UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ...........to...............
Commission File Number 000-12561
Deli Solar (USA), Inc.
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(Exact name of small business issuer as specified in its charter)
Nevada 95-3819300
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
558 Lime Rock Road, Lakeville, Connecticut 06039
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(Address of Principal Executive Offices) (Zip Code)
(860) 435-7000
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: there were 6,205,290 shares
outstanding as of September 30, 2006.
Transitional Small Business Disclosure Format (check one) Yes No X
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2
Deli Solar (USA), Inc.
TABLE OF CONTENTS
PART I Financial Information Page No.
Item 1. Financial Statements and Notes..................................... 4
Item 2. Management's Discussion and Analysis or Plan of Operation.......... 12
Item 3. Controls and Procedures............................................ 17
PART II Other Information
Item 6. Exhibits........................................................... 18
Signatures................................................................... 18
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements
DELI SOLAR (USA), INC. Consolidated Balance Sheets
Assets September 30, 2006 December 31, 2005
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(unaudited)
Current assets
Cash and cash equivalents $ 4,580,200 $ 5,629,168
Trade accounts receivable 903,527 748,475
Allowances for doubtful accounts (199,048) (193,630)
Net trade accounts receivable 704,479 554,845
Advance to suppliers 850,586 811,275
Prepaid expenses 11,696 44,783
Related entities receivable -- 37,856
Inventories 922,795 383,183
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Total current assets 7,069,756 7,461,110
Property, plant and equipment
Buildings 3,481,516 3,175,994
Machinery and equipment 70,190 43,335
Vehicles 111,897 106,636
Computer equipment 28,610 26,197
Office equipment 8,654 6,976
Construction in progress 1,099,801 159,356
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Total 4,800,668 3,518,494
Accumulated depreciation (327,543) (228,986)
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Net property, plant and equipment 4,473,125 3,289,508
Other receivables 29,836 82,090
Prepaid land lease 992,158 70,798
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Total other assets 1,021,994 152,888
Total assets 12,564,875 10,903,506
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The accompanying notes are an integral part of these consolidated financial
statements.
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ITEM 1. Consolidated Financial Statements
DELI SOLAR (USA), INC. Consolidated Balance Sheets (Continued)
September 30, 2006 December 31, 2005
-----------------------------------------
(unaudited)
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable $ 142,312 $ 89,375
Related party payable 105,045 50,045
Other payables 154,152 --
Accrued expenses 8,838 1,733
Deposits 160,330 5,621
Short-term notes payable 31,611 130,112
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Total current liabilities 602,288 276,886
Stockholders' equity
Common stock 6,205 6,205
Additional paid in capital 5,705,574 5,705,574
Retained earnings 5,964,608 4,740,284
Accumulated other comprehensive income 286,200 174,557
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Total stockholders' equity 11,962,587 10,626,620
Total liabilities and stockholders' equity 12,564,875 $ 10,903,506
================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
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ITEM 1. Consolidated Financial Statements
DELI SOLAR (USA), INC. Consolidated Statements of Operations (unaudited)
Consolidated Income statement Nine months Nine months Three months Three months
------------------ ------------------ ------------------ ------------------
ended Sep 30, 2006 ended Sep 30, 2005 ended Sep 30, 2006 ended Sep 30, 2005
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Sales Revenues $ 15,982,081 $ 10,565,301 $ 6,565,606 $ 4,868,129
Cost of goods sold 12,549,545 8,072,933 5,190,840 3,708,391
------------------ ------------------ ------------------ ------------------
Gross profit 3,432,536 2,492,368 1,374,766 1,159,738
Operating expenses
Advertising 881,190 488,102 382,287 198,868
Selling expense 330,400 158,637 145,073 80,226
Salaries and benefits 194,319 138,987 88,113 59,165
Depreciation 89,208 31,681 29,943 16,447
Other general and administrative 877,544 679,644 175,914 140,425
------------------ ------------------ ------------------ ------------------
Total operating expenses 2,372,661 1,497,051 821,330 495,131
------------------ ------------------ ------------------ ------------------
Net operating income 1,059,875 995,317 553,436 664,607
Other income (expense)
Interest income (expense) (10,108) (17,857) (3,898) (4,144)
Other income (expense) -- 61,516 -- 61,516
------------------ ------------------ ------------------ ------------------
Total other income (expense) (10,108) 43,659 (3,899) 57,372
------------------ ------------------ ------------------ ------------------
--
Net income before taxes 1,049,767 1,038,976 549,538 721,979
Taxes -- -- -- --
------------------ ------------------ ------------------ ------------------
Net income $ 1,049,767 $ 1,038,976 $ 549,538 $ 721,979
================== ================== ================== ==================
Foreign Currency Translation 286,200 121,120 194,660 121,120
Adjustment
Comprehensive Income $ 1,335,967 $ 1,160,096 $ 744,198 $ 843,099
================== ================== ================== ==================
Basic earnings per share $ 0.17 $ 0.17 $ 0.09 $ 0.12
Denominator for basic EPS 6,205,290 6,145,290 6,205,290 6,145,290
Fully diluted earnings per share $ 0.13 $ 0.16 $ 0.07 $ 0.09
Denominator for diluted EPS 8,031,009 6,614,365 8,031,009 7,688,151
The accompanying notes are an integral part of these consolidated financial
statements.
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ITEM 1. Consolidated Financial Statements
DELI SOLAR (USA), INC. Consolidated Statement of Changes in Stockholders' Equity
(unaudited)
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Common Common Paid in Retained
Balances at: Shares Stock Capital Earnings Totals
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Balance: December 31, 2005 6,205,290 $ 6,205 $ 5,705,574 $ 4,914,841 $ 10,626,620
============ ============ ============ ============ ============
Q1 2006 Net income 203,993 203,993.00
Other comprehensive income in Q1 44,578 44,578
Balance: March 31, 2006 6,205,290 $ 6,205 $ 5,705,574 $ 5,163,412 $ 10,875,191
------------ ------------ ------------ ------------ ------------
Q2 2006 Net income 296,236 296,235.70
Other comprehensive income in Q2 46,962 46,962
Balance: June 30, 2006 6,205,290 $ 6,205 $ 5,705,574 $ 5,506,610 $ 11,218,389
------------ ------------ ------------ ------------ ------------
Q3 2006 Net income 549,539 549,538.58
Other comprehensive income in Q3 194,660 194,660
Balance: September 30, 2006 6,205,290 $ 6,205 $ 5,705,574 $ 6,250,808 $ 11,962,587
------------ ------------ ------------ ------------ ------------
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The accompanying notes are an integral part of these consolidated financial
statements.
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ITEM 1. Consolidated Financial Statements
DELI SOLAR (USA), INC. Consolidated Statements of Cash Flows (unaudited)
Cash flows from operating activities: Nine months ended Nine months ended
September 30, 2006 September 30, 2005
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Net income 1,049,766 1,038,976
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 98,557 35,148
Provision for allowance on accounts receivable 5,418
Loss on disposal of fixed assets --
Changes in operating liabilities and assets:
Trade accounts receivable -155,052 -490,155
Advance to suppliers -39,311 -272,057
Inventories -539,612 -95,021
Receivables - employees 90,111 -38,990
Prepaid expenses 33,087
Trade accounts payable 52,937 -81,019
Other payables 209,152 -4,334
Accrued expenses 7,105 -204,705
Deposits 154,709 -2,638
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Net cash provided by operations 966,867 -114,795
Cash flows from investing activities:
Purchases of property, plant and equipment -1,282,174 -627,802
Prepaid leased land -921,360 -505
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Net cash used in investing activities -2,203,534 -628,307
Cash flows from financing activities:
Proceeds from short-term notes payable -98,501 -483,781
Related party receivables -- 227,490
Proceeds from sales of stock
Payment of dividends
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Net cash provided by (used in) financing activities -98,501 4,413,097
Effect of rate changes on cash 286,200 121,120
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Increase in cash and cash equivalents -1,048,968 3,791,115
Cash and cash equivalents, beginning of period 5,629,168 1,241,808
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Cash and cash equivalents, end of period 4,580,200 5,032,923
Supplemental disclosures of cash flow information:
Interest paid in cash -16,318 -17,857
Income taxes paid in cash
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The accompanying notes are an integral part of these consolidated financial
statements.
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ITEM 1. Consolidated Financial Statements
Notes to Consolidated Financial Statements of September 30, 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 contained in the Company's Annual report on 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 September 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 31, 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 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.
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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. The 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 uncollectable 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
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and any gain or loss is included in income. Depreciation related to property and
equipment used in production is reported in cost of sales.
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, 2005, 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 statements of Deli Solar (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.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
FORWARD-LOOKING INFORMATION - Management's Discussion and Analysis ("MD&A")
includes "forward-looking statements". All statements, other than statements of
historical facts, included in this MD&A regarding the Company's financial
position, business strategy and plans and objectives of management of the
Company for future operations are forward-looking statements. These
forward-looking statements rely on a number of assumptions concerning future
events and are subject to a number of uncertainties and other factors, many of
which are outside of the Company's control, that could cause actual results to
materially differ from such statements. While the Company believes that the
assumptions concerning future events are reasonable, it cautions that there are
inherent difficulties in predicting certain important factors, especially the
timing and magnitude of technological advances; the prospects for future
acquisitions; the competition in the solar water heaters and boilers industry
and the impact of such competition on pricing, revenues and margins;
uncertainties surrounding budget reductions or changes in funding priorities of
existing government programs and the cost of attracting and retaining highly
skilled personnel.
OVERVIEW
Deli Solar (USA), Inc. ("we," "us" or the Company) is a holding company
for Bazhou Deli Solar Heating Energy Co. Ltd, a People's Republic of China
("PRC") company ("Deli Solar (PRC)"). Its principal products are solar 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.
The revenue derived from the sale of coal-fired residential boilers in the
first nine months of 2006 was approximately $4,616,485. The revenue derived from
the sale of solar water heaters in the same period was approximately
$10,786,133. For the nine months ended September 30, 2006, sales of residential
boilers had a margin of approximately 25%, the same as that of the same period
in 2005, while sales of solar water heaters had a margin of about 20%, compared
to approximately 22% in the same period in 2005. The lower margin in solar water
heaters is mainly because of the fierce price competition in the solar water
heater industry in China. We expect price competition to continue in the last
quarter in 2006. As a result, we expect the margin on solar water heaters will
likely continue to decrease. Even though the Company experienced a decrease in
sales margins, overall sales increased which resulted in an increase of total
revenues in the first nine months of 2006.
We are building a flat plat collector production line and a water tank
assembly line. These two projects are still under construction and are expected
to be finished before the end of year 2006. With the new assembly line we could
produce higher quality products to improve our performance in sales margin.
In mid-October, we signed a Memorandum of Understanding ("MOU") with Tian
Jin Hua Neng Group to purchase its 51% ownership of the Tianjin Hua Neng
company, which manufactures energy saving boilers and environment protection
equipment for industrial customers. Besides the consideration paid to Tian Jin
Hua Neng Group, which is still being negotiated, we also promised to invest
about $2.5 million into the new company after we control it. The transaction is
still in the due diligence process.
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We also signed a MOU with Shen Zhen Xiong Ri solar power company to get a
60% ownership in Shen Zhen Xiong Ri solar power company for a purchase price of
approximately $250,000 and additional contingent consideration of up to $5
million consisting of shares of our common stock and depending on the
performance of the company through 2006 to 2008. This transaction is also in the
due diligence process. The target company is a firm with an attractive position
in the solar water heater market in Shen Zhen district, PRC. Strong support from
the Shen Zhen government for solar water heater products could help us exploit a
potentially huge market in Shen Zhen district.
Under certain regulations in the form of public notices issued by the PRC
State Administration of Foreign Exchange in October 2005, or SAFE, our
shareholders who are PRC resident individuals are subject to certain
registration requirements regarding their ownership of shares in the Company.
Mr. Deli Du, our PRC shareholder, had complied with the registration requirement
with SAFE before the formation of Deli Solar (Beijing); however, our PRC counsel
advised that he should update his registration to include the formation of the
new entity - Deli Solar (Beijing). Otherwise, it will prohibit Deli Solar
(Beijing) from distributing dividends or profits to us. The Company currently
does not have any present plans to pay dividends; however. Mr. Du has advised us
that he will comply with the registration requirements under the SAFE
regulations.
RESULTS OF OPERATIONS
Quarter ended September 30, 2006 compared to the quarter ended September 30,
2005
Sales and Gross Profit
Revenues for the three months ended September 30, 2006 were $6,565,606 as
compared to $4,868,129 for the same period last year, an increase of 35%. Gross
profit for the three months ended September 30, 2006 was $1,374,766, an increase
of approximately 19%, as compared to $1,159,738 for the three months ended
September 30, 2005. The increase in sales revenue is attributable to our
continued investment in brand marketing, sales promotion and our development of
a sales distribution network. However, our sales gross margin has been
decreasing due to severe price competition in traditional solar water heaters
market, which we believe will continue in the near future. Even though the
Company experienced decreased sales margins, overall increased sales resulted in
an increase of total revenues in the three months ended September 30, 2006.
Operating Expenses
Operating expenses for the three months ended September 30, 2006 were
$821,330, as compared to $495,131 for the same period in 2005, an increase of
66%. The increased operating expenses primarily went to marketing and
advertising expenses and selling expenses.
The advertising expenses for the three months ended September 30, 2006
were $382,287 as compared to $198,868 for the same period last year, an increase
of $183,419, or approximately 92%. The increase in advertising expense was a
result of our continued increasing emphasis on advertising to increase product
awareness, branding and sales. Management
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believes increased marketing is an effective method the Company can use to gain
more market share in the face of severe competition.
Selling expenses for the three months ended September 30, 2006 were
$145,073 as compared to $80,226 for the same period last year, an increase of
$64,847, or approximately 81%. These selling expenses consisted primarily of
distribution transportation expenses, agency administration expenses and after
sales services, such as expenses for installation and replacements. The increase
in selling expenses was primarily due to the increase in sales volume.
Other general and administrative expenses for the three months ended
September 30, 2006 were $175,914, as compared to $140,425 for the same period
last year, an increase of $35,489, or approximately 25%.
Income from Operations
Income from operations for the three months ended September 30, 2006 was
$553,436, as compared to $664,607 for the three months ended September 30, 2005.
The decreased income was due to the increased sales and marketing expenses in
the third quarter of 2006.
Net Income
Net income was $549,538 in the three months ended September 30, 2006,
compared with $721,979 in the same period last year, primarily due to decreased
sales margins and increasing marketing expenses.
Nine months ended September 30, 2006 compared to nine months ended September
30, 2005
Sales and Gross Profit
Revenues for the nine months ended September 30, 2006 were $15,982,081 as
compared to $10,565,301 for the same period last year, an increase of 51%. Gross
profit for the nine months ended September 30, 2006 was $3,432,536, an increase
of $940,168, or approximately 54%, as compared to $2,492,368 for the nine months
ended September 30, 2005. The increase in sales revenue is attributable to our
continued investment in brand marketing, sales promotion and the development of
our sales distribution network. However, our sales gross margin for the nine
months ended September 30, 2006 decreased by approximately one percent over the
comparable period in 2005 due to severe price competition in traditional solar
water heaters market which we believe is likely to continue in the near future,
and increased raw material costs.
Operating Expenses
Operating expenses for the nine months ended September 30, 2006 were
$2,372,661, as compared to $1,497,051 for the same period in 2005, an increase
of $875,610 or 55%. The increased operating expenses primarily went to marketing
expenses, selling expenses and administrative expenses.
The advertising expenses for the nine months ended September 30, 2006 were
$881,190, an increase of $393,088, as compared to $488,102 for the same period
last year. The increase in
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advertising expense was a result of our continued increasing emphasis on
advertising to increase product awareness, branding and sales. Management
believes that increased marketing is an effective method the Company can use to
gain more market share in the face of severe competition.
Selling expenses for the nine months ended September 30, 2006 were
$330,400 as compared to $158,637 for the same period last year, an increase of
$171,763. These selling expenses consisted primarily of distribution
transportation expenses, agency administration expenses, after sales services,
such as expenses for installation and replacements. The increase in selling
expenses was primarily due to the increase of sales volume.
Other general and administrative expenses were $877,544, as compared to
$679,644 for the same period last year. The increase of other general and
administrative expenses was primarily from increased administrative activities
including negotiations for potential mergers and acquisitions, preparation for
land purchase and new product line constructions.
Income from Operations
Income from operations for the nine months ended September 30, 2006 was
$1,059,875, as compared to $995,317 for the nine months ended September 30,
2005. The increased income was primarily due to the increased sales revenues in
the first three quarters of 2006.
Net Income
Net income increased to approximately $1,049,767 in the nine months ended
September 30, 2006, from $1,038,976 in the same period last year, primarily due
to increased sales revenues and effective control in sales expenses.
LIQUIDITY AND CAPITAL RESOURCES
In a reverse merger closed 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. 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 $966,867 for the nine
months ended September 30, 2006. Net cash used in operating activities for the
same period of 2005 was $114,795. The increase in net cash provided by
operations was due to effective control over out working capital.
Net cash used in investing activities increased to $2,203,534 for the nine
months ended September 30, 2006, from $628,307 for the same period of 2005. The
increase was due to the fulfillment of our payment obligations under the
contracts we refer to below under "Construction in Process" and "Prepaid Land
Lease".
As of September 30, 2006, the Company did not have long term debt.
15
We intend to use our available funds to accelerate the development and
testing of new product lines. We believe that our available funds will provide
us with sufficient capital for the next twelve months. However, to the extent
that we make acquisitions or establish additional production facilities, we may
require additional capital for the acquisition or for the operation of the
combined companies. We cannot assure you that such funding will be available.
ACCOUNTS RECEIVABLE
During the nine months ended September 30, 2006, accounts receivable
increased to $704,479 from $554,845, primarily due to the increase in sales,
offset by our active collection efforts.
INVENTORY
Inventories as of September 30, 2006 increased to $922,795 from $383,183
as of December 31, 2005 mainly because of our preparation for our peak selling
season which is the last quarter.
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. In accordance with the terms and
conditions of a Construction Contract, Deli Solar (PRC) agreed to pay the total
construction costs of $237,199, which have been paid as of September 30, 2006.
On February 10, 2006, Deli Solar (PRC) signed an agreement with Chengde
Hui Da Conveyance Equipment Co., Ltd. for the design, manufacture and
installation of production plant and machineries for our water tank assembly
line. In accordance with the terms and conditions of the agreement, Deli Solar
(PRC) paid $326,410 before September 30, 2006.
PREPAID LAND LEASE
On March 17, 2006, Deli Solar (PRC) entered into an agreement with the local
government to acquire land use rights of 61,530 square meters at the price of
approximately $919,858, which was paid before June 30, 2006. This piece of land
is close to the present Bazhou factory and will be used to enlarge the present
Bazhou manufacturing base at Bazhou City.
CASH
Cash and cash equivalents decreased from $5,629,168 at December 31, 2005
to $4,580,200 at September 30, 2006, primarily as a result of land use right
acquisition, project construction and the facility purchase as above referenced.
In the foreseeable future, capital investment could decrease our working capital
further as a result of significant investments in acquisition of businesses,
expansion of production capacity and new product development.
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Item 3. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding management's control objectives.
At the conclusion of the period ended September 30, 2006 we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective in alerting them in a timely manner to information relating to the
Company required to be disclosed in this report.
During the period covered by this report, there have been no changes in
our internal controls over financial reporting that have materially affected, or
are reasonably likely to materially affect our internal controls over financial
reporting.
There have been no significant changes in our internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date of the evaluation in connection with the preparation of this
quarterly report on Form 10-QSB.
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PART II - OTHER INFORMATION
Item 6. Exhibits.
Exhibit No. Description
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) as adopted, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Rules
13a-14(a) as adopted, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications of the Chief Executive Officer and the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Deli Solar (USA), Inc.
(Registrant)
Date: November 14, 2006 /s/ Deli Du
-----------
Deli Du
Chief Executive Officer
Date: November 14, 2006 /s/ Jianmin Li
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Jianmin Li
Chief Financial Officer
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