U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM
10-KSB/A
____________________
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
Fiscal Year Ended
December
31, 2007
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from ________________ to __________________
Commission
File Number
000-12561
China
Solar & Clean Energy Solutions, Inc.
(Name
of
small business issuer in its charter)
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Nevada
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95-3819300
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(State
or other jurisdiction of incorporation or
organization)
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(IRS.
Employer Identification No.)
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Building
3 No. 28, Feng Tai North Road, Beijing,
China
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100071
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(Address
of principal executive offices)
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(Zip
Code)
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Issuer’s
telephone number, including area code
+86-10-63850516
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
c
ommon
stock $.001 par value
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.
Yes
o
No
x
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
o
Check
if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K contained in this form, and no disclosure will be contained, to the best
of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB/A or any amendment
to
this Form 10-KSB/A.
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
State
issuer’s revenues for its most recent fiscal year: $37,072,346 for the fiscal
year ended December 31, 2007.
The
aggregate market value of the voting and non-voting common stock held by
non-affiliates of the registrant, based on the closing price of the registrant's
common stock as quoted on the OTC Bulletin Board on October 24, 2008 of $ 1.10,
was approximately $10,281,022.
The
number of shares of common stock outstanding as of the close of business on
October 24, 2008 was 15,799,450.
Documents
Incorporated By Reference: None.
Transitional
Small Business Disclosure Format (check one):
Yes
o
No:
x
China
Solar & Clean Energy Solutions, Inc.
Form
10-KSB/A
For
the Fiscal Year Ended December 31, 2007
Table
of Contents
Cautionary
Note Regarding Forward-Looking Statements And Other Information Contained In
This Report
Currency
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Page
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Item
1.
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Description
of Business
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1
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Item
2.
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Description
of Property
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20
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Item
3.
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Legal
Proceedings
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21
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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21
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PART
II
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Item
5.
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Market
for Common Equity, Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities
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22
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Item
6.
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Management’s
Discussion and Analysis or Plan of Operation
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24
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Item
7.
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Financial
Statements
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31
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Item
8.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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32
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Item
8AT.
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Controls
and Procedures
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32
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Item
8B.
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Other
Information
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34
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PART
III
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Item
9.
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Directors,
Executive Officers, Promoters and Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange
Act
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35
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Item
10.
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Executive
Compensation
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38
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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40
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Item
12.
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Certain
Relationships and Related Transactions
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41
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Item
13.
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Exhibits
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41
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Item
14.
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Principal
Accountant Fees and Services
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43
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Signatures
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44
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Financial
Statements
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN
THIS REPORT
This
report contains some forward-looking statements. Forward-looking statements
give
our current expectations or forecasts of future events. You can identify these
statements by the fact that they do not relate strictly to historical or current
facts. Forward
-looking
statements involve risks and uncertainties. Forward-looking statements include
statements regarding, among other things, (a) our projected sales, profitability
and cash flows, (b) our growth strategies, (c) anticipated trends in our
industries, (d) our future financing plans and (e) our anticipated needs for
working capital. They are generally identifiable by use of the words "may,"
"will," "should," "anticipate," "estimate," "plans," “potential," "projects,"
"continuing," "ongoing," "expects," "management believes," "we believe," "we
intend" or the negative of these words or other variations on these words or
comparable terminology. These statements may be found under "Management's
Discussion and Analysis of Financial Condition and Plan of Operation" and
"Business," as well as in this report generally.
In
particular, these include statements relating to future actions, prospective
products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies
such
as legal proceedings, and financial results.
Any
or
all of our forward-looking statements in this report may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or
by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially
as
a
result of various factors, including, without limitation, the risks and matters
described in this report generally. In light of these risks and uncertainties,
there can be no assurance that the forward-looking statements contained in
this
filing will in fact occur. You should not place undue reliance on these
forward-looking statements.
Currency
Unless
otherwise noted, all currency figures in this filing are in U.S.dollars.
References to "yuan" or "RMB" are to the Chinese yuan (also known as the
Renminbi). According to xe.com as of October 24, 2008, $1 = 6.8633
yuan.
PART
I
EXPLANATORY
NOTE
This
Amendment No. 1 (“Amendment No. 1”) on Form 10-KSB/A is being filed to
amend our annual report on Form 10-KSB for the fiscal year ended December
31,
2007, as filed with the Securities and Exchange Commission (the “Commission”) on
April 10, 2008 (the “Original Report”), to
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amend
our audited financial statements for the fiscal year ended December
31,
2007; and
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amend
Item 8A(T), “Controls and Procedures.”
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In
addition, we are filing updated certifications pursuant to the Sarbanes-Oxley
Act of 2002 as Exhibits 31.1, 31.2, and 32.1.
ITEM
1. DESCRIPTION OF BUSINESS
Except
as
otherwise specifically stated or unless the context otherwise requires, the
“Company,” we," "our" and "us" refers collectively to:
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(i)
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China
Solar & Clean Energy Solutions, Inc. ("China Solar") formerly known
as ("Deli Solar (USA)
Inc.)",
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(ii)
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Deli
Solar Holding Ltd., ("Deli Solar (BVI)"), a wholly-owned subsidiary
of China Solar and a limited liability company organized under the
International Business Companies Act of the British Virgin Islands,
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(iii)
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Bazhou
Deli Solar Energy Heating Co., Ltd. ("Deli Solar Bazhou”), a wholly-owned
subsidiary of Deli Solar (BVI) and a limited liability company organized
under the laws of the PRC
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(iv)
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Beijing
Deli Solar Technology Development Co. (“Deli Solar (Beijing)”
),
a
wholly-owned subsidiary of China Solar and a limited liability
company organized under the laws of the
PRC,
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(v)
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Shenzhen PengSangPu
Solar Industrial Products Corporation (“
SZPSP”),
a wholly-owned subsidiary of Deli Solar (Beijing); and
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(vi)
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Tianjin
Huaneng Group Energy Equipment Co., Ltd. (“Tianjin Huaneng”), a
majority-owned subsidiary of Deli Solar (Beijing).
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Business
Overview
We
are
engaged in the solar and renewable energy business in the People's Republic
of
China (“PRC”).
Our
business is conducted through our wholly-owned PRC based operating subsidiaries,
Deli Solar (Bazhou), Deli Solar (Beijing) and our recently acquired indirect
majority owned subsidiary Tianjin Huaneng.
Deli
Solar (Bazhou), founded in 1997, designs, manufactures and sells renewable
energy systems to produce hot water and for space heating in the PRC. Deli
Solar
(Bazhou)’s principal products are solar hot water heaters and multifunctional
space heating products, including coal-fired boilers for residential use. Deli
Solar (Bazhou) also sells component parts for its systems, and provides
after-sales maintenance and repair services.
Most
end
users of Deli Solar (Bazhou)’s products use them to heat water for their homes,
with a concentration in rural areas where electricity is in short supply. Deli
Solar (Bazhou)’s coal-fired boilers, furnaces and heating stoves are also used
as primary household space heaters during cold weather and as cooking stoves.
Deli
Solar (Beijing), established during the second quarter of 2006, is
principally engaged in the installation of large solar water heaters in
construction projects in major cities in the PRC, including Beijing.
Tianjin
Huaneng, acquired in July 2007, manufactures and installs waste heat recovery
systems primarily for use in manufacturing facilities whose manufacturing
processes require the generation of large amounts of heat, such as steel and
chemical plants. The waste heat can be sued to generate hot water at the
manufacturing facilities Tianjin Huaneng’s products include heating pipes, heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators. Products and systems manufactured and sold by Tianjin
Huaneng during the period from May 1, 2007 (the date of acquisition) through
December 31, 2007 represented 19% of our sales revenues for the fiscal year
ended December 31, 2007. Tianjin Huaneng’s products are sold in more than 28
provinces in the PRC as well as Singapore, Indonesia, and North Korea.
SZPSP,
which we acquired effective March 31, 2008, is principally engaged in the resale
of energy-saving heating products such as heat pipes, heat exchangers, pressure
water boilers, solar energy water heaters and radiators. Currently, SZPSP
is also operating a distribution facility in Shenzhen, PRC. This acquisition
will add to the assortment of solar water products which we have available
for
sale.
For
the
fiscal year ended December 31, 2007 approximately 47% of our sales revenues
were
derived from sales of our solar water heaters, 34%
were
derived
from sales of our coal-fired boilers, space heating and other products and
19%
were derived from sales of heat exchange equipment.
For
the
fiscal year ended December 31, 2007, approximately 88% of our sales revenues
were derived from sales made to PRC based customers and approximately 12% were
derived from the international market.
Products
Solar
Hot Water Heaters
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 use. 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 water heater revenues for 2007. This type
of solar water heater can generate hot water even in cold weather and therefore
can be used throughout the year. Further, these water heaters 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 annually account
for most of our sales.
Boilers
We
also
manufacture boilers, furnaces, stove heating, and space heating products. Most
of our boilers and space heating products are coal-fired, small scale units
for
residential space heating and cooking.
Sales
of
our hot water heaters and boilers comprised approximately 72% of our total
sales
revenues in 2007.
Heat
Pipe Related Products
We
also
manufacture waste heat recovery systems, heating products such as heating pipes,
heat exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators.
Sales
of
these products and systems comprised approximately 19% of our total sales
revenues in 2007.
Recent
Developments.
February
2008 Private Placement
On
February 25, 2008 we raised gross proceeds of approximately $
11,300,000
in a
private placement
providing
for the sale of 4,691,499 shares of common stock at a price of $2.40 per
share.
Acquisition
of Shenzhen PengSangPu Solar Industrial Products
Corporation
On
January 9, 2008 Deli Solar (Beijing) entered into an equity purchase agreement
and a complementary agreement with Shenzhen PengSangPu Solar Industrial Products
Corporation (“SZPSP”) and its shareholders to acquire 100% of the outstanding
equity interests of SZPSP from its three shareholders. The closing occurred
on
March 31, 2008.
SZPSP
was
incorporated as a limited liability company under the laws of the PRC on
September 23, 1993. Its registered capital was Renminbi Yuan (“RMB”)
2,650,000 (equivalent to $365,916) which was contributed by its three
shareholders. On July 13, 2006, the registered capital increased to $1,767,443
(RMB 12,800,000).
SZPSP
specializes in the manufacture of solar hot water systems for commercial use.
Our customers include factories, hospitals, schools and hotels. SZPSP’s solar
energy products include flat plate solar collectors, solar water heater systems,
central solar water heater system and solar energy photovoltaic technology,
etc.
It acquired ISO9001: 2000 international quality system accreditation in 2004.
SZPSP
is
principally engaged in the manufacture and distribution of solar heating
products such as heat pipes, heat exchangers, pressure water boilers, solar
energy water heaters and radiators. Currently, SZPSP is also operating a
distribution facility in Shenzhen, PRC. SZPSP had sales revenues of
RMB73,885,035 ($10,114,864) for 2007.
The
purchase price consisted of $4,087,832 (RMB 28,800,000) in cash, 1,419,729
shares of our common stock, and five year warrants to purchase 141,973 shares
of
common stock at an exercise price of $2.50 per share (subject to adjustment).
The cash portion was based on an appraisal of SZPSP. The three shareholders
agreed to loan the cash purchase price back to the Deli Solar (Beijing) to
be
used as working capital. Fifty (50%) of the principal amount of this loan is
required to be repaid within one year and the remaining balance is required
to
be repaid within two years. In addition to the payment of the cash
purchase price, we paid RMB 20 million for SZPSP’s trademarks and other
intangible assets which was paid in 1,419,729 shares of our common stock. We
agreed that if on the first anniversary of the closing our common stock price
is
lower than the share price ($2), we will pay the difference.
SZPSP
warranted that if (i) for the year ended December 31, 2008 its sales
revenues are less than RMB 99 million (approximately $13,670,068) or its
after-tax net profits are less than RMB 9.43 million (approximately $1,302,108);
or (ii) for the year ended December 31, 2009, sales revenues are less than
RMB
143.9 million (approximately $19,868,336) or its after-tax net profits are
less
than RMB 12.13 million (approximately $1,674,789), SZPSP will pay the difference
between the revenue and the targeted revenue of the year specified by reducing
the amount payable on the shareholders’ loan. If the shareholders’ loan is not
sufficient to pay the difference, the common shares held by SZPSP will be
returned to us to the extent necessary for the remaining balance.
The
current shareholders of SZPSP, being the management of SZPSP, have entered
into
employment contracts with us for a term of three years to remain in their
current managing positions of SZPSP.
Deli
Solar (Beijing) has the right to elect a majority of the board members of SZPSP.
Acquisition
of Tianjin Huaneng
On
May
18, 2007, Deli Solar (Beijing) entered into an agreement with Tianjin Municipal
Ji County State-owned Assets Administration Commission (the “SAAC”) to purchase
51% of the equity interests in Tianjin Huaneng Group Energy Equipment Co.,
Ltd.
(“Tianjin Huaneng”) for a purchase price of RMB24,100,000 (approximately
$3,149,147). The transaction closed on July 1, 2007 and we paid approximately
$1,575,600 in July 2007. By supplemental agreement between the parties dated
August 8, 2007, the purchase price was reduced to approximately $1,689,741.
However in addition to the purchase price we are required to pay a finder’s fee
of approximately $769,418. At the closing Deli Solar (Beijing) assumed 51%
of
the liabilities of Tianjin Huaneng. In addition, we are required to contribute
RMB20,000,000 (approximately $2,613,400) as working capital to the acquired
company. Deli Solar (Beijing) also agreed to employ the 550 current Tianjin
Huaneng employees pursuant to new three year employment contracts.
Tianjin
Huaneng had sales revenues of approximately $11 million for 2006 and since
July
2007 contributed approximately $9.6 million or approximately 26% of our total
sales revenue of approximately $37 million for 2007.
Tianjin
Huaneng, incorporated in 1987, is a state-owned enterprise with 51% of its
equity formerly-owned by SAAC and 49% owned by the employees.
Tianjin
Huaneng manufactures heating products such as heating pipes, heat exchangers,
specialty heating pipes and tubes, high temperature hot blast stoves, heating
filters, normal pressure water boilers, solar energy water heaters and
radiators.
Tianjin
is a city in the PRC which is approximately 50 miles from Beijing and has a
population of approximately 10.24 million (as of December 31, 2004), and is
one
of only four municipal cities directly governed by the central government in
China.
Change
of Name
Effective
October 29, 2007, we changed our name from Deli Solar (USA), Inc. to China
Solar
& Clean Energy Solutions, Inc. We believe that the new name better reflects
the direction of the business. The name change was completed by means of a
short
form merger under the Nevada law, under which Du Solar, Inc., our wholly
owned subsidiary merged into us. We survived as the surviving corporation and
we
effected the name change in connection with that merger. No shareholder approval
was required for the short form merger and the related name change. The name
change became effective with the OTCBB at the opening of trading on
November 5, 2007 under the new stock symbol “CSOL.OB.” Our new CUSIP number is
16943E 105.
Appointment
of Joe Levinson and Yihai Yang as Directors
Effective
July 25, 2008, Messrs Joseph J. Levinson and Yihai Yang were appointed as
directors of the Board of the Company (the “Board”). Mr. Levinson is qualified
as an "independent director" as defined by the rules of the Nasdaq Stock
Market
and as a result of his appointment we have a majority of independent directors.
At the same time, Mr. Levinson was also appointed as Chairman of the Audit
Committee and Mr. Deli Du, the Chief Executive Officer of the Company, was
appointed as Chairman of the Compensation Committee.
Resignation
of Kevin Randolph as a Director
Effective
July 25, 2008, Mr. Randolph resigned as a director to pursue other
interests. His resignation was not the result of any disagreement with us
on any matter relating to our operations, policies or practices.
Resignation
of Mr. Jianmin Li as Chief Financial Officer and as a
Director
Effective
November 1, 2007, Mr. Jianmin Li resigned as our Chief Financial Officer
to
pursue other interests. Mr. Li's resignation was not the result of any
disagreement with us on any matter relating to our operations, policies or
practices. Following his resignation as the Chief Financial Officer, Mr.
Li continued to serve as a director until March 31, 2008 when he resigned
as a
director. Mr. Li's resignation as director was not the result of any
disagreement with us on any matter relating to our operations, policies or
practices.
Appointment
of Gary Lam as Chief Financial Officer and Subsequent Resignation as Chief
Financial Officer
Effective
November 1, 2007, Mr. Gary Lam was appointed to serve as our Chief Financial
Officer. Effective March 14, 2008, Mr. Lam resigned as our Chief Financial
Officer to pursue other interests. Mr. Lam’s resignation was not the
result of any disagreement with us on any matter relating to our operations,
policies or practices.
Appointment
of Yihai Yang as Acting Chief Financial Officer
Effective
March 14, 2008, Mr. Yihai Yang was appointed to serve as our Acting Chief
Financial Officer.
June
2007 Private Placement
On
June
13, 2007 we raised gross proceeds of $2,750,000 in a private placement
providing
for the sale at a purchase price of $1.55 per share of
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(i)
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1,774,194
shares of series A preferred stock (with each share convertible into
one
(1) share of common stock, subject to
adjustment)
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(ii)
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five
year class A warrants to purchase 1,774,194 shares of common stock
at an
exercise price $1.90 per share (subject to adjustment), and
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(iii)
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five
year class B warrants to purchase an additional 1,774,194 shares
of common
stock at an exercise price of $2.40 per share (subject to adjustment).
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Corporate
History
China
Solar & Clean Energy Solutions, Inc. was formerly known as Deli Solar (USA),
Inc., which was formerly known as Meditech Pharmaceuticals, Inc.
(“Meditech”).
Meditech
was incorporated in Nevada on March 21, 1983.
Organization
of Holding Company and Acquisition of Deli Solar (Bazhou)
In
2004,
Deli Solar (BVI), was organized as a limited liability company
under
the
International Business Companies Act of the British Virgin Islands by Mr.
Deli
Du
of Bazhou City, Hebei Province, PRC
and
others (with Mr. Du owning 80% )
as
a
holding company for Deli Solar (Bazhou).
On
August
1, 2004, Deli Solar (BVI) purchased all the capital stock of Deli Solar (Bazhou)
from Messrs. Deli Du, his brother Xiaosan Du and Xiao'er Du, for RMB 6,800,000
(approximately $879,920). As a result of that transaction, Deli Solar (Bazhou)
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).
Reverse
Merger and Financing
On
March
31, 2005, Meditech entered into a stock contribution agreement with the
shareholders of Deli Solar (BVI) under which Meditech acquired all of the issued
and outstanding shares of capital stock of Deli Solar (BVI) in exchange for
the
issuance to the shareholders of Deli Solar (BVI) of 4,067,964 shares of
Meditech’s common stock.
In
connection with the stock contribution, also on March 31, 2005, we received
net
proceeds of $5,748,015 from the sale of 1,642,990 shares of common stock
and warrants to a number of accredited investors in a private placement. (The
number and the price of the shares as described in this and the prior paragraph
have been adjusted to give effect to the one-for-six reverse stock split of
the
common stock, which became effective on August 15, 2005.)
As
a
result of foregoing transactions, the former shareholders of Deli Solar (BVI)
(including Mr. Du) became holders of a majority of the common stock of Meditech
and Deli Solar (BVI) became a wholly-owned subsidiary of Meditech. Following
(i)
Mr. Du's purchase of the 56,259 shares from a third party for $500,000, (ii)
the
issuance to him of the additional 3,254,371 shares in exchange for his 80%
of
the outstanding shares of Deli Solar (BVI) and (iii) the simultaneous issuance
by the Company of an additional 1,642,990 shares to accredited investors in
the
private placement, Mr. Du then owned,
of
record, 57% of the issued and outstanding common stock of the Company.
On
August
15, 2005, Meditech changed its name from Meditech to Deli Solar (USA), Inc
and
completed a one of six reverse stock split of the common stock.
On
August
29, 2005 Meditech completed a spin-off of its drug development business to
East
West Distributors, Inc., its wholly owned subsidiary.
During
the quarter ended June 30, 2006, Deli Solar (USA) set up a new wholly-owned
subsidiary, Deli Solar (Beijing) to further develop our business in Beijing.
Deli Solar (USA) contributed $1 million into Deli Solar (Beijing) as its
registered capital.
Corporate
Structure
The
following diagram sets forth our current corporate structure:
Neither
China Solar nor Deli Solar (BVI) has any operations or currently intend to
have any operations in the future other than acting as a holding company and
management company for Deli Solar (Bazhou) and Deli Solar (Beijing) and raising
capital for their operations.
Products
We
manufacture solar water heaters, boilers as well as heat pipe products.
Solar
Hot Water Heater Products
Our
solar
water heaters are primarily used to generate hot water for residential
use.
Approximately
47% of our total revenues for 2007 were derived from sales of our solar hot
water heaters compared to 60% of our total revenues for 2006.
We
manufacture two types of solar hot water heaters: evacuated tubular solar water
heaters and flat plate solar water heaters.
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 water heater revenues for 2007. 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 most of our sales of solar 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 PRC market are evacuated tube collectors and glazed
flat plates.
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.
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. % of water
heater revenues
|
|
Sub-types
|
|
Approx. % of total solar
product revenue
|
|
|
|
|
|
|
|
|
|
|
|
Evacuated
Tubular Solar
Water
Heaters
|
|
|
90
%
|
|
|
Regular
Evacuated
Tubular
Solar Water
Heaters
|
|
|
85
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evacuated
Heat Pipe
Solar
Water Heaters
|
|
|
5
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flat
Plate Solar Water
Heaters
|
|
|
10
%
|
|
|
|
|
|
N/A
|
|
Evacuated
Tubular Solar Water Heaters
This
line
of products represents about 5% of our sales revenues from solar water heaters
in 2007. They 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 regular evacuated tubular solar water
heaters; and (ii) evacuated heat-pipe solar water heaters. Our regular evacuated
tubular solar water heaters use all-glass vacuum tubes, and our evacuated heat
pipe solar water heaters use heat pipe vacuum tubes. The primary use of our
evacuated tubular solar water heaters is to generate hot water for household
use. However, solar thermal energy can also be employed in industrial processes,
timber treatment, agricultural processes, cooling and space heating.
All
glass:
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 and comprise
approximately 85% of our solar water heaters sales.
Heat
Pipe:
Our
evacuated heat pipe solar water heaters comprise approximately 5% of our solar
hot water heaters sales. These solar water heaters use 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
off
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 °C (i.e. 3.6°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 which provides
a
solution where uneven temperature is a 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.
Flat
Plate Solar Water Heaters
Our
sales
of this product comprise approximately 10% of our total solar hot water heater
sales.
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°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.
Integrated
Solar Heating Packages
A
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 December 31, 2006 we completed the
installation of our solar hot water and space heating systems in 16 of such
houses. The project continues to be suspended due to a payment default.
Boilers
and Space Heating Products
We
also
manufacture boilers, furnaces, stove heating, and space heating products,
comprising approximately 27% of our total sales revenues in the year of 2007.
Most
of
our boilers and space heating products are coal-fired, small scale units for
residential space heating and cooking.
We
manufacture more than 80 types of boilers, furnaces, space heating and stove
cooking products. Separated by functions and use, our boilers, furnaces and
stove heating products can be divided into three types: 1) combined cooking
and
space heating, comprising approximately 60% of our sales of boilers and space
heating products, 2) combined shower and space heating, comprising approximately
10% of our sales of boiler and space heating products, and 3) multifunctional
shower, cooking and space heating, comprising approximately 30% of our sales
of
boilers and space heating products.
We
have
also developed two environmentally friendly boilers: smokeless coal-fired
boilers and bio-materials furnaces. The former does not produce smoke and the
latter utilizes waste materials such as dry hay to generate heat. The
development of these products has been completed and we have sent samples of
these products to our distributors. As of the date of this report we have not
made significant sales of these environmentally friendly new
products.
New
Product Pipeline
We
have
the following products in the product planning and developing stage:
Photovoltaic
powered water heaters
.
We are
in the process of improving the physical performance of 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.
|
Our
sales
of photovoltaic powered water heaters have not been significant thus far.
Densely
Covered Regular Tubular Heaters
.
We have
developed a new solar water heater which is designed with densely covered
evacuated tubes to improve heating efficiency with only a small cost increase.
As an updated regular evacuated tubular heater, this product installs more
tubes
in one square meter than normal products do. For instance, it has ten tubes
on
one collector while others only have eight. We began marketing this product
in
June 2007 and we had sales through December 31, 2007 of RMB30 million.
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 (Bazhou) 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 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 that necessary
raw materials will continue to be available at prices or delivery terms
acceptable to us.
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 (Bazhou) is located, which has approximately 100 steel
suppliers. We do not rely on any particular suppliers to procure other raw
materials.
Manufacturing
Process, Cost, and Capacity
Deli
Solar (Bazhou) assembles and manufactures most of its products in its own
production facility in Bazhou. Tianjin Huaneng assembles and manufactures most
of its products in its own production facility in Tianjin. SZPSP assembles
and
manufactures most of its products in its own production facility in Shenzhen.
Our senior manufacturing personnel include a number of professional engineers
and senior technology consultants. We primarily use manual labor for our product
because of availability of cheap labor in the Bazhou area. However, Deli Solar
(Bazhou) is in the process of automating some of its production processes.
In
February 2006, Deli Solar (Bazhou) purchased an automated production line for
the manufacture of water tanks. That production line has been assembled, tested
and validated and is expected to be in use by the end of the second quarter
of
2008.
As
of
March 24, 2008, we employed approximately 815 permanent manufacturing employees
and also 250 contract temporary workers. We added 550 employees as a result
of
the Tianjin acquisition and will be adding an additional 185 employees as a
result of the SZPSP acquisition. During manufacturing peak season 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. Because of the strategic location of our manufacturing facilities, we
are
able to take advantage of low labor cost in the Bazhou, Tianjin and Shenzhen
areas, 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 and Tianjin areas 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 Production (Approximate Units)
|
|
Annual Production (Approximate Units)
|
|
|
|
|
|
|
|
Solar
Hot Water Heaters
|
|
500
|
|
133,000
|
|
|
|
|
|
|
|
Boilers
and Space Heating Products
|
|
120
|
|
26,000
|
Quality
Control
Our
manufacturing processes follow strict guidelines and standard operating
procedures that we believe are compliant with ISO 14000. Our products are
routinely tested as are individual aspects of our production. Deli Solar
(Bazhou) is in the process of applying for ISO 14000 certification and
anticipates that the certification will be issued by the end of
2008.
SZPSP
has
been issued
ISO9001:
2000 certification.
Because
of our stringent quality control system, most of our products are certified
by
governmental quality control testing centers, such as the Institute of China
Product Quality Association, 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
Solar 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
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 peak season when
our
production capacity falls short of the market demand, we assemble and
manufacture products through 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 2007, we contracted with two OEMs,
Shandong Xin Xing Solar Power Heater Co., Ltd. and Lian Yun Gang Solar Power
Heating Co Ltd.
Manufacturing
through OEM arrangements comprises approximately 30% to 40% of our total sales
during the peak season. For 2007, the two 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.
Demand
for Our Products
The
majority of the demand for our solar water heaters and space heaters is from
residential households in the PRC, particularly in rural areas. Presently,
we
sell our solar water heaters and space heaters primarily in the rural areas
of
the north-east part of the PRC including Hebei, Beijing, Tianjin, 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
fluctuate, reflecting seasonal variations in solar energy supply during the
four
seasons. We have higher sales of solar hot water products in the spring because
solar hot water heaters perform the best during the summer when solar energy
is
abundant. High sales volumes for coal boilers occur in the fall because
customers purchase our space heating products for the winter. Sales volumes
for
our products tend to be lower between January and March.
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 this depletion and the 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. Renewable energy currently accounts for a negligible
percentage of the country’s total energy supply. The Act, however, does not
provide for any incentive schemes for purchasers.
Urban
and Rural Market Segmentation for Hot Water and Space Heating Systems in China
Recently
the market for hot water and space heating systems in the PRC has shown
substantial growth. 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. We do not know the number of
rural households that currently have hot water systems but believe that it
significantly less due to the fact that modern hot water and heating
systems have still not become available to and are not 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.
In
the
rural areas of the PRC the infrastructure is insufficient to facilitate delivery
of conventional energy solutions that are available in more developed 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. Large portions of the PRC's rural areas are not electrified or
connected to the electric grid and approximately 60% of rural communities that
are grid-connected experience serious shortages of electricity. According to
the
National Renewable Energy Laboratories Eleven rural counties with a population
of approximately 70 million have no electricity at all. In addition, 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 rural
home use 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 (15 years)
|
|
|
241
|
|
|
1,770
|
|
|
1,431
|
|
Projected
Growth of Solar Hot Water Industry
The
PRC
solar hot water industry is an emerging, but fast growing industry. It has
experienced 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%
until2015 as shown in the following table:
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
|
)
|
A
=
actual. F = forecast.
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 rural
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
Growth Strategy:
Acquisition
Strategy
As
part
of our business strategy, we review acquisition and strategic investment
prospects that we believe would complement our current product offerings,
increase our market coverage or enhance our technical capabilities, or otherwise
offer growth opportunities.
In
July
2005 we acquired a 51% interest in Tianjin Huaneng and in March 2008 we acquired
a 100% interest in SZSP.
From
time
to time we consider investing in new businesses and we expect to make
investments in, and to acquire businesses, products, or technologies in the
future.
Our
Organic Growth Strategies
We
are
seeking to grow and expand our business through the following strategies:
|
·
|
focus
on rural market segment.
|
|
·
|
extensive
and targeted advertising.
|
|
·
|
a larger
distribution and agency network.
|
|
·
|
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 PRC 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 approximately
$1,415,493, or 3.8% of sales, on advertising in 2007 compared to $1.1 million,
or 5.2% of sales in 2006. In 2005 and 2004, we spent over $646,000 and $278,000,
respectively, or 4.2% and 4.6% 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
|
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:
|
·
|
to
target different products in different tiers of the same geographical
market.
|
|
·
|
to
eliminate agency dominance in a regional market by granting non-exclusive
agencies to more than one distributor in a region.
|
|
·
|
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.
|
|
·
|
to
increase the market share of our products.
|
Our
brand
logos are the following:
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.
We
also
have a Marketing Department consisting of approximately 87 marketing and sales
personnel who collect feedback from our customers and other market information
for our management and our product development team.
Distribution
Channels for Solar Water Heater Systems
The
PRC
is a vast country geographically 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 604 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
Tianjin 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
for
the following reasons:
|
|
·
|
We
produce both solar hot water heaters and boilers, while the majority
of
manufacturers in the PRC normally produce only one type of product.
Sales
of solar hot water heaters and boilers are both affected by seasonality.
As described elsewhere 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 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:
|
|
|
·
|
Local
solar energy status and market potential
|
|
|
·
|
Sales
and market potential in the covered
area
|
|
|
·
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Presence
of alternatives, such as gas or electricity
|
|
|
·
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Credibility
of the candidate
|
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.
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 300 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 controlling
17% of the domestic market.
We
believe our success lies in our quality control, brand recognition strategy,
comprehensive distribution network and advertising.
RESEARCH
AND DEVELOPMENT ACTIVITIES
Our
research and development ("R&D") expenses have historically been
approximately 1% to 2% of our annual sales revenues. Most of these expenses
were
spent in designing and manufacturing new products. 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. In 2006, we spent approximately $51,741 in R&D on
the development of pressurized evacuated heat pipe solar water heaters. In
2007,
we spent approximately $1.8 million in R&D on biomass fuel system program,
multi-source energy program. 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 with such R&D activities
are generally borne by the requesting customers.
Currently,
we have a R&D team of three full time members and part time research
assistants. Our 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.
In
February 2006, we executed a non binding Cooperation Memorandum (the “Memo”)
with the Key Laboratory of Heat Transmission and Energy Saving Education of
Beijing University of Industry (“BUI”) in February 2006 for cooperation on
research and development of renewable energy technologies. The Memo sets forth
a
general cooperation framework between the two parties: we make available funding
for certain renewable energy research and development projects undertaken by
BUI. Further details of each party’ rights and obligations will be on a project
by project basis with specific agreements. To date we have not incurred any
expenses under this arrangement.
INTELLECTUAL
PROPERTY
Trademarks
Deli
Solar (Bazhou) 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 replace our brand "Ailiyang")
|
|
Approved,
pending the trademark certificate
delivery
|
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.
Patents.
SZPSP
has
obtained
the following patents in the PRC for its unique solar energy selective absorbing
coat and manufacturing technology:
|
|
|
|
|
|
|
|
|
Authorized
Scope
|
|
Valid
Term
|
|
Certificate
Number
|
|
|
|
|
|
|
|
|
|
Cold
water recovery system in solar heating
|
|
2015
|
|
ZL200620016815X
|
|
|
Recycle
Heating Product in different temperature system
|
|
n/a
|
|
Application
submitted
7/4/06
|
Domain
names.
We
own
and operate a website under the internet domain name
http://www.cn-sce.com
.
Traffic
to our other internet domain names www.AiLiYang.com are directed to that
website. SZPSP owns and operates a website under the internet domain name
http://www.szpsp.com
.
Government
Regulation
We
are
not subject to any requirements for governmental permits or approvals 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
(Bazhou) 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. We are currently in the process of renewing the
certificate. Other than the foregoing, Deli Solar (Bazhou) 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.
Executive
Offices
Our
executive office is located at Building 3, No. 28 Feng Tai North Road, Beijing,
China, 100071 and our telephone number is +86-10-63850516.
Deli
Solar (Bazhou)’s factory facilities are located outside of the city of Bazhou in
the Hebei Province of the PRC. Deli Solar (Bazhou) utilizes one factory in
Bazhou with a total of over 10,000 square meters of production, warehouse,
and
office space and space for use as a distribution center and approximately 2,000
square meters of office space and exhibition center in Beijing
Tianjin
Huaneng’s factory facilities are located outside of the Tianjin municipalities
of the PRC. Tianjin Huaneng’s utilizes one factory in Tianjin with over
51,000 square meters of production, warehouse, and office space and space for
use as a distribution center.
SZPSP’s
factory facilities are located outside of the city of Shenzhen in the Guangdong
Province of the PRC. SZPSP utilizes two factories in Shenzhen with a total
of over 2,000 square meters of production, warehouse, and office space and
space
for use as a distribution center
Employees
As
of
March 24, 2008 we had approximately 815 full time employees and 250 part time
employees.
Deli
Solar (Bazhou) requires each employee to enter into a one-year standard
employment agreement. Tianjin employees have three year agreements. 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 Liability 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 bear the risk of loss in shipping and
purchase shipping insurance at their expense.
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 (Bazhou) has never experienced significant failures of its products,
we
cannot assure you that Deli Solar (Bazhou) 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
the
second quarter of 2008.
ITEM
2.
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 owned by Deli
Du, our Chief Executive Officer, President and Director, were transferred to
us
in October 2005 for a price of RMB20,000 (approximately $2,588). The application
for the change of the land use right certificate for this piece of land was
submitted to Bazhou City National Land Resources Bureau on January 16, 2006.
Once the application is approved, the registered holder for this land will
be
Deli Solar (Bazhou). As of October 11, 2007, the application has not yet
been approved and the registered holder is still Mr. Du.
Deli
Solar (Bazhou)’s factory facilities are located outside of the city of Bazhou in
the Hebei Province of the PRC. Deli Solar (Bazhou) utilizes one factory in
Bazhou with a total of over 10,000 square meters of production, warehouse,
and
office space and space for use as a distribution center and an approximately
2,000 square meters of office space and exhibition center in
Beijing
On
March
17, 2006, Deli Solar (Bazhou) entered into an agreement with the local
government to acquire land use rights of a land of 61,530 square meters at
the
price of approximately $919,858. This piece of land is close to the present
Bazhou factory and is used to enlarge the present manufacturing base at Bazhou
City. The land use right has been approved by the local government after payment
of approximately $919,858. An official certificate evidencing the land lease
has
not yet been delivered from the government to the Company.
|
Registered
Holder
|
|
Location
& Deed Number
|
|
Usage
and Nature
|
|
Square
meters
|
|
Construction/building
on the land
|
|
Term
of use right
|
|
Transfer
price
|
|
Deli
Solar (Bazhou)
|
|
Bazhou,
Ningnan Village; #98060026
|
|
Industrial
Transferred Land
|
|
10,244.05
Sq. M
|
|
Plant,
warehouses, accessories room, convention center
|
|
50
years (from March 25, 1998 to March 25, 2048
|
|
RMB
615,000
(approximately
$79,581) was paid to the Langfang Municipal Land Administration Bureau,
plus annual land use fee of RMB 5122 (approximately $
662.79)
|
|
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|
Mr.
Deli Du
|
|
Eighty
kilometers from
Bazhou
Jingbao Road North; #20010700405
|
|
Office
space for Deli Solar (Bazhou) Granted Land
|
|
816
Sq. M
|
|
Office
building, accessories room
|
|
50
years (from June 11, 2001 to June 3, 2051
|
|
RMB
20,000 (approximately $ 2,588) was paid to the Langfang Municipal
Land
Administration Bureau
|
|
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|
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|
Deli
Solar (Bazhou)
|
|
Close
to Bazhou Jingbao Road
|
|
Factory
Facilities
|
|
61,530
Sq. M
|
|
Factory
facilities
|
|
Pending
the Land Use Right Certificate
|
|
approximately
$919,858 was paid to Bazhou local government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Huaneng
Group
Energy Equipment
Co.
Ltd.
|
|
No.
119 Yuyang South Road
Ji
County, Tianjin
|
|
Factory
|
|
51,000
Sq. M
|
|
|
|
50
years from September 2004 to September 2054
|
|
Approximately
528,000 was paid to Ji county
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
72,590.05
Sq. M
|
|
|
|
|
|
|
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 RMB 120,000 (approximately $15,528) which
commenced on 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 Dajiangxia 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 (approximately $47,878) for the first
year
and RMB400,000 (approximately $ 51,760) for the second year, and the following
years pending a possible increase. We paid annual rent of RMB 400,000 in
2007.
ITEM
3. LEGAL PROCEEDINGS
Neither
we nor any of our subsidiaries is a party to any pending legal
proceedings.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
was
no matter submitted to a vote of our securities holders during the fourth
quarter of 2007 through the solicitation of proxies or
otherwise.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
Market
Information
Our
common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under
the symbol "CSOL.OB". There has never been any established public market for
shares of our common stock.
The
following table sets forth the high and low bid prices, in the over-the-counter
market, as reported and summarized by the OTCBB, for each fiscal quarter during
each of the fiscal years ended December 31, 2006 and December 31, 2007. These
prices are based on inter-dealer prices, without retail markup, markdown or
omissions and may not represent actual transactions.
|
Quarter
Ended
|
|
High
|
|
Low
|
|
|
03/31/2006
|
|
|
11
|
|
|
7.5
|
|
|
06/30/2006
|
|
|
11
|
|
|
11
|
|
|
09/30/2006
|
|
|
6.50
|
|
|
1.3
|
|
|
12/31/2006
|
|
|
2.50
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
03/31/2007
|
|
|
3.73
|
|
|
3.50
|
|
|
06/30/2007
|
|
|
2.60
|
|
|
1.81
|
|
|
09/30/2007
|
|
|
3.45
|
|
|
1.75
|
|
|
12/31/2007
|
|
|
4.50
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
03/31/2008
|
|
|
3.70
|
|
|
1.50
|
|
|
06/30/2008
|
|
|
2.36
|
|
|
1.36
|
|
As
of
October 24, 2008, the last reported sale price of our common stock was $1.10
per
share.
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.
Holders
As
of
October 24, 2008, there were 15,799,450 shares of our common stock issued
and
outstanding, and there were approximately 2,530 holders of record of our
outstanding shares of common stock. This does not reflect the number of persons
or entities who held stock in nominee or "street" name through various brokerage
firms.
Dividends
We
have
never declared or paid any cash dividends on our common stock. The payment
of
dividends, if any, is at the discretion of the Board of Directors and is
contingent on the Company's revenues and earnings, capital requirements,
financial conditions and the ability of our PRC based operating subsidiaries
Deli Solar (Bazhou) and Deli Solar (Beijing) to obtain approval to send monies
out of the PRC. We currently intend to retain all earnings, if any, for use
in
business operations. Accordingly, we do not anticipate declaring any dividends
in the near future.
The
PRC's
national currency, the Yuan, is not a freely convertible currency. 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.
Shortages in the availability of foreign currency may restrict our ability
to
remit sufficient foreign currency to pay dividends.
In
addition, under the terms of the certificate of designation which was filed
in
the office of Secretary of State for the State of Nevada on June 12, 2007 in
connection with the issuance of the Series A Preferred Stock, we are restricted
in paying dividends on our common stock.
Securities
Authorized for Issuance Under Equity Compensation
Plans.
We
currently do not have any equity compensation plans.
Recent
Sales of Unregistered Securities; Use of Proceeds from Unregistered
Securities.
February
2008 Private Placement
On
February 25, 2008 we raised gross proceeds of approximately $11,300,000 in
a
private placement providing for the sale to the investors of 4,691,499 shares
of
common stock at a price of $2.40 per share. The net proceeds to us from that
transaction were $9,995,156.51. The net proceeds are to be used for acquisitions
and for general working capital. The shares were not registered under the
Securities Act of 1933, as amended, in reliance on the exemption from
registration provided in Section 4(2) of the Act and Regulation D promulgated
thereunder.
June
2007 Private Placement
On
June
13, 2007 we raised net proceeds of $2,581,000 in a private placement providing
for the sale for an aggregate purchase price of $2,750,000 (or $1.55 per share)
of
|
(i)
|
1,774,194
shares of Series A Preferred Stock (with each share convertible into
one
(1) share of common stock, subject to adjustment)
|
|
|
|
|
(ii)
|
five
year class A warrants to purchase 1,774,194 shares of common stock
at an
exercise price $1.90 per share (subject to adjustment), and
|
|
|
|
|
(iii)
|
five
year class B warrants to purchase an additional 1,774,194 shares
of common
stock at an exercise price of $2.40 per share (subject to adjustment).
|
The
net
proceeds were to be used for acquisitions and for general working capital.
The
securities were not registered under the Securities Act of 1933, as amended,
in
reliance on the exemption from registration provided in Section 4(2) of the
Act
and Regulation D promulgated thereunder.
|
ITEM 6.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|
FORWARD-LOOKING
INFORMATION - Management's Discussion and Analysis or Plan of Operation
("MD&A") includes "forward-looking statements". All statements, other than
statements of historical facts, included in this report 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
prospects for future acquisitions; the competition in the solar hot water
product market, the competition in the solar water heaters and boilers industry
and the impact of such competition on pricing, revenues and margins; and the
cost of attracting and retaining highly skilled personnel.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
We
are engaged in the solar and renewable energy business in the People's Republic
of China (“PRC”).
Our
business is conducted through our wholly-owned PRC based operating subsidiaries,
Deli Solar (Bazhou) and Deli Solar (Beijing) and our recently acquired indirect
majority owned subsidiary Tianjin Huaneng and indirect subsidiary SZPSP.
Deli
Solar (Bazhou), founded in 1997, designs, manufactures and sells renewable
energy systems to produce hot water and for space heating in the PRC. Deli
Solar
(Bazhou)’s principal products are solar hot water heaters and multifunctional
space heating products, including coal-fired boilers for residential use. Deli
Solar (Bazhou) also sells component parts for its systems, and provides
after-sales maintenance and repair services.
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 boilers, furnaces and heating stoves are also used as primary
household space heaters during cold weather and as cooking stoves.
Deli
Solar (Beijing), established during the second quarter of 2006, is
principally engaged in the installation of large solar water heaters in
construction projects in major cities in the PRC, including Beijing.
Tianjin
Huaneng manufactures heating products such as heating pipes, heat exchangers,
specialty heating pipes and tubes, high temperature hot blast stoves, heating
filters, normal pressure water boilers, solar energy water heaters and
radiators.
SZPSP
is
principally engaged in the resale of energy-saving heating products such as
heat
pipes, heat exchangers, pressure water boilers, solar energy water heaters
and
radiators. Currently, SZPSP is also operating a distribution facility in
Shenzhen, PRC.
Approximately
47% of our sales revenues for the fiscal year ended December 31, 2007 were
derived from sales of our solar water heaters, 19% derived from sales of heat
exchange equipment with the balance of approximately 34%
derived
from sales of our coal-fired boilers, space heating and other products.
88%
of
our sales revenues for the fiscal year ended December 31, 2007 were derived
from
sales made to PRC based customers. Approximately 12% of our sales revenues
were
derived from the international market.
Recent
Developments
Additional
Capital
February
2008 Private Placement
On
February 25, 2008 we raised gross proceeds of approximately $
11,300,000
in a
private placement
providing
from the sale to investors of 4,691,499 shares of common stock at a price of
$2.40 per share.
June
2007 Private Placement
On
June
13, 2007 we raised gross proceeds of approximately $2,750,000 in a private
placement
providing
for the sale to investors for a purchase price of $1.55 per share of
|
(i)
|
1,774,194
shares of Series A Preferred Stock (with each share convertible into
one
(1) share of common stock, subject to
adjustment)
|
|
(ii)
|
five
year class A warrants to purchase 1,774,194 shares of common stock
at an
exercise price $1.90 per share (subject to adjustment), and
|
|
(iii)
|
five
year class B warrants to purchase an additional 1,774,194 shares
of common
stock at an exercise price of $2.40 per share (subject to adjustment).
|
Acquisitions
As
part
of our business strategy, we review acquisition and strategic investment
prospects that we believe would complement our current product offerings,
increase our market coverage or enhance our technical capabilities, or otherwise
offer growth opportunities. From time to time we consider investing in new
businesses and we expect to make investments in, and to acquire businesses,
products, or technologies in the future. We are currently considering a number
of possible investments of this kind but we have not made any definitive
investment or acquisition decisions.
Acquisition
of Shenzhen PengSangPu Solar Industrial Products
Corporation
On
March
31, 2008 Deli Solar (Beijing) completed the acquisition of 100% of the
outstanding equity interests of Shenzhen PengSangPu Solar Industrial Products
Corporation (“SZPSP”) from its three shareholders. SZPSP was incorporated as a
limited liability company under the laws of the PRC on September 23, 1993.
SZPSP
is
principally engaged in the resale of energy-saving heating products such as
heat
pipes, heat exchangers, pressure water boilers, solar energy water heaters
and
radiators. Currently, SZPSP is also operating a distribution facility in
Shenzhen, PRC.
Cash
Purchase Price
:
$4,087,832 (RMB 28,800,000) of the purchase price was paid in cash. This cash
portion was based on an appraisal of SZPSP. The three shareholders agreed to
loan the cash portion back to the Deli Solar (Beijing) which will be used as
working capital. Fifty (50%) of the principal amount of this loan is required
to
be repaid within one year of entry of the complementary agreement and the
remaining balance is required to be paid off within two
years.
Stock
Purchase Price
.
In
addition to the cash purchase price, the parties agreed to an appraised value
of
RMB 20 million for SZPSP’s intangible assets. The purchase price for these
intangible assets was paid in 1,419,729 shares of our common stock. If on March
31, 2009 (the first anniversary of the closing) our common stock price is lower
than $2, we will make up the difference. Fifty percent (50%) of these shares
shall be transferable and unrestricted within one (1) year after the closing
and
the remaining fifty percent (50%) transferable within two (2) years.
Warrants.
In
addition, as part of the purchase price the sellers were issued five year
warrants to purchase 141,973 shares of common stock at an exercise price of
$2.50 per share (subject to adjustment).
Acquisition
of Tianjin Huaneng
On
July
1, 2007 Deli Solar (Beijing) purchased 51% of the equity in Tianjin Huaneng
Group Energy Equipment Co., Ltd. (“Tianjin Huaneng”) for a purchase price of
approximately $1,689,741. In addition to the purchase price we paid a finder’s
fee of approximately $769,418. Deli Solar (Beijing) assumed 51% of the
liabilities of Tianjin Huaneng and contributed RMB 20,000,000
(approximately $2,613,400) as working capital to the acquired company. Deli
Solar (Beijing) also agreed to employ the 550 current Tianjin Huaneng employees
pursuant to new three year employment contracts.
Tianjin
Huaneng, incorporated in 1987, was a state-owned enterprise with 51% of its
equity formerly- owned by SAAC and 49% owned by the employees. Tianjin Huaneng
manufactures heating products such as heating pipes, heat exchangers, specialty
heating pipes and tubes, high temperature hot blast stoves, heating filters,
normal pressure water boilers, solar energy water heaters and
radiators.
Tianjin
is a city in the PRC which is approximately 50 miles from Beijing with a
population of 10.24 million (as of 12/31/04), and is one of only four municipal
cities directly governed by the central government in China.
Shenzhen
Xiongri
In
December 2006 we signed a memorandum of understanding with Shenzhen Xiongri
Solar Power Co., Ltd. (“Shenzhen Xiongri”) to acquire 60% of its equity for a
purchase price of approximately $250,000 and additional contingent consideration
of up to $5 million consisting of shares of our common stock. Shenzhen Xiongri
is located in Shenzhen, PRC. Its local government provides strong support for
the solar water heater industry which could help us grow business in that area.
We paid an initial deposit of $258,592 to Shenzhen Xiongri. Management has
decided not to complete this acquisition due to the fact that Shenzhen Xiongri’s
sales revenues were significantly less than our management had expected. We
have
asked that our deposit be returned, and Shenzens Xiongr’s management has agreed
to return it to us by the end of 2008. There can be assurance that it will
in
fact be returned.
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 2 to the consolidated
financial statements 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.
Revenue
Recognition
Product
sales are recognized when the products are delivered to and inspected by
customers and title has passed. Deli Solar (Bazhou) provides a three-year
standard warranty on 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, replacement parts must be paid for by the customer but not the
labor. 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, we have recorded no liability for warranty
reserve. We also allow our sales agents and distributors to return any defective
product for exchange.
Allowance
for Doubtful Accounts
Our
business operations are conducted in the PRC. 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
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. We consider assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. We also
re-evaluate the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. As of December
31,
2007, we expect these assets to be fully recoverable.
Because
our fiscal year is the calendar year, throughout this section we refer to the
fiscal years ended December 31, 2007, 2006 and 2005 as “2007,” “2006,” and
“2005,” respectively.
Key
Items in 2007
Significant
financial items during 2007 include:
|
|
•
|
|
Completed
acquisition of Tianjin Huaneng.
|
|
|
•
|
|
Overall
net sales increased 73% to $37,072,346 in 2007.
|
|
|
•
|
|
Excluding
sales attributable to Tianjin Huaneng net sales increased 28 % to
$27,480,290 in 2007.
|
|
|
•
|
|
Net
income for 2007 increased by 104% to $2,525,141 compared to 2006.
|
|
|
•
|
|
Excluding
Tianjin Huaneng, operating income for 2007 increased 89% compared
to
2006.
|
|
|
•
|
|
Operating
income for 2007 increased by 163% compared to
2006.
|
RESULTS
OF OPERATIONS
Fiscal
year ended December 31, 2007 compared to fiscal year ended December 31, 2006
Sales
Sales
increased to $37,072,346 for 2007 as compared to $21,468,313 for 2006, an
increase of approximately $15,604,033 or 73%. Excluding Tianjin Huaneng our
sales revenues increased to $27,480,290 an increase of about 28% of our sales
revenues. Approximately $17 million were derived from sales of solar hot water
heaters, a 35% increase from 2006; approximately $9 million was derived from
sales of coal-fired boilers and space heating products, about a 9% increase
as
compared to 2006. The increase in sales is attributed to the acquisition of
Tianjin Huaneng and from sales of its energy-saving boilers and environmental
protection equipment and due to our continued investment in brand marketing,
sales promotion and our development of a more extensive sales distribution
network. We continued to develop new sales agents to expand our sales network
in
rural areas in 2008. We recruited 10 additional sales agents and expanded our
sales coverage. The increase in the average household income, particularly
in
the rural areas and small and medium size cities, continues to drive up the
demand of our products.
Gross
Profit
Gross
profit for 2007 was $8,300,268 or 22.39% of revenues as compared to gross profit
of $4,625,319 or 21.5% of revenues for 2006. Excluding Tianjin Huaneng our
gross
profit for 2007 was $5,681,565 or 21% of revenues. The increase in gross profit
resulted primarily from the increase in sales revenue. In 2007, we sold
approximately 147,500 solar water heater products and 108,800 units of boiler
heater products compared to 133,000 solar water heaters and 99,000 boiler heater
products in 2006. The profit margin in 2007 increased slightly due to the
acquisition of Tianjin Huaneng whose products have higher profit margins than
our other products. The profit margins on our solar heaters have been falling
because of market pressure to keep our prices competitive. We are facing severe
price competition in the traditional solar water heater market. We expect price
competition to continue through the end of 2008. As a result, we expect our
gross profit margin for our solar water heaters to continue to decrease.
However, we anticipate that Tianjin Huaneng’s energy saving boilers and
environmental protection equipment will generate better gross profit margins
to
offset the decline in our profit margins for solar water heaters and residential
boilers.
Cost
of Sales
In
line
with the 73% increase in our overall sales, our costs of goods sold were
$28,772,078 for 2007, an increase of $11,929,084 or 71% from $16,842,994 for
2006. Excluding Tianjin Huaneng our cost of sales increased to $21,798,724
or
79% of sales. Management is continuing to focus on cost controls for raw
materials. The supply of raw materials is currently a buyer’s market and
management believes this trend will continue, which will provide us with the
opportunity to be more selective in our purchase of raw materials. We try to
minimize our product costs and keep our product prices competitive.
Operating
Expenses
Operating
expenses increased to $5,114,634 for 2007 as compared to $3,414,707 for 2006
an
increase of $1,699,927 or about 50%. Excluding Tianjin Huaneng our operating
expenses increased to $3,392,905 or 12.35% of sales.
Among
the
increase of operating expenses, selling and distribution expenses increased
to
$827,839 from $459,746 for 2006, an increase of $368,093, or 80%. These selling
expenses consisted primarily of sales promotions, 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 our acquisition of Tianjin Huaneng and due to the increase
in
sales volume and increase in sales promotion activities.
Advertising
expenses for 2007 were $1,415,493 as compared to $1,106,488 for 2006, an
increase of $309,005 or approximately 28%. The increase in advertising expense
was a result of our continued emphasis on advertising to increase our product
awareness, branding and sales. We believe that through marketing, we will able
to face down competition and generate greater market share for our products.
General
and administrative expenses were $4,003,973 for 2007, or approximately 11%
of
sales, compared to $ 2,800,015 or approximately 13% of sales, for 2006. The
increase was mainly due to the acquisition of Tianjin Huaneng which incurred
general and administrative expenses of approximately $1,486,751; Deli Solar
(Bazhou) and Deli Solar (Beijing)’s expenses incurred approximately $1,852,430
and the Company at the U.S. level incurred a total of $664,792 which included
legal fees of approximately $340,197.
Salaries
and benefits increased from $279,069 for 2006 to $454,012 for 2007, an increase
of $174,943 or 63% from the same corresponding period last year. The increase
reflects the addition of 550 employees as a result if the Tianjin Huaneng
acquisition. Per employee, salaries and benefits decreased from $1,188 for
2006
to $890 for 2007, a decrease of $ 298 or 25% from the same corresponding period
last year.
Income
from Operations
Operating
income was $3,185,634 for 2007 as compared to operating income of $1,210,612
for
2006, an increase of $1,975,022 or 163%. The increased operating income was
due
to our acquisition of Tianjin Huaneng and the increased sales revenue and our
budget control on operating expenses in 2007. As a percentage of sales,
operating income was 8.59% in 2007 as compared to 5.64% for 2006. Excluding
Tianjin Huaneng our operating income was $2,288,660 or 8% of sales. The increase
in operating income as a percentage of sales was substantially due to the
increase in sales and controlling selling expenses in 2007.
Income
Taxes
We
did
not carry on any business or maintain any branch office in the United States
during 2007 or 2006. Therefore, no provision for U.S. federal income taxes
or
tax benefits on the undistributed earnings and/or losses has been
made.
Normally
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. However, pursuant to the
applicable laws and regulations in the PRC, Deli Solar (Bazhou), and Deli Solar
(Beijing) as wholly foreign owned enterprises (“WFOEs”) in the PRC, are 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. Since Deli Solar (Bazhou) was converted into a WFOE
in March 2005, it enjoyed a two-year tax-exempt treatment in the PRC which
ended
on March 31, 2007. Since then it has been subject to 50% of its enterprise
income tax from 2007 until 2010. Our direct subsidiary, Deli Solar (Beijing),
had a net loss for 2007. Consequently, it did not incur income tax. Tianjin
Huaneng is domestically owned and subject to the Corporate Income Tax governed
by the Income Tax Law of the People’s Republic of China, at a statutory rate of
33%, which is comprised of a 30% national income tax and 3% local income
tax.
Minority
Interests
Minority
interests of $199,744 arise as of December 31, 2007 primarily due to share
of
profits by minority interests from consolidation with Tianjin
Huaneng.
Net
Income
Net
income was $2,525,141 in 2007, an increase of $1,285,640 or about 104% from
$1,239,501 for 2006. Excluding Tianjin Huaneng our net income was $2,134,129
in
2007, an increase of 72% from 2006. The increase was primarily due to an
increase in our revenue and our acquisition of Tianjin Huaneng and resultant
sales of its products.
Liquidity
and Capital Resources
Net
cash
provided by our operating activities was $4,673,831 for 2007, an increase of
$3,420,933 or approximately 273% from $1,252,898 for 2006.
Net
cash
used in investing activities was $5,419,926 for 2007, an increase of $1,415,518
or approximately 35% compared with 2006. The increase is mainly due to the
increase in purchase of property, plant and equipment associated with the
acquisition of Tianjin Huaneng in July 2007.
Net
cash
(used in) provided by financing activities was $2,400,306 for 2007, an increase
of $2,425,251 from $(24,945) from 2006. The increase was due to the issuance
of
preferred stock in June 2007. On June 14, 2007 we raised net sale proceeds
of
$2,581,000 in a private placement of our Series A Preferred Stock and warrants.
Investors purchased an aggregate of 1,774,194 shares of our Series A Preferred
Stock. Each share of Series A Preferred Stock is convertible into one share
of
our common stock, subject to adjustment. Additional shares of Series A Preferred
Stock (not to exceed 900,000) are required to be issued to the investors in
the
event that we fail to achieve certain income targets for the fiscal years ended
December 31, 2007 and 2008. We achieved the income target for the year ended
December 31, 2007.
We
believe that current cash will be sufficient to meet anticipated working capital
and capital expenditures for at least the next twelve months. However, we need
to require additional cash resources for future developments of business,
including any investments or acquisitions we may decide to pursue. However,
we
cannot assure you that such funding will be available.
Cash
Cash
and
cash equivalents increased to $5,466,637 at December 31, 2007 from $3,212,065
at
December 31, 2006. We raised $2,581,000 in net proceeds from the sale of stock
to investors in June 2007. We also raised $9,995,156 in net proceeds from the
sale of stock to investors in February 2008. While we anticipate that our cash
flow will be sufficient to support our operations for the next 12 months, we
will need to raise additional equity capital to make further acquisitions.
There
can be no assurance that financing will be available to us, or that if
available, that it will be available on satisfactory terms.
Accounts
Receivable
During
2007, accounts receivable increased to $7,453,009 from $870,446 at the end
of
2006, primarily due to consolidation with Tianjin Huaneng. Tianjin Huaneng
has a
large balance of accounts receivable.
The
majority of Tianjin Huaneng’s sales are on credit terms in accordance with terms
specified in the contracts governing the relevant transactions. We evaluate
the
need for an allowance for doubtful accounts based on specifically identified
amounts that we believe to be uncollectible. If actual collections experience
changes, revisions to the allowance may be required. Based upon the
aforementioned criteria, the allowances for doubtful accounts for 2007 were
$650,432.
Inventory
Inventories
as of December 31, 2007 increased to $3,875,658 from $315,765 as of December
31,
2006 primarily due to consolidation with Tianjin Huaneng. The inventory mainly
consists of finished goods waiting for transportation or installation.
Other
receivables and prepayments
Other
receivables and prepayments as of December 31, 2007 increased to $1,637,948
from
$1,387,911 as of December 31, 2006. Other receivables and prepayments mainly
consist of advances to suppliers, prepaid expenses and customers’
deposits.
Property,
plant and equipment
Property,
plant and equipment as of December 31, 2007 increased to $8,819,216 from
$5,926,468 as of December 31, 2006 primarily due to consolidation with Tianjin
Huaneng. The increase is mainly contributed from increase in buildings, plant
and machinery and office equipment from $3,528,180, $71,131 and $65,749 as
of
December 31, 2006 to $5,573,982, $1,836,914 and $1,004,118 as of December 31,
2007 respectively.
Goodwill
Goodwill
of $1,789,324 arises as of December 31, 2007 primarily due to consolidation
with
Tianjin Huaneng.
Intangible
assets
Intangible
assets refer to land use rights of the Company. The amount increased from
$1,003,530 as of December 31, 2006 to $1,597,921 as of December 31, 2007
primarily due to consolidation with Tianjin Huaneng. All of the Company’s land
purchases in the PRC are considered to be leasehold land and are stated at
cost
less accumulated amortization and any recognized impairment loss. Amortization
is provided over the term of the land use right agreement which is 50 years,
on
a straight-line basis.
Accounts
payable
Account
payable as of December 31, 2007 increased to $2,111,028 from $147,901 as of
December 31, 2006 primarily due to consolidation with Tianjin
Huaneng.
Income
tax payables
Income
tax payable of $1,108,433 arises as of December 31, 2007 primarily due to
consolidation with Tianjin Huaneng. Tianjin Huaneng are domestically owned
and
subject to the Corporate Income Tax governed by the Income Tax Law of the
People’s Republic of China, at a statutory rate of 33%, which is comprised of a
30% national income tax and 3% local income tax.
Other
payables and accrued liabilities
Other
payables and accrued liabilities as of December 31, 2007 increased to $8,552,452
from $342,811 as of December 31, 2006 primarily due to consolidation with
Tianjin Huaneng. The increase is mainly contributed from increase in accrued
expenses, customer deposits, other payable, taxes payable and deferred revenue.
Off-Balance
Sheet Arrangements
We
do not
have any off balance sheet arrangements that are reasonably likely to have
a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
|
Item 7.
|
FINANCIAL
STATEMENTS
|
The
following table presents selected financial data for the Company on a
consolidated basis for the fiscal years ended December 31, 2007 and
2006.
We
derived the selected financial data set forth below from the Company's
consolidated audited statements of operations for the fiscal years ended
December 31, 2007 and 2006 and the consolidated audited balance sheets as at
December 31, 2007 and 2006, each of which is included in this report. You should
read the following summary financial data in conjunction with the consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition or Plan of Operation" appearing elsewhere in this report.
|
|
|
For
the Fiscal Year ended
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Gross
revenues
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
|
Income
from operations
|
|
$
|
3,185,634
|
|
$
|
1,210,612
|
|
|
Net
income
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
|
Comprehensive
income
|
|
$
|
3,125,502
|
|
$
|
1,598,853
|
|
|
Total
assets
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
|
Total
liabilities (1)
|
|
$
|
11,771,913
|
|
$
|
490,712
|
|
|
|
(1)
|
Total
liabilities consisted of deposits from customers $2,281,909, deferred
revenues $795,022, trade account payables $2,111,028, other payables
$3,508,066, tax payables $1,359,140, income tax payables $1,108,433,
and
accrued expenses $608,315. The increase reflects the revenue potential
and
working capital needs for the business
expansion.
|
The
Company's consolidated audited financial statements for the fiscal years ended
December 31, 2007 and 2006, together with the report of the independent
certified public accounting firm thereon and the notes thereto, are presented
beginning at page F-1.
|
ITEM 8.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
|
The
disclosure required by Item 304 (a) of Regulation S-B was previously disclosed
in our Current Report on Form 8-K filed on January 30, 2008.
|
ITEM 8AT.
|
CONTROLS
AND PROCEDURES
|
Attached
as exhibits to this Form 10-KSB/A are certifications of the Company’s Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), which are required
in
accordance with Rule 13a-14 of the
Securities
Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). This ‘‘Controls and
Procedures’’ section includes information concerning the controls and controls
evaluation referred to in the certifications.
Evaluation
of Disclosure Controls and Procedures
We
conducted an evaluation of the effectiveness of the design and operation of
our
‘‘disclosure controls and procedures’’ (‘‘Disclosure Controls’’) as of the end
of the period covered by this Form 10-KSB/A. The Disclosure Controls evaluation
was conducted under the supervision and with the participation of management,
including our CEO and CFO. Disclosure Controls are controls and procedures
designed to reasonably assure that information required to be disclosed in
our
reports filed under the Exchange Act, such as this Form 10-KSB, is recorded,
processed, summarized, and reported within the time periods specified in the
SEC’s rules and forms. Disclosure Controls are also designed to reasonably
assure that such information is accumulated and communicated to our management,
including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure. Our quarterly evaluation of Disclosure Controls includes
an
evaluation of some components of our internal control over financial reporting,
and internal control over financial reporting is also separately evaluated
on an
annual basis for purposes of providing the management report, which is set
forth
below.
The
evaluation of our Disclosure Controls included a review of the Disclosure
Controls’ objectives and design, the Company’s implementation of the Disclosure
Controls, and their effect on the information generated for use in this Form
10-KSB/A. Many of the components of our Disclosure Controls are also evaluated
on an ongoing basis by other personnel in our finance department. The overall
goals of these various evaluation activities are to monitor our Disclosure
Controls, and to modify them as necessary. Our intent is to maintain the
Disclosure Controls as dynamic systems that change as conditions warrant.
Based
on
the Disclosure Controls evaluation, our CEO and CFO have concluded that,
as of
the end of the period covered by this Form 10-KSB/A, our Disclosure Controls
were effective to provide reasonable assurance that information required
to be
disclosed in our Exchange Act reports is recorded, processed, summarized,
and
reported within the time periods specified by the SEC, and that material
information related to the Company and its consolidated subsidiaries is made
known to management, including the CEO and CFO, particularly during the period
when our periodic reports are being prepared.
Management
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding
the
reliability of our financial reporting and the preparation of financial
statement for external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that
in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles,
and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements.
Management
assessed our internal control over financial reporting as of
December 31, 2007, the end of our fiscal year based on the framework
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management’s assessment included
evaluation of the design and operating effectiveness of key financial reporting
controls, process documentation, accounting policies, and our overall control
environment. This
assessment
is supported by testing and monitoring performed by our internal finance
department.
Based
on
our assessment at that time, management concluded that our internal control
over
financial reporting was effective as of the end of the fiscal year to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles.
In
view
of the need for the restatement of our audited financial statements being
included in this 10-KSB/A due to error in calculating diluted earnings per
share
management considered the impact this error has on the effectiveness of the
Company’s internal control over financial reporting and disclosure controls and
procedures for the periods being restated. Management believes that the
Company's internal controls over financial reporting and disclosure were
effective, except for the error in the calculation of diluted earnings per
share. The error in the calculation of diluted earnings per share was limited
to (1) the calculation of the diluted earnings per share and (2) the
review of that calculation resulting from the misapplication by the Company
of the treasury stock and the “if converted” methods under SFAS No.
128.
Inherent
Limitations on Effectiveness of Controls
The
Company’s management, including the CEO and CFO, does not expect that our
Disclosure Controls or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no matter how
well
designed and operated, can provide only reasonable, not absolute, assurance
that
the control system’s objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include faulty judgments
and breakdowns due to simple error or mistake. Controls can also be circumvented
by individuals, by collusion, or by management override (whether such action
is
intentional or unintentional). The design of any system of controls is based
in
part on certain assumptions about the likelihood of future events, and there
can
be no assurance that any design will succeed in achieving its stated goals
under
all potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. Therefore, any current evaluation of controls
cannot and should not be projected to future periods.
Changes
in Internal Controls
There
were no changes in the Company’s internal control over financial reporting that
occurred during our fourth fiscal quarter of 2007 that has materially affected
or is reasonably likely to materially affect our internal control over financial
reporting.
|
ITEM 8B.
|
OTHER
INFORMATION
|
None.
PART
III
|
ITEM 9.
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
|
Our
executive officers and directors as of the date of this report are as
follows:
|
Name
|
|
Position
|
|
Age
|
|
|
|
|
|
|
|
Deli
Du
|
|
President,
CEO and a director
|
|
43
|
|
Yihai
Yang
|
|
Acting
Chief Financial Officer
,
director
|
|
43
|
|
Zhaolin
Ding
|
|
director
|
|
40
|
|
Zhenhang
Jia
|
|
director
|
|
61
|
|
Joe
Levinson
|
|
director
|
|
32
|
Our
board
of directors currently consists of five members. We also have an audit
committee and a compensation committee. Misses Zhenghang Jia and Zhaolin Ding
serve on both of those committees. The directors serve until our next annual
meeting or until their successors are duly elected and qualified. The officers
serve at the pleasure of the Board.
Effective
March 14, 2008, Mr. Yihai Yung was appointed to serve as Acting Chief Financial
Officer.
Effective
July 25, 2008, Mr. Yihai Yang was appointed as a director.
Under
the
terms securities purchase agreement entered into on June 13, 2007 with the
investors in that financing, we were required, prior to July 13, 2007, to
increase the size of our Board to five or seven and cause the appointment
of a
majority of the Board of Directors to be “independent directors,” as defined by
the rules of the Nasdaq Stock Market. Prior to November 1, 2007 our Board
consisted of four members two of whom were “independent.” Under the terms of the
securities purchase agreement we are required to pay those investors
liquidated damages equal to one percent (1%) per month of the purchase price
of
the then outstanding shares of Series A Preferred Stock, in cash or in Series
A
Preferred Stock at the option of the investors, based on the number of days
that such obligation is not met beyond certain grace periods.
Accordingly, we were delinquent by 110 days in meeting this obligation and
we are required to pay the investors a total of $99,000 as of that date.
Effective March 31, 2008 Mr. Jianmin Li resigned from our board of directors.
Effective
July 25, 2008 Mr. Joseph J. Levinson was appointed as a director. Mr. Levinson
is qualified as an “independent director” as defined by the rules of the Nasdaq
Stock Market and as a result of his appointment we continue to have a majority
of “independent directors,” as three of our directors, namely Mssrs.
Ding, Jia and Levinson, are “independent directors” under the Rules of
NASDAQ, Marketplace Rule 4200(a)(15).
In
addition, under the terms of the securities purchase agreement, we were
required, prior to August 12, 2007 to appoint (i) an audit committee comprised
solely of at least three independent directors and a (ii) compensation committee
comprised of at least three directors, a majority of whom are independent
directors. Our audit and compensation currently each currently consists of
two
members both of whom are independent, namely Mssrs. Zhaolin Ding and Zhenghang
Jia. Accordingly, we are currently delinquent in this obligation. However,
under
the terms of the securities purchase agreement no liquidated damages are
required to be paid for this breach during any period for which liquidated
damages are payable for failing to have an independent board. Accordingly,
damages began to accrue for breach of this provision on November 1, 2007. As
of
March 31, 2008 we were delinquent by 152 days in meeting this obligation and
we
are required to pay investors a total of approximately $137,500.00.
Deli
Du,
age 43, was appointed as President, CEO and as a director on March 31, 2005.
Mr.
Du founded Deli Solar (Bazhou) 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.
Yihai
Yang, age 43, was appointed as our Acting Chief Financial Officer effective
March 14, 2008 and as our director effective July 25, 2008. From September
2006
until the present Mr. Yang, served as Financial Controller of China Diagnostics
Medical Corporation, a company engaged in the business of pharmaceutical
research and development. From April 2005 to August 2006, Mr. Yang served
as the
Chief Financial Officer of Beijing Tanglewood Tour Development, Ltd., a company
engaged in the business of real estate investment and development. From March
2000 to July 2003 Mr. Yang worked for CE Accountancy Ltd. as a project manager.
In 1990 Mr. Yang graduated from Shenyang Industrial University with a BA
in
Financial Accounting and in March 2005, he obtained his Masters Degree in
Finance and Accounting from London South Bank University.
Zhaolin
Ding, age 40, was appointed as a director on August 3, 2007. Mr. Ding is
currently the director of Everbright International Executive Management
Education Center, an adjunct professor of the Executive Program, School of
Continuing Education, Tsinghua University and a visiting professor of executive
program of Peking University and Renmin University of China. He is an officially
appointed news commentator of China National Radio. He also worked as research
associate in the Center for International Communication Studies of Tsinghua
University. He holds an MBA degree from Harvard University, a Master’s degree in
International Journalism from China School of Journalism, a bachelor degree
of
Law in International Affairs from the University of International Relations.
Zhenhang
Jia, age 60, was appointed as our director on August 3, 2007. He has been a
director on Beijing Mechanic Engineering and Reusable Energies and Vice
Secretary-in-Chief of China Rural Energy Association Energy Saving Space Heating
Professional Society from April 1994. He also has been vice chairman, vice
secretary-in-chief of Beijing Municipal New Energy and director in Beijing
Mechanics and Engineering Committee, Energy Resourses and Engineering Branch
from 1995. Mr. Jia has been lecturing in his field of profession in colleges
and
universities for over ten years and has published two professional books such
as
Enterprise Energy Saving Technology and 70 papers.
Mr.
Joseph J. Levinson, age 32, has served as Chief Executive Officer of Levinson
Services Partnership, a U.S. consulting company, since March 2006. Mr. Levinson
also serves as a director and Chairman of the audit committee of China Aoxing
Pharmaceutical (CAXG), a publicly trade Florida corporation engaged in the
research, development, manufacture, and marketing of various narcotics and
pain
management pharmaceutical products in generic and formulations in China.
Mr.
Levinson also serves as a director of China 3C (CHCG), a retailer and
distributor of consumer and business products in China. From September 2006
through February 2007, he worked as the Chief Financial Officer of PacificNet,
a
NASDAQ listed company and a is a provider of gaming and mobile game technology
worldwide with a focus on emerging markets in Asia, Latin America and Europe
.
From January 2006 to May 2007, Mr. Levinson worked for Global Pharmatech
(GBLP)
as Chief Financial Officer and a director. From October 2001 to December
2005,
Mr. Levinson was a partner at Halo Equity Consulting Partnership, a Hong
Kong
private company. From December 2004 to January 2006, he worked at BOL Media,
a
PRC media company, as the Chief Financial Officer. Mr. Levinson is a certified
public accountant. In December 1994, he graduated from State of University
of
New York at Buffalo with a B.S. Degree in Accounting and Finance.
The
following are the officers and directors of Deli Solar (Bazhou) as of the date
of this report:
|
Name
|
|
Positions
|
|
Age
|
|
|
|
|
|
|
|
Deli
Du
|
|
Chairman
and Director
|
|
43
|
|
Yunjin
Luo
|
|
Director
|
|
72
|
|
Hao
Dong
|
|
CEO
|
|
33
|
|
Xueling
Wu
|
|
Controller
|
|
27
|
Yunjun
Luo was appointed a director in June 2005. He holds a Bachelor's degree in
Pyrology from the Southeast University (Bazhou) 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.
Hao
Dong
was appointed as CEO of Deli Solar (Bazhou) in January 2005. He has been working
for Deli Solar (Bazhou) 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 (Bazhou). Mr. Dong is an assistant engineer
on mechanics, a certification recognized by Bazhou Municipal Government
Technology Department.
Xueling
Wu was appointed as controller of Deli Solar (Bazhou) in January 2005. Prior
to
that, Ms. Wu had worked for Deli Solar (Bazhou) since 2001 as a staff
accountant, inventory controller and sales person. She graduated from Hebei
Provincial Fisheries College and is a PRC Certified Accountant.
There
are
no family relationships among our directors or executive officers. We currently
do not have directors and officers insurance.
AUDIT
COMMITTEE FINANCIAL EXPERT
Our
audit
committee currently consists of two members both of whom are independent, namely
Zhenhang Jia and Zhaolin Ding. The audit committee does not currently have
an
audit committee "financial expert" as defined under Item 407(d)(5)(i) of
Regulation S-B. The Board of Directors is in the process of searching for a
suitable candidate for this position.
Under
the
terms of the securities purchase agreement, we were required, prior to August
12, 2007 to appoint an audit committee comprised solely of at least three
independent directors and damages began to accrue for breach of this provision
on November 1, 2007. As of March 31, 2008 we were delinquent by 152 days in
meeting this obligation and we are required to pay investors a total of
approximately $137,500.00.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of common stock and our other
equity securities. These insiders are required by SEC regulations to furnish
us
with copies of all Section 16(a) forms they file, including Forms 3, 4 and
5.
SEC
rules
require disclosure in the Company’s Annual Report on Form 10-KSB/A of the
failure of an executive officer, director or 10% beneficial owner to file such
forms on a timely basis. Based upon a review of the filings made on their behalf
during 2007, as well as an examination of the SEC's EDGAR system Form 3, 4,
and 5 filings and the Company's records, the following table sets forth
exceptions to timely filings:
|
Name
|
|
Reporting
Event
|
|
Ardsley
Partners and its affiliates (1)
|
|
Form
3 filed on June 12, 2008 reporting purchase of 1,666,500 shares
on
February 25, 2008.
|
|
Deli
Du (2)
|
|
Form
4 to be filed reporting transfer of 315,604 shares on February 26,
2008.
|
|
|
(1)
|
These
shares were purchased by affiliates of Ardsley as set forth
below:
|
|
Name
|
|
Number of
Shares
|
|
|
Ardsley
Partners Fund II, L.P.
|
|
|
702,500
|
|
|
Ardsley
Offshore Fund, Ltd.
|
|
|
491,500
|
|
|
Ardsley
Partners Institutional Fund, L.P.
|
|
|
455,000
|
|
|
Marion
Lynton
|
|
|
17,500
|
|
|
|
(2)
|
As
a closing condition to the unit purchase agreement under which the
certain
accredited investors subscribed for shares from the Company in the
private
placement transaction which closed on March 31, 2005, Mr. Du agreed
to
place 10% of the shares of common stock then held by him (approximately
315,604 shares) into escrow for the benefit of the investors in the
event
we fail to attain specified levels of net income. The Company failed
to
attain those numbers and consequently Mr. Du transferred 315,604
shares.
|
CODE
OF ETHICS
On
July
20, 2006, our Board adopted a Code of Ethics that applies to our executive
offers and employees. We filed a copy of the Code of Ethics as exhibit 14 to
our
Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2006.
|
ITEM 10.
|
EXECUTIVE
COMPENSATION
|
The
following table reflects the compensation paid to our principal executive
officer during each of our fiscal years ending December 31, 2007, 2006 and
2005.
None of our other executive officers was paid a salary and bonus of more than
$100,000 in 2007 and so none are included in this table.
|
Name
and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
|
Deli
Du (1)
|
|
|
2007
|
|
|
80,000
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
80,000
|
|
|
|
|
|
2006
|
|
|
80,000
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
60,000
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60,000
|
|
(1)
Commencing March 31, 2005, Mr. Du receives an annual salary of $80,000.
Outstanding
Equity Awards at 2007 Fiscal Year End
There
were no option exercises or options outstanding in 2007.
Employment
Agreements
We
have
no employment agreements with any of our executive officers. We plan to enter
into an employment agreement with Mr. Yang shortly but no such agreement has
yet
been executed. In the absence of written employment agreements, the PRC labor
laws provide the terms of employment such as the term of employment, the
provision of labor-related insurance, termination for cause, termination on
30
days’ notice and termination without notice and the labor-related benefits.
Compensation
Discussion and Analysis
Overview
of Compensation Program and Philosophy
The
Company’s compensation committee currently has two members both of whom are
independent, namely Zhenhang Jia and Zhaolin Ding. Under the terms of the June
2007 securities purchase agreement with Barron Partners and the other investors,
we were required, prior to August 12, 2007 to appoint an audit committee
comprised solely of at least three independent directors and damages began
to
accrue for breach of this provision on November 1, 2007. As of March 31, 2008
we
were delinquent by 152 days in meeting this obligation and we are required
to
pay investors a total of approximately $137,500.
The
Compensation Committee’s goal in determining compensation levels is to
adequately reward the efforts and achievements of executive officers for the
management of the Company. The Company currently has no pension plan, stock
option plan, non-equity incentive plan or deferred compensation arrangement.
The
Company has not used a compensation consultant in any capacity but believes
that
it executive compensation package is comparable to similar businesses in its
location of its operations.
None
of
the executive officers currently has an employment agreement with the Company.
Director
Compensation
Our
standard arrangement with our directors provides that we pay each director
annual compensation in the amount of $20,000 for serving as a director. There
are no other elements of compensation paid to our directors but it is expected
that in the future, we may create a remuneration and expense reimbursement
plan.
It is anticipated that such a plan would be primarily based on stock
options.
The
following table reflects the compensation of directors for our fiscal year
ended
December 31, 2007:
|
Name
of Director
|
|
Fees
Earned
or
Paid in
Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Change in
Pension value
and
Nonqualified
Deferred
Compensation
Earnings
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhaolin
Ding
|
|
|
8,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deli
Du
|
|
|
20,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin
Randolph(1)
|
|
|
3,300
|
|
|
4,285
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhenhang
Jia
|
|
|
8,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jianmin
Li
|
|
|
8,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,400
|
|
(1)
Effective November 1, 2007, Mr. Kevin Randolph was appointed as a director.
Under the terms of the securities purchase agreement, dated June 13, 2007,
by
and among Barron Partners, L.P. and two other investors, we were obligated
to
appoint independent directors to constitute the majority of the board. Mr.
Randolph has not had any relationship with us (either as a partner, stockholder
or employee) in the past three years and he is qualified as an independent
director as defined by rules of the Nasdaq Stock Market. With Kevin Randolph
appointed as a director we have a majority of independent directors. Mr.
Randolph receives an annual director’s fee of $5,000, and he will be compensated
with $5,000 for each full Board of Directors meeting held at Beijing, China
and
$2,500 for each board meeting by conference call. In addition, he is entitled
to
receive shares of our common stock at the amount of 0.36% of our total
outstanding common stock to be vested monthly over three years. As of
December 31, 2007, Mr. Randolph had earned 1,242 shares of common stock with
a
value of $4,285, based on a closing price on December 31, 2007 of $3.45.
On
July
25, 2008, Mr. Kevin Randolph resigned from his position as a director of the
Company.
|
ITEM 11.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth certain information with respect to the beneficial
ownership of the voting securities by (i) any person or group with more than
5%
of the Company's securities, (ii) each director, (iii) each executive officer
and (iv) all executive officers and directors as a group, as of October 24,
2008.
|
Named
and Address of Beneficial Owner
|
|
Amount and
Nature
of
Beneficial
Ownership
|
|
Percent (%) of
Class
(1)
|
|
|
5%
Owners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Gelbaum and Monica Chavez as trustees of
The
Quercus Trust,
2309
Santiago Drive
Newport
Beach, CA 92660 (2)
|
|
|
1,949,283
|
|
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Ardsley
Partners (3)
|
|
|
1,666,500
|
|
|
10.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Executive
Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deli
Du,
President,
CEO and director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
2,837,282
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Yihai
Yang,
Acting
Chief Financial Officer
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deli
Du,
President,
CEO and director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
2,837,282
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Zhaolin
Ding, director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
Jianmin
Li, director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
Zhenhang
Jia, director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
309
3rd Ave SE
Ephrata,
WA 98823-2245 (4)
|
|
|
0
|
|
|
0
|
|
Less
that
1%.
|
|
(1)
|
As
of October 24, 2008 we had 15,799,450 outstanding shares of common
stock.
In determining the percent of common stock owned by a stockholder
on
October 24, 2008, (a) the numerator is the number of shares of
common
stock beneficially owned by such stockholder, including shares
the
beneficial ownership of which may be acquired, within 60 days upon
the
conversion of convertible securities or the exercise of warrants
held by
such stockholder, and (b) the denominator is the sum of (i) 15,799,450,
the number of shares outstanding on October 24, 2008, and (ii)
the total
number of shares underlying the convertible securities and warrants,
which
such stockholders has the right to acquire within 60 days following
October 24, 2008.
|
|
|
(2)
|
Based
on information set forth in Amendment No 1. to a Schedule 13D filed
on
March 04, 2008.
|
|
|
|
|
|
|
(3)
|
These
shares are held by affiliates of Ardsley as set forth
below:
|
|
Name
|
|
Number of Shares
|
|
|
Ardsley
Partners Fund II, L.P.
|
|
|
702,500
|
|
|
Ardsley
Offshore Fund, Ltd.
|
|
|
491,500
|
|
|
Ardsley
Partners Institutional Fund, L.P.
|
|
|
455,000
|
|
|
Marion
Lynton
|
|
|
17,500
|
|
|
|
(4)
|
Mr.
Randolph
is
entitled to receive common stock at the amount of 0.36% of our
total
outstanding common stock vested monthly over 3 years. As of October
24, 2008 Mr. Randolph was entitled to receive 3,236
shares.
|
|
ITEM 12.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR
INDEPENDENCE
|
Since
January 1, 2007 we have not engaged in any transactions with any related persons
which would require disclosure under Item 404 of Regulation S-B.
Three
of
our five directors are independent directors under the definition of
“independent director” of the Rules of NASDAQ, Marketplace Rule 4200(a)(15).
|
3.1
|
Certificate
of Incorporation (including all amendments thereto) is incorporated
by
reference to Exhibit 3.1 to the registration statement on Form SB-2
filed
by the Company with the SEC on November 2, 2005.
|
|
|
|
|
3.2-1
|
Bylaws,
is incorporated herein by reference to the registration statement
on Form
S-1 filed with the by the Company with the SEC in August
1983.
|
|
|
|
|
3.2-2
|
Amendment
to Bylaws dated October 17, 2005, is incorporated herein by reference
to
the Registrant's Registration Statement on Form SB-2 filed by the
Company
with the SEC on March 26, 2001.
|
|
|
|
|
4.1
|
Common
Stock Specimen, is hereby incorporated by reference to the annual
report
on Form 10-KSB/A filed on April 17, 2006.
|
|
|
|
|
4.1-1
|
Certificate
of Designation Rights and Preferences for our Series A Preferred
Stock is
incorporated by reference to Exhibit 4.1 to our Current Report on
Form 8-K
filed by the Company with the SEC on June 19, 2007.
|
|
|
|
|
4.1-2
|
Form
of Series A Preferred Stock Certificate, is hereby incorporated by
reference to our Current Report on Form 8-K filed by the Company
with the
SEC on June 19, 2007.
|
|
4.2
|
Form
of Warrant is incorporated by reference to Exhibit 4.2 to the registration
statement on Form SB-2 filed by the Company with the SEC on November
2,
2005.
|
|
|
|
|
4.3
|
Form
of Class A Warrant issued on June 13, 2007 is incorporated by reference
to
Exhibit 4.2 to the to our Current Report on Form 8-K filed by the
Company
with the SEC on June 19, 2007.
|
|
|
|
|
4.4
|
Form
of Class B Warrant issued on June 13, 2007 is incorporated by reference
to
Exhibit 4.3 to the to our Current Report on Form 8-K filed by the
Company
with the SEC on June 19, 2007.
|
|
|
|
|
10.1
|
Securities
Purchase Agreement dated June 13, 2007 by and among the Company,
Barron
Partners LP and the other investors named therein, is incorporated
by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed
by the
Company with the SEC on June 19, 2007.
|
|
|
|
|
10.2
|
Registration
Rights Agreement dated June 13, 2007 by and among the Company, Barron
Partners LP and the other investors named therein, is incorporated
by
reference to Exhibit 10.2 to our Current Report on Form 8-K filed
by the
Company with the SEC on June 19, 2007.
|
|
|
|
|
10.3
|
Stock
Escrow Agreement dated June 13, 2007 by and between the Company and
Tri-State Title & Escrow, LLC, as escrow agent, is incorporated by
reference to Exhibit 10.3 to our Current Report on Form 8-K filed
by the
Company with the SEC on June 19, 2007.
|
|
|
|
|
10.4
|
Closing
Escrow Agreement dated June 13, 007 by and between the Company and
Barron
Partners, L.P., and the other investors named therein and Tri-State
Title
& Escrow, LLC, as escrow agent, is incorporated by reference to
Exhibit 10.3 to our Current Report on Form 8-K filed by the Company
with
the SEC on June 19, 2007.
|
|
|
|
|
10.5
|
Securities
Purchase Agreement dated as of February 25, 2008 by and among the
Company
and the investors named therein, is incorporated by reference to
Exhibit
10.1 to our Current Report on Form 8-K filed by the Company with
the SEC
on February 29, 2008.
|
|
|
|
|
10.6
|
Registration
Rights Agreement dated as of February 25, 2008 by and among the Company
and the investors named therein, is incorporated by reference to
Exhibit
10.2 to our Current Report on Form 8-K filed by the Company with
the SEC
on February 29, 2008.
|
|
|
|
|
10.7
|
Make
Good Escrow Agreement dated as of February 25, 2008 by and between
the
Company, the investors named therein, Roth Capital Partners, LLC
and
Tri-State Title & Escrow, LLC, as escrow agent, is incorporated by
reference to Exhibit 10.3 to our Current Report on Form 8-K filed
by the
Company with the SEC on February 29, 2008.
|
|
|
|
|
10.8
|
Escrow
Agreement dated as of February 25, 2008 by and between the Company,
Roth
Capital Partners, LLC and Tri-State Title & Escrow, LLC, as escrow
agent, is incorporated by reference to Exhibit 10.4 to our Current
Report
on Form 8-K filed by the Company with the SEC on February 29,
2008.
|
|
|
|
|
10.8
|
Waiver
and Consent dated as of February 25, 2008 , is incorporated by reference
to Exhibit 10.5 to our Current Report on Form 8-K filed by the Company
with the SEC on February 29, 2008.
|
|
|
|
|
14
|
Code
of Ethics is incorporated by reference to Exhibit 14 to our Annual
Report
on Form 10-KSB/A for the fiscal year ended December 31, 2006 filed
by the
Company with the SEC on April 11, 2007.
|
|
|
|
|
21.1
|
List
of subsidiaries.
|
|
|
|
|
31.1
|
Certification
of Deli Du pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002;
|
|
31.2
|
Certification
of Yihai Yang pursuant to Exchange Act Rules 13a-14(a) and 15d- 14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002;
|
|
|
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The
following tables set forth the fees billed to us for the periods covered by
this
report by our accountants:
Audit
and
Non-Audit Fees paid and payable to Corovano and Honeck LLP (“C&H”), our
current auditors, and Zhong Yi (Hong Kong) C.P.A. Company Limited (“ZY”),
auditors to Tianjin Huaneng, as follows:
|
|
Fiscal Year Ended
|
Fiscal Year Ended
|
|
|
December 31, 2006
|
December 31, 2007
|
|
C&H
|
|
|
|
Audit
Fees
|
None.
|
60,000
|
|
Audit-Related
Fees(1)
|
None
|
None
|
|
Tax
Fees
|
None
|
None
|
|
All
Other Fees
|
None
|
None
|
|
|
|
|
|
ZY
|
|
|
|
Audit
Fees
|
None.
|
53,664
|
|
Audit-Related
Fees(1)
|
None
|
None
|
|
Tax
Fees
|
None
|
None
|
|
All
Other Fees
|
None
|
None
|
Audit
and
Non-Audit Fees Paid to our former auditor, Child, Van Wagoner & Bradshaw,
PLLC and its predecessor firm, Child, Sullivan & Company:
|
|
Fiscal Year Ended
|
Fiscal Years Ended
|
|
|
December 31, 2006
|
December 31, 2007
|
|
Audit
Fees
|
$83,000
|
$33,500
|
|
Audit
Related Fees
|
None
|
None
|
|
Tax
Fees
|
None
|
None
|
|
All
Other Fees
|
None
|
None
|
|
(1)
|
All
audit related fees paid to Child, Van Wagoner & Bradshaw, PLLC and its
predecessor firm, Child, Sullivan & Company in 2006 and 2007 are
related to review of the financial statements due for periodic reports
and
review of the Company’s registration statements and amendment thereto
filed during 2006 and 2007 which incorporates their report relating
to the
Company’s financial statements for the fiscal y years ended Decemerb31
2006 and 2005.
|
Our
audit
committee did not pass on whether any non-audit services impacted our auditor's
independence. We currently do not have any policy or procedures in place for
approval of audit and permitted non-audit services by our audit committee.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
|
|
|
|
|
Date:
November
6
, 2008
|
/s/ Deli
Du
|
|
|
By:
Deli Du,
Chief
Executive Officer and President (principal
executive
officer)
|
|
|
|
|
|
/s/
Yihai Yang
|
|
|
By:
Yihai Yang
Acting
Chief Financial Officer (principal financial
officer
and accounting officer)
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf
of
the registrant and in the capacities and on the dates indicated.
|
/s/ Deli
Du
|
|
November
6
, 2008
|
|
By:
Deli Du, Director
|
|
|
|
|
|
|
|
/s/
Joseph Levinson
|
|
November
6
, 2008
|
|
By: Joseph
Levinson,
Director
|
|
|
|
|
|
|
|
/s/ Zhaolin
Ding
|
|
November
6
, 2008
|
|
By:
Zhaolin Ding, Director
|
|
|
|
|
|
|
|
/s/ Zhenhang
Jia
|
|
November
6
, 2008
|
|
By:
Zhenhang Jia , Director
|
|
|
|
|
|
|
|
/s/
Yihai Yang
|
|
November
6
, 2008
|
|
By: Yihai
Yang,
Director
|
|
|
|
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
Consolidated
Financial Statements
For
The Years Ended December 31, 2007 and 2006
(With
Report of Independent Registered Public Accounting Firm
Thereon)
|
Cordovano
and Honeck LLP
Independent
Registered Public Accounting Firm
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm for the years
ended
December 31, 2006 and 2005
|
F-2
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm for the year
ended
December 31, 2007
|
F-3
|
|
|
|
|
Consolidated
Balance Sheets
|
F-4
|
|
|
|
|
Consolidated
Statements of Income
|
F-5
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive
Income
|
F-7
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
- F-28
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
China
Solar & Clean Energy Solutions, Inc. (fka Deli Solar (USA),
Inc.)
Beijing,
People’s Republic of China
We
have
audited the consolidated balance sheet of China Solar & Clean Energy
Solutions, Inc. (fka Deli Solar (USA), Inc.) (the Company) as of December
31,
2006, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for the years ended December 31, 2006 and
2005. 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). 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
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of China Solar & Clean
Energy Solutions, Inc. (fka Deli Solar (USA), Inc.) as of December 31, 2006,
and
the results of its operations and its cash flows for the years ended December
31, 2006 and 2005, 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
31, 2007
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and stockholders of
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
We
have
audited the accompanying consolidated balance sheet of China Solar & Clean
Energy Solutions, Inc. (the “Company”) as of December 31, 2007 and the related
consolidated statements of income, cash flows and changes in stockholders’
equity and comprehensive income for the year ended December 31, 2007. 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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
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 include consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated 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 December
31, 2007 and the results of their operations and their cash flows for the
year
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
As
discussed in Note 17 to the consolidated financial statements, the Company
has
restated its 2007 consolidated financial statements.
/s/
Cordovano and Honeck LLP
Englewood,
Colorado USA
March
28,
2008, except Note 11 - net income per share and Note 17 - restatement which
are
dated October 17, 2008.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
BALANCE
SHEETS
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,466,637
|
|
$
|
3,212,065
|
|
|
Accounts
receivable, net
|
|
|
7,453,009
|
|
|
870,446
|
|
|
Inventories
|
|
|
3,875,658
|
|
|
315,765
|
|
|
Other
receivables and prepayments
|
|
|
1,637,948
|
|
|
1,387,911
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
18,433,252
|
|
|
5,786,187
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
8,819,216
|
|
|
5,926,468
|
|
|
Goodwill
|
|
|
1,789,324
|
|
|
-
|
|
|
Intangible
assets, net
|
|
|
1,597,921
|
|
|
1,003,530
|
|
|
TOTAL
ASSETS
|
|
|
30,639,713
|
|
|
12,716,185
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$
|
2,111,028
|
|
$
|
147,901
|
|
|
Income
tax payables
|
|
|
1,108,433
|
|
|
-
|
|
|
Other
payables and accrued liabilities
|
|
|
8,552,452
|
|
|
342,811
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
11,771,913
|
|
|
490,712
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
935,825
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Convertible
preferred stock: par value $0.001;
25,000,000
shares authorized, 1,774,194 and -0- shares issued and outstanding,
respectively
|
|
|
1,774
|
|
|
-
|
|
|
Common
stock, $0.001 par value; 66,666,667 shares authorized; 6,205,290
and
6,205,290 shares issued and outstanding, respectively
|
|
|
6,205
|
|
|
6,205
|
|
|
Additional
paid-in capital
|
|
|
9,260,607
|
|
|
5,705,574
|
|
|
Accumulated
other comprehensive income
|
|
|
1,134,270
|
|
|
533,909
|
|
|
Retained
earnings
|
|
|
7,529,119
|
|
|
5,979,785
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
17,931,975
|
|
|
12,225,473
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
30,639,713
|
|
|
12,716,185
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS
OF INCOME
(Currency
expressed in United States Dollars (“US$”))
|
|
|
Years
ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
As
adjusted and restated
(Note
17)
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
$
|
15,577,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
28,772,078
|
|
|
16,842,994
|
|
|
11,868,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,300,268
|
|
|
4,625,319
|
|
|
3,708,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
282,822
|
|
|
154,946
|
|
|
14,631
|
|
|
Selling
and distribution
|
|
|
827,839
|
|
|
459,746
|
|
|
256,634
|
|
|
General
and administrative
|
|
|
4,003,973
|
|
|
2,800,015
|
|
|
2,117,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
5,114,634
|
|
|
3,414,707
|
|
|
2,389,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,185,634
|
|
|
1,210,612
|
|
|
1,319,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
220,057
|
|
|
45,606
|
|
|
-
|
|
|
Interest
expense
|
|
|
(65,481
|
)
|
|
(16,717
|
)
|
|
(20,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
154,576
|
|
|
28,889
|
|
|
(20,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,340,210
|
|
|
1,239,501
|
|
|
1,298,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(615,325
|
)
|
|
-
|
|
|
-
|
|
|
Minority
interests
|
|
|
(199,744
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
1,549,334
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – basic
|
|
$
|
0.25
|
|
$
|
0.20
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – diluted
|
|
$
|
0.24
|
|
$
|
0.18
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
6,205,290
|
|
|
6,205,290
|
|
|
5,732,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
6,396,697
|
|
|
6,957,876
|
|
|
7,558,335
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Currency
expressed in United States Dollars)
|
|
|
Years
ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
324,157
|
|
|
178,437
|
|
|
100,171
|
|
|
Provision
for allowance on accounts receivable
|
|
|
650,432
|
|
|
(77,267
|
)
|
|
105,030
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(7,232,995
|
)
|
|
(238,334
|
)
|
|
(476,106
|
)
|
|
Inventories
|
|
|
(3,559,893
|
)
|
|
67,418
|
|
|
(8,279
|
)
|
|
Other
receivables and prepayments
|
|
|
(250,037
|
)
|
|
(238,268
|
)
|
|
(566,989
|
)
|
|
Accounts
payable, trade
|
|
|
1,963,127
|
|
|
58,526
|
|
|
(79,124
|
)
|
|
Income
tax payable
|
|
|
1,108,433
|
|
|
-
|
|
|
-
|
|
|
Other
payables and accrued liabilities
|
|
|
8,209,641
|
|
|
262,885
|
|
|
(300,621
|
)
|
|
Minority
interest
|
|
|
935,825
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
4,673,831
|
|
|
1,252,898
|
|
|
73,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of a subsidiary
|
|
|
(489,459
|
)
|
|
-
|
|
|
-
|
|
|
Deposits
made to acquire subsidiary
|
|
|
-
|
|
|
(256,278
|
)
|
|
-
|
|
|
Purchase
of intangible assets
|
|
|
(635,726
|
)
|
|
(932,732
|
)
|
|
(2,711
|
)
|
|
Purchase
of property, plant and equipment
|
|
|
(4,294,741
|
)
|
|
(2,815,398
|
)
|
|
(845,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(5,419,926
|
)
|
|
(4,004,408
|
)
|
|
(847,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of short-term borrowings
|
|
|
(180,694
|
)
|
|
(130,112
|
)
|
|
(403,101
|
)
|
|
Capital
contribution received from shareholders
|
|
|
-
|
|
|
-
|
|
|
4,882,389
|
|
|
Proceeds
from issuance of preferred stock (net of offering costs of
$169,000 paid
in cash)
|
|
|
2,581,000
|
|
|
-
|
|
|
-
|
|
|
Related
receivable
|
|
|
-
|
|
|
82,639
|
|
|
518,637
|
|
|
Related
payables
|
|
|
-
|
|
|
22,528
|
|
|
(10,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
2,400,306
|
|
|
(24,945
|
)
|
|
4,987,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
600,361
|
|
|
359,352
|
|
|
174,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
2,254,572
|
|
|
(2,417,103
|
)
|
|
4,387,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
3,212,065
|
|
|
5,629,168
|
|
|
1,241,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS,
END
OF YEAR
|
|
$
|
5,466,637
|
|
$
|
3,212,065
|
|
|
5,629,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
939,798
|
|
$
|
-
|
|
$
|
-
|
|
|
Cash
paid for interest expenses
|
|
$
|
95,446
|
|
$
|
16,717
|
|
$
|
20,884
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
shares granted for offering costs
|
|
$
|
138,338
|
|
$
|
-
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
|
Preferred
stock
|
|
Common
stock
|
|
Additional
paid-in
|
|
Accumulated
other
comprehensive
|
|
Retained
|
|
Total
stockholders’
|
|
|
|
|
No.
of shares
|
|
Par
value
|
|
No.
of shares
|
|
Par
value
|
|
Capital
|
|
income
|
|
earnings
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2005
|
|
|
-
|
|
|
-
|
|
|
4,431,000
|
|
|
4,430
|
|
|
824,960
|
|
|
-
|
|
|
3,441,310
|
|
|
4,270,700
|
|
|
Shares
issued for private placement, net of offering costs of $1,348,626
in
cash
|
|
|
-
|
|
|
-
|
|
|
1,714,290
|
|
|
1,715
|
|
|
4,649,674
|
|
|
-
|
|
|
-
|
|
|
4,651,389
|
|
|
Warrants
exercised
|
|
|
-
|
|
|
-
|
|
|
60,000
|
|
|
60
|
|
|
230,940
|
|
|
-
|
|
|
-
|
|
|
231,000
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,298,974
|
|
|
1,298,974
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
174,557
|
|
|
-
|
|
|
174,557
|
|
|
Comprehensive
income:
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,473,531
|
|
|
Balance
as of December 31, 2005
|
|
|
-
|
|
|
-
|
|
|
6,205,290
|
|
|
6,205
|
|
|
5,705,574
|
|
|
174,557
|
|
|
4,740,284
|
|
|
10,626,620
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,239,501
|
|
|
1,239,501
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
359,352
|
|
|
-
|
|
|
359,352
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,598,853
|
|
|
Balance
as of December 31, 2006
|
|
|
-
|
|
|
-
|
|
|
6,205,290
|
|
|
6,205
|
|
|
5,705,574
|
|
|
533,909
|
|
|
5,979,785
|
|
|
12,225,473
|
|
|
Shares
issued for private placement, net of offering costs of $169,000
in cash
and $138,338 in warrants.
|
|
|
1,774,194
|
|
|
1,774
|
|
|
|
|
|
|
|
|
2,579,226
|
|
|
|
|
|
|
|
|
2,581,000
|
|
|
Preferred
share dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975,807
|
|
|
|
|
|
(975,807
|
)
|
|
-
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,525,141
|
|
|
2,525,141
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600,361
|
|
|
|
|
|
600,361
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,125,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
|
1,774,194
|
|
$
|
1,774
|
|
|
6,205,290
|
|
$
|
6,205
|
|
$
|
9,260,607
|
|
$
|
1,134,270
|
|
$
|
7,529,119
|
|
$
|
17,931,975
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
|
1.
|
ORGANIZATION
AND BUSINESS BACKGROUND
|
China
Solar & Clean Energy Solutions, Inc. (“China Solar”), formerly known as 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 reorganization with Deli
Solar
Holding Ltd., a corporation organized in the British Virgin Islands (“Deli Solar
(BVI)”). In contemplation of the reorganization, 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 spin-off was completed on August 29, 2005. The acquisition
of Deli Solar (BVI) was accounted for as a recapitalization of Deli Solar
(BVI).
Deli
Solar (BVI) was formed in June 2004. On August 1, 2004, Deli Solar (BVI)
purchased Bazhou Deli Solar Energy Heating Co., Ltd. (“Deli Solar (Bazhou)”), 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 (Bazhou) 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 (Bazhou) 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 (Bazhou) remains a wholly-owned
subsidiary of Deli Solar (BVI).
On
November 21, 2005 Deli Solar (Bazhou) acquired Ailiyang Solar Energy Technology
Co., Ltd. (“Ailiyang”), an entity formerly controlled by the owners of Deli
Solar (Bazhou). The transaction was accounted for as a transfer of entities
under common control.
Beijing
Deli Solar Technology Development Co., Ltd. (“Deli Solar (Beijing)”) was founded
in 2006 and is principally engaged in solar power heater integrated construction
projects in major cities in the PRC.
In
January 2007, Deli Solar (Bazhou) via Mr. Deli Du, set up a branch sales
offices
in
the
city
of Lian Yun Gang and the City of Bazhou
to
cope
with the increasing sales demand in that region. This branch office exists
in
the form of a sole-proprietorship set up in the name of Mr. Deli Du but
is
beneficially owned by Deli Solar (Bazhou), so is regarded as a variable
interest
entity (“VIE”) by the Company.
On
July
1, 2007, Deli Solar (Beijing) acquired 51% of Tianjin Hua Neng Energy Equipment
Company (“Tianjin Huaneng”), which manufactures energy saving boilers and
environmental protection equipment for industrial customers.
The
transaction was accounted for under the purchase method. See Note
2.
China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng are hereinafter referred to as (“the Company”).
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America
(“US
GAAP”).
The
consolidated financial statements include the financial statements of
China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng
and the
VIE.
The
Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 46R, “Consolidation of Variable Interest Entities ” (“FIN
46R”). The sole-proprietorship business in the name of Mr. Deli Du is regarded
a
VIE of the Company and is consolidated in the Company’s financial
statements.
All
significant intercompany balances and transactions within the Company have
been
eliminated upon consolidation.
In
preparing these financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities in the balance
sheets
and revenues and expenses during the years reported. Actual results may differ
from these estimates.
|
|
Cash
and cash equivalents
|
The
Company considers all highly liquid securities with original maturities of
three
months or less when acquired to be cash equivalents. At December 31, 2007
and
2006, the Company had $5,466,637 and $3,212,065, respectively, in cash
equivalents.
|
|
Accounts
receivable and allowance for doubtful
accounts
|
Accounts
receivable consists of amounts due from customers. The Company extends unsecured
credit to its customers in the ordinary course of business but mitigates
the
associated risks by performing credit checks and actively pursuing past due
accounts. An allowance for doubtful accounts is established and determined
based
on management’s assessment of known requirements, aging of receivables, payment
history, the customer’s current credit worthiness and the economic environment.
Inventories
include direct materials, labor and factory overhead and are stated at lower
of
cost or market value, cost being determined on a first-in, first-out basis.
The
Company periodically reviews historical sales activity to determine excess,
slow
moving items and potentially obsolete items and also evaluates the impact
of any
anticipated changes in future demand. The Company provides inventory allowances
based on excess and obsolete inventories determined principally by customer
demand. As of December 31, 2007, 2006 and 2005, the Company did not record
an
allowance for obsolete inventories, nor have there been any
write-offs.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
|
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date
on
which they become fully operational and after taking into account their
estimated residual values. Property, plant and equipment are depreciated
over
their estimated useful lives as follows:
|
|
|
Depreciable life
|
|
Residual value
|
|
|
Buildings
|
|
|
6-50
years
|
|
|
10%
|
|
|
Plant
and machinery
|
|
|
10
years
|
|
|
10%
|
|
|
Office
equipments
|
|
|
7
years
|
|
|
10%
|
|
|
Motor
vehicles
|
|
|
7
years
|
|
|
10%
|
|
|
Computer
equipment
|
|
|
3
years
|
|
|
10%
|
|
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.
|
|
Goodwill
and intangible assets
|
Goodwill
and intangibles, including intellectual property, were generally acquired
in
acquisitions in 2007. Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, or SFAS No. 142, requires goodwill to
be tested for impairment on an annual basis and between annual tests in certain
circumstances, and written down when impaired. We perform this analysis during
the fourth quarter of each year. No impairment of goodwill has been identified
since the date of acquisition.
Furthermore,
SFAS No. 142 requires purchased intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined to be
indefinite. Purchased intangible assets are carried at cost less accumulated
amortization. No impairment of intangibles has been identified since the
date of
acquisition. All lands in the PRC are owned by the PRC government. The
government in the PRC, according to the relevant PRC law, may sell the right
to
use the land for a specified period of time. Thus, all of the Company’s land
purchases in the PRC are considered to be leasehold land and are stated at
amortized cost. Amortization is provided over the term of the land use right
agreements on a straight-line basis, which is 50 years and they will expire
in
2048, 2051 and 2054.
|
|
Impairment
of long-lived assets
|
In
accordance with SFAS No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets”
,
a
long-lived assets and certain identifiable intangible assets held and used
by
the Company are reviewed 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 evaluated by a comparison of the carrying
amount of assets to estimated undiscounted net cash flows expected to be
generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets. There has been
no
impairment as of December 31, 2007, 2006 and 2005.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
Company sells their products and services under a bundled sales arrangement,
which typically include equipment, installation, testing and maintenance
components. The components of equipment, installation and testing are
non-separable and considered as a single unit of deliverables, namely product
revenue. Hence, the product and maintenance are considered separate units
of
accounting in the arrangement. Revenues under these bundled arrangements
are
allocated considering the relative fair values of two separate deliverables:
(a)
product deliverable and (b) maintenance deliverable, included in the bundled
arrangement based on the estimated relative fair values of each element in
accordance with EITF 00-21, “Accounting for Multiple Element Revenue
Arrangements” and recognized when the applicable revenue recognition criteria
for each element are met.
Revenue
from product deliverables are recognized upon final acceptance, which is
signed
by the customer when installation is completed. Revenue from maintenance
support
for the Company’s products are deferred and recognized ratably over the term of
the service period upon the acceptance of the products, which is generally
12
months.
Revenue
from the provision of energy-saving projects are recognized when persuasive
evidence of an arrangement exists, transfer of title has occurred or services
have been rendered, the selling price is fixed or determinable and
collectibility is reasonably assured.
T
he
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of the products at the rate
of
17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition
to the invoiced value of purchases to the extent not refunded for export
sales.
Cost
of
revenue consists primarily of material costs, direct labor, shipping and
handling fee, depreciation and manufacturing overheads, which are directly
attributable to the manufactured products and the provision of the energy-saving
projects.
Advertising
costs are expensed as incurred in accordance with the American Institute
of
Certified Public Accountants (“AICPA”) Statement of Position 93-7,
“Reporting
for Advertising Costs”
.
Advertising expenses for the years ended December 31, 2007, 2006 and 2005
were
$1,415,493, $1,106,488 and $646,667, respectively.
Contributions
to retirement schemes (which are defined contribution plans) are charged
to
general and administrative expenses in the accompanying consolidated statements
of operations as the related employee service is provided.
SFAS
No.
130,
“Reporting
Comprehensive Income”,
establishes standards for reporting and display of comprehensive income,
its
components and accumulated balances. Comprehensive income as defined includes
all changes in equity during a period from non-owner sources. Accumulated
other
comprehensive income, as presented in the accompanying statement of changes
in
owners’ equity consists of changes in unrealized gains and losses on foreign
currency translation. This comprehensive income is not included in the
computation of income tax expense or benefit.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
Company accounts for income tax using SFAS No. 109
“Accounting
for Income Taxes”
,
which
requires the asset and liability approach for financial accounting and reporting
for income taxes. Under this approach, deferred income taxes are provided
for
the estimated future tax effects attributable to temporary differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery or
reversal and the effect from a change in tax rates is recognized in the
statement of operations and comprehensive (loss) income in the period of
enactment. A valuation allowance is provided to reduce the amount of deferred
tax assets if it is considered more likely than not that some portion of,
or all
of the deferred tax assets will not be realized.
The
Company calculates net income per share in accordance with SFAS
No. 128,
“Earnings
per Share.”
Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per
share
is computed similar to basic income per share except that the denominator
is
increased to include the number of additional common shares that would have
been
outstanding if the potential common stock equivalents had been issued and
if the
additional common shares were dilutive.
|
|
Foreign
currency translation
|
The
reporting currency of the Company is United States dollar (“US$”). Transactions
denominated in currency other than US$ are translated into US$ at the average
rate for the period. Monetary assets and liabilities denominated in currency
other than US$ are translated into US$ at the rates of exchange ruling at
the
balance sheet date. The resulting exchange differences are recorded in other
expenses in the accompanying statements of operations.
The
financial records of the Company’s operating subsidiaries are maintained in
their local currency, the Renminbi (“RMB”), which is the functional currency.
Assets and liabilities are translated at the exchange rates at the balance
sheet
date, equity accounts are translated at historical exchange rates, and income
and expenses items are translated using the average rate for the period.
The
translation adjustments are recorded in accumulated other comprehensive income
in the statements of changes in stockholders’ equity and comprehensive
income.
Prior
to
January 1, 2006, we accounted for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Bulletin No. 25,
Accounting
for Stock Issued to Employees
, or APB
No. 25 and related interpretations. Compensation expense for stock options
was recognized ratably over the vesting period.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Effective
January 1, 2006, we adopted the fair value recognition provisions of
Financial Accounting Standards Board, or FASB, Statement of Financial Accounting
Standards,
Share-Based
Payment
, or
SFAS No. 123(R) using the modified prospective application method. Under
SFAS No. 123R, stock-based compensation expense is measured at the
grant date based on the value of the option or restricted stock and is
recognized as expense, less expected forfeitures, over the requisite service
period.
The
Company provides a three-year standard warranty to all Deli Solar (Bazhou)
manufactured products. Repair and replacement of defective component parts
during the first year following purchase are covered under the standard warranty
program. In the second and third year, repair services are covered under
the
warranty program but customers pay for the purchase of the replacement parts.
Warranty services on the products manufactured by Deli Solar (Bazhou) are
performed by independent sales agents and distributors in exchange for 1%-2%
discount off the purchase price of our products.
Under
the
terms of the contracts for energy-saving projects, the Company provides a
product warranty on the equipment to its customers for a period of twelve
months
upon the completion of installation at the Company’s expense. The Company has
not experienced any material returns where it was under obligation to honor
this
standard warranty provision. As such, no reserve for product warranty has
been
provided in the statements of operations
for
the
years ended December 31, 2007, 2006 and 2005, respectively.
SFAS
No.
131
“Disclosures
about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments
on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
financial statements. The Company operates in two principal reportable segments:
Sales
of
solar heater or boiler related products and sales of heat pipe related
products.
|
|
Fair
value of financial instruments
|
The
Company values its financial instruments as required by SFAS No. 107,
“Disclosures
about Fair Value of Financial Instruments”
.
The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. The
estimates presented herein are not necessarily indicative of amounts that
the
Company could realize in a current market exchange.
The
Company’s financial instruments primarily include cash and cash equivalents,
accounts receivable, other receivables and prepayments, accounts payable,
other
payables and accrued liabilities. As of the balance sheet date, the estimated
fair values of financial instruments were not materially different from their
carrying values as presented due to short maturities of these
instruments.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
|
|
Registration
payment arrangements
|
The
Company accounts for registration payment arrangement in accordance with
FASB
Staff Position EITF 00-19-2, Accounting for Registration Payment Arrangements
("FSP EITF 00-19-2") which provides guidance on the accounting for registration
payment arrangements. FSP EITF 00-19-2 specifies that the contingent obligation
to make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included
as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with FASB Statement No. 5, Accounting
for
Contingencies. A registration payment arrangement is defined in FSP EITF
00-19-2
as an arrangement with both of the following characteristics: (1) the
arrangement specifies that the issuer will endeavor (a) to file a registration
statement for the resale of specified financial instruments and/or for
the
resale of equity shares that are issuable upon exercise or conversion of
specified financial instruments and for that registration statement to
be
declared effective by the Securities and Exchange Commission within a specified
grace period, and/or (b) to maintain the effectiveness of the registration
statement for a specified period of time (or in perpetuity); and(2) the
arrangement requires the issuer to transfer consideration to the counterparty
if
the registration statement for the resale of the financial instrument or
instruments subject to the arrangement is not declared effective or if
effectiveness of the registration statement is not
maintained.
The
Company adopted Financial Accounting Standards Board Interpretation No. 48,
“Accounting
for Uncertainty in Income Taxes”
(“FIN
48”), on January 1, 2007. FIN 48 prescribes a more likely than not
threshold for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition of income tax assets and liabilities, classification
of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, accounting for income
taxes in interim periods, and income tax disclosures. The Company did not
have
any adjustment to the opening balance of retained earnings as of January 1,
2007 as a result of the implementation of FIN 48. For the year ended
December 31, 2007, the Company did not have any interest and penalties
associated with tax positions. As of December 31, 2007, the Company did not
have any significant unrecognized uncertain tax positions.
|
|
Recently
issued accounting standards
|
In
2008,
the Securities and Exchange Commission (the “SEC”) adopted rule amendments that
replace the category of “Small Business Issuers” with a broader category of
“Smaller Reporting Companies.” Under these rules, a "Smaller Reporting
Company" is a company with a public float less than $75,000,000 (measured
at end
of Q2). Companies that meet this definition are able to elect "scaled
disclosure standards" on an item-by-item or "a-la-carte" basis. With this
change, the SEC has streamlined and simplified reporting for many companies,
and
has not added any significant disclosure requirements.
In
February 2007, the
FASB
issued Statement of Financial Accounting Standard No. 159,
“The
Fair Value Option for Financial Assets and Financial
Liabilities”
,
or SFAS
159. SFAS 159 permits companies to choose to measure many financial instruments
and certain other items at fair value. It is expected to expand the use of
fair
value measurements which is consistent with the Financial Accounting Standards
Board’s long-term measurement objectives for accounting for financial
instruments. SFAS 159 is effective for our first fiscal year that begins
after
November 15, 2007, which is our fiscal year 2008 that begins in January 2008.
The Company is currently evaluating the impact of this statement to its
financial position and results of operations.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
‘’Business
Combinations’’
,
or SFAS
No. 141R. SFAS No. 141R will change the accounting for business combinations.
Under SFAS No. 141R, an acquiring entity will be required to recognize all
the
assets acquired and liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS No. 141R will change the accounting
treatment and disclosure for certain specific items in a business combination.
SFAS No. 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Accordingly, any business
combinations we engage in will be recorded and disclosed following existing
GAAP
until January 1, 2009. We expect SFAS No. 141R will have an impact on accounting
for business combinations once adopted but the effect is dependent upon
acquisitions at that time. We are still assessing the impact of this
pronouncement.
In
December 2007, the FASB issued SFAS No. 160,
"Noncontrolling Interests in Consolidated Financial Statements--An Amendment
of
ARB No. 51’’
,
or SFAS
No. 160. SFAS No. 160 establishes new accounting and reporting standards
for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. We believe that SFAS 160 should not have a material impact
on
our financial position or results of operations.
Acquisition
On
May
18, 2007, the Company’s wholly owned subsidiary, Beijing Deli Solar Technology
Development Co., Ltd. entered into a purchase agreement to acquire 51% equity
interest in Tianjin Huaneng held by Tianjin Municipal Ji County State-owned
Assets Administration Commission for a total purchase price of $3,149,147.
By
supplemental agreement dated August 8, 2007, the purchase price was reduced
to
approximately $1,689,741. The Company also incurred additional cost of $769,418
related to finder’s fee, which has been included in the total cost of the
acquisition of $2,459,159. As of December 31, 2007, the Company paid
approximately $2,345,018 of the purchase price and the finder’s fee. The
remaining balance as of the date of this report was $114,141. In addition,
the
Company agreed to provide working capital of approximately $2.6 million to
Tianjin Huaneng. The accounting date of the acquisition was July 1, 2007
and was
accounted for under the purchase method. Tianjin Huaneng results of operations
have been included in our consolidated financial statements since the date
of
acquisition. Tianjin Huaneng is principally engaged in the design, development
and manufacturing and marketing of energy-saving related heating products
such
as heat pipes, heat exchangers, specialty heating pipes and tubes, high
temperature hot blast stoves, heating filters, normal pressure water boilers,
solar energy water heaters and radiators. These products are distributed
in the
PRC and Southeast Asia. Goodwill recorded as part of the purchase price
allocation was $1,789,324. Identifiable intangible assets acquired as part
of
the acquisition included definite-lived intangibles such as land use rights
which totaled $256,157, with a weighted average amortization period of
approximately 50 years. We continue to evaluate the purchase price allocation
for the Tianjin Huaneng acquisition, including intangible assets, contingent
liabilities and property, plant and equipment.
The
aggregate purchase price was $2,459,159, including $1,689,741 of cash and
costs
related to the acquisition of $769,418. Below is a summary of the total purchase
price:
|
Cash
|
|
$
|
1,689,741
|
|
|
Direct
acqusition costs
|
|
|
769,418
|
|
|
|
|
|
|
|
|
Total
purchase price
|
|
$
|
2,459,159
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
total
purchase price was allocated to the estimated fair value of the assets acquired
and liabilities assumed as follows:
|
Fair
value of tangible net assets acquired
|
|
$
|
5,256,426
|
|
|
Fair
value of intangible net assets acquired
|
|
|
256,157
|
|
|
Goodwill
|
|
|
1,789,324
|
|
|
Trade
accounts payable, accrued expenses and other liabilities
|
|
|
(4,842,748
|
)
|
|
|
|
$
|
2,459,159
|
|
The
following unaudited pro forma financial information for the Company gives
effect
to the 2007 acquisition as if they had occurred on January 1, 2006. These
pro forma results do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on such
date or
to project the Company’s results of operations for any future
period.
|
|
|
Years
ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Pro
forma net sales
|
|
$
|
46,937,497
|
|
$
|
34,981,140
|
|
|
Pro
forma net income
|
|
|
2,480,272
|
|
|
1,445,425
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma earnings per common share — net income
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
$
|
0.23
|
|
|
Diluted
|
|
$
|
0.17
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,316,518
|
|
|
6,205,290
|
|
|
Diluted
|
|
|
20,257,394
|
|
|
6,957,876
|
|
|
3.
|
ACCOUNTS
RECEIVABLE, NET
|
The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible.
If
actual collections experience changes, revisions to the allowance may be
required.
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, cost
|
|
$
|
8,219,804
|
|
$
|
986,809
|
|
|
Less:
allowance for doubtful accounts
|
|
|
(766,795
|
)
|
|
(116,363
|
)
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
7,453,009
|
|
$
|
870,446
|
|
For
the
year ended December 31, 2006, the Company recorded the reversal of the allowance
for doubtful accounts of $77,267. For the year ended December 31, 2007, the
Company recorded allowance for doubtful accounts of $650,432.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Inventories
consisted of the following:
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
656,605
|
|
$
|
150,748
|
|
|
Consumables
|
|
|
5,359
|
|
|
5,970
|
|
|
Work-in-process
|
|
|
2,464,441
|
|
|
-
|
|
|
Finished
goods
|
|
|
749,253
|
|
|
159,047
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
3,875,658
|
|
$
|
315,765
|
|
|
5.
|
OTHER
RECEIVABLES AND
PREPAYMENTS
|
Other
receivables and prepayments consisted of the following:
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Advance
to suppliers
|
|
$
|
493,421
|
|
$
|
1,007,709
|
|
|
Prepaid
expenses
|
|
|
249,598
|
|
|
58,203
|
|
|
Deposits
|
|
|
894,268
|
|
|
256,278
|
|
|
Other
receivables
|
|
|
661
|
|
|
65,721
|
|
|
|
|
|
|
|
|
|
|
|
Other
receivables and prepayments
|
|
$
|
1,637,948
|
|
$
|
1,387,911
|
|
|
6.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property,
plant and equipment, net, consisted of the following:
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
5,573,982
|
|
$
|
3,528,180
|
|
|
Plant
and machinery
|
|
|
1,836,914
|
|
|
71,131
|
|
|
Office
equipments
|
|
|
1,004,118
|
|
|
65,749
|
|
|
Motor
vehicles
|
|
|
81,497
|
|
|
76,176
|
|
|
Computer
equipment
|
|
|
13,507
|
|
|
12,625
|
|
|
Construction
in progress
|
|
|
2,118,615
|
|
|
2,580,031
|
|
|
|
|
|
10,628,633
|
|
|
6,333,892
|
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(1,809,417
|
)
|
|
(407,424
|
)
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$
|
8,819,216
|
|
$
|
5,926,468
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Depreciation
expenses for the years ended December 31, 2007, 2006 and 2005 were $282,822,
$162,695 and $100,171, respectively.
|
7.
|
INTANGIBLE
ASSETS, NET
|
Intangible
assets consisted of the following:
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Land
use rights, at cost
|
|
$
|
1,654,998
|
|
$
|
1,019,272
|
|
|
Less:
accumulated amortization
|
|
|
(57,077
|
)
|
|
(15,742
|
)
|
|
|
|
|
|
|
|
|
|
|
Land
use rights, net
|
|
$
|
1,597,921
|
|
$
|
1,003,530
|
|
All
lands
in the PRC are owned by the PRC government. The government in the PRC, according
to the relevant PRC law, may sell the right to use the land for a specified
period of time. Thus, all of the Company’s land purchases in the PRC are
considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided
over
the term of the land use right agreement which is 50 years, on a straight-line
basis.
Amortization
expenses for the years ended December 31, 2007, 2006 and 2005 were $41,335,
$15,742 and $-0-, respectively.
|
8.
|
OTHER
PAYABLES AND ACCRUED
LIABILITIES
|
Other
payables and accrued liabilities consisted of the following:
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Related
party payable
|
|
$
|
-
|
|
$
|
22,528
|
|
|
Accrued
expenses
|
|
|
608,315
|
|
|
22,080
|
|
|
Customer
deposits
|
|
|
2,281,909
|
|
|
262,269
|
|
|
Other
payables
|
|
|
3,508,066
|
|
|
35,934
|
|
|
Taxes
payables
|
|
|
1,359,140
|
|
|
-
|
|
|
Deferred
revenue
|
|
|
795,022
|
|
|
-
|
|
|
|
|
$
|
8,552,452
|
|
$
|
342,811
|
|
Authorized
Capital
The
Company’s authorized
capital
stock consists of 66,666,667 shares of $0.001 par value per share common
stock
and 25,000,000 shares of $0.001 par value per share preferred stock
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Class
A Preferred stock
The
Company has designated 3,500,000 of its Preferred Shares as Class A Convertible
Preferred Shares. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the corporation, Class A Convertible Preferred
Shareholders
shall
be
entitled to receive out of the assets of the Corporation, an amount equal
to
$1.55 per share. Each share of Series A Preferred Stock shall be initially
convertible into one (1) share of Common Stock at the conversion price of
$1.55,
subject to adjustment for stock dividend and stock splits, sale or issuance
of
common stock at a price which is less than the conversion price and pro rata
distribution, at the option of the investors, at any time after the original
issue date.
The
Class
A
Convertible Preferred Shares
contain
a
beneficial conversion feature in favor of the holder. The beneficial conversion
feature was measured at its intrinsic value at the date of issuance of the
shares and is recognized immediately as a return to the preferred shareholders
through a charge to retained earnings, since the conversion feature is
immediately exercisable by the holders. The charge during the current year
was
$975,807. Although there is no impact on net income, the charge to retained
earnings affects the computation of both basic and diluted EPS for US GAAP
in
the same way that dividends on the preferred shares do.
Sale
of Units
On
June
13, 2007, the Company entered into a Securities Purchase Agreement with Barron
Partners L.P., and two accredited investors in a private placement (“Private
Placement) providing for the sale of: (i) 1,774,194 shares of our Series
A
Convertible Preferred Stock; (ii) stock purchase warrants to purchase an
aggregate of 1,774,194 shares of common stock at a price of $1.90 per share;
and
(iii) stock purchase warrants to purchase an aggregate of 1,774,194 shares
of
common stock at a price of $2.40 per share.
In
connection with the Private Placement, the Company deposited 900,000 shares
of
Series A Convertible Preferred Stock into escrow as security in the event
(i)
the earnings target for 2007 is not met and (ii) the earnings target for
2008 is
not met.
The
900,000 shares held in escrow were included in the diluted earnings per share
calculation. Net proceeds of $2,581,000 were used to finance business
acquisitions.
Registration
Rights
On
June
13, 2007, the Company also entered into a registration rights
agreement
for the
common stock underlying the convertible preferred shares and all warrants
related to the Private Placement, under which it agreed to use its commercially
reasonable efforts to cause the initial registration statement to be declared
effective by the SEC at the earlier of (i) 150 days following the filing
date
with respect to the registration statement, (ii) 10 days following the receipt
of a “No Review” or similar letter from the SEC or (iii) the third business day
following the day the Company receives notice from the SEC that the SEC has
determined that the registration statement eligible to be declared effective
without further comments by the SEC. The Company is subject to monthly
liquidated damages of 17,742 shares of Series A Preferred Stock, up to a
maximum
of 266,129 shares of Series A Preferred Stock in aggregate, for failing to
register the shares timely. The Company is under the obligation to have the
Registration Statement effective on January 10, 2008. However, it was not
effective until 28 days later on February 7, 2008 being the effectiveness
date
of SB-2. 17,742 shares of preferred stock per month prorated per 28 days
means
16,559 shares of preferred stock will be issued to
investors.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Common
stock
On
March
30, 2005, the Company issued 4,067,968 shares of its common stock in the
recapitalization transaction with Deli Solar (BVI).
On
March
30, 2005, the Company issued 1,714,290 shares of its common stock at $3.50
per
share in a private placement transaction along with five year warrants to
purchase 1,714,290 additional common shares at $3.85 per share. Gross proceeds
to the Company totaled $6,000,015 and costs of issuance totaled
$1,348,626.
On
August
15, 2005 the Company effected a 1:6 reverse stock split. Fractional shares
were
rounded up the nearest whole share. These financial statements have been
retroactively restated to give effect to the reverse split for all periods
presented. Immediately prior to the reverse stock split there were 36,850,379
common shares outstanding and following the split there were 6,145,290 shares
outstanding.
In
October 2005, the Company issued 60,000 shares of its common stock in exercise
of warrants.
Warrants
for services
In
connection with the Private Placement on June 13, 2007, the Board of Directors
granted to consultants and agents warrants to purchase an aggregate of 181,452
shares of the Company’s common stock, of which 75,000 warrants are exercisable
at US$2.90 per share and 106,452 warrants are exercisable at US$2.71 per
share,
or on a cashless exercise basis. The warrants vested immediately and expire
on
June 13, 2012. The market price of the stock was US$2.10 per share on the
grant
date. The Company valued the 75,000 warrants at US$0.74 per share and the
106,452 warrants at US$0.78 per share, or $138,338 in aggregate in accordance
with SFAS 123R, which were recorded as offering cost in additional paid-in
capital in the accompanying consolidated financial statements for the year
ended
December 31, 2007.
The
fair
value of the warrants was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
|
Risk
free interest rate (%)
|
|
|
5.00
|
%
|
|
Dividend
yield (%)
|
|
|
0.00
|
%
|
|
Expected
life of warrant grants (years)
|
|
|
5
years
|
|
|
Expected
volatility of warrant grants (%)
|
|
|
43.79
|
%
|
On
March
30, 2005,
in
conjunction with a private placement sale of common stock the Company issued
five year warrants to purchase 1,714,290 shares of common stock at a price
of
$3.85 per share to investors.
Concurrently, the Company issued five year warrants to purchase 171,429 common
shares at $3.85 per share to financial advisers and others. No share-based
compensation expense was recorded, as management determined this transaction
to
be a cost of issuance.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
A
summary
of the status of the Company’s outstanding common stock warrants as of December
31, 2007 and 2006:
|
|
|
Number of
Shares
|
|
Weighted-
average
Exercise Price
|
|
Weighted-
average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding
at December 31, 2005
|
|
|
1,825,719
|
|
$
|
3.85
|
|
|
—
|
|
$
|
—
|
|
|
Granted
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,825,719
|
|
|
3.85
|
|
|
2.25
years
|
|
|
—
|
|
|
Granted
|
|
|
3,729,840
|
|
|
2.18
|
|
|
4.50
years
|
|
|
354,839
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Outstanding
and Exercisable at December 31, 2007
|
|
|
5,555,559
|
|
$
|
2.73
|
|
|
3.76
years
|
|
$
|
354,839
|
|
The
Company is registered in the United States of America and has operations
in
three tax jurisdictions: the United States of America, British Virgin Island
(“BVI”) and the PRC. The operations in the United States of America and British
Virgin Island have incurred net operating losses for income tax purposes.
The
Company generated substantially its net income from the operation of its
subsidiary in the PRC and subject to the PRC tax jurisdiction. The Company
has
recorded income tax provision for the years ended December 31, 2007 and
2006.
The
components of (loss) income before income taxes separating U.S., BVI and
PRC tax
jurisdictions are as follows:
|
|
|
Years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Tax
jurisdictions from:
|
|
|
|
|
|
|
|
|
Loss
subject to U.S.
|
|
$
|
(461,433
|
)
|
$
|
(693,745
|
)
|
$
|
-
|
|
|
Loss
subject to BVI
|
|
|
(184,056
|
)
|
|
(73,691
|
)
|
|
-
|
|
|
Income
subject to the PRC
|
|
|
3,985,699
|
|
|
2,006,937
|
|
|
1,298,974
|
|
|
Income
before income taxes
|
|
$
|
3,340,210
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
United
States of America
China
Solar is registered in the State of
Nevada
and
is
subject to the tax laws of United States of America.
As
of
December 31, 2007, the operation in the United States of America incurred
$461,433 of net operating losses available for federal tax purposes, which
are
available to offset future taxable income. The net operating loss carry forwards
will to expire through 2028, if unutilized. The Company has provided for
a full
valuation allowance against the deferred tax assets of $461,433 on the expected
future tax benefits from the net operating loss carryforwards as the management
believes it is more likely than not that these assets will not be realized
in
the future.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
British
Virgin Island
Under
the
current BVI law, the Company is not subject to tax on income.
The
PRC
The
Company's subsidiary operating in the PRC, Ailiyang and Tianjin Huaneng are
domestically owned and
subject
to the Corporate Income Tax governed by the Income Tax Law of the People’s
Republic of China, at a statutory rate of 33%, which is comprised of a 30%
national income tax and 3% local income tax.
In
March
2005, the Deli Solar (Bazhou) became a foreign investment enterprise. Hence,
effective from the year ended 2005, Deli Solar (Bazhou) is entitled to a
two-year exemption from enterprise income tax and a reduced enterprise income
tax rate of 15% for the following three years.
In
September 2006, the Deli Solar (Beijing) was founded as a foreign investment
enterprise. Hence, effective from the year ended 2006, Deli Solar (Beijing)
is
entitled to a two-year exemption from enterprise income tax and a reduced
enterprise income tax rate of 15% for the following three years.
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law, among
other things, imposes a unified income tax rate of 25% for both domestic
and
foreign invested enterprises with effect from January 1, 2008. Deli Solar
(Bazhou) and Deli Solar (Beijing) are considered a foreign invested enterprise
and its ultimate applicable effective tax rate in 2008 and beyond will depend
on
many factors, including but not limited to whether certain of its legal entity
will be subject to a transitional policy under the Corporate Income Tax Law,
whether Deli Solar (Bazhou) and Deli Solar (Beijing) can continue to enjoy
the
unexpired tax holidays.
The
reconciliation of income tax rate to the effective income tax rate based
on
income before income taxes stated in the statements of operations for the
years
ended December 31, 2007, 2006 and 2005 is as follows:
|
|
|
Years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
3,340,210
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
15
|
%
|
|
15
|
%
|
|
|
|
|
1,102,269
|
|
|
185,925
|
|
|
194,846
|
|
|
Less:
items not subject to taxes
|
|
|
|
|
|
|
|
|
|
|
|
Effect
for tax holiday
|
|
|
(486,944
|
)
|
|
(185,925
|
)
|
|
(194,846
|
)
|
|
Income
tax expenses
|
|
$
|
615,325
|
|
$
|
-
|
|
$
|
-
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
following table sets forth the significant components of the aggregate deferred
tax assets of the Company as of December 31, 2007 and 2006:
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
-
Net operating loss carried forward
|
|
$
|
1,432,326
|
|
|
767,436
|
|
|
Less:
valuation allowance
|
|
|
(1,432,326
|
)
|
|
(767,436
|
)
|
|
Deferred
tax assets
|
|
$
|
-
|
|
$
|
-
|
|
Basic
net
income per share is computed using the weighted average number of the ordinary
shares outstanding during the year. Diluted net income per share is computed
using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year less number of warrants issued during
the year in note 10.
The
following table sets forth the
computation
of basic and diluted net income per share for the years ended December 31,
2007,
2006 and 2005:
|
|
|
Years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
As
adjusted and restated
(Note
17)
|
|
|
|
|
|
|
Basic
and diluted net income per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,525,141
|
|
|
1,239,501
|
|
|
1,298,974
|
|
|
Less:
Preferred stock dividends
|
|
|
(975,807
|
)
|
|
-
|
|
|
-
|
|
|
Net
income available to common stockholders in computing basic
and
diluted
net income per share
|
|
$
|
1,549,334
|
|
$
|
1,239,501
|
|
$
|
1,298,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
- Weighted average ordinary shares outstanding
|
|
|
6,205,290
|
|
|
6,205,290
|
|
|
5,732,616
|
|
|
-
Weighted average preferred stock outstanding
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
Weighted average warrant shares outstanding
|
|
|
191,407
|
|
|
752,586
|
|
|
1,825,719
|
|
|
|
|
|
6,396,697
|
|
|
6,957,876
|
|
|
7,558,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.25
|
|
$
|
0.20
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.24
|
|
$
|
0.18
|
|
$
|
0.17
|
|
For
the
year ended December 31, 2007, warrants to purchase 2,007,171 shares of
common
stock have been excluded from the diluted earnings per share calculation
as the
average market price of the common stock was less than the exercise price
of the warrants, thereby making the warrants antidilutive under the treasury
method. Convertible preferred stocks were also excluded from the denominator
and
the associated beneficial conversion was excluded from the numerator as
the
assumed conversion had an antidilutive effect.
For
the
years ended December 31, 2006 and 2005, there were no securities excluded
from
diluted earnings per share as none were antidilutive.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
|
12.
|
SEGMENT
REPORTING, GEOGRAPHICAL
INFORMATION
|
The
Company has two reportable segments namely solar heater/boiler related products
and heat pipe related products for the three year ended December 31, 2007,
2006
and 2005. The solar heater/boiler related products are mainly under the
management of Deli Solar (Bazhou) while the heat pipe related products are
energy-savings projects under the management of Tianjin Huaneng.
An
analysis of the Company’s revenue and total assets are as follows:
|
|
|
Years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
26,693,850
|
|
$
|
21,468,313
|
|
$
|
15,577,447
|
|
|
Heat
Pipe related products
|
|
|
7,002,015
|
|
|
-
|
|
|
-
|
|
|
Unallocated
|
|
|
3,376,481
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
$
|
15,577,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
5,672,443
|
|
$
|
4,625,319
|
|
$
|
3,708,988
|
|
|
Heat
Pipe related products
|
|
|
1,820,524
|
|
|
-
|
|
|
-
|
|
|
Unallocated
|
|
|
807,301
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,300,268
|
|
$
|
4,625,319
|
|
$
|
3,708,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
18,690,225
|
|
$
|
12,716,185
|
|
$
|
10,903,506
|
|
|
Heat
Pipe related products
|
|
|
9,029,994
|
|
|
-
|
|
|
-
|
|
|
Unallocated
|
|
|
2,919,494
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
$
|
10,903,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Heat
Pipe related products
|
|
|
1,789,324
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,789,324
|
|
$
|
-
|
|
$
|
-
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
|
(b)
|
Geographic
information
|
The
Company operates in the PRC and all of the company’s long lived assets are
located in the PRC.
In
respect of geographical segment reporting, sales are based on the country
in
which the customer is located and total assets and capital expenditure are
based
on the country where the assets are located.
The
Company’s operations are located in PRC, which is the main geographical areas.
The Company’s sales and total assets by geographical market are analyzed as
follows:
|
|
|
Years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
32,623,664
|
|
$
|
19,321,482
|
|
$
|
14,331,251
|
|
|
Others
|
|
|
4,448,682
|
|
|
2,146,831
|
|
|
1,246,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
$
|
15,577,447
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
6,806,220
|
|
$
|
4,070,281
|
|
$
|
3,338,089
|
|
|
Others
|
|
|
1,494,048
|
|
|
555,038
|
|
|
370,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,300,268
|
|
$
|
4,625,319
|
|
$
|
3,708,988
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
29,107,727
|
|
$
|
11,445,134
|
|
$
|
9,704,120
|
|
|
Others
|
|
|
1,531,986
-
|
|
|
1,271,051
|
|
|
1,199,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
$
|
10,903,506
|
|
|
13.
|
CHINA
CONTRIBUTION PLAN
|
Under
the
PRC Law, full-time employees of the Company’s subsidiaries, Deli Solar (Bazhou),
Ailiyang, Deli Solar (Beijing) and Tianjin Huaneng are entitled to staff
welfare
benefits including medical care, welfare subsidies, unemployment insurance
and
pension benefits through a China government-mandated multi-employer defined
contribution plan. The Company is required to accrue for these benefits based
on
certain percentages of the employees’ salaries. The total contributions made for
such employee benefits were $327,257, $201,072 and $199,472 for the years
ended
December 31, 2007, 2006 and 2005, respectively.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
|
14.
|
CONCENTRATION
OF
RISK
|
No
revenue from customers that individually represent greater than 10% of the
total
revenue for each of the years ended December 31, 2007, 2006 and 2005.
The
following is a table summarizing the purchases from vendors that individually
represent greater than 10% of the total purchases for each of the years ended
December 31, 2007, 2006 and 2005 and their outstanding balances as at year-end
date:
|
|
|
Year ended December 31, 2007
|
|
|
Vendor
|
|
Purchases
|
|
Percentage of
total purchases
|
|
Accounts
payable, trade
|
|
|
Vendor
A
|
|
$
|
5,475,372
|
|
|
50.4
|
%
|
$
|
667,718
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
Vendor
|
|
|
Purchases
|
|
|
Percentage of
total purchases
|
|
|
Accounts
payable, trade
|
|
|
Vendor
A
|
|
$
|
3,800,242
|
|
|
49.0
|
%
|
$
|
379,215
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
Vendor
|
|
|
Purchases
|
|
|
Percentage of
total purchases
|
|
|
Accounts
payable, trade
|
|
|
Vendor
A
|
|
$
|
3,669,748
|
|
|
55.2
|
%
|
$
|
390,678
|
|
Financial
instruments that are potentially subject to credit risk consist principally
of
cash and trade receivables. All cash held in financial institutions are not
insured and therefore subject to credit risk. The Company believes the
concentration of credit risk in its trade receivables is substantially mitigated
by its ongoing credit evaluation process and relatively short collection
terms.
The Company does not generally require collateral from customers. The Company
evaluates the need for an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and
other
information.
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
The
Company’s interest-rate risk arises from short-term borrowings. Borrowings
issued at floating rates expose the Company to cash flow and fair value
interest-rate risk. Company policy is to maintain approximately all of its
borrowings in floating rate instruments. At the year end, all of borrowings
were
at floating rates.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
|
15.
|
COMMITMENTS
AND CONTINGENCIES
|
|
(a)
|
Operating
lease commitment
|
The
Company leases land and buildings under non-cancelable operating lease
agreements. Based on the current rental lease agreements, the future minimum
rental payments required for the coming years are as follows:
|
Years
ending December 31:
|
|
|
|
|
2008
|
|
$
|
20,015
|
|
|
2009
|
|
|
20,015
|
|
|
2010
|
|
|
20,015
|
|
|
2011
|
|
|
20,014
|
|
|
|
|
|
|
|
|
Total
future minimum operating lease payments
|
|
$
|
80,059
|
|
For
the
years ended December 31, 2007, 2006 and 2005, rental expenses were $101,780,
$77,246, and $21,985, respectively.
On
January 9, 2008
and
March
25, 2008 Beijing Deli Solar Technology Development Co., Ltd., the Company’s
wholly-owned subsidiary (“Deli Solar (Beijing)”), entered into an Equity
Purchase Agreement, a Complementary Agreement and a Supplementary, with
Shenzhen
PengSangPu Solar Industrial Products Corporation (“SZPSP”) and its shareholders
to acquire 100% of the outstanding equity interests of SZPSP from its three
current shareholders. The closing will be effective March 31, 2008.
Under
the
agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest
of
SZPSP from its current three shareholders. Part of the consideration of
the transaction is RMB 28.8 million ($4,087,832) payable in cash. This
purchase
price is based on an appraisal of SZPSP. The three shareholders have agreed
to
loan the proceeds back to the Deli Solar (Beijing) and will be used as
working
capital (the “Shareholders’ Loan”). Fifty (50%) of the principal of the
Shareholders’ Loan shall be paid within one year upon the entry of the
Complementary Agreement (the “Closing”) and the remaining balance be paid off
within two years.
In
addition to the payment of the cash purchase price under the Complementary
Agreement the parties agreed to an appraisal value of RMB 20 million of
SZPSP’s
intangible assets which was paid in 1,419,729 shares of common stock. Provided
that if on the first anniversary of the closing the common stock price
is lower
than $2, the Company will pay the difference. Fifty percent (50%) of these
shares shall be transferable and unrestricted within one year after the
Closing
and the remaining Fifty percent (50%) transferable within two years. The
shares
shall be transferred to SZPSP within 180 days of the closing. In addition,
as part of the purchase price, the shareholders of SZPSP will receive five
years
warrants to purchase a total of 141,973 shares of common stock at an exercise
price of $2.5 per share, subject to future adjustments.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
SZPSP
warranted in the Complementary Agreement that if (i) its sales revenue
is less
than RMB 99 million (approximately $13,670,068) with an after-tax net profit
of
less than RMB 9.43 million (approximately $1,302,108) for the year ended
December 31, 2008; or (ii) if in the year ended December 31, 2009, it
does
not
reach the targeted sales revenue of RMB 143.9 million (approximately
$19,868,336) or the after-tax net profit of RMB 12.13 million (approximately
$1,674,789), SZPSP will pay the difference between the revenue and the
targeted
revenue of the year specified by reducing the amount payable on the
shareholders’ loan. If the shareholders’ loan is not sufficient to pay the
difference, the common shares held by SZPSP will be returned to us to the
extent
necessary for the remaining balance.
The
current shareholders of SZPSP, being the management of SZPSP, will enter
into
employment contracts with the Company for a term of three years to remain
in
their current managing positions of SZPSP, subject to further amendments
of such
employment arrangement.
After
the
Closing, Deli Solar (Beijing) has the right to a majority of the board
seats of
SZPSP.
On
February 25, 2008 the Company raised gross proceeds of approximately $11,300,000
in a private placement providing for the sale of 4,691,499 shares of common
stock at a price of $2.40 per share.
|
17.
|
RESTATEMENT
ON CONSOLIDATED FINANCIAL
STATEMENTS
|
In
April 2008, we filed a registration statement on Form S-1 with the Securities
and Exchange Commission relating to the sale by certain selling stockholders
identified in the related prospectus of up to 5,160,649 shares of our
common
stock including 469,150 shares they may acquire on exercise of warrants.
When
reviewing our financial statements for inclusion in the prospectus, we
became
aware of an error in the calculation of diluted net income per share
for the
year ended December 31, 2007. We misapplied the treasury stock and the
“if
converted” methods under SFAS No. 128 and because of the error we identified, we
have restated our historical financial statements for 2007 to record
an increase
of 10¢ in diluted net income per share.
This
10¢ per share adjustment was non-cash. The error had no impact on our
reported assets, liabilities, equity, revenue, expenses or earnings.
There was
no cumulative effect on retained earnings or other components of equity
in the
balance sheet at December 31, 2007. It had no impact on basic earnings
per
share. Nor did it have any impact on cash or cash equivalents. It had
no impact
on prior year financial statements and, likewise, will have no impact
on future
financial statements.
The
following table sets forth the income statement impact of the
restatement:
|
|
|
December
31, 2007
|
|
|
|
|
As
reported
|
|
Adjustment
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
- Total weighted average shares outstanding
|
|
|
11,233,026
|
|
|
(4,836,329
|
)
|
|
6,396,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.14
|
|
$
|
0.10
|
|
$
|
0.24
|
|
The
impact of the restatement on the disclosures of earnings per share data
is set
forth in the table below:
|
|
|
December
31, 2007
|
|
|
|
|
As
reported
|
|
Adjustment
|
|
As
Adjusted
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
-
Weighted average preferred stock outstanding
|
|
|
1,337,097
|
|
|
(1,337,097
|
)
|
|
-
|
|
|
-
Weighted average warrant shares outstanding
|
|
|
3,690,639
|
|
|
(3,499,232
|
)
|
|
191,407
|
|
|
Diluted
- Total weighted average shares outstanding
|
|
|
11,233,026
|
|
|
(4,836,329
|
)
|
|
6,396,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.14
|
|
$
|
0.10
|
|
$
|
0.24
|
|
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