|
|
131,832
|
|
Government
levy payable
|
|
|
16,171
|
|
|
99,293
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,315,498
|
|
$
|
1,148,560
|
|
11.
LONG-TERM
PAYABLES
Long-term
payables consisted of the following:
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
(audited)
|
|
Payable
to employees
|
|
$
|
496,252
|
|
$
|
496,252
|
|
Payable
to government
|
|
|
194,560
|
|
|
194,560
|
|
Payable
to third parties
|
|
|
57,600
|
|
|
57,600
|
|
Foreign
translation difference
|
|
|
30,062
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
778,474
|
|
$
|
748,412
|
|
Payable
to employees represented unsecured advances with interest rate at 8.20%
per
annum payable quarterly and
no
specific terms of repayment
.
Payable
to government and third parties represented unsecured advances, interest-free
and no specific terms of repayment.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
12.
INCOME
TAXES
The
Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax
Laws, the
Company is generally subject to enterprise income tax (“EIT”) at a statutory
rate of 33% (30% national income tax plus 3% local income tax).
The
provision for income tax expense consisted of the following:
|
|
Nine
months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Current
tax
|
|
$
|
177,166
|
|
$
|
134,648
|
|
Deferred
tax
|
|
|
(47,549
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Income
tax expenses
|
|
$
|
129,617
|
|
$
|
134,648
|
|
The
reconciliation of income tax rate to the effective income tax rate based
on
income before income taxes stated in the statements of operations for
the nine
months ended September 30, 2007 and 2006 is as follows:
|
|
Nine
months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
455,709
|
|
$
|
396,803
|
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
33
|
%
|
|
|
|
150,384
|
|
|
130,945
|
|
Add:
Items not subject to taxes
|
|
|
|
|
|
|
|
-
Provisions and accrued liabilities
|
|
|
7,072
|
|
|
3,703
|
|
-
Deferred revenue
|
|
|
(27,839
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Income
tax expenses
|
|
$
|
129,617
|
|
$
|
134,648
|
|
The
following table sets forth the significant components of the deferred
tax
liabilities of the Company as of September 30, 2007 and December 31,
2006:
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
(audited)
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
-
Accounts receivables
|
|
$
|
31,489
|
|
$
|
79,038
|
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
13.
OWNERS’
EQUITY
Prior
to
the restructuring in 2004, the Company was established as a state-owned
enterprise with a registered capital of $182,016 (approximately RMB1,500,000).
In July 2004, the Company was restructured to a limited liability company
with
51%
of its equity interest owned by SAAC and 49% of equity interest owned
by
employees in the PRC
.
In
accordance with the Company’s Articles of Association, the registered capital of
the Company was $720,786 (approximately RMB5,940,000).
For
the
nine months ended September 30, 2007, the Company declared and paid a
dividend
of $20,737 to the owners.
On
May
18, 2007, the Company and the shareholders of the Company entered into
a
purchase agreement with Beijing Deli Solar Technology Development Co.,
Ltd.
(“Deli Solar (Beijing)”), a wholly-owned subsidiary of Deli Solar (USA), Inc., a
company organized under the laws of the State of Nevada and is a reporting
issuer in the United States
and has
its shares listed on the NASD Over-the-Counter Bulletin Board under the
symbol
“CSOL”. Pursuant to the purchase agreement,
Deli
Solar (Beijing)
agreed
to acquire 51% of equity interest in the registered capital of the Company
for a
purchase price of
$3,149,147.
On
July
1, 2007, the transaction was closed on July 1, 2007 and the Company became
a
51%-owned subsidiary of Deli Solar (Beijing).
14.
SEGMENT
INFORMATION
The
Company operates in one single business segment that includes the design,
development, manufacture of products and provision of energy-saving projects.
The following table summarizes the Company’s net revenue generated from
different geographic locations:
|
|
Nine
months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
-
Southeast
Asia
|
|
$
|
303,311
|
|
$
|
31,062
|
|
-
The PRC
|
|
|
10,142,112
|
|
|
4,046,941
|
|
|
|
|
|
|
|
|
|
Total
revenue, net
|
|
$
|
10,445,423
|
|
$
|
4,078,003
|
|
All
of
the Company’s long-lived assets are located in the PRC.
15.
CONCENTRATION
OF RISK
(a)
Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. The Company
performs
ongoing credit evaluations of its customers' financial condition, but
does not
require collateral to support such receivables.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
(b)
Interest
rate risk
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market
interest
rates.
The
Company’s interest-rate risk arises from long-term borrowings. Borrowings issued
at variable rates expose the Company to cash flow interest-rate risk.
Borrowings
issued at fixed rates expose the Company to fair value interest-rate
risk.
Company policy is to maintain approximately all of its borrowings in
floating
rate instruments. At the period end, all of borrowings were at floating
rates.
16.
COMMITMENTS
The
Company rented offices under non-cancelable operating lease agreements.
As of
September 30, 2007, future minimum annual operating lease payments were
as
follows:
Years
ending September 30:
|
|
|
|
|
|
|
|
2008
|
|
$
|
12,720
|
|
2009
|
|
|
3,180
|
|
|
|
|
|
|
Total
future minimum operating lease payments
|
|
$
|
15,900
|
|
For
the
nine months ended September 30, 2007 and 2006, rent expense was $9,540
and
$9,450, respectively.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-46
|
|
|
Balance
Sheets
|
F-47
|
|
|
Statements
of Operations And Comprehensive Income
|
F-48
|
|
|
Statements
of Cash Flows
|
F-49
|
|
|
Statements
of Owners’ Equity
|
F-50
|
|
|
Notes
to Financial Statements
|
F-51
to F-63
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Owners of
Tianjin
Huaneng Group Energy Equipment Co., Ltd.
We
have
audited the accompanying balance sheets of Tianjin Huaneng Group Energy
Equipment Co., Ltd. (“the Company”) as of December 31, 2006 and 2005 and the
related statements of operations and comprehensive income, cash flows
and
owners’ equity for the years ended December 31, 2006 and 2005. The financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements
based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control
over
financial reporting. Our audits include consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of Tianjin Huaneng Group Energy
Equipment Co., Ltd. as of December 31, 2006 and 2005 and the results
of
operations and cash flows for the years ended December 31, 2006 and 2005
and in
conformity with accounting principles generally accepted in the United
States of
America.
/s/
Zhong Yi (Hong Kong) C.P.A. Company Limited
Zhong
Yi
(Hong Kong) C.P.A. Company Limited
Certified
Public Accountants
Hong
Kong, China
July
17,
2007
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
BALANCE
SHEETS
AS
OF DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
|
|
As
of December 31,
|
|
ASSETS
|
|
2006
|
|
2005
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
282,148
|
|
$
|
258,737
|
|
Accounts
receivable, net
|
|
|
4,129,068
|
|
|
2,113,888
|
|
Inventories
|
|
|
3,136,141
|
|
|
3,771,807
|
|
Prepayments
and other receivables
|
|
|
569,416
|
|
|
475,753
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
8,116,773
|
|
|
6,620,185
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,151,521
|
|
|
1,190,894
|
|
Intangible
assets, net
|
|
|
507,556
|
|
|
518,130
|
|
|
|
|
|
|
|
|
|
Total
non-current assets
|
|
|
1,659,077
|
|
|
1,709,024
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
9,775,850
|
|
$
|
8,329,209
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND OWNERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$
|
1,154,703
|
|
$
|
1,154,703
|
|
Accounts
payable, trade
|
|
|
614,355
|
|
|
564,418
|
|
Deferred
revenue
|
|
|
696,813
|
|
|
477,566
|
|
Advances
from customers
|
|
|
2,513,511
|
|
|
2,924,157
|
|
Value-added
tax payable
|
|
|
875,750
|
|
|
373,338
|
|
Income
taxes payable
|
|
|
835,860
|
|
|
642,817
|
|
Deferred
tax liabilities
|
|
|
79,038
|
|
|
-
|
|
Accrued
liabilities and other payables
|
|
|
1,148,560
|
|
|
853,103
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
7,918,590
|
|
|
6,990,102
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
Long-term
payables
|
|
|
748,412
|
|
|
773,823
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
8,667,002
|
|
|
7,763,925
|
|
|
|
|
|
|
|
|
|
Owners’
equity:
|
|
|
|
|
|
|
|
Registered
capital
|
|
|
720,786
|
|
|
720,786
|
|
Accumulated
other comprehensive income
|
|
|
66,449
|
|
|
16,872
|
|
Statutory
reserve
|
|
|
257,466
|
|
|
178,348
|
|
Retained
earnings (accumulated deficits)
|
|
|
64,147
|
|
|
(350,722
|
)
|
|
|
|
|
|
|
|
|
Total
owners’ equity
|
|
|
1,108,848
|
|
|
565,284
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND OWNERS’ EQUITY
|
|
$
|
9,775,850
|
|
$
|
8,329,209
|
|
See
accompanying notes to financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
|
|
Years
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Revenue,
net
|
|
|
|
|
|
Product
|
|
$
|
13,026,841
|
|
$
|
8,984,244
|
|
Maintenance
|
|
|
485,986
|
|
|
368,176
|
|
|
|
|
13,512,827
|
|
|
9,352,420
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
Product
|
|
|
10,346,178
|
|
|
7,293,042
|
|
Maintenance
|
|
|
27,809
|
|
|
23,896
|
|
|
|
|
10,373,987
|
|
|
7,316,938
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,138,840
|
|
|
2,035,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
992,474
|
|
|
743,219
|
|
Depreciation
and amortization
|
|
|
123,366
|
|
|
110,052
|
|
Research
and development
|
|
|
119,603
|
|
|
94,962
|
|
General
and administrative
|
|
|
845,632
|
|
|
674,019
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
2,081,075
|
|
|
1,622,252
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,057,765
|
|
|
413,230
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(152,742
|
)
|
|
(119,027
|
)
|
Interest
income
|
|
|
1,169
|
|
|
1,643
|
|
Other
income
|
|
|
34,011
|
|
|
62,450
|
|
Loss
on disposal of plant and equipment
|
|
|
-
|
|
|
(2,944
|
)
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
(117,562
|
)
|
|
(57,878
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
940,203
|
|
|
355,352
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
337,558
|
|
|
254,185
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
602,645
|
|
$
|
101,167
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
49,577
|
|
|
33,166
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
652,222
|
|
$
|
134,333
|
|
See
accompanying notes to financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
STATEMENTS
OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2006 & 2005
(Currency
expressed in United States Dollars (“US$”))
|
|
Years
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
602,645
|
|
$
|
101,167
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
202,215
|
|
|
181,455
|
|
Allowance
for doubtful accounts
|
|
|
291,785
|
|
|
148,418
|
|
Loss
on disposal of plant and equipment
|
|
|
-
|
|
|
2,944
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,306,965
|
)
|
|
(756,552
|
)
|
Inventories
|
|
|
635,666
|
|
|
(550,936
|
)
|
Prepayments
and other receivables
|
|
|
(93,663
|
)
|
|
(113,623
|
)
|
Accounts
payable
|
|
|
49,937
|
|
|
152,797
|
|
Deferred
revenue
|
|
|
219,247
|
|
|
112,986
|
|
Advances
from customers
|
|
|
(410,646
|
)
|
|
194,051
|
|
Value-added
tax payable
|
|
|
502,412
|
|
|
241,339
|
|
Income
taxes payable
|
|
|
193,043
|
|
|
47,088
|
|
Deferred
tax liabilities
|
|
|
79,038
|
|
|
-
|
|
Accrued
liabilities and other payables
|
|
|
295,458
|
|
|
532,294
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
260,172
|
|
|
293,428
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(152,269
|
)
|
|
(194,453
|
)
|
Proceeds
from disposal of plant and equipment
|
|
|
-
|
|
|
5,556
|
|
Payment
in relation to intangible assets
|
|
|
-
|
|
|
(107,920
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(152,269
|
)
|
|
(296,817
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Dividend
paid to owners
|
|
|
(108,658
|
)
|
|
(56,709
|
)
|
Repayment
of long-term payables
|
|
|
(25,411
|
)
|
|
(47,502
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(
134,069
|
)
|
|
(
104,211
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
49,577
|
|
|
33,166
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
23,411
|
|
|
(74,434
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
258,737
|
|
|
333,171
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
282,148
|
|
$
|
258,737
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
84,562
|
|
$
|
207,097
|
|
Cash
paid for interest expenses
|
|
$
|
152,742
|
|
$
|
119,027
|
|
See
accompanying notes to financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
STATEMENTS
OF OWNERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
|
|
Registered
capital
|
|
Accumulated
other comprehensive (loss) income
|
|
Statutory
reserve
|
|
(Accumulated
deficits)/
retained
earnings
|
|
Total
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2005
|
|
$
|
720,786
|
|
$
|
(16,294
|
)
|
$
|
103,838
|
|
$
|
(320,670
|
)
|
$
|
487,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
-
|
|
|
33,166
|
|
|
-
|
|
|
-
|
|
|
33,166
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
101,167
|
|
|
101,167
|
|
Dividend
to owners
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(56,709
|
)
|
|
(56,709
|
)
|
Transfer
of retained earnings to statutory reserve
|
|
|
-
|
|
|
-
|
|
|
74,510
|
|
|
(74,510
|
)
|
|
-
|
|
Balance
as of December 31, 2005
|
|
|
720,786
|
|
|
16,872
|
|
|
178,348
|
|
|
(350,722
|
)
|
|
565,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
-
|
|
|
49,577
|
|
|
-
|
|
|
-
|
|
|
49,577
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
602,645
|
|
|
602,645
|
|
Dividend
to owners
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(108,658
|
)
|
|
(108,658
|
)
|
Transfer
of retained earnings to statutory reserve
|
|
|
-
|
|
|
-
|
|
|
79,118
|
|
|
(79,118
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2006
|
|
$
|
720,786
|
|
|
66,449
|
|
|
257,466
|
|
|
64,147
|
|
|
1,108,848
|
|
See
accompanying notes to financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars
(“US$”))
1.
|
ORGANIZATION
AND BUSINESS
BACKGROUND
|
Tianjin
Huaneng Group Energy Equipment Co., Ltd. (“the Company”) was established in 1987
as a state-owned enterprise and then was restructured in July 2004 as
a limited
liability company with 51% of its equity interest owned by Tianjin Municipal
Ji
County State-owned Assets Administration Commission (“SAAC”) and 49% of equity
interest owned by employees in the People’s Republic of China (“PRC”). Its
principal place of business is located in No.119 Yuyang South Road, Ji
County,
Tianjin Municipality, the PRC. The registered capital of the Company
is
US$720,786 (equivalent to Renminbi Yuan (“RMB”) 5,940,000).
The
Company is principally engaged in the design, development and manufacturing
and
marketing of energy-saving related heating products such as heat pipes,
heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy
water
heaters and radiators. These products are distributed in the PRC and
Southeast
Asia.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of
America.
In
preparing these financial statements, management makes estimates and
assumptions
that affect the reported amounts of assets and liabilities in the balance
sheets
and revenues and expenses during the year reported. Actual results may
differ
from these estimates.
The
Company derives revenues from the provision of energy-saving projects.
The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of the products at the
rate of
17% on the invoiced value of sales. Output VAT is borne by customers
in addition
to the invoiced value of sales and input VAT is borne by the Company
in addition
to the invoiced value of purchases to the extent not refunded for export
sales.
In
accordance with the SEC’s Staff Accounting Bulletin No. 104,
Revenue
Recognition
,
the
Company recognizes revenue when persuasive evidence of an arrangement
exists,
transfer of title has occurred or services have been rendered, the selling
price
is fixed or determinable and collectibility is reasonably assured.
The
Company sells their products and services under a bundled sales arrangement,
which typically include equipment, installation, testing and maintenance
components. The components of equipment, installation and testing are
non-separable and considered as a single unit of deliverables, namely
product
revenue. Hence, the product and maintenance are considered separate units
of
accounting in the arrangement.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
Revenues
under these bundled arrangements are allocated considering the relative
fair
values of two separate deliverables: (a) product deliverable and (b)
maintenance
deliverable, included in the bundled arrangement based on the estimated
relative
fair values of each element in accordance with
EITF
00-21,
“Accounting
for Multiple Element Revenue Arrangements”
and
recognized when the applicable revenue recognition criteria for each
element are
met.
Revenue
from these product deliverables are recognized upon final acceptance,
which is
signed by the customer when installation is completed.
In
accordance with EITF 00-10,
“Accounting
for Shipping and Handling Fees and Costs,”
the
Company records shipping and handling costs incurred for inbound and
outbound
freight as a component of cost of revenues.
Revenue
from maintenance support for the Company’s products are deferred and recognized
ratably over the term of the service period upon the acceptance of the
products,
which is generally 12 months. As of December 31, 2006 and 2005, the
unrecognized portion of revenue related to maintenance was $696,813 and
$477,566
and were included in the Deferred Revenue caption on the balance
sheets.
Interest
income is recognized on a time apportionment basis, taking into account
the
principal amounts outstanding and the interest rates applicable.
Cost
of
revenue consists primarily of material costs, direct labor, shipping
and
handling fee, depreciation and manufacturing overheads, which are directly
attributable to the manufacture of products and the provision of the
energy-saving projects.
l
|
Cash
and Cash Equivalents
|
Cash
and
cash equivalents are carried at cost and represent cash on hand, demand
deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the
purchase
date of such investments.
l
|
Accounts
Receivable and
Allowance
for
Doubtful
Accounts
|
The
Company carries accounts receivable at their face amounts less an
allowance
for
doubtful
accounts
.
On a
regular basis, an allowance for uncollectible receivables is established
and
determined based upon past transaction history with customers, customer
payment
practices and economic conditions. Actual collection experience may differ
from
the current estimate of net receivables. A change to the allowance for
uncollectible amounts may be required if a future event or other change
in
circumstances results in a change in the estimate of the ultimate collectibility
of a specific account. The Company does not require collateral for the
accounts
receivable balances. For the years ended December 31, 2006 and 2005,
the Company
recorded an allowance for doubtful accounts of $291,785 and $148,418,
respectively.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
Inventories
consist primarily of finished goods, work in process and raw materials
and are
stated at the lower of cost or net realizable value, with cost being
determined
on a weighted average basis. Allowance for slow-moving and obsolescence
is an
estimate amount based on an analysis of current business and economic
risks, the
duration of the inventories held and other specific identifiable risks
that may
indicate a potential loss. The allowance is reviewed regularly to ensure
that it
adequately provides for all reasonable expected losses. For the years
ended
December 31, 2006 and 2005, the Company did not record any allowance
for
obsolescence.
l
|
Property,
Plant and Equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation
and
accumulated impairment losses, if any. Depreciation is calculated on
the
straight-line basis over the following expected useful lives from the
date on
which they become fully operational and after taking into account their
estimated residual values:
|
|
Depreciable
life
|
|
Residual
value
|
|
|
|
|
|
|
|
Building
|
|
|
20
years
|
|
|
5
|
%
|
Plant
and machinery
|
|
|
10
years
|
|
|
5
|
%
|
Motor
vehicles
|
|
|
5
years
|
|
|
5
|
%
|
Office
equipment
|
|
|
10
years
|
|
|
5
|
%
|
Expenditure
for maintenance and repairs is expensed as incurred. The gain or loss
on the
disposal of property, plant and equipment is the difference between the
net
sales proceeds and the carrying amount of the relevant assets and is
recognized
in the statements of operations.
All
lands
in the PRC are owned by the PRC government. The government in the PRC,
according
to the relevant PRC law, may sell the right to use the land for a specified
period of time. Thus, all of the Company’s land purchases in the PRC are
considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided
over
the term of the land use right agreements on a straight-line basis, which
is 50
years and they will expire in 2054.
Amortization
expense totaled $10,574 and $10,574 for the years ended December 31,
2006 and
2005, respectively.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
l
|
Valuation
of Long-lived Assets
|
In
accordance with SFAS No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets,”
the
Company reviews its long-lived assets, including property, plant and
equipment,
for impairment whenever events or changes in circumstances indicate that
the
carrying amounts of the assets may not be fully recoverable. If the total
of the
expected undiscounted future net cash flows is less than the carrying
amount of
the asset, a loss is recognized for the difference between the fair value
and
carrying amount of the asset. There has been no impairment as of
December 31, 2006 or 2005.
SFAS
No. 130,
“Reporting
Comprehensive Income”
,
establishes standards for reporting and display of comprehensive income,
its
components and accumulated balances. Comprehensive income as defined
includes
all changes in equity during the year from non-owner sources. Accumulated
comprehensive income, as presented in the accompanying statement of owners’
equity consists of changes in unrealized gains and losses on foreign
currency
translation. This comprehensive income is not included in the computation
of
income tax expense or benefit.
The
Company accounts for income tax using SFAS No. 109
“Accounting
for Income Taxes”
,
which
requires the asset and liability approach for financial accounting and
reporting
for income taxes. Under this approach, deferred income taxes are provided
for
the estimated future tax effects attributable to temporary differences
between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery
or
reversal and the effect from a change in tax rates is recognized in the
statements of operations and comprehensive income in the period of enactment.
A
valuation allowance is provided to reduce the amount of deferred tax
assets if
it is considered more likely than not that some portion of, or all of
the
deferred tax assets will not be realized.
l
|
Foreign
Currencies Translation
|
The
functional currency of the Company is Renminbi Yuan (“RMB”). The accompanying
financial statements have been expressed in United States dollars, the
reporting
currency of the Company. The balance sheet is translated into United
States
dollars based on the rates of exchange ruling at the balance sheet date.
The
statements of operations and comprehensive income are translated using
a
weighted average rate for the year. Translation adjustments are reflected
as
cumulative translation adjustments in owners’ equity.
Contributions
to retirement schemes (which are defined contribution plans) are charged
to
general and administrative expenses in the statements of operations and
comprehensive income as and when the related employee service is provided.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
l
|
Research
and Development Costs
|
Research
and development costs are expensed when incurred in the development of
new
processes including significant improvements and refinements of existing
products. Such costs mainly relate to labor and material cost.
The
Company incurred $119,603 and $94,962 for the years ended December 31,
2006 and
20
05,
respectively.
The
Company expenses advertising costs as incurred in accordance with the
American
Institute of Certified Public Accountants (“AICPA”) Statement of Position
93-7,
“Reporting
for Advertising Costs”
.
The
Company incurred $32,904 and $47,379 advertising expenses for each of
the years
ended December 31, 2006 and 2005, respectively.
Under
the
terms of the contracts, the Company provides a product warranty on the
equipment
to its customers for a period of twelve months upon the completion of
installation at the Company’s expense. The Company has not experienced any
material returns where it was under obligation to honor this standard
warranty
provision. As such, no reserve for product warranty has been provided
in the
statements of operations for the years ended December 31, 2006 and 2005.
Parties,
which can be a corporation or individual, are considered to be related
if the
Company has the ability, directly or indirectly, to control the other
party or
exercise significant influence over the other party in making financial
and
operating decisions. Companies are also considered to be related if they
are
subject to common control or common significant influence.
SFAS
No.
131
“Disclosures
about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments
on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
financial statements. The Company operates in one principal reportable
business
segment. All the customers are located in the PRC and the South East
Asia
region.
l
|
Fair
Value of Financial Instruments
|
The
Company values its financial instruments as required by SFAS No. 107,
“Disclosures
about Fair Value of Financial Instruments”
.
The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies.
The
estimates presented herein are not necessarily indicative of amounts
that the
Company could realize in a current market exchange.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
The
Company’s financial instruments primarily include cash and cash equivalents,
trade accounts receivable, inventories, prepayments and other receivables,
short-term bank loan, trade accounts payable, deferred revenue, advances
from
customers, value-added tax payable, income taxes payable, accrued liabilities
and other payable.
As
of the
balance sheet date, the estimated fair values of financial instruments
were not
materially different from their carrying values as presented due to short
maturities of these instruments.
l
|
Recently
Issued Accounting Standards
|
In
September 2005, the FASB’s Emerging Issues Task Force (“EITF”) reached a final
consensus on Issue 04-13,
“Accounting
for Purchases and Sales of Inventory with the Same
Counterparty”
(“EITF
04-13”). EITF 04-13 requires that two or more legally separate exchange
transactions with the same counterparty be combined and considered a
single
arrangement for purposes of applying APB Opinion No. 29,
“Accounting
for Nonmonetary Transactions”
,
when
the transactions are entered into in contemplation of one another. EITF
04-13 is
effective for new arrangements entered into, or modifications or renewals
of
existing arrangements, in interim or annual periods beginning after March
15,
2006. The Company does not expect that the adoption of this statement
would have
a material effect on the Company’s financial position or results of
operations.
In
February 2006, the FASB issued SFAS No. 155,
“Accounting
for Certain Hybrid Instruments-an amendment of FASB Statements 133 and
140”
,
which
is effective for all financial instruments acquired or issued after the
beginning of an entity’s first fiscal year that begins after September 15, 2006.
The statement improves financial reporting by eliminating the exemption
from
applying SFAS No. 133 to interests in securitized financial assets so
that
similar instruments are accounted for similarly regardless of the form
of the
instruments. The Statement also improves financial reporting by allowing
a
preparer to elect fair value measurement at acquisition, at issuance,
or when a
previously recognized have to bifurcated, if the holder elects to account
for
the whole instrument-by-instrument basis, in cases in which a derivative
would
otherwise have to bifurcated, if the holder elects to account for the
whole
instrument on a fair value basis. The Company does not expect that the
adoption
of this statement would have a material effect on the Company’s financial
position or results of operations.
In
July
2006, the FASB issued FIN 48,
“Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement No.
109”
,
which
clarifies the accounting for uncertainty in tax positions. This Interpretation
requires that the Company recognizes in its financial statements the
impact of a
tax position if that position is more likely than not of being sustained
on
audit, based on the technical merits of the position. The provisions
of FIN 48
are effective for the Company on January 1, 2007, with the cumulative
effect of
the change in accounting principle, if any, recorded as an adjustment
to opening
retained earnings. The Company is currently evaluating the impact of
adopting
FIN 48 on its financial statements.
In
September 2006, the SEC released SAB No. 108,
“Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements
in
Current Year Financial Statements”
(“SAB
108”). SAB 108 provides interpretive guidance on the SEC’s views on how the
effects of the carryover or reversal of prior year misstatements should
be
considered in quantifying a current year misstatement. The provision
of SAB 108
is effective for the Company in the current fiscal year ended December
31, 2006.
The Company is currently evaluating the impact of SAB 108 but does not
believe
that the application of SAB 108 would have a material effect on its financial
position, cash flows nor results of operations.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
In
September 2006, the FASB issued SFAS No.157,
“Fair
Value Measurements”
(“SFAS
157”), which defines fair value, establishes guidelines for measuring fair
value
and expands disclosures regarding fair value measurements. SFAS 157 does
not
require any new fair value measurements but rather eliminates inconsistencies
in
guidance found in various prior accounting pronouncements. SFAS 157 will
be
effective for the Company starting January 1, 2008. Earlier adoption is
permitted, provided the Company has not yet issued financial statements,
including for interim periods, for that fiscal year. The Company is currently
evaluating the impact of SFAS 157 on its financial position, cash flows
and
results of operations.
In
February 2007, the FASB issued SFAS No. 159,
“The
Fair Value Option for Financial Assets and Financial
Liabilities.”
SFAS
No. 159 permits entities to choose to measure, on an item-by-item basis,
specified financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option
has been
elected are required to be reported in earnings at each reporting date.
SFAS
No. 159 is effective for fiscal year beginning after November 15,
2007, the provisions of which are required to be applied prospectively.
The
Company’s results of operations and financial condition will not be affected
by
SFAS No. 159 since the Company does not plan to implement the fair value
option.
3.
|
ACCOUNTS
RECEIVABLE, NET
|
The
majority of the Company’s sales are on credit terms and in accordance with terms
specified in the contracts governing the relevant transactions. The Company
evaluates the need of an allowance for doubtful accounts based on specifically
identified amounts that management believes to be uncollectible. If actual
collections experience changes, revisions to the allowance may be required.
Based upon the aforementioned criteria, the allowances for doubtful accounts
are
provided as $291,785 and $148,418 for the years ended December 31, 2006
and
2005, respectively.
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Accounts
receivable, gross
|
|
$
|
4,706,360
|
|
$
|
2,399,395
|
|
|
|
|
|
|
|
|
|
Less:
allowance
for doubtful accounts
|
|
|
(577,292
|
)
|
|
(285,507
|
)
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
4,129,068
|
|
$
|
2,113,888
|
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
Inventories
consisted of the following:
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
508,161
|
|
$
|
553,206
|
|
Work
in process
|
|
|
245,082
|
|
|
29,794
|
|
Finished
goods
|
|
|
2,382,898
|
|
|
3,188,807
|
|
|
|
|
3,136,141
|
|
|
3,771,807
|
|
|
|
|
|
|
|
|
|
Less:
allowance
for obsolescence
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,136,141
|
|
$
|
3,771,807
|
|
5.
|
PREPAYMENTS
AND OTHER RECEIVABLES
|
A
summary
of prepayments and other receivables was:
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Advances
to employees
|
|
$
|
206,661
|
|
$
|
216,475
|
|
Deposits
to vendors
|
|
|
345,024
|
|
|
240,937
|
|
Other
receivables
|
|
|
17,731
|
|
|
18,341
|
|
|
|
|
|
|
|
|
|
|
|
$
|
569,416
|
|
$
|
475,753
|
|
6.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property,
plant and equipment, net, consisted of the following:
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Building
|
|
$
|
721,753
|
|
$
|
690,887
|
|
Plant
and machinery
|
|
|
1,157,166
|
|
|
1,063,659
|
|
Motor
vehicles
|
|
|
199,606
|
|
|
192,997
|
|
Office
equipment
|
|
|
109,806
|
|
|
88,520
|
|
|
|
|
2,188,331
|
|
|
2,036,063
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(1,036,810
|
)
|
|
(845,169
|
)
|
|
|
|
|
|
|
|
|
Net
book value
|
|
$
|
1,151,521
|
|
$
|
1,190,894
|
|
Depreciation
expense for the years ended December 31, 2006 and 2005 were $191,641
and
$170,881, respectively.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
As
of
December 31, 2006 and 2005, certain property, plant and machinery with
the net
book value of $933,300 and $1,042,342, respectively, were pledged as
securities
in connection with outstanding loan facilities (see Note 8).
7.
|
INTANGIBLE
ASSETS, NET
|
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Land
use rights, cost
|
|
$
|
528,704
|
|
$
|
528,704
|
|
|
|
|
|
|
|
|
|
Less:
accumulated amortization
|
|
|
(21,148
|
)
|
|
(10,574
|
)
|
|
|
|
|
|
|
|
|
Land
use rights, net
|
|
$
|
507,556
|
|
$
|
518,130
|
|
Amortization
expense for the years ended December 31, 2006 and 2005 were $10,574 and
$10,574,
respectively.
The
Company has a short-term bank loan of $1,154,703 with the Agricultural
Bank of
China, which is secured with interest rate at 5.841% per annum payable
quarterly, with principle due November 27, 2006. It is collateralized
by
building and certain plant and machinery of the Company (see Note 6).
In July
2007, the Company repaid the short-term bank loan to the bank.
Deferred
revenue represents the unrecognized portion of the entire fee from the
bundled
arrangement allocated to maintenance service and recognized to revenue
ratably
over the service period, usually 12 months (see Note 2).
10.
|
ADVANCES
FROM CUSTOMERS
|
Advances
from customers represent the advanced payments made by the customers
upon the
signing of a purchase contract.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
11.
|
ACCRUED
LIABILITIES AND OTHER
PAYABLES
|
Accrued
liabilities and other payables consisted of the following:
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Welfare
payable
|
|
$
|
523,566
|
|
$
|
278,389
|
|
Salary
payable
|
|
|
393,869
|
|
|
325,280
|
|
Government
levy payable
|
|
|
99,293
|
|
|
85,584
|
|
Accrued
expenses
|
|
|
131,832
|
|
|
163,850
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,148,560
|
|
$
|
853,103
|
|
Long-term
payables consisted of the following:
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Payable
to employees
|
|
$
|
496,252
|
|
$
|
579,263
|
|
Payable
to government
|
|
|
194,560
|
|
|
194,560
|
|
Payable
to third parties
|
|
|
57,600
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
748,412
|
|
$
|
773,823
|
|
Payable
to employees represented unsecured advances with interest rate at 8.2%
per annum
payable quarterly and repayable in the next twelve months.
Payable
to government and third parties represented unsecured advances, interest-free
and repayable in the next twelve months.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
The
Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax
Laws, the
Company is generally subject to enterprise income tax (“EIT”) at a statutory
rate of 33% (30% national income tax plus 3% local income tax).
The
provision for income tax expense consisted of the following:
|
|
Years
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Current
tax
|
|
$
|
258,520
|
|
$
|
254,185
|
|
Deferred
tax
|
|
|
79,038
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Income
tax expenses
|
|
$
|
337,558
|
|
$
|
254,185
|
|
The
reconciliation of income tax rate to the effective income tax rate based
on
income before income taxes stated in the statements of operations for
the years
ended December 31, 2006 and 2005 is as follows:
|
|
Years
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
940,203
|
|
$
|
355,352
|
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
33
|
%
|
|
|
|
310,267
|
|
|
117,266
|
|
Add:
Items not subject to taxes
|
|
|
|
|
|
|
|
-
Deferred revenue
|
|
|
65,880
|
|
|
34,544
|
|
-
Provisions
|
|
|
(38,589
|
)
|
|
102,375
|
|
|
|
|
|
|
|
|
|
Income
tax expenses
|
|
$
|
337,558
|
|
$
|
254,185
|
|
The
following table sets forth the significant components of the deferred
tax
liabilities of the Company as of December 31, 2006 and 2005:
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
Accounts
receivables
|
|
$
|
75,378
|
|
$
|
-
|
|
Depreciation
|
|
|
3,660
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
$
|
79,038
|
|
$
|
-
|
|
Prior
to
the restructuring in 2004, the Company was established as a state-owned
enterprise with a registered capital of $182,016 (approximately RMB1,500,000).
In July 2004, the Company was restructured to a limited liability company
with
51%
of its equity interest owned by SAAC and 49% of equity interest owned
by
employees in the PRC
.
In
accordance with the Company’s Articles of Association, the registered capital of
the Company was $720,786 (approximately RMB5,940,000).
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
15.
|
CHINA
CONTRIBUTION PLAN
|
Under
the
PRC Law, full-time employees of the Company are entitled to staff welfare
benefits including medical care, welfare subsidies, unemployment insurance
and
pension benefits through a China government-mandated multi-employer defined
contribution plan. The Company is required to accrue for these benefits
based on
certain percentages of the employees’ salaries. The total contributions provided
for such employee benefits were $266,446 and $209,788 for the years ended
December 31, 2006 and 2005, respectively.
Under
the
PRC Law, the Company is required to make appropriations to the statutory
reserve
based on after-tax net earnings and determined in accordance with generally
accepted accounting principles of the People’s Republic of China (the “PRC
GAAP”). Appropriation to the statutory reserve should be at least 10% of the
after-tax net income until the reserve is equal to 50% of the registered
capital. The statutory reserve is established for the purpose of providing
employee facilities and other collective benefits to the employees and
is
non-distributable other than in liquidation.
For
the
years ended December 31, 2006 and 2005, the Company contributed $79,118
and
$74,510 to statutory reserve, respectively.
The
Company operates in one single business segment that includes the design,
development, manufacture of products and provision of energy-saving projects.
The following table summarizes the Company’s net revenues generated from
different geographic locations:
|
|
Years
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
-
Southeast
Asia
|
|
$
|
126,250
|
|
$
|
268,761
|
|
-
The PRC
|
|
|
13,386,577
|
|
|
9,083,659
|
|
|
|
|
|
|
|
|
|
Total
revenue, net
|
|
$
|
13,512,827
|
|
$
|
9,352,420
|
|
All
of
the Company’s long-lived assets are located in the PRC.
18.
|
CONCENTRATION
AND RISK
|
For
the
years ended December 31, 2006 and 2005, there is no customer who accounts
for
10% or more of total net revenues.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
The
vendors who account for 10% or more of purchases are presented as follows:
|
|
Year
ended December 31, 2006
|
|
Vendors
|
|
Purchases
|
|
Percentage
of
purchases
|
|
Accounts
Payables
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
$
|
3,400,500
|
|
|
58
|
%
|
$
|
354,560
|
|
Vendor
B
|
|
|
709,068
|
|
|
12
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
4,109,568
|
|
|
70
|
%
|
$
|
354,560
|
|
|
|
Year
ended December 31, 2005
|
|
Vendors
|
|
Purchases
|
|
Percentage
of purchases
|
|
Accounts
Payables
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
$
|
4,047,680
|
|
|
55
|
%
|
$
|
352,723
|
|
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. The Company
performs
ongoing credit evaluations of its customers' financial condition, but
does not
require collateral to support such receivables.
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market
interest
rates.
The
Company’s interest-rate risk arises from long-term borrowings. Borrowings issued
at variable rates expose the Company to cash flow interest-rate risk.
Borrowings
issued at fixed rates expose the Company to fair value interest-rate
risk.
Company policy is to maintain approximately all of its borrowings in
fixed rate
instruments. At the year end, all of borrowings were at fixed
rates.
The
Company rented offices under non-cancelable operating lease agreements.
As of
December 31, 2006, future minimum annual operating lease payments were
as
follows:
Year
ending December 31:
|
|
|
|
2007
|
|
$
|
12,720
|
|
2008
|
|
|
12,720
|
|
|
|
|
|
|
Total
future minimum operating lease payments
|
|
$
|
25,440
|
|
For
the
years ended December 31, 2006 and 2005, rent expense was $12,720 and
$12,377,
respectively.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
|
UNAUDITED
PRO FORMA COMBINED STATEMENT OF OPERATIONS
|
FOR
THE NINE MONTHS ENDED SEPTEMBER 30,
2007
|
C
HINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO
UNAUDITED
PRO FORMA CONDENSED FINANCIAL INFORMATION
(Currency
expressed in United States Dollars (“US$”))
The
following unaudited pro forma condensed combined financial
information of China
Solar & Clean Energy Solutions, Inc. ("China Solar") and Tianjin Huaneng
Group Energy Equipment Co., Ltd. (“Tianjing Huaneng”) give effect to the merger
between China Solar and Tianjin Huaneng under the purchase
method of accounting
prescribed by Financial Accounting Standards No. 141, Business
Combinations.
On
May
18, 2007, China Solar’s wholly owned subsidiary, Beijing Deli Solar Technology
Development Co., Ltd. entered into a purchase agreement to
acquire 51% equity
interest in Tianjin Huaneng held by Tianjin Municipal Ji County
State-owned
Assets Administration Commission for a purchase price of approximately
$3,149,147 (the “Acquisition”). The effective date for this acquisition was July
1, 2007 and the acquisition has been accounted for by the purchase
method. China
Solar paid approximately $1,575,600 in July 2007. By supplemental
agreement
dated August 8, 2007, the purchase price was reduced to approximately
$1,689,741
and the balance of the purchase price of $100,876 was outstanding
as of the date
of this report. In addition to the purchase price, China Solar
was required to
pay a finder’s fee of approximately $769,418.
The
Acquisition was recorded on the purchase method by allocating
the purchase price
over the assets acquired, including intangible assets and liabilities
assumed,
based on their estimated fair values at the acquisition date.
The excess of the
purchase price over the net of amounts assigned to the assets
acquired and the
liabilities assumed was recorded as goodwill based on their
estimated fair
values at the acquisition date. In connection with the Acquisition,
China Solar
acquired 51% of the equity interest of Tianjin Huaneng. At
the completion date,
China Solar controlled 51% of Tianjin Huaneng in exchange for
$1,689,741. These
pro forma combined financial statements are presented for illustrative
purposes
only. The pro forma adjustments are based upon available information
and
assumptions that management believes are reasonable. The unaudited
pro forma
condensed combined financial statements do not purport to represent
what the
results of operations or financial position of China Solar
would actually have
been if the merger had in fact occurred on January 1, 2007,
nor do they purport
to project the results of operations or financial position
of China Solar for
any future period or as of any date, respectively.
The
following unaudited pro forma condensed combined balance sheet
and statements of
operations for the year ended December 31, 2006 and as of and
for the nine
months ended September 30, 2007 reflect the completion of the
Acquisition as
presented below:
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
UNAUDITED
PRO FORMA CONDENSED COMBINED
BALANCE
SHEET
AS
OF SEPTEMBER 30, 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
China
Solar
|
|
Tianjin
Huaneng
|
|
Pro
forma adjustment #1
|
|
|
Pro
forma combined
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,977,906
|
|
$
|
333,515
|
|
|
|
|
|
|
$
|
3,311,421
|
|
Net
trade accounts receivable
|
|
|
1,023,995
|
|
|
5,384,146
|
|
|
|
|
|
|
|
6,408,141
|
|
Related
party receivable
|
|
|
2,177,019
|
|
|
-
|
|
|
(2,177,019
|
)
|
(4)
|
|
|
-
|
|
Advances
and prepayments
|
|
|
798,013
|
|
|
579,370
|
|
|
|
|
|
|
|
1,377,383
|
|
Inventories
|
|
|
1,595,627
|
|
|
3,642,557
|
|
|
|
|
|
|
|
5,238,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
8,572,560
|
|
|
9,939,588
|
|
|
|
|
|
|
|
16,335,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
6,675,215
|
|
|
1,317,675
|
|
|
|
|
|
|
|
7,992,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in a subsidiary
|
|
|
1,689,741
|
|
|
-
|
|
|
(1,689,741
|
)
|
(1)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
receivables
|
|
|
1,061,591
|
|
|
521,978
|
|
|
|
|
|
|
|
1,583,569
|
|
Intangible
assets
|
|
|
-
|
|
|
536,308
|
|
|
|
|
|
|
|
536,308
|
|
Prepaid
land lease
|
|
|
1,024,120
|
|
|
-
|
|
|
|
|
|
|
|
1,024,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
2,085,711
|
|
|
1,058,286
|
|
|
|
|
|
|
|
3,143,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-
|
|
|
-
|
|
|
1,773,550
|
|
(1),
(2)
|
|
|
1,773,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
19,023,227
|
|
$
|
12,315,549
|
|
|
|
|
|
|
$
|
29,245,566
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS
OF SEPTEMBER 30, 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
|
China
Solar
|
|
|
Tianjin
Huaneng
|
|
|
Pro
forma adjustment #1
|
|
|
|
|
Pro
forma combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
bank loans
|
|
$
|
558,229
|
|
$
|
596,474
|
|
|
|
|
|
|
$
|
1,154,703
|
|
Accounts
payable, trade
|
|
|
206,667
|
|
|
1,416,353
|
|
|
|
|
|
|
|
1,623,020
|
|
Related
party payable
|
|
|
500
|
|
|
2,177,019
|
|
|
(2,177,019
|
)
|
(4)
|
|
|
500
|
|
Deferred
revenue
|
|
|
-
|
|
|
678,486
|
|
|
|
|
|
|
|
678,486
|
|
Deposits
|
|
|
314,546
|
|
|
3,178,932
|
|
|
|
|
|
|
|
3,493,478
|
|
Taxes
payable
|
|
|
1,243,004
|
|
|
732,855
|
|
|
|
|
|
|
|
1,975,859
|
|
Accrued
liabilities
|
|
|
40,895
|
|
|
695,148
|
|
|
|
|
|
|
|
736,043
|
|
Other
payables
|
|
|
-
|
|
|
620,350
|
|
|
769,418
|
|
(2)
|
|
|
1,389,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,363,841
|
|
|
10,095,617
|
|
|
|
|
|
|
|
11,051,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
loan
|
|
|
-
|
|
|
778,474
|
|
|
|
|
|
|
|
778,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
-
|
|
|
-
|
|
|
720,717
|
|
(1),
(3)
|
|
|
720,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock: par value $0.001; 25,000,000 shares
authorized, 2,674,194
shares issued and outstanding
|
|
|
2,674
|
|
|
-
|
|
|
|
|
|
|
|
2,674
|
|
Common
stock: par value $0.001; 66,666,667 shares authorized,
6,205,290 shares
issued and outstanding
|
|
|
6,205
|
|
|
720,786
|
|
|
(720,786
|
)
|
(1)
|
|
|
6,205
|
|
Additional
paid-in capital
|
|
|
8,348,200
|
|
|
257,466
|
|
|
(257,466
|
)
|
(1)
|
|
|
8,348,200
|
|
Accumulated
other comprehensive income
|
|
|
965,872
|
|
|
93,704
|
|
|
(123,098
|
)
|
(1)
|
|
|
936,478
|
|
Retained
earnings
|
|
|
7,336,435
|
|
|
369,502
|
|
|
(304,976
|
)
|
(1),
(3)
|
|
|
7,400,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
16,659,386
|
|
|
1,441,458
|
|
|
|
|
|
|
|
16,694,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
19,023,227
|
|
$
|
12,315,549
|
|
|
|
|
|
|
$
|
29,245,566
|
|
#1:
|
The
pro forma adjustments give effect to the acquisition
of Tianjin Huaneng as
if it were consummated on June 30,
2007.
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
China
Solar
|
|
Tianjin
Huaneng
|
|
Pro
forma adjustment #2
|
|
|
Pro
forma combined
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
21,248,106
|
|
$
|
10,445,423
|
|
|
|
|
|
|
$
|
31,693,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
16,796,518
|
|
|
8,192,566
|
|
|
|
|
|
|
|
24,989,084
|
|
Gross
profit
|
|
|
4,451,588
|
|
|
2,252,857
|
|
|
|
|
|
|
|
6,704,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
433,115
|
|
|
946,279
|
|
|
|
|
|
|
|
1,379,394
|
|
Depreciation
and amortization
|
|
|
89,605
|
|
|
183,974
|
|
|
|
|
|
|
|
273,579
|
|
General
and administrative
|
|
|
2,306,885
|
|
|
570,136
|
|
|
|
|
|
|
|
2,877,021
|
|
Total
operating expenses
|
|
|
2,829,605
|
|
|
1,700,389
|
|
|
|
|
|
|
|
4,529,994
|
|
Income
from operations
|
|
|
1,621,983
|
|
|
552,468
|
|
|
|
|
|
|
|
2,174,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
-
|
|
|
(98,488
|
)
|
|
|
|
|
|
|
(98,488
|
)
|
Interest
income
|
|
|
96
|
|
|
1,729
|
|
|
|
|
|
|
|
1,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
96
|
|
|
(96,759
|
)
|
|
|
|
|
|
|
(96,663
|
)
|
Income
before income taxes and minority interest
|
|
|
1,622,079
|
|
|
455,709
|
|
|
|
|
|
|
|
2,077,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
-
|
|
|
-
|
|
|
(159,785
|
)
|
(3)
|
|
|
(159,785
|
)
|
Income
tax expense
|
|
|
(265,429
|
)
|
|
(129,617
|
)
|
|
|
|
|
|
|
(395,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
1,356,650
|
|
$
|
326,092
|
|
|
|
|
|
|
$
|
1,522,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per common share
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per common share
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
common shares
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
common shares
|
|
|
7,039,341
|
|
|
|
|
|
|
|
|
|
|
7,039,341
|
|
#2
|
The
pro forma adjustments give effect to the acquisition
of Tianjin Huaneng as
if it were consummated on January 1,
2007.
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR
THE YEAR ENDED DECEMBER 31, 2006
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
China
Solar
|
|
Tianjin
Huaneng
|
|
Pro
forma adjustment #3
|
|
|
Pro
forma combined
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
21,468,313
|
|
$
|
13,512,827
|
|
|
|
|
|
|
$
|
34,981,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
16,842,994
|
|
|
10,373,987
|
|
|
|
|
|
|
|
27,216,981
|
|
Gross
profit
|
|
|
4,625,319
|
|
|
3,138,840
|
|
|
|
|
|
|
|
7,764,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
1,106,488
|
|
|
992,474
|
|
|
|
|
|
|
|
2,098,962
|
|
General
and administrative
|
|
|
2,308,219
|
|
|
1,088,601
|
|
|
|
|
|
|
|
3,396,820
|
|
Total
operating expenses
|
|
|
3,414,707
|
|
|
2,081,075
|
|
|
|
|
|
|
|
5,495,782
|
|
Income
from operations
|
|
|
1,210,612
|
|
|
1,057,765
|
|
|
|
|
|
|
|
2,268,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
28,889
|
|
|
(117,562
|
)
|
|
|
|
|
|
|
(88,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
1,239,501
|
|
|
940,203
|
|
|
|
|
|
|
|
2,179,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
-
|
|
|
-
|
|
|
(295,296
|
)
|
(3)
|
|
|
(295,296
|
)
|
Income
tax expense
|
|
|
-
|
|
|
(337,558
|
)
|
|
|
|
|
|
|
(337,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
1,239,501
|
|
$
|
602,645
|
|
|
|
|
|
|
$
|
1,546,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per common share
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per common share
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
common shares
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
common shares
|
|
|
8,732,070
|
|
|
|
|
|
|
|
|
|
|
8,732,070
|
|
#3
|
The
pro forma adjustments give effect to the acquisition
of Tianjin Huaneng as
if it were consummated on January 1,
2006.
|
C
HINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO
UNAUDITED
PRO FORMA CONDENSED FINANCIAL INFORMATION
(Currency
expressed in United States Dollars (“US$”))
NOTE –
2
PRO
FORMA ADJUSTMENTS
The
adjustments to the unaudited pro forma condensed combined financial
statements
reflect the consideration of $1,689,741 at the completion date
for the
acquisition of 51% of the equity interest of Tianjin Huaneng
and are as
follows:
(1)
|
To
reflect the allocation of the purchase price based
on their estimated fair
value at the acquisition date
|
The
following table summarizes the estimated fair value of the
assets acquired and
liabilities assumed at the date of acquisition. The Company
has obtained
valuations from an independent valuer for its certain tangible
and intangible
assets; thus the allocation of the purchase price consideration
is presented as
below:
|
|
Allocation
of purchase price of assets acquired
|
|
Acquired
assets:
|
|
|
|
Cash
|
|
$
|
384,607
|
|
Accounts
receivable, trade
|
|
|
4,648,699
|
|
Inventories
|
|
|
3,265,915
|
|
Other
receivables and prepayments
|
|
|
881,590
|
|
Property,
plant and equipment
|
|
|
1,156,835
|
|
Intangible
assets
|
|
|
502,269
|
|
Goodwill
|
|
|
1,004,132
|
|
|
|
|
|
|
Total
assets acquired
|
|
|
11,844,047
|
|
|
|
|
|
|
Less:
liabilities assumed
|
|
|
|
|
Short-term
bank borrowings
|
|
|
(1,154,703
|
)
|
Accounts
payable, trade
|
|
|
(1,124,468
|
)
|
Deferred
revenue
|
|
|
(668,345
|
)
|
Advances
from customers
|
|
|
(2,601,305
|
)
|
Value-added
tax payable
|
|
|
(863,151
|
)
|
Income
taxes payable
|
|
|
(899,421
|
)
|
Deferred
tax liabilities
|
|
|
(31,489
|
)
|
Accrued
liabilities and other payable
|
|
|
(1,404,290
|
)
|
Long-term
loan
|
|
|
(748,412
|
)
|
|
|
|
(9,495,584
|
)
|
Less:
minority interest
|
|
|
(658,722
|
)
|
|
|
|
|
|
Purchase
price
|
|
$
|
1,689,741
|
|
(2)
|
To
record the finder’s fee of approximately $769,418 as the part of
acquisition cost.
|
(3)
|
To
record Tianjin Huaneng’s 49% minority
interest.
|
(4)
|
To
eliminate inter-company balance between China Solar
and Tianjin
Huaneng.
|