March 05, 2010
Karl Hiller
Joanna Lam
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549-4628
RE: | China Prosperous Clean Energy Corporation | ||||
Form 10-K for the Fiscal Year Ended December 31, 2008 Filed March 31, 2009 | |||||
Form 10-Q for the Fiscal Quarter Ended March 31, 2009 Filed May 15, 2009 | |||||
Form 10-Q for the Fiscal Quarter Ended June 30, 2009 Filed August 14, 2009 | |||||
Form 10-Q for the Fiscal Quarter Ended September 30, 2009 Filed November 12, 2009 | |||||
File No. 000-53224 |
Form 10-K for the Fiscal Year Ended December 31, 2008
General
1. We noted the qualitative disclosures you intend to include in an amendment to your Form 10K for the fiscal year ended December 31, 2008 in response to our prior comment1. Please note that Rule 4-08(e)(3) of Regulation S-X requires you to also disclose certain quantitative information with respect to restrictions that are in place as a result of your operations in China. That is, you must also provide the amounts of restricted net assets for unconsolidated subsidiaries and consolidated subsidiaries as of December 31, 2008. In addition, you must also provide the schedule information required by Rule 5-04 of Regulation S-X to the extent your proportionate share of the restricted net assets of your consolidated subsidiaries exceeds 25% of your consolidated net assets. Refer to FRC §213.02 and SAB Topic 6K:2 for additional guidance.
Response:
Per reviews of loan agreements, statutory and regulatory requirements, we determined that there are no limitations on subsidiaries’ ability to transfer funds to the Company in the form of loans, advances or cash dividends. Therefore, the disclosure requirement with respect to restricted net assets for unconsolidated and consolidated subsidiaries as of December 31, 2008 under Rule 4-08(e)(3) is not applicable.
Financial Statements
Statements of Changes in Stockholders’ Equity, page 35
2. We note your response to our prior comment 3 in which you propose to revise the Statements of Changes in shareholders’ Equity to reflect the recapitalization. However, it does not appear that you have appropriately adjusted your statements as we previously requested.
The share activity of the accounting acquirer should be recast using an exchange ratio of the shares issued by the legal acquirer in the reverse merger over the shares of the accounting acquirer that were outstanding immediately prior to the exchange, similar to a sock split. After recasting, all share activity immediately before the reverse merger recapitalization transaction should sum to equal the number of shares issued by the accounting garget. This should be followed by an entry showing the number of shares of the accounting target that were outstanding immediately before the event, along with the accounting target’s net assets or liabilities received by the accounting acquirer.
Please consider the additional guidance we have provided above and revise your statements of stockholders’ equity accordingly.
Response:
We will amend the Form 10-K for year ended December 31, 2008 in which we will refer to the share exchange transaction between us and Origin Orbit as a reverse merger recapitalization and revise the Statements of Changes in Shareholders’ Equity so that the ratio at which shares are exchanged is shown retroactively in our financial statements and the our shares outstanding immediately prior to the transaction are reflected within the activity section of the statement for the period in which the merger occurred, along with the fair value of the net assets or net liabilities received by us. The Statement of Shareholders’ Equity will be amended as follows:
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2008 and 2007
Accumulated | ||||||||||||||||||||||||
other | Total | |||||||||||||||||||||||
Additional | Compre- | Stock- | ||||||||||||||||||||||
Common Stock | Paid in | Statutory | Retained | hensive | Holders’ | |||||||||||||||||||
Shares | Amount | Capital | Reserve | Earnings | Income | Equity | ||||||||||||||||||
Balance at December 31, 2006 | 5,865,000 | $ | 59 | $ | (59 | ) | $ | - | $ | (292 | ) | $ | 76 | $ | (215 | ) | ||||||||
Net income | -- | -- | -- | -- | 1,242,327 | -- | 1,242,327 | |||||||||||||||||
Statutory reserve | -- | -- | -- | 120,511 | (120,511 | ) | -- | -- | ||||||||||||||||
Other comprehensive income | -- | -- | -- | -- | -- | 38,639 | 38,563 | |||||||||||||||||
Balance at December 31, 2007 | 5,865,000 | $ | 59 | $ | (59 | ) | $ | 120,511 | $ | 1,121,524 | $ | 38,639 | $ | 1,280,675 | ||||||||||
Common stock issued in | ||||||||||||||||||||||||
recapitalization | 6,135,000 | 60 | (60 | ) | -- | -- | -- | -- | ||||||||||||||||
Additional paid-in capital | -- | -- | 8,055,381 | -- | -- | -- | 8,055,381 | |||||||||||||||||
Net income | -- | -- | -- | -- | 1,053,818 | -- | 1,053,818 | |||||||||||||||||
Statutory reserve | -- | -- | -- | 105,382 | (105,382 | ) | -- | -- | ||||||||||||||||
Other comprehensive income | -- | -- | -- | -- | -- | 372,194 | 372,194 | |||||||||||||||||
Balance at December 31, 2008 | 12,000,000 | $ | 120 | $ | 8,055,262 | $ | 225,893 | $ | 2,069,960 | $ | 410,833 | $ | 10,762,068 |
Note 2- Summary of Significant Accounting Policies, page 39
Basis of Presentation and consolidation, page 39
3. We note your response to prior comment 5, in which you clarify that you have complied with U.S.GAAP with respect to the classification of transportation costs as a component of cost of goods sold. Under U.S.GAAP, a change in classification of transportation costs should be retroactively applied under the guidance of EITE 00-10. Please confirm that you have presented transportation costs as a component of cost of goods sold for all financial statement period presented. Otherwise, please submit the revisions that you would propose to address this concern.
Response:
We confirm that we have retroactively applied the change in the classification of transportation costs and presented them as a component of cost of goods sold for both 2008 and 2007. We have also indicated in Note 2 under the caption, Reclassification, that certain amounts in the 2007 financial statements have been reclassified for comparative purpose to conform to the presentation in the 2008 financial statements.
Segment Information. Page 44
4. We have read your response to prior comment 6 in which you explain how you concluded the three primary operations, identified in MD&A do not represent reportable segments as all the criteria provided in FASB ASC paragraph 280-10- 50-1 1 have been met to allow the aggregation of these operating segments into one reportable segment. However, you have not explained how you determined that these operations have met the overriding first criterion, similar economic characteristics such as similar gross margins and sales trends. In addition, it is unclear how you came to the conclusion that these operations meet the first three criteria set-forth in paragraph 50-1 1:
Nature of products:
o We note you concluded that both CNG and LPG are viewed as sources of "clean energy". However, as you mentioned on page 7 of your Form 10-K, CNG is "...mainly composed of methane.. .and.. . LPG is a mixture of hydrocarbon gases.. . .", indicating that the nature of the products is different.
Nature of production process:
o We note you concluded that CNG and LPG are similar as they are "...produced based on natural gas.. .." You further state that the production process is similar in that they "...both require M e r mechanical processing of natural resources, which can be either natural gas or crude oil.. .." However, based on the disclosure on page 7, CNG is made by "compressing natural gas" and LPG is manufactured during the "...refining of crude oil, or extracted form oil or gas streams as they emerge form the ground.. .." indicating different production process.
Type of class of customers:
o We note you concluded that the types of customers are the same for the CNG and LPG and for both the retail and wholesale operations as they are "consumers for the use of their motor vehicles that are powered by CNG or LPG.. ..." However, it is unclear how you can group retail and wholesales customers as we would expect they would have different profit margins.
Refer to FASB ASC paragraphs 280-10-55-7A through 55-7C and paragraphs 280-10-55-33 through 55-36 for further guidance. We reissue prior comment 6.
Response:
Per your comment, we have reviewed the natures and characteristics of our three primary business operations and have determined that they represented separate reportable segments. Therefore, we will amend the Form 10-K for year ended December 31, 2008 to classify them as separate segments and adjust financial statements accordingly. Currently we are working on such adjustment and will submit the proposed adjustment to you as soon as possible.
Note 14-Income Taxes, page 47
5. We note your proposed disclosure does not comply with FASB ASC paragraph 740-10-50-12 which requires reconciliation of your domestic statutory tax rates of 25% to your effective tax rates of 26%. We reissue prior comment 7.
Response:
We will amend the Form 10-K for year ended December 31, 2008 in which we will present reconciliation, using percentages or dollar amounts, of the amount of our reported income tax expense to the amount of income tax expense that would result from applying domestic statutory tax rates to our pre-tax income.
The reconciliation that we will present is as follows:
Year Ended December 31,2008 | ||
Computed tax @ statutory rate of 25% | ||
($1,1419,839*25%) | $354,960 | |
Loss carryforward | (7,528) | |
Non taxable income | (77,269) | |
Tax catch up for 2007 | 3,639 | |
Current year losses | 96,118 | |
Total provision for income taxes | $369,920 |
Form 10-Q for the Interim Period ended September 30, 2009
Financial Statements
Statement of Cash Flows, page 6
6. We noted in your response to prior comment 10 you continue to present cash payments made to non-controlling interests as a financing activity. Please explain to us in further detail the origin of this line item and why you believe it is appropriately classified as a financing activity rather than an investing activity.
Response:
Pursuant to your comment and following the guidance in Paragraph 15 through 24 of SFAS 95 [ASC No. 230-10-45-12 to 23], the Company has revised Consolidated Statements of Cash Flows for the periods ended September 30, 2009 and 2008, as below:
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
(Restated) | (Restated) | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 181,245 | $ | 1,085,261 | ||||
Adjustments to reconcile net income to net cash provided by | ||||||||
(used in) operating activities: | ||||||||
Depreciation | 238,453 | 212,428 | ||||||
Noncontrolling interest | 946 | 11,684 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 135,567 | (416,447 | ) | |||||
Inventories | (291,240 | ) | 125,429 | |||||
Advance payments | (3,883,992 | ) | 1,724,789 | |||||
Dividend receivable | 78,280 | (3,513 | ) | |||||
Other receivables | 125,497 | (3,471,766 | ) | |||||
Other non-current assets | 2,818 | (5,949 | ) | |||||
Prepaid expenses | 12,540 | 3,754,304 | ||||||
Accounts payable and accrued expenses | 92,260 | (19,035 | ) | |||||
Trade notes payable | 73,295 | -- | ||||||
Customer advances | 503,191 | (1,055,628 | ) | |||||
Income taxes payable | (23,696 | ) | (643,968 | ) | ||||
Other payables | 635,912 | 526,646 | ||||||
Total adjustments | (2,300,169 | ) | 738,974 | |||||
Net cash provided by (used in) operating activities | (2,118,924 | ) | 1,824,235 | |||||
Cash flows from investing activities: | ||||||||
Deposit for buildings, machinery, and equipment | -- | (264,338 | ) | |||||
Acquisition of property and equipment | (411,502 | ) | (506,042 | ) | ||||
Proceeds from investment income | 58,636 | -- | ||||||
Payments to Noncontrolling interest for ownership buyback | (202,206 | ) | -- | |||||
Investment deposit paid | -- | 71,685 | ||||||
Repayment of loans for acquisition of subsidiaries | -- | (5,105,952 | ) | |||||
Net cash used in investing activities | (555,072 | ) | (5,804,647 | ) | ||||
Cash flows from financing activities: | ||||||||
Additional paid-in capital from shareholders | -- | 8,018,257 | ||||||
Proceeds from short-term bank loan | 146,590 | 716,850 | ||||||
Due to former shareholders | -- | (1,544,757 | ) | |||||
Proceeds form shareholders | -- | 143,370 | ||||||
Proceeds from (repayments of) related party loans | (492,649 | ) | 2,757,940 | |||||
Loans from third party | 7,412,373 | (6,491,158 | ) | |||||
Net cash provided by financing activities | 7,066,314 | 3,600,502 | ||||||
Effect of foreign currency translation on cash | (32,657 | ) | 261,800 | |||||
Net increase (decrease) in cash and cash equivalents | ||||||||
and restricted cash | 4,359,661 | (118,110 | ) | |||||
Cash and cash equivalents and restricted cash – beginning | 1,034,387 | 1,049,768 | ||||||
Cash and cash equivalents and restricted cash – ending | $ | 5,394,048 | $ | 931,658 | ||||
Supplemental disclosure information: | ||||||||
Interest paid | $ | 54,602 | $ | 22,139 | ||||
Income taxes paid | $ | 74,916 | $ | 824,931 |
Acknowledgement Statement
In connection to responding to all the comments of the Securities and Exchange Commission, China Prosperous Clean Energy Corporation (“Company”) hereby acknowledges that:
1. The Company is responsible for the adequacy and accuracy of the disclosure in the filings;
2. Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filings; and
3. The Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
We greatly appreciate your assistance. If you have any questions or comments regarding the foregoing, please do not hesitate to contact us via phone: 86-372-3166864, also with copy to our legal counsel’s office at Bernard & Yam, LLP, Attn: Man Yam, Esq., 401 Broadway Suite 1708, New York, NY 10013, phone: 212-219-7783, facsimile: 212-219-3604.
Truly yours
/s/ Ben Wang
_________________________
Ben Wang
Chief Financial Officer
China Prosperous Clean Energy Corporation