As filed with the Securities and Exchange Commission on June , 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. 3)
DELI SOLAR (USA), INC.
(Name of small business issuer in its charter)
Nevada 3433 95-3819300
(State or Jurisdiction (Primary Standard Industrial (IRS Employer Identification
of Incorporation or Organization) Classification Code Number) Number)
558 Lime Rock Road,
Lakeville, Connecticut, 06039
(860)435-7000
(Address and telephone number of principal executive offices)
No. 28, Fengtai Bei Road
Fengtai District, Beijing, PRC 100071
Tel: 011-86-10-63835176
(Address of principal place of business or intended principal place of business)
558 Lime Rock Road,
Lakeville, Connecticut, 06039
(860)435-7000
(Name, address and telephone number of agent for service)
Copies of communications to:
Darren Ofsink, Esq.
Guzov Ofsink, LLC
600 Madison Avenue, 14th Floor
New York, New York 10022
(212) 371-8008
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the offering. |_|
If this Form is post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. |_|
If this Form is post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
Calculation of Registration Fee
================================================================================================================
Title of each class Proposed Proposed
of securities to Amount to be maximum offering maximum aggregate Amount of
be registered registered (1) price per unit (2) offering price (2) registration fee
================================================================================================================
$.001 par value per 3,952,025 $ 11.75 $ 46,436,293.75 $ 5,465.55
share common (previously
stock paid)
(1) This registration statement relates to the offer and resale by the selling
stockholders identified herein of up to 3,952,025 shares of our common stock,
including 1,825,719 shares which they may acquire upon exercise of the
outstanding warrants.
(2) The registration fee is calculated pursuant to Rule 457(c). As of the date
of this prospectus, our common stock is quoted under the symbol "DLSL.OB" on the
NASD's Over-the-Counter (OTC) Bulletin Board. As of October 28, 2005, the last
reported bid price was $6.75 per share and the last reported asked price was
$16.75 per share. The average of the bid and asked price was thus $11.75 per
share. Accordingly, the registration fee is $5,465.55 based on $11.75 per share.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said section 8(a), may determine.
2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE __, 2006
PRELIMINARY PROSPECTUS
DELI SOLAR (USA), Inc.
Common Stock
----------------
This prospectus relates to the offer and sale by the selling stockholders
identified under the caption "Selling Stockholders" (collectively, the "Selling
Stockholders"; individually, "Selling Stockholder") of up to 3,952,025 shares of
our Common Stock, including 1,825,719 that they may acquire upon exercise of
warrants. The Selling Stockholders acquired substantially all of the shares and
the warrants in connection with a private placement completed on March 31, 2005.
The remaining 230,674 shares offered by Halter Capital Corporation and Kevin
Halter, Jr. were acquired from the former controlling stockholders of our
company in a private sale completed on January 31, 2005. We have registered the
shares for resale under registration rights granted to the Selling Stockholders
in connection with the purchase transactions.
We will not receive any of the proceeds from sales of the shares by the
Selling Stockholders. However, if the Selling Stockholders decide to exercise
their warrants, we will receive the net proceeds of the exercise of outstanding
warrants held by the Selling Stockholders. We will pay all expenses of
registration incurred in connection with this offering, but the Selling
Stockholders will pay all of the selling commissions, brokerage fees and related
expenses. We have agreed to indemnify the Selling Stockholders against some
liabilities, including liabilities under the Securities Act.
Our Common Stock is currently quoted on the National Association of
Securities Dealers' Over-the-Counter Bulletin Board under the symbol "DLSL.OB."
As of May 15, 2006, the last reported bid price was $6.50 per share and the last
reported asked price was $10.90 per share. During the past 60 business days,
however, neither the bid quotation nor the asked quotation has appeared
regularly in the Bulletin Board. Further, there has been no participation of a
broker or dealer in trading our common stock. Thus, there is no existing "public
market" for our common stock.
The shares are being offered by the Selling Stockholders in anticipation
of the development of a secondary trading market in our common stock. We cannot
give you any assurance that an active trading market in our common stock will
develop, or if an active market does develop, that it will continue.
3
Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 12.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______.
----------------------------------------------------------
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. No
person is authorized in connection with this prospectus to give any information
or to make any representations about us, the Selling Stockholders, the
securities or any matter discussed in this prospectus, other than the
information and representations contained in this prospectus. If any other
information or representation is given or made, such information or
representation may not be relied upon as having been authorized by us or any
Selling Stockholder.
The information in this prospectus is not complete and may be changed. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of our common stock or share warrants. The Selling Stockholders are offering to
sell and seeking offers to buy shares of our common stock and shares for which
their warrants are exercisable only in jurisdictions where offers and sales are
permitted. The Selling Stockholders may not sell the securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy the securities in any circumstances under which
the offer or solicitation is unlawful.
4
TABLE OF CONTENTS
Cautionary Note Regarding Forward Looking Statements
and Other Information Contained in this Prospectus..........................6
Prospectus Summary ............................................................7
Risk Factors..................................................................12
Use of Proceeds...............................................................23
Determination of Offering Price...............................................23
Selling Stockholders..........................................................24
Business......................................................................27
Description of Property.......................................................46
Selected Financial Data.......................................................47
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................48
Security Ownership of Certain Beneficial Owners and Management................61
Directors and Executive Officers, Promoters
and Control Persons .......................................................63
Executive Compensation........................................................65
Certain Relationships and Related Party Transactions..........................66
Plan of Distribution..........................................................67
Description of Securities.....................................................68
Market Price of and Dividends on Our Common Equity and
Related Stockholder Matters.................................................70
Legal Proceedings.............................................................72
Legal Matters.................................................................72
Experts.......................................................................72
Interest of Named Experts and Counsel.........................................72
Disclosure of Commission Position of Indemnification for
Securities Act Liabilities.................................................72
Changes in and Disagreements with Accountants.................................73
Financial Statements..........................................................74
Where You Can Find More Information...........................................74
Part II. Information Not Required in Prospectus
Indemnification of Directors and Officers...................................II-1
Other Expenses of Issuance and Distribution.................................II-1
Recent Sales of Unregistered Securities.....................................II-2
Exhibits....................................................................II-3
Undertakings................................................................II-4
5
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS
Our disclosure and analysis in this prospectus contain some
forward-looking statements. These statements relate to our operations, cash
flows, financial position, economic performance and financial condition,
including, in particular, future sales, product demand, the market for solar hot
water heaters in the People's Republic of China, which we refer to herein as the
PRC, competition, exchange rate fluctuations, and the effect of economic
conditions. These statements are forward-looking statements within the meaning
of section 27A of the Securities Act of 1933, referred to herein as the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, referred
to herein as the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to
future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements. Although we believe that these
statements are based upon reasonable assumptions, including projections of
orders, sales, operating margins, earnings, cash flow, research and development
costs, working capital, capital expenditures and other projections, they are
subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Investors are cautioned that our forward-looking statements are not
guarantees of future performance and the actual results or developments may
differ materially from the expectations expressed in the forward-looking
statements.
As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than projected. Given these uncertainties, you should not place any
reliance on these forward-looking statements. These forward-looking statements
also represent our estimates and assumptions only as of the date that they were
made. We expressly disclaim a duty to provide updates to these forward-looking
statements, and the estimates and assumptions associated with them, after the
date of this filing to reflect events or changes in circumstances or changes in
expectations or the occurrence of anticipated events. You are advised, however,
to consult any additional disclosures we make in our Form 10-KSB, Form 10-QSB
and Form 8-K reports filed with the Securities and Exchange Commission ("SEC").
Also note that we provide a cautionary discussion of risk and
uncertainties under the caption "Risk Factors" in this prospectus. These are
factors that we think could cause our actual results to differ materially from
expected results. Other factors besides those listed here could also adversely
affect us. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
Certain of the information provided in this prospectus, such as data
regarding the market for our products, has been obtained from third parties.
While we believe that these sources are accurate, you should be aware that we
have not independently verified the information and that we disclaim any duty to
update the information provided by these sources in the future.
6
Unless otherwise noted, all currency figures in this filing are in U.S.
dollars. References to "yuan" or "RMB" are to the currency of the People's
Republic of China (the "PRC"), yuan (also known as the Renminbi). According to
Xe.com as of May 15, 2006, $1 = 8.0055 yuan.
The "Company", "we," "us," "our," and the "Registrant" refer to (i) Deli
Solar (USA), Inc. ("Deli Solar (USA)", formerly also known as Meditech
Pharmaceuticals, Inc.), (ii) Deli Solar Holding Ltd., ("Deli Solar (BVI)"), a
wholly-owned subsidiary of Deli Solar (USA) and a limited liability company
organized under the International Business Companies Act of the British Virgin
Islands, and (iii) Bazhou Deli Solar Energy Heating Co., Ltd. ("Deli Solar
(PRC)"), a wholly-owned subsidiary of Deli Solar (BVI) and a limited liability
company organized under the laws of the PRC.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our common stock. You should read the entire
prospectus, including "Risk Factors" and the consolidated financial statements
and the related notes before making an investment decision.
OUR COMPANY
Our Corporation History and Structure
Meditech Pharmaceuticals, Inc. ("Meditech") was incorporated in Nevada on
March 21, 1983. Meditech was a drug development company, focusing on research,
development, and marketing of anti-infective drugs in the biomedical industry.
In late 2004, Meditech spun off its drug development business, whose primary
assets consisted of various intellectual property rights, by assigning such
intellectual property rights to East West Distributors, Inc. ("East West"), a
wholly-owned subsidiary of Meditech formed on December 13, 2004 under the Nevada
law. Thereafter, Meditech distributed all of the capital stock of East West, pro
rata, in the form of a stock dividend to the shareholders of Meditech of record
on February 17, 2005. East West reported the spin-off on a Registration
Statement on Form 10-SB with the SEC on June 28, 2005. The spin-off was
completed on August 29, 2005. The spin-off was not required to be registered
under the Securities Act of 1933, as amended.
Deli Solar (BVI) is a holding company for Deli Solar (PRC), which operates
a solar and renewable energy business in the PRC. On March 31, 2005, Meditech
entered into a Stock Contribution Agreement (the "Stock Contribution Agreement")
with Mr. Deli Du of Bazhou City, Hebei Province, PRC. Under the Stock
Contribution Agreement, Meditech acquired all of the issued and outstanding
shares of capital stock of Deli Solar (BVI) (par value US$0.05 per share) in
exchange for the issuance of 4,067,968 shares (the number and the price of the
shares as described in this paragraph have 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) of Meditech's common
stock (par value $.001 per share). In connection with the transactions
contemplated by the Stock Contribution Agreement, on March 31, 2005, certain
non-affiliated accredited investors paid $6,000,015 to Meditech in exchange for
the issuance of 1,714,290 shares of common stock of Meditech and warrants to
purchase ten (10) shares of common stock for each ten (10) shares of common
stock issued to such accredited investors, representing warrants to purchase an
aggregate of 1,885,719 shares of common stock of Meditech at an exercise price
of $3.85 per share, which warrants are exercisable through March 31, 2010. As a
result of foregoing transactions, the former shareholders of Deli Solar (BVI)
became holders of majority of the common stock of Meditech and Deli Solar (BVI)
became a wholly-owned subsidiary of Meditech. On August 15, 2005, Meditech
changed its name from "Meditech Pharmaceuticals, Inc." to "Deli Solar (USA),
Inc." (the transactions described in this paragraph, are collectively referred
to herein, the "Reverse Merger"). Further information regarding the Reverse
Merger is contained in the Current Report on Form 8-K filed with the SEC by
Meditech on April 6, 2005 and a Schedule 13D filed by Mr. Deli Du with the SEC
on April 18, 2005.
7
Deli Solar (BVI) was formed in June, 2004. On August 1, 2004, Deli Solar
(BVI) purchased Deli Solar (PRC), a corporation duly organized under the laws of
the PRC from Messrs. Deli Du, Xiao'er Du, and Xiaosan Du for RMB6,800,000. As a
result of this transaction, Deli Solar (PRC) became a wholly-foreign owned
enterprise ("WFOE") under PRC law on March 30, 2005, by virtue of its status as
a wholly-owned subsidiary of a foreign company, Deli Solar (BVI).
On November 21, 2005, Deli Solar (PRC) acquired all the capital stock of
Beijing Ailiyang Solar Energy Technology Co., Ltd. ("Ailiyang") for a total
purchase price of RMB500,000 pursuant to a stock purchase agreement with
Ailiyang dated February 24, 2005, whereby Ailiyang has become a wholly-owned
subsidiary of Deli Solar (PRC). The sole business of Ailiyang has been to serve
as a distributor of Deli Solar (PRC). Details of the acquisition were reported
in our Current Report filed with the SEC on November 28, 2005.
On August 15, 2005 we changed our name from Meditech Pharmaceuticals, Inc.
to Deli Solar (USA), Inc. The result of the above transactions, as set forth in
the following diagram, is that Deli Solar (BVI) is now our direct, wholly-owned
subsidiary and Deli Solar (PRC) remains a wholly-owned subsidiary of Deli Solar
(BVI). Ailiyang became a wholly-owned subsidiary of Deli Solar (PRC).
----------------------
Deli Solar (USA), Inc.
----------------------
| 100%
----------------------
Deli Solar Holding Ltd.
"Deli Solar (BVI)"
----------------------
| 100%
----------------------
Bazhou Deli Solar
Energy Heating Co., Ltd.
"Deli Solar (PRC)"
----------------------
| 100%
----------------------
Ailiyang Solar
Energy Technology Co., Ltd.
"Ailiyang"
----------------------
Our U.S. offices are located at 558 Lime Rock Road, Lakeville, Connecticut
06039 and our telephone number is (860) 435-7000. Deli Solar (PRC)'s executive
office is located at No. 28, Fengtai Bei Road, Fengtai District, Beijing, PRC
100071. Its principal place of business is located outside of the city of Bazhou
in the Hebei Province of the PRC.
8
Our Business
Deli Solar (PRC) is a limited liability company under the laws of the PRC
that was founded in 1997 and is engaged in the business of designing,
manufacturing and selling renewable energy systems that produce hot water and
provide space heating. Its principal products are solar hot water heaters and
multifunctional space heating products, including coal-fired residential
boilers. Deli Solar (PRC) also sells component parts for its systems, and
provides after-sales maintenance and repair services.
Our primary products are solar hot water heaters, comprising approximately
68% of our total sales revenues in the year of 2005. We manufacture two types of
solar hot water heaters: evacuated tubular solar water heaters and flat plate
solar water heaters. Our solar water heaters are primarily used to generate hot
water for residential and household uses. Among evacuated tubular solar water
heaters, regular evacuated tubular solar water heaters using all-glass vacuum
collectors are our best selling product, comprising approximately 85% of our
total solar product revenue. This type of solar water heater can generate hot
water even in cold weather and therefore, can be used throughout the year.
Further, they are relatively easy and inexpensive to produce compared to other
solar hot water heaters using other types of vacuum collectors. Because our
primary market is in rural areas of the PRC, our regular evacuated tubular solar
water heaters account for a majority of our sales.
We also manufacture boilers, furnaces, stove heating, and space heating
products, comprising approximately 32% of our total sales revenues in the year
of 2005. Most of our boilers and space heating products are coal-fired, small
scale units for residential space heating and cooking.
Our Strengths, Strategies and Risks
We believe that our success in the PRC is primarily attributable to the
following strengths:
o Our focus on rural market segment in the PRC and our eight years of
experience with rural marketing and sales agents.
o Our multiple brands which are marketed to different customers.
o Our extensive and effective distribution network of over 585
distributors and wholesalers, as well as approximately 2,000 local
electronics retailers or dealers covering 27 provinces in the PRC,
with a focus on northern and north-eastern parts of the PRC.
o Our support to our distributors and independent sales agents, which
allow them to effectively market our products by educating consumers
about their features. Our distributors also provide feedback to our
management team allowing us to change our marketing strategies based
on customer sentiment.
9
Our goals are to increase our market share and become a leading producer
in the PRC's solar hot water heater industry. We seek to achieve our goals by
implementing the following strategies:
o Expanding our market coverage to more rural areas, as well as urban
areas in the PRC by recruiting more distributors and sales agents.
o Continuing to increase our sales of premium brand products.
o Improving our products' features and developing new environmentally
friendly products.
o Strengthening our after-sales services network in parallel with our
distribution network.
o Pursuing selective strategic acquisitions and alliances that will
allow us to increase our market and competitive position.
o Expanding our product offerings and achieving economies of scale in
manufacturing.
The successful implementation and execution of our strategies are subject
to a series of risks and uncertainties, such as the following:
o Our ability to successfully control our manufacturing cost and
management expenses, such as our ability to obtain raw materials in
a cost-effective manner.
o Our ability to offer new and improved products in order to attract
more customers.
o Our ability to manage and attract talented independent sales people.
o Our ability to respond to technological changes in our industry.
o Our ability to attract, retain and motivate qualified management
personnel.
Please see the "Risk Factors" and other information included in this
prospectus for a further discussion of these risks and uncertainties.
10
THE OFFERING
This prospectus relates to the resale by the Selling Stockholders
identified herein. The following table sets forth information about the shares
being offered for resale under this prospectus:
Common stock outstanding prior to this offering ..................... 6,205,290
shares Common stock offered by us ................................... 0 shares
Total shares of common stock offered by Selling 3,952,025 shares
Stockholders(1)......................................................
Common stock to be outstanding after the offering (assuming
all warrants have been exercised) ................................... 8,031,009 shares
Use of Proceeds ..................................................... We will not receive any of the
proceeds from the sales of the
shares owned by the Selling
Stockholders. We may receive,
however, most of the proceeds
in connection with the
exercise of warrants for the
underlying shares of common
stock, which may in turn be
sold by the Selling
Stockholders under this
prospectus. We intend to use
any proceeds we receive from
the exercise of warrants for
working capital and other
general corporate purposes.
There is no assurance that any
of the warrants will ever be
exercised for cash, if at all.
Our OTC Bulletin Board Trading Symbol ............................... DLSL.OB
Risk Factors ........................................................ See "Risk Factors" beginning on
page 12 and other information
included in this prospectus for
a discussion of factors you
should consider before deciding
to invest in shares of our
common stock.
(1) Seventeen of the Selling Stockholders acquired their securities in
our private placement of securities completed on March 31, 2005. In
consideration for their payment of $6,000,015 to us, we issued to
these investors an aggregate of 1,714,290 shares of common stock
(after adjustment for a reverse stock split), along with warrants to
purchase 10 shares of our common stock for every 10 shares
purchased, with an exercise price of $3.85 per share . The warrants
are exercisable until March 31, 2010. An additional 292,771 shares
of common stock and 171,429 warrants were issued to our financial
advisors and others in connection with the private placement and our
acquisition of Meditech.
11
MARKET FOR OUR SECURITIES
Our common stock is currently quoted under the symbol "DLSL.OB" on the
over-the-counter Bulletin Board. As of May 15, 2006, the last reported bid price
was $6.50 per share and the last reported asked price was $10.90 per share.
However, there was no reported trading volume of our common stock. Neither the
bid quotation nor the asked quotation of our stock has appeared regularly on the
over-the-counter Bulletin Board during the past 60 business days. Further, there
has been no participation of a broker or dealer in trading our common stock.
Thus, there is no existing "public market" for our common stock, as such term
defined under Item 10 of Regulation S-B.
SALES BY SELLING STOCKHOLDERS
The Selling Stockholders named herein may offer the common stock pursuant
to this prospectus in varying amounts and transactions so long as this
prospectus is then current under the rules of the SEC and we have not withdrawn
the registration statement. The offering of common stock may be through the
facilities of the over-the-counter Bulletin Board or such other exchange or
reporting system where our common stock may be traded. Brokerage commissions may
be paid and discounts are allowed in connection with such sales; however, it is
anticipated that the discounts allowed or commissions paid will be no more than
the ordinary brokerage commissions paid on sales effected through brokers or
dealers. To our knowledge, as of the date hereof, no one has made any
arrangements with a broker or dealer concerning the offer or sale of the common
stock. See "Plan of Distribution" in this prospectus for more information.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and the other information
contained in this prospectus before deciding to invest in our common stock.
The risks and uncertainties described below are not the only ones we may
face. Additional risks and uncertainties not currently known to us or that we
currently deem immaterial may also adversely affect our business, financial
condition, and/or operating results. If any of the following risks, or any other
risks not described below, actually occur, it is likely that our business,
financial condition, and operating results could be seriously harmed. As a
result, the trading price of our common stock could decline and you could lose
part or all of your investment.
Risks Related to our Business
We operate in a highly-competitive industry and our failure to compete
effectively may adversely affect our ability to generate revenue.
12
We are principally engaged in the manufacture and marketing of solar hot
water heaters. According to statistics from the Chinese Energy Research
Association, there are currently over 3,500 solar hot water heater manufacturers
producing products under more than 3,000 brands. Many of our competitors are
better capitalized and more experienced, and have deeper ties in the PRC
marketplace. The profit margin on the sale of our solar hot water heaters was
decreased to 21% in the first quarter of 2006 as compared to 22% in the year of
2005 as a result of increased advertising costs, which is expected to continue
to rise in the following quarters in 2006. Consequently, we expect the profit
margin on the sale of our solar water heaters to decrease. We may be
unsuccessful in our attempts to upgrade our product mix, which would have a
material adverse impact on our business and financial condition.
While most solar hot water manufacturers focus on the urban market, we
have always focused on the rural market. While there are relatively fewer
competitors in the rural market currently, there can be no assurance that our
competitors will not focus their marketing efforts on rural customers in the
future.
We rely on our sales agents to distribute our products and we could lose a
substantial portion of our sales if we are not able to maintain an efficient
internal control system to effectively monitor the activities of our sales
agents, or to attract new sales agents.
We believe that our success relies, to a large degree, on our distribution
network. The PRC is a geographically vast country and it is critical to market
our products in a range of various regions. In order to expand our business, we
will need to increase our distribution network by adding more sales agents,
distributors, wholesalers and retailers that carry our products. There can be no
assurance that we will be able to effectively manage our independent
distributors and sales agents, as our internal resource may be limited. Nor can
there be any assurance that we will be able to grow our distribution network, as
our competitors may offer better products and commission to distributors and
sales agents, and, if we can grow our distribution network, there can be no
assurance that we will be able to operate it efficiently.
We may not be able to effectively control and manage our growth.
If our business and markets grow and develop, it will be necessary for us
to finance and manage expansion in an orderly fashion. In addition, we may face
challenges in managing expanding product and service offerings and in
integrating acquired businesses with our own. Such eventualities will increase
demands on our existing management, workforce and facilities. Failure to satisfy
such increased demands could interrupt or adversely affect our operations and
cause production backlogs, longer product development time frames and
administrative inefficiencies.
Our profitability depends on our success on brand recognition and we could lose
our competitive advantage if we are not able to protect our trademarks against
infringement, and any related litigation could be time-consuming and costly.
Our trademarked brands have gained substantial recognition to the
customers in various areas, however, the protection of intellectual property
rights in the PRC may not be as effective as those in the United States or other
countries. The unauthorized use of our brands could enable some other
manufacturers take unfair advantage, which could harm our business and
competitive position.
13
We do not have any long-term supply contracts with our raw materials suppliers
and any significant fluctuation in price of our raw materials may have a
material adverse effect on the manufacturing cost of our products.
Stainless steel and glass tube are two major raw materials we use, the
price of which are subject to market conditions and for which we normally do not
have long-term contracts or arrangements with our suppliers. While these raw
materials are generally available and we have not experienced any raw material
shortage in the past, there can be no assurance that prices will not rise
because of changes in market conditions. An increase in component or raw
material costs relative to our product prices could have a material adverse
effect on our gross margins and earnings.
We have to outsource our production to third party manufacturers during the
sales peak season due to our limited manufacturing capacity.
Approximately 30% to 40% of our total sales during our peak season are
manufactured through an Original Equipment Manufacturer ("OEM") arrangement.
Under an OEM arrangement, we contract with other manufacturers to produce our
products and authorize these manufacturers to put our brand names or trademarks
on these products. There is no assurance that we will continue to find qualified
manufacturers on acceptable terms in the areas where our customers are located
and, if we do, there can be no assurance that product quality will continue to
be acceptable which could lead to a loss of sales and revenues.
We do not have key man insurance on our President and CEO, Mr. Du, on whom we
rely for the management of our business.
We depend, to a large extent, on the abilities and participation of our
current management team, but have a particular reliance upon Deli Du. The loss
of the services of Mr. Du, for any reason, may have a material adverse effect on
our business and prospects. There can be no assurance in this regard nor can
there be any assurance that we will be able to find a suitable replacement for
Mr. Du. We do not carry key man life insurance for any key personnel.
We are responsible for the indemnification of our officers and directors.
Our Bylaws provide for the indemnification of our directors, officers,
employees, and agents, under certain circumstances, against costs and expenses
incurred by them in any litigation to which they become a party arising from
their association with or activities on behalf of us. This indemnification
policy could result in substantial expenditures, which we may be unable to
recoup.
We may not be able to hire and retain qualified personnel to support our growth
and if we are unable to retain or hire such personnel in the future, our ability
to improve our products and implement our business objectives could be adversely
affected.
Competition for senior management and senior technology personnel is
intense, the pool of qualified candidates is very limited, and we may not be
able to retain the services of our senior executives or senior technology
personnel, or attract and retain high-quality senior executives or senior
technology personnel in the future. Such failure could materially and adversely
affect our future growth and financial condition.
14
We do not presently maintain fire, theft, product liability or any other
property insurance, which leaves us with exposure in the event of loss or damage
to our properties or claims filed against us.
We do not maintain fire, theft, product liability or other insurance of
any kind. We bear the economic risk with respect to loss of or damage or
destruction to our property and to the interruption of our business as well as
liability to third parties for damage or destruction to them or their property
that may be caused by our personnel or products. Such liability could be
substantial and the occurrence of such loss or liability may have a material
adverse effect on our business, financial condition and prospects. While product
liability lawsuits in the PRC are rare, and we have never experienced
significant failure of our products, there can be no assurance that we would not
face liability in the event of the failure of any of our products.
Rapid technological changes in our industry could render our products
non-competitive or obsolete and consequently affect our ability to generate
revenues.
The solar hot water industry is subject to rapid technological changes.
Our future success will depend on our ability to respond to rapidly changing
technologies and improve the product quality. Our failure to adapt to such
changes could harm our business. Our future plans to market our products to
urban areas require our products to be innovative. If we are slow to develop
products and technologies that are attractive to people in these areas, we may
not be successful in capturing a significant share of this market. For example,
most of our current products rely on a tubular structure while urban customers
prefer a flat plate collector for aesthetic purposes. If we fail to keep up with
rapid technological changes to remain competitive in our rapidly evolving
industry, our future marketing and expansion may be adversely affected.
Our agents' deposit may not cover total warranty claims.
We typically offer a three-year warranty coverage for our products. During
the first year of this warranty program, we cover any defects and product
malfunctions. Most of our warranty services are performed by our independent
sales agents and distributors in return for a 1-2% discount of the purchase
price they pay for our products. We normally require our new sales agents and
distributors to pay us a deposit varying from RMB5,000 to 20,000 depending on
their represented areas, which we believe to certain extent, will ensure their
performance of the necessary warranty services. Although we have not experienced
any significant product returns or repairs, there can be no assurance that these
sales agents and distributors will perform the warranty services as we require,
and if they fail to provide the required warranty services, there can be no
assurance that the agents' deposits will be sufficient to cover all remaining
warranty services on the products sold by these sales agents and distributors.
We lease some of the real property on which our business center and exhibition
center and other facilities are located and there is no guarantee that our lease
will be renewed.
15
All land in the PRC is owned by the government and cannot be sold to any
individual or entity. Instead, the PRC government grants landholders a "land use
right." Our business center in Bazhou City and our exhibition center in Beijing
are located on the leased land. See Description of Property of this prospectus.
Under the lease for the land for the business center at Bazhou City, upon the
expiration of the initial lease term and if the lessor decides to continue to
lease the land, we have the right of first refusal to renew the lease. Under the
lease for the land for the exhibition center at Beijing, the lease is renewable
by a three month notice prior to the expiration date. However, there is no
assurance that we may renew the lease on acceptable terms. Any failure by Deli
Solar (PRC) to obtain the reasonable renewal of the lease could cause the
Company extra expenses and cost for any alternative land and for the
reconstruction of the buildings thereon.
Our acquisition of the land use rights from villagers is subject to announcement
and approval procedures and we cannot assure you that they will be through.
On March 16, 2006, Deli Solar (PRC) entered into an agreement with the
Governance Commission of Beijiahe Village Chaheji County Bazhou City (the
"Village Governance Commission") to acquire land use rights to a piece of land
comprising 61,530 square meters (the "Land") at a price of approximately
$919,858, subject to the procedures as mentioned below. The previous users of
the Land were villagers and the Land was used for agricultural purposes.
According to the relevant PRC regulations, the Village Governance Commission
shall announce its intention to transfer of land use rights to Deli Solar (PRC)
(the "Announcement Procedure") and provide the villagers with reasonable
compensation to acquire their land use rights from them. The conversion of land
use from agricultural to non-agricultural requires the approval of the local
government. Further once the approval from the local government has been
obtained, the new holder of such land use rights will have to be registered with
the land administration bureau. We cannot guarantee that the Village Governance
Commission will carry out the Announcement Procedure and provide reasonable
compensation to the villagers as prescribed. We further cannot guarantee that
the application to change the purpose of land use will be approved by the local
government or that the new holder of the land use rights would be able to be
registered with the land administration bureau.
Risk Related to Our Industry
A drop in the retail price of conventional energy non-solar alternative energy
or any improvement to the rural household's electricity supply system in the PRC
may have a negative effect on our business.
A customer's decision to purchase our solar power products is primarily
driven by the poor electricity supply system in the rural areas of the PRC, as
well as the return on investment resulting from the energy savings from our
solar power products. An improvement in the power supply infrastructure in the
rural areas of the PRC could adversely affect the demand for our products. In
addition, fluctuations in economic and market conditions that impact the
viability of conventional and non-solar alternative energy sources, such as
decreases in the prices of oil and other fossil fuels could cause the demand for
our solar power heaters to decline. Although we believe that current retail
energy prices support a reasonable return on investment for our products, there
can be no assurance that future retail pricing of conventional energy and
non-solar alternative energy will remain at such levels.
16
Existing regulations and changes to such regulations may present technical,
regulatory and economic barriers to the purchase and use of solar power
products, which may significantly reduce demand for our products.
Our solar power products and their installation are subject to oversight
and regulation in accordance with national and local ordinances relating to
building codes, safety, environmental protection, utility interconnection and
metering and related matters. We are responsible for knowing the requirements of
individual cities and must design equipment to comply with varying standards.
Any new government regulations or utility policies pertaining to our solar power
products may result in significant additional expenses to us, our resellers and
their customers and, as a result, could cause a significant reduction in demand
for our solar power products.
If solar power technology is not suitable for widespread adoption or sufficient
demand for solar power products does not develop or takes longer to develop than
we anticipate, our sales would not significantly increase and we would be unable
to achieve or sustain profitability.
The market for solar power products is emerging and rapidly evolving, and
its future success is uncertain. If solar power technology proves unsuitable for
widespread commercial deployment or if demand for solar power products fails to
develop sufficiently, we would be unable to generate enough revenues to achieve
and sustain profitability. In addition, demand for solar power products in the
markets and geographic regions we target may not develop or may develop more
slowly than we anticipate. Many factors will influence the widespread adoption
of solar power technology and demand for solar power products, including:
o cost-effectiveness of solar power technologies as compared with
conventional and non-solar alternative energy technologies;
o performance and reliability of solar power products as compared with
conventional and non-solar alternative energy products;
o capital expenditures by customers that tend to decrease if the PRC
or global economy slows down;
o availability of government subsidies and incentives.
Risks Related to Doing Business in the PRC.
We face the risk that changes in the policies of the PRC government could
have a significant impact upon the business we may be able to conduct in the PRC
and the profitability of such business.
The PRC's economy is in a transition from a planned economy to a market
oriented economy subject to five-year and annual plans adopted by the government
that set national economic development goals. Policies of the PRC government can
have significant effects on the economic conditions of the PRC. The PRC
government has confirmed that economic development will follow the model of a
market economy. Under this direction, we believe that the PRC will continue to
strengthen its economic and trading relationships with foreign countries and
business development in the PRC will follow market forces. While we believe that
this trend will continue, there can be no assurance that this will be the case.
A change in policies by the PRC government could adversely affect our interests
by, among other factors: changes in laws, regulations or the interpretation
thereof, confiscatory taxation, restrictions on currency conversion, imports or
sources of supplies, or the expropriation or nationalization of private
enterprises. Although the PRC government has been pursuing economic reform
policies for more than two decades, there is no assurance that the government
will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership, social
or political disruption, or other circumstances affecting the PRC's political,
economic and social life.
17
The PRC laws and regulations governing our current business operations are
sometimes vague and uncertain. Any changes in such PRC laws and regulations may
have a material and adverse effect on our business.
There are substantial uncertainties regarding the interpretation and
application of PRC laws and regulations, including but not limited to the laws
and regulations governing our business, or the enforcement and performance of
our arrangements with customers in the event of the imposition of statutory
liens, death, bankruptcy and criminal proceedings. We and any future
subsidiaries are considered foreign persons or foreign funded enterprises under
PRC laws, and as a result, we are required to comply with PRC laws and
regulations. These laws and regulations are sometimes vague and may be subject
to future changes, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws, regulations or
amendments may be delayed, resulting in detrimental reliance by foreign
investors. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively. We cannot predict what effect the
interpretation of existing or new PRC laws or regulations may have on our
businesses.
A slowdown or other adverse developments in the PRC economy may materially
and adversely affect our customers, demand for our services and our business.
All of our operations are conducted in the PRC and all of our revenues are
generated from sales in the PRC. Although the PRC economy has grown
significantly in recent years, we cannot assure you that such growth will
continue. The solar hot water and renewable energy industry in the PRC is
relatively new and growing, but we do not know how sensitive we are to a
slowdown in economic growth or other adverse changes in the PRC economy which
may affect demand for solar hot water heaters and boilers. A slowdown in overall
economic growth, an economic downturn or recession or other adverse economic
developments in the PRC may materially reduce the demand for our products and
materially and adversely affect our business.
Inflation in the PRC could negatively affect our profitability and growth.
While the PRC economy has experienced rapid growth, such growth has been
uneven among various sectors of the economy and in different geographical areas
of the country. Rapid economic growth can lead to growth in the money supply and
rising inflation. If prices for our products rise at a rate that is insufficient
to compensate for the rise in the costs of supplies, it may have an adverse
effect on profitability. In order to control inflation in the past, the PRC
government has imposed controls on bank credits, limits on loans for fixed
assets and restrictions on state bank lending. Such an austere policy can lead
to a slowing of economic growth. In October 2004, the People's Bank of China,
the PRC's central bank, raised interest rates for the first time in nearly a
decade and indicated in a statement that the measure was prompted by
inflationary concerns in the Chinese economy. Repeated rises in interest rates
by the central bank would likely slow economic activity in China which could, in
turn, materially increase our costs and also reduce demand for our products.
18
Governmental control of currency conversion may affect the value of your
investment.
The PRC government imposes controls on the convertibility of Renminbi into
foreign currencies and, in certain cases, the remittance of currency out of the
PRC. We receive substantially all of our revenues in Renminbi, which is
currently not a freely convertible currency. Shortages in the availability of
foreign currency may restrict our ability to remit sufficient foreign currency
to pay dividends, or otherwise satisfy foreign currency dominated obligations.
Under existing PRC foreign exchange regulations, payments of current account
items, including profit distributions, interest payments and expenditures from
the transaction, can be made in foreign currencies without prior approval from
the PRC State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate governmental
authorities is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies.
The PRC government may also at its discretion restrict access in the
future to foreign currencies for current account transactions. If the foreign
exchange control system prevents us from obtaining sufficient foreign currency
to satisfy our currency demands, we may not be able to pay certain of our
expenses as they come due.
The fluctuation of the Renminbi may materially and adversely affect your
investment.
The value of the Renminbi against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in the PRC's political
and economic conditions. As we rely entirely on revenues earned in the PRC, any
significant revaluation of the Renminbi may materially and adversely affect our
cash flows, revenues and financial condition. For example, to the extent that we
need to convert U.S. dollars we receive from an offering of our securities into
Renminbi for our operations, appreciation of the Renminbi against the U.S.
dollar could have a material adverse effect on our business, financial condition
and results of operations. Conversely, if we decide to convert our Renminbi into
U.S. dollars for the purpose of making payments for dividends on our common
shares or for other business purposes and the U.S. dollar appreciates against
the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be
reduced. In addition, the depreciation of significant U.S. dollar denominated
assets could result in a charge to our income statement and a reduction in the
value of these assets.
On July 21, 2005, the PRC government changed its decade-old policy of
pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the
Renminbi is permitted to fluctuate within a narrow and managed band against a
basket of certain foreign currencies. This change in policy has resulted in an
approximately 3.2% appreciation of the Renminbi against the U.S. dollar as of
May 15, 2006. While the international reaction to the Renminbi revaluation has
generally been positive, there remains significant international pressure on the
PRC government to adopt an even more flexible currency policy, which could
result in a further and more significant appreciation of the Renminbi against
the U.S. dollar.
19
Recent PRC State Administration of Foreign Exchange ("SAFE") Regulations
regarding offshore financing activities by PRC residents have undergone a number
of changes which may increase the administrative burden we face. The failure by
our shareholders who are PRC residents to make any required applications and
filings pursuant to such regulations may prevent us from being able to
distribute profits and could expose us and our PRC resident shareholders to
liability under PRC law.
SAFE, issued a public notice ("October Notice") effective from November 1,
2005, which requires registration with SAFE by the PRC resident shareholders of
any foreign holding company of a PRC entity. Without registration, the PRC
entity cannot remit any of its profits out of the PRC as dividends or otherwise;
however, it is uncertain how the October Notice will be interpreted or
implemented regarding specific documentation requirements for a foreign holding
company formed prior to the effective date of the October Notice, such as in our
case: Our PRC resident controlling shareholder, Mr. Du, has taken all necessary
steps as instructed by the local SAFE branch at Bazhou city to comply with the
October Notice by filing a disclosure form regarding his ownership status in us;
however, there can be no assurance that such disclosure document will be
sufficient. It is also unclear exactly whether our other PRC resident
shareholders must make disclosure to SAFE. While our PRC counsel advised us that
only the PRC resident shareholders who receive the ownership of the foreign
holding company in exchange for ownership in the PRC operating company are
subject to the October Notice, there can be no assurance that SAFE will not
require our three other PRC resident shareholders to make disclosure. In
addition, the October Notice requires that any monies remitted to PRC residents
outside of the PRC be returned within 180 days; however, there is no indication
of what the penalty will be for failure to comply or if shareholder
non-compliance will be considered to be a violation of the October Notice by us
or otherwise affect us.
In the event that the proper procedures are not followed under the SAFE
October Notice, we could lose the ability to remit monies outside of the PRC and
would therefore be unable to pay dividends or make other distributions. Our PRC
resident shareholders could be subject to fines, other sanctions and even
criminal liabilities under the PRC Foreign Exchange Administrative Regulations
promulgated January 29, 1996, as amended.
Our current tax status is uncertain.
Deli Solar (PRC) has, in the past, received favorable tax treatment from
the Bazhou Municipal government and has paid only nominal amounts of income tax
at the central, provincial and municipal levels.
Pursuant to the relevant laws and regulations in the PRC, Deli Solar
(PRC), as a wholly foreign owned enterprise ("WFOE") in the PRC, is entitled to
an exemption from the PRC enterprise income tax for two years commencing from
its first profitable year. Thereafter, it is entitled to a 50% relief from PRC
enterprise income tax for the next three years. Because Deli Solar (PRC) was
transformed into a WFOE in March 2005, it should be entitled to be exempted from
PRC enterprise income tax for two years ending March 2007, and then a
preferential relief of 50% of the tax rate for the following three years of its
operation ending March 2010.
20
However, such tax exemption status has not been formally approved by the
local tax authorities yet. We are in the process of requesting a written
confirmation. We understand from the authorities that the exact commencement
date for the tax exemption period is from March 2005, the date on which Deli
Solar (PRC) was transformed into a WFOE; however the taxes we have paid for the
period from March, 2005 to present (albeit nominal) will not be refunded.
Further, once our tax exemption as a WFOE expires, we do not know whether we
will continue to receive the relief from taxes that we received in the past.
Finally, there can be no assurance that the central government will not audit
our previous tax returns and payments and require that we pay additional taxes
and penalties in the future which could materially and adversely affect our
business and financial condition.
Any recurrence of severe acute respiratory syndrome, or SARS, or another
widespread public health problem, could adversely affect our operations.
A renewed outbreak of SARS or another widespread public health problem in
the PRC, such as bird flu where all of the Company's revenue is derived, could
have an adverse effect on our operations. Our operations may be impacted by a
number of health-related factors, including quarantines or closures of some of
our offices that would adversely disrupt our operations.
Any of the foregoing events or other unforeseen consequences of public
health problems could adversely affect our operations.
Because our principal assets are located outside of the United States and two of
our directors and nearly all our officers reside outside of the United States,
it may be difficult for you to enforce your rights based on U.S. Federal
Securities Laws against us and our officers and some directors in the U.S. or to
enforce U.S. court judgment against us or them in the PRC.
Two of our five directors and nearly all of our officers reside outside of
the United States. In addition, Deli Solar (PRC), our operating subsidiary, is
located in the PRC and substantially all of its assets are located outside of
the United States. It may therefore be difficult for investors in the United
States to enforce their legal rights based on the civil liability provisions of
the U.S. Federal securities laws against us in the courts of either the U.S. or
the PRC and, even if civil judgments are obtained in U.S. courts, to enforce
such judgments in PRC courts. Further, it is unclear if extradition treaties now
in effect between the United States and the PRC would permit effective
enforcement against us or our officers and directors of criminal penalties,
under the U.S. Federal securities laws or otherwise.
We may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The PRC historically has not adopted a western style of management and
financial reporting concepts and practices, as well as in modern banking,
computer and other control systems. We may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the PRC. As a
result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet western standards.
Risks Related to Our Common Stock.
21
Our officers, directors and affiliates control us through their positions
and stock ownership and their interests may differ from other stockholders.
Our officers, directors and affiliates beneficially own approximately
65.73% of our common stock. Deli Du, our Chief Executive Officer, beneficially
owns approximately 51.62% of our Common Stock. As a result, Mr. Du is able to
influence the outcome of stockholder votes on various matters, including the
election of directors and extraordinary corporation transactions including
business combinations. Mr. Du's interests may differ from other stockholders.
Furthermore, the current ratios of ownership of our common stock reduce the
public float and liquidity of our common stock which can in turn affect the
market price of our common stock.
We are not likely to pay cash dividends in the foreseeable future.
We currently intend to retain any future earnings for use in the operation
and expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiary. In addition, our operating
subsidiary, from time to time, may be subject to restrictions on its ability to
make distributions to us, including restrictions on the conversion of local
currency into U.S. dollars or other hard currency and other regulatory
restrictions.
There is currently a limited trading market for our common stock.
Our common stock is quoted on the over-the-counter Bulletin Board.
However, our bid and asked quotations have not regularly appeared on the OTC
Bulletin Board for any consistent period of time. There is no established
trading market for our common stock and our common stock may never be included
for trading on any stock exchange or through any other quotation system
(including, without limitation, the NASDQ Stock Market). You may be unable to
sell your shares due to the absence of a trading market.
Our common stock may be also subject to the "penny stock" rules to the
extent that the price drops below $5.00, which require delivery of a schedule
explaining the penny stock market and the associated risks before any sale. See
Item 20, "Market for Common Equity and Related Stockholder Matters" of this
prospectus. These requirements may further limit your ability to sell your
shares.
Our common stock is illiquid and subject to price volatility unrelated to our
operations.
The market price of our common stock could fluctuate substantially due to
a variety of factors, including market perception of our ability to achieve our
planned growth, quarterly operating results of other companies in the same
industry, trading volume in our common stock, changes in general conditions in
the economy and the financial markets or other developments affecting our
competitors or us. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market
price of securities issued by many companies for reasons unrelated to their
operating performance and could have the same effect on our common stock.
A large number of shares will be eligible for future sale and may depress our
stock price.
22
This is an offering of 3,952,025 shares of our common stock by the Selling
Stockholders, among which 1,825,719 shares are purchasable upon the exercise of
the warrants at the price of $3.85 per share. As of May 10, 2006, there were
6,205,290 shares of our common stock outstanding. In addition to the shares
covered by this prospectus, approximately 72,544 of these shares are freely
tradable without substantial restriction or the requirement of future
registration under the Securities Act.
Sales of substantial amounts of common stock, or a perception that such
sales could occur, and the existence of options or warrants to purchase shares
of common stock at prices that may be below the then current market price of the
common stock, could adversely affect the market price of our common stock and
could impair our ability to raise capital through the sale of our equity
securities.
USE OF PROCEEDS
We will not receive any of the proceeds from any sales of the shares
registered under this prospectus by the Selling Stockholders. We may receive
proceeds from the issuance of shares of our common stock upon the exercise of
warrants we issued in connection with our private placement completed on March
31, 2005, which are exercisable at $3.85 per share, except that the placement
agent for the offering, pursuant to its engagement agreement, is entitled to 9%
of the proceeds of the exercise of the warrants, or approximately $594,000.
We intend to use the net proceeds from the exercise of warrants, if any,
for working capital and other general corporate purposes. There is no assurance
that any of the warrants will ever be exercised for cash, if at all. If all of
these outstanding warrants are exercised for cash, we would receive aggregate
gross proceeds of approximately $7,029,018, and our placement agent would
receive approximately $594,000.
DETERMINATION OF OFFERING PRICE
We are not selling any of the common stock that we are registering,
although we will issue shares to warrant holders upon the exercise of these
warrants. The common stock will be sold by the Selling Stockholders listed under
the section entitled "Selling Stockholders" in this prospectus.
Our common stock is currently quoted under the symbol "DLSL.OB" on the OTC
Bulletin Board. As of May 15, 2006, the last reported bid price was $6.50 per
share and the last reported asked price was $10.90 per share. However, there was
no reported trading volume of our common stock. Neither the bid quotation nor
the ask quotation of our stock has appeared regularly in the over-the-counter
Bulletin Board during the past 60 business days. Further, there has been no
participation of a broker or dealer in trading our common stock. Thus, there is
no existing "public market" for our common stock, as such term defined under
Item 10 of Regulation S-B. A Selling Stockholder will determine when it will
sell its common stock and in all cases, will sell its common stock at the
current market price or at negotiated prices at the time of the sale.
23
SELLING STOCKHOLDERS
This prospectus relates to the offer and sale of our common stock by the
Selling Stockholders identified in the table below. Each Selling Stockholder
identified as an Accredited Investor acquired its shares and warrants in our
private placement transaction completed on March 31, 2005. Each Selling
Stockholder identified as a member of the Financial Advisor Group acquired its
shares and/or warrants for its role as a private placement agent or financial
advisor to the Company in connection with the Reverse Merger and private
placement transactions. Except as described in the footnotes below, none of the
Selling Stockholders has held a position as an officer or director of the
Company, nor has any Selling Stockholder had a material relationship of any kind
with the Company.
The shares being offered are being registered to permit public secondary
trading of the shares and each Selling Stockholder may offer all or part of the
shares owned for resale from time to time. A Selling Stockholder is under no
obligation, however, to sell any shares immediately pursuant to this prospectus,
nor is a Selling Stockholder obligated to sell all or any portion of the shares
at any time. Therefore, no estimate can be given as to the number of shares of
common stock that will be sold pursuant to this prospectus or the number of
shares that will be owned by the Selling Stockholders upon termination of the
offering made hereby.
As of May 10, 2006, we had outstanding 6,205,290 shares of common stock,
our only class of outstanding voting securities.
- -----------------------------------------------------------------------------------------------------------------------------
Name of Selling Shares Shares Percentage Shares of Percentage of
Stockholders(1) Beneficially Issuable Ownership Common Stock Securities to
Owned(2) upon Before to be be Held After
Exercise of Offering (4) registered(5) Offering (6)
Warrants(3)
- -----------------------------------------------------------------------------------------------------------------------------
Accredited Investors:
- -----------------------------------------------------------------------------------------------------------------------------
Lake Street Fund L.P. 514,280 257,140 7.96% 514,280 0%
- -----------------------------------------------------------------------------------------------------------------------------
Lagunitas Partners L.P. 340,000 170,000 5.33% 340,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Gruber & McBaine 80,000 40,000 1.28% 80,000 0%
International
- -----------------------------------------------------------------------------------------------------------------------------
Jon D. Gruber & Linda W. 80,000 40,000 1.28% 80,000 0%
Gruber
- -----------------------------------------------------------------------------------------------------------------------------
Lynk Capital Partners 481,440 240,720 7.47% 481,440 0%
Limited
- -----------------------------------------------------------------------------------------------------------------------------
MidSouth Investor Fund L.P. 342,860 171,430 5.37% 342,860 0%
- -----------------------------------------------------------------------------------------------------------------------------
Lyman O. Heidtke 114,280 57,140 1.82% 114,280 0%
- -----------------------------------------------------------------------------------------------------------------------------
Wedbush Morgan Securities,
Custodian FBO Fred L.
Astman, IRA, R/O Holding 228,580 114,290 3.61% 228,580 0%
10/13/92
- -----------------------------------------------------------------------------------------------------------------------------
Scott Hood 22,860 11,430 * 22,860 0%
- -----------------------------------------------------------------------------------------------------------------------------
24
- -----------------------------------------------------------------------------------------------------------------------------
MicroCapital Fund L.P. 100,000 50,000 1.60% 100,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
MicroCapital Fund, Ltd. 65,700 32,850 1.05% 65,700 0%
- -----------------------------------------------------------------------------------------------------------------------------
Presidio Partners 102,000 51,000 1.63% 102,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Geary Partners 76,000 38,000 1.22% 76,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Brady Fund L.P. 22,000 11,000 * 22,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Poling Investments LLC 180,000 90,000 2.86% 180,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Iroquois Capital 144,000 72,000 2.29% 144,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Perritt Emerging 120,000 60,000 (11) 1.92% 120,000 0%
Opportunities Fund
- -----------------------------------------------------------------------------------------------------------------------------
C. Barry Zolot 80,000 40,000 1.28% 80,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Omicron Master Trust 72,000 36,000 1.15% 72,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Howard L. Farkas & Leslie 30,000 15,000 * 30,000 0%
A. Farkas, JT/WROS
- -----------------------------------------------------------------------------------------------------------------------------
Farkas Family Trust,
Steven J. Revenig, Esq., 30,000 15,000 * 30,000 0%
Trustee
- -----------------------------------------------------------------------------------------------------------------------------
Martin Fabrikant Revocable 30,000 15,000 * 30,000 0%
Trust
- -----------------------------------------------------------------------------------------------------------------------------
Leong Sing Lye 28,580 14,290 * 28,580 0%
- -----------------------------------------------------------------------------------------------------------------------------
Kircher Family Trust U/A/D
3/24/04 32,000 16,000 * 32,000 0%
Steven Kircher, Trustee
- -----------------------------------------------------------------------------------------------------------------------------
Steven Kay 28,000 14,000 * 28,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Richard A. Bocci 28,000 14,000 * 28,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
William H. Hedden 28,000 14,000 * 28,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Larry D. Kelley, Sr & Mary
Jane L. Kelley,
co-trustees, 28,000 14,000 * 28,000 0%
Kelley Revocable Trust
U/A/D 10/01/99
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal for Accredited 3,428,580 1,714,290 3,428,580 0%
Investors --------- --------- --- --------- ---
- -----------------------------------------------------------------------------------------------------------------------------
Financial Advisors
- -----------------------------------------------------------------------------------------------------------------------------
Delphinian Quest Advisors, 77,646 32,143 * 77,646 0%
LLC
- -----------------------------------------------------------------------------------------------------------------------------
Fletcher Capital 25,882 10,714 * 25,882 0%
Corporation
- -----------------------------------------------------------------------------------------------------------------------------
John D. Kuhns (7) 41,697 20,763 * 41,697 0%
- -----------------------------------------------------------------------------------------------------------------------------
John H. Starr 31,046 15,572 * 31,046 0%
- -----------------------------------------------------------------------------------------------------------------------------
Mary Fellows (8) 31,954 15,573 * 31,954 0%
- -----------------------------------------------------------------------------------------------------------------------------
Sam Shoen 17,726 11,058 17,726 0%
- -----------------------------------------------------------------------------------------------------------------------------
25
- -----------------------------------------------------------------------------------------------------------------------------
Paul Kuhns 3,565 2,351 * 3,565 0%
- -----------------------------------------------------------------------------------------------------------------------------
Kuhns Bros. & Co., Inc.(8) 51,255 51,255 * 51,255 0%
- -----------------------------------------------------------------------------------------------------------------------------
Robert Drake 1,000 1,000 * 1,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Jay Gutterman 11,000 11,000 * 11,000 0%
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal for the Financial 292,771 171,429 292,771 0%
Advisor Group(9) ------- ------- --- ------- ---
- -----------------------------------------------------------------------------------------------------------------------------
Former Controlling Group
- -----------------------------------------------------------------------------------------------------------------------------
Halter Capital 184,007 none 2.97% 184,007 0%
Corporation (10)
- -----------------------------------------------------------------------------------------------------------------------------
Kevin Halter, Jr.(10) 46,667 none 0.75% 46,667 0%
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal for Former 230,674 none 3.71% 230,674 0%
------- ---- ---- ------- ---
Controlling Group
- -----------------------------------------------------------------------------------------------------------------------------
Total 3,952,025 1,885,719 3,952,015 0%
- -----------------------------------------------------------------------------------------------------------------------------
* Denotes less than 1% of the outstanding shares of common stock.
(1) Each listed Selling Stockholder has the sole investment and voting power
with respect to all shares of common stock shown as beneficially owned by such
Selling Stockholder, except as otherwise indicated in the table. Under
applicable SEC rules, a person is deemed to be the "beneficial owner" of a
security with regard to which the person directly or indirectly, has or shares
(a) the voting power, which includes the power to vote or direct the voting of
the security, or (b) the investment power, which includes the power to dispose,
or direct the disposition, of the security, in each case, irrespective of the
person's economic interest in the security. Under these SEC rules, a person is
deemed to beneficially own securities which the person has the right to acquire
within 60 days through the exercise of any option or warrant or through the
conversion of another security.
(2) Includes shares that will be acquired upon the exercise of warrants as
indicated in column 3 of the table.
(3) Each warrant granted to the Accredited Investors entitles the holder to
purchase 10 shares of common stock at the exercise price of $3.85 per share at
any time prior to March 31, 2010. Each warrant granted to Kuhns Bros. & Co.,
Inc. and its designated persons entitles the holder to purchase 1 share of
common stock at the exercise price of $3.85 per share at any time prior to March
30, 2015. Kuhns Bros. & Co., Inc. is an investment banking firm 100% owned by
Kuhns Brothers, Inc., a holding company founded and 95% owned by John D. Kuhns,
one of our Directors.
(4) In determining the percent of common stock owned by a Selling Stockholder on
May 10, 2006, (a) the numerator is the number of shares of common stock
beneficially owned by such Selling Stockholder, including shares the beneficial
ownership of which may be acquired, within 60 days upon the exercise of the
warrants held by such Selling Stockholder, and (b) the denominator is the sum of
(i) the total 6,205,290 shares outstanding on May 10, 2006, and (ii) any number
of shares underlying the warrants, which each of the Selling Stockholders has
the right to acquire within 60 days upon the exercise of its warrants.
26
(5) The total number of registered shares for each Selling Stockholder is the
sum of (i) the number of shares owned by such Selling Stockholder, and (ii) the
shares the Selling Stockholder may acquire upon exercise of the warrants.
(6) Assumes the sale of all shares offered by the Selling Stockholders.
(7) Mr. John D. Kuhns, one of our Directors, is the Chairman and 95% shareholder
of Kuhns Brothers, Inc. and its 100% subsidiary, Kuhns Bros. & Co., Inc..
(8) Ms. Mary Fellows owns 5% of Kuhns Brothers, Inc.. Kuhns Brothers, Inc. is
the sole shareholder of Kuhns Bros. & Co., Inc. Thus, John D. Kuhns and Marry
Fellows together have the voting and investment power over the securities held
by Kuhns Bros. & Co., Inc..
(9) The shares issued to the Selling Stockholders identified as members of the
Financial Advisor Group and the share to be acquired by them upon the exercise
of the warrants are subject to a one year lock up agreement commencing from
March 31, 2005 to March 31, 2006. They purchased the securities in the ordinary
course of business, and at the time of the purchase of the securities to be
resold, had no agreements or understandings, directly or indirectly, with any
person to distribute the securities.
(10) The shares held by Halter Capital Corporation were acquired on January 31,
2005 in a private purchase transaction with Gerald N. Kern and Cynthia S. Kern,
the former controlling stockholders of the Company. Kevin Halter Jr. and Kevin
Halter Sr. are the sole shareholders and officers of Halter Capital Corporation
and are the sole members of Halter Capital Corporation's Board of Directors. The
percent of shares owned by the Halter Capital Corporation and Kevin Halter Jr.
is 3.72%. Kevin Halter Jr. has been President, Treasurer and CEO of Meditech
from January 31, 2005 to March 31, 2005. He has also served as Meditech's
director from January 31, 2005 to July 17, 2005.
(11) Perritt Emerging Opportunities Fund exercised its warrants to purchase a
total of 60,000 shares of our common stock at the exercise price of $3.85 per
share in November 2005. We received a total of $231,000 gross proceeds from the
exercise of the warrants; however, we are obligated to pay our placement agent
9% of the proceeds of the exercise of the warrants. The 60,000 shares of common
stock issued pursuant to the warrant exercise bear a restrictive legend.
BUSINESS
COMPANY HISTORY
Meditech Pharmaceuticals, Inc. ("Meditech") was incorporated in Nevada on
March 21, 1983. Meditech was a drug development company, focusing on research,
development, and marketing of anti-infective drugs in the biomedical industry.
In late 2004, Meditech spun off its drug development business, whose primary
assets consisted of various intellectual property rights, by assigning such
intellectual property rights to East West Distributors, Inc. ("East West"), a
wholly-owned subsidiary of Meditech formed on December 13, 2004 under the Nevada
law. Thereafter, Meditech distributed all of the capital stock of East West, pro
rata, in the form of a stock dividend to the shareholders of Meditech of record
on February 17, 2005. East West reported the spin-off on a Registration
Statement on Form 10-SB with the SEC on June 28, 2005. The spin-off was
completed on August 29, 2005. The spin-off was not required to be registered
under the Securities Act of 1933, as amended.
27
Deli Solar (BVI) is a holding company for Deli Solar (PRC), which operates
a solar and renewable energy business in the PRC. On March 31, 2005, Meditech
entered into a Stock Contribution Agreement (the "Stock Contribution Agreement")
with Mr. Deli Du of Bazhou City, Hebei Province, PRC. Under the Stock
Contribution Agreement, Meditech acquired all of the issued and outstanding
shares of capital stock of Deli Solar (BVI) (par value US$0.05 per share) in
exchange for the issuance of 4,067,968 shares (the number and the price of the
shares as described in this paragraph have 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) of Meditech's common
stock (par value $.001 per share). In connection with the transactions
contemplated by the Stock Contribution Agreement, on March 31, 2005, certain
non-affiliated accredited investors paid $6,000,015 to Meditech in exchange for
the issuance of 1,714,290 shares of common stock of Meditech and warrants to
purchase ten (10) shares of common stock for each ten (10) shares of common
stock issued to such accredited investors, representing warrants to purchase an
aggregate of 1,885,719 shares of common stock of Meditech at an exercise price
of $3.85 per share, which warrants are exercisable through March 31, 2010. As a
result of foregoing transactions, the former shareholders of Deli Solar (BVI)
became holders of majority of the common stock of Meditech and Deli Solar (BVI)
became a wholly-owned subsidiary of Meditech. On August 15, 2005, Meditech
changed its name from "Meditech Pharmaceuticals, Inc." to "Deli Solar (USA),
Inc." (the transactions described in this paragraph, are collectively referred
to herein, the "Reverse Merger"). Further information regarding the Reverse
Merger is contained in the Current Report on Form 8-K filed with the SEC by
Meditech on April 6, 2005 and a Schedule 13D filed by Mr. Deli Du with the SEC
on April 18, 2005.
We effectuated a 1 for 6 reverse split in May 2005 pursuant to which the
10,285,744 shares were adjusted to approximately 1,714,290 shares. In August
2005, we increased the warrant coverage to allow these accredited investors to
purchase 10 shares of our common stock for every 10 shares (adjust for post
split) purchased with an exercise price of $3.85 per share. These shares and the
shares to be issued upon the exercise of the warrants constitute a majority part
of the shares being registered under this prospectus.
Summary of our Business and Structure
The business of Deli Solar (BVI) and Deli Solar (USA), respectively, is to
serve as the direct and indirect holding company of Deli Solar (PRC), a limited
liability company duly organized and registered under the laws of the PRC, with
the Bureau for Industry and Commerce in Bazhou City, Heibei Province, the PRC.
On August 1, 2004, Deli Solar (BVI) purchased all the capital stock of Deli
Solar (PRC) from Messrs Deli Du, Xiao'er Du, and Xiaoshan Du for RMB6,800,000.
The purchase was approved by Hebei Provincial Commercial Bureau on March 24,
2005, and the State Administration for Industry and Commerce for the PRC issued
a new business license to Deli Solar (PRC) on March 30, 2005. Deli Solar (PRC)
became a wholly foreign-owned enterprise ("WFOE") under PRC law, by virtue of
its status as a wholly-owned subsidiary of a foreign company, Deli Solar (BVI).
28
Deli Solar (PRC) was founded in 1997 and is engaged in the business of
designing, manufacturing and selling renewable energy systems to produce hot
water and for space heating. Its principal products are solar hot water heaters
and multifunctional space heating products including coal-fired residential
boilers. Deli Solar (PRC) also sells component parts for its systems, and
provides after-sales maintenance and repair services.
On November 21, 2005, Deli Solar (PRC) acquired all the capital stock of
Beijing Ailiyang Solar Energy Technology Co., Ltd. ("Ailiyang") for a total
purchase price of RMB500,000 pursuant to a stock purchase agreement with
Ailiyang dated February 24, 2005, whereby Ailiyang has become a wholly-owned
subsidiary of Deli Solar (PRC). The sole business of Ailiyang has been to serve
as a distributor of Deli Solar (PRC). Details of the acquisition were reported
in our Current Report filed with the SEC on November 28, 2005.
Deli Solar (PRC) currently has approximately 273 employees and utilizes
three factory facilities in Bazhou with a total of over 10,244 square meters of
production, warehouse, and office space and space for use as a distribution
center and a approximately 2,000 square meters of office space and exhibition
center in Beijing. A complete description of our properties and facilities is
contained in "Item 2 - Description of Property" below.
The offices of Deli Solar (USA) are located at 558 Lime Rock Road, Lime
Rock, Connecticut 06039 and our telephone number is (860) 435-7000. Deli Solar
(PRC) is located outside of the city of Bazhou in the Hebei Province of the PRC.
The following diagram sets forth the corporate structure of the Company
as of December 31, 2005:
----------------------
Deli Solar (USA), Inc.
----------------------
| 100%
----------------------
Deli Solar Holding Ltd.
"Deli Solar (BVI)"
----------------------
| 100%
----------------------
Bazhou Deli Solar
Energy Heating Co., Ltd.
"Deli Solar (PRC)"
----------------------
| 100%
----------------------
Ailiyang Solar
Energy Technology Co., Ltd.
"Ailiyang"
----------------------
Neither Deli Solar (USA) nor Deli Solar (BVI) have any operations or plan
to have any operations in the future other than acting as a holding company and
management company for Deli Solar (PRC) and raising capital for its operations.
However, we reserve the right to change our operating plans regarding Deli Solar
(USA) and Deli Solar (BVI).
Recent Development
29
On March 24, 2006, Deli Solar (PRC) executed a non-binding Memorandum of
Understanding ("MOU") to acquire all capital stock of Beijing Four Seasons Solar
Power Technology Co, Ltd. ("Four Seasons"), a limited liability company
organized under the laws of the PRC involved in selling solar power equipment in
the PRC. The proposed purchase price for Four Seasons is $10.5 million, payable
in $2,000,000 cash in the form of a demand loan and 1,062,500 shares of common
stock of Deli Solar (USA). Pursuant to the MOU, the final completion of the
transaction is subject to due diligence and other conditions.
Our plan to acquire Beijing Yuxin Yangguang Solar Energy Industrial Co.,
Ltd., another PRC enterprise, which manufactures solar hot water heaters and has
an estimated value of $3 million, has been suspended.
We terminated the MOU with Four Seasons in June 2006 due to the fact that
the parties had not reached a definitive merger agreement by May 31, 2006 and
the MOU could have been terminated at any time after May 31, 2006 by its terms.
We released a press release on the termination on June 15, 2006. We will
continue to seek acquisition targets.
We are in the progress of setting up a new subsidiary of the Company in
Beijing called Beijing Deli Solar Technology Development Co., Ltd. ("Deli Solar
(Beijing)") to further develop our business there. Deli Solar (Beijing) will be
a directly wholly-owned subsidiary of the Company. We have contributed the
registered capital of $1,000,000 into Deli Solar (Beijing). The issuance of a
business licence for Deli Solar (Beijing) is in process by the Beijiing
Industrial and Commercial Bureau.
OUR BUSINESS
Following the completion of the Reverse Merger, the business of Deli Solar
(PRC) became our only business. Deli Solar (PRC) designs, manufactures and sells
solar hot water heaters and coal-fired boilers and space heating products. We
also provide components, parts and after-sale services associated with these
products. Approximately 68% of our revenues are derived from our solar hot water
business, with the balance of approximately 32% of our revenues from sales of
our coal-fired boilers and space heating products.
Most end users of our products use them to heat water for their homes,
with a concentration in rural areas where electricity is in short supply. Our
coal-fired residential boilers, furnaces and heating stoves are also used as
primary household space heaters during cold weather and cooking stoves.
Solar Hot Water Heater Products
Our primary products are solar hot water heaters. Solar hot water heaters
use sunlight to heat either water or a heat-transfer fluid in collectors. The
solar collector is mounted on or near a house facing south. As sunlight passes
through the collector's glazing, it strikes an absorbing material. This material
converts sunlight into heat, and the glazing prevents the heat from escaping.
The two most common types of solar collectors used in solar water heaters in the
China market are evacuated tube collectors and glazed flat plate.
Solar-heated water is stored in an insulated tank until use. Hot water is
drawn off the tank when tap water is used, and cold make-up water enters at the
bottom of the tank. Solar water heaters tend to have a slightly larger hot water
storage capacity than conventional water heaters. This is because solar heat is
available only during the day and sufficient hot water must be collected to meet
evening and morning requirements.
30
We produce and sell solar hot water heaters using both evacuated tube
collectors and glazed flat plate. Evacuated tubular solar water heaters are our
principal solar products. There are two major types of evacuated tubular solar
water heaters: standard evacuated tubular solar water heaters and evacuated heat
pipe solar water heaters. The following table sets forth our product types and
the approximate percentage of the sales of each type:
- ------------------------ ------------ ------------------------- --------------------------
Types Approx. % Sub-types Approx. % of
of total total solar
sales product revenue
revenues
- ------------------------ ------------ ------------------------- --------------------------
Evacuated Tubular 95% Regular Evacuated 85%
Solar Water Heaters Tubular Solar Water
Heaters
- ------------------------ ------------ ------------------------- --------------------------
Evacuated Heat Pipe 10%
Solar Water Heaters
- ------------------------ ------------ ------------------------- --------------------------
Flat Plate Solar Water 5% N/A
Heaters
- ------------------------ ------------ ------------------------- --------------------------
Evacuated Tubular Solar Water Heaters.
This line of products can generate hot water all year round for homes,
whether or not they are located in a cold climate. There are two types of vacuum
tube water heaters currently available: i) the all-glass vacuum tube; and ii)
the heat-pipe vacuum tube. Our regular evacuated tubular solar water heaters use
the all-glass vacuum tubes, and our evacuated heat pipe solar water heaters use
the heat pipe vacuum tubes. The primary use of our evacuated tubular solar water
heaters is to generate hot water for household uses. However, solar thermal
energy can also be employed in industrial processes, timber treatment,
agricultural processes, cooling and space heating.
A growing number of our products are being used in complete building
integrated solar heating packages, which integrate our solar hot water and space
heating systems directly into the construction of new multi-family dwellings,
commercial office buildings and industrial developments. In August 2005 we
entered into a construction agreement with Beijing Municipal Mengtougou District
Yingtaogou Village Committee to install our solar hot water and space heating
systems in 83 detached houses by March 30, 2007. As of May 15, 2006, we have
completed the installation of our solar hot water and space heating systems in 6
of such houses' integrated solar heating packages.
31
Our regular evacuated products use all-glass evacuated tubular collectors.
These collectors consist of rows of parallel transparent glass tubes, which are
double layered and made of borosilicate glass. Each tube contains an absorber
and is covered with a selective coating. Sunlight enters the tube, strikes the
absorber, and heats the water flowing through the absorber. The space between
the glass tubes and the absorber is "evacuated," or is a "vacuum". This vacuum
helps the collectors achieve extremely high temperatures (170-350 degrees F).
Because all-glass evacuated tubular collectors are relatively easy and cheap to
make as compared to heat pipe vacuum tubes, our regular evacuated tubular solar
water heaters are our best selling solar hot water heater comprising
approximately 85% of our solar water heaters sales.
Our evacuated heat pipe solar water heaters use the heat pipe vacuum tubes
to convert solar energy into thermal energy. A heat pipe vacuum tube is a
hermetically sealed evacuated tube containing a mesh or sintered powder wick and
a working fluid in both the liquid and vapor phase. When one end of the tube is
heated the liquid turns to vapor absorbing the latent heat of vaporization. The
hot vapor flows to the colder end of the tube where it condenses and gives out
heat. The use of the latent heat of the fluid enables heat to be transferred at
500 to 1000 times the rate compared with a solid metal rod and at temperature
differences between the ends of the pipe as low as 2 (degree)C (i.e.
3.6(degree)F difference). The heat-pipe vacuum tube is a combined pipe and
vacuum technology. This product line features fast heating, minimum thermal
loss, high temperature resistance, anti-freeze and good pressure resistance.
Evacuated heat pipe solar water heaters, if pressurized, can produce high
pressure hot water and solve the uneven temperature of the hot water problem.
Our pressurized evacuated heat pipe solar water haters can be customized
according to actual needs of our customers. Moreover, heat pipe vacuum tubes are
more difficult to manufacture and have higher production costs than all-glass
vacuum tubes. Given our targeted residential household market, we only sell a
limited amount of evacuated heat pipe solar water heaters, comprising
approximately 10% of our solar hot water heaters sales.
Flat Plate Solar Water Heaters.
This type of solar water heater consists of a flat-plate solar collector
and a hot water tank with natural circulation (thermosyphon). The collector is
constructed from either a copper-aluminum mix, all copper, or anti-corrosive
aluminum. The collector is a rectangular box with a transparent cover and a back
side insulation layer. Small tubes run through the box and carry fluid-either
water or other fluid, such as an antifreeze solution. The tubes attach to the
collector. As heat builds up in the collector, it heats the fluid passing
through the tubes. The hot water or liquid goes to a storage tank. Flat plate
solar water heaters made by foreign manufacturers typically can provide a
household with 70-100 liters of hot water (at 40-60(degree)C) per day all year
round. However, the anti-freeze technology for the flat plate has not fully
developed in the PRC. Our flat plate solar hot water heaters, and to our
knowledge, other flat plate solar hot water heaters that are currently available
in China, can be used only during the spring, summer and fall seasons. Our sales
of this product comprise approximately 5% of our total solar hot water heater
sales.
Boilers and Space Heating Products
Our boilers, furnaces and stove heating products are coal-fired, small
scale units for residential space heating and cooking purposes. We manufacture
more than 80 types of boilers, furnaces, space heating and stove cooking
products. Separated by functions and usage, our boilers, furnaces and stove
heating products can be divided into three types: 1) combined cooking and space
heating, comprising approximately 65% of our sales of boilers and space heating
products, 2) combined shower and space heating, comprising approximately 15% of
our sales of boiler and space heating products, and 3) multifunctional shower,
cooking and space heating, comprising approximately 20% of our sales of boilers
and space heating products.
32
New Product Pipeline
In addition to the building integrated (part of the building system's
heating and hot water system during new construction) solar hot water and space
heating systems for multi-family, commercial and industrial settings we
developed in the fiscal year ended December 31, 2005, we have the following
products in the product planning and developing stage:
Smokeless coal-fired boilers. This product will not produce smoke and is
environmentally friendly. The research and development on this product has
been completed. Once any of our customers sends us orders for the
manufacture of the product, we can arrange the production.
Photovoltaic powered water heaters. Currently we are developing
photovoltaic powered water heaters. Photovoltaic technology (PV) is a
technology that converts solar energy into electricity. Photovoltaic
modules or panels are made of semiconductors that allow sunlight to be
converted directly into electricity. These modules can provide customers
with a safe, reliable, maintenance-free and environmentally friendly
source of power for a very long time. This system consists of a
photovoltaic array connected to several resistive heating elements within
a water storage tank. The PV array produces electrical power during
periods of solar irradiation and this power is immediately dissipated in
the resistive elements. We believe that the following factors make
photovoltaic powered water heaters an attractive addition to our existing
product line: severe electricity shortages for the PRC's grid-connected
residents, the complete absence of grid electricity for millions of others
and the poor prospect of improvement via incremental central station
capacity and grid development in the near future, the abundance of solar
energy resource in the PRC and an active rural banking system. We
currently anticipate that the earliest this product will become available
on the market is in 2007.
Bio-materials furnace. This product utilizes waste materials such as dry
hay to generate heat. We anticipate that the earliest this product will
become available on the market is in 2007.
Raw Materials and Principal Suppliers
The primary raw materials for manufacturing our products are stainless
steel plate, vacuum tubes, iron and regular steel plate. These raw materials are
generally available on the market and Deli Solar (PRC) has not experienced any
raw material shortage in the past. Because of the general availability of these
raw materials, it has not been our standard practice to enter into long-term
contracts or arrangements with most of our raw materials suppliers. We believe
that this gives us the flexibility to select the most suitable suppliers based
on product quality and price terms provided by such suppliers each year. We
generally have at least three suppliers that are pre-approved for each raw
material supply. However, this arrangement does not provide any guarantee to us
that necessary raw materials will continue to be procured at the price or
delivery terms currently available or acceptable to us.
33
During the past three years, we have purchased stainless steel plate
primarily from Lingyi Co. in Shangdong Province. Our three principal suppliers
of vacuum tubes have been Shangdong Taian Co., Beijing Linuo Co. and Beijing
Tianpu Co. Our principal supplier of steel and iron plate has been the local
market in Bazhou City, where Deli Solar (PRC) is located, which consists of
approximately 100 steel suppliers. We do not rely on any particular suppliers to
procure other raw materials.
Manufacturing Process, Cost, and Capacity
Deli Solar (PRC) assembles and manufactures most of its products in its
own production facility in Bazhou. Our senior manufacturing personnel include a
number of professional engineers and senior technology consultants. Currently,
we use primarily manual labor for our product because of availability of cheap
labor in the Bazhou area. However, we plan to investigate automation of some of
our production processes if our production reaches a volume where it would be
cost effective to do so. In February 2006, we purchased an automation production
line for the manufacture of the water storage boxes of the solar hot water
heaters, which is under installation currently. We expect the installation will
be completed by the end of July 2006. We plan to automate the manufacturing
process of the flat collectors, which is contingent on the favorable conclusion
of a feasibility study we are currently conducting on such automation.
We employ approximately 165 permanent manufacturing employees and also
contract temporary workers to meet increased production requirements, when
necessary. During manufacturing peak seasons for solar hot water heaters, which
normally are the second and third calendar quarters of the year, we have at
least approximately 300 workers working 3 shifts and 7 days per week. We pay our
production workers by items produced. Because of the strategic location of our
manufacturing facilities, we are able to take advantage of low labor cost in the
Bazhou area, which we estimate to be approximately 40% lower than that in the
Beijing or Shanghai areas. We have not experienced a great deal of worker
turnover because there are relatively few manufacturing employment positions in
the Bazhou area and believe that we have achieved a high level of employee
loyalty. Set forth below is certain information regarding our current
manufacturing capacity:
Current Manufacturing Capacity
--------------------- ---------------------- ----------------------
Daily Annual
Production Production
(Approximate Units) (Approximate Units)
--------------------- ---------------------- ----------------------
Solar Hot Water
Heaters 300 80,000
--------------------- ---------------------- ----------------------
Boilers and Space
Heating Products 150 39,000
--------------------- ---------------------- --------------------
34
Quality Control
Our manufacturing processes follow strict guidelines and standard
operating procedures that we believe is compliant with ISO 14000. Our products
are routinely tested as are individual aspects of our production. We are in the
process of applying for ISO 14000 certification.
Because of our stringent quality control system, most of our products are
certified by governmental quality control testing centers, such as Hebei
Province New Energy Products and Projects Quality Control and Testing Center,
and Beijing Technology Supervisory Bureau. We also received awards from Hebei
Province Consumers Organization and Hebei Province Administration of Industry
and Commerce, as well as endorsement from the China Rural Areas Energy Industry
Association. The following table sets forth the brands of our products that are
certified by Beijing Technology Supervisory Bureau to have met the National
Industry Standard NY-T 343-1998, which is the testing standard for solar hot
water heaters' thermal power:
------------------- -------------------------------- -----------------
Brands Products Model Numbers
------------------- -------------------------------- -----------------
Deli Sunny Brand Solar Water Heaters DLYG-12/75
------------------- -------------------------------- -----------------
Ailiyang Brand Solar Water Heaters ALY-12/75
------------------- -------------------------------- -----------------
Dudeli Brand Solar Water Heaters DDL-12/75
------------------- -------------------------------- -----------------
Deyu Brand Solar Water Heaters DY-12/75
------------------- -------------------------------- -----------------
Original Equipment Manufacturer (OEM) Arrangement
As set forth above, our sales peak season normally occurs in the second
and third calendar quarters of the year for solar hot water heaters and the
third and fourth calendar quarters of the year for boilers and space heating
products. During the sales peak seasons when our production capacity falls short
of the market demand, we assemble and manufacture products through Original
Equipment Manufacturer ("OEM") arrangements. Under a typical OEM arrangement, we
authorize an OEM to manufacture products under our brand names and/or
trademarks. We achieve quality control over products manufactured under such OEM
arrangement by sending our technicians on site to supervise the production and
test the products. During fiscal year 2005, we contracted three OEM. They are
Beijing Shen Guang Solar Power Co., Ltd., Shandong Xin Xing Solar Power Heater
Co., Ltd. and Hebei Guang Lei Stove Co., Ltd.
Manufacturing through OEM arrangements comprises approximately 30% to 40%
of our total sales during the peak season. For fiscal year 2005, the three OEM
generated an aggregate of 40% of our annual revenues. The OEM manufacturers
typically receive approximately 1% of the gross sales from the products they
manufacture for us. Most of the OEM manufacturers we select are located near
areas where products are demanded, thereby minimizing transportation costs.
35
Demand for Our Products
The majority of the demand for our products is from residential households
in the PRC, particularly in rural areas. Presently, we sell our products
primarily in the rural areas of the north-east part of the PRC including Hebei,
Beijing, Tianjing, Heilongjiang, and Liaoning, where there is prolonged sunny
and dry weather.
We believe the rural residential market has additional growth potential
because it is an emerging market where we have encountered relatively little
competition. Historically, the PRC's rural households have used primitive means
of generating hot water and space heating by using biomass, local agricultural
wastes, and/or kerosene. As the PRC's rural population has been earning
incremental discretionary income in recent years, modern hot water and space
heating systems have become increasingly affordable and a priority for
discretionary spending.
Seasonality of Business
Our sales experience fluctuation, reflecting seasonal variations in solar
energy supply during the four seasons. We have high sales volume of solar hot
water products in the spring because solar hot water heaters perform the best
during the summer when the solar energy is abundant. High sales volume of coal
boilers occur in the fall because customers purchase our space heating product
for the winter. Sales volume of our products tends to be lower between January
and March of a given year.
The PRC Solar Hot Water and Space Heating Market
The PRC's Economic Growth, Energy Shortage and Renewable Energy Policy
The rapid economic growth of the PRC in recent years has fueled a massive
demand for coal, oil and gas, which has caused a depletion in the country's coal
and oil reserves and a resulting shortage in supply, as well as serious
environmental problems. Recognizing that accelerating the country's transition
to efficient and renewable energy would ease such depletion and environmental
concerns, the National People's Congress, the PRC's parliament, passed the China
Renewable Energy Promotion Act, which became effective on January 1, 2006. The
Act aims to promote the use of renewable energy as an alternative source of
energy to the more polluting fuels. Such renewable energy currently accounts for
a negligible percentage of the country's total energy supply.
Urban and Rural Market Segmentation for Hot Water and Space Heating Systems in
China
The market for hot water and space heating systems in the PRC has shown
substantial growth recently. According to a research conducted by the China
Hardware Products Association and the China Information Center in 2002, only
71.5% of urban households had modern hot water systems. Modern hot water and
heating systems still have not become available or affordable in many households
in the country. Only recently have some of these households started to earn the
disposable income required to purchase the hot water and space heating systems.
36
There is insufficient infrastructure in place in the rural areas of the
PRC to deliver other energy solutions that are available as more conventional
options in other countries. The infrastructure to deliver natural gas or
propane, two of the most common energy sources used in the United States, for
example, are not well developed in the PRC, even in larger cities. As to
electrical energy, while it has become more available in the urban areas of the
PRC, it remains much less available in rural areas. Approximately 60% of rural
communities that are grid-connected experience serious shortages of electricity.
Large portions of the PRC's rural areas are not electrified or connected to the
electric grid. Eleven counties containing approximately 70 million of the PRC's
rural population have no electricity at all, according to National Renewable
Energy Laboratories. Also, the cost of electricity is high in many rural areas,
making it impractical for hot water and space heating purposes.
We believe that in most provinces of the PRC, solar-generated hot water
for domestic supply is the most available and economical solution. Compared with
electricity, natural gas or propane, we believe that solar hot water is more
available, less expensive and more suitable to rural household needs as shown in
the following table.
Cost Economics of Solar Hot Water Heaters
------------------------------- ---------- ---------- -----------------
(in $USD) Solar Gas Electric
------------------------------- ---------- ---------- -----------------
Initial Equipment Cost 241 120 72
------------------------------- ---------- ---------- -----------------
Engineering Life (Years) 15 6 5
------------------------------- ---------- ---------- -----------------
Equipment Cost (15 years) 241 300 216
------------------------------- ---------- ---------- -----------------
Annual Additional Energy Cost 0 98 81
------------------------------- ---------- ---------- -----------------
------------------------------- ---------- ---------- -----------------
Total Operating Cost 241 1,770 1,431
(15 years)
------------------------------- ---------- ---------- -----------------
Solar Hot Water Industry
The PRC solar hot water industry is an emerging, but fast growing
industry. It has been experiencing an annual growth rate of approximately 30%
since 1999 as measured by the square meters of systems installed. The Solar
Energy Usage Commission of the PRC Rural Energy Industry Association and the PRC
Renewable Energy Industries Association project such growth to continue at an
annual average rate of 27.36% until 2015 as shown in the following table:
37
Aggregate Solar Hot Water Industry Sales
-------------------------- ----------------------------
Annual Sales
-------------------------- ----------------------------
1999 A 5.0 million m(2)
-------------------------- ----------------------------
2000 A 6.0 million m(2)
-------------------------- ----------------------------
2001 A 8.0 million m(2)
-------------------------- ----------------------------
2002 A 10.0 million m(2)
-------------------------- ----------------------------
2003 A 12.0 million m(2)
-------------------------- ----------------------------
2004 F 16.2 million m(2)
-------------------------- ----------------------------
2015 F 232.0 million m(2)
-------------------------- ----------------------------
Source: China Solar Hot Water Industries Development and Research Report
(2001-2003), jointly published by the solar energy association and commission
described above.
Because of the rapid growth in solar hot water industry, solar hot water
heaters have become one of the three major hot water sources along with
gas-fired heaters and electric heaters for PRC households and the PRC has become
the world's largest producer and consumer of solar hot water heaters.
Boiler and Space Heating Industry
The PRC space heating industry is not new, but the modern systems that we
sell are new for our customers. While many rural PRC households have considered
hot water a luxury, heat generating facilities for cooking and space heating
purposes in one form or another are considered basic necessities. These heat
generating facilities are generally extremely primitive and inefficient, and
usually consist of hearths and biomass stoves, which are dirty, unsafe and
difficult to handle with respect to fuel. As many rural households have started
to earn disposable income in recent years, many of them can afford to modernize
their cooking and space heating facilities by using coal-fired boilers, which
have become one of the principal means for such modernization among the PRC
households.
Our Product Warranty
We provide a three-year standard warranty to our end users for all of the
products we manufacture. Under this standard warranty program, we provide free
repair and exchange of component parts in the first year following the purchase,
and we charge labor costs for repair and maintenance but provide free exchange
of component parts in the second and third years following the purchase.
Thereafter, end users are required to pay for any repair and maintenance
services, as well as exchange of component parts. Most of our warranty services
are performed by our independent sales agents and distributors in return for a
1-2% discount of the purchase price they pay for our products. According to the
standard terms of our agreement with sales agents, we allow our sales agents and
distributors to return any defective product for exchange.
Our Marketing Strategies
38
We are seeking to grow and expand our business through the following
strategies:
o focus on rural market segment.
o extensive and targeted advertising.
o multi-brand strategy.
o a larger distribution and agency network.
o after-sales services network.
Our focus on rural market segment
We market our products in both the urban and the rural markets in the PRC.
While most solar hot water manufacturers focus on the urban market, we have
always focused on the rural market because the size of the rural market in the
RPC is about eight times larger than that of the urban market. Further, our
rural customers regard purchasing a hot water heater as a long term investment
in a durable good, more so than urban customers.
We have eight years of experience in operating marketing and sales
organizations in rural areas. Our marketing and sales team works with our agents
to educate our end users and inform them of the utility, functionality and
comparative cost advantages of our products as compared to electricity and gas
water heaters. We have also received a great deal of feedback from rural
customers and have designed our products and marketing to meet their needs and
concerns.
Our Advertising
Based on various advertising effectiveness studies in the PRC, we believe
that large scale advertising on TV and other mass media can have a significant
impact on rural residential purchase decisions. Accordingly, we spent over
$646,000, or over 4% of sales, on advertising in 2005. In 2003 and 2004, we
spent over $278,000 and $249,000, respectively, or over 4.6%, and 2.7% of sales,
respectively, on advertising.
Our Multi-Brand Strategy
In order to position our products in different tiers of markets, we have
utilized a multi-brand approach. Our solar hot water brands include: "Ailiyang",
"DeYu" and "Deli Solar", among which, Ailiyang is not a registered trademark;
our space heating brands include "De Yu" and "Du Deli". Each of these brands
targets a different type of customer. We classify the brand names of the solar
hot heaters into three types: Premium, Standard, and Economy, and space heating
products into two types: Premium and Standard. Below are some of our products
and related brand names and classifications: Solar Hot Water Heater Series
--------------------------- ----------------------------
Our Brand Name Our Classification of Products
--------------------------- ----------------------------
Deli Solar Premium
--------------------------- ----------------------------
DeYu Standard
--------------------------- ----------------------------
AiliYang Economy
--------------------------- ----------------------------
39
Space Heating Series
--------------------------- ---------------------------
Our Brand Name Our Classification of Products
--------------------------- ---------------------------
Du Deli Premium
--------------------------- ---------------------------
DeYu Standard
--------------------------- ---------------------------
We intend to achieve the following objectives through the Multi-Brand Strategy:
o to target different product in different tiers of the same
geographical market.
o to eliminate agency dominance in a regional market by granting
non-exclusive agency to more than one distributor in a region.
o to create competition among agents by assigning only one specific
brand of our products to one distributor in a sales region so that
each different distributor will be responsible for selling a brand
different from other distributors in the same geographical region.
We periodically evaluate the performance of distributors in the same
region, and then provide suggestions to help them perform better. In
addition, we also encourage them to increase sales of our premium
products.
o to increase the market share of our products.
Our brand logos are the following:
[GRAPHIC OMITTED]
[BRAND LOGOS - BOY WITH CAPE]
Our distribution and agency network
We use a network of wholesalers, dealers and retailers to distribute our
products. After we manufacture and assemble our products, we sell them to our
wholesalers, generally located in major cities or provincial hubs, who then sell
our products on to a network of smaller distributors, or dealers, in outlying
areas. Sometimes when the dealers are closer to our warehouse, we also sell
directly to dealers to simplify the payment process and reduce transportation
costs. Because these dealers are usually developed by the wholesalers, each
direct sale to a dealer will be recorded on the account of the wholesaler who
developed the business relationship with such dealer. Our end users purchase
their products from either wholesalers or dealers, who also handle the
installation and warranty service of the systems for the end users.
40
We also have a Marketing Department consisting of approximately 56
marketing and sales personnel who collect feedback from our customers and other
market information for our management and our product development team.
Distribution Channel for Solar Water Heater Systems
The PRC is a geographically vast country and the market for our products
covers many regions. To penetrate the market effectively, especially the
less-developed rural areas, we have established a vast distribution and sales
network that includes approximately 585 distributors and wholesalers and
approximately 2,000 local appliance retailers covering 27 provinces in China,
with a focus on the northern PRC area, north-eastern PRC area, Beijing
metropolitan area, and Tianjing metropolitan area. The northern PRC area
includes Hebei Province, Henan Province, Shangdong Province, Shanxi Province,
and An'hui Province. The north-eastern PRC area includes Liaoning Province and
Heilongjiang Province. Sales to these areas consist of approximately 70% of our
total sales revenues. We believe that our comprehensive distribution and sales
network enables us to efficiently service the rural communities without having
to rely on any particular agent or distributor for our sales. In the past five
years, no single agent or distributor has generated more than 5% of our total
annual sales.
We are able to attract a large number of distributors, sales agents, and
retailers because of the following reasons:
We produce both solar hot water heaters and boilers, while the majority of
manufacturers in the PRC normally produce only one single type of product. The
sales of solar hot water heaters and boilers are both affected by seasonality.
As described above in this report, solar hot water heaters are in high demand in
the spring and boilers are in high demand in the fall. Therefore, the combined
production of solar hot water heaters and boilers allows us to provide our
distributors, wholesalers and retailers with products for sale throughout the
year.
We carefully select our distributors and provide various support to them.
Our contracts with our wholesalers and distributors normally have a three- to
five-year term. While most of our agency and distributor contracts are
non-exclusive, we are seeking to establish exclusive distribution relationships
with some strong distributors. We require new sales agents to deposit a
significant amount of cash as a down payment towards the purchase of our
systems. We consider the following factors in our selection of a new distributor
or wholesaler:
o Local solar energy status and market potential
o Local competition
o Sales and market potential in the covered area
o Presence of alternatives, such as gas or electricity
o Credibility of the candidate
41
For each candidate we select, we enter into an agency contract with it,
under which we provide warranty cards, product testing certificates, product
brochures, and other promotional materials. In addition, we help them design
store logos and show rooms, provide them with uniforms, and assist them to make
marketing plans.
We have designed and implemented a horizontal distribution structure to
streamline the efficiency of our distribution network, shorten the product lead
time, provide better coverage of our geographical markets and reduce
distribution costs. The horizontal distribution structure also facilitates
immediate market feedback from customers to our management.
The horizontal distribution structure is a significant competitive
advantage for us in successfully penetrating the rural market segment.
Currently, 50% of our products are delivered directly to customers via only one
layer of agency organization, as compared to 20% in 2001. We expect that 70% of
our products will move through one layer of agency organization in the future.
Our After-sales Services Network
We are in the process of implementing an after-sales services network in
parallel with our national sales and distribution network. Our after-sales
services are primarily performed by our sales agents and distributors. We have
begun to provide technical training to our 585 distributors in order to provide
after-sales services to our end users. The local distributors are very
enthusiastic about having the ability to provide after-sales services to the end
users, which also provides the distributors with a new source of revenue. One
additional benefit to us provided by the after-sales services network is the
ability to receive product feedback from our end users on a constant basis. We
can use this information to continuously adjust our production plans, product
designs, inventory control and marketing and sales strategies.
COMPETITION
The solar hot water market in the PRC is highly fragmented. According to
statistics from the Chinese Energy Research Association, there are currently
over 3,500 solar hot water heater manufacturers producing products under more
than 3,000 brands. The top 51 companies have, on average, over 10 million RMB in
sales (approximately $1.2 million), with the top ten companies together control
17% of the domestic market.
In fiscal year 2003, the largest manufacturer was Huangming Solar Water
Heaters, Co, Ltd. ("Huangming"), which had 5% of the total market. The second
and third largest companies were Tsinghua Sunshine Solar Water Heaters, Co, Ltd.
and Huayang Solar Water Heaters, Co, Ltd., each of which had approximately 3% of
the market in the PRC. There has not been similar ranking information for fiscal
years 2004 and 2005 available to us.
42
Ranking of Solar Hot Water Companies by Market Share Based on Revenue in 2003
- ------------------------- ----------------- ----------------- ------------------ -----------------
Company Ranking Market Share Type of Ownership Profitable
- ------------------------- ----------------- ----------------- ------------------ -----------------
Huangming 1 5% Government-owned No
- ------------------------- ----------------- ----------------- ------------------ -----------------
Tsinghua Sunshine 2 3% Government-owned No
- ------------------------- ----------------- ----------------- ------------------ -----------------
Huayang 3 3% Government-owned No
- ------------------------- ----------------- ----------------- ------------------ -----------------
Deli Solar (PRC) 19 0.4% Privately-owned Yes
- ------------------------- ----------------- ----------------- ------------------ ----------------
Top 10 Companies 17%
- ------------------------- ----------------- ----------------- ------------------ ----------------
Source: Chinese Energy Research Association
In fiscal year 2003, we generated $6.01 million in sales revenue,
representing a market share of 0.4% and a ranking of number 19 among solar hot
water companies nation-wide in terms of sales revenue. Our sales revenue for
fiscal years 2004 and 2005 were $9.5 million and $15.6 million, respectively. We
believe our success lies in our quality control, brand recognition strategy,
comprehensive distribution network, and most importantly, our private ownership
status.
The majority of our competitors are entities owned and controlled by
various PRC governmental entities, usually at the local or municipal level. In
the late 1970's, the PRC government created these entities as a means to employ
residents and generate cash flow. While these entities served a useful purpose,
they generally were inefficient and unprofitable, and many that have not already
been privatized remain so today. In the 1990's, the PRC government authorized
the ownership of businesses by private individuals, shareholders and other
non-governmental entities for the first time, and as a result, some of the
government owned entities have been privatized. Today these privately-owned
enterprises tend to outperform their government owned counterparts.
RESEARCH AND DEVELOPMENT ACTIVITIES
Our research and development ("R&D") expenses have historically consisted
of approximately 1% to 2% of our annual sales revenues. Most of these expenses
were spent in designing and manufacturing new products. In 2004 and 2003, we
developed 18 and 11 new products, respectively. In 2005, our R&D expenses
consisted of approximately 0.5% of our annual sales revenues, which we used to
improve the functions and appearance of our current products instead of
developing new products. We also conduct other R&D activities based on our
customers' specific request for certain new functions or improvements on our
existing products. The R&D expenses associated to such R&D activities are
generally borne by the requesting customers.
Currently, we have a 5-member R&D team whose senior engineer members
include: Luo Yunjun, who also serves as the chairman of Beijing Solar Industry
Association, and Hao Fangzhou, who also serves as the chairman of the Chinese
Economic Boiler Association.
43
INTELLECTUAL PROPERTY
Trademarks.
Deli Solar (PRC) is the holder of the following trademarks registered with
the Trademark Offices of the PRC National Industrial and Commerce Administrative
Bureau (the "PRC Trademark Offices"):
- --------------------- --------------------------------------- --------------------- ------------------
Trademark Authorized Scope Valid Term Certificate Number
- --------------------- --------------------------------------- --------------------- ------------------
Deli Solar Boiler (Space Heating Utility); 03/14/2003 to 1978396
Solar Hot Water Utility; 03/13/2013
Solar Stove and Solar Energy
Collection Heater
- --------------------- --------------------------------------- --------------------- -------------------
Du Deli The same as the above 01/28/2003 to 1978532
01/27/2013
- --------------------- --------------------------------------- --------------------- -------------------
De Yu Solar Energy Collection Heat 07/28/1998 to 1195609
and Boiler (Not machine accessory) 07/27/2008
- --------------------- --------------------------------------- --------------------- -------------------
Aili Solar (to Registration is pending
replace our
brand "Ailiyang")
- --------------------- --------------------------------------- --------------------- -------------------
A registered trademark is protected for a term of ten years, renewable for
another term of ten years under the trademark law of the PRC, so long as an
application for renewal is submitted to the PRC Trademark Offices within six
months prior to the expiration of the initial term.
Our mark "Ailiyang" is not a registered trademark. We are in the process
of applying for the registration of the mark of "Aili Solar" with the PRC
Trademark Offices. Once the mark "Aili Solar" is registered, we plan to use it
for products manufactured under the current brand "Ailiyang." The registration
application is in the name checking stage and we anticipate the entire
registration process will take about 12 to 18 months to complete under the PRC
trademark law.
Patents. Currently, none of our products or technology is patented.
Domain names. We own and operate a website under the internet domain name
http://www.deli-group.com (the "Company Website"). Traffic to our other internet
domain names www.delisolar.com and www.AiLiYang.com are directed to the Company
Website. We are currently in the process of updating our websites. The
information contained in our websites is not incorporated by reference to this
Annual Report.
GOVERNMENT REGULATION
44
Under certain regulations in the form of public notices issued by the PRC
State Administration of Foreign Exchange, or SAFE, our shareholders who are PRC
resident entities or individuals are subject to certain registration
requirements due to the status of Deli Solar (USA) and Deli Solar (BVI) as
"SPC"s (as defined under the public notice issued by SAFE on October 21, 2005).
These regulations would prohibit Deli Solar (PRC) from distributing dividends or
profits to Deli Solar (USA) and/or Deli Solar (BVI) as "SPC"s unless the
registration requirements are complied with. The registration procedures were
completed and Deli Solar (PRC) obtained a SAFE certificate from BaZhou SAFE on
October 17, 2005. Our PRC counsel advised us that the SAFE certificate will
allow Deli Solar (PRC) to distribute dividends and profits out of the PRC.
We are not subject to any permit or approval requirement by the
government or any self regulatory professional associations for the manufacture
and sale of solar hot water heaters. We are required to obtain a production
approval from the Quality and Technology Supervisory and Control Bureau at the
provincial level for the manufacture and sale of boilers and space heating
products. Deli Solar (PRC) obtained the approval to manufacture, install and
repair small and regular size pressure boilers and space heating products from
Hebei Provincial Quality and Technology Supervisory and Control Bureau on August
28, 2002 effective for five years. Other than the foregoing, Deli Solar (PRC) is
not subject to any other significant government regulation of its business or
production, or any other government permits or approval requirements, except for
the laws and regulations of general applicability for corporations formed under
the laws of the PRC.
COMPLIANCE WITH ENVIRONMENTAL LAWS
To our knowledge, neither the production nor the sale of our products
constitute activities or generate materials, in a material manner, which causes
our operation to be subject to the PRC environmental laws.
EMPLOYEES
Deli Solar (PRC) currently has approximately 273 employees.
Deli Solar (PRC) requires each employee to enter into a one-year standard
employment agreement. The standard employment agreement contains a
confidentiality clause and a covenant-not-to-compete clause, under which an
employee must keep confidential all manufacturing technology including drawings
and other technology materials, sales and financial information, and trade
secrets obtained through his or her employment with us. Breach of this
confidentiality clause will result in termination of employment. Further, each
employee may not compete against us for a certain period of time following the
termination of employment with us. We purchase group workers' compensation
policy on behalf of our employees, and the premium is deducted from each
employee's paycheck.
RISK OF LOSS AND PRODUCT LIABILTITY INSURANCE
Delivery of our products can be arranged by our sales agents and
distributors, or by us. In the latter case, we deliver our products primarily
through trucks, supplemented with trains and cargo ships. Our standard agency
contract generally requires our sales agents to pay for the transportation cost.
Although the agency contract has not specifically provided for the issue of risk
of loss, our customary practice is that sales agents bears the risk of loss in
shipping and purchase shipping insurance at their expense.
45
We currently do not carry any product liability or other similar
insurance, nor do we have property insurance covering our plants, manufacturing
equipment and office buildings. While product liability lawsuits in the PRC are
rare and Deli Solar (PRC) has never experienced significant failures of its
products, there can be no assurance that Deli Solar (PRC) would not face
liability in the event of any failure of any of its products. We plan to
purchase property insurance to cover our manufacturing plants, equipment and
office buildings by the end of 2006.
DESCRIPTION OF PROPERTY
All land in the PRC is owned by the government and cannot be sold to any
individual or entity. Instead, the government grants landholders a "land use
right." The following are the details regarding our land use rights with regard
to the two pieces of land that we use in our business. The land use rights over
one piece of land previously owned by Deli Du, our CEO, President and Director,
have been transferred to us in October 2005 for a price of RMB20,000. The
application for the change of the ownership certificate for that piece of land
was submitted to Bazhou City National Land Resources Bureau on January 16, 2006.
Once the application is approved, the registered owner of the land use rights
for that piece of land will be Deli Solar (PRC). It is expected that the
approval will be issued in June, 2006. In addition, on March 16, 2006, Deli
Solar (PRC) entered into an agreement with the Village Governance Commission of
Beijiahe Village Chaheji County Bazhou City to acquire land use rights to a
piece of land comprising 61,530 square meters at a price of approximately
$919,858, subject to certain announcement and approval procedures as described
in the risk factor of this prospectus "Our acquisition of the land use rights
from villagers is subject to announcement and approval procedures and we cannot
assure you that they will be through". This piece of land is close to the
present our factory in Bazhou and will be used to enlarge our present
manufacturing base there.
- ---------------------------------------------------------------------------------------------------------------------
Registered Owner Location & Usage and Square Construction/building Term of use Transfer price
Deed Number Nature meters on the land right
- ---------------------------------------------------------------------------------------------------------------------
Deli Solar (PRC) Bazhou, Industrial 10,244.05 Plant, warehouses, 50 years RMB615,000 was
Ningnan Transferred Sq. M; accessories room, (from March paid to the
Village; Land convention center 25, 1998 to Langfang Municipal
#98060026 March 25, Land
2048 Administration
Bureau, plus
annual land use
fee of RMB 5,122
- ---------------------------------------------------------------------------------------------------------------------
Mr. Deli Du Eighty Office 816 Sq. M; Office building, 50 years RMB20,000 was paid
kilometers space for accessories room (from June to the Langfang
from Bazhou Deli Solar 11, 2001 to Municipal Land
Jinbao Road (PRC) June 3, 2051 Administration
North; Granted Land Bureau
#20010700405
- ---------------------------------------------------------------------------------------------------------------------
Collectively Xihuan Road Transferred 61,530 Sq. M Planning for factory 50 years RMB 7,383,700 was
owned by Beijia West, from facilities (from March paid to the
he Village Bazhou City villagers; 17, 2006 to Village Governance
Chaheji County # pending transferred March 17, Commission of
Bazhou City usage is 2056) Beijiahe Village
subject to Chaheji County
the Bazhou City
approval
from the
local
government
- ---------------------------------------------------------------------------------------------------------------------
Total 72,590.05
Sq. M
- ---------------------------------------------------------------------------------------------------------------------
46
We lease 19,140 square meters of land ("Leased Land") from Bazhou County
Credit Union Lianshe Branch ("Credit Union") for an office building pursuant to
a 20 year renewal lease at an annual rent of RMB120,000 commencing May 1, 2003.
The lease is automatically renewable for another 20 year term subject to terms
to be negotiated at the expiration of the first 20-year term. We are retaining a
majority of the building's usable space for our business and seeking to sublease
the rest to parties with business related to ours such as our sales agents,
distributors, accessory parts dealers, and after-sales service agents. We also
constructed a business center on the Leased Land. The business center is to be
used for show rooms, retail stores, and a distribution center for solar related
products and space heating products.
We lease our Beijing office facility of approximately 2,000 square meters
at No. 28, Fengtai Bei Road, Fengtai District from Beijing Dajianxia Technology
and Trade Co., Ltd. pursuant to a renewable lease commencing October 1, 2005 to
August 8, 2011 for an annual rent of RMB370,000 for the first year and
RMB400,000 for the second year, and the following years pending a possible
increase. We use approximately 1,000 square meters of such facility as an
exhibition center to develop our cooperation with the organizations of renewable
energy and the companies from the same industry. For example, in December 2005,
we entered into a cooperation agreement with China Renewable Project Office of
the World Bank ("CRPO") where we agree to provide a 174 square meters'
exhibition space for the exhibition of the solar energy products recommended by
CRPO. We terminated our lease for the Beijing office at 68 An'li Road, Chaoyang
District in October 2005.
SELECTED FINANCIAL DATA
The following table presents selected financial data for Deli Solar (PRC)
for the previous two fiscal years ended December 31, 2003 and 2004 and for the
Company on a consolidated basis for the fiscal year ended December 31, 2005 and
2004 and for the three months ended March 31, 2006 and 2005. We derived the
selected financial data set forth below from Deli Solar (PRC)'s audited
statements of operations for the two fiscal years ended December 31, 2003 and
2004 and audited balance sheets as at December 31, 2003 and 2004, the Company's
consolidated audited statements of operations for the fiscal year ended December
31, 2005 and 2004 and consolidated audited balance sheet as at December 31,
2005, and the Company's consolidated unaudited statements of operations for the
three months ended March 31, 2006 and 2005 and consolidated unaudited balance
sheet as at March 31, 2006 each of which is included in this prospectus. You
should read the following summary financial data in conjunction with the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus.
47
Deli Solar Deli Solar (USA) Consolidated
(PRC)
For the Fiscal Year ended For the Fiscal Year ended For the Three Months ended
December 31, December 31, March 31,
--------------------------------- --------------------------------- ----------------------------------
2004 2003 2005 2004 2006 2005
Gross revenues $9,380,2476 $6,011,870 $15,577,447 $9,504,394 $ 2,353,287 $1,156,938
Income from operations $ 2,090,891 $ 660,315 $ 1,319,803 $2,083,256 $ 207,762 $ 89,150
Net income $ 2,137,025 $ 602,245 $ 1,298,974 $2,129,390 $ 203,993 $ 78,293
Total assets $ 5,157,812 $2,934,155 $10,903,506 $5,340,773 $11,252,688 N/A
Total liabilities $ 887,612 $ 645,183 $ 276,886 $1,070,073 $ 377,497 N/A
Deli Solar (USA)'s unaudited consolidated financial statements for the
three months ended March 31, 2006 and the notes, Deli Solar (USA)'s consolidated
audited financial statements for the fiscal years ended December 31, 2005 and
2004, together with the report of the independent certified public accounting
firm thereon and the notes thereto, Deli Solar (PRC)'s audited financial
statements for the fiscal years ended December 31, 2004 and 2003, together with
the report of independent certified public accountants thereon and the notes
thereto, and Meditech's audited financial statements for the fiscal years ended
May 31, 2004 and 2003 together with the report of independent certified public
accountants thereon and the notes thereto and its unaudited consolidated
financial statements for the three months ended February 28, 2005 are presented
beginning at page F-1.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated financial
condition and results of operations should be read with "Selected Financial
Data" and our consolidated financial statements and related notes appearing
elsewhere in this prospectus. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.
48
OVERVIEW
Meditech was incorporated in Nevada on March 21, 1983. It was a drug
development company, focusing on research, development, and marketing of
anti-infective drugs in the biomedical industry. We spun off our business to
East West, which was completed on August 29, 2005.
Following the completion of the acquisition of Deli Solar (BVI) on March
31, 2005, as stated in Company History of this prospectus our sole business
consists of designing, manufacturing and selling systems to produce hot water
and space heating through Deli Solar (PRC), our indirectly wholly-owed operating
subsidiary. Deli Solar (PRC) was founded in 1997. Its main products are solar
hot water heaters and space heating and cooking products including coal-fired
residential boilers. It also sells accessories, component parts, and provides
after-sales maintenance and repair services.
Meditech had a fiscal year ending May 31. On August 2, 2005, our Board of
Directors resolved to change our fiscal year end to December 31. Therefore, the
financial statements in this prospectus reflect the operating results of the
Company on a consolidated basis for the three months ended March 31, 2006 and
for the fiscal years ended December 31, 2005 and 2004, and the operating results
of Deli Solar (PRC) for the fiscal years ended December 31, 2004 and 2003,
respectively.
The revenue of coal-fired residential boilers in the first quarter of 2006
was approximately $1,258,713. The revenue of solar hot water heaters in the same
period was approximately $956,371, among which revenue of regular evacuated
tubular solar water heaters was approximately $841,000 while the evacuated heat
pipe solar water heaters was approximately $114,000. There were few flat plate
solar water heater sales that period.
The first quarter of 2006 was cold and the sales of our coal-fired
residential boilers were relatively strong in the rural areas. At the end of
January 2006, the demand on solar water heaters began to increase. The
residential boilers have a profit margin of about 26%, while the solar hot water
heaters have a profit margin of about 21% as compared to 22% the previous year.
The lower and decreased margin in solar water heaters is mainly because of the
fierce price competition in the solar water heater industry in China. We could
still expect the price competition to continue in the following quarters in
2006. As a result we expect the margin on solar water heaters will continue to
decrease. We are planning to adjust our product mix in the next couple of
months.
On March 24, 2006, Deli Solar (PRC) executed a non-binding Memorandum of
Understanding ("MOU") to acquire all capital stock of Beijing Four Seasons Solar
Power Technology Co., Ltd. ("Four Seasons"), a limited liability company
organized under the laws of the PRC involved in selling solar power equipment in
the PRC. The proposed purchase price for Four Seasons is $10.5 million, payable
in $2,000,000 cash in the form of a demand loan and 1,062,500 shares of common
stock of Deli Solar (USA). Pursuant to the MOU, the final completion of the
transaction is subject to due diligence and other conditions. Negotiations on
definitive terms are pending. We anticipate that this acquisition will increase
our production capacity and expand our market coverage.
49
Our plan to acquire Beijing Yuxin Yangguang Solar Energy Industrial Co.,
Ltd., another PRC enterprise, which manufactures solar hot water heaters and has
an estimated value of $3 million, has been suspended.
We terminated the MOU with Four Seasons in June 2006 due to the fact that
the parties had not reached a definitive merger agreement by May 31, 2006 and
the MOU could have been terminated at any time after May 31, 2006 by its terms.
We released a press release on the termination on June 15, 2006. We will
continue to seek acquisition targets.
We are in the progress of setting up a new subsidiary of the Company in
Beijing called Beijing Deli Solar Technology Development Co., Ltd. ("Deli Solar
(Beijing)") to further develop our business there. Deli Solar (Beijing) will be
a directly wholly-owned subsidiary of the Company. We have contributed the
registered capital of $1,000,000 into Deli Solar (Beijing). The issuance of a
business license for Deli Solar (Beijing) is in process by the Beijing
Industrial and Commercial Bureau.
RESULTS OF OPERATIONS
The Three Months Ended March 31, 2006 and March 31, 2005.
Sales and Gross Profit
Revenue for the three months ended March 31, 2006 was $2,353,287 as
compared to $1,156,938 for the same period last year, an increase of 103%. Gross
profit for the three months ended March 31, 2006 was $570,615, an increase of
$344,242, or approximately 152%, as compared to $226,373 for the three months
ended March 31, 2005. The increase in sales revenue is due to our continued
investment in brand marketing and sales distribution network. The increase in
gross profit margin is primarily because of the increased demand and sales of
coal-fired boilers in the first quarter, which have a better gross profit margin
than solar hot water heaters.
Operating Expenses
Operating expenses for the three months ended March 31, 2006 was $362,847,
as compared to $137,223 for the same period in 2005, an increase of $225,624 or
164%. The increased operating expenses primarily went to advertising expenses,
selling expenses and administrative expenses.
The advertising expenses for the three months ended March 31 was $105,776,
as compared to $63,693 for the same period last year. The increase in
advertising expense was a result of continued increasing effort in advertising
campaigns to increase product awareness, branding and sales.
Selling expenses for the three months ended March 31, 2006 were $35,902 as
compared to $6,704 for the same period last year, an increase of $29,198, or
435%. These selling expenses consist primarily of transportation expenses,
agency administration expenses including salaries paid for several newly-hired
sales managers and bonuses paid to sales agents during Chinese Spring Festival.
The increase in other selling expenses was primarily due to the increase of
sales volume and addition of new distributors.
The other general and administrative expenses were $162,013, as compared
to $30,639 for the same period last year. The increase of the other general and
administrative expenses was primarily from maintaining our standing as a
reporting company as we became a public company from March 31, 2005. The other
general and administrative expenses include legal fees, auditing expenses, board
meeting expenses and board member compensation.
50
Income from Operations
Income from operations for the three months ended March 31, 2006 was
$207,768, as compared to $89,150 for the three months ended March 31, 2005. The
increased income was due to the increased sales revenue in the first quarter
2006.
Net Income
Net income increased to approximately $203,993 in the three months ended
March 31, 2006, from $78,293 in the same period last year, primarily due to
increased sales revenue.
Liquidity and Capital Resources
In March 2005, we raised $6,000,015 in gross proceeds with a cost of
issuance totaling $1,348,626, through a private financing by certain
non-affiliated accredited investors as part of the reverse merger, to meet our
liquidity and capital needs. We are using these monies to increase our
production capacity and facilities, as well as to merge and acquire prospective
companies.
Net cash provided by our operating activities was $263,696 for the first
quarter of 2006; net cash used in operating activities for the same period of
2005 was $543,299. The increase in net cash provided by operations was due to
the decrease of account receivable and advances to suppliers from active
collection and control on prepayment.
As of March 31, 2006, the Company does not have any long term debt.
The Company will continue to rely on its cash flow from operations,
renewal of short-term notes, and proceeds from the private financing to meet its
liquidity and capital needs in the next 12 months.
Accounts Receivable
During the three months ended March 31, 2006, accounts receivable
decreased to $653,808 from $748,475, primarily due to active collections during
the first quarter.
Inventory
Inventory as of March 31, 2006 increased to $619,029 from $383,183 at the
end of last year mainly because of our preparation for oncoming peak selling
season in the second quarter.
51
Construction in Process
On January 20, 2006, Deli Solar (PRC) entered into a construction contract
with Bazhou Xin Quan Construction Company (the "Construction Contract") for the
construction of a new steel frame warehouse (618 square meters) and employee
dorms and dining room (510 square meters) and the renovation of the offices (618
square meters) (the "Project") at Bazhou city. Under the Construction Contract,
Deli Solar ("PRC") shall pay a total construction cost of $237,199 of which
$98,717 (40%) has been paid as the first installment as of March 31, 2005. The
second installment of 40% shall be paid upon the completion of 80% of the
Project and the remaining 20% shall be paid after the Project passes
construction completion inspection.
On February 10, 2006, Deli Solar (PRC) entered into an agreement with
Chengde Hui Da Conveyance Equipment Co., Ltd. for the design, manufacture and
installation of production plant and machinery for automatic water tank
production assembly. Under the agreement, Deli Solar (PRC) will pay $326,410 of
which $170,449 has been paid. The balance of $155,961 shall be settled based on
the progress of the construction and installation.
Prepaid land lease
On March 16, 2006, Deli Solar (PRC) entered into an agreement with the
Village Governance Commission of Beijiahe Village Chaheji County Bazhou City to
acquire land use rights to a piece of land of 61,530 square meters at the price
of approximately $919,858, which has been paid before March 31, 2006, subject to
certain announcement and approval procedures as described in the risk factor of
this prospectus "Our acquisition of the land use rights from villagers is
subject to announcement and approval procedures and we cannot assure you that
they will be through". This piece of land is close to the present Bazhou factory
and will be used to enlarge our present manufacturing base there.
Cash
Cash and cash equivalents decreased from $5,629,168 at December 31, 2005
to $4,595,498 at March 31, 2006, primarily as a result of land use right
acquisition, project construction and facility purchase as above referenced
during the first quarter. In the foreseeable future, our cash and cash
equivalent may be reduced due our acquiring potential businesses, significantly
expanding our production capacity, and developing new products.
Fiscal Years Ended December 31, 2005 and December 31, 2004.
Sales and Gross Profit
Sales revenues increased to approximately $15.58 million for the year
ended December 31, 2005 as compared to approximately $9.5 million for the prior
year, an increase of approximately $6.08 million or 64%. Our revenues increased
during the period as a result of continued effort in sales and marketing. We
have recruited more sales agents and expanded our covered sales areas. The
incremental household income, particularly in the rural areas and small and
medium size cities, has driven up the demand of our products. Among the total
$15.58 million in sales revenue of 2005, $10.5 million was derived from sales of
solar hot water heaters, about an 87% increase as compared to 2004; $5million
was derived from sales of coal-fired boilers and space heating products, about a
45% increase as compared to 2004.
52
Gross profit for the year ended December 31, 2005 was approximately $3.71
million or 24% of revenues as compared to gross profit of approximately $ 2.73
million or 29% of revenues for the prior year. The increase in gross profit
resulted primarily from increase in sales. In 2005, we sold nearly one hundred
and twenty thousands units of solar water heater products and sixty five
thousands units of boiler heater products. The profit margin in 2005 dropped
compared with that of last year mainly because of the intensified price
competition in the market.
Cost of Sales
Cost of goods sold increased to approximately $11.87 million for the
fiscal year ended December 31, 2005, or approximately 75% from approximately
$6.77 million in the prior year. The increase was primarily due to increased
production driven by increased sales. We continue to focus on cost control of
raw materials. The raw materials supply market is currently a buyer's market and
we believe such status will continue for the next two or three years, which will
provide sufficient time for the Company to select the most suitable raw
materials in terms of price and quality.
Operating Expenses
Operating expenses increased to $2,389,185 for the year ended December 31,
2005 as compared to $650,834 for the prior year, an increase of $ 1,738,351 or
about 267%.
Among the increase of operating expenses, other selling expenses increased
to $256,634 from $98,826 for the prior year, an increase of $157,808, or 160%.
Selling expenses other than advertising consisted primarily of promotion
activities, transportation expenses, sales agency administration expenses and
after-sales services. We had 273 employees and 586 independent selling agents
engaged in sales and marketing as of December 31, 2005, as compared to 268 and
515 respectively as of December 31, 2004.
General and administrative expenses were $1,279,714 for the fiscal year
ended December 31, 2005, or approximately 8.2% of revenues, as compared to
$123,210 or approximately 1.3% of revenues for the fiscal year ended December
31, 2004. Most of the increase in general and administrative expenses was
attributable to the professional service fees we incurred in order to comply
with our obligations as a public company and compensation paid to certain top
management personnel for one time consulting services provided in the first year
of our public listing.
Income from Operations
Operating income totaled $1,319,803 for the year ended December 31, 2005,
as compared to operating income of $2,083,256 for the year ended December 31,
2004, a decrease of $763,453 or 37 %.
As a percentage of revenues, operating income was 8.47% in 2005 as
compared to 22% for the prior year. The decrease in operating income as a
percentage of revenues was substantially due to the increase in general and
administrative expenses in 2005.
Income Taxes
The Company did not carry on any business or maintain any branch office in
the United States during the year ended December 31, 2005 or the year ended
December 31, 2004. Therefore, no provision for U.S. federal income taxes or tax
benefits on the undistributed earnings and/or losses of the Company has been
made.
53
Normally at the national level, a Chinese company is subject to enterprise
income tax at the rate of 33%, value added tax at the rate of 17% for most of
the goods sold, and business tax on services at a rate ranging from 3% to 5%
annually. However, pursuant to the relevant laws and regulations of the PRC,
Deli Solar (PRC), as a wholly foreign owned enterprise ("WFOE") in the PRC, is
entitled to an exemption from the PRC enterprise income tax for two years
commencing from its first profitable year, and thereafter, is entitled to a 50%
tax exemption from the PRC enterprise income tax. Since Deli Solar (PRC) was
transformed into a WFOE in March 2005, it should be entitled to the 100%
exemption from income taxes in the two-year until March 2007, and then a
preferential rate equals to 50% of the tax rate for the following years of its
operation from 2007 until 2010; however, Deli Solar (PRC)'s tax exemption status
has not been approved by the local tax authorities and it continues to pay its
fixed assessment taxes at its current rate. Although we anticipate that the
approval from the local tax authority will be granted by the end of April, 2006,
it is unclear what the exact commencement date for the tax exemption period is
at this stage.
Net Income
Net income was $1,298,974 and the comprehensive income was $1,473,531 in
the fiscal year ended December 31, 2005, or 61% and 69.2%, respectively, of that
in the fiscal year ended December 31, 2004, primarily due to increased expenses
in 2005.
Liquidity and Capital Resources
Since its inception, Deli Solar (PRC) has financed its operation and met
capital expenditure requirements primarily through cash flows from operations,
bank loans and lines of credit, and equity financing.
Net cash provided by our operating activities was $70,345 and $1,879,479
for the fiscal years ended December 31, 2005 and 2004, respectively. The
decrease in net cash provided by operations was due to the increase of our
general and administrative expenses to $1,279,714, or approximately 8.2% of
revenues for the fiscal year ended December 31, 2005, as compared to $123,210,
or approximately 1.3% of revenues for the fiscal year ended December 31, 2004.
Most of the increase in general and administrative expenses was attributable to
the professional service fees we incurred in order to comply with our
obligations as a public company and compensation paid to certain top management
personnel for one time consulting services provided in the first year of our
public listing.
In March 2005, we raised $6,000,015 in gross proceeds with cost of
issuance totaling $1,348,626, through a private financing by certain
non-affiliated accredited investors as part of the Reverse Merger, to meet our
liquidity and capital needs. As a result, we paid down our short-term renewal
notes from $533,213 as of December 31, 2004 to $130,112 as of December 31, 2005.
The notes bear interest at rates ranging from 7.98% to 8.85% and are
collateralized by our inventory and buildings. The short-term notes will be due
between September and October 2006. As of December 31, 2005, the Company did not
have long term debts.
54
The company will continue to rely on our cash flows from operations,
renewal short-term notes, and proceeds from the private financing to meet our
liquidity and capital needs in the next 12 months.
Dividend Policy
We have not paid out any dividends to date. In determining our dividend
policy, our Board of Directors considers factors such as current and long term
profitability, committed and potential cash requirements, and our overall
financial condition. We do not anticipate the payment of any dividends in the
near future based on the present financial requirements for expansion. Our
future ability to pay dividends while meeting other obligations of the Company
depends upon the receipt of dividends or other payments from our operating
subsidiary and other holdings and investments. In addition, our operating
subsidiary, from time to time, may be subject to restrictions on its ability to
make distributions to us, which include, among other things, restrictive
covenants in loan agreements, restrictions on the conversion of local currency
into U.S. dollars or other hard currency, and other regulatory restrictions.
Accounts Receivable
The increase in net trade accounts receivable from $272,369 as of December
31, 2004 to $748,475 as of December 31, 2005 is primarily attributable to the
large increase of sales in 2005. The ratio of accounts receivable to sales
revenue increased from 2.9% in 2004 to 4.8% in 2005 and was primarily due to the
capital shortage of our sales agents when facing fast increased sales.
Deli Solar (PRC) extends unsecured trade credit to some sales agents and
distributors based on factors such as sales volume, historical payment records,
credit status and sales potential for the relevant sales periods. Most new
agents and small agents are subject to our standard cash sales policy.
Advances to suppliers
Advances to suppliers were $811,275 in the fiscal year ended December 31,
2005 as compared to $353,044 in 2004, an increase of $458,231 or 130%. The
increase was primarily due to advanced payment to our suppliers to purchase raw
materials. Such payment in advance allowed us to receive competitive prices and
guaranteed supplies of our raw materials.
Inventory
Inventories as of December 31, 2005 and December 31, 2004 amounted to
$383,183 and $374,904, respectively. In general, our inventory levels are stable
as compared to sales because our 2005 credit policy to our sales agents has
facilitated the products ordered by the sales agent to be delivered at an
earlier time than that in the same period last year.
Accounts Payable
Accounts payable, including trade account payable, other payable and
accrued expenses, decreased to $89,375 as of December 31, 2005 from $168,499 as
of December 31, 2004. Most of these accounts are payable within one year. There
are no interest expenses accrued on these accounts.
55
Cash
The increase in cash and cash equivalent from $1.2 million as of December
31, 2004 to $5.6 million as of December 31, 2005 was primarily from the private
placement the Company conducted in March 2005. The Company plans to use the
large amount of cash and cash equivalents for potential acquisitions and other
investment projects in order to substantially grow the Company's business.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in
conformity with U.S. generally accepted accounting principles requires us to
make judgments, estimates and assumptions that affect the reported amounts in
the Consolidated Financial Statements and accompanying notes. Note 3 to the
Consolidated Financial Statements describe the significant accounting policies
and methods used in the preparation of the Consolidated Financial Statements.
The areas described below are affected by critical accounting estimates and are
impacted significantly by judgments and assumptions in the preparation of the
Consolidated Financial Statements. Actual results could differ materially from
the amounts reported based on these critical accounting estimates.
Revenue Recognition
Product sales are recognized when the products are delivered to and
inspected by customers and title has passed. The Company provides a three-year
standard warranty to all of the products it manufactures. Under this standard
warranty program, repair and replacement of defective component parts are free
of any charge during the first year following the purchase. In the second and
third year, customers must pay for the purchase of the replacement parts, but
not for repair services. Most of our warranty services are performed by our
independent sales agents and distributors in return for a 1-2% discount of the
purchase price they pay for our products. Accordingly the Company has recorded
no liability for warranty reserve. The Company also allows its sales agents and
distributors to return any defective product for exchange.
Allowance for Doubtful Accounts
The Company's business operations are conducted in the People's Republic of
China. We extend unsecured trade credit to our relatively large customers
according to their sales volume and historical payment records. The allowance
for doubtful accounts is established through charges to the provision for bad
debts. We regularly evaluate the adequacy of the allowance for doubtful accounts
based on historical trends in collections and write-offs, our judgment as to the
probability of collecting accounts and our evaluation of business risk. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to revision as more information becomes available. Accounts are
determined to be uncollectible when the debt is deemed to be worthless or only
recoverable in part and are written off at that time through a charge against
the allowance.
Property, Plant and Equipment
56
Building, plant and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are recorded
utilizing the straight-line method over the estimated original useful lives of
the assets. Amortization of leasehold improvements is calculated on a
straight-line basis over the life of the asset or the term of the lease,
whichever is shorter. Major renewals and betterments are capitalized and
depreciated; maintenance and repairs that do not extend the life of the
respective assets are charged to expense as incurred. Upon disposal of assets,
the cost and related accumulated depreciation are removed from the accounts and
any gain or loss is included in income. Depreciation related to property and
equipment used in production is reported in cost of sales.
Long-term assets of the Company are reviewed annually as to whether their
carrying value has become impaired. The Company considers assets to be impaired
if the carrying value exceeds the future projected cash flows from related
operations. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of December 31, 2005, the Company expects these assets to be
fully recoverable.
Fiscal Years Ended December 31, 2004 and December 31, 2003.
Sales and Gross Profit
Sales revenues increased to approximately $ 9.38 million for the year
ended December 31, 2004 as compared to approximately $ 6.01 million for the
prior year, an increase of approximately $ 3.37 million or 56%. Our revenues
increased during the period as a result of continuing sales and marketing
campaigns along with an increase in production. Our average selling prices
remained relatively stable during these periods.
During the fiscal year ended December 31, 2004, we hired more salespeople
and expanded our sales territories. In addition, during the fiscal year ended
December 31, 2004, average PRC household incomes continued to rise in rural
areas and smaller cities which we believe contributed to increased demand for
our products.
Of our $ 9.38 million in sales for the fiscal year ended December 31,
2004, $ 5.7 million was derived from sales of solar hot water heaters, an
approximate 50% increase over the prior year. Approximately $0.5 million in
sales were represented by coal fired boilers for the fiscal year ended December
31, 2004, an approximate 70% increase over the prior year.
Gross profit for the fiscal year ended December 31, 2004 was approximately
$2.7 million, or 29% of revenues, as compared to gross profit of approximately $
1.2 million or 20% of revenues for the prior year. The increase in gross profit
resulted primarily from both increase in sales of premium brand solar water
heaters and cost controls implemented in production and raw material purchasing.
The increase in premium brand sales resulted from our increased penetration into
more medium-sized cities in the northern PRC, where the average household income
tends to be higher than in rural areas. For the fiscal year ended December 31,
2004, we sold approximately fifty-two thousand solar water heater products, of
which approximately ten thousand were our premium brand, as compared to less
than four thousand of the premium brand in the fiscal year ended December 31,
2003.
57
We did not have any material concentration of sales to any particular
distributor, wholesaler or other entity during the fiscal years ended December
31, 2004 or 2003.
Cost of Sales
Cost of sales increased to approximately $6.63 million for the fiscal year
ended December 31, 2004, or approximately 71% of sales, from approximately $4.78
million, or approximately 80% of sales, in the prior year. The increase in cost
of sales was primarily due to increased production driven by increased sales and
higher market demand. The decrease in cost of sales as a percentage of sales
reflects increasing margins from the sale of higher end brands. In addition,
management continues to focus on cost control of raw materials. There are
numerous raw material suppliers available to us and the market for the raw
materials we use is competitive.
Operating Expenses
Operating expenses increased to $655,519 for the fiscal year ended
December 31, 2004 as compared to approximately $567,566 for the prior year, an
increase of $87,953 or about 15 %.
Among the increase of operating expenses, other selling expenses increased
to approximately $86,217 from approximately $11,648 for the prior year, an
increase of approximately $74,569, or 640% due to increased sales and our
expanded marketing efforts. Selling expenses other than advertising consisted
primarily of transportation expenses, agency administration expenses,
after-sales service, such as expenses for installation, repairs and
replacements. We had 268 employees and 515 independent selling agents engaged in
sales and marketing as of December 31, 2004, as compared to 168 and 328,
respectively, as of December 31, 2003.
General and administrative expenses were approximately $118,739 for the
fiscal year ended December 31, 2004, or approximately 1.3% of revenues, compared
to approximately $82,354, or approximately 1.4% of revenues, for the fiscal year
ended December 31, 2003. Despite increased sales and production, general and
administrative expenses remained manageable relative to revenues. Most of the
increase in general and administrative expenses was spent on recruiting and
training qualified sales personnel. We anticipate that our general and
administrative expenses in the future will be higher due to additional expenses
to be incurred as a result of our status as a reporting company.
Income from Operations
Operating income totaled approximately $2.09 million for the fiscal year
ended December 31, 2004 as compared to operating income of approximately $0.66
million for the year ended December 31, 2003, an increase of approximately $
1.43 million or 217 %.
As a percentage of revenues, operating income was approximately 22% in
2004 as compared to approximately 11 % for the prior year. The increase in
operating income as a percentage of revenues was substantially due to the
increase in gross profit and the controlling of costs.
Income Taxes
58
The Company did not carry on any business or maintain any branch office in
the United States during the year ended December 31, 2004 or the year ended
December 31, 2003. Therefore, no provision for U.S. federal income taxes or tax
benefits on the undistributed earnings and/or losses of the Company has been
made.
Normally at the national level, a PRC company is subject to enterprise
income tax at the rate of 33%, value added tax at the rate of 17% for most of
the goods sold, and business tax on services at a rate ranging from 3% to 5%
annually. PRC companies are also subject to local taxes. However, the
governments at the provincial, municipal and local levels can provide many tax
incentives and abatements based on a number of programs at each level. To spur
local economy and encourage certain industries, the Bazhou municipal government
provides preferential tax treatments to certain high-tech entities or entities
meet the asset and registered capital requirements. Although the Bazhou
municipal government did not provide the formal list of these entities, Deli
Solar (PRC) is allowed to pay a fixed tax assessment to the local government in
return for an exemption from other taxes. Each year the local tax bureau
provides Deli Solar (PRC) with a fixed number representing the tax Deli Solar
(PRC) is to remit, which is usually lower than the taxes that would otherwise be
payable. Deli Solar (PRC) has been paying a fixed tax amount in this manner
since its formation in 1997.
The amount of taxes paid by Deli Solar (PRC) for the fiscal years ended
December 31, 2004 and 2003 are included in the financial statements under
general and administrative expenses and were $7,990 and $6,295 respectively.
Net Income
Net income increased to approximately $2.1 million in the fiscal year
ended December 31, 2004, or approximately 254% from approximately $0.60 million
in the fiscal year ended December 31, 2003, primarily due to increased sales.
Liquidity and Capital Resources
Since Deli Solar (PRC)'s inception, it has financed its operations and met
capital expenditure requirements primarily through cash flows from operations,
bank loans and lines of credit, capital from its shareholders and related
parties and outside sources. Deli Solar (PRC) extends unsecured trade credit to
sales agents and distributors according to their credit status and their sales
potential in the sales periods, however, most new agents and small agents do not
receive any credit from us.
As of December 31, 2004, Deli Solar (PRC) had a short-term credit facility
from local banks in the PRC with an outstanding balance of $533,213. Each of
them is revolving loans with various maturity dates in 2005 with annual interest
rates between 6% and 8%.
We incurred approximately $56,000 in interest expense from bank loans in
the fiscal year ended December 31, 2004, as compared to $63,000 in 2003. Most of
these interest expenses were capitalized and included in construction in
progress.
We believe that we have sufficient capital from our recent private
placement and our operations to support our current operations over the next 12
months.
59
Accounts Receivable
The increase in net trade accounts receivable from December 31, 2003 to
December 31, 2004 from $208,797 to $216,055 is primarily attributable to the
increase of sales in 2004.
Prepaid Expenses
Prepaid expenses were approximately $353,044 in 2004 as compared to
$29,180 in 2003, an increase of approximately $323,864. The increase was
primarily due to advance payment to suppliers to purchase raw materials. Such
payment in advance allowed us to receive competitive price and guaranteed
supplies of raw materials.
Inventory
Inventories consisted of the following as at December 31, 2004 and
December 31, 2003:
December 31, 2004 December 31, 2003
----------------- -----------------
Raw materials 38,148 166,753
Consumables 14,394 --
Finished goods 246,456 193,987
----------------- -----------------
Totals 298,998 360,740
Inventories of raw materials declined during the fiscal year ended
December 31, 2004 due to increased production and demand for our products.
Inventories of finished goods increased during the same period to allow us to
meet increased production and demand.
Accounts Payable
Accounts payable, including trade accounts payable, other payable and
accrued expenses, decreased slightly from $349,827 as of December 31, 2003 to
$341,951 as of December 31, 2004. Most of these accounts are payable within one
year. There is no interest expense on these accounts. Accounts payable consists
primarily of accrued expenses.
Cash
Cash and cash equivalents increased from $1.1 million as of December 31,
2003 to $1.2 December 31, 2004. Cash and cash equivalents remained relatively
stable from 2003 to 2004, despite the increase in our net profits for the fiscal
year ended December 31, 2004. This is because we spent $1,421,332 on
construction of a new building intended for use as a warehouse and for
additional operating capacity.
60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth as of May 10, 2006, certain information
with respect to the beneficial ownership of our common stock, our only shares of
voting securities, by (i) any person or group with more than 5% of the common
stock, (ii) each director, (iii) each executive officer and (iv) all executive
officers and directors as a group.
Name and Amount and
Title of Address of Nature of Beneficial Percent of
Class Beneficial Owner Owner Class (a)
----------------
Common Stock Lake Street Fund L.P. 514,280(1) 7.96%
C/o Wedbush Morgan Securities
Attn: Carmen Rivera
Clearance Dept
1000 Wilshire Blvd.
Los Angeles, CA 90017
Common Stock Lagunitas Partners L.P. 340,000(1) 5.33%
C/o Gruber McBaine
50 Osgood Place
San Francisco, CA 94133
Common Stock Lynk Capital Partners Limited 481,440(1) 7.47%
Attn: David Moy
Tung Chai Building, Rm 1001
86-90 Wellington Street
Central, Hong Kong
Common Stock MidSouth Investor Fund L.P. 342,860(1) 5.37%
C/o Heidtke Inc.
201 4th Avenue North, Suite 1950
Nashville, TN 37219
Common Stock Yousu Lin 240,000(2) 3.87%(2)
No. 28, Fengtai Bei Road
Fengtai District, Beijing, PRC 100071
Common Stock Yunchun Wang 320,000(2) 5.16%(2)
No. 28, Fengtai Bei Road
Fengtai District, Beijing, PRC 100071
Common Stock Qian Wang 240,000(2) 3.87%(2)
No. 28, Fengtai Bei Road
Fengtai District, Beijing, PRC 100071
Common Stock Deli Du (3), President, CEO 3,202,886(2) 51.62%(2)
No. 28, Fengtai Bei Road
Fengtai District, Beijing, PRC 100071
61
Common Stock John D. Kuhns, 75,851(4) 1.22%
Director
The Farm House
Chairman, and
558 Lime Rock Road
Lakeville, CT
06039
Common Stock Kelly Chow Director 0 0
c/o The Farm House
558 Lime Rock Road
Lakeville, CT 06039
Common Stock Yunjun Luo, Director 0 0
No. 28, Fengtai Bei Road
Fengtai District, Beijing, PRC 100071
Common Stock Ravinder Soin, Director 0 0
No. 28, Fengtai Bei Road
Fengtai District, Beijing, PRC 100071
Common Stock All Directors and Officers of the Company as a group 4,078,737 65.73%
(a) As of May 10, 2006 we had 6,205,290 outstanding shares. In
determining the percent of common stock owned by a Selling
Stockholder on May 10, 2006, (a) the numerator is the number of
shares of common stock beneficially owned by such Selling
Stockholder, including shares the beneficial ownership of which may
be acquired, within 60 days upon the exercise of the warrants held
by such Selling Stockholder, and (b) the denominator is the sum of
(i) the total 6,205,290 shares outstanding on May 10, 2006, and (ii)
the total number of shares underlying the warrants, which each of
the Selling Stockholders has the right to acquire within 60 days
upon the exercise of its warrants.
(1) Includes shares that may be acquired upon exercise of warrants. Each
warrant entitles the holder to purchase 10 shares of our common
stock (increased from the original 8 shares to 10 shares in August
2005) at the exercise price of $3.85 per share at any time within
the five year period commencing March 31, 2005.
(2) On March 31, 2005, Messrs. Yousu Lin, Yunchun Wang, Qian Wang and
Deli Du acting in concert, acquired beneficial ownership of a total
of 4,002,886 shares of the Company's Common Stock. For purpose of
Section 13(d)(3) of the Exchange Act, they may be considered
collectively as a "group", and thus each the beneficial owner of the
entire 4,002,886 shares. The percentage of ownership of the group as
a whole is 64.51%. All of the shares owned by Yousu Lin, Yunchun
Wang, and Qian Wang, and most of the shares owned by Deli Du,
totaling 4,000,000 shares, are subject to a 12-month lock up
agreement, commencing from March 31, 2005.
(3) As a closing condition to the unit purchase agreement under which
the seventeen Selling Stockholders identified as Accredited
Investors subscribed their shares from the Company in the private
placement transaction closed on March 31, 2005, Mr. Du agreed to
place 10% of his equity interest in the Company (approximately
320,289 shares) into escrow for the benefit of the Accredited
Investors in the event we fail to attain specified levels of net
income.
(4) Includes 20,763 warrants to Mr. Kuhns and 52,907 warrants to Kuhns
Bros. & Co., Inc., each warrant entitles the holder to purchase one
share of the Company's Common Stock at $3.85 per share at any time
within the ten-year period commencing from March 31, 2005. Mr.
Kuhns, one of our Directors, is the Chairman and 95% shareholder of
Kuhns Brothers, Inc., which is the holding company for its 100%
subsidiaries, Kuhns Bros. & Co., Inc. and Kuhns Brothers Securities
Corporation. The shares held by Mr. Kuhns and the shares issuable to
Mr. Kuhns upon the exercise of his warrants are subject to a
one-year lock up agreement commencing from March 31, 2005.
62
Except for the disclosure made above, the Company knows of no other
beneficial owners (as a group or otherwise) of more than five percent (5%) of
the Company's shares of Common Stock.
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following are our officers and directors as of the date of this
prospectus. Some of our officers and directors is a resident of the PRC and,
therefore, it may be difficult for investors to effect service of process within
the United States upon them or to enforce judgments against them obtained from
the United States courts.
Name Position Age
- ------------------------- -------------------------------- --------------
John D. Kuhns Director, Chairman. 56
Deli Du President, CEO and Director 41
Jianmin Li Treasurer and CFO 37
Kelly Chow Director 47
Yunjun Luo Director 70
Ravinder Soin Director 53
Jing Wang Secretary 37
Mr. John D. Kuhns was appointed as a Director and chairman of the Board of
Directors of the Company on March 31, 2005. Since its founding in 1987 he has
been a controlling shareholder, president, CEO, a director and chairman of Kuhns
Brothers, Inc., an investment banking firm specializing in providing financing
for power technology ventures, and, more recently, manufacturing operations
within the PRC. Kuhns Brothers, Inc. owns 100% of Kuhns Brothers Securities
Corporation, a broker dealer, registered with the Securities and Exchange
Commission, in which Mr. Kuhns is the Chairman. Since 2002 Mr. Kuhns has been a
director and chairman of Distributed Power, Inc., a public company that owns
electric generating projects. Neither of the foregoing Kuhns companies, nor
Distributed Power, Inc. are affiliated with the Company. Mr. Kuhns holds a
Bachelor's degree in sociology and fine arts from Georgetown University, a
Master's degree in fine arts from the University of Chicago and an MBA from the
Harvard Business School.
Mr. Deli Du was appointed as a Director, President and CEO of the Company
on March 31, 2005. Mr. Du founded Deli Solar (PRC) in 1997 and has been its
controlling equity holder, chairman and chief executive officer during the past
five (5) years. Since June, 2004 he has also been a director and manager of Deli
Solar (BVI). He is a standing member of the China Solar Energy Utilization
Association, the China Efficiency Boiler Association and the Beijing New Energy
and Renewable Energy Union.
63
Mr. Jianmin Li was appointed as our Treasurer and CFO of the Company on
March 31, 2005. Prior thereto, commencing October 21, 2001, he served as Senior
Finance Manager for Tianjin Exist Food Co. Ltd., one of the largest distributors
of fast food consumer goods in Tianjin, PRC. Mr. Li received a Bachelor's degree
in Economics from the Business College of Beijing Forestry University in 1991
and has completed the MBA program at Katholicke University Leuven Vlerick
Management School in Belgium in 2001.
Ms. Jing Wang was appointed as Secretary of the Company in May, 2005 and
also acted as an assistant to the President, Mr. Deli Du. Ms. Wang was
responsible for our compliance with U.S. securities laws and regulations. Ms.
Wang holds a Bachelor's degree in Architecture from the Beijing Jiao Tong
University, a Master's degree in Real Estate Finance from the University of New
South Wales (Australia), a post graduate degree in commerce from the Chinese
Academy of Social Sciences, with English studies at ACCL in Sydney, Australia.
From March 2002 to February, 2005 she was with Northcroft (Australia) Pty.,
Ltd., a company engaged in project, cost and risk management analysis, in which
she held the position business development manager. Ms. Wang resigned from her
position with the Company effective January 31, 2006.
Mr. Kelly Chow was appointed as a Director in June 2005. Mr. Chow holds a
Bachelor's degree in Arts from the University of Toronto. From 1996 until May,
2005 he was associated with the investment banking firm of Merrill Lynch,
Pierce, Fenner & Smith and most recently held the office of vice president.
While at Merrill Lynch he was engaged primarily in investments and asset
management. Presently Mr. Chow is an independent investor and consultant
specializing in U.S.-Chinese business and corporate financial affairs.
Mr. Yunjun Luo was appointed as a Director of the Company in June 2005. He
holds a Bachelor's degree in Pyrology from the Southeast University (PRC) with
further studies and research within the PRC at The Academy of Social Sciences
(structural mechanics), the Commission of Science, Technology and Industry for
National Defense (space satellites) and the Beijing Solar Energy Research
Institute (solar heaters). For over five (5) years he has been associated with
the Beijing New Energy and Renewable Energy Association, serving as a director
and associate professor. He also serves as a director and chief consultant for
Ailiyang.
Mr. Ravinder Soin was appointed as a Director in June 2005. Mr. Soin holds
chemical engineering degrees from the following institutions in India: B.Sc.
from Punjab University, M.E. from Biria Institute of Technology & Science
(affiliated with Massachusetts Institute of Technology), Ph. D. from MS
University. From 1992 to 2003 he was employed by BP Solar Pty Ltd., an
Australian corporation engaged in development and exploitation of solar
photovoltaic equipment, where he held the position of director of business
development. From 2003 to the present he has been associated as a director of
Aus Renewable Energy Ltd., an Australian corporation engaged in the renewable
energy business. Neither of these companies is an affiliate of ours. Mr. Soin is
currently a member of the Institution of Engineers (Australia), the Australian
and New Zealand Solar Energy Society and the Australian China Business Council.
64
The following are the officers and directors of Deli Solar (PRC) as of the
date of this report:
Name Positions Age
- ---- --------- -----
Deli Du Chairman and Director 41
Yunjin Luo Director 70
Hao Dong CEO 31
Xueling Wu Controller 25
Mr. Hao Dong was appointed as CEO of Deli Solar (PRC) in January 2005. He
has been working for Deli Solar (PRC) since 1997, holding positions in the
technology department (from 1997 to 1999), manufacturing department (from 1999
to 2004) and sales department. Mr. Dong graduated from Bazhou Municipal
Technical College in 1995 and worked as technical staff for Bazhou Municipal Hua
Xin Construction Co., Ltd. before joining Deli Solar (PRC). Mr. Dong is an
assistant engineer on mechanics, a certification recognized by Bazhou Municipal
Government Technology Department.
Ms. Xueling Wu was appointed as controller of Deli Solar (PRC) in January
2005. Prior to that, Ms. Wu had worked for Deli Solar (PRC) since 2001 as a
staff accountant, inventory controller and sales person. She graduated from
Hebei Provincial Fisheries College and is a PRC Certified Accountant.
FAMILY RELATIONSHIPS
There are no family relationships among our directors or officers.
AUDIT COMMITTEE FINANCIAL EXPERT
Our full Board of Directors of the Company currently serves as its audit
committee. The Board of Directors does not currently have an audit committee
"financial expert" as defined under Rule 401(e) of Regulation S-B because the
Company only recently consummated its transaction with Deli Solar (BVI) and the
Board of Directors is in the process of searching for a suitable candidate for
this Board position.
EXECUTIVE COMPENSATION
The following is a summary of the compensation paid by the Company to its CEO
and two most highly compensated officers for the three years ended December 31,
2005.
65
ANNUAL COMPENSATION LONG TERM COMPENSATION
Awards Payouts
Other Restricted Securities
Annual Stock Underlying All
Year Compen- Awards Options/ LTIP Other
Name Position Ended Salary($) Bonus($) sation($) $ SARS Payouts Compensation
- ------------- --------- ---------- --------- -------- --------- ----------- ---------- ------- ------------
Deli Du(1) CEO 12/31/2005 $ 80,000 0 0 0 0 0 0
12/31/2004 N/A 0 0 0 0 0 0
12/31/2003 N/A 0 0 0 0 0 0
Jianmin Li(2) CFO 12/31/2005 $ 30,000 0 0 0 0 0 0
12/31/2004 N/A 0 0 0 0 0 0
12/31/2003 N/A 0 0 0 0 0 0
Jing Wang(3) Secretary 12/31/2005 $ 30,000 0 0 0 0 0 0
12/31/2004 N/A 0 0 0 0 0 0
12/31/2003 N/A 0 0 0 0 0 0
(1) Starting from March 31, 2005, Mr. Du received a salary from the Company at
the annual rate of $80,000.
(2) Starting from March 31, 2005, Mr. Li receives a salary from the Company at
the annual rate of $30,000.
(3) From May 2005 to January 31, 2006, Ms. Wang received a salary at the annual
rate of $30,000.
Our standard arrangement with the directors of the Company provides that
we pay each director an annual compensation in the amount of $20,000 for serving
as a director of the Company.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Under an engagement agreement, Kuhns Brothers, Inc. through its 100%
subsidiaries, Kuhns Brothers Securities Corporation, and Kuhns Bros. & Co. Inc.,
rendered investment banking and financing services to Deli Solar (PRC), during
the year ended December 31, 2005. Kuhns Brothers, Inc. is 95% owned by John D.
Kuhns, the Chairman of our Board of Directors. In return for these investment
banking and financing services rendered by Kuhns Brothers, Inc., we paid it
$150,000 and a financing fee of $574,802, plus 121,342 shares of our common
stock, along with warrants to purchase 171,429 shares of our common stock at
$3.85 per share at any time prior to March 30, 2015. Under the engagement
agreement, Kuhns Brothers, Inc. will also be entitled to a fee equals to 9% of
the proceeds from exercise of the warrants held by the seventeen Accredited
Investors. In addition we have entered into an agreement, dated April 1, 2005,
with Kuhns Brothers, Inc. to render financial advisory and consulting services
to the Company and its subsidiaries for the period ending December 31, 2005, for
which Kuhns Brothers, Inc. is paid $10,000 per month commencing April 1, 2005.
Pursuant to a Consultancy Agreement dated June 2005 between Deli Solar
(PRC) and AUS Renewable Energy Ltd., a Hong Kong company controlled by our
director, Ravinder Soin, Deli Solar (PRC) retained Mr. Soin as its consultant to
assist the Company to market its products and services outside of China for an
annual consulting fee of U.S.$60,000, payable on a bimonthly basis. Under the
agreement, we are obligated to reimburse Mr. Soin for certain travel and
transportation expenses associated with the consulting services.
66
We entered into a stock purchase agreement, dated February 24, 2005, with
the shareholders of Ailiyang, in which one of our directors held more than 80%
of its capital stock. Pursuant to the agreement, we purchased all of the stock
of Ailiyang from the Ailiyang Shareholders for a total purchase price of
RMB500,000. We completed the acquisition of Ailiyang on November 21, 2005, and
Ailiyang is now a wholly owned subsidiary of Deli Solar (PRC) and its sole
business is to serve as a distributor of Deli Solar (PRC).
Mr. Deli Du, our Director, CEO and president, borrowed a total of $406,498
in 2004, which was reflected as part of our accounts receivable as of December
31, 2004. As of the date of this Report, Mr. Deli Du has repaid all of his
borrowings from us.
PLAN OF DISTRIBUTION
The Selling Stockholders may sell the common stock directly or through
brokers, dealers or underwriters who may act solely as agents or may acquire
common stock as principals. Such sales may be made at prevailing market prices,
at prices related to such prevailing market prices, or at variable prices
negotiated between the sellers and purchasers. The Selling Stockholders may
distribute the common stock in one or more of the following methods:
o ordinary brokers transactions, which may include long or short sales
through the facilities of the Over-the-Counter Bulletin Board (if a
market maker successfully applies for inclusion of our common stock
in such market) or other market;
o transactions involving cross or block trades or otherwise on the
open market;
o purchases by brokers, dealers or underwriters as principal and
resale by these purchasers for their own accounts under this
prospectus;
o sales "at the market" to or through market makers or into an
existing market for the common stock;
o sales in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales made
through agents;
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise); or
o any combination of the above, or by any other legally available
means.
67
In addition, the Selling Stockholders may enter into hedging transactions
with broker-dealers who may engage in short sales of common stock, or options or
other transactions that require delivery by broker-dealers of the common stock.
The Selling Stockholders and/or the purchasers of common stock may
compensate brokers, dealers, underwriters or agents with discounts, concessions
or commissions (compensation may be in excess of customary commissions). The
Selling Stockholders and any broker dealers acting in connection with the sale
of the shares being registered may be deemed to be underwriters within the
meaning of Section 2(11) of the Securities Act, as amended, and any profit
realized by them on the resale of shares as principals may be deemed
underwriting compensation under the Securities Act. We do not know of any
arrangements between the Selling Stockholders and any broker, dealer,
underwriter or agent relating to the sale or distribution of the shares being
registered.
We and the Selling Stockholders and any other persons participating in a
distribution of our common stock will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, these parties and other
persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions subject to specified exceptions or
exemptions.
The Selling Stockholders may sell any securities that this prospectus
covers under Rule 144 of the Securities Act rather than under this prospectus if
they qualify.
We cannot assure you that the Selling Stockholders will sell any of their
shares of common stock.
In order to comply with the securities laws of certain states, if
applicable, the Selling Stockholders will sell the common stock in jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states, the Selling Stockholders may not sell or offer the common stock unless
the holder registers the sale of the shares of common stock in the applicable
state or the applicable state qualifies the common stock for sale in that state,
or the applicable state exempts the common stock from the registration or
qualification requirement.
We have agreed to indemnify the Selling Stockholders whose shares we are
registering from all liability and losses resulting from any misrepresentations
we make in connection with the registration statement.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of (i) 66,666,667
shares of common stock, par value $.001 per share, of which there are 6,205,290
shares issued and outstanding, and (ii) 25,000,000 shares of preferred stock,
par value $.001 per share, of which no shares have been designated or issued.
68
The following is a summary of the material terms of our capital stock.
This summary is subject to and qualified in its entirety by our Articles of
Incorporation, as amended, and Bylaws, and by the applicable provisions of
Nevada law.
Common Stock
Every stockholder of record is entitled to one vote for each share on all
matters to be voted on by the stockholders. Our charter documents do not provide
for cumulative voting rights and thus, under the applicable Nevada corporate
statute, holders of common stock do not have cumulative voting rights. Holders
of common stock are entitled to share ratably in dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion from
funds legally available therefore.
Under the Nevada corporate statute NRS 78.265, stockholders in
corporations organized before October 1, 1991 have a preemptive right to acquire
unissued shares, unless such a preemptive right is denied by the articles of
incorporation. However, a preemptive right does not exist to acquire shares if
the shares upon issuance are registered pursuant to Section 12 of the Securities
Exchange Act of 1934, which is the case for the Company. Thus, holders of the
Company's common stock have no preemptive rights. There are no conversion or
redemption rights or sinking fund provisions with respect to the Company's
common stock.
Preferred Stock
The Company's Board of Directors is authorized under the Restated Article
of Incorporation to provide for the issuance of shares of preferred stock, by
resolution or resolutions for the issuance of such stock, and, by filing a
certificate of designations under Nevada law, to fix the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof without any further vote or action by the
shareholders. Any shares of preferred stock so issued are likely to have
priority over the Company's common stock with respect to dividend or liquidation
rights.
The issuance of shares of preferred stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of preferred stock might impede
a business combination by including class voting rights that would enable the
holder to block such a transaction, or facilitate a business combination by
including voting rights that would provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
preferred stock could adversely affect the voting power of the holders of the
common stock. Although the Board of Directors is required to make any
determination to issue such stock based on its judgment as to the best interests
of the stockholders of the Company, the Board of Directors could act in a manner
that would discourage an acquisition attempt or other transaction that some, or
a majority, of the stockholders might believe to be in their best interests or
in which stockholders might receive a premium for their stock over the then
market price of such stock. The Board of Directors does not at present intend to
seek stockholder approval prior to any issuance of currently authorized
preferred stock, unless otherwise required by law.
69
MARKET PRICE OF AND DIVIDENDS ON OUR
COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock was reported on NASDAQ through April 30, 1986, at which
time it was delisted because of failure to meet the minimum capital, surplus and
asset requirements of the NASD by-laws. Thereafter, our common stock was traded
on the over-the-counter Bulletin Board under the trading symbol "MDPM.OB." After
the completion of the Reverse Merger on March 31, 2005, we obtained the new
symbol "DLSL.OB" under which our common stock is now traded.
On March 31, 2005, the closing price for the common stock of the Company
was $11.00. The closing prices for the fiscal years ended on December 31, 2004
and December 31, 2005, and the closing price for the first quarter of 2006 are
set forth below:
Quarter Ended Closing Price
- ------------- -------------
3/31/2004 $ 0.18
6/30/2004 $ 0.12
9/30/2004 $ 0.12
12/31/2004 $ 0.30
3/31/2005 $ 11.70
6/30/2005 $ 15.90
9/30/2005 $ 6.75
12/31/2005 $ 9.00
03/31/2006 $ 11.00
Some of the above prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. These prices have 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.
Since the completion of the Reverse Merger, our common stock has traded
sporadically and with high volatility. Consequently, our historical prices may
not be an accurate indication of the future prices of our common stock.
As of May 10, 2006, there were 6,205,290 shares of our common stock issued
and outstanding, and there were approximately 2500 holders of record of our
outstanding shares.
Dividends
The payment of dividends, if any, is to be within the discretion of the
Company's Board of Directors. The Company presently intends to retain all
earnings, if any, for use in its business operations and accordingly, the Board
of Directors does not anticipate declaring any dividends in the near future.
70
Dividends, if any, will be contingent upon the Company's revenues and
earnings, capital requirements, financial conditions and the ability of Deli
Solar (PRC) to obtain approval to get monies out of the PRC. The PRC's national
currency, the Yuan, is not a freely convertible currency. Please refer to the
risk factors "Governmental control of currency conversion may affect the value
of your investment"; "The fluctuation of the Renminbi may materially and
adversely affect your investment"; "Recent PRC State Administration of Foreign
Exchange ("SAFE") Regulations regarding offshore financing activities by PRC
residents have undergone a number of changes which may increase the
administrative burden we face and create regulatory uncertainties that could
adversely affect the implementation of our acquisition strategy. The failure by
our shareholders who are PRC residents to make any required applications and
filings pursuant to such regulations may prevent us from being able to
distribute profits and could expose us and our PRC resident shareholders to
liability under PRC law."
Equity Compensation Plan Information
We do not have any equity compensation plans.
Transfer Agent
The Company's stock transfer agent is Securities Transfer Corporation,
located at 2591 Dallas Parkway, Suite 102, Fisco, TX 75034. Their telephone
number is 469-633-0100, and their facsimile is 469-633-0088.
Penny Stock Regulations
The Commission has adopted regulations which generally define "penny
stock" to be an equity security that has a market price of less than $5.00 per
share. The Company's Common Stock may fall within the definition of penny stock
and be subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000, or annual incomes exceeding $200,000 or $300,000, together with
their spouse).
For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's prior written consent to the transaction. Additionally,
for any transaction, other than exempt transactions, involving a penny stock,
the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's Common Stock and
may affect the ability of investors to sell their Common Stock in the secondary
market.
71
LEGAL PROCEEDINGS
We know of no material, active, pending or threatened proceeding against
us, Deli Solar (BVI) or Deli Solar (PRC), nor are we involved as a plaintiff in
any material proceeding or pending litigation. We also know of no proceedings in
which any of our or our subsidiaries' directors, officers, or affiliates, or any
registered or beneficial shareholder is an adverse party or has a material
interest adverse to our interests.
LEGAL MATTERS
Our counsel, Guzov Ofsink, LLC, located at 600 Madison Avenue, 14th Floor,
New York, New York 10022, is passing upon the validity of the issuance of the
common stock that we are offering under this prospectus.
EXPERTS
Child, Van Wagoner & Bradshaw, PLLC, independent certified public
accountants, located at 1284 W. Flint Meadow Dr., Suite D, Kaysville, Utah, have
audited our financial statements included in this registration statement to the
extent, and for the periods set forth in their reports. We have relied upon such
reports, given upon the authority of such firm as experts in accounting and
auditing.
INTEREST OF NAMED EXPERTS AND COUNSEL
No "expert" or "counsel" as defined by Item 509 of Regulation S-B
promulgated pursuant to the Securities Act, whose services were used in the
preparation of this Form SB-2, was hired on a contingent basis or will receive a
direct or indirect interest in us, nor was any of them a promoter, underwriter,
voting trustee, director, officer or employee of the Company.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our Bylaws provide that we will indemnify our directors and officers from
all costs and expenses of liability incurred by them in connection with any
action, suit or proceeding in which they are involved by reason of their acting
as our directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons, we have
been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person in the successful defence of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of 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 Securities
Act and will be governed by the final adjudication of such issue.
72
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On August 11, 2003, we engaged MGB Partners, LLP ("MGB") and
simultaneously dismissed Corbin & Company, LLP as our independent auditor. This
change of our independent auditor was approved by our Board of Directors. Corbin
& Company, LLP ("C&C") had not issued any opinion on our financial statements.
We are unaware of any past disagreements between us and C&C on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to the satisfaction of C&C, would
have caused C&C to make reference to the subject matter of the disagreements for
the interim financial statements they reviewed. During the Company's two most
recent fiscal years and any subsequent interim period prior to the engagement of
MGB, neither the Company nor anyone on the Company's behalf consulted with MGB
regarding either (i) the application of accounting principles to a specified
transaction, either contemplated or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements or (ii) any matter that
was either the subject of a disagreement or a reportable event. The Company has
authorized C&C to respond fully to all inquiries of MGB.
On June 13, 2005, after the completion of the Reverse Merger, we engaged
Child, Sullivan & Company ("CS&C"), a professional corporation of Certified
Public Accountants, as our principal independent accountant with the approval of
our Board of Directors. Accordingly, we dismissed MGB on the same date. The
reason to change our principal independent accountant was based on the fact that
our operating company, Deli Solar (PRC), and our subsidiary, Deli Solar (BVI),
have been audited by CS&C in the past and it was in our best interests to
continue to retain such firm's services. The reports of MGB dated August 27,
2004 for the years ended May 31, 2004 and 2003 and for the period from May 4,
1982 (date of inception) through May 31, 2004 did not contain an adverse opinion
or disclaimer of opinion, or was modified as to uncertainty, audit scope, or
accounting principles. In connection with the audit of our financial statements
and in the subsequent interim period through the date of dismissal, there were
no disagreements with MGB on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of MGB, would have caused MGB to make reference to
the subject matter of the disagreements in connection with their report. During
the period the Company's engaged MGB, neither the Company nor anyone on the
Company's behalf consulted with CS&C regarding either (i) the application of
accounting principles to a specified transaction, either contemplated or
proposed, or the type of audit opinion that might be rendered on the Company's
financial statements or (ii) any matter that was either the subject of a
disagreement or a reportable event. The Company has authorized MGB to respond
fully to all inquiries of CS&C.
On January 2, 2006, CS&C, our principal accountant changed its accounting
practice from a corporation to a professional limited liability company named
Child, Van Wagoner & Bradshaw, PLLC ("CVWB"). As this is viewed as a separate
legal entity, we disengaged CS&C as our principal accountant and engaged CVWB,
as our principal accountant for the fiscal year ending December 31, 2005 and the
interim periods for 2005 and 2006. The decision to change principal accountants
was ratified by our Board of Directors. See the current report on Form 8-K filed
with the Commission on January 23, 2006 and is hereby incorporated by reference.
73
FINANCIAL STATEMENTS
Deli Solar (USA)'s unaudited consolidated financial statements for the
three months ended March 31, 2006 and the notes, Deli Solar (USA)'s consolidated
audited financial statements for the fiscal years ended December 31, 2005 and
2004, together with the report of the independent certified public accounting
firm thereon and the notes thereto, Deli Solar (PRC)'s audited financial
statements for the fiscal years ended December 31, 2004 and 2003, together with
the report of independent certified public accountants thereon and the notes
thereto, and Meditech's audited financial statements for the fiscal years ended
May 31, 2004 and 2003 together with the report of independent certified public
accountants thereon and the notes thereto and its unaudited consolidated
financial statements for the three months ended February 28, 2005 are presented
beginning at page F-1.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, a registration statement on Form SB-2, as
amended, under the Securities Act for the common stock offered by this
prospectus. We have not included in this prospectus all the information
contained in the registration statement and you should refer to the registration
statement and its exhibits for further information.
The registration statement and other information may be read and copied at
the SEC's Public Reference Room at 450 Fifth Street N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web
site (HTTP://WWW.SEC.GOV.) that contains the registration statements, reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC such as us.
You may also read and copy any reports, statements or other information
that we have filed with the SEC at the addresses indicated above and you may
also access them electronically at the web site set forth above. These SEC
filings are also available to the public from commercial document retrieval
services.
74
INDEX TO FINANCIAL STATEMENTS
I. Deli Solar (USA), Inc.
1. Unaudited Consolidated Financial Statements for the Three Months
ended March 31, 2006 and 2005 F-1 - F-7
i. Consolidated Balance Sheets as of March 31, 2006 and
December 31, 2005
ii. Consolidated Statements of Operations and Comprehensive
iii. Income for the three months ended March 31, 2006 and
2005
iv. Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 and 2005
v. Notes to Consolidated Financial Statements of March 31,
2006
2. Audited Consolidated Financial Statements for the Year ended
December 31, 2005 F-8 - F-25
i. Report of Independent Public Accounting Firm
ii. Consolidated Balance Sheet as of December 31, 2005 and
2004 (restated)
iii. Consolidated Statements of Operations and Comprehensive
Income for the Years ended December 31, 2005 and 2004
(restated)
iv. Consolidated Statements of Changes in Stockholders'
Equity for the Years ended December 2005 and 2004
(restated)
v. Consolidated Statements of Cash Flows for the Years
Ended December 31, 2005 and 2004 (restated)
vi. Notes to Audited Consolidated Financial Statements
II. Bazhou Deli Solar Energy Heating Co., Ltd. (Deli Solar (PRC))
1. Audited Financial Statements for the fiscal years ended December 31,
2004 and 2003 F-26 - F-37
i. Report of Independent Registered Public Accounting Firm
ii. Balance Sheets as of December 31, 2004 and 2003
iii. Statements of Operations for the years ended December
31, 2004 and 2003
iv. Statements of Changes in Equity for the years ended
December 31, 2004, 2003 and 2002
v. Statement of Cash Flows for the years ended December 31,
2004 and 2003
vi. Notes to Financial Statements for the years ended
December 31, 2004 and 2003
III. Meditech Pharmaceuticals, Inc. F-38 - F-57
1. Audited Financial Statements for the fiscal years ended May 31, 2004
and 2003
i. Report of Independent Registered Public Accounting Firm
ii. Consolidated Balance Sheet as of May 31, 2004
iii. Consolidated Statements of Operations for the years
ended May 31, 2004 and 2003 and for the period from May
4, 1982 (date of inception) through May 31, 2004
iv. Consolidated Statements of Stockholders' Deficit for the
years ended May 4, 1982 (date of inception) through May
31, 2004
v. Notes to the Consolidated Financial Statements for the
years ended May 31, 2004 and 2003
2. Unaudited Consolidated Financial Statements for the three months
ended February 28, 2005 F-59 - F-66
i. Balance Sheet at February 28, 2005 and May 31, 2004
ii. Consolidated Statements of Operations for the three
months ended February 28, 2005 and 2004;
iii. Consolidated Statements of Cash Flows for the three
months ended February 28, 2005 and 2004
iv. Notes to Unaudited Consolidated Financial Statements
1. DELI SOLAR (USA), INC. Consolidated Balance Sheets (unaudited)
Assets March 31, 2006 December 31, 2005
------------ ------------
Current assets
Cash and cash equivalents $ 4,595,498 $ 5,629,168
Trade accounts receivable 653,808 748,475
Allowances for doubtful accounts (194,667) (193,630)
------------ ------------
Net trade accounts receivable 459,141 554,845
Advance to suppliers 750,121 811,275
Prepaid expenses 44,571 44,783
Related entities receivable 42,111 37,856
Inventories 619,029 383,183
------------ ------------
Total current assets 6,510,471 7,461,110
Property, plant and equipment
Buildings 3,193,007 3,175,994
Machinery and equipment 43,567 43,335
Vehicles 107,208 106,636
Computer equipment 23,806 26,197
Office equipment 7,194 6,976
Construction in progress 562,240 159,356
------------ ------------
Total property, plant and equipment 3,937,022 3,518,494
Accumulated depreciation (256,271) (228,986)
------------ ------------
Net property, plant and equipment 3,680,751 3,289,508
Other receivables 73,912 82,090
Prepaid land lease 987,554 70,798
------------ ------------
Total other assets 1,061,466 152,888
------------ ------------
Total assets $ 11,252,688 $ 10,903,506
============ ============
F-1
DELI SOLAR (USA), INC. Consolidated Balance Sheets (unaudited) (Continued)
Liabilities and stockholders' equity March 31, 2006 December 31, 2005
----------- -----------
Current liabilities
Trade accounts payable $ 180,040 $ 89,375
Related party payable 50,045 50,045
Accrued expenses 6,804 1,733
Deposits 9,799 5,621
Short-term notes payable 130,809 130,112
----------- -----------
Total current liabilities 377,497 276,886
Stockholders' equity
Preferred stock: par value $.001; 25,000,000 -- --
shares authorized, no shares issued and outstanding
Common stock: par value $.001; 66,666,667 shares 6,205 6,205
authorized, 6,205,290 shares issued and outstanding
Additional paid in capital 5,705,574 5,705,574
Retained earnings 4,944,277 4,740,284
Accumulated other comprehensive income 219,135 174,557
----------- -----------
Total stockholders' equity 10,875,191 10,626,620
----------- -----------
Total liabilities and stockholders' equity $11,252,688 $10,903,506
=========== ===========
F-2
ITEM 1. Consolidated Financial Statements
1.2 DELI SOLAR (USA), INC. Consolidated Statements of Operations and
Comprehensive Income (unaudited)
Three months ended Three months ended
March 31, 2006 March 31, 2005
----------- -----------
Sales revenues $ 2,353,287 $ 1,156,938
Cost of goods sold 1,782,672 930,565
----------- -----------
Gross profit 570,615 226,373
Operating expenses
Advertising 105,776 63,693
Selling expense 35,902 6,704
Salaries and benefits 33,854 28,966
Depreciation 25,302 7,221
Other general and administrative 162,013 30,639
----------- -----------
Total operating expenses 362,847 137,223
----------- -----------
Net operating income 207,768 89,150
Other income (expense)
Interest expense (3,775) (10,857)
Other income (expense) -- --
----------- -----------
Total other income (expense) (3,775) (10,857)
----------- -----------
Net income before taxes 203,993 78,293
Taxes -- --
----------- -----------
Net income $ 203,993 $ 78,293
=========== ===========
Foreign currency translation adjustment 44,578 --
----------- -----------
Comprehensive income $ 248,571 $ 78,293
=========== ===========
Basic earnings per share $ 0.03 $ 0.02
Denominator for basic EPS 6,205,290 4,431,000
Fully diluted earnings per share $ 0.03 $ 0.02
Denominator for diluted EPS 8,031,009 4,431,000
F-3
ITEM 1. Consolidated Financial Statements
1.3 DELI SOLAR (USA), INC. Consolidated Statements of Cash Flows (unaudited)
Three months ended Three months ended
March 31, 2006 March 31, 2005
----------- -----------
Cash flows from operating activities:
Net income $ 203,993 $ 78,293
Adjustments to reconcile net income
to net cash provided by (used in) operations:
Depreciation and amortization 27,285 7,295
Provision for allowance on accounts receivable 1,037 --
Loss on disposal of fixed assets
Changes in operating liabilities and assets:
Trade accounts receivable 94,667 (41,273)
Advance to suppliers 61,154 (226,800)
Inventories (235,846) (217,978)
Receivables - employees 8,178 18,116
Prepaid land lease 3,102 371
Prepaid expenses 212 (31,120)
Trade accounts payable 90,665 (101,068)
Other payables -- 173,465
Accrued expenses 5,071 (195,114)
Deposits 4,178 (7,486)
----------- -----------
Net cash provided by (used in) operations 263,696 (543,299)
Cash flows from investing activities:
Purchases of property, plant and equipment (418,528) (49,991)
Related party receivables (4,255) 277,289
Prepaid land lease (919,858) --
----------- -----------
Net cash used in investing activities (1,342,641) 227,298
Cash flows from financing activities:
Proceeds from short-term notes payable 697 --
Related party payables -- 500
Proceeds from sale of stock -- 4,651,389
----------- -----------
Net cash provided by (used in) financing activities 697 4,651,889
Effect of rate changes on cash 44,578 --
----------- -----------
Increase in cash and cash equivalents (1,033,670) 4,335,888
Cash and cash equivalents, beginning of period 5,629,168 1,241,808
----------- -----------
Cash and cash equivalents, end of period $ 4,595,498 $ 5,577,696
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid in cash $ (3,775) $ (10,857)
Income taxes paid in cash $ -- $ --
F-4
ITEM 1. Consolidated Financial Statements
1.4 Notes to Consolidated Financial Statements of March 31, 2006 (unaudited)
Note 1: Basis of Presentation
Quarterly Financial Statements
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB but do not include all of the
information and footnotes required by generally accepted accounting principles
and should, therefore, be read in conjunction with the Company's 2005 financial
statements in Form 10-KSB. These statements do include all normal recurring
adjustments which the Company believes necessary for a fair presentation of the
statements. The interim operating results are not necessarily indicative of the
results for a full year.
Principles of Consolidation
Deli Solar (USA) Inc. was incorporated in the State of Nevada on March 21, 1983
as Meditech Pharmaceuticals, Inc. ("Meditech"). In late 2004, the Board of
Directors of Meditech contemplated a strategic alliance with Deli Solar (BVI).
In contemplation of the alliance, the Board of Directors resolved to spin off
Meditech's drug development business to the shareholders of Meditech of record
on February 17, 2005, through a pro rata distribution in the form of a stock
dividend. The acquisition of Deli Solar (BVI) was accounted for as a
recapitalization of Deli Solar (BVI).
Deli Solar (BVI) was formed in June, 2004 in the Territory of the British Virgin
Islands. On August 1, 2004, Deli Solar (BVI) purchased Bazhou Deli Solar Energy
Heating Co., Ltd. ("Deli Solar (PRC)"), a corporation duly organized under the
laws of the People's Republic of China ("PRC") from Messrs. Deli Du, Xiao'er Du,
and Xiaosan Du for RMB 6,800,000. As a result of this transaction, Deli Solar
(PRC) became a wholly-foreign owned enterprise ("WFOE") under PRC law on March
30, 2005. This acquisition was accounted for as a transfer of entities under
common control.
Deli Solar (PRC) was incorporated on August 19, 1997 under the laws of the PRC.
In the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the
United States ("US").
The result of the above transactions is that Deli Solar (BVI) is now our direct,
wholly-owned subsidiary and Deli Solar (PRC) remains a wholly-owned subsidiary
of Deli Solar (BVI).
On November 21, 2005 Deli Solar (PRC) acquired Ailiyang Solar Energy Technology
Co., Ltd. ("Ailiyang"), an entity formerly controlled by the owners of Deli
Solar (PRC). The transaction was accounted for as a transfer of entities under
common control.
Deli Solar (PRC) designs, manufactures and sells solar hot water heaters,
coal-fired boilers and space heating products within the PRC. The consolidated
financial statements include the accounts of Deli Solar (USA), Inc., Deli Solar
(BVI), Deli Solar (PRC) and Ailiyang. All material intercompany accounts and
transactions have been eliminated in consolidation.
F-5
The comparative statements for the prior year have been retroactively restated
to show the effects due to the consolidation of Ailiyang, the recapitalization
effected on March 31, 2005, wherein the Company assumed the capital structure of
Meditech Pharmaceuticals, Inc. and the 1:6 reverse stock split that was effected
on August 15, 2005.
Note 2: Summary of Significant Accounting Policies
The preparation of financial statements and related disclosures in
conformity with U.S. generally accepted accounting principles requires us to
make judgments, estimates and assumptions that affect the reported amounts in
the Consolidated Financial Statements and accompanying notes. Following
paragraph describes the significant accounting policies and methods used in the
preparation of the Consolidated Financial Statements. The areas described below
are affected by critical accounting estimates and are impacted significantly by
judgments and assumptions in the preparation of the Consolidated Financial
Statements. Actual results could differ materially from the amounts reported
based on these critical accounting estimates.
a) Revenue Recognition
Product sales are recognized when the products are delivered to and
inspected by customers and title has passed. The Company provides a three-year
standard warranty to all of the products it manufactures. Under this standard
warranty program, repair and replacement of defective component parts are free
of any charge during the first year following the purchase. In the second and
third year, customers must pay for the purchase of the replacement parts, but
not for repair services. Most of our warranty services are performed by our
independent sales agents and distributors in return for a 1-2% discount of the
purchase price they pay for our products. The Company also allows its sales
agents and distributors to return any defective product for exchange.
b) Allowance for Doubtful Accounts
The Company's business operations are conducted in the People's Republic
of China. We extend unsecured trade credit to our relatively large customers
according to their sales volume and historical payment records. The allowance
for doubtful accounts is established through charges to the provision for bad
debts. We regularly evaluate the adequacy of the allowance for doubtful accounts
based on historical trends in collections and write-offs, our judgment as to the
probability of collecting accounts and our evaluation of business risk. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to revision as more information becomes available. Accounts are
determined to be uncollectible when the debt is deemed to be worthless or only
recoverable in part and are written off at that time through a charge against
the allowance.
c) Property, Plant and Equipment
Building, plant and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are recorded
utilizing the straight-line method over the estimated original useful lives of
the assets. Amortization of leasehold improvements is calculated on a
straight-line basis over the life of the asset or the term of the lease,
whichever is shorter. Major renewals and betterments are capitalized and
depreciated; maintenance and repairs that do not extend the life of the
respective assets are charged to expense as incurred. Upon disposal of assets,
the cost and related accumulated depreciation are removed from the accounts and
any gain or loss is included in income. Depreciation related to property and
equipment used in production is reported in cost of sales.
F-6
d) Construction-in-progress
All facilities purchased for installation, self-made or subcontracted are
accounted for under construction-in-progress. Construction-in-progress is
recorded at acquisition cost, including cost of facilities, installation
expenses and the interest capitalized during the course of construction for the
purpose of financing the project. Upon completion and readiness for use of the
project, the cost of construction-in-progress is to be transferred to fixed
assets.
e) Income Taxes
Normally at the national level, a Chinese company is subject to enterprise
income tax at the rate of 33%, value added tax at the rate of 17% for most of
the goods sold, and business tax on services at a rate ranging from 3% to 5%
annually. However, pursuant to the relevant laws and regulations of the PRC,
Deli Solar (PRC), as a wholly foreign owned enterprise ("WFOE") in the PRC, is
entitled to an exemption from the PRC enterprise income tax for two years
commencing from its first profitable year, after loss carry-forwards from the
previous five years have been recovered. Deli Solar (PRC) first reported gross
profits for the year ended December 31, 1997. Since Deli Solar (PRC) was
transformed into a WFOE in March 2005, it is currently in the two-year 100%
exemption from income taxes until the end of fiscal year 2006. Thereafter, it
will be entitled to a 50% tax exemption from the PRC enterprise income tax until
the end of fiscal year 2010.
f) Foreign currencies:
The accompanying financial statements are presented in United States (US)
dollars. The functional currency is the Renminbi (RMB). The financial statements
are translated into US dollars from RMB at period end exchange rates for assets
and liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred. On July 21, 2006, China changed its foreign
currency exchange policy from a fixed RMB/USD exchange rate into a flexible rate
under the control of China's government. We use the Closing Rate Method in
translation of the financial statement of Deli PRC.
g) Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-7
Child, Sullivan &Company
A Professional Corporation of CERTIFIED PUBLIC ACCOUNTANTS
1284 W. Flint Meadow Dr., Suite D, Kaysville, UT 84037
PHONE: (801) 927-1337 FAX: (801) 927-1344
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors
Deli Solar (USA), Inc.
We have audited the accompanying consolidated balance sheets of Deli Solar
(USA), Inc. as of December 31, 2005 and 2004, and the related consolidated
statements of operations and comprehensive income, changes in stockholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting, as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Deli Solar (USA),
Inc. as of December 31, 2005 and 2004, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Child, Van Wagoner & Bradshaw, PLLC
Child, Van Wagoner & Bradshaw, PLLC
Salt Lake City, Utah
March 16, 2006
F-8
DELI SOLAR (USA), INC.
Consolidated Balance Sheets
December 31,
----------------------------
Restated
2005 2004
------------ ------------
Assets
Current assets
Cash and cash equivalents $ 5,629,168 $ 1,241,808
Trade accounts receivable 748,475 272,369
Allowances for doubtful accounts (193,630) (88,600)
------------ ------------
Net trade accounts receivable 554,845 183,769
Advances to suppliers 811,275 353,044
44,783 --
Prepaid expenses
Related party receivable 37,856 556,493
Inventories 383,183 374,904
------------ ------------
Total current assets 7,461,110 2,710,018
Property, plant and equipment
Buildings 3,175,994 1,575,401
Machinery and equipment 43,335 42,236
Vehicles 106,636 61,474
Computer equipment 26,197 5,818
Office equipment 6,976 3,512
Construction in progress 159,356 980,208
------------ ------------
Total 3,518,494 2,668,649
Accumulated depreciation (228,986) (124,096)
------------ ------------
Net property, plant and equipment 3,289,508 2,544,553
Receivables - employees 82,090 18,116
Prepaid land lease 70,798 68,086
------------ ------------
Total other assets 152,888 86,202
------------ ------------
Total assets $ 10,903,506 $ 5,340,773
------------ ------------
See notes to financial statements.
F-9
DELI SOLAR (USA), INC.
Consolidated Balance Sheets (Continued)
December 31,
Restated
2005 2004
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities
Trade accounts payable $ 89,375 $ 168,499
Other payables -- 81,746
Accrued expenses 1,733 213,781
Related party payable 50,045 60,386
Deposits 5,621 12,448
Short-term notes payable 130,112 533,213
------------ ------------
Total current liabilities 276,886 1,070,073
Stockholders' equity
Preferred stock: par value $.001; 25,000,000
shares authorized, no shares issued and
outstanding -- --
Common stock: par value $.001; 66,666,667
shares authorized, 6,205,290 and 4,431,000
shares issued and outstanding 6,205 4,430
Additional paid in capital 5,705,574 824,960
Retained earnings 4,740,284 3,441,310
Accumulated other comprehensive income 174,557 --
------------ ------------
Total stockholders' equity 10,626,620 4,270,700
------------ ------------
Total liabilities and stockholders' equity $ 10,903,506 $ 5,340,773
------------ ------------
See notes to financial statements.
F-10
DELI SOLAR (USA), INC.
Consolidated Statements of Operations and Comprehensive Income
Restated
Year ended Year ended
Dec 31, 2005 Dec 31, 2004
------------ ------------
Sales revenues $ 15,577,447 $ 9,504,394
Cost of goods sold 11,868,45 6,770,304
------------ ------------
Gross profit 3,708,988 2,734,090
Operating expenses
Advertising 646,667 249,084
Other selling expenses 256,634 98,826
Salaries and benefits 191,539 170,008
Depreciation 14,631 9,706
Other general and administrative 1,279,714 123,210
------------ ------------
Total operating expenses 2,389,185 650,834
------------ ------------
Net operating income 1,319,803 2,083,256
Other income (expense)
Interest expense (20,829) (4,014)
Other -- 50,148
------------ ------------
Total other income (expense) (20,829) 46,134
------------ ------------
Net income before taxes 1,298,974 2,129,390
Taxes -- --
------------ ------------
Net income $ 1,298,974 $ 2,129,390
------------ ------------
Foreign currency translation adjustment 174,557 --
------------ ------------
Comprehensive income $ 1,473,531 $ 2,129,390
------------ ------------
Basic earnings per share $ 0.23 $ 0.48
------------ ------------
Denominator for basic EPS 5,732,616 4,431,000
------------ ------------
Fully diluted earnings per share $ 0.17 $ 0.48
------------ ------------
Denominator for diluted EPS 7,558,335 4,431,000
------------ ------------
See notes to financial statements.
F-11
DELI SOLAR (USA), INC.
Consolidated Statements of Changes in Stockholders' Equity
Accumulated
Additional Other
Common Common Paid in Retained Comprehensive
Balances at: Shares Stock Capital Earnings Income Totals
------------ ------------ ------------ ------------ ------------ ------------
Restated: January
1, 2003 4,431,000 $ 4,430 $ 816,826 $ 1,467,716 $ -- $ 2,288,972
Contributed capital -- -- 8,134 -- -- 8,134
Net Income-
restated -- -- -- 2,129,390 -- 2,129,390
Dividend paid -- -- -- (155,796) -- (155,796)
------------ ------------ ------------ ------------ ------------ ------------
Restated: December
31, 2004 4,431,000 4,430 824,960 3,441,310 -- 4,270,700
Shares
issued: private
placement 1,714,290 1,715 5,998,300 -- -- 6,000,015
Cost of issuance -- -- (1,348,626) -- -- (1,348,626)
Warrants exercised 60,000 60 230,940 -- -- 231,000
Net income -- -- -- 1,298,974 -- 1,298,974
Foreign currency -- -- -- -- 174,557 174,557
------------ ------------ ------------ ------------ ------------ ------------
Balance: December
31, 2005 6,205,290 $ 6,205 $ 5,705,574 $ 4,740,284 $ 174,557 $ 10,626,620
------------ ------------ ------------ ------------ ------------ ------------
See notes to financial statements.
F-12
DELI SOLAR (USA), INC.
Consolidated Statements of Cash Flows
Year ended
December 31,
----------------------------
Restated
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 1,298,974 $ 2,129,390
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 100,171 31,471
Provision for allowance on accounts receivable 105,030 3,598
Loss on disposal of fixed assets -- 3,971
Combine entity under common control -- 8,134
Changes in operating liabilities and assets:
Trade accounts receivable (476,106) (63,572)
Advance to suppliers (458,231) (323,864)
Prepaid expenses (44,783) --
Inventories (8,279) (14,164)
Receivables - employees (63,975) (18,116)
Prepaid land lease (2,711) 1,485
Trade accounts payable (79,124) 129,157
Other payables (81,746) (16,483)
Accrued expenses (212,048) 1,525
Deposits (6,827) 6,947
------------ ------------
Net cash provided by operations 70,345 1,879,479
Cash flows from investing activities:
Purchases of property, plant and equipment (845,126) (1,421,332)
------------ ------------
Net cash used in investing activities (845,126) (1,421,332)
Cash flows from financing activities:
Proceeds from short-term notes payable (403,101) 243,359
Capital contribution received from shareholders 4,882,389 --
Related party receivables 518,637 (473,397)
Related party payables (10,341) 60,385
Payment of dividends -- (155,796)
------------ ------------
Net cash provided by (used in) financing activities 4,987,584 (325,449)
------------ ------------
Effect of rate changes on cash 174,557 --
Increase in cash and cash equivalents 4,387,360 132,698
Cash and cash equivalents, beginning of period 1,241,808 1,109,110
------------ ------------
Cash and cash equivalents, end of period $ 5,629,168 $ 1,241,808
------------ ------------
Supplemental disclosures of cash flow information:
Interest paid in cash $ 20,884 $ 56,006
------------ ------------
Income taxes paid in cash $ -- $ --
------------ ------------
See notes to financial statements.
F-13
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
1. Nature of operations
Deli Solar (USA) Inc. was incorporated in the State of Nevada on March 21, 1983
as Meditech Pharmaceuticals, Inc. ("Meditech"). In late 2004, the Board of
Directors of Meditech contemplated a strategic alliance with Deli Solar (BVI).
In contemplation of the alliance, the Board of Directors resolved to spin off
Meditech's drug development business to the shareholders of Meditech of record
on February 17, 2005, through a pro rata distribution in the form of a stock
dividend. The acquisition of Deli Solar (BVI) was accounted for as a
recapitalization of Deli Solar (BVI).
Deli Solar (BVI) was formed in June, 2004 in the Territory of the British Virgin
Islands. On August 1, 2004, Deli Solar (BVI) purchased Deli Solar (PRC), a
corporation duly organized under the laws of the People's Republic of China
("PRC") from Messrs. Deli Du, Xiao'er Du, and Xiaosan Du for RMB 6,800,000. As a
result of this transaction, Deli Solar (PRC) became a wholly-foreign owned
enterprise ("WFOE") under PRC law on March 30, 2005. This acquisition was
accounted for as a transfer of entities under common control.
Deli Solar (PRC) was incorporated on August 19, 1997 under the laws of the PRC.
In the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the
United States ("US").
The result of the above transactions is that Deli Solar (BVI) is now our direct,
wholly-owned subsidiary and Deli Solar (PRC) remains a wholly-owned subsidiary
of Deli Solar (BVI).
On November 21, 2005 Deli Solar (PRC) acquired Ailiyang Solar Energy Technology
Co., Ltd. ("Ailiyang"), an entity formerly controlled by the owners of Deli
Solar (PRC). The transaction was accounted for as a transfer of entities under
common control.
In January 2006, the Company formed a new 100% owned subsidiary in the PRC known
as Beijing Deli Solar Technology Development, Ltd. This entity has not yet begun
operations.
Deli Solar (PRC) designs, manufactures and sells solar hot water heaters,
coal-fired boilers and space heating products within the PRC.
2. Basis of Presentation
The consolidated financial statements include the accounts of Deli Solar (USA),
Inc., Deli Solar (BVI), Deli Solar (PRC) and Ailiyang. All material intercompany
accounts and transactions have been eliminated in consolidation.
F-14
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
2. Basis of Presentation (continued)
The accompanying consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
("US GAAP"). This basis differs from that used in the statutory accounts of the
Deli Solar (PRC), which were prepared in accordance with the accounting
principles and relevant financial regulations applicable to enterprises in the
PRC. All necessary adjustments have been made to present the financial
statements in accordance with US GAAP. These statements have been retroactively
restated to show the effects due to the consolidation of a Ailiyang (see note
10), a recapitalization effected on March 31, 2005, wherein the Company assumed
the capital structure of Meditech Pharmaceuticals, Inc. and a 1:6 reverse stock
split that was effected on August 15, 2005.
3. Summary of Significant Accounting Policies
Economic and Political Risks
The Company faces a number of risks and challenges as a result of having primary
operations and markets in the PRC. Changing political climates in the PRC could
have a significant effect on the Company's business.
Restrictions on Transfer of Assets Out of the PRC
Dividend payments by Deli Solar (PRC) are limited by certain statutory
regulations in the PRC. No dividends may be paid by Deli Solar (PRC) without
first receiving prior approval from the Foreign Currency Exchange Management
Bureau. Dividend payments are restricted to 85% of profits, after tax.
Control by Principal Stockholders
The directors, executive officers and their affiliates or related parties own,
beneficially and in the aggregate, the majority of the voting power of the
outstanding shares of the common stock of the Company. Accordingly, the
directors, executive officers and their affiliates, if they voted their shares
uniformly, would have the ability to control the approval of most corporate
actions, including increasing the authorized capital stock of the Company and
the dissolution, merger or sale of the Company's assets.
F-15
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
3. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents include
cash on hand and demand deposits held by banks. Cash deposits in PRC and BVI
banks are not insured by any government agency or entity. Cash deposits in US
banks are guaranteed by the Federal Deposit Insurance Corporation to a maximum
of $100,000. At December 31, 2005 the Company had $2,085,795 in a single US
bank.
Trade Accounts Receivable
Trade accounts receivable are recognized and carried at original invoice amount
less an allowance for any uncollectible amounts. Management reviews past due
accounts on a regular basis and determines collectibility based on a customer's
current financial condition and recent payment history, and the Company's
success in recent collection efforts. An estimate for doubtful accounts is made
when collection of the full amount becomes questionable.
Inventories
Inventories consist of raw materials and low cost consumables for the
construction of the Company's products, as well as finished goods. The
inventories are valued at the lower of cost or market using the first-in,
first-out method. Impairment and changes in market value are evaluated on a per
item basis. If the cost of the inventory exceeds the market value evaluation
based on total inventory, provisions are made for the difference between the
cost and the market value. Provision for potential obsolete or slow moving
inventory is made based on analysis of inventory levels, age of inventory and
future sales forecasts. Inventories consisted of the following:
Restated
2005 2004
------------ ------------
Raw Material 103,543 38,148
Consumables 6,138 14,394
Finished goods 273,502 322,362
------------ ------------
Total $ 383,183 $ 374,904
------------ ------------
F-16
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
3. Summary of Significant Accounting Policies (continued)
Property, Plant, and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the useful lives of the assets. Amortization of
leasehold improvements is calculated on a straight-line basis over the life of
the asset or the term of the lease, whichever is shorter. Major renewals and
betterments are capitalized and depreciated; maintenance and repairs that do not
extend the life of the respective assets are charged to expense as incurred.
Upon disposal of assets, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in income.
Depreciation related to property and equipment used in production is reported in
cost of sales. Property and equipment are depreciated over their estimated
useful lives as follows:
Buildings 6 - 50 years based on the land lease term.
Machinery and equipment 10 years
Vehicles 7 years
Computer equipment 3 years
Office equipment 7 years
During 2005, the Company has completed its construction in progress for use as a
warehouse and for additional operating capacity. During the years ended December
31, 2005 and 2004, respectively, the Company capitalized interest, related to
the new building under construction, totaling approximately $2,837 and $55,963.
The capitalized interest is included in construction in progress before being
reclassified to building on the balance sheet upon completion. Part of the
property is collateralized by a short-term loan.
Depreciation expense for the years ended December 31, 2005 and 2004 was $100,171
and $31,471, respectively of which $85,540 and $21,765 were included in cost of
goods sold.
Long-term assets of the Company are reviewed annually to assess whether the
carrying value has become impaired, according to the guidelines established in
Statement of Accounting Standards (SFAS) No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." The Company also evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. No impairment of assets was recorded in the
periods reported.
F-17
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
3. Summary of Significant Accounting Policies (continued)
Earnings Per Share
Basic earnings per common share ("EPS") are calculated by dividing net income by
the weighted average number of common shares outstanding during the year.
Diluted EPS is calculated by adjusting the weighted average outstanding shares,
assuming conversion of all potentially dilutive securities, such as stock
options and warrants. The numerators and denominators used in the computations
of basic and diluted EPS are presented in the following table:
Restated Effect of
2005 2004 Restatement
----------- ----------- -----------
NUMERATOR FOR BASIC AND DILUTED EPS
Net income to common stockholders $ 1,298,974 $ 2,129,390 $ (7,635)
----------- ----------- -----------
DENOMINATORS FOR BASIC AND DILUTED EPS
Weighted average shares of common stock outstanding 5,732,616 4,431,000 4,431,000
----------- ----------- -----------
Add: dilutive equity securities outstanding 1,825,719 -- --
----------- ----------- -----------
Denominator for diluted EPS 7,558,335 4,431,000 4,431,000
----------- ----------- -----------
EPS - Basic $ 0.23 $ 0.48 $ --
----------- ----------- -----------
EPS - Diluted $ 0.17 $ 0.48 $ --
----------- ----------- -----------
Revenue Recognition
Revenue is recognized when the customer takes delivery of products subject to
pre-existing terms, conditions and pricing, and when the Company reasonably
expects that the amount invoiced to the customer is fully collectible.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense amounted to
$646,667 and $249,084 for the years ended December 31, 2005 and 2004,
respectively.
Foreign Currency and Comprehensive Income
The accompanying financial statements are presented in US dollars. The
functional currency is the Renminbi ("RMB") of the PRC. The financial statements
are translated into US dollars from RMB at year-end exchange rates for assets
and liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
F-18
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
3. Summary of Significant Accounting Policies (continued)
Foreign Currency and Comprehensive Income
On July 21, 2005, the PRC changed its foreign currency exchange policy from a
fixed RMB/USD exchange rate into a flexible rate under the control of the PRC's
government. We use the Closing Rate Method in currency translation of the
financial statements of Deli PRC. The financial statements are translated into
US dollars from RMB at an exchange rate of 8.07 RMB to one U.S. Dollar for
assets and liabilities, and weighted average exchange rates (8.19:1) for
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
RMB is not freely convertible into the currency of other nations. All such
exchange transactions must take place through authorized institutions. There is
no guarantee the RMB amounts could have been, or could be, converted into US
dollars at rates used in translation.
Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statement of
operations in the period that includes the enactment date. A valuation allowance
is provided for deferred tax assets if it is more likely than not these items
will either expire before the Company is able to realize their benefits, or that
future deductibility is uncertain.
Historically, the Company has recorded no income taxes and no deferred taxes
because it paid a fixed tax as assessed, and annually adjusted, by the State
Administration of Taxation of Bazhou and Bazhou Local Taxation Bureau.
Therefore, there was no income tax, per se, and there were no temporary
differences in assets or liabilities.
Pursuant to the laws and regulations in the PRC, Deli Solar (PRC), as a wholly
foreign owned enterprise ("WFOE") in the PRC, is entitled to an exemption from
the PRC enterprise income tax for two years commencing from its first profitable
year.
Estimates
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
F-19
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
3. Summary of Significant Accounting Policies (continued)
Reclassification
Certain amounts in the prior year have been reclassified to conform to the
current year's presentation.
4. Advances to Suppliers
Advances to suppliers represent the cash paid in advance for purchasing raw
materials or inventory.
5. Receivable - employees
All amounts due from employees are unsecured, interest free, and have no fixed
payment terms.
6. Prepaid Land Lease
According to the laws of the PRC, the government owns all of the land in the
PRC. Companies or individuals are authorized to possess and use the land only
through land use rights granted by the PRC government. Accordingly, the Company
paid in advance for the land leases of its buildings. Prepaid land leases are
being amortized and recorded as lease expense using the straight-line method
over the leases term of 20 to 50 years. Prepaid land lease for the years ended
December 31, 2005 and 2004 was $70,798 and $68,086, respectively.
7. Short-Term Notes Payable
Short-term notes payable consist of renewable notes. The notes bear interest at
rates ranging from 7.98% to 8.85%, are collateralized by the Company's inventory
and building, and fall due between September and October 2006
8. Related Party Receivable and Payable
Receivable from related parties represents amounts advanced to one of the
Company's directors. The balance as of December 31, 2005, and 2004,
respectively, was $37,856 and $556,493. Related party payable represents
compensation or reimbursements owed to the directors. The balance as of December
31, 2005 and 2004 was $50,045 and $60,386.
F-20
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
9. Leases
The Company leases land and buildings under non-cancelable lease arrangements
accounted for as operating leases. One of the leases is a fifty year lease (see
note 6) and the other, which was not paid in advance, is a twenty year lease.
Rent expense under non-cancelable leases was $3,414 and $13,901 during the years
ended December 31, 2005 and 2004, respectively.
Future minimum lease payments of lease obligations are as follows:
2006 $ 14,500
2007 14,500
2008 14,500
2009 14,500
2010 14,500
Thereafter 193,229
------------
$ 265,729
------------
10. 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 March 30, 2005, in conjunction with the recapitalization and private
placement, 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.
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.
F-21
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
11. Warrants
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, and equivalent warrants to
purchase 171,429 shares of common stock to financial advisors and others. Stock
warrant transactions are summarized in the following table.
Warrants
2005 2004
--------- ---------
Outstanding - beginning of year -- --
Granted 1,885,719 --
Exercised 60,000 --
Forfeited -- --
--------- ---------
Outstanding - end of year 1,825,719 --
--------- ---------
Shares exercisable - end of year 1,825,719 --
--------- ---------
The following table provides certain information with respect to the
above-referenced stock warrants outstanding and exercisable at December 31,
2005:
Number Weighted Weighted
Outstanding and Exercise Average Average
Exercisable Price Range Exercise Price Life in Years
--------------- --------------- --------------- ---------------
Warrants 1,825,719 $3.85 $3.85 4.2
12. Business Combinations between Entities under Common Control
The Company entered into a stock purchase agreement, dated February 24, 2005,
with Ailiyang Solar Energy Technology Co., Ltd. ("Ailiyang"), one of the Company
distributors. Ailiyang was formed on July 28, 1997 as a limited liability
company in the PRC and was owned by one of the Company's directors and his
family (collectively, "Ailiyang Shareholders"). Pursuant to the agreement, the
Company purchased all of the stock of Ailiyang from the Ailiyang Shareholders
for a total purchase price of RMB 500,000. The Company completed the acquisition
of Ailiyang on November 21, 2005, and Ailiyang is now a wholly owned subsidiary
of Deli Solar (PRC) and its sole business is acting as a distributor for Deli
Solar (PRC)'s products.
The acquisition was accounted for as a transfer of entities under common
control. Accordingly, the operations of Ailiyang for the year ended December 31,
2005 and 2004 are included in the consolidated statements as if the transaction
had occurred at the beginning of the first period presented, each account stated
at its historical cost. In this regard, the prior year's financial statements
and financial information has been restated to combine the previously separate
entities to furnish comparative information. The results of the restatement on
operations were to decrease net income for the year ended December 31, 2004 by
$7,635, to increase additional paid-in capital by $8,134.
F-22
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
13. Contingencies
The Company has not, historically, carried any property or casualty insurance.
No amounts have been accrued for any liability that could arise from the lack of
insurance. Management believes the chances of such an obligation arising are
remote.
14. Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of
FASB Statements No. 133 and 140". The statement permits fair value remeasurement
for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation, clarifies which interest-only strips are
not subject to the requirements of Statement 133, establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends Statement 140 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. The Statement is effective for financial instruments acquired or
issued after the beginning of the first fiscal year that begins after September
15, 2006. The Company expects that the Statement will have no material impact on
its consolidated financial statements.
In February 2006, the FASB issued Staff Position No. FAS 123(R)-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
Event". This position addresses the classification of options and similar
instruments issued as employee compensation that allow for cash settlement upon
the occurrence of a contingent event, amending paragraphs 32 and A229 of SFAS
No. 123 (revised 2004), "Share-Based Payment". As the Company has not
traditionally paid compensation through the issuance of equity securities, no
impact is expected on its consolidated financial statements.
F-23
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
14. Recent Accounting Pronouncements (continued)
In October 2005, the FASB issued Staff Position No. FAS 13-1, "Accounting for
Rental Costs Incurred during a Construction Period". This position addresses the
accounting for rental costs associated with operating leases that are incurred
during a construction period. Management believes that this position has no
application to the Company.
("SFAS No. 154"), which replaced Accounting Principles Board Opinion No. 20,
Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS No. 154 changes the requirements for the accounting
for and reporting of a change in accounting principles. It requires
retrospective application to prior periods' financial statements of changes in
accounting principles, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. This statement
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The impact on the Company's operations
will depend on future accounting pronouncements or changes in accounting
principles.
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47, "Accounting
for Conditional Asset Retirement Obligations." FIN 47 clarifies that the term
"Conditional Asset Retirement Obligation" as used in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. Accordingly, an entity is required to recognize a
liability for the fair value of a Conditional Asset Retirement Obligation if the
fair value of the liability can be reasonably estimated. FIN 47 is effective no
later than the end of fiscal years ending after December 15, 2005. Management
does not believe the adoption of FIN 47 will have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
In May 2004, the Emerging Issues Task Force of the FASB came to a consensus
regarding EITF 02-14 "Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock". The consensus of the task
force is that the equity method of accounting is to be used for investments in
common stock or in-substance common stock, effective for reporting periods
beginning after September 15, 2004.
In December 2004, the FASB issued Statement No. 153, "Exchange of Non-Monetary
Assets". SFAS No. 153 confirms that exchanges of nonmonetary assets are to be
measured based on the fair value of the assets exchanged, except for exchanges
of nonmonetary assets that do not have commercial substance. Those transactions
are to be measured at entity specific values. The Company believes that the
application of SFAS No. 153 will have no significant impact on the financial
statements, as the Company has no immediate plans for the exchange of
nonmonetary assets.
F-24
DELI SOLAR (USA), INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
14. Recent Accounting Pronouncements (continued)
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which amends SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123, as revised, requires public entities to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. The cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. No compensation cost is recognized for equity instruments for which
employees do not render the requisite service. The effective date for the
Company is the first reporting period beginning after December 15, 2005.
Management expects that the application of SFAS No. 123 (revised 2004) may have
an adverse effect on its results of operations in the future, should the Company
choose to compensate its employees with equity instruments of the Company.
In November 2004, the FASB issued Statement No. 151, "Inventory Costs". SFAS No.
151 requires that items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs be recognized as current period charges and
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The statement is
effective for fiscal periods beginning after June 15, 2005. The Company believes
that the application of SFAS No. 151 will have no significant impact on the
consolidated financial statements.
F-25
Child, Sullivan &Company
A Professional Corporation of CERTIFIED PUBLIC ACCOUNTANTS
1284 W. Flint Meadow Dr., Suite D, Kaysville, UT 84037
PHONE: (801) 927-1337 FAX: (801) 927-1344
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Stockholders
Bazhou Deli Solar Energy Heating Co., Ltd.
We have audited the accompanying balance sheet of Bazhou Deli Solar Energy
Heating Co., Ltd. as of December 31, 2004 and the related statements of
operations, changes in equity, and cash flows for the years ended December 31,
2004 and 2003. These 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 of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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 Bazhou Deli Solar Energy
Heating Co., Ltd. as of December 31, 2004 and the results of its operations and
its cash flows for the years ended December 31, 2004 and 2003, in conformity
with accounting principles generally accepted in the United States of America.
Child, Sullivan & Company
Kaysville, Utah
March 22, 2005, except for Notes 2, 3 and 9, which are dated August 24, 2005
F-26
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
BALANCE SHEETS
December 31,
Assets 2004 2003
----------- -----------
Current assets
Cash and cash equivalents $ 1,191,067 $ 1,109,110
Trade accounts receivable 216,055 208,797
Allowances for doubtful accounts (88,600) (85,002)
----------- -----------
Net trade accounts receivable 127,455 123,795
Prepaid expenses 353,044 29,180
Related party receivable 556,493 83,096
Inventories 298,998 360,740
----------- -----------
Total current assets 2,527,057 1,705,921
Property, plant and equipment
Buildings 1,575,401 911,150
Machinery and equipment 42,236 41,716
Vehicles 61,474 66,236
Computer equipment 5,818 4,972
Office equipment 3,512 3,512
Construction in progress 980,208 226,177
----------- -----------
Total 2,668,649 1,253,763
Accumulated depreciation (124,096) (95,100)
----------- -----------
Net property, plant and equipment 2,544,553 1,158,663
Other receivables 18,116 --
Prepaid land lease 68,086 69,571
----------- -----------
Total other assets 86,202 69,571
----------- -----------
Total assets $ 5,157,812 $ 2,934,155
=========== ===========
See notes to financial statements.
F-27
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
BALANCE SHEETS (CONTINUED)
December 31,
Liabilities and Equity 2004 2003
---------- ----------
Current liabilities
Trade accounts payable $ 47,971 $ 39,342
Other payables 81,746 98,229
Accrued expenses 212,234 212,256
Deposits 12,448 5,501
Short-term notes payable 533,213 289,855
---------- ----------
Total current liabilities 887,612 645,183
Equity
Preferred stock: par value $.001; 25,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock: par value $.001; 66,666,667 shares
authorized, 4,429,768 shares issued and outstanding 4,430 4,430
Additional paid in capital 816,826 816,826
Retained earnings 3,448,944 1,467,716
---------- ----------
Total Equity 4,270,200 2,288,972
---------- ----------
Total Liabilities and Equity $5,157,812 $2,934,155
========== ==========
See notes to financial statements.
F-28
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
STATEMENTS OF OPERATIONS
Year ended
December 31,
2004 2003
----------- -----------
Sales revenues $ 9,380,246 $ 6,011,870
Cost of goods sold 6,633,836 4,783,989
----------- -----------
Gross profit 2,746,410 1,227,881
Operating expenses
Advertising 249,084 278,329
Other selling expenses 86,217 11,648
Salaries and benefits 170,008 168,181
Depreciation 31,471 27,054
Other general and administrative expenses 118,739 82,354
----------- -----------
Total operating expenses 655,519 567,566
----------- -----------
Net operating income 2,090,891 660,315
Other income (expense)
Interest expense (43) (63,508)
Gain (loss) on asset disposal (3,971) 5,446
Other 50,148 (8)
----------- -----------
Total other income (expense) 46,134 (58,070)
----------- -----------
Net income before taxes 2,137,025 602,245
Taxes -- --
----------- -----------
Net income $ 2,137,025 $ 602,245
=========== ===========
Basic and fully diluted earnings per share $ 0.48 $ 0.14
=========== ===========
Weighted average common shares outstanding 4,429,768 4,429,768
----------- -----------
See notes to financial statements.
F-29
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
STATEMENTS OF CHANGES IN EQUITY
Common Stock Additional Retained Total
Shares Amount Paid in capital Earnings Equity
----------- ----------- ----------- ----------- -----------
Balances at January 1, 2002 4,429,768 $ 4,430 $ 816,826 $ 598,275 $ 1,419,531
Net income -- -- -- 267,196 267,196
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2002 4,429,768 4,430 816,826 865,471 1,686,727
Net income -- -- -- 602,245 602,245
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 4,429,768 4,430 816,826 1,467,716 2,288,972
Net income 2,137,025 2,137,025
Dividends paid -- -- -- (155,797) (155,797)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 4,429,768 $ 4,430 $ 816,826 $ 3,448,944 $ 4,270,200
=========== =========== =========== =========== ===========
See notes to financial statements.
F-30
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
STATEMENTS OF CASH FLOWS
Year ended
December 31,
2004 2003
----------- -----------
Cash flows from operating activities:
Net income $ 2,137,025 $ 602,245
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 31,471 27,054
Provision for allowance on accounts receivable 3,598 29,501
(Gain) Loss on disposal of fixed assets 3,971 (5,446)
Changes in operating liabilities and assets:
Trade accounts receivable (7,258) 9,889
Prepaid expenses (323,864) (22,247)
Inventories 61,742 (53,781)
Other receivables (18,116) --
Prepaid land lease 1,485 1,486
Trade accounts payable 8,629 (157,777)
Other payables (16,483) 27,425
Accrued expenses (22) 114,525
Deposits 6,947 (756)
----------- -----------
Net cash provided by operations 1,889,125 572,118
Cash flows from investing activities:
Purchases of property, plant and equipment (1,421,332) (306,655)
----------- -----------
Net cash used in investing activities (1,421,332) (306,655)
Cash flows from financing activities:
Proceeds from short-term notes payable 243,358 78,502
Related party receivables (473,397) 36,000
Payment of dividends (155,797) --
----------- -----------
Net cash provided by (used in) financing activities (385,836) 114,502
----------- -----------
Increase in cash and cash equivalents 81,957 379,965
Cash and cash equivalents, beginning of period 1,109,110 729,145
----------- -----------
Cash and cash equivalents, end of period $ 1,191,067 $ 1,109,110
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid in cash $ 56,006 $ 74,333
=========== ===========
See notes to financial statements.
F-31
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. Nature of operations
Bazhou Deli Solar Energy Heating Co., Ltd. (the Company) was incorporated on
August 19, 1997 under the laws of the People's Republic of China (the PRC). In
the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the United
States (US).
The Company primarily manufactures and sells solar energy heaters, heating
stoves, related accessories, and other solar energy products within the PRC.
2. Basis of Presentation
The accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP). This
basis differs from that used in the statutory accounts of the Company, which
were prepared in accordance with the accounting principles and relevant
financial regulations applicable to enterprises in the PRC. All necessary
adjustments have been made to present the financial statements in accordance
with US GAAP. These statements have been retroactively restated to show the
effects due to a reverse merger effected on March 31, 2005, wherein the Company
assumed the capital structure of Meditech Pharmaceuticals, Inc. and a 1:6
reverse stock split that was effected on August 2, 2005 (see note 9).
3. Summary of Significant Accounting Policies
Economic and Political Risks
The Company faces a number of risks and challenges as a result of having primary
operations and markets in the PRC. Changing political climates in the PRC could
have a significant effect on the Company's business.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents includes
cash on hand and demand deposits held by banks. Cash deposits in banks are not
insured by any government agency or entity.
Trade Accounts Receivable
Trade accounts receivable are recognized and carried at original invoice amount
less an allowance for any uncollectible amounts. Management reviews past due
accounts on a regular basis and determines collectibility based on a customer's
current financial condition and recent payment history, and success in recent
collection efforts. An estimate for doubtful accounts is made when collection of
the full amount becomes questionable.
F-32
3. Summary of Significant Accounting Policies (continued)
Inventories
Inventories consist of raw materials and low cost consumables for the
construction of the Company's products, as well as finished goods. The
inventories are valued at the lower of cost (first-in, first-out method) or
market. Impairment and changes in market value are evaluated on a per item
basis. If the cost of the inventory exceeds the market value evaluation based on
total inventory, provisions are made for the difference between the cost and the
market value. Provision for potential obsolete or slow moving inventory is made
based on analysis of inventory levels, age of inventory and future sales
forecasts. Inventories consisted of the following:
December 31, December 31,
2004 2003
------- -------
Raw materials 38,148 166,753
Consumables 14,394 --
Finished goods 246,456 193,987
------- -------
Totals 298,998 360,740
Property, Plant, and Equipment
Property, plant and equipment is carried at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the useful lives of the assets. Amortization of
leasehold improvements is calculated on a straight-line basis over the life of
the asset or the term of the lease, whichever is shorter. Major renewals and
betterments are capitalized and depreciated; maintenance and repairs that do not
extend the life of the respective assets are charged to expense as incurred.
Upon disposal of assets, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in income.
Depreciation related to property and equipment used in production is reported in
cost of sales. Property and equipment are depreciated over their estimated
useful lives as follows:
Buildings 50 years
Machinery and equipment 10 years
Vehicles 7 years
Computer equipment 3 years
Office equipment 7 years
F-33
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. Summary of Significant Accounting Policies (continued)
Property, Plant, and Equipment (continued)
Land and buildings have historically been owned by the government in the PRC. As
is generally the case with most businesses in the PRC, the Company has leased
such assets on a lease term of 50 years and is depreciating the building over
that term.
Construction in progress consists of the development of a new building intended
for use as a warehouse and for additional operating capacity. During the years
ended December 31, 2004 and 2003, respectively, the Company capitalized
interest, related to the new building under construction, totaling approximately
$55,963, and $10,825. The capitalized interest is included in construction in
progress on the balance sheet. This new building will be owned by the Company,
not by the PRC, but the land on which the building sits is still owned by the
PRC and is under a 50 year lease, similar to the other land and buildings.
Long-term assets of the Company are reviewed annually to assess whether the
carrying value has become impaired, according to the guidelines established in
Statement of Accounting Standards (SFAS) No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." The Company also evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. No impairment of assets was recorded in the
periods reported.
Registered Capital
Companies in the PRC are not held by stock ownership as is the case in the US.
Those creating a company register and pay in a given amount of required
registered capital at formation of the company, as required by laws in the PRC
governing business entity formation. These statements have been retroactively
restated to show the effects due to a reverse merger effected on March 31, 2005,
wherein the Company assumed the capital structure of Meditech Pharmaceuticals,
Inc.
Revenue Recognition
Revenues are recognized when (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred and title has passed according to the sale terms, (3)
the seller's price to the buyer is fixed or determinable; and (4) collectibility
is reasonably assured.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense amounted to
$249,084 and $278,329 for the years ended December 31, 2004 and 2003,
respectively.
F-34
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. Summary of Significant Accounting Policies (continued)
Foreign Currency and Comprehensive Income
The accompanying financial statements are presented in United States (US)
dollars. The functional currency is the Renminbi (RMB). The financial statements
are translated into US dollars from RMB at year-end exchange rates for assets
and liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
The exchange rate for RMB to US dollars has varied by only 100ths during 2004
and 2003. Thus, the consistent exchange rate used has been 8.28 RMB per each US
dollar. Since there have been no greater fluctuations in the exchange rate,
there is no gain or loss from foreign currency translation and no resulting
other comprehensive income or loss.
RMB is not freely convertible into the currency of other nations. All such
exchange transactions must take place through authorized institutions. There is
no guarantee the RMB amounts could have been, or could be, converted into US
dollars at rates used in translation.
Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statement of
operations in the period that includes the enactment date. A valuation allowance
is provided for deferred tax assets if it is more likely than not these items
will either expire before the Company is able to realize their benefits, or that
future deductibility is uncertain.
Currently, the Company has recorded no income taxes and no deferred taxes
because it pays a fixed tax as assessed, and annually adjusted, by the State
Administration of Taxation of Bazhou and Bazhou Local Taxation Bureau.
Therefore, there is no income tax, per se, and there are no temporary
differences in assets or liabilities.
Estimates
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
3. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements
In May 2004, the Emerging Issues Task Force of the FASB came to a consensus
regarding EITF 02-14 "Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock". The consensus of the task
force is that the equity method of accounting is to be used for investments in
common stock or in-substance common stock, effective for reporting periods
beginning after September 15, 2004. The Company currently has no equity
investments, and therefore no impact will be made on the financial statements of
the Company.
In November 2004, the FASB issued Statement No. 151, "Inventory Costs". SFAS No.
151 requires that items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs be recognized as current period charges and
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The statement is
effective for fiscal periods beginning after June 15, 2005. The Company believes
that the application of SFAS No. 151 will have no significant impact on the
financial statements.
In December 2004, the FASB issued Statement No. 153, "Exchange of Non-Monetary
Assets". SFAS No. 153 confirms that exchanges of nonmonetary assets are to be
measured based on the fair value of the assets exchanged, except for exchanges
of nonmonetary assets that do not have commercial substance. Those transactions
are to be measured at entity specific values. The Company believes that the
application of SFAS No. 153 will have no significant impact on the financial
statements, as the Company has no immediate plans for the exchange of
nonmonetary assets.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which amends SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123, as revised, requires public entities to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. The cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. No compensation cost is recognized for equity instruments for which
employees do not render the requisite service. The effective date for the
Company is the first reporting period beginning after December 15, 2005.
Management expects that the application of SFAS No. 123 (revised 2004) may have
an adverse effect on its results of operations in the future, should the Company
choose to compensate its employees with equity instruments of the Company.
F-35
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
4. Prepaid Land Lease
The Company paid in advance for the lease of one of its buildings and land for a
fifty year time period, consisting of approximately $75,000 (see note 6). The
amount is being amortized and recorded as rent expense over the 50 year term of
the lease.
5. Short-Term Notes Payable
Short-term notes payable consist of renewable notes. The notes bear interest at
rates ranging from 7.98% to 8.85%, are collateralized by the Company's inventory
and building, and fall due between February and May 2005.
6. Leases
The Company leases land and buildings under non-cancelable lease arrangements
accounted for as operating leases. One of the leases is a fifty year lease (see
note 4) and the other, which was not paid in advance, is a twenty year lease.
Rent expense under non-cancelable leases was $13,901, and $7,186 during the
years ended December 31, 2004 and 2003, respectively.
Future minimum lease payments of lease obligations are as follows:
2005 $ 14,500
2006 14,500
2007 14,500
2008 14,500
2009 14,500
Thereafter 193,229
---------
$ 265,729
=========
7. Related Party Transactions
Transactions with related parties can be substantiated by the Company as `arms
length' transactions. Sales to a related party consisted of $149,995, and
$33,888 during the years ended December 31, 2004, and 2003, respectively.
Accounts receivable from related parties at December 31, 2004, and 2003,
respectively, were $556,493, and $83,096.
F-36
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
8. Contingencies
The Company has not, historically, carried any property or casualty insurance.
No amounts have been accrued for any liability that could arise from the lack of
insurance. Management believes the chances of such an obligation arising are
remote.
Deposits in banks in the PRC are not insured by any government entity or agency,
and are consequently exposed to risk of loss. Management believes the
probability of a bank failure, causing loss to the Company, is remote.
9. Subsequent Events
Deli Solar Holding Ltd., a BVI company, acquired 100% ownership in the Company
from its previous owners, after which Deli Solar Holding Ltd. was acquired by
Meditech Pharmaceuticals, Inc. (Meditech) on March 31, 2005. Both acquisition
transactions are treated as reverse mergers, in which Bazhou Deli Solar is
treated as the accounting acquirer. These financial statements have been
retroactively restated to show the adopted capital structure of Meditech for all
periods presented.
On August 2, 2005, the Company effected a 1:6 reverse stock split. These
financial statements have been retroactively restated to show the effect of the
reverse stock split as if it had occurred at the beginning of the periods
presented.
F-37
Board of Directors
Meditech Pharmaceuticals, Inc.
Scottsdale, AZ
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Meditech
Pharmaceuticals, Inc. and subsidiary (development stage companies) (the
"Company") as of May 31, 2004, and related consolidated statement of operations,
stockholders' deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
May 31, 2004, and the results of their operations and their cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the Untied States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the year ended May 31,
2004, the Company incurred a net loss of $307,866. In addition, at May 31, 2004,
the Company had an accumulated deficit during development stage of $17,098,644
and a negative working capital of $8,201,462. Recovery of the Company's assets
is dependent upon future events, the outcome of which is indeterminable. In
addition, successful completion of the Company's transition, ultimately, to the
attainment of profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure. These factors, among others,
as discussed in Note A of the consolidated financial statement, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note A. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
MGB Partners, LLP
Los Angeles, CA
August 27, 2004
F-38
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED BALANCE SHEET
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
================================================================================
ASSETS
May 31, 2004
------------
Current assets:
Cash and cash equivalents $ 58,964
------------
Total current assets 58,964
Property and equipment
Property and equipment 5,366
Less: accumulated depreciation (4,508)
------------
Total property and equipment, net 858
Other assets 7,448
------------
Total assets $ 67,270
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 257,893
Accrued compensation 3,493,187
Advances from affiliates 4,509,346
------------
Total current liabilities 8,260,425
Minority interest in consolidated subsidiary 191,300
Commitments and contigencies
Stockholders' deficit:
Preferred stock, $0.001 par value; 25,000,000 shares
authorized; no shares issued and outstanding
Common stock, $0.001 par value; 400,000,000 shares
authorized; 171,685,487 shares issued and outstanding 198,672
Subscriptions receivable (165,000)
Additional paid-in capital 8,963,610
Deficit accumulated during the development stage (17,381,738)
------------
Total stockholders' deficit (8,384,455)
------------
Total liabilities and stockholders' deficit $ 67,270
============
See independent auditors' report and accompanying
notes to consolidated financial statements.
F-39
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
=======================================================================================================
For The Period
May 14,1982
For The Year For The Year (Date of
Ended Ended of Inception
May 31, 2004 May 31, 2003 May 31, 2004
------------- ------------- -------------
Revenue $ -- $ 27,132 $ 125,000
------------- ------------- -------------
Operating expenses:
Research and development -- 30,000 1,869,450
General and administrative 307,936 412,611 13,579,522
General -- -- 325,400
------------- ------------- -------------
Total Operating expenses 307,936 442,611 15,774,372
------------- ------------- -------------
Loss before other income (expense) (307,936) (415,479) (15,649,372)
------------- ------------- -------------
Other income (expense):
Interest expense -- (197,699) (3,241,675)
Interest income 70 284 305,559
Other income, net -- -- 81,612
Gain on writedown of accounts payable -- -- 1,405,232
------------- ------------- -------------
Total other income (expenses) 70 (197,415) (1,449,272)
------------- ------------- -------------
Loss before minority interest in losses of subsidiary (307,866) (612,894) (17,098,644)
------------- ------------- -------------
Minority interest in losses of subsidiary -- -- 329,800
------------- ------------- -------------
Net (loss) income $ (307,866) $ (612,894) $ (16,768,844)
============= ============= =============
Net (loss) income available to common stockholders
per common share:
Net (loss) income per common share basic and diluted $ -- $ --
============= =============
Weighted average shares outstanding:
Basic 164,901,971 155,512,905
============= =============
Diluted 164,901,971 155,512,905
============= =============
See independent auditors' report and accompanying
notes to consolidated financial statements.
F-40
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
========================================================================================
Common Stock Treasury Stock
------------------------- -------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Initial capitalization 48,000,000 $ 48,000 -- $ --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 1983 48,000,000 48,000 -- --
Private placement of stock 4,715,000 4,700 -- --
Initial public offering 13,200,000 13,200 -- --
Offering costs -- -- -- --
Cash on sale of common
stock to officer 50,000 50 -- --
Compensation on stock
issued to officer 50,000 50 -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 1984 66,015,000 66,000 -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 1985 66,015,000 66,000 -- --
Issuance of stock for
subscriptions to officers 8,000,000 8,000 -- --
Issuance of options for services
to consultants -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
F-41
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
(Continued)
===========================================================================================
Deficit
Accumulated
Additional During the
Subscriptions Paid-in Development
Receivable Capital Stage Total
----------- ----------- ----------- -----------
Initial capitalization $ -- $ 529,400 $ -- $ 577,400
Net loss -- -- (1,022,600) (1,022,600)
----------- ----------- ----------- -----------
Balance, May 31, 1983 -- 529,400 (1,022,600) (445,200)
Private placement of stock -- 584,700 -- 589,400
Initial public offering -- 3,946,800 -- 3,960,000
Offering costs -- (935,435) -- (935,435)
Cash on sale of common
stock to officer -- 7,450 -- 7,500
Compensation on stock
issued to officer -- 20,500 -- 20,550
Net loss -- -- (1,338,400) (1,338,400)
----------- ----------- ----------- -----------
Balance, May 31, 1984 -- 4,153,415 (2,361,000) 1,858,415
Net loss -- -- (1,794,100) (1,794,100)
----------- ----------- ----------- -----------
Balance, May 31, 1985 -- 4,153,415 (4,155,100) 64,315
Issuance of stock for
subscriptions to officers (1,440,000) 1,440,000 -- 8,000
Issuance of options for services
to consultants -- 160,200 -- 160,200
Net loss -- -- (1,533,800) (1,533,800)
----------- ----------- ----------- -----------
See independent auditors' report and accompanying
notes to consolidated financial statements
F-41(Con't)
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
====================================================================================
Common Stock Treasury Stock
----------------------- -----------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Balance, May 31, 1986 74,015,000 74,000 -- --
Conversion of advances from
affiliates 10,000,000 10,000 -- --
Rescission of common stock
issued to officer and held in
treasury -- -- 8,000,000 --
Issuance of shares for services
rendered 310,000 300 -- --
Issuance of Viral Research
Technologies, Inc. common
stock for services -- -- -- --
Issuance of Viral Research
Technologies, Inc. options
for services -- -- -- --
Issuance of options for services -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance, May 31, 1987 84,325,000 84,300 8,000,000 --
Issuance of shares to
consultants for services 1,540,000 1,500 -- --
Stock options exercised 366,000 400 -- --
Stock options issued to
employees and consultants -- -- -- --
F-42
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
(Continued)
=======================================================================================
Deficit
Accumulated
Additional During the
Subscriptions Paid-in Development
Receivable Capital Stage Total
---------- ---------- ---------- ----------
Balance, May 31, 1986 (1,440,000) 5,753,615 (5,688,900) (1,301,285)
Conversion of advances from
affiliates -- 549,900 -- 559,900
Rescission of common stock
issued to officer and held in
treasury 1,440,000 (1,440,000) -- --
Issuance of shares for services
rendered -- 77,900 -- 78,200
Issuance of Viral Research
Technologies, Inc. common
stock for services -- 296,700 -- 296,700
Issuance of Viral Research
Technologies, Inc. options
for services -- 190,400 -- 190,400
Issuance of options for services -- 42,200 -- 42,200
Net loss -- -- (1,706,300) (1,706,300)
---------- ---------- ---------- ----------
Balance, May 31, 1987 -- 5,470,715 (7,395,200) (1,840,185)
Issuance of shares to
consultants for services -- 125,800 -- 127,300
Stock options exercised -- 9,500 -- 9,900
Stock options issued to
employees and consultants -- 13,800 -- 13,800
See independent auditors' report and accompanying
notes to consolidated financial statements
F-42(Con't)
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
=====================================================================================
Common Stock Treasury Stock
----------------------- -----------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Issuance of common stock of
subsidiary -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance, May 31, 1988 86,231,000 86,200 8,000,000 --
Common stock issued to
officers 8,000,000 8,000 -- --
Stock options issued to employees
and consultants -- -- -- --
Sale of common stock 2,756,832 2,800 -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance, May 31, 1989 96,987,832 97,000 8,000,000 --
Sale of common stock 100,000 100 -- --
Stock options issued to employees -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance, May 31, 1990 97,087,832 97,100 8,000,000 --
Stock issued for services 2,750,000 2,800 -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance, May 31, 1991 99,837,832 99,900 8,000,000 --
F-43
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
(Continued)
======================================================================================
Deficit
Accumulated
Additional During the
Subscriptions Paid-in Development
Receivable Capital Stage Total
---------- ---------- ---------- ----------
Issuance of common stock of
subsidiary -- 290,000 -- 290,000
Net loss -- -- (880,200) (880,200)
---------- ---------- ---------- ----------
Balance, May 31, 1988 -- 5,909,815 (8,275,400) (2,279,385)
Common stock issued to
officers -- 72,000 -- 80,000
Stock options issued to employees
and consultants -- 15,600 -- 15,600
Sale of common stock -- 131,600 -- 134,400
Net loss -- -- (641,400) (641,400)
---------- ---------- ---------- ----------
Balance, May 31, 1989 -- 6,129,015 (8,916,800) (2,690,785)
Sale of common stock -- 3,200 -- 3,300
Stock options issued to employees -- 7,300 -- 7,300
Net loss -- -- (522,000) (522,000)
---------- ---------- ---------- ----------
Balance, May 31, 1990 -- 6,139,515 (9,438,800) (3,202,185)
Stock issued for services -- 38,300 -- 41,100
Net loss -- -- (479,100) (479,100)
---------- ---------- ---------- ----------
Balance, May 31, 1991 -- 6,177,815 (9,917,900) (3,640,185)
See independent auditors' report and accompanying
notes to consolidated financial statements
F-43(Con't)
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
====================================================================================
Common Stock Treasury Stock
------------------------- -------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Sale of common stock 2,000,000 2,000 -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 1992 101,837,832 101,900 8,000,000 --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 1993 101,837,832 101,900 8,000,000 --
Stock issued for services 7,385,300 7,400 -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 1994 109,223,132 109,300 8,000,000 --
Committed stock for services -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 1995 109,223,132 109,300 8,000,000 --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 1996 109,223,132 109,300 8,000,000 --
Stock issued for services 3,360,300 3,300 -- --
Stock issued to employees
as compensation 11,980,000 12,000 -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 1997 124,563,432 124,600 8,000,000 --
F-44
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2003
(Continued)
=====================================================================================
Deficit
Accumulated
Additional During the
Subscriptions Paid-in Development
Receivable Capital Stage Total
----------- ----------- ----------- -----------
Sale of common stock -- 29,400 -- 31,400
Net loss -- -- (483,100) (483,100)
----------- ----------- ----------- -----------
Balance, May 31, 1992 -- 6,207,215 (10,401,000) (4,091,885)
Net loss -- -- (449,400) (449,400)
----------- ----------- ----------- -----------
Balance, May 31, 1993 -- 6,207,215 (10,850,400) (4,541,285)
Stock issued for services -- 208,400 -- 215,800
Net loss -- -- (753,900) (753,900)
----------- ----------- ----------- -----------
Balance, May 31, 1994 -- 6,415,615 (11,604,300) (5,079,385)
Committed stock for services -- 13,600 -- 13,600
Net loss -- -- (515,600) (515,600)
----------- ----------- ----------- -----------
Balance, May 31, 1995 -- 6,429,215 (12,119,900) (5,581,385)
Net loss -- -- (501,600) (501,600)
----------- ----------- ----------- -----------
Balance, May 31, 1996 -- 6,429,215 (12,621,500) (6,082,985)
Stock issued for services -- 89,100 -- 92,400
Stock issued to employees
as compensation -- 322,900 -- 334,900
Net loss -- -- (957,400) (957,400)
----------- ----------- ----------- -----------
Balance, May 31, 1997 -- 6,841,215 (13,578,900) (6,613,085)
See independent auditors' report and accompanying
notes to consolidated financial statements
F-44(Con't)
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
=========================================================================================
Common Stock Treasury Stock
------------------------- -------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 1998 124,563,432 124,600 8,000,000 --
Stock issued to employees 3,500,000 3,500 -- --
Stock issued to consultants
for services 1,300,000 1,300 -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 1999 129,363,432 129,400 8,000,000 --
Stock issued to employees
as compensation 450,000 400 -- --
Stock issued to vendors
for services 1,400,000 1,400 -- --
Exercise of options for
accrued compensation 5,000,000 5,000 -- --
Exercise of options for
subscriptions receivable 500,000 500 -- --
Stock options issued to
consultants -- -- -- --
Stock options issued to employees -- -- -- --
Contributed services -- -- -- --
F-45
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
(Continued)
===========================================================================================
Deficit
Accumulated
Additional During the
Subscriptions Paid-in Development
Receivable Capital Stage Total
----------- ----------- ----------- -----------
Net loss -- -- (555,200) (555,200)
----------- ----------- ----------- -----------
Balance, May 31, 1998 -- 6,841,215 (14,134,100) (7,168,285)
Stock issued to employees -- 120,000 -- 123,500
Stock issued to consultants
for services -- 51,700 -- 53,000
Net loss -- -- (767,400) (767,400)
----------- ----------- ----------- -----------
Balance, May 31, 1999 -- 7,012,915 (14,901,500) (7,759,185)
Stock issued to employees
as compensation -- 10,850 -- 11,250
Stock issued to vendors
for services -- 73,600 -- 75,000
Exercise of options for
accrued compensation -- 45,000 -- 50,000
Exercise of options for
subscriptions receivable (10,000) 9,500 -- --
Stock options issued to
consultants -- 29,000 -- 29,000
Stock options issued to employees -- 35,435 -- 35,435
Contributed services -- 126,900 -- 126,900
See independent auditors' report and accompanying
notes to consolidated financial statements
F-45(Con't)
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
======================================================================================
Common Stock Treasury Stock
------------------------- -------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Stock option issued to Immune
Network Research, Ltd. -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 2000 136,713,432 136,700 8,000,000 --
Exercise of Immune Network
Research, Ltd. stock option 10,000,000 10,000 -- --
Contributed services -- -- -- --
Employee option exercise 1,500,000 1,500 -- --
Exercise of put option to
Swartz LLC 605,055 605 -- --
Shares to be returned from
Swartz LLC -- -- 894,945 --
Cost incurred to register
common stock -- -- -- --
Stock options issued to
consultants -- -- -- --
Net income -- -- -- --
----------- ----------- ----------- -----------
Balance, May 31, 2001 148,818,487 148,805 8,894,945 --
Proceeds received for
exercise of put option
to Swartz LLC -- -- -- --
F-46
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
(Continued)
==========================================================================================
Deficit
Accumulated
Additional During the
Subscriptions Paid-in Development
Receivable Capital Stage Total
----------- ----------- ----------- -----------
Stock option issued to Immune
Network Research, Ltd. -- 400,000 -- 400,000
Net loss -- -- (1,150,100) (1,150,100)
----------- ----------- ----------- -----------
Balance, May 31, 2000 (10,000) 7,743,200 (16,051,600) (8,181,700)
Exercise of Immune Network
Research, Ltd. stock option -- 290,000 -- 300,000
Contributed services -- 336,150 -- 336,150
Employee option exercise (155,000) 153,500 -- --
Exercise of put option to
Swartz LLC (48,404) 47,799 -- --
Shares to be returned from
Swartz LLC -- -- -- --
Cost incurred to register
common stock -- (76,973) -- (76,973)
Stock options issued to
consultants -- 19,500 -- 19,500
Net income -- -- 562,695 562,695
----------- ----------- ----------- -----------
Balance, May 31, 2001 (213,404) 8,513,176 (15,488,905) (7,040,328)
Proceeds received for
exercise of put option
to Swartz LLC 48,404 -- -- 48,404
See independent auditors' report and accompanying
notes to consolidated financial statements
F-46(Con't)
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
==========================================================================================
Common Stock Treasury Stock
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Exercise of put option to
Swartz LLC 1,157,000 1,157 -- --
Shares to be returned from
Swartz LLC -- -- 3,843,000 --
Reimbursement for costs
incurred to register common
stock -- -- -- --
Stock issued to consultant for
fundraising activity 250,000 250 -- --
Stock options issued to
consultants -- -- -- --
Stock issued for exercise of
option 2,500,000 2,500 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, May 31, 2002 152,725,487 152,712 12,737,945 --
Sale of Stock 5,860,000 5,860 -- --
Stock issued to consultant 300,000 300 -- --
Stock options issued to
consultants -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, May 31, 2003 158,885,487 $ 158,872 12,737,945 $ --
Sale of Stock 9,800,000 9,800 -- --
Stock issued as forgiveness
of debt 3,000,000 30,000 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, May 31, 2004 171,685,487 198,672 12,737,945 --
F-47
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
(Continued)
=============================================================================================
Deficit
Accumulated
Additional During the
Subscriptions Paid-in Development
Receivable Capital Stage Total
------------ ------------ ------------ ------------
Exercise of put option to
Swartz LLC -- 69,385 -- 70,542
Shares to be returned from
Swartz LLC -- -- -- --
Reimbursement for costs
incurred to register common
stock -- 14,637 -- 14,637
Stock issued to consultant for
fundraising activity -- (250) -- --
Stock options issued to
consultants -- 56,400 -- 56,400
Stock issued for exercise of
option -- 72,500 -- 75,000
Net loss -- -- (972,073) (972,073)
------------ ------------ ------------ ------------
Balance, May 31, 2002 (165,000) 8,725,848 (16,460,978) (7,747,418)
Sale of Stock -- 58,140 -- 64,000
Stock issued to consultant -- 14,700 -- 15,000
Stock options issued to
consultants -- 32,500 -- 32,500
Net loss -- -- (612,894) (612,894)
------------ ------------ ------------ ------------
Balance, May 31, 2003 (165,000) $ 8,831,188 $(17,073,872) $ (8,248,812)
Sale of Stock -- 132,422 -- 142,222
Stock issued as forgiveness
of debt -- -- -- 30,000
Net loss -- -- (307,866) (307,866)
------------ ------------ ------------ ------------
Balance, May 31, 2004 (165,000) 8,963,610 (17,381,738) (8,384,456)
See independent auditors' report and accompanying
notes to consolidated financial statements
F-47(Con't)
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
=========================================================================================================
For The Period
May 14,1982
For The Year For The Year (Date of
Ended Ended of Inception
May 31, 2004 May 31, 2003 May 31, 2004
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (307,866) $ (612,894) $(16,768,844)
Adjustments to reconcile net )loss) income to
net cash used in operating activities:
Depreciation and amortization 1,493 1,346 140,183
Warrants and options issued to employees,
vendors and consultants -- 32,500 851,000
Minority interest in losses of subsidiary -- (329,800)
Stock issued to employees, vendors and
consultants -- 15,000 1,667,300
Contributed services -- 463,050
Accrued interest on advances from affiliates -- 197,697 3,241,648
Gain on write-down of accounts payable -- (1,405,232)
Changes in operating assets and liabilities:
Other receivable -- 621 --
Trade mark (189) -- (189)
Other assets -- (161) (9,140)
Accounts payable and accrued expenses (3,976) 1,333 1,590,794
Accrued compensation 219,000 248,834 3,244,353
------------ ------------ ------------
Net cash used in operating activities (91,538) (115,724) (7,314,877)
Cash flows used in investing activities:
Purchases of furniture and equipment (1,773) -- (140,966)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from advances from affiliates, net -- 30,000 2,190,800
Proceeds from loan payable -- -- 71,000
Proceeds from sale of stock and exercise options, net 142,222 64,000 5,320,568
Cost incurred to register securities -- -- (62,336)
Principal payments on advances from stockholder -- -- (43,500)
------------ ------------ ------------
Net cash provided by financing activities 142,222 94,000 7,476,532
------------ ------------ ------------
Net change in cash and cash equivalents 48,911 (21,724) 20,689
Cash and cash equivalents, beginning of period 10,053 31,777 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 58,964 $ 10,053 $ 20,689
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ -- $ --
============ ============ ============
Income taxes $ -- $ -- $ --
============ ============ ============
See independent auditors' report and accompanying
notes to consolidated financial statements.
F-48
MEDITECH PHARMACEUTICALS, INC AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD OF MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business activity (Company and Subsidiaries)
Meditech Pharmaceuticals, Inc. ("Meditech") is a drug development company,
which is focused in the areas of research, development, and marketing in
the biomedical industry, with an emphasis on anti-infective drugs. Meditech
was incorporated in Nevada on March 21, 1983. Since then, it has been
engaged in research and development activities associated with bringing its
products to market.
Principles of Consolidation
The consolidated financial statements include the accounts of Meditech and
its 37% owned and controlled subsidiary Viral Research Technologies, Inc.
("Viral" - see Note C) (Collectively, the "Company"). All significant
transactions and balances have been eliminated in consolidation.
Development Stage Enterprise
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises." The Company is devoting substantially all
of its present efforts to establish a new business, and its planned
principal operations have not yet commenced. The Company has not generated
significant revenues from operations and has no assurance of any future
revenues. All losses accumulated since inception have been considered as
part of the Company's development stage activities. The Company will
require substantial additional funding for commercialization of its
products. There is no assurance that the Company will be able to obtain
sufficient additional funds when needed, or that such funds will be
obtainable on terms satisfactory to the Company. The Company's products, to
the extent that they may be deemed medical devices or biologics, are
governed by the Federal Food, Drug and Cosmetics Act and by the regulations
of state agencies and various foreign government agencies. There can be no
assurance that the Company will maintain or obtain the regulatory approvals
required to market its products.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America, which contemplate continuation of the Company as a going
concern. The Company incurred a net loss of $307,866 during the year ended
May 31, 2004 and had a cash balance of approximately $58,964 at May 31,
2004. In addition, at May 31, 2004, the Company's deficit accumulated
during the development stage was $17,381,738 and the Company had negative
working capital of $8,201,462. Management recognizes that the Company must
generate additional resources for the eventual achievement of sustained
profitable operations. Management's plans include obtaining additional
capital through equity financing and the extension of existing debt.
However, no assurance can be given that additional capital, if needed, will
be available when required or upon terms acceptable to the Company or that
the Company will be successful in its efforts to negotiate the extension of
its existing debt.
These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result from the outcome of
these uncertainties.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
F-49
MEDITECH PHARMACEUTICALS, INC AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD OF MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Cash and Cash Equivalents
The company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Revenue
Revenue represents license fees that are recognized when earned over the
period of the applicable license agreement.
Property and Equipment
Property and Equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related
assets, which range from 3 to 5 years. Repairs and maintenance are charged
to expense as incurred while improvements are capitalized. Upon the sale or
retirement of property and equipment, the accounts are relieved of the cost
and the related accumulated depreciation, with any resulting gain or loss
included in the consolidated statements of operations.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to future net
cash flows expected to be generated by the assets. If the assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount exceeds the fair value of the
assets. Based on its analysis, the Company believes that no impairment of
the carrying value on its long-lived assets exists at May 31, 2004. There
can be no assurance, however, that market conditions will not change which
could result in impairment on long-lived assets in the future.
Stock-Based Compensation
The Company accounts for non-employee stock-based compensation under
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." SFAS 123 defines a fair value
based method of accounting for stock-based compensation. However, SFAS 123
allows an entity to continue to measure compensation cost related to stock
and stock options issued to employees using the intrinsic method of
accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees." Under APB 25,
compensation cost, if any, is recognized over the respective vesting period
based on the difference, on the date of grant, between the fair value of
the Company's common stock and the grant price. Entities electing to remain
with the accounting method of APB 25 must make pro forma disclosures of net
income (loss) and earnings per share, as if the fair value method of
accounting defined in SFAS 123 had been applied. The Company has elected to
account for its stock-based compensation to employees under APB 25.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. Adjustments
are made for options forfeited prior to vesting. The effect on compensation
expense and net (loss) income had compensation cost for the Company's stock
option issues been determined based on fair value on the date of grant
consistent with the provisions of SFAS 123 is as follows for the years
ended May 31:
F-50
MEDITECH PHARMACEUTICALS, INC AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD OF MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Stock-Based Compensation (cont.)
2004 2003
---------- ----------
Net (loss) income, as reported (307,866) (612,896)
Additional compensation expense under SFAS 123 -- --
---------- ----------
Pro forma net (loss) income $ (307,866) (612,896)
========== ==========
Pro forma net (loss) income per share $ -- $ --
========== ==========
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to
affect taxable income. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not those assets will not
be recovered.
Fair Value of Financial Instruments
The carrying values of the Company's certain financial instruments as of
May 31, 2004, including cash, accounts payable and accrued expenses, and
accrued compensation, approximate their respective fair values due to their
short-term nature. The fair value of advances from affiliates are not
determinable as the transactions are with related parties.
Concentration of Credit Risk
The financial instrument which potentially subjects the Company to
concentration of credit risk is cash and cash equivalents. The Company
maintains cash and cash equivalents balances at certain high quality
financial institutions, and at times such balances may exceed the Federal
Deposit Insurance Corporation $100,000 insurance limit. As of May 31, 2004,
there were no uninsured portions of cash.
Loss Per Share
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding.
Diluted loss per share is computed similar to basic loss 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
shares had been issued and if the additional common shares were dilutive.
As the Company has incurred net losses for 2004 and 2003, potential common
shares (totaling 3,800,000 and 3,800,000 shares, respectively) were
excluded from the computation as the effect would be anti-dilutive.
Comprehensive Income
Comprehensive income is not presented in the Company's consolidated
financial statements since the Company did not have any items of
comprehensive income in any period presented.
Segments of an Enterprise and Related Information
As the Company operates in one segment, the Company has not made segment
disclosures in the accompanying consolidated financial statements.
F-51
MEDITECH PHARMACEUTICALS, INC AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD OF MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
New Accounting Standard
On December 31, 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" SFAS 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for
stock-based employee compensation. Application of the provisions of SFAS
148 may be as of the beginning of the fiscal year or as of the beginning of
the interim period in which SFAS 148 was issued. The Company has elected to
adopt SFAS 148 as of the beginning of the current fiscal year.
On April 30, 2003, the FASB issued a Financial Interpretation No. 45,
"Disclosure Requirements Mandate Fair Value at Inception." FIN 45 states
that "a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligations to stand ready to perfom over
the term of the guarantee of the event that the specified triggering events
or conditions occur. The objective of the initial measurement of that
liability is the fair value of the guarantee at its inception." FIN 45
covers guarantee contracts such as financial and market value guarantees,
performance guarantees, and indirect guarantees of the indebtedness of
others. As of May 31, 2003, The Company does not have any guarantee
contracts affected by this interpretation.
On May 31, 2003 the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity." This statement establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances). Many of those instruments were previously
classified as equity. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts
Statement No. 6, Elements of Financial Statements. The remaining provisions
of this statement are consistent with the Board's proposal to revise that
definition to encompass certain obligations that a reporting entity can or
must settle by issuing its own equity shares, depending on the nature of
the relationship established between the holder and the issuer. Application
of the provisions of SFAS 150 is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company has elected to
adopt SFAS 150 at the beginning of the next fiscal year.
Reclassifications
Certain reclassifications have been made to prior year amounts in the
consolidated financial statements in order to conform to the current year
presentation. These reclassifications have no effect on previously reported
results of operations.
NOTE B - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
On January 22, 1987, the Company and a 50% investor formed VRT, Inc.
("VRT"), a Nevada corporation, for the purposes of developing a marketing
strategy for its products. On January 26, 1987, the Company granted certain
exclusive rights to VRT to market and distribute the Company's products.
The agreement expired on November 30, 1996.
On April 30, 1987, pursuant to a merger agreement, VRT was combined with
Viral, a Nevada corporation and an inactive public shell, which became the
surviving corporation. In the transaction, Viral issued 15,000,000 shares
of common stock to the company and its investor for all outstanding shares
of VRT. After the merger, the Company owned 37% of Viral. Viral's Board of
Directors is controlled by officers and directors of the Company.
Additionally, the companies have the same management team, and Viral is
economically dependent on the Company to fund its continuing operations.
Therefore, Viral has been consolidated as it is effectively controlled by
the Company.
F-52
MEDITECH PHARMACEUTICALS, INC AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD OF MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
- --------------------------------------------------------------------------------
NOTE B - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY (cont.)
At May 31, 2004, the assets and liabilities of Viral were as follows:
ASSETS
Due from Meditech $ 400,000
------------
Total Assets $ 400,000
============
LIABILITIES
Accounts Payable $ 5,000
Due to Meditech 129,000
------------
Total Liabilities 134,000
EQUITY 266,000
------------
Total Liabilities and Equity $ 400,000
============
Amounts recorded as minority interest in consolidated subsidiary on the
accompanying consolidated balance sheet represent the pro rata portion of
Viral's equity attributable to minority stockholders.
NOTE C - COMMITMENTS AND CONTINGENCIES
Leases
Currently, the Company uses its operating facilities provided by its Chief
Executive Officer, without a license agreement. The Company incurred
approximately $18,000 for the years ended May 31, 2004 and 2003 of rent
expense related to this lease. There is no guarantee the officer will be
willing to provide these facilities in the future (see Note G).
Employment Agreements
The Company entered into employment agreements dated February 3, 2000
(amended on May 31, 2001) with two of its officers. The agreements are for
three-year terms ending on March 15, 2003, however if it is not terminated
by either party, the term shall be automatically renewed for successive
one-year periods commencing on each anniversary date of the original term.
As of May 31, 2003, the agreements were not terminated. The agreements
provide for a combined base salary of $270,000 per annum for the first year
with an increase at least equal to the consumer price index over each
succeeding year. The agreements also provide for an annual bonus based on
certain performance goals and a severance payment based on two years of
base salary and bonus based, as defined, upon termination without cause or
change of control of the Company. Additionally, on August 9, 2001, the
Company granted to its officers, options to purchase a total of 44,900,000
shares of common stock exercisable at $0.056 per share and vesting
immediately on the date of grant. No compensation expense was recognized
for the granting of these options as the exercise price was equal to the
market price on the date of grant.
Litigation
The Company may become involve in various legal proceedings and claims
which arise in the ordinary course of its business. Management does not
believe that these matters will have a material adverse effect on the
Company's consolidated financial position or results of operations.
F-53
MEDITECH PHARMACEUTICALS, INC AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD OF MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
- --------------------------------------------------------------------------------
NOTE C - COMMITMENTS AND CONTINGENCIES (cont.)
License Agreement
On February 3, 2000, the Company received $25,000 from Immune Network
Research, Ltd. ("INR"), a Canadian pharmaceutical development company,
under a letter of intent. The payment was made for a one-year irrevocable
option granting INR the right to negotiate for an exclusive license for
pharmaceutical applications worldwide outside of the United States. The
Company then received an additional $100,000 from INR in anticipation of a
definitive agreement. Under the terms of the letter, if an agreement is
reached, the Company will issue an option to INR for up to 10,000,000
shares of common stock, exercisable at $0.03 per share. In return, the
Company will receive royalties equal to 7% of net sales for all MTCH-24
(TM) products sold and 4% of net sales for all Viraplex (R) products sold
by INR. The option was valued at $400,000 using the Black-Scholes
option-pricing model, which was recorded as an operating expense on the
date granted.
On May 25, 2001, the Company and INR entered into a definitive licensing
agreement, which terminated the letter of intent. Under this licensing
agreement the Company assigned its rights and interests in two applications
of its proprietary products. In consideration of the assignment, INR agreed
to pay a royalty equal to 2% of the gross worldwide sales of each of the
products. The term of the royalty is the longer of 10 years or the life of
any patent based on the products. The Company has not yet recognized any
royalty revenue related to this agreement.
NOTE D - STOCKHOLDERS' DEFICIT
Preferred Stock
The Company is authorized to issue 25,000,000 shares of its $0.001 par
value preferred stock. The Company has not issued any preferred stock to
date.
Common Stock
In May 2003, the Company issued 300,000 shares of common stock to a
consultant for work performed in connection with a proceeding against
Meditech, recording consulting expense of $15,000.
During the year ended May 31, 2003, the Company issued 5,860,000 shares of
common stock for cash of $64,000.
During the year ended May 31, 2004, the Company issued 3,000,000 shares of
common stock as a payment against a loan. This issuance paid off the entire
loan of $30,000.
During the year May 31, 2004, the Company issued 9,800,000 shares of common
stock for cash of $142,222.
Stock Options
The Company has no formal stock option plan. From time to time, the Company
issues stock options pursuant to various agreements and other compensating
arrangements.
The following summarizes all transactions for the years ended May 31, 2004
and 2003 involving the Company's stock options:
During the year ended May 31, 2003, the Company issued options to purchase
1,500,000 shares of its common stock to vendors and consultants of the
Company. The options are exercisable at $0.010 per share for 1,250,000
options and $0.028 per share for 250,000 options and expire at various
dates through February 2008. All of these options vest immediately. The
Company recognized $32,500 as consulting expense under general and
administrative expenses in the accompanying consolidated statement of
operations related to these options (based on the Black- Scholes option
pricing model pursuant to SFAS 123).
F-54
MEDITECH PHARMACEUTICALS, INC AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD OF MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
- --------------------------------------------------------------------------------
NOTE D - STOCKHOLDERS' DEFICIT (cont.)
Stock Options (cont.)
During the year ended May 31, 2003, the Company issued options to purchase
2,250,000 shares of common stock to employees and stockholders of the
Company, vesting immediately. The options are exercisable at $0.010 per
share and expire at various dates through December 2007. No compensation
expense was recognized as the exercise price at the dates of grant
approximates the fair market value of the stock on those dates.
Stock option activity for the years ended May 31, 2004 and 2003, is as
follows:
2004 2003
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
---------- ---------- ---------- ----------
Outstanding, beginning of year 57,890,000 $ 0.06 54,140,000 $ 0.14
Granted -- -- 3,750,000 0.05
Exercised -- -- --
Outstanding, end of year 57,890,000 0.06 57,890,000 0.06
========== ========== ========== ==========
Exercisable, end of year 57,890,000 0.06 53,640,000 0.06
========== ========== ========== ==========
Weighted average fair value of
options granted 0.06 0.05
========== ==========
The following summarizes information about stock options outstanding at May
31, 2004:
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life (Years) Price Exercisable Price
----------------- ----------- ------------ ---------- ----------- ----------
$ 0.010 - $ 0.028 7,650,000 5.4 $ 0.020 7,650,000 $ 0.018
$ 0.050 - $ 0.056 46,990,000 6.9 0.060 46,990,000 0.056
$ 0.130 - $ 0.210 3,250,000 0.7 0.210 3,250,000 0.206
---------- ---------- ---------- ---------- ----------
57,890,000 $ 0.059 57,890,000 $ 0.059
========== ========== ========== ==========
Pro Forma Stock Option Information
Pro Forma information regarding net (loss) income is required by SFAS 123
and is determined as if the Company accounted for its employee stock
options under the fair value method pursuant to SFAS 123,
F-55
MEDITECH PHARMACEUTICALS, INC AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD OF MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
- --------------------------------------------------------------------------------
NOTE D - STOCKHOLDERS' DEFICIT (cont.)
Pro Forma Stock Option Information (cont.)
rather than the method pursuant to APB 25, as discussed in Note A. The fair
value of these options is estimated at the date of grant based on the
Black-Scholes options pricing model (the "Model") with the following
assumptions for the years ended May 31, 2004 and 2003, respectively; risk
free interest rate of 3.9% and 4.4%; expected dividend yield of 0%;
expected life of the options of 5 years; and volatility factor of the
expected market price of the Company's common stock of 88% and 207%.
The Model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, the Model requires the input of highly subjective assumptions
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options; changes in the subjective input assumptions can materially affect
the fair value estimate.
NOTE E - INVESTMENT AGREEMENT
On June 30, 2000, and subsequently amended on February 15, 2001, the
Company entered into an investment agreement with Swartz Private Equity,
LLC ("Swartz"). The investment agreement entitles the Company to issue and
sell common stock to Swartz in the form of put rights for up to an
aggregate of $30,000,000 from time to time during a three-year period
beginning on the date of an effective registration statement which was May
3, 2001.
Under the agreement, in order to invoke a put right, the Company must
provide Swartz with at least 10 but not more than 20 business days advance
notice of the date on which the Company intends to exercise a put right and
must indicate the number of shares of common stock the Company intends to
sell to Swartz. The Company may also designate a maximum dollar amount of
common stock (not to exceed 2,000,000), which the Company will sell to
Swartz during the put/and or a minimum purchase price per common share at
which Swartz may purchase shares during the put. The number of shares of
common stock sold to Swartz in a put may not exceed the lesser of (i)
1,500,000 shares; (ii) 15% of the aggregate daily reported trading volume
of the Company's common shares, excluding certain block trades, during the
20 business days after the date of a put notice, with certain restrictions;
(iii) 15% of the aggregate daily reported trading volume of common shares
during the 20 days before the put date, excluding certain block trades; or
(iv) a number of shares that, when added to the number of shares acquired
by Swartz under the investment agreement during the 31 days preceding the
put date, would exceed 9.99% of the total number of shares of common stock
outstanding. For each common share, Swartz will pay the Company the lesser
of (i) the market price for such put, minus $0.075 or (ii) 91% of the
market price for the put.
Further, under the provisions of the agreement, during the term of the
investment agreement and for a period of one year thereafter, the Company
is prohibited from engaging in certain financing transactions involving the
Company's equity securities.
During the year ended May 31, 2004 and 2003, the Company exercised no put
options.
F-56
MEDITECH PHARMACEUTICALS, INC AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD OF MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
- --------------------------------------------------------------------------------
NOTE F - INCOME TAXES
Significant components of the Company's defered tax assets and liabilities
consisted of the following at May 31, 2004:
Deferred Tax Assets:
Reserve for finance charges $ 57,416
Accrued compensation 1,454,541
Interest on related party advances 1,375,430
Net operating loss carryforwards 1,022,330
Valuation allowance (3,909,717)
------------
Net deferred tax asset $ --
============
The valuation allowance decreased by $74,964 and increased by $571,681
during the years ended May 31, 2004 and 2003, respectively. No current
provision for income taxes for the year ended May 31, 2004 and 2003 is
required, since the Company incurred net operating losses through May 31,
2004.
As of May 31, 2004, the Company had net operating loss carryforwards of
approximately $1,771,838 for federal income tax reporting purposes
available to offset future taxable income, which expire on 2019.
NOTE G - RELATED PARTY TRANSACTIONS
Since inception, the Company has received advances from Petro-Med, Inc., an
affiliate, to fund its working capital requirements. At May 31, 2004, the
Company maintained short-term advances from affiliates of $4,539,346 which
are due on demand. Accrued interest is attributed to and included in the
outstanding balance as incurred. The advances bear interest at 9% per annum
on any outstanding balance. During fiscal year ended May 31, 2003, both
partners agreed to stop accruing interest on these advances. Interest
expense on the advances was $0 and $197,699 for the years ended May 31,
2004 and 2003, respectively.
The Company maintains its primary place of business in facilities owned by
the Chief Executive Office, for which it is charged rent expense (see Note
C).
NOTE H - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for the years ended May
31, 2004 and 2003.
F-57
MEDITECH PHARMACEUTICALS, INC AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD OF MAY 4, 1982 (Date of Inception) THROUGH MAY 31, 2004
- -----------------------------------------------------------------------------------------------
2004 2003
----------- -----------
Numerator for basic and diluted earning per share:
Net loss contributed to common stockholders $ 307,866 $ 612,896
=========== ===========
Denominator for basic and diluted earnings per share:
Weighted average shares (basic) 164,901,971 155,512,905
Common stock equivalents -- --
----------- -----------
Weighted average shares (dilutive) 164,901,971 155,512,905
=========== ===========
Basic and diluted earnings per share -
Loss per common share $ 0.00 $ 0.00
=========== ===========
F-58
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
- --------------------------------------------------------------------------------
February 28, 2005 May 31, 2004
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 58,964
Other current assets -- --
----------------- -----------------
Total current assets -- 58,964
Property and equipment
Property and equipment -- 5,366
Less: accumulated depreciation -- (4,508)
----------------- -----------------
Total property and equipment, net -- 858
Other assets -- 7,448
----------------- -----------------
Total assets $ -- $ 67,270
================= =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ -- $ 257,893
Accrued compensation -- 3,493,187
Advances from affiliates -- 4,509,346
----------------- -----------------
Total current liabilities -- 8,260,426
Minority interest in consolidated subsidiary -- 191,300
Commitments and contigencies
Stockholders' deficit:
Preferred stock, $0.001 par value; 25,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $0.001 par value; 400,000,000 shares
authorized; 2,156,855 and 171,685,487 shares issued
and outstanding at February 28, 2005 and May 31, 2004,
respectively 2,157 171,672
Subscriptions receivable -- (165,000)
Additional paid-in capital 15,048,708 8,990,610
Deficit accumulated during the development stage (15,050,865) (17,381,738)
----------------- -----------------
Total stockholders' deficit -- (8,384,456)
----------------- -----------------
Total liabilities and stockholders' deficit $ -- $ 67,270
================= =================
"See Accompanying Notes and Accountant's Report"
F-59
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
For the Period
May 14,1982
For The Three For The Three For The Nine For The Nine (Date of
Months Ended Months Ended Months Ended Months Ended Inception) to
February 28, February 29, February 28, February 29, February 28,
2005 2004 2005 2004 2005
------------- ------------- ------------- ------------- -------------
Revenue $ -- $ -- $ -- $ -- $ 152,132
------------- ------------- ------------- ------------- -------------
Operating expenses:
Research and development -- -- -- -- 1,899,450
General and administrative 44,041 69,426 138,626 223,403 14,130,760
General -- -- -- -- 325,400
------------- ------------- ------------- ------------- -------------
Total Operating expenses 44,041 69,426 138,626 223,403 16,355,610
------------- ------------- ------------- ------------- -------------
Loss before other income (expense) (44,041) (69,426) $ (138,626) (223,403) (16,203,478)
------------- ------------- ------------- ------------- -------------
Other income (expense):
Interest expense -- -- (15) 65 (3,439,389)
Interest income 23 4 56 -- 305,899
Other income, net -- -- -- -- 81,612
Gain on forgiveness of debt 2,278,158 -- 2,278,158 -- 2,278,158
Gain on write-down of accounts payable -- -- -- -- 1,405,232
------------- ------------- ------------- ------------- -------------
Total other income (expenses) 2,278,181 4 2,278,199 65 631,513
------------- ------------- ------------- ------------- -------------
Loss before minority interest in losses
of subsidiary 2,234,140 (69,421) 2,139,573 (223,338) (15,571,965)
------------- ------------- ------------- ------------- -------------
Minority interest in losses of subsidiary 191,300 -- 191,300 -- 521,100
------------- ------------- ------------- ------------- -------------
Net (loss) income $ 2,425,440 $ (69,421) $ 2,330,873 $ (223,338) $ (15,050,865)
============= ============= ============= ============= =============
Net (loss) income available to common
stockholders per common share: $ 0.7 $ -- $ 0.8 $ --
============= ============= ============= =============
Net (loss) income per common share -
basic and diluted $ 0.3 $ -- $ 0.2 $ --
============= ============= ============= =============
Weighted average shares outstanding:
Basic 834,525 161,980,378 413,656 160,214,449
============= ============= ============= =============
Diluted 834,525 161,980,378 413,656 160,214,449
============= ============= ============= =============
"See Accompanying Notes and Accountant's Report"
F-60
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2005 AND 2004
- --------------------------------------------------------------------------------
For The Nine For The Nine
Months Ended Months Ended
February 28, February 28,
2005 2005
------------ ------------
Cash flows from operating activities:
Net income $ 2,330,873 $ (223,338)
Adjustments to reconcile (net loss) income to
net cash used in operating activities:
Depreciation and amortization 858 372
Forgiveness of debt 2,278,158 --
Stock issued in exchange for debt 3,775,425 --
Minority interest in losses of subsidiary (191,300) --
Changes in operating assets and liabilities:
Other current assets -- (2,379)
Other assets 7,448 9,587
Accounts payable and accrued expenses (257,893) (38,556)
Advances from affiliates (4,509,346) (10,000)
Accrued compensation (3,493,187) 240,000
------------ ------------
Net cash used in operating activities (58,964) (24,314)
Cash flows from investing activities:
Purchase of furniture and fixtures -- (1,724)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 82,000
------------ ------------
Net change in cash and cash equivalents (58,964) 55,962
Cash and cash equivalents, beginning of period 58,964 20,418
------------ ------------
Cash and cash equivalents, end of period $ -- $ 76,380
============ ============
"See Accompanying Notes and Accountant's Report"
F-61
MEDITECH PHARMACEUTICALS, INC
AND SUBSIDIARY
(Development Stage Companies)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2005 (Unaudited)
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business activity (Company and Subsidiaries)
Meditech Pharmaceuticals, Inc. ("Meditech") is a drug development company,
which is focused in the areas of research, development, and marketing in
the biomedical industry, with an emphasis on anti-infective drugs. Meditech
was incorporated in Nevada on March 21, 1983. Since then, it has been
engaged in research and development activities associated with bringing its
products to market.
Development Stage Enterprise
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises." The Company is devoting substantially all
of its present efforts to establish a new business, and its planned
principal operations have not yet commenced.
The Company has not generated significant revenues from operations and has
no assurance of any future revenues. All losses accumulated since inception
have been considered as part of the Company's development stage activities.
The Company will require substantial additional funding for
commercialization of its products. There is no assurance that the Company
will be able to obtain sufficient additional funds when needed, or that
such funds will be obtainable on terms satisfactory to the Company. The
Company's products, to the extent that they may be deemed medical devices
or biologics, are governed by the Federal Food, Drug and Cosmetics Act and
by the regulations of state agencies and various foreign government
agencies. There can be no assurance that the Company will maintain or
obtain the regulatory approvals required to market its products.
Basis of Presentation
The accompanying financial statements have been prepared by Meditech
pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the
opinion of managements, necessary to fairly represent the operating results
for the respective periods. Certain information and footnote disclosures
normally present in the annual consolidated financial statements prepared
in accordance with accounting principles generally accepted in the United
States of America have been omitted pursuant to such rules and regulations.
The results of the three months ended February 28, 2005 are not necessarily
indicative of the results to be expected for the full year ending May 31,
2005.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-62
MEDITECH PHARMACEUTICALS, INC
AND SUBSIDIARY
(Development Stage Companies)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2005 (Unaudited)
- --------------------------------------------------------------------------------
Revenue
Revenue represents license fees that are recognized when earned over the
period of the applicable license agreement.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to future net
cash flows expected to be generated by the assets. If the assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount exceeds the fair value of the
assets. Based on its analysis, the Company believes that no impairment of
the carrying value on its long-lived assets exists at February 28, 2005.
There can be no assurance, however, that market conditions will not change
which could result in impairment of long-lived assets in the future.
Stock-Based Compensation
The Company accounts for non-employee stock-based compensation under
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." SFAS 123 defines a fair value
based method of accounting for stock-based compensation. However, SFAS 123
allows an entity to continue to measure compensation cost related to stock
and stock options issued to employees using the intrinsic method of
accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees." Under APB 25,
compensation cost, if any, is recognized over the respective vesting period
based on the difference, on the date of grant, between the fair value of
the Company's common stock and the grant price. Entities electing to remain
with the accounting method of APB 25 must make pro forma disclosures of net
income (loss) and earnings per share, as if the fair value method of
accounting defined in SFAS 123 had been applied. The Company has elected to
account for its stock-based compensation to employees under APB 25.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. Adjustments
are made for options forfeited prior to vesting. The effect on compensation
expense and net (loss) income had compensation cost for the Company's stock
option issues been determined based on fair value on the date of grant
consistent with the provisions of SFAS 123 is as follows for the years
ended May 31:
2004 2003
--------- ---------
Net (loss) income, as reported (612,896) (612,896)
Additional compensation expense under SFAS 123 -- --
--------- ---------
Pro forma net (loss) income $(612,896) (612,896)
========= =========
Pro forma net (loss) income per share $ -- $ --
========= =========
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax
F-63
MEDITECH PHARMACEUTICALS, INC
AND SUBSIDIARY
(Development Stage Companies)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2005 (Unaudited)
- --------------------------------------------------------------------------------
rates applicable to the periods in which the differences are expected to
affect taxable income. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not those assets will not
be recovered.
Loss Per Share
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding.
Diluted loss per share is computed similar to basic loss 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
shares had been issued and if the additional common shares were dilutive.
For the three months ended February 28, 2005 and February 29, 2004, the
Company incurred net losses; therefore, potential common shares are ignored
as their effect would be anti-dilutive.
Comprehensive Income
Comprehensive income is not presented in the Company's consolidated
financial statements since the Company did not have any items of
comprehensive income in any period presented.
Segments of an Enterprise and Related Information
As the Company operates in one segment, the Company has not made segment
disclosures in the accompanying consolidated financial statements.
F-64
MEDITECH PHARMACEUTICALS, INC
AND SUBSIDIARY
(Development Stage Companies)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2005 (Unaudited)
- --------------------------------------------------------------------------------
Reclassifications
Certain reclassifications have been made to prior year amounts in the
consolidated financial statements in order to conform to the current year
presentation. These reclassifications have no effect on previously reported
results of operations.
NOTE B - COMMITMENTS AND CONTINGENCIES
Leases
Currently, the Company uses its operating facilities provided by its Chief
Executive Officer, without a lease agreement. During the nine months ended
February 28, 2005, and the year ended May 31, 2004, the Company incurred
approximately $13,500 and $18,000, respectively, of rent expense related to
this lease. There is no guarantee the officer will be willing to provide
these facilities in the future.
Employment Agreements
There are no employment agreements in effect as of February 28, 2005.
Litigation
The Company may become involved in various legal proceedings and claims
which arise in the ordinary course of its business. Management does not
believe that these matters will have a material adverse effect on the
Company's consolidated financial position or results of operations.
F-65
MEDITECH PHARMACEUTICALS, INC
AND SUBSIDIARY
(Development Stage Companies)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2005 (Unaudited)
- --------------------------------------------------------------------------------
NOTE C - STOCKHOLDERS' DEFICIT
During the three months ended February 28, 2005, the Company issued a total
of 1,805,000 shares of restricted common stock as follows: 25,000 shares in
repayment of a $25,000 note payable; 280,000 shares as stock incentive
compensation for $280.00; and 1,500,000 shares for conversion of
$2,418,303.90 debt to equity.
NOTE D - RELATED PARTY TRANSACTIONS
Since inception, the Company has received advances from Petro-Med, Inc., an
affiliate, to fund its working capital requirements. At May 31, 2004, the
Company maintained short-term advances from affiliates of $4,509,346 which
are due on demand. Accrued interest is attributed to and included in the
outstanding balance as incurred. The advances bear interest at 9% per annum
on any outstanding balance. During fiscal year ended May 31, 2003, both
partners agreed to stop accruing interest on these advances. On October 25,
2004, the Company and Petro-Med entered into a debt exchange agreement,
thereby, paying in full the advances due to Petro-Med.
The Company maintains its primary place of business in facilities owned by
the Chief Executive Officer, for which it is charged rent expense (see Note
B).
NOTE E - STOCK SPLIT
On January 12, 2005 the Company effected a 1 for 1000 reverse split of its
common Stock.
NOTE F - SUBSEQUENT EVENT
In March 2005, Registrant underwent a change of control when it issued
9,853,740 shares of common stock in exchange for $5,748,015 and the
contribution of a Chinese operating company. Details of the transaction and
the new company has been set forth in a Form 8K filed by the Company.
Registrant's pharmaceutical development business was transferred to its
subsidiary East West Distributors, Inc., which will be distributed to the
company's shareholders after East West provides disclosure information
about the new company.
F-66
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
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.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Although we will receive no proceeds from the sale of shares pursuant to
this prospectus, we have agreed to bear the costs and expenses of the
registration of the shares. Our expenses in connection with the issuance and
distribution of the securities being registered, other than the underwriting
discount, are estimated as follows:
SEC Registration Fee $ 5,465.55
Printing and Engraving Expenses* $ 5,000
Professional Fees and Expenses* $ 150,000
Transfer Agent's Fees* $ 2,500
Miscellaneous Expenses* $ 3,000
-----------
Total $165,965.55
-----------
* Estimates
II-1
RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth recent sales by the Company of unregistered
securities during the fiscal year ended December 31, 2005:
1. 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), par value U.S.$0.05 per share, in exchange for
4,067,968 shares of common stock of the Company. The exchange qualified as
exempt transactions under Section 4(2) and/or Regulation S under the Securities
Act of 1933, as amended.
2. 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 entitling the warrant holders to purchase ten
(10) shares of common stock for each ten (10) shares issued, in private
placements qualifying as exempt transactions 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 per share of the individual 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 the Chairman of our Board of
Directors.
Further information regarding these transactions is contained in out
Current Report on Form 8-K filed with the SEC on April 6, 2005.
The following sets forth recent sales by the Company of unregistered
securities during the fiscal year ended May 31, 2004 and the seven months ended
December 31, 2004:
1. During the year ended May 31, 2004 and the seven months ended December
31, 2004, we granted 3,000,000 shares of our common stock as payment against a
loan given to Meditech. The loan of $30,000 was paid off through this issuance.
2. During the year ended May 31, 2004 and the seven months ended December
31, 2004, we issued an aggregate of 9,800,000 shares of our common stock for
cash of $142,222.
No underwriter was involved in any of the above issuances of securities.
All of the above securities were issued in reliance upon the exemptions set
forth in Section 4(2) of the Securities Act on the basis that they were issued
under circumstances not involving a public offering.
The following sets forth recent sales by the Company of unregistered
securities during the fiscal year ended May 31, 2003.
II-2
1. During the year ended May 31, 2003, we granted 300,000 shares of our
common stock to a consultant for work performed in connection with a proceeding
against Meditech, recording consulting expense of $15,000.
2. During the year ended May 31, 2003, we issued an aggregate of 5,860,000
shares of our common stock for cash of $64,000.
No underwriter was involved in any of the above issuances of securities.
All of the above securities were issued in reliance upon the exemptions set
forth in Section 4(2) of the Securities Act of 1933 on the basis that they were
issued under circumstances not involving a public offering.
Other than the securities mentioned above, we have not issued or sold any
securities without registration for the past three years from the date of this
registration statement.
EXHIBITS
3.1 Certificate of Incorporation. (1)
3.2-1 Bylaws. (2)
3.2-2 Amendment to Bylaws dated October 17, 2005 (3)
4.1 Common Stock Specimen (4)
4.2 Form of Warrant. (1)
5.1 Legal Opinion of Guzov Ofsink, LLC re legality of the common stock being
registered.
10.1 Stock Contribution Agreement, dated March 28, 2005, entered into by and
between the Company and Deli Du (5)
10.2 Stock Purchase Agreement, dated March 30, 2005, by and among Deli Du,
Halter Capital Corporation, and the Company (5)
10.3 Form of Unit Purchase Agreement (1)
10.4 Form of Engagement Agreement (1)
10.5 Form of Lock Up Agreement between the Company and the members of the
Financial Advisor Group (1)
10.6 Land Purchase Agreement by and between Deli Solar (PRC) and Deli Du (4)
(English Translation).
II-3
10.7 Stock Purchase Agreement by and between Deli Solar (PRC) and Ailiyang
Shareholders (6).
10.8 Land Use Rights Purchase Agreement by and between Deli Solar (PRC) and the
Governance Commission of Beijiahe Village Chaheji County Bazhou City dated March
16, 2006 (English Translation).
21.1 List of subsidiaries.
23.1 Consent of counsel to the use of the opinion annexed at Exhibit 5.1 is
contained in the opinion annexed at Exhibit 5.1
23.2 Consent of accountants (Child, Van Wagoner & Bradshaw, PLLC) for use of
their report.
23.3 Consent of accountants (MGB Partners, LLP) for use of their report.
- ------------
(1) Incorporated herein by reference to the Registration Statement on Form SB-2
filed with the SEC on November 2, 2005.
(2) Incorporated herein by reference to the Registration Statement on Form S-1
filed with the SEC in August 2003.
(3) Incorporated herein by reference to the Registration Statement on Form SB-2
filed with the SEC ion 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.
UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement(or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
II-4
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly in
Beijing, PRC, on June 16, 2006.
DELI SOLAR (USA), INC.
/s/ Deli Du
----------------------
By: Deli Du,
Chief Executive Officer and President
(principal executive officer)
/s/ Jianmin Li
----------------------
By: Jianmin Li
Chief Financial Officer (principal
financial officer and accounting officer)
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Name and Title Date
- -------------- ----
/s/ Deli Du June 16, 2006
- -----------------------
By: Deli Du,
Chief Executive Officer, President
(principal executive officer)
/s/ Jianmin Li June 16, 2006
- -----------------------
By: Jianmin Li
Chief Financial Officer
(principal financial officer and accounting officer)
/s/ Deli Du June 16, 2006
- -----------------------
By: Deli Du, Director
/s/ John D. Kuhns June 16, 2006
- -----------------------
John D. Kuhns, Director
II-6
/s/ Kelly Chow June 16, 2006
- -----------------------
Kelly Chow, Director
/s/ Yunjun Luo June 16, 2006
- -----------------------
Yunjun Luo, Director
/s/ Ravinder Soin June 16, 2006
- -----------------------
Ravinder Soin, Director
II-7