The Company sells their products and services under a bundled sales arrangement, which typically include equipment, installation, testing and maintenance components. The components of equipment, installation and testing are non-separable and considered as a single unit of deliverables, namely product revenue. Hence, the product and maintenance are considered separate units of accounting in the arrangement. Revenues under these bundled arrangements are allocated considering the relative fair values of two separate deliverables: (a) product deliverable and (b) maintenance deliverable, included in the bundled arrangement based on the estimated relative fair values of each element in accordance with EITF 00-21, “Accounting for Multiple Element Revenue Arrangements” and recognized when the applicable revenue recognition criteria for each element are met. Revenue from product deliverables are recognized upon final acceptance, which is signed by the customer when installation is completed. Revenue from maintenance support for the Company’s products are deferred and recognized ratably over the term of the service period upon the acceptance of the products, which is generally 12 months.
Revenue from the provision of energy-saving projects are recognized when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.
The Company recognizes its revenues net of value-added taxes (“VAT”). The Company is subject to VAT which is levied on the majority of the products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.
Cost of revenue consists primarily of material costs, direct labor, inbound freight charges, depreciation and manufacturing overheads, which are directly attributable to the manufactured products and the provision of the energy-saving projects. Additionally, costs of revenue includes purchasing, and receiving costs, inspection costs, warehousing costs and costs associated with distribution networks.
Selling and distribution expenses consists primarily of non-cash sales promotions, outbound distribution, traveling and transportation expenses, and agency administration expenses. The nature of outbound distribution, traveling, and transportation expenses includes outbound shipping and handling costs related to the sale of our products. It is our Company’s accounting policy to differentiate outbound shipping costs from inbound shipping costs. Inbound shipping costs are capitalized in inventory and charged to costs of sales at the time revenue is recognized. O utbound shipping and handling costs recorded in selling and distribution expense totaled $177,413 and $65,312, for the years ended December 31, 2007 and 2006, respectively. General and administrative expenses includes advertising expenses and salaries and benefits.
Advertising costs are expensed as incurred in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-7, “Reporting for Advertising Costs” . Advertising expenses for the years ended December 31, 2007,and 2006 were $1,415,493 and $1,106,488, respectively.
Contributions to retirement schemes (which are defined contribution plans) are charged to general and administrative expenses in the accompanying consolidated statements of operations as the related employee service is provided.
SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying statement of changes in owners’ equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit. CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”))
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. o | 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. o | Stock based compensation |
Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Bulletin No. 25, Accounting for Stock Issued to Employees , or APB No. 25 and related interpretations. Compensation expense for stock options was recognized ratably over the vesting period.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”))
Effective January 1, 2006, we adopted the fair value recognition provisions of Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, Share-Based Payment , or SFAS No. 123(R) using the modified prospective application method. Under SFAS No. 123R, stock-based compensation expense is measured at the grant date based on the value of the option or restricted stock and is recognized as expense, less expected forfeitures, over the requisite service period. The Company provides a three-year standard warranty to all Deli Solar (Bazhou) manufactured products. Repair and replacement of defective component parts during the first year following purchase are covered under the standard warranty program. In the second and third year, repair services are covered under the warranty program but customers pay for the purchase of the replacement parts. Warranty services are performed by our independent sales agents and distributors in return for a 1%-2% discount of the purchase price they pay for our products. No discount is provided to independent sales agents and distributors unless and until warranty services are provided to the Company. The Company has not experienced any material returns and therefore has not provided any discount to independent sales agents and distributors for warranty services.
Under the terms of the contracts for energy-saving projects, the Company provides a product warranty on the equipment sold to its customers for a period of twelve months upon the completion of installation at the Company’s expense.
The Company has not experienced any material returns where it was under obligation to honor this standard warranty provision. As such, no reserve for product warranty has been provided in the statements of operations for the years ended December 31, 2007 and 2006, respectively.
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. o | Fair value of financial instruments |
The Company values its financial instruments as required by SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” . The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of amounts that the Company could realize in a current market exchange.
The Company’s financial instruments primarily include cash and cash equivalents, 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$”)) o | Registration payment arrangements |
The Company accounts for registration payment arrangement in accordance with FASB Staff Position EITF 00-19-2, Accountingfor Registration PaymentArrangements ("FSP EITF 00-19-2") which provides guidance on the accounting for registration payment arrangements . FSP EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies . A registration payment arrangement is defined in FSP EITF 00-19-2 as an arrangement with both of the following characteristics: (1) the arrangement specifies that the issuer will endeavor (a) to file a registration statement for the resale of specified financial instruments and/or for the resale of equity shares that are issuable upon exercise or conversion of specified financial instruments and for that registration statement to be declared effective by the Securities and Exchange Commission within a specified grace period, and/or (b) to maintain the effectiveness of the registration statement for a specified period of time (or in perpetuity); and(2) the arrangement requires the issuer to transfer consideration to the counterparty if the registration statement for the resale of the financial instrument or instruments subject to the arrangement is not declared effective or if effectiveness of the registration statement is not maintained.
The Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. FIN 48 prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
The Company 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. o | 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 | | $ | 46,937,497 | | $ | 34,981,140 | | Pro forma net income | | | 2,480,272 | | | 1,445,425 | | | | | | | | | | Pro forma earnings per common share — net income | | | | | | | | Basic | | $ | 0.20 | | $ | 0.23 | | Diluted | | $ | 0.20 | | $ | 0.21 | | | | | | | | | | Weighted average common shares outstanding | | | | | | | | Basic | | | 12,316,518 | | | 6,205,290 | | Diluted | | | 12,699,332 | | | 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 | |
During the year ended December 31, 2006, the Company received the amount of $82,639 being the settlement of related party receivables for an advance to one of the Company’s directors. Related party receivable as of December 31, 2007 and 2006 were in the amounts of $-0- and $-0- respectively. 6. | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment, net, consisted of the following:
| | As of December 31, | | | | 2007 | | 2006 | | | | | | | | Buildings | | $ | 5,573,982 | | $ | 3,528,180 | | Plant and machinery | | | 1,836,914 | | | 71,131 | | Office equipments | | | 1,004,118 | | | 65,749 | | Motor vehicles | | | 81,497 | | | 76,176 | | Computer equipment | | | 13,507 | | | 12,625 | | Construction in progress | | | 2,118,615 | | | 2,580,031 | | | | | 10,628,633 | | | 6,333,892 | | | | | | | | | | Less: accumulated depreciation | | | (1,809,417 | ) | | (407,424 | ) | | | | | | | | | Property, plant and equipment, net | | $ | 8,819,216 | | $ | 5,926,468 | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”))
Depreciation expenses for the years ended December 31, 2007and2006 were $282,822 and$162,695, respectively.
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 subject to adjustment for stock dividend and stock splits, sale or issuance of common stock at a price which is less than $1.55, at the option of the investors, at any time after the original issue date.
The Class A Convertible Preferred Shares contain a beneficial conversion feature in favor of the holder. The beneficial conversion feature was measured at its intrinsic value at the date of issuance of the shares and is recognized immediately as a return to the preferred shareholders through a charge to retained earnings, since the conversion feature is immediately exercisable by the holders. The charge during the current year was $975,807. Although there is no impact on net income, the charge to retained earnings affects the computation of both basic and diluted EPS for US GAAP in the same way that dividends on the preferred shares do.
Sale of Units
On June 13, 2007, the Company entered into a Securities Purchase Agreement with Barron Partners L.P., and two accredited investors in a private placement (“Private Placement) providing for the sale of: (i) 1,774,194 shares of our Series A Convertible Preferred Stock; (ii) stock purchase warrants to purchase an aggregate of 1,774,194 shares of common stock at a price of $1.90 per share; and (iii) stock purchase warrants to purchase an aggregate of 1,774,194 shares of common stock at a price of $2.40 per share. In connection with the Private Placement, the Company deposited 900,000 shares of Series A Convertible Preferred Stock into escrow as security in the event (i) the earnings target for 2007 is not met and (ii) the earnings target for 2008 is not met. The 900,000 shares held in escrow were not included in the diluted earnings per share calculation as the earnings target for 2007 was met and the fulfillment of earnings target for 2008 has not been determined. Net proceeds of $2,581,000 were used to finance business acquisitions.
Registration Rights On June 13, 2007, the Company also entered into a registration rights agreement for the common stock underlying the convertible preferred shares and all warrants related to the Private Placement, under which it agreed to use its commercially reasonable efforts to cause the initial registration statement to be declared effective by the SEC at the earlier of (i) 150 days following the filing date with respect to the registration statement, (ii) 10 days following the receipt of a “No Review” or similar letter from the SEC or (iii) the third business day following the day the Company receives notice from the SEC that the SEC has determined that the registration statement eligible to be declared effective without further comments by the SEC. The Company is subject to monthly liquidated damages of 17,742 shares of Series A Preferred Stock, up to a maximum of 266,129 shares of Series A Preferred Stock in aggregate, for failing to register the shares timely. The Company is under the obligation to have the Registration Statement effective on January 10, 2008. However, it was not effective until 28 days later on February 7, 2008 being the effectiveness date of SB-2. 17,742 shares of preferred stock per month prorated per 28 days means 16,559 shares of preferred stock will be issued to investors.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”))
Warrants for services
In connection with the Private Placement on June 13, 2007, the Board of Directors granted to consultants and agents warrants to purchase an aggregate of 181,452 shares of the Company’s common stock, of which 75,000 warrants are exercisable at US$2.90 per share and 106,452 warrants are exercisable at US$2.71 per share, or on a cashless exercise basis. The warrants vested immediately and expire on June 13, 2012. The market price of the stock was US$2.10 per share on the grant date. The Company valued the 75,000 warrants at US$0.74 per share and the 106,452 warrants at US$0.78 per share, or $138,338 in aggregate in accordance with SFAS 123R, which were recorded as offering cost in additional paid-in capital in the accompanying consolidated financial statements for the year ended December 31, 2007.
The fair value of the warrants was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: Risk free interest rate (%) | | | 5.00 | % | Dividend yield (%) | | | 0.00 | % | Expected life of warrant grants (years) | | | 5 years | | Expected volatility of warrant grants (%) | | | 43.79 | % |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”)) A summary of the status of the Company’s outstanding common stock warrants as of December 31, 2007 and 2006:
| | Number of Shares | | Weighted- average Exercise Price | | Weighted- average Remaining Contractual Term | | Aggregate Intrinsic Value | | Outstanding at December 31, 2005 | | | 1,825,719 | | | | | $ | 3.85 | | | — | | $ | — | | Granted | | | — | | | | | | — | | | — | | | — | | Exercised | | | — | | | | | | — | | | — | | | — | | Forfeited | | | — | | | | | | — | | | — | | | — | | Expired | | | — | | | | | | — | | | — | | | — | | Outstanding at December 31, 2006 | | | 1,825,719 | | | | | | 3.85 | | | 2.25 years | | | — | | Granted | | | 3,729,840 | | | | | | 2.18 | | | 4.50 years | | | 354,839 | | Exercised | | | — | | | | | | — | | | — | | | — | | Forfeited | | | — | | | | | | — | | | — | | | — | | Expired | | | — | | | | | | — | | | — | | | — | | Outstanding and Exercisable at December 31, 2007 | | | 5,555,559 | | | | | $ | 2.73 | | | 3.76 years | | $ | 354,839 | |
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 | | | | As adjusted and restated (Note 17) | | | | 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 | | | - | | | - | | Net income available to common stockholders in computing diluted net income per share | | $ | 1,549,334 | | $ | 1,239,501 | | | | | | | | | | Denominator: - Weighted average ordinary shares outstanding | | | 6,205,290 | | | 6,205,290 | | - Weighted average preferred stock outstanding | | | - | | | - | | - Weighted average warrant shares outstanding | | | 191,407 | | | 752,586 | | | | | 6,396,697 | | | 6,957,876 | | | | | | | | | | Basic net income per share | | $ | 0.25 | | $ | 0.20 | | | | | | | | | | Diluted net income per share | | $ | 0.24 | | $ | 0.18 | |
For the year ended December 31, 2007, warrants to purchase 2,007,171 shares of common stock have been excluded from the diluted earnings per share calculation as the average market price of the common stock was less than the exercise price of the warrants, thereby making the warrants antidilutive under the treasury method. Convertible preferred stocks were also excluded from the denominator and the associated beneficial conversion was excluded from the numerator as the assumed conversion had an antidilutive effect. For the year ended December 31, 2006, there were no securities excluded from diluted earnings per share as none were antidilutive. CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”))
12.SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
(a) Business information
The Company has two reportable segments namely solar heater/boiler related products and heat pipe related products for the three year ended December 31, 2007, 2006 and 2005. The solar heater/boiler related products are mainly under the management of Deli Solar (Bazhou) while the heat pipe related products are energy-savings projects under the management of Tianjin Huaneng.
An analysis of the Company’s revenue and total assets are as follows: | | Years ended December 31, | | | | 2007 | | 2006 | | Revenue: | | | | | | | | Solar Heater/Boiler related products | | $ | 26,693,850 | | $ | 21,468,313 | | Heat Pipe related products | | | 7,002,015 | | | - | | Other segment | | | 3,376,481 | | | - | | | | | | | | | | | | $ | 37,072,346 | | $ | 21,468,313 | |
| | Years ended December 31, | | | | 2007 | | 2006 | | Gross profit: | | | | | | | | Solar Heater/Boiler related products | | $ | 5,672,443 | | $ | 4,625,319 | | Heat Pipe related products | | | 1,820,524 | | | - | | Other segment | | | 807,301 | | | - | | | | | | | | | | | | $ | 8,300,268 | | $ | 4,625,319 | |
| | As of December 31, | | | | 2007 | | 2006 | | Total assets: | | | | | | | | Solar Heater/Boiler related products | | $ | 18,690,225 | | $ | 12,716,185 | | Heat Pipe related products | | | 9,029,994 | | | - | | Other segment | | | 2,919,494 | | | - | | | | | | | | | | | | $ | 30,639,713 | | $ | 12,716,185 | | | | | | | | | | Total goodwill: | | | | | | | | Solar Heater/Boiler related products | | $ | - | | $ | - | | Heat Pipe related products | | | 1,789,324 | | | - | | | | | | | | | | | | $ | 1,789,324 | | $ | - | |
Other segment in total revenue, gross profit, and assets refers to solar lighting products and sales of spare parts/components. The amount of other segment revenue, gross profit, and assets are less than 10% in each category and disclosed as an “all other” category in accordance with paragraph 21 of SFAS 131. There were no elimination or reversal of transactions between reportable segments.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”))
(b) | Geographic information |
The Company operates in the PRC and all of the company’s long lived assets are located in the PRC. In respect of geographical segment reporting, sales are based on the country in which the customer is located and total assets and capital expenditure are based on the country where the assets are located.
The Company’s operations are located in PRC, which is the main geographical areas. The Company’s sales and total assets by geographical market are analyzed as follows: | | Years ended December 31, | | | | 2007 | | 2006 | | Revenue: | | | | | | | | PRC | | $ | 32,623,664 | | $ | 19,321,482 | | Others | | | 4,448,682 | | | 2,146,831 | | | | | | | | | | | | $ | 37,072,346 | | $ | 21,468,313 | |
| | Years ended December 31, | | | | 2007 | | 2006 | | Gross profit: | | | | | | | | PRC | | $ | 6,806,220 | | $ | 4,070,281 | | Others | | | 1,494,048 | | | 555,038 | | | | | | | | | | | | $ | 8,300,268 | | $ | 4,625,319 | |
| | As of December 31, | | | | 2007 | | 2006 | | Total assets: | | | | | | | | PRC | | $ | 29,107,727 | | $ | 11,445,134 | | Others | | | 1,531,986 | | | 1,271,051 | | | | | | | | | | | | $ | 30,639,713 | | $ | 12,716,185 | |
13. | CHINA CONTRIBUTION PLAN |
Under the PRC Law, full-time employees of the Company’s subsidiaries, Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing) and Tianjin Huaneng are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a China government-mandated multi-employer defined contribution plan. The Company is required to accrue for these benefits based on certain percentages of the employees’ salaries. The total contributions made for such employee benefits were $327,257 and $201,072 for the years ended December 31, 2007and 2006 respectively.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”))
No revenue from customers that individually represent greater than 10% of the total revenue for each of the years ended December 31, 2007and 2006.
The following is a table summarizing the purchases from vendors that individually represent greater than 10% of the total purchases for each of the years ended December 31, 2007and 2006 and their outstanding balances as at year-end date: | | Year ended December 31, 2007 | | | | Purchases | | Percentage of total purchases | | Accounts payable, trade | | Vendor A | | $ | 5,475,372 | | | 50.4 | % | $ | 667,718 | |
| | Year ended December 31, 2006 | | | | 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.
17. | RESTATEMENT ON CONSOLIDATED FINANCIAL STATEMENTS |
In April 2008, we filed a registration statement on Form S-1 with the Securities and Exchange Commission relating to the sale by certain selling stockholders identified in the related prospectus of up to 5,160,649 shares of our common stock including 469,150 shares they may acquire on exercise of warrants. When reviewing our financial statements for inclusion in the prospectus, we became aware of an error in the calculation of diluted net income per share for the year ended December 31, 2007. We misapplied the treasury stock and the “if converted” methods under SFAS No. 128 and because of the error we identified, we have restated our historical financial statements for 2007 to record an increase of 10¢ in diluted net income per share.
This 10¢ per share adjustment was non-cash. The error had no impact on our reported assets, liabilities, equity, revenue, expenses or earnings. There was no cumulative effect on retained earnings or other components of equity in the balance sheet at December 31, 2007. It had no impact on basic earnings per share. Nor did it have any impact on cash or cash equivalents. It had no impact on prior year financial statements and, likewise, will have no impact on future financial statements.
The following table sets forth the income statement impact of the restatement:
| | December 31, 2007 | | | | As reported | | Adjustment | | As Restated | | | | | | | | | | Diluted - Total weighted average shares outstanding | | | 11,233,026 | | | (4,836,329 | ) | | 6,396,697 | | | | | | | | | | | | | Diluted net income per share | | $ | 0.14 | | $ | 0.10 | | $ | 0.24 | |
The impact of the restatement on the disclosures of earnings per share data is set forth in the table below:
| | December 31, 2007 | | | | As reported | | Adjustment | | As Adjusted | | Denominator: | | | | | | | | | | | - Weighted average preferred stock outstanding | | | 1,337,097 | | | (1,337,097 | ) | | - | | - Weighted average warrant shares outstanding | | | 3,690,639 | | | (3,499,232 | ) | | 191,407 | | Diluted - Total weighted average shares outstanding | | | 11,233,026 | | | (4,836,329 | ) | | 6,396,697 | | | | | | | | | | | | | Diluted net income per share | | $ | 0.14 | | $ | 0.10 | | $ | 0.24 | |
TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., 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 EQUIPMENTCO., 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 EQUIPMENTCO., 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 | | | | | | | | | | | | | | | | | | 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 EQUIPMENTCO., LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”)) (Unaudited) 1.BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The condensed financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to our annual audited financial statements for the preceding fiscal year. Accordingly, these condensed financial statements should be read in conjunction with the financial statements for the year ended December 31, 2006. 2.ORGANIZATION AND BUSINESS BACKGROUND
Tianjin Huaneng Group Energy Equipment Co., Ltd. (“the Company”) was established in 1987 as a state-owned enterprise and then was restructured in July 2004 as a limited liability company with 51% of its equity interest owned by Tianjin Municipal Ji County State-owned Assets Administration Commission (“SAAC”) and 49% of equity interest owned by employees in the People’s Republic of China (“PRC”). Its principal place of business is located in No.119 Yuyang South Road, Ji County, Tianjin Municipality, the PRC. The registered capital of the Company is US$720,786 (equivalent to Renminbi Yuan (“RMB”) 5,940,000).
The Company is principally engaged in the design, development and manufacturing and marketing of energy-saving related heating products such as heat pipes, heat exchangers, specialty heating pipes and tubes, high temperature hot blast stoves, heating filters, normal pressure water boilers, solar energy water heaters and radiators. These products are distributed in the PRC and Southeast Asia. 3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ooo Basis of Presentation
These accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.
ooo Use of Estimates
In preparing these financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the period reported. Actual results may differ from these estimates.
TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”)) (Unaudited)
ooo Revenue Recognition
The Company derives revenues from the provision of energy-saving projects. The Company recognizes its revenues net of value-added taxes (“VAT”). The Company is subject to VAT which is levied on the majority of the products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.
Cost of revenue consists primarily of material costs, direct labor, shipping and handling fee, depreciation and manufacturing overheads, which are directly attributable to the manufactured products and the provision of the energy-saving projects.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.
Advertising costs are expensed as incurred in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-7,“Reporting for Advertising Costs”. Advertising expenses for the years ended December 31, 2007, 2006 and 2005 were $1,415,493, $1,106,488 and $646,667, respectively.The Company sells their products and services under a bundled sales arrangement, which typically include equipment, installation, testing and maintenance components. The components of equipment, installation and testing are non-separable and considered as a single unit of deliverables, namely product revenue. Hence, the product and maintenance are considered separate units of accounting in the arrangement.
Revenues under these bundled arrangements are allocated considering the relative fair values of two separate deliverables: (a) product deliverable and (b) maintenance deliverable, included in the bundled arrangement based on the estimated relative fair values of each element in accordance with EITF 00-21, “Accounting for Multiple Element Revenue Arrangements” and recognized when the applicable revenue recognition criteria for each element are met.
(a) Product Revenue
Revenue from these product deliverables are recognized upon final acceptance, which is signed by the customer when installation is completed.
In accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and Costs,” the Company records shipping and handling costs incurred for inbound and outbound freight as a component of cost of revenues.
(b) Maintenance Revenue
Revenue from maintenance support for the Company’s products are deferred and recognized ratably over the term of the service period upon the acceptance of the products, which is generally 12 months. As of June 30, 2007 and 2006, the unrecognized portion of revenue related to maintenance was $668,345 and $401,866 and were included in the Deferred Revenue caption on the balance sheets.
(c) Interest Income
Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
Contributions to retirement schemes (which are defined contribution plans) are charged to general and administrative expenses in the accompanying consolidated statements of operations as the related employee service is provided.
SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying statement of changes in owners’ equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATEDTIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”)) (Unaudited)
The Company 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 amountsooo Cost of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carry-forwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the years of recovery or reversal and the effect from a change in tax rates is recognized in the statement of operations and comprehensive (loss) income in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.
The Company calculates net income per share in accordance with SFAS No. 128,“Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.
| Foreign currency translation |
The reporting currency of the Company is United States dollar (“US$”). Transactions denominated in currency other than US$ are translated into US$ at the average rate for the period. Monetary assets and liabilities denominated in currency other than US$ are translated into US$ at the rates of exchange ruling at the balance sheet date. The resulting exchange differences are recorded in other expenses in the accompanying statements of operations.
The financial records of the Company’s operating subsidiaries are maintained in their local currency, the Renminbi (“RMB”), which is the functional currency. Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates, and income and expenses items are translated using the average rate for the period. The translation adjustments are recorded in accumulated other comprehensive income in the statements of changes in stockholders’ equity and comprehensive income.
Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Bulletin No. 25, Accounting for Stock Issued to Employees , or APB No. 25 and related interpretations. Compensation expense for stock options was recognized ratably over the vesting period.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
Effective January 1, 2006, we adopted the fair value recognition provisions of Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, Share-Based Payment , or SFAS No. 123(R) using the modified prospective application method. Under SFAS No. 123R, stock-based compensation expense is measured at the grant date based on the value of the option or restricted stock and is recognized as expense, less expected forfeitures, over the requisite service period.
The Company provides a three-year standard warranty to all Deli Solar (Bazhou) manufactured products. Repair and replacement of defective component parts during the first year following purchase are covered under the standard warranty program. In the second and third year, repair services are covered under the warranty program but customers pay for the purchase of the replacement parts. Warranty services on the products manufactured by Deli Solar (Bazhou) are performed by independent sales agents and distributors in exchange for 1%-2% discount off the purchase price of our products.
Under the terms of the contracts for energy-saving projects, the Company provides a product warranty on the equipment to its customers for a period of twelve months upon the completion of installation at the Company’s expense. The Company has not experienced any material returns where it was under obligation to honor this standard warranty provision. As such, no reserve for product warranty has been provided in the statements of operations for the years ended December 31, 2007, 2006 and 2005, respectively.
SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company operates in two principal reportable segments: Sales of solar heater or boiler related products and sales of heat pipe related products.
| Fair value of financial instruments |
The Company values its financial instruments as required by SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”. The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of amounts that the Company could realize in a current market exchange.
The Company’s financial instruments primarily include cash and cash equivalents, accounts receivable, other receivables and prepayments, accounts payable, other payables and accrued liabilities. As of the balance sheet date, the estimated fair values of financial instruments were not materially different from their carrying values as presented due to short maturities of these instruments.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
| Registration payment arrangements |
The Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. FIN 48 prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. The Company did not have any adjustment to the opening balance of retained earnings as of January 1, 2007 as a result of the implementation of FIN 48. For the year ended December 31, 2007, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2007, the Company did not have any significant unrecognized uncertain tax positions.
| Recently issued accounting standards |
In 2008, the Securities and Exchange Commission (the “SEC”) adopted rule amendments that replace the category of “Small Business Issuers” with a broader category of “Smaller Reporting Companies.” Under these rules, a "Smaller Reporting Company" is a company with a public float less than $75,000,000 (measured at end of Q2). Companies that meet this definition are able to elect "scaled disclosure standards" on an item-by-item or "a-la-carte" basis. With this change, the SEC has streamlined and simplified reporting for many companies, and has not added any significant disclosure requirements.
In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or SFAS 159. SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. It is expected to expand the use of fair value measurements which is consistent with the Financial Accounting Standards Board’s long-term measurement objectives for accounting for financial instruments. SFAS 159 is effective for our first fiscal year that begins after November 15, 2007, which is our fiscal year 2008 that begins in January 2008. The Company is currently evaluating the impact of this statement to its financial position and results of operations.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), ‘’Business Combinations’’, or SFAS No. 141R. SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009. We expect SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time. We are still assessing the impact of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements--An Amendment of ARB No. 51’’, or SFAS No. 160. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We believe that SFAS 160 should not have a material impact on our financial position or results of operations.
Acquisition
On May 18, 2007, the Company’s wholly owned subsidiary, Beijing Deli Solar Technology Development Co., Ltd. entered into a purchase agreement to acquire 51% equity interest in Tianjin Huaneng held by Tianjin Municipal Ji County State-owned Assets Administration Commission for a total purchase price of $3,149,147. By supplemental agreement dated August 8, 2007, the purchase price was reduced to approximately $1,689,741. The Company also incurred additional cost of $769,418 related to finder’s fee, which has been included in the total cost of the acquisition of $2,459,159. As of December 31, 2007, the Company paid approximately $2,345,018 of the purchase price and the finder’s fee. The remaining balance as of the date of this report was $114,141. In addition, the Company agreed to provide working capital of approximately $2.6 million to Tianjin Huaneng. The accounting date of the acquisition was July 1, 2007 and was accounted for under the purchase method. Tianjin Huaneng results of operations have been included in our consolidated financial statements since the date of acquisition. Tianjin Huaneng is principally engaged in the design, development and manufacturing and marketing of energy-saving related heating products such as heat pipes, heat exchangers, specialty heating pipes and tubes, high temperature hot blast stoves, heating filters, normal pressure water boilers, solar energy water heaters and radiators. These products are distributed in the PRC and Southeast Asia. Goodwill recorded as part of the purchase price allocation was $1,789,324. Identifiable intangible assets acquired as part of the acquisition included definite-lived intangibles such as land use rights which totaled $256,157, with a weighted average amortization period of approximately 50 years. We continue to evaluate the purchase price allocation for the Tianjin Huaneng acquisition, including intangible assets, contingent liabilities and property, plant and equipment.
The aggregate purchase price was $2,459,159, including $1,689,741 of cash and costs related to the acquisition of $769,418. Below is a summary of the total purchase price:
Cash | | $ | 1,689,741 | | Direct acqusition costs | | | 769,418 | | | | | | | Total purchase price | | $ | 2,459,159 | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
The total purchase price was allocated to the estimated fair value of the assets acquired and liabilities assumed as follows:
Fair value of tangible net assets acquired | | $ | 5,256,426 | | Fair value of intangible net assets acquired | | | 256,157 | | Goodwill | | | 1,789,324 | | Trade accounts payable, accrued expenses and other liabilities | | | (4,842,748 | ) | | | $ | 2,459,159 | |
The following unaudited pro forma financial information for the Company gives effect to the 2007 acquisition as if they had occurred on January 1, 2006. These pro forma results do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on such date or to project the Company’s results of operations for any future period.
| | Years ended December 31, | | | | 2007 | | 2006 | | | | | | | | Pro forma net sales | | $ | 43,552,104 | | $ | 34,981,140 | | Pro forma net income | | | 2,558,974 | | | 1,445,425 | | | | | | | | | | Pro forma earnings per common share — net income | | | | | | | | Basic | | $ | 0.26 | | $ | 0.23 | | Diluted | | $ | 0.14 | | $ | 0.21 | | | | | | | | | | Weighted average common shares outstanding | | | | | | | | Basic | | | 6,206,290 | | | 6,205,290 | | Diluted | | | 11,233,026 | | | 6,957,876 | |
3.
| ACCOUNTS RECEIVABLE, NET
|
The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required.
| | As of December 31, | | | | 2007 | | 2006 | | | | | | | | Accounts receivable, cost | | $ | 8,219,804 | | $ | 986,809 | | Less: allowance for doubtful accounts | | | (766,795 | ) | | (116,363 | ) | | | | | | | | | Accounts receivable, net | | $ | 7,453,009 | | $ | 870,446 | |
For the year ended December 31, 2006, the Company recorded the reversal of the allowance for doubtful accounts of $77,267. For the year ended December 31, 2007, the Company recorded allowance for doubtful accounts of $650,432.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
Inventories consisted of the following:
| | As of December 31, | | | | 2007 | | 2006 | | | | | | | | Raw materials | | $ | 656,605 | | $ | 150,748 | | Consumables | | | 5,359 | | | 5,970 | | Work-in-process | | | 2,464,441 | | | - | | Finished goods | | | 749,253 | | | 159,047 | | | | | | | | | | Inventories | | $ | 3,875,658 | | $ | 315,765 | |
5.
| OTHER RECEIVABLES AND PREPAYMENTS
|
Other receivables and prepayments consisted of the following:
| | As of December 31, | | | | 2007 | | 2006 | | | | | | | | Advance to suppliers | | $ | 493,421 | | $ | 1,007,709 | | Prepaid expenses | | | 249,598 | | | 58,203 | | Deposits | | | 894,268 | | | 256,278 | | Other receivables | | | 661 | | | 65,721 | | | | | | | | | | Other receivables and prepayments | | $ | 1,637,948 | | $ | 1,387,911 | |
6.
| PROPERTY, PLANT AND EQUIPMENT, NET
|
Property, plant and equipment, net, consisted of the following:
| | As of December 31, | | | | 2007 | | 2006 | | | | | | | | Buildings | | $ | 5,573,982 | | $ | 3,528,180 | | Plant and machinery | | | 1,836,914 | | | 71,131 | | Office equipments | | | 1,004,118 | | | 65,749 | | Motor vehicles | | | 81,497 | | | 76,176 | | Computer equipment | | | 13,507 | | | 12,625 | | Construction in progress | | | 2,118,615 | | | 2,580,031 | | | | | 10,628,633 | | | 6,333,892 | | | | | | | | | | Less: accumulated depreciation | | | (1,809,417 | ) | | (407,424 | ) | | | | | | | | | Property, plant and equipment, net | | $ | 8,819,216 | | $ | 5,926,468 | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
Depreciation expenses for the years ended December 31, 2007, 2006 and 2005 were $282,822, $162,695 and $100,171, respectively.
Intangible assets consisted of the following:
| | As of December 31, | | | | 2007 | | 2006 | | | | | | | | Land use rights, at cost | | $ | 1,654,998 | | $ | 1,019,272 | | Less: accumulated amortization | | | (57,077 | ) | | (15,742 | ) | | | | | | | | | Land use rights, net | | $ | 1,597,921 | | $ | 1,003,530 | |
All lands in the PRC are owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time. Thus, all of the Company’s land purchases in the PRC are considered to be leasehold land and are stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreement which is 50 years, on a straight-line basis. Amortization expenses for the years ended December 31, 2007, 2006 and 2005 were $41,335, $15,742 and $-0-, respectively.
8.
| OTHER PAYABLES AND ACCRUED LIABILITIES
|
Other payables and accrued liabilities consisted of the following:
| | As of December 31, | | | | 2007 | | 2006 | | | | | | | | Related party payable | | $ | - | | $ | 22,528 | | Accrued expenses | | | 608,315 | | | 22,080 | | Customer deposits | | | 2,281,909 | | | 262,269 | | Other payables | | | 3,508,066 | | | 35,934 | | Taxes payables | | | 1,359,140 | | | - | | Deferred revenue | | | 795,022 | | | - | | | | $ | 8,552,452 | | $ | 342,811 | |
Authorized Capital
The Company’s authorized capital stock consists of 66,666,667 shares of $0.001 par value per share common stock and 25,000,000 shares of $0.001 par value per share preferred stock
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
Class A Preferred stock
The Company has designated 3,500,000 of its Preferred Shares as Class A Convertible Preferred Shares. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the corporation, Class A Convertible Preferred Shareholders shall be entitled to receive out of the assets of the Corporation, an amount equal to $1.55 per share. Each share of Series A Preferred Stock shall be initially convertible into one (1) share of Common Stock at the conversion price of $1.55, subject to adjustment for stock dividend and stock splits, sale or issuance of common stock at a price which is less than the conversion price and pro rata distribution, at the option of the investors, at any time after the original issue date.
The Class A Convertible Preferred Shares contain a beneficial conversion feature in favor of the holder. The beneficial conversion feature was measured at its intrinsic value at the date of issuance of the shares and is recognized immediately as a return to the preferred shareholders through a charge to retained earnings, since the conversion feature is immediately exercisable by the holders. The charge during the current year was $975,807. Although there is no impact on net income, the charge to retained earnings affects the computation of both basic and diluted EPS for US GAAP in the same way that dividends on the preferred shares do.
Sale of Units
On June 13, 2007, the Company entered into a Securities Purchase Agreement with Barron Partners L.P., and two accredited investors in a private placement (“Private Placement) providing for the sale of: (i) 1,774,194 shares of our Series A Convertible Preferred Stock; (ii) stock purchase warrants to purchase an aggregate of 1,774,194 shares of common stock at a price of $1.90 per share; and (iii) stock purchase warrants to purchase an aggregate of 1,774,194 shares of common stock at a price of $2.40 per share. In connection with the Private Placement, the Company deposited 900,000 shares of Series A Convertible Preferred Stock into escrow as security in the event (i) the earnings target for 2007 is not met and (ii) the earnings target for 2008 is not met. The 900,000 shares held in escrow were included in the diluted earnings per share calculation. Net proceeds of $2,581,000 were used to finance business acquisitions.
Registration Rights
On June 13, 2007, the Company also entered into a registration rights agreement for the common stock underlying the convertible preferred shares and all warrants related to the Private Placement, under which it agreed to use its commercially reasonable efforts to cause the initial registration statement to be declared effective by the SEC at the earlier of (i) 150 days following the filing date with respect to the registration statement, (ii) 10 days following the receipt of a “No Review” or similar letter from the SEC or (iii) the third business day following the day the Company receives notice from the SEC that the SEC has determined that the registration statement eligible to be declared effective without further comments by the SEC. The Company is subject to monthly liquidated damages of 17,742 shares of Series A Preferred Stock, up to a maximum of 266,129 shares of Series A Preferred Stock in aggregate, for failing to register the shares timely. The Company is under the obligation to have the Registration Statement effective on January 10, 2008. However, it was not effective until 28 days later on February 7, 2008 being the effectiveness date of SB-2. 17,742 shares of preferred stock per month prorated per 28 days means 16,559 shares of preferred stock will be issued to investors.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
Common stock
On March 30, 2005, the Company issued 4,067,968 shares of its common stock in the recapitalization transaction with Deli Solar (BVI).
On March 30, 2005, the Company issued 1,714,290 shares of its common stock at $3.50 per share in a private placement transaction along with five year warrants to purchase 1,714,290 additional common shares at $3.85 per share. Gross proceeds to the Company totaled $6,000,015 and costs of issuance totaled $1,348,626.
On August 15, 2005 the Company effected a 1:6 reverse stock split. Fractional shares were rounded up the nearest whole share. These financial statements have been retroactively restated to give effect to the reverse split for all periods presented. Immediately prior to the reverse stock split there were 36,850,379 common shares outstanding and following the split there were 6,145,290 shares outstanding.
In October 2005, the Company issued 60,000 shares of its common stock in exercise of warrants.
Warrants for services
In connection with the Private Placement on June 13, 2007, the Board of Directors granted to consultants and agents warrants to purchase an aggregate of 181,452 shares of the Company’s common stock, of which 75,000 warrants are exercisable at US$2.90 per share and 106,452 warrants are exercisable at US$2.71 per share, or on a cashless exercise basis. The warrants vested immediately and expire on June 13, 2012. The market price of the stock was US$2.10 per share on the grant date. The Company valued the 75,000 warrants at US$0.74 per share and the 106,452 warrants at US$0.78 per share, or $138,338 in aggregate in accordance with SFAS 123R, which were recorded as offering cost in additional paid-in capital in the accompanying consolidated financial statements for the year ended December 31, 2007.
The fair value of the warrants was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Risk free interest rate (%) | | | 5.00 | % | Dividend yield (%) | | | 0.00 | % | Expected life of warrant grants (years) | | | 5 years | | Expected volatility of warrant grants (%) | | | 43.79 | % |
On March 30, 2005, in conjunction with a private placement sale of common stock the Company issued five year warrants to purchase 1,714,290 shares of common stock at a price of $3.85 per share to investors. Concurrently, the Company issued five year warrants to purchase 171,429 common shares at $3.85 per share to financial advisers and others. No share-based compensation expense was recorded, as management determined this transaction to be a cost of issuance.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
A summary of the status of the Company’s outstanding common stock warrants as of December 31, 2007 and 2006:
| | Number of Shares | | Weighted- average Exercise Price | | Weighted- average Remaining Contractual Term | | Aggregate Intrinsic Value | | Outstanding at December 31, 2005 | | | 1,825,719 | | $ | 3.85 | | | — | | $ | — | | Granted | | | — | | | — | | | — | | | — | | Exercised | | | — | | | — | | | — | | | — | | Forfeited | | | — | | | — | | | — | | | — | | Expired | | | — | | | — | | | — | | | — | | Outstanding at December 31, 2006 | | | 1,825,719 | | | 3.85 | | | 2.25 years | | | — | | Granted | | | 3,729,840 | | | 2.18 | | | 4.50 years | | | 354,839 | | Exercised | | | — | | | — | | | — | | | — | | Forfeited | | | — | | | — | | | — | | | — | | Expired | | | — | | | — | | | — | | | — | | Outstanding and Exercisable at December 31, 2007 | | | 5,555,559 | | $ | 2.73 | | | 3.76 years | | $ | 354,839 | |
The Company is registered in the United States of America and has operations in three tax jurisdictions: the United States of America, British Virgin Island (“BVI”) and the PRC. The operations in the United States of America and British Virgin Island have incurred net operating losses for income tax purposes. The Company generated substantially its net income from the operation of its subsidiary in the PRC and subject to the PRC tax jurisdiction. The Company has recorded income tax provision for the years ended December 31, 2007 and 2006.
The components of (loss) income before income taxes separating U.S., BVI and PRC tax jurisdictions are as follows:
| | Years ended December 31, | | | | 2007 | | 2006 | | 2005 | | | | | | | | | | Tax jurisdictions from: | | | | | | | | Loss subject to U.S. | | $ | (461,433 | ) | $ | (693,745 | ) | $ | - | | Loss subject to BVI | | | (184,056 | ) | | (73,691 | ) | | - | | Income subject to the PRC | | | 3,985,699 | | | 2,006,937 | | | 1,298,974 | | Income before income taxes | | $ | 3,340,210 | | $ | 1,239,501 | | $ | 1,298,974 | |
United States of America
China Solar is registered in the State of Nevada and is subject to the tax laws of United States of America.
As of December 31, 2007, the operation in the United States of America incurred $461,433 of net operating losses available for federal tax purposes, which are available to offset future taxable income. The net operating loss carry forwards will to expire through 2028, if unutilized. The Company has provided for a full valuation allowance against the deferred tax assets of $461,433 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
British Virgin Island
Under the current BVI law, the Company is not subject to tax on income.
The PRC
The Company's subsidiary operating in the PRC, Ailiyang and Tianjin Huaneng are domestically owned and subject to the Corporate Income Tax governed by the Income Tax Law of the People’s Republic of China, at a statutory rate of 33%, which is comprised of a 30% national income tax and 3% local income tax.
In March 2005, the Deli Solar (Bazhou) became a foreign investment enterprise. Hence, effective from the year ended 2005, Deli Solar (Bazhou) is entitled to a two-year exemption from enterprise income tax and a reduced enterprise income tax rate of 15% for the following three years.
In September 2006, the Deli Solar (Beijing) was founded as a foreign investment enterprise. Hence, effective from the year ended 2006, Deli Solar (Beijing) is entitled to a two-year exemption from enterprise income tax and a reduced enterprise income tax rate of 15% for the following three years.
On March 16, 2007, the National People’s Congress approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”). The new CIT Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises with effect from January 1, 2008. Deli Solar (Bazhou) and Deli Solar (Beijing) are considered a foreign invested enterprise and its ultimate applicable effective tax rate in 2008 and beyond will depend on many factors, including but not limited to whether certain of its legal entity will be subject to a transitional policy under the Corporate Income Tax Law, whether Deli Solar (Bazhou) and Deli Solar (Beijing) can continue to enjoy the unexpired tax holidays.
The reconciliation of income tax rate to the effective income tax rate based on income before income taxes stated in the statements of operations for the years ended December 31, 2007, 2006 and 2005 is as follows:
| | Years ended December 31, | | | | 2007 | | 2006 | | 2005 | | | | | | | | | | Income before income taxes | | $ | 3,340,210 | | $ | 1,239,501 | | $ | 1,298,974 | | Statutory income tax rate | | | 33 | % | | 15 | % | | 15 | % | | | | 1,102,269 | | | 185,925 | | | 194,846 | | Less: items not subject to taxes | | | | | | | | | | | Effect for tax holiday | | | (486,944 | ) | | (185,925 | ) | | (194,846 | ) | Income tax expenses | | $ | 615,325 | | $ | - | | $ | - | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
The following table sets forth the significant components of the aggregate deferred tax assets of the Company as of December 31, 2007 and 2006:
| | As of December 31, | | | | 2007 | | 2006 | | Deferred tax assets: | | | | | | - Net operating loss carried forward | | $ | 1,432,326 | | | 767,436 | | Less: valuation allowance | | | (1,432,326 | ) | | (767,436 | ) | Deferred tax assets | | $ | - | | $ | - | |
Basic net income per share is computed using the weighted average number of the ordinary shares outstanding during the year. Diluted net income per share is computed using the weighted average number of ordinary shares and ordinary share equivalents outstanding during the year less number of warrants issued during the year in note 10.
The following table sets forth the computation of basic and diluted net income per share for the years ended December 31, 2007, 2006 and 2005:
| | Years ended December 31, | | | | 2007 | | 2006 | | 2005 | | Basic and diluted net income per share calculation | | | | | | | | | | | | | | | | Numerator: | | | | | | | | Net income | | | 2,525,141 | | | 1,239,501 | | | 1,298,974 | | Less: Preferred stock dividends | | | (975,807 | ) | | - | | | - | | Net income available to common stockholders in computing basic net income per share | | $ | 1,549,334 | | $ | 1,239,501 | | $ | 1,298,974 | | | | | | | | | | | | | Denominator: - Weighted average ordinary shares outstanding | | | 6,205,290 | | | 6,205,290 | | | 5,732,616 | | - Weighted average preferred stock outstanding | | | 1,337,097 | | | - | | | - | | - Weighted average warrant shares outstanding | | | 3,690,639 | | | 752,586 | | | 1,825,719 | | | | | 11,233,026 | | | 6,957,876 | | | 7,558,335 | | | | | | | | | | | | | Basic net income per share | | $ | 0.25 | | $ | 0.20 | | $ | 0.23 | | | | | | | | | | | | | Diluted net income per share | | $ | 0.14 | | $ | 0.18 | | $ | 0.17 | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
12.
| SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
|
The Company has two reportable segments namely solar heater/boiler related products and heat pipe related products for the three year ended December 31, 2007, 2006 and 2005. The solar heater/boiler related products are mainly under the management of Deli Solar (Bazhou) while the heat pipe related products are energy-savings projects under the management of Tianjin Huaneng.
An analysis of the Company’s revenue and total assets are as follows:
| | Years ended December 31, | | | | 2007 | | 2006 | | 2005 | | Revenue: | | | | | | | | Solar Heater/Boiler related products | | $ | 26,693,850 | | $ | 21,468,313 | | $ | 15,577,447 | | Heat Pipe related products | | | 7,002,015 | | | - | | | - | | Unallocated | | | 3,376,481 | | | - | | | - | | | | | | | | | | | | | | | $ | 37,072,346 | | $ | 21,468,313 | | $ | 15,577,447 | | | | | | | | | | | | | | | Years ended December 31, | | | | 2007 | | | 2006 | | | 2005 | | Gross profit: | | | | | | | | | | | Solar Heater/Boiler related products | | $ | 5,672,443 | | $ | 4,625,319 | | $ | 3,708,988 | | Heat Pipe related products | | | 1,820,524 | | | - | | | - | | Unallocated | | | 807,301 | | | - | | | - | | | | | | | | | | | | | | | $ | 8,300,268 | | $ | 4,625,319 | | $ | 3,708,988 | | | | | | | | | | | | | | | As of December 31, | | | | 2007 | | | 2006 | | | 2005 | | Total assets: | | | | | | | | | | | Solar Heater/Boiler related products | | $ | 18,690,225 | | $ | 12,716,185 | | $ | 10,903,506 | | Heat Pipe related products | | | 9,029,994 | | | - | | | - | | Unallocated | | | 2,919,494 | | | - | | | - | | | | | | | | | | | | | | | $ | 30,639,713 | | $ | 12,716,185 | | $ | 10,903,506 | | | | | | | | | | | | | Total goodwill: | | | | | | | | | | | Solar Heater/Boiler related products | | $ | - | | $ | - | | $ | - | | Heat Pipe related products | | | 1,789,324 | | | - | | | - | | | | | | | | | | | | | | | $ | 1,789,324 | | $ | - | | $ | - | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
(b) | Geographic information |
The Company operates in the PRC and all of the company’s long lived assets are located in the PRC. In respect of geographical segment reporting, sales are based on the country in which the customer is located and total assets and capital expenditure are based on the country where the assets are located.
The Company’s operations are located in PRC, which is the main geographical areas. The Company’s sales and total assets by geographical market are analyzed as follows:
| | Years ended December 31, | | | | 2007 | | 2006 | | 2005 | | Revenue: | | | | | | | | PRC | | $ | 32,623,664 | | $ | 19,321,482 | | $ | 14,331,251 | | Others | | | 4,448,682 | | | 2,146,831 | | | 1,246,196 | | | | | | | | | | | | | | | $ | 37,072,346 | | $ | 21,468,313 | | $ | 15,577,447 | | | | | | | Years ended December 31, | | | | 2007 | | | 2006 | | | 2005 | | Gross profit: | | | | | | | | | | | PRC | | $ | 6,806,220 | | $ | 4,070,281 | | $ | 3,338,089 | | Others | | | 1,494,048 | | | 555,038 | | | 370,899 | | | | | | | | | | | | | | | $ | 8,300,268 | | $ | 4,625,319 | | $ | 3,708,988 | | | | | | | As of December 31, | | | | 2007 | | | 2006 | | | 2005 | | Total assets: | | | | | | | | | | | PRC | | $ | 29,107,727 | | $ | 11,445,134 | | $ | 9,704,120 | | Others | | | 1,531,986 - | | | 1,271,051 | | | 1,199,386 | | | | | | | | | | | | | | | $ | 30,639,713 | | $ | 12,716,185 | | $ | 10,903,506 | |
13.
| CHINA CONTRIBUTION PLAN
|
Under the PRC Law, full-time employees of the Company’s subsidiaries, Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing) and Tianjin Huaneng are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a China government-mandated multi-employer defined contribution plan. The Company is required to accrue for these benefits based on certain percentages of the employees’ salaries. The total contributions made for such employee benefits were $327,257, $201,072 and $199,472 for the years ended December 31, 2007, 2006 and 2005, respectively.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
No revenue from customers that individually represent greater than 10% of the total revenue for each of the years ended December 31, 2007, 2006 and 2005.
The following is a table summarizing the purchases from vendors that individually represent greater than 10% of the total purchases for each of the years ended December 31, 2007, 2006 and 2005 and their outstanding balances as at year-end date:
| | Year ended December 31, 2007 | | Vendor | | Purchases | | Percentage of total purchases | | Accounts payable, trade | | Vendor A | | $ | 5,475,372 | | | 50.4 | % | $ | 667,718 | | | | | | | Year ended December 31, 2006 | Vendor | | | Purchases | | | Percentage of total purchases | | | Accounts payable, trade | | Vendor A | | $ | 3,800,242 | | | 49.0 | % | $ | 379,215 | | | | | | | Year ended December 31, 2005 | Vendor | | | Purchases | | | Percentage of total purchases | | | Accounts payable, trade | | Vendor A | | $ | 3,669,748 | | | 55.2 | % | $ | 390,678 | |
Financial instruments that are potentially subject to credit risk consist principally of cash and trade receivables. All cash held in financial institutions are not insured and therefore subject to credit risk. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
As the Company has no significant interest-bearing assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
The Company’s interest-rate risk arises from short-term borrowings. Borrowings issued at floating rates expose the Company to cash flow and fair value interest-rate risk. Company policy is to maintain approximately all of its borrowings in floating rate instruments. At the year end, all of borrowings were at floating rates.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
15.
| COMMITMENTS AND CONTINGENCIES
|
(a) | Operating lease commitment |
The Company leases land and buildings under non-cancelable operating lease agreements. Based on the current rental lease agreements, the future minimum rental payments required for the coming years are as follows:
Years ending December 31: | | | | 2008 | | $ | 20,015 | | 2009 | | | 20,015 | | 2010 | | | 20,015 | | 2011 | | | 20,014 | | | | | | | Total future minimum operating lease payments | | $ | 80,059 | |
For the years ended December 31, 2007, 2006 and 2005, rental expenses were $101,780, $77,246, and $21,985, respectively.
On January 9, 2008 and March 25, 2008 Beijing Deli Solar Technology Development Co., Ltd., the Company’s wholly-owned subsidiary (“Deli Solar (Beijing)”), entered into an Equity Purchase Agreement, a Complementary Agreement and a Supplementary, with Shenzhen PengSangPu Solar Industrial Products Corporation (“SZPSP”) and its shareholders to acquire 100% of the outstanding equity interests of SZPSP from its three current shareholders. The closing will be effective March 31, 2008.
Under the agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest of SZPSP from its current three shareholders. Part of the consideration of the transaction is RMB 28.8 million ($4,087,832) payable in cash. This purchase price is based on an appraisal of SZPSP. The three shareholders have agreed to loan the proceeds back to the Deli Solar (Beijing) and will be used as working capital (the “Shareholders’ Loan”). Fifty (50%) of the principal of the Shareholders’ Loan shall be paid within one year upon the entry of the Complementary Agreement (the “Closing”) and the remaining balance be paid off within two years.
In addition to the payment of the cash purchase price under the Complementary Agreement the parties agreed to an appraisal value of RMB 20 million of SZPSP’s intangible assets which was paid in 1,419,729 shares of common stock. Provided that if on the first anniversary of the closing the common stock price is lower than $2, the Company will pay the difference. Fifty percent (50%) of these shares shall be transferable and unrestricted within one year after the Closing and the remaining Fifty percent (50%) transferable within two years. The shares shall be transferred to SZPSP within 180 days of the closing. In addition, as part of the purchase price, the shareholders of SZPSP will receive five years warrants to purchase a total of 141,973 shares of common stock at an exercise price of $2.5 per share, subject to future adjustments.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
SZPSP warranted in the Complementary Agreement that if (i) its sales revenue is less than RMB 99 million (approximately $13,670,068) with an after-tax net profit of less than RMB 9.43 million (approximately $1,302,108) for the year ended December 31, 2008; or (ii) if in the year ended December 31, 2009, it does not reach the targeted sales revenue of RMB 143.9 million (approximately $19,868,336) or the after-tax net profit of RMB 12.13 million (approximately $1,674,789), SZPSP will pay the difference between the revenue and the targeted revenue of the year specified by reducing the amount payable on the shareholders’ loan. If the shareholders’ loan is not sufficient to pay the difference, the common shares held by SZPSP will be returned to us to the extent necessary for the remaining balance.
The current shareholders of SZPSP, being the management of SZPSP, will enter into employment contracts with the Company for a term of three years to remain in their current managing positions of SZPSP, subject to further amendments of such employment arrangement.
After the Closing, Deli Solar (Beijing) has the right to a majority of the board seats of SZPSP.
On February 25, 2008 the Company raised gross proceeds of approximately $11,300,000 in a private placement providing for the sale of 4,691,499 shares of common stock at a price of $2.40 per share.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
INDEX TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
| | Page
| | | | Condensed Balance Sheets | | F-29 | | | | Condensed Statements of Operations And Comprehensive Income | | F-30 | | | | Condensed Statements of Cash Flows | | F-31 | | | | Condensed Statement of Owners’ Equity | | F-32 | | | | Notes to Condensed Financial Statements | | F-33 to F-44 |
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
CONDNESED BALANCE SHEETS
AS OF SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Currency expressed in United States Dollars (“US$”))
| | September 30, 2007 | | December 31, 2006 | | | | (unaudited) | | (audited) | | ASSETS | | | | | | | | Current assets: | | | | | | | | Cash and cash equivalents | | $ | 333,515 | | $ | 282,148 | | Accounts receivable, net | | | 5,384,146 | | | 4,129,068 | | Inventories | | | 3,642,557 | | | 3,136,141 | | Prepayments and other receivables | | | 1,101,348 | | | 569,416 | | | | | | | | | | Total current assets | | | 10,461,566 | | | 8,116,773 | | | | | | | | | | Non-current assets: | | | | | | | | Property, plant and equipment, net | | | 1,317,675 | | | 1,151,521 | | Intangible assets, net | | | 536,308 | | | 507,556 | | | | | | | | | | TOTAL ASSETS | | $ | 12,315,549 | | $ | 9,775,850 | | | | | | | | | | LIABILITIES AND OWNERS’ EQUITY | | | | | | | | Current liabilities: | | | | | | | | Short-term bank loan | | $ | 596,474 | | $ | 1,154,703 | | Accounts payable, trade | | | 1,416,353 | | | 614,355 | | Deferred revenue | | | 678,486 | | | 696,813 | | Advances from customers | | | 3,178,932 | | | 2,513,511 | | Amount due to related party | | | 2,177,019 | | | - | | Value-added tax payable | | | 498,476 | | | 875,750 | | Income taxes payable | | | 201,625 | | | 835,860 | | Deferred tax liabilities | | | 32,754 | | | 79,038 | | Accrued liabilities and other payables | | | 1,315,498 | | | 1,148,560 | | | | | | | | | | Total current liabilities | | | 10,095,617 | | | 7,918,590 | | | | | | | | | | Long-term liabilities: | | | | | | | | Long-term payables | | | 778,474 | | | 748,412 | | | | | | | | | | Total liabilities | | | 10,874,091 | | | 8,667,002 | | | | | | | | | | Owners’ equity: | | | | | | | | Registered capital | | | 720,786 | | | 720,786 | | Accumulated other comprehensive income | | | 93,704 | | | 66,449 | | Statutory reserve | | | 257,466 | | | 257,466 | | Retained earnings | | | 369,502 | | | 64,147 | | | | | | | | | | Total owners’ equity | | | 1,441,458 | | | 1,108,848 | | | | | | | | | | TOTAL LIABILITIES AND OWNERS’ EQUITY | | $ | 12,315,549 | | $ | 9,775,850 | |
See accompanying notes to condensed financial statements.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
| | Three months ended September 30, | | Nine months ended September 30, | | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
| | | | | | | | | | Revenue, net | | | | | | | | | | | | | | Product | | $ | 3,791,419 | | $ | 3,485,607 | | $ | 9,735,722 | | $ | 7,083,384 | | Maintenance | | | 4,135 | | | 2,288 | | | 709,701 | | | 482,514 | | | | | 3,795,554 | | | 3,487,895 | | | 10,445,423 | | | 7,565,898 | | | | | | | | | | | | | | | | Cost of revenue | | | | | | | | | | | | | | Product | | | 3,020,048 | | | 2,544,860 | | | 8,149,145 | | | 5,628,748 | | Maintenance | | | 1,087 | | | 137 | | | 43,421 | | | 28,951 | | | | | 3,021,135 | | | 2,544,997 | | | 8,192,566 | | | 5,657,699 | | | | | | | | | | | | | | | | Gross profit | | | 774,419 | | | 942,898 | | | 2,252,857 | | | 1,908,199 | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | Sales and marketing | | | 345,750 | | | 389,951 | | | 946,279 | | | 744,761 | | Depreciation and amortization | | | 64,092 | | | 42,767 | | | 183,974 | | | 128,301 | | Research and development | | | 31,457 | | | 29,968 | | | 92,998 | | | 89,061 | | General and administrative | | | 133,034 | | | 134,968 | | | 477,138 | | | 380,799 | | | | | | | | | | | | | | | | Total operating expenses | | | 574,333 | | | 597,654 | | | 1,700,389 | | | 1,342,922 | | | | | | | | | | | | | | | | Income from operations | | | 200,086 | | | 345,244 | | | 552,468 | | | 565,277 | | | | | | | | | | | | | | | | Other income (expenses): | | | | | | | | | | | | | | Interest expense | | | (11,796 | ) | | (98,321 | ) | | (98,488 | ) | | (169,201 | ) | Interest income | | | 549 | | | 167 | | | 1,729 | | | 727 | | | | | | | | | | | | | | | | Total other expenses | | | (11,247 | ) | | (98,154 | ) | | (96,759 | ) | | (168,474 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income before income taxes | | | 188,839 | | | 247,090 | | | 455,709 | | | 396,803 | | | | | | | | | | | | | | | | Income tax expense | | | (62,318 | ) | | (81,558 | ) | | (129,617 | ) | | (134,648 | ) | | | | | | | | | | | | | | | NET INCOME | | $ | 126,521 | | $ | 165,532 | | $ | 326,092 | | $ | 262,155 | | | | | | | | | | | | | | | | Other comprehensive income: | | | | | | | | | | | | | | - Foreign currency translation gain | | | 27,255 | | | (21,037 | ) | | 27,255 | | | 25,041 | | | | | | | | | | | | | | | | COMPREHENSIVE INCOME | | $ | 153,776 | | $ | 144,495 | | $ | 353,347 | | $ | 287,196 | |
See accompanying notes to condensed financial statements.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
| | Nine months ended September 30, | | | | 2007 | | 2006 | | Cash flows from operating activities: | | | | | | | | Net income | | $ | 326,092 | | $ | 262,155 | | Adjustments to reconcile net income to net cash (used in) provided by operating activities: | Gain on disposal of plant and equipment | | | (2,066 | ) | | - | | Depreciation and amortization | | | 183,974 | | | 128,301 | | Allowance for doubtful accounts | | | 104,189 | | | - | | Deferred tax liabilities | | | (46,284 | ) | | - | | Change in operating assets and liabilities: | | | | | | | | Accounts receivable, trade | | | (1,359,266 | ) | | (282,091 | ) | Inventories | | | (506,416 | ) | | (1,288,724 | ) | Prepayments and other receivables | | | (531,934 | ) | | (124,176 | ) | Accounts payable | | | 801,998 | | | 344,530 | | Deferred revenue | | | (18,327 | ) | | (75,700 | ) | Advances from customers | | | 665,421 | | | 971,107 | | Value-added tax payable | | | (377,274 | ) | | (318,027 | ) | Income taxes payable | | | (634,235 | ) | | (607,877 | ) | Accrued liabilities and other payables | | | 166,851 | | | 1,044,088 | | | | | | | | | | Net cash (used in) provided by operating activities | | | (1,227,277 | ) | | 53,586 | | | | | | | | | | Cash flows from investing activities: | | | | | | | | Purchase of property, plant and equipment | | | (345,814 | ) | | (71,306 | ) | Proceeds from disposal of plant and equipment | | | 5,739 | | | - | | | | | | | | | | Net cash used in investing activities | | | (340,075 | ) | | (71,306 | ) | | | | | | | | | Cash flows from financing activities: | | | | | | | | Dividends paid to owners | | | (20,915 | ) | | - | | Advances from a related party | | | 2,177,019 | | | - | | Repayment of short-term bank loan | | | (558,229 | ) | | - | | Repayment of long-term payables | | | 30,062 | | | (25,411 | ) | | | | | | | | | Net cash provided by (used in) financing activities | | | 1,627,937 | | | (25,411 | ) | | | | | | | | | Foreign currency translation adjustment | | | (9,218 | ) | | (18,494 | ) | | | | | | | | | NET CHANGE IN CASH AND CASH EQUIVALENTS | | | 51,367 | | | (61,625 | ) | | | | | | | | | CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 282,148 | | | 258,737 | | | | | | | | | | CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 333,515 | | $ | 197,112 | | | | | | | | | | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | Cash paid for income taxes | | $ | 896,067 | | $ | 741,886 | | Cash paid for interest expenses | | $ | 133,966 | | $ | - | |
See accompanying notes to condensed financial statements.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
CONDENSED STATEMENT OF OWNERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
| | Registered capital | | Accumulated other comprehensive income | | Statutory reserve | | Retained earnings | | Total owner’s equity | | | | | | | | | | | | | | Balance as of January 1, 2007 | | $ | 720,786 | | $ | 66,449 | | $ | 257,466 | | $ | 64,147 | | $ | 1,108,848 | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment | | | - | | | 27,255 | | | - | | | - | | | 27,255 | | Net income for the period | | | - | | | - | | | - | | | 326,092 | | | 326,092 | | Dividends paid to owners | | | - | | | - | | | - | | | (20,737 | ) | | (20,737 | ) | | | | | | | | | | | | | | | | | | Balance as of September 30, 2007 | | $ | 720,786 | | $ | 93,704 | | $ | 257,466 | | $ | 369,502 | | $ | 1,441,458 | |
See accompanying notes to condensed financial statements.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
1.BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The condensed financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to our annual audited financial statements for the preceding fiscal year. Accordingly, these condensed financial statements should be read in conjunction with the financial statements for the year ended December 31, 2006.
2. ORGANIZATION AND BUSINESS BACKGROUND
Tianjin Huaneng Group Energy Equipment Co., Ltd. (“the Company”) was established in 1987 as a state-owned enterprise and then was restructured in July 2004 as a limited liability company with 51% of its equity interest owned by Tianjin Municipal Ji County State-owned Assets Administration Commission (“SAAC”) and 49% of equity interest owned by employees in the People’s Republic of China (“PRC”). Its principal place of business is located in No.119 Yuyang South Road, Ji County, Tianjin Municipality, the PRC. The registered capital of the Company is US$720,786 (equivalent to Renminbi Yuan (“RMB”) 5,940,000).
The Company is principally engaged in the design, development and manufacturing and marketing of energy-saving related heating products such as heat pipes, heat exchangers, specialty heating pipes and tubes, high temperature hot blast stoves, heating filters, normal pressure water boilers, solar energy water heaters and radiators. These products are distributed in the PRC and Southeast Asia.
3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.
In preparing these financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the period reported. Actual results may differ from these estimates.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
The Company derives revenues from the provision of energy-saving projects. The Company recognizes its revenues net of value-added taxes (“VAT”). The Company is subject to VAT which is levied on the majority of the products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.
In accordance with the SEC’s Staff Accounting Bulletin No. 104, Revenue Recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.
The Company sells their products and services under a bundled sales arrangement, which typically include equipment, installation, testing and maintenance components. The components of equipment, installation and testing are non-separable and considered as a single unit of deliverables, namely product revenue. Hence, the product and maintenance are considered separate units of accounting in the arrangement.
Revenues under these bundled arrangements are allocated considering the relative fair values of two separate deliverables: (a) product deliverable and (b) maintenance deliverable, included in the bundled arrangement based on the estimated relative fair values of each element in accordance with EITF 00-21, “Accounting for Multiple Element Revenue Arrangements” and recognized when the applicable revenue recognition criteria for each element are met.
(a)Product Revenue
Revenue from these product deliverables are recognized upon final acceptance, which is signed by the customer when installation is completed.
In accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and Costs,” the Company records shipping and handling costs incurred for inbound and outbound freight as a component of cost of revenues.
(b)Maintenance Revenue
Revenue from maintenance support for the Company’s products are deferred and recognized ratably over the term of the service period upon the acceptance of the products, which is generally 12 months.
(c)Interest Income
Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
Cost of revenue consists primarily of material costs, direct labor, shipping and handling fee, depreciation and manufacturing overheads, which are directly attributable to the manufacture of products and the provision of the energy-saving projects.
l | Cash and Cash Equivalents | ooo Cash and Cash Equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
The Company carries accounts receivable at their face amounts less an allowance for doubtful accounts . On a regular basis, an allowance for uncollectible receivables is established and determined based upon past transaction history with customers, customer payment practices and economic conditions. Actual collection experience may differ from the current estimate of net receivables. A change to the allowance for uncollectible amounts may be required if a future event or other change in circumstances results in a change in the estimate of the ultimate collectibility of a specific account. The Company does not require collateral for the accounts receivable balances. For the six months ended June 30, 2007 and 2006, the Company recorded an allowance for doubtful accounts of $103,419 and $Nil, respectively.
Inventories consist primarily of finished goods, work in process and raw materials and are stated at the lower of cost or net realizable value, with cost being determined on a weighted average basis. Allowance for slow-moving and obsolescence is an estimate amount based on an analysis of current business and economic risks, the duration of the inventories held and other specific identifiable risks that may indicate a potential loss. The allowance is reviewed regularly to ensure that it adequately provides for all reasonable expected losses. For the nine months ended Septemberooo Inventories
Inventories consist primarily of finished goods, work in process and raw materials and are stated at the lower of cost or net realizable value, with cost being determined on a weighted average basis. Allowance for slow-moving and obsolescence is an estimate amount based on an analysis of current business and economic risks, the duration of the inventories held and other specific identifiable risks that may indicate a potential loss. The allowance is reviewed regularly to ensure that it adequately provides for all reasonable expected losses. For the six months ended June 30, 2007 and 2006, the Company did not record any allowance for obsolescence.
l | Property, Plant and Equipment | ooo Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:
Property, plant | | Depreciable life | | Residual value | | | | | | | | Building | | | 20 years | | | 5 | % | Plant and machinery | | | 10 years | | | 5 | % | Motor vehicles | | | 5 years | | | 5 | % | Office 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% | | | 10 years | | | 5 | % |
TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”)) (Unaudited)
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
Expenditure for maintenance and repairs is expensed as incurred. The gain or loss on the disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the statements of operations.
All lands in the PRC are owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time. Thus, all of the Company’s land purchases in the PRC are considered to be leasehold land and are stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreements on a straight-line basis, which is 50 years and they will expire in 2054.
Amortization expense totaled $7,930 and $7,930 for the nine months ended Septemberooo Land Use Right
All lands in the PRC are owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time. Thus, all of the Company’s land purchases in the PRC are considered to be leasehold land and are stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreements on a straight-line basis, which is 50 years and they will expire in 2054.
Amortization expense totaled $5,287 and $5,287 for the six months ended June 30, 2007 and 2006, respectively.
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 Septemberooo 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 NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
l | Foreign Currencies Translation | 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 EQUIPMENTCO., LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”)) (Unaudited) ooo Foreign Currencies Translation
The functional currency of the Company is Renminbi Yuan (“RMB”). The accompanying financial statements have been expressed in United States dollars, the reporting currency of the Company. The balance sheet is translated into United States dollars based on the rates of exchange ruling at the balance sheet date. The statements of operations and comprehensive income are translated using a weighted average rate for the period. Translation adjustments are reflected as cumulative translation adjustments in owners’ equity.
l | Research and Development Costs |
Research and development costs are expensed when incurred in the development of new processes including significant improvements and refinements of existing products. Such costs mainly relate to labor and material cost. The Company incurred $92,998 and $89,061 for the nine months ended Septembero o o Retirement Plan Costs
Contributions to retirement schemes (which are defined contribution plans) are charged to general and administrative expenses in the statements of operations and comprehensive income as and when the related employee service is provided. o o o Research and Development Costs
Research and development costs are expensed when incurred in the development of new processes including significant improvements and refinements of existing products. Such costs mainly relate to labor and material cost. The Company incurred $61,541 and $59,093 for the six months ended June 30, 2007 and 2006 , respectively.
Under the terms of the contracts, the Company provides a product warranty on the equipment to its customers for a period of twelve months upon the completion of installation at the Company’s expense. The Company has not experienced any material returns where it was under obligation to honor this standard warranty provision. As such, no reserve for product warranty has been provided in the statements of operations for the nine months ended Septembero o o Product Warranty
Under the terms of the contracts, the Company provides a product warranty on the equipment to its customers for a period of twelve months upon the completion of installation at the Company’s expense. The Company has not experienced any material returns where it was under obligation to honor this standard warranty provision. As such, no reserve for product warranty has been provided in the statements of operations for the six months ended June 30, 2007 and 2006.
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company operates in one principal reportable business segment. All the customers are located in the PRC and the South East Asia region.
l | Fair Value of Financial Instruments |
The Company values its financial instruments as required by SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”. The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of amounts that the Company could realize in a current market exchange.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
o o o Segment Reporting NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
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 EQUIPMENTCO., LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”)) (Unaudited) o o o Fair Value of Financial Instruments
The Company values its financial instruments as required by SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” . The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of amounts that the Company could realize in a current market exchange. The Company’s financial instruments primarily include cash and cash equivalents, trade accounts receivable, inventories, prepayments and other receivables, short-term bank loan, trade accounts payable, deferred revenue, advances from customers, value-added tax payable, income taxes payable, accrued liabilities and other payable.
As of the balance sheet dates, the estimated fair values of financial instruments were not materially different from their carrying values as presented due to short maturities of these instruments.
l | Recently Issued Accounting Standards | o o o Recently Issued Accounting Standards
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company adopted FIN48 on January 1, 2007. The adoption of FIN 48 did not have an effect on the results of operations or financial condition. The Company did not have any unrecognized tax benefits as of June 30, 2007.
On February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This standard permits an entity to measure financial instruments and certain other items at estimated fair value. Most of the provisions of SFAS No. 159 are elective; however, the amendment to FASB No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities that own trading and available-for-sale securities. The fair value option created by SFAS 159 permits an entity to measure eligible items at fair value as of specified election dates. The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and not to only a portion of the instrument. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity (i) makes that choice in the first 120 days of that year, (ii) has not yet issued financial statements for any interim period of such year, and (iii) elects to apply the provisions of FASB 157. Management is currently evaluating the impact of SFAS 159, if any, on the Company’s financial statements.
TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., 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 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company adopted FIN48 on January 1, 2007. The adoption of FIN 48 did not have an effect on the results of operations or financial condition. The Company did not have any unrecognized tax benefits as of September 30, 2007.
On February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This standard permits an entity to measure financial instruments and certain other items at estimated fair value. Most of the provisions of SFAS No. 159 are elective; however, the amendment to FASB No. 115,“Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities that own trading and available-for-sale securities. The fair value option created by SFAS 159 permits an entity to measure eligible items at fair value as of specified election dates. The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and not to only a portion of the instrument. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity (i) makes that choice in the first 120 days of that year, (ii) has not yet issued financial statements for any interim period of such year, and (iii) elects to apply the provisions of FASB 157. Management is currently evaluating the impact of SFAS 159, if any, on the Company’s financial statements.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
4.ACCOUNTS RECEIVABLE, NET
The majority of the Company’s sales are on credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, the allowances for doubtful accounts are provided as $104,189 and $Nil for the nine months ended September 30, 2007 and 2006, respectively.
| | June 30, 2007 | | December 31, 2006 | | | | | | (audited) | | | | | | | | Accounts receivable, gross | | $ | 5,329,410 | | $ | 4,706,360 | | | | | | | | | | Less: allowance for doubtful accounts | | | (680,711 | ) | | (577,292 | ) | | | | | | | | | Accounts receivable, net | | $ | 4,648,699 | | $ | 4,129,068 | |
5.INVENTORIES
Inventories consisted of the following:
| | June 30, 2007 | | December 31, 2006 | | | | | | (audited) | | | | | | | | Raw materials | | $ | 534,995 | | $ | 508,161 | | Work in process | | | 750,189 | | | 245,082 | | Finished goods | | | 1,980,731 | | | 2,382,898 | | | | | | | | | | | | $ | 3,265,915 | | $ | 3,136,141 | |
As of June 30, 2007 and December 31, 2006, the Company recorded no allowance for obsolete inventories and write-offs.
TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., 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.
| | September 30, 2007 | | December 31, 2006 | | | | | | | | (audited) | | 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).
| | | | | | Accounts receivable, gross | | $ | 6,064,857 | | $ | 4,706,360 | | | | | | | | | | Less: allowance for doubtful accounts | | | (680,711 | ) | | (577,292 | ) | | | | | | | | | Accounts receivable, net | | $ | 5,384,146 | | $ | 4,129,068 | |
5.INVENTORIES
Inventories consisted of the following:
| | September 30, 2007 | | December 31, 2006 | | | | | | | | (audited) | |
Raw materials | | $ | 512,798 | | $ | 508,161 | | Work in process | | | 480,743 | | | 245,082 | | Finished goods | | | 2,649,016 | | | 2,382,898 | | | | | | | | | | | | $ | 3,642,557 | | $ | 3,136,141 | |
As of September 30, 2007 and December 31, 2006, the Company recorded no allowance for obsolete inventories and write-offs.
6.PREPAYMENTS AND OTHER RECEIVABLES
A summary of prepayments and other receivables was:
F-58 | | September 30, 2007 | | December 31, 2006 | | | | | | | | (audited) | |
Advances to employees | | $ | 521,977 | | $ | 206,661 | | Deposits paid to suppliers | | | 571,950 | | | 345,024 | | Other receivables | | | 7,421 | | | 17,731 | | | | | | | | | | | | $ | 1,101,348 | | $ | 569,416 | |
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
7.PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consisted of the following:
| | September 30, 2007 | | December 31, 2006 | | | | | | | | (audited) | |
Building | | $ | 760,927 | | $ | 721,753 | | Plant and machinery | | | 1,343,724 | | | 1,157,166 | | Motor vehicles | | | 249,106 | | | 199,606 | | Office equipment | | | 104,074 | | | 109,806 | | Foreign translation difference | | | 39,998 | | | - | | | | | 2,497,829 | | | 2,188,331 | | | | | | | | | | Less: accumulated depreciation | | | (1,180,154 | ) | | (1,036,810 | ) | | | | | | | | | Net book value | | $ | 1,317,675 | | $ | 1,151,521 | |
Depreciation expense for the nine months ended September 30, 2007 and 2006 were $176,044 and $120,371, respectively.
8.TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD.INTANGIBLE ASSETS, NET
| | September 30, 2007 | | December 31, 2006 | | | | | | | | (audited) | | NOTES TO CONDENSED FINANCIAL STATEMENTSLand use rights, cost | | $ | 528,704 | | $ | 528,704 | | Foreign translation difference | | | 36,682 | | | - | | | | | 565,386 | | | 528,704 | | | | | | | | | | Less: accumulated amortization | | | (29,078 | ) | | (21,148 | ) | | | | | | | | | Land use rights, net | | $ | 536,308 | | $ | 507,556 | |
Amortization expense for the nine months ended September 30, 2007 and 2006 were $7,930 and $7,930, respectively.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
9.SHORT-TERM BANK LOAN
As of September 30, 2007, the Company has a short-term bank loan of $596,474 with the Agricultural Bank of China, which is secured with interest rate at 5.84% per annum payable quarterly. It is collateralized by building and certain plant and machinery of the Company.
10.ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following:
| | September 30, 2007 | | December 31, 2006 | | | | | | | | (audited) | |
Welfare payable | | $ | 370,999 | | $ | 523,566 | | Salary payable | | | 233,180 | | | 393,869 | | Accrued expenses | | | 695,148 | | | 131,832 | | Government levy payable | | | 16,171 | | | 99,293 | | | | | | | | | | | | $ | 1,315,498 | | $ | 1,148,560 | |
11.LONG-TERM PAYABLES
Long-term payables consisted of the following:
| | September 30, 2007 | | December 31, 2006 | | | | | | | | (audited) | |
Payable to employees | | $ | 496,252 | | $ | 496,252 | | Payable to government | | | 194,560 | | | 194,560 | | Payable to third parties | | | 57,600 | | | 57,600 | | Foreign translation difference | | | 30,062 | | | - | | | | | | | | | | | | $ | 778,474 | | $ | 748,412 | |
Payable to employees represented unsecured advances with interest rate at 8.20% per annum payable quarterly and no specific terms of repayment.
Payable to government and third parties represented unsecured advances, interest-free and no specific terms of repayment.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBERFOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”)) (Unaudited) 8.INTANGIBLE ASSETS, NET
| | June 30, 2007 | | December 31, 2006 | | | | | | (audited) | | | | | | | | Land use rights, cost | | $ | 528,704 | | $ | 528,704 | | | | | | | | | | Less: accumulated amortization | | | (26,435 | ) | | (21,148 | ) | Land use rights, net | | $ | 502,269 | | $ | 507,556 | |
Amortization expense for the six months ended June 30, 2007 and 2006 were $5,287 and $5,287, respectively.
9.SHORT-TERM BANK LOAN
As of June 30, 2007, the Company has a short-term bank loan of $1,154,703 with the Agricultural Bank of China, which is secured with interest rate at 5.84% per annum payable quarterly, with principle due November 27, 2006. It is collateralized by building and certain plant and machinery of the Company (see Note 7). 10.ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following:
| | June 30, 2007 | | December 31, 2006 | | | | | | (audited) | | | | | | | | Welfare payable | | $ | 688,250 | | $ | 523,566 | | Salary payable | | | 461,873 | | | 393,869 | | Accrued expenses | | | 173,318 | | | 131,832 | | Government levy payable | | | 80,849 | | | 99,293 | | | | $ | 1,404,290 | | $ | 1,148,560 | |
11.LONG-TERM PAYABLES
Long-term payables consisted of the following:
| | June 30, 2007 | | December 31, 2006 | | | | | | (audited) | | | | | | | | Payable to employees | | $ | 496,252 | | $ | 496,252 | | Payable to government | | | 194,560 | | | 194,560 | | Payable to third parties | | | 57,600 | | | 57,600 | | | | $ | 748,412 | | $ | 748,412 | |
Payable to employees represented unsecured advances with interest rate at 8.20% per annum payable quarterly and no specific terms of repayment .
Payable to government and third parties represented unsecured advances, interest-free and no specific terms of repayment. TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”)) (Unaudited) 12. | INCOME TAXES
The Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax Laws, the Company is generally subject to enterprise income tax (“EIT”) at a statutory rate of 33% (30% national income tax plus 3% local income tax).
The provision for income tax expense consisted of the following:
| | Nine months ended September 30, | | | | 2007 | | 2006 | | | | | | | | | |
Current tax | | $ | 177,166 | | $ | 134,648 | | Deferred tax | | | (47,549 | ) | | - | | | | | | | | | | Income tax expenses | | $ | 129,617 | | $ | 134,648 | |
The reconciliation of income tax rate to the effective income tax rate based on income before income taxes stated in the statements of operations for the nine months ended September 30, 2007 and 2006 is as follows:
| | Nine months ended September 30, | | | | 2007 | | 2006 | | | | | | | | | |
Income before income taxes | | $ | 455,709 | | $ | 396,803 | | Statutory income tax rate | | | 33 | % | | 33 | % | | | | 150,384 | | | 130,945 | | Add: Items not subject to taxes | | | | | | | | - Provisions and accrued liabilities | | | 7,072 | | | 3,703 | | - Deferred revenue | | | (27,839 | ) | | - | | | | | | | | | | Income tax expenses | | $ | 129,617 | | $ | 134,648 | |
The following table sets forth the significant components of the deferred tax liabilities of the Company as of September 30, 2007 and December 31, 2006:
| | September 30, 2007 | | December 31, 2006 | | | | | | | | (audited) | |
Deferred tax liabilities: | | | | | | | | - Accounts receivables | | $ | 31,489 | | $ | 79,038 | |
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
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 EQUIPMENTCO., LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”)) (Unaudited) 13. | OWNERS’ EQUITY
Prior to the restructuring in 2004, the Company was established as a state-owned enterprise with a registered capital of $182,016 (approximately RMB1,500,000). In July 2004, the Company was restructured to a limited liability company with 51% of its equity interest owned by SAAC and 49% of equity interest owned by employees in the PRC. In accordance with the Company’s Articles of Association, the registered capital of the Company was $720,786 (approximately RMB5,940,000).
For the nine months ended September 30, 2007, the Company declared and paid a dividend of $20,737 to the owners.
On May 18, 2007, the Company and the shareholders of the Company entered into a purchase agreement with Beijing Deli Solar Technology Development Co., Ltd. (“Deli Solar (Beijing)”), a wholly-owned subsidiary of Deli Solar (USA), Inc., a company organized under the laws of the State of Nevada and is a reporting issuer in the United States and has its shares listed on the NASD Over-the-Counter Bulletin Board under the symbol “CSOL”. Pursuant to the purchase agreement, Deli Solar (Beijing) agreed to acquire 51% of equity interest in the registered capital of the Company for a purchase price of $3,149,147.
On July 1, 2007, the transaction was closed on July 1, 2007 and the Company became a 51%-owned subsidiary of Deli Solar (Beijing).
|
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. 14. | SEGMENT INFORMATION
The Company operates in one single business segment that includes the design, development, manufacture of products and provision of energy-saving projects. The following table summarizes the Company’s net revenue generated from different geographic locations:
| | Nine months ended September 30, | | | | 2007 | | 2006 | | | | | | | | | |
Revenue: | | | | | | | | - Southeast Asia | | $ | 303,311 | | $ | 31,062 | | - The PRC | | | 10,142,112 | | | 4,046,941 | | | | | | | | | | Total revenue, net | | $ | 10,445,423 | | $ | 4,078,003 | |
|
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.
All of the Company’s long-lived assets are located in the PRC.
15. | CONCENTRATION OF RISK
(a)Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
(b)Interest rate risk
As the Company has no significant interest-bearing assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
The Company’s interest-rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Company to cash flow interest-rate risk. Borrowings issued at fixed rates expose the Company to fair value interest-rate risk. Company policy is to maintain approximately all of its borrowings in floating rate instruments. At the period end, all of borrowings were at floating rates.
16.COMMITMENTS
The Company rented offices under non-cancelable operating lease agreements. As of September 30, 2007, future minimum annual operating lease payments were as follows:
Years ending September 30: | | | | | | | | 2008 | | $ | 12,720 | | 2009 | | | 3,180 | | | | | | | Total future minimum operating lease payments | | $ | 15,900 | |
For the nine months ended September 30, 2007 and 2006, rent expense was $9,540 and $9,450, respectively.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
INDEX TO FINANCIAL STATEMENTS
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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 | |
| Page
| | | Report of Independent Registered Public Accounting Firm | F-46 | | | Balance Sheets | F-47 | | | Statements of Operations And Comprehensive Income | F-48 | | | Statements of Cash Flows | F-49 | | | Statements of Owners’ Equity | F-50 | | | Notes to Financial Statements | F-51 to F-63 |
TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., 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 | | | | 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 EQUIPMENTCO., LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”)) (Unaudited)
The Company rented offices under non-cancelable operating lease agreements. As of June 30, 2007, future minimum annual operating lease payments were as follows:
Years ending June 30: | | | | 2008 | | $ | 12,720 | | 2009 | | | 6,360 | | Total future minimum operating lease payments | | $ | 19,080 | |
For the six months ended June 30, 2007 and 2006, rent expense was $6,360 and $6,360, respectively.
On May 18, 2007, the Company and the shareholders of the Company entered into a purchase agreement with Beijing Deli Solar Technology Development Co., Ltd. (“Deli Solar (Beijing)”), a wholly-owned subsidiary of Deli Solar (USA), Inc., a company organized under the laws of the State of Nevada and is a reporting issuer in the United States and has its shares listed on the NASD Over-the-Counter Bulletin Board under the symbol “DLSL”. Pursuant to the purchase agreement, Deli Solar (Beijing) agreed to acquire 51% of equity interest in the registered capital of the Company for a purchase price of $3,149,147. The transaction was closed on July 1, 2007 and approximately $1,575,600 was paid in July 2007. By supplemental agreement dated August 8, 2007, the purchase price was reduced to approximately $1,689,741. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Owners of Tianjin Huaneng Group Energy Equipment Co., Ltd.
We have audited the accompanying balance sheets of Tianjin Huaneng Group Energy Equipment Co., Ltd. (“the Company”) as of December 31, 2006 and 2005 and the related statements of operations and comprehensive income, cash flows and owners’ equity for the years ended December 31, 2006 and 2005. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tianjin Huaneng Group Energy Equipment Co., Ltd. as of December 31, 2006 and 2005 and the results of operations and cash flows for the years ended December 31, 2006 and 2005 and in conformity with accounting principles generally accepted in the United States of America.
/s/ Zhong Yi (Hong Kong) C.P.A. Company Limited | | | | Zhong Yi (Hong Kong) C.P.A. Company Limited | | Certified Public Accountants | | | | Hong Kong, China | | July 17, 2007 | |
TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD. BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2005 (Currency expressed in United States Dollars (“US$”))
| | As of December 31, | | | | 2006 | | 2005 | | ASSETS | | | | | | Current assets: | | | | | | Cash and cash equivalents | | $ | 282,148 | | $ | 258,737 | | Accounts receivable, net | | | 4,129,068 | | | 2,113,888 | | Inventories | | | 3,136,141 | | | 3,771,807 | | Prepayments and other receivables | | | 569,416 | | | 475,753 | | | | | | | | | | Total current assets | | | 8,116,773 | | | 6,620,185 | | | | | | | | | | Non-current assets: | | | | | | | | Property, plant and equipment, net | | | 1,151,521 | | | 1,190,894 | | Intangible assets, net | | | 507,556 | | | 518,130 | | | | | | | | | | Total non-current assets | | | 1,659,077 | | | 1,709,024 | | | | | | | | | | TOTAL ASSETS | | $ | 9,775,850 | | $ | 8,329,209 | | | | | | | | | | LIABILITIES AND OWNERS’ EQUITY | | | | | | | | Current liabilities: | | | | | | | | Short-term bank loan | | $ | 1,154,703 | | $ | 1,154,703 | | Accounts payable, trade | | | 614,355 | | | 564,418 | | Deferred revenue | | | 696,813 | | | 477,566 | | Advances from customers | | | 2,513,511 | | | 2,924,157 | | Value-added tax payable | | | 875,750 | | | 373,338 | | Income taxes payable | | | 835,860 | | | 642,817 | | Deferred tax liabilities | | | 79,038 | | | - | | Accrued liabilities and other payables | | | 1,148,560 | | | 853,103 | | | | | | | | | | Total current liabilities | | | 7,918,590 | | | 6,990,102 | | | | | | | | | | Long-term liabilities: | | | | | | | | Long-term payables | | | 748,412 | | | 773,823 | | | | | | | | | | Total liabilities | | | 8,667,002 | | | 7,763,925 | | | | | | | | | | Owners’ equity: | | | | | | | | Registered capital | | | 720,786 | | | 720,786 | | Accumulated other comprehensive income | | | 66,449 | | | 16,872 | | Statutory reserve | | | 257,466 | | | 178,348 | | Retained earnings (accumulated deficits) | | | 64,147 | | | (350,722 | ) | | | | | | | | | Total owners’ equity | | | 1,108,848 | | | 565,284 | | | | | | | | | | TOTAL LIABILITIES AND OWNERS’ EQUITY | | $ | 9,775,850 | | $ | 8,329,209 | |
See accompanying notes to financial statements. TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., 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 EQUIPMENTCO., 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 EQUIPMENTCO., 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 EQUIPMENTCO., LTD. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (Currency expressed in United States Dollars (“US$”))
Revenues under these bundled arrangements are allocated considering the relative fair values of two separate deliverables: (a) product deliverable and (b) maintenance deliverable, included in the bundled arrangement based on the estimated relative fair values of each element in accordance with EITF 00-21, “Accounting for Multiple Element Revenue Arrangements” and recognized when the applicable revenue recognition criteria for each element are met.
Revenue from these product deliverables are recognized upon final acceptance, which is signed by the customer when installation is completed.
In accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and Costs,” the Company records shipping and handling costs incurred for inbound and outbound freight as a component of cost of revenues.
Revenue from maintenance support for the Company’s products are deferred and recognized ratably over the term of the service period upon the acceptance of the products, which is generally 12 months. As of December 31, 2006 and 2005, the unrecognized portion of revenue related to maintenance was $696,813 and $477,566 and were included in the Deferred Revenue caption on the balance sheets.
Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
Cost of revenue consists primarily of material costs, direct labor, shipping and handling fee, depreciation and manufacturing overheads, which are directly attributable to the manufacture of products and the provision of the energy-saving projects.
o | Cash and Cash Equivalents |
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
o | Accounts Receivable and Allowance for Doubtful Accounts |
The Company carries accounts receivable at their face amounts less an allowance for doubtful accounts. On a regular basis, an allowance for uncollectible receivables is established and determined based upon past transaction history with customers, customer payment practices and economic conditions. Actual collection experience may differ from the current estimate of net receivables. A change to the allowance for uncollectible amounts may be required if a future event or other change in circumstances results in a change in the estimate of the ultimate collectibility of a specific account. The Company does not require collateral for the accounts receivable balances. For the years ended December 31, 2006 and 2005, the Company recorded an allowance for doubtful accounts of $291,785 and $148,418, respectively. TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (Currency expressed in United States Dollars (“US$”))
Inventories consist primarily of finished goods, work in process and raw materials and are stated at the lower of cost or net realizable value, with cost being determined on a weighted average basis. Allowance for slow-moving and obsolescence is an estimate amount based on an analysis of current business and economic risks, the duration of the inventories held and other specific identifiable risks that may indicate a potential loss. The allowance is reviewed regularly to ensure that it adequately provides for all reasonable expected losses. For the years ended December 31, 2006 and 2005, the Company did not record any allowance for obsolescence.
o | Property, Plant and Equipment |
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:
| | Depreciable life | | Residual value | | | | | | | | Building | | | 20 years | | | 5 | % | Plant and machinery | | | 10 years | | | 5 | % | Motor vehicles | | | 5 years | | | 5 | % | Office equipment | | | 10 years | | | 5 | % |
Expenditure for maintenance and repairs is expensed as incurred. The gain or loss on the disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the statements of operations.
All lands in the PRC are owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time. Thus, all of the Company’s land purchases in the PRC are considered to be leasehold land and are stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreements on a straight-line basis, which is 50 years and they will expire in 2054.
Amortization expense totaled $10,574 and $10,574 for the years ended December 31, 2006 and 2005, respectively. TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (Currency expressed in United States Dollars (“US$”)) o | Valuation of Long-lived Assets |
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews its long-lived assets, including property, plant and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset. There has been no impairment as of December 31, 2006 or 2005.
SFAS No. 130, “Reporting Comprehensive Income” , establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during the year from non-owner sources. Accumulated comprehensive income, as presented in the accompanying statement of owners’ equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.
The Company accounts for income tax using SFAS No. 109 “Accounting for Income Taxes” , which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred income taxes are provided for the estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carry-forwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the years of recovery or reversal and the effect from a change in tax rates is recognized in the statements of operations and comprehensive income in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.
o | Foreign Currencies Translation |
The functional currency of the Company is Renminbi Yuan (“RMB”). The accompanying financial statements have been expressed in United States dollars, the reporting currency of the Company. The balance sheet is translated into United States dollars based on the rates of exchange ruling at the balance sheet date. The statements of operations and comprehensive income are translated using a weighted average rate for the year. Translation adjustments are reflected as cumulative translation adjustments in owners’ equity.
Contributions to retirement schemes (which are defined contribution plans) are charged to general and administrative expenses in the statements of operations and comprehensive income as and when the related employee service is provided. TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (Currency expressed in United States Dollars (“US$”)) o | Research and Development Costs |
Research and development costs are expensed when incurred in the development of new processes including significant improvements and refinements of existing products. Such costs mainly relate to labor and material cost. The Company incurred $119,603 and $94,962 for the years ended December 31, 2006 and 20 05, respectively.
The Company expenses advertising costs as incurred in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-7, “Reporting for Advertising Costs” . The Company incurred $32,904 and $47,379 advertising expenses for each of the years ended December 31, 2006 and 2005, respectively.
Under the terms of the contracts, the Company provides a product warranty on the equipment to its customers for a period of twelve months upon the completion of installation at the Company’s expense. The Company has not experienced any material returns where it was under obligation to honor this standard warranty provision. As such, no reserve for product warranty has been provided in the statements of operations for the years ended December 31, 2006 and 2005.
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company operates in one principal reportable business segment. All the customers are located in the PRC and the South East Asia region.
o | Fair Value of Financial Instruments |
The Company values its financial instruments as required by SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” . The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of amounts that the Company could realize in a current market exchange. TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (Currency expressed in United States Dollars (“US$”))
The Company’s financial instruments primarily include cash and cash equivalents, trade accounts receivable, inventories, prepayments and other receivables, short-term bank loan, trade accounts payable, deferred revenue, advances from customers, value-added tax payable, income taxes payable, accrued liabilities and other payable.
As of the balance sheet date, the estimated fair values of financial instruments were not materially different from their carrying values as presented due to short maturities of these instruments.
o | Recently Issued Accounting Standards |
In September 2005, the FASB’s Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty” (“EITF 04-13”). EITF 04-13 requires that two or more legally separate exchange transactions with the same counterparty be combined and considered a single arrangement for purposes of applying APB Opinion No. 29, “Accounting for Nonmonetary Transactions” , when the transactions are entered into in contemplation of one another. EITF 04-13 is effective for new arrangements entered into, or modifications or renewals of existing arrangements, in interim or annual periods beginning after March 15, 2006. The Company does not expect that the adoption of this statement would have a material effect on the Company’s financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments-an amendment of FASB Statements 133 and 140” , which is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The statement improves financial reporting by eliminating the exemption from applying SFAS No. 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. The Statement also improves financial reporting by allowing a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized have to bifurcated, if the holder elects to account for the whole instrument-by-instrument basis, in cases in which a derivative would otherwise have to bifurcated, if the holder elects to account for the whole instrument on a fair value basis. The Company does not expect that the adoption of this statement would have a material effect on the Company’s financial position or results of operations.
In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” , which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognizes in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.
In September 2006, the SEC released SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’s views on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provision of SAB 108 is effective for the Company in the current fiscal year ended December 31, 2006. The Company is currently evaluating the impact of SAB 108 but does not believe that the application of SAB 108 would have a material effect on its financial position, cash flows nor results of operations. TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., 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 EQUIPMENTCO., 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 $170,881, respectively. TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (Currency expressed in United States Dollars (“US$”))
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). | | 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 $1,154,703 with the Agricultural Bank of China, which is secured with interest rate at 5.841% per annum payable quarterly, with principle due November 27, 2006. It is collateralized by building and certain plant and machinery of the Company (see Note 6). In July 2007, the Company repaid the short-term bank loan to the bank.
Deferred revenue represents the unrecognized portion of the entire fee from the bundled arrangement allocated to maintenance service and recognized to revenue ratably over the service period, usually 12 months (see Note 2).
10. | ADVANCES FROM CUSTOMERS |
Advances from customers represent the advanced payments made by the customers upon the signing of a purchase contract. TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (Currency expressed in United States Dollars (“US$”))
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 EQUIPMENTCO., 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 $720,786 (approximately RMB5,940,000). TIANJIN HUANENG GROUP ENERGY EQUIPMENTCO., LTD. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (Currency expressed in United States Dollars (“US$”))
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 EQUIPMENTCO., 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 $12,377, respectively. SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION CONDENSED BALANCE SHEETS AS OF MARCH 31, 2008 AND DECEMBER 31, 2007 (Currency expressed in United States Dollars (“US$”))
| | 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 CONDENSEDSTATEMENTS OF CHANGE IN OWNERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2008 (Currency expressed in United States Dollars (“US$”)) (Unaudited) | | Registered and paid-in capital | | Distribution to owners | | Accumulated other comprehensive income | | Statutory reserve | | Retained earnings | | Total owner’s equity | | | | | | | | | | | | | | | | Balance as of January 1, 2008 | | $ | 1,598,979 | | $ | (1,190,756 | ) | $ | 167,717 | | $ | 74,508 | | $ | 803,985 | | $ | 1,454,433 | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment | | | - | | | - | | | 108,789 | | | - | | | - | | | 108,789 | | Net income for the period | | | - | | | - | | | - | | | - | | | 47,806 | | | 47,806 | | Balance as of March 31, 2008 | | $ | 1,598,979 | | $ | (1,190,756 | ) | $ | 276,506 | | $ | 74,508 | | $ | 851,791 | | $ | 1,611,028 | |
See accompanying notes to financial statements. SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”)) 1.BASIS OF PRESENTATION The accompanying condensed consolidated balance sheet as of December 31, 2007 has been derived from audited financial statements and the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the interim reporting requirements of Regulation S-X. They do not include all of the information and footnotes for complete consolidated financial statements as required by GAAP. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2007.
The results of operations for the three months ended March 31, 2008 and 2007 presented are not necessarily indicative of the results to be expected for the year.
There is no provision for dividends for the quarter to which this quarterly report relates .
2.ORGANIZATION AND BUSINESS BACKGROUND
Shenzhen Pengsangpu Solar Industrial Products Corporation (“the Company”) was incorporated as a limited liability company in the People’s Republic of China (“PRC”) on September 23, 1993. Its registered capital was Renminbi Yuan (“RMB”) 2,650,000 (equivalent to $353,333) and contributed by three individuals namely, Mr Renzheng Qiu, Mr Hanwen Chen and Mr Hongde Chen
On July 13, 2006, the registered capital was approved to increase to $1,706,666 (RMB12,800,000) by an injection of additional capital of $1,353,333 (RMB10,150,000) by the existing owners and a new owner, Shenzhen Shunda Solar Energy Co., Ltd registered in the PRC.
On April 18, 2007, Shenzhen Shunda Solar Energy Co. entered an Equity Exchange Agreement to transfer its interest of 0.23% in the Company to Mr Chen Hanwen.
On May 30, 2007, Mr Hongde Chen entered an Equity Exchange Agreement to transfer his 34.77% interest in the Company to Mr Chen Hanwen.
On July 24, 2007, Mr Chen Hanwen entered an Equity Exchange Agreement to transfer his 3.33% interest in the Company to Mr Renzheng Qiu and his 28.33% interest in the Company to Mr Bin Luo, respectively.
On January 9, 2008, the Company entered into an Equity Purchase Agreement and a Complementary Agreement (the “Agreements”) with Beijing Deli Solar Technology Development Co., Ltd, a wholly-owned subsidiary of China Solar and Clean Energy Solutions, Inc., a company organized under the laws of the State of Nevada and is a reporting issuer in the United States and has its shares listed on the NASD Over-the-Counter Bulletin Board under the symbol “CSOL”. Pursuant to the Agreements, China Solar and Clean Energy Solutions, Inc. agreed to purchase 100% equity interest in the Company. The accounting date of the acquisition was April 1, 2008 and was accounted for under the purchase method. SZPSP results of operations have been not included in the three months ended March 31, 2008 consolidated financial statements. See note12.
SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”)) The Company is principally engaged in the re-sale of energy-saving related heating products such as heat pipes, heat exchangers, pressure water boilers, solar energy water heaters and radiators. The Company currently operates a distribution facility in Shenzhen City, the PRC.
All the customers are located in the PRC.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, the provisions of which are required to be applied prospectively. The Company believes that SFAS 159 should not have a material impact on the consolidated financial position or results of operations. In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations" ("SFAS No. 141R"). SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations the Company engages in will be recorded and disclosed following existing GAAP until January 1, 2009. The Company expects SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time. The Company is still assessing the impact of this pronouncement. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51, or SFAS No. 160" ("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company believes that SFAS 160 should not have a material impact on the consolidated financial position or results of operations. In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.
SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”)) 4. PREPAYMENTS AND OTHER RECEIVABLES
A summary of prepayments and other receivables was: | | As of | | | | March 31, 2008 | | December 31, 2007 | | | | (Unaudited) | | (Note 1) | | Prepayments | | $ | 195,833 | | $ | 54,936 | | Value added tax receivable | | | 21,773 | | | 20,904 | | Deposits to vendors | | | - | | | 8,347 | | Advance to employees | | | - | | | 6,993 | | | | | | | | | | | | $ | 217,606 | | $ | 91,180 | |
5.INVESTMENT IN SALES-TYPE LEASES
Starting from 2007, the Company engages in installing energy-saving facilities and leasing the equipment facilities to customers under sales-type leasing arrangement.
The components of the lease receivable, net, are as follows: | | March 31, 2008 | | December 31, 2007 | | | | (Unaudited) | | (Note 1) | | Gross minimum lease receivables | | $ | 2,039,570 | | $ | 2,112,360 | | Estimated residual value of leased assets | | | 36,574 | | | 36,574 | | Less: unearned interest income | | | (1,109,338 | ) | | (1,253,673 | ) | | | | 966,806 | | | | | Net investment in sales-type leases | | | | | | 895,261 | | Less: current portion | | | (143,317 | ) | | (137,599 | ) | | | | | | | | | Net investment in sales-type leases, non-current | | $ | 823,489 | | $ | 757,662 | |
As of March 31 , 2008, the future minimum rentals to be received on non-cancelable sales-type leases are as follows:
Years ending March 31, | | | | | | | 143,317 | | 2010 | | | 143,317 | | 2011 | | | 143,317 | | 2012 | | | 143,317 | | 2013 | | | 143,317 | | Thereafter | | | 1,322,985 | | | | $ | 2,039,570 | |
SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”)) 6.PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consisted of the following: | | As of | | | | March 31, 2008 | | December 31, 2007 | | | | (Unaudited) | | (Note 1) | | Plant and machinery | | $ | 1,310,877 | | $ | 1,310,877 | | Office equipment | | | 79,183 | | | 79,183 | | Motor vehicles | | | 145,184 | | | 145,184 | | Foreign translation difference | | | 69,946 | | | 65,775 | | | | | 1,605,190 | | | 1,601,019 | | | | | | | | | | Less: accumulated depreciation | | | 315,260 | | | 270,587 | | Less: foreign translation difference | | | 14,643 | | | 18,294 | | Net book value | | $ | 1,275,287 | | $ | 1,312,138 | |
Depreciation expense for the three months ended March 31, 2008 and 2007 were $44,673 (unaudited) and $10,376 (unaudited), respectively. 7.SHORT-TERM BANK LOAN
As of March 31, 2008, the short-term bank loan is as follows:
The Company has a short-term bank loan of $54,690 (unaudited) with an independent financial institution in the PRC, which is secured with interest rate at 6.63% per annum payable quarterly, with principle due July 19, 2008. It was pledged by the accounts receivable of the Company.
The Company has a short-term bank loan of $144,684 (unaudited) with an independent financial institution in the PRC, which is secured with interest rate at 6.57% per annum payable quarterly, with principle due June 29, 2008. It is personally guaranteed by the owner, Mr Renzheng Qiu of the Company.
The Company has a short-term bank loan of $511,294 (unaudited) with an independent financial institution in the PRC, which is secured with interest rate at 6.75% per annum payable quarterly, with principle due October 12, 2008. It is personally guaranteed by the owner, Mr Chen Hanwen of the Company. SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”)) As of December 31, 2007, the short-term bank loan is as follows:
The Company has a short-term bank loan of $54,690 with an independent financial institution in the PRC, which is secured with interest rate at 6.63% per annum payable quarterly, with principle due July 19, 2008. It was pledged by the accounts receivable of the Company.
The Company has a short-term bank loan of $205,086 with an independent financial institution in the PRC, which is secured with interest rate at 6.57% per annum payable quarterly, with principle due June 29, 2008. It is personally guaranteed by the owner, Mr Renzheng Qiu of the Company.
The Company has a short-term bank loan of $546,896 with an independent financial institution in the PRC, which is secured with interest rate at 6.75% per annum payable quarterly, with principle due October 12, 2008. It is personally guaranteed by the owner, Mr Chen Hanwen of the Company. 8.DISTRIBUTION TO OWNERS
As of March 31, 2008, the distribution amount to owners, Mr Renzheng Qiu, Mr Chen Hanwen and Mr Bin Luo totaled , $1,190,756. 9.INCOME TAXES
The Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax Laws, the Company is generally subject to enterprise income tax (“EIT”) at a statutory rate of 33% (30% national income tax plus 3% local income tax). Since the Company is registered and operates in Shenzhen, the PRC and is recognized as “Manufacturing Enterprise Located in Special Economic Zone”, it is entitled to EIT at a preferential tax rate of 15%.
On July 25, 2006, the Company was classified as an Advanced Technology Enterprise in the PRC. The Company is exempted from EIT for the first two profit making years and then the EIT is reduced to 15% in the following three years.
The Company was exempted from EIT due to cumulative tax losses for the year ended December 31, 2006. As of December 31, 2006, the Company has approximately $142,169 of cumulative tax losses which can be carried forward indefinitely to offset future taxable income. The deferred tax assets for the Company as of December 31, 2006 consisted mainly of tax losses and for which a full valuation allowance has been provided, as the losses were fully utilized in 2007 without a tax reductive benefit to the Company due to the exemption from EIT under the tax concession policy for an Advanced Technology Enterprise.
On March 16, 2007, the National People’s Congress approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”). The new CIT Law , among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises with effect from January 1, 2008. The Company is entitled to tax concession policy for an Advanced Technology Enterprise and its ultimate applicable effective tax rate in 2008 and beyond will depend on many factors, including but not limited to whether certain of its legal entity will be subject to a transitional policy under the Corporate Income Tax Law, whether the Company can continue to enjoy the unexpired tax holidays.
The Company’s effective income tax rates for the three months ended March 31, 2008 and 2007 were both 15%. SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”)) 10.SEGMENT INFORMATION - BUSINESS SEGMENTS
The Company currently operates in two principal business segments: (i) sale of components, (ii) provision of energy-saving projects. The Company had no inter-segment sales for the period ended March 31, 2008 and 2007. The Company’s reportable segments are strategic business units that offer different products and services.
Summarized financial information that is directly attributable to the Company’s reportable segments is shown in the following table for the period ended March 31, 2008: | | Sale of products | | Energy-saving projects | | Total | | | | | | | | | | Revenue, net | | $ | 71,144 | | $ | 322,776 | | $ | 393,920 | | Cost of revenue | | | 57,521 | | | 160,829 | | | 218,350 | | | | | | | | | | | | | Gross profit | | $ | 13,623 | | $ | 161,947 | | $ | 175,570 | |
Summarized financial information that is directly attributable to the Company’s reportable segments is shown in the following table for the year ended March 31, 2007: | | Sale of products | | Energy-saving projects | | Total | | | | | | | | | | Revenue, net | | $ | 44,106 | | $ | 15,879 | | $ | 59,985 | | Cost of revenue | | | 32,036 | | | - | | | 32,036 | | | | | | | | | | | | | Gross profit | | $ | 12,070 | | $ | 15,879 | | $ | 27,949 | |
For the period ended March 31, 2008 and year ended December 31, 2007, all assets and operating facilities are located in the PRC. SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”)) 11.CONCENTRATION AND RISK
(a) Major customers
No revenue from customers that individually represent greater than 10% of the total revenue for each of the three months ended March 31, 2008 and 2007.
(b) Major vendors
No purchase from vendors that individually represent greater than 10% of the total purchase for the each of the three months ended March 31, 2008 and 2007.
(c) Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable and sales-type leases. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.
(d) Interest rate risk As the Company has no significant interest-bearing assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
The Company’s interest-rate risk arises from short-term borrowings. Borrowings issued at variable rates expose the Company to cash flow interest-rate risk. Borrowings issued at fixed rates expose the Company to fair value interest-rate risk. Company policy is to maintain approximately all of its borrowings in fixed rate instruments. At the year-end, all of borrowings were at fixed rates.
(e) Exchange rate risk
The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates against the US$, the value of the RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.
12.SUBSEQUENT EVENTS
On January 9, 2008, the Company entered into an Equity Purchase Agreement and Complementary Agreement to the Equity Purchase Agreement with Beijing Deli Solar Technology Development Co., Ltd (“Deli Solar (Beijing)”), a wholly-owned subsidiary of China Solar and Clean Energy Solutions, Inc. (“China Solar”), a company organized under the laws of the State of Nevada and is a reporting issuer in the United States and has its shares listed on the NASD Over-the-Counter Bulletin Board under the symbol “CSOL”. Pursuant to the Agreements, Deli Solar (Beijing) agreed to acquire 100% of the outstanding equity interest of the Company from its shareholders. On March 25, 2008, both parties signed a Supplmentary Agreement to the Equity Purchase Agreement and the Complementary Agreement to amend and supplement the previous agreements and set forth the final terms of the total purchase price and payment method of the acquisition.
SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Currency expressed in United States Dollars (“US$”)) Under the agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest of the Company from its three shareholders. $4,087,832 (RMB 28.8 million) of the purchase price was payable in cash. The three shareholders of the Company agreed to loan the cash proceeds back to the Company interest free to be used for working capital. Fifty (50%) of the principal amount of the loan is required to be paid prior to March 31, 2009 and the remaining 50% balance is required to be paid prior to March 31, 2010. In addition to the cash portion of the purchase price, the parties agreed to an additional consideration of RMB 20 million (approximately $2,839,458) to represent the agreed-upon value of the Company’s intangible assets.
This portion is required to be paid in the form of 1,419,729 shares of the common stock of China Solar (which was based on the average closing price of the common stock for the 30 days immediately preceding the execution of the Complementary Agreement (the “Share Price”)), provided that if on March 31, 2010 the common stock price is lower than the Share Price, China Solar will pay the difference. Fifty percent (50%) of these shares will be transferable and unrestricted on or after March 31, 2009 and the remaining fifty percent (50%) will be transferable on or after March 31, 2010. The shares are required to be transferred to the Company within 180 days of the closing. In addition, as part of the purchase price, the shareholders of the Company will receive five years warrants to purchase a total of 141,973 shares of common stock at an exercise price of $2.50 per share, subject to future adjustment for stock splits and stock dividend.
The Company warranted in the Complementary Agreement that if (i) its sales revenue is less than RMB 99 million (approximately $13,670,068) with an after-tax net profit of less than RMB 9.43 million (approximately $1,302,108) for the year ended December 31, 2008; or (ii) if in the year ended December 31, 2009, it does not reach the targeted sales revenue of RMB 143.9 million (approximately $19,868,336) or the after-tax net profit of RMB 12.13 million (approximately $1,674,789), the Company will pay the difference between the revenue and the targeted revenue of the year specified by reducing the amount payable on the shareholders’ loan. If the shareholders’ loan is not sufficient to pay the difference, the common shares held by the Company will be returned to China Solar to the extent necessary for the remaining balance. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Owners of Shenzhen Pengsangpu Solar Industrial Products Corporation
We have audited the accompanying balance sheets of Shenzhen Pengsangpu Solar Industrial Products Corporation (“the Company”) as of December 31, 2007 and 2006 and the related statements of operations and comprehensive income (loss), cash flows and change in owners’ equity for the years ended December 31, 2007 and 2006. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shenzhen Pengsangpu Solar Industrial Products Corporation as of December 31, 2007 and 2006 and the results of operations and cash flows for the years ended December 31, 2007 and 2006 and in conformity with accounting principles generally accepted in the United States of America. /s/ Zhong Yi (Hong Kong) C.P.A. Company Limited |
Zhong Yi (Hong Kong) C.P.A. Company Limited Certified Public Accountants
Hong Kong, China July 17, 2007May 14, 2008
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
BALANCE SHEETS AS OF DECEMBER 31, 20062007 AND 20052006 (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.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007 & 2006 (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 | |
| | 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. TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
STATEMENTS OF CASH FLOWSCHANGE IN OWNERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2007 AND 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 | |
| | 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.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 20062007 AND 20052006 (Currency expressed in United States Dollars (“US$”))
1.ORGANIZATION AND BUSINESS BACKGROUND 1. | ORGANIZATION AND BUSINESS BACKGROUND
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Tianjin Huaneng Group Energy Equipment Co., Ltd.Shenzhen Pengsangpu Solar Industrial Products Corporation (“the Company”) was established in 1987 as a state-owned enterprise and then was restructured in July 2004incorporated 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”). on September 23, 1993. 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 towas Renminbi Yuan (“RMB”) 5,940,000).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 design, development and manufacturing and marketingre-sale 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 productsThe Company currently operates a distribution facility in Shenzhen City, the PRC.
All the customers are distributedlocated in the PRC and Southeast Asia.PRC. 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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lo | Basis of Presentationpresentation |
These accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.
lo | Use of Estimatesestimates |
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.
o | Revenue Recognitionrecognition |
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 provisionsale of energy-saving projects.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 addition to the invoiced value of purchases to the extent not refunded for export sales.Company.
In accordance with the SEC’s Staff Accounting Bulletin No. 104,EITF 00-10, Revenue Recognition“Accounting for Shipping and Handling Fees and Costs,”, the Company recognizes revenue when persuasive evidencerecords shipping and handling costs incurred for inbound and outbound freight as a component of an arrangement exists, transfercost of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.revenues.
The(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. 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$”))
Revenues under these bundled arrangements are allocated considering the relative fair values of two separate deliverables: (a) product deliverable and (b) maintenance deliverable, included in the bundled arrangement based on the estimated relative fair values of each element in accordance with EITF 00-21, “Accounting for Multiple Element Revenue Arrangements” and recognized when the applicable revenue recognition criteria for each element are met.
Revenue from these product deliverables are recognized upon final acceptance, which is signed by the customer when installation is completed.
In accordance with EITF 00-10, SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
“Accounting for Shipping and Handling Fees and Costs,NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (Currency expressed in United States Dollars (“US$” 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 1224 to 42 months. As of December 31, 2006 and 2005,2007, the unrecognized portion of revenue related to maintenance was $696,813$21,451 and $477,566 and werewas included in the Deferred Revenue caption on the balance sheets.
(iii) Project revenue under sales-type leases
In accordance with SFAS No. 13, “Accounting for Leases” , the Company recognizes interest income over the lease term so as to produce a constant rate of return on the net investment in the lease using effective interest method.
Under sales-type leases, the Company also recognizes a profit (or loss) at the beginning of the lease term. Sales revenue should be recorded for the fair value of the leased asset, or, if lower, the present value of the minimum lease payments, computed using the interest rate implicit in the lease. Cost of sales should be recorded for the carrying amount of the leased asset, less the present value of the unguaranteed residual value.
(c) Interest income
Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
Cost of revenue consists primarily of material costs, direct labor, shipping and handling fee depreciation and manufacturing overheads, which are directly attributable to the manufacture of products and the provision of the energy-saving projects.
lo | Cash and Cash Equivalentscash equivalents |
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
The Company maintains cash balances at an independent financial institution specializing in corporate guarantees as a pledge to the short-term bank loan.
SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”))
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 endedAs of December 31, 20062007 and 2005,2006, the Company did not record anyhas determined that no allowance for obsolescence.obsolescence is required.
lo | Property, Plantplant and Equipmentequipment |
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 | | | 105 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.
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 $10,574 for the years ended December 31, 2006 and 2005, respectively.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency expressed in United States Dollars (“US$”))
lo | Valuation of Long-lived Assetslong-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, 20062007 or 2005.2006.
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$”)) lo | Comprehensive Incomeincome |
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.
lo | Foreign Currencies Translationcurrencies 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 functionalresulting 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$, in accordance with SFAS No. 52, “ Foreign Currency Translation” , using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the year. The accompanyinggains and losses resulting from translation of financial statements have beenof foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of changes in owners’ equity.
SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (Currency expressed in United States dollars, the reporting currencyDollars (“US$”)) Translation of the Company. The balance sheet is translatedamounts from RMB into United States dollars based on the rates of exchange rulingUS$ has been made at the balance sheet date. The statements of operations and comprehensive income are translated using a weighted average ratefollowing exchange rates for the year. Translation adjustments are reflected as cumulative translation adjustments in owners’ equity.respective year:
| | 2007 | | 2006 | | | | | | | | Year-end RMB:US$ exchange rate | | | 7.314 | | | 7.813 | | Average rates RMB:US$ exchange rate | | | 7.563 | | | 7.945 | |
lo | Retirement Plan Costsplan costs |
Contributions to retirement schemes (which are defined contribution plans) are charged to general and administrative expenses in the statements of operations and comprehensive income as and when the related employee service is provided. TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency expressed in United States Dollars (“US$”))
l | Research and Development Costs |
Research and development costs are expensed when incurred in the development of new processes including significant improvements and refinements of existing products. Such costs mainly relate to labor and material cost. The Company incurred $119,603 and $94,962 for the years ended December 31, 2006 and 2005, respectively.
lo | Advertising Expensesexpenses |
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$12,422 and $47,379$0 advertising expenses for each of the years ended December 31, 20062007 and 2005,2006, 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 $3,272 for the years ended December 31, 2007 and 2006 .
o | Product Warrantywarranty |
Under the terms of the contracts, the Company provides a product warranty on the equipment to its customers for a period of twelve months upon the completion of installation at the Company’s expense. The Company has not experienced any material returns where it was under obligation to honor this standard warranty provision. As such, no reserve for product warranty has been provided in the statements of operations for the years ended December 31, 20062007 and 2005.2006.
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”)) lo | Segment Reportingreporting |
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 principaltwo reportable business segment.segments: Sales of products and Energy-saving projects (including sales-type leases). All the customers are located in the PRC and the South East Asia region.PRC.
lo | Fair Valuevalue of Financial Instrumentsfinancial 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, restricted cash, trade accounts receivable, inventories, investment in sales-type leases, 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.
lo | Recently Issued Accounting Standardsissued accounting pronouncements |
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 doeshas reviewed all recently issued, but not expect thatyet effective, accounting pronouncements and do not believe the future adoption of this statement would haveany such pronouncements may be expected to cause 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,condition or 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.”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 yearyears beginning after November 15, 2007, the provisions of which are required to be applied prospectively. The Company’sCompany believes that SFAS 159 should not have a material impact on the financial position or 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.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 | 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, theno allowances for doubtful accounts arewere provided as $291,785 and $148,418 for the years ended December 31, 20062007 and 2005, respectively.2006. 4.INVENTORIES
| | 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 | |
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.
TIANJIN HUANENG GROUP ENERGY EQUIPMENTNOTES TO FINANCIAL STATEMENTS
CO.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 , LTD.2007, the future minimum rentals to be received on non-cancelable sales-type leases are as follows:
Years ending December 31, | | | | | | | | 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, 20062007 AND 20052006 (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 | |
7.PROPERTY, PLANT AND EQUIPMENT, NET
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, | | | As of December 31, | | | | 2006 | | 2005 | | | 2007 | | 2006 | | | | | | | | | | | | | Building | | $ | 721,753 | | $ | 690,887 | | | Plant and machinery | | | 1,157,166 | | | 1,063,659 | | | $ | 1,310,877 | | $ | - | | Office equipment | | | | 79,183 | | | 47,633 | | Motor vehicles | | | 199,606 | | | 192,997 | | | | 145,184 | | | 145,184 | | Office equipment | | | 109,806 | | | 88,520 | | | Foreign translation difference | | | | 65,775 | | | 6,445 | | | | | 2,188,331 | | | 2,036,063 | | | | 1,601,019 | | | 199,262 | | | | | | | | | | | | | | | | | Less: accumulated depreciation | | | (1,036,810 | ) | | (845,169 | ) | | | 270,587 | | | 138,130 | | Less: foreign translation difference | | | | 18,294 | | | 4,087 | | | | | | | | | | | | | | | | | Net book value | | $ | 1,151,521 | | $ | 1,190,894 | | | $ | 1,312,138 | | $ | 57,045 | |
Depreciation expense for the years ended December 31, 2007 and 2006 were $132,457 and 2005 were $191,641 and $170,881,$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 $384,000 with an independent financial institution in the PRC, which is secured with interest rate at 7.3% per annum payable quarterly, with principle due September 27, 2007. It is personally guaranteed by the owner, Mr Chen Hanwen and Mr Renzheng Qiu of the Company.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT CO., LTD.SHENZHEN PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 20062007 AND 20052006 (Currency expressed in United States Dollars (“US$”))
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 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).Mr Bin Luo totaled , $1,291,913. | | 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 $1,154,703 with the Agricultural Bank of China, which is secured with interest rate at 5.841% per annum payable quarterly, with principle due November 27, 2006. It is collateralized by building and certain plant and machinery of the Company (see Note 6). In July 2007, the Company repaid the short-term bank loan to the bank.
Deferred revenue represents the unrecognized portion of the entire fee from the bundled arrangement allocated to maintenance service and recognized to revenue ratably over the service period, usually 12 months (see Note 2).
10. | ADVANCES FROM CUSTOMERS
|
Advances from customers represent the advanced payments made by the customers upon the signing of a purchase contract.
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 20062007 AND 20052006 (Currency expressed in United States Dollars (“US$”))
11. | ACCRUED LIABILITIES AND OTHER PAYABLES
|
Accrued liabilitiesAs of December 31, 2007, the distribution amount owners , Mr Renzheng Qiu, Mr Chen Hanwen 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.Mr Bin Luo totaled , $1,190,756.
TIANJIN HUANENG GROUP ENERGY EQUIPMENT12. CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency expressed in United States Dollars (“US$”))
The Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax Laws, the Company is generally subject to enterprisecorporate income tax (“EIT”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 provisionCompany was exempted from CIT due to cumulative tax losses for income tax expense consisted of the following:year ended December 31, 2006.
| | Years ended December 31, | | | | 2006 | | 2005 | | | | | | | | Current tax | | $ | 258,520 | | $ | 254,185 | | Deferred tax | | | 79,038 | | | - | | | | | | | | | | Income tax expenses | | $ | 337,558 | | $ | 254,185 | |
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, 20062007 and 20052006 is as follows: | | Years ended December 31, | | | Years ended December 31, | | | | 2006 | | 2005 | | | 2007 | | 2006 | | | | | | | | | | | | | Income before income taxes | | $ | 940,203 | | $ | 355,352 | | | Income (loss) before income taxes | | | $ | 1,033,157 | | $ | (30,502 | ) | Statutory income tax rate | | | 33 | % | | 33 | % | | | 33 | % | | 33 | % | | | | 310,267 | | | 117,266 | | | | 340,942 | | | (10,066 | ) | Add: Items not subject to taxes | | | | | | | | | 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 | | | 65,880 | | | 34,544 | | | | 6,846 | | | - | | - Provisions | | | (38,589 | ) | | 102,375 | | | | | | | | | | | | - Effect from tax holiday | | | | (269,651 | ) | | - | | Income tax expenses | | $ | 337,558 | | $ | 254,185 | | | $ | - | | $ | - | |
The following table sets forthOn March 16, 2007, the significant componentsNational People’s Congress approved the Corporate Income Tax Law of the deferredPeople’s Republic of China (the “New CIT Law”). The new CIT Law , among other things, imposes a unified income tax liabilitiesrate 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 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 | | $ | - | |
Priorcan continue to enjoy 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 $720,786 (approximately RMB5,940,000).unexpired tax holidays.
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 20062007 AND 20052006 (Currency expressed in United States Dollars (“US$”))
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 | | $ | - | | $ | - | |
15. | 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 $266,446$24,625 and $209,788$9,555 for the years ended December 31, 20062007 and 2005,2006, 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, 2007 and 2006, appropriation of $74,508 and 2005, the Company contributed $79,118 and $74,510 to statutory reserve,$0 were made 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.
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 20062007 AND 20052006 (Currency expressed in United States Dollars (“US$”))
(b) | 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.
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”))
17.CONCENTRATION AND RISK
(a) Major customers
The customers who account for 10% or more of revenue are presented as follows:
| | Year ended December 31, 2007 | | December 31, 2007 | | | | Revenue | | Percentage of revenue | | Accounts receivable | | | | | | | | | | Customer A | | $ | 737,385 | | | 23 | % | $ | - | | Customer B | | | 288,276 | | | 9 | % | | 136,724 | | Customer C | | | 264,838 | | | 8 | % | | - | | Customer D | | | 264,086 | | | 8 | % | | 14,629 | | | | | | | | | | | | | | | | 1,554,585 | | | 48 | % | | 151,353 | |
| | Year ended December 31, 2006 | | December 31, 2006 | | | | Revenue | | Percentage of revenue | | Accounts receivable | | | | | | | | | | Customer E | | $ | 69,226 | | | 22 | % | $ | - | | Customer F | | | 50,346 | | | 16 | % | | - | | Customer G | | | 44,053 | | | 14 | % | | - | | Customer H | | | 41,493 | | | 13 | % | | - | | Customer I | | | 37,760 | | | 11 | % | | - | | | | | | | | | | | | | | | $ | 242,878 | | | 76 | % | $ | - | |
(b) Major vendors |
The vendors who account for 10% or more of purchases are presented as follows: | | Year ended December 31, 2007 | | December 31, 2007 | | | | Purchases | | Percentage of purchases | | Accounts payable | | | | | | | | | | Vendor A | | $ | 355,483 | | | 21 | % | $ | 39,787 | | Vendor B | | | 177,741 | | | 11 | % | | - | | Vendor C | | | 175,006 | | | 11 | % | | 39,434 | | | | | | | | | | | | | Total: | | $ | 708,230 | | | 43 | % | $ | 79,221 | |
| | Year ended December 31, 2006 | | | Year ended December 31, 2006 | | December 31, 2006 | | Vendors | | Purchases | | Percentage of purchases | | Accounts Payables | | | | | | Purchases | | Percentage of purchases | | Accounts payable | | | | | | | | | | | | | | | | | Vendor A | | $ | 3,400,500 | | | 58 | % | $ | 354,560 | | | $ | 51,955 | | | 18 | % | $ | 18,276 | | Vendor B | | | 709,068 | | | 12 | % | | - | | | Vendor C | | | | 92,972 | | | 31 | % | | 35,410 | | Vendor D | | | | 46,486 | | | 16 | % | | 64,342 | | Vendor E | | | | 42,384 | | | 14 | % | | - | | | | | | | | | | | | | | | | | | | | | | | Total: | | $ | 4,109,568 | | | 70 | % | $ | 354,560 | | | $ | 233,797 | | | 79 | % | $ | 118,028 | |
F-113 | | Year ended December 31, 2005 | | Vendors | | Purchases | | Percentage of purchases | | Accounts Payables | | | | | | | | | | Vendor A | | $ | 4,047,680 | | | 55 | % | $ | 352,723 | |
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (Currency expressed in United States Dollars (“US$”))
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable.receivable and sales-type leases. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.
As the Company has no significant interest-bearing assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
The Company’s interest-rate risk arises from long-termshort-term borrowings. Borrowings issued at variable rates expose the Company to cash flow interest-rate risk. Borrowings issued at fixed rates expose the Company to fair value interest-rate risk. Company policy is to maintain approximately all of its borrowings in fixed rate instruments. At the year end,year-end, all of borrowings were at fixed rates.
19. | COMMITMENTS Exchange rate risk |
The reporting currency of the Company rented offices under non-cancelable operating lease agreements.is US$, 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 December 31, 2006, future minimum annual operating lease payments wereoperations may be affected by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates against the US$, the value of the RMB revenues and assets as follows:expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk. 18.SUBSEQUENT EVENTS
Year ending December 31: | | | | 2007 | | $ | 12,720 | | 2008 | | | 12,720 | | | | | | | Total future minimum operating lease payments | | $ | 25,440 | |
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.
For the years ended December 31, 2006 and 2005, rent expense was $12,720 and $12,377, respectively.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
| UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS | FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 |
CHINACHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO Unaudited Pro Forma Financial Information
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATIONCOMBINED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 (Currency expressed in United States Dollars (“US$”)) (UNAUDITED)
The following unaudited pro forma condensed combined financial informationPro Forma Condensed, Combined Statements of Operations for the nine months ended September 30, 2008 gives effect to the acquisition of Shenzhen PengSangPu Solar Industrial Products Corporation (“Target”) by 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”Registrant”). The effective date for this acquisitiontransaction was July 1, 2007 andvalued at fair value. The unaudited Pro Forma Condensed, Combined Statements of Operations was taken from the acquisition has been accounted for by the purchase method. China Solar paid approximately $1,575,600 in July 2007. By supplemental agreement dated August 8, 2007, the purchase price was reduced to approximately $1,689,741 and the balance of the purchase price of $100,876 was outstanding as of the date of this report. In addition to the purchase price, China Solar was required to pay a finder’s fee of approximately $769,418.
The Acquisition was recorded on the purchase method by allocating the purchase price over the assets acquired, including intangible assets and liabilities assumed, based on their estimated fair values at the acquisition date. The excess of the purchase price over the net of amounts assigned to the assets acquired and the liabilities assumed was recorded as goodwill based on their estimated fair values at the acquisition date. In connection with the Acquisition, China Solar acquired 51% of the equity interest of Tianjin Huaneng. At the completion date, China Solar controlled 51% of Tianjin Huaneng in exchange for $1,689,741. These pro forma combinedrespective financial statements are presented for illustrative purposes only. The pro forma adjustments are based upon available informationof Target and assumptions that management believes are reasonable. The unaudited pro forma condensed combined financial statements do not purport to represent what the results of operations or financial position of China Solar would actually have been if the merger had in fact occurred on January 1, 2007, nor do they purport to project the results of operations or financial position of China Solar for any future period or as of any date, respectively.
The following unaudited pro forma condensed combined balance sheet and statements of operations for the year ended December 31, 2006 and as of andRegistrant for the nine months ended September 30, 2007 reflect2008. The unaudited Pro Forma Condensed, Combined Statements of Operations was prepared assuming that the completionacquisition described above was consummated as of the Acquisitionbeginning of the period 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 presented below: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.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
ASSTATEMENT OF SEPTEMBER 30, 2007
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| | China Solar | | Tianjin Huaneng | | Pro forma adjustment #1 | | | Pro forma combined | | | | | | | | | | | | | ASSETS | | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 2,977,906 | | $ | 333,515 | | | | | | | $ | 3,311,421 | | Net trade accounts receivable | | | 1,023,995 | | | 5,384,146 | | | | | | | | 6,408,141 | | Related party receivable | | | 2,177,019 | | | - | | | (2,177,019 | ) | (4) | | | - | | Advances and prepayments | | | 798,013 | | | 579,370 | | | | | | | | 1,377,383 | | Inventories | | | 1,595,627 | | | 3,642,557 | | | | | | | | 5,238,184 | | | | | | | | | | | | | | | | | | Total current assets | | | 8,572,560 | | | 9,939,588 | | | | | | | | 16,335,129 | | | | | | | | | | | | | | | | | | Property, plant and equipment, net | | | 6,675,215 | | | 1,317,675 | | | | | | | | 7,992,890 | | | | | | | | | | | | | | | | | | Investment in a subsidiary | | | 1,689,741 | | | - | | | (1,689,741 | ) | (1) | | | - | | | | | | | | | | | | | | | | | | Total other assets: | | | | | | | | | | | | | | | | Other receivables | | | 1,061,591 | | | 521,978 | | | | | | | | 1,583,569 | | Intangible assets | | | - | | | 536,308 | | | | | | | | 536,308 | | Prepaid land lease | | | 1,024,120 | | | - | | | | | | | | 1,024,120 | | | | | | | | | | | | | | | | | | Total other assets | | | 2,085,711 | | | 1,058,286 | | | | | | | | 3,143,997 | | | | | | | | | | | | | | | | | | Goodwill | | | - | | | - | | | 1,773,550 | | (1), (2) | | | 1,773,550 | | | | | | | | | | | | | | | | | | TOTAL ASSETS | | $ | 19,023,227 | | $ | 12,315,549 | | | | | | | $ | 29,245,566 | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2007
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| | | China Solar | | | Tianjin Huaneng | | | Pro forma adjustment #1 | | | | | Pro forma combined | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | Short-term bank loans | | $ | 558,229 | | $ | 596,474 | | | | | | | $ | 1,154,703 | | Accounts payable, trade | | | 206,667 | | | 1,416,353 | | | | | | | | 1,623,020 | | Related party payable | | | 500 | | | 2,177,019 | | | (2,177,019 | ) | (4) | | | 500 | | Deferred revenue | | | - | | | 678,486 | | | | | | | | 678,486 | | Deposits | | | 314,546 | | | 3,178,932 | | | | | | | | 3,493,478 | | Taxes payable | | | 1,243,004 | | | 732,855 | | | | | | | | 1,975,859 | | Accrued liabilities | | | 40,895 | | | 695,148 | | | | | | | | 736,043 | | Other payables | | | - | | | 620,350 | | | 769,418 | | (2) | | | 1,389,768 | | | | | | | | | | | | | | | | | | Total current liabilities | | | 2,363,841 | | | 10,095,617 | | | | | | | | 11,051,857 | | | | | | | | | | | | | | | | | | Long-term liabilities: | | | | | | | | | | | | | | | | Long-term loan | | | - | | | 778,474 | | | | | | | | 778,474 | | | | | | | | | | | | | | | | | | Minority interest | | | - | | | - | | | 720,717 | | (1), (3) | | | 720,717 | | | | | | | | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | | | | | | | | Convertible preferred stock: par value $0.001; 25,000,000 shares authorized, 2,674,194 shares issued and outstanding | | | 2,674 | | | - | | | | | | | | 2,674 | | Common stock: par value $0.001; 66,666,667 shares authorized, 6,205,290 shares issued and outstanding | | | 6,205 | | | 720,786 | | | (720,786 | ) | (1) | | | 6,205 | | Additional paid-in capital | | | 8,348,200 | | | 257,466 | | | (257,466 | ) | (1) | | | 8,348,200 | | Accumulated other comprehensive income | | | 965,872 | | | 93,704 | | | (123,098 | ) | (1) | | | 936,478 | | Retained earnings | | | 7,336,435 | | | 369,502 | | | (304,976 | ) | (1), (3) | | | 7,400,961 | | | | | | | | | | | | | | | | | | Total stockholders’ equity | | | 16,659,386 | | | 1,441,458 | | | | | | | | 16,694,518 | | | | | | | | | | | | | | | | | | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 19,023,227 | | $ | 12,315,549 | | | | | | | $ | 29,245,566 | |
#1: | The pro forma adjustments give effect to the acquisition of Tianjin Huaneng as if it were consummated on June 30, 2007. |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONSINCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 (Currency expressed in United States Dollars (“US$”), except for number of shares)
| | China Solar | | Tianjin Huaneng | | Pro forma adjustment #2 | | | Pro forma combined | | | | | | | | | | | | | Revenue, net | | $ | 21,248,106 | | $ | 10,445,423 | | | | | | | $ | 31,693,529 | | | | | | | | | | | | | | | | | | Cost of revenue | | | 16,796,518 | | | 8,192,566 | | | | | | | | 24,989,084 | | Gross profit | | | 4,451,588 | | | 2,252,857 | | | | | | | | 6,704,445 | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | Sales and marketing | | | 433,115 | | | 946,279 | | | | | | | | 1,379,394 | | Depreciation and amortization | | | 89,605 | | | 183,974 | | | | | | | | 273,579 | | General and administrative | | | 2,306,885 | | | 570,136 | | | | | | | | 2,877,021 | | Total operating expenses | | | 2,829,605 | | | 1,700,389 | | | | | | | | 4,529,994 | | Income from operations | | | 1,621,983 | | | 552,468 | | | | | | | | 2,174,451 | | | | | | | | | | | | | | | | | | Other income (expenses): | | | | | | | | | | | | | | | | Interest expense | | | - | | | (98,488 | ) | | | | | | | (98,488 | ) | Interest income | | | 96 | | | 1,729 | | | | | | | | 1,825 | | | | | | | | | | | | | | | | | | Total other expenses | | | 96 | | | (96,759 | ) | | | | | | | (96,663 | ) | Income before income taxes and minority interest | | | 1,622,079 | | | 455,709 | | | | | | | | 2,077,788 | | | | | | | | | | | | | | | | | | Minority interest | | | - | | | - | | | (159,785 | ) | (3) | | | (159,785 | ) | Income tax expense | | | (265,429 | ) | | (129,617 | ) | | | | | | | (395,046 | ) | | | | | | | | | | | | | | | | | NET INCOME | | $ | 1,356,650 | | $ | 326,092 | | | | | | | $ | 1,522,957 | | | | | | | | | | | | | | | | | | Basic income per common share | | $ | 0.22 | | | | | | | | | | $ | 0.25 | | | | | | | | | | | | | | | | | | Diluted income per common share | | $ | 0.19 | | | | | | | | | | $ | 0.22 | | | | | | | | | | | | | | | | | | Basic common shares | | | 6,205,290 | | | | | | | | | | | 6,205,290 | | | | | | | | | | | | | | | | | | Diluted common shares | | | 7,039,341 | | | | | | | | | | | 7,039,341 | |
#2 | The pro forma adjustments give effect to the acquisition of Tianjin Huaneng as if it were consummated on January 1, 2007. |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2006
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| | China Solar | | Tianjin Huaneng | | Pro forma adjustment #3 | | | Pro forma combined | | | | | | | | | | | | | Revenue, net | | $ | 21,468,313 | | $ | 13,512,827 | | | | | | | $ | 34,981,140 | | | | | | | | | | | | | | | | | | Cost of revenue | | | 16,842,994 | | | 10,373,987 | | | | | | | | 27,216,981 | | Gross profit | | | 4,625,319 | | | 3,138,840 | | | | | | | | 7,764,159 | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | Sales and marketing | | | 1,106,488 | | | 992,474 | | | | | | | | 2,098,962 | | General and administrative | | | 2,308,219 | | | 1,088,601 | | | | | | | | 3,396,820 | | Total operating expenses | | | 3,414,707 | | | 2,081,075 | | | | | | | | 5,495,782 | | Income from operations | | | 1,210,612 | | | 1,057,765 | | | | | | | | 2,268,377 | | | | | | | | | | | | | | | | | | Other income (expenses) | | | 28,889 | | | (117,562 | ) | | | | | | | (88,673 | ) | | | | | | | | | | | | | | | | | Income before income taxes and minority interest | | | 1,239,501 | | | 940,203 | | | | | | | | 2,179,704 | | | | | | | | | | | | | | | | | | Minority interest | | | - | | | - | | | (295,296 | ) | (3) | | | (295,296 | ) | Income tax expense | | | - | | | (337,558 | ) | | | | | | | (337,558 | ) | | | | | | | | | | | | | | | | | NET INCOME | | $ | 1,239,501 | | $ | 602,645 | | | | | | | $ | 1,546,850 | | | | | | | | | | | | | | | | | | Basic income per common share | | $ | 0.20 | | | | | | | | | | $ | 0.25 | | | | | | | | | | | | | | | | | | Diluted income per common share | | $ | 0.14 | | | | | | | | | | $ | 0.18 | | | | | | | | | | | | | | | | | | Basic common shares | | | 6,205,290 | | | | | | | | | | | 6,205,290 | | | | | | | | | | | | | | | | | | Diluted common shares | | | 8,732,070 | | | | | | | | | | | 8,732,070 | |
#3 | The pro forma adjustments give effect to the acquisition of Tianjin Huaneng as if it were consummated on January 1, 2006. |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION2008
(Currency expressed in United States Dollars (“US$”)) NOTE – (UNAUDITED)
| | Registrant (Historical) * | | Target (Historical) | | Pro forma adjustments Increase (Decrease) | | Pro forma combined | | | | | | | | | | | | Revenue, net | | $ | 48,846,916 | | $ | 393,920 | | | | | $ | 49,240,836 | | | | | | | | | | | | | | | | Cost of revenue | | | 37,069,100 | | | 218,350 | | | | | | 37,287,450 | | | | | | | | | | | | | | | | Gross profit | | | 11,777,816 | | | 175,570 | | | | | | 11,953,386 | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | Depreciation and amortization | | | 464,599 | | | 44,673 | | | | | | 509,272 | | Selling and distribution | | | 3,060,961 | | | - | | | | | | 3,060,961 | | General and administrative | | | 2,911,418 | | | 39,681 | | | 51,000 | (A) | | 3,002,099 | | | | | | | | | | | | | | | | Total operating expenses | | | 6,436,978 | | | 84,354 | | | | | | 6,572,332 | | | | | | | | | | | | | | | | Income from operations | | | 5,340,838 | | | 91,216 | | | | | | 5,381,054 | | | | | | | | | | | | | | | | Other income (expenses): | | | | | | | | | | | | | | Other income | | | 277,106 | | | - | | | | | | 277,106 | | Interest income | | | - | | | - | | | | | | - | | Other expense | | | (86,291 | ) | | - | | | | | | (86,291 | ) | Interest expense | | | (223,075 | ) | | (43,087 | ) | | | | | (266,162 | ) | | | | | | | | | | | | | | | Total other income (expenses) | | | (32,259 | ) | | (43,087 | ) | | | | | (75,347 | ) | | | | | | | | | | | | | | | Income before income taxes | | | 5,308,578 | | | 48,129 | | | | | | 5,305,707 | | | | | | | | | | | | | | | | Income tax expense | | | 1,254,614 | | | 323 | | | | | | 1,254,937 | | Minority interests | | | 928,900 | | | | | | | | | 928,900 | | | | | | | | | | | | | | | | NET INCOME | | $ | 3,125,064 | | $ | 47,806 | | | | | $ | 3,121,870 | | | | | | | | | | | | | | | | Basic income per common share | | $ | 0.27 | | | | | | | | $ | 0.24 | (D) | | | | | | | | | | | | | | | Diluted income per common share | | $ | 0.23 | | | | | | | | $ | 0.21 | (D) | | | | | | | | | | | | | | | Basic common shares | | | 11,651,656 | | | | | | | | | 13,076,836 | (D) | | | | | | | | | | | | | | | Diluted common shares | | | 13,800,196 | | | | | | | | | 15,225,376 | (D) |
2* Includes the operating results of Target from the effective date of acquisition of April 1, 2008.
PRO FORMA ADJUSTMENTSCONDENSED COMBINED STATEMENTS OF INCOME FOR THEYEAR ENDED DECEMBER 31, 2007 (Currency expressed in United States Dollars (“US$”)) (UNAUDITED) The unaudited Pro Forma Condensed, Combined Statements of Operations for the year ended December 31, 2007 gives effect to the acquisitions of Tianjin Huaneng Group Energy Equipment Co. Ltd. (“Tianjin Huaneng”) and Shenzhen PengSangPu Solar Industrial Products Corporation (“Shenzhen PengSangPu”) by China Solar & Clean Energy Solutions, Inc. (“Registrant”). The transaction was valued at fair value. The unaudited Pro Forma Condensed, Combined Statements of Operations was taken from the respective financial statements of Tianjin Huaneng, Shenzhen PengSangPu and Registrant for the year ended December 31, 2007. The unaudited Pro Forma Condensed, Combined Statements of Operations was prepared assuming that the acquisition described above was consummated as of the beginning of the year presented. The unaudited Pro Forma Condensed, Combined Statements of Operations are based upon historical financial statements of Tianjin Huaneng, Shenzhen PengSangPu and Registrant. The pro forma adjustments and the resulting unaudited Pro Forma Condensed, Combined Statements of Operations have been prepared based upon available information and certain assumptions and estimates deemed appropriate by the Registrant. The unaudited Pro Forma Condensed, Combined Statements of Operations are not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of the date indicated, or that may be achieved in the future. Furthermore, the unaudited Pro Forma Condensed, Combined Statements of Operations do not reflect changes that may occur as the result of post-combination activities and other matters. The unaudited Pro Forma Condensed, Combined Statements of Operations and notes thereto should be read in conjunction with the accompanying audited financial statements of Target and Registrant.
PRO FORMA CONDENSED, COMBINED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2007 (Currency expressed in United States Dollars (“US$”)) (UNAUDITED)
| | | | Tianjin Huaneng For the six months | | | | Pro forma | | | | | | | | Ended June | | Shenzhen | | adjustments | | | | | | Registrant | | 30, 2007 | | Pengsangpu | | Increase | | Pro forma | | | | (Historical) | | (Historical) | | (Historical) | | (Decrease) | | combined | | | | | | | | | | | | | | Revenue, net | | $ | 37,072,346 | | $ | 6,649,869 | | $ | 3,215,282 | | | | | $ | $46,937,497 | | | | | | | | | | | | | | | | | | | Cost of revenue | | | 28,772,078 | | | 5,171,431 | | | 1,848,703 | | | | | | 35,792,212 | | Gross profit | | | 8,300,268 | | | 1,478,438 | | | 1,366,579 | | | | | | 11,145,285 | | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | Depreciation and amortization | | | 282,822 | | | 119,882 | | | 132,457 | | | 204,000 | (A) | | 739,161 | | Selling and distribution | | | 827,839 | | | 654,140 | | | - | | | | | | 1,481,979 | | General and administrative | | | 4,003,973 | | | 371,090 | | | 131,673 | | | | | | 4, 506,736 | | | | | | | | | | | | | | | | | | | Total operating expenses | | | 5,114,634 | | | 1,145,112 | | | 264,130 | | | | | | 6,727,876 | | | | | | | | | | | | | | | | | | | Income from operations | | | 3,185,634 | | | 333,326 | | | 1,102,449 | | | | | | 4, 417,409 | | | | | | | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | | | | | | | Other income | | | 220,057 | | | 20,236 | | | 3,982 | | | | | | 244,275 | | Interest expense | | | (65,481 | ) | | (86,692 | ) | | (73,274 | ) | | | | | (225,447 | ) | | | | | | | | | | | | | | | | | | Total other income (expense) | | | 154,576 | | | (66,456 | ) | | (69,292 | ) | | | | | 18,828 | | Income before income taxes | | | 3,340,210 | | | 266,870 | | | 1,033,157 | | | | | | 4, 436,237 | | Income tax expense | | | (615,325 | ) | | (67,299 | ) | | | | | | | | (682,624 | ) | Minority interests | | | (199,744 | ) | | - | | | - | | | (97,790 | )(C) | | (297,534 | ) | | | | | | | | | | | | | | | | | | Income from continuing operations before nonrecurring charges attributable to certain transaction | | $ | 2,525,141 | | $ | 199,571 | | $ | 1,033,157 | | | | | $ | 3, 456,079 | (B) | | | | | | | | | | | | | | | | | | NET INCOME AVAILABLE TO COMMON STOCKHOLDERS | | $ | 1,549,334 | | | | | | | | | | | $ | 2, 480,272 | (B) | | | | | | | | | | | | | | | | | | Basic income per common share | | $ | 0.25 | | | | | | | | | | | $ | 0. 20 | (B) | | | | | | | | | | | | | | | | | | Diluted income per common share | | $ | 0.24 | | | | | | | | | | | $ | 0. 20 | (B) | | | | | | | | | | | | | | | | | | Basic common shares | | | 6,205,290 | | | | | | | | | | | | 12,316,518 | (B) | | | | | | | | | | | | | | | | | | Diluted common shares | | | 6,396,697 | | | | | | | | | | | | 12,699,332 | (B) |
Notes to Unaudited Pro Forma Combined Financial Statements
Note A The adjustment of $51,000 was additional amortization of intellectual property and customer relationships arising from the acquisition of SZPSP for the nine months ended September 30, 2008, which includes amortization for the period from January to March 2008, as if the acquisition was consummated on January 1, 2008.
The adjustments to the unaudited pro forma condensed combined financial statements reflect the considerationadjustment of $1,689,741 at the completion date for$204,000 was additional amortization of intellectual property and customer relationships arising from the acquisition of 51%SZPSP for the year ended December 31, 2007, as if the acquisition was consummated on January 1, 2007.
A $310,000 nonrecurring charge on the statements of income was not included as a pro forma adjustment, as the amount was attributable to the write-off of in-process research and development during the nine months ended September 30, 2008. Of the $2,350,000 of acquired intangible assets, $310,000 was assigned to in-process research and development which was written off during the nine months ended September 30, 2008, $940,000 was assigned to existing intellectual property, and $1,100,000 was assigned to customer relationships. The acquired identifiable intangibles assets have a weighted-average amortization period totaling approximately 10 years and residual value totaling approximately $0. The adjustment to amortize intellectual property and customer relationships were $23,500 and $27,500, respectively, during the period. The property, plant and equipment acquired consists of plant machinery and equipment, motor vehicles and leasehold improvements with estimated depreciable lives of 5 years and residual value is 10% of the equity interestcost of assets. Note B Income per share as of December 31, 2007 was calculated as follows:
| | Historical | | Pro forma | | | | | | | | Basic and diluted net income per share calculation | | | | | | | | | | | | | | | | Numerator: | | | | | | | | Net income | | | 2,525,141 | | | 3,456,079 | | Less: Preferred stock dividends | | | (975,807 | ) | | (975,807 | ) | Net income available to common stockholders in computing basic net income per share | | $ | 1,549,334 | | $ | 2, 480,272 | | | | | | | | | | Plus: Preferred stock beneficial conversion | | | - | | | - | | Net income available to common stockholders in computing diluted net income per share | | $ | 1,549,334 | | $ | 2,480,272 | | | | | | | | | | Denominator: | | | | | | | | Weighted average number of ordinary shares outstanding – Basic | | | 6,205,290 | | | 6,205,290 | | Weighted average number of ordinary shares issued for February 2008 private placement | | | - | | | 4,691,499 | | Weighted average number of ordinary shares issued for acquisition of Shenzhen Pengsangpu | | | - | | | 1,419,729 | | Total basic weighted average number of ordinary shares outstanding | | | 6,205,290 | | | 12,316,518 | | | | | | | | | | Dilutive effect of convertible preferred stock | | | - | | | - | | Dilutive effect of warrant shares granted as part of the June 2007 private placement | | | 191,407 | | | 382,814 | | Dilutive effect of warrant shares for February 2008 private placement | | | - | | | - | | Dilutive effect of warrant shares for acquisition of Shenzhen Pengsangpu | | | - | | | - | | Weighted average number of ordinary shares outstanding – Diluted | | | 6,396,697 | | | 12,699,332 | | | | | | | | | | Basic net income per share | | $ | 0.25 | | $ | 0.20 | | | | | | | | | | Diluted net income per share | | $ | 0.24 | | $ | 0.20 | |
For the year ended December 31, 2007, warrants to purchase 2,007,171 shares of common stock have been excluded from the historical and pro forma diluted earnings per share calculation as the average market price of the common stock was less than the exercise price of the warrants, thereby making the warrants antidilutive under the treasury method. Convertible preferred stocks were also excluded from the denominator and the associated beneficial conversion was excluded from the numerator as the assumed conversion had an antidilutive effect. Note C The pro forma adjustment gives effect to the acquisition of Tianjin Huaneng and areas if it were consummated on January 1, 2007. Net income per Tianjin for the year of 2007 | | $ | 199,571 | | Multiply: Minority interest portion | | | 49 | % | Total minority interests | | $ | 97,790 | |
Note D Income per share as of September 30, 2008 was calculated as follows: | | Historical | | Pro forma | | Basic and diluted net income per share calculation | | | | | | | | | | | | | | | | Numerator: | | | | | | | | Net income available to common stockholders in computing basic net income per share | | $ | 3,125,064 | | $ | 3,121,870 | | | | | | | | | | Net income available to common stockholders in computing diluted net income per share | | $ | 3,125,064 | | $ | 3,121,870 | | | | | | | | | | Denominator: | | | | | | | | Weighted average number of ordinary shares outstanding - Basic | | | 6,965,608 | * | | 6,965,608 | * | Weighted average number of ordinary shares issued for 2008 Private Placement | | | 3,732,653 | E | | 4,691,499 | F | Weighted average number of ordinary shares issued for acquisition of Shenzhen Pengsangpu | | | 953,395 | G | | 1,419,729 | H | Total basic weighted average ordinary shares outstanding | | | 11,651,656 | | | 13,076,836 | | | | | | | | | | Dilutive effect of convertible preferred stock | | | 1,126,801 | | | 1,126,801 | | Dilutive effect of warrant shares | | | 226,119 | | | 226,119 | | Dilutive effect of contingent shares | | | 795,620 | | | 795,620 | | Weighted average number of ordinary shares outstanding - Diluted | | | 13,800,196 | | | 15,225,376 | | | | | | | | | | Basic net income per share | | $ | 0.27 | | $ | 0.24 | | | | | | | | | | Diluted net income per share | | $ | 0.23 | | $ | 0.21 | |
*The total basic weighted average ordinary shares outstanding was calculated as follows:
| | | | Historical | | Pro forma | | | No. of Shares | | Weighted Period | Weighted Shares | | Weighted Shares | | Balance of common shares on 1/1/2008 | 6,205,290 | X | 274/274 | 6,205,290 | | 6,205,290 | | Common shares granted to Kevin Randolph on 6/29/08 | 7,304 | X | 92/274 | 2,452 | | 2,452 | | Warrants exercised on Janurary 24, 2008 | 50,000 | X | 250/274 | 45,620 | | 45,620 | | Warrants exercised on February 13, 2008 | 25,000 | X | 230/274 | 20,985 | | 20,985 | | Preferred stock converted on February 13, 2008 | 118,569 | X | 230/274 | 99,529 | | 99,529 | | Preferred stock converted on March 6, 2008 | 45,947 | X | 208/274 | 34,879 | | 34,879 | | Preferred stock converted on April 24, 2008 | 371,596 | X | 159/274 | 257,676 | | 257,676 | | Preferred stock converted on May 16, 2008 | 200,000 | X | 138/274 | 100,730 | | 100,730 | | Preferred stock converted on June 25, 2008 | 100,000 | X | 97/274 | 35,401 | | 35,401 | | Preferred stock converted on July 18, 2008 | 64,516 | X | 74/274 | 17,424 | | 17,424 | | Weighted average ordinary shares outstanding-BASIC: | | | | 6,965,608 | | 6,965,608 | |
(1) | To reflect the allocation of the purchase price based on their estimated fair value at the acquisition date | | | | | | | E. Calculated as (4,691,499 x 218 / 274). | | | | | | | | F. Calculated as (4,691,499 x 274 / 274). | | | | | | | | G. Calculated as (1,419,729 x 184/274). | | | | | | | | H. Calculated as (1,419,729 x 274/274). | | | | | | | |
For the nine months ended September 30, 2008, warrants exercisable to 4,392,488 shares of common stock were excluded from the diluted earnings per share calculation as the average market price of the common stock during the period was less than the exercise price of the warrants, thereby making the warrants antidilutive under the treasury method. PART II:
INFORMATION NOT REQUIRED IN PROSPECTUS OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Although we will not receive any of the proceeds from the sale of the shares being registered in this registration statement, we have agreed to bear the costs and expenses of the registration of those shares. Our expenses in connection with the issuance and distribution of the securities being registered, other than the underwriting discount, are as follows: SEC Registration Fee | | $ | 392 | | Professional Fees and Expenses* | | $ | 75,000 | | Printing and Engraving Expenses * | | $ | 5,000 | | Transfer Agent's Fees* | | $ | 2,500 | | Miscellaneous Expenses* | | $ | 3,000 | | Total | | $ | 85,892* | |
* Estimates
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Article VI, Sections 1 and 2 of our By-Laws, we may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that such person is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with such action or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Company and, in the case of a criminal action or proceeding, had no reasonable cause to believe the conduct of such person was unlawful. RECENT SALES OF UNREGISTERED SECURITIES The following sets forth recent sales by the Company of unregistered securities during the fiscal year ending December 31, 2007:
On June 13, 2007, we entered into a number of agreements with Barron Partners L.P., a Delaware limited partnership, and two other investors (all accredited investors) pursuant to a private placement transaction providing for the sale to the investors for an aggregate purchase price of $2,750,000 (or $1.55 per share) of (i) 1,774,194 shares of Series A Preferred Stock (with each share of Series A Preferred Stock being convertible into one (1) share of common stock), subject to adjustment; (ii) five year warrants to purchase 1,774,194 shares of common stock at an exercise price $1.90 per share, subject to adjustment; and (iii) five year warrants to purchase an additional 1,774,194 shares of common stock at an exercise price of $2.40 per share, subject to adjustment. Additional shares of Series A Preferred Stock (not to exceed 900,000) are required to be delivered to the investors in the event that we fail to achieve certain pre tax income targets for the fiscal years ended December 31, 2007 and 2008. The private placement qualified as an exempt transaction under Section 4(2) of the Securities Act, as amended, and Rule 506 of Regulation D thereunder. In connection with the placement we issued Trenwith Securities, LLC warrants to purchase 106,452 shares exercisable for a period of five years at an exercise price of $1.17 ( subject to adjustment) and a transaction fee of $165,000. In connection with their appointment we had previously issued Trenwith five year warrants to purchase 75,000 shares of common sock at an exercise price of $2.81, subject to adjustment.
The following sets forth recent sales by the Company of unregistered securities during the fiscal year ended December 31, 2006:
None. The following sets forth recent sales by the Company of unregistered securities during the fiscal year ended December 31, 2005:
On March 31, 2005, pursuant to the Stock Contribution Agreement, the former shareholders of Deli Solar (BVI) contributed all the shares of capital stock of Deli Solar (BVI) in exchange for 4,067,968 shares of our common stock. The exchange qualified as an exempt transaction under Section 4(2) and/or Regulation S under the Securities Act of 1933, as amended.
On March 31, 2005, pursuant to subscriptions executed by seventeen accredited investors, the Company issued a total of 1,714,290 shares of common stock, accompanied by warrants to purchase 1,825,719 shares of common stock, in a private placement qualifying as an exempt transaction under Section 4(2) of the Securities Act, as amended, and Rule 506 of Regulation D thereunder. The total purchase price paid for the common shares and warrants was $6,000,015. The exercise price of the warrants was $3.85 per share. (The number and the price of shares described in these two paragraphs has been adjusted to give effect to the one-for-six reverse stock split of all issued and outstanding shares of our common stock, which became effective on August 15, 2005.).
The offering to the seventeen accredited investors was accomplished through Kuhns Brothers Securities Corporation, an NASD member and SEC registered broker dealer, as placement agent. John Kuhns, the Chairman and 95% shareholder of Kuhns Brother Securities Corporation, is a former Chairman of our Board.
The following table summarizessets forth recent sales by the estimated fair valueCompany 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 assets acquired and liabilities assumed atabove 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 acquisition. The Company has obtained valuations from an independent valuer for its certain tangible and intangible assets; thus the allocation of the purchase price consideration is presented as below:this registration statement. II-2 | | Allocation of purchase price of assets acquired | | Acquired assets: | | | | Cash | | $ | 384,607 | | Accounts receivable, trade | | | 4,648,699 | | Inventories | | | 3,265,915 | | Other receivables and prepayments | | | 881,590 | | Property, plant and equipment | | | 1,156,835 | | Intangible assets | | | 502,269 | | Goodwill | | | 1,004,132 | | | | | | | Total assets acquired | | | 11,844,047 | | | | | | | Less: liabilities assumed | | | | | Short-term bank borrowings | | | (1,154,703 | ) | Accounts payable, trade | | | (1,124,468 | ) | Deferred revenue | | | (668,345 | ) | Advances from customers | | | (2,601,305 | ) | Value-added tax payable | | | (863,151 | ) | Income taxes payable | | | (899,421 | ) | Deferred tax liabilities | | | (31,489 | ) | Accrued liabilities and other payable | | | (1,404,290 | ) | Long-term loan | | | (748,412 | ) | | | | (9,495,584 | ) | Less: minority interest | | | (658,722 | ) | | | | | | Purchase price | | $ | 1,689,741 | |
EXHIBITS
3.1 | Certificate of Incorporation. (1) | | | 3.2-1 | Bylaws. (2) | | | 3.2-2 | Amendment to Bylaws dated October 17, 2005 (3) | | | 3.2-3 | Articles of Merger of Du Solar, Inc. into the Company (10) | | | 4.1 | Common Stock Specimen (4) | | | 4.2 | Form of Warrant. (1) | | | 4.3 | Certificate of Designation as filed with the Secretary of State of Nevada on June 12 , 2007 (8) | | | 4.4 | Series A Preferred Stock Specimen (8) | | | 4.5 | Form of Class A Warrant (8) | | | 4.6 | Form of Class B Warrant (8) | | | 4.7 | Form of Placement Agent Warrant (12) |
5.1 | Legal Opinion of Guzov Ofsink, LLC re legality of the common stock being registered. (14) |
10.1 | Stock Contribution Agreement, dated March 28, 2005, entered into by and between the Company and Deli Du (5) | | | 10.2 | Stock Purchase Agreement, dated March 30, 2005, by and among Deli Du, Halter Capital Corporation, and the Company (5) | | | 10.3 | Form of Unit Purchase Agreement (1) | | | 10.4 | Form of Engagement Agreement (1) | | | 10.5 | Form of Lock Up Agreement between the Company and the members of the Financial Advisor Group (1) | | | 10.6 | Land Purchase Agreement by and between Deli Solar (Bazhou) and Deli Du (English Translation) (4) | | | 10.7 | Stock Purchase Agreement by and between Deli Solar (Bazhou) and Ailiyang Shareholders (6). | | | 10.8 | Land Use Rights Purchase Agreement by and between Deli Solar (Bazhou) and the Governance Commission of Beijiahe Village Chaheji County Bazhou City dated March 16, 2006 (English Translation) (7) | | | 10.9 | Securities Purchase Agreement dated June 13, 2007 by and among the Company, Barron Partners LP and the other investors named therein (8) | | | 10.10 | Registration Rights Agreement dated June 13, 2007 by and among the Company, Barron Partners LP and the other investors named (8) | | | 10.11 | Stock Escrow Agreement dated June 13, 2007 by and between the Company and Tri-State Title & Escrow, LLC, as escrow agent (8) |
10.12 | Closing Escrow Agreement dated June 13, 2007 by and between the Company and Barron Partners, L.P., and the other investors named therein and Tri-State Title & Escrow, LLC, as escrow agent (8) | | | 10.13 | Investor Relations Consulting Agreement dated July 23, 2007 between the Company and Hayden Communications International, Inc. (9) | | | 10.14 | Securities Purchase Agreement dated as of February 25, 2008 by and among the Company and the investors named therein (10) | | | 10.15 | Registration Rights Agreement dated as of February 25, 2008 by and among the Company and the investors named therein (10) | | | 10.16 | Make Good Escrow Agreement dated as of February 25, 2008 by and between the Company, the investors named therein, Roth Capital Partners, LLC and Tri-State Title & Escrow, LLC, as escrow agent, (10) | | | 10.17 | Escrow Agreement dated as of February 25, 2008 by and between the Company, Roth Capital Partners, LLC and Tri-State Title & Escrow, LLC, as escrow agent (10) | | | 21.1 | List of subsidiaries. (11) | | | 23.1 | Consent of counsel to the use of the opinion annexed at Exhibit 5.1 (contained in the opinion annexed at Exhibit 5.1) | | | 23.2 | Consent of accountants Cordovano and Honeck LLP for use of their report | | | 23.3 | Consent of accountants Zhong Yi (Hong Kong) C.P.A. Company Limited for use of their report. | | | 23.4 | Consent of accountants Child, Van Wagoner & Bradshaw, PLLC for use of their report |
(1) | Incorporated herein by reference to the Registration Statement on Form SB-2 filed with the SEC on November 2, 2005. | | | (2) | To recordIncorporated herein by reference to the finder’s fee of approximately $769,418 asRegistration Statement on Form S-1 filed with the part of acquisition cost.SEC in August 2003. | | | (3) | Incorporated herein by reference to the Registration Statement on Form SB-2 filed with the SEC on March 26, 2001. | | | (4) | Incorporated herein by reference to the Registration Statement Amendment No. 1 on Form SB-2 filed with the SEC on February 6, 2006. | | | (5) | Incorporated herein by reference to Schedule 13D filed by the Company on April 18, 2005. | | | (6) | Incorporated herein by reference to the Current Report on Form 8-K filed by the Company on November 28, 2005. | | | (7) | Incorporated herein by reference to the Registration Statement Amendment No. 2 on Form SB-2 filed with the SEC on May 22, 2006. | | | (8) | Incorporated herein by reference to the Current Report on Form 8-K filed by the Company on June 19, 2007. | | | (9) | Incorporated herein by reference to Amendment No. 2 to the Registration Statement on Form SB-2 filed with the SEC on January 1, 2008.. |
(10) | Incorporated by reference to our Current Report on Form 8-K filed by the Company with the SEC on March 3, 2008. | | | (11) | Incorporated herein by reference to the Annual Report on Form 10-KSB filed by the Company on April 10, 2008. | | | (12) | Incorporated herein by reference to the Registration Statement on Form S-1 filed by the Company on April 14, 2008. |
(13) | Incorporated herein by reference to Amendment No. 1 the Registration Statement on Form S-1 filed by the Company on June 25, 2008. |
(3)(14) | To record Tianjin Huaneng’s 49% minority interest.Incorporated herein by reference to Amendment No. 3 to the Registration Statement on Form S-1 filed by the Company on August 27, 2008. |
UNDERTAKINGS
(4) | To eliminate inter-company balance between China Solar and Tianjin Huaneng. | The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the Securities Act;
ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement(or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;
(3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: Each prospectus filed by the Registrant pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 6 to the Registration Statement on Form S-1 to be signed on its behalf by the undersigned thereunto duly authorized in Beijing, PRC, on December 2, 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.6 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 | | December 2, 2008 | Deli Du, | | | Chief Executive Officer, President and Director | | | (principal executive officer) | | | | | | /s/ Yihai Yang | | December 2, 2008 | Yihai Yang | | | Acting Chief Financial Officer and director | | | (principal financial officer and accounting officer) | | | | | | /s/ Zhaolin Di | | December 2, 2008 | Zhaolin Ding | | | Director | | | | | | /s/ Zhenhang Jia | | December 2, 2008 | Zhenhang Jia | | | Director | | | | | | /s/ Joseph Levinson | | December 2, 2008 | Joseph Levinson | | | Director | | |
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