RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus before deciding to invest in our common
stock.
The
risks and uncertainties described below are not the
only ones we may face. Additional risks and uncertainties not currently known
to
us or that we currently deem immaterial may also adversely affect our business,
financial condition, and/or operating results. If any of the following risks,
or
any other risks not described below, actually occur, it is likely that our
business, financial condition, and operating results could be seriously harmed.
As a result, the trading price of our common stock could decline and you
could
lose
part
or all of your investment.
Risks
Related to our Business
Our
profit margins have been declining and our operating income as a percentage
of
sales has been decreasing
Although
our gross profits have been increasing due to increased sales, our profit
margins have been decreasing. Gross profit for the nine months ended September
30, 2007 was $5,226,007 or approximately 20.8% of revenues. Gross profit
for the
year ended December 31, 2006 was $4,625,319 or 21.5% of revenues as compared
to
gros
s profit for the year ended December 31, 2005 of
approximately $3.71 million or 24% of revenues and as compared to gross
profit
of approximately $2.73 million or 29% of revenues for the year ended December
31
2004.
The
increase in gross profit resulted primarily from the increase in sales
revenue.
The profit margin is decreasing due to market pressure to keep our prices
competitive.
Consequently, we expect the profit margin on
the sale of our products to continue to decrease going forward. We are
attempting to introduce new products with higher gross profit margins.
We may be
unsuccessful in our attempts to upgrade our product mix, which would have
a
material adverse impact on our business and financial
condition.
Operating
income was $1,841,125 for the nine months ended September 30, 2007. As a
percentage of sales operating income was 7.4% for the nine months ended
September 30, 2007. Operating income totaled $1,210,612 for the year ended
December 31, 2006 as compared to operating income of $1,319,803 for the year
ended December 31, 2005, a decrease of $109,191 or 8.3 %. As a percentage
of
sales, operating income was 5.64% in 2006 as compared to 8.47% for the prior
year. The decrease in operating income as a percentage of sales in 2006 was
substantially due to the increase in advertising and selling expenses in
2006
which are expected to continue. If we continue to be unable to pass on to
the
consumer our additional costs our operating income as percentage of net sales
will continue to decline.
We
operate in a highly-competitive industry and our failure to compete effectively
may hurt our ability to generate revenue.
We
manufacture and market solar hot water heaters. According to statistics from
the
Chinese Energy Research Association, there are currently over 3,500 solar
hot
water heater manufacturers producing products under more than 3,000 brands.
Many
of our competitors are better capitalized and more experienced, and have
deeper
ties in the PRC marketplace. While most solar hot water manufacturers focus
on
the urban markets, we have always focused on the rural markets. While there
are
relatively fewer competitors in the rural market at present, there can be
no
assurance that our competitors will not focus their marketing efforts on
rural
customers in the future.
We
rely on our sales agents to distribute our products and to expand our business
we must attract new sales agents; we could lose a substantial portion of
our
sales if we are not able to effectively monitor the activities of our sales
agents.
We
believe that our success relies, to a large degree, on our distribution network.
The PRC is a geographically vast country and it is critical that we market
our
products in a number of different regions.
Presently,
we sell our products primarily in the rural areas of the north-east part
of the
PRC including Hebei, Beijing, Tianjin, Heilongjiang, and Liaoning.
In
order to expand our business into others regions, we will need to increase
our
distribution network by adding more sales agents, distributors, wholesalers
and
retailers who will carry our products. We may not be able to grow our
distribution network, as our competitors may offer better products and
commissions to distributors and sales agents, and, even if we can grow our
distribution network, we may not be able to operate it efficiently or manage
it
effectively, as our internal resources are limited.
We
may not be able to effectively control and manage our
growth
Our
sales revenues have increased from $9,380,246 for the fiscal year ended December
31, 2004 to $21,468,313 for the fiscal year ended December 31, 2006. Our
sales
revenues for the nine months ended September 30, 2007 were $25,043,660, an
increase of approximately 56.7% over sales revenues of $15,982,081 for the
same
period of 2006. If our business and markets continues to grow and develop,
it
will be necessary for us to finance and manage our expansion in an orderly
fashion. In addition, we may face challenges in managing expanding product
offerings and in integrating any acquired businesses with our own. This will
increase demands on our existing management, workforce and facilities. Failure
to effectively deal with these increased demands could interrupt or adversely
affect our operations and cause production backlogs, longer product development
time frames, and administrative inefficiencies.
The
protection of intellectual property rights in the PRC is not as effective
as in
the United States or other countries.
Our
trademarked brands have gained substantial recognition in the northeast part
of
the PRC. The protection of intellectual property rights in the PRC however
is
not as effective or enforced to the same degree as in the United States or
other
countries. The unauthorized use of our brands could enable other manufacturers
to take unfair advantage, which could harm our business and competitive
position.
We
do not have any long-term supply contracts with our suppliers of raw materials;
any significant fluctuation in price of raw materials may have a material
adverse effect on our manufacturing costs.
Stainless
steel and glass tubing are two major raw materials that we use. The prices
of
these are subject to market conditions. We do not have long-term contracts
or
arrangements with our suppliers. While these raw materials are generally
available and we have not experienced any raw material shortage in the past,
we
cannot assure you that prices will not rise because of changes in market
conditions. An increase in component or raw material costs relative to our
product prices could have a material adverse effect on our gross margins
and
earnings.
We
have to outsource our production to third party manufacturers during the
peak
sales season due to our limited manufacturing capacity.
Our
manufacturing capacity is not able to meet the demand for our products during
the peak season. Accordingly, we are required to have products representing
between 30% to 40% of our total sales revenues during our peak season
manufactured through Original Equipment Manufacturer ("OEM") arrangements.
Under
an OEM arrangement, we contract with other manufacturers to produce our products
and authorize these manufacturers to put our brand names or trademarks on
these
products. We cannot assure you that we will continue to find qualified
manufacturers on acceptable terms in the areas where our customers are located
and, if we do, we cannot assure you that product quality will continue to
be
acceptable.
We
may engage in future acquisitions that could dilute the ownership interests
of
our stockholders, cause us to incur debt and assume contingent
liabilities.
On July
1, 2007 we acquired 51% of the equity in Tianjin Huaneng Group Energy Equipment
Co., Ltd. for RMB24,100,000 (approximately $ 3,149,147), half of which was
paid
in July 2007. Deli Solar (Beijing) assumed 51% of the liabilities of Tianjin
Huaneng. In addition, we contributed a minimum of RMB20,000,000 (approximately
$2,613,400) as working capital to the acquired company. By supplemental
agreement dated August 8, 2007 the purchase price was reduced to approximately
$1,689,741 (plus a finder's fee of approximately $769,418). As part of our
business strategy, we review acquisition and strategic investment prospects
that
we believe would complement our current product offerings, increase our market
coverage or enhance our technical capabilities, or otherwise offer growth
opportunities. From time to time we review investments in new businesses
and we
expect to make investments in, and to acquire, businesses, products, or
technologies in the future. In the event of any future acquisitions, we could:
|
|
|
issue
equity securities which would dilute current stockholders’ percentage
ownership;
|
|
|
|
assume
contingent liabilities; or
|
These
actions could harm our operating results or the price of our common stock.
Moreover, even if we do obtain benefits in the form of increased sales and
earnings, there may be a lag between the time when the expenses associated
with
an acquisition are incurred and the time when we recognize such benefits.
Acquisitions and investment activities also entail numerous risks,
including:
|
|
|
difficulties
in the assimilation of acquired operations, technologies and/or
products;
|
|
|
|
unanticipated
costs associated with the acquisition or investment transaction;
|
|
|
|
the
diversion of management’s attention from other business concerns;
|
|
|
|
adverse
effects on existing business relationships with suppliers and customers;
|
|
|
|
risks
associated with entering markets in which we have no or limited
prior
experience;
|
|
|
|
the
potential loss of key employees of acquired organizations; and
|
|
|
|
substantial
charges for the amortization of certain purchased intangible assets,
deferred stock compensation or similar items.
|
We
cannot
ensure that we will be able to successfully integrate any businesses, products,
technologies, or personnel that we might acquire in the future, and our failure
to do so could harm our business, operating results and financial
condition.
We
may need additional capital to fund our future operations and, if it is not
available when needed, we may need to reduce our planned development and
marketing efforts, which may reduce our sales revenues
.
We
believe that our existing working capital and cash available from operations
will enable us to meet our working capital requirements for at least the
next 12
months. However, if cash from future operations is insufficient, or if cash
is
used for acquisitions or other currently unanticipated uses, we may need
additional capital. Under the terms of Securities Purchase Agreement entered
into on June 13, 2007 with the investors in the private placement we cannot,
prior to June 13, 2010, issue any convertible debt or any shares of convertible
preferred stock, have any debt outstanding in an amount greater than twice
EBITDA from continuing operations for the prior four quarters. These restrictive
covenants will inhibit our ability to raise additional financing. The
development and marketing of new products and the expansion of distribution
channels and associated support personnel requires a significant commitment
of
resources. In addition, if the markets for our products develop more slowly
than
anticipated, or if we fail to establish significant market share and achieve
sufficient net revenues, we may continue to consume significant amounts of
capital. As a result, we could be required to raise additional capital. To
the
extent that we raise additional capital through the sale of equity or
convertible debt securities, the issuance of such securities could result
in
dilution of the shares held by existing stockholders. If additional funds
are
raised through the issuance of debt securities, such securities may provide
the
holders certain rights, preferences, and privileges senior to those of common
stockholders, and the terms of such debt could impose restrictions on our
operations. We cannot assure you that additional capital, if required, will
be
available on acceptable terms, or at all. If we are unable to obtain sufficient
amounts of additional capital, we may be required to reduce the scope of our
planned product development and marketing efforts, which could harm our
business, financial condition and operating results.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The
PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, as well as in modern banking, computer
and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result
of
these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
We
may not have adequate internal accounting controls. While we have certain
internal procedures in our budgeting, forecasting and in the management and
allocation of funds, our internal controls may not be
adequate.
We
are
constantly striving to improve our internal accounting controls. We hope
to
develop an adequate internal accounting control to budget, forecast, manage
and
allocate our funds and account for them. There is no guarantee that such
improvements will be adequate or successful or that such improvements will
be
carried out on a timely basis. If we do not have adequate internal accounting
controls, we may not be able to appropriately budget, forecast and manage
our
funds, we may also be unable to prepare accurate accounts on a timely basis
to
meet our continuing financial reporting obligations and we may not be able
to
satisfy our obligations under US securities laws.
Our
internal controls over financial reporting may not be effective, and our
independent auditors may not be able to certify as to their effectiveness,
which
could have a significant and adverse effect on our
business.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting,
and
attestation of this assessment by our company's independent registered public
accountants. The SEC extended the compliance dates for “non-accelerated filers,”
as defined by the SEC. Accordingly, we believe that the annual assessment
of our
internal controls requirement will first apply to our annual report for the
2007
fiscal year and the attestation requirement of management's assessment by
our
independent registered public accountants will first apply to our annual
report
for the 2008 fiscal year.
The
standards that must be met for management to assess the internal control
over
financial reporting as effective are new and complex, and require significant
documentation, testing and possible remediation to meet the detailed standards.
We
have
not yet evaluated our internal controls over financial reporting in order
to
allow management to report on, and our independent auditors to attest to,
our
internal controls over financial reporting, as will be required by Section
404
of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC.
We
have never performed the system and process evaluation and testing required
in
an effort to comply with the management assessment and auditor certification
requirements of Section 404, which will initially apply to us as of December
31,
2007. Our lack of familiarity with Section 404 may unduly divert management’s
time and resources in executing the business plan. If, in the future, management
identifies one or more material weaknesses, or our external auditors are
unable
to attest that our management’s report is fairly stated or to express an opinion
on the effectiveness of our internal controls, this could result in a loss
of
investor confidence in our financial reports, have an adverse effect on our
stock price and/or subject us to sanctions or investigation by regulatory
authorities.
We
do not have key man insurance on our President and CEO, Mr. Du, on whom we
rely
for the management of our business.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Deli Du. The loss
of
the services of Mr. Du, for any reason, may have a material adverse effect
on
our business and prospects. We cannot assure you that we will be able to
find a
suitable replacement for Mr. Du. We do not carry key man life insurance for
any
of our key personnel.
We
may not be able to hire and retain qualified personnel to support our growth
and
if we are unable to retain or hire these personnel in the future, our ability
to
improve our products and implement our business objectives could be adversely
affected
.
Competition
for senior management and senior technology personnel in the PRC is intense,
the
pool of qualified candidates in the PRC is very limited, and we may not be
able
to retain the services of our senior executives or senior technology personnel,
or attract and retain high-quality senior executives or senior technology
personnel in the future. This failure could harm our future growth and financial
condition.
We
do not presently maintain fire, theft, product liability or any other property
insurance, which leaves us with exposure in the event of loss or damage to
our
properties or claims filed against us.
We
do not maintain fire, theft, product liability or other insurance of any
kind.
We bear the economic risk with respect to loss of or damage or destruction
to
our property and to the interruption of our business as well as
liability
to third parties for personal injury or damage or destruction to their property
that may be caused by our personnel or products. This liability could be
substantial and the occurrence of such loss or liability may have a material
adverse effect on our business, financial condition and prospects. However
product liability lawsuits in the PRC are rare, and we have never experienced
significant failure of our products.
Rapid
technological changes in our industry could render our products non-competitive
or obsolete and consequently affect our ability to generate
revenues.
The
solar hot water industry is subject to rapid technological change. Our future
success will depend on our ability to respond to rapidly changing technologies
and improve the quality of our products. Our failure to adapt to these changes
could harm our business. Our future plans to market our products to urban
areas
require our products to be innovative. If we are slow to develop new products
and technologies that are attractive to people in these urban areas, we may
not
be successful in capturing a significant share of this market. For example,
most
of our current products rely on a tubular structure while urban customers
prefer
a flat plate collector for aesthetic purposes. If we fail to keep up with
rapid
technological changes to remain competitive in our rapidly evolving industry,
our future marketing and expansion may be adversely affected.
Most
of our warranty services are performed by our independent sales agents and
distributors whose deposit may not cover total warranty claims.
We
typically offer a three-year warranty for our products. During the first
year of
this warranty program, we cover any defects and product malfunctions. Most
of
our warranty services are performed by our independent sales agents and
distributors in return for a 1-2% discount of the purchase price they pay
for
our products. We normally require our new sales agents and distributors to
pay
us a deposit (varying from RMB5,000 to 20,000 depending on their represented
areas) which we believe will ensure their performance of the necessary warranty
services. Although we have not experienced any significant product returns
or
repairs, we cannot assure you that these sales agents and distributors will
perform the warranty services when required, and if they fail to do so, we
cannot assure you that the agents' deposits will be sufficient to cover the
costs associated with the warranty services to be performed on the products
sold
by these sales agents and distributors.
We
lease some of the real property on which our business center and exhibition
center and other facilities are located and there is no guarantee that our
lease
will be renewed.
All
land in the PRC is owned by the government and cannot be sold to any individual
or entity. Instead, the PRC government grants landholders a "land use right."
Our business center in Bazhou City and our exhibition center in Beijing are
located on leased land. Under the lease for the land for the business center
at
Bazhou City, on the expiration of the initial term and if the lessor decides
to
continue to lease the land, we have the right of first refusal to renew the
lease. Under the lease for the land for the exhibition center at Beijing,
the
lease is renewable by a three month notice prior to the expiration date.
However, there is no assurance that we may renew the lease on acceptable
terms.
The failure to obtain the renewal of the lease on reasonable terms could
cause
us to incur extra expenses and costs for alternative land and for the
reconstruction of our buildings.
Our
acquisition of the land use rights from villagers is subject to announcement
and
approval procedures and we cannot assure you that they will be successful.
On
March 16, 2006,
Deli Solar (Bazhou) entered into an agreement with the Governance Commission
of
Beijiahe Village Chaheji County Bazhou City (the "Village Governance
Commission") to acquire land use rights to a piece of land comprising 61,530
square meters (the "Land") at a price of approximately $919,858, subject
to the
procedures as mentioned below. The previous users of the Land were villagers
and
the Land was used for agricultural purposes. According to the relevant PRC
regulations, the Village Governance Commission
is
required to announce its intention to transfer the land use rights to Deli
Solar
(Bazhou) (the "Announcement Procedure") and provide the villagers with
reasonable compensation to acquire the land use rights from them. The conversion
of land use from agricultural to non-agricultural purposes requires the approval
of the local government. In addition, once the approval from the local
government has been obtained, the new holder of the land use rights will
have to
be registered with the land administration bureau. We cannot guarantee that
the
Village Governance Commission will carry out the Announcement Procedure and
provide reasonable compensation to the villagers as prescribed. We cannot
guarantee that the application to change the purpose of land use will be
approved by the local government or that the new holder of the land use rights
would be able to be registered with the land administration
bureau.
Effect
of the Issuance of the Series A Preferred Stock and Warrants on June 13,
2007
The
Series A Preferred Stock and the Warrants may have an adverse impact on the
market value of our common stock.
The
resale of the shares of common stock being registered in this prospectus
which
shares are issuable on conversion of the Series A Preferred Stock and on
exercise of the warrants issued in connection with our June 13, 2007 financing,
or even the possibility of their resale, may adversely affect the trading
market for our common stock and adversely affect the prevailing market price
of
our common stock. On June 13, 2007 the closing sale price of our common stock
was $2.10 per share. On January 9, 2008 the closing sale price of the
common stock was $3.45.
The
existence of full ratchet anti-dilution clauses may prove a hindrance to
our efforts to raise future equity and debt funding, and the exercise of
such
rights will dilute the percentage ownership interest of our stockholders
and
will dilute the value of their stock.
The
Series A Preferred Stock and Warrants may adversely affect our financial
and operational flexibility.
The
terms
of the June 13, 2007 financing impose restrictions on us that may affect
our ability to successfully operate our business. The transaction
documents contain a number of covenants that may restrict our ability to
operate, including, among other things, covenants that restrict our
ability:
|
·
|
to
incur additional indebtedness;
|
|
·
|
pay
dividends on our capital stock;
|
|
·
|
to
redeem or repurchase our common stock or any class or series of
capital
stock that is junior or on a parity with the Series A Preferred
Stock;
|
|
·
|
to
enter into any transaction that has any reset feature that could
result in
additional shares being issued.
|
Risk
Related to Our Industry
A
drop in the retail price of conventional energy or non-solar alternative
energy
or any improvement to the rural household's electricity supply system in
the PRC
may have a negative effect on our business.
A
customer's decision to purchase our solar power products is primarily driven
by
the poor electricity supply system in the rural areas of the PRC, as well
as the
energy savings from our solar power products. An improvement in the power
supply
infrastructure in the rural areas of the PRC could adversely affect the demand
for our products. In addition, fluctuations in economic and market conditions
that impact the viability of conventional and non-solar alternative energy
sources, such as decreases in the prices of oil and other fossil fuels could
cause the demand for our solar power heaters to decline. Although we believe
that current retail energy prices support a reasonable return on investment
for
our products, there can be no assurance that future retail pricing of
conventional energy and non-solar alternative energy will remain at such
levels.
Existing
regulations and changes to existing regulations may present technical,
regulatory and economic barriers to the purchase and use of solar power
products, which may significantly reduce demand for our
products
Our
solar power products and their installation are subject to oversight and
regulation in accordance with national and local ordinances relating to building
codes, safety, environmental protection, utility interconnection and metering
and related matters. We are responsible for knowing the requirements of
individual cities and must design equipment to comply with varying standards.
Any new government regulations or utility policies that relate to our solar
power products may result in significant additional expenses to us, our
resellers and
their
customers and, as a result, could cause a significant reduction in demand
for
our solar power products.
If
solar power technology is not suitable for widespread adoption or sufficient
demand for solar power products does not develop or takes longer to develop
than
we anticipate, our sales would not significantly increase and we would be
unable
to sustain profitability.
The
market for solar power products is emerging and rapidly evolving, and its
future
success is uncertain. If solar power proves to be unsuitable for widespread
commercial deployment or if demand for solar power products fails to develop
sufficiently, we would be unable to generate enough revenues to sustain
profitability. In addition, demand for solar power products in the markets
and
geographic regions we target may not develop or may develop more slowly than
we
anticipate. Many factors will influence the widespread adoption of solar
power
technology and demand for solar power products, including:
|
·
|
cost-effectiveness
of solar power technologies as compared with conventional and non-solar
alternative energy technologies;
|
|
·
|
performance
and reliability of solar power products as compared with conventional
and
non-solar alternative energy technologies; and
|
|
·
|
capital
expenditures by customers that tend to decrease if the PRC or global
economy slows down.
|
Risks
Related to Doing Business in the PRC.
Changes
in the policies of the PRC government could have a significant impact upon
the
business we may be able to conduct in the PRC and the profitability of our
business.
The
PRC's economy is in a transition from a planned economy to a market oriented
economy subject to five-year and annual plans adopted by the government that
set
national economic development goals. Policies of the PRC government can have
significant effects on the economic conditions of the PRC. The PRC government
has confirmed that economic development will follow the model of a market
economy. Under this direction, we believe that the PRC will continue to
strengthen its economic and trading relationships with foreign countries
and
business development in the PRC will follow market forces. While we believe
that
this trend will continue, there can be no assurance that this will be the
case.
A
change in policies by the PRC government could adversely affect our interests
by, among other factors: changes in laws, regulations or the interpretation
thereof, confiscatory taxation, restrictions on currency conversion, imports
or
sources of supplies, or the expropriation or nationalization of private
enterprises. Although the PRC government has been pursuing economic reform
policies for more than two decades, there is no assurance that the government
will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership,
social
or political disruption, or other circumstances affecting the PRC's political,
economic and social life.
The
PRC laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in these PRC laws and regulations may harm
our business.
The
PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain.
There are substantial uncertainties regarding the interpretation and application
of PRC laws and regulations, including the laws and regulations governing
our
business, or the enforcement and performance of our arrangements with customers
in the event of the imposition of statutory liens, death, bankruptcy and
criminal proceedings. We and any future subsidiaries are considered foreign
persons or foreign funded enterprises under PRC laws, and as a result, we
are
required to comply with PRC laws and regulations. These laws and regulations
are
sometimes vague and may be subject to future changes, and their official
interpretation and enforcement involves substantial uncertainty. New laws
and
regulations that affect existing and new businesses may also be applied
retroactively. We cannot predict what effect the interpretation of existing
or
new PRC laws or regulations may have on our businesses.
A
slowdown or other adverse developments in the PRC economy may harm our customers
and the demand for our services and our products.
All
of our operations are conducted in the PRC and all of our revenues are
generated
from sales in the PRC. Although the PRC economy has grown significantly
in
recent years, we cannot assure you that this growth will
continue.
The solar hot water and renewable energy industry in the PRC is relatively
new
and growing, but we do not know how sensitive we are to a slowdown in
economic
growth or other adverse changes in the PRC economy which may affect demand
for
solar hot water heaters and boilers. A slowdown in overall
economic
growth, an economic downturn, a recession or other adverse economic developments
in the PRC could significantly reduce the demand for our products and
harm our
business.
Inflation
in the PRC could negatively affect our profitability and
growth
.
While
the PRC economy has experienced rapid growth, such growth has been uneven
among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth could lead to growth in the money supply and
rising inflation. If prices for our products rise at a rate that is insufficient
to compensate for the rise in the costs of supplies, it may harm our
profitability. In order to control inflation in the past, the PRC government
has
imposed controls on bank credit, limits on loans for fixed assets and
restrictions on state bank lending. Such an austere policy can lead to a
slowing
of economic growth. In October 2004, the People's Bank of China, the PRC's
central bank, raised interest rates for the first time in nearly a decade
and
indicated in a statement that the measure was prompted by inflationary concerns
in the Chinese economy. Repeated rises in interest rates by the central bank
would likely slow economic activity in China which could, in turn, materially
increase our costs and also reduce demand for our products.
Governmental
control of currency conversion may affect the value of your
investment.
The
PRC government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
We
receive substantially all of our revenues in Renminbi, which is currently
not a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations. Under existing
PRC
foreign exchange regulations, payments of current account
items,
including profit distributions, interest payments and expenditures from the
transaction, can be made in foreign currencies without prior approval from
the
PRC State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate governmental
authorities is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of
bank
loans denominated in foreign currencies.
The
PRC government may also in the future restrict access to foreign currencies
for
current account transactions. If the foreign exchange control system prevents
us
from obtaining sufficient foreign currency to satisfy our currency demands,
we
may not be able to pay certain of our expenses as they come due.
The
fluctuation of the Renminbi may harm your investment.
The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate
and is affected by, among other things, changes in the PRC's political and
economic conditions. As we rely entirely on revenues earned in the PRC, any
significant revaluation of the Renminbi may materially and adversely affect
our
cash flows, revenues and financial condition. For example, to the extent
that we
need to convert U.S. dollars we receive from an offering of our securities
into
Renminbi for our operations, appreciation of the Renminbi against the U.S.
dollar would diminish the value of the proceeds of the offering and this
could
harm our business, financial condition and results of operations. Conversely,
if
we decide to convert our Renminbi into U.S. dollars for the purpose of making
payments for dividends on our common shares or for other business purposes
and
the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent
of
the Renminbi we convert would be reduced. In addition, the depreciation of
significant U.S. dollar denominated assets could result in a charge to our
income statement and a reduction in the value of these assets.
On
July 21, 2005, the PRC government changed its decade-old policy of pegging
the
value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi
is
permitted to fluctuate within a narrow and managed band against a basket
of
certain foreign currencies. This change in policy has resulted in significant
appreciation of the Renminbi against the U.S. dollar. While the international
reaction to the Renminbi revaluation has generally been positive, there remains
significant international pressure on the
PRC
government to adopt an even more flexible currency policy, which could result
in
a further and more significant appreciation of the Renminbi against the U.S.
dollar.
PRC
State Administration of Foreign Exchange ("SAFE") Regulations regarding offshore
financing activities by PRC residents which may increase the administrative
burden we face. The failure by our shareholders who are PRC residents to
make
any required applications and filings pursuant to such regulations may prevent
us from being able to distribute profits and could expose us and our PRC
resident shareholders to liability under PRC law.
SAFE,
issued a public notice ("SAFE #75") effective from November 1, 2005, which
requires registration with SAFE by the PRC resident shareholders of any foreign
holding company of a PRC entity. Without registration, the PRC entity cannot
remit any of its profits out of the PRC as dividends or otherwise. Our PRC
resident controlling shareholder, Mr. Du, has taken all necessary steps as
instructed by the local SAFE branch at Bazhou city to comply with SAFE #75
by
filing a disclosure form regarding his ownership status; however, we cannot
assure you that this disclosure document will be sufficient. It is also unclear
exactly whether our other PRC resident shareholders must make disclosure
to
SAFE. While our PRC counsel has advised us that only the PRC resident
shareholders who receive ownership of the foreign holding company in exchange
for ownership in the PRC operating company are subject to SAFE #75, there
can be
no assurance that SAFE will not require our three other PRC resident
shareholders to register and make the applicable disclosure. In addition,
SAFE
#75 requires that any monies remitted to PRC residents outside of the PRC
be
returned within 180 days; however, there is no indication of what the penalty
will be for failure to comply or if shareholder non-compliance will be
considered to be a violation of SAFE #75 by us or otherwise affect
us.
In
the event that the proper procedures are not followed under SAFE #75, we
could
lose the ability to remit monies outside of the PRC and would therefore be
unable to pay dividends or make other distributions. Our PRC resident
shareholders could be subject to fines, other sanctions and even criminal
liabilities under the PRC Foreign Exchange Administrative Regulations
promulgated January 29, 1996, as amended.
The
PRC’s legal and judicial system may not adequately protect our business and
operations and the rights of foreign investors
The
PRC
legal and judicial system may negatively impact foreign investors. In 1982,
the
National People's Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in the PRC. However, the PRC's system of laws is not yet
comprehensive. The legal and judicial systems in the PRC are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in the PRC
lack
the depth of legal training and experience that would be expected of a judge
in
a more developed country. Because the PRC judiciary is relatively inexperienced
in enforcing the laws that do exist, anticipation of judicial decision-making
is
more uncertain than would be expected in a more developed country. It may
be
impossible to obtain swift and equitable enforcement of laws that do exist,
or
to obtain enforcement of the judgment of one court by a court of another
jurisdiction. The PRC's legal system is based on the civil law regime, that
is,
it is based on written statutes; a decision by one judge does not set a legal
precedent that is required to be followed by judges in other cases. In addition,
the interpretation of Chinese laws may be varied to reflect domestic political
changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of
local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced
the
protection of foreign investment and allowed for more control by foreign
parties
of their investments in Chinese enterprises. There can be no assurance that
a
change in leadership, social or political disruption, or unforeseen
circumstances affecting the PRC's political, economic or social life, will
not
affect the PRC government's ability to continue to support and pursue these
reforms. Such a shift could have a material adverse effect on our business
and
prospects.
The
practical effect of the PRC legal system on our business operations in the
PRC
can be viewed from two separate but intertwined considerations. First, as
a
matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate Articles and contracts
to Foreign Invested Enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are qualitatively
different from the general corporation laws of the United States. Similarly,
the
PRC accounting laws mandate accounting practices, which are not consistent
with
U.S. generally accepted accounting principles. PRC’s accounting laws require
that an annual "statutory audit" be performed in accordance with PRC accounting
standards and that the books of account of Foreign Invested Enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the
People's Republic of China Wholly Foreign-Owned Enterprise Law requires a
wholly
foreign-owned enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation. While the enforcement of substantive rights may appear
less
clear than United States procedures, the Foreign Invested Enterprises and
Wholly
Foreign-Owned Enterprises are Chinese registered companies, which enjoy the
same
status as other Chinese registered companies in business-to-business dispute
resolution. Any award rendered by an arbitration tribunal is enforceable
in
accordance with the United Nations Convention on the Recognition and Enforcement
of Foreign Arbitral Awards (1958). Therefore, as a practical matter, although
no
assurances can be given, the Chinese legal infrastructure, while different
in
operation from its United States counterpart, should not present any significant
impediment to the operation of Foreign Invested Enterprises.
Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could harm our operations.
A
renewed outbreak of SARS or another widespread public health problem (such
as
bird flu) in the PRC, where all of our revenues are derived, could significantly
harm our operations. Our operations may be impacted by a number of
health-related factors, including quarantines or closures of some of our
offices
that would adversely disrupt our operations. Any of the foregoing events
or
other unforeseen consequences of public health problems could significantly
harm
our operations.
Because
our principal assets are located outside of the United States and all of
our
directors and officers reside outside of the United States, it may be difficult
for you to enforce your rights based on U.S. Federal Securities Laws against
us
and our officers and some directors in the U.S. or to
enforce
U.S. court judgment against us or them in the PRC.
All
of our directors and officers reside outside of the United States. In addition,
our operating subsidiaries, Deli Solar (Bazhou) and Deli Solar (Beijing)
are
located in the PRC and substantially all of their assets are located outside
of
the United States. It may therefore be difficult for investors in the United
States to enforce their legal rights based on the civil liability provisions
of
the U.S. Federal securities laws against us in the courts of either the U.S.
or
the PRC and, even if civil judgments are obtained in U.S. courts, to enforce
such judgments in PRC courts. Further, it is unclear if extradition treaties
now
in effect between the United States and the PRC would permit effective
enforcement against us or our officers and directors of criminal penalties,
under the U.S. Federal securities laws or otherwise.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
We
have in the past and may continue to have difficulty in hiring and retaining
a
sufficient number of qualified employees to work for us. Accordingly, we
may
experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet western
standards.
The
relative lack of public company experience of our management team may put
us at
a competitive disadvantage.
Our
management
team lacks public company experience, which could impair our ability to comply
with legal and regulatory requirements such as those imposed by Sarbanes-Oxley
Act of 2002. The individuals who now constitute our senior management have
never
had responsibility for managing a publicly traded company. Such responsibilities
include complying with federal securities laws and making required disclosures
on a timely basis. Our senior management may not be able to implement programs
and policies in an effective and timely manner that adequately respond to
such
increased legal, regulatory compliance and reporting requirements. Our failure
to comply with all applicable requirements could lead to the imposition of
fines
and penalties and distract our management from attending to the growth of
our
business.
Risks
Related to Our Common Stock.
We
are controlled by Mr. Du and his position and stock ownership and his interests
may differ from other stockholders.
As
of January 9, 2008, there were 6,205,290 shares of
our common stock issued and outstanding. As of January 9, 2008, Deli Du,
our
Chief Executive Officer, was the beneficially owner of 3,152,886 shares of
our
common stock which represented approximately 50.8% of our common stock. (None
of
our other officers and directors own any shares of our common stock.) As
a
result, Mr. Du is currently able to control the outcome of stockholder votes
on
various matters, including the election of directors and extraordinary
corporation transactions including business combinations. Mr. Du's interests
may
differ from other stockholders. Furthermore, the current ownership of our
common
stock reduces the public float and liquidity of our common stock which can
in
turn affect the market price of our common stock. If all of the 1,774,194
outstanding shares of Series A Preferred Stock are converted into 1,774,194
shares of common stock there will be 7,979,484 shares outstanding in which
event
Mr. Du’s will be the beneficial owner of 39.5% of our outstanding common stock
and he will no longer have voting control.
We
are not likely to pay cash dividends in the foreseeable
future.
We
intend to retain any future earnings for use in the operation and expansion
of
our business. We do not expect to pay any cash dividends in the foreseeable
future but will review this policy as circumstances dictate. Should we decide
in
the future to do so, as a holding company, our ability to pay dividends and
meet
other obligations depends upon the receipt of dividends or other payments
from
our operating subsidiaries. In addition, our operating subsidiaries, from
time
to time, may be subject to restrictions on their ability to make distributions
to us, including restrictions on the conversion of local currency into U.S.
dollars or other hard currency and other regulatory restrictions.
Our
common stock is thinly traded, so you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
Prior
to
the reverse merger our shares were not publicly traded. Through the reverse
merger, we have essentially become public without the typical initial public
offering procedures which usually include a large selling group of
broker-dealers who may provide market support after going public. Thus, we
have
undertaken efforts to develop market recognition for our stock, including
through the retention of Hayden Communications International, Inc on July
23,
2007. As of January 9, 2008, we had approximately 2,531 stockholders of record
and our market capitalization (excluding 3,152,886 shares held by Mr. Du)
was
approximately $10,530,793. As a result, there is limited market activity
in our
stock and we are too small to attract the interest of many brokerage firms
and
analysts. We cannot give you any assurance that a broader or more active
public
trading market for our common stock will develop or be sustained. Currently
our
common stock is quoted in the OTC Bulletin Board market and the trading volume
we will develop may be limited by the fact that many major institutional
investment funds, including mutual funds, as well as individual investors
follow
a policy of not investing in Bulletin Board stocks and certain major brokerage
firms restrict their brokers from recommending Bulletin Board stocks because
they are considered speculative, volatile and thinly traded. The OTC Bulletin
Board market is an inter-dealer market much less regulated than the major
exchanges and our common stock is subject to abuses and volatilities and
shorting. Thus there is currently no broadly followed and established trading
market for our common stock. An established trading market may never develop
or
be maintained. Active trading markets generally result in lower price volatility
and more efficient execution of buy and sell orders. Absence of an active
trading market reduces the liquidity of the shares traded there.
The
trading volume of our common stock may be limited and sporadic. As a result
of
such trading activity, the quoted price for our common stock on the OTC Bulletin
Board may not necessarily be a reliable indicator of its fair market value.
Further, if we cease to be quoted, holders would find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of our
common stock and as a result, the market value of our common stock likely
would
decline.
Our
common stock is currently subject to the "penny stock" rules which require
delivery of a schedule explaining the penny stock market and the associated
risks before any sale.
Our
common stock is currently subject to regulations prescribed by the SEC relating
to “penny stocks.” The SEC has adopted regulations that generally define a penny
stock to be any equity security that has a market price (as defined in such
regulations) of less than $5 per share, subject to certain exceptions.
On January 9, 2008 the last sale price of our common stock was $3.45
per share. These regulations impose additional sales practice requirements
on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally institutions with assets in
excess
of $5,000,000 and individuals with a net worth in excess of $1,000,000 or
annual
income exceeding $200,000 (individually) or $300,000 (jointly with their
spouse)). For transactions covered by these rules, the broker-dealer must
make a
special suitability determination for the purchase of these securities and
have
received the purchaser's prior written consent to the transaction. Additionally,
for any transaction, other than exempt transactions, involving a penny stock,
the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the common stock and may affect
the ability of investors to sell their common stock in the secondary
market.
Our
common stock is illiquid and subject to price volatility unrelated to our
operations.
The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the
economy
and the financial markets or other developments affecting our competitors
or us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market
price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
A
large number of shares will be eligible for future sale and may depress our
stock price.
This
is
an offering of 1,017,468 shares of our common stock by the selling stockholders,
among which 508,734 shares may be acquired on conversion of the Series
A
Preferred Stock and 508,734 shares may be acquired on exercise of class A
warrants. As of January 9, 2008, there were 6,205,290 shares of our common
stock
outstanding. Assuming (i) conversion of the Series A Preferred Stock, (ii)
the
exercise of the warrants being registered in this prospectus, (iii) the
conversion of the remaining shares of Series A Preferred Stock and exercise
of
the class A and class B warrants not being registered in this prospectus,
(iv)
the exercise of the warrants to purchase 1,825,719 shares registered for
resale
in the registration statement declared effective on July 18, 2006, there
will be
13,353,591 shares of common stock outstanding. Of these 13,353,591 shares
(i)
1,017,468 shares are being registered for resale pursuant to this
prospectus, (ii) 3,952,025 shares were registered for resale in a
registration statement declared effective on July 18, 2006 and (iii) and
the
4,067,964 issued in the reverse merger may be sold without substantial
restrictions or the requirement of future registration under the Securities
Act
subject to the requirements of Rule 144.
Sales
of substantial amounts of common stock, or a perception that such sales could
occur, and the existence of options or warrants to purchase shares of common
stock at prices that may be below the then current market price of the common
stock, could adversely affect the market price of our common stock and could
impair our ability to raise capital through the sale of our equity
securities.
We
are authorized to issue "blank check" preferred stock, which can be issued
without stockholder approval and may adversely affect the rights of holders
of
our common stock.
We
are
authorized to issue 25,000,000 shares of preferred stock, of which 3,500,000
shares have been designated as Series A Preferred Stock. As of January 9,
2008 there were 1,774,194 shares of Series A Preferred Stock issued and
outstanding. The Board of Directors is authorized under our Restated Articles
of
Incorporation to provide for the issuance of additional shares of preferred
stock by resolution, and by filing a certificate of designations under
Nevada
law, to fix the designation, powers, preferences and rights of the shares
of
each such series and the qualifications, limitations or restrictions thereof
without any further vote or action by the stockholders. Any shares of preferred
stock so issued are likely to have priority over the common stock (but
not the
Series A Preferred Stock) with respect to dividend or liquidation rights.
In the
event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change
in
control, which could have the effect of discouraging bids for our company
and
thereby prevent stockholders from receiving the maximum value for their
shares.
We have no present intention to issue any shares of its preferred stock
in order
to discourage or delay a change of control. However, there can be no assurance
that preferred stock will not be issued at some time in the
future.
This
prospectus relates to the offer and sale of our
common stock by the selling stockholders identified in the table below. Each
of
the selling stockholders acquired the Series A Preferred Stock and the warrants
pursuant to our private placement transaction completed on June 13, 2007.
Each
investor was an “accredited investor” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act.
None
of the selling stockholders has held a position as an officer or director
of the
Company, nor has any selling stockholder had a material relationship of any
kind
with the Company.
The
table
set forth below lists the names of the selling stockholders as well as (1)
the
number of shares underlying the Series A Preferred Stock acquired by the
selling
stockholder in the June 13, 2007 private placement which are being registered,
and (2) the number of shares underlying the class A warrants acquired by
the
selling stockholder in the June 13, 2007 private placement which are being
registered.
Each
selling stockholder may offer for sale all or part of the shares from time
to
time. The table below assumes that the selling stockholders will sell all
of the
shares offered for sale. A selling stockholder is under no obligation, however,
to sell any shares immediately pursuant to this prospectus, nor is a selling
stockholder obligated to sell all or any portion of the shares at any
time.
The
Company has not in the past been engaged in any prior securities transaction
with any of the selling shareholder, any affiliates of the selling shareholders,
or, after due inquiry and investigation, to the knowledge of the management
of
the Company, any person with whom any selling shareholder has a contractual
relationship regarding the transaction (or any predecessors of those
persons).
After
due
inquiry and investigation and based on information provided by counsel
to the
selling shareholders, none of the selling shareholders has an existing short
position in the Company stock.
On
July
23, 2007, the Company entered into an investor relations consulting agreement
with Hayden Communications, Inc., a company controlled by Matt Hayden one
of the
selling stockholders, pursuant to which HCI agreed to perform investor
relations
and stock market support for the Company for a period of twelve months.
In
consideration for such services the Company has agreed to pay HCI a monthly
consulting fee of $8,500 and 175,000 three year warrants to purchase common
stock with an exercise of $2.40 per share. Half of the warrants vest on
January
23, 2008 and the other half vest on July 23, 2008.
Other
than as described in this prospectus and the issuance and sale of the Series
A
Preferred Stock and the class A and class B warrants to the selling
shareholders, the Company has not in the past three years engaged in any
securities transaction with any of the selling shareholders, any affiliates
of
the selling shareholders, or, after due inquiry and investigation, to the
knowledge of the management of the Company, any person with whom any selling
shareholder has a contractual relationship regarding the transaction (or
any
predecessors of those persons). In addition, other than in connection with
the
contractual obligations set forth in (i) the purchase agreements entered
into
between the Company on one hand and each of the selling stockholders on
the
other hand, (ii) the Series A Preferred Stock and the warrants, (iii) the
investor relations agreement between Matt Hayden and the Company entered
into on
July 23, 2007, the Company does not have any agreements or arrangements
with the
selling shareholders with respect to the performance of any current or
future
obligations.
Name
of Selling Stockholder
|
|
Number
of
Shares
Underlying Series A Preferred Stock owned prior to the
Offering
|
|
Number
of Shares
Underlying
Class A Warrants owned prior to the Offering
|
|
Total
Number
Of
Shares Beneficially Owned Prior to Offering
|
|
Percentage
Of Shares Beneficially Owned Prior to Offering
|
|
Maximum
Number of Shares Underlying Series A Preferred Stocks to be
Sold
|
|
Maximum
Number of Shares Underlying Class A Warrants to be
Sold
|
|
Total
Number
Of
Shares Beneficially Owned after Offering
|
|
Percentage
Ownership after Offering % (6)
|
|
Barron
Partners LP
(7)
|
|
|
1,645,162
|
|
|
1,645,162
|
|
|
304,059(2)(3)
|
|
|
4.9%(2)(3)
|
|
|
471,596
|
|
|
471,596
|
|
|
304,059(2)(3)
|
|
|
4.9%(2)(3)
|
|
Eos
Holdings, LLC
(7)
|
|
|
64,516
|
|
|
64,516
|
|
|
193,548(4)
|
|
|
3%(3)
|
|
|
18,569
|
|
|
18,569
|
|
|
156,410
|
|
|
2.5%
|
|
Matthew
Hayden
|
|
|
64,516
|
|
|
64,516
|
|
|
281,048(4)
|
(5)
|
|
4.3%(3)
|
|
|
18,569
|
|
|
37,138
|
|
|
243,910
|
|
|
3.8%
|
|
(1)
Under
applicable SEC rules, a person is deemed to
beneficially own securities which the person has the right to acquire within
60
days through the exercise of any option or warrant or through the conversion
of
another security. Also under applicable SEC rules, a person is deemed to
be the
“beneficial owner” of a security with regard to which the person directly or
indirectly, has or shares (a) the voting power, which includes the power
to vote
or direct the voting of the security, or (b) the investment power, which
includes the power to dispose, or direct the disposition, of the security,
in
each case, irrespective of the person’s economic interest in the security. Each
listed selling stockholder has the sole investment and voting power with
respect
to all shares of common stock shown as beneficially owned by such selling
stockholder, except as otherwise indicated in the table.
(2)
Represents 4.9% of the 6,205,290 shares of common stock issued and
outstanding
on January 9, 2008. Under the terms of the securities purchase
agreement (to which each selling shareholder is a party) none of such
selling stockholders (including Barron) can own at any time more than
4.9% of
the issued and outstanding shares of common stock. Under SEC rules,
without
taking into account the 4.9% beneficial ownership limitation contained
in the
private placement documents, Barron Partners would be deemed to be
the
beneficial owner of 4,935,486, shares of common stock or 44.3% (representing
1,645,162 shares issuable on conversion of the Series A Preferred Stock,
1,645,162 shares issuable on conversion of the class A warrants and
1,645,162
shares issuable on exercise of the class B warrants). The 4.9% beneficial
ownership limitation does not prevent a selling stockholder from selling
some of
their holdings then receiving additional shares. Accordingly, Barron
Parners and
each other selling stockholder could exercise and sell more than the
4.9%
beneficial ownership limitation while never at any one time holding
more than
this limit. The 4.9% beneficial ownership limitation does not
prevent Barron Partners or any other selling stockholder from ultimately
converting and/or exercising and subsequently selling all of the 4,935,486,
shares of common stock set forth above.
(3)
Subject to footnote 2, in determining the percent of common stock beneficially
owned by a selling stockholder on January 9, 2008, (a) the numerator
is the
number of shares of common stock beneficially owned by such selling
stockholder,
including shares the beneficial ownership of which may be acquired,
within 60
days on conversion of the Series A Preferred Stock or on exercise of
the
warrants held by such selling stockholder, and (b) the denominator
is the sum of
(i) the 6,205,290 shares outstanding on January 9, 2008, and (ii) the
number of
shares underlying the Series A Preferred Stock and warrants, which
each of the
selling stockholders has the right to acquire within 60 days of January
9,
2008.
(4)
Represents 64,516 shares issuable on conversion of the Series A Preferred
Stock,
64,516 shares issuable on exercise of the Class A Warrants, and 64,516
shares
issuable on exercise of the Class B Warrants.
(5)
Represents 64,516 shares issuable on conversion of the Series A Preferred
Stock,
64,516 shares issuable on exercise of the Class A Warrants, and 64,516
shares
issuable on exercise of the Class B Warrants. Also includes half of the
175,000 shares issuable on the exercise of 175,000 warrants issued
to Hayden
Communications International, Inc (“HCI”) under a consulting agreement dated
July 23, 2007 between the Company and HCI, which are exercisable within 60
days of January 9, 2008. HCI is controlled by Matt Hayden, one of the
Selling
Stockholders.
(6)
Assumes the sale of all shares offered by the selling stockholders.
(7)
Barron Partners LPi is controlled by Andrew Worden.
Eos Holdings, LLC is controlled by Jon Carnes.
Background
On
June
13, 2007 we entered into a number of agreements with the selling stockholders
providing for the sale for an aggregate purchase price of $2,750,000 (or
$1.55
per share) of
|
(i)
|
1,774,194
shares of Series A Preferred Stock (with each share of Series A
Preferred
Stock convertible into one (1) share of common stock), subject
to
adjustment);
|
|
(ii)
|
five
year class A warrants to purchase 1,774,194 shares of common stock
at an
exercise price $1.90 per share, subject to adjustment; and
|
|
(iii)
|
five
year class B warrants to purchase an additional 1,774,194 shares
of common
stock at an exercise price of $2.40 per share, subject to
adjustment.
|
Additional
shares of Series A Preferred Stock (not to exceed 900,000) are required to
be
delivered to the investors in the event that we fail to achieve “pre tax income”
targets for of $3,000,000 the fiscal year ended December 31, 2007 and $5,500,000
for the fiscal year ended December 31, 2008.
In
connection with the placement we issued T
renwith
Securities, LLC
warrants
to purchase 106,452 shares exercisable for a period of five years at an exercise
price of $1.71 per share, subject to adjustment, and a transaction fee equal
to
$165,000. In connection with their appointment, the Company had previously
issued Trenwith five year warrants to purchase 75,000 shares of common stock
at
an exercise price of $2.91 per share, subject to adjustment.
As
of
June 13, 2007 the closing sale price of our common stock was $2.10. As
of January 9, 2008 the last sale price of our common stock was $3.45.
The
agreements entered into with the investors include a securities purchase
agreement, and a registration rights agreement and various ancillary agreements
and certificates, disclosure schedules and exhibits in support thereof including
a certificate of designation and the warrants, each dated June 13, 2007 (except
for the certificate of designation which was dated June 12, 2007). The following
is a summary of the material terms.
Securities
Purchase Agreement
The
securities purchase agreement provides for the purchase by the investors
of the
securities as described below.
Name
and
Address
|
|
Amount
of Investment
|
|
Number
of Shares
of
Series A Preferred Stock
|
|
Number
of
Shares
of Common Underlying Series A Preferred Stock
|
|
Number
of Shares of Common
Underlying
Class A Warrants
|
|
Number
of Shares of Common
Underlying
Class B Warrants
|
|
Barron
Partners LP
|
|
$
|
2,550,000
|
|
|
1,645,162
|
|
|
1,645,162
|
|
|
1,645,162
|
|
|
1,645,162
|
|
Eos
Holdings, LLC
|
|
$
|
100,000
|
|
|
64,516
|
|
|
64,516
|
|
|
64,516
|
|
|
64,516
|
|
Matthew
Hayden
|
|
$
|
100,000
|
|
|
64,516
|
|
|
64,516
|
|
|
64,516
|
|
|
64,516
|
|
Total
|
|
$
|
2,750,000
|
|
|
1,774,194
|
|
|
1,774,194
|
|
|
1,774,194
|
|
|
1,774.194
|
|
Representations;
Warranties; Indemnification
:
The
Securities Purchase Agreement contains representations and warranties by
us and
the investors which are customary for transactions of this type. The Securities
Purchase Agreement also obligates us to indemnify the investors for any losses
arising
out of any breach of the agreement or failure by us to perform with respect
to
the representations, warranties or covenants in the agreement.
Covenants:
The
Securities Purchase Agreement contains certain covenants on our part, including
the following:
|
·
|
we
may not issue any convertible debt or any shares of convertible
preferred
stock prior to June 13, 2010 (or the date, if earlier, that the
investors
have converted all the Series A Preferred Stock, exercised all
warrants
and sold the underlying shares in the public
market);
|
|
·
|
we
must use the proceeds of the financing for acquisitions and working
capital purposes and not to repay any outstanding debt or to redeem
or
repurchase any equity securities;
|
|
·
|
we
cannot have any debt outstanding in an amount greater than twice
EBITDA
from continuing operations for the prior four quarters. This restriction
continues until June 13, 2010
(or
the date, if earlier, that
the
investors have converted all the Series A Preferred Stock, exercised
all
warrants and sold 90% of the underlying shares in public market);
|
|
·
|
we
cannot enter into any transaction that has any reset features that
could
result in additional shares being issued. This restriction continues
until
June 13, 2012 (or the date, if earlier, on which the investors
have
converted all the Series A Preferred Stock, exercised all warrants
and
sold the underlying shares in the public market);
|
|
|
Prior
to July 13, 2007, we were required to increase the size of our
Board of
Directors to five or seven and cause the appointment of a majority
of the
board to be “independent directors,” as defined by the rules of the
Nasdaq Stock Market. Prior to November 1, 2007 our Board consisted
of four
members two of whom are independent. Under the terms of our the
securities
purchase agreement we are required to pay the investors liquidated
damages
equal to one percent (1%) per month of the purchase price of the
then
outstanding shares of Series A Preferred Stock, in cash or in Series
A
Preferred Stock at the option of the investors, based on the number
of
days that such obligation is not met beyond certain grace periods.
As
of November 1, 2007
we
were delinquent by 110 days in meeting this
obligation;
|
|
|
In
addition, under the terms of the securities purchase agreement,
we were
required, prior to August 12,2007 to appoint (i) an audit committee
comprised solely of not less than three independent directors
and a (ii)
compensation committee comprised of not less than three directors,
a
majority of whom are independent directors. Our audit and compensation
currently each consists of two members both of whom are independent.
Accordingly, we are delinquent in our obligation. However, under
the terms
of the securities purchase agreement no liquidated damages are
required to
be paid for this breach during any period for which liquidated
damages are
payable for failing to have an independent board. Accordingly,
damages
began to accrue for breach of this provision on November 1, 2007.
As of
January 15, 2008 we were delinquent by
76
days in meeting this obligation and we are required to pay investors
a
total of approximately
$68,750.
|
|
·
|
Until
June 13, 2010, we must obtain approval from the Board of Directors
or
Compensation Committee (comprised of a majority of independent
directors)
that any awards other than salary to any officer, director or consultants
(whose compensation is more than $100,000 per annum) are customary,
appropriate and reasonable;
|
|
·
|
we
were required to retain an investor relations firm prior to July
13, 2007.
We met this obligation on July 23,
2007.
|
Right
of First Refusal.
E
ach
investor has the right to participate pro rata in any financing prior to
December 13, 2008.
Adjustment
to Conversion Price
of
Series A Preferred Stock; Full Ratchet
.
I
f
we
issue common stock at a sale price, or issue warrants, options,
convertible
debt or equity securities with a exercise or conversion price per share which
is
lower than the conversion price of the Series A Preferred Stock ($1.55 as
of the
date of this prospectus) then in effect, the conversion price of the Series
A
Preferred Stock in effect from and after the date of that transaction will
be
reduced to the lower price.
Delivery
of up to 900,000 additional shares of Series A Preferred Stock from Escrow
Based
on Pre-Tax Income Per Share
:
We
delivered
to an escrow agent at the closing 900,000 shares of Series A Preferred Stock
(the “
Make
Good
Escrow Stock
”).
If
our
consolidated “pre-tax income” for the year ended December 31, 2007 is less than
$3,000,000 (or pretax income per share of $0.22 on a fully diluted basis)
(the
“
2007
Target Number
”)
the
“
2007
Percentage Shortfall
”
will
first be computed by dividing the amount of the shortfall by the 2007 Target
Number. If the 2007 Percentage Shortfall is equal to or greater than thirty
three and one-third percent (33 1/3%), then the escrow agent is required
to
deliver all of the Make Good Escrow Stock to the investors. If the 2007
Percentage Shortfall is less than thirty three and one-third percent (33
1/3%),
then the escrow agent is required to (i) deliver to the investors the number
of
shares of the Make Good Escrow Stock as is determined by multiplying the
2007
Percentage Shortfall by 2,750,000 (not to exceed 900,000), and (ii) deliver
to
the Escrow Agent the remaining shares of Make Good Escrow Stock, if any (the
“
Remaining
Escrowed Shares
”).
If
the Company’s consolidated pre-tax income for the year ended December 31, 2008
is less than $5,500,000 (or pretax income per share of $0.40 on a fully diluted
basis (the “
2008
Target Number
”)
the
“
2008
Percentage Shortfall”
shall be
computed by dividing the amount of the shortfall by the 2008 Target Number.
If
the 2008 Percentage Shortfall is equal to or greater than thirty three and
one-third percent (33 1/3%), then the escrow agent shall deliver all of the
Remaining Escrowed Shares to the investors. If the 2008 Percentage Shortfall
is
less than thirty three and one-third percent (33 1/3%), then the escrow agent
shall (i) deliver to the investors the number of shares of the Make Good
Escrow
Stock as is determined by multiplying the 2008 Percentage Shortfall by 2,750,000
(not to exceed the Remaining Escrowed Shares) and (ii) deliver to the Company
any Remaining Escrowed Shares. The investors shall not be entitled to any
of the
Make Good Escrow Stock for 2008 and all Remaining Escrowed Shares shall be
returned to the Company if the Company does not receive at least
$4,000,000
from the investors (within 90 days after the effectiveness of the first
registration statement filed pursuant to the registration rights agreement)
either through the exercise of warrants, or additional equity financing.
There
is
no existing agreement, arrangement or understanding between the Company and
any
of the selling shareholders regarding the exercise of any warrants within
90
days of the effectiveness of the registration statement or any other equity
financing.
Two
year lock up.
Our
officers, directors or affiliates are p
rohibited
from selling any shares of common stock in the public market prior to June
13,
2009 (or the earlier date that
the
investors have converted all the Series A Preferred Stock, exercised all
the
warrants and sold the underlying shares in the public market).
Subsequent
Equity Sales; Variable Rate or MFN Transactions
.
As long
as the investors continue to beneficially own at least 15% of the outstanding
shares of the Series A Preferred Stock (or common stock issued on conversion
thereof), we shall not effect or enter into an agreement to effect any
subsequent financing involving a “variable rate transaction” or an “MFN
transaction.” A “variable rate transaction” means a transaction in which we
issue or sell any debt or equity securities that are convertible into,
exchangeable or exercisable for, or include the right to receive additional
shares of common stock either (A) at a conversion, exercise or exchange rate
or
other price that is based upon and/or varies with the trading prices of or
quotations for the shares of common stock at any time after the initial issuance
of such debt or equity securities, or (B) with a conversion, exercise or
exchange price that is subject to being reset at some future date after the
initial issuance of such debt or equity security or upon the occurrence of
specified or contingent events directly or indirectly related to our business
or
the market for our common stock. An “MFN transaction” means a transaction in
which we issue or sell any securities in a capital raising transaction (or
series of related transactions) which grants an investor the right to receive
additional shares based upon future transactions of the Company on terms
more
favorable than those granted to such investor in such offering. Investors
are
entitled to obtain injunctive relief against us to preclude any such issuance.
The
Series A Preferred Stock
The
rights and preferences of the Series A Preferred Stock are set forth in the
certificate of designation. The following is a summary of the rights and
preferences:
No
Dividends
.
No
dividends are payable with respect to the Series A Preferred Stock and no
dividends can be paid on our common stock while the preferred is outstanding.
Voting
Rights
.
The
Series A Preferred Stock has no voting rights except as may be required by
Nevada law. However, the approval of the holders of 75% of the Series A
Preferred Stock is required for us:
|
·
|
to
change the powers, preferences or rights of the Series A Preferred
Stock
or to alter or amend the Certificate of Designation;
|
|
·
|
to
authorize or create any class of stock ranking as to dividends
or
distribution of assets on liquidation senior to or pari passu with
the
Series A Preferred Stock, or any series of preferred stock possessing
greater voting rights or the right to convert at a more favorable
price
than the Series A Preferred Stock;
|
|
·
|
to
increase the authorized number of shares of Series A Preferred
Stock or
the number of authorized shares of preferred stock; and
|
|
·
|
to
amend our certificate of incorporation in breach of any of the
above
provisions.
|
Liquidation
Preference
.
On
liquidation the holders are entitled to receive $1.55 per share (out of
available assets) before any distribution or payment can be made to the holders
of any junior securities.
Fundamental
Transactions
:
Holders
of Series A Preferred Stock may elect to treat a “fundamental transaction” or a
transaction involving a change of control as a liquidation as to such
holder
.
Conversion.
Conversion
at Option of Holder
.
Each
share of Series A Preferred Stock is convertible at any time into one share
of
common stock at the option of the holder. If the conversion price (initially
$1.55) is adjusted the conversion ratio will likewise be adjusted and the
new
conversion ratio will be determined by multiplying the conversion ratio in
effect by a fraction, the numerator of which is the conversion price in effect
before the adjustment and the denominator of which is the new conversion
price.
Automatic
Conversion on Change of Control
.
In the
event of a “change of control” the shares of Series A Preferred Stock will be
automatically converted into common stock. However, holders may elect to
treat a
fundamental transaction or a transaction involving a change of control as
a
liquidation as to such holder.
4.9%
Beneficial Ownership Limitation
.
Except
in certain circumstances, the right of the holder to convert the Series A
Preferred Stock is subject to the 4.9% limitation, with the result we shall
not
effect any conversion of the Series A Preferred Stock, and the holder has
no
right to convert any portion of the Series A Preferred Stock, to the extent
that
after giving effect to such conversion, the holder (together with the holder’s
affiliates) would beneficially own in excess of 4.9% of the number of shares
of
common stock outstanding immediately after giving effect to such
conversion. B
eneficial
ownership is determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder.
The
4.9%
limitation may not be waived or amended.
Liquidated
Damages for Failing to Timely Deliver Certificates
:
If we
fail to deliver the appropriate stock certificates within two trading days
of
the conversion date, we are required to pay the holder, in cash, liquidated
damages for each $5,000 of conversion value of Series A Preferred Stock being
converted, of $50 per trading day (increasing to $100 per trading day after
three (3) trading days and increasing to $200 per trading day six (6) trading
days after such damages begin to accrue) for each trading day until such
certificates are delivered. In addition, if we fail to deliver to the holder
the
certificates on the requisite dates, and if thereafter the holder purchases
(in
an open market transaction or otherwise) common stock to deliver in satisfaction
of a sale by such holder of the shares which the holder was entitled to receive
on conversion, then we are required to pay in cash to the holder the amount
by
which (x) the holder’s total purchase price (including brokerage commissions, if
any) for the common stock so purchased exceeds (y) the product of (1) the
aggregate number of shares of common stock that such holder was entitled
to
receive from the conversion at issue multiplied by (2) the price at which
the
sell order giving rise to such purchase obligation was executed
.
Certain
Adjustments.
Stock
Dividends and Stock Splits.
Appropriate adjustments will be made to the conversion ratio in the event
of a
stock dividend, stock distribution, stock split or reverse stock split or
reclassification with respect to the outstanding shares of common
stock.
Price
Adjustment; Full Ratchet
:
If,
except for certain exempted issuances, we issue any common stock at a price,
or
issues warrants, options, convertible debt or equity securities with a exercise
or conversion price per share which is lower than the conversion price then
in
effect, the conversion price in effect from and after the date of such issuance
shall be reduced to the lower price.
Pro
Rata Distributions
.
If we
distribute to the holders of common stock evidences of its indebtedness,
assets,
rights or warrants to subscribe for or purchase any security, then in each
case
the conversion price shall be determined by multiplying the conversion price
by
a fraction the numerator of which is the VWAP minus the then fair market
value
at such record date of the portion of the assets or evidence of indebtedness
so
distributed applicable to one outstanding share of the common stock as
determined by the Board of Directors in good faith and the denominator of
which
is the VWAP on the record date,.
Fundamental
Transaction
.
If we
effect a merger, sell all or substantially all of our assets, any tender
offer
or exchange offer is completed pursuant to which holders of common stock
are
permitted to tender or exchange their shares for other securities, cash or
property, or we effect any reclassification of the common stock or any
compulsory share exchange pursuant to which the common stock is effectively
converted into or exchanged for other securities, cash or property (each,
a
“fundamental transaction”), then on subsequent conversion of the Series A
Preferred Stock, the holder has the right to receive, for each share of common
stock that would have been issuable on such conversion absent such fundamental
transaction, the same kind and amount of securities, cash or property as
the
holder would have been entitled to receive on the occurrence of the fundamental
transaction as if the holder had been, immediately prior to such fundamental
transaction, the holder of common stock.
The
Warrants
The
class A warrants entitle the holders to purchase up to an aggregate of
1,774,194 shares of common stock at an exercise price of $1.90 per share,
subject to adjustment. The class B warrants entitle the holders to purchase
up to an aggregate of 1,774,194 shares of common stock at an exercise price
of
$2.40 per share, subject to adjustment. The class A and class B warrants
expire
on June 12, 2012. The terms of the class A warrants and class B warrants
are
substantially identical except that only the class A warrants grant the Company
the right to redeem under the circumstances set forth therein. 106,452 of
the
placement agent warrants expire on June 12, 2012 and have an exercise price
of
$1.71 subject to adjustment. 75,000 of the placement agent warrants entitled
expire on April 25, 2012 and have an exercise price of $2.91, subject to
adjustment. Otherwise the terms of the placement agent warrants are
substantially similar to the terms of the class A warrants except that the
exercise price is not subject to a
djustments
based on pre-tax i
ncome
per share and the 4.9% limitation does not apply.
Cashless
Exercise.
The holders
may
make
a cashless exercise
but
not until June 13, 2008 and only then if the resale of the warrant shares
by the
holder is not covered by
an effective registration statement
.
Maximum
Exercise; 4.9% Limitation
.
The holder is not permitted to exercise the warrant to the extent that on
the
date of exercise the exercise would result in beneficial
ownership
by the holder and its affiliates of more than 4.9% of the outstanding shares
of
common stock on such date. This provision may not be waived or amended.
Adjustment
for Stock Splits, Stock Dividends, Recapitalizations,
Etc
.
The exercise price of the warrants and the number of shares of common stock
issuable on exercise of the warrants will be appropriately adjusted to reflect
any stock dividend, stock split,
stock
distribution,
combination of shares
,
reverse split
,
reclassification, recapitalization or other similar event affecting the number
of outstanding shares.
Adjustment
for Reorganization, Consolidation, Merger, Etc.
If we merge or consolidate with or into any other person, or are a party
to any
other corporate reorganization, and we are not the continuing or surviving
entity
,
then, in each case, the holder of the warrant (on exercise at any time after
the
consummation of such transaction)
will
be entitled to receive, the stock and other securities and property (including
cash) which the holder would have been entitled to receive if the holder
had
exercised the warrant immediately prior to the effectiveness of the
transaction.
Sales
of Common Stock at less than the Exercise Price; Weighted Average
Adjustment
.
Subject to certain exceptions,
if
we
sell or issue any common stock at a per share price, or warrants, options,
convertible debt or equity securities with an exercise or conversion price
per
share, which is less than the warrant exercise price then in effect, the
exercise price shall be adjusted immediately thereafter so that it will equal
the price determined by multiplying the exercise price in effect immediately
prior thereto by a fraction, the numerator of which shall be the sum of the
number of shares of common stock outstanding immediately prior to the issuance
of such additional shares plus the number of shares of common stock which
the
aggregate consideration received or receivable for the issuance of such
additional shares would purchase at the exercise price then in effect, and
the
denominator of which shall be the number of shares of common stock outstanding
immediately after the issuance of such additional shares including the exercise
or conversion of all options, warrants and other convertible
securities
.
Exercise
Price is Subject to
Adjustments
Based on Pre-Tax
Income
per Share
.
In
the
event our consolidated “pre-tax income” for the year ended December 31, 2007 is
less than $3,000,000 then the exercise price will be reduced by the percentage
shortfall, up to a maximum of 75%. In the event our consolidated “pre-tax
income” for the year ended December 31, 2008 is less than the $5,500,000, then
the exercise price will be reduced by the percentage shortfall, again up
to a
maximum of 75%. Any reductions to the exercise price made under this provision
will not in the aggregate exceed 75% of the initial exercise price.
Right
of Redemption.
We have
the right to redeem the outstanding class A warrants (and placement agent
warrants) at the redemption price of one cent ($.01) per share on at least
forty
five (45) days notice prior to the redemption date, provided that the market
price of our common stock equals or exceeds $3.80 on each trading day in
the
twenty (20) trading days period ending on the trading day prior to the date
that
the Company calls the class A warrants for redemption. We may only exercise
the
right of redemption if a registration statement covering the resale by the
holder of the underlying shares of common stock is current and effective
on each
day in the period commencing on the first day of the twenty day period and
ending forty five (45) days after the
redemption
date and the right of redemption only applies with respect to the warrant
shares
included in such registration statement
.
If
at any
time after the date the class A warrants are called for redemption and before
the redemption date, the resale of the warrant shares is not covered by a
current and effective registration statement, our right to call the warrants
for
redemption shall be suspended until such time as the resale of the warrant
shares is covered by a current and effective registration statement.
The
redemption date shall be postponed for two (2) trading days for each day
after
the call date that the market price of the common stock is less than $3.80;
but
if the market price is less than $3.80 for ten (10) consecutive trading days
or
fifteen (15) trading days during the period from the call date to the redemption
date, our right to redeem any warrants not theretofore exercised shall terminate
subject to our right to call the remaining warrants for redemption pursuant
to
this call right.
Registration
Rights Agreement
For
a
description of the material terms of the registration rights agreement reference
is made “Selling Stockholders -- Background,” in the Summary section.
PLAN
OF DISTRIBUTION
The
selling stockholders may sell the common stock directly themselves or through
brokers, dealers or underwriters who may act solely as agents or may acquire
common stock as principals. These sales may be made at prevailing market
prices,
at prices related to prevailing market prices, or at prices negotiated between
the sellers and purchasers. The selling stockholders may distribute the common
stock in one or more of the following methods:
|
·
|
ordinary
brokers transactions (which may include long or short sales) through
the
facilities of the OTCBB or other
market;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
transactions
involving cross or block trades or otherwise on the open market;
|
|
·
|
purchases
by brokers, dealers or underwriters as principal and resale by
these
purchasers for their own accounts under this prospectus;
|
|
·
|
sales
"at the market" to or through market makers or into an existing
market for
the common stock;
|
|
·
|
sales
in other ways not involving market makers or established trading
markets,
including direct sales to purchasers or sales made through agents;
|
|
·
|
through
transactions in options, swaps or other derivatives (whether exchange
listed or otherwise);
|
|
·
|
any
combination of the above, or by any other legally available means;
and
|
|
·
|
any
other method permitted by applicable
law.
|
In
addition, the selling stockholders may enter into hedging transactions with
broker-dealers who may engage in short sales of common stock, or options
or
other transactions that require delivery by broker-dealers of the common
stock.
The
selling stockholders and/or the purchasers of common stock may compensate
brokers, dealers, underwriters or agents with discounts, concessions or
commissions (compensation may be in excess of customary commissions). The
selling stockholders and any broker dealers acting in connection with the
sale
of
the shares being registered may be deemed to be underwriters within the meaning
of Section 2(11) of the Securities Act and any profit realized by them on
the
resale of shares as principals may be deemed
underwriting
compensation under the Securities Act. We do not know of any arrangements
between the selling stockholders and any broker, dealer, underwriter or agent
relating to the sale or distribution of the shares being
registered.
We
and the selling stockholders and any other persons participating in a
distribution of our common stock will be subject to applicable provisions
of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, these parties and other
persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities
with
respect to such securities for a specified period of time prior to the
commencement of such distributions subject to specified exceptions or
exemptions.
The
selling stockholders may offer the common stock pursuant to this prospectus
in
varying amounts and transactions so long as this prospectus is then current
under the rules of the SEC and we have not withdrawn the registration statement.
The selling stockholders may sell any securities that this prospectus covers
under Rule 144 of the Securities Act rather than under this prospectus if
they
qualify. However, we cannot assure you that the selling stockholders will
sell
any of their shares of common stock.
In
order to comply with the securities laws of certain states, if applicable,
the
selling stockholders will sell the common stock in jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain
states,
the selling stockholders may not sell or offer the common stock unless the
holder registers the sale of the shares of common stock in the applicable
state
or the applicable state qualifies the common stock for sale in that state,
or
the applicable state exempts the common stock from the registration or
qualification requirement.
We
have
agreed to pay all fees and expenses incident to the registration of the shares
being offered under this prospectus (estimated to be approximately $160,000).
However each selling stockholder is responsible for paying any discounts,
commissions and similar selling expenses they incur.
We
have agreed to indemnify the selling stockholders whose shares we are
registering from all liability and losses resulting from any misrepresentations
we make in connection with the registration statement.
USE
OF PROCEEDS
We
will
not receive any of the proceeds from the sales of the shares by the selling
stockholders. To the extent the warrants are exercised for cash, if at all,
we
will receive the exercise price for those warrants. Under the terms of the
warrants cashless exercise is permitted but not until June 13, 2008 and only
then if the resale of the warrant shares by the holder is not covered by
an
effective registration statement.
We
intend
to use any proceeds received from the exercise of warrants for working capital
and other general corporate purposes. We cannot assure you that any of the
warrants will ever be exercised for cash or at all.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market
Information
Our
common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under
the symbol "CSOL.OB". There has never been any established public market
for
shares of our common stock.
The
following table sets forth the high and low bid prices, in the over-the-counter
market, as reported and summarized by the OTCBB, for each fiscal quarter
during
each of the fiscal years ended December 31, 2005 and December 31, 2006 and
December 31, 2007. These prices are based on inter-dealer prices, without
retail
markup, markdown or omissions and may not represent actual transactions.
These
prices have been adjusted to give effect to the one-for-six reverse stock
split
of all issued and outstanding shares of our common stock, which became effective
on August 15, 2005.
Quarter
Ended
|
|
High
|
|
Low
|
|
03/31/2005
|
|
$
|
10.01
|
|
$
|
0.01
|
|
06/30/2005
|
|
|
2.8
|
|
|
1.95
|
|
09/30/2005
|
|
|
16.75
|
|
|
1.95
|
|
12/31/2005
|
|
|
16.75
|
|
|
7
|
|
|
|
|
|
|
|
|
|
03/31/2006
|
|
|
11
|
|
|
7.5
|
|
06/30/2006
|
|
|
11
|
|
|
11
|
|
09/30/2006
|
|
|
6.50
|
|
|
1.3
|
|
12/31/2006
|
|
|
2.50
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
03/31/2007
|
|
|
3.73
|
|
|
3.50
|
|
06/30/2007
|
|
|
2.60
|
|
|
1.81
|
|
09/30/2007
|
|
|
3.45
|
|
|
1.75
|
|
12/31/2007
|
|
|
4.50
|
|
|
2.40
|
|
As
of
January 9, 2008, the last reported sale price of our common stock was $3.45
per
share.
Since
the
completion of the reverse merger, our common stock has traded sporadically
and
with high volatility. Consequently, our historical prices may not be an accurate
indication of the future prices of our common stock.
Holders
As
of
January 9, 2008, there were 6,205,290 shares of our common stock issued and
outstanding, and there were approximately 2,531 holders of record of our
outstanding shares of common stock. This does not reflect the number of persons
or entities who held stock in nominee or "street" name through various brokerage
firms.
Dividends
We
have
not declared or paid any cash dividends on our common stock during either
of our
last three fiscal years. The payment of dividends, if any, is at the discretion
of the Board of Directors and is contingent on the Company's revenues and
earnings, capital requirements, financial conditions and the ability of our
operating subsidiaries Deli Solar (Bazhou) and Deli Solar (Beijing) to obtain
approval to send monies out of the PRC. We currently intend to retain all
earnings, if any, for use in business operations. Accordingly, we do not
anticipate declaring any dividends in the near future.
The
PRC's national currency, the Yuan, is not a freely convertible currency.
Please
refer to the risk factors
"Governmental
control of currency conversion may affect the value of your investment;"
"The
fluctuation of the Renminbi may harm your investment;" "Recent PRC State
Administration of Foreign Exchange ("SAFE") Regulations regarding offshore
financing activities by PRC residents have undergone a number of changes
which
may increase the administrative burden we face.”
Securities
Authorized for Issuance Under Equity Compensation
Plans.
We
do not
have any equity compensation plans.
Penny
Stock Regulations
The
SEC
has adopted regulations which generally define "penny stock" to be an equity
security that has a market price of less than $5.00 per share. Our common
stock
falls within the definition of penny stock and is subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000, or annual incomes
exceeding $200,000 or $300,000, together with their spouse).
For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's prior written consent to the transaction. Additionally, for
any
transaction, other than exempt transactions, involving a penny stock, the
rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and
the
registered representative, current quotations for the securities and, if
the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny
stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell the common stock and may affect the ability of investors to sell
their
common stock in the secondary market.
Shares
Eligible for Future Sale
There
is
no established trading market for our common stock. Future sales of substantial
amounts of our common stock in the trading market could adversely affect
market
prices.
This
is
an offering of 1,017,468 shares of our common stock by the selling stockholders,
among which 508,734 shares may be acquired on conversion of the Series
A
Preferred Stock and 508,734 shares may be acquired on exercise of class
A
warrants. As of January 9, 2008, there were 6,205,290 shares of our common
stock
outstanding. Assuming (i) conversion of all of the outstanding Series A
Preferred Stock, (ii) the exercise of all of the outstanding class A and
class B
warrants, (iii) the exercise of the warrants to purchase 1,825,719 shares
registered for resale in the registration statement declared effective
on July
18, 2006, there will be 13,353,591 shares of common stock outstanding.
Of these
13,353,591 shares, (i) 1,017,468 shares are being registered for resale
pursuant
to this prospectus, (ii) 3,952,025 shares were registered for resale in
a
registration statement declared effective on July 18, 2006 and (iii) all
other
outstanding shares not registered in this prospectus or in registration
statement declared effective on July 18, 2006 will be deemed "restricted
securities" as defined under Rule 144. Restricted securities may be sold
in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 promulgated under the Securities Act, which
rules
are summarized below.
Rule
144
In
general, under Rule 144 as currently in effect, a person, or persons whose
shares are aggregated, who has beneficially owned shares of common stock
for at
least one year, including the holding period of any prior owner, except if
the
prior owner was one of our affiliates, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
|
·
|
1%
of the number of shares of our common stock then outstanding; or
|
|
·
|
the
average weekly trading volume of our common stock during the four
calendar
weeks preceding the filing of a notice on Form 144 with respect
to the
sale.
|
Sales
under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about
our
company.
Rule
144(k)
Under
Rule 144(k), a person who is not deemed to have been one of our affiliates
at
any time during the 90 days preceding a sale, and who has beneficially owned
the
shares proposed to be sold for at least two years, including the holding
period of any prior owner except one of our affiliates, is entitled to sell
the
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Lock-Up
Agreement
On
June
13, 2007, in connection with the closing of the private placement, Mr. Deli
Du,
our President and CEO, entered into a “lock-up” agreement with the investors
pursuant to which he has agreed (with certain limited exceptions) not to
sell or
transfer any shares of our common stock in the public market until June 13,
2009
(or the date, if earlier, on which the investors have converted all the Series
A
Preferred Stock, exercised all warrants and sold the underlying shares in
the
public market). Under the terms of the securities purchase agreement all
of the
officers, directors and affiliates have agreed to be subject to a similar
lock
up however only Mr. Du has executed a formal lock- up agreement. As of August
3,
2007, Mr. Du is the beneficial owner of 3,152,886 shares of our common stock.
As
an “affiliate” Mr. Du would not be permitted sell under Rule 144(k).
Other
Registration Rights
Other
than the registration rights set forth in the registration rights agreement
entered into on June 13, 2007 with certain of the selling stockholders, and
the
registration rights granted to the placement agent we have no other obligation
to register under the Securities Act any of our shares of common stock.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
China
Solar & Clean Energy Solutions, Inc. (“we,” “us” or the “Company”) is a
holding company for our indirect wholly-owned subsidiary, Bazhou Deli
Solar
Heating Energy Co. Ltd, a PRC company (“Deli Solar (Bazhou)”).
Our
principal products are solar water heaters and space heating and cooking
products including coal-fired residential boilers. We also sell accessories,
component parts, and provide after-sales maintenance and repair services.
Recent
Developments
On
June
13, 2007, we raised gross proceeds of $2,750,000 from the sale in a private
placement of 1,774,194 shares of our Series A Preferred Stock (with each
share
initially convertible into one share of common stock), five year warrants
to
purchase 1,774,194 shares of common stock at an exercise price of $1.90
per
share and five year warrants to purchase 1,774,194 shares of common stock
at an
exercise price of $2.40 per share.
We
are in
the process of conducting a trial production of a flat plate collector
production line and a water tank assembly line. We expect the new assembly
line
could be in full production by the end of the first quarter in 2008 which
could
enhance our production efficiency and improve the quality of our products.
Our wholly-owned
subsidiary, Beijing Deli Solar Technology Development Co., Ltd. (“Deli Solar
(Beijing)”) completed an acquisition on July 1, 2007, to purchase the Tianjin
Municipal Ji County State-owned Assets Administration Commission (the
“SAAC”)’s
51% equity interest in Tianjin Huaneng Group Energy Equipment Co., Ltd.
(“Tianjin Huaneng”). Tianjin Huaneng is a manufacturer of heating products such
as pipes, heat exchangers, specialty heating pipes and tubes, high temperature
hot blast stoves, heating filters, normal pressure water boilers, solar
energy
water heaters and radiators. The remaining 49% of the equity of Tianjin
Huanneng
is owned by Tianjin Huaneng’s employees. The ultimate purchase price was RMB
12,869,315.36 (approximately $1,689,741), and under the terms of a consulting
agreement dated August 8, 2007, we paid a consulting fee of RMB 5,860,000
(approximately $769,418) to Tianjin Wan Shi Tong Enterprise Management
Consulting Co., Ltd., for its assistance in negotiating the purchase
price
reduction.
As
part
of our business strategy, we review acquisition and strategic investment
prospects that we believe would complement our current product offerings,
increase our market coverage or enhance our technical capabilities, or
otherwise
offer growth opportunities. From time to time we consider investing in
new
businesses and we expect to make investments in, and to acquire businesses,
products, or technologies in the future. We are currently considering
a number
of possible investments of this kind but we have not made any definitive
decisions.
In
December 2006 we signed an MOU with Shenzhen Xiongri Solar Power Co., Ltd.
(“Shenzhen Xiongri”) to acquire 60% of its equity for a purchase price of
approximately $250,000 and additional contingent consideration of up to $5
million consisting of shares of our common stock. Shenzhen Xiongri is located
in
Shenzhen, PRC. Its local government provides strong support for the solar
water
heater industry which could help us grow business in that area. We paid an
initial deposit of $258,592 to Shenzhen Xiongri. The acquisition has not
taken
place as of the date of this prospectus. We believe Shenzhen Xiongri had
sales
revenues of approximately $7 million and net profit before tax of $1 million
in
2006 and we are continuing due diligence on that company. There can be no
assurance the actual revenues and profits will be at these levels.
We
developed 71 new sales agents in fiscal 2006 which brings the total number
of
our sales agents in the PRC to 604 as of December 31, 2006. Most of these
new
sales agents are in the northern region of the PRC, close to our manufacturing
facility, where we can minimize the transportation cost and service. The
new
agents are expected to penetrate their respective markets and strengthen
our
market position there.
Critical
Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in conformity
with
U.S. generally accepted accounting principles requires us to make judgments,
estimates and assumptions that affect the reported amounts in the Consolidated
Financial Statements and accompanying notes. Note 3 to the Consolidated
Financial Statements describes the significant accounting policies and methods
used in the preparation of the Consolidated Financial Statements. The areas
described below are affected by critical accounting estimates and are impacted
significantly by judgments and assumptions in the preparation of the
Consolidated Financial Statements. Actual results could differ materially
from
the amounts reported based on these critical accounting estimates.
Revenue
Recognition
Product
sales are recognized when the products are delivered to and inspected by
customers and title has passed. The Company provides a three-year standard
warranty to all of the products it manufactures. Under this standard warranty
program, repair and replacement of defective component parts are free of
any
charge during the first year following the purchase. In the second and third
year, customers must pay for the purchase of the replacement parts, but not
for
repair services. Most of our warranty services are performed by our independent
sales agents and distributors in return for a 1-2% discount of the purchase
price they pay for our products. Accordingly, the Company has recorded no
liability for warranty reserve. The Company also allows its sales agents
and
distributors to return any defective product for exchange.
Allowance
for Doubtful Accounts
The
Company's business operations are conducted in the PRC. We extend unsecured
trade credit to our relatively large customers according to their sales volume
and historical payment records. The allowance for doubtful accounts is
established through charges to the provision for bad debts. We regularly
evaluate the adequacy of the allowance for doubtful accounts based on historical
trends in collections and write-offs, our judgment as to the probability
of
collecting accounts and our evaluation of business risk. This evaluation
is
inherently subjective, as it requires estimates that are susceptible to revision
as more information becomes available. Accounts are determined to be
uncollectible when the debt is deemed to be worthless or only recoverable
in
part and are written off at that time through a charge against the
allowance.
Property,
Plant and Equipment
Building,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization are recorded utilizing the
straight-line method over the estimated original useful lives of the assets.
Amortization of leasehold improvements is calculated on a straight-line basis
over the life of the asset or the term of the lease, whichever is shorter.
Major
renewals and betterments are capitalized and depreciated; maintenance and
repairs that do not extend the life of the respective assets are charged
to
expense as incurred. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included
in
income. Depreciation related to property and equipment used in production
is
reported in cost of sales.
Long-term
assets of the Company are reviewed annually as to whether their carrying
value
has become impaired. The Company considers assets to be impaired if the carrying
value exceeds the future projected cash flows from related operations. The
Company also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of June 30, 2007, the Company expects these assets to be fully
recoverable.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2007 Compared to Three Months Ended September
30,
2006
Sales
and Gross Profit
Sales
for
the three months ended September 30, 2007 were $12,629,636 as compared
to
$6,565,606 for the same period last year, an increase of $6,064,030 or
92.4%.
Gross profit for the three months ended September 30, 2007 was $2,551,027,
an
increase of approximately 85.6%, as compared to $1,374,766 for the three
months
ended September 30, 2006. The increase in sales is attributed to the
acquisition
of Tianjin Huaneng and from sales of its energy-saving boilers and environmental
protection equipment and due to our continued investment in brand marketing,
sales promotion and our development of a more extensive sales distribution
network. Our gross profit margin for the three months ended September
30, 2007
was about 20.2%, slightly lower as compared to 20.9% for the same period
last
year. This is primarily due to competition in the market over the sale
prices of
solar water heaters and boilers. We are facing severe price competition
in the
traditional solar water heater market. We expect price competition to
continue
through the end of calendar 2007. As a result, we expect our gross profit
margin
for our solar water heaters to continue to decrease. However, we anticipate
that
Tianjin Huaneng’s energy saving boilers and environmental protection equipment
will generate better gross profit margins to offset the decline in our
profit
margins for solar water heaters and residential boilers.
Operating
Expenses
Operating
expenses for the three months ended September 30, 2007 were $1,768,342,
as
compared to $821,330 for the same period in 2006, an increase of $947,012
or
approximately 115.3%.
Advertising
expenses for the three months ended September 30, 2007 were $458,652
as compared
to $382,287 for the same period last year, an increase of $76,365 or
approximately 20%. The increase in advertising expense was a result of
our
continued emphasis on advertising to increase our product awareness,
branding
and sales. We believe that through marketing, we would be able to face
down
competition and generate greater market share for our products.
Selling
expenses for the three months ended September 30, 2007 were $583,166
as compared
to $145,073 for the same period last year, an increase of $438,093, or
approximately 302%. These selling expenses consisted primarily of sales
promotions, distribution transportation expenses, agency administration
expenses
and after sales services, such as expenses for installation and replacements.
The increase in selling expenses was primarily due to our acquisition
of Tianjin
Huaneng and due to the increase in sales volume and increase in sales
promotion
activities.
Other
general and administrative expenses for the three months ended September
30,
2007 were $532,137, as compared to $175,914 for the same period last
year, an
increase of $356,223, or approximately 202.5%. The increase was partly
due to
the acquisition of Tianjin Huaneng which incurred a total of approximately
$170,000 expenses; Deli Solar (Bazhou) and Deli Solar (Beijing)’s expenses
incurred approximately $119,000 and the Company at U.S. level incurred
a total
of 242,000 which included a legal fee of approximately $190,000.
Income
from Operations
Income
from operations for the three months ended September 30, 2007 was $782,685,
an
increase of $229,249 or 41.4% as compared to $553,436 for the three months
ended
September 30, 2006. The increased income was due to our acquisition of
Tianjin
Huaneng and the increased sales revenue and our budget control on operating
expenses in the third quarter of 2007.
Net
Income
Net
income was $499,074 in the three months ended September 30, 2007, a
decrease of
$50,464 or about 9.2% from $549,538 for the same period last year.
This decrease
is primarily due to an increase in our operating
expenses.
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September
30,
2006
Sales
and Gross Profit
Sales
for
the nine months ended September 30, 2007 were $25,043,660 as compared
to
$15,982,081 for the same period last year, an increase of 56.7% or $9,061,579.
Gross profit for the nine months ended September 30, 2007 was $5,226,007,
an
increase of approximately 52.2%, as compared to $3,432,536 for the nine
months
ended September 30, 2006. The increase in sales is attributed to the
acquisition
of Tianjin Huaneng and from sales of its energy-saving boilers and environmental
protection equipment and due to our continued investment in brand marketing,
sales promotion and our development of a more extensive sales distribution
network. Our sales gross margin in the first nine months of 2007 was
about
20.9%, slightly lower as compared with 21.5% for the same period last
year. This
decline is primarily a result of price competition in the market.
Operating
Expenses
Operating
expenses for the nine months ended September 30, 2007 were $3,384,882
as
compared to $2,372,661 for the same period in 2006, an increase of 42.7%
or
$1,012,221. Among the operating expenses, the advertising expenses for
the nine
months ended September 30, 2007 were $1,118,745 as compared to $881,190
for the
same period last year, an increase of $237,555, or approximately 27%.
The
increase in advertising expense was a result of our emphasis on advertising
to
increase product awareness, branding and sales. Salaries and benefits
increased
from $194,319 for the nine months ended September 30, 2006 to $260,649
for the
nine months ended September 30, 2007, an increase of $66,330 or 34.1%
from the
same corresponding period last year.
Selling
expenses for the nine months ended September 30, 2007 were $864,698 as
compared
to $330,400 for the same period last year, an increase of $534,698, or
approximately 162%. These selling expenses consisted primarily of sales
promotions, distribution transportation expenses, agency administration
expenses
and after sales services, such as expenses for installation and replacements.
The increase in selling expenses was primarily due to the consolidation
with
Tianjin Huaneng, and increase in sales and sales promotion activities.
Other
general and administrative expenses for the nine months ended September
30, 2007
were $987,093, as compared to $877,544 for the same period last year,
an
increase of $109,549, or approximately 12.5%. The increase of the other
general
and administrative expenses was primarily due to the consolidation with
Tianjin
Huaneng.
Income
from Operations
Income
from operations for the nine months ended September 30, 2007 was $1,841,125,
an
increase of $781,250 or 73.7% as compared to $1,059,875 for the same
period last
year. The increased income was due to an increase in revenue and our
budget
control on operating expenses.
Net
Income
Net
income was $1,421,175 for the nine months ended September 30, 2007, compared
with $1,049,767 for the same period last year, an increase of $371,408,
or
approximately 35%. The increase was primarily due to an increase in our
revenue
and our acquisition of Tianjin Huaneng and resultant sales of its
products.
Liquidity
and Capital Resources
Net
cash
provided by our operating activities was $324,013 for the nine months
ended
September 30, 2007, a decrease of $624,854 or approximately 66.5% from
$966,867
for the same period of 2006. Tianiin Huaneng is expanding its business
and
requires a large amount of working capital. Tianjin Huaneng delayed the
principal payment of its loans to the China Agriculture Bank (Tianjin
Ji county)
for two consecutive years. The bank decided to auction off the $1,154,703
outstanding loan and accepted a bid price of $665,708 from Deli Solar
(Beijing).
Deli Solar (Beijing) paid the bank the auction bid price in September
2007. The
bid price is subject to an approval by the local government of Tianjin
Ji
County. Once we obtain the approval, we will incur a one-time non-operating
income of $488,995, the difference of the original loan and the bid price.
Net
cash
used in investing activities was $2,877,802 for the nine months ended
September
30, 2007, an increase of $674,268 or approximately 30.6% compared with
the same
period last year. The increase in part is due to the purchase of Tianjin
Huaneng
in July 2007.
Net
cash
from financing activities was $2,481,602 for the nine months ended September
30,
2007, an increase of $2,580,103 from $98,501 for the same period last
year. The
increase was due to the issuance of preferred stock in June 2007. On
June 14,
2007 we raised net sale proceeds of $2,501,080 in a private placement
of our
Series A Preferred Stock and warrants. Investors purchased an aggregate
of
1,774,194 shares of our Series A Preferred Stock. Each share of Series
A
Preferred Stock is convertible into one share of our common stock, subject
to
adjustment. Additional shares of Series A Preferred Stock (not to exceed
900,000) are required to be issued to the investors in the event that
we fail to
achieve certain income targets for the fiscal years ended December 31,
2007 and
2008.
As
of
September 30, 2007, Tianjin Huaneng had a short term debt of $1,154,703,
which
Deli Solar (Beijing) purchased from its lender, China Agriculture Bank
(Tianjin
Ji county), in an auction for $665,708.
As
of
September 30, 2007, Tianjin Huaneng also has a long-term debt of $778,474,
of
which approximately $477,000 was due to its employees; approximately
$187,000
was due to government and $55,000 was due to a third party.
We
are
seeking funds to develop our business including making acquisitions;
however, we
cannot assure you that such funding will be available.
Accounts
Receivable
During
the nine months ended September 30, 2007, accounts receivable increased
to
$7,220,091 from $986,809 at the end of last year, primarily due to consolidation
with Tianjin Huaneng. Tianjin Huaneng has large balance of accounts receivable.
The
majority of Tianjin Huaneng’s sales are on credit terms in accordance with terms
specified in the contracts governing the relevant transactions. We evaluate
the
need of an allowance for doubtful accounts based on specifically identified
amounts that we believe to be uncollectible. If actual collections experience
changes, revisions to the allowance may be required. Based upon the
aforementioned criteria, the allowances for doubtful accounts are provided
as
$811,950 for the nine months ended September 30, 2007.
Inventory
Inventories
as of September 30, 2007 increased to $5,238,184 from $315,765 as of
December
31, 2006 primarily due to consolidation with Tianjin Huaneng. The inventory
mainly consists of finished goods waiting for transportation or installation.
Cash
Cash
and
cash equivalents increased to $3,311,421 at September 30, 2007 from $3,212,065
at December 31, 2006. While we anticipate that our cash flow will be
sufficient
to support our operations for the next 12 months, we will need to raise
additional equity capital to make further acquisitions. There can be
no
assurance that financing will be available to us, or that if available,
that it
will be available on satisfactory terms.