.As
filed
with the Securities and Exchange Commission on June 25,
2008
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
(
Exact
name of registrant as specified in its charter
)
Nevada
(
State
or other jurisdiction of incorporation or organization
)
3433
(
Primary
Standard Industrial Classification Code Number
)
95-3819300
(
I.R.S.
Employer Identification Number
)
Building
3 No 28, Feng Tai North Road,
Beijing
China 100071
+86-10-63850516
(
Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices
)
United
Corporate Services, Inc.
202
South Minnesota Street
Carson
City, Nevada 89703
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to
:
Darren
Ofsink, Esq.
GUZOV
OFSINK LLC
600
Madison Avenue, 14
th
Floor,
New
York, NY 10022
Approximate
date of commencement of proposed sale to the public
:
From
time to time after the Registration Statement has been declared effective.
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
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
|
|
Accelerated
filer
o
|
|
|
|
Non-accelerated
filer
o
(Do
not check if a smaller reporting company)
|
|
Smaller
reporting company
x
|
CALCULATION
OF REGISTRATION FEE
Title of each class of securities to be
registered
|
|
Amount to
be
registered
(1)
|
|
Proposed
maximum
offering
price per
share (2)
|
|
Proposed
maximum
aggregate
offering
price
|
|
Amount of
registration
fee
|
|
Common
stock, par value $.001 per share
|
|
|
4,691,499
|
|
$
|
1.93
|
|
$
|
9,054,593
|
|
$
|
356
|
|
Common
stock, par value $.001 per share, underlying warrants
|
|
|
469,150
|
(3)
|
$
|
1.93
|
|
$
|
905,460
|
|
$
|
36
|
|
Total
|
|
|
5,160,649
|
|
|
1.93
|
|
$
|
9,960,053
|
|
$
|
392
|
*
|
*
Previously Filed
|
(1)
|
Pursuant
to Rule 416 promulgated under the Securities Act of 1933, as amended,
there are also registered hereunder such indeterminate number of
additional shares as may be issued to the selling stockholders to
prevent
dilution resulting from stock splits, stock dividends or similar
transactions
|
|
(2)
|
The
registration fee was calculated pursuant to Rule 457(c). As of the
date of
this prospectus, our common stock is quoted under the symbol "CSOL.OB"
on
the 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.
|
|
(3)
|
Includes
shares of common stock underlying five year warrants to
purchase 469,150 shares of common stock with an exercise price of
$2.88 per share (subject to
adjustment).
|
The
Registrant amends this registration statement on such date or dates as may
be
necessary to delay its effective date until the registrant shall file a further
amendment which specifically states that this registration statement shall
hereafter become effective in accordance with Section 8(a) of the Securities
Act
of 1933, or until the registration statement shall become effective on such
date
as the Commission, acting pursuant to Section 8(a), may
determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT
TO COMPLETION, DATED JUNE 25, 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 28, 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 June 10,
2008, the closing price was $1.75 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 June __, 2008
TABLE
OF CONTENTS
|
|
Prospectus
Summary
|
2
|
Risk
Factors
|
6
|
About
This Prospectus
|
21
|
Cautionary
Note Regarding Forward Looking Statements and Other Information
Contained
in this Prospectus
|
21
|
Selling
Stockholders
|
22
|
Plan
of Distribution
|
26
|
Use
of Proceeds
|
27
|
Market
Price of and Dividends of our Common Stock and Related Stockholder
Matters
|
28
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
30
|
Business
|
43
|
Properties
|
63
|
Security
Ownership of Certain Beneficial Owners and Management
|
65
|
Directors
and Executive Officers
|
66
|
Executive
Compensation
|
68
|
Certain
Relationships and Related Transactions
|
70
|
Description
of Securities to be Registered
|
70
|
Legal
Matters
|
71
|
Interests
of Named Experts and Counsel
|
71
|
Changes
in and Disagreements with Accountants
|
72
|
|
73
|
Where
You Can Find More Information
|
73
|
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. This
summary does not contain all of the information you should consider before
investing in our common stock. You should read the entire prospectus, including
"Risk Factors" and the consolidated financial statements and the related notes
before making an investment decision. Except as otherwise specifically stated
or
unless the context otherwise requires, the “Company,” we," "our" and "us" refers
collectively to
(i)
|
China
Solar & Clean Energy Solutions, Inc. ("China Solar") formerly known
as Deli Solar (USA) Inc.;
|
|
|
(ii)
|
Deli
Solar Holding Ltd. ("Deli Solar (BVI)"), a wholly-owned subsidiary
of China Solar and a limited liability company organized under the
International Business Companies Act of the British Virgin Islands;
|
|
|
(iii)
|
Bazhou
Deli Solar Energy Heating Co., Ltd. ("Deli Solar Bazhou”), a wholly-owned
subsidiary of Deli Solar (BVI) and a limited liability company organized
under the laws of the PRC;
|
|
|
(iv)
|
Beijing
Deli Solar Technology Development Co. (“Deli Solar
(Beijing)”
),
a
wholly-owned subsidiary of China Solar and a limited liability
company organized under the laws of the PRC;
|
|
|
(v)
|
Shenzhen PengSangPu
Solar Industrial Products Corporation
(“
SZPSP”),
a wholly - owned subsidiary of Deli Solar (Beijing); and
|
|
|
(vi)
|
Tianjin
Huaneng Group Energy Equipment Co., Ltd. (“Tianjin Huaneng”), a majority -
owned subsidiary of Deli Solar (Beijing).
|
The
Company
Business
Overview
We
are
engaged in the solar and renewable energy business in the People's Republic
of
China (“PRC”).
Our
business is conducted through our wholly-owned PRC based operating subsidiaries,
Deli Solar (Bazhou) and Deli Solar (Beijing) and our recently acquired indirect
operating subsidiaries SZPSP and Tianjin Huaneng.
We
have
two reportable segments namely solar heater/boiler related products and heat
pipe related products. The solar heater/boiler related products are mainly
sold
by Deli Solar (Bazhou) while the heat pipe related products are energy-savings
projects sold by 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 and Taiwan.
SZPSP,
which we acquired effective March 31, 2008, is principally engaged in the
manufacture of solar hot water systems for commercial use. Its customers
include
factories, hospitals, schools and hotels. SZPSP’s solar energy products include
flat plate solar collectors, solar water heater systems and central solar
water
heater systems.
Approximately
34% of our sales revenues for the three month period ended March 31, 2008
were
derived from sales of our solar water heaters and boiler related products
and
approximately 66% derived from sales of heat pipe related products.
Approximately
88% of our sales revenues for the three month period ended March 31, 2008
were
derived from sales made to PRC based customers. Approximately 12% of our
sales
revenues were derived from the international market (8% from Singapore and
4%
from Taiwan) all of which were sales of heat pipe related products made by
Tianjin Huaneng.
Products
Solar
Hot Water Heaters and Boilers
We
manufacture two types of solar hot water heaters: evacuated tubular solar water
heaters and flat plate solar water heaters. Our solar water heaters are
primarily used to generate hot water for residential use. Among evacuated
tubular solar water heaters, regular evacuated tubular solar water heaters
using
all-glass vacuum collectors are our best selling product, comprising
approximately 85% of our total solar water heater revenues for 2007. This type
of solar water heater can generate hot water even in cold weather and therefore
can be used throughout the year. Further, these water heaters are relatively
easy and inexpensive to produce compared to other solar hot water heaters using
other types of vacuum collectors. Because our primary market is in rural areas
of the PRC, our regular evacuated tubular solar water heaters annually account
for most of our sales.
We
also
manufacture boilers, furnaces, stove heating, and space heating products. Most
of our boilers and space heating products are coal-fired, small scale units
for
residential space heating and cooking.
Sales
of
our hot water heaters and boilers comprised approximately 34% of our sales
revenues for the three month period ended March 31, 2008 compared to
approximately 72% of our total sales revenues for 2007.
Heat
Pipe Related Products
We
also
manufacture waste heat recovery systems, heating products such as heating pipes,
heat exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators.
Sales
of
these products and systems comprised approximately 66% for the three month
period ended March 31, 2008 compared to 19% of our total sales revenues in
2007.
Sales of these products were included in our consolidated revenues commencing
July 1, 2007.
Employees
As
of
June 10, 2008 we had approximately 1,106 full time employees and 71 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 29,
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
|
|
14,007,901
shares outstanding as of June 10, 2008
|
|
|
|
Common
stock offered by the Company
|
|
0
|
|
|
|
Total
shares of common stock offered by selling stockholders
|
|
5,160,649
representing 35.6% of the shares of common stock currently
outstanding.
|
|
|
|
Common
stock to be outstanding after the offering (assuming all placement
agent
warrants being registered have been exercised)
|
|
14,477,051
|
|
|
|
Total dollar
value of common stock and placement agent warrants being
registered
|
|
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 June 10, 2008 was
$1.75.
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 $9,031,136.
|
|
|
|
Use
of Proceeds
|
|
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.
|
Our
OTC Bulletin Board Trading Symbol
|
|
CSOL.OB
|
|
|
|
Risk
Factors
|
|
See
"Risk Factors" beginning on page 6 and other information included in
this prospectus for a discussion of factors you should consider
before
deciding to invest in shares of our common
stock.
|
Background
On
February 29, 2008, we completed a private placement of 4,691,499 shares of
our
common stock for price per share of $2.40 or an aggregate purchase price
of
approximately $11,300,000. We received $9,995,156 as net proceeds from this
financing.
In
connection with the transaction we agreed to issue to Roth Capital Partners
LLC
as placement agent, warrants to purchase 469,150 shares of common stock
exercisable for a period of five years at an exercise price equal to $2.88
per
share and we paid them a transaction fee of approximately $790,000 (7% of the
gross proceeds of the transaction). Roth paid vFinancing $153,000 as a
selling agent fee and transferred to them and their affiliates warrants to
purchase 106,250 shares of common stock. On February 29, 2008, the closing
price
of the common stock as quoted on the OTCBB was $2.71. For more information
relating to the terms of this private placement, reference is made to “Selling
Stockholders - Background.”
In
connection with the private placement we entered into a registration rights
agreement with the investors on February 25, 2008 which requires us to file
with
the SEC a "resale" registration statement providing for the resale of (i) all
of
the 4,691,499 shares of common stock sold to the investors, (ii) the
2,000,000 “make good shares” and (iii) the 469,150 shares underlying the
placement agent warrants (collectively, the “registrable securities”) for an
offering to be made on a continuous basis pursuant to Rule 415 of the Securities
Act of 1933, as amended.
We
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.
Risks
Related to our Business
Our
profit margins on sales of our solar water heaters have been declining
Although
our gross profits have been increasing due to increased sales, prior to the
acquisition of Tianjin Huaneng our profit margins had been decreasing. However,
gross profit for the three months ended March 31, 2008 was $2,455,060, an
increase of $1,708,112, or approximately 229%, as compared to $746,948 for
the
three months ended March 31, 2007 and our gross margin (gross profit as a
percentage of sales) in the first three months in 2008 was approximately
30%
compared to approximately 25% in the same period last year. This increase
is
primarily due to the increase in the volume of sales of higher margin products
such as heat pipe related products due to the acquisition of Tianjin Huaneng.
The profit margins on sales of our solar water heaters have been decreasing
due
to market pressure to keep our prices competitive, a trend which we expect
to
continue going forward. However we expect this trend to be more than offset
by
sales of products with higher gross profit margins sold by Tianjin Huaneng.
If
our expectation is not correct our business and financial condition would
be
harmed.
Competition
in the solar water heater industry in rural areas has recently intensified
causing us to lower our prices resulting in lower sales revenues.
We
manufacture and market solar hot water heaters and other products. According
to
statistics from the Chinese Energy Research Association, there are currently
over 3,500 solar hot water heater manufacturers producing products under
more
than 3,000 brands. Many of our competitors are better capitalized and more
experienced, and have deeper ties in the PRC marketplace. While most solar
hot
water manufacturers focus on the urban markets, we have always focused on
the
rural markets. Lately c
ompetition
in the solar water heater industry in rural areas has recently intensified
causing us to lower our prices resulting in lower sales revenues.
We
expect
this trend to continue going in the immediate future.
We
rely on our sales agents to distribute our solar water heater products and
to
expand our business we must attract new sales agents; we could lose a
substantial portion of our sales if we are not able to effectively monitor
the
activities of our sales agents.
We
believe that our success relies, to a large degree, on our distribution network.
The PRC is a geographically vast country and it is critical that we market
our
products in a number of different regions. Presently, we sell our products
primarily in the rural areas of the north-east part of the PRC including Hebei,
Beijing, Tianjin, Heilongjiang, and Liaoning. In order to expand our business
into others regions, we will need to increase our distribution network by adding
more sales agents, distributors, wholesalers and retailers who will carry our
products. We may not be able to grow our distribution network, as our
competitors may offer better products and commissions to distributors and sales
agents, and, even if we can grow our distribution network, we may not be able
to
operate it efficiently or manage it effectively, as our internal resources
are
limited.
We
may not be able to effectively control and manage our
growth
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 for
stock
splits and stock dividends).
On
July
1, 2007 Deli Solar (Beijing) purchased 51% of the equity in Tianjin Huaneng
Group Energy Equipment Co., Ltd. (“Tianjin Huaneng”) for a purchase price of
approximately $1,689,741. In addition to the purchase price we paid a finder’s
fee of approximately $769,418. Deli Solar (Beijing) assumed 51% of the
liabilities of Tianjin Huaneng and contributed RMB 20,000,000
(approximately $2,613,400) as working capital to the acquired company. Deli
Solar (Beijing) also agreed to employ the 550 current Tianjin Huaneng employees
pursuant to new three year employment contracts.
As
part
of our growth strategy, we review acquisition and strategic investment prospects
that we believe would complement our current product offerings, increase our
market coverage or enhance our technical capabilities, or otherwise offer growth
opportunities. From time to time we review investments in new businesses and
we
expect to make investments in, and to acquire, businesses, products, or
technologies in the future. In the event of any future acquisitions, we could:
|
·
|
|
issue
equity securities which would dilute current stockholders’ percentage
ownership;
|
|
·
|
|
incur
substantial debt;
|
|
·
|
|
assume
contingent liabilities; or
|
|
·
|
|
expend
significant cash.
|
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:
|
·
|
|
difficulties
in the assimilation of acquired operations, technologies and/or
products;
|
|
·
|
|
unanticipated
costs associated with the acquisition or investment transaction;
|
|
·
|
|
the
diversion of management’s attention from other business concerns;
|
|
·
|
|
adverse
effects on existing business relationships with suppliers and customers;
|
|
·
|
|
risks
associated with entering markets in which we have no or limited prior
experience;
|
|
·
|
|
the
potential loss of key employees of acquired organizations; and
|
|
·
|
|
substantial
charges for the amortization of certain purchased intangible assets,
deferred stock compensation or similar items.
|
We
cannot
ensure that we will be able to successfully integrate any businesses, products,
technologies, or personnel that we have acquired or might acquire in the future,
and our failure to do so could harm our business, operating results and
financial condition.
We
may need additional capital to fund our future operations and, if it is not
available when needed, we may need to reduce our planned development and
marketing efforts, which may reduce our sales revenues
.
We
believe that our existing working capital and cash available from operations
will enable us to meet our working capital requirements for at least the next
12
months. However, if cash from future operations is insufficient, or if cash
is
used for acquisitions or other currently unanticipated uses, we may need
additional capital. Under the terms of the securities purchase agreement entered
into on June 13, 2007 with the investors in the June private placement we
cannot, prior to June 13, 2010, issue any convertible debt or any shares of
convertible preferred stock, have any debt outstanding in an amount greater
than
twice EBITDA from continuing operations for the prior four quarters. Those
investors also have right of first refusal with respect to any subsequent
financing. There are also restrictive covenants in the securities purchase
agreements entered into with the investors in the February 2008 private
placement. These restrictive covenants may inhibit our ability to raise
additional financing. The development and marketing of new products and the
expansion of distribution channels and associated support personnel requires
a
significant commitment of resources. In addition, if the markets for our
products develop more slowly than anticipated, or if we fail to establish
significant market share and achieve sufficient net revenues, we may continue
to
consume significant amounts of capital. As a result, we could be required to
raise additional capital. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution of the shares held by existing stockholders.
If additional funds are raised through the issuance of debt securities, such
securities may provide the holders certain rights, preferences, and privileges
senior to those of common stockholders, and the terms of such debt could impose
restrictions on our operations. We cannot assure you that additional capital,
if
required, will be available on acceptable terms, or at all. If we are unable
to
obtain sufficient amounts of additional capital, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our business, financial condition and operating results.
The
relative lack of public company experience of our management team may put
us at
a competitive disadvantage.
Our
internal controls over financial reporting may not be effective, and our
independent auditors may not be able to certify as to their effectiveness,
which
could have a significant and adverse effect on our
business.
Our
management
team lacks public company experience, which could impair our ability to comply
with legal and regulatory requirements such as those imposed by Sarbanes-Oxley
Act of 2002. The individuals who now constitute our senior management have
never
had responsibility for managing a publicly traded company. These
responsibilities include complying with federal securities laws and making
required disclosures on a timely basis. Our senior management may not be
able to
implement programs and policies in an effective and timely manner that
adequately respond to such increased legal, regulatory compliance and reporting
requirements. Our failure to comply with all applicable requirements could
lead
to the imposition of fines and penalties and distract our management from
attending to the growth of our business.
Moreover,
rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act
of
2002 require annual assessment of our internal control over financial reporting,
and attestation of this assessment by our company's independent registered
public accountants. The SEC extended the compliance dates for “non-accelerated
filers,” like us. Accordingly, the annual assessment of our internal controls
requirement first applied to our annual report for the 2007 fiscal year and
the
attestation requirement of management's assessment by our independent registered
public accountants will first apply to our annual report for the 2009 fiscal
year. The standards that had to be met for management to assess the internal
control over financial reporting as effective are new and complex, and require
significant documentation, testing and possible remediation to meet the detailed
standards. Our lack of familiarity with Section 404 may have diverted
management’s time and resources in executing the business plan. If, in the
future, management identifies one or more material weaknesses, or our external
auditors are unable to attest that our management’s report is fairly stated or
to express an opinion on the effectiveness of our internal controls, this
could
result in a loss of investor confidence in our financial reports, have an
adverse effect on our stock price and/or subject us to sanctions or
investigation by regulatory authorities.
We
do not have key man insurance on our President and CEO, Mr. Du, on whom we
rely
for the management of our business.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Deli Du, our CEO.
The
loss of the services of Mr. Du, for any reason, may have a material adverse
effect on our business and prospects. We cannot assure you that we will be
able
to find a suitable replacement for Mr. Du. We do not carry key man life
insurance for any of our key personnel.
We
may not be able to hire and retain qualified personnel to support our growth
and
if we are unable to retain or hire these personnel in the future, our ability
to
improve our products and implement our business objectives could be adversely
affected
.
Competition
for senior management and senior technology personnel in the PRC is intense,
the
pool of qualified candidates in the PRC is very limited, and we have had
difficulty in attracting and retaining the services of senior executives and
may
continue to do so in the future. This failure could harm our future growth
and
financial condition.
We
do not
maintain fire, theft, product liability or other insurance of any kind. We
bear
the economic risk with respect to loss of or damage or destruction to our
property and to the interruption of our business as well as liability to third
parties for personal injury or damage or destruction to their property that
may
be caused by our personnel or products. This liability could be substantial
and
the occurrence of such loss or liability may have a material adverse effect
on
our business, financial condition and prospects. However product liability
lawsuits in the PRC are rare, and we have never experienced significant failure
of our products.
Rapid
technological changes in our industry could render our products non-competitive
or obsolete and consequently affect our ability to generate
revenues.
The
solar
hot water industry is subject to rapid technological change. Our future success
will depend on our ability to respond to rapidly changing technologies and
improve the quality of our products. Our failure to adapt to these changes
could
harm our business. Our future plans to market our products to urban areas
require our products to be innovative. If we are slow to develop new products
and technologies that are attractive to people in these urban areas, we may
not
be successful in capturing a significant share of this market. For example,
most
of our current products rely on a tubular structure while urban customers prefer
a flat plate collector for aesthetic purposes. If we fail to keep up with rapid
technological changes to remain competitive in our rapidly evolving industry,
our future marketing and expansion may be adversely affected.
Most
of our warranty services are performed by our independent sales agents and
distributors whose deposit may not cover total warranty claims.
We
typically offer a three-year warranty for our products. During the first
year of
this warranty program, we cover any defects and product malfunctions. Most
of
our warranty services are performed by our independent sales agents and
distributors in return for a 1-2% discount of the purchase price they pay
for
our products. We normally require our new sales agents and distributors to
pay
us a deposit (varying from RMB5,000 to 20,000 depending on their represented
areas) which we believe will ensure their performance of the necessary warranty
services. Our financial statements do not provide for a reserve for product
warranties and these expenses have not been significant to date. Although
we
have not experienced any significant product returns or repairs, we cannot
assure you that these sales agents and distributors will perform the warranty
services when required, and if they fail to do so, we cannot assure you that
the
agents' deposits will be sufficient to cover the costs associated with the
warranty services to be performed on the products sold by these sales agents
and
distributors.
We
lease some of the real property on which our business center and exhibition
center and other facilities are located and there is no guarantee that our
lease
will be renewed.
Our
acquisition of the land use rights from villagers is subject to announcement
and
approval procedures and we cannot assure you that they will be successful.
On
March
16, 2006,
Deli
Solar (Bazhou) entered into an agreement with the Governance Commission of
Beijiahe Village Chaheji County Bazhou City (the "Village Governance
Commission") to acquire land use rights to a piece of land comprising 61,530
square meters (the "Land") at a price of approximately $919,858, subject to
the
procedures as mentioned below. The previous users of the Land were villagers
and
the Land was used for agricultural purposes. According to the relevant PRC
regulations, the Village Governance Commission is required to announce its
intention to transfer the land use rights to Deli Solar (Bazhou) (the
"Announcement Procedure") and provide the villagers with reasonable compensation
to acquire the land use rights from them. The conversion of land use from
agricultural to non-agricultural purposes requires the approval of the local
government. In addition, once the approval from the local government has been
obtained, the new holder of the land use rights will have to be registered
with
the land administration bureau. We cannot guarantee that the Village Governance
Commission will carry out the Announcement Procedure and provide reasonable
compensation to the villagers as prescribed. We cannot guarantee that the
application to change the purpose of land use will be approved by the local
government or that the new holder of the land use rights would be able to be
registered with the land administration bureau.
Effect
of the Issuance of the Preferred Stock and Warrants in June 2007 and Common
Stock in February 2008
The
resale in the public market of the shares underlying the Preferred Stock and
Warrants acquired in the June 2007 financing and the resale in the public market
of the common stock acquired in the February 2008 private placement may have
an
adverse impact on the market value of our common stock.
On
February 7, 2008, our registration statement was declared effective by the
SEC.
In that registration statement we registered for resale by the investors
in the
June 2007 private placement 508,734 shares of common stock and 508,734 shares
underlying class A warrants. In addition under new Rule 144, which became
effective in February 14, 2008, non affiliates, such as the investors in
the
June financing, may sell their shares without any volume restrictions if
they
hold their shares for at least 6 months and we are current in our reporting
obligations at the time of sale. 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 be sold under Rule 144 to the extent held by
non-affiliates. As of June 10, 2008, 1,036,112 of these shares have been
sold
under Rule 144. We believe that sales by these investors have caused the
market
price of our shares to fall significantly over the last few months. In addition,
the 1,734,194 class A warrants and the 1,774,194 class B warrants currently
outstanding may now be exercised by and sold by non affiliates in cashless
exercise under Rule 144. As of June 10, 2008, 40,000 of the class A warrants
have been exercised. The resale of the additional 738,082 shares of common
stock
issuable on conversion of the Series A Preferred Stock outstanding on June
10,
2008 and the 3,508,388 shares of common stock issuable on exercise of the
class
A and class B warrants, or even the possibility of their resale,
may adversely affect the trading market for our common stock and adversely
affect the prevailing market price of our common stock.
The
resale of the 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 June 10, 2008 the closing sale price of the common stock was
$1.75.
The
Series A Preferred Stock and the Warrants have anti-dilution protection which
may have an adverse impact on the market value of our common stock and out
ability to raise additional financing.
The
holders of the Series A Preferred Stock have full ratchet anti dilution
protection and the holders of the class A and class B warrants have weighted
average anti-dilution protection. This may prove a hindrance to our efforts
to raise future equity and debt funding, and the exercise of such rights
will
dilute the percentage ownership interest of our stockholders and will dilute
the
value of their stock.
The
Series A Preferred Stock and Warrants may adversely affect our financial
and operational flexibility.
The
terms
of the June 13, 2007 financing imposed restrictions on us that may affect
our ability to successfully operate our business. The transaction
documents contain a number of covenants that may restrict our ability to
operate, including, among other things, covenants that restrict our
ability:
|
·
|
to
incur additional indebtedness;
|
|
·
|
pay
dividends on our capital stock;
|
|
·
|
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;
|
|
·
|
to
enter into any transaction that has any reset feature that could
result in
additional shares being issued.
|
|
·
|
to
enter into any subsequent financing.
|
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.
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:
|
·
|
cost-effectiveness
of solar power technologies as compared with conventional and non-solar
alternative energy technologies;
|
|
·
|
performance
and reliability of solar power products as compared with conventional
and
non-solar alternative energy technologies; and
|
|
·
|
capital
expenditures by customers that tend to decrease if the PRC or global
economy slows down.
|
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.
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.
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), Tianjin Huaneng and SZPSP are located in the PRC and substantially
all of their assets are located outside of the United States. It may therefore
be difficult for investors in the United States to enforce their legal rights
based on the civil liability provisions of the U.S. Federal securities laws
against us in the courts of either the U.S. or the PRC and, even if civil
judgments are obtained in U.S. courts, to enforce such judgments in PRC courts.
Further, it is unclear if extradition treaties now in effect between the
United
States and the PRC would permit effective enforcement against us or our officers
and directors of criminal penalties, under the U.S. Federal securities laws
or
otherwise.
We
may have difficulty hiring and retaining qualified senior management and
in
establishing adequate management, legal and financial controls in the
PRC.
Western
style of management, financial reporting concepts and practices, modern banking,
computer and other control systems are relatively new to the PRC. In the
past we
have had difficulties in hiring and retaining qualified senior management
and we
may continue to have difficulty in hiring and retaining a sufficient number
of
senior management and other qualified employees. Accordingly, we may experience
difficulty in establishing management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and
corporate records and instituting business practices that meet Western
standards.
Risks
Related to Our Common Stock.
We
are not likely to pay cash dividends in the foreseeable
future.
We
intend
to retain any future earnings for use in the operation and expansion of our
business. We do not expect to pay any cash dividends in the foreseeable future
as we are contractually restricted from doing so. As a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt
of
dividends or other payments from our operating subsidiaries based in the PRC.
Our PRC based operating subsidiaries are subject to restrictions on their
ability to make distributions to us, including restrictions on the conversion
of
local currency into U.S. dollars.
Our
common stock is thinly traded, so you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
Prior
to
the reverse merger our shares were not publicly traded although shares of
the
shell into whom we merged were thinly traded. Through the reverse merger,
we
have essentially become public without the typical initial public offering
procedures which usually include a large selling group of broker-dealers
who may
provide market support after going public. We have undertaken efforts to
develop
market recognition for our stock, including through the retention of Hayden
Communications International, Inc. on July 23, 2007. As of June 10, 2008,
there
were 14,007,901 shares of our common stock issued and outstanding, and there
were approximately 2,526 holders of record of our outstanding shares of common
stock. The market capitalization as June 10, 2008 (excluding shares held
by our
affiliates) was approximately $12,345,963. 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
June
10, 2008 the last sale price of our common stock was $1.75 per share. These
regulations impose additional sales practice requirements on broker-dealers
who
sell such securities to persons other than established customers and accredited
investors (generally institutions with assets in excess of $5,000,000 and
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 (individually) or $300,000 (jointly with their spouse)). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of these securities and have received
the purchaser's prior written consent to the transaction. Additionally, for
any
transaction, other than exempt transactions, involving a penny stock, the
rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the SEC relating to the penny stock market. The broker-dealer
also
must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if
the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny
stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell the common stock and may affect the ability of investors to sell
their
common stock in the secondary market.
Our
common stock is illiquid and subject to price volatility unrelated to our
operations.
The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or
us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
A
large number of shares will be eligible for future sale and this may depress
our
stock price.
This
is
an offering of 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 June 10, 2008, there were 14,007,901 shares of our common
stock
issued and outstanding and 738,082 shares of Series A Preferred Stock (excluding
900,000 shares 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 738,082 shares of Series A Preferred
Stock issued in June 13, 2007 financing which have not yet been converted,
(ii)
the exercise of the other outstanding warrants to purchase an aggregate of
4,041,698 shares of common stock, there will be 19,250,831 shares of common
stock outstanding. Of these 19,250,831 shares (i) 5,160,649 shares are being
registered for resale in this prospectus, (ii) all of the 738,082 shares
of
Series A Preferred Stock outstanding may be sold without restriction under
Rule
144 by non affiliates, (iii) 3,952,025 shares were registered for resale
in a
registration statement declared effective on July 18, 2006, (iv) the 4,067,964
issued in the reverse merger may be sold subject to the requirements of Rule
144, (v) 508,734 shares underlying the class A warrants were registered for
resale in the registration statement declared effective on February 7, 2008
and
all of the 1,734,194 shares underlying the class A warrants currently
outstanding and all of the 1,774,194 shares underlying the class B warrants
may
now be sold if purchased by way of a cashless exercise.
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 June 10,
2008 there were 738,082 shares of Series A Preferred Stock (excluding the
900,000 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.
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.
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 June 11, 2008, $1 = 6.91750
yuan.
SELLING
STOCKHOLDERS
This
prospectus relates to the offer and sale of our common stock by the selling
stockholders identified in the table below. Each of the selling stockholders
acquired the shares of our common stock pursuant to our private placement
transaction completed on February 29, 2008. Each investor was an “accredited
investor” within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act. The placement agent warrants were issued to Roth Capital
Partners, LLC for services rendered in connection with the private
placement.
Except
as
set forth below none of the selling stockholders has held a position as an
officer or director of the Company, nor has any selling stockholder had a
material relationship of any kind with the Company. As of June 10, 2008,
(i)
Ardsley and its affiliates and (ii) The Quercus Trust may be deemed to be
an
“affiliate” by virtue of the fact that it is the beneficial owner of in excess
of 10% of the outstanding common stock.
The
table
set forth below lists the names of the selling stockholders as well as (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 and other than Roth Capital Partners, LLC , vFinance Investments
and
Ancora Greater China Fund LP, none of the selling stockholders is a
broker-dealer or an affiliate of a broker-dealer.
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 (3)
|
|
|
2,449,283
|
|
|
17.5
|
%
|
|
2,083,333
|
|
|
365,950
|
|
|
2.6
|
%
|
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 (5)
|
|
|
166,666
|
|
|
1.2
|
%
|
|
166,666
|
|
|
0
|
|
|
0
|
|
Ardsley
Offshore Fund, Ltd.
c/o
Ardsley Partners
262
Harbor Drive
Stamford
CT 06902 (6)
|
|
|
491,500
|
|
|
3.5
|
%
|
|
491,500
|
|
|
0
|
|
|
0
|
|
Marion
Lynton
c/o
Ardsley Partners
262
Harbor Drive
Stamford
CT 06902 (6)
|
|
|
17,500
|
|
|
*
|
|
|
17,500
|
|
|
0
|
|
|
0
|
|
Ardsley
Partners Institutional Fund, L.P.
c/o
Ardsley Partners
262
Harbor Drive
Stamford
CT 06902 (6)
|
|
|
455,000
|
|
|
3.2
|
%
|
|
455,000
|
|
|
0
|
|
|
0
|
|
Ardsley
Partners Fund II, L.P
c/o
Ardsley Partners
262
Harbor Drive
Stamford
CT 06902 (6)
|
|
|
702,500
|
|
|
5.0
|
%
|
|
702,500
|
|
|
0
|
|
|
0
|
|
Chestnut
Ridge Partners, LP
c/o
Chestnut Ridge Capital, LLC
50
Tice Boulevard
Woodcliff
Lake, NJ 07677 (7)
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
0
|
|
|
0
|
|
Jayhawk
Private Equity Fund, LP
5410
West 61
st
Place
Suite
100
Mission
KS 66205 (8)
|
|
|
195,993
|
|
|
1.4
|
%
|
|
195,993
|
|
|
0
|
|
|
0
|
|
Jayhawk
Private Equity Co-Invest Fund, LP
5410
West 61
st
Place
Suite
100
Mission
KS 66205 (9)
|
|
|
12,340
|
|
|
*
|
|
|
12,340
|
|
|
0
|
|
|
0
|
|
The
USX China Fund
c/o
Parr Financial Group
5100
Poplar Avenue
Suite
3117
Memphis,
TN 38137 (10)
|
|
|
200,000
|
|
|
1.4
|
%
|
|
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 (11)
|
|
|
155,000
|
|
|
1.1
|
%
|
|
100,000
|
|
|
55,000
|
|
|
*
|
|
Roth
Capital Partners LLC
24
Corporate Plaza
Newport
Beach, CA 92660 (12)
|
|
|
362,900
|
|
|
2.6
|
%
|
|
362,900
|
|
|
0
|
|
|
0
|
|
vFinance
Investments
880
Third Avenue, 12
th
floor
New
York, NY 10022 (13)
|
|
|
19,921
|
|
|
*
|
|
|
19,921
|
|
|
0
|
|
|
0
|
|
Jeffrey
H Auerbach
c/o
vFinance Investments
880
Third Avenue, 12
th
floor
New
York, NY 10022 (13)
|
|
|
83,672
|
|
|
*
|
|
|
83,672
|
|
|
0
|
|
|
0
|
|
Jonathan
Rich
vFinance
Investments
880
Third Avenue, 12
th
floor
New
York, NY 10022 (13)
|
|
|
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
June 10, 2008 there were 14,007,901 shares of our common sock issued and
outstanding. In determining the percent of common stock beneficially owned
by a
selling stockholder on June 10, 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 14,007,901 shares outstanding on June 10,
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 June 10, 2008.
(3)
Based
on information set forth in Amendment No 1 to Schedule 13D filed on March
4,
2008. David Gelbaum and Monica Chavez have shares voting and dispositive
power
the shares held by The Quercus Trust.
(4)
These entities are affiliated with each other. Peter Siris and Leigh S. Curry
have shared voting and dispositive power over these shares.
(5)
John
P. Micklitish has sole voting and dispositive power over the shares held
by
Ancora.
(6)
These
entities are affiliated with each other. These entities in the aggregate
are the
beneficial owners of 1,666,500 shares of common stock (or approximately 11.9%).
Ardsley
Advisory Partners, a New York general partnership ("Ardsley") serves as
investment manager to, and has investment discretion over the securities
held by
Ardsley Offshore and the Marion Lynton, and serves as investment adviser
to
Ardsley II and Ardsley Institutional. Phillip J. Hempleman and Ardsley Partners
I, a New York general partnership ("Ardsley Partners") serve as the general
partners of Ardsley II and Ardsley Institutional. Ardsley Partners also serves
as the general partner of Ardsley. Philip J. Hempleman has ultimate voting
and
dispositive power over these securities.
(7)
Kenneth Pasternak has sole voting and dispositive power over the shares held
by
Chestnut Ridge.
(8)
Kent
C. McCarthy is the Managing Member of Jayhawk Capital Management LLC, which
is
the General Partner of Jayhawk Private Equity GP, LP, which is the General
Partner of Jayhawk Private Equity Fund, L.P. and has voting power and investment
power over securities held by Jayhawk Private Equity Fund,
L.P.
(9)
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.
(10)
Stephen L. Parr has sole voting and dispositive power over the shares held
by
USX China Fund.
(11)
Howard Punch has sole voting and dispositive power over the shares held by
Punch.
(13)
Represents shares of common stock issuable upon exercise of placement agent
warrants which were assigned by Roth. Jonathan Rich and Jeffrey Auerbach
have
shared voting and dispositive power over the shares held by vFinance.
(13)
Jonathan Rich and Jeffrey Auerbach are affiliates of
vFinance.
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 June 10, 2008 the last sale price of our common stock was $1.75.
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 June 10, 2008, the last reported sale price of our common stock was $1.75
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
June 10, 2008, there were 14,007,901 shares of our common stock issued and
outstanding, and there were approximately 2,526 holders of record of our
outstanding shares of common stock. This does not reflect the number of persons
or entities who held stock in nominee or "street" name through various brokerage
firms.
Dividends
We
have
never declared or paid any cash dividends on our common stock and are restricted
from paying dividends both contractually and by virtue of the fact that we
are a
holding company. We currently intend to retain all earnings, if any, for use
in
business operations and we do not anticipate declaring any dividends in the
near
future.
The
payment of dividends is contingent on the ability of our PRC based operating
subsidiaries Deli Solar (Bazhou), Deli Solar (Beijing), Tianjin Huaneng and
SZPSP to obtain approval to send monies out of the PRC. The PRC's national
currency, the Yuan, is not a freely convertible currency. The PRC government
imposes controls on the convertibility of Renminbi into foreign currencies
and,
in certain cases, the remittance of currency out of the PRC. Shortages in
the
availability of foreign currency may restrict our ability to remit sufficient
foreign currency to pay dividends.
In
addition, under the terms of the certificate of designation which was filed
in
the office of Secretary of State for the State of Nevada on June 12, 2007 in
connection with the issuance of the Series A Preferred Stock, we are restricted
in paying dividends on our common stock.
Securities
Authorized for Issuance Under Equity Compensation
Plans.
We
currently do not have any equity compensation plans.
Penny
Stock Regulations
The
SEC
has adopted regulations which generally define "penny stock" to be an equity
security that has a market price of less than $5.00 per share. 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 June 10, 2008, there were 14,007,901 shares of our common
stock
issued and outstanding and 738,082 shares of Series A Preferred Stock (excluding
900,000 shares 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 738,082 shares of Series A Preferred
Stock issued in June 13, 2007 financing which have not yet been converted,
(ii)
the exercise of the other outstanding warrants to purchase an aggregate of
4,041,698 shares of common stock, there will be 19,250,831 shares of common
stock outstanding. Of these 19,250,831 shares (i) 5,160,649 shares are being
registered for resale in this prospectus, (ii) all of the 738,082 shares
of
Series A Preferred Stock outstanding may be sold without restriction under
Rule
144 by non affiliates, (iii) 3,952,025 shares were registered for resale
in a
registration statement declared effective on July 18, 2006, (iv) the 4,067,964
issued in the reverse merger may be sold subject to the requirements of Rule
144, (v) 508,734 shares underlying the class A warrants were registered for
resale in the registration statement declared effective on February 7, 2008
and
all of the 1,734,194 shares underlying the class A warrants currently
outstanding and all of the 1,774,194 shares underlying the class B warrants
may
now be sold if purchased by way of a cashless exercise.
Rule
144
In
general, under Rule 144 as currently in effect, a person other than an
affiliate, who has beneficially owned shares of common stock of a reporting
issuer for at least six months is entitled to sell such shares without further
limitations,
provided,
that
current
public information is available for such issuer for at least another six months.
Other
Registration Rights
Other
than the registration rights granted to (i ) the investors and placement
agent
in the February 2008 private placement and (ii) the June 07 investors (and
the
placement agent in that transaction) we have no other obligation to register
under the Securities Act any of our shares of common stock. The registration
rights granted to the June 07 investors require us to register all of the
shares
underlying the class A warrants and the class B warrants.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
INFORMATION - Management's Discussion and Analysis 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.
The
Company has two reportable segments namely solar heater/boiler related products
and heat pipe related products. The solar heater/boiler related products
are
mainly sold by Deli Solar (Bazhou) while the heat pipe related products are
energy-savings projects sold by 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.
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 manufacture of solar hot water systems for commercial
use. Its customers include factories, hospitals, schools and hotels. SZPSP’s
solar energy products include flat plate solar collectors, solar water heater
systems and central solar water heater systems.
Approximately
34% of our sales revenues for the three month period ended March 31, 2008
were
derived from sales of our solar water heaters and boiler related products
and
approximately 66% derived from sales of heat pipe related products.
F
or
the
fiscal year ended December 31, 2007, approximately 47% of our sales revenues
were derived from sales of our solar water heaters, approximately
34%
derived
from sales of our coal-fired boilers, space heating and other products and
approximately 19% derived from sales of heat pipe related products.
Approximately
88% of our sales revenues for both the three month period ended March 31,
2008
and the fiscal year ended December 31, 2007 were derived from sales made
to PRC
based customers and approximately 12% of our sales revenues were derived
from
the international market with 8% from Singapore and 4% from Taiwan.
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.
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 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.
Cash
Purchase Price
:
$4,087,832 (RMB 28,800,000) of the purchase price was paid in cash. This
cash
portion was based on an appraisal of SZPSP. The three shareholders agreed
to
loan the cash portion back to SZPSP to be used as working capital. Fifty
(50%)
of the principal amount of this loan is required to be repaid within one
year of
entry of the complementary agreement and the remaining balance is required
to be
paid off within two years.
Stock
Purchase Price
.
In
addition to the cash portion of the purchase price, the parties agreed to
an
additional consideration of RMB 20 million (approximately $2,839,458) to
represent the agreed-upon value of SZPSP’s intangible assets. The purchase price
for these intangible assets is required to be paid in 1,419,729 shares of
our common stock (based on the average closing price of the common stock
for the
30 days immediately preceding the execution of the Complementary Agreement
(the
“Share Price”), provided that if on March 31, 2009 (the first anniversary of the
closing) the common stock price is lower than the share Price, the Company
will
pay the difference. Fifty percent (50%) of these shares are transferable
and
unrestricted after March 31, 2009 and the remaining fifty percent (50%)
transferable after March 31, 2010. The shares are required to be transferred
to
SZPSP within 180 days of the closing.
Warrants.
In
addition, as part of the purchase price the sellers were issued five year
warrants to purchase 141,973 shares of common stock at an exercise price
of
$2.50 per share (subject to adjustment for stock splits and stock
dividends).
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 Shenzhens 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 March
31,
2008, we expect these assets to be fully recoverable.
RESULTS
OF OPERATIONS
Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007
Sales
Revenues
An
analysis of the Company’s revenues and gross profits for each segment are as
follows:
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
2,829,815
|
|
$
|
2,995,863
|
|
Heat
Pipe related products
|
|
|
5,470,261
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,300,076
|
|
$
|
2,995,863
|
|
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Gross
profit:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
574,893
|
|
$
|
746,948
|
|
Heat
Pipe related products
|
|
|
1,880,167
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,455,060
|
|
$
|
746,948
|
|
Overall:
Sales
revenues for the three months ended March 31, 2008 were $8,300,076 as compared
to $2,995,863 for the same period last year, an increase of $5,304,213 or
177%
compared to the same period in the prior year. The overall increase in sales
is
primarily attributed to the acquisition of Tianjin Huaneng and the commencement
of sale by us of its heat pipe related products.
Solar
Heater/Boiler Related Products
:
Sales
revenues for these products for the three months ended March 31, 2008 were
$2,829,815 as compared to $2,995,863 for the same period last year, a decrease
of $166,048, or 5.5%, compared to the same period in the prior year. The
decrease in sales of solar heaters and boiler related products was a result
of
lower prices and lower sales volume resulting from increased competition
in the
solar heater segment. We expect price competition to continue for the remainder
of 2008 and as a result we expect lower sales volume to continue.
Heat
Pipe Related Products:
Sales
revenues for the three months ended March 31, 2008 were $5,470,261 compared
to
nil for the same period last year. The sales of heat pipe related products
are
attributed to the acquisition of Tianjin Huaneng completed in July 1, 2007
and
our commencement to sell heat pipe related products.
Gross
Profit
Overall
:
Gross
profit for the three months ended March 31, 2008 was $2,455,060, an increase
of
$1,708,112, or approximately 229%, as compared to $746,948 for the three
months
ended March 31, 2007. Our gross margin (gross profit as a percentage of sales)
in the first three months in 2008 was approximately 30% compared to
approximately 25% in the same period last year. This is primarily due to
the
increase in the volume of sales of higher margin products such as heat pipe
related products due to the acquisition of Tianjin Huaneng.
Solar
Heater/Boiler Related Products
:
Gross
profit was $574,893, a decrease of $172,055 or 23% compared to the same period
in the prior year. The decrease in gross profit is caused by lower sales
prices
caused by increased price competition. Gross margin in the first three months
of
2008 was approximately 20% compared to the approximately 25% in the same
period
last year. We expect price competition to continue for the remainder of 2008
and
as a result we expect gross profit and gross margin on these products to
continue to decrease.
Heat
Pipe Related Products:
Gross
profit for the three months ended March 31, 2008 were $1,880,167 compared
to nil for the same period last year. Gross profit of heat pipe
related products is attributed to the acquisition of Tianjin Huaneng
completed in July 1, 2007 and our commencement of the sale of their products.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2008 were $1,253,383, as compared
to $473,323 for the same period in 2007, an increase of $780,060 or 164%.
The
overall increase in operating expenses was primarily due to the acquisition
of
Tianjin Huaneng as well as increased marketing and advertising activities
and
the selling expenses detailed below.
Depreciation
and amortization expense increased to $149,167 or 322% from $35,336 for the
same
period last year. The increase was mainly due to an increased depreciation
and
amortization expense of $109,066 as a result of the acquisition of Tianjin
Huaneng as well as increased depreciation expense of $40,101 as a result
of new
equipment used.
Selling
and distribution expense increased to $502,563, or 1041%, from $44,030 for
the
same period last year. The increase was mainly due to increased expenses
incurred on the development of sales network and training programs. Selling
expenses consisted of distribution and transportation expenses ($143,278),
agency administration expenses ($220,697) and after sales service $(138,588),
such as expenses for installation and replacements.
Solar
Heater/Boiler Related Products
:
Operating
expenses for the three months ended March 31, 2008 were $458,489 compared
to
$473,323 for the same period in 2007, a decrease of $14,834, or approximately
3.1%. The decrease in operating expenses was primarily due to decreased expenses
is explained below.
Depreciation
and amortization expense increased to $40,101 or 13% from $35,336 for
the same period last year. The additional expense was incurred by Deli Solar
(Bazhou) in connection with manufacturing property which it began using at
the
end of 2007.
Selling
and distribution expense increased to $144,484 or approximately 228%, from
$44,030 for the same period last year. The increased expense was used to
develop
the existing and new distribution network and increase and train more sales
force.
General
and administrative expense decreased to $273,904, or 30%, from $393,957 for
the
same period last year. General and administrative expenses mainly include
advertising expenses, salaries and benefits of management, business travel
expenses, office expenses and other general and administrative expenses.
Advertising expenses for the three months ended March 31, 2008 were $152,221
as
compared to $141,474 for the same period last year, an increase of $10,747,
or
approximately 8%. The increase in advertising expense was a result of our
emphasis on advertising to increase product awareness, branding and sales.
Management believes strengthening marketing is an effective method to increase
market share in the face of severe competition. Other general and administrative
expenses for the three months ended March 31, 2008 were $121,683 (including
office expense ($34,185), salary and benefits ($66,034), business travel
expense
($14,000) and miscellaneous payments ($7,464)), compared to $252,483 for
the
same period last year, a decrease of $130,800 or approximately 52%, resulting
mainly from a decrease in business travel expenses during the year.
Income
from Operations
Income
from operations for the three months ended March 31, 2008 was $1,201,677,
an
increase of $928,052 or approximately 339% as compared to $273,625 for the
three
months ended March 31, 2007. The increased income was due to the increased
sales
revenue attributable to the acquisition of Tianjin Huaneng and our commencement
of the sale of their products.
Net
Income
Net
income was $389,651 for the three months ended March 31, 2008, compared with
$275,282 in the same period last year, an increase of $114,369 or approximately
41.5%. The increase was primarily due to the increased sales attributable
to our
acquisition of Tianjing Huaneng.
2007
Compared to 2006
Because
our fiscal year is the calendar year, throughout this section we refer to
the
fiscal years ended December 31, 2007 and 2006 as “2007” and “2006,”
respectively.
Key
Items in 2007
Significant
financial items during 2007 include:
|
·
|
|
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.
|
Sales
Revenues
An
analysis of the Company’s revenues for each segment follows:
|
|
Fiscal Year Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
26,693,850
|
|
$
|
21,468,313
|
|
Heat
Pipe related products
|
|
|
7,002,015
|
|
|
0
|
|
Other
segments
|
|
|
3,376,481
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
Overall:
Sales
revenues increased to $37,072,346 for 2007 as compared to $21,468,313 for
2006,
an increase of $15,604,033 or 73%.
The
overall increase in sales is the result of (i) the acquisition of Tianjin
Huaneng and the commencement by us of the sale of their products which
contributed $7,002,015 to our sales revenues and (ii) our investment in
marketing, sales promotion of our solar water heaters and the development
of a
more extensive sales distribution network for our solar water heaters and
our
boiler related products discussed below.
Solar
Heater/Boiler Related Products
:
Sales
revenues of this product segment for 2007 increased to $26,693,850 from
$21,468,313 for 2006, an increase of about $5,225,537 or 24% over $21,468,313
for 2006. Approximately $17 million were derived from sales of solar hot
water
heaters, a 35% increase from 2006; approximately $9 million was derived from
sales of coal-fired boilers and space heating products, about a 9% increase
as
compared to 2006.
The
increase in sales of solar heaters and boiler related products was a result
of
our investment in marketing and sales promotion and the development of a
more
extensive sales distribution network for our solar water heaters and our
boiler
related products. The increase in sales revenues was not associated with
a one
time event. The increase in sales is not the result of an increase in sales
prices of our products but the result of increased sales volume. On the contrary
the sales prices for our s
olar
heater and boiler related products have been declining due to increased
competition.
Going
forward we believe that the continued organic growth of revenue of this segment
will be negatively impacted by increased competition in the solar heater
segment
which is causing us to lower our prices. We expect price competition to continue
for the next year and we expect sales revenues on this product segment to
decrease.
Heat
Pipe Related Products:
Sales
revenues for 2007 were $7,002,015 compared to nil for the same period last
year.
The sales of heat pipe related products are attributed to the acquisition
of
Tianjin Huaneng completed in July 1, 2007 and our commencement to sell heat
pipe
related products.
Other
segments:
Sales
revenues for 2007 were $3,376,481. Other segments refer to solar lighting
and
spare parts/components which account for less than 10% of the total
revenue.
Cost
of Revenue
Overall
:
In line
with the 73% increase in our overall sales, our costs of goods sold were
$28,772,078 for 2007, an increase of $11,929,084 or 71% from $16,842,994
for
2006.
Solar
Water Heaters and Boilers
:
Our
cost of revenue increased to $21,021,407, or 79% of sales, an increase of
$4,178,413 or 25% from $16,842,994 for 2006.
Although
sales revenues increased by 24% for 2007 over 2006 costs of revenues increased
by 79% due mainly to the cost of raw materials. Management believes this
trend
will continue. The Company is endeavoring to minimize its product costs by
reducing our manufacturing overhead and reducing waste to keep its product
prices competitive.
Heat
Pipe Related Products:
Our
cost
of revenue was $5,181,491 or 74% of sales compared to nil for the prior year.
Other
Segments:
Cost
of
revenues for 2007 were $2,569,180 or 76% of sales. Other segments refer to
solar
lighting and spare parts/components which are less than 10% of the total
cost of
revenue.
Gross
Profit
|
|
Fiscal Year Ended
December 31
|
|
|
|
2007
|
|
2006
|
|
Gross
profit:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
5,672,443
|
|
$
|
4,625,319
|
|
Heat
Pipe related products
|
|
|
1,820,524
|
|
|
0
|
|
Other
segments
|
|
|
807,301
|
|
|
0
|
|
|
|
$
|
8,300,268
|
|
$
|
4,625,319
|
|
Overall
:
Gross
profit for 2007 was $8,300,268, compared to $4,625,319 for 2006. The increase
in
gross profit resulted primarily from the increase in sales revenue from the
sales of additional solar water heaters and boilers discussed below. We also
commenced selling Tianjin Huaneng’s products.
Gross
margin (gross profit as a percentage of sales) in 2007 was approximately
22.4%
compared to approximately 21.5% in 2006. The profit margin in 2007 increased
slightly over 2006 due to the acquisition of Tianjin Huaneng whose products
have
higher profit margins than our other products. The profit margins on our
solar
heaters have been falling because of market pressure to keep our prices
competitive. We are facing severe price competition in the traditional solar
water heater market. We expect price competition to continue through the
end of
2008. As a result, we expect our gross profit margin for our solar water
heaters
to continue to decrease. However, we anticipate that Tianjin Huaneng’s energy
saving boilers and environmental protection equipment will generate better
gross
profit margins to offset the decline in our profit margins for solar water
heaters and residential boilers. The gross margin on the sale of the Tianjin
Huaneng’s products was 26% in 2007.
Solar
Heater/Boiler Related Products
:
Gross
profit from this segment was approximately $5,672,443 in 2007, about a 22.6%
increase compared to the prior year of approximately $4,625,319. The increase
in
gross profit is due to the increase in sales volume of products. In 2007,
we
sold approximately 147,500 solar water heaters and 108,800 boiler heaters
compared to 133,000 solar water heaters and 99,000 boiler heaters in 2006.
However,
gross profit margin for this segment decreased slightly in 2007 to 21.2%
compared to the approximately 21.5% in 2006. The profit margins on our solar
heaters have been falling because of increased competition causing us to
lower
our prices. We are facing severe price competition in the traditional solar
water heater market. We expect price competition to continue through the
end of
2008. As a result we expect gross profit margin for our solar water heaters
to
continue decrease. Accordingly to deal with this trend management intends
to
invest more in R & D to develop a new high tech product and focus on
flat-plate solar panels for commercial and industrial customers instead of
traditional evacuated tube solar water heaters for residential customers.
Heat
Pipe Related Products:
Gross
profit on the sale of heat pipe related products was $1,820,524 which was
attributed to the acquisition of Tianjin Huaneng. Gross margin (gross profit
as
a percentage of sales of these products) was approximately 26%. We anticipate
that Tianjin Huaneng’s energy saving boilers and environmental protection
equipment will generate better gross profit margins to offset the decline
in our
profit margins for solar water heaters and residential
boilers.
Other
Segments:
Gross
profit for other segments for 2007 were $807,301. Other segments refer to
solar
lighting and spare parts/components which are less than 10% of the total
gross
profit.
Segment
assets
Assets
in
solar heater were $18,690,225, about a 47% increase as compared to 2006 of
approximately 12,716,185. The increase is in line with increase in sales
generated from solar heater.
Assets
in
heat pipe were $9,029,994 compared with nil balance in 2006, the increase
was
mainly due to acquisition of Tianjin Huaneng.
Assets
in
other segments of $2,919,494 refer to solar lighting products and sales of
spare
parts/ components which are less than 10% of the total
assets.
Operating
Expenses
Operating
expenses increased to $5,114,634 for 2007 as compared to $3,414,707 for 2006.
This represented an increase of $1,699,927 or about 50%. The overall increase
in
operating expenses was primarily due to the acquisition of Tianjin Huaneng
(whose operating expenses amounted to $1,721,729) as well as increased selling
and distribution expenses described below (which amounted to $827,839) and
increased advertising expenses which amounted to $1,415,493.
Selling
and distribution expenses increased to $827,839 from $459,746 for 2006 (or
2.2%
of sales) an increase of $368,093, or 80%. These selling and distribution
expenses consisted primarily of non cash sales promotion expenses ($127,365),
outbound distribution expenses ($177,413), traveling and transportation expenses
($166,319), agency administration expenses ($268,653) and after sales services,
such as expenses for installation and replacements ($88,089). The increase
in
selling and distribution expenses was primarily the result of our acquisition
of
Tianjin Huaneng (whose selling and distribution expenses were
$125,912.)
General
and administrative expenses were $4,003,973 for 2007 (or approximately 11%
of
sales) compared to $2,800,015 (or approximately 13% of sales) for 2006. The
net
increase of $1,203,958 was mainly due to the acquisition of Tianjin Huaneng
which had general and administrative expenses of $1,486,751. This was offset
by
the decrease in general and administrative expenses by Deli Solar (Bazhou)
of
approximately $0.3 million. Deli Solar (Bazhou) and Deli Solar (Beijing)’s
expenses were approximately $1,852,430 and the Company at the U.S. level
incurred a total of $664,792 which included legal fees of approximately
$340,197. General and administrative expenses include advertising expenses
and
salaries and benefits.
|
·
|
Advertising
expenses (which is a component of our general and administrative
expenses
line item) for 2007 were $1,415,493 as compared to $1,106,488 for
2006, an
increase of $309,005 or approximately 28%. The increase in advertising
expense was a result of our acquisition of Tianjin Huaneng (whose
advertising expenses were $30,687) as well as our continued spending
on
advertising to increase our product awareness, branding and sales
of our
solar water heaters and boilers). We believe that through advertising
and
marketing, we will able to face our competition and generate greater
market share for our products.
|
|
·
|
Salaries
and benefits (which is also a component of our general and administrative
expenses line item) increased from $279,069 for 2006 to $454,012
for 2007,
an increase of $174,943 or 63% from the same corresponding period
last
year. The increase reflects the addition of 550 employees as a
result if
the Tianjin Huaneng acquisition. Per employee, salaries and benefits
decreased from $1,188 for 2006 to $890 for 2007, a decrease of
$298 or 25%
from the same corresponding period last
year.
|
Depreciation
and amortization expense for 2007 increased by $127,876 to $282,822 or 83%
from
$154,946 for 2006. The increase was due to an increased depreciation and
amortization expense of $109,066 as a result of the acquisition of Tianjin
Huaneng as well as increased depreciation expense of $18,810 as a result
of new
equipment used.
Income
from Operations
Income
from operations for 2007 was $3,185,634 , an increase of $1,975,022 or 163%
as
compared to $1,210,612 for 2006. The increased operating income was due to
the
increased sales revenue and the acquisition of Tianjin Huaneng and our
commencement of the sale of their products. As a percentage of sales, operating
income was 8.59% in 2007 as compared to 5.64% for 2006. 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.
Net
Income
Net
income was $2,525,141 for 2007, compared with $1,239,501 for 2006, an increase
of $1,285,640 or approximately 104%. The increase was primarily due to increase
in sales volume of the exiting products and increased sales attributable
to our
acquisition of Tianjin Huaneng.
Minority
Interests
Minority
interests of $199,744 arise as of December 31, 2007 primarily due to share
of
profits by minority interests from consolidation with Tianjin
Huaneng.
Income
Taxes
We
did
not carry on any business or maintain any branch office in the United States
during 2007 or 2006. Therefore, no provision for U.S. federal income taxes
or
tax benefits on the undistributed earnings and/or losses has been
made.
Normally
a PRC company is subject to enterprise income tax at the rate of 33%, value
added tax at the rate of 17% for most of the goods sold, and business tax on
services at a rate ranging from 3% to 5% annually. However, pursuant to the
applicable laws and regulations in the PRC, Deli Solar (Bazhou), and Deli Solar
(Beijing) as wholly foreign owned enterprises (“WFOEs”) in the PRC, are entitled
to an exemption from the PRC enterprise income tax for two years commencing
from
its first profitable year, after loss carry-forwards from the previous five
years have been recovered. Since Deli Solar (Bazhou) was converted into a WFOE
in March 2005, it enjoyed a two-year tax-exempt treatment in the PRC which
ended
on March 31, 2007. Since then it has been subject to 50% of its enterprise
income tax from 2007 until 2010. Our direct subsidiary, Deli Solar (Beijing),
had a net loss for 2007. Consequently, it did not incur income tax. Tianjin
Huaneng is domestically owned and subject to the Corporate Income Tax governed
by the Income Tax Law of the People’s Republic of China, at a statutory rate of
33%, which is comprised of a 30% national income tax and 3% local income
tax.
LIQUIDITY
AND CAPITAL RESOURCES
Net
cash
used in operating activities was $4,104,527 for the three months ended March
31,
2008, and net cash provided by our operating activities was $909,192 for
the
same period of 2007. The increase in net cash used by operations was mainly
due
to an increase in advances made to suppliers ($1,602,232) and increase in
payments made to creditors ($2,502,295). Net cash provided by our operating
activities was $4,673,831 for 2007, an increase of $3,420,933 or approximately
273% from $1,252,898 for 2006
Net
cash
used in investing activities was $730,974 for the three months ended March
31,
2008, compared with $154,617 for the same period of 2007. The increase was
due
to the purchase of new facilities and assembly lines in connection with the
Tianjin Huaneng acquisition. Net cash used in investing activities was
$5,419,926 for 2007, an increase of $1,415,518 or approximately 35% compared
with 2006. The increase is mainly due to the increase in purchase of property,
plant and equipment associated with the acquisition of Tianjin Huaneng in
July
2007.
Net
cash
provided by financing activities was $10,102,656 for the three months ended
March 31, 2008, compared with nil for the same period of 2007. The increase
was
due to the purchase of 4,691,499 shares of common stock by the investors
in our
February 2008 private placement and the exercise of 75,000 warrants. Net
cash
(used in) provided by financing activities was $2,400,306 for 2007, an increase
of $2,425,251 from $(24,945) from 2006. The increase was due to the issuance
of
preferred stock in June 2007. On June 14, 2007 we raised net sale proceeds
of
$2,581,000 in a private placement of our Series A Preferred Stock and warrants.
Investors purchased an aggregate of 1,774,194 shares of our Series A Preferred
Stock. Each share of Series A Preferred Stock is convertible into one share
of
our common stock, subject to adjustment. Additional shares of Series A Preferred
Stock (not to exceed 900,000) are required to be issued to the investors
in the
event that we fail to achieve certain income targets for the fiscal years
ended
December 31, 2007 and 2008. We achieved the income target for the year ended
December 31, 2007.
As
of
March 31, 2008, the Company did not have long term or short term
debt.
We
believe that current cash will be sufficient to meet anticipated working
capital
and capital expenditures for at least the next twelve months. However, we
need
to require additional cash resources for future developments of business,
including any investments or acquisitions we may decide to pursue. However,
we
cannot assure you that such funding will be available
Cash
Cash
and
cash equivalents increased to $10,733,793 at March 31, 2008 from $5,466,637
at
December 31, 2007, primarily as a result of the receipt of net proceeds of
$9,995,156 from our private placement of our common stock. We used $4.1
million on increasing our working capital and $0.7 million on increasing
manufacturing facilities. We intend to use our available funds to increase
our
working capital and to make additional acquisitions. We believe that our
available funds will provide us with sufficient capital for the next twelve
months. However, if we make further acquisitions or establish additional
production facilities, we may require additional capital for the acquisition
or
for the operation of the combined companies. We cannot assure you that such
funding will be available.
Accounts
Receivable
During
the three months ended March 31, 2008, accounts receivable decreased to
$7,116,825 from $7,453,009 as of December 31, 2007, primarily due to our
active
collection efforts.
During
2007, accounts receivable increased to $7,453,009 from $870,446 at the end
of
2006, primarily due to consolidation with Tianjin Huaneng. Tianjin Huaneng
has a
large balance of accounts receivable. The majority of Tianjin Huaneng’s sales
are on credit terms in accordance with terms specified in the contracts
governing the relevant transactions. We evaluate the need for an allowance
for
doubtful accounts based on specifically identified amounts that we believe
to be
uncollectible. If actual collections experience changes, revisions to the
allowance may be required. Based upon the aforementioned criteria, the
allowances for doubtful accounts for 2007 were $650,432.
Inventory
Inventories
as of March 31, 2008 increased to $4,065,773 from $3,875,658 as of December
31,
2007 principally because of our preparation for the second quarter of 2008
which
is the peak selling season for all of our products.
Inventories
as of December 31, 2007 increased to $3,875,658 from $315,765 as of December
31,
2006 primarily due to consolidation with Tianjin Huaneng. The inventory mainly
consists of finished goods waiting for transportation or installation.
Other
Receivables And Prepayments
Other
receivables and prepayments as of March 31, 2008 increased to $4,959,380
from
$1,637,948 as of December 31, 2007. Other receivables and prepayments mainly
consist of advances to suppliers, prepaid expenses and deposits.
Other
receivables and prepayments as of December 31, 2007 increased to $1,637,948
from
$1,387,911 as of December 31, 2006. Other receivables and prepayments mainly
consist of advances to suppliers, prepaid expenses and customers’
deposits.
Accounts
Payable
Accounts
payable as of March 31, 2008 decreased to $1,254,717 from $2,111,028 as of
December 31, 2007 primarily due to payments made to creditors under the term
of
credit agreements.
Account
payable as of December 31, 2007 increased to $2,111,028 from $147,901 as
of
December 31, 2006 primarily due to consolidation with Tianjin
Huaneng.
Other
Payables And Accrued Liabilities
Other
payables and accrued liabilities as of March 31, 2007 decreased to$6,906,468
from $8,552,452 as of December 31, 2007. The decrease is mainly contributed
from
decrease in accrued expenses, customer deposits, and other payable and deferred
revenue.
Other
payables and accrued liabilities as of December 31, 2007 increased to $8,552,452
from $342,811 as of December 31, 2006 primarily due to consolidation with
Tianjin Huaneng. The increase is mainly contributed from increase in accrued
expenses, customer deposits, other payable, taxes payable and deferred revenue.
BUSINESS
Business
Overview
We
are
engaged in the solar and renewable energy business in the People's Republic
of
China (“PRC”).
Our
business is conducted through our wholly-owned PRC based operating subsidiaries,
Deli Solar (Bazhou), Deli Solar (Beijing) and our recently acquired 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 and Taiwan.
SZPSP,
which we acquired effective March 31, 2008, is principally engaged in the resale
of energy-saving heating products such as heat pipes, heat exchangers, pressure
water boilers, solar energy water heaters and radiators. Currently, SZPSP
is also operating a distribution facility in Shenzhen, PRC. This acquisition
will add to the assortment of solar water products which we have available
for
sale.
Approximately
34% of our sales revenues for the three month period ended March 31, 2008
were
derived from sales of our solar water heaters and boiler related products
and
approximately 66% derived from sales of heat pipe related products.
F
or
the
fiscal year ended December 31, 2007, approximately 47% of our sales revenues
were derived from sales of our solar water heaters, approximately
34%
derived
from sales of our coal-fired boilers, space heating and other products and
approximately 19% derived from sales of heat pipe related products.
For
both
the three month period ended March 31, 2008 and 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, with 8% from Singapore and 4% for Taiwan.
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 81% of our total solar water heater revenues for the three
month
period ended March 31, 2008 and 85% of our total solar water heater revenues
for
2007. This type of solar water heater can generate hot water even in cold
weather and therefore can be used throughout the year. Further, these water
heaters are relatively easy and inexpensive to produce compared to other
solar
hot water heaters using other types of vacuum collectors. Because our primary
market is in rural areas of the PRC, our regular evacuated tubular solar
water
heaters annually account for most of our sales.
Boilers
We
also
manufacture boilers, furnaces, stove heating, and space heating products. Most
of our boilers and space heating products are coal-fired, small scale units
for
residential space heating and cooking.
Approximately
34% of our sales revenues for the three month period ended March 31, 2008
and
72% of our total sales revenues in 2007 were derived from sales of our solar
water heaters and boiler related products. Approximately 66% of our sales
revenues for the three month period ended March 31, 2008 were derived from
sales
of heat pipe related products.
Heat
Pipe Related Products
We
also
manufacture waste heat recovery systems, heating products such as heating pipes,
heat exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators.
Sales
of
these products and systems comprised approximately 66% of our total sales
revenues for the three month period ended March 31, 2008 and approximately
19%
of our total sales revenues in 2007 (from July 1, 2007 the date of
acquisition).
Recent
Developments.
February
2008 Private Placement
On
February 29, 2008 we raised gross proceeds of approximately $11,300,000 in
a
private placement providing for the sale of 4,691,499 shares of common stock
at
a price of $2.40 per share.
In
connection with the transaction we agreed to issue to Roth Capital Partners
LLC
as placement agent, warrants to purchase 469,150 shares of common stock
exercisable for a period of five years at an exercise price equal to $2.88
per
share and we paid them a transaction fee of 7% of the gross proceeds of the
transaction or approximately $790,000. On February 25, 2008, the closing
price of the common stock as quoted on the OTCBB was $2.69. For more information
relating to the terms of this private placement, reference is made to “Selling
Stockholders - Background.”
Acquisition
of Shenzhen PengSangPu Solar Industrial Products
Corporation
On
January 9, 2008 Deli Solar (Beijing) entered into an equity purchase agreement
and a complementary agreement with Shenzhen PengSangPu Solar Industrial Products
Corporation (“SZPSP”) and its shareholders to acquire 100% of the outstanding
equity interests of SZPSP from its three shareholders. The closing occurred
on
March 31, 2008.
SZPSP
was
incorporated as a limited liability company under the laws of the PRC on
September 23, 1993. Its registered capital was Renminbi Yuan (“RMB”)
2,650,000 (equivalent to $365,916) which was contributed by its three
shareholders. On July 13, 2006, the registered capital increased to $1,767,443
(RMB 12,800,000).
SZPSP
specializes in the manufacture of solar hot water systems for commercial
use.
Its customers include factories, hospitals, schools and hotels. SZPSP’s solar
energy products include flat plate solar collectors, solar water heater systems
and central solar water heater systems. It acquired ISO9001: 2000 international
quality system accreditation in 2004. Currently, SZPSP is also operating
a
distribution facility in Shenzhen, PRC. SZPSP had sales revenues of $393,920
for
the three month period ended March 31, 2008 and sales revenues of $3,215,282
for
2007.
The
purchase price consisted of $4,087,832 (RMB 28,800,000) in cash, 1,419,729
shares of our common stock, and five year warrants to purchase 141,973 shares
of
common stock at an exercise price of $2.50 per share (subject to adjustment
for
stock splits and stock dividends). The cash portion was based on the net
asset
value of SZPSP. The three shareholders agreed to loan the cash purchase price
back to the Deli Solar (Beijing) interest free to be used as working capital.
Fifty (50%) of the principal amount of this loan is required to be repaid
within
one year of the closing and the remaining balance is required to be repaid
within two years. In addition to the cash purchase price, we paid RMB 20
million for SZPSP’s trademarks and other intangible assets which was paid in
1,419,729 shares of our common stock. We agreed that if on the first anniversary
of the closing our common stock price is lower than the share price ($2),
we
will pay the difference.
SZPSP
warranted that if (i) for the year ended December 31, 2008 its sales
revenues are less than RMB 99 million (approximately $13,670,068) or its
after-tax net profits are less than RMB 9.43 million (approximately $1,302,108);
or (ii) for the year ended December 31, 2009, sales revenues are less than
RMB
143.9 million (approximately $19,868,336) or its after-tax net profits are
less
than RMB 12.13 million (approximately $1,674,789), SZPSP will pay the difference
between the revenue and the targeted revenue of the year specified by reducing
the amount payable on the shareholders’ loan. If the shareholders’ loan is not
sufficient to pay the difference, the common shares held by SZPSP will be
returned to us to the extent necessary for the remaining balance.
The
management of SZPSP, have entered into employment contracts with us for a
term
of three years to remain in their current managing positions of SZPSP.
Acquisition
of Tianjin Huaneng
On
May
18, 2007, Deli Solar (Beijing) entered into an agreement with Tianjin Municipal
Ji County State-owned Assets Administration Commission (the “SAAC”) to purchase
51% of the equity interests in Tianjin Huaneng Group Energy Equipment Co.,
Ltd.
(“Tianjin Huaneng”) for a purchase price of RMB24,100,000 (approximately
$3,149,147). The transaction closed on July 1, 2007 and we paid approximately
$1,575,600 in July 2007. By supplemental agreement between the parties dated
August 8, 2007, the purchase price was reduced to approximately $1,689,741.
However in addition to the purchase price we paid a finder’s fee to Tianjin
Wangshitong Corporate Consulting Co, Ltd , an unrelated party, of approximately
$769,418. At the closing Deli Solar (Beijing) assumed 51% of the liabilities
of
Tianjin Huaneng. In addition, we contributed RMB20,000,000 (approximately
$2,613,400) as working capital to the acquired company. Deli Solar (Beijing)
also agreed to employ the 550 current Tianjin Huaneng employees pursuant
to new
three year employment contracts.
Tianjin
Huaneng had sales revenues of approximately $11 million for 2006 and sales
revenues of approximately $3.7 million for six month period ended June 30,
2007.
For the six month period beginning July 1, 2007 and ending December 31, 2007,
Tianjin Huaneng had sales of $9,592,056
which
represented 26% of our total sales revenues for 2007.
Tianjin
Huaneng, incorporated in 1987, is a state-owned enterprise with 51% of its
equity formerly-owned by SAAC and 49% owned by the employees.
Tianjin
Huaneng manufactures heating products such as heating pipes, heat exchangers,
specialty heating pipes and tubes, high temperature hot blast stoves, heating
filters, normal pressure water boilers, solar energy water heaters and
radiators.
Tianjin
is a city in the PRC which is approximately 50 miles from Beijing and has a
population of approximately 10.24 million (as of December 31, 2004), and is
one
of only four municipal cities directly governed by the central government in
China.
June
2007 Private Placement
On
June
13, 2007 we raised $2,750,000 in a private placement providing for the sale
to
the investors for an aggregate purchase price of $2,750,000 (or $1.55 per share)
of
(i)
|
1,774,194
shares of Series A Preferred Stock (with each share convertible into
one
(1) share of common stock, subject to
adjustment)
|
(ii)
|
five
year class A warrants to purchase 1,774,194 shares of common stock
at an
exercise price $1.90 per share (subject to adjustment), and
|
(iii)
|
five
year class B warrants to purchase an additional 1,774,194 shares
of common
stock at an exercise price of $2.40 per share (subject to adjustment).
|
On
June
13, 2007, the closing price of the common stock as quoted on the OTCBB was
$2.10.
As
of
June 10, 2008, 1,036,112 of the Series A Preferred Stock have been converted
and
sold in the public market and 40,000 of the class A warrants have been exercised
and sold.
Change
of Name
Effective
October 29, 2007, we changed our name from Deli Solar (USA), Inc. to China
Solar
& Clean Energy Solutions, Inc. We believe that the new name better reflects
the direction of the business. The name change was completed by means of a
short
form merger under the Nevada law under which Du Solar, Inc., our wholly
owned subsidiary, merged into us. We survived as the surviving corporation
and
we effected the name change in connection with that merger. No shareholder
approval was required for the short form merger and the related name change.
The
name change became effective with the OTCBB at the opening of trading on
November 5, 2007 under the new stock symbol “CSOL.OB.” Our new CUSIP number is
16943E 105.
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.
As
of
June 10, 2008 we had approximately 1,106 full time employees and 71 part
time
employees.
Deli
Solar (Bazhou) requires each employee to enter into a one-year standard
employment agreement. Tianjin employees have three year agreements. The standard
employment agreement contains a confidentiality clause and a
covenant-not-to-compete clause, under which an employee must keep confidential
all manufacturing technology including drawings and other technology materials,
sales and financial information, and trade secrets obtained through his or
her
employment with us. Breach of this confidentiality clause will result in
termination of employment. Further, each employee may not compete against us
for
a certain period of time following the termination of employment with us. We
purchase group workers' compensation policy on behalf of our employees, and
the
premium is deducted from each employee's paycheck.
Executive
Offices
Our
executive office is located at Building 3, No. 28 Feng Tai North Road, Beijing,
China, 100071 and our telephone number is +86-10-63850516. Our factory
facilities are located outside of the city of Bazhou in the Hebei Province
of
the PRC in Shenzhen and in Tianjin.
Products
We
manufacture solar water heaters, 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
21% of our total revenues for the three month period ended March 31, 2008
were
derived from sales of our solar hot water heaters compared to 47% of our
total
revenues for 2007 and 60% of our total revenues for 2006.
We
manufacture two types of solar hot water heaters: evacuated tubular solar water
heaters and flat plate solar water heaters.
Among
evacuated tubular solar water heaters, regular evacuated tubular solar water
heaters using all-glass vacuum collectors are our best selling product,
comprising approximately 81%
of
our
total solar water heater revenues for the three month period ended March
31,
2008 and approximately 85%
of
our
total solar water heater revenues for 2007. This type of solar water heater
can
generate hot water even in cold weather and therefore, can be used throughout
the year. Further, they are relatively easy and inexpensive to produce compared
to other solar hot water heaters using other types of vacuum collectors.
Because
our primary market is in rural areas of the PRC, our regular evacuated tubular
solar water heaters account for most of our sales of solar water heaters.
Solar
hot
water heaters use sunlight to heat either water or a heat-transfer fluid in
collectors. The solar collector is mounted on or near a house facing south.
As
sunlight passes through the collector's glazing, it strikes an absorbing
material. This material converts sunlight into heat, and the glazing prevents
the heat from escaping. The two most common types of solar collectors used
in
solar water heaters in the PRC market are evacuated tube collectors and glazed
flat plates.
Solar-heated
water is stored in an insulated tank until use. Hot water is drawn off the
tank
when tap water is used, and cold make-up water enters at the bottom of the
tank.
Solar water heaters tend to have a slightly larger hot water storage capacity
than conventional water heaters. This is because solar heat is available only
during the day and sufficient hot water must be collected to meet evening and
morning requirements.
We
produce and sell solar hot water heaters using both evacuated tube collectors
and glazed flat plate. Evacuated tubular solar water heaters are our principal
solar products. There are two major types of evacuated tubular solar water
heaters: standard evacuated tubular solar water heaters and evacuated heat
pipe
solar water heaters.
The
following table sets forth our product types and the approximate percentage
of
the sales of each type for 2007:
Types
|
|
Approx. % of
water heater
revenues
|
|
Sub-types
|
|
Approx. % of
total solar product
revenue
|
|
|
|
|
|
|
|
|
|
Evacuated
Tubular Solar Water Heaters
|
|
|
90
|
%
|
Regular
Evacuated Tubular Solar Water Heaters
|
|
|
85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evacuated
Heat Pipe Solar Water Heaters
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
Flat
Plate Solar Water Heaters
|
|
|
10
|
%
|
|
|
|
N/A
|
|
Evacuated
Tubular Solar Water Heaters
This
line
of products represents about 5% of our sales revenues from solar water heaters
in 2007. They can generate hot water all year round for homes, whether or not
they are located in a cold climate. There are two types of vacuum tube water
heaters currently available: (i) the regular evacuated tubular solar water
heaters; and (ii) evacuated heat-pipe solar water heaters. Our regular evacuated
tubular solar water heaters use all-glass vacuum tubes, and our evacuated heat
pipe solar water heaters use heat pipe vacuum tubes. The primary use of our
evacuated tubular solar water heaters is to generate hot water for household
use. However, solar thermal energy can also be employed in industrial processes,
timber treatment, agricultural processes, cooling and space heating.
All
glass:
Our
regular evacuated products use all-glass evacuated tubular collectors. These
collectors consist of rows of parallel transparent glass tubes, which are double
layered and made of borosilicate glass. Each tube contains an absorber and
is
covered with a selective coating. Sunlight enters the tube, strikes the
absorber, and heats the water flowing through the absorber. The space between
the glass tubes and the absorber is "evacuated," or is a "vacuum". This vacuum
helps the collectors achieve extremely high temperatures (170-350 degrees F).
Because all-glass evacuated tubular collectors are relatively easy and cheap
to
make as compared to heat pipe vacuum tubes, our regular evacuated tubular solar
water heaters are our best selling solar hot water heater and comprise
approximately 85% of our solar water heaters sales.
Heat
Pipe:
Our
evacuated heat pipe solar water heaters comprise approximately 5% of our solar
hot water heaters sales. These solar water heaters use heat pipe vacuum tubes
to
convert solar energy into thermal energy. A heat pipe vacuum tube is a
hermetically sealed evacuated tube containing a mesh or sintered powder wick
and
a working fluid in both the liquid and vapor phase. When one end of the tube
is
heated the liquid turns to vapor absorbing the latent heat of vaporization.
The
hot vapor flows to the colder end of the tube where it condenses and gives
off
heat. The use of the latent heat of the fluid enables heat to be transferred
at
500 to 1000 times the rate compared with a solid metal rod and at temperature
differences between the ends of the pipe as low as 2 °C (i.e. 3.6°F difference).
The heat-pipe vacuum tube is a combined pipe and vacuum technology. This product
line features fast heating, minimum thermal loss, high temperature resistance,
anti-freeze and good pressure resistance. Evacuated heat pipe solar water
heaters, if pressurized, can produce high pressure hot water which provides
a
solution where uneven temperature is a problem. Our pressurized evacuated heat
pipe solar water haters can be customized according to actual needs of our
customers. Moreover, heat pipe vacuum tubes are more difficult to manufacture
and have higher production costs than all-glass vacuum tubes. Given our targeted
residential household market, we only sell a limited amount of evacuated heat
pipe solar water heaters.
Flat
Plate Solar Water Heaters
Our
sales
of this product comprise approximately 10% of our total solar hot water heater
sales for 2007.
This
type
of solar water heater consists of a flat-plate solar collector and a hot water
tank with natural circulation (thermosyphon). The collector is constructed
from
either a copper-aluminum mix, all copper, or anti-corrosive aluminum. The
collector is a rectangular box with a transparent cover and a back side
insulation layer. Small tubes run through the box and carry fluid-either water
or other fluid, such as an antifreeze solution. The tubes attach to the
collector.
As
heat
builds up in the collector, it heats the fluid passing through the tubes. The
hot water or liquid goes to a storage tank. Flat plate solar water heaters
made
by foreign manufacturers typically can provide a household with 70-100 liters
of
hot water (at 40-60°C) per day all year round. However, the anti-freeze
technology for the flat plate has not fully developed in the PRC. Our flat
plate
solar hot water heaters, and to our knowledge, other flat plate solar hot water
heaters that are currently available in China, can be used only during the
spring, summer and fall seasons.
Integrated
Solar Heating Packages
A
number
of our products are being used in complete building integrated solar heating
packages, which integrate our solar hot water and space heating systems directly
into the construction of new multi-family dwellings, commercial office buildings
and industrial developments. In August 2005 we entered into a construction
agreement with Beijing Municipal Mengtougou District Yingtaogou Village
Committee to install our solar hot water and space heating systems in 83
detached houses by March 30, 2007. As of December 31, 2006 we completed the
installation of our solar hot water and space heating systems in 16 of such
houses. The project continues to be suspended due to a payment default.
Boilers
and Space Heating Products
We
also
manufacture boilers, furnaces, stove heating, and space heating products,
comprising approximately 27% of our total sales revenues in 2007.
Most
of
our boilers and space heating products are coal-fired, small scale units for
residential space heating and cooking.
We
manufacture more than 80 types of boilers, furnaces, space heating and stove
cooking products. Separated by functions and use, our boilers, furnaces and
stove heating products can be divided into three types: 1) combined cooking
and
space heating, comprising approximately 60% of our sales of boilers and space
heating products, 2) combined shower and space heating, comprising approximately
10% of our sales of boiler and space heating products, and 3) multifunctional
shower, cooking and space heating, comprising approximately 30% of our sales
of
boilers and space heating products.
We
have
also developed two environmentally friendly boilers: smokeless coal-fired
boilers and bio-materials furnaces. The former does not produce smoke and the
latter utilizes waste materials such as dry hay to generate heat. The
development of these products has been completed and we have sent samples of
these products to our distributors. As of the date of this report we have not
made significant sales of these environmentally friendly new
products.
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 of RMB 5 million for the three month period ended
March 31 2008.
Raw
Materials and Principal Suppliers
The
primary raw materials for manufacturing our products are stainless steel plate,
vacuum tubes, iron and regular steel plate. These raw materials are generally
available on the market and Deli Solar (Bazhou) has not experienced any raw
material shortage in the past. Because of the general availability of these
raw
materials, it has not been our standard practice to enter into long-term
contracts or arrangements with most of our raw materials suppliers. We believe
that this gives us the flexibility to select the most suitable suppliers based
on product quality and price terms provided by suppliers each year. We generally
have at least three suppliers that are pre-approved for each raw material
supply. However, this arrangement does not provide any guarantee that necessary
raw materials will continue to be available at prices or delivery terms
acceptable to us.
During
the past three years, we have purchased stainless steel plate primarily from
Lingyi Co. in Shangdong Province. Our three principal suppliers of vacuum tubes
have been Shangdong Taian Co., Beijing Linuo Co. and Beijing Tianpu Co. Our
principal supplier of steel and iron plate has been the local market in Bazhou
City, where Deli Solar (Bazhou) is located, which has approximately 100 steel
suppliers. We do not rely on any particular suppliers to procure other raw
materials.
Heat
Pipe Related Products
Tianjin
Huaneng manufactures and installs waste heat recovery systems primarily for
customers in the steel and chemical industries. Tianjin Huaneng’s products
include heat pipe and heat pipe related products such as heat exchangers,
specialty heating pipes and tubes, high temperature hot blast stoves and
radiators. The waste heat can be used to generate hot water or steam for
residential, commercial and industrial uses.
Manufacturing
Process, Cost, and Capacity
Deli
Solar (Bazhou) assembles and manufactures most of its products in its own
production facility in Bazhou. Tianjin Huaneng assembles and manufactures
most
of its products in its own production facility in Tianjin. SZPSP assembles
and
manufactures most of its products in its own production facility in Shenzhen.
Our senior manufacturing personnel include a number of professional engineers
and senior technology consultants. We primarily use manual labor for our
product
because of availability of cheap labor in the Bazhou area. However, Deli
Solar
(Bazhou) is in the process of automating some of its production processes.
In
February 2006, Deli Solar (Bazhou) purchased an automated production line
for
the manufacture of water tanks. That production line has been assembled,
tested
and validated and has been in use since the beginning of May
2008.
As
of
June 10, 2008, we employed approximately 1,106 full time employees and 71
part
time employees.
We
added
550 employees as a result of the Tianjin acquisition and 185 employees as
a
result of the SZPSP acquisition. During manufacturing peak season for solar
hot
water heaters, which normally are the second and third calendar quarters
of the
year, we have at least approximately 300 workers working 3 shifts and 7 days
per
week. Because of the strategic location of our manufacturing facilities,
we are
able to take advantage of low labor cost in the Bazhou, Tianjin and Shenzhen
areas, which we estimate to be approximately 40% lower than that in the Beijing
or Shanghai areas. We have not experienced a great deal of worker turnover
because there are relatively few manufacturing employment positions in the
Bazhou and Tianjin areas and believe that we have achieved a high level of
employee loyalty. Set forth below is certain information regarding our current
manufacturing capacity:
Current
Manufacturing Capacity
|
|
Daily
Production
(Approximate
Units
)
|
|
Annual
Production
(Approximate
Units)
|
|
|
|
|
|
|
|
Solar
Hot Water Heaters
|
|
|
500
|
|
|
133,000
|
|
|
|
|
|
|
|
|
|
Boilers
and Space Heating Products
|
|
|
120
|
|
|
26,000
|
|
|
|
|
|
|
|
|
|
Heat
Pipe Related Products
|
|
|
*
|
|
|
*
|
|
*
The
heat pipe related products are non-standard products so they cannot be measured
by unit.
Quality
Control
Our
manufacturing processes follow strict guidelines and standard operating
procedures that we believe are compliant with ISO 14000. Our solar water
heater
products and boilers are routinely tested as are individual aspects of our
production. Deli Solar (Bazhou) is in the process of applying for ISO 14000
certification and anticipates that the certification will be issued by the
end
of 2008.
SZPSP
has
been issued
ISO9001:
2000 certification.
Because
of our stringent quality control system, most of our products are certified
by
governmental quality control testing centers, such as the Institute of China
Product Quality Association, Hebei Province New Energy Products and Projects
Quality Control and Testing Center, and Beijing Technology Supervisory Bureau.
We also received awards from Hebei Province Consumers Organization and Hebei
Province Administration of Industry and Commerce, as well as endorsement from
the China Rural Areas Energy Industry Association. The following table sets
forth the brands of our products that are certified by Beijing Technology
Supervisory Bureau to have met the National Industry Standard NY-T 343-1998,
which is the testing standard for solar hot water heaters' thermal
power:
Brands
|
|
Products
|
|
Model
Numbers
|
|
|
|
|
|
|
|
Deli
Solar Brand
|
|
Solar
Water Heaters
|
|
|
DLYG-12/75
|
|
|
|
|
|
|
|
|
Ailiyang
Brand
|
|
Solar
Water Heaters
|
|
|
ALY-12/75
|
|
|
|
|
|
|
|
|
Dudeli
Brand
|
|
Solar
Water Heaters
|
|
|
DDL-12/75
|
|
|
|
|
|
|
|
|
Deyu
Brand
|
|
Solar
Water Heaters
|
|
|
DY-12/75
|
|
Original
Equipment Manufacturer (OEM) Arrangement
Sales
of
our solar water heater and boiler products peak in the second and third calendar
quarters of the year for solar hot water heaters and the third and fourth
calendar quarters of the year for boilers and space heating products. During
the
peak season when our production capacity falls short of the market demand,
we
assemble and manufacture products through OEM arrangements. Under a typical
OEM
arrangement, we authorize an OEM to manufacture products under our brand
names
and/or trademarks. We achieve quality control over products manufactured
under
such OEM arrangement by sending our technicians on site to supervise the
production and test the products. During fiscal year 2007, we contracted
with
two OEMs, Shandong Xin Xing Solar Power Heater Co., Ltd. and Lian Yun Gang
Solar
Power Heating Co Ltd.
Manufacturing
through OEM arrangements comprises approximately 30% to 40% of our total sales
during the peak season. For 2007, the two OEM generated an aggregate of 40%
of
our annual revenues. The OEM manufacturers typically receive approximately
1% of
the gross sales from the products they manufacture for us. Most of the OEM
manufacturers we select are located near areas where products are demanded,
thereby minimizing transportation costs.
Demand
for Our Products
Solar
Water Heaters and Boilers:
The
majority of the demand for our solar water heaters and space heaters is from
residential households in the PRC, particularly in rural areas. Presently,
we
sell our solar water heaters and space heaters primarily in the rural areas
of
the north-east part of the PRC including Hebei, Beijing, Tianjin, Heilongjiang,
and Liaoning, where there is prolonged sunny and dry weather.
We
believe the rural residential market has additional growth potential because
it
is an emerging market and until recently we encountered relatively little
competition. Competition has recently intensified resulting in lower sales
volume and lower prices for our solar water heaters for the three month period
ended March 31, 2008. Historically, the PRC's rural households have used
primitive means of generating hot water and space heating by using biomass,
local agricultural wastes, and/or kerosene. As the PRC's rural population
has
been earning incremental discretionary income in recent years, modern hot
water
and space heating systems have become increasingly affordable and a priority
for
discretionary spending.
Heat
Pipe Related Products
The
demand for our heat pipe related products comes from industrial customers
in the
PRC, Taiwan and Singapore, particularly in steel and chemical industries.
We
believe the market for our heat pipe related products has great potential
to
grow as the PRC central government is developing energy saving initiatives
and
regional governments and officials are required to implement energy-saving
programs to implement these initiatives. As a result we believe the demand
for
our heat pipe related products will increase.
Seasonality
of Business
Our
sales
fluctuate, reflecting seasonal variations in solar energy supply during the
four
seasons. We have higher sales of solar hot water products in the spring because
solar hot water heaters perform the best during the summer when solar energy
is
abundant. High sales volumes for coal boilers occur in the fall because
customers purchase our space heating products for the winter. Sales volumes
for
our products tend to be lower between January and March.
For
heat
pipe related products, because the demands for hot water and for steam are
higher in the winter and spring, sales for heat pipe products is higher in
the
fall and the winter as customers need to purchase our products and to install
before or during the winter. Sales of our heat pipe products tend to be lower
between January and March.
The
PRC Solar Hot Water and Space Heating Market
The
PRC's Economic Growth, Energy Shortage and Renewable Energy Policy
The
rapid
economic growth of the PRC in recent years has fueled a massive demand for
coal,
oil and gas, which has caused a depletion in the country’s coal and oil reserves
and a resulting shortage in supply, as well as serious environmental problems.
Recognizing that accelerating the country's transition to efficient and
renewable energy would ease this depletion and the environmental concerns,
the
National People's Congress, the PRC's parliament, passed the China Renewable
Energy Promotion Act, which became effective on January 1, 2006. The Act aims
to
promote the use of renewable energy as an alternative source of energy to the
more polluting fuels. Renewable energy currently accounts for a negligible
percentage of the country’s total energy supply. The Act, however, does not
provide for any incentive schemes for purchasers.
Urban
and Rural Market Segmentation for Hot Water and Space Heating Systems in China
Recently
the market for hot water and space heating systems in the PRC has shown
substantial growth. According to a research conducted by the China Hardware
Products Association and the China Information Center in 2002, only 71.5% of
urban households had modern hot water systems. We do not know the number of
rural households that currently have hot water systems but believe that it
significantly less due to the fact that modern hot water and heating
systems have still not become available to and are not affordable in many
households in the country. Only recently have some of these households started
to earn the disposable income required to purchase the hot water and space
heating systems.
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.
Market
for our Heat Pipe Related Products
We
sell
heat pipe related products to manufacturing customers especially steel
and
chemical customers for their waste heat recovery. The waste heat recovery
system
can produce hot water or steam for residential and industrial uses. Customers
benefit not only from sales of hot water, steam or electricity generated
by the
power of steam, but also from government energy-saving program subsidies.
Recently, the PRC central government has issued a number of energy saving
initiates which require compliance by regional governments. Management
believes
that as a result of these governmental initiatives the demand for our heat
pipe
related products over the next few years will increase.
Boiler
and Space Heating Industry
The
PRC
space heating industry is not new, but the modern systems that we sell are
new
for our customers. While many rural PRC households have considered hot water
a
luxury, heat generating facilities for cooking and space heating purposes
in one
form or another are considered basic necessities. These heat generating
facilities are generally extremely primitive and inefficient, and usually
consist of hearths and biomass stoves, which are dirty, unsafe and difficult
to
handle with respect to fuel. As many rural households have started to earn
disposable income in recent years, many of them can afford to modernize their
cooking and space heating facilities by using coal-fired boilers, which have
become one of the principal means for such modernization among the PRC rural
households.
Our
Product Warranty
We
provide a three-year standard warranty to our end users for all of the products
we manufacture. Under this standard warranty program, we provide free repair
and
exchange of component parts in the first year following the purchase, and
we
charge labor costs for repair and maintenance but provide free exchange of
component parts in the second and third years following the purchase.
Thereafter, end users are required to pay for any repair and maintenance
services, as well as exchange of component parts. Most of our warranty services
are performed by our independent sales agents and distributors in return
for a
1-2% discount of the purchase price they pay for our products. 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
2007 we acquired a 51% interest in Tianjin Huaneng and in March 2008 we
acquired
a 100% interest in SZSP.
From
time
to time we consider investing in new businesses and we expect to make
investments in, and to acquire businesses, products, or technologies in the
future.
Our
Organic Growth Strategies
We
are
seeking to grow and expand our business through the following strategies:
·
|
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 for our solar water heaters and boilers
We
market
our products in both the urban and the rural markets in the PRC. While most
solar hot water manufacturers focus on the urban market, we have always focused
on the rural market because the size of the rural market in the PRC is about
eight times larger than that of the urban market. Further, our rural customers
regard purchasing a hot water heater as a long term investment in a durable
good, more so than urban customers.
We
have
years of experience in operating marketing and sales organizations in rural
areas. Our marketing and sales team works with our agents to educate our
end
users and inform them of the utility, functionality and comparative cost
advantages of our products as compared to electricity and gas water heaters.
We
have also received a great deal of feedback from rural customers and have
designed our products and marketing to meet their needs and concerns.
Our
Advertising
Based
on
various advertising effectiveness studies in the PRC, we believe that large
scale advertising on TV and other mass media can have a significant impact
on
rural residential purchase decisions. Accordingly, we spent $152,221, or
1.8% of
sales, on advertising in the three month period ended March 31, 2008 compared
to
$141,474 million, or 4.7% of sales in the three month period ended March
31,
2007. We spent approximately $1,415,493, or 3.8% of sales, on advertising
in
2007 compared to $1.1 million, or 5.2% of sales in 2006.
Our
Multi-Brand Strategy
In
order
to position our products in different tiers of markets, we have utilized
a
multi-brand approach. Our solar hot water brands include: "Ailiyang", "DeYu"
and
"Deli Solar", among which, Ailiyang is not a registered trademark; our space
heating brands include "De Yu" and "Du Deli". Each of these brands targets
a
different type of customer. We classify the brand names of the solar hot
heaters
into three types: Premium, Standard, and Economy, and space heating products
into two types: Premium and Standard. Below are some of our products and
related
brand names and classifications:
Solar
Hot Water Heater Series
Our
Brand Name
|
|
Our
Classification of Products
|
|
|
|
Deli
Solar
|
|
Premium
|
|
|
|
DeYu
|
|
Standard
|
|
|
|
AiliYang
|
|
Economy
|
Space
Heating Series
Our
Brand Name
|
|
Our
Classification of Products
|
|
|
|
Du
Deli
|
|
Premium
|
|
|
|
DeYu
|
|
Standard
|
We
intend
to achieve the following objectives through the Multi-Brand Strategy:
·
|
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, which as of June 10, 2008 consisted of
approximately 96 marketing and sales personnel, who collect feedback from
our
customers and other market information for our management and our product
development team.
Distribution
Channels for Solar Water Heater Systems
The
PRC
is a vast country geographically and the market for our solar water heaters
covers many regions. To penetrate the market effectively, especially the
less-developed rural areas, we have established a vast distribution and
sales
network that as of June 10, 2008, included approximately 612 distributors
and
wholesalers and approximately 2,089 local appliance retailers covering
28
provinces in China, with a focus on the northern PRC area, north-eastern
PRC
area, Beijing metropolitan area, and Tianjin metropolitan area. The northern
PRC
area includes Hebei Province, Henan Province, Shangdong Province, Shanxi
Province, and An'hui Province. The north-eastern PRC area includes Liaoning
Province and Heilongjiang Province.
In
2007
s
ales
of
solar water heaters to these areas consist of approximately 70% of our
total
sales revenues. We believe that our comprehensive distribution and sales
network
enables us to efficiently service the rural communities without having
to rely
on any particular agent or distributor for our sales. In the past five
years, no
single agent or distributor has generated more than 5% of our total annual
sales.
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.
Recently
competition in the solar water heater marker has intensified causing us
to lower
our sales prices to remain competitive.
RESEARCH
AND DEVELOPMENT ACTIVITIES
Our
research and development ("R&D") expenses have historically been
approximately 1% to 2% of our annual sales revenues. Most of these expenses
were
spent in designing and manufacturing new products. In 2005, our R&D expenses
consisted of approximately 0.5% of our annual sales revenues, which we used
to
improve the functions and appearance of our current products instead of
developing new products. In 2006, we spent approximately $51,741 in R&D on
the development of pressurized evacuated heat pipe solar water heaters. In
2007,
we spent approximately $1.8 million in R&D on biomass fuel system program,
multi-source energy program. We also conduct other R&D activities based on
our customers' specific request for certain new functions or improvements
on our
existing products. The R&D expenses associated with such R&D activities
are generally borne by the requesting customers.
Currently,
we have a R&D team of three full time members and part time research
assistants. Our senior engineer members include: Luo Yunjun, who also serves
as
the chairman of Beijing Solar Industry Association, and Hao Fangzhou, who
also
serves as the chairman of the Chinese Economic Boiler Association.
In
February 2006, we executed a non binding Cooperation Memorandum (the “Memo”)
with the Key Laboratory of Heat Transmission and Energy Saving Education
of
Beijing University of Industry (“BUI”) in February 2006 for cooperation on
research and development of renewable energy technologies. The Memo sets
forth a
general cooperation framework between the two parties: we make available
funding
for certain renewable energy research and development projects undertaken
by
BUI. Further details of each party’ rights and obligations will be on a project
by project basis with specific agreements. To date we have not incurred any
expenses under this arrangement.
INTELLECTUAL
PROPERTY
Trademarks
Deli
Solar (Bazhou) is the holder of the following trademarks registered with
the
Trademark Offices of the PRC National Industrial and Commerce Administrative
Bureau (the “PRC Trademark Offices”):
Trademark
|
|
Authorized
Scope
|
|
Valid
Term
|
|
Certificate
Number
|
|
|
|
|
|
|
|
Deli
Solar
|
|
Boiler
(Space Heating Utility);
|
|
03/14/2003
|
|
to
1978396
|
|
|
Solar
Hot Water Utility;
|
|
03/13/2013
|
|
|
|
|
Solar
Stove and Solar Energy
|
|
|
|
|
|
|
Collection
Heater
|
|
|
|
|
|
|
|
|
|
|
|
Du
Deli
|
|
The
same as the above
|
|
01/28/2003
|
|
to
1978532
|
|
|
|
|
01/27/2013
|
|
|
|
|
|
|
|
|
|
De
Yu
|
|
Solar
Energy Collection Heat
|
|
07/28/1998
|
|
to
1195609
|
|
|
and
Boiler (Not machine accessory)
|
|
07/27/2008
|
|
|
|
|
|
|
|
|
|
Aili
Solar (to replace our brand "Ailiyang")
|
|
Approved,
pending the trademark certificate
delivery
|
A
registered trademark is protected for a term of ten years, renewable for
another
term of ten years under the trademark law of the PRC, so long as an application
for renewal is submitted to the PRC Trademark Offices within six months prior
to
the expiration of the initial term.
Patents.
SZPSP
has
obtained the following patents in the PRC for its unique solar energy selective
absorbing coat and manufacturing technology:
Authorized
Scope
|
|
Valid
Term
|
|
Certificate
Number
|
|
|
|
|
|
Cold
water recovery system in solar heating
|
|
2015
|
|
ZL200620016815X
|
Recycle
Heating Product in different temperature system
|
|
n/a
|
|
Application
submitted 7/4/06
|
Domain
names.
We
own
and operate a website under the internet domain name
http://www.cn-sce.com
.
Traffic
to our other internet domain names www.AiLiYang.com are directed to that
website. SZPSP owns and operates a website under the internet domain name
http://www.szpsp.com
.
Government
Regulation
We
are
not subject to any requirements for governmental permits or approvals or
any
self regulatory professional associations for the manufacture and sale of
solar
hot water heaters. We are required to obtain a production approval from the
Quality and Technology Supervisory and Control Bureau at the provincial level
for the manufacture and sale of boilers and space heating products. Deli
Solar
(Bazhou) obtained the approval to manufacture, install and repair small and
regular size pressure boilers and space heating products from Hebei Provincial
Quality and Technology Supervisory and Control Bureau on August 28, 2002
effective for five years. We are currently in the process of renewing the
certificate. Other than the foregoing, Deli Solar (Bazhou) is not subject
to any
other significant government regulation of its business or production, or
any
other government permits or approval requirements, except for the laws and
regulations of general applicability for corporations formed under the laws
of
the PRC.
Compliance
with Environmental Laws
To
our
knowledge, neither the production nor the sale of our products constitute
activities or generate materials, in a material manner, which causes our
operation to be subject to the PRC environmental laws.
Executive
Offices
Our
executive office is located at Building 3, No. 28 Feng Tai North Road, Beijing,
China, 100071 and our telephone number is +86-10-63850516.
Deli
Solar (Bazhou)’s factory facilities are located outside of the city of Bazhou in
the Hebei Province of the PRC. Deli Solar (Bazhou) utilizes one factory in
Bazhou with a total of over 10,000 square meters of production, warehouse,
and
office space and space for use as a distribution center and approximately
2,000
square meters of office space and exhibition center in Beijing
Tianjin
Huaneng’s factory facilities are located outside of the Tianjin municipalities
of the PRC. Tianjin Huaneng utilizes one factory in Tianjin with over
51,000 square meters of production, warehouse, and office space and space
for
use as a distribution center.
SZPSP’s
factory facilities are located outside of the city of Shenzhen in the Guangdong
Province of the PRC. SZPSP utilizes two factories in Shenzhen with a total
of over 2,000 square meters of production, warehouse, and office space and
space
for use as a distribution center
Employees
As
of
June 10, 2008 we had approximately 1,106 full time employees and 71 part
time
employees
Deli
Solar (Bazhou) requires each employee to enter into a one-year standard
employment agreement. Tianjin employees have three year agreements. The
standard
employment agreement contains a confidentiality clause and a
covenant-not-to-compete clause, under which an employee must keep confidential
all manufacturing technology including drawings and other technology materials,
sales and financial information, and trade secrets obtained through his
or her
employment with us. Breach of this confidentiality clause will result in
termination of employment. Further, each employee may not compete against
us for
a certain period of time following the termination of employment with us.
We
purchase group workers' compensation policy on behalf of our employees,
and the
premium is deducted from each employee's paycheck.
Risk
of Loss and Product Liability Insurance
Delivery
of our products can be arranged by our sales agents and distributors, or
by us.
In the latter case, we deliver our products primarily through trucks,
supplemented with trains and cargo ships. Our standard agency contract generally
requires our sales agents to pay for the transportation cost. Although the
agency contract has not specifically provided for the issue of risk of loss,
our
customary practice is that sales agents bear the risk of loss in shipping
and
purchase shipping insurance at their expense.
We
currently do not carry any product liability or other similar insurance,
nor do
we have property insurance covering our plants, manufacturing equipment
and
office buildings. While product liability lawsuits in the PRC are rare
and Deli
Solar (Bazhou) has never experienced significant failures of its products,
we
cannot assure you that Deli Solar (Bazhou) would not face liability in
the event
of any failure of any of its products. We are currently negotiating with
insurers to purchase property insurance to cover our manufacturing plants,
equipment and office buildings and we anticipate that an insurance policy
will
be issued in the next few months.
PROPERTY
All
land
in the PRC is owned by the government and cannot be sold to any individual
or
entity. Instead, the government grants landholders a "land use right."
The
following are the details regarding our land use rights with regard to
the two
pieces of land that we use in our business. The land use rights owned by
Deli
Du, our Chief Executive Officer, President and Director, were transferred
to us
in October 2005 for a price of RMB20,000 (approximately $2,588). The application
for the change of the land use right certificate for this piece of land
was
submitted to Bazhou City National Land Resources Bureau on January 16,
2006.
Once the application is approved, the registered holder for this land will
be
Deli Solar (Bazhou). As of June 10, 2008, the application has not yet been
approved and the registered holder is still Mr. Du.
Deli
Solar (Bazhou)’s factory facilities are located outside of the city of Bazhou in
the Hebei Province of the PRC. Deli Solar (Bazhou) utilizes one factory in
Bazhou with a total of over 10,000 square meters of production, warehouse,
and
office space and space for use as a distribution center and an approximately
2,000 square meters of office space and exhibition center in
Beijing
On
March
17, 2006, Deli Solar (Bazhou) entered into an agreement with the local
government to acquire land use rights of a land of 61,530 square meters at
the
price of approximately $919,858. This piece of land is close to the present
Bazhou factory and is used to enlarge the present manufacturing base at Bazhou
City. The land use right has been approved by the local government after
payment
of approximately $919,858. An official certificate evidencing the land lease
has
not yet been delivered from the government to the Company.
Registered
Holder
|
|
Location
& Deed Number
|
|
Usage
and Nature
|
|
Square
meters
|
|
Construction/building
on the land
|
|
Term
of use right
|
|
Transfer
price
|
Deli
Solar (Bazhou)
|
|
Bazhou,
Ningnan Village; #98060026
|
|
Industrial
Transferred Land
|
|
10,244.05
Sq. M
|
|
Plant,
warehouses, accessories room, convention center
|
|
50
years (from March 25, 1998 to March 25, 2048
|
|
RMB
615,000
(approximately
$79,581) was paid to the Langfang Municipal Land Administration
Bureau,
plus annual land use fee of RMB 5122 (approximately $
662.79)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr.
Deli Du
|
|
Eighty
kilometers from
Bazhou
Jingbao Road North; #20010700405
|
|
Office
space for Deli Solar (Bazhou) Granted Land
|
|
816
Sq. M
|
|
Office
building, accessories room
|
|
50
years (from June 11, 2001 to June 3, 2051
|
|
RMB
20,000 (approximately $ 2,588) was paid to the Langfang Municipal
Land
Administration Bureau
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deli
Solar (Bazhou) -
|
|
Close
to Bazhou Jingbao Road
|
|
Factory
|
|
61,530
Sq. M
|
|
Factory
facilities
|
|
Pending
the Land Use Right Certificate
|
|
approximately
$919,858 was paid to Bazhou local government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Huaneng
Group
Energy Equipment
Co.
Ltd.
|
|
No.
119 Yuyang South Road
Ji
County, Tianjin
|
|
Factory
|
|
51,000
Sq. M
|
|
|
|
50
years from September 2004 to September 2054
|
|
Approximately
528,000 was paid to Ji county
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
72,590.05 Sq. M
|
|
|
|
|
|
|
We
lease
19,140 square meters of land (“Leased Land”) from Bazhou County Credit Union
Lianshe Branch ("Credit Union") for an office building pursuant to a 20 year
renewal lease at an annual rent of RMB 120,000 (approximately $15,528) which
commenced on May 1, 2003. The lease is automatically renewable for another
20
year term subject to terms to be negotiated at the expiration of the first
20-year term. We are retaining a majority of the building's usable space
for our
business and seeking to sublease the rest to parties with business related
to
ours such as our sales agents, distributors, accessory parts dealers, and
after-sales service agents. We also constructed a business center on the
Leased
Land. The business center is to be used for show rooms, retail stores, and
a
distribution center for solar related products and space heating
products.
We
lease
our Beijing office facility of approximately 2,000 square meters at No. 28,
Fengtai Bei Road, Fengtai District from Beijing Dajiangxia Technology and
Trade
Co., Ltd. pursuant to a renewable lease commencing October 1, 2005 to August
8,
2011 for an annual rent of RMB370,000 (approximately $47,878) for the first
year
and RMB400,000 (approximately $ 51,760) for the second year, and the following
years pending a possible increase. We paid annual rent of RMB 400,000 in
2007.
Legal
Proceedings
Neither
we nor any of our subsidiaries is a party to any pending legal
proceedings..
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information with respect to the beneficial
ownership of the voting securities by (i) any person or group with more
than 5%
of the Company's securities, (ii) each director, (iii) each executive officer
and (iv) all executive officers and directors as a group, as of June 10,
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
|
|
|
17.5
|
%
|
|
|
|
|
|
|
|
|
Ardsley
Partners (3)
|
|
|
1,666,500
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
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)
|
|
|
7,114
|
|
|
*
|
|
Less
that
1%.
|
(1)
|
As
of June 10, 2008 we had 14,007,901 outstanding shares of common
stock. In
determining the percent of common stock owned by a stockholder
on June 10,
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) 14,007,901,
the
number of shares outstanding on June 10, 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
June 10,
2008.
|
|
(2)
|
Based
on information set forth in Amendment No 1 to Schedule 13D filed
on March
4, 2008.
|
|
(3)
|
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 June 10, 2008 Mr. Randolph
is
entitled to receive approximately 7,114 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. We
intend to request a waiver of these liquidated damages provisions. Effective
March 31, 2008 Mr. Jianmin Li resigned from our board of directors as a
result
of which our board again consists of four members. However, notwithstanding
such
resignation we still have a majority of independent
directors.
In
addition, under the terms of the securities purchase agreement, we were
required, prior to August 12, 2007 to appoint (i) an audit committee comprised
solely of at least three independent directors and a (ii) compensation
committee
comprised of at least three directors, a majority of whom are independent
directors. Our audit and compensation currently each currently consists
of two
members both of whom are independent, namely Mssrs. Zhaolin Ding and Zhenghang
Jia. Accordingly, we are currently delinquent in this obligation. However,
under
the terms of the securities purchase agreement no liquidated damages are
required to be paid for this breach during any period for which liquidated
damages are payable for failing to have an independent board. Accordingly,
damages began to accrue for breach of this provision on November 1, 2007.
As of
June 10, 2008 we were delinquent by 223 days in meeting this obligation
and we
are required to pay investors liquidated damages for this breach. We intend
to
request a waiver of these liquidated damages provisions.
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 February 2007 Mr. Yang, served
as
Financial Controller of China Diagnostics Medical Corporation, a company
engaged
in the business of pharmaceutical research and development. From April
2005 to
August 2006, Mr. Yang served as the Chief Financial Officer of Beijing
Tanglewood Tour Development, Ltd., a company engaged in the business of
real
estate investment and development. From July 2002 to March 2005, Mr. Yang
studied in the UK and obtained his Masters Degree in Finance and Accounting
from
London South Bank University. From March 2000 to July 2002 Mr. Yang worked
for
CE Accountancy Ltd. as a project manager. In 1990 Mr. Yang graduated from
Shenyang Industrial University with a BA in Financial Accounting.
Zhaolin
Ding, age 40, was appointed as a director on August 3, 2007. Mr. Ding is
currently the director of Everbright International Executive Management
Education Center, an adjunct professor of the Executive Program, School
of
Continuing Education, Tsinghua University and a visiting professor of executive
program of Peking University and Renmin University of China. Mr. Ding has
been
working as professor of the School of Continuing Education, Tsinghua University
froth last five years. He is an officially appointed news commentator of
China
National Radio. He also worked as research associate in the Center for
International Communication Studies of Tsinghua University. He holds an
MBA
degree from Harvard University, a Master’s degree in International Journalism
from China School of Journalism, a bachelor degree of Law in International
Affairs from the University of International Relations.
Zhenhang
Jia, age 61, was appointed as our director on August 3, 2007. He has been
a
director on Beijing Mechanic Engineering and Reusable Energies and Vice
Secretary-in-Chief of China Rural Energy Association Energy Saving Space
Heating
Professional Society from April 1994. He also has been vice chairman, vice
secretary-in-chief of Beijing Municipal New Energy and director in Beijing
Mechanics and Engineering Committee, Energy Resourses and Engineering Branch
from 1995. Mr. Jia has been lecturing in his field of profession in colleges
and
universities for over ten years and has published two professional books
such as
Enterprise Energy Saving Technology and 70 papers.
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 June 10,
2008 we
were delinquent by 223 days in meeting this obligation and we are required
to
pay investors liquidated damages based off the number of share of Series
A
Preferred Stock outstanding on the date of computation. We intend to request
a
waiver of these liquidated damages provisions.
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.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Since
January 1, 2007 we have not engaged in any transactions with any related persons
which would require disclosure under Item 404 of Regulation S-K.
DESCRIPTION
OF SECURITIES TO BE REGISTERED
The
following is a summary description of our capital stock and certain provisions
of our Restated Articles of Incorporation and By-laws, as amended, and of
certain applicable provisions of Nevada law.
General
We
are
authorized to issue 66,666,667 shares of common stock, par value $.001 per
share
and 25,000,000 shares of preferred stock, par value $.001 per share, of which
3,500,000 shares have been designated as Series A Preferred Stock. As of
June
10, 2008 there were 14,007,901 shares of common stock issued and outstanding
and
738,082 shares of Series A Preferred Stock issued and outstanding
(excluding 900,000 currently held in escrow). The following is a summary
of the
material terms of the common stock.
Common
Stock
Voting:
The
holders of common stock are entitled to one vote per share on all matters to
be
voted on by the stockholders and are not entitled to cumulate their votes in
the
election of directors.
Dividends
:
Holders
of common stock are entitled to any dividends that may be declared from time
to
time by the Board of Directors in its discretion out of funds legally available
therefore subject to the prior rights, if any, of holders of any outstanding
shares of preferred stock and any contractual restrictions against the payment
of dividends on common stock.
The
payment of dividends is contingent on the ability of our PRC based operating
subsidiaries Deli Solar (Bazhou), Deli Solar (Beijing), Tianjin Huaneng and
SZSP
to obtain approval to send monies out of the PRC. The PRC's national currency,
the Yuan, is not a freely convertible currency. The PRC government imposes
controls on the convertibility of Renminbi into foreign currencies and, in
certain cases, the remittance of currency out of the PRC. Shortages in the
availability of foreign currency may restrict our ability to remit sufficient
foreign currency to pay dividends.
In
addition, under the terms of the certificate of designation which was filed
in
the office of Secretary of State for the State of Nevada on June 12, 2007 in
connection with the issuance of the Series A Preferred Stock, we are restricted
in paying dividends on our common stock.
Liquidation:
In the
event of our liquidation or dissolution, holders of common stock are entitled
to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock.
No
Preemptive Rights
.
Holders
of common stock have no preemptive or other subscription rights and no right
to
convert their common stock into any other securities.
Preferred
Stock
The
Board
of Directors is authorized under our Restated Articles of Incorporation to
issue
‘blank check” preferred stock by resolution and by filing a certificate of
designations under Nevada law, to fix the designation, powers, preferences
and
rights of the shares of each such series and the qualifications, limitations
or
restrictions thereof without any further vote or action by the stockholders.
Any
shares of preferred stock so issued are likely to have priority over the common
stock with respect to dividend or liquidation rights.
Anti-takeover
provisions
As
discussed above, our Board of Directors can issue shares of "blank check"
preferred stock, with any rights or preferences, including the right to approve
or not approve an acquisition or other change in control. The issuance of such
"blank check" preferred stock could be used to discourage a transaction
involving an actual or potential change in control of us or our management,
including a transaction in which our stockholders might otherwise receive a
premium for their shares over then current prices.
The
Placement Agent Warrants
The
placement agent warrants granted to Roth Capital in connection with the February
29, 2008 private placement entitle the holder to purchase up to an aggregate
of
469,150 shares of common stock at an exercise price of $2.88 per share, subject
to adjustment. The warrants expire on February 28, 2013. The holders
may make a cashless exercise but not until February 28, 2009 and then only
if the shares underlying the warrants have not been registered. The exercise
price and number of shares to be issued on exercise are subject to customary
adjustments in the event of the payment of stock dividends and stock splits
and
fundamental transactions..
Our
counsel, Guzov Ofsink, LLC, located at 600 Madison Avenue, 14th Floor, New
York,
New York 10022, is passing upon the validity of the issuance of the common
stock
that we are offering under this prospectus.
EXPERTS
Cordovano
and Honeck LLP, Independent Registered Public Accountants, located in Englewood,
Colorado, have audited our financial statements included in this Registration
Statement to the extent and for the periods set forth in their report. We have
relied on such reports given upon the authority of such firm as experts in
accounting and auditing.
Zhong
Yi
(Hong Kong) C.P.A. Company Limited located in Hong Kong, PRC, have audited
the
financial statements of Tianjin Huaneng and Shenzhen Pengsangpu included
in this
Registration Statement to the extent and for the periods set forth in their
report. We have relied on such reports given upon the authority of such firm
as
experts in accounting and auditing.
Child,
Van Wagoner & Bradshaw, PLLC, independent certified public accountants,
located at 5296 S. Commerce Drive, Suite 300, Salt Lake City, Utah, have audited
our financial statements included in this registration statement to the extent,
and for the periods set forth in their reports. We have relied upon such
reports, given upon the authority of such firm as experts in accounting and
auditing.
INTEREST
OF NAMED EXPERTS AND COUNSEL
No
"expert" or "counsel" as defined by Item 509 of Regulation S-K promulgated
under
the Securities Act, whose services were used in the preparation of this Form
S-1, was hired on a contingent basis or will receive a direct or indirect
interest in us or our parents or subsidiaries, nor was any of them a promoter,
underwriter, voting trustee, director, officer or employee of the Company.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION
FOR
SECURITIES ACT LIABILITIES
Our
bylaws provide that we will indemnify our directors and officers from all
liabilities incurred by them in connection with any action, suit or proceeding
in which they are involved by reason of their acting as our directors and
officers.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons, we have been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In
the event that a claim for indemnification against such liabilities (other
than
the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed
by
the final adjudication of such issue.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
On
January 24, 2008, our Board of Directors approved the termination of Child,
Van
Wagoner & Bradshaw, PLLC (“CVWB”) as our independent certified public
accounting firm.
Concurrently
with this action, our Board of Directors appointed Cordovano and Honeck,
LLP
(“C&H”) as our new independent certified public accounting firm. C&H is
located at 88 Inverness Circle East, Building M Englewood, Colorado, USA.
C&H’s affiliated firm Zhong Yi (Hong Kong) C.P.A. Company Limited (“Zhong
Yi”), has been auditing the financial statements of Tianjin Huaneng Group Energy
Equipment Co., Ltd (“Tianjin Huaneng”), which we acquired effective July 1,
2007. Accordingly, management elected to continue this existing relationship
with C&H and Zhong Yi and engage C&H as the Company’s independent
auditors.
Our
consolidated financial statements for the years ended December 31, 2006 and
2005
were audited by CVWB. CVWB’s reports on our financial statements for two most
recent fiscal years did not contain an adverse opinion, a disclaimer of opinion,
nor was it qualified or modified as to uncertainty, audit scope or accounting
principles.
During
the years ended December 31, 2006 and 2005 and through January 24, 2008 there
were no disagreements with CVWB on any matter of accounting principles or
practices, financial statement disclosure, auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of CVWB, would have caused
it
to make reference to the subject matter of the disagreement in connection
with
its report.
The
Company provided CVWB with a copy of a Current Report on Form 8-K prior to
its
filing with the SEC on January 30 2008 and requested them to furnish a letter
addressed to the SEC stating whether it agrees with the statements made above.
That letter of CVWB’s letter to the SEC, dated January 30, 2008 was filed as
Exhibit 16.1 to the 8-K.
During
the period the Company engaged CVWB, neither the Company nor anyone on the
Company's behalf consulted with C&H regarding either (i) the application of
accounting principles to a specified transaction, either contemplated or
proposed, or the type of audit opinion that might be rendered on the Company's
financial statements or (ii) any matter that was either the subject of a
disagreement or a reportable event. The Company has authorized CVWB to respond
fully to all inquiries of C&H.
FINANCIAL
STATEMENTS
Reference
is made to “Index to Financial Statements” for a list of the financial
statements being filed as a part of this prospectus.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the U.S. Securities and Exchange Commission, 100 F. Street,
N.E., Washington, D.C. 20549, a registration statement on Form S-1 under the
Securities Act for the common stock offered by this prospectus. We have not
included in this prospectus all the information contained in the registration
statement and you should refer to the registration statement and its exhibits
for further information.
The
registration statement and other information may be read and copied at the
SEC's
Public Reference Room at 100 F. Street N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room
by
calling the SEC at 1-800-SEC-0330. The SEC maintains a web site
(HTTP://WWW.SEC.GOV.) that contains the registration statements, reports, proxy
and information statements and other information regarding registrants that
file
electronically with the SEC such as us.
You
may
also read and copy any reports, statements or other information that we have
filed with the SEC at the addresses indicated above and you may also access
them
electronically at the web site set forth above. These SEC filings are also
available to the public from commercial document retrieval
services.
INDEX
TO FINANCIAL STATEMENTS
1.
Unaudited Condensed, Consolidated Financial Statements of China
Solar
& Clean Energy Solutions, Inc. as of March 31, 2008 and December
31,
2007 and for the three months ended March 31, 2008 and
2007
|
|
|
|
i.
|
Condensed,
Consolidated Balance Sheets as of March 31, 2008 and December
31,
2007
|
F-1
|
|
|
|
ii.
|
Condensed,
Consolidated Statements of Income for the three months ended
March 31,
2008 and 2007
|
F-2
|
|
|
|
iii.
|
Condensed,
Consolidated Statements of Cash Flows for the three months
ended March 31,
2008 and 2007
|
F-3
|
|
|
|
iv.
|
Condensed,
Consolidated Statement of Changes in Stockholders’ Equity and
Comprehensive Income for the three months ended March 31,
2008
|
F-4
|
|
|
|
v.
|
Notes
to Condensed, Consolidated Financial Statements
|
F-
5
|
|
|
2.
Audited Consolidated Financial Statements of China Solar & Clean
Energy Solutions, Inc. as of December 31, 2007 and 2006 and
for the years
ended December 31, 2007 and 2006
|
|
|
|
|
i.
|
Report
of Independent Registered Public Accounting Firm
|
F-14
|
|
|
|
ii
|
Report
of Independent Registered Public Accounting Firm
|
F-15
|
|
|
|
iii.
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
F-16
|
|
|
|
iv.
|
Consolidated
Statements of Income for the years ended December 31, 2007
and 2006
|
F-17
|
|
|
|
v.
|
Consolidated
Statements of Cash Flows for the years Ended December 31, 2007
and
2006
|
F-18
|
|
|
|
vi.
|
Consolidated
Statement of Changes in Shareholders' Equity and Comprehensive
Income from
January 1, 2005 through December 31, 2007
|
F-19
|
|
|
|
vii.
|
Notes
to Consolidated Financial Statements
|
F-20
|
|
|
|
3.
Unaudited Condensed Financial Statements of Tianjin Huaneng
Group Energy
Equipment Co., Ltd as of June 30, 2007 and December 31, 2006
and for the
six months ended June 30, 2007 and 2006
|
|
|
|
|
i.
|
Condensed
Balance Sheets as of June 30, 2007 and December 31, 2006
|
F-41
|
|
|
|
ii
|
Condensed
Statements of Operations and Comprehensive Income for the six
months ended
June 30, 2007 and 2006
|
F-42
|
|
|
|
iii.
|
Condensed
Statements of Cash Flows for the six months ended June 30,
2007 and
2006
|
F-43
|
|
|
|
iv.
|
Condensed
Statement of Owners Equity for the six months ended June 30,
2007 and
2006
|
F-44
|
|
|
|
v.
|
Notes
to Condensed Financial Statements
|
F-45
|
|
|
|
4.
Audited Financial Statements of Tianjin Huaneng Group Energy
Equipment
Co., Ltd as of December 31, 2006 and 2005 and for the years
ended December
31, 2006 and 2005
|
|
|
|
|
i.
|
Report
of Independent Registered Public Accounting Firm
|
F-58
|
|
|
|
ii.
|
Balance
Sheets as of December 31, 2006 and 2005
|
F-59
|
|
|
|
iii.
|
Statements
of Operations and Comprehensive Income for the years ended
December 31,
2006 and 2005
|
F-60
|
|
|
|
iv.
|
Statements
of Cash Flows for the years ended December 31, 2006 and
2005
|
F-61
|
|
|
|
v.
|
Statements
of Changes in Owners’ Equity for the years ended December 31, 2006 and
2005
|
F-52
|
|
|
|
vi.
|
Notes
to Financial Statements
|
F-53
|
|
|
5.
Unaudited Pro forma Financial Information of Tianjin Huaneng
Group Energy
Equipment Co., Ltd
|
|
|
|
|
i.
|
Condensed,
Combined Pro Forma Balance Sheet as of December 31, 2007
|
F-78
|
|
|
|
ii.
|
Condensed,
Combined Pro Forma Statement of Operations for the year ended
December 31, 2007
|
F-79
|
|
|
|
iii.
|
Notes
to pro forma financial information
|
F-80
|
|
|
|
|
6.
Unaudited Condensed Financial Statements of Shenzhen Pengsangpu
Solar
Industrial Products Corporation as of March 31, 2008 and December
31, 2007
and for the three months ended March 31, 2008 and 2007
|
|
|
|
|
i.
|
Condensed,
Consolidated Balance Sheets as of March 31, 2008 and December
31,
2007
|
F-82
|
|
|
|
ii.
|
Condensed,
Consolidated Statements of Operations for the three months
ended March 31,
2008 and 2007
|
F-83
|
|
|
|
iii.
|
Condensed, Consolidated
Statements of Cash Flows for the three months ended March 31,
2008 and
2007
|
F-84
|
|
|
|
iv.
|
Condensed, Consolidated
Statement of Owners’ Equity for the three months ended March 31,
2008
|
F-85
|
|
|
|
v.
|
Notes
to Condensed, Consolidated Financial Statements
|
F-86
|
|
|
|
7.
Audited Financial Statements of Shenzhen Pengsangpu Solar Industrial
Products Corporation as of December 31, 2007 and 2006 and for
the years
ended December 31, 2007 and 2006
|
|
|
|
|
i.
|
Report
of Independent Registered Public Accounting Firm
|
F-94
|
|
|
|
ii.
|
Balance
Sheets as of December 31, 2007 and 2006
|
F-95
|
|
|
|
iii.
|
Statements
of Operations and Comprehensive Income (Loss) for the years
ended December
31, 2007 and 2006
|
F-96
|
|
|
|
iv.
|
Statements
of Cash Flows for the years ended December 31, 2007 and
2006
|
F-97
|
|
|
|
v.
|
Statements
of Changes in Owners’ Equity for the years ended December 31, 2007 and
2006
|
F-98
|
|
|
|
vi.
|
Notes
to Financial Statements
|
F-99
|
|
|
|
8.
Unaudited Pro forma Financial Information of Shenzhen Pengsangpu
Solar
Industrial Products
Corporation
|
|
|
|
i.
|
Condensed,
Combined Pro Forma Statement of Income for the three months
ended March
31, 2008
|
F-117
|
|
|
|
ii.
|
Condensed,
Combined Pro Forma Statement of Income for the year ended December
31,
2007
|
F-119
|
|
|
|
iii.
|
Condensed,
Combined Pro Forma Balance Sheet as of March 31, 2008
|
F-120
|
|
|
|
iv.
|
Notes
to Condensed, Combined Pro Forma Balance Sheet
|
F-122
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC
CONDENSED CONSOLIDATED
BALANCE SHEETS
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
As
of March 31,
|
|
As
of December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Note
1)
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,733,793
|
|
$
|
5,466,637
|
|
Accounts
receivable, net
|
|
|
7,116,825
|
|
|
7,453,009
|
|
Inventories
|
|
|
4,065,773
|
|
|
3,875,658
|
|
Other
receivables and prepayments
|
|
|
4,959,380
|
|
|
1,637,948
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
26,875,771
|
|
|
18,433,252
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
9,401,021
|
|
|
8,819,216
|
|
Goodwill
|
|
|
1,789,324
|
|
|
1,789,324
|
|
Intangible
assets, net
|
|
|
1,651,885
|
|
|
1,597,921
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
39,718,001
|
|
|
30,639,713
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$
|
1,254,717
|
|
$
|
2,111,028
|
|
Income
tax payables
|
|
|
1,411,384
|
|
|
1,108,433
|
|
Other
payables and accrued liabilities
|
|
|
6,906,468
|
|
|
8,552,452
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
9,572,569
|
|
|
11,771,913
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
259,612
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
1,454,872
|
|
|
935,825
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Convertible
preferred stock
|
|
|
1,609
|
|
|
1,774
|
|
Common
stock
|
|
|
11,136
|
|
|
6,205
|
|
Additional
paid-in capital
|
|
|
19,358,497
|
|
|
9,260,607
|
|
Accumulated
other comprehensive income
|
|
|
1,140,936
|
|
|
1,134,270
|
|
Retained
earnings
|
|
|
7,918,770
|
|
|
7,529,119
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
28,430,948
|
|
|
17,931,975
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
39,718,001
|
|
|
30,639,713
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
For
the three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
8,300,076
|
|
$
|
2,995,863
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
5,845,016
|
|
|
2,248,915
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,455,060
|
|
|
746,948
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
149,167
|
|
|
35,336
|
|
Selling
and distribution
|
|
|
502,563
|
|
|
44,030
|
|
General
and administrative
|
|
|
601,653
|
|
|
393,957
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,253,383
|
|
|
473,323
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,201,677
|
|
|
273,625
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Other
income
|
|
|
41,090
|
|
|
1,657
|
|
Interest
expense
|
|
|
(33,838
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
7,252
|
|
|
1,657
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
1,208,929
|
|
|
275,282
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
346,263
|
|
|
-
|
|
Income
before minority interst
|
|
|
862,666
|
|
|
275,282
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
473,015
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
389,651
|
|
$
|
275,282
|
|
|
|
|
|
|
|
|
|
Net
income per share - basic
|
|
$
|
0.05
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
Net
income per share - diluted
|
|
$
|
0.03
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
8,009,713
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
15,284,770
|
|
|
6,205,290
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
For
the three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(4,104,526
|
)
|
|
909,192
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(730,974
|
)
|
|
(154,617
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(730,974
|
)
|
|
(154,617
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Private
placement sale of common stock
|
|
|
9,995,156
|
|
|
|
|
Warrant
exercise of common stock
|
|
|
107,500
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
10,102,656
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
27,551
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
5,267,156
|
|
|
782,126
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
5,466,637
|
|
|
3,212,065
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS,
END
OF PERIOD
|
|
$
|
10,733,793
|
|
|
3,994,191
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
Cash
paid for income taxes
|
|
$
|
31,978
|
|
$
|
-
|
|
Cash
paid for interest expenses
|
|
$
|
33,838
|
|
$
|
-
|
|
See
accompanying notes to condensed consolidated financial
statements
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
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
as of December 31, 2007
|
|
|
1,774,194
|
|
$
|
1,774
|
|
|
6,205,290
|
|
$
|
6,205
|
|
$
|
9,260,607
|
|
$
|
1,134,270
|
|
$
|
7,529,119
|
|
$
|
17,931,975
|
|
Shares
issued for private placement, net of offering costs of $1,264,451
in cash
and $541,695 in warrants.
|
|
|
|
|
|
|
|
|
4,691,499
|
|
|
4,691
|
|
|
9,990,465
|
|
|
|
|
|
|
|
|
9,995,156
|
|
Warrant
exercised
|
|
|
|
|
|
|
|
|
75,000
|
|
|
75
|
|
|
107,425
|
|
|
|
|
|
|
|
|
107,500
|
|
Preferred
share converted
|
|
|
(164,516
|
)
|
|
(165
|
)
|
|
164,516
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the three months
ended
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
389,651
|
|
|
389,651
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,666
|
|
|
|
|
|
6,666
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2008
|
|
|
1,609,678
|
|
$
|
1,609
|
|
|
11,136,305
|
|
$
|
11,136
|
|
$
|
19,358,497
|
|
$
|
1,140,936
|
|
$
|
7,918,770
|
|
$
|
28,430,948
|
|
See
accompanying notes to condensed consolidated financial statements
Notes
to Condensed, Consolidated Financial
Statements
The
accompanying condensed consolidated balance sheet as of December 31,
2007
has
been
derived from audited financial statements
and the
accompanying unaudited condensed consolidated financial statements have
been
prepared in accordance with accounting principles generally accepted
in the
United States of America (“GAAP”) for interim financial information and the
interim reporting requirements of Regulation S-X. They do not include
all of the
information and footnotes for complete consolidated financial statements
as
required by GAAP. In management's opinion, all adjustments (consisting
only of
normal recurring adjustments) considered necessary for a fair presentation
have
been included. These financial statements should be read in conjunction
with the
audited financial statements and notes thereto contained in the Company’s annual
report on Form 10-K for the year ended December 31,
2007.
The
results of operations for the three months ended March 31, 2008 and 2007
presented are not necessarily indicative of the results to be expected
for the
year.
There
is
no provision for dividends for the quarter to which this quarterly report
relates
.
2.
ORGANIZATION AND BUSINESS BACKGROUND
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
.
China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing)
and Tianjin Huaneng are hereinafter referred to as (“the
Company”).
3.
RECENTLY ISSUED ACCOUNTING STANDARDS
In
2008,
the Securities and Exchange Commission (the “SEC”) adopted rule amendments that
replace the category of “Small Business Issuers” with a broader category of
“Smaller Reporting Companies.” Under these rules, a "Smaller Reporting
Company" is a company with a public float less than $75,000,000 (measured
at end
of Q2). Companies that meet this definition are able to elect "scaled
disclosure standards" on an item-by-item or "a-la-carte" basis. With this
change, the SEC has streamlined and simplified reporting for many companies,
and
has not added any significant disclosure requirements.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No.
159
permits entities to choose to measure, on an item-by-item basis, specified
financial instruments and certain other items at fair value. Unrealized
gains
and losses on items for which the fair value option has been elected
are
required to be reported in earnings at each reporting date. SFAS No.
159 is
effective for fiscal years beginning after November 15, 2007, the provisions
of
which are required to be applied prospectively. The Company believes
that SFAS
159 should not have a material impact on the consolidated financial position
or
results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations" ("SFAS No. 141R"). SFAS No. 141R will change the accounting
for
business combinations. Under SFAS No. 141R, an acquiring entity will
be required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS No. 141R
will
change the accounting treatment and disclosure for certain specific items
in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations the Company engages in will be
recorded
and disclosed following existing GAAP until January 1, 2009. The Company
expects
SFAS No. 141R will have an impact on accounting for business combinations
once
adopted but the effect is dependent upon acquisitions at that time. The
Company
is still assessing the impact of this pronouncement.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in
Consolidated Financial Statements--An Amendment of ARB No. 51, or SFAS
No. 160"
("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal
years
beginning on or after December 15, 2008. The Company believes that SFAS
160
should not have a material impact on the consolidated financial position
or
results of operations.
In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires
companies with derivative instruments to disclose information that should
enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are
accounted
for under FASB Statement No. 133 "Accounting for Derivative Instruments
and
Hedging Activities" and how derivative instruments and related hedged
items
affect a company's financial position, financial performance and cash
flows.
SFAS 161 is effective for financial statements issued for fiscal years
and
interim periods beginning after November 15, 2008. The adoption of this
statement is not expected to have a material effect on the Company's
future
financial position or results of operations.
4.
INVENTORIES
Inventories
consisted of the following:
|
|
As
of March 31, 2008
|
|
As
of December 31, 2007
|
|
|
|
(Unaudited)
|
|
|
|
Raw
materials
|
|
$
|
688,814
|
|
$
|
656,605
|
|
Consumables
|
|
|
5,621
|
|
|
5,359
|
|
Work-in-process
|
|
|
2,585,331
|
|
|
2,464,441
|
|
Finished
goods
|
|
|
786,007
|
|
|
749,253
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
4,065,773
|
|
$
|
3,875,658
|
|
5.
STOCK HOLDERS’ EQUITY
Issuance
of Common Stock
On
February 29, 2008, the Company completed a private placement of 4,691,499
shares
of common stock for an aggregate purchase price of approximately $11,300,000.
The Company received $9,995,156 as net proceeds from this financing.
In
connection with the private placement, the Company deposited 2,000,000
shares of
common stock (“Make Good Shares”) into escrow and
we
are
required to deliver (i) 1,000,000 of the Make Good Shares to the investors
on a
pro rata basis for no additional consideration in the event that the
Company’s
after-tax net income for the fiscal year ending December 31, 2008 is
less than
$4.8 million; and (ii) 1,000,000 of the Make Good Shares to the investors
on a
pro rata basis for no additional consideration in the event that the
Company’s
after-tax net income for the fiscal year ending December 31, 2009 is
less than
$8 million.
In
accordance with SFAS 128,
Earnings
Per Share,
the
2,000,000 shares held in escrow were not included in the diluted earnings
per
share calculation as the
contingency
provision is met at the end of a reporting period
.
During
the three months ended March 31, 2008, the Company issued 164,516 shares
of
common stock as part of the conversion of the Series A Preferred
Stock.
During
the three months ended March 31, 2008, certain investors exercised their
warrants to purchase an aggregate of 75,000 shares of common stock totaling
$107,500.
Warrants
Issued to Placement Agent
In
connection with the private placement, the Company issued 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. These warrants are immediately exerciseable. The fair value
of the
warrants was estimated at the date of grant using the Black-Scholes
option-pricing model. In calculating the fair value of the warrants,
management
used the closing price of the common stock on February 29, 2008, of $2.71
per
share, plus the following assumptions:
Risk
free interest rate (%)
|
|
|
5.00
|
%
|
Dividend
yield (%)
|
|
|
0.00
|
%
|
Expected
life of warrant grants (years)
|
|
|
5
years
|
|
Expected
volatility of warrant grants (%)
|
|
|
43.79
|
%
|
The
Company valued the warrants at US$1.155 per share, or $541,695 in aggregate,
in
accordance with SFAS 123R. The $541,695 was recorded as offering costs
which
offset additional paid-in capital in the accompanying consolidated financial
statements for the three months ended March 31, 2008.
A
summary
of the status of the Company’s outstanding common stock warrants as of March 31,
2008:
|
|
Number of
Shares
|
|
Weighted-
average
Exercise Price
|
|
Weighted-
average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2007
|
|
|
5,555,559
|
|
$
|
2.73
|
|
|
3.76
years
|
|
$
|
354,839
|
|
Granted
|
|
|
469,150
|
|
|
2.88
|
|
|
5.00
years
|
|
|
—
|
|
Exercised
|
|
|
(50,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding
and Exercisable at March 31, 2008
|
|
|
5,974,709
|
|
$
|
2.74
|
|
|
4.38
years
|
|
$
|
354,839
|
|
Registration
Rights Agreement
In
connection with the private placement the Company entered into a registration
rights agreement with the investors on February 25, 2008 which requires
us to
file with the SEC a "resale" registration statement providing for the
resale of
(i) all of the 4,691,499 shares of common stock sold to the investors,
(ii) the
2,000,000 “make good shares” and (iii) the 469,150 shares underlying the
placement agent warrants (collectively, the “registrable securities”) for an
offering to be made on a continuous basis pursuant to Rule 415 of the
Securities
Act of 1933, as amended.
The
Company agreed, among other things, to prepare and file an initial registration
statement within 45 days of the closing date (i.e. April 14, 2008) to
register
for resale part of the registrable securities (other than the 2,000,000
make
good shares) and 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 the Company receive notice from the
SEC that
the initial registration statement will not be reviewed or is no longer
subject
to further review and comments.
The
Company is required to file additional registration statements covering
all of
the remaining registrable securities (or such lesser number as the SEC
deems
appropriate) if any registrable securities could not be registered in
the
initial registration statement, by the 15th day following the date we
are able
to effect the registration of such securities in accordance with any
SEC
restrictions.
The
Company failure to meet this schedule and other timetables provided in
the
registration rights agreement could result in the imposition of liquidated
damages. No liquidated damages will accrue on any registrable securities
which
the SEC has requested (due to the application of Rule 415) the Company
to remove
from the registration statement and the required effectiveness date for
such
securities will be tolled until such time as the Company are able to
effect the
registration of those securities in accordance with any SEC
restrictions.
6.
INCOME TAXES
The
Company is registered in the United States of America and has operations
in
three tax jurisdictions: the United States of America, British Virgin
Island
(“BVI”) and the PRC. The operations in the United States of America and British
Virgin Island have incurred net operating losses for income tax purposes.
The
Company generated substantially its net income from the operation of
its
subsidiary in the PRC and is subject to the PRC tax jurisdiction. The
Company
has recorded an income tax provision for the three months ended March
31, 2008
and 2007.
United
States of America
China
Solar was incorporated in the State of
Nevada
and is
subject to the tax laws of United States of America. As of March 31,
2008, the
operation in the United States of America incurred $146,103 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 $146,103 on the expected future tax
benefits
from the net operating loss carryforwards as the management believes
it is more
likely than not that these assets will not be realized in the
future.
British
Virgin Island
Under
the
current BVI law, the Company is not subject to tax on income.
The
PRC
The
Company's subsidiaries operating in the PRC are Deli Solar (Bazhou),
Deli Solar
(Beijing), Ailiyang, Tianjin Huaneng and SZPSP.
Of
these subsidiaries Ailiyang, Tianjin Huaneng and SZPSP are domestically
owned
and
subject
to the Corporate Income Tax (“CIT”) governed by the Income Tax Law of the
People’s Republic of China, at a statutory rate of 25%.
In
March 2005, the Deli Solar (Bazhou) became a foreign investment enterprise.
Hence, effective from the year ended 2005, Deli Solar (Bazhou) is entitled
to a
two-year exemption from enterprise income tax (which expired at the end
of 2007)
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. Tianjin
Huaneng
is now is subject to CIT at a statutory rate of 25%. However, as foreign
invested enterprises, Deli Solar (Bazhou) and Deli Solar (Beijing) can
continue
to enjoy the lower CIT rate of 15% until their tax holiday expires.
The
Company’s effective income tax rates for the three months ended March 31, 2008
and 2007 were both 15%.
7.
SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
(a)
Business
information
The
Company has two reportable segments namely solar heater/boiler related
products
and heat pipe related products for the three months ended March 31, 2008
and
2007. 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:
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
2,829,815
|
|
$
|
2,995,863
|
|
Heat
Pipe related products
|
|
|
5,470,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,300,076
|
|
$
|
2,995,863
|
|
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Gross
profit:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
574,893
|
|
$
|
746,948
|
|
Heat
Pipe related products
|
|
|
1,880,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,455,060
|
|
$
|
746,948
|
|
|
|
As
of March 31, 2008
|
|
As
of December 31, 2007
|
|
Total
assets:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
22,971,381
|
|
$
|
18,690,225
|
|
Heat
Pipe related products
|
|
|
11,098,392
|
|
|
9,029,994
|
|
Unallocated
|
|
|
5,648,228
|
|
|
2,919,494
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,718,001
|
|
$
|
30,639,713
|
|
|
|
|
|
|
|
|
|
Total
goodwill:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
|
|
|
|
|
|
Heat
Pipe related products
|
|
$
|
1,789,324
|
|
$
|
1,789,324
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,789,324
|
|
$
|
1,789,324
|
|
(b)
Geographic
information
The
Company operates in the PRC and all of the company’s long lived assets are
located in the PRC. In respect of geographical segment reporting, sales
are
based on the country in which the customer is located and total assets
and
capital expenditure are based on the country where the assets are
located.
The
Company’s operations are located in PRC, which is the main geographical area.
The Company’s sales and total assets by geographical market are analyzed as
follows:
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
PRC
|
|
$
|
7,320,833
|
|
$
|
2,995,863
|
|
Others
|
|
|
979,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,300,076
|
|
$
|
2,995,863
|
|
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Gross
profit:
|
|
|
|
|
|
PRC
|
|
$
|
2,038,300
|
|
$
|
746,948
|
|
Others
|
|
|
416,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,455,060
|
|
$
|
746,948
|
|
|
|
As
of March 31, 2008
|
|
As
of December 31, 2007
|
|
Total
assets:
|
|
|
|
|
|
PRC
|
|
$
|
37,835,101
|
|
$
|
29,107,727
|
|
Others
|
|
|
1,882,900
|
|
|
1,531,986
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,718,001
|
|
$
|
30,639,713
|
|
8.
BUSINESS ACQUISITION
On
January 9, 2008, Beijing Deli Solar Technology Development Co., Ltd,
the
Company’s wholly-owned subsidiary (“Deli Solar (Beijing)”), entered into an
Equity Purchase Agreement and Complementary Agreement to the Equity Purchase
Agreement to acquire 100% of the outstanding equity interest of Shenzhen
Pengsangpu Solar Industrial Products Corporation (“SZPSP”) from its
shareholders. On March 25, 2008, both parties signed a Supplmentary Agreement
to
the Equity Purchase Agreement and the Complementary Agreement to amend
and
supplement the previous agreements and set forth the final terms of the
total
purchase price and payment method of the acquisition.
Under
the
agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest
of
SZPSP from its three shareholders. $4,087,832 (RMB 28.8 million) of the
purchase price was payable in cash. The three shareholders of SZPSP agreed
to
loan the cash proceeds back to SZPSP interest free to be used for working
capital. Fifty (50%) of the principal amount of the loan is required
to be paid
prior to March 31, 2009 and the remaining 50% balance is required to
be paid
prior to March 31, 2010.
In
addition to the cash portion of the purchase price, the parties agreed
to an
additional consideration of RMB 20 million (approximately $2,839,458)
to
represent the agreed-upon value of SZPSP’s intangible assets.
This
portion is required to be paid in the form of 1,419,729 shares of the
Company’s
common stock (which was based on the average closing price of the common
stock
for the 30 days immediately preceding the execution of the Complementary
Agreement (the “Share Price”)), provided that if on March 31, 2010 the common
stock price is lower than the Share Price, the Company will pay the difference.
Fifty percent (50%) of these shares will be transferable and unrestricted
on or
after March 31, 2009 and the remaining fifty percent (50%) will be transferable
on or after March 31, 2010. The shares are required to be transferred
to SZPSP
within 180 days of the closing. In addition, as part of the purchase
price, the shareholders of SZPSP will receive five years warrants to
purchase a
total of 141,973 shares of common stock at an exercise price of $2.50
per share,
subject to future adjustment.
SZPSP
warranted in the Complementary Agreement that if (i) its sales revenue
is less
than RMB 99 million (approximately $13,670,068) with an after-tax net
profit of
less than RMB 9.43 million (approximately $1,302,108) for the year ended
December 31, 2008; or (ii) if in the year ended December 31, 2009, it
does not
reach the targeted sales revenue of RMB 143.9 million (approximately
$19,868,336) or the after-tax net profit of RMB 12.13 million (approximately
$1,674,789), SZPSP will pay the difference between the revenue and the
targeted
revenue of the year specified by reducing the amount payable on the
shareholders’ loan. If the shareholders’ loan is not sufficient to pay the
difference, the common shares held by SZPSP will be returned to us to
the extent
necessary for the remaining balance.
The
accounting date of the acquisition was April 1, 2008 and was accounted
for under
the purchase method. SZPSP results of operations have been not included
in the
three months ended March 31, 2008 consolidated financial statements.
The
acquisition of SZPSP will enable the Company to immediately begin leveraging
its
technology and engineering capabilities and expertise, and will significantly
expand China Solar's customer base and presents a commercial and industrial
market opportunity for solar water heaters in southern China.
The
estimated aggregate purchase price was $7,019,483. Below is a summary
of the
total purchase price:
Cash
|
|
$
|
4,087,832
|
|
Fair
value of 1,419,729 common stock
|
|
|
2,839,458
|
|
Fair
value of 141,973 warrants
|
|
|
92,193
|
|
Total
purchase price
|
|
$
|
7,019,483
|
|
We
continue to evaluate the purchase price allocation for the SZPSP acquisition,
including intangible assets, contingent liabilities and property, plant
and
equipment.
The
following unaudited pro forma financial information for the Company gives
effect
to the 2008 acquisition as if they had occurred on January 1, 2008. These
pro forma results do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on such
date or
to project the Company’s results of operations for any future
period.
|
|
|
|
|
|
For
the three months ended March 31, 2008
|
|
|
|
|
|
Pro
forma revenues
|
|
$
|
9,103,896
|
|
Pro
forma net income
|
|
|
647,940
|
|
|
|
|
|
|
Pro
forma earnings per common share — net income
|
|
|
|
|
Basic
|
|
$
|
0.08
|
|
Diluted
|
|
$
|
0.04
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
Basic
|
|
|
8,009,713
|
|
Diluted
|
|
|
15,284,770
|
|
Under
an
engagement agreement dated January 16, 2008 between the Company and Roth
Capital
Partners,
LLC
(“Roth”), Roth acted as a placement agent for the Company in connection with
during the private
placement
of approximately 4.7 million shares of our common stock which was consummated
in
February
2008
(the
“Offering”). Under a certain agreement, dated as of March 21, 2007 by and among
Trenwith
Securities,
LLC (“Trenwith”) and the Company (the “Trenwith Agreement”), Trenwith was
granted certain
rights,
including the right to act as placement agent in connection with a subsequent
private placement of
the
Company’s securities at fees which are mutually acceptable within a period of
24
months after the
closing
of the June 2007 financing. Trenwith believes that it had the right to
act as
placement agent with
respect
to the Offering and has threatened to bring proceedings against the Company
for
alleged violation
of
its
rights under the Trenwith Agreement. The Company disputes these claims
and
intends to vigorously
defend
any lawsuit which Trenwith may commence.
|
|
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors
China
Solar & Clean Energy Solutions, Inc. (fka Deli Solar (USA),
Inc.)
Beijing,
People’s Republic of China
We
have audited the consolidated balance sheet of China Solar & Clean
Energy Solutions, Inc. (fka Deli Solar (USA), Inc.) (the Company)
as of
December 31, 2006, and the related consolidated statements of
operations,
changes in stockholders’ equity, and cash flows for the year then ended.
These consolidated financial statements are the responsibility
of the
Company’s management. Our responsibility is to express an opinion on
these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that
we plan and perform the audit to obtain reasonable assurance
about whether
the consolidated financial statements are free of material misstatement.
The company is not required to have, nor were we engaged to perform,
an
audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting
as a
basis for designing audit procedures that are appropriate in
the
circumstances, but not for the purpose of expressing an opinion
on the
effectiveness of the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining,
on a test basis, evidence supporting the amounts and disclosures
in the
financial statements, assessing the accounting principles used
and
significant estimates made by management, as well as evaluating
the
overall financial statement presentation. We believe that our
audit
provides a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to
above
present fairly, in all material respects, the financial position
of China
Solar & Clean Energy Solutions, Inc. (fka Deli Solar (USA), Inc.) as
of December 31, 2006, and the results of its operations and its
cash flows
for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
Child,
Van Wagoner & Bradshaw, PLLC
Salt
Lake City, Utah
March
31, 2007
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and stockholders of
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
We
have
audited the accompanying consolidated balance sheet of China Solar & Clean
Energy Solutions, Inc. (the “Company”) as of December 31, 2007 and the related
consolidated statements of income, cash flows and changes in stockholders’
equity and comprehensive income for the year ended December 31, 2007.
These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
The Company
is not required to have, nor were we engaged to perform, an audit of
its
internal control over financial reporting. Our audits include consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the
purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An
audit also
includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well
as
evaluating the overall consolidated financial statement presentation.
We believe
that our audit provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of the Company as of
December
31, 2007 and the results of their operations and their cash flows for
the year
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
/s/
Cordovano and Honeck LLP
Englewood,
Colorado USA
March
28,
2008, except for Note 2 which is dated June 20, 2008
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
BALANCE
SHEETS
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,466,637
|
|
$
|
3,212,065
|
|
Accounts
receivable, net
|
|
|
7,453,009
|
|
|
870,446
|
|
Inventories
|
|
|
3,875,658
|
|
|
315,765
|
|
Other
receivables and prepayments
|
|
|
1,637,948
|
|
|
1,387,911
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
18,433,252
|
|
|
5,786,187
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
8,819,216
|
|
|
5,926,468
|
|
Goodwill
|
|
|
1,789,324
|
|
|
-
|
|
Intangible
assets, net
|
|
|
1,597,921
|
|
|
1,003,530
|
|
TOTAL
ASSETS
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$
|
2,111,028
|
|
$
|
147,901
|
|
Income
tax payables
|
|
|
1,108,433
|
|
|
-
|
|
Other
payables and accrued liabilities
|
|
|
8,552,452
|
|
|
342,811
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
11,771,913
|
|
|
490,712
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
935,825
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Convertible
preferred stock: par value $0.001;
25,000,000
shares authorized, 1,774,194 and -0- shares issued and outstanding,
respectively
|
|
|
1,774
|
|
|
-
|
|
Common
stock, $0.001 par value; 66,666,667 shares authorized; 6,205,290
and
6,205,290 shares issued and outstanding, respectively
|
|
|
6,205
|
|
|
6,205
|
|
Additional
paid-in capital
|
|
|
9,260,607
|
|
|
5,705,574
|
|
Accumulated
other comprehensive income
|
|
|
1,134,270
|
|
|
533,909
|
|
Retained
earnings
|
|
|
7,529,119
|
|
|
5,979,785
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
17,931,975
|
|
|
12,225,473
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS
OF INCOME
(Currency
expressed in United States Dollars (“US$”))
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
28,772,078
|
|
|
16,842,994
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,300,268
|
|
|
4,625,319
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
282,822
|
|
|
154,946
|
|
Selling
and distribution
|
|
|
827,839
|
|
|
459,746
|
|
General
and administrative
|
|
|
4,003,973
|
|
|
2,800,015
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
5,114,634
|
|
|
3,414,707
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,185,634
|
|
|
1,210,612
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Other
income
|
|
|
220,057
|
|
|
45,606
|
|
Interest
expense
|
|
|
(65,481
|
)
|
|
(16,717
|
)
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
154,576
|
|
|
28,889
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,340,210
|
|
|
1,239,501
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(615,325
|
)
|
|
-
|
|
Minority
interests
|
|
|
(199,744
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
|
|
|
|
|
|
|
|
Computation
of
income available to common stockholders:
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
Preferred
stock beneficial conversion
|
|
|
(975,807
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
1,549,334
|
|
$
|
1,239,501
|
|
|
|
|
|
|
|
|
|
Net
income per share - basic
|
|
$
|
0.25
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Net
income per share - diluted
|
|
$
|
0.23
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
6,205,290
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
10,783,026
|
|
|
6,957,876
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Currency
expressed in United States Dollars)
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
324,157
|
|
|
178,437
|
|
Provision
for allowance on accounts receivable
|
|
|
650,432
|
|
|
(77,267
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(7,232,995
|
)
|
|
(238,334
|
)
|
Inventories
|
|
|
(3,559,893
|
)
|
|
67,418
|
|
Other
receivables and prepayments
|
|
|
(250,037
|
)
|
|
(238,268
|
)
|
Accounts
payable, trade
|
|
|
1,963,127
|
|
|
58,526
|
|
Income
tax payable
|
|
|
1,108,433
|
|
|
-
|
|
Other
payables and accrued liabilities
|
|
|
8,209,641
|
|
|
262,885
|
|
Minority
interest
|
|
|
935,825
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
4,673,831
|
|
|
1,252,898
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of a subsidiary
|
|
|
(489,459
|
)
|
|
-
|
|
Deposits
made to acquire subsidiary
|
|
|
-
|
|
|
(256,278
|
)
|
Purchase
of intangible assets
|
|
|
(635,726
|
)
|
|
(932,732
|
)
|
Purchase
of property, plant and equipment
|
|
|
(4,294,741
|
)
|
|
(2,815,398
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(5,419,926
|
)
|
|
(4,004,408
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Repayment
of short-term borrowings
|
|
|
(180,694
|
)
|
|
(130,112
|
)
|
Capital
contribution received from shareholders
|
|
|
-
|
|
|
-
|
|
Proceeds
from issuance of preferred stock (net of offering costs of
$169,000 paid
in cash)
|
|
|
2,581,000
|
|
|
-
|
|
Related
receivable
|
|
|
-
|
|
|
82,639
|
|
Related
payables
|
|
|
-
|
|
|
22,528
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
2,400,306
|
|
|
(24,945
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
600,361
|
|
|
359,352
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
2,254,572
|
|
|
(2,417,103
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
3,212,065
|
|
|
5,629,168
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS,
END
OF YEAR
|
|
$
|
5,466,637
|
|
$
|
3,212,065
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
939,798
|
|
$
|
-
|
|
Cash
paid for interest expenses
|
|
$
|
95,446
|
|
$
|
16,717
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS
|
|
|
|
|
|
|
|
Warrant
shares granted for offering costs
|
|
$
|
138,338
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
Preferred
stock
|
|
Common
stock
|
|
Additional
paid-in
|
|
Accumulated
other
comprehensive
|
|
Retained
|
|
Total
stockholders’
|
|
|
|
No.
of shares
|
|
Par
value
|
|
No.
of shares
|
|
Par
value
|
|
Capital
|
|
income
|
|
earnings
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2006
|
|
|
-
|
|
|
-
|
|
|
6,205,290
|
|
|
6,205
|
|
|
5,705,574
|
|
|
174,557
|
|
|
4,740,284
|
|
|
10,626,620
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,239,501
|
|
|
1,239,501
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
359,352
|
|
|
-
|
|
|
359,352
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,598,853
|
|
Balance
as of December 31, 2006
|
|
|
-
|
|
|
-
|
|
|
6,205,290
|
|
|
6,205
|
|
|
5,705,574
|
|
|
533,909
|
|
|
5,979,785
|
|
|
12,225,473
|
|
Shares
issued for private placement, net of offering costs of $169,000
in cash
and $138,338 in warrants.
|
|
|
1,774,194
|
|
|
1,774
|
|
|
|
|
|
|
|
|
2,579,226
|
|
|
|
|
|
|
|
|
2,581,000
|
|
Preferred
share dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975,807
|
|
|
|
|
|
(975,807
|
)
|
|
-
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,525,141
|
|
|
2,525,141
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600,361
|
|
|
|
|
|
600,361
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,125,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
|
1,774,194
|
|
$
|
1,774
|
|
|
6,205,290
|
|
$
|
6,205
|
|
$
|
9,260,607
|
|
$
|
1,134,270
|
|
$
|
7,529,119
|
|
$
|
17,931,975
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
1.
|
ORGANIZATION
AND BUSINESS
BACKGROUND
|
China
Solar & Clean Energy Solutions, Inc. (“China Solar”), formerly known as Deli
Solar (USA) Inc. was incorporated in the State of Nevada on March 21,
1983 as
Meditech Pharmaceuticals, Inc. (“Meditech”). In late 2004, the Board of
Directors of Meditech contemplated a strategic reorganization with Deli
Solar
Holding Ltd., a corporation organized in the British Virgin Islands (“Deli Solar
(BVI)”). In contemplation of the reorganization, the Board of Directors resolved
to spin off Meditech's drug development business to the shareholders
of Meditech
of record on February 17, 2005, through a pro rata distribution in the
form of a
stock dividend. The spin-off was completed on August 29, 2005. The acquisition
of Deli Solar (BVI) was accounted for as a recapitalization of Deli Solar
(BVI).
Deli
Solar (BVI) was formed in June 2004. On August 1, 2004, Deli Solar (BVI)
purchased Bazhou Deli Solar Energy Heating Co., Ltd. (“Deli Solar (Bazhou)”), a
corporation duly organized under the laws of the People’s Republic of China
(“PRC”) from Messrs. Deli Du, Xiao'er Du, and Xiaosan Du for RMB 6,800,000.
As a
result of this transaction, Deli Solar (Bazhou) became a wholly-foreign
owned
enterprise ("WFOE") under PRC law on March 30, 2005. This acquisition
was
accounted for as a transfer of entities under common control.
Deli
Solar (Bazhou) was incorporated on August 19, 1997 under the laws of
the PRC. In
the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the
United
States (“US”).
The
result of the above transactions is that Deli Solar (BVI) is now our
direct,
wholly-owned subsidiary and Deli Solar (Bazhou) remains a wholly-owned
subsidiary of Deli Solar (BVI).
On
November 21, 2005 Deli Solar (Bazhou) acquired Ailiyang Solar Energy
Technology
Co., Ltd. (“Ailiyang”), an entity formerly controlled by the owners of Deli
Solar (Bazhou). The transaction was accounted for as a transfer of entities
under common control.
Beijing
Deli Solar Technology Development Co., Ltd. (“Deli Solar (Beijing)”) was founded
in 2006 and is principally engaged in solar power heater integrated construction
projects in major cities in the PRC.
During
2007, the Company set up a branch sales office in the cities of Lian
Yun Gang
and the City of Bazhou to provide sales support in those cities as
sole-proprietorship of its chief executive officer and president, Mr.
Deli Du.
The sole proprietorships are considered variable interest entities because
they
(1) lack equity sufficient to finance their activities without additional
subordinated financial support and (2) the Company, and not Mr. Deli
Du, absorbs
the losses or receives the gains.
Based
upon a review of the provisions of FIN 46R, the structure of the agreements
and activities of the entities described above, the Company determined
that it
is the primary beneficiary of the sole proprietorships at December 31,
2007. If
the facts and circumstances change in the future, the Company could determine
that it is no longer the primary beneficiary, which would require China
Solar to
de-consolidate the sole-proprietorships. The Company's investment in
the
sole-proprietorships was immaterial as of December 31, 2007.
On
July
1, 2007, Deli Solar (Beijing) acquired 51% of Tianjin Hua Neng Energy
Equipment
Company (“Tianjin Huaneng”), which manufactures energy saving boilers and
environmental protection equipment for industrial customers. The transaction
was
accounted for under the purchase method. See Note 2.
China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng are hereinafter referred to as (“the
Company”).
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America
(“US
GAAP”).
The
consolidated financial statements include the financial statements of
China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng and the VIE.
The
Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 46R, “Consolidation of Variable Interest Entities ” (“FIN
46R”). The sole-proprietorship business in the name of Mr. Deli Du is regarded
a
VIE of the Company and is consolidated in the Company’s financial statements.
The
Company evaluates its relationship with other entities to identify whether
they
are variable interest entities, as defined by Financial Accounting Standards
Board (FASB) Interpretation No. 46 (revised), "Consolidation of Variable
Interest Entities" (FIN 46R), and assesses whether it is the primary
beneficiary of such entities. If the determination is made that the Company
is
the primary beneficiary, then that entity is included in the Company's
Consolidated Financial Statements in accordance with
FIN 46R.
All
significant intercompany balances and transactions within the Company
have been
eliminated upon consolidation.
In
preparing these financial statements, management makes estimates and
assumptions
that affect the reported amounts of assets and liabilities in the balance
sheets
and revenues and expenses during the years reported. Actual results may
differ
from these estimates.
|
Cash
and cash equivalents
|
The
Company considers all highly liquid securities with original maturities
of three
months or less when acquired to be cash equivalents. At December 31,
2007 and
2006, the Company had $5,466,637 and $3,212,065, respectively, in cash
equivalents.
|
Accounts
receivable and allowance for doubtful
accounts
|
Accounts
receivable consists of amounts due from customers. The Company extends
unsecured
credit to its customers in the ordinary course of business but mitigates
the
associated risks by performing credit checks and actively pursuing past
due
accounts. An allowance for doubtful accounts is established and determined
based
on management’s assessment of known requirements, aging of receivables, payment
history, the customer’s current credit worthiness and the economic
environment.
Inventories
include direct materials, labor and factory overhead and are stated at
lower of
cost or market value, cost being determined on a first-in, first-out
basis. The
Company periodically reviews historical sales activity to determine excess,
slow
moving items and potentially obsolete items and also evaluates the impact
of any
anticipated changes in future demand. The Company provides inventory
allowances
based on excess and obsolete inventories determined principally by customer
demand. As of December 31, 2007, 2006 and 2005, the Company did not record
an
allowance for obsolete inventories, nor have there been any
write-offs.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation
and
accumulated impairment losses, if any. Depreciation is calculated on
the
straight-line basis over the following expected useful lives from the
date on
which they become fully operational and after taking into account their
estimated residual values. Property, plant and equipment are depreciated
over
their estimated useful lives as follows:
|
|
Depreciable life
|
|
Residual value
|
|
Buildings
|
|
|
6-50
years
|
|
|
10%
|
|
Plant
and machinery
|
|
|
10
years
|
|
|
10%
|
|
Office
equipments
|
|
|
7
years
|
|
|
10%
|
|
Motor
vehicles
|
|
|
7
years
|
|
|
10%
|
|
Computer
equipment
|
|
|
3
years
|
|
|
10%
|
|
All
facilities purchased for installation, self-made or subcontracted are
accounted
for under construction-in-progress. Construction-in-progress is recorded
at
acquisition cost, including cost of facilities, installation expenses
and the
interest capitalized during the course of construction for the purpose
of
financing the project. Upon completion and readiness for use of the project,
the
cost of construction-in-progress is to be transferred to fixed
assets.
|
Goodwill
and intangible assets
|
Goodwill
and intangibles, including intellectual property, were generally acquired
in
acquisitions in 2007. Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, or SFAS No. 142, requires goodwill to
be tested for impairment on an annual basis and between annual tests
in certain
circumstances, and written down when impaired. We perform this analysis
during
the fourth quarter of each year. No impairment of goodwill has been identified
since the date of acquisition.
Furthermore,
SFAS No. 142 requires purchased intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined to
be
indefinite. Purchased intangible assets are carried at cost less accumulated
amortization. No impairment of intangibles has been identified since
the date of
acquisition. All lands in the PRC are owned by the PRC government. The
government in the PRC, according to the relevant PRC law, may sell the
right to
use the land for a specified period of time. Thus, all of the Company’s land
purchases in the PRC are considered to be leasehold land and are stated
at
amortized cost. Amortization is provided over the term of the land use
right
agreements on a straight-line basis, which is 50 years and they will
expire in
2048, 2051 and 2054.
|
Impairment
of long-lived assets
|
In
accordance with SFAS No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets”
, a
long-lived assets and certain identifiable intangible assets held and
used by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is evaluated
by a
comparison of the carrying amount of assets to estimated undiscounted
net cash
flows expected to be generated by the assets. If such assets are considered
to
be impaired, the impairment to be recognized is measured by the amount
by which
the carrying amounts of the assets exceed the fair value of the assets.
There
has been no impairment as of December 31, 2007and 2006.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
Company sells their products and services under a bundled sales arrangement,
which typically include equipment, installation, testing and maintenance
components. The components of equipment, installation and testing are
non-separable and considered as a single unit of deliverables, namely
product
revenue. Hence, the product and maintenance are considered separate units
of
accounting in the arrangement. Revenues under these bundled arrangements
are
allocated considering the relative fair values of two separate deliverables:
(a)
product deliverable and (b) maintenance deliverable, included in the
bundled
arrangement based on the estimated relative fair values of each element
in
accordance with EITF 00-21, “Accounting for Multiple Element Revenue
Arrangements” and recognized when the applicable revenue recognition criteria
for each element are met. Revenue from product deliverables are recognized
upon
final acceptance, which is signed by the customer when installation is
completed. Revenue from maintenance support for the Company’s products are
deferred and recognized ratably over the term of the service period upon
the
acceptance of the products, which is generally 12 months.
Revenue
from the provision of energy-saving projects are recognized when persuasive
evidence of an arrangement exists, transfer of title has occurred or
services
have been rendered, the selling price is fixed or determinable and
collectibility is reasonably assured.
The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of the products at the
rate of
17% on the invoiced value of sales. Output VAT is borne by customers
in addition
to the invoiced value of sales and input VAT is borne by the Company
in addition
to the invoiced value of purchases to the extent not refunded for export
sales.
Cost
of
revenue consists primarily of material costs, direct labor, inbound freight
charges, depreciation and manufacturing overheads, which are directly
attributable to the manufactured products and the provision of the energy-saving
projects. Additionally, costs of revenue includes purchasing, and receiving
costs, inspection costs, warehousing costs and costs associated with
distribution networks.
Selling
and distribution expenses consists
primarily
of non-cash sales promotions, outbound distribution, traveling and
transportation expenses, and agency administration expenses. General
and
administrative expenses includes advertising expenses and salaries and
benefits.
Advertising
costs are expensed as incurred in accordance with the American Institute
of
Certified Public Accountants (“AICPA”) Statement of Position 93-7,
“Reporting
for Advertising Costs”
.
Advertising expenses for the years ended December 31, 2007,and 2006 were
$1,415,493 and $1,106,488, respectively.
Contributions
to retirement schemes (which are defined contribution plans) are charged
to
general and administrative expenses in the accompanying consolidated
statements
of operations as the related employee service is provided.
SFAS
No.
130,
“Reporting
Comprehensive Income”,
establishes standards for reporting and display of comprehensive income,
its
components and accumulated balances. Comprehensive income as defined
includes
all changes in equity during a period from non-owner sources. Accumulated
other
comprehensive income, as presented in the accompanying statement of changes
in
owners’ equity consists of changes in unrealized gains and losses on foreign
currency translation. This comprehensive income is not included in the
computation of income tax expense or benefit.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
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 sold to its customers for a period
of twelve
months upon the completion of installation at the Company’s expense.
The
Company has not experienced any material returns where it was under obligation
to honor this standard warranty provision. As such, no reserve for product
warranty has been provided in the statements of operations for the years
ended
December 31, 2007 and 2006, respectively.
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 adopted Financial Accounting Standards Board Interpretation No. 48,
“Accounting
for Uncertainty in Income Taxes”
(“FIN
48”), on January 1, 2007. FIN 48 prescribes a more likely than not
threshold for financial statement recognition and measurement of a tax
position
taken or expected to be taken in a tax return. This Interpretation also
provides
guidance on derecognition of income tax assets and liabilities, classification
of current and deferred income tax assets and liabilities, accounting
for
interest and penalties associated with tax positions, accounting for
income
taxes in interim periods, and income tax disclosures.
The
Company or one of its subsidiaries files income tax returns in the U.S.
federal
jurisdiction and foreign jurisdictions, principally the PRC. With few
exceptions, the Company is no longer subject to U.S. federal, state and
local,
or non-U.S. income tax examinations by tax authorities for years prior
to the
reverse merger on March 31, 2005. The Internal Revenue Service (IRS)
has not
commenced any examinations of the Company's U.S. income tax returns for
the year
2005, of which reverse merger taking place, through 2007.
The
Company did not have any adjustment to the opening balance of retained
earnings
as of January 1, 2007 as a result of the implementation of FIN 48.
As
of
December 31, 2007, the Company did not have any significant liability for
unrecognized tax benefits. For the year ended December 31, 2007, the
Company did not have any interest accrued related to unrecognized tax
benefits
in interest expense and penalties in operating expenses.
|
Recently
issued accounting standards
|
In
2008,
the Securities and Exchange Commission (the “SEC”) adopted rule amendments that
replace the category of “Small Business Issuers” with a broader category of
“Smaller Reporting Companies.” Under these rules, a "Smaller Reporting
Company" is a company with a public float less than $75,000,000 (measured
at end
of Q2). Companies that meet this definition are able to elect "scaled
disclosure standards" on an item-by-item or "a-la-carte" basis. With this
change, the SEC has streamlined and simplified reporting for many companies,
and
has not added any significant disclosure requirements.
In
February 2007, the FASB issued Statement of Financial Accounting Standard
No.
159,
“The
Fair Value Option for Financial Assets and Financial
Liabilities”
, or
SFAS 159. SFAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value. It is expected to
expand the
use of fair value measurements which is consistent with the Financial
Accounting
Standards Board’s long-term measurement objectives for accounting for financial
instruments. SFAS 159 is effective for our first fiscal year that begins
after
November 15, 2007, which is our fiscal year 2008 that begins in January
2008.
The Company is currently evaluating the impact of this statement to its
financial position and results of operations.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
‘’Business
Combinations’’
, or
SFAS No. 141R. SFAS No. 141R will change the accounting for business
combinations. Under SFAS No. 141R, an acquiring entity will be required
to
recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS No. 141R
will
change the accounting treatment and disclosure for certain specific items
in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations we engage in will be recorded
and
disclosed following existing GAAP until January 1, 2009. We expect SFAS
No. 141R
will have an impact on accounting for business combinations once adopted
but the
effect is dependent upon acquisitions at that time. We are still assessing
the
impact of this pronouncement.
In
December 2007, the FASB issued SFAS No. 160,
"Noncontrolling
Interests in Consolidated Financial Statements--An Amendment of ARB No.
51’’
, or
SFAS No. 160. SFAS No. 160 establishes new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation
of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or
after
December 15, 2008. We believe that SFAS 160 should not have a material
impact on
our financial position or results of operations.
Acquisition
On
May
18, 2007, the Company’s wholly owned subsidiary, Beijing Deli Solar Technology
Development Co., Ltd. entered into a purchase agreement to acquire 51%
equity
interest in Tianjin Huaneng, to expand market share, held by Tianjin
Municipal
Ji County State-owned Assets Administration Commission for a total purchase
price of $3,149,147. By supplemental agreement dated August 8, 2007,
the
purchase price was reduced to approximately $1,689,741. The Company also
incurred additional cost of $769,418 related to finder’s fee, which has been
included in the total cost of the acquisition of $2,459,159. The finder’s fee
was paid to Tianjin Wangshitong Corporate Consulting Co, Ltd., an unrelated
third party. As of December 31, 2007, the Company paid approximately
$2,345,018
of the purchase price and the finder’s fee. The remaining balance as of the date
of this report was $114,141. In addition, the Company agreed to provide
working
capital of approximately $2.6 million to Tianjin Huaneng. The accounting
date of
the acquisition was July 1, 2007 and was accounted for under the purchase
method. Tianjin Huaneng results of operations have been included in our
consolidated financial statements since the date of acquisition. Tianjin
Huaneng
is principally engaged in the design, development and manufacturing and
marketing of energy-saving related heating products such as heat pipes,
heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy
water
heaters and radiators. These products are distributed in the PRC and
Southeast
Asia. Goodwill recorded as part of the purchase price allocation was
$1,708,665.
Identifiable intangible assets acquired as part of the acquisition included
definite-lived intangibles such as land use rights which totaled $256,157,
with
a weighted average amortization period of approximately 50 years.
The
aggregate purchase price was $2,459,159, including $1,689,741 of cash
and costs
related to the acquisition of $769,418. Below is a summary of the total
purchase
price:
Cash
|
|
$
|
1,689,741
|
|
Direct
acquisition costs
|
|
|
769,418
|
|
|
|
|
|
|
Total
purchase price
|
|
$
|
2,459,159
|
|
In
June
2008, the purchase price allocation was finalized which resulted to no
adjustment to the fair value of assets acquired and liabilities assumed.
The
following table represents the final purchase price allocation to the
estimated
fair value of the assets acquired and liabilities assumed:
|
|
|
|
|
|
As
of July 1, 2007
|
|
Cash
and cash equivalents
|
|
$
|
196,150
|
|
Accounts
receivable
|
|
|
2,362,792
|
|
Inventories
|
|
|
1,665,617
|
|
Prepayments
and other receivables
|
|
|
441,882
|
|
Property,
plant and equipment
|
|
|
589,985
|
|
Land
use rights
|
|
|
256,157
|
|
Goodwill
|
|
|
1,789,324
|
|
Total
assets acquired
|
|
$
|
7,301,907
|
|
Short-term
bank loan
|
|
$
|
588,899
|
|
Accounts
payable
|
|
|
573,479
|
|
Deferred
revenue
|
|
|
340,856
|
|
Advances
from customers
|
|
|
1,326,665
|
|
Value-added
tax payable
|
|
|
440,207
|
|
Income
taxes payable
|
|
|
458,705
|
|
Deferred
tax liabilities
|
|
|
16,059
|
|
Accrued
liabilities and other payables
|
|
|
716,188
|
|
Long-term
payables
|
|
|
381,690
|
|
Total
liabilities assumed
|
|
|
4,842,748
|
|
Net
assets acquired
|
|
$
|
2,459,159
|
|
The
$1,789,324 of goodwill was assigned to the heat solar and related products
segment. The company does not expect goodwill to be tax deductible in
the
PRC.
The
following unaudited pro forma financial information for the Company gives
effect
to the 2007 acquisition as if they had occurred on January 1, 2006. These
pro forma results do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on such
date or
to project the Company’s results of operations for any future
period.
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Pro
forma net sales
|
|
$
|
43,722,215
|
|
$
|
34,981,140
|
|
Pro
forma net income
|
|
|
2,626,922
|
|
|
1,445,425
|
|
|
|
|
|
|
|
|
|
Pro
forma earnings per common share — net income
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
$
|
0.23
|
|
Diluted
|
|
$
|
0.24
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
6,206,290
|
|
|
6,205,290
|
|
Diluted
|
|
|
10,783,026
|
|
|
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, 2007and2006 were $282,822 and$162,695,
respectively.
7.
|
INTANGIBLE
ASSETS, NET
|
Intangible
assets consisted of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Land
use rights, at cost
|
|
$
|
1,654,998
|
|
$
|
1,019,272
|
|
Less:
accumulated amortization
|
|
|
(57,077
|
)
|
|
(15,742
|
)
|
|
|
|
|
|
|
|
|
Land
use rights, net
|
|
$
|
1,597,921
|
|
$
|
1,003,530
|
|
All
lands
in the PRC are owned by the PRC government. The government in the PRC,
according
to the relevant PRC law, may sell the right to use the land for a specified
period of time. Thus, all of the Company’s land purchases in the PRC are
considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided
over
the term of the land use right agreement which is 50 years, on a straight-line
basis. Amortization expenses for the years ended December 31, 2007 and2006
were
$41,335 and $15,742, respectively.
8.
|
OTHER
PAYABLES AND ACCRUED
LIABILITIES
|
Other
payables and accrued liabilities consisted of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Related
party payable
|
|
$
|
-
|
|
$
|
22,528
|
|
Accrued
expenses
|
|
|
608,315
|
|
|
22,080
|
|
Customer
deposits
|
|
|
2,281,909
|
|
|
262,269
|
|
Other
payables
|
|
|
3,508,066
|
|
|
35,934
|
|
Taxes
payables
|
|
|
1,359,140
|
|
|
-
|
|
Deferred
revenue
|
|
|
795,022
|
|
|
-
|
|
|
|
$
|
8,552,452
|
|
$
|
342,811
|
|
Related
party payable as of December 31, 2006 included expenses reimbursement
payable to
Mr. Deli Du, Chairman and Director, in the amount of $22,528. During
the year
ended December 31, 2007, the Company repaid Mr. Deli Du the amount of
$22,528.
Related party payable to Mr. Deli Du as of December 31, 2007 was in the
amount
of $-0-.
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 not included in the diluted earnings
per
share calculation as the earnings target for 2007 was met and the fulfillment
of
earnings target for 2008 has not been determined. Net proceeds of $2,581,000
were used to finance business acquisitions.
Registration
Rights
On
June
13, 2007, the Company also entered into a registration rights agreement
for the
common stock underlying the convertible preferred shares and all warrants
related to the Private Placement, under which it agreed to use its commercially
reasonable efforts to cause the initial registration statement to be
declared
effective by the SEC at the earlier of (i) 150 days following the filing
date
with respect to the registration statement, (ii) 10 days following the
receipt
of a “No Review” or similar letter from the SEC or (iii) the third business day
following the day the Company receives notice from the SEC that the SEC
has
determined that the registration statement eligible to be declared effective
without further comments by the SEC. The Company is subject to monthly
liquidated damages of 17,742 shares of Series A Preferred Stock, up to
a maximum
of 266,129 shares of Series A Preferred Stock in aggregate, for failing
to
register the shares timely. The Company is under the obligation to have
the
Registration Statement effective on January 10, 2008. However, it was
not
effective until 28 days later on February 7, 2008 being the effectiveness
date
of SB-2. 17,742 shares of preferred stock per month prorated per 28 days
means
16,559 shares of preferred stock will be issued to investors.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Warrants
for services
In
connection with the Private Placement on June 13, 2007, the Board of
Directors
granted to consultants and agents warrants to purchase an aggregate of
181,452
shares of the Company’s common stock, of which 75,000 warrants are exercisable
at US$2.90 per share and 106,452 warrants are exercisable at US$2.71
per share,
or on a cashless exercise basis. The warrants vested immediately and
expire on
June 13, 2012. The market price of the stock was US$2.10 per share on
the grant
date. The Company valued the 75,000 warrants at US$0.74 per share and
the
106,452 warrants at US$0.78 per share, or $138,338 in aggregate in accordance
with SFAS 123R, which were recorded as offering cost in additional paid-in
capital in the accompanying consolidated financial statements for the
year ended
December 31, 2007.
The
fair
value of the warrants was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
Risk
free interest rate (%)
|
|
|
5.00
|
%
|
Dividend
yield (%)
|
|
|
0.00
|
%
|
Expected
life of warrant grants (years)
|
|
|
5
years
|
|
Expected
volatility of warrant grants (%)
|
|
|
43.79
|
%
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
A
summary
of the status of the Company’s outstanding common stock warrants as of December
31, 2007 and 2006:
|
|
Number of
Shares
|
|
Weighted-
average
Exercise Price
|
|
Weighted-
average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2005
|
|
|
1,825,719
|
|
|
|
|
$
|
3.85
|
|
|
—
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding
at December 31, 2006
|
|
|
1,825,719
|
|
|
|
|
|
3.85
|
|
|
2.25
years
|
|
|
—
|
|
Granted
|
|
|
3,729,840
|
|
|
|
|
|
2.18
|
|
|
4.50
years
|
|
|
354,839
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding
and Exercisable at December 31, 2007
|
|
|
5,555,559
|
|
|
|
|
$
|
2.73
|
|
|
3.76
years
|
|
$
|
354,839
|
|
The
Company is registered in the United States of America and has operations
in
three tax jurisdictions: the United States of America, British Virgin
Island
(“BVI”) and the PRC. The operations in the United States of America and British
Virgin Island have incurred net operating losses for income tax purposes.
The
Company generated substantially its net income from the operation of
its
subsidiary in the PRC and subject to the PRC tax jurisdiction. The Company
has
recorded income tax provision for the years ended December 31, 2007 and
2006.
The
components of (loss) income before income taxes separating U.S., BVI
and PRC tax
jurisdictions are as follows:
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Tax
jurisdictions from:
|
|
|
|
|
|
Loss
subject to U.S.
|
|
$
|
(461,433
|
)
|
$
|
(693,745
|
)
|
Loss
subject to BVI
|
|
|
(184,056
|
)
|
|
(73,691
|
)
|
Income
subject to the PRC
|
|
|
3,985,699
|
|
|
2,006,937
|
|
Income
before income taxes
|
|
$
|
3,340,210
|
|
$
|
1,239,501
|
|
United
States of America
China
Solar is registered in the State of Nevada and is subject to the tax laws
of United States of America.
As
of
December 31, 2007, the operation in the United States of America incurred
$461,433 of net operating losses available for federal tax purposes,
which are
available to offset future taxable income. The net operating loss carry
forwards
will to expire through 2028, if unutilized. The Company has provided
for a full
valuation allowance against the deferred tax assets of $461,433 on the
expected
future tax benefits from the net operating loss carryforwards as the
management
believes it is more likely than not that these assets will not be realized
in
the future.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
British
Virgin Island
Under
the
current BVI law, the Company is not subject to tax on income.
The
PRC
The
Company's subsidiary operating in the PRC, Ailiyang and Tianjin Huaneng
are
domestically owned and subject to the Corporate Income Tax governed by
the
Income Tax Law of the People’s Republic of China, at a statutory rate of 33%,
which is comprised of a 30% national income tax and 3% local income
tax.
In
March
2005, the Deli Solar (Bazhou) became a foreign investment enterprise.
Hence,
effective from the year ended 2005, Deli Solar (Bazhou) is entitled to
a
two-year exemption from enterprise income tax and a reduced enterprise
income
tax rate of 15% for the following three years.
In
September 2006, the Deli Solar (Beijing) was founded as a foreign investment
enterprise. Hence, effective from the year ended 2006, Deli Solar (Beijing)
is
entitled to a two-year exemption from enterprise income tax and a reduced
enterprise income tax rate of 15% for the following three
years.
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law, among
other things, imposes a unified income tax rate of 25% for both domestic
and
foreign invested enterprises with effect from January 1, 2008. Deli Solar
(Bazhou) and Deli Solar (Beijing) are considered a foreign invested enterprise
and its ultimate applicable effective tax rate in 2008 and beyond will
depend on
many factors, including but not limited to whether certain of its legal
entity
will be subject to a transitional policy under the Corporate Income Tax
Law,
whether Deli Solar (Bazhou) and Deli Solar (Beijing) can continue to
enjoy the
unexpired tax holidays.
The
reconciliation of income tax rate to the effective income tax rate based
on
income before income taxes stated in the statements of operations for
the years
ended December 31, 2007, 2006 and 2005 is as follows:
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
3,340,210
|
|
$
|
1,239,501
|
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
15
|
%
|
|
|
|
1,102,269
|
|
|
185,925
|
|
Less:
items not subject to taxes
|
|
|
|
|
|
|
|
Effect
for tax holiday
|
|
|
(486,944
|
)
|
|
(185,925
|
)
|
Income
tax expenses
|
|
$
|
615,325
|
|
$
|
-
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
following table sets forth the significant components of the aggregate
deferred
tax assets of the Company as of December 31, 2007 and 2006:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
-
Net operating loss carried forward
|
|
$
|
1,432,326
|
|
|
767,436
|
|
Less:
valuation allowance
|
|
|
(1,432,326
|
)
|
|
(767,436
|
)
|
Deferred
tax assets
|
|
$
|
-
|
|
$
|
-
|
|
Basic
net
income per share is computed using the weighted average number of the
ordinary
shares outstanding during the year. Diluted net income per share is computed
using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year less number of warrants issued
during
the year in note 10.
The
following table sets forth the computation of basic and diluted net income
per
share for the years ended December 31, 2007and 2006:
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Basic
and diluted net income per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net
income
|
|
|
2,525,141
|
|
|
1,239,501
|
|
Less:
Preferred stock beneficial conversion
|
|
|
(975,807
|
)
|
|
-
|
|
Net
income available to common stockholders in computing basic
net income per
share
|
|
$
|
1,549,334
|
|
$
|
$
1,239,501
|
|
|
|
|
|
|
|
|
|
Plus:
Preferred stock beneficial conversion
|
|
|
975,807
|
|
|
-
|
|
Net
income available to common stockholders in computing diluted
net income
per share
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
|
|
|
|
|
|
|
|
Denominator:
- Weighted average ordinary shares outstanding
|
|
|
6,205,290
|
|
|
6,205,290
|
|
-
Weighted average preferred stock outstanding
|
|
|
887,097
|
|
|
-
|
|
-
Weighted average warrant shares outstanding
|
|
|
3,690,639
|
|
|
752,586
|
|
|
|
|
10,783,026
|
|
|
6,957,876
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.25
|
|
$
|
$
0.20
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.23
|
|
$
|
$
0.18
|
|
There
were no securities excluded from diluted earnings per share as none were
anti-dilutive.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
12.
|
SEGMENT
REPORTING, GEOGRAPHICAL
INFORMATION
|
The
Company has two reportable segments namely solar heater/boiler related
products
and heat pipe related products for the three year ended December 31,
2007, 2006
and 2005. The solar heater/boiler related products are mainly under the
management of Deli Solar (Bazhou) while the heat pipe related products
are
energy-savings projects under the management of Tianjin
Huaneng.
An
analysis of the Company’s revenue and total assets are as
follows:
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
26,693,850
|
|
$
|
21,468,313
|
|
Heat
Pipe related products
|
|
|
7,002,015
|
|
|
-
|
|
Other
segment
|
|
|
3,376,481
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Gross
profit:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
5,672,443
|
|
$
|
4,625,319
|
|
Heat
Pipe related products
|
|
|
1,820,524
|
|
|
-
|
|
Other
segment
|
|
|
807,301
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,300,268
|
|
$
|
4,625,319
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
Total
assets:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
18,690,225
|
|
$
|
12,716,185
|
|
Heat
Pipe related products
|
|
|
9,029,994
|
|
|
-
|
|
Other
segment
|
|
|
2,919,494
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
|
|
|
|
|
|
|
|
Total
goodwill:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
-
|
|
$
|
-
|
|
Heat
Pipe related products
|
|
|
1,789,324
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,789,324
|
|
$
|
-
|
|
Other
segment in total revenue, gross profit, and assets refers to solar lighting
products and sales of spare parts/components. The amount of other segment
revenue, gross profit, and assets are less than 10% in each category
and
disclosed as an “all other” category in accordance with paragraph 21 of SFAS
131. There were no elimination or reversal of transactions between reportable
segments.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(b)
|
Geographic
information
|
The
Company operates in the PRC and all of the company’s long lived assets are
located in the PRC. In respect of geographical segment reporting, sales
are based on the country in which the customer is located and total assets
and
capital expenditure are based on the country where the assets are
located.
The
Company’s operations are located in PRC, which is the main geographical areas.
The Company’s sales and total assets by geographical market are analyzed as
follows:
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
PRC
|
|
$
|
32,623,664
|
|
$
|
19,321,482
|
|
Others
|
|
|
4,448,682
|
|
|
2,146,831
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Gross
profit:
|
|
|
|
|
|
PRC
|
|
$
|
6,806,220
|
|
$
|
4,070,281
|
|
Others
|
|
|
1,494,048
|
|
|
555,038
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,300,268
|
|
$
|
4,625,319
|
|
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
Total
assets:
|
|
|
|
|
|
PRC
|
|
$
|
29,107,727
|
|
$
|
11,445,134
|
|
Others
|
|
|
1,531,986
-
|
|
|
1,271,051
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
13.
|
CHINA
CONTRIBUTION PLAN
|
Under
the
PRC Law, full-time employees of the Company’s subsidiaries, Deli Solar (Bazhou),
Ailiyang, Deli Solar (Beijing) and Tianjin Huaneng are entitled to staff
welfare
benefits including medical care, welfare subsidies, unemployment insurance
and
pension benefits through a China government-mandated multi-employer defined
contribution plan. The Company is required to accrue for these benefits
based on
certain percentages of the employees’ salaries. The total contributions made for
such employee benefits were $327,257 and $201,072 for the years ended
December
31, 2007and 2006 respectively.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
14.
|
CONCENTRATION
OF
RISK
|
No
revenue from customers that individually represent greater than 10% of
the total
revenue for each of the years ended December 31, 2007and
2006.
The
following is a table summarizing the purchases from vendors that individually
represent greater than 10% of the total purchases for each of the years
ended
December 31, 2007and 2006 and their outstanding balances as at year-end
date:
|
|
Year ended December 31, 2007
|
|
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
|
|
Financial
instruments that are potentially subject to credit risk consist principally
of
cash and trade receivables. All cash held in financial institutions are
not
insured and therefore subject to credit risk. The Company believes the
concentration of credit risk in its trade receivables is substantially
mitigated
by its ongoing credit evaluation process and relatively short collection
terms.
The Company does not generally require collateral from customers. The
Company
evaluates the need for an allowance for doubtful accounts based upon
factors
surrounding the credit risk of specific customers, historical trends
and other
information.
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market
interest
rates.
The
Company’s interest-rate risk arises from short-term borrowings. Borrowings
issued at floating rates expose the Company to cash flow and fair value
interest-rate risk. Company policy is to maintain approximately all of
its
borrowings in floating rate instruments. At the year end, all of borrowings
were
at floating rates.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
15.
|
COMMITMENTS
AND CONTINGENCIES
|
(a)
|
Operating
lease commitment
|
The
Company leases land and buildings under non-cancelable operating lease
agreements. Based on the current rental lease agreements, the future
minimum
rental payments required for the coming years are as follows:
Years
ending December 31:
|
|
|
|
2008
|
|
$
|
20,015
|
|
2009
|
|
|
20,015
|
|
2010
|
|
|
20,015
|
|
2011
|
|
|
20,014
|
|
|
|
|
|
|
Total
future minimum operating lease payments
|
|
$
|
80,059
|
|
For
the
years ended December 31, 2007and 2006, rental expenses were $101,780
and
$77,246, respectively.
On
January 9, 2008 and March 25, 2008 Beijing Deli Solar Technology Development
Co., Ltd., the Company’s wholly-owned subsidiary (“Deli Solar (Beijing)”),
entered into an Equity Purchase Agreement, a Complementary Agreement
and a
Supplementary, with Shenzhen PengSangPu Solar Industrial Products Corporation
(“SZPSP”) and its shareholders to acquire 100% of the outstanding equity
interests of SZPSP from its three current shareholders. The closing will
be
effective March 31, 2008.
Under
the
agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest
of
SZPSP from its current three shareholders. Part of the consideration of
the transaction is RMB 28.8 million ($4,087,832) payable in cash. This
purchase
price is based on an appraisal of SZPSP.
The
three
shareholders of SZPSP agreed to loan the cash proceeds back to SZPSP
interest
free to be used for working capital. Fifty (50%) of the principal amount
of the
loan is required to be paid prior to March 31, 2009 and the remaining
50%
balance is required to be paid prior to March 31, 2010.
In
addition to the payment of the cash purchase price under the Complementary
Agreement the parties agreed to an appraisal value of RMB 20 million
of SZPSP’s
intangible assets which was paid in 1,419,729 shares of common stock.
Provided
that if on the first anniversary of the closing the common stock price
is lower
than $2, the Company will pay the difference. Fifty percent (50%) of
these
shares shall be transferable and unrestricted within one year after the
Closing
and the remaining Fifty percent (50%) transferable within two years.
The shares
shall be transferred to SZPSP within 180 days of the closing. In addition,
as part of the purchase price, the shareholders of SZPSP will receive
five years
warrants to purchase a total of 141,973 shares of common stock at an
exercise
price of $2.5 per share subject to future adjustments such as stock splits
and
transactions similar in nature.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
SZPSP
warranted in the Complementary Agreement that if (i) its sales revenue
is less
than RMB 99 million (approximately $13,670,068) with an after-tax net
profit of
less than RMB 9.43 million (approximately $1,302,108) for the year ended
December 31, 2008; or (ii) if in the year ended December 31, 2009, it
does not
reach the targeted sales revenue of RMB 143.9 million (approximately
$19,868,336) or the after-tax net profit of RMB 12.13 million (approximately
$1,674,789), SZPSP will pay the difference between the revenue and the
targeted
revenue of the year specified by reducing the amount payable on the
shareholders’ loan. If the shareholders’ loan is not sufficient to pay the
difference, the common shares held by SZPSP will be returned to us to
the extent
necessary for the remaining balance.
The
current shareholders of SZPSP, being the management of SZPSP, will enter
into
employment contracts with the Company for a term of three years to remain
in
their current managing positions of SZPSP, subject to further amendments
of such
employment arrangement.
After
the
Closing, Deli Solar (Beijing) has the right to a majority of the board
seats of
SZPSP.
On
February 25, 2008 the Company raised gross proceeds of approximately
$11,300,000
in a private placement providing for the sale of 4,691,499 shares of
common
stock at a price of $2.40 per share.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
CONDENSED BALANCE
SHEETS
AS
OF JUNE 30, 2007 AND DECEMBER 31, 2006
(Currency
expressed in United States Dollars (“US$”))
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
(unaudited)
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
384,607
|
|
$
|
282,148
|
|
Accounts
receivable, net
|
|
|
4,648,699
|
|
|
4,129,068
|
|
Inventories
|
|
|
3,265,915
|
|
|
3,136,141
|
|
Prepayments
and other receivables
|
|
|
881,590
|
|
|
569,416
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
9,180,811
|
|
|
8,116,773
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,156,835
|
|
|
1,151,521
|
|
Intangible
assets, net
|
|
|
502,269
|
|
|
507,556
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
10,839,915
|
|
$
|
9,775,850
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND OWNERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$
|
1,154,703
|
|
$
|
1,154,703
|
|
Accounts
payable, trade
|
|
|
1,124,468
|
|
|
614,355
|
|
Deferred
revenue
|
|
|
668,345
|
|
|
696,813
|
|
Advances
from customers
|
|
|
2,601,305
|
|
|
2,513,511
|
|
Value-added
tax payable
|
|
|
863,151
|
|
|
875,750
|
|
Income
taxes payable
|
|
|
899,421
|
|
|
835,860
|
|
Deferred
tax liabilities
|
|
|
31,489
|
|
|
79,038
|
|
Accrued
liabilities and other payables
|
|
|
1,404,290
|
|
|
1,148,560
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
8,747,172
|
|
|
7,918,590
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
Long-term
payables
|
|
|
748,412
|
|
|
748,412
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
9,495,584
|
|
|
8,667,002
|
|
|
|
|
|
|
|
|
|
Owners’
equity:
|
|
|
|
|
|
|
|
Registered
capital
|
|
|
720,786
|
|
|
720,786
|
|
Accumulated
other comprehensive income
|
|
|
123,098
|
|
|
66,449
|
|
Statutory
reserve
|
|
|
257,466
|
|
|
257,466
|
|
Retained
earnings
|
|
|
242,981
|
|
|
64,147
|
|
|
|
|
|
|
|
|
|
Total
owners’ equity
|
|
|
1,344,331
|
|
|
1,108,848
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND OWNERS’ EQUITY
|
|
$
|
10,839,915
|
|
$
|
9,775,850
|
|
See
accompanying notes to condensed financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
CONDENSED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenue,
net
|
|
|
|
|
|
|
|
Product
|
|
$
|
5,944,303
|
|
$
|
3,597,777
|
|
Maintenance
|
|
|
705,566
|
|
|
480,226
|
|
|
|
|
6,649,869
|
|
|
4,078,003
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
Product
|
|
|
5,129,097
|
|
|
3,083,888
|
|
Maintenance
|
|
|
42,334
|
|
|
28,814
|
|
|
|
|
5,171,431
|
|
|
3,112,702
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,478,438
|
|
|
965,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
654,140
|
|
|
364,787
|
|
Depreciation
and amortization
|
|
|
119,882
|
|
|
85,534
|
|
Research
and development
|
|
|
61,541
|
|
|
59,093
|
|
General
and administrative
|
|
|
309,549
|
|
|
245,831
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,145,112
|
|
|
755,245
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
333,326
|
|
|
210,056
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(86,692
|
)
|
|
(70,880
|
)
|
Interest
income
|
|
|
1,180
|
|
|
560
|
|
Other
income
|
|
|
16,990
|
|
|
9,977
|
|
Gain
on disposal of plant and equipment
|
|
|
2,066
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
(66,456
|
)
|
|
(60,343
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
266,870
|
|
|
149,713
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(67,299
|
)
|
|
(53,090
|
)
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
199,571
|
|
$
|
96,623
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
56,649
|
|
|
6,375
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
256,220
|
|
$
|
102,998
|
|
See
accompanying notes to condensed financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
CONDENSED
STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
199,571
|
|
$
|
96,623
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
Gain
on disposal of plant and equipment
|
|
|
(2,066
|
)
|
|
-
|
|
Depreciation
and amortization
|
|
|
119,882
|
|
|
85,534
|
|
Allowance
for doubtful accounts
|
|
|
103,419
|
|
|
-
|
|
Deferred
tax benefit
|
|
|
(47,549
|
)
|
|
-
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(623,050
|
)
|
|
(170,624
|
)
|
Inventories
|
|
|
(129,774
|
)
|
|
(1,308,034
|
)
|
Prepayments
and other receivables
|
|
|
(312,174
|
)
|
|
(80,958
|
)
|
Accounts
payable
|
|
|
510,113
|
|
|
(36,971
|
)
|
Deferred
revenue
|
|
|
(28,468
|
)
|
|
(75,700
|
)
|
Advances
from customers
|
|
|
87,794
|
|
|
1,249,042
|
|
Value-added
tax payable
|
|
|
(12,599
|
)
|
|
(99,207
|
)
|
Income
taxes payable
|
|
|
63,561
|
|
|
4,876
|
|
Accrued
liabilities and other payables
|
|
|
255,730
|
|
|
309,109
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
184,390
|
|
|
(26,310
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(123,582
|
)
|
|
(50,987
|
)
|
Proceeds
from disposal of plant and equipment
|
|
|
5,739
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(117,843
|
)
|
|
(50,987
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Dividends
paid to owners
|
|
|
(20,737
|
)
|
|
-
|
|
Repayment
of long-term payables
|
|
|
-
|
|
|
(25,411
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(20,737
|
)
|
|
(25,411
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
56,649
|
|
|
6,375
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
102,459
|
|
|
(96,333
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
282,148
|
|
|
258,737
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
384,607
|
|
$
|
162,404
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
Cash
paid for income taxes
|
|
$
|
3,738
|
|
$
|
48,214
|
|
Cash
paid for interest expenses
|
|
$
|
86,692
|
|
$
|
70,880
|
|
See
accompanying notes to condensed financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
CONDENSED
STATEMENT OF OWNERS’ EQUITY
FOR
THE SIX MONTHS ENDED JUNE 30, 2007
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Registered
capital
|
|
Accumulated
other comprehensive income
|
|
Statutory
reserve
|
|
Retained
earnings
|
|
Total
owner’s
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2007
|
|
$
|
720,786
|
|
$
|
66,449
|
|
$
|
257,466
|
|
$
|
64,147
|
|
$
|
1,108,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
56,649
|
|
|
-
|
|
|
-
|
|
|
56,649
|
|
Net
income for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
199,571
|
|
|
199,571
|
|
Dividends
paid to owners
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(20,737
|
)
|
|
(20,737
|
)
|
Balance
as of June 30, 2007
|
|
$
|
720,786
|
|
|
123,098
|
|
|
257,466
|
|
|
242,981
|
|
|
1,344,331
|
|
See
accompanying notes to condensed financial
statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
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$720,786 (equivalent to Renminbi Yuan (“RMB”) 5,940,000).
The
Company is principally engaged in the design, development and manufacturing
and
marketing of energy-saving related heating products such as heat pipes,
heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy
water
heaters and radiators. These products are distributed in the PRC and
Southeast
Asia.
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
These
accompanying unaudited condensed financial statements have been prepared
in
accordance with generally accepted accounting principles in the United
States of
America.
In
preparing these financial statements, management makes estimates and
assumptions
that affect the reported amounts of assets and liabilities in the balance
sheets
and revenues and expenses during the period reported. Actual results
may differ
from these estimates.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(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.
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 June 30, 2007 and 2006, the unrecognized
portion of revenue related to maintenance was $668,345 and $401,866 and
were
included in the Deferred Revenue caption on the balance
sheets.
Interest
income is recognized on a time apportionment basis, taking into account
the
principal amounts outstanding and the interest rates
applicable.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
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
|
Inventories
consist primarily of finished goods, work in process and raw materials
and are
stated at the lower of cost or net realizable value, with cost being
determined
on a weighted average basis. Allowance for slow-moving and obsolescence
is an
estimate amount based on an analysis of current business and economic
risks, the
duration of the inventories held and other specific identifiable risks
that may
indicate a potential loss. The allowance is reviewed regularly to ensure
that it
adequately provides for all reasonable expected losses. For the six months
ended
June 30, 2007 and 2006, the Company did not record any allowance for
obsolescence.
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 SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Expenditure
for maintenance and repairs is expensed as incurred. The gain or loss
on the
disposal of property, plant and equipment is the difference between the
net
sales proceeds and the carrying amount of the relevant assets and is
recognized
in the statements of operations.
All
lands
in the PRC are owned by the PRC government. The government in the PRC,
according
to the relevant PRC law, may sell the right to use the land for a specified
period of time. Thus, all of the Company’s land purchases in the PRC are
considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided
over
the term of the land use right agreements on a straight-line basis, which
is 50
years and they will expire in 2054.
Amortization
expense totaled $5,287 and $5,287 for the six months ended June 30, 2007
and
2006, respectively.
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 June
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 SIX MONTHS ENDED JUNE 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.
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.
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 $61,541 and $59,093 for the six months ended June 30,
2007 and
2006
,
respectively.
Under
the
terms of the contracts, the Company provides a product warranty on the
equipment
to its customers for a period of twelve months upon the completion of
installation at the Company’s expense. The Company has not experienced any
material returns where it was under obligation to honor this standard
warranty
provision. As such, no reserve for product warranty has been provided
in the
statements of operations for the six months ended June 30, 2007 and 2006.
Parties,
which can be a corporation or individual, are considered to be related
if the
Company has the ability, directly or indirectly, to control the other
party or
exercise significant influence over the other party in making financial
and
operating decisions. Companies are also considered to be related if they
are
subject to common control or common significant influence.
SFAS
No.
131
“Disclosures
about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments
on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
financial statements. The Company operates in one principal reportable
business
segment. All the customers are located in the PRC and the South East
Asia
region.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
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.
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 June 30, 2007.
On
February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 159,
“The
Fair Value Option for Financial Assets and Financial Liabilities — Including an
Amendment of FASB Statement No. 115”
(“SFAS
159”). This standard permits an entity to measure financial instruments and
certain other items at estimated fair value. Most of the provisions of
SFAS
No. 159 are elective; however, the amendment to FASB
No. 115,
“Accounting
for Certain Investments in Debt and Equity Securities,”
applies
to all entities that own trading and available-for-sale securities. The
fair
value option created by SFAS 159 permits an entity to measure eligible
items at
fair value as of specified election dates. The fair value option (a) may
generally be applied instrument by instrument, (b) is irrevocable unless a
new election date occurs, and (c) must be applied to the entire instrument
and not to only a portion of the instrument. SFAS 159 is effective as
of the
beginning of the first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of the previous fiscal
year
provided that the entity (i) makes that choice in the first 120 days
of that year, (ii) has not yet issued financial statements for any interim
period of such year, and (iii) elects to apply the provisions of FASB 157.
Management is currently evaluating the impact of SFAS 159, if any, on
the
Company’s financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
4.
|
ACCOUNTS
RECEIVABLE, NET
|
The
majority of the Company’s sales are on credit terms and in accordance with terms
specified in the contracts governing the relevant transactions. The Company
evaluates the need of an allowance for doubtful accounts based on specifically
identified amounts that management believes to be uncollectible. If actual
collections experience changes, revisions to the allowance may be required.
Based upon the aforementioned criteria, the allowances for doubtful accounts
are
provided as $103,419 and $Nil for the six months ended June 30, 2007
and 2006,
respectively.
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
Accounts
receivable, gross
|
|
$
|
5,329,410
|
|
$
|
4,706,360
|
|
|
|
|
|
|
|
|
|
Less:
allowance
for doubtful accounts
|
|
|
(680,711
|
)
|
|
(577,292
|
)
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
4,648,699
|
|
$
|
4,129,068
|
|
Inventories
consisted of the following:
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
534,995
|
|
$
|
508,161
|
|
Work
in process
|
|
|
750,189
|
|
|
245,082
|
|
Finished
goods
|
|
|
1,980,731
|
|
|
2,382,898
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,265,915
|
|
$
|
3,136,141
|
|
As
of
June 30, 2007 and December 31, 2006, the Company recorded no allowance
for
obsolete inventories and write-offs.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
6.
|
PREPAYMENTS
AND OTHER
RECEIVABLES
|
A
summary
of prepayments and other receivables was:
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
Advances
to employees
|
|
$
|
280,180
|
|
$
|
206,661
|
|
Deposits
paid to suppliers
|
|
|
601,410
|
|
|
345,024
|
|
Other
receivables
|
|
|
-
|
|
|
17,731
|
|
|
|
$
|
881,590
|
|
$
|
569,416
|
|
7.
|
PROPERTY,
PLANT AND EQUIPMENT,
NET
|
Property,
plant and equipment, net, consisted of the following:
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
Building
|
|
$
|
760,927
|
|
$
|
721,753
|
|
Plant
and machinery
|
|
|
1,161,492
|
|
|
1,157,166
|
|
Motor
vehicles
|
|
|
249,106
|
|
|
199,606
|
|
Office
equipment
|
|
|
104,074
|
|
|
109,806
|
|
|
|
|
2,275,599
|
|
|
2,188,331
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(1,118,764
|
)
|
|
(1,036,810
|
)
|
Net
book value
|
|
$
|
1,156,835
|
|
$
|
1,151,521
|
|
Depreciation
expense for the six months ended June 30, 2007 and 2006 were $114,595
and
$80,247, respectively.
As
of
June 30, 2007 and 2006, certain property, plant and machinery with the
net book
value of $915,135 and $1,071,835 respectively, were pledged as securities
in
connection with outstanding loan facilities (see Note 9).
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
8.
|
INTANGIBLE
ASSETS, NET
|
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
Land
use rights, cost
|
|
$
|
528,704
|
|
$
|
528,704
|
|
|
|
|
|
|
|
|
|
Less:
accumulated amortization
|
|
|
(26,435
|
)
|
|
(21,148
|
)
|
Land
use rights, net
|
|
$
|
502,269
|
|
$
|
507,556
|
|
Amortization
expense for the six months ended June 30, 2007 and 2006 were $5,287 and
$5,287,
respectively.
As
of
June 30, 2007, the Company has a short-term bank loan of $1,154,703 with
the
Agricultural Bank of China, which is secured with interest rate at 5.84%
per
annum payable quarterly, with principle due November 27, 2006. It is
collateralized by building and certain plant and machinery of the Company
(see
Note 7).
10.
|
ACCRUED
LIABILITIES AND OTHER
PAYABLES
|
Accrued
liabilities and other payables consisted of the following:
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
Welfare
payable
|
|
$
|
688,250
|
|
$
|
523,566
|
|
Salary
payable
|
|
|
461,873
|
|
|
393,869
|
|
Accrued
expenses
|
|
|
173,318
|
|
|
131,832
|
|
Government
levy payable
|
|
|
80,849
|
|
|
99,293
|
|
|
|
$
|
1,404,290
|
|
$
|
1,148,560
|
|
Long-term
payables consisted of the following:
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
Payable
to employees
|
|
$
|
496,252
|
|
$
|
496,252
|
|
Payable
to government
|
|
|
194,560
|
|
|
194,560
|
|
Payable
to third parties
|
|
|
57,600
|
|
|
57,600
|
|
|
|
$
|
748,412
|
|
$
|
748,412
|
|
Payable
to employees represented unsecured advances with interest rate at 8.20%
per
annum payable quarterly and
no
specific terms of repayment
.
Payable
to government and third parties represented unsecured advances, interest-free
and no specific terms of repayment.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax
Laws, the
Company is generally subject to enterprise income tax (“EIT”) at a statutory
rate of 33% (30% national income tax plus 3% local income tax).
The
provision for income tax expense consisted of the following:
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Current
tax
|
|
$
|
114,848
|
|
$
|
53,090
|
|
Deferred
tax
|
|
|
(47,549
|
)
|
|
-
|
|
Income
tax expenses
|
|
$
|
67,299
|
|
$
|
53,090
|
|
The
reconciliation of income tax rate to the effective income tax rate based
on
income before income taxes stated in the statements of operations for
the six
months ended June 30, 2007 and 2006 is as follows:
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
266,870
|
|
$
|
149,713
|
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
33
|
%
|
|
|
|
88,067
|
|
|
49,405
|
|
Add:
Items not subject to taxes
|
|
|
|
|
|
|
|
-
Provisions and accrued liabilities
|
|
|
7,071
|
|
|
3,685
|
|
-
Deferred revenue
|
|
|
(27,839
|
)
|
|
-
|
|
Income
tax expenses
|
|
$
|
67,299
|
|
$
|
53,090
|
|
The
following table sets forth the significant components of the deferred
tax
liabilities of the Company as of June 30, 2007 and December 31,
2006:
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
(audited)
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
-
Accounts receivables
|
|
$
|
31,489
|
|
$
|
79,038
|
|
Deferred
tax liabilities
|
|
$
|
31,489
|
|
$
|
79,038
|
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Prior
to
the restructuring in 2004, the Company was established as a state-owned
enterprise with a registered capital of $182,016 (approximately RMB1,500,000).
In July 2004, the Company was restructured to a limited liability company
with
51%
of its equity interest owned by SAAC and 49% of equity interest owned
by
employees in the PRC
.
In
accordance with the Company’s Articles of Association, the registered capital of
the Company was $720,786 (approximately RMB5,940,000).
For
the
six months ended June 30, 2007, the Company declared and paid a dividend
of
$20,737 to the owners.
The
Company operates in one single business segment that includes the design,
development, manufacture of products and provision of energy-saving projects.
The following table summarizes the Company’s net revenue generated from
different geographic locations:
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
-
Southeast
Asia
|
|
$
|
209,391
|
|
$
|
31,062
|
|
-
The PRC
|
|
|
6,440,478
|
|
|
4,046,941
|
|
Total
revenue, net
|
|
$
|
6,649,869
|
|
$
|
4,078,003
|
|
All
of
the Company’s long-lived assets are located in the PRC.
15.
|
CONCENTRATION
OF RISK
|
The
customers who account for 10% or more of revenue are presented as follows:
|
|
Six
months ended June 30, 2007
|
|
Customer
s
|
|
Revenue
|
|
Percentage
of revenue
|
|
Trade
accounts receivables
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
$
|
991,445
|
|
|
15
|
%
|
$
|
444,296
|
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
For
the
six months ended June 30, 2006, there is no customer who accounts for
10% or
more of total revenues.
The
vendors who account for 10% or more of purchases are presented as follows:
|
|
Six
months ended June 30, 2007
|
|
Vendors
|
|
Purchases
|
|
Percentage
of purchases
|
|
Accounts
Payables
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
$
|
2,238,273
|
|
|
43
|
%
|
$
|
716,684
|
|
Vendor
B
|
|
|
811,000
|
|
|
16
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
3,049,273
|
|
|
59
|
%
|
$
|
716,684
|
|
|
|
Six
months ended June 30, 2006
|
|
Vendors
|
|
Purchases
|
|
Percentage
of purchases
|
|
Accounts
Payables
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
$
|
1,882,836
|
|
|
60
|
%
|
$
|
237,984
|
|
Vendor
B
|
|
|
571,756
|
|
|
18
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
2,454,592
|
|
|
78
|
%
|
$
|
237,984
|
|
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. The Company
performs
ongoing credit evaluations of its customers' financial condition, but
does not
require collateral to support such receivables.
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market
interest
rates.
The
Company’s interest-rate risk arises from long-term borrowings. Borrowings issued
at variable rates expose the Company to cash flow interest-rate risk.
Borrowings
issued at fixed rates expose the Company to fair value interest-rate
risk.
Company policy is to maintain approximately all of its borrowings in
floating
rate instruments. At the period end, all of borrowings were at floating
rates.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO., LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company rented offices under non-cancelable operating lease agreements.
As of
June 30, 2007, future minimum annual operating lease payments were as
follows:
Years
ending June 30:
|
|
|
|
2008
|
|
$
|
12,720
|
|
2009
|
|
|
6,360
|
|
Total
future minimum operating lease payments
|
|
$
|
19,080
|
|
For
the
six months ended June 30, 2007 and 2006, rent expense was $6,360 and
$6,360,
respectively.
17.
SUBSEQUENT
EVENTS
On
May
18, 2007, the Company and the shareholders of the Company entered into
a
purchase agreement with Beijing Deli Solar Technology Development Co.,
Ltd.
(“Deli Solar (Beijing)”), a wholly-owned subsidiary of Deli Solar (USA), Inc., a
company organized under the laws of the State of Nevada and is a reporting
issuer in the United States
and has
its shares listed on the NASD Over-the-Counter Bulletin Board under the
symbol
“DLSL”. Pursuant to the purchase agreement,
Deli
Solar (Beijing)
agreed
to acquire 51% of equity interest in the registered capital of the Company
for a
purchase price of
$3,149,147.
The transaction was closed on July 1, 2007 and approximately $1,575,600
was paid
in July 2007. By supplemental agreement dated August 8, 2007, the purchase
price
was reduced to approximately $1,689,741.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Owners of
Tianjin
Huaneng Group Energy Equipment Co., Ltd.
We
have
audited the accompanying balance sheets of Tianjin Huaneng Group Energy
Equipment Co., Ltd. (“the Company”) as of December 31, 2006 and 2005 and the
related statements of operations and comprehensive income, cash flows
and
owners’ equity for the years ended December 31, 2006 and 2005. The financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements
based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control
over
financial reporting. Our audits include consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of Tianjin Huaneng Group Energy
Equipment Co., Ltd. as of December 31, 2006 and 2005 and the results
of
operations and cash flows for the years ended December 31, 2006 and 2005
and in
conformity with accounting principles generally accepted in the United
States of
America.
/s/
Zhong Yi (Hong Kong) C.P.A. Company Limited
Zhong
Yi
(Hong Kong) C.P.A. Company Limited
Certified
Public Accountants
Hong
Kong, China
July
17,
2007
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
BALANCE
SHEETS
AS
OF DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
|
|
As
of December 31,
|
|
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
$477,566
and were included in the Deferred Revenue caption on the balance
sheets.
Interest
income is recognized on a time apportionment basis, taking into account
the
principal amounts outstanding and the interest rates
applicable.
Cost
of
revenue consists primarily of material costs, direct labor, shipping
and
handling fee, depreciation and manufacturing overheads, which are directly
attributable to the manufacture of products and the provision of the
energy-saving projects.
|
Cash
and Cash Equivalents
|
Cash
and
cash equivalents are carried at cost and represent cash on hand, demand
deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the
purchase
date of such investments.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
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.
|
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 $10,574 for the years ended December 31,
2006 and
2005, respectively.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
|
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.
|
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$”))
|
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.
|
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.
|
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
$12,377,
respectively.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
|
Unaudited
Pro forma Financial Information of Tianjin Huaneng Group Energy
Equipment
Co.
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
PRO
FORMA CONDENSED FINANCIAL INFORMATION
(Currency
expressed in United States Dollars (“US$”))
UNAUDITED
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
in
cash. 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 financial information
also
gives effect to the February 2008 private placement
of
4,691,499 shares of common stock for an aggregate purchase price of
approximately $11,300,000.
In
connection with the private placement, the Company issued 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. These warrants are immediately exerciseable. The fair value
of the
warrants was estimated at the date of grant using the Black-Scholes
option-pricing model. The Company valued the warrants at US$1.155 per
share, or
$541,695 in aggregate, in accordance with SFAS 123R. The $541,695 was
recorded
as offering costs in additional paid-in capital
The
following unaudited pro forma condensed combined balance sheet as of
December
31, 2007 gives effect to February 2008
private
placement as if it occurred as of January 1, 2007
.
The
private placement had no effect of the pro forma condensed combined statements
of operations for the year ended December 31, 2007.
The
unaudited pro forma condensed combined statements of operations for the
year
ended December 31, 2007 includes the historical consolidated financial
statements of China Solar for the year ended December 31, 2007 and the
unaudited
historical financial statements of Tianjin Huaneng for the six months
ended June
30, 2007 to give effect to the acquisition of Tianjin Huaneng as if it
occurred
as of January 1, 2007, as presented below:
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
UNAUDITED
PRO FORMA CONDENSED COMBINED
BALANCE
SHEET
AS
OF DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
China
Solar
|
|
Pro
forma adjustments #(1)
|
|
Pro
forma combined
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,466,637
|
|
|
9,995,156
|
|
$
|
15,461,793
|
|
Accounts
receivable, net
|
|
|
7,453,009
|
|
|
|
|
|
7,453,009
|
|
Inventories
|
|
|
3,875,658
|
|
|
|
|
|
3,875,658
|
|
Other
receivables and prepayments
|
|
|
1,637,948
|
|
|
|
|
|
1,637,948
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
18,433,252
|
|
|
|
|
|
28,428,408
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,789,324
|
|
|
|
|
|
1,789,324
|
|
Intangible
assets, net
|
|
|
1,597,921
|
|
|
|
|
|
1,597,921
|
|
Property,
plant and equipment, net
|
|
|
8,819,216
|
|
|
|
|
|
8,819,216
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
30,639,713
|
|
|
|
|
$
|
40,634,869
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$
|
2,111,028
|
|
|
|
|
$
|
2,111,028
|
|
Income
tax payable
|
|
|
1,108,433
|
|
|
|
|
|
1,108,433
|
|
Other
payables and accrued liabilities
|
|
|
8,552,452
|
|
|
|
|
|
8,552,452
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
11,771,913
|
|
|
|
|
|
11,771,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
935,825
|
|
|
|
|
|
935,825
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
1,774
|
|
|
|
|
|
1,774
|
|
Common
stock
|
|
|
6,205
|
|
|
4,691
|
|
|
10,896
|
|
Additional
paid-in capital
|
|
|
9,260,607
|
|
|
9,990,465
|
|
|
19,251,072
|
|
Accumulated
other comprehensive income
|
|
|
1,134,270
|
|
|
|
|
|
1,134,270
|
|
Retained
earnings
|
|
|
7,529,119
|
|
|
|
|
|
7,529,119
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
17,931,975
|
|
|
|
|
|
27,927,131
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
30,639,713
|
|
|
|
|
$
|
40,634,869
|
|
#(1)
The
pro forma adjustments give effect to the February 2008 private placement
as if
it were consummated as of January 1, 2007.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS
FOR
THE YEAR ENDED DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
China
Solar for the year ended December 31, 2007
|
|
Tianjin
Huaneng for the six months ended June
30, 2007
|
|
Pro
forma adjustment #(2)
|
|
Pro
forma combined
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
37,072,346
|
|
$
|
6,649,869
|
|
|
|
|
$
|
43,722,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
28,772,078
|
|
|
5,171,431
|
|
|
|
|
|
33,943,509
|
|
Gross
profit
|
|
|
8,300,268
|
|
|
1,478,438
|
|
|
|
|
|
9,778,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
282,822
|
|
|
119,882
|
|
|
|
|
|
402,704
|
|
Selling
and marketing
|
|
|
827,839
|
|
|
654,140
|
|
|
|
|
|
1,481,979
|
|
General
and administrative
|
|
|
4,003,973
|
|
|
371,090
|
|
|
|
|
|
4,375,063
|
|
Total
operating expenses
|
|
|
5,114,634
|
|
|
1,145,112
|
|
|
|
|
|
6,259,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,185,634
|
|
|
333,326
|
|
|
|
|
|
3,518,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
220,057
|
|
|
20,236
|
|
|
|
|
|
240,293
|
|
Interest
expense
|
|
|
(65,481
|
)
|
|
(86,692
|
)
|
|
|
|
|
(152,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
154,576
|
|
|
(66,456
|
)
|
|
|
|
|
88,120
|
|
Income
before income taxes
|
|
|
3,340,210
|
|
|
266,870
|
|
|
|
|
|
3,607,080
|
|
Income
tax expense
|
|
|
(615,325
|
)
|
|
(67,299
|
)
|
|
|
|
|
(682,624
|
)
|
Minority
interest
|
|
|
(199,744
|
)
|
|
-
|
|
|
(97,790
|
)
|
|
(297,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
2,525,141
|
|
$
|
199,571
|
|
|
|
|
$
|
2,626,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME AVAILABLE TO COMMON TOCKHOLDERS
|
|
$
|
1,549,334
|
|
$
|
-
|
|
|
|
|
$
|
1,651,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per common share
|
|
$
|
0.25
|
|
|
|
|
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per common share
|
|
$
|
0.23
|
|
|
|
|
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
common shares
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
10,896,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
common shares
|
|
|
10,783,026
|
|
|
|
|
|
|
|
|
14,587,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
#(2)
The
pro forma adjustment gives effect to the acquisition of Tianjin Huaneng
as if it
were consummated on January 1, 2007.
NOTES
TO
UNAUDITED
PRO FORMA CONDENSED FINANCIAL INFORMATION
(Currency
expressed in United States Dollars (“US$”))
NOTE -
1
PRO
FORMA ADJUSTMENTS
The
adjustments to the unaudited pro forma condensed combined financial statements
reflect the total purchase price of $2,459,159 at the completion date
for the
acquisition of 51% of the equity interest of Tianjin Huaneng and are
as
follows:
(a)
|
To
reflect the allocation of the purchase price based on their
estimated fair
value on the acquisition date
|
The
purchase price allocation of Tianjin Huaneng was finalized on June 2008.
The
following table summarizes the final estimated fair value of the assets
acquired
and liabilities assumed at the date of acquisition. The Company has obtained
valuations from an independent appraiser for its certain tangible and
intangible
assets; thus the allocation of the purchase price consideration is presented
as
below:
|
|
|
|
|
|
As
of July 1, 2007
|
|
Cash
and cash equivalents
|
|
$
|
196,150
|
|
Accounts
receivable
|
|
|
2,362,792
|
|
Inventories
|
|
|
1,665,617
|
|
Prepayments
and other receivables
|
|
|
441,882
|
|
Property,
plant and equipment
|
|
|
589,985
|
|
Land
use rights
|
|
|
256,157
|
|
Goodwill
|
|
|
1,789,324
|
|
Total
assets acquired
|
|
$
|
7,301,907
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$
|
588,899
|
|
Accounts
payable
|
|
|
573,479
|
|
Deferred
revenue
|
|
|
340,856
|
|
Advances
from customers
|
|
|
1,326,665
|
|
Value-added
tax payable
|
|
|
440,207
|
|
Income
taxes payable
|
|
|
458,705
|
|
Deferred
tax liabilities
|
|
|
16,059
|
|
Accrued
liabilities and other payables
|
|
|
716,188
|
|
Long-term
payables
|
|
|
381,690
|
|
Total
liabilities assumed
|
|
|
4,842,748
|
|
Net
assets acquired
|
|
$
|
2,459,159
|
|
(b)
To
record Tianjin Huaneng’s 49% minority interest, calculated as
follows:
Net
income of Tianjin for the six months ended June 30, 2007
|
|
$
|
199,571
|
|
Multiply:
Minority interest portion
|
|
|
49
|
%
|
Total
minority interest
|
|
$
|
97,790
|
|
(c)
To
record the private placement, calculated as follows:
Gross
proceeds from sale of 4,691,499 shares of common stock
|
|
$
|
11,300,0000
|
|
Less:
Offering costs
|
|
|
(1,304,844
|
)
|
Net
proceeds
|
|
$
|
9,995,156
|
|
.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO
UNAUDITED
PRO FORMA CONDENSED FINANCIAL INFORMATION
(Currency
expressed in United States Dollars (“US$”))
(d)
Income per share as of December 31, 2007 was calculated as
follows:
|
|
Historical
|
|
Pro
forma
|
|
Basic
and diluted net income per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net
income
|
|
|
2,525,141
|
|
|
2,626,922
|
|
Less:
Preferred stock dividends
|
|
|
(975,807
|
)
|
|
(975,807
|
)
|
Net
income available to common stockholders in computing basic
net income per
share
|
|
$
|
1,549,334
|
|
|
1,651,115
|
|
|
|
|
|
|
|
|
|
Plus:
Preferred stock beneficial conversion*
|
|
|
975,807
|
|
|
-
|
|
Net
income available to common stockholders in computing diluted
net income
per share
|
|
$
|
2,525,141
|
|
|
1,651,115
|
|
|
|
|
|
|
|
|
|
Denominator:
Weighted
average ordinary shares outstanding - Basic
|
|
|
6,205,290
|
|
|
6,205,290
|
|
Weighted
average of ordinary shares issued for February 2008 private
placement, net
|
|
|
-
|
|
|
4,691,499
|
|
Dilutive
effect of convertible preferred stock*
|
|
|
887,097
|
|
|
-
|
|
Dilutive
effect of warrant shares
|
|
|
3,690,639
|
|
|
3,690,639
|
|
Weighted
average ordinary shares outstanding - Diluted
|
|
|
10,783,026
|
|
|
14,587,428
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.25
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.23
|
|
|
0.11
|
|
*
The
convertible preferred stock were not assumed exercised because they were
antidilutive in the pro-forma diluted net income per share.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
CONDENSED
BALANCE SHEETS
AS
OF MARCH 31, 2008 AND DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”))
|
|
|
March
31,
2008
|
|
|
December
31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
(Note
1)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
87,316
|
|
$
|
122,501
|
|
Restricted
cash
|
|
|
84,304
|
|
|
80,941
|
|
Accounts
receivable, trade
|
|
|
510,269
|
|
|
423,137
|
|
Inventories
|
|
|
325,429
|
|
|
345,363
|
|
Net
investment in sales-type leases, current
|
|
|
143,317
|
|
|
137,599
|
|
Prepayments
and other receivables
|
|
|
217,606
|
|
|
91,180
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,368,241
|
|
|
1,200,721
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
Net
investment in sales-type leases, non-current
|
|
|
823,489
|
|
|
757,662
|
|
Property,
plant and equipment, net
|
|
|
1,275,287
|
|
|
1,312,138
|
|
|
|
|
|
|
|
|
|
Total
non-current assets
|
|
|
2,098,776
|
|
|
2,069,800
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
3,467,017
|
|
$
|
3,270,521
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND OWNERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$
|
710,668
|
|
$
|
806,672
|
|
Accounts
payable, trade
|
|
|
908,124
|
|
|
795,958
|
|
Deferred
revenue
|
|
|
25,903
|
|
|
21,451
|
|
Accrued
liabilities and other payables
|
|
|
211,294
|
|
|
192,007
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,855,989
|
|
|
1,816,088
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,855,989
|
|
|
1,816,088
|
|
|
|
|
|
|
|
|
|
Owners’
equity:
|
|
|
|
|
|
|
|
Registered
and paid-in capital
|
|
|
1,598,979
|
|
|
1,598,979
|
|
Distribution
to owners
|
|
|
(1,190,756
|
)
|
|
(1,190,756
|
)
|
Accumulated
other comprehensive income
|
|
|
276,506
|
|
|
167,717
|
|
Statutory
reserve
|
|
|
74,508
|
|
|
74,508
|
|
Retained
earnings
|
|
|
851,791
|
|
|
803,985
|
|
|
|
|
|
|
|
|
|
Total
owners’ equity
|
|
|
1,611,028
|
|
|
1,454,433
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND OWNERS’ EQUITY
|
|
$
|
3,467,017
|
|
$
|
3,270,521
|
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
CONDENSED
STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three
months ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Revenue,
net:
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
71,144
|
|
$
|
44,106
|
|
Project
revenue
|
|
|
322,776
|
|
|
15,879
|
|
Total
revenue, net
|
|
|
393,920
|
|
|
59,985
|
|
|
|
|
|
|
|
|
|
Cost
of revenue:
(exclusive
of depreciation)
|
|
|
|
|
|
|
|
Cost
of products
|
|
|
57,521
|
|
|
32,036
|
|
Cost
of projects
|
|
|
160,829
|
|
|
-
|
|
Total
cost of revenue
|
|
|
218,350
|
|
|
32,036
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
175,570
|
|
|
27,949
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
44,673
|
|
|
10,376
|
|
General
and administrative
|
|
|
39,681
|
|
|
28,429
|
|
Total
operating expenses
|
|
|
84,354
|
|
|
38,805
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
91,216
|
|
|
(10,856
|
)
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Other
income
|
|
|
-
|
|
|
8,572
|
|
Interest
expense
|
|
|
(43,087
|
)
|
|
(10,568
|
)
|
Total
other expenses
|
|
|
(43,087
|
)
|
|
(1,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
48,129
|
|
|
(12,852
|
)
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
323
|
|
|
319
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
47,806
|
|
$
|
(13,171
|
)
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
CONDENSED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
47,806
|
|
$
|
(13,171
|
)
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
Depreciation
|
|
|
44,673
|
|
|
10,376
|
|
Interest
income from sales-type leases
|
|
|
(34,026
|
)
|
|
(15,879
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(69,551
|
)
|
|
196,348
|
|
Inventories
|
|
|
(21,731
|
)
|
|
(403,996
|
)
|
Prepayments
and other receivables
|
|
|
(118,678
|
)
|
|
(408,622
|
)
|
Accounts
payable
|
|
|
115,121
|
|
|
247,828
|
|
Deferred
revenue
|
|
|
3,560
|
|
|
-
|
|
Accrued
liabilities and other payables
|
|
|
75,245
|
|
|
(28,105
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
42,419
|
|
|
(415,221
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from leases receivable
|
|
|
35,830
|
|
|
15,879
|
|
Net
cash provided by investing activities
|
|
|
35,830
|
|
|
15,879
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Drawdown
from short-term bank loans
|
|
|
-
|
|
|
699,938
|
|
Repayment
of short-term bank loans
|
|
|
(129,528
|
)
|
|
-
|
|
Contribution
from (distribution to) owners
|
|
|
-
|
|
|
(108,415
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(129,528
|
)
|
|
591,523
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
16,094
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(35,185
|
)
|
|
193,192
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
122,501
|
|
|
25,912
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
87,316
|
|
$
|
219,104
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
Cash
paid for income taxes
|
|
$
|
-
|
|
$
|
-
|
|
Cash
paid for interest expenses
|
|
$
|
12,437
|
|
$
|
14,117
|
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
CONDENSED
STATEMENTS OF CHANGE IN OWNERS’ EQUITY
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
|
Registered
and
paid-in
capital
|
|
|
Distribution
to owners
|
|
|
Accumulated
other
comprehensive income
|
|
|
Statutory
reserve
|
|
|
Retained
earnings
|
|
|
Total
owner’s
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2008
|
|
$
|
1,598,979
|
|
$
|
(1,190,756
|
)
|
$
|
167,717
|
|
$
|
74,508
|
|
$
|
803,985
|
|
$
|
1,454,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
108,789
|
|
|
-
|
|
|
-
|
|
|
108,789
|
|
Net
income for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
47,806
|
|
|
47,806
|
|
Balance
as of March 31, 2008
|
|
$
|
1,598,979
|
|
|
(1,190,756
|
)
|
$
|
276,506
|
|
|
74,508
|
|
$
|
851,791
|
|
$
|
1,611,028
|
|
See
accompanying notes to financial
statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
1.
BASIS
OF PRESENTATION
The
accompanying condensed consolidated balance sheet as of December 31, 2007
has
been
derived from audited financial statements
and the
accompanying unaudited condensed consolidated financial statements have
been
prepared in accordance with accounting principles generally accepted in
the
United States of America (“GAAP”) for interim financial information and the
interim reporting requirements of Regulation S-X. They do not include all
of the
information and footnotes for complete consolidated financial statements
as
required by GAAP. In management's opinion, all adjustments (consisting
only of
normal recurring adjustments) considered necessary for a fair presentation
have
been included. These financial statements should be read in conjunction
with the
audited financial statements and notes for the year ended December 31,
2007.
The
results of operations for the three months ended March 31, 2008 and 2007
presented are not necessarily indicative of the results to be expected
for the
year.
There
is
no provision for dividends for the quarter to which this quarterly report
relates
.
2.
ORGANIZATION
AND BUSINESS BACKGROUND
Shenzhen
Pengsangpu Solar Industrial Products Corporation
(“the
Company”) was incorporated as a limited liability company in the People’s
Republic of China (“PRC”) on September 23, 1993. Its registered capital was
Renminbi Yuan (“RMB”) 2,650,000 (equivalent to $353,333) and contributed by
three individuals namely, Mr Renzheng Qiu, Mr Hanwen Chen and Mr Hongde
Chen
On
July
13, 2006, the registered capital was approved to increase to $1,706,666
(RMB12,800,000) by an injection of additional capital of $1,353,333
(RMB10,150,000) by the existing owners and a new owner, Shenzhen Shunda
Solar
Energy Co., Ltd registered in the PRC.
On
April
18, 2007, Shenzhen Shunda Solar Energy Co. entered an Equity Exchange Agreement
to transfer its interest of 0.23% in the Company to Mr Chen
Hanwen.
On
May
30, 2007, Mr Hongde Chen entered an Equity Exchange Agreement to transfer
his
34.77% interest in the Company to Mr Chen Hanwen.
On
July
24, 2007, Mr Chen Hanwen entered an Equity Exchange Agreement to transfer
his
3.33% interest in the Company to Mr Renzheng Qiu and his 28.33% interest
in the
Company to Mr Bin Luo, respectively.
On
January 9, 2008, the Company entered into an Equity Purchase Agreement
and a
Complementary Agreement (the “Agreements”) with Beijing Deli Solar Technology
Development Co., Ltd, a wholly-owned subsidiary of China Solar and Clean
Energy
Solutions, Inc., a company organized under the laws of the State of Nevada
and
is a reporting issuer in the United States and has its shares listed on
the NASD
Over-the-Counter Bulletin Board under the symbol “CSOL”. Pursuant to the
Agreements, China Solar and Clean Energy Solutions, Inc. agreed to purchase
100%
equity interest in the Company.
The
accounting date of the acquisition was April 1, 2008 and was accounted
for under
the purchase method. SZPSP results of operations have been not included
in the
three months ended March 31, 2008 consolidated financial statements. See
note12.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
Company is principally engaged in the re-sale of energy-saving related
heating
products such as heat pipes, heat exchangers, pressure water boilers, solar
energy water heaters and radiators. The Company currently operates a
distribution facility in Shenzhen City, the PRC.
All
the
customers are located in the PRC.
3.
RECENTLY ISSUED ACCOUNTING STANDARDS
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations" ("SFAS No. 141R"). SFAS No. 141R will change the accounting
for
business combinations. Under SFAS No. 141R, an acquiring entity will be
required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS No. 141R
will
change the accounting treatment and disclosure for certain specific items
in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations the Company engages in will be recorded
and disclosed following existing GAAP until January 1, 2009. The Company
expects
SFAS No. 141R will have an impact on accounting for business combinations
once
adopted but the effect is dependent upon acquisitions at that time. The
Company
is still assessing the impact of this pronouncement.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in
Consolidated Financial Statements--An Amendment of ARB No. 51, or SFAS
No. 160"
("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company believes that SFAS
160
should not have a material impact on the consolidated financial position
or
results of operations.
In
March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires companies with
derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133 "Accounting for Derivative Instruments
and
Hedging Activities" and how derivative instruments and related hedged items
affect a company's financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years
and
interim periods beginning after November 15, 2008. The adoption of this
statement is not expected to have a material effect on the Company's future
financial position or results of operations.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
4. PREPAYMENTS
AND OTHER RECEIVABLES
A
summary
of prepayments and other receivables was:
|
|
As
of
|
|
|
|
|
March
31,
2008
|
|
|
December
31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
(Note
1)
|
|
Prepayments
|
|
$
|
195,833
|
|
$
|
54,936
|
|
Value
added tax receivable
|
|
|
21,773
|
|
|
20,904
|
|
Deposits
to vendors
|
|
|
-
|
|
|
8,347
|
|
Advance
to employees
|
|
|
-
|
|
|
6,993
|
|
|
|
|
|
|
|
|
|
|
|
$
|
217,606
|
|
$
|
91,180
|
|
5.
INVESTMENT
IN SALES-TYPE LEASES
Starting
from 2007, the Company engages in installing energy-saving facilities and
leasing the equipment facilities to customers under sales-type leasing
arrangement.
The
components of the lease receivable, net, are as follows:
|
|
|
March
31,
2008
|
|
|
December
31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
(Note
1)
|
|
Gross
minimum lease receivables
|
|
$
|
2,039,570
|
|
$
|
2,112,360
|
|
Estimated
residual value of leased assets
|
|
|
36,574
|
|
|
36,574
|
|
Less:
unearned interest income
|
|
|
(1,109,338
|
)
|
|
(1,253,673
|
)
|
|
|
|
966,806
|
|
|
|
|
Net
investment in sales-type leases
|
|
|
|
|
|
895,261
|
|
Less:
current portion
|
|
|
(143,317
|
)
|
|
(137,599
|
)
|
|
|
|
|
|
|
|
|
Net
investment in sales-type leases, non-current
|
|
$
|
823,489
|
|
$
|
757,662
|
|
As
of
March
31
,
2008,
the future minimum rentals to be received on non-cancelable sales-type
leases
are as follows:
Years
ending March 31,
|
|
|
|
|
2009
|
|
|
143,317
|
|
2010
|
|
|
143,317
|
|
2011
|
|
|
143,317
|
|
2012
|
|
|
143,317
|
|
2013
|
|
|
143,317
|
|
Thereafter
|
|
|
1,322,985
|
|
|
|
$
|
2,039,570
|
|
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
6.
PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net, consisted of the following:
|
|
As
of
|
|
|
|
March
31,
2008
|
|
|
December
31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
(Note
1)
|
|
Plant
and machinery
|
|
$
|
1,310,877
|
|
$
|
1,310,877
|
|
Office
equipment
|
|
|
79,183
|
|
|
79,183
|
|
Motor
vehicles
|
|
|
145,184
|
|
|
145,184
|
|
Foreign
translation difference
|
|
|
69,946
|
|
|
65,775
|
|
|
|
|
1,605,190
|
|
|
1,601,019
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
315,260
|
|
|
270,587
|
|
Less:
foreign translation difference
|
|
|
14,643
|
|
|
18,294
|
|
Net
book value
|
|
$
|
1,275,287
|
|
$
|
1,312,138
|
|
Depreciation
expense for the three months ended March 31, 2008 and 2007 were $44,673
(unaudited) and $10,376 (unaudited), respectively.
7.
SHORT-TERM
BANK LOAN
As
of
March 31, 2008, the short-term bank loan is as follows:
The
Company has a short-term bank loan of $54,690 (unaudited) with an independent
financial institution in the PRC, which is secured with interest rate at
6.63%
per annum payable quarterly, with principle due July 19, 2008. It was pledged
by
the accounts receivable of the Company.
The
Company has a short-term bank loan of $144,684 (unaudited) with an independent
financial institution in the PRC, which is secured with interest rate at
6.57%
per annum payable quarterly, with principle due June 29, 2008. It is personally
guaranteed by the owner,
Mr
Renzheng Qiu
of the
Company.
The
Company has a short-term bank loan of $511,294 (unaudited) with an independent
financial institution in the PRC, which is secured with interest rate at
6.75%
per annum payable quarterly, with principle due October 12, 2008. It is
personally guaranteed by the owner, Mr Chen Hanwen of the Company.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
As
of
December 31, 2007, the short-term bank loan is as follows:
The
Company has a short-term bank loan of $54,690 with an independent financial
institution in the PRC, which is secured with interest rate at 6.63% per
annum
payable quarterly, with principle due July 19, 2008. It was pledged by
the
accounts receivable of the Company.
The
Company has a short-term bank loan of $205,086 with an independent financial
institution in the PRC, which is secured with interest rate at 6.57% per
annum
payable quarterly, with principle due June 29, 2008. It is personally guaranteed
by the owner, Mr Renzheng Qiu of the Company.
The
Company has a short-term bank loan of $546,896 with an independent financial
institution in the PRC, which is secured with interest rate at 6.75% per
annum
payable quarterly, with principle due October 12, 2008. It is personally
guaranteed by the owner, Mr Chen Hanwen of the Company.
8.
DISTRIBUTION
TO OWNERS
As
of
March 31, 2008, the distribution amount to owners,
Mr
Renzheng Qiu, Mr Chen Hanwen and Mr Bin Luo totaled
,
$1,190,756.
9.
INCOME
TAXES
The
Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax
Laws, the
Company is generally subject to enterprise income tax (“EIT”) at a statutory
rate of 33% (30% national income tax plus 3% local income tax).
Since
the Company
is
registered and operates in Shenzhen, the PRC and is recognized as “Manufacturing
Enterprise Located in Special Economic Zone”, it is entitled to EIT at a
preferential tax rate of 15%.
On
July
25, 2006, the Company was classified as an Advanced Technology Enterprise
in the
PRC. The Company is exempted from EIT for the first two profit making years
and
then the EIT is reduced to 15% in the following three years.
The
Company was exempted from EIT due to cumulative tax losses for the year
ended
December 31, 2006.
As
of
December 31, 2006, the Company has approximately $142,169 of cumulative
tax
losses which can be carried forward indefinitely to offset future taxable
income. The deferred tax assets for the Company as of December 31, 2006
consisted mainly of tax losses and for which a full valuation allowance
has been
provided, as the losses were fully utilized in 2007 without a tax reductive
benefit to the Company due to the exemption from EIT under the tax concession
policy for an Advanced Technology Enterprise.
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT
Law
,
among
other things, imposes a unified income tax rate of 25% for both domestic
and
foreign invested enterprises
with
effect from January
1,
2008.
The Company is entitled to tax concession policy for
an
Advanced Technology Enterprise
and its
ultimate applicable effective tax rate in 2008 and beyond will depend on
many
factors, including but not limited to whether certain of its legal entity
will
be subject to a transitional policy under the Corporate Income Tax Law,
whether
the Company can continue to enjoy the unexpired tax holidays.
The
Company’s effective income tax rates for the three months ended March 31, 2008
and 2007 were both 15%.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
10.
SEGMENT
INFORMATION - BUSINESS SEGMENTS
The
Company currently operates in two principal business segments: (i) sale
of
components, (ii) provision of energy-saving projects. The Company had no
inter-segment sales for the period ended March 31, 2008 and 2007. The Company’s
reportable segments are strategic business units that offer different products
and services.
Summarized
financial information that is directly attributable to the Company’s reportable
segments is shown in the following table for the period ended March 31,
2008:
|
|
|
Sale
of products
|
|
|
Energy-saving
projects
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
71,144
|
|
$
|
322,776
|
|
$
|
393,920
|
|
Cost
of revenue
|
|
|
57,521
|
|
|
160,829
|
|
|
218,350
|
|
Gross
profit
|
|
$
|
13,623
|
|
$
|
161,947
|
|
$
|
175,570
|
|
Summarized
financial information that is directly attributable to the Company’s reportable
segments is shown in the following table for the year ended March 31,
2007:
|
|
|
Sale
of products
|
|
|
Energy-saving
projects
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
44,106
|
|
$
|
15,879
|
|
$
|
59,985
|
|
Cost
of revenue
|
|
|
32,036
|
|
|
-
|
|
|
32,036
|
|
Gross
profit
|
|
$
|
12,070
|
|
$
|
15,879
|
|
$
|
27,949
|
|
For
the
period ended March 31, 2008 and year ended December 31, 2007, all assets
and
operating facilities are located in the PRC.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
11.
CONCENTRATION
AND RISK
(a)
Major
customers
No
revenue from customers that individually represent greater than 10% of
the total
revenue for each of the three months ended March 31, 2008 and
2007.
(b)
Major
vendors
No
purchase from vendors that individually represent greater than 10% of the
total
purchase for the each of the three months ended March 31, 2008 and
2007.
(c)
Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable and sales-type
leases.
The Company performs ongoing credit evaluations of its customers' financial
condition, but does not require collateral to support such receivables.
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market
interest
rates.
The
Company’s interest-rate risk arises from short-term borrowings. Borrowings
issued at variable rates expose the Company to cash flow interest-rate
risk.
Borrowings issued at fixed rates expose the Company to fair value interest-rate
risk. Company policy is to maintain approximately all of its borrowings
in fixed
rate instruments. At the year-end, all of borrowings were at fixed
rates.
(e)
Exchange
rate risk
The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets
and
liabilities are denominated in RMB. As a result, the Company is exposed
to
foreign exchange risk as its revenues and results of operations may be
affected
by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates
against the US$, the value of the RMB revenues and assets as expressed
in US$
financial statements will decline. The Company does not hold any derivative
or
other financial instruments that expose to substantial market
risk.
12.
SUBSEQUENT
EVENTS
On
January 9, 2008, the Company entered into an Equity Purchase Agreement
and
Complementary Agreement to the Equity Purchase Agreement with Beijing Deli
Solar
Technology Development Co., Ltd (“Deli Solar (Beijing)”), a wholly-owned
subsidiary of China Solar and Clean Energy Solutions, Inc. (“China Solar”), a
company organized under the laws of the State of Nevada and is a reporting
issuer in the United States and has its shares listed on the NASD
Over-the-Counter Bulletin Board under the symbol “CSOL”. Pursuant to the
Agreements, Deli Solar (Beijing) agreed to acquire 100% of the outstanding
equity interest of the Company from its shareholders. On March 25, 2008,
both
parties signed a Supplmentary Agreement to the Equity Purchase Agreement
and the
Complementary Agreement to amend and supplement the previous agreements
and set
forth the final terms of the total purchase price and payment method of
the
acquisition.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Under
the
agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest
of
the
Company from its three shareholders. $4,087,832 (RMB 28.8 million) of the
purchase price was payable in cash. The three shareholders of the Company
agreed
to loan the cash proceeds back to the Company interest free to be used
for
working capital. Fifty (50%) of the principal amount of the loan is required
to
be paid prior to March 31, 2009 and the remaining 50% balance is required
to be
paid prior to March 31, 2010.
In
addition to the cash portion of the purchase price, the parties agreed
to an
additional consideration of RMB 20 million (approximately $2,839,458)
to
represent the agreed-upon value of the Company’s intangible
assets.
This
portion is required to be paid in the form of 1,419,729 shares of the common
stock of China Solar (which was based on the average closing price of the
common
stock for the 30 days immediately preceding the execution of the Complementary
Agreement (the “Share Price”)), provided that if on March 31, 2010 the common
stock price is lower than the Share Price, China Solar will pay the difference.
Fifty percent (50%) of these shares will be transferable and unrestricted
on or
after March 31, 2009 and the remaining fifty percent (50%) will be transferable
on or after March 31, 2010. The shares are required to be transferred to
the
Company within 180 days of the closing. In addition, as part of the
purchase price, the shareholders of the Company will receive five years
warrants
to purchase a total of 141,973 shares of common stock at an exercise price
of
$2.50 per share, subject to future adjustment for stock splits and stock
dividend.
The
Company warranted in the Complementary Agreement that if (i) its sales
revenue
is less than RMB 99 million (approximately $13,670,068) with an after-tax
net
profit of less than RMB 9.43 million (approximately $1,302,108) for the
year ended December 31, 2008; or (ii) if in the year ended December 31,
2009, it does not reach the targeted sales revenue of RMB 143.9 million
(approximately $19,868,336) or the after-tax net profit of RMB 12.13 million
(approximately $1,674,789), the Company will pay the difference between
the
revenue and the targeted revenue of the year specified by reducing the
amount
payable on the shareholders’ loan. If the shareholders’ loan is not sufficient
to pay the difference, the common shares held by the Company will be returned
to
China Solar to the extent necessary for the remaining
balance.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Owners of
Shenzhen
Pengsangpu Solar Industrial Products Corporation
We
have
audited the accompanying balance sheets of Shenzhen Pengsangpu Solar
Industrial
Products Corporation (“the Company”) as of December 31, 2007 and 2006 and the
related statements of operations and comprehensive income (loss), cash
flows and
change in owners’ equity for the years ended December 31, 2007 and 2006. The
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements
based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is
not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits include consideration of
internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of Shenzhen Pengsangpu Solar
Industrial Products Corporation as of December 31, 2007 and 2006 and
the results
of operations and cash flows for the years ended December 31, 2007 and
2006 and
in conformity with accounting principles generally accepted in the United
States
of America.
/s/
Zhong Yi (Hong Kong) C.P.A. Company Limited
Zhong
Yi
(Hong Kong) C.P.A. Company Limited
Certified
Public Accountants
Hong
Kong, China
May
14,
2008
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
BALANCE
SHEETS
AS
OF DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
122,501
|
|
$
|
25,912
|
|
Restricted
cash
|
|
|
80,941
|
|
|
-
|
|
Accounts
receivable, trade
|
|
|
423,137
|
|
|
64,678
|
|
Inventories
|
|
|
345,363
|
|
|
190,886
|
|
Net
investment in sales-type leases, current
|
|
|
137,599
|
|
|
-
|
|
Prepayments
and other receivables
|
|
|
91,180
|
|
|
433,323
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,200,721
|
|
|
714,799
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
Net
investment in sales-type leases, non-current
|
|
|
757,662
|
|
|
101,565
|
|
Property,
plant and equipment, net
|
|
|
1,312,138
|
|
|
57,045
|
|
|
|
|
|
|
|
|
|
Total
non-current assets
|
|
|
2,069,800
|
|
|
158,610
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
3,270,521
|
|
$
|
873,409
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND OWNERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$
|
806,672
|
|
$
|
384,000
|
|
Accounts
payable, trade
|
|
|
795,958
|
|
|
285,871
|
|
Deferred
revenue
|
|
|
21,451
|
|
|
-
|
|
Accrued
liabilities and other payables
|
|
|
192,007
|
|
|
19,245
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,816,088
|
|
|
689,116
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,816,088
|
|
|
689,116
|
|
|
|
|
|
|
|
|
|
Owners’
equity:
|
|
|
|
|
|
|
|
Registered
and paid-in capital
|
|
|
1,598,979
|
|
|
1,598,979
|
|
Distribution
to owners
|
|
|
(1,190,756
|
)
|
|
(1,291,913
|
)
|
Accumulated
other comprehensive income
|
|
|
167,717
|
|
|
31,891
|
|
Statutory
reserve
|
|
|
74,508
|
|
|
-
|
|
Retained
earnings (accumulated losses)
|
|
|
803,985
|
|
|
(154,664
|
)
|
|
|
|
|
|
|
|
|
Total
owners’ equity
|
|
|
1,454,433
|
|
|
184,293
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND OWNERS’ EQUITY
|
|
$
|
3,270,521
|
|
$
|
873,409
|
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
|
Years
ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Revenue,
net:
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
136,714
|
|
$
|
304,222
|
|
Project
revenue
|
|
|
3,078,568
|
|
|
16,541
|
|
Total
revenue, net
|
|
|
3,215,282
|
|
|
320,763
|
|
|
|
|
|
|
|
|
|
Cost
of revenue:
(exclusive
of depreciation)
|
|
|
|
|
|
|
|
Cost
of products
|
|
|
80,052
|
|
|
209,296
|
|
Cost
of projects
|
|
|
1,768,651
|
|
|
-
|
|
Total
cost of revenue
|
|
|
1,848,703
|
|
|
209,296
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,366,579
|
|
|
111,467
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
132,457
|
|
|
35,269
|
|
General
and administrative
|
|
|
131,673
|
|
|
102,501
|
|
Total
operating expenses
|
|
|
264,130
|
|
|
137,770
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
1,102,449
|
|
|
(26,303
|
)
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,982
|
|
|
-
|
|
Interest
expense
|
|
|
(73,274
|
)
|
|
(4,199
|
)
|
Total
other expenses
|
|
|
(69,292
|
)
|
|
(4,199
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
1,033,157
|
|
|
(30,502
|
)
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
1,033,157
|
|
$
|
(30,502
|
)
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
135,826
|
|
|
27,971
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
$
|
1,168,983
|
|
$
|
(2,531
|
)
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
STATEMENTS
OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 & 2006
(Currency
expressed in United States Dollars (“US$”))
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,033,157
|
|
$
|
(30,502
|
)
|
Adjustments
to reconcile net income to net cash provided by
(used
in) operating activities:
|
Depreciation
|
|
|
132,457
|
|
|
35,269
|
|
Interest
income from sales-type leases
|
|
|
(65,357
|
)
|
|
(16,541
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(342,382
|
)
|
|
44,078
|
|
Inventories
|
|
|
(136,805
|
)
|
|
(66,944
|
)
|
Prepayments
and other receivables
|
|
|
359,427
|
|
|
(392,002
|
)
|
Accounts
payable
|
|
|
474,435
|
|
|
176,813
|
|
Deferred
revenue
|
|
|
20,745
|
|
|
-
|
|
Accrued
liabilities and other payables
|
|
|
165,801
|
|
|
(19,104
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
1,641,478
|
|
|
(268,933
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Investment
in sales-type leases
|
|
|
(760,936
|
)
|
|
-
|
|
Proceeds
from leases receivable
|
|
|
65,448
|
|
|
15,869
|
|
Purchase
of property, plant and equipment
|
|
|
(1,342,427
|
)
|
|
(5,623
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(2,037,915
|
)
|
|
10,246
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
(78,273
|
)
|
|
-
|
|
Drawdown
from short-term bank loans
|
|
|
1,057,746
|
|
|
377,596
|
|
Repayment
of short-term bank loans
|
|
|
(674,313
|
)
|
|
-
|
|
Contribution
from (distribution to) owners
|
|
|
182,975
|
|
|
(105,727
|
)
|
Net
cash provided by financing activities
|
|
|
488,135
|
|
|
271,869
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
4,891
|
|
|
224
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
96,589
|
|
|
13,406
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
25,912
|
|
|
12,506
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
122,501
|
|
$
|
25,912
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
Cash
paid for income taxes
|
|
$
|
-
|
|
$
|
-
|
|
Cash
paid for interest expenses
|
|
$
|
73,274
|
|
$
|
4,199
|
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
STATEMENTS
OF CHANGE IN OWNERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
|
|
Registered
and
paid-in
capital
|
|
|
Distribution
to owners
|
|
|
Accumulated
other
comprehensive income
|
|
|
Statutory
reserve
|
|
|
(Accumulated
losses)
retained
earnings
|
|
|
Total
owner’s
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2006
|
|
$
|
321,446
|
|
$
|
(121,091
|
)
|
$
|
3,920
|
|
$
|
-
|
|
$
|
(124,162
|
)
|
$
|
80,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
27,971
|
|
|
-
|
|
|
-
|
|
|
27,971
|
|
Net
loss for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(30,502
|
)
|
|
(30,502
|
)
|
Contribution
by owners
|
|
|
1,277,533
|
|
|
(1,170,822
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
106,711
|
|
Balance
as of December 31, 2006
|
|
$
|
1,598,979
|
|
$
|
(1,291,913
|
)
|
$
|
31,891
|
|
$
|
-
|
|
$
|
(154,664
|
)
|
$
|
184,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution
from owners
|
|
|
-
|
|
|
101,157
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
101,157
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
135,826
|
|
|
-
|
|
|
-
|
|
|
135,826
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,033,157
|
|
|
1,033,157
|
|
Transfer
to statutory reserve
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
74,508
|
|
|
(74,508
|
)
|
|
-
|
|
Balance
as of December 31, 2007
|
|
$
|
1,598,979
|
|
|
(1,190,756
|
)
|
$
|
167,717
|
|
|
74,508
|
|
$
|
803,985
|
|
$
|
1,454,433
|
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
1.
ORGANIZATION
AND BUSINESS BACKGROUND
Shenzhen
Pengsangpu Solar Industrial Products Corporation
(“the
Company”) was incorporated as a limited liability company in the People’s
Republic of China (“PRC”) on September 23, 1993. Its registered capital was
Renminbi Yuan (“RMB”) 2,650,000 (equivalent to $321,446) and contributed by
three individuals namely, Mr Renzheng Qiu, Mr Hanwen Chen and Mr Hongde
Chen.
On
July
13, 2006, the registered capital was approved to increase to $1,598,979
(RMB12,800,000) by an injection of additional capital of $1,277,533
(RMB10,150,000) by the existing owners and a new owner, Shenzhen Shunda
Solar
Energy Co., Ltd registered in the PRC.
On
April
18, 2007, Shenzhen Shunda Solar Energy Co. entered an Equity Exchange
Agreement
to transfer its interest of 0.23% in the Company to Mr Chen
Hanwen.
On
May
30, 2007, Mr Hongde Chen entered an Equity Exchange Agreement to transfer
his
34.77% interest in the Company to Mr Chen Hanwen.
On
July
24, 2007, Mr Chen Hanwen entered an Equity Exchange Agreement to transfer
his
3.33% interest in the Company to Mr Renzheng Qiu and his 28.33% interest
in the
Company to Mr Bin Luo, respectively.
The
Company is principally engaged in the re-sale of energy-saving related
heating
products such as heat pipes, heat exchangers, pressure water boilers,
solar
energy water heaters and radiators. The Company currently operates a
distribution facility in Shenzhen City, the PRC.
All
the
customers are located in the PRC.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of
America.
In
preparing these financial statements, management makes estimates and
assumptions
that affect the reported amounts of assets and liabilities in the balance
sheets
and revenues and expenses during the year reported. Actual results may
differ
from these estimates.
The
Company engages in installing energy-saving facilities and leasing the
equipment
facilities to customers and the Company will transfer all benefits, risks
and
ownership of the leased property to the customers at the end of the lease
term.
The Company’s investment cost in these projects is recorded as sales-type leases
in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13,
“Accounting
for Leases”
and its
various amendments and interpretations. The sales and cost of goods sold
is
recognized at the point of sales. The investment in sales-type lease
consists of
the sum of the total minimum lease payments receivable less unearned
interest
income. Unearned interest income is amortized to income over the lease
term as
to produce a constant periodic rate of return on the net investment in
the
lease. The gross investment on sales-type lease is recorded as net of
unearned
interest income.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
Sales-type
leases are generally placed in a non-accrual status (i.e., no revenue
is
recognized) when payments are more than 90 days past due. Additionally,
management periodically reviews the credit worthiness of all sales-type
lessees
with payments outstanding less than 90 days. Based upon management’s judgment,
sales-type lessees with balances less than 90 days delinquent may be
placed in a
non-accrual status. Leases placed on non-accrual status are only returned
to an
accrual status when the account has been brought current and management
believes
recovery of the remaining unpaid lease payments is probable.
In
accordance with the SEC’s Staff Accounting Bulletin No. 104,
Revenue
Recognition
,
the
Company recognizes revenue when persuasive evidence of an arrangement
exists,
transfer of title has occurred or services have been rendered, the selling
price
is fixed or determinable and collectibility is reasonably
assured.
(a)
Product
sales
The
Company derives revenues from the sale of energy-saving products. The
Company
recognizes its revenues net of value-added taxes (“VAT”). The Company is subject
to VAT which is levied on the majority of the products at the rate of
17% on the
invoiced value of sales. Output VAT is borne by customers in addition
to the
invoiced value of sales and input VAT is borne by the
Company.
In
accordance with EITF 00-10,
“Accounting
for Shipping and Handling Fees and Costs,”
the
Company records shipping and handling costs incurred for inbound and
outbound
freight as a component of cost of revenues.
(b)
Project
revenue
(i)
Project
revenue under multiple element arrangements
Starting
from 2007, the Company also sells their products and services under a
bundled
sales arrangement namely energy-saving projects, which typically include
design,
equipment, installation, testing and maintenance components. The components
of
design, equipment, installation and testing are non-separable and considered
as
a single unit of deliverables, namely product revenue. Hence, the product
and
maintenance are considered separate units of accounting in the
arrangement.
Revenues
under these bundled arrangements are allocated considering the relative
fair
values of two separate deliverables: (a) product deliverable and (b)
maintenance
deliverable, included in the bundled arrangement based on the estimated
relative
fair values of each element in accordance with
EITF
00-21,
“Accounting
for Multiple Element Revenue Arrangements”
and
recognized when the applicable revenue recognition criteria for each
element are
met.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars
(“US$”))
(ii)
Maintenance
service
Revenue
from maintenance support for the Company’s products are deferred and recognized
ratably over the term of the service period upon the acceptance of the
products,
which is generally 24 to 42 months. As of December 31, 2007, the unrecognized
portion of revenue related to maintenance was $21,451 and was included
in the
Deferred Revenue caption on the balance sheets.
(iii)
Project
revenue under sales-type leases
In
accordance with SFAS No. 13,
“Accounting
for Leases”
,
the
Company recognizes interest income over the lease term so as to produce
a
constant rate of return on the net investment in the lease using effective
interest method.
Under
sales-type leases, the Company also recognizes a profit (or loss) at
the
beginning of the lease term. Sales revenue should be recorded for the
fair value
of the leased asset, or, if lower, the present value of the minimum lease
payments, computed using the interest rate implicit in the lease. Cost
of sales
should be recorded for the carrying amount of the leased asset, less
the present
value of the unguaranteed residual value.
(c)
Interest
income
Interest
income is recognized on a time apportionment basis, taking into account
the
principal amounts outstanding and the interest rates
applicable.
Cost
of
revenue consists primarily of material costs, direct labor, shipping
and
handling fee and manufacturing overheads, which are directly attributable
to the
manufacture of products and the provision of the energy-saving
projects.
l
|
Cash
and cash equivalents
|
Cash
and
cash equivalents are carried at cost and represent cash on hand, demand
deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the
purchase
date of such investments.
The
Company maintains cash balances at an independent financial institution
specializing in corporate guarantees as a pledge to the short-term bank
loan.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
Inventories
consist primarily of finished goods, work in process and raw materials
and are
stated at the lower of cost or net realizable value, with cost being
determined
on a weighted average basis. Allowance for slow-moving and obsolescence
is an
estimate amount based on an analysis of current business and economic
risks, the
duration of the inventories held and other specific identifiable risks
that may
indicate a potential loss. The allowance is reviewed regularly to ensure
that it
adequately provides for all reasonable expected losses.
As
of
December 31, 2007 and 2006, the Company has determined that no
allowance
for obsolescence
is
required.
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
|
|
|
|
|
|
|
|
|
|
Plant
and machinery
|
|
|
5
years
|
|
|
5
|
%
|
Office
equipment
|
|
|
5
years
|
|
|
5
|
%
|
Motor
vehicles
|
|
|
5
years
|
|
|
5
|
%
|
Expenditure
for maintenance and repairs is expensed as incurred. The gain or loss
on the
disposal of property, plant and equipment is the difference between the
net
sales proceeds and the carrying amount of the relevant assets and is
recognized
in the statements of operations.
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,
2007 or 2006.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
SFAS
No.
130,
“Reporting
Comprehensive Income”
,
establishes standards for reporting and display of comprehensive income,
its
components and accumulated balances. Comprehensive income as defined
includes
all changes in equity during the year from non-owner sources. Accumulated
comprehensive income, as presented in the accompanying statement of owners’
equity consists of changes in unrealized gains and losses on foreign
currency
translation. This comprehensive income is not included in the computation
of
income tax expense or benefit.
The
Company accounts for income tax using SFAS No. 109
“Accounting
for Income Taxes”
,
which
requires the asset and liability approach for financial accounting and
reporting
for income taxes. Under this approach, deferred income taxes are provided
for
the estimated future tax effects attributable to temporary differences
between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery
or
reversal and the effect from a change in tax rates is recognized in the
statements of operations and comprehensive income in the period of enactment.
A
valuation allowance is provided to reduce the amount of deferred tax
assets if
it is considered more likely than not that some portion of, or all of
the
deferred tax assets will not be realized.
The
Company also adopts the provisions of the Financial Accounting Standards
Interpretation No. 48,
“Accounting
for Uncertainty in Income Taxes” (“
FIN
48
”)
.
FIN 48
prescribes a recognition threshold and measurement process for recording
in the
financial statements uncertain tax positions taken or expected to be
taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transitions. The Company adopted FIN 48 and has determined that the adoption
did
not have an impact on the Company’s financial position, results of operations,
or cash flows.
l
|
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated
into
the functional currency at the exchange rates prevailing at the dates
of the
transaction. Monetary assets and liabilities denominated in currencies
other
than the functional currency are translated into the functional currency
using
the applicable exchange rates at the balance sheet dates. The resulting
exchange
differences are recorded in the statement of operations.
The
reporting currency of the Company is the United States dollar (“US$”). The
Company maintains its books and records in its local currency, Renminbi
Yuan
(“RMB”), which is functional currency as being the primary currency of the
economic environment in which these entities operate.
In
general, assets and liabilities are translated into US$, in accordance
with SFAS
No. 52, “
Foreign
Currency Translation”
,
using
the exchange rate on the balance sheet date. Revenues and expenses are
translated at average rates prevailing during the year. The gains and
losses
resulting from translation of financial statements of foreign subsidiaries
are
recorded as a separate component of accumulated other comprehensive income
within the statement of changes in owners’ equity.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
Translation
of amounts from RMB into US$ has been made at the following exchange
rates for
the respective year:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Year-end
RMB:US$ exchange rate
|
|
|
7.314
|
|
|
7.813
|
|
Average
rates RMB:US$ exchange rate
|
|
|
7.563
|
|
|
7.945
|
|
Contributions
to retirement schemes (which are defined contribution plans) are charged
to
general and administrative expenses in the statements of operations and
comprehensive income as and when the related employee service is provided.
The
Company expenses advertising costs as incurred in accordance with the
American
Institute of Certified Public Accountants (“AICPA”) Statement of Position
93-7,
“Reporting
for Advertising Costs”
.
The
Company incurred $12,422 and $0 advertising expenses for each of the
years ended
December 31, 2007 and 2006, respectively.
l
Research
and development costs
Research
and development costs are expensed as incurred and consist mainly of
labor cost
incurred in the development of new products, new applications, new features
or
enhancements for existing products or applications. The Company incurred
$9,520
and $3,272 for the years ended December 31, 2007 and
2006
.
Under
the
terms of the contracts, the Company provides a product warranty on the
equipment
to its customers for a period of twelve months upon the completion of
installation at the Company’s expense. The Company has not experienced any
material returns where it was under obligation to honor this standard
warranty
provision. As such, no reserve for product warranty has been provided
in the
statements of operations for the years ended December 31, 2007 and 2006.
Parties,
which can be a corporation or individual, are considered to be related
if the
Company has the ability, directly or indirectly, to control the other
party or
exercise significant influence over the other party in making financial
and
operating decisions. Companies are also considered to be related if they
are
subject to common control or common significant influence.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
SFAS
No.
131
“Disclosures
about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments
on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
financial statements. The Company operates in two reportable business
segments:
Sales of products and Energy-saving projects (including sales-type leases).
All
the customers are located in the PRC.
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.
The
Company’s financial instruments primarily include cash and cash equivalents,
restricted cash, trade accounts receivable, inventories, investment in
sales-type leases, prepayments and other receivables, short-term bank
loan,
trade accounts payable, deferred revenue, accrued liabilities and other
payable.
As
of the
balance sheet date, the estimated fair values of financial instruments
were not
materially different from their carrying values as presented due to short
maturities of these instruments.
l
|
Recently
issued accounting
pronouncements
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition
or the
results of its operations.
In
February 2007, the FASB issued SFAS No. 159,
"The
Fair Value Option for Financial Assets and Financial
Liabilities"
("SFAS
No. 159"). SFAS No. 159 permits entities to choose to measure, on an
item-by-item basis, specified financial instruments and certain other
items at
fair value. Unrealized gains and losses on items for which the fair value
option
has been elected are required to be reported in earnings at each reporting
date.
SFAS No. 159 is effective for fiscal years beginning after November 15,
2007,
the provisions of which are required to be applied prospectively. The
Company
believes that SFAS 159 should not have a material impact on the financial
position or results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
"Business
Combinations" ("
SFAS
No.
141R"
)
.
SFAS
No. 141R will change the accounting for business combinations. Under
SFAS No.
141R, an acquiring entity will be required to recognize all the assets
acquired
and liabilities assumed in a transaction at the acquisition-date fair
value with
limited exceptions. SFAS No. 141R will change the accounting treatment
and
disclosure for certain specific items in a business combination. SFAS
No. 141R
applies prospectively to business combinations for which the acquisition
date is
on or after the beginning of the first annual reporting period beginning
on or
after December 15, 2008. Accordingly, any business combinations the Company
engages in will be recorded and disclosed following existing GAAP until
January
1, 2009. The Company expects SFAS No. 141R will have an impact on accounting
for
business combinations once adopted but the effect is dependent upon acquisitions
at that time. The Company is still assessing the impact of this pronouncement.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
In
December 2007, the FASB issued SFAS No. 160,
"Noncontrolling
Interests in Consolidated Financial Statements--An Amendment of ARB No.
51, or
SFAS No. 160"
("SFAS
No. 160"). SFAS No. 160 establishes new accounting and reporting standards
for
the noncontrolling interest in a subsidiary and for the deconsolidation
of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or
after
December 15, 2008. The Company believes that SFAS No. 160 should not
have a
material impact on the financial position or results of
operations.
In
March
2008, the FASB issued SFAS No. 161 ("SFAS No. 161"),
"Disclosures
about Derivative Instruments and Hedging Activities"
.
SFAS
161 requires companies with derivative instruments to disclose information
that
should enable financial-statement users to understand how and why a company
uses
derivative instruments, how derivative instruments and related hedged
items are
accounted for under SFAS No. 133
"Accounting
for Derivative Instruments and Hedging Activities"
and how
derivative instruments and related hedged items affect a company's financial
position, financial performance and cash flows. SFAS No. 161 is effective
for
financial statements issued for fiscal years and interim periods beginning
after
November 15, 2008. The adoption of this statement is not expected to
have a
material effect on the Company's future financial position or results
of
operations.
3.
ACCOUNTS
RECEIVABLE, TRADE
The
majority of the Company’s sales are on credit terms and in accordance with terms
specified in the contracts governing the relevant transactions. The Company
evaluates the need of an allowance for doubtful accounts based on specifically
identified amounts that management believes to be uncollectible. If actual
collections experience changes, revisions to the allowance may be required.
Based upon the aforementioned criteria, no allowances for doubtful accounts
were
provided for the years ended December 31, 2007 and 2006.
4.
INVENTORIES
Inventories
consisted of the following:
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
94,308
|
|
$
|
127,177
|
|
Finished
goods
|
|
|
141,663
|
|
|
33,837
|
|
|
|
|
|
|
|
|
|
|
|
$
|
345,363
|
|
$
|
190,886
|
|
For
the
years ended December 31, 2007 and 2006, the Company recorded no allowance
for
obsolete inventories and write-offs.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
5.
PREPAYMENTS
AND OTHER RECEIVABLES
A
summary
of prepayments and other receivables was:
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Prepayments
|
|
$
|
54,936
|
|
$
|
-
|
|
Value
added tax receivable
|
|
|
20,904
|
|
|
-
|
|
Deposits
to vendors
|
|
|
8,347
|
|
|
424,440
|
|
Advance
to employees
|
|
|
6,993
|
|
|
-
|
|
Other
receivables
|
|
|
-
|
|
|
8,883
|
|
|
|
$
|
91,180
|
|
$
|
433,323
|
|
6.
INVESTMENT
IN SALES-TYPE LEASES
The
Company engages in installing energy-saving facilities and leasing the
equipment
facilities to customers under sales-type leasing arrangement.
As
of
December 31, 2007, the components of the lease receivable, net, are as
follows:
Gross
minimum lease receivables
|
|
$
|
2,112,360
|
|
Estimated
residual value of leased assets
|
|
|
36,574
|
|
Less:
unearned interest income
|
|
|
(1,253,673
|
)
|
|
|
|
|
|
Net
investment in sales-type leases
|
|
|
895,261
|
|
Less:
current portion
|
|
|
(137,599
|
)
|
|
|
|
|
|
Net
investment in sales-type leases, non-current
|
|
$
|
757,662
|
|
As
of
December
31
,
2007,
the future minimum rentals to be received on non-cancelable sales-type
leases
are as follows:
Years
ending December 31,
|
|
|
|
|
2008
|
|
|
137,599
|
|
2009
|
|
|
137,599
|
|
2010
|
|
|
137,599
|
|
2011
|
|
|
137,599
|
|
2012
|
|
|
137,599
|
|
Thereafter
|
|
|
1,424,365
|
|
|
|
$
|
2,112,360
|
|
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
7.
PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net, consisted of the following:
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Plant
and machinery
|
|
$
|
1,310,877
|
|
$
|
-
|
|
Office
equipment
|
|
|
79,183
|
|
|
47,633
|
|
Motor
vehicles
|
|
|
145,184
|
|
|
145,184
|
|
Foreign
translation difference
|
|
|
65,775
|
|
|
6,445
|
|
|
|
|
1,601,019
|
|
|
199,262
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
270,587
|
|
|
138,130
|
|
Less:
foreign translation difference
|
|
|
18,294
|
|
|
4,087
|
|
Net
book value
|
|
$
|
1,312,138
|
|
$
|
57,045
|
|
Depreciation
expense for the years ended December 31, 2007 and 2006 were $132,457
and
$35,269, respectively.
8.
SHORT-TERM
BANK LOAN
As
of
December 31, 2007, the short-term bank loan is as follows:
The
Company has a short-term bank loan of $54,690 with an independent financial
institution in the PRC, which is secured with interest rate at 6.63%
per annum
payable quarterly, with principle due July 19, 2008. It was pledged by
the
accounts receivable of the Company.
The
Company has a short-term bank loan of $205,086 with an independent financial
institution in the PRC, which is secured with interest rate at 6.57%
per annum
payable quarterly, with principle due June 29, 2008. It is personally
guaranteed
by the owner, Mr Renzheng Qiu of the Company.
The
Company has a short-term bank loan of $546,896 with an independent financial
institution in the PRC, which is secured with interest rate at 6.75%
per annum
payable quarterly, with principle due October 12, 2008. It is personally
guaranteed by the owner, Mr Chen Hanwen of the Company.
As
of
December 31, 2006, the short-term bank loan is as follows:
The
Company has a short-term bank loan of $384,000 with an independent financial
institution in the PRC, which is secured with interest rate at 7.3% per
annum payable quarterly, with principle due September 27, 2007. It is
personally
guaranteed by the owner, Mr Chen Hanwen and Mr Renzheng Qiu of the
Company.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
9.
ACCRUED
LIABILITIES AND OTHER PAYABLES
Accrued
liabilities and other payables consisted of the following:
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Business
tax payable
|
|
$
|
93,751
|
|
$
|
-
|
|
Customer
deposits
|
|
|
56,492
|
|
|
-
|
|
Welfare
payable
|
|
|
23,128
|
|
|
209
|
|
Salary
payable
|
|
|
13,132
|
|
|
16,941
|
|
Government
levy payable
|
|
|
4,212
|
|
|
2,095
|
|
Other
payable
|
|
|
1,292
|
|
|
-
|
|
|
|
$
|
192,007
|
|
|
19,245
|
|
10.
OWNERS’
EQUITY
In
accordance with the Company’s Articles of Association, the registered capital of
the Company was $321,446 (approximately RMB2,650,000)
and
contributed by three individuals namely, Mr Renzheng Qiu, Mr Hanwen Chen
and Mr
Hongde Chen
at its
inception.
On
July
13, 2006, the registered capital was approved to increase to $1,598,979
(RMB12,800,000) by an injection of additional capital of $1,277,533
(RMB10,150,000) by the existing owners and a new owner, Shenzhen Shundeng
Solar
Energy Co., Ltd registered in the PRC.
On
April
18, 2007, Shenzhen Shunda Solar Energy Co. entered an Equity Exchange
Agreement
to transfer its interest of 0.23% in the Company to Mr Chen
Hanwen.
On
May
30, 2007, Mr Hongde Chen entered an Equity Exchange Agreement to transfer
his
34.77% interest in the Company to Mr Chen Hanwen.
On
July
24, 2007, Mr Chen Hanwen entered an Equity Exchange Agreement to transfer
his
3.33% interest in the Company to Mr Renzheng Qiu and his 28.33% interest
in the
Company to Mr Bin Luo, respectively.
As
of
December 31, 2007, the ultimate owners of the Company were Mr Renzheng
Qiu, Mr
Chen Hanwen and Mr Bin Luo.
11.
DISTRIBUTION
TO OWNERS
As
of
December 31, 2006, the distribution amount to owners,
Mr
Renzheng Qiu, Mr Chen Hanwen and Mr Bin Luo totaled
,
$1,291,913.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
As
of
December 31, 2007, the distribution amount owners
,
Mr
Renzheng Qiu, Mr Chen Hanwen and Mr Bin Luo totaled
,
$1,190,756.
12.
INCOME
TAXES
The
Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax
Laws, the
Company is generally subject to corporate income tax (“CIT”) at a statutory rate
of 33% (30% national income tax plus 3% local income tax).
Since
the Company
is
registered and operates in Shenzhen, the PRC and is recognized as “Manufacturing
Enterprise Located in Special Economic Zone”, it is entitled to CIT at a
preferential tax rate of 15%.
On
July
25, 2006, the Company was classified as an Advanced Technology Enterprise
in the
PRC. The Company is exempted from CIT for the first two profit making
years and
then the CIT is reduced to 15% in the following three years.
The
Company was exempted from CIT due to cumulative tax losses for the year
ended
December 31, 2006.
As
of
December 31, 2006, the Company has approximately $142,169 of cumulative
tax
losses which can be carried forward indefinitely to offset future taxable
income. The deferred tax assets for the Company as of December 31, 2006
consisted mainly of tax losses and for which a full valuation allowance
has been
provided, as the losses were fully utilized in 2007 without a tax reductive
benefit to the Company due to the exemption from CIT under the tax concession
policy for an Advanced Technology Enterprise.
The
reconciliation of income tax rate to the effective income tax rate based
on
income before income taxes stated in the statements of operations for
the years
ended December 31, 2007 and 2006 is as follows:
|
|
Years
ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
$
|
1,033,157
|
|
$
|
(30,502
|
)
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
33
|
%
|
|
|
|
340,942
|
|
|
(10,066
|
)
|
Add:
Items not subject to tax purpose
|
|
|
|
|
|
|
|
-
Net operating losses carryforwards
|
|
|
(46,916
|
)
|
|
(1,809
|
)
|
-
Provisions and accrued liabilities
|
|
|
(31,221
|
)
|
|
11,875
|
|
-
Deferred revenue
|
|
|
6,846
|
|
|
-
|
|
-
Effect from tax holiday
|
|
|
(269,651
|
)
|
|
-
|
|
Income
tax expenses
|
|
$
|
-
|
|
$
|
-
|
|
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT
Law
,
among
other things, imposes a unified income tax rate of 25% for both domestic
and
foreign invested enterprises
with
effect from January
1,
2008.
The Company is entitled to tax concession policy for
an
Advanced Technology Enterprise
and its
ultimate applicable effective tax rate in 2008 and beyond will depend
on many
factors, including but not limited to whether certain of its legal entity
will
be subject to a transitional policy under the Corporate Income Tax Law,
whether
the Company can continue to enjoy the unexpired tax holidays.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
The
following table sets forth the significant components of the aggregate
net
deferred tax assets of the Company as of December 31, 2007 and
2006:
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
-
|
|
$
|
46,916
|
|
Less:
valuation allowance
|
|
|
-
|
|
|
(46,916
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
|
13.
RELATED
PARTY TRANSACTIONS
For
the
period from January 1, 2005 to July 31, 2007, Mr. Chen Hanwen and Mr.
Renzheng
Qiu, the owners of the Company maintained the office premises and provided
office services without charge to the Company. The imputed rent expense
at its
current market fair value for the years ended December 31, 2007 and 2006
were
not significant.
On
February 2, 2007,
Shenzhen
Shunda Solar Energy Co., the former owner of the Company sold the plant
and
machinery to the Company at the market fair value of $698,108, equivalent
to RMB
5,280,000, at a cash consideration in a normal course of
business.
14.
CHINA
CONTRIBUTION PLAN
Under
the
PRC Law, full-time employees of the Company are entitled to staff welfare
benefits including medical care, welfare subsidies, unemployment insurance
and
pension benefits through a China government-mandated multi-employer defined
contribution plan. The Company is required to accrue for these benefits
based on
certain percentages of the employees’ salaries. The total contributions provided
for such employee benefits were $24,625 and $9,555 for the years ended
December
31, 2007 and 2006, respectively.
15.
STATUTORY
RESERVE
Under
the
PRC Law, the Company is required to make appropriations to the statutory
reserve
based on after-tax net earnings and determined in accordance with generally
accepted accounting principles of the People’s Republic of China (the “PRC
GAAP”). Appropriation to the statutory reserve should be at least 10% of the
after-tax net income until the reserve is equal to 50% of the registered
capital. The statutory reserve is established for the purpose of providing
employee facilities and other collective benefits to the employees and
is
non-distributable other than in liquidation.
For
the
years ended December 31, 2007 and 2006, appropriation of $74,508 and
$0 were
made respectively.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
16.
SEGMENT
INFORMATION - BUSINESS SEGMENTS
The
Company currently operates in two principal business segments: (i) sale
of
components, (ii) provision of energy-saving projects. The accounting
policies of
the segments are the same as those described in the summary of significant
accounting policies (see Note 2). The Company had no inter-segment sales
for the
years ended December 31, 2007 and 2006. The Company’s reportable segments are
strategic business units that offer different products and services.
Summarized
financial information that is directly attributable to the Company’s reportable
segments is shown in the following table for the year ended December
31,
2007:
|
|
|
Sale
of products
|
|
|
Energy-saving
projects
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
136,714
|
|
$
|
3,078,568
|
|
$
|
3,215,282
|
|
Cost
of revenue
|
|
|
80,052
|
|
|
1,768,651
|
|
|
1,848,703
|
|
Gross
profit
|
|
$
|
56,662
|
|
$
|
1,309,917
|
|
$
|
1,366,579
|
|
Summarized
financial information that is directly attributable to the Company’s reportable
segments is shown in the following table for the year ended December
31,
2006:
|
|
|
Sale
of products
|
|
|
Energy-saving
projects
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
304,222
|
|
$
|
16,541
|
|
$
|
320,763
|
|
Cost
of revenue
|
|
|
209,296
|
|
|
-
|
|
|
209,296
|
|
Gross
profit
|
|
$
|
94,926
|
|
$
|
16,541
|
|
$
|
111,467
|
|
For
the
years ended December 31, 2007 and 2006, all assets and operating facilities
are
located in the PRC.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
17.
CONCENTRATION
AND RISK
(a)
Major
customers
The
customers who account for 10% or more of revenue are presented as
follows:
|
|
Year
ended December 31,
2007
|
|
December
31,
2007
|
|
|
|
|
Revenue
|
|
|
Percentage
of
revenue
|
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
$
|
737,385
|
|
|
23
|
%
|
$
|
-
|
|
Customer
B
|
|
|
288,276
|
|
|
9
|
%
|
|
136,724
|
|
Customer
C
|
|
|
264,838
|
|
|
8
|
%
|
|
-
|
|
Customer
D
|
|
|
264,086
|
|
|
8
|
%
|
|
14,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,554,585
|
|
|
48
|
%
|
|
151,353
|
|
|
|
Year
ended December 31,
2006
|
|
|
December
31,
2006
|
|
|
|
|
Revenue
|
|
|
Percentage
of
r
evenue
|
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
E
|
|
$
|
69,226
|
|
|
22
|
%
|
$
|
-
|
|
Customer
F
|
|
|
50,346
|
|
|
16
|
%
|
|
-
|
|
Customer
G
|
|
|
44,053
|
|
|
14
|
%
|
|
-
|
|
Customer
H
|
|
|
41,493
|
|
|
13
|
%
|
|
-
|
|
Customer
I
|
|
|
37,760
|
|
|
11
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
242,878
|
|
|
76
|
%
|
$
|
-
|
|
(b)
Major
vendors
The
vendors who account for 10% or more of purchases are presented as follows:
|
|
Year
ended December 31,
2007
|
|
|
December
31,
2007
|
|
|
|
|
Purchases
|
|
|
Percentage
of
purchases
|
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
$
|
355,483
|
|
|
21
|
%
|
$
|
39,787
|
|
Vendor
B
|
|
|
177,741
|
|
|
11
|
%
|
|
-
|
|
Vendor
C
|
|
|
175,006
|
|
|
11
|
%
|
|
39,434
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
708,230
|
|
|
43
|
%
|
$
|
79,221
|
|
|
|
Year
ended December 31,
2006
|
|
|
December
31,
2006
|
|
|
|
|
Purchases
|
|
|
Percentage
of
purchases
|
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
$
|
51,955
|
|
|
18
|
%
|
$
|
18,276
|
|
Vendor
C
|
|
|
92,972
|
|
|
31
|
%
|
|
35,410
|
|
Vendor
D
|
|
|
46,486
|
|
|
16
|
%
|
|
64,342
|
|
Vendor
E
|
|
|
42,384
|
|
|
14
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
233,797
|
|
|
79
|
%
|
$
|
118,028
|
|
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable and sales-type
leases.
The Company performs ongoing credit evaluations of its customers' financial
condition, but does not require collateral to support such receivables.
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market
interest
rates.
The
Company’s interest-rate risk arises from short-term borrowings. Borrowings
issued at variable rates expose the Company to cash flow interest-rate
risk.
Borrowings issued at fixed rates expose the Company to fair value interest-rate
risk. Company policy is to maintain approximately all of its borrowings
in fixed
rate instruments. At the year-end, all of borrowings were at fixed
rates.
The
reporting currency of the Company is US$, to date the majority of the
revenues
and costs are denominated in RMB and a significant portion of the assets
and
liabilities are denominated in RMB. As a result, the Company is exposed
to
foreign exchange risk as its revenues and results of operations may be
affected
by fluctuations in the exchange rate between US$ and RMB. If the RMB
depreciates
against the US$, the value of the RMB revenues and assets as expressed
in US$
financial statements will decline. The Company does not hold any derivative
or
other financial instruments that expose to substantial market
risk.
18.
SUBSEQUENT
EVENTS
On
January 9, 2008, the Company entered into an Equity Purchase Agreement
and a
Complementary Agreement (the “Agreements”) with Beijing Deli Solar Technology
Development Co., Ltd, a wholly-owned subsidiary of China Solar and Clean
Energy
Solutions, Inc., a company organized under the laws of the State of Nevada
and
is a reporting issuer in the United States and has its shares listed
on the NASD
Over-the-Counter Bulletin Board under the symbol “CSOL”. Pursuant to the
Agreements, China Solar and Clean Energy Solutions, Inc. agreed to purchase
100%
equity interest in the Company for a cash consideration of RMB19 million
(equivalent to US$2,588,203) and also agreed to purchase the Company’s
trademarks and other intangible assets at an appraisal value of RMB20
million.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
Unaudited
Pro Forma Financial Information of Shenzhen Pengsangpu Solar Industrial
Products
Corporation
PRO
FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(UNAUDITED)
The
unaudited Pro Forma Condensed, Combined Statements of Operations for
the three
months ended March 31, 2008 gives effect to the acquisition of Shenzhen
PengSangPu Solar Industrial Products Corporation (“Target”) by China Solar &
Clean Energy Solutions, Inc. (“Registrant”). The transaction was valued at fair
value. The unaudited Pro Forma Condensed, Combined Statements of Operations
was
taken from the respective financial statements of Target and Registrant
for the
three months ended March 31, 2008. The unaudited Pro Forma Condensed,
Combined
Statements of Operations was prepared assuming that the acquisition described
above was consummated as of the beginning of the year
presented.
The
unaudited Pro Forma Condensed, Combined Statements of Operations are
based upon
historical financial statements of Target and Registrant. The pro forma
adjustments and the resulting unaudited Pro Forma Condensed, Combined
Statements
of Operations have been prepared based upon available information and
certain
assumptions and estimates deemed appropriate by the
Registrant.
The
unaudited Pro Forma Condensed, Combined Statements of Operations are
not
necessarily indicative of the results of operations that actually would
have
been achieved had the acquisition been consummated as of the date indicated,
or
that may be achieved in the future. Furthermore, the unaudited Pro Forma
Condensed, Combined Statements of Operations do not reflect changes that
may
occur as the result of post-combination activities and other
matters.
The
unaudited Pro Forma Condensed, Combined Statements of Operations and
notes
thereto should be read in conjunction with the accompanying unaudited
financial
statements of Target and Registrant.
PRO
FORMA CONDENSED CO
MBINED
STATEMENTS OF INCOME
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(UNAUDITED)
|
|
Registrant
(Historical)
|
|
Target
(Historical)
|
|
Pro
forma
adjustments
Increase
(Decrease)
|
|
Pro
forma
combined
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
8,300,076
|
|
$
|
393,920
|
|
|
|
|
$
|
8,693,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
5,845,016
|
|
|
218,350
|
|
|
|
|
|
6,063,366
|
|
Gross
profit
|
|
|
2,455,060
|
|
|
175,570
|
|
|
|
|
|
2,630,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
149,167
|
|
|
44,673
|
|
|
|
|
|
193,840
|
|
Selling
and distribution
|
|
|
502,563
|
|
|
-
|
|
|
|
|
|
502,563
|
|
General
and administrative
|
|
|
601,653
|
|
|
39,681
|
|
|
|
|
|
641,334
|
|
Total
operating expenses
|
|
|
1,253,383
|
|
|
84,354
|
|
|
|
|
|
1,337,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,201,677
|
|
|
91,216
|
|
|
|
|
|
1,292,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
41,090
|
|
|
-
|
|
|
|
|
|
41,090
|
|
Interest
expense
|
|
|
(33,838
|
)
|
|
(43,087
|
)
|
|
|
|
|
(76,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
7,252
|
|
|
(43,087
|
)
|
|
|
|
|
(35,835
|
)
|
Income
before income taxes
|
|
|
1,208,929
|
|
|
48,129
|
|
|
|
|
|
1,257,058
|
|
Income
tax expense
|
|
|
346,263
|
|
|
323
|
|
|
|
|
|
346,586
|
|
Income
before minority interest
|
|
|
862,666
|
|
|
47,806
|
|
|
|
|
|
910,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
473,015
|
|
|
-
|
|
|
|
|
|
473,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
389,651
|
|
$
|
47,806
|
|
|
|
|
$
|
437,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per common share
|
|
$
|
0.05
|
|
|
|
|
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per common share
|
|
$
|
0.03
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
common shares
|
|
|
8,009,713
|
|
|
|
|
|
|
|
|
9,571,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
common shares
|
|
|
15,284,770
|
|
|
|
|
|
|
|
|
15,675,195
|
|
PRO
FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR
THE
YEAR
ENDED DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”))
(UNAUDITED)
The
unaudited Pro Forma Condensed, Combined Statements of Operations for
the year
ended December 31, 2007 gives effect to the acquisition of Shenzhen PengSangPu
Solar Industrial Products Corporation (“Target”) by China Solar & Clean
Energy Solutions, Inc. (“Registrant”). The transaction was valued at fair value.
The unaudited Pro Forma Condensed, Combined Statements of Operations
was taken
from the respective financial statements of Target and Registrant for
the year
ended December 31, 2007. The unaudited Pro Forma Condensed, Combined
Statements
of Operations was prepared assuming that the acquisition described above
was
consummated as of the beginning of the year presented. The unaudited
Pro Forma
Condensed, Combined Statements of Operations are based upon historical
financial
statements of Target and Registrant. The pro forma adjustments and the
resulting
unaudited Pro Forma Condensed, Combined Statements of Operations have
been
prepared based upon available information and certain assumptions and
estimates
deemed appropriate by the Registrant.
The
unaudited Pro Forma Condensed, Combined Statements of Operations are
not
necessarily indicative of the results of operations that actually would
have
been achieved had the acquisition been consummated as of the date indicated,
or
that may be achieved in the future. Furthermore, the unaudited Pro Forma
Condensed, Combined Statements of Operations do not reflect changes that
may
occur as the result of post-combination activities and other
matters.
The
unaudited Pro Forma Condensed, Combined Statements of Operations and
notes
thereto should be read in conjunction with the accompanying audited financial
statements of Target and Registrant.
PRO
FORMA CONDENSED, COMBINED STATEMENTS OF INCOME
FOR
THE YEAR ENDED DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”))
(
UNAUDITED)
|
|
Registrant
(Historical)
|
|
Target
(Historical)
|
|
Pro
forma
adjustments
Increase
(Decrease)
|
|
Pro
forma
combined
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
37,072,346
|
|
$
|
3,215,282
|
|
|
|
|
$
|
40,287,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
28,772,078
|
|
|
1,848,703
|
|
|
|
|
|
30,620,781
|
|
Gross
profit
|
|
|
8,300,268
|
|
|
1,366,579
|
|
|
|
|
|
9,666,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
282,822
|
|
|
132,457
|
|
|
|
|
|
415,279
|
|
Selling
and distribution
|
|
|
827,839
|
|
|
-
|
|
|
|
|
|
827,839
|
|
General
and administrative
|
|
|
4,003,973
|
|
|
131,673
|
|
|
|
|
|
4,135,646
|
|
Total
operating expenses
|
|
|
5,114,634
|
|
|
264,130
|
|
|
|
|
|
5,378,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,185,634
|
|
|
1,102,449
|
|
|
|
|
|
4,288,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
220,057
|
|
|
3,982
|
|
|
|
|
|
224,039
|
|
Interest
expense
|
|
|
(65,481
|
)
|
|
(73,274
|
)
|
|
|
|
|
(138,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
154,576
|
|
|
(69,292
|
)
|
|
|
|
|
85,284
|
|
Income
before income taxes
|
|
|
3,340,210
|
|
|
1,033,157
|
|
|
|
|
|
4,373,367
|
|
Income
tax expense
|
|
|
(615,325
|
)
|
|
-
|
|
|
|
|
|
(615,325
|
)
|
Minority
interests
|
|
|
(199,744
|
)
|
|
-
|
|
|
|
|
|
(199,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
2,525,141
|
|
$
|
1,033,157
|
|
|
|
|
$
|
3,558,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
2,525,141
|
|
$
|
1,033,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per common share
|
|
$
|
0.25
|
|
|
|
|
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per common share
|
|
$
|
0.23
|
|
|
|
|
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
common shares
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
7,766,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
common shares
|
|
|
10,783,026
|
|
|
|
|
|
|
|
|
12,344,728
|
|
PRO
FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS
OF MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
The
unaudited Pro Forma Condensed, Combined Balance Sheet as of March 31,
2008 gives
effect to the acquisition of Shenzhen PengSangPu Solar Industrial Products
Corporation (“Target”) by China Solar & Clean Energy Solutions, Inc.
(“Registrant”). The transaction was valued at fair value. The unaudited Pro
Forma Condensed, Combined Balance Sheet was taken from the respective
financial
statements of Target and Registrant as of March 31, 2008. The unaudited
Pro
Forma Condensed, Combined Balance Sheet was prepared assuming that the
acquisition described above was consummated as of the balance sheet
date.
The
unaudited Pro Forma Condensed, Combined Balance Sheet is based upon historical
financial statements of Target and Registrant. The pro forma adjustments
and the
resulting unaudited Pro Forma Condensed, Combined Balance Sheet has been
prepared based upon available information and certain assumptions and
estimates
deemed appropriate by the Registrant.
The
unaudited Pro Forma Condensed, Combined Balance Sheet is not necessarily
indicative of the financial position that actually would have been achieved
had
the acquisition been consummated as of the date indicated, or that may
be
achieved in the future. Furthermore, the unaudited Pro Forma Condensed,
Combined
Balance Sheet does not reflect changes that may occur as the result of
post-combination activities and other matters.
The
unaudited Pro Forma Condensed, Combined Balance Sheet and notes thereto
should
be read in conjunction with the accompanying unaudited financial statements
of
Target and Registrant.
PRO
FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS
OF MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
|
|
Registrant
(Historical)
|
|
Target
(Historical)
|
|
|
|
Pro
forma adjustments
Increase
(Decrease)
|
|
|
|
Pro
forma adjustments
Increase
(Decrease)
|
|
Pro
forma
combined
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,733,793
|
|
$
|
87,316
|
|
|
A
|
|
|
(2,087,832
|
)
|
|
|
|
|
|
|
$
|
8,733,277
|
|
Restricted
cash
|
|
|
-
|
|
|
84,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,304
|
|
Accounts
receivable, net
|
|
|
7,116,825
|
|
|
510,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,627,094
|
|
Inventories
|
|
|
4,065,773
|
|
|
325,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,391,202
|
|
Lease
receivable, current
|
|
|
-
|
|
|
143,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,317
|
|
Other
receivables and prepayments
|
|
|
4,959,380
|
|
|
217,606
|
|
|
A
|
|
|
(2,000,000
|
)
|
|
|
|
|
|
|
|
3,176,986
|
|
Investment
cost
|
|
|
-
|
|
|
-
|
|
|
A
|
|
|
7,019,483
|
|
|
B
|
|
|
(7,019,483
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
26,875,771
|
|
|
1,368,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,156,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,789,324
|
|
|
-
|
|
|
|
|
|
|
|
|
B
|
|
|
5,408,455
|
|
|
7,197,779
|
|
Intangible
assets, net
|
|
|
1,651,885
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,651,885
|
|
Net
investment in sales-type leases, non-current
|
|
|
-
|
|
|
823,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
823,489
|
|
Property,
plant and equipment, net
|
|
|
9,401,021
|
|
|
1,275,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,676,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
39,718,001
|
|
$
|
3,467,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,505,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
-
|
|
$
|
710,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
710,668
|
|
Accounts
payable, trade
|
|
|
1,254,717
|
|
|
908,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,162,841
|
|
Deferred
Revenue
|
|
|
-
|
|
|
25,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,903
|
|
Income
tax payable
|
|
|
1,411,384
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,411,384
|
|
Other
payables and accrued liabilities
|
|
|
6,906,468
|
|
|
211,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,117,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
9,572,569
|
|
|
1,855,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,428,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
259,612
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
1,454,872
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,454,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
1,609
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,609
|
|
Common
stock
|
|
|
11,136
|
|
|
1,598,979
|
|
|
A
|
|
|
1,562
|
|
|
B
|
|
|
(1,598,979
|
)
|
|
12,698
|
|
Additional
paid-in capital
|
|
|
19,358,497
|
|
|
-
|
|
|
A
|
|
|
2,930,089
|
|
|
|
|
|
|
|
|
22,288,586
|
|
Statutory
reserve
|
|
|
-
|
|
|
74,508
|
|
|
|
|
|
|
|
|
B
|
|
|
(74,508
|
)
|
|
-
|
|
Accumulated
other comprehensive income
|
|
|
1,140,936
|
|
|
276,506
|
|
|
|
|
|
|
|
|
B
|
|
|
(276,506
|
)
|
|
1,140,936
|
|
Distribution
to owners
|
|
|
-
|
|
|
(1,190,756
|
)
|
|
|
|
|
|
|
|
B
|
|
|
1,190,756
|
|
|
-
|
|
Retained
earnings
|
|
|
7,918,770
|
|
|
851,791
|
|
|
|
|
|
|
|
|
B
|
|
|
(851,791
|
)
|
|
7,918,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
28,430,948
|
|
|
1,611,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,362,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
39,718,001
|
|
$
|
3,467,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,505,641
|
|
Notes
to Unaudited Pro Forma Combined Financial
Statements
Note
A
Adjustment to reflect the differences between fair values and carrying
values of
the Target’s assets. The allocation of the excess of the purchase price over the
related net assets was determined as follows:
|
|
$
|
4,087,832
|
|
Fair
value of 1,419,729 common stock
|
|
|
2,839,458
|
|
Fair
value of 141,973 warrants
|
|
|
92,193
|
|
Total
purchase price
|
|
$
|
7,019,483
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
1,611,028
|
|
Purchase
price:
|
|
$
|
7,019,483
|
|
Goodwill
in the acquisition of Shenzhen Pengsangpu
|
|
$
|
5,408,455
|
|
Please
note that the purchase price allocation is preliminary as the Registrant
is
awaiting additional information to determine the values to be assigned.
The
Registrant hired a valuation specialist to value the assets acquired
as part of
the acquisition of Target. The valuation specialist, engaged to value
the assets
acquired from the Target in the acquisition, has not yet completed her
work. In
the absence of a final valuation, management has made a preliminary allocation
of the excess of the purchase price over Target’s net assets to goodwill.
However, it is possible that the final valuation will include amounts
allocated
to limited-life intangibles (including related amortization expense)
and/or
unlimited-life intangibles . As a result, the allocation of $5,408,455
to
goodwill in the accompanying pro forma financial information is preliminary
and
subject to change.
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.
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
(12)
|
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 Cordovano and Honeck LLP for use of their
report
|
23.3
|
Consent
of accountants Zhong Yi (Hong Kong) C.P.A. Company Limited for use of
their report.
|
23.4
|
Consent
of accountants Child, Van Wagoner & Bradshaw, PLLC for use of their
report
|
(1)
|
Incorporated
herein by reference to the Registration Statement on Form SB-2 filed
with
the SEC on November 2, 2005.
|
(2)
|
Incorporated
herein by reference to the Registration Statement on Form S-1 filed
with
the SEC in August 2003.
|
(3)
|
Incorporated
herein by reference to the Registration Statement on Form SB-2 filed
with
the SEC on March 26, 2001.
|
(4)
|
Incorporated
herein by reference to the Registration Statement Amendment No. 1
on Form
SB-2 filed with the SEC on February 6,
2006.
|
(5)
|
Incorporated
herein by reference to Schedule 13D filed by the Company on April
18,
2005.
|
(6)
|
Incorporated
herein by reference to the Current Report on Form 8-K filed by the
Company
on November 28, 2005.
|
(7)
|
Incorporated
herein by reference to the Registration Statement Amendment No. 2
on Form
SB-2 filed with the SEC on May 22,
2006.
|
(8)
|
Incorporated
herein by reference to the Current Report on Form 8-K filed by the
Company
on June 19, 2007.
|
(9)
|
Incorporated
herein by reference to Amendment No. 2 to the Registration Statement
on
Form SB-2 filed with the SEC on January 1,
2008..
|
(10)
|
Incorporated
by reference to our Current Report on Form 8-K filed by the Company
with
the SEC on March 3, 2008.
|
(11)
|
Incorporated
herein by reference to the Annual Report on Form 10-KSB filed by
the
Company on April 10, 2008.
|
(12)
|
Incorporated
herein by reference to the Registration Statement on Form S-1 filed
by the
Company on April 14, 2008.
|
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;
(2)
That,
for the purpose of determining any liability under the Securities Act, each
such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(3)
File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4)
That,
for
the purpose of determining liability under the Securities Act of 1933 to
any
purchaser:
Each
prospectus filed by the Registrant pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance
on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus
that
is part of the registration statement or made in a document incorporated
or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a
time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of
the
registration statement or made in any such document immediately prior to
such
date of first use.
Insofar
as indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer
will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and
will be governed by the final adjudication of such issue.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form
S-1
to be signed on its behalf by the undersigned thereunto duly authorized in
Beijing, PRC, on June 23, 2008.
|
CHINA
SOLAR & CLEAN ENERGY
SOLUTIONS,
INC.
|
|
|
|
/s/
Deli Du
|
|
By:
Deli Du,
|
|
Chief
Executive Officer, President and Director
|
|
(principal
executive officer)
|
In
accordance with the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-1 was signed by the following
persons in the capacities and on the dates indicated.
Name
and Title
|
|
Date
|
|
|
|
/s/
Deli Du
|
|
June
23, 2008
|
Deli
Du,
|
|
|
Chief
Executive Officer, President and Director
|
|
|
(principal
executive officer)
|
|
|
|
|
|
/s/
Yihai Yang
|
|
June
23, 2008
|
Yihai
Yang
|
|
|
Acting
Chief Financial Officer
|
|
|
(principal
financial officer and accounting
officer)
|
|
|
|
|
|
/s/
Zhaolin Di
|
|
June
23, 2008
|
Zhaolin
Ding
|
|
|
Director
|
|
|
|
|
|
/s/
Zhenhang Jia
|
|
June
23, 2008
|
Zhenhang
Jia
|
|
|
Director
|
|
|
EXHIBIT
INDEX
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
(12)
|
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 Cordovano and Honeck LLP for use of their
report
|
23.3
|
Consent
of accountants Zhong Yi (Hong Kong) C.P.A. Company Limited for use of
their report.
|
23.4
|
Consent
of accountants Child, Van Wagoner & Bradshaw, PLLC for use of their
report
|
(1)
|
Incorporated
herein by reference to the Registration Statement on Form SB-2
filed with
the SEC on November 2, 2005.
|
(2)
|
Incorporated
herein by reference to the Registration Statement on Form S-1 filed
with
the SEC in August 2003.
|
(3)
|
Incorporated
herein by reference to the Registration Statement on Form SB-2
filed with
the SEC on March 26, 2001.
|
(4)
|
Incorporated
herein by reference to the Registration Statement Amendment No.
1 on Form
SB-2 filed with the SEC on February 6,
2006.
|
(5)
|
Incorporated
herein by reference to Schedule 13D filed by the Company on April
18,
2005.
|
(6)
|
Incorporated
herein by reference to the Current Report on Form 8-K filed by
the Company
on November 28, 2005.
|
(7)
|
Incorporated
herein by reference to the Registration Statement Amendment No.
2 on Form
SB-2 filed with the SEC on May 22,
2006.
|
(8)
|
Incorporated
herein by reference to the Current Report on Form 8-K filed by
the Company
on June 19, 2007.
|
(9)
|
Incorporated
herein by reference to Amendment No. 2 to the Registration Statement
on
Form SB-2 filed with the SEC on January 1,
2008..
|
(10)
|
Incorporated
by reference to our Current Report on Form 8-K filed by the Company
with
the SEC on March 3, 2008.
|
(11)
|
Incorporated
herein by reference to the Annual Report on Form 10-KSB filed by
the
Company on April 10, 2008.
|
(12)
|
Incorporated
herein by reference to the Registration Statement on Form S-1 filed
by the
Company on April 14, 2008.
|