CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
18,213,508
|
|
|
$
|
17,343,723
|
|
|
$
|
49,312,341
|
|
|
$
|
39,585,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
13,576,808
|
|
|
|
13,024,265
|
|
|
|
37,572,531
|
|
|
|
30,689,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
4,636,700
|
|
|
|
4,319,458
|
|
|
|
11,739,810
|
|
|
|
8,896,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
109,652
|
|
|
|
373,896
|
|
|
|
461,539
|
|
|
|
1,122,432
|
|
Selling, general and administrative
|
|
|
1,316,925
|
|
|
|
739,386
|
|
|
|
2,675,076
|
|
|
|
2,157,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
1,426,577
|
|
|
|
1,113,282
|
|
|
|
3,136,615
|
|
|
|
3,279,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
3,210,123
|
|
|
|
3,206,176
|
|
|
|
8,603,195
|
|
|
|
5,616,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
14,840
|
|
|
|
5,069
|
|
|
|
16,009
|
|
|
|
10,919
|
|
Interest expense
|
|
|
(74,638
|
)
|
|
|
(84,289
|
)
|
|
|
(244,291
|
)
|
|
|
(244,685
|
)
|
Foreign currency (loss) gain
|
|
|
(9,821
|
)
|
|
|
1,251
|
|
|
|
(15,800
|
)
|
|
|
6,642
|
|
Warrant modification expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(235,133
|
)
|
Other income
|
|
|
5,933
|
|
|
|
51,523
|
|
|
|
43,015
|
|
|
|
64,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense), net
|
|
|
(63,686
|
)
|
|
|
(26,446
|
)
|
|
|
(201,067
|
)
|
|
|
(397,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
3,146,437
|
|
|
|
3,179,730
|
|
|
|
8,402,128
|
|
|
|
5,219,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES
|
|
|
1,015,701
|
|
|
|
824,628
|
|
|
|
2,326,239
|
|
|
|
1,490,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
2,130,736
|
|
|
$
|
2,355,102
|
|
|
$
|
6,075,889
|
|
|
$
|
3,729,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
2,130,736
|
|
|
$
|
2,355,102
|
|
|
$
|
6,075,889
|
|
|
$
|
3,729,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign currency translation gain (loss)
|
|
|
516,244
|
|
|
|
(169,625
|
)
|
|
|
2,161,711
|
|
|
|
342,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
$
|
2,646,980
|
|
|
$
|
2,185,477
|
|
|
$
|
8,237,600
|
|
|
$
|
4,071,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
|
$
|
0.88
|
|
|
$
|
1.95
|
|
|
$
|
1.51
|
|
Diluted
|
|
$
|
0.61
|
|
|
$
|
0.88
|
|
|
$
|
1.95
|
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,479,646
|
|
|
|
2,667,017
|
|
|
|
3,112,148
|
|
|
|
2,469,818
|
|
Diluted
|
|
|
3,479,646
|
|
|
|
2,667,017
|
|
|
|
3,112,148
|
|
|
|
2,617,798
|
|
See notes to unaudited consolidated financial statements
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income
|
|
$
|
6,075,889
|
|
|
$
|
3,729,267
|
|
Adjustments to reconcile net income from operations to net cash
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,882,899
|
|
|
|
4,719,769
|
|
Amortization of land use rights
|
|
|
71,261
|
|
|
|
70,068
|
|
Increase (decrease) in allowance for doubtful accounts
|
|
|
76,784
|
|
|
|
(46,616
|
)
|
Warrant modification expense
|
|
|
-
|
|
|
|
235,133
|
|
Stock-based compensation expense
|
|
|
278,034
|
|
|
|
129,030
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
(390,950
|
)
|
|
|
(112,209
|
)
|
Accounts receivable
|
|
|
(1,260,651
|
)
|
|
|
(3,368,092
|
)
|
Inventories
|
|
|
(158,944
|
)
|
|
|
(1,925,810
|
)
|
Prepaid value-added taxes on purchases
|
|
|
(270,730
|
)
|
|
|
844,969
|
|
Prepaid and other current assets
|
|
|
82,378
|
|
|
|
(41,315
|
)
|
Advances to suppliers
|
|
|
(687,094
|
)
|
|
|
(627,455
|
)
|
Accounts payable
|
|
|
(672,461
|
)
|
|
|
1,310,123
|
|
Accrued expenses
|
|
|
(451,672
|
)
|
|
|
(49,578
|
)
|
VAT and service taxes payable
|
|
|
(209,667
|
)
|
|
|
-
|
|
Income taxes payable
|
|
|
222,801
|
|
|
|
289,230
|
|
Advances from customers
|
|
|
305,052
|
|
|
|
668,446
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
7,892,929
|
|
|
|
5,824,960
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(9,943,309
|
)
|
|
|
(6,334,776
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(9,943,309
|
)
|
|
|
(6,334,776
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Principal payments on capital lease
|
|
|
(390,009
|
)
|
|
|
(205,509
|
)
|
Proceeds from bank loans
|
|
|
4,821,973
|
|
|
|
2,686,706
|
|
Repayments of bank loans
|
|
|
(4,018,311
|
)
|
|
|
(2,370,623
|
)
|
(Increase) decrease in restricted cash
|
|
|
(787,589
|
)
|
|
|
316,083
|
|
Increase (decrease) in bank acceptance notes payable
|
|
|
787,589
|
|
|
|
(316,083
|
)
|
Net proceeds from sale of common stock
|
|
|
2,388,589
|
|
|
|
-
|
|
Proceeds from exercise of warrants
|
|
|
-
|
|
|
|
198,142
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
2,802,242
|
|
|
|
308,716
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
|
|
|
25,427
|
|
|
|
3,898
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
777,289
|
|
|
|
(197,202
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - beginning of period
|
|
|
1,445,728
|
|
|
|
1,152,607
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - end of period
|
|
$
|
2,223,017
|
|
|
$
|
955,405
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
244,291
|
|
|
$
|
244,685
|
|
Income taxes
|
|
$
|
2,103,438
|
|
|
$
|
1,200,944
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Property and equipment acquired on credit as payable
|
|
$
|
547,294
|
|
|
$
|
-
|
|
Series A preferred converted to common shares
|
|
$
|
-
|
|
|
$
|
13,198
|
|
Common stock issued for future service
|
|
$
|
78,600
|
|
|
$
|
27,440
|
|
See notes to unaudited consolidated financial statements
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Cleantech Solutions International, Inc. (the “Company”) was incorporated in Delaware on June 24, 1987 under the name of Malex, Inc. On December 18, 2007, the Company’s corporate name was changed to China Wind Systems, Inc., and on June 13, 2011, the Company’s corporate name was changed to Cleantech Solutions International, Inc. On August 7, 2012, the Company was converted into a Nevada corporation.
Through its affiliated companies and subsidiaries, the Company manufactures and sells forged products and fabricated products to a range of clean technology customers including high precision forged rolled rings and related products for the wind power industry and other industries and equipment to the solar industry. The Company also makes textile dyeing and finishing machines. The Company is the sole owner of Fulland Limited (“Fulland”), a Cayman Island limited liability company, which was organized on May 9, 2007. Fulland owns 100% of the capital stock of Green Power Environment Technology (Shanghai) Co., Ltd. (“Green Power”) and Wuxi Fulland Wind Energy Equipment Co., Ltd. (“Fulland Wind Energy”), which are wholly foreign-owned enterprises (“WFOE”) organized under the laws of the People’s Republic of China (“PRC” or “China”). Green Power is a party to a series of contractual arrangements, as fully described below, dated October 12, 2007 with Wuxi Huayang Electrical Power Equipment Co., Ltd. (“Electrical”) and Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”), both of which are limited liability companies organized under the laws of, and based in, the PRC. Electrical and Dyeing are sometimes collectively referred to as the “Huayang Companies.”
Fulland was organized by the owners of the Huayang Companies as a special purpose vehicle for purposes of raising capital, in accordance with requirements of the PRC State Administration of Foreign Exchange (“SAFE”). On May 31, 2007, SAFE issued an official notice known as Hui Zong Fa [2007] No. 106 (“Circular 106”), which requires the owners of any Chinese company to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters in China. Accordingly, the owners of the Huayang Companies, Mr. Jianhua Wu and Ms. Lihua Tang, submitted their application to SAFE in early September 2007. On October 11, 2007, SAFE approved their application, permitting these Chinese citizens to establish Fulland as a special purpose vehicle for any foreign ownership and capital raising activities by the Huayang Companies.
Electrical was formed on May 21, 2004, and Fulland Wind Energy was formed on August 27, 2008. Beginning in April 2007, Electrical began to produce large-scaled forged rolled rings that are up to three meters in diameter for the wind-power and other industries. In 2009, the Company began to produce and sell forged products through Fulland Wind Energy. Through Fulland Wind Energy, the Company manufactures and machines all forged products, including wind products such as shafts, rolled rings, gear rims, gearboxes, bearings and other components and finished products and assemblies for the wind power industry, and solar products, including large-scale equipment used in the manufacturing process for the solar industry. The Company refers to this segment of its business as the forged rolled rings and related components division.
Dyeing, which was formed on August 17, 1995, produces and sells a variety of high and low temperature dyeing and finishing machinery for the textile industry. The Company refers to this segment as the dyeing division.
Basis of presentation; management’s responsibility for preparation of financial statements
Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented.
These unaudited consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2012.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of presentation; management’s responsibility for preparation of financial statements (continued)
The accompanying unaudited consolidated financial statements for Cleantech Solutions International, Inc., its subsidiaries and variable interest entities, have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.
The Company’s unaudited consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Fulland, Green Power and Fulland Wind Energy, as well as the financial statements of Huayang Companies, Dyeing and Electric. All significant intercompany accounts and transactions have been eliminated in consolidation.
Pursuant to Accounting Standards Codification (“ASC”) Topic 810, the Huayang Companies are considered variable interest entities (“VIE”), and the Company is the primary beneficiary. The Company’s relationships with the Huayang Companies and their shareholders are governed by a series of contractual arrangements between Green Power, the Company’s wholly foreign-owned enterprise in the PRC, and each of the Huayang Companies, which are the operating companies of the Company in the PRC. Under PRC laws, each of Green Power, Dyeing and Electrical is an independent legal entity and none of them is exposed to liabilities incurred by the other parties. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. On October 12, 2007, the Company entered into the following contractual arrangements with each of Dyeing and Electrical:
Consulting Services Agreement
. Pursuant to the exclusive consulting services agreements between Green Power and the Huayang Companies, Green Power has the exclusive right to provide to the Huayang Companies general business operation services, including advice and strategic planning, as well as consulting services related to the technological research and development of dyeing and finishing machines, electrical equipment and related products (the “ Services ”). Under this agreement, Green Power owns the intellectual property rights developed or discovered through research and development, in the course of providing the Services, or derived from the provision of the Services. The Huayang Companies shall pay a quarterly consulting service fees in Renminbi (“RMB”) to Fulland that is equal to all of the Huayang Companies’ profits for such quarter.
Operating Agreement
. Pursuant to the operating agreement among Green Power, the Huayang Companies and all shareholders of the Huayang Companies, Green Power provides guidance and instructions on the Huayang Companies’ daily operations, financial management and employment issues. The Huayang Companies shareholders must designate the candidates recommended by Green Power as their representatives on the boards of directors of each of the Huayang Companies. Green Power has the right to appoint senior executives of the Huayang Companies. In addition, Green Power agrees to guarantee the Huayang Companies’ performance under any agreements or arrangements relating to the Huayang Companies’ business arrangements with any third party. The Huayang Companies, in return, agree to pledge their accounts receivable and all of their assets to Green Power. Moreover, each of the Huayang Companies agrees that, without the prior consent of Green Power, it will not engage in any transactions that could materially affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of their assets or intellectual property rights in favor of a third party or transfer of any agreements relating to their business operation to any third party. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended only upon Green Power’s written confirmation prior to the expiration of the this agreement, with the extended term to be mutually agreed upon by the parties.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of presentation; management’s responsibility for preparation of financial statements (continued)
Equity Pledge Agreement
.
Under the equity pledge agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders pledged all of their equity interests in the Huayang Companies to Green Power to guarantee the Huayang Companies’ performance of their respective obligations under the consulting services agreement. If the Huayang Companies or the Huayang Companies’ shareholders breach their respective contractual obligations, Green Power, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The Huayang Companies’ shareholders also agreed that, upon occurrence of any event of default, Green Power shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the Huayang Companies’ shareholders to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that Green Power may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The Huayang Companies’ shareholders agreed not to dispose of the pledged equity interests or take any actions that would prejudice Green Power’s interest. The equity pledge agreement will expire two years after the Huayang Companies’ obligations under the consulting services agreements have been fulfilled.
Option Agreement
.
Under the option agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders irrevocably granted Green Power or its designated person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in the Huayang Companies for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Green Power or its designated person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended prior to its expiration by written agreement of the parties.
Pursuant to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, the accounts of the Huayang Companies are consolidated in the accompanying financial statements. As VIEs, the Huayang Companies’ sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s net income includes all of the Huayang Companies net income. The Company does not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income of the VIEs that is attributable to the Company. Because of the contractual arrangements, the Company has a pecuniary interest in the Huayang Companies that requires consolidation of the Company’s and the Huayang Companies’ financial statements.
Use of estimates
The preparation of the unaudited consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates in the three and nine months ended September 30, 2013 and 2012 include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, accruals for taxes due, and the value of stock-based compensation and warrant modification expense.
Cash and cash equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions mainly in the PRC and the U.S. As of September 30, 2013 and December 31, 2012, balances in banks in the PRC of $1,756,117 and $1,414,674, respectively, are uninsured.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments
The Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The following tables present information about equipment held for sale measured at fair value on a nonrecurring basis as of September 30, 2013 and December 31, 2012:
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Balance at
September 30,
2013
|
|
|
Gains
(Losses)
|
|
Equipment held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,309,150
|
|
|
$
|
7,309,150
|
|
|
$
|
-
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Balance at
December 31,
2012
|
|
|
Loss
|
|
Equipment held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,118,555
|
|
|
$
|
7,118,555
|
|
|
$
|
2,206,253
|
|
The Company conducted an impairment assessment on the equipment held for sale based on the guidelines established in FASB ASC Topic 360 to determine the estimated fair market value of the equipment as of December 31, 2012. Upon completion of its 2012 impairment analysis, the Company determined that the carrying value exceeded the fair market value on equipment which is held for sale. The Company recorded an impairment charge of $2,206,253 at December 31, 2012. The difference in the value of equipment held for sale at September 30, 2013 from December 31, 2012 reflects changes in the currency exchange ratio.
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, notes receivable, accounts receivable, inventories, advances to suppliers, prepaid VAT on purchases, prepaid expenses and other, short-term bank loans, bank acceptance notes payable, accounts payable, accrued expenses, capital lease obligations, advances from customers, VAT and service taxes payable and income taxes payable approximate their fair market value based on the short-term maturity of these instruments.
ASC Topic 825-10 “
Financial Instruments
” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of credit risk
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
At September 30, 2013 and December 31, 2012, the Company’s cash balances by geographic area were as follows:
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
Country:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
466,900
|
|
|
|
21.0
|
%
|
|
$
|
31,054
|
|
|
|
2.1
|
%
|
China
|
|
|
1,756,117
|
|
|
|
79.0
|
%
|
|
|
1,414,674
|
|
|
|
97.9
|
%
|
Total cash and cash equivalents
|
|
$
|
2,223,017
|
|
|
|
100.0
|
%
|
|
$
|
1,445,728
|
|
|
|
100.0
|
%
|
Restricted cash consists of cash deposits held by a bank to secure bank acceptance notes payable.
Notes receivable
Notes receivable represents trade accounts receivable due from customers where the customers’ bank has guaranteed the payment of the receivable. This amount is non-interest bearing and is normally paid within six months. Historically, the Company has experienced no losses on notes receivable. The Company’s notes receivable totaled $485,793 and $88,029 at September 30, 2013 and December 31, 2012, respectively.
Accounts receivable
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At September 30, 2013 and December 31, 2012, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $2,739,117 and $2,592,057, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories, consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. The Company recorded an inventory reserve of $139,621 and $135,980 at September 30, 2013 and December 31, 2012, respectively.
A
dvances to suppliers
Advances to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $1,303,911 and $593,104 as of September 30, 2013 and December 31, 2012, respectively.
Property and equipment
Property and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Included in property and equipment is construction-in-progress which consisted of factory improvements and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation of the assets. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.
Equipment held for sale
Long-lived assets are classified as held for sale when certain criteria are met. These criteria include: management’s commitment to a plan to sell the assets; the availability of the assets for immediate sale in their present condition; an active program to locate buyers and other actions to sell the assets has been initiated; the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; the assets are being marketed at reasonable prices in relation to their fair value; and it is unlikely that significant changes will be made to the plan to sell the assets. We measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less associated costs to sell. At September 30, 2013 and December 31, 2012, the Company reflected certain electro-slag re-melted (“ESR”) equipment that was used in 2010 and 2011 to produce forged products for the high performance components market as equipment held for sale on the accompanying consolidated balance sheets.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
I
mpairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charge for the three and nine months ended September 30, 2013 and 2012.
Advances from customers
Advances from customers at September 30, 2013 and December 31, 2012 amounted to $2,210,102 and $1,851,987, respectively, and consist of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods and title to the assets is transferred to customers in accordance with the Company’s revenue recognition policy.
Revenue recognition
Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company recognizes revenues from the sale of dyeing and finishing equipment, forged rolled rings and other components upon shipment and transfer of title. The other elements may include installation and, generally, a one-year warranty. Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period. For the three and nine months ended September 30, 2013 and 2012, amounts allocated to installation and warranty revenues were minimal. Based on historical experience, warranty service calls and any related labor costs have been minimal. All other product sales with customer specific acceptance provisions, including the forged rolled rings, are recognized upon customer acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.
Income taxes
The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. The Company accounts for income taxes using the liability method prescribed by ASC Topic 740, “
Income Taxes
.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of September 30, 2013 and December 31, 2012, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The Financial Accounting Standards Board (“FASB”) ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated, based on the then current fair value, at each subsequent reporting date.
Shipping costs
Shipping costs are included in selling expenses and totaled $354,164 and $311,275 for the three months ended September 30, 2013 and 2012, respectively. Shipping costs totaled $910,095 and $803,951 for the nine months ended September 30, 2013 and 2012, respectively.
Employee benefits
The Company’s operations and employees are all located in the PRC. The Company makes mandatory contributions to the PRC government’s health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws. The costs of these payments are charged to the same accounts as the related salary costs in the same period as the related salary costs. Employee benefit costs totaled $56,491 and $48,020 for the three months ended September 30, 2013 and 2012, respectively. Employee benefit costs totaled $157,588 and $137,575 for the nine months ended September 30, 2013 and 2012, respectively.
Advertising
Advertising is expensed as incurred and is included in selling, general and administrative expenses on the accompanying consolidated statements of income and comprehensive income and totaled $18,260 and $16,997 for the three months ended September 30, 2013 and 2012, respectively. Advertising expenses totaled $18,260 and $20,653 for the nine months ended September 30, 2013 and 2012, respectively.
Research and development
Research and development costs are expensed as incurred and are included in selling, general and administrative expenses. The costs primarily consist of raw materials and salaries paid for the development and improvement of the Company’s new dyeing machinery. Research and development costs totaled $29,050 and $66,846 for the three and nine months ended September 30, 2013, respectively. The Company did not incur any research and development expense during the three and nine months ended September 30, 2012.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency translation
The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). For the subsidiaries and affiliates, whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. The cumulative translation adjustment and effect of exchange rate changes on cash for the nine months ended September 30, 2013 and 2012 was $25,427 and $3,898, respectively. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries and affiliates. Other than for the purchase of equipment from non-Chinese suppliers, the Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts at September 30, 2013 and December 31, 2012 were translated at 6.15140 RMB to $1.00 and at 6.31610 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the nine months ended September 30, 2013 and 2012 were 6.22152 RMB and 6.32745 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
Reverse stock split
The Company effected a one-for-ten reverse stock split on March 6, 2012. All share and per share information has been retroactively adjusted to reflect this reverse stock split.
Income per share of common stock
ASC Topic 260 “
Earnings per Share
,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common stock consist of common stock issuable upon the conversion of series A convertible preferred stock (using the if-converted method) and common stock purchase warrants (using the treasury stock method).
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income per share of common stock (continued)
The following table presents a reconciliation of basic and diluted net income per share:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net income available to common stockholders for basic and diluted net income per share of common stock
|
|
$
|
2,130,736
|
|
|
$
|
2,355,102
|
|
|
$
|
6,075,889
|
|
|
$
|
3,729,267
|
|
Weighted average common stock outstanding - basic
|
|
|
3,479,646
|
|
|
|
2,667,017
|
|
|
|
3,112,148
|
|
|
|
2,469,818
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
137,783
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,197
|
|
Weighted average common stock outstanding - diluted
|
|
$
|
3,479,646
|
|
|
|
2,667,017
|
|
|
|
3,112,148
|
|
|
|
2,617,798
|
|
Net income per common share - basic
|
|
$
|
0.61
|
|
|
$
|
0.88
|
|
|
$
|
1.95
|
|
|
$
|
1.51
|
|
Net income per common share - diluted
|
|
$
|
0.61
|
|
|
$
|
0.88
|
|
|
$
|
1.95
|
|
|
$
|
1.42
|
|
The Company did not have any common stock equivalents at September 30, 2013 and December 31, 2012.
Related parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded at fair value of the goods or services exchanged.
Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the three and nine months ended September 30, 2013 and 2012 included net income and unrealized gains/losses from foreign currency translation adjustments.
Recent accounting pronouncement
In March 2013, the FASB issued
ASU
2013-05
“Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.”
ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. For public entities, the ASU is effective prospectively for fiscal years, and interim periods, within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s consolidated financial statements.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncement (continued)
In July 2013, the FASB issued ASU 2013-11,
"Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists."
ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits related to any disallowed portion of net operating loss carryforwards, similar tax losses, or tax credit carryforwards, if they exist. ASU 2013-11 is effective for fiscal years beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
Reclassification
Certain reclassifications have been made in prior year same period’s financial statements to conform to the current period’s financial presentation.
NOTE 2 –
ACCOUNTS RECEIVABLE
At September 30, 2013 and December 31, 2012,
accounts receivable consisted of the following:
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
Accounts receivable
|
|
$
|
14,284,951
|
|
|
$
|
12,670,680
|
|
Less: allowance for doubtful accounts
|
|
|
(2,739,117
|
)
|
|
|
(2,592,057
|
)
|
|
|
$
|
11,545,834
|
|
|
$
|
10,078,623
|
|
The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. After evaluating the collectability of individual receivable balances, the Company increased the allowance for doubtful accounts in the amount of $76,784 for the nine months ended September 30, 2013 and decreased the allowance for doubtful accounts of $46,616 for the nine months ended September 30, 2012.
NOTE 3 -
INVENTORIES
At September 30, 2013 and December 31, 2012, inventories consisted of the following:
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
Raw materials
|
|
$
|
1,560,581
|
|
|
$
|
1,685,493
|
|
Work in process
|
|
|
2,580,155
|
|
|
|
2,602,990
|
|
Finished goods
|
|
|
2,215,100
|
|
|
|
1,745,052
|
|
|
|
|
6,355,836
|
|
|
|
6,033,535
|
|
Less: reserve for obsolete inventory
|
|
|
(139,621
|
)
|
|
|
(135,980
|
)
|
|
|
$
|
6,216,215
|
|
|
$
|
5,897,555
|
|
For the three and nine months ended September 30, 2013 and 2012, the Company did not make any change for reserve for obsolete inventory.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 4 -
PROPERTY AND EQUIPMENT
At September 30, 2013 and December 31, 2012, property and equipment consisted of the following:
|
|
Useful Life
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
Office equipment and furniture
|
|
5 Years
|
|
|
$
|
253,404
|
|
|
$
|
222,853
|
|
Manufacturing equipment
|
|
5 – 10 Years
|
|
|
|
67,477,040
|
|
|
|
56,916,700
|
|
Vehicles
|
|
5 Years
|
|
|
|
128,518
|
|
|
|
125,167
|
|
Construction in progress
|
|
-
|
|
|
|
1,578,728
|
|
|
|
28,785
|
|
Building and building improvements
|
|
20 Years
|
|
|
|
21,342,118
|
|
|
|
20,785,597
|
|
|
|
|
|
|
|
90,779,808
|
|
|
|
78,079,102
|
|
Less: accumulated depreciation
|
|
|
|
|
|
(24,080,717
|
)
|
|
|
(18,643,002
|
)
|
|
|
|
|
|
$
|
66,699,091
|
|
|
$
|
59,436,100
|
|
For the three months ended September 30, 2013 and 2012, depreciation expense amounted to $1,661,740 and $1,627,258, respectively, of which $1,552,088 and $1,253,362, respectively, is included in cost of revenues and the remainder is included in operating expenses. For the nine months ended September 30, 2013 and 2012, depreciation expense amounted to $4,882,899 and $4,719,769, respectively, of which $4,421,360 and $3,597,337, respectively, is included in cost of revenues and the remainder is included in operating expenses. Depreciation is not taken during the period of construction or equipment installation. Upon completion of the installation of manufacturing equipment or any construction in progress, construction in progress balances will be classified to their respective property and equipment category.
NOTE 5 –
LAND USE RIGHTS
There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. The Company’s land use rights have terms of 45 and 50 years and expire on January 1, 2053 and October 30, 2053. The Company amortizes the land use rights over the term of the respective land use right. For the three months ended September 30, 2013 and 2012, amortization of land use rights amounted to $23,954 and $23,341, respectively. For the nine months ended September 30, 2013 and 2012, amortization of land use rights amounted to $71,261 and $70,068, respectively. At September 30, 2013 and December 31, 2012, land use rights consisted of the following:
|
|
Useful Life
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
Land use rights
|
|
45 - 50 years
|
|
|
$
|
4,389,374
|
|
|
$
|
4,274,916
|
|
Less: accumulated amortization
|
|
|
|
|
|
(604,533
|
)
|
|
|
(518,574
|
)
|
|
|
|
|
|
$
|
3,784,841
|
|
|
$
|
3,756,342
|
|
Amortization of land use rights attributable to future periods is as follows:
Twelve-month periods ending September 30:
|
|
Amount
|
|
2014
|
|
$
|
96,098
|
|
2015
|
|
|
96,098
|
|
2016
|
|
|
96,098
|
|
2017
|
|
|
96,098
|
|
2018
|
|
|
96,098
|
|
Thereafter
|
|
|
3,304,351
|
|
|
|
$
|
3,784,841
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 6 –
EQUIPMENT HELD FOR SALE
The Company measures long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less associated costs to sell these assets. The assets held for sale are no longer subject to depreciation as they are not used in operations. As of September 30, 2013 and December 31, 2012, the Company committed to a plan to sell certain ESR equipment that was used to produce forged products for the high performance components market as equipment held for sale on the accompanying consolidated balance sheet. The Company evaluated equipment for impairment at September 30, 2013 and December 31, 2012. The Company compared the estimated fair values of the equipment to its carrying value with impairment indicators and recorded an impairment charge for the excess of carrying value over fair value. For the nine months ended September 30, 2013 and 2012, the Company did not incur any impairment charge on ESR equipment. Although the Company is actively seeking and negotiating with potential buyers, the Company can give no assurances that the sale process will be successful and, if it were successful, there are no assurances as to the amount or timing of any potential proceeds.
NOTE 7 –
SHORT-TERM BANK LOANS
Short-term bank loan represents an amount due to a bank that is due within one year. This loan can be renewed with the bank upon maturity. At September 30, 2013 and December 31, 2012, short-term bank loans consisted of the following:
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
Loan from Agricultural and Commercial Bank, due on August 26, 2013 with annual interest rate of 6.90% at December 31, 2012, secured by certain assets of the Company and repaid on May 15, 2013.
|
|
$
|
-
|
|
|
$
|
474,977
|
|
Loan from Agricultural and Commercial Bank, due on May 9, 2014 with annual interest rate of 7.20% at September 30, 2013, secured by certain assets of the Company.
|
|
|
487,694
|
|
|
|
-
|
|
Loan from Bank of Communications, due on May 8, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.
|
|
|
-
|
|
|
|
316,651
|
|
Loan from Bank of Communications, due on May 12, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.
|
|
|
-
|
|
|
|
474,977
|
|
Loan from Bank of Communications, due on November 5, 2013 with annual interest rate of 6.72% at September 30, 2013,
repaid on due date. (see note 16)
|
|
|
325,129
|
|
|
|
-
|
|
Loan from Bank of Communications, due on November 12, 2013 with annual interest rate of 6.72% at September 30, 2013,
repaid on due date. (see note 16)
|
|
|
487,694
|
|
|
|
-
|
|
Loan from Bank of China, due on January 16, 2013 with annual interest rate of 7.35% at December 31, 2012, secured by certain assets of the Company, repaid on due date.
|
|
|
-
|
|
|
|
949,953
|
|
Loan from Bank of China, due on March 1, 2014 with annual interest rate of 6.27% at September 30, 2013, secured by certain assets of the Company.
|
|
|
487,694
|
|
|
|
-
|
|
Loan from Bank of China, due on March 3, 2014 with annual interest rate of 6.27% at September 30, 2013, secured by certain assets of the Company.
|
|
|
487,694
|
|
|
|
-
|
|
Loan from Jiangsu Huishan Mintai Village Town Bank, due on July 15, 2014 with annual interest rate of 9.30% at September 30, 2013, secured by certain assets of the Company.
|
|
|
812,823
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total short-term bank loans
|
|
$
|
3,088,728
|
|
|
$
|
2,216,558
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 8 –
BANK ACCEPTANCE NOTES PAYABLE
Bank acceptance notes payable represents amounts due to a bank which are collateralized and typically renewed. All bank acceptance notes payable are secured by the Company’s restricted cash which is on deposit with the lender. At September 30, 2013 and December 31, 2012, the Company’s bank acceptance notes payables consisted of the following:
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
Bank of China, non-interest bearing, due on January 4, 2014, collateralized by 100% of restricted cash deposited.
|
|
$
|
81,283
|
|
|
$
|
-
|
|
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on February 23, 2014, collateralized by 100% of restricted cash deposited.
|
|
|
325,129
|
|
|
|
-
|
|
Bank of Communications, non-interest bearing, due on November 23, 2013, collateralized by 100% of restricted cash deposited.
|
|
|
32,513
|
|
|
|
-
|
|
Bank of Communications, non-interest bearing, due on November 30, 2013, collateralized by 100% of restricted cash deposited.
|
|
|
325,129
|
|
|
|
-
|
|
Bank of Communications, non-interest bearing, due on January 3, 2014, collateralized by 100% of restricted cash deposited.
|
|
|
32,513
|
|
|
|
-
|
|
Total
|
|
$
|
796,567
|
|
|
$
|
-
|
|
The Company accounts for income taxes pursuant to the accounting standards that require the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carry forwards and to the temporary differences related to the deduction of impairment losses in PRC for income tax purposes as compared to financial statement purposes, are dependent upon future taxable income during the periods in which those temporary differences become deductible or are utilized.
Net deferred tax asset related to the U.S. net operating loss carry forward has been fully offset by a valuation allowance. The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. Effective in January 2008, under the Income Tax Laws of PRC, Chinese companies are generally subject to an income tax at an effective rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. The Company’s VIEs (Dyeing and Electric) and the Company’s subsidiary, Fulland Wind Energy, are subject to these statutory rates. The Company’s wholly-owned subsidiary, Fulland Limited was incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, this entity is not subject to income taxes.
The tax effects of temporary differences under the Income Tax Law of the PRC that give rise to significant portions of deferred tax assets and liabilities as of September 30, 2013 and December 31, 2012 are as follows:
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 9 –
INCOME TAXES (continued)
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
Deferred tax asset:
|
|
|
|
|
|
|
Net U.S. operating loss carry forward
|
|
$
|
1,786,309
|
|
|
$
|
1,614,245
|
|
Loss on impairment of equipment
|
|
|
566,666
|
|
|
|
551,890
|
|
Total gross deferred tax asset
|
|
|
2,352,975
|
|
|
|
2,166,135
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(1,786,309
|
)
|
|
|
(1,614,245
|
)
|
Net deferred tax asset
|
|
$
|
566,666
|
|
|
$
|
551,890
|
|
The valuation allowance at September 30, 2013 and December 31, 2012 was $1,786,309 and $1,614,245, respectively, related to the U.S. net operating loss carry forward. During the nine months ended September 30, 2013, the valuation allowance was increased by approximately $172,000.
In assessing the ability to realize the deferred tax asset from the loss on impairment of equipment held for sale in PRC, management considers whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The Company concluded that the temporary difference on the impairment loss of equipment held for sale in PRC will be deductible or utilized on the future PRC taxable income and a deferred tax asset of $566,666 and $551,890 has been set up at September 30, 2013 and December 31, 2012, respectively.
NOTE 10 –
SHAREHOLDERS’ EQUITY
Common stock sold for cash
On June 18, 2013, the Company sold 428,398 shares of common stock at a purchase price of $4.50 per share. The shares were sold pursuant to a prospectus supplement dated June 18, 2013 to the Company’s registration statement on Form S-3. The Company did not engage a placement agent with respect to the sale. The Company paid a fee of 10% and a non-accountable expense allowance of 2%, for a total of $154,745, to an individual in connection with sales made to investors introduced to the Company by this individual who is not a U.S. citizen or resident. The net proceeds received by the Company from the sale of the shares were approximately $1,768,000.
On July 10, 2013, the Company sold a total of 150,518 shares of common stock at a price of $4.70 per share to an investor. The shares were issued pursuant to a prospectus supplement for the Company’s registration statement on Form S-3. The Company paid a fee of 10% and a non-accountable expense allowance of 2%, for a total of $84,892, to an individual in connection with sales made to investors introduced to the Company by this individual who is not a U.S. citizen or resident. The net proceeds received by the Company from the sale of the shares were approximately $620,000.
Common stock issued for services
On July 29, 2013, the Company issued a total of 30,000 shares of common stock pursuant to its 2010 long-term incentive plan, of which 8,000 shares were issued to the chief executive officer’s wife, who the Company employs in its sales department, 8,000 shares were issued to the chief financial officer and 14,000 shares were issued to other employees. The shares were valued at the fair market value on the grant date, and the Company recorded stock-based compensation of $78,600 in the third quarter of fiscal 2013 and prepaid expenses of $78,600 which will be amortized in the fourth quarter of fiscal 2013.
NOTE 11 –
STATUTORY RESERVES
The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 11 –
STATUTORY RESERVES (continued)
entities’ registered capital or members’ equity. Appropriations to the statutory public welfare fund are at a minimum of 5% of the after tax net income determined in accordance with PRC GAAP. Commencing on January 1, 2006, the new PRC regulations waived the requirement for appropriating retained earnings to a welfare fund. As of December 31, 2012, the Company appropriated the required maximum 50% of its registered capital to statutory reserves for Dyeing and Electric, accordingly, no additional statutory reserve is required at September 30, 2013. As of December 31, 2012, the Company had not appropriated the required maximum 50% of its registered capital to statutory reserve for Fulland Wind Energy.
For the nine months ended September 30, 2013, statutory reserve activity was as follows:
|
|
Dyeing
|
|
|
Electrical
|
|
|
Fulland Wind
Energy
|
|
|
Total
|
|
Balance – December 31, 2012
|
|
$
|
373,048
|
|
|
$
|
1,168,796
|
|
|
$
|
937,894
|
|
|
$
|
2,479,738
|
|
Addition to statutory reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
277,306
|
|
|
|
277,306
|
|
Balance – September 30, 2013
|
|
$
|
373,048
|
|
|
$
|
1,168,796
|
|
|
$
|
1,215,200
|
|
|
$
|
2,757,044
|
|
NOTE 12 -
SEGMENT INFORMATION
For the three and nine months ended September 30, 2013 and 2012, the Company operated in two reportable business segments - (1) the manufacture of forged rolled rings and related components for the wind power and other industries segment, which also includes the manufacture of the Company’s solar industry products, and (2) the manufacture of dyeing and finishing equipment segment. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of the Company’s operations are conducted in the PRC.
Information with respect to these reportable business segments for the three and nine months ended September 30, 2013 and 2012 was as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged rolled rings and related components
|
|
$
|
8,722,683
|
|
|
$
|
9,826,210
|
|
|
$
|
23,447,214
|
|
|
$
|
23,619,875
|
|
Dyeing and finishing equipment
|
|
|
9,490,825
|
|
|
|
7,517,513
|
|
|
|
25,865,127
|
|
|
|
15,965,940
|
|
|
|
|
18,213,508
|
|
|
|
17,343,723
|
|
|
|
49,312,341
|
|
|
|
39,585,815
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged rolled rings and related components
|
|
|
1,065,933
|
|
|
|
1,261,991
|
|
|
|
3,171,777
|
|
|
|
3,694,696
|
|
Dyeing and finishing equipment
|
|
|
595,807
|
|
|
|
365,267
|
|
|
|
1,711,122
|
|
|
|
1,025,073
|
|
|
|
|
1,661,740
|
|
|
|
1,627,258
|
|
|
|
4,882,899
|
|
|
|
4,719,769
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged rolled rings and related components
|
|
|
38,428
|
|
|
|
66,494
|
|
|
|
118,341
|
|
|
|
196,690
|
|
Dyeing and finishing equipment
|
|
|
36,210
|
|
|
|
17,795
|
|
|
|
125,950
|
|
|
|
47,995
|
|
|
|
|
74,638
|
|
|
|
84,289
|
|
|
|
244,291
|
|
|
|
244,685
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged rolled rings and related components
|
|
|
1,094,210
|
|
|
|
1,270,837
|
|
|
|
3,114,330
|
|
|
|
2,347,542
|
|
Dyeing and finishing equipment
|
|
|
1,248,012
|
|
|
|
1,201,156
|
|
|
|
3,467,999
|
|
|
|
2,117,296
|
|
Other (a)
|
|
|
(211,486
|
)
|
|
|
(116,891
|
)
|
|
|
(506,440
|
)
|
|
|
(735,571
|
)
|
|
|
$
|
2,130,736
|
|
|
$
|
2,355,102
|
|
|
$
|
6,075,889
|
|
|
$
|
3,729,267
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 12 -
SEGMENT INFORMATION (continued)
Identifiable long-lived tangible assets at September 30, 2013 and December 31, 2012 by segment:
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
Forged rolled rings and related components
|
|
$
|
44,867,148
|
|
|
$
|
40,636,142
|
|
Dyeing and finishing equipment
|
|
|
21,831,943
|
|
|
|
18,799,958
|
|
|
|
$
|
66,699,091
|
|
|
$
|
59,436,100
|
|
|
|
|
|
|
|
|
|
|
Identifiable long-lived tangible assets at September 30, 2013 and December 31, 2012 by geographical location:
|
|
September 30, 2013
|
|
|
|
December 31, 2012
|
|
China
|
|
$
|
66,699,091
|
|
|
$
|
59,436,100
|
|
United States
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
66,699,091
|
|
|
$
|
59,436,100
|
|
(a) The Company does not allocate any general and administrative expenses of its U.S. activities to its reportable segments, because these activities are managed at a corporate level.
NOTE 13 –
CONCENTRATIONS
Customers
No customer accounted for 10% or more of the Company’s revenues during the nine months ended September 30, 2013 and 2012.
Suppliers
The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for the nine months ended September 30, 2013 and 2012.
|
|
|
Nine Months Ended
September 30,
|
|
Supplier
|
|
|
2013
|
|
|
2012
|
|
A
|
|
|
|
19
|
%
|
|
|
17
|
%
|
B
|
|
|
|
*
|
|
|
|
14
|
%
|
C
|
|
|
|
15
|
%
|
|
|
11
|
%
|
*less than 10%
NOTE 14 –
RESTRICTED NET ASSETS
Regulations in the PRC permit payments of dividends by the Company’s PRC VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Subject to certain cumulative limit, a statutory reserve fund requires annual appropriations of at least 10% of after-tax profit, if any, of the relevant PRC VIE’s and subsidiary. The statutory reserve funds are not distributable as cash dividends. As a result of these PRC laws and regulations, the Company’s PRC VIE’s and its subsidiary are restricted in their abilities to transfer a portion of their net assets to the Company. Foreign exchange and other regulations in PRC may further restrict the Company’s PRC VIEs and its subsidiary from transferring funds to the Company in the form of loans and/or advances.
As of September 30, 2013 and December 31, 2012, substantially all of the Company’s net assets are attributable to the PRC VIE’s and its subsidiary located in the PRC. Accordingly, the Company’s restricted net assets at September 30, 2013 and December 31, 2012 were approximately $87,292,000 and $77,514,000, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 15 -
CAPITAL LEASE OBLIGATIONS
In 2011, the Company entered into a non-cancelable capital lease agreement with expiration date of June 3, 2014. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The asset and future obligations related to the capital lease are included in the accompanying consolidated balance sheets in property and equipment and capital lease obligations, respectively. The Company paid off the capital lease obligation in the third quarter of 2013. At September 30, 2013 and December 31, 2012, capital lease obligations consisted of the following:
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
Capital lease obligation - current portion
|
|
$
|
-
|
|
|
$
|
251,413
|
|
Capital lease obligation - long-term portion
|
|
|
-
|
|
|
|
132,756
|
|
|
|
$
|
-
|
|
|
$
|
384,169
|
|
NOTE 16 –
SUBSEQUENT EVENTS
In November 2013, the Company repaid a short-term loan from Bank of Communications in the principal amount of $325,129, and borrowed the same amount from Bank of Communications. The new loan bears interest at 6.72% and is due on April 21, 2014.
In November 2013, the Company repaid a short-term loan from Bank of Communications in the principal amount of $487,694, and borrowed the same amount from Bank of Communications. The new loan bears interest at 6.72% and is due on April 23, 2014.