| | Three months ended March 31, | |
| | 2009 | | | 2008 | |
Cash flows from operating activities: | | | | | | |
Net cash used in operating activities | | $ | (829,589 | ) | | $ | (4,104,526 | ) |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Purchase of property, plant and equipment | | | (185,122 | ) | | | (730,974 | ) |
Cash paid for investment in acquisition | | | (95,086 | ) | | | - | |
Net cash used in investing activities | | | (280,208 | ) | | | (730,974 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Proceeds from private placement sale of stock | | | - | | | | 9,995,156 | |
Proceeds from warrants exercised | | | - | | | | 107,500 | |
Net cash provided by financing activities | | | - | | | | 10,102,656 | |
| | | | | | | | |
Foreign currency translation adjustment | | | 66,643 | | | | - | |
| | | | | | | | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | | (1,043,154 | ) | | | 5,267,156 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 2,404,996 | | | | 5,466,637 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 1,361,842 | | | $ | 10,733,793 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
Cash paid for income taxes | | $ | 63,014 | | | $ | 31,978 | |
Cash paid for interest expenses | | $ | 47,159 | | | $ | 33,838 | |
| | Preferred stock | | | Common stock | | | Additional | | | Accumulated other | | | | | | | | | Total | |
| | No. of | | | Par | | | No. of | | | Par | | | paid-in | | | comprehensive | | | Retained | | | Earnings | | | stockholders’ | |
| | shares | | | value | | | shares | | | value | | | capital | | | income | | | earnings | | | reserve | | | equity | |
Balance as of December 31, 2008 | | | 373,566 | | | $ | 373 | | | | 13,799,450 | | | $ | 13,799 | | | $ | 22,966,404 | | | $ | 1,615,081 | | | $ | 3,365,788 | | | $ | 963,106 | | | $ | 28,924,551 | |
Cancel 939,364 shares of disposal subsidiary | | | | | | | | | | | (939,364 | ) | | | (939 | ) | | | (459,349 | ) | | | | | | | | | | | (963,106 | ) | | | (1,423,394 | ) |
Preferred share converted | | | (373,566 | ) | | | -373 | | | | 373,566 | | | | 373 | | | | | | | | | | | | | | | | | | | | 0 | |
Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 221,815 | | | | | | | | 221,815 | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | (918,380 | ) | | | | | | | | | | | (918,380 | ) |
Issue 1,000,000 contingent shares outstanding | | | | | | | | | | | 1,000,000 | | | | 1,000 | | | | (1,000 | ) | | | | | | | | | | | | | | | | |
Balance as of September 30, 2009 | | | 0 | | | $ | 0 | | | | 14,233,652 | | | $ | 14,233 | | | $ | 22,506,055 | | | $ | 696,701 | | | $ | 3,587,603 | | | $ | - | | | $ | 26,804,592 | |
See accompanying notes to condensed consolidated financial statements
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))US Dollars)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of December 31, 2008 has been derived from audited financial statements and the accompanying unaudited condensed consolidated financial statements for the ninethree months ended September 30,March 31, 2009 and 2008 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the interim reporting requirements of Regulation S-X. They do not include all of the information and footnotes for complete consolidated financial statements as required by GAAP. In management’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2008.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to change include assumptions used in determining the fair value of securities owned and non-readily marketable securities.
The results of operations for the nine and three months ended September 30,March 31, 2009 and 2008 are not necessarily indicative of the results to be expected for the entire fiscal year ended December 31, 2009 or for any future period.
There is no provision for dividends for the quarter to which this quarterly report relates.
NOTE 2 - ORGANIZATION AND BUSINESS BACKGROUND
China Solar & Clean Energy Solutions, Inc. (“China Solar”), formerly known as Deli Solar (USA) Inc., is a provider of integrated renewable energy products and services in the People's Republic of China (“PRC”). China Solar sells and distributes hot water and space heating devices along with waste heat recovery systems via its subsidiaries including Bazhou Deli Solar Energy Heating Co. Ltd. ("Deli Solar (Bazhou)"), Deli Solar (Beijing) Technology Development Co., Ltd (“Deli Solar (Beijing)”) and Tianjin Huaneng Group.
China Solar 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 June 2004.. 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).
Bazhou Deli Solar Energy Heating Co Ltd (“Deli Solar (Bazhou)”)
(BVI) was formed in June 2004. On August 1, 2004, Deli Solar (BVI) purchased all the capital stock of Bazhou Deli Solar Energy Heating Co., Ltd. (“Bazhou Deli Solar (Bazhou)”Solar”), 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 (approximately $995,753.4).6,800,000. As a result of this transaction, Bazhou Deli Solar (Bazhou) became a wholly-foreign owned enterprise (“WFOE”) under PRC law on March 30, 2005. This acquisition was accounted for as a transfer of entities under common control.
Bazhou Deli Solar (Bazhou) was incorporated on August 19, 1997 under the laws of the PRC. In the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the United States (“US”).
The result of the above transactions is that Deli Solar (BVI) is now our direct, wholly owned subsidiary and Bazhou Deli Solar remains a wholly owned subsidiary of Deli Solar (BVI).
On November 21, 2005 Bazhou Deli Solar acquired Ailiyang Solar Energy Technology Co., Ltd. (“Ailiyang”), an entity formerly controlled by the owners of Bazhou Deli Solar. The transaction was accounted for as a transfer of entities under common control.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))US Dollars)
(Unaudited)
The result of the above transactions is thatNOTE 2 - ORGANIZATION AND BUSINESS BACKGROUND, continued
Beijing 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 Development Co., Ltd. (“Ailiyang”), an entity formerly controlled by the owners ofBeijing Deli Solar (Bazhou). The transactionSolar”) was accounted for as a transfer of entities under common control.
Deli Solar (Beijing) Technology Development Co Ltd. (“Deli Solar (Beijing)”)
Deli Solar (Beijing) was incorporatedfounded in June, 2005. It2006 and is principally engaged in the design and implementation of energy efficient solutions for commercial and industrial customerssolar power heater integrated construction projects in major cities in the PRC.
Tianjin Huaneng Energy Equipment Co LtdIn January 2007, Bazhou Deli Solar 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 Bazhou Deli Solar, so is regarded as a variable interest entity (“Tianjin Huaneng”VIE”) by the Company.
On July 1, 2007, Beijing Deli Solar acquired 51% of Tianjin HuanengHua Neng Energy Equipment Company (“Tianjin Huaneng”), incorporated in 1987 in Ji County, Tianjin, is principally engaged in manufacturing and installation of waste heat recovery systems,which manufactures energy saving boilers and environmental protection equipmentsequipment for industrial customers.
On JulyApril 1, 2007,2008, Beijing Deli Solar (Beijing) completed an acquisitionacquired 100% of 51%Shenzhen Pengsangpu Solar Industrial Products Corporation (“SZPSP”), which is engaged in the re-sale of equity in Tianjin Huaneng. energy-saving related heating products such as heat pipes, heat exchangers, pressure water boilers, solar energy heaters and raditors.
On October 27, 2008, Beijing Deli Solar, (Beijing) additionally purchasedentered into an agreement to acquire approximately 29.97% of the outstanding equity interest of Tianjin Huaneng, from the minority shareholders of Tianjin Huaneng. Following this transaction, the Company increased the registered capital of Tianjin Huaneng from RMB5.94 million to RMB21.68 million by contributing an additional RMB15,740,000 ($2,295,531).AsAs a result Deli Solar (Beijing) nowof the consummation of the agreement and the additional capital contribution, the Company owns approximately 91.82% of the equity interest in Tianjin Huaneng.
China Solar, Deli Solar (BVI), Bazhou Deli Solar, (Bazhou), Ailiyang, Beijing Deli Solar, (Beijing) and Tianjin Huaneng and SZPSP are collectively hereinafter referred to as the “Company”"Company".
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, the provisions of which are required to be applied prospectively. The Company believes that SFAS 159 will not have a material impact on the consolidated financial position or results of operations.
In December 2007, the FASB issued guidance related to Business Combinations under ASC 805, Business Combinations, and guidance related to the accounting and reporting of non controlling interest under ASC 810-10-65-1, Consolidation. This guidance significantly changesSFAS No. 141 (Revised 2007), “Business Combinations” (“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 ofperiod beginning on or after December 15, 2008. Accordingly, any business combination transactionscombinations the Company engages in will be recorded and non controlling (minority) interests in consolidated financial statements. This guidance became effectivedisclosed following existing GAAP until January 1, 2009.
In May 2009, The Company expects SFAS No. 141R will have an impact on accounting for business combinations once adopted but the FASB issued guidance related to subsequent events under ASC 855-10, Subsequent Events. This guidance sets fortheffect is dependent upon acquisitions at that time. The Company is still assessing the period after the balance sheet date during which management or a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. It requires disclosureimpact of the date through which an entity has evaluated subsequent events and the basis for that date, whether that date represents the date the financial statements were issued or were available to be issued. This guidance is effective for interim and annual periods ending after June 15, 2009. We adopted ASC 855-10 beginning June 30, 2009 and have included the required disclosures in our consolidated condensed financial statements.
In June 2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC 105, Generally Accepted Accounting Principles. This guidance states that the ASC will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Once effective, the Codification's content will carry the same level of authority. Thus, the U.S. GAAP hierarchy will be modified to include only two levels of U.S. GAAP: authoritative and non-authoritative. This is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted ASC 105 as of September 30, 2009 and thus have incorporated the new Codification citations in place of the corresponding references to legacy accounting pronouncements.this pronouncement.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))US Dollars)
(Unaudited)
NOTE 4 – BUSINESS DISPOSAL3 - RECENTLY ISSUED ACCOUNTING STANDARDS, continued
On July 6, 2009, we entered intoIn December 2007, the Termination AgreementFASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-An Amendment of ARB No. 51 (“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. The Company believes that SFAS 160 will not have a material impact on the consolidated financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this statement is not expected to have a material effect on the three former shareholdersCompany’s future financial position or results of Shenzhen Pengsangpuoperations.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SZPSP”SFAS No. 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles to terminatebe used in the preparation of financial statements in conformity with GAAP in the United States. This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Equity Purchase Agreement”Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The Company does not expect the adoption of SFAS No. 162 to have a material effect on the financial condition or results of operations of the Company.
Also in May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60" ("SFAS No. 163"). SFAS No. 163 interprets Statement 60 and “Complementary Agreementamends existing accounting pronouncements to clarify their application to the Equity Purchase Agreement” signed on January 9th,financial guarantee insurance contracts included within the scope of that Statement. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and “The Supplementary Agreementall interim periods within those fiscal years. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS No. 163 on Terms, Pricing and Payment” signedits financial statements but does not expect it to have an effect on March 25, 2008. We accounted for SZPSP as a wholly-owned subsidiary from March 31, 2008 up to March 31, 2009.the Company's financial position, results of operations or cash flows.
In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years after December 15, 2008, and must be applied on a retrospective basis. Early adoption is not permitted. The key termsadoption of this statement is not expected to have a material effect on the Termination Agreement are:Company's future financial position or results of operations.
| · | We have already received RMB12,960,486.30 (US$1.89 million) from the SZPSP Shareholders prior to the execution of the Termination Agreement, the SZPSP shareholders to pay to Deli-Solar (Beijing) the remaining RMB15,839,513.70 (US$2.32 million) from the RMB28.8 million (US$4.22 million) purchase price specified in the Supplementary Agreement in two installments (RMB8,000,000 (US$1.17 million) within 10 days from the execution date of the Termination Agreement and the remaining balance within two months from the execution date of the Termination Agreement) |
In June 2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per Share. | · | The SZPSP shareholders to return to us an aggregate of 939,364 shares in our Company they received pursuant to the Supplementary Agreement |
9
| · | The SZPSP shareholders will also pay to us a portion of SZPSP's net profit for the period from April 1, 2008 to March 31, 2009, an amount which will be determined at a future date by the SZPSP shareholders and Deli-Solar (Beijing) |
On August 20,CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in US Dollars)
(Unaudited)
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS, continued
Under the guidance of FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The Company is assessing the potential impact of this FSP on the earnings per share calculation.
In June 2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early application is not permitted. The Company is assessing the potential impact of this EITF 07-5 on the financial condition and results of operations.
In April 2009, the 939,364 shares returned from SZPSPFASB issued Financial Staff Position SFAS 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP SFAS 107-1 and APB 28-1). The FSP statement amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments,” to require disclosures about fair value of financial instruments in interim financial statements as partwell as in annual financial statements. The statement also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements. This statement is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. We are evaluating the impact of the disposal were cancelled by the transfer agent. Up to September 30, 2009, we have received an aggregate RMB 22,460,486.30 (US$3.29 million) in cash from the SZPSP shareholders.this FSP on our financial statements.
NOTE 54 - BALANCE SHEET COMPONENTS
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 the aging of accounts receivablespecifically identified amounts that management believes to be reasonable.uncollectible. If actual collections experience changes, revisions to the allowance may be required.
| September 30, 2009 | | December 31, 2008 | |
| (Unaudited) | | | |
| | | | |
Accounts receivable, cost | | $ | 8,035,301 | | | $ | 6,807,085 | |
L Less : allowance for doubtful accounts | | | (522,942 | ) | | | (845,034 | ) |
| | | | | | | | |
Accounts receivable, net | | $ | 7,512,359 | | | $ | 5,962,051 | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”)
(Unaudited) | | March 31, 2009 | | | December 31, 2008 | |
Accounts receivable, cost | | $ | 6,019,421 | | | $ | 6,885,099 | |
Less: Allowance for doubtful accounts | | | (844,873 | ) | | | (845,034 | ) |
Accounts receivable, net | | $ | 5,174,548 | | | $ | 6,040,065 | |
Inventories:
| September 30, 2009 | | December 31, 2008 | |
| (Unaudited) | | | |
| | | | |
Raw materials | | $ | 887,964 | | | $ | 1,261,714 | |
Consumables | | | 19,631 | | | | 4,320 | |
Work-in-process | | | 126,511 | | | | 21,269 | |
Finished goods | | | 1,857,967 | | | | 3,870,850 | |
Inventories | | $ | 2,892,074 | | | $ | 5,158,153 | |
Other receivables and prepayments:
| | September 30, 2009 | | | December 31, 2008 | |
| | (Unaudited) | | | | |
| | | | | | |
Advance to suppliers | | $ | 944,082 | | | $ | 414,257 | |
Notes receivable | | | 717,323 | | | | 727,175 | |
Prepaid expenses | | | 125,435 | | | | 99,000 | |
Income tax receivable | | | | | | | 195,549 | |
Other receivables | | | 5,142,518 | | | | 5,269,597 | |
Other receivables and prepayments | | $ | 6,929,358 | | | $ | 6,705,578 | |
The balance of other receivables includes the following items:
(1) | The pending amount of receivable from SZPSP as part of the disposal is US$928,322.40 (RMB 6,339,513.70) |
(2) | The amount of loans to Fuwaysun is US$3,000,000 and RMB6,550,000 (US$958,737). See Note 11. |
Other payables and accrued liabilities:
| | September 30, 2009 | | | December 31, 2008 | |
| | (Unaudited) | | | | |
| | | | | | |
Customer deposit | | $ | 2,124,069 | | | $ | 2,827,620 | |
Salary payable | | | 289,251 | | | | 506,936 | |
Accrued expenses | | | 539,763 | | | | 715,256 | |
Other payables | | | 1,298,267 | | | | 2,109,673 | |
Deferred revenue | | | 939,158 | | | | 1,136,809 | |
Totals | | $ | 5,190,508 | | | $ | 7,296,294 | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”)US Dollars)
(Unaudited)
NOTE 4 - BALANCE SHEET COMPONENTS, continued
Inventories consisted of the following:
| | March 31, 2009 | | | December 31, 2008 | |
Raw materials | | $ | 1,961,283 | | | $ | 1,443,266 | |
Work-in-process | | | 2,560,455 | | | | 21,269 | |
Finished goods | | | 5,188,362 | | | | 6,816,666 | |
Consumable | | | 38,545 | | | | 4,320 | |
Total inventory | | $ | 9,748,645 | | | $ | 8,285,521 | |
Other receivables and prepayments consisted of the following:
| | March 31, 2009 | | | December 31, 2008 | |
Advance to suppliers | | $ | 1,710,354 | | | $ | 1,389,998 | |
Notes receivable | | | - | | | | 727,175 | |
Prepaid expenses | | | 164,429 | | | | 159,089 | |
Income tax receivable | | | - | | | | 195,549 | |
Other receivable | | | 4,831,418 | | | | 5,398,764 | |
Other receivables and prepayments | | $ | 6,706,201 | | | $ | 7,870,575 | |
NOTE 65 - STOCKHOLDERS’ EQUITY
Authorized Capital
The Company’s authorized capital stock consists of 66,666,667 shares of common stock at $0.001 par value per share and 25,000,000 shares of preferred stock at $0.001 par value per share.
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 subject to adjustment for stock dividend and stock splits, sale or issuance of common stock at a price which is less than $1.55, at the option of the investors, at any time after the original issue date.
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. Net proceeds of $2,581,000 were used to finance business acquisitions.
During the nine months ended September 30, 2009, 373,566 shares of preferred stock were converted to the same number of shares of common stock.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
Registration Rights
In connection with the private placement on June 13, 2007, the Company deposited 900,000 shares of Series A Convertible Preferred Stock into escrow as security. If the Company’s consolidated pre-tax income for the year ended December 31, 2007 was less than $3,000,000 (or pretax income per share of $0.22 on a fully diluted basis), the Company was required to deliver to the investors (pro rata according to the relative size of their investment) a number of the escrow shares to be determined based on the shortfall by which the Company failed to achieve the 2007 earnings target. If the Company’s consolidated pre-tax income for the year ending December 31, 2008 is less than $5,500,000 (or pretax income per share of $0.40 on a fully diluted basis) the investors were entitled to receive (pro rata according to the relative size of their investment) a number of the remaining escrow shares to be determined based on the shortfall by which the Company failed to achieve 2008 earnings target. The agreement with the investors further provided that the investors will not be entitled to any of the remaining escrow shares and all remaining escrow shares shall be returned to the Company if the Company did not receive at least $4,000,000 from the investors, either through the exercise of warrants, or additional equity financing, within 90 days after the effectiveness of the first registration statement filed pursuant to a certain registration rights agreement entered into with the investors concurrently.
The registration statement was declared effective on February 7, 2008. The earnings target for the year ended December 31, 2007 was met, thus 900,000 escrow shares remained in escrow at the beginning of the year ending December 31, 2008. However, the 900,000 shares held in escrow were not included in the diluted earnings per share calculation for the twelve months ended December 31, 2008 as the escrow shares were to be returned to the Company since the investors did not provide at least $4,000,000 in additional equity financing within 90 days after the effectiveness of the first registration statement and the diluted earnings per share were the same as basic earnings per share due to the net loss result in 2008.
In connection with the private placement, the Company entered into a registration rights agreement with the investors on February 25, 2008 which requires us to file with the SEC a “resale” registration statement providing for the resale of (i) all of the 4,691,499 shares of common stock sold to the investors, (ii) the 2,000,000 “make good shares” and (iii) the 469,150 shares underlying the placement agent warrants (collectively, the “registrable securities”) for an offering to be made on a continuous basis pursuant to Rule 415 of the Securities Act of 1933, as amended.
The Company agreed, among other things, to prepare and file an initial registration statement within 45 days of the closing dates (i.e. April 14, 2008) to register for the registrable securities (other than the 2,000,000 make good shares and the 469,150 shares underlying the placement agent warrants) and cause the registration statements to be declared effective by SEC.
The Company is required to file additional registration statements covering all of the remaining registrable securities (or such lesser number as the SEC deems appropriate). Failure to have the registration declared effective by due date may lead to an imposition of liquidated damages for the Company.
On December 17, 2008, the Registration Statement covering 4,691,499 of common shares in connection with the private placement on February 25, 2008 were declared effective by the Securities and Exchange Commission (“SEC”). On July 1, 2009, the Company filed another Registration Statement covering the 1,000,000 Make Good Shares due to the fact that the Company’s after-tax income for the fiscal year ended December 31, 2008 is less than $4.8 million. The Registration Statement for the 1,000,000 Make Good Shares was declared effective on July 20, 2009.
Common stock
During the nine months ended September 30, 2009, the Company issued 373,566 shares of common stock as part of the conversion of Series A Preferred Stock.
On August 20, 2009, all the 939,364 shares received from SZPSP as part of the disposal of SZPSP were cancelled by the transfer agent. As a result, the number of common shares issued and outstanding as of September 30, 2009 was 15,233,652.
Common Stocks Held in Escrow
In connection with the private placement on February 29, 2008, the Company deposited 2,000,000 shares of common stock (“Make Good Shares”) into escrow and we areis required to deliver (i) 1,000,000 of the Make Good Shares to the investors on a pro rata basis for no additional consideration in the event that the Company’s after-tax net income for the fiscal year endedending December 31, 2008 is less than $4.8 million; and (ii) 1,000,000 of the Make Good Shares to the investors on a pro rata basis for no additional consideration in the event that the Company’s after-tax net income for the fiscal year ending December 31, 2009 is less than $8 million.
As of December 31, 2008, the target of after-tax net income for the fiscal year ended December 31, 2008 wastarget of $4.8 million has not met, the Company filed S-1 registration statement of 1,000,000 of the Make Good Shares to the investors on July 1. The S-1 was declared effective by the Securities and Exchange Commission (“SEC”) on July 20, 2009. As a result, the number of common stocks held in escrow is 1,000,000
A summary of the status of the Company’s outstanding common stock warrants:
| | Number of Shares | | | Weighted- average Exercise Price | | | Weighted- average Remaining Contractual Term | | | Aggregate Intrinsic Value | |
Outstanding and Exercisable at January 1, 2008 | | | 5,555,559 | | | $ | 2.73 | | | 3.76 years | | | $ | 354,839 | |
Granted | | | 611,123 | | | | 2.79 | | | 4.75 years | | | | 633,888 | |
Exercised | | | (75,000 | ) | | | — | | | | — | | | | — | |
Forfeited | | | — | | | | — | | | | — | | | | — | |
Expired | | | — | | | | — | | | | — | | | | — | |
Outstanding and Exercisable at December 31, 2008 | | | 6,091,682 | | | $ | 2.76 | | | 3.53 years | | | $ | 988,727 | |
Granted | | | — | | | | — | | | | — | | | | — | |
Exercised | | | — | | | | — | | | | — | | | | — | |
Forfeited | | | — | | | | — | | | | — | | | | — | |
Expired | | | — | | | | — | | | | — | | | | — | |
Outstanding and Exercisable at September 30, 2009 | | | 6,091,682 | | | $ | 2.76 | | | 2.14 years | | | | 1,040,651 | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
(Unaudited)been met.
NOTE 76 - INCOME TAXES
The Company is registered in the United States of America (“USA”) and has operations in three tax jurisdictions: the USA,United States of America, British Virgin IslandIslands (“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 all of its net income from the operation of its subsidiary in the PRC and is subject to the PRC tax jurisdiction. The Company has recorded an income tax provision for the ninethree months ended September 30,March 31, 2009.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in US Dollars)
(Unaudited)
NOTE 6 - INCOME TAXES, continued
United States of America
China Solar was incorporated in the State of Nevada and is subject to the tax laws of United States of America. As of September 30,March 31, 2009, the operation in the United States of America incurred $362,933 of net operating losses available for federal tax purposes, which are available to offset future taxable income. The net operating loss carry forwards will expire through 2028, if unutilized. The Company has provided for a full valuation allowance against the deferred tax assets of $54,440 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.
British Virgin IslandIslands
Under the current BVI law, the Company is not subject to tax on income.
The PRC
The Company’s subsidiaries operating in the PRC are Bazhou Deli Solar, (Bazhou),Beijing Deli Solar, (Beijing), Ailiyang, Tianjin Huaneng and Tianjin Huaneng.SZPSP.
Of these subsidiaries Ailiyang, isTianjin Huaneng are domestically owned and subject to the Corporate Income Tax (“CIT”) governed by the Income Tax Law of the People’s Republic of China, at a statutory rate of 25%.
On November 4, 2008, Tianjin Huaneng was classified as an Advanced Technology Enterprise in the PRC, consequently, the CIT for Tianjin Huaneng is reduced to 15% for the years of 2008, 2009 and 2010.
In March 2005, the Bazhou Deli Solar (Bazhou) was classified asbecame a foreign investment enterprise. Hence, effective from the year ended 2005, Bazhou Deli Solar (Bazhou) is entitled to a two-year exemption from enterprise income tax (which expired at the end of March 2007) and a reduced enterprise income tax rate of 15% for the following three years.
On July 25, 2006, SZPSP was classified as an Advanced Technology Enterprise in the PRC. The Company is exempted from CIT for the first two profit making years and then the CIT is reduced to 15% in the following three years. On July 6, 2009, Deli Solar (Beijing), entered into the Termination Agreement with SZPSP's shareholders. From April 1, 2008 up to March 31,2009 shares of SZPSP were held by Deli Solar (Beijing) and we accounted for SZPSP as a wholly-owned subsidiary. As of March 31, 2009, the operation in SZPSP incurred $461,641 of net operating losses.
In September 2006, the Beijing Deli Solar (Beijing) was formedfounded as a foreign investment enterprise. Hence, effective from the year ended 2006, Beijing Deli Solar (Beijing) is entitled to a two-year exemption from enterprise income tax and a reduced enterprise income tax rate of 15% for the following three years.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
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. Tianjin Huaneng is now is subject to CIT at a statutory rate of 25%. However, as foreign invested enterprises, Bazhou Deli Solar, (Bazhou) andBeijing Deli Solar (Beijing)and SZPSP can continue to enjoy the lower CIT rate of 15% until their tax holiday expires.
The Company’s effective income tax rates for the three months ended March 31, 2009 and 2008 were 18%. The Company’s effective income tax rate of 18% for the three months ended March 31, 2008 was due to an exemption from enterprise income tax provided by the PRC taxing authority during that period, as discussed above.
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in US Dollars)
(Unaudited)
NOTE 87 - SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
(a) Business information
During the ninethree months ended September 30,March 31, 2009, the Company had twoprimarily four reportable segments, namely (i) Solarsolar heater/Biomass stove/Building integrated energyboiler related products, (ii) heat pipe related products and (iii) energy-saving projects, (iv) solar heat collector and others, under the management of Bazhou Deli Solar, (Bazhou), Deli Solar (Beijing)Tianjin Huaneng, and Ailiyang; and (ii) Industrial waste heat recovery/energy-saving projects under the management Tianjin Huaneng.Shenzhne Pengsangpu, respectively.
An analysis ofDuring the three months ended March 31, 2008, the Company had primarily two reportable segments, (i) solar heater/boiler related products and (ii) heat pipe related products.
The Company’s revenue, gross profit and total assets isby reportable segment for the three months ended March 31, 2009 and 2008 are as follows:
Revenue
| Three months ended September 30, | | Nine months ended September 30, | |
| 2009 | | | 2008 | | 2009 | | 2008 | |
| | | | | | | | | |
Revenue: | | | | | | | | | |
Solar heater/Biomass stove/Building integrated energy projects | | $ | 1,527,584 | | | | 11,317,237 | | | $ | 4,539,572 | | | $ | 24,143,765 | |
Industrial waste heat recovery/energy-saving projects | | | 3,817,339 | | | | 6,032,199 | | | | 15,580,920 | | | | 17,349,529 | |
| | $ | 5,344,923 | | | | 17,349,436 | | | $ | 20,120,492 | | | $ | 41,493,294 | |
Gross Profit
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2009 | | 2008 | | 2009 | | 2008 | |
| | | | | | | | | |
Gross profit: | | | | | | | | | |
Solar heater/Biomass stove/ Building integrated energy saving projects | | $ | 375,792 | | | $ | 2,281,451 | | | $ | 1,024,025 | | | $ | 4,901,773 | |
Industrial waste heat recovery/energy-saving projects | | | 936,592 | | | | 1,915,612 | | | | 3,334,171 | | | | 5,697,302 | |
| | $ | 1,312,384 | | | $ | 4,197,063 | | | $ | 4,358,197 | | | $ | 10,599,075 | |
Total assets
| | September 30,2009 | | | December 31,2008 | |
Total assets | | 2009 | | | 2008 | |
Solar heater/Biomass stove/Building integrated energy projects | | $ | 14,917,326 | | | | 12,795,964 | |
Industrial waste heat recovery/energy-saving projects | | $ | 15,529,407 | | | | 14,360,410 | |
Discontinued operation | | $ | | | | | 8,972,481 | |
Other | | $ | 8,194,952 | | | | 10,440,068 | |
| | $ | 38,641,685 | | | | 46,568,923 | |
| | 2009 | | | 2008 | |
Revenue: | | | | | | |
Solar water heaters/boilers & space heaters | | $ | 1,547,847 | | | $ | 2,829,815 | |
Heat-pipe related products and equipment | | | 2,106,541 | | | | 5,470,261 | |
Energy-saving projects | | | 369,105 | | | | - | |
Solar heat collector and others | | | 709,671 | | | | - | |
| | $ | 4,733,164 | | | $ | 8,300,076 | |
| | | | | | | | |
Gross profit: | | | | | | | | |
Solar water heaters/boilers & space heaters | | $ | 328,312 | | | $ | 574,893 | |
Heat-pipe related products and equipment | | | 557,518 | | | | 1,880,167 | |
Energy-saving projects | | | 10,027 | | | | - | |
Solar heat collector and others | | | 19,280 | | | | - | |
| | $ | 915,137 | | | $ | 2,455,060 | |
| | | | | | | | |
Total assets: | | | | | | | | |
Solar water heaters/boilers & space heaters | | $ | 14,165,584 | | | $ | 12,795,964 | |
Heat-pipe related products and equipment | | | 13,650,457 | | | | 14,360,410 | |
Energy-saving projects | | | 2,333,218 | | | | 7,916,717 | |
Solar heat collector and others | | | 4,486,035 | | | | 2,409,562 | |
All other | | | 10,257,783 | | | | 9,015,555 | |
| | $ | 44,893,077 | | | $ | 46,498,208 | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))US Dollars)
(Unaudited)
NOTE 7 - SEGMENT REPORTING, GEOGRAPHICAL INFORMATION, continued
Other segment in total assets refers to solar lighting products and sales of spare parts parts/components. The amount of other assets is less than 10% in each category and disclosed as an “all other” category in accordance with paragraph 21 of SFAS 131.131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). There was no elimination or reversal of transactions between reportable segments.
(b) Geographic information
The Company operates in the PRC and all of the company’sCompany’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 area. The Company’s salesrevenue, gross profit and total assets by geographical market for the three months ended March 31, 2009 and 2008 are analyzed as follows:
| | Three months ended September 30, | | Nine months ended September 30, | | |
| | 2009 | | 2008 | | 2009 | | 2008 | | |
| | | | | | | | | | | March 31, 2009 | | March 31, 2008 | |
Revenue: | | | | | | | | | | | | | | |
PRC | | $ | 5,339,069 | | | $ | 17,327,480 | | | $ | 19,712,775 | | | $ | 41,451,013 | | | $ | 4,586,613 | | | $ | 7,320,833 | |
Others | | | 5,854 | | | | 21,956 | | | | 407,717 | | | | 42,281 | | |
Other markets | | | | 146,551 | | | | 979,243 | |
| | | | | | | | | | | | | | | | | | $ | 4,733,164 | | | $ | 8,300,076 | |
| | $ | 5,344,923 | | | $ | 17,349,436 | | | $ | 20,120,492 | | | $ | 41,493,294 | | | | | | |
Gross profit: | | | | | | |
PRC | | | $ | 886,662 | | | $ | 2,165,363 | |
Other markets | | | | 28,475 | | | | 289,697 | |
| | | $ | 915,137 | | | $ | 2,455,060 | |
| | | | | | |
Total assets: | | | | | | |
PRC | | | $ | 40,473,231 | | | $ | 40,331,385 | |
Other markets | | | | 4,419,846 | | | | 6,166,823 | |
| | | $ | 44,893,077 | | | $ | 46,498,208 | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2009 | | 2008 | | 2009 | | 2008 | |
| | | | | | | | | |
Gross profit: | | | | | | | | | |
PRC | | $ | 1,307,387 | | | $ | 4,190,476 | | | $ | 4,099,770 | | | $ | 10,580,894 | |
Others | | | 4,997 | | | | 6,587 | | | | 258,427 | | | | 18,181 | |
| | | | | | | | | | | | | | | | |
| | $ | 1,312,384 | | | $ | 4,197,063 | | | $ | 4,358,197 | | | $ | 10,599,075 | |
| | September 30, | | | December 31, | |
| | 2009 | | | 2008 | |
Total assets: | | | | | | |
PRC | | $ | 35,098,892 | | | $ | 40,402,100 | |
Others | | | 3,542,793 | | | | 6,166,823 | |
| | | | | | | | |
| | $ | 38,641,685 | | | $ | 46,568,923 | |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”))US Dollars)
(Unaudited)
NOTE 98 – CONTINGENCY
Under an engagement agreement dated January 16, 2008 between the Company and Roth Capital Partners, LLC (“Roth”), Roth acted as a placement agent for the Company in connection with the private placement of approximately 4.7 million shares of our common stock which was consummated in February 2008 (the “Offering”). Under a certain agreement, dated as of March 21, 2007 by and among Trenwith Securities, LLC (“Trenwith”) and the Company (the “Trenwith Agreement”), Trenwith was granted certain rights, including the right to act as placement agent in connection with a subsequent private placement of the Company’s securities at fees which are mutually acceptable within a period of 24 months after the closing of the June 2007 financing. Trenwith believes that it had the right to act as placement agent with respect to the Offering and has threatened to bring proceedings against the Company for alleged violation of its rights under the Trenwith Agreement. The Company disputes these claims and intends to vigorously defend any lawsuit which Trenwith may commence.
NOTE 10 –NET INCOME PER SHARE9-RELATED PARTY
Zhang Junru, CEO of Tianjin Huaneng, is one of the 21 individual investors for Huaneng Installation Corporation, a subsidiary of Tianjin Huaneng, which is the controlling shareholder of Huaneng Installion with 65% of the equity. The 21 individual investors including Zhang Junru in combination owns 35% of the shares in Huaneng Installation.
The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended September 30, 2009 and 2008:
| | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Basic and diluted net income per share calculation | | | | | | | | | | | | |
| | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
Net income from continued operation | | $ | 45,646 | | | $ | 1,190,839 | | | $ | 81,452 | | | $ | 2,511,146 | |
Net income from discontinued operation | | | - | | | | 448,362 | | | | (512,390 | ) | | | 613,917 | |
Gain on sale of discontinued operation | | | - | | | | - | | | | 652,753 | | | | - | |
| | | 45,646 | | | | 1,639,201 | | | | 221,815 | | | | 3,125,064 | |
| | | | | | | | | | | | | | | | |
Denominator: - Weighted average ordinary shares outstanding | | | 14,652,826 | | | | 13,586,827 | | | | 14,300,013 | | | | 11,651,656 | |
- Weighted average preferred stock outstanding | | | 900,000 | | | | 586,189 | | | | 932,550 | | | | 1,126,801 | |
- Weighted average contingent shares outstanding | | | 1,000,000 | | | | 1,000,000 | | | | 1,000,000 | | | | 795,620 | |
- Weighted average warrant shares outstanding | | | - | | | | - | | | | - | | | | 226,119 | |
- Weighted average ordinary shares outstanding -diluted | | | 16,552,826 | | | | 15,173,016 | | | | 16,232,563 | | | | 13,800,196 | |
NOTE 1110 - SUBSEQUENT EVENT
(a) | Postponement of Acquisition of Shenzhen Fuwaysun Technology Co Ltd |
(a) Postponement of Acquisition of Shenzhen Fuwaysun Technology Co., Ltd.
On January 21, 2008, we entered into a letter of intent (“LOI”) with Mr. ChaoweiCaowei Liang, Ms. Xuemei Mo and Mr. Huafeng Mo (the “Fuwaysun Shareholders”), the three shareholders holding the entire equity interests of Shengzhen Fuwaysun Technology Co., Ltd. (“Fuwaysun”), a PRC company primarily engaged in the development and production of solar pest killing lamps and transportable solar generators. Pursuant to the LOI, we will acquire 60% of Fuwaysun’s entire equity interests (the “Acquisition”) from the Fuwaysun Shareholders at a purchase price equal to 60% of Fuwaysun’s audited net assets as of January 30, 2008 (the “Purchase Price”). We will pay the purchase price with cash and our shares of China Solar.
to be agreed upon by the parties.
In April 2008, we entered into two loan agreements with Fuwaysun (the “Loan Agreements”), pursuant to which we made two loans to Fuwaysun as working capital for ninesix months, one for $3,000,000 and the other for RMB3,000,000 ($424,352) (the “Loans”), respectively. The Loan Agreements are substantially identical, except for the amountamounts of the loans. Pursuant to the Loan Agreements, if we complete the Acquisition within ninesix months, we will cancel the Loansloans to offset the Purchase Price; ifPrice. If we cannot complete the Acquisition within ninesix months, Fuwaysun must repay the Loansloans within 30 days after the expiration of the ninesix months plus interest on the Loansloans at a rate of 12% per annum. However, if Fuwaysun refuses to complete the Acquisition, Fuwaysun shallmust repay the Loans plus accrued interest at a rate of 20% per annum within 30 days thereafter and pay us liquidated damages equal to 5% of the Purchase Price. If Fuwaysun fails to repay either Loanloan, pursuant to the applicable Loan Agreement, it shallis required to pay us additional interest on such Loan at a rate of 0.5% per day.
On April 9, 2009, we entered into a supplementarysupplement agreement with the Fuwaysun Shareholders and Fuwaysun (the “Supplementary“Supplement Agreement”) and extended both the date for the parties to extend the dates of bothcomplete the Acquisition and the maturity date of the Loans to June 30, 2009. The acquisition was not completed by September 30, 2009 due toand otherwise retained the fact that the equity staketerms of the acquiree expands substantially during the periodLOI and the parties are still in negotiations to complete the deal.Loan Agreements.
(b) | Postponement of Acquisition of Shenzhen Xiongri Solar Co Ltd |
CHINA SOLAR & CLEAN ENERGY SOLUTIONS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in US Dollars)
(Unaudited)
NOTE 10 - SUBSEQUENT EVENTS, continued
(b) Postponement of Acquisition of Shenzhen Xiongri Solar Co., Ltd.
In 2006, we entered into a series of agreements with the three shareholders of Shenzhen Xiongri Solar Co., Ltd. (“Xiongri”) to purchase 60% of the entire equity interests of Xiongri for RMB2,000,000 ($282,901). The three shareholders agreed to loan RMB2,000,000RMB2, 000,000 to Xiongri as working capital. TheWe have not completed the transfer of the 60% equity interests is not yet completed.
interests.. On April 9, 2009, the parties entered into a supplementarysupplemental agreement and agreed to complete the transfer of the 60% equity interests by June 30, 2009.
NOTE 11- RESTATEMENT ON CONSOLIDATED FINANCIAL STATEMENTS
In April 14, 2010, we file an amendment of 10K of 2008, the following are the reasons the restatement is required.
The Acquisitionacquisition of the additional 29.97% interest in Tianjin Hua Neng Energy Equipment Company on October 27, 2009 was not completed by September 30, 2009 and the parties are stillproperly recorded. As disclosed in negotiationsNote 4 to complete the deal.
The subsequent events were evaluated as of November 12, 2009, the date the financial statements of 2008, the Registrant paid $515,026 at the completion of the agreement with the remainder, aggregating approximately $1,047,611 plus interest to be paid over the next three years. We only recorded the amount actually paid and did not record the corresponding debt. In addition there 1,000,000 warrants to purchase the company’s common stock were issued.issued as part of the purchase price and were not valued and included as additional purchase price.
The using right of building of Deli Solar (Beijing) will expire in August, 2011. But the Company never depreciated for it. So the Company decided to correct it.
After further analysis of the Company’s revenue recognition policy, it has decided to change the revenue recognition of its consolidated subsidiary Tianjin Hua Neng. The Company will make the appropriate entries to properly record the revenue and associated costs of revenue.
The following is a summary of the effects of the restatement on the balance sheet as of December 31, 2008.
| | As of December 31, 2008 | |
| | as previously reported | | | as restated | |
| | | | | | |
ASSETS | | | | | | |
Accounts receivable, net | | $ | 7,284,255 | | | $ | 6,040,065 | |
Inventories | | | 6,950,844 | | | | 8,285,521 | |
Total current assets | | | 24,667,249 | | | | 24,757,736 | |
Property, plant and equipment, net | | | 15,366,009 | | | | 15,149,198 | |
Goodwill | | | 2,284,903 | | | | 2,340,512 | |
Total assets | | $ | 46,568,923 | | | $ | 46,498,2083 | |
| | As of December 31, 2008 | |
| | as previously reported | | | as restated | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Income tax payables | | $ | 2,236,298 | | | $ | 1,818,488 | |
Other payables and accrued liabilities | | | 8,386,698 | | | | 11,900,000 | |
Total current liabilities | | | 15,924,345 | | | | 18,309,837 | |
Long-term debt | | | - | | | | 286,483 | |
Total liabilities | | | 15,940,124 | | | | 18,612,099 | |
Minority interests | | | 1,704,248 | | | | 194,542 | |
| | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Additional paid-in capital | | | 22,966,404 | | | | 23,073,258 | |
Retained earnings | | | 3,365,788 | | | | 2,025,950 | |
Total stockholders’ equity | | | 28,924,551 | | | | 27,691,567 | |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 46,568,923 | | | $ | 46,498,208 | |
The following is a summary of the effects of the restatement on the 10Q for the three months ended March 31, 2009.
| | As of March 31, 2009 | |
| | as previously reported | | | as restated | |
| | | | | | |
ASSETS | | | | | | |
Accounts receivable, net | | $ | 6,658,667 | | | $ | 5,174,548 | |
Inventories | | | 7,240,423 | | | | 9,748,645 | |
Total current assets | | | 22,218,418 | | | | 23,242,521 | |
Property, plant and equipment, net | | | 15,306,283 | | | | 15,089,472 | |
Goodwill | | | 2,284,903 | | | | 2,340,512 | |
Total assets | | $ | 44,030,176 | | | $ | 44,893,077 | |
| | As of March 31, 2009 | |
| | as previously reported | | | as restated | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Income tax payables | | $ | 2,210,157 | | | $ | 1,543,770 | |
Other payables and accrued liabilities | | | 7,343,0611 | | | | 11,617,232 | |
Total current liabilities | | | 14,249,947 | | | | 17,857,731 | |
Long-term debt | | | - | | | | 286,483 | |
Total liabilities | | | 14,265,726 | | | | 18,159,993 | |
Minority interests | | | 1,713,804 | | | | 204,098 | |
| | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Additional paid-in capital | | | 22,966,404 | | | | 23,073,258 | |
Retained earnings | | | 2,425,240 | | | | 796,726 | |
Total stockholders’ equity | | | 28,050,646 | | | | 26,528,986 | |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 44,030,176 | | | $ | 44,893,077 | |
| | Three months ended March 31, 2009 | |
| | as previously reported | | | as restated | |
Revenue, net | | $ | 6,195,691 | | | $ | 4,733,164 | |
Cost of revenue | | | 4,991,878 | | | | 3,818,027 | |
Gross profit | | | 1,203,813 | | | | 915,137 | |
Income before income taxes | | | (893,669 | ) | | | (1,182,345 | ) |
Net income | | | (940,548 | ) | | | (1,229,224 | ) |
Net income available to common stockholders | | $ | (940,548 | ) | | $ | (1,229,224 | ) |
Net income per share – basic | | $ | (0.07 | ) | | $ | (0.09 | ) |
Net income per share – diluted | | $ | (0.07 | ) | | $ | (0.09 | ) |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information — This item includes “forward-looking statements”. All statements, other than statements of historical facts, included in this item 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, which could cause actual results to materially differ from such statements. While the Company believes that the assumptions concerning future events are reasonable, it cautions that there are inherent difficulties in predicting certain important factors, especially the timing and magnitude of technological advances; the prospects for future acquisitions; the competition in the solar water heaters and boilers industry and the impact of such competition on pricing, revenues and margins; uncertainties surrounding budget reductions or changes in funding priorities of existing government programs and the cost of attracting and retaining highly skilled personnel.
Overview
We are engaged in the renewable energy business in the PRC. Our business is conducted through our wholly-owned PRC based operating subsidiaries, Deli Solar (Bazhou), Deli Solar (Beijing), Ailiyang and our majority owned subsidiary Tianjin Huaneng.
The Company has twothree reportable segments: (i) Solar heater/Biomass stove/Building integrated energy projects for households and buildings; and (ii) Industrial waste heat recovery/Energy-saving projects for industrial customers.customers; and (iii) Heat pipe related products.
Deli Solar (Bazhou) manufactures and distributes solar products in the PRC. The Company’ principal products are solar hot water heaters and multifunctional space heaters, including coal-fired boilers for residential use. Deli Solar (Bazhou) also sells spare parts for its products and provides after-sales maintenance and repair services.
Deli Solar (Beijing) is principally engaged in the service and installation of energy saving equipments in residential and commercial buildings in major cities in the PRC.
Tianjin Huaneng provides waste heat recovery and energy saving solutions for industrial customers. The Company manufactures heating products such as heating pipes, heat exchangers, specialty heating pipes and tubes, high temperature hot blast boilers, heating filters, normal pressure water boilers, solar energy water heaters and radiators.
Approximately 22.6% of our net revenue for the nineThree months ended September 30,March 31, 2009 was derived from salescompared to three months ended March 31, 2008
Sales Revenues
An analysis of our Solar heater/Biomass stove/Building integrated energy projectsthe Company’s revenues and 77.4% from sales of our Industrial waste heat recovery/energy-saving projects, respectively. Approximately 98.0% and 2.0% of our netgross profits for each segment is as follows:
| | Three Months Ended March 31, 2009 | | | Three Months Ended March 31, 2008 | |
Revenue: | | | | | | |
Solar water heaters/boilers & space heaters | | $ | 1,547,847 | | | $ | 2,829,815 | |
Heat-pipe related products and equipment | | | 2,106,541 | | | | 5,470,261 | |
Energy-saving projects | | | 369,105 | | | | - | |
Solar heat collector and others | | | 709,671 | | | | - | |
| | $ | 4,733,164 | | | $ | 8,300,076 | |
Overall: Sales revenues for the ninethree months ended September 30,March 31, 2009 were derived from$4,733,164 as compared to $8,300,076 for the same period last year, a decrease of $3,566,912 or 43% compared to the same period in 2008. The decrease in sales made insidewas primarily attributable to a weakening economy. Sales for industrial enterprises in China are usually slow for the PRCfirst quarter due to the long holiday season around Chinese Lunar New Year. We expect sales revenue to increase during the rest of the year with the completion of pending projects in the first quarter and outsidecollection of the PRC, respectively.account receivables corresponding to these projects.
Recent DevelopmentsSolar Heater/Boiler Related Products: Sales revenues for these products for the three months ended March 31, 2009 were $1,547,847 as compared to $2,829,815 for the same period last year, a decrease of $1,281,968 or 45.3%. The decrease in sales revenue derived from solar heaters and boiler related products was due to lower average selling price as a result of increased competition and a weakening economy. We expect price competition to continue for the remainder of 2009.
Heat Pipe Related Products and Equipment: Sales revenues for the three months ended March 31, 2009 were $2,106,541 compared to $5,470,261 for the same period last year, a decrease of $3,363,720 or 61.5%. The decrease in sales of heat pipe related products and equipments were a result of slowdown in demand amid economic downturn. The average selling price decreased as a result of increased competition. We expect an increase in sales of heat pipe related products and equipments in the second half due to traditional seasonal increased market demand for boiler related products as winter approaches and as a result of aggressive investment in infrastructure construction as part of its stimulus initiative by the Chinese government to revive the economy. This potential increase in sales will be negatively affected by the continuing price competition for the rest of 2009.
On July 6,Energy Saving Projects: Sales revenues for the three months ended March 31, 2009 Deli Solar (Beijing) entered intowere $ 369,105 compared to 0 for the Termination Agreement withsame period last year. The sales of energy saving projects were attributable to the acquisition of SZPSP Shareholders. The Termination Agreement terminates the Equity Purchase and Complementary Agreements Deli Solar (Beijing) entered into with the SZPSP Shareholders on January 9, 2008, which were amended and supplemented by the Supplementary Agreement Deli Solar (Beijing) entered into with the SZPSP Shareholders on March 25, 2008. The terms of the Equity Purchase and Complementary Agreements are described in our Form 8-K report filed on January 15, 2008. The terms of the Supplementary Agreement are described in our Form 8-K report filedthat was completed on April 1, 2008.
Solar Heat Collector and Others: Sales revenues for the three months ended March 31, 2009 were $ 709,671 compared to 0 for the same period last year. The sales of solar heat collectors and others were attributable to the acquisition of SZPSP completed on April 1, 2008.
Gross Profit
| | For the Three Months Ended March 31, 2009 | | | For the Three Months Ended March 31, 2008 | |
Revenue: | | | | | | |
Solar water heaters/boilers & space heaters | | $ | 328,312 | | | $ | 574,893 | |
Heat-pipe related products and equipment | | | 557,518 | | | | 1,880,167 | |
Energy-saving projects | | | 10,027 | | | | - | |
Solar heat collector and others | | | 19,280 | | | | - | |
| | $ | 915,137 | | | $ | 2,455,060 | |
Overall: Gross profit margin for the three months ended March 31, 2009 decreased by approximately 10% from the corresponding period in 2008. This was primarily due to a decrease in sales of low-margin products such as household water heaters and the relatively higher cost of key raw materials such as stainless steel. The Company added stockpiles when the stainless steel price was higher, which translated to a higher production cost and lower gross profit. We accountedexpect the gross profit for SZPSPlower margin products, such as household water heaters, to decrease as a wholly-owned subsidiary fromresult of increasingly intensive competition in the market, while the gross profit for higher margin products, such as large-scale projects and equipments, is to increase for the remaining of year with the completion of pending projects and new orders for equipments.
Solar Heater/Boiler Related Products: Gross profit margin remained fairly constant for the three months ended March 31, 2009 (21%) compared to the three months ended March 30, 2008 up(20%). Although we anticipate an increase in market demand in the boiler related products as winter approaches, we expect the profit margin for household solar water heater/boilers to decrease as the price competition is likely to continue for the remainder of 2009.
Heat Pipe Related Products and Equipments: Gross profit margin for the three months ended March 31, 2009.2009 was approximately 26%, a decrease of 8% from the corresponding period last year. The decrease in gross profit margin was to the lower average product sales price as a result of increased competition for these products.
Energy Saving Projects: Gross profit for the three months ended March 31, 2009 was $ 10,027 (2.7% margin) . The profit margin for this category is attributable to the decrease in average selling price and increase in expenditure for the product promotion and marketing campaigns launched during the first three months in SZPSP. We expect the gross profit for energy-saving projects to increase due to an increase in government orders for infrastructure construction. There were no sales of these products in the corresponding period for the prior year as SZPSP was not one of the subsidiaries in 1Q of 2008.
Solar Heat Collector and Others: Gross profit for the three months ended March 31, 2009 was $19,280 (2.7% margin) The profit margin for this category is attributable to the decrease in average selling price and increase in expenditures for the product promotion and marketing campaigns launched during the first three months in SZPSP. There were no sales of these products in the corresponding period for the prior year as SZPSP was not one of the subsidiaries in 1Q of 2008.
Operating Expenses
Operating expenses for the three months ended March 31, 2009 were $2,117,231, as compared to $1,253,383 for the same period in 2008, an increase of $863,848, or 68.9%. The overall increase in operating expenses was primarily due to the acquisition of SZPSP and the subsequent increase in sales and marketing expenses detailed below.
Depreciation and amortization expense increased to $304,988 as compared to $149,167 for the same period last year. The increase was mainly due to an increase in depreciation and amortization expense as a result of the acquisition of SZPSP.
The key terms of the Termination Agreement are:
| · | Deli Solar (Beijing) having already received RMB12,960,486.30 from the SZPSP Shareholders prior to the execution of the Termination Agreement, the SZPSP Shareholders to pay to Deli Solar (Beijing) the remaining RMB15,839,513.70 from the RMB28.8 million purchase price specified in the Supplementary Agreement in two installments (RMB8,000,000 within 10 days from the execution date of the Termination Agreement and the remaining balance within two months from the execution date of the Termination Agreement) |
| · | The SZPSP Shareholders to return to Deli Solar (Beijing) an aggregate of 939,364 shares in our Company they received pursuant to the Supplementary Agreement |
| · | The SZPSP Shareholders will also pay to Deli-Solar (Beijing) a portion of SZPSP's net profit for the period from April 1, 2008 to March 31, 2009, an amount which will be determined at a future date by the SZPSP Shareholders and Deli Solar (Beijing) |
Three months ended September 30, 2009 compared to three months ended September 30, 2008
Sales Revenue
| | Three months ended September 30 | |
Revenue | | 2009 | | | 2008 | |
Solar heater/Biomass stove/Building integrated energy projects | | $ | 1,527,584 | | | | 11,317,237 | |
Industrial waste heat recovery/energy-saving projects | | $ | 3,817,339 | | | | 6,032,199 | |
total | | $ | 5,344,923 | | | | 17,349,436 | |
Overall: Sales revenue for the three months ended September 30, 2009 were $5,344,923 as compared to $17,349,436 for the three months ended September 30, 2008, a decrease of $12,004,513 or 69.2%. The decrease in sales was primarily attributable to the decline in sales from single solar products such as solar heater and biomass stove in Deli Solar (Bazhou). We expect overall sales revenue for the single solar products to continue to face intensive competition in the PRC market, while the sales revenue for energy-saving projects is expected to increase during the rest of the year with the completion of these projects.
Solar heater/Biomass stove/Building integrated energy projects: Sales revenue for these products for the three months ended September 30, 2009 were $1,527,584 as compared to $11,317,237 for the three months ended September 30, 2008, a decrease of $9,789,653 or 86.5%. The decrease in sales revenue derived from solar heaters/biomass stove/boiler related products was due to a weak market and strong competition. We expect the competition in solar heaters/biomass stove/boiler related products to continue for the remainder of 2009.
Industrial waste heat recovery/energy-saving projects: Sales revenue for the three months ended September 30, 2009 was $3,817,339 as compared to $6,032,199 for the three months ended September 30, 2008, a decrease of $2,214,860 or 36.7%. The decrease in sales of industrial waste heat recovery/energy-saving projects was due to slowdown in industrial orders during the first quarter of 2009 as a result of a weakening economy. There is a time delay for the recognition of sales revenue for the industrial projects, which usually takes three to six months to complete. Certain large orders were placed in the third quarter of 2009, revenue from which we could recognize in the fourth quarter of 2009 or first quarter of 2010.
Gross Profit
| | Three months ended September 30 | |
Gross profit | | 2009 | | 2008 | |
Solar heater/Biomass stove/Building integrated energy projects | | $ | 375,794 | | | $ | 2,281,451 | |
Industrial waste heat recovery/energy-saving projects | | $ | 936,590 | | | | 1,915,612 | |
| | $ | 1,312,384 | | | $ | 4,197,063 | |
Overall: Gross profit margin for the three months ended September 30, 2009 increased slightly by approximately 0.3% to 24.5%, as compared to 24.2% for the three months ended September 30, 2008. This was primarily due to the decrease in the cost of key raw materials. We decreased our inventory of stainless steel while the price of stainless steel price was high, resulting in lower production costs and a higher gross profit.
Solar heater/Biomass stove/Building integrated energy projects: Gross profit margin for the three months ended September 30, 2009 was stable at approximately 24.6%, a slight increase of 4.4% as compared to 20.2% for the three months ended September 30, 2008.
Industrial waste heat recovery/energy-saving projects: Gross profit margin for the three months ended September 30, 2009 was approximately 24.5%, a decrease of 7.2%, as compared to 31.8% for the three months ended September 30, 2008. The decrease in gross profit margin is primarily due to an increase in the cost of raw materials.
Operating Expenses,
Operating expenses for the three months ended September 30, 2009 were $1,190,657, as compared to $2,575,956 for the three months ended September 30, 2008, a decrease of $1,385,299, or 53.8%. The overall decrease in the selling/distribution expenses and general/administrative expenses was primarily due to the decrease in sales revenue from solar water heaters and biomass stoves.
Depreciation and amortization expenses decreased to $69,294 for the three months ended September 30, 2009, a decrease of $113,922 or 62.2%, from $183,216 for the three months ended September 30, 2008, primarily as a result of the end of useful life for certain of our manufacturing equipments in the first quarter of 2009. continued
Selling and distribution expenses decreasedexpense increased to $526,874$545,899 as compared to $502,563 for the three months ended September 30, 2009, a decrease of $881,970 or 62.6%, from $1,408,844 for the three months ended September 30, 2008, primarilysame period last year. The increase was mainly due to increased expenses incurred in the decrease indevelopment of sales of solar heatersnetwork and biomass stoves.promotion programs.
General and administrative expenses were $594,489$1,266,344 and $601,653, or approximately 26.8% and 7.2% of sales, for the three months ended September 30,March 31, 2009 (or approximately 11.1%and 2008, respectively. The net increase of sales) compared to $983,896 (or approximately 5.7% of sales) for the three months ended September 30, 2008, a decrease of $389,407 or 39.6%. The decrease$664,691 was primarilymainly due to the decrease in salesacquisition of solar heaters and biomass stoves.
Net Income
Net income was $45,646 for the three months ended September 30, 2009, compared to $1,639,201 for the three months ended September 30, 2008. The decrease was primarily due to the decrease in sales of solar heater/biomass stove/boiler related products.
Sales Revenue
| | Nine months ended September 30 | |
Revenue | | 2009 | | 2008 | |
Solar heater/Biomass stove/Building integrated energy projects | | $ | 4,539,572 | | | $ | 24,143,765 | |
Industrial waste heat recovery/energy-saving projects | | $ | 15,580,920 | | | | 17,349,529 | |
| | $ | 20,120,492 | | | $ | 41,493,294 | |
Overall: Sales revenue for the nine months ended September 30, 2009 were $20,120,492 as compared to $41,493,294 for the nine months ended September 30, 2008, a decrease of $21,372,802 or 51.5% compared to the nine months ended September 30, 2008. The decrease in sales revenue was primarily attributable to the decline in revenue from the Solar heater/Biomass stove/Building integrated energy projects under the management of Deli Solar (Bazhou).
Solar heater/Biomass stove/Building integrated energy projects: Sales revenue for these products for the nine months ended September 30, 2009 were $4,539,572 as compared to $24,143,765 for the nine months ended September 30, 2008, a decrease of $19,604,193 or 81.2%. The decrease in sales revenue was due to a weak market and competition for solar heater and biomass stove. We expect competition to continue for the remainder of 2009.
Heat pipe related equipments/Energy-savings projects: Sales revenue for the nine months ended September 30, 2009 were $15,580,920 compared to $17,349,529 for the nine months ended September 30, 2008, an increase of $1,768,609 or 10.2%. The decrease in sales of industrial waste heat recovery/energy-saving projects was due to slowdown in industrial orders during the first quarter of 2009 as a result of a weakening economy. There is a time delay for the recognition of sales revenue for the industrial projects, which usually takes three to six months to complete. Certain large orders were placed in the third quarter of 2009, revenue from which we could be recognized in the fourth quarter of 2009 or first quarter of 2010.
Gross Profit
| | Nine months ended September 30 | |
Gross profit | | 2009 | | 2008 | |
Solar heater/Biomass stove/Building integrated energy projects | | $ | 1,024,027 | | | $ | 4,901,773 | |
Industrial waste heat recovery/energy-saving projects | | $ | 3,334,170 | | | | 5,697,302 | |
| | $ | 4,358,197 | | | $ | 10,599,075 | |
Overall: Gross profit margin for the nine months ended September 30, 2009 decreased by approximately 3.9% to 21.6% from 25.5% for the nine months ended September 30, 2008. This was primarily due to the decrease in sales of Industrial waste heat recovery/energy-saving projects and increase in the cost of key raw materials. We increased our inventory of stainless steel while the price of stainless steel price was high, resulting in higher production costs and a lower gross profit.
Solar heater/Biomass stove/Building integrated energy projects: Gross profit margin remained fairly constant for the nine months ended September 30, 2009 at 22.6% compared to 20.3% for the nine months ended September 30, 2008.
Industrial waste heat recovery/energy-saving projects: Gross profit margin for the nine months ended September 30, 2009 was approximately 21.4%, a decrease of 11.4% from 32.8% for the nine months ended September 30, 2009. The decrease in gross profit margin was due to the lower average product sales price and higher production costs.
Operating Expenses
Operating expenses for the nine months ended September 30, 2009 were $3,973,170, as compared to $6,072,096 for the nine months ended September 30, 2008, a decrease of $2,098,926 or 34.6%. The overall decrease in operating expenses was primarily due to the decrease in sales of Solar heater/Biomass stove/Building integrated energy projects and the resulting decrease in selling and distribution expenses and general and administrative expenses.
Depreciation and amortization expense decreased to $261,200 for the nine months ended September 30, 2009 from $464,599 for the nine months ended September 30, 2008, primarily as a result of the end of useful life for certain manufacturing equipments in the first quarter of 2009.
Selling and distribution expense decreased to $1,566,946, for the nine months ended September 30, 2009, a decrease of $2,082,920 or 57.1%, from $3,649,866 for the nine months ended September 30, 2008, primarily due to the decrease in sales of Solar heater/Biomass stove/Building integrated energy projects.
General and administrative expenses were $2,145,024 (or approximately 10.7% of sales revenue) for the nine months ended September 30, 2009, compared to $1,957,631 (or approximately 4.7% of sales revenue) for the nine months ended September 30, 2008, primarily due to the decrease in sales of Solar heater/Biomass stove/Building integrated energy projects.SZPSP.
Net Income
Net income (loss) was $221,815($1,229,224) for the ninethree months ended September 30,March 31, 2009, compared to $3,125,064 for$389,651 in the nine months ended September 30, 2008,same period last year, a decrease of $2,903,249$1,618,875 or approximately 92.9%415.5%. The decrease in net incomeloss was due to primarily a result of decreaseslowdown in sales of Solar heater/Biomass stove/Building integrated energy projects.amid a weakening economy and price competition among the peer companies.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided byused in operating activities was $705,573($829,589) and ($4,104,526) for the ninethree months ended September 30,March 31, 2009 whileand 2008, respectively. The decrease in net cash used by operations was mainly due to the decrease in our operating activities was $(2,995,268) for the nine months ended September 30, 2008.sales.
Net cash provided by investing activities was $940,575 for the nine months ended September 30, 2009, compared with net cash used in investing activities in the amount of $(8,118,852)was ($280,208) and ($730,974) for the ninethree months ended September 30, 2008.March 31, 2009 and 2008, respectively.
Net cash provided by financing activities was $51,532 for the nine months ended September 30, 2009, compared with$0 and $10,102,656 for the ninethree months ended September 30, 2008.March 31, 2009 and 2008, respectively.
We believe that current cash flow iswill be sufficient to meet anticipated working capital and capital expenditures for at least the next twelve months. We mayHowever, we need to require additional cash for further development of business, including any investments or acquisitions we may decide to pursue. However, weWe cannot assure you that such funding will be available.
Cash
Cash and cash equivalents increaseddecreased to $3,587,364 as of September 30,$1,361,842 at March 31, 2009 compared to $1,820,882 asfrom $2,404,996 at December 31, 2008, primarily as a result of receiving cash from disposal SZPSPdecrease in sales.
Accounts Receivable
AccountsDuring the three months ended March 31, 2009, account receivable increaseddecreased to $7,512,359$5,174,548 from $6,040,065 as at September 30, 2009, from $5,962,051 as atof December 31, 2008, primarily due to collection positively. We evaluate the need for an increase inallowance for doubtful accounts receivable in connection with an increase inbased on specifically identified amounts that we believe to be uncollectible. If actual collections experience changes, revisions to the projects under construction by Tianjin Huaneng.allowance may be required. Based upon the aforementioned criteria, the allowances for doubtful accounts during the three months ended March 31, 2009 were none.
Inventory
Inventories decreasedas of March 31, 2009 increased to $2,892,074$9,748,645 from $8,285,521 as at September 30, 2009, as compared to $5,158,153 as atof December 31, 2008. This substantial decrease was primarily due to strong sales and a sharp decrease2008 principally because of an increase in inventories of finished products inventorygoods by Tianjin Huaneng. The inventory mainly consists of finished goods waiting for transportation or installation.
Other Receivables and Prepayments
Other receivables and prepayments increased slightlyas of March 31, 2009 decreased to $6,929,358$6,706,201 from $7,870,575 as at September 30, 2009, compared to $6,705,578 as atof December 31, 2008. Other receivables and prepayments mainly consist of prepaid expenses and deposits.
Accounts Payable
Accounts payable increasedas of March 31, 2009 decreased to $1,944,999$4,696,729 from $5,301,349 as at September 30, 2009, compared to $1,148,428 as atof December 31, 2008. This increase was2008 primarily due an increase in inventoryto the payments made to creditors under the term of raw materials.credit agreements.
Other Payables and Accrued Liabilities
Other payables and accrued liabilities decreasedas of March 31, 2009 increased to $5,190,508$11,617,232 from $11,190,000 as at September 30, 2009 from $7,296,294 as atof December 31, 2008, primarily due to a decrease in shareholder loans and customer deposits.
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, resultsthe increase of operations, liquidity or capital expenditures.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Item 4T. CONTROLS AND PROCEDURES
Evaluationdeposit of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
contract.
PART II — OTHER INFORMATION
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportAmendment No. 1 to Form 10-Q on Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized.