UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 2010
¨ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________ to __________
Commission file number: 333-150768
UNIVERSAL SOLAR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Nevada | 26-0768064 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
No. 1 Pingbei Road 2,
Nanping Science & Technology Industrial Park,
Zhuhai City, Guangdong Province,
The People’s Republic of China
(Address of principal executive offices including zip code)
86-756-8682610
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of Common Stock outstanding as of November 5, 2010 was 22,599,974 shares.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION | 1 |
Item 1. Financial Statements | 1 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 |
Item 3.Quantitative and Qualitative Disclosures About Market Risk | 12 |
Item 4T. Controls and Procedures | 12 |
PART II - OTHER INFORMATION | 12 |
Item 1. Legal Proceedings | 12 |
Item 1A. Risk Factors | 12 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 13 |
Item 3. Defaults Upon Senior Securities | 13 |
Item 4. Removed and Reserved | 13 |
Item 5. Other Information | 13 |
Item 6. Exhibits | 13 |
SIGNATURES | 14 |
Except as otherwise required by the context, all references in this report to "we", "us”, "our", “Universal Solar Technology” or "Company" refer to the consolidated operations of Universal Solar Technology, Inc., and its wholly owned subsidiaries.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS |
September 30, 2010 | December 31, 2009 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 126,125 | $ | 1,115,047 | ||||
Prepaid expenses and other current assets | 1,394,993 | 319,123 | ||||||
Inventories | 603,813 | 42,956 | ||||||
TOTAL CURRENT ASSETS | 2,124,931 | 1,477,126 | ||||||
Deposits for future deliveries of property and equipment | 545,269 | 312,362 | ||||||
Land use right, net of accumulated amortization of $19,741 and $11,452, respectively | 410,981 | 411,391 | ||||||
Property and equipment, net of accumulated depreciation of $66,225 and $3,446, respectively | 5,397,443 | 3,294,946 | ||||||
TOTAL ASSETS | $ | 8,478,624 | $ | 5,495,825 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable and accrued expenses | $ | 872,977 | $ | 154,813 | ||||
Advance from customers | 314,726 | |||||||
Short Term loan | 746,150 | |||||||
Due to related parties-current portion | 65,922 | 5,675,528 | ||||||
TOTAL CURRENT LIABILITIES | 1,999,775 | 5,830,341 | ||||||
Due to related parties- non-current portion | 7,358,022 | 22,485 | ||||||
TOTAL LIABILITIES | 9,357,797 | 5,852,826 | ||||||
STOCKHOLDERS' DEFICIENCY: | ||||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding | - | |||||||
Common stock, $0.0001 par value, 90,000,000 shares authorized, issued and outstanding 22,599,974 shares and 22,599,974 shares, respectively | 2,260 | 2,260 | ||||||
Additional paid-in capital | 598,048 | 553,826 | ||||||
Accumulated deficit | (1,546,599 | ) | (925,466 | ) | ||||
Accumulated other comprehensive income (loss) | 67,118 | 12,379 | ||||||
TOTAL STOCKHOLDERS' DEFICIENCY | (879,173 | ) | (357,001 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY | $ | 8,478,624 | $ | 5,495,825 |
See notes to consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
Sep 30, 2010 | Sep 30, 2009 | Sep 30, 2010 | Sep 30, 2009 | |||||||||||||
SALES | $ | 609,500 | $ | 31,609 | $ | 609,500 | $ | 691,660 | ||||||||
Cost of goods sold | 598,721 | 29,989 | 598,721 | 619,449 | ||||||||||||
Gross Profit | 10,779 | 1,620 | 10,779 | 72,211 | ||||||||||||
Expenses | ||||||||||||||||
Selling Expenses | 57,266 | 57,266 | ||||||||||||||
General and administrative expenses | 90,259 | 120,418 | 441,074 | 282,615 | ||||||||||||
TOTAL OPERATING EXPENSES | 147,525 | 120,418 | 498,340 | 282,615 | ||||||||||||
LOSS FROM OPERATIONS | (136,746 | ) | (118,798 | ) | (487,561 | ) | (210,404 | ) | ||||||||
Interest expense | (28,082 | ) | (55,869 | ) | (130,749 | ) | (75,674 | ) | ||||||||
Dividend and interest income | 0 | 686 | ||||||||||||||
Gain (loss) on foreign currency transactions | (49 | ) | 11 | (3,509 | ) | (2,408 | ) | |||||||||
Other income | - | - | ||||||||||||||
NET LOSS | (164,877 | ) | (174,656 | ) | (621,133 | ) | (288,486 | ) | ||||||||
OTHER COMPREHENSIVE INCOME (LOSS): | ||||||||||||||||
Foreign currency translation adjustment | 22,063 | 45 | 54,739 | 28,934 | ||||||||||||
COMPREHENSIVE LOSS | $ | (142,814 | ) | $ | (174,611 | ) | $ | (566,394 | ) | $ | (259,552 | ) | ||||
Loss per common share -basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.01 | ) | ||||
Weighted average number of shares outstanding -basic and diluted | 22,599,974 | 22,574,974 | 22,599,974 | 22,574,974 |
See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
Nine month ended | Nine month ended | |||||||
9/30/2010 | 9/30/2009 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (621,133 | ) | $ | (288,486 | ) | ||
Adjustments to reconcile net loss to net | ||||||||
cash used in operating activities: | ||||||||
Imputed interest on loans from related parties | 44,899 | 76,819 | ||||||
Increase in long term interest payable to affiliated parties | 76,253 | |||||||
Depreciation of property and equipment | 61,409 | 1,121 | ||||||
Amortization of land use right and intangible assets | 8,459 | 8,809 | ||||||
Changes in operating assets and liabilities: | - | |||||||
Prepaid expenses and other current assets | (1,094,077 | ) | 12,650 | |||||
Inventory | (552,750 | ) | ||||||
Accounts payable and accrued expenses | 721,912 | 25,940 | ||||||
Advance from customers | 310,621 | |||||||
NET CASH USED IN OPERATING ACTIVITIES | (1,044,407 | ) | (163,147 | ) | ||||
INVESTING ACTIVITIES: | ||||||||
Deposits for future deliveries of equipment | (224,124 | ) | (791,113 | ) | ||||
Acquisition of property and equipment | (2,076,393 | ) | (740,226 | ) | ||||
NET CASH USED IN INVESTING ACTIVITIES | (2,300,517 | ) | (1,531,339 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from short-term loan | 736,416 | |||||||
Loans from related parties | 1,607,340 | 2,883,004 | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | $ | 2,343,756 | $ | 2,883,004 | ||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 12,246 | 29,510 | ||||||
INCREASE IN CASH | (988,922 | ) | 1,218,028 | |||||
CASH - BEGINNING OF PERIOD | 1,115,047 | 259,025 | ||||||
CASH - END OF PERIOD | $ | 126,125 | $ | 1,477,053 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | $ | - | $ | - | ||||
Income taxes paid | $ | - | $ | - |
See notes to consolidated financial statements.
3
UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2010 and the results of operations and cash flows for the periods ended September 30, 2010 and 2009. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the nine months ended September 30, 2010 is not necessarily indicative of the results to be expected for any subsequent periods of the entire year ending December 31, 2010. The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2009 as included in our report on Form 10-K.
2. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Universal Solar Technology, Inc. (the “Company”) was incorporated in the State of Nevada on July 24, 2007. The Company operates through its wholly-owned subsidiaries, Kuong U Science & Technology (Group) Ltd. (“Kuong U”), a company incorporated in Macau, Peoples Republic of China (“PRC”) on May 10, 2007, and Nanyang Universal Solar Technology Co., Ltd. (“NUST”), a company incorporated in Nanyang, PRC on September 8, 2008. The Company sells solar photovoltaic (“PV”) modules.
Basis of presentation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant inter-company accounts and transactions have been eliminated. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
Currency translation
The reporting currency of the Company is the United States dollar. The functional currency of Kuong U is the Hong Kong dollar. The functional currency of NUST is the Chinese Yuan (”RMB”). Revenue and expense accounts of our two subsidiaries are translated into United States dollars at the average rates during the period, and balance sheet items are translated at year-end rates, except for equity accounts which are translated at historical rates. Translation adjustments arising from the use of differing exchange rates from period to period are included as a separate component of shareholders’ equity. Gains and losses from foreign currency transactions are recognized in current operations.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
Uses of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. Actual results could differ from those estimates.
4
Revenue recognition
Revenue from solar products is recognized when there is evidence of an arrangement, delivery has occurred or services have been rendered, the arrangement fee is fixed or determinable, and collectability of the arrangement fee is reasonably assured.
Comprehensive income (loss)
Comprehensive income (loss) is defined to include all changes in equity except those resulting from investments by shareholders and distributions to shareholders. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income (loss) are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income (loss) and the foreign currency translation adjustment, net of tax.
Going concern
The financial statements have been prepared on a "going concern" basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. At September 30, 2010, the Company had a stockholders’ deficiency of $879,173. Further, the Company has incurred net losses of $1,546,599 since inception. These factors raise substantial doubt as to the Company’s ability to continue as a going concern. The Company plans to improve its financial condition by raising capital in a private placement of its securities. However, there is no assurance that the Company will be successful in accomplishing this objective. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
3. SHORT TERM LOAN
On July 2, 2010, NUST signed a short term loan agreement for RMB 5 million with Fangcheng County Hong Yu Industrial Development and Investment Company. By September 30, 2010, NUST has received the total cash amount of RMB 5 million. According to the loan agreement, NUST agrees to pay interest at the interest rate of 4.425% per month. The maturity date of the loan is 12/31/2010.
4. DUE TO/DUE FROM RELATED PARTIES
On May 5, 2010, NUST amended the previous oral loan agreement with Yuemao Technology and formed a Line of Credit Agreement. By September 30, 2010, NUST has received the total cash amount of RMB 26,470,000. According to the Line of Credit Agreement, NUST may continue to borrow from Yuemao Technology at the interest rate of 1 percent per annum, NUST promises to pay the principal and the interest balance by 12/1/2013.
On May 5, 2010, KUST amended the previous oral loan agreement with Yuemao Laser Technology and formed a Line of Credit Agreement. By September 30, 2010, KUST has received the total cash amount of HKD 1,925,353. According to the Line of Credit Agreement, KUST may continue to borrow from Yuemao Technology at the interest rate of 1 percent per annum, KUST promises to pay the principal and the interest balance by 12/1/2013.
On May 5, 2010, KUST amended the previous oral loan agreement with Mr. Wenshen Cheng and formed a Line of Credit Agreement. By September 30, 2010, KUST has received the total cash amount of HKD 23, 681,566. According to the Line of Credit Agreement, KUST may continue to borrow from Mr. Wenshen Chen at the interest rate of 1 percent per annum, KUST promises to pay the principal and the interest balance by 12/1/2013.
On May 5, 2010, the Company amended the previous oral loan agreement with Mr. Wenshen Cheng and formed a Line of Credit Agreement. By September 30, 2010, Universal Solar Technology has received the total cash amount of USD 22,485. According to the Line of Credit Agreement, Universal Solar Technology may continue to borrow from Mr. Wenshen Chen at the interest rate of 1 percent per annum, Universal Solar Technology promises to pay the principal and the interest balance by 12/1/2013.
5
Both Yuemao Laser and Yuemao Technology are PRC companies and controlled by the Company’s chairman and chief executive officer.
Due to related parties
Due to related parties consists of following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Due to President Ms. Lin Chen | $ | 104,536 | $ | 0 | ||||
Due to Mr. Wenshen Chen, Company’s chairman and chief executive officer, due 12/1/2013, at 1% per annum | $ | 3,067,934 | $ | 2,207,704 | ||||
Due to Zhuhai Yuemao Laser Facility Engineering Co., Ltd. (“Yuemao Laser”) due 12/1/2013, at 1% per annum | $ | 247,600 | $ | 238,009 | ||||
Due from Zhuhai Yuemao Laser Facility Engineering Co., Ltd. (“Yuemao Laser”) | $ | (38,614 | ) | 0 | ||||
Due to Yuemao Technology Ltd. (“Yuemao Technology”), due 12/1/2013, at 1% per annum | $ | 3,950,118 | $ | 3,252,300 | ||||
Interest Payable, due 12/1/2013with the principals, not interest bearing | $ | 92,370 | $ | 0 | ||||
Total | $ | 7,423,944 | $ | 5,698,013 | ||||
Current portion | $ | (65,922 | ) | (5,675,528 | ) | |||
Non-current portion | $ | 7,358,022 | $ | 22, 485 |
5. INCOME TAXES
The Company has not recorded a provision for United States federal income tax for the periods presented since it incurred net losses in such periods.
The Company’s Chinese subsidiaries are governed by the Income Tax Law of the People’s Republic of China concerning private enterprises, which are generally subject to tax at a statutory rate of 25% on taxable income.
As of September 30, 2010, the Company had approximately $1,546,599 of net operating loss carry forwards for income tax purposes.
Based on management's present assessment, the Company has not determined it to be more likely than not that a deferred tax asset attributable to the future utilization of the net operating loss carry forward as of September 30, 2010 will be realized. Accordingly, the Company has provided a 100% allowance against the deferred tax asset in the financial statements at September 30, 2010. The Company will continue to review this valuation allowance and make adjustments as appropriate.
6
As of September 30, 2010, the company had $410, 981 of net land use right. NUST acquired the right to use a parcel of land approximating 71,280 square meters for forty (40) years for its office and production facilities from the local government in the PRC on the December 1, 2008 for a cost of RMB 2,886,300. The land use right is being amortized using the straight line method over the 40 year term of the contract.
As of September 30, 2010 and December 31, 2009, property, plant and equipment consisted of the following:
September 30, 2010 | December 31, 2009 | |||||||
Construction in progress | $ | 715,045 | $ | 1,019,760 | ||||
Office equipment and furniture | 20,093 | 11,123 | ||||||
Equipment | 4,121,710 | 2,219,913 | ||||||
Automobile | 65,369 | 47,596 | ||||||
Building | 535,513 | |||||||
Software | 5,939 | |||||||
Less accumulated depreciation and amortization | (66,226 | ) | (3,446 | ) | ||||
Property, plant and equipment, net | $ | 5,397,443 | $ | 3,294,946 |
7. COMMITMENTS AND CONTINGENCIES
On August 23, 2010, Universal Solar Technology, Inc. (the "Company") provided notice to C.T.O., spol. s.r.o. to terminate the Sales Contract entered into on June 18, 2010 for the sale of 20MW of monocrystalline solar modules for an aggregate sales price of $32,600,000. The Company terminated the Sales Contract as a result of CTO's failure to make required payment under the Sales Contract.
8. SUBSEQUENT EVENT
In accordance with ASC 855, “Subsequent Events”, the Company has evaluated subsequent events that have occurred through the date of issuance of these financial statements and has determined that there were no material events that occurred after the date of the balance sheets included in this report.
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.
DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements, which are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Terms such as “anticipate”, “may”, “will”, “should”, “believe”, “estimate”, “expect”, “intend”, “plan”, predict”, “project”, “target”, “will likely result”, “will continue” and similar expressions are intended to identify forward-looking statement and based upon our expectations at the time they made. The forward-looking statements are not guarantee for future performance and actual results may differ from those indicated or implied in the forward-looking statements due to a various factors including, but not limited to changes to our assumptions, risks and uncertainties involved, many of which are beyond our control. We discuss risks and uncertainties in great details under item 1A “Risk Factors” below.
The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent annual and periodic reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes and the other financial information appearing in Part I, Item 1 and elsewhere in this report. The Company’s fiscal year end is December 31.
OVERVIEW OF OUR BUSINESS
We are a development stage enterprise that manufactures silicon ingots, wafers, high efficiency solar photovoltaic (“PV”) modules and other PV application products in the EU, North America, Asia and Africa. The Company was incorporated under the laws of the State of Nevada on July 24, 2007. It operates through its wholly-owned subsidiaries, including Kuong U Science & Technology (Group) Ltd. (“KUST”), a company incorporated in Macau, Peoples Republic of China (“PRC”) on May 10, 2007, and Nanyang Universal Solar Technology Co., Ltd. (“NUST”), a company incorporated in Nanyang, PRC on September 8, 2008. On May 9th, 2008, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission (SEC), and raised capital of $300,000 from a self-underwritten offering of 2,000,000 shares of our common stock.
The Company’s focus during 2010 has been on completing the development of its Nanyang factory. The new factory covers an area of 71,337 square meters in Nanyang City, Henan province. Our new factory is one of the largest in its kind in China. We produce silicon ingots, silicon wafers, PV modules, on-grid and off-grid generating systems. We also have the ability to produce the equipment such as ingots puller, and downstream products such as solar lamps for road and highway infrastructures. Our production capacity is 15 MW in September and we target to reach to 50 MW by the end of the year. As of today, we have completed testing of 9 ingot growers and continue to acquire more equipment to expand the production volume. During the third quarter of 2010 we have accepted delivery of water cooling system, multi-wire saw and framing machine. We have hired a total of 158 employees as of September 30, 2010.
We have built an assorted product portfolio to serve the diverse needs of global customers. Products currently being marketed, and/or developed include: silicon ingots, silicon wafers, PV modules, on-grid generating systems, off-grid power, solar lamps for road and highway infrastructure, solar LED home accessories, and solar handheld device chargers (iPods, cameras, etc.) Our products have passed multiple standard tests and achieved the certificates of VDE, TUV, IEC61215, IEC 61730, CE and ISO 9001:2000.
The VDE Testing and Certification Institute is accredited on national and international levels for the area of testing and certification of electro-technical equipment, components, and systems. Testing of electro-technical products is conducted for safety, electromagnetic compatibility, and other characteristics. The results of testing are evaluated scientifically and contribute to the development of electro-technical standards. VDE is a professional organization of electrical engineers; they address issues in collaboration with German Institute for Standardization (DIN) standards for the field of electrical engineering. It also conducts testing and certification much likes UL in the United States. We contacted VDE directly and completed an IEC 61730 evaluation. We also passed the construction evaluation requirements of IEC 61730-1, additional IEC 61730-2 module or materials tests, and factory inspection requirements. By satisfying these tests, we are able to market and sell our Solar products to EU countries.
8
RESULTS OF OPERATIONS
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Revenue
We generated $609,500 in sales for the quarter ended September 30, 2010 compared to $31,609 for the quarter ended September 30, 2009. The increase in sales was because we have begun production at our newly completed factory in Nanyang. During the three months ended September 30, 2010, we produced and sold more than 300,000 silicon wafers to seven new customers by the end of September 2010. These customers were Jingneng Inc., and Zhongde Inc. from Jiangsu Province; Dingli Inc., Zhonghong Inc., Jingnuo Inc., Sangni Inc, and Jinhong, Inc. from Zhengjiang Province. These companies will continue to buy silicon wafers to manufacture their products.
Cost of Sales
Our cost of sales was $598,721 for the quarter ended September 30, 2010 compared to $29,989 for the quarter ended September 30, 2009. The increase in cost of sale was due to the increased sales volume during the third quarter of 2010.
Gross Profit
Gross profit is affected by numerous factors, including our average selling prices, foreign exchange rates, our manufacturing costs and the effective utilization of our production facilities. Our gross profit was $10,779 for the quarter ended September 30, 2010 compared to $1,620 for the quarter ended September 30, 2009, an increase of 565% compared to $1,620 for the quarter ended September 30, 2009. The increase was due to increased sales volume. Our profit margin is about the industry average.
Selling, General and Administrative
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, advertisement, and other selling expenses. It was $147,525 for the three months ended September 30, 2010, compared to $120,418 for the three months ended September 30, 2009, an increase of $27,107or 22.5%. The increase was mainly associated with the increase in personnel at the Nanyang factory. We currently have 158 employees compared to 4 employees as of September 30, 2009. We expect these expenses to increase further in the near future, both in absolute dollars and as a percentage of net sales, in order to support the completion of manufacturing construction, installation of equipment, improvement of our information processes and systems, compliance and other infrastructure required for a public company.
Interest Expense
Net interest expense was $28,082 for the three months ended September 30, 2010, compared to $55,869 for the three months ended September 30, 2009, a decrease of $ 27,787 or 49.7%. The decrease of interest expense was attributable to lower interest rate from related parties, offsetting the impact of increase of borrowing from to related parties.
Net Loss
Net loss for the three months ended September 30, 2010 was $164,877 compared to $174,656 for the third quarter of 2009 as a result of the combination of increase of revenue, selling and general administration and personal expenses and decrease of interest expenses. The number of employees has increased from 4 to 158 at the end of the third quarter of 2010 compared to the same period in 2009. Most workers are still in training period and therefore the increase in personnel has not translated to increase in productivity. We expect the selected workers to finish their training and to start producing PV modules as we finish testing the equipment at our new facility.
Foreign Currency Gain (Loss)
Foreign currency gain (loss) consists of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our functional currencies. During the three months ended September 30, 2010, we recognized a foreign currency translation gain of $22,063, compared to $45 for the three months ended September 30, 2009 an increase of $22,018. The increase in foreign currency translation gain was mainly due to the fluctuation between US Dollar and Chinese Yuan during the reporting period.
9
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Revenue
Our revenue for the nine months ended September 30, 2010 was $609,500 compared to $691,660 for the nine months ended September 30, 2009, a decrease of $82,160 or 12%. Last year our revenue was mainly generated from our export of PV modules to our customers in India; while this year we sold our wafers to seven Chinese companies. The decrease in revenue was mainly due to the lower gross margin for silicon wafers as compared to PV modules.
Cost of Sales
The cost of sales for the nine months ended September 30, 2010 was $598,721, compared to $619,449 for the nine months ended September 30, 2009 which constituted a 3.3% decrease.
Gross Profit
Gross profit is affected by numerous factors, including our average selling prices, foreign exchange rates, our manufacturing costs and the effective utilization of our production facilities. Our gross profit for the nine months ended September 30, 2010 was $ 10,779, compared to $72,211 for the nine months of 2009 for reasons discussed above.
Selling, General and Administrative
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, advertisement, and other selling expenses. It was $498,340 for the nine months ended September 30, 2010, compared to $282,615for the same period in 2009, an increase of $215,725 or 76.3 %. The increase was mainly associated with the expenses related to the increase in personnel from 4 to 158 related to the new manufacturing facilities in Nanyang. We expect these expenses to increase further in the near future, both in absolute dollars and as a percentage of net sales, in order to support the completion of manufacturing construction, installation of equipment, improvement of our information processes and systems, compliance and other infrastructure required for a public company.
Interest Expense
Net interest expense was $130,749 for the nine months ended September 30, 2010, compared to $75,674 for the nine months ended September 30, 2009, an increase of $55,075 or 72.8%. The majority of the interest expense was attributable to the interest expense on the loans from related parties and the increase was due to increased borrowing from related parties, offsetting by lower interest rate on such borrowings starting from May 5, 2010
Net Loss
Net loss for the nine months ended September 30, 2010 was $621,133 compared to $288,486 for the same period in 2009, an increase of $332,647 or 115%. The increase was due to the increase in payroll expenses as a result of the large hiring to staff our new manufacturing facilities in Nanyang. The number of employees has increase from 4 to 158 at the end of the second quarter of 2010 compared to the same period a year ago. As discussed above, the newly hired employees are still in training and we expect as the new employees complete their training and begin production, our productivity and sales would increase.
Foreign Currency Gain (Loss)
Foreign currency gain (loss) consists of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our functional currencies. During the nine months ended September 30, 2010, we recognized a foreign currency translation gain of $54,739, compared to $28,934 for the three months ended September 30, 2009, an increase of $25,805 or 89.2%. This increase was mainly due to the fluctuation between US Dollar and Chinese Yuan during the reporting period.
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LIQUIDITY AND CAPITAL RESOURCES
Our operation is primarily funded through paid-in capital and short term and long term loans from the related parties. As of September 30, 2010, we had $126,125 in cash, cash equivalents and marketable securities, compared with $1,115,047 ended December 31, 2009. We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, operating results and cash flows.
Operating Activities
For the nine months ended September 30, 2010, cash used in operating activities was $ 1,044,407 compared with $163,147 used during the nine months ended September 30, 2009. This was primarily attributable to cash used in prepaid expenses, other current assets and inventory. Offset to the increase was an increase in imputed interest on advances from related parties and interest payable on long term loans from related parties of $ 44,899 and $ 76,253 respectively and net increase in accounts payable, advances from customers and accrued expenses of $1,032,533.
Investment Activities
For the nine months ended September, 2010, cash used in investment activities was $2,300,517 compared to $1,531,339 for the nine months ended September 30, 2009. The increase was primarily related to cash paid as deposits for future deliveries of equipment and acquisition of property and equipment as a result of a series equipment purchases for supporting business establishment and future growth.
Financing Activities
Financial activities provided net cash inflow of $2,343,756 during first nine months of 2010 as compared to $2,883,004 for the same period in 2009.
Short Term Loans
On July 2, 2010, NUST signed a short term loan agreement for RMB 5 million with Fangcheng County Hong Yu Industrial Development and Investment Company. By September 30, 2010, NUST has received the total cash amount of RMB 5 million. According to the loan agreement, NUST agrees to pay interest at the interest rate of 4.425% per month. The maturity date of the loan is 12/31/2010.
Long Term Loans
As of September 30, 2010, we had long term liability in the total amount of $7,358,022, which were loans from related parties. Since the management controls 95% of the shares, our short term goal for financing activity is to identify credible financial partners who has strong interest in the Chinese solar industry. As of today, the company is in the negotiation process with a few Private Equity groups. The majority of our debt is due to the related parties, which are also controlled by our CEO. Our CEO is willing to convert most of our debt (the outstanding balance due to the related parties) into equity any time when the company meets its financing goal to expand the production capacity to 200 MW per year. Under the current letter of credits with the related parties, the annual interest rate is 1%, which is much lower than the prevailing interest rate. The motivation of lending to the company at such a low interest rate is not to collect the financing profit from interest payments, but to invest in the growth of the Company. The same model may be applied for the future investors as well. The company has no doubt that it will meet its interest payment obligations.
Off-Balance Sheet Arrangements
As of September 30, 2010, we had not entered into any financial guarantees or other commitments to guarantee the payment obligations of any other parties. We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, operating results and cash flows.
The recent and unprecedented disruption in the credit markets has had a significant impact on a number of financing activities. Additional financing is desirable within the next 9 months in order to meet our current and projected cash flow deficits from business operations and future development. We will continue to seek financing from related parties and other sources.
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As of June 30, 2010, our liquidity and capital resources have not been materially adversely impacted and we believe that they will not be materially adversely impacted in the near future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 4T. Evaluation of Disclosure Controls and Procedures
Evaluation Of Disclosure Controls And Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were operating effectively.
Changes In Internal Control Over Financial Reporting
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, during the fiscal quarter covered by this report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitation On The Effectiveness Of Controls
The inherent limitations of the control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives are being met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of this quarter reported ended September 30, 2010, there is no pending litigation made against Universal Solar Technology, Inc. In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, routine employment matters.
Item 1A. Risk Factors
There has been no material change in the Company’s risk factors as previously disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2010.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults on Senior Securities
None.
Item 4. (Removed and Reserved)
None
Item 5. Other Information
Item 6. Exhibits
(a) Exhibits
Exhibit No. | Title of Document | |
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended | |
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended | |
32.1 | Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 (Chief Executive Officer) | |
32.2 | Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 (Chief Financial Officer) |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Universal Solar Technology, Inc. | ||
Date: November 15, 2010 | By: | /s/ Wensheng Chen |
Wensheng Chen | ||
Chief Executive Officer | ||
By: | /s/ Lijie Zhu | |
Lijie Zhu Chief Financial Officer (Principal Financial and Accounting Officer) |
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