Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number: 000-53511
CLEANTECH
INNOVATIONS,
INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
|
98-0516425
|
(State or other jurisdiction of incorporation
or organization)
|
|
(IRS Employer Identification No.)
|
C District, Maoshan Industry Park,
Tieling Economic Development Zone,
Tieling, Liaoning Province, China
|
|
112616
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(86) 0410-6129922
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the last 90 days. YES x NO ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,”
“non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer ¨
|
Accelerated filer ¨
|
Non-accelerated filer ¨
|
Smaller reporting company x
|
(do not check if a smaller
reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES ¨ NO x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 22,463,322 shares of common stock
outstanding as of November 1, 2010.
TABLE
OF CONTENTS
|
|
Page
|
PART I.
FINANCIAL INFORMATION
|
|
|
Item 1.
|
Financial
Statements
|
|
3
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
20
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
27
|
Item 4.
|
Controls
and Procedures
|
|
28
|
PART
II. OTHER INFORMATION
|
|
|
Item 1.
|
Legal
Proceedings
|
|
28
|
Item 1A.
|
Risk
Factors
|
|
28
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
28
|
Item 3.
|
Defaults
Upon Senior Securities
|
|
28
|
Item 5.
|
Other
Information
|
|
28
|
Item 6.
|
Exhibits
|
|
28
|
SIGNATURES
|
|
29
|
Item
1. Financial Statements.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
September 30, 2010 (Unaudited)
|
|
|
December 31, 2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
397,876 |
|
|
$ |
1,295,145 |
|
Restricted
cash
|
|
|
1,344,235 |
|
|
|
- |
|
Accounts
receivable
|
|
|
11,056,451 |
|
|
|
1,320,899 |
|
Other
receivables and deposits
|
|
|
2,471,361 |
|
|
|
550,469 |
|
Retentions
receivable
|
|
|
2,000,807 |
|
|
|
57,088 |
|
Advance
to suppliers
|
|
|
270,719 |
|
|
|
11,245 |
|
Inventories
|
|
|
1,029,778 |
|
|
|
169,707 |
|
Notes
receivable
|
|
|
89,538 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
18,660,765 |
|
|
|
3,404,553 |
|
|
|
|
|
|
|
|
|
|
NON
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Long
term investment
|
|
|
89,538 |
|
|
|
87,872 |
|
Retentions
receivable
|
|
|
832,152 |
|
|
|
63,234 |
|
Prepayments
|
|
|
313,308 |
|
|
|
254,940 |
|
Construction
in progress
|
|
|
997,194 |
|
|
|
2,326,460 |
|
Property
and equipment, net
|
|
|
6,699,289 |
|
|
|
52,864 |
|
Intangible
assets
|
|
|
3,623,595 |
|
|
|
3,536,894 |
|
|
|
|
|
|
|
|
|
|
Total
non current assets
|
|
|
12,555,076 |
|
|
|
6,322,264 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
31,215,841 |
|
|
$ |
9,726,817 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
4,116,853 |
|
|
$ |
518,392 |
|
Other
payables and accrued liabilities
|
|
|
400,541 |
|
|
|
747,759 |
|
Unearned
revenue
|
|
|
239,617 |
|
|
|
202,812 |
|
Short
term loans
|
|
|
3,969,498 |
|
|
|
3,221,932 |
|
Taxes
payable
|
|
|
1,835,777 |
|
|
|
466,593 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
10,562,286 |
|
|
|
5,157,488 |
|
|
|
|
|
|
|
|
|
|
Long
term payable, net of unamortized interest
|
|
|
1,167,848 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
11,730,134 |
|
|
|
5,157,488 |
|
|
|
|
|
|
|
|
|
|
CONTIGENCY
AND COMMITMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.00001 par value, 100,000,000 shares authorized, no shares issued
and outstanding as of September 30, 2010 and December 31, 2009,
respectively
|
|
|
- |
|
|
|
- |
|
Common
stock, $0.00001 par value, 100,000,000 shares authorized, 22,463,322 and
15,122,000 shares issued and outstanding as of September 30, 2010, and
December 31, 2009, respectively
|
|
|
224 |
|
|
|
151 |
|
Paid
in capital
|
|
|
11,976,664 |
|
|
|
358,939 |
|
Statutory
reserve fund
|
|
|
697,665 |
|
|
|
393,578 |
|
Accumulated
other comprehensive income
|
|
|
684,977 |
|
|
|
289,383 |
|
Retained
earnings
|
|
|
6,126,177 |
|
|
|
3,527,278 |
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
19,485,707 |
|
|
|
4,569,329 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
31,215,841 |
|
|
$ |
9,726,817 |
|
The
accompanying notes are an integral part of these financial
statements.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
|
|
NINE MONTHS ENDED SEPTEMBER 30,
|
|
|
THREE MONTHS ENDED SEPTEMBER 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
14,739,702 |
|
|
$ |
978,623 |
|
|
$ |
13,056,465 |
|
|
$ |
706,228 |
|
Cost
of goods sold
|
|
|
10,519,685 |
|
|
|
478,343 |
|
|
|
9,324,522 |
|
|
|
318,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,220,017 |
|
|
|
500,280 |
|
|
|
3,731,943 |
|
|
|
387,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
207,756 |
|
|
|
15,190 |
|
|
|
100,321 |
|
|
|
7,814 |
|
General
and administrative
|
|
|
804,446 |
|
|
|
226,446 |
|
|
|
440,053 |
|
|
|
100,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,012,202 |
|
|
|
241,636 |
|
|
|
540,374 |
|
|
|
108,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,207,815 |
|
|
|
258,644 |
|
|
|
3,191,569 |
|
|
|
279,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5,436 |
|
|
|
410 |
|
|
|
2,088 |
|
|
|
157 |
|
Subsidy
income
|
|
|
1,009,940 |
|
|
|
211,788 |
|
|
|
2,644 |
|
|
|
33,820 |
|
Other
expenses
|
|
|
(59,258 |
) |
|
|
(315 |
) |
|
|
(15,797 |
) |
|
|
(170 |
) |
Interest
expense
|
|
|
(264,162 |
) |
|
|
(75,672 |
) |
|
|
(50,576 |
) |
|
|
(59,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-operating income (loss)
|
|
|
691,956 |
|
|
|
136,211 |
|
|
|
(61,641 |
) |
|
|
(25,410 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax
|
|
|
3,899,771 |
|
|
|
394,855 |
|
|
|
3,129,928 |
|
|
|
253,644 |
|
Income
tax expense
|
|
|
(996,785 |
) |
|
|
(98,714 |
) |
|
|
(808,059 |
) |
|
|
(62,109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
2,902,986 |
|
|
|
296,141 |
|
|
|
2,321,869 |
|
|
|
191,535 |
|
Foreign
currency translation
|
|
|
395,594 |
|
|
|
3,362 |
|
|
|
351,325 |
|
|
|
2,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$ |
3,298,580 |
|
|
$ |
299,503 |
|
|
$ |
2,673,194 |
|
|
$ |
193,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
17,447,008 |
|
|
|
15,122,000 |
|
|
|
22,021,207 |
|
|
|
15,122,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
17,609,141 |
|
|
|
15,122,000 |
|
|
|
22,502,319 |
|
|
|
15,122,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.17 |
|
|
$ |
0.02 |
|
|
$ |
0.11 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.16 |
|
|
$ |
0.02 |
|
|
$ |
0.10 |
|
|
$ |
0.01 |
|
The
accompanying notes are an integral part of these financial
statements.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
NINE MONTHS ENDED SEPTEMBER 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,902,986 |
|
|
$ |
296,141 |
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
150,344 |
|
|
|
56,997 |
|
Stock
options expense
|
|
|
90,007 |
|
|
|
- |
|
(Increase)
decrease in current assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(9,625,524 |
) |
|
|
(636,464 |
) |
Retentions
receivable
|
|
|
(2,668,267 |
) |
|
|
(39,926 |
) |
Other
receivables and deposits
|
|
|
(1,880,785 |
) |
|
|
(1,406,736 |
) |
Advance
to suppliers
|
|
|
(255,235 |
) |
|
|
(19,042 |
) |
Prepayment
|
|
|
(52,702 |
) |
|
|
(257,768 |
) |
Note
receivable
|
|
|
(22,331 |
) |
|
|
- |
|
Inventories
|
|
|
(843,547 |
) |
|
|
(339,603 |
) |
Restricted
cash
|
|
|
(1,323,360 |
) |
|
|
- |
|
Increase
(decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
3,532,902 |
|
|
|
189,496 |
|
Other
payables and accrued liabilities
|
|
|
(710,668 |
) |
|
|
190,746 |
|
Unearned
revenue
|
|
|
32,447 |
|
|
|
172,729 |
|
Taxes
payable
|
|
|
1,339,210 |
|
|
|
121,901 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(9,334,523 |
) |
|
|
(1,671,529 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
(876,207 |
) |
|
|
(195,698 |
) |
Acquisition
of property & equipment
|
|
|
(2,081,322 |
) |
|
|
(27,598 |
) |
Acquisition
of intangible assets
|
|
|
(74,988 |
) |
|
|
- |
|
Long
term investment
|
|
|
- |
|
|
|
(87,821 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(3,032,517 |
) |
|
|
(311,117 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Contribution
by shareholders
|
|
|
2,426,287 |
|
|
|
- |
|
Issuance
of common stock
|
|
|
8,253,471 |
|
|
|
- |
|
Proceeds
from short term loans
|
|
|
9,473,013 |
|
|
|
2,195,518 |
|
Repayment
of short term loans
|
|
|
(8,797,218 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
11,355,553 |
|
|
|
2,195,518 |
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & EQUIVALENTS
|
|
|
114,218 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH & EQUIVALENTS
|
|
|
(897,269 |
) |
|
|
212,990 |
|
|
|
|
|
|
|
|
|
|
CASH
& EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
1,295,145 |
|
|
|
25,855 |
|
|
|
|
|
|
|
|
|
|
CASH
& EQUIVALENTS, END OF PERIOD
|
|
$ |
397,876 |
|
|
$ |
238,845 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash flow data:
|
|
|
|
|
|
|
|
|
Income
tax paid
|
|
$ |
869,186 |
|
|
$ |
- |
|
Interest
paid
|
|
$ |
264,162 |
|
|
$ |
75,672 |
|
The
accompanying notes are an integral part of these financial
statements.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
CleanTech
Innovations, Inc., formerly known as Everton Capital Corporation (the “Company”
or “CleanTech”), was incorporated on May 9, 2006, in the State of Nevada.
Through its wholly owned operating subsidiaries in China, the Company
designs, manufactures, tests and sells structural towers for on-land and
off-shore wind turbines and manufactures patented, specialty metal products that
require advanced manufacturing and engineering capabilities, including bellows
expansion joints and connecting bend pipes used for waste heat recycling in
steel production and in ultra-high-voltage electricity transmission grids, as
well as industrial pressure vessels.
The
Company authorized an 8-for-1 forward split of its common stock effective July
2, 2010. Prior to the forward split, CleanTech had 5,501,000 shares of common
stock outstanding, and, after giving effect to the forward split, CleanTech had
44,008,000 shares of common stock outstanding. The effect of the forward stock
split was retroactively reflected for all periods presented.
On July
2, 2010, the Company signed a share exchange agreement with Liaoning Creative
Bellows Co., Ltd. (“Creative Bellows”) and the shareholders of Creative Bellows,
whereby the Creative Bellows’ shareholders received 15,122,000 shares in
CleanTech. Concurrent with the share exchange agreement, CleanTech’s principal
shareholder cancelled 40,000,000 shares in CleanTech for $40,000, which was
charged to additional paid in capital. The $40,000 payment reflected the fair
value of the shares in the pre-acquisition company, which was a non-operating
public shell with no trading market for its common stock. The cancelled shares
were retired and, for accounting purposes, the shares were treated as not having
been outstanding for any period presented. CleanTech had 4,008,000 shares
outstanding after the cancellation of the shares. After giving effect to the
foregoing transactions, the shareholders of Creative Bellows owned 79.05% of the
19,130,000 shares outstanding of CleanTech. Simultaneously with the share
exchange agreement, CleanTech changed its year end from August to
December. For accounting purposes, the transaction is being accounted for
as a recapitalization of Creative Bellows as the Creative Bellows’ shareholders
own the majority of the shares outstanding and will exercise significant
influence over the operating and financial policies of the consolidated
entity.
Prior to
the acquisition of Creative Bellows, CleanTech was a non-operating public shell.
Pursuant to Securities and Exchange Commission ("SEC") rules, the merger or
acquisition of a private operating company into a non-operating public shell
with nominal net assets is considered a capital transaction, rather than a
business combination. Accordingly, for accounting purposes, the transaction was
treated as a reverse acquisition and recapitalization, and pro-forma information
is not presented.
Creative
Bellows was incorporated in Liaoning Province, People’s Republic of China
(“PRC”) on September 17, 2007. Creative Bellows designs and manufactures bellows
expansion joints, pressure vessels, wind tower components for wind turbines and
other fabricated metal specialty products. On May 26, 2009, three individual
shareholders, who were also the shareholders of Creative Bellows, established
Liaoning Creative Wind Power Equipment Co., Ltd (“Creative Wind Power”). At the
end of 2009, the three shareholders transferred all of their shares to Creative
Bellows at cost; as a result of the transfer of ownership, Creative Bellows
owned 100% of Creative Wind Power. Creative Wind Power markets and sells wind
towers components designed and manufactured by Creative Bellows.
These
unaudited consolidated financial statements were prepared by the Company
pursuant to the rules and regulations of the SEC. The information furnished
herein reflects all adjustments (consisting of normal recurring accruals and
adjustments) that are, in the opinion of management, necessary to present fairly
the operating results for the respective periods. Certain information and
footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) were omitted pursuant to such rules
and regulations. These unaudited consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
footnotes for the year ended December 31, 2009. The results for the nine
and three months ended September 30, 2010, are not necessarily indicative of the
results to be expected for the full year ending December 31, 2010.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of CleanTech, Creative
Bellows and Creative Wind Power. All intercompany transactions and account
balances are eliminated in consolidation.
Use
of Estimates
In
preparing financial statements in conformity with US GAAP, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Significant estimates include the
recoverability of long-lived assets and the valuation of inventories. Actual
results could differ from those estimates.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
Cash
and Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Restricted
Cash
Restricted
cash consists of a percentage of sales deposited by the Company into its bank
accounts according to contract terms and which serves as a contract execution
and product delivery guarantee. The restriction is released upon customer
acceptance of the product. As of September 30, 2010 and December 31, 2009, the
Company had restricted cash of $1,344,235 and $0, respectively.
Accounts
and Retentions Receivable
The
Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Based on historical collection
activity, the Company did not have any allowances for bad debts at September 30,
2010 (unaudited) and December 31, 2009.
At
September 30, 2010 and December 31, 2009, the Company had retentions receivable
for product quality assurance of $2,832,959 and $120,322, respectively. The
retention rate generally was 10% of the sales price with a term of one to two
years, but no later than the termination of the warranty period. The Company has
not encountered any significant collectability issue with respect to the
retention receivables.
Inventories
The
Company’s inventories are valued at the lower of cost or market with cost
determined on a weighted average basis. The Company compares the cost of
inventories with the market value and allowance is made to write down the
inventories to their market value, if lower.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using
the straight-line method for substantially all assets with 5% salvage value and
estimated lives as follows:
Building
|
40
|
Years
|
Machinery
|
5 – 15
|
Years
|
Vehicle
|
5
|
Years
|
Office
Equipment
|
5
|
Years
|
Land
Use Rights
Right to
use land is stated at cost less accumulated amortization. Amortization is
provided using the straight-line method over 50 years.
Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
Recoverability
of long-lived assets to be held and used is measured by comparing of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily determinable.
Based on its review, the Company believes that, as of September 30, 2010 and
December 31, 2009, there were no significant impairments of its long-lived
assets.
Income
Taxes
The
Company utilizes Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes,” codified in Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 740, which requires
recognition of deferred tax assets and liabilities for expected future tax
consequences of events that were included in the financial statements or tax
returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, (“FIN 48”), codified in FASB ASC Topic 740. When
tax returns are filed, it is likely that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to
uncertainty about the merits of the position taken or the amount of the position
that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits along with any associated interest and penalties that
would be payable to the taxing authorities upon examination. Interest associated
with unrecognized tax benefits are classified as interest expense and penalties
are classified in selling, general and administrative expenses in the statements
of income. The adoption of FIN 48 did not have a material impact on the
Company’s financial statements. At September 30, 2010 and December 31, 2009, the
Company did not take any uncertain positions that would necessitate recording a
tax related liability.
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Sales revenue,
including the final 10% of the purchase price, is recognized after delivery is
complete, customer acceptance of the product occurs and collectability is
reasonably assured. Customer acceptance occurs after the customer puts the
product through a quality inspection, which normally is completed within one to
two weeks from customer receipt of the product. The customer is responsible for
installation and integration of our component products into their end products.
Payments received before satisfaction of all relevant criteria for revenue
recognition are recorded as unearned revenue. Unearned revenue consists of
payments received from customers prior to customer acceptance of the
product.
The
Company's standard payment terms generally provide that 30% of the purchase
price is due upon the placement of an order, 30% is due upon reaching certain
milestones in the manufacturing process and 30% is due upon customer inspection
and acceptance of the product, which customers normally complete within one to
two weeks after delivery. As a common practice in the manufacturing business in
China, payment of the final 10% of the purchase price is due no later than the
termination date of the product warranty period, which can be up to 24 months
from the customer acceptance date. The final 10% of the purchase price is
recognized as revenue upon customer acceptance of the product. Payment terms are
negotiated on a case-by-case basis and these payment percentages and terms may
differ for each customer.
Sales
revenue represents the invoiced value of goods, net of value-added tax (VAT).
The Company’s products sold and services provided in the PRC are subject to VAT
of 17% of the gross sales price. This VAT may be offset by VAT paid by the
Company on raw materials and other materials included in the cost of producing
their finished product. The Company recorded VAT payable and VAT receivable net
of payments in the financial statements. The VAT tax return is filed offsetting
the payables against the receivables.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
Warranties
The
Company offers a warranty to its customers on its products for up to 24 months
depending on the terms negotiated with each customer. During the warranty
period, the Company will repair or replace defective products free of charge.
The Company commenced production in 2009 and, as of September 30, 2010, has yet
to incur any warranty expense. The Company has implemented a stringent set of
internal manufacturing protocols to ensure product quality beginning at the time
raw materials are received into our facilities up to the final inspection at the
time products are shipped to the customer. However, the Company will monitor
warranty claims and accrue for warranty expense accordingly, using ASC Topic 450
to account for our standard warranty.
The
Company provides its warranty to all customers and does not consider it an
additional service; rather, the warranty is considered an integral part of the
product’s sale. There is no general right of return indicated in the contracts
or purchase orders. If a product under warranty is defective or malfunctioning,
the Company is responsible for fixing it or replacing it with a new product. The
Company’s products are the only deliverables.
The
Company provides after-sales services at a charge after expiration of the
warranty period. Such revenue is recognized when service is
provided.
Cost
of Goods Sold
Cost of
goods sold consists primarily of material costs, labor costs and related
overhead, which are directly attributable to the products and other indirect
costs that benefit all products. Write-down of inventory to lower of cost or
market is also recorded in cost of goods sold.
Research
and Development
Research
and development costs are related primarily to the Company’s development and
testing of its new technologies that are used in the manufacturing of
bellows-related products. Research and development costs are expensed as
incurred. For the nine months ended September 30, 2010 and 2009, research
and development was immaterial. For the three months ended September 30, 2010
and 2009, research and development was immaterial. Research and development was
included in general and administrative expenses.
Subsidy
Income
Subsidy
income is a Science and Technology Support Grant from Administrative Committee
of Liaoning Province Tieling Economic & Technological Development Zone to
attract businesses with high-tech products to such zone. The grant was
without any conditions and restrictions, not required to be repaid and was
exempt from income tax in 2008. From 2009, subsidy income is subject to
statutory income tax. The grant is determined based on the investment made by
the Company, its floor space occupied in such zone, and certain taxes paid by
the Company. For the nine months ended September 30, 2010 and 2009, the subsidy
income was $1,009,940 and $211,788, respectively.
Basic
and Diluted Earnings per Share (EPS)
Basic EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similar to basic net income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if all the potential common shares, warrants and stock options had
been issued and if the additional common shares were dilutive. Diluted earnings
per share are based on the assumption that all dilutive convertible shares and
stock options were converted or exercised. Dilution is computed by applying the
treasury stock method for the outstanding options and the if-converted method
for the outstanding convertible preferred shares. Under the treasury stock
method, options and warrants are assumed to be exercised at the beginning of the
period (or at the time of issuance, if later), and as if funds obtained thereby
were used to purchase common stock at the average market price during the
period. Under the if-converted method, convertible outstanding instruments are
assumed to be converted into common stock at the beginning of the period (or at
the time of issuance, if later). The following table presents a reconciliation
of basic and diluted earnings per share:
|
|
Nine
Months Ended September 30,
|
|
|
Three Months
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net
income
|
|
$
|
2,902,986
|
|
|
$
|
296,141
|
|
|
$
|
2,321,869
|
|
|
$
|
191,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
17,447,008
|
|
|
|
15,122,000
|
|
|
|
22,021,207
|
|
|
|
15,122,000
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised
warrants and options
|
|
|
162,133
|
|
|
|
-
|
|
|
|
481,112
|
|
|
|
-
|
|
Weighted
average shares outstanding - diluted
|
|
|
17,609,141
|
|
|
|
15,122,000
|
|
|
|
22,502,319
|
|
|
|
15,122,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic
|
|
$
|
0.17
|
|
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
0.01
|
|
Earnings
per share - diluted
|
|
$
|
0.16
|
|
|
$
|
0.02
|
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts and other receivables. The Company does not require
collateral or other security to support these receivables. The Company conducts
periodic reviews of its clients' financial condition and customer payment
practices to minimize collection risk on accounts receivable.
The
operations of the Company are located in the PRC. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, as well
as by the general state of the PRC economy.
Statement
of Cash Flows
In
accordance with SFAS 95, “Statement of Cash Flows,” codified in FASB ASC Topic
230, cash flows from the Company's operations are calculated based upon local
currencies. As a result, amounts related to assets and liabilities reported
on the statement of cash flows may not necessarily agree with changes in the
corresponding balances on the balance sheet. The cash flows from
operating, investing and financing activities exclude the effects of the
following transactions during the nine months ended September 30,
2010:
|
i.
|
Conversion
from construction in progress to property, plant and equipment of
$2,228,273;
|
|
ii.
|
Contribution
of property, plant and equipment of $822,707 by the shareholders (See Note
19); and
|
|
iii.
|
Acquisition
of building by assumption of debt of $1,528,326 (See Note
16).
|
Fair
Value of Financial Instruments
Certain
of the Company’s financial instruments, including cash and cash equivalents,
accounts receivable, other receivables, accounts payable, accrued liabilities
and short-term debt, have carrying amounts that approximate their fair values
due to their short maturities. ASC Topic 820, “Fair Value Measurements and
Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value
and establishes a three-level valuation hierarchy for disclosures of fair value
measurement that enhances disclosure requirements for fair value
measures. The carrying amounts reported in the consolidated balance sheets
for receivables and current liabilities each qualify as financial instruments
and are a reasonable estimate of their fair values because of the short period
of time between the origination of such instruments and their expected
realization and their current market rate of interest. The three levels of
valuation hierarchy are defined as follows:
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.
As of
September 30, 2010 and December 31, 2009, the Company did not identify any
assets and liabilities required to be presented on the balance sheet at fair
value.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No.
123” (codified in FASB ASC Topics 718 & 505). The Company recognizes in
the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and
non-employees.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
Foreign
Currency Translation and Transactions
The
accompanying consolidated financial statements are presented in United States
Dollars (“USD”). The Company’s functional currency is RMB, which is translated
into USD for balance sheet accounts using the current exchange rates in effect
as of the balance sheet date and for revenue and expense accounts using the
average exchange rate during the fiscal year. The translation adjustments are
recorded as a separate component of stockholders’ equity, captioned accumulated
other comprehensive income (loss). Gains and losses resulting from transactions
denominated in foreign currencies are included in other income (expense) in the
consolidated statements of operations.
Comprehensive
Income (Loss)
The
Company uses SFAS 130 “Reporting Comprehensive Income” (codified in FASB ASC
Topic 220). Comprehensive income is comprised of net income and all changes to
the statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders.
Comprehensive income for the nine and three months ended September 30, 2010 and
2009 included net income and foreign currency translation
adjustments.
Segment
Reporting
SFAS 131,
“Disclosures about Segments of an Enterprise and Related Information” (codified
in FASB ASC Topic 280), requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a
company’s management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure or any other
manner in which management disaggregates a company.
Management
determined that all of its product lines – wind towers, bellows expansion joints
and pressure vessels – constituted a single reportable segment in accordance
with ASC 280. The Company operates exclusively in one business: the design and
manufacture of highly engineered clean technology metal components for heavy
industry. The manufacturing processes for each of our products, principally the
rolling and welding of raw steel materials, make use of the same pool of
production workers and engineering talent for design, fabrication, assembly and
testing. Our products are characterized and marketed by their ability to
withstand temperature, pressure, structural load and other environmental
factors. Our products are used by major electrical utilities and large-scale
industrial companies in China specializing in heavy industry, and our sales
force sells our products directly to these companies, who utilize our components
in their finished products. All of our long-lived assets for production are
located in our facilities in Tieling, Liaoning Province, China, and operate
within the same environmental, safety and quality regulations governing
industrial component manufacturing companies. We established our subsidiary,
Creative Wind Power, solely for the purpose of marketing and selling our wind
towers, which constitute the structural support cylinder for an industrial wind
turbine installation. Management believes that the economic characteristics of
our product lines, specifically costs and gross margin, will be similar as
production increases and labor continues to be shared across
products.
As a
result, management views the Company’s business and operations for all product
lines as a blended gross margin when determining future growth, return on
investment and cash flows. Accordingly, management has concluded the Company had
one reportable segment in accordance with ASC 280 because (i) all of our
products are created with similar production processes, in the same facilities,
under the same regulatory environment and sold to similar customers using
similar distribution systems; and (ii) gross margins of all product lines have
and should continue to converge.
Following
is a summary of sales by products for the nine and three months ended September
30, 2010 and 2009:
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues
from product lines
|
|
|
|
|
|
|
Bellows
expansion joints and related
|
|
$ |
1,099,643 |
|
|
$ |
671,982 |
|
Pressure
vessels
|
|
|
44,293 |
|
|
|
306,641 |
|
Wind
towers
|
|
|
13,595,766 |
|
|
|
- |
|
|
|
$ |
14,739,702 |
|
|
$ |
978,623 |
|
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues
from product lines
|
|
|
|
|
|
|
Bellows
expansion joints and related
|
|
$ |
446,989 |
|
|
$ |
608,637 |
|
Pressure
vessels
|
|
|
- |
|
|
|
97,591 |
|
Wind
towers
|
|
|
12,609,476 |
|
|
|
- |
|
|
|
$ |
13,056,465 |
|
|
$ |
706,228 |
|
New
Accounting Pronouncements
In
October 2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standard Update (ASU) No. 2009-13 on ASC 605, Revenue Recognition – Multiple
Deliverable Revenue Arrangement – a consensus of the FASB Emerging Issues Task
Force (ASU 2009-13). ASU 2009-13 amended guidance related to multiple-element
arrangements which requires an entity to allocate arrangement consideration at
the inception of an arrangement to all of its deliverables based on their
relative selling prices. The consensus eliminates the use of the residual method
of allocation and requires the relative-selling-price method in all
circumstances. All entities must adopt the guidance no later than the beginning
of their first fiscal year beginning on or after June 15, 2010. Entities may
elect to adopt the guidance through either prospective application for revenue
arrangements entered into, or materially modified, after the effective date or
through retrospective application to all revenue arrangements for all periods
presented. We are currently evaluating the impact, if any, of ASU 2009-13 on our
financial position and results of operations.
On
February 25, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09
Subsequent Events Topic 855, “Amendments to Certain Recognition and Disclosure
Requirements,” effective immediately. The amendments in the ASU remove the
requirement for an SEC filer to disclose a date through which subsequent events
have been evaluated in both issued and revised financial statements. Revised
financial statements include financial statements revised as a result of either
correction of an error or retrospective application of US GAAP. The FASB
believes these amendments remove potential conflicts with the SEC’s literature.
The adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815,
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging – Embedded Derivatives –
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have
a material impact on the Company’s consolidated financial
statements.
In April
2010, the FASB codified the consensus reached in Emerging Issues Task Force
Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU No. 2010-17
provides guidance on defining a milestone and determining when it may be
appropriate to apply the milestone method of revenue recognition for research
and development transactions. FASB ASU No. 2010-17 is effective for fiscal years
beginning on or after June 15, 2010, and is effective on a prospective basis for
milestones achieved after the adoption date. The Company does not expect this
ASU will have a material impact on its financial position or results of
operations when it adopts this update on January 1, 2011.
Recently
Issued Accounting Pronouncements Not Yet Adopted
As of
September 30, 2010, there are no recently issued accounting standards not yet
adopted that would have a material effect on the Company’s financial
statements.
3.
ADVANCE TO SUPPLIERS
Advance
to suppliers is prepayment to suppliers for raw material purchases.
4.
OTHER RECEIVABLES AND DEPOSITS
Other
receivables and deposits consisted of the following at September 30, 2010 and
December 31, 2009:
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
|
|
2010
|
|
|
2009
|
|
Short
term advance to third parties
|
|
$
|
1,961,923
|
|
|
$
|
254,243
|
|
Deposits
for bidding
|
|
|
457,168
|
|
|
|
271,236
|
|
Deposits
for patent
|
|
|
-
|
|
|
|
22,261
|
|
Other
|
|
|
52,270
|
|
|
|
2,729
|
|
Total
|
|
$
|
2,471,361
|
|
|
$
|
550,469
|
|
The short
term advance to third parties is interest free and due within one
year.
5.
INVENTORIES
Inventories
consisted of the following at September 30, 2010 and December 31,
2009:
|
|
2010
|
|
|
2009
|
|
Raw
material
|
|
$
|
765,552
|
|
|
$
|
131,988
|
|
Finished
goods
|
|
|
165,754
|
|
|
|
6,416
|
|
Work
in process
|
|
|
98,472
|
|
|
|
31,303
|
|
Total
|
|
$
|
1,029,778
|
|
|
$
|
169,707
|
|
6.
NOTES RECEIVABLE – BANK ACCEPTANCES
The
Company sold goods to its customers and received Commercial Notes (Bank
Acceptance) from them in lieu of the payments for accounts receivable. The
Company discounted these notes with a bank or endorsed notes to vendors for
payment of their obligations or to get cash from third parties. Most of the
Commercial Notes have a maturity of less than six months. At September 30, 2010
and December 31, 2009, the Company had notes receivable of $89,538 and $0,
respectively, and there were no notes discounted.
7.
LONG TERM INVESTMENT
On June
10, 2009, Creative Bellows entered into an investment with a Credit Union and
purchased 600,000 Credit Union shares for $89,538. As a result, Creative Bellows
became a 0.57% shareholder of the Credit Union. The Company accounted for this
investment using the cost method. There was no significant impairment of
investment as at September 30, 2010 and December 31, 2009.
8.
PREPAYMENT – NONCURRENT
Prepayment
mainly represented prepaid land occupancy fee to the inhabitants of the land as
a result of the Company’s planned future use of the land for constructing a
manufacturing plant. Currently, the Company amortizes prepaid rental over a
period of 40 years according to the terms of the lease agreement.
9.
CONSTRUCTION IN PROGRESS
Construction
in progress represented the amount paid for construction of the auxiliary
facility of the Phase II project of the wind tower manufacturing plant for which
the Company is responsible. The total estimated cost of construction is $3.58
million, of which $2.99 million is for the cost of workshop and $0.59 million
for the ancillary construction. As of September 30, 2010, the Company has paid
approximately $1.00 million.
The
Company’s construction project is divided into two phases. The first phase, for
the bellows expansion joints manufacturing plant, was completed in 2009 and
assets were capitalized appropriately. The second phase, for the wind tower
manufacturing plant, was assigned initially to a contractor with prepayment of
$2.24 million as of March 31, 2010. The Company subsequently cancelled the
contract with the original contractor and received its money back from the
contractor on April 30, 2010. The Company then reassigned the second phase of
the construction project, which is comprised mainly of a production workshop and
related facilities, to the local government. By assigning the contract to the
local government, the Company had no need to make any advance payment, but is
committed to pay approximately $1.8 million in construction cost to the local
government when the Company starts using the plant. However, under the terms of
the agreement with the local government, the Company can pay the project cost
evenly in five installments within five years (See Note 16). The Company started
using the plant on August 30, 2010, and recorded the cost of construction as a
long term payable from the commencement date of use. Originally, the Company was
required to make its first payment in October 2010; the cost of construction was
unsettled, however, and the first payment date was postponed.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
10.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at September 30, 2010 and December 31,
2009:
|
|
2010
|
|
|
2009
|
|
Building
|
|
$
|
5,109,348
|
|
|
$
|
-
|
|
Equipment
|
|
|
1,621,898
|
|
|
|
35,687
|
|
Vehicle
|
|
|
19,400
|
|
|
|
4,394
|
|
Office
equipment
|
|
|
47,095
|
|
|
|
15,032
|
|
Total
|
|
|
6,797,741
|
|
|
|
55,113
|
|
Accumulated
depreciation
|
|
|
(98,452
|
)
|
|
|
(2,249
|
)
|
Net
value
|
|
$
|
6,699,289
|
|
|
$
|
52,864
|
|
Depreciation
for the nine months ended September 30, 2010 and 2009, was $94,667 and $746,
respectively; depreciation for the three months ended September 30, 2010 and
2009, was $46,756 and $509, respectively.
11.
INTANGIBLE ASSETS
Intangible
assets consisted of land use right and patent. All land in the PRC is
government-owned and cannot be sold to any individual or company. However, the
government grants the user a “land use right” to use the land. The Company has
the right to use the land for 50 years and amortizes the right on a
straight-line basis over 50 years.
Intangible
assets as of September 30, 2010 and December 31, 2009, were as
follows:
|
|
2010
|
|
|
2009
|
|
Land
use right
|
|
$
|
3,770,317
|
|
|
$
|
3,640,028
|
|
Patent
|
|
|
14,923
|
|
|
|
-
|
|
Less:
Accumulated amortization
|
|
|
(161,645
|
)
|
|
|
(103,134
|
)
|
Net
|
|
$
|
3,623,595
|
|
|
$
|
3,536,894
|
|
Amortization
expense of intangible assets for the nine and three months ended September 30,
2010, was $55,677 and $18,659, and for the nine and three months ended September
30, 2009, was $56,251 and $19,485, respectively. At September 30, 2010, annual
amortization for the next five years was expected to be as follows:
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77,200
|
|
|
$
|
77,200
|
|
|
$
|
77,200
|
|
|
$
|
77,200
|
|
|
$
|
77,200
|
|
|
$
|
3,238,000
|
|
12.
OTHER PAYABLES AND ACCRUED LIABILITY
Other
payables as at September 30, 2010, mainly consisted of outside labor, accrued
payroll in the aggregate amount of $40,063, and the current portion of
construction cost payable of $360,478 (See Note 16).
As at
December 31, 2009, other payables include unsecured and non-interest bearing
short term loans from third parties.
13.
UNEARNED REVENUE
Unearned
revenue represents cash collected for products not yet accepted by customers at
the balance sheet date.
14.
SHORT TERM LOANS
On June
2, 2009, the Company borrowed $1,398,931 and $809,907 from two Credit Unions.
Both of the loans bore interest of 10.459% with maturity dates on May 26, 2010.
These loans were not subject to any covenants and were paid in full in August
2010.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
On
December 31, 2009, the Company borrowed $957,163 and $73,629 from two Credit
Unions. Both of the loans bore interest of 9.558% with maturity dates on May 26,
2010. These loans were not subject to any covenants and were paid in full in
August 2010.
All the
above loans were collateralized by the Company’s land use right, one of its
buildings and other long-lived assets.
In
February and March 2010, the Company borrowed $5,565,156 from a bank. The short
term loan bore interest of 4.425%. On March 18, 2010, the Company repaid the
loan. This loan was collateralized by one of the Company’s buildings and its
land use right.
On May
27, 2010, the Company borrowed $387,997 with interest of 5.346% from a bank. The
maturity date is November 24, 2010. The loan is collateralized by raw material
inventory and the personal guarantee of the Company’s CEO together with a third
party’s guarantee.
On
September 13, 2010, the Company borrowed $1,716,136, $895,375 and $969,990 from
three different Credit Unions, respectively. All of the loans bore interest of
7.2% with maturity dates on September 12, 2011. These loans were collateralized
by one of the Company’s buildings and its land use right.
15.
TAXES PAYABLE
Taxes
payable consisted of the following at September 30, 2010 and December 31,
2009:
|
|
2010
|
|
|
2009
|
|
Value
added
|
|
$
|
1,026,342
|
|
|
$
|
142,957
|
|
Income
|
|
|
809,119
|
|
|
|
267,324
|
|
Land
use
|
|
|
-
|
|
|
|
55,343
|
|
Other
|
|
|
316
|
|
|
|
969
|
|
Total
|
|
$
|
1,835,777
|
|
|
$
|
466,593
|
|
16.
LONG TERM PAYABLE
On
September 21, 2009, the Company entered into a construction contract with a
local authority, the Administration Committee for Liaoning Special Vehicle
Production Base (“LSVPB”), to build a plant for the Company. LSVPB is
responsible for the construction of the main body of the plant and the Company
is responsible for the construction of certain infrastructure for the plant,
including plumbing, heating and electrical systems. The plant has an estimated
area of 8,947 square meters with construction costs estimated at RMB 1,350
($200) per square meter. The final cost of construction will be determined based
on actual square meters built.
LSVPB is
responsible for hiring a qualified construction team according to the Company’s
approved design and the Company must approve any material changes to the design
during construction. LSVPB is also responsible for site survey, quality
supervision and completion of inspection, and transfer of all construction
completion records to the Company. Upon completion of its ownership
registration, the Company is required to pledge the plant as collateral for
payment by the Company to LSVPB of approximately $1,802,391 (RMB 12,078,000) in
plant construction cost. The pledge will terminate upon payment in full by the
Company.
The
Company will pay LSVPB for the cost of the project in five equal annual
installment payments in October of each year starting October 2010. The Company
is not required to pay interest. Ownership of the plant will transfer to the
Company upon payment in full by the Company. The default penalty will be 0.5% of
the amount outstanding, compounded daily, in the event of a payment default.
LSVPB has the right to foreclose on the plant in the event that payments are in
arrears for more than two years, in which case all prior payments made by the
Company will be treated as liquidated damages by LSVPB.
The
Company recorded the cost of construction at the present value of the
five annual payments by using imputed interest of 9% when the Company started
using the plant. Amortization of the cost commenced
from the date of occupation and use. The Company started using the plant on
August 30, 2010. The Company expects to file for ownership registration by the
end of this year or beginning of 2011.
The
Company estimated the construction cost based on estimated area of 8,947 square
meters with construction costs estimated at RMB 1,350 ($200) per square meter,
while the final actual cost has not yet been settled and determined; however,
the Company does not expect a major difference between the estimated and actual
cost. At September 30, 2010, the long term payable consisted of the
following:
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
|
|
September 30, 2010
|
|
Long
term payable
|
|
$ |
1,802,391 |
|
Less:
unamortized interest
|
|
|
(274,064 |
) |
Net
|
|
|
1,528,326 |
|
Current
portion
|
|
|
(360,478 |
) |
Noncurrent
portion
|
|
$ |
11,67,848 |
|
Maturities
as of the twelve months period ended September 30, for the next five years are
as follows:
Year
|
|
Amount
|
|
2010
|
|
$ |
360,478 |
|
2011
|
|
|
255,372 |
|
2012
|
|
|
278,355 |
|
2013
|
|
|
303,407 |
|
2014
|
|
|
330,714 |
|
Total
|
|
$ |
1,528,326 |
|
17.
MAJOR CUSTOMERS AND VENDORS
Four
customers accounted for 85% of sales for the nine months ended September 30,
2010, and each one customer accounted for 24%, 22%, 21% and 18%, respectively.
The same four customers accounted for 95% of sales for the three months ended
September 30, 2010, and each customer accounted for 27%, 25% 24% and 20%,
respectively. At September 30, 2010, total receivable from these customers was
$11,342,353.
Two
customers accounted for 21% and 21% of sales for the nine months ended September
30, 2009; three customers accounted for 49% of sales for the three months ended
September 30, 2009, and each customer accounted for 29%, 10% and 10%,
respectively.
Two
vendors accounted for 57% of purchases for the nine months ended September 30,
2010, and each vendor accounted for 33% and 23% of purchases, respectively. For
the three months ended September 30, 2010, three vendors accounted for 67% of
purchases, each vendor accounted for 43%, 14% and 10%, respectively. At
September 30, 2010, the total payable to these vendors was
$2,191,434.
Three
vendors accounted for 61% of purchases for the nine months ended September 30,
2009, and each vendor accounted for 28%, 24% and 10% of purchases, respectively.
Two vendors accounted for 55% of purchases for the three months ended September
30, 2009 and each vendor accounted for 37% and 18%, respectively.
18.
INCOME TAX
The
Company is subject to income taxes by entity on income arising in or derived
from the tax jurisdiction in which each entity is domiciled.
Creative
Bellows and Creative Wind Power generated substantially all of their net income
from their PRC operations and are governed by the Income Tax Law of the PRC for
privately run enterprises, which are generally subject to tax at a rate of 25%
on income reported in the financial statements after appropriate tax
adjustments.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the nine and three months ended September 30, 2010 and
2009:
|
|
For the Nine Months Ended September 30,
|
|
|
For the Three Months Ended September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
US
statutory rates
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
Tax
rate difference
|
|
|
(9.2 |
)% |
|
|
(9.0 |
)% |
|
|
(9.3 |
)% |
|
|
(9.0 |
)% |
Other
|
|
|
0.8 |
% |
|
|
- |
% |
|
|
1.1 |
% |
|
|
- |
% |
Tax
per financial statements
|
|
|
25.6 |
% |
|
|
25.0 |
% |
|
|
25.8 |
% |
|
|
25.0 |
% |
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
There
were no material temporary differences on deferred tax as of September 30, 2010
and December 31, 2009.
19.
STOCKHOLDERS’ EQUITY
Contribution by
Shareholders
On
January 29, 2010, three shareholders contributed $922,900 to the Company. On
March 26, 2010, a third party contributed equipment with a fair value of
$820,300 to the Company and became a shareholder; simultaneously, the three
shareholders bought this third party’s ownership interest and became 100% owners
of the Company. On April 15, 2010, one shareholder injected $1,362,438 to the
Company as a cash contribution. On July 15, 2010, a third party injected
$167,702 to the Company as a cash contribution and became a
shareholder.
Common Stock with Warrants
Issued for Cash
On July
12, 2010, CleanTech completed a closing of a private placement offering of Units
pursuant to which CleanTech sold 3,333,322 Units at $3.00 per Unit for
$10,000,000. Each “Unit” consisted of one share of CleanTech’s common stock and
a three-year warrant to purchase 15% of one share of CleanTech’s common stock at
$3.00 per share. The warrants are immediately exercisable, expire on the third
anniversary of their issuance, and entitle the purchasers of the Units, in the
aggregate, to purchase up to 499,978 shares of CleanTech’s common stock at $3.00
per share. The warrants may be called by CleanTech at any time after (i) the
registration statement registering the common stock underlying the warrants
becomes effective, (ii) the common stock is listed on a national securities
exchange and (iii) the trading price of the common stock exceeds $4.00.
CleanTech also issued warrants to purchase 333,332 shares of common stock to the
placement agents in the offering. The warrants granted to these placement agents
had the same terms and conditions as the warrants granted in the
offering. The warrants are exercisable into a fixed number of shares,
solely redeemable by CleanTech and not redeemable by warrant
holders. Accordingly, the warrants are classified as equity
instruments. CleanTech accounted for the warrants issued to the investors
and placement agents based on the fair value method under ASC Topic 505. The
fair value of the warrants was calculated using the Black Scholes Model and the
following assumptions: estimated life of three years, volatility of 147%, risk
free interest rate of 1.89%, and dividend yield of 0%. No estimate of
forfeitures was made as CleanTech has a short history of granting options and
warrants. The fair value of the warrants at grant date was $5,903,228. CleanTech
received net proceeds of $8.4 million from this private placement. The
commission and legal cost associated with this offering was $1.6
million.
Following
is a summary of the warrant activity:
|
|
Number of
Shares
|
|
|
Average
Exercise
Price per Share
|
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
|
Granted
|
|
|
833,310
|
|
|
$
|
3.00
|
|
|
|
3
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2010
|
|
|
833,310
|
|
|
$
|
3.00
|
|
|
|
2.78
|
|
Exercisable
at September 30, 2010
|
|
|
833,310
|
|
|
$
|
3.00
|
|
|
|
2.78
|
|
20.
STOCK-BASED COMPENSATION PLAN
On July
13, 2010, the Company granted non-statutory stock options to its one independent
U.S. director. The terms of the option are: 30,000 shares at an exercise price
per share of $8.44, with a life of three years and vesting over three years as
follows: 10,000 shares vest on the grant date; 10,000 shares vest on July 13,
2011; and 10,000 shares vest on July 13, 2012, subject in each case to the
director continuing to be associated with the Company as a director. The options
were valued using a volatility of 147%, risk free interest rate of 1.89%, and
dividend yield of 0%. No estimate of forfeitures was made as the Company has a
short history of granting options. The grant date fair value of the options was
$203,235.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
Based on
the fair value method under SFAS No. 123 (Revised) “Share Based Payment” (“SFAS
123(R)”) (codified in FASB ASC Financial Instruments, Topic 718), the fair value
of each stock option granted is estimated on the date of the grant using the
Black-Scholes option pricing model. The Black-Scholes option pricing model has
assumptions for risk free interest rates, dividends, stock volatility and
expected life of an option grant. The risk free interest rate is based upon
market yields for United States Treasury debt securities at a maturity near the
term remaining on the option. Dividend rates are based on the Company’s dividend
history. The stock volatility factor is based on the historical volatility of
the Company’s stock price. The expected life of an option grant is based on
management’s estimate. The fair value of each option grant to independent
directors is calculated by the Black-Scholes method and is recognized as
compensation expense over the vesting period of each stock option
award.
Following
is a summary of the option activity:
|
|
Number of
Shares
|
|
|
Average
Exercise
Price per Share
|
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
|
Granted
|
|
|
30,000
|
|
|
$
|
8.44
|
|
|
|
3
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2010
|
|
|
30,000
|
|
|
$
|
8.44
|
|
|
|
2.78
|
|
Exercisable
at September 30, 2010
|
|
|
10,000
|
|
|
$
|
8.44
|
|
|
|
2.78
|
|
There
were no options exercised during the nine and three months ended September 30,
2010. The Company recorded $90,007 as compensation expense for stock
options during the three months ended September 30, 2010.
21.
STATUTORY RESERVES
Pursuant
to the corporate law of the PRC effective January 1, 2006, PRC subsidiaries of
the Company are required to maintain one statutory reserve by appropriating from
its after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
Surplus reserve
fund
The PRC
subsidiaries of the Company are required to transfer 10% of their net income, as
determined under PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Common welfare
fund
Common
welfare fund is a voluntary fund into which the Company can elect to transfer 5%
to 10% of its net income. The Company did not make any contribution to this
fund in the nine and three months ended September 30, 2010 and
2009.
This fund
can only be utilized on capital items for the collective benefit of the
Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. This fund is non-distributable other than
upon liquidation.
22.
OPERATING RISKS
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
CLEANTECH
INNOVATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be transacted only
by authorized financial institutions. Remittances in currencies other than RMB
may require certain supporting documentation in order to affect the
remittance.
23.
SUBSEQUENT EVENTS
On
October 14, 2010, the Company entered into a Short Term Loan Agreement (the
“Loan Agreement”) with Strong Growth Capital Ltd. (“Lender”) in the amount of
$1.5 million for working capital to help meet significantly increased demand for
the Company’s products. Under the terms of the Loan Agreement, the Company
agreed to interest of 10% and the principal amount and interest accrued thereon
is due and payable in full on March 31, 2011 (the “Maturity Date”). The Lender
may also demand payment of outstanding principal and interest at any time if and
after the Company completes any capital financing of at least $2 million prior
to the Maturity Date. If the Company does not repay the principal and the
interest in full according to the agreed upon schedule, the Company shall pay
0.003% of the balance of the unpaid principal on a daily basis as penalty for
breach of the Loan Agreement. The penalty shall be computed by this formula
until the full repayment of the principal and the interest.
CAUTIONARY
STATEMENT FOR FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). We have based these forward-looking statements on
our current expectations and projections about future events. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions about us that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“continue,” or the negative of such terms or other similar expressions.
Factors that might cause or contribute to such a discrepancy include, but
are not limited to, those listed under the heading “Risk Factors” and those
listed in our other Securities and Exchange Commission filings. The
following discussion should be read in conjunction with our Financial Statements
and related Notes thereto included elsewhere in this report. Throughout this
Quarterly Report, we will refer to CleanTech Innovations, Inc. as “CleanTech,”
the “Company,” “we,” “us,” and “our.”
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Overview
We are a
manufacturer of structural towers for megawatt-class wind turbines as well as
other highly engineered clean technology metal components in the People’s
Republic of China (“China” or “PRC”). We currently design, manufacture, test and
sell structural towers for 1 and 1.5 megawatt (“MW”) on-land and 3MW off-shore
wind turbines and have the expertise and manufacturing capability to provide
towers for larger MW on-land and off-shore turbines. We are currently the only
certified wind tower manufacturer within Tieling, Liaoning Province, which
provides significant competitive advantage in supplying towers into the
wind-rich northern provinces of China. We also manufacture patented, specialty
metal products that require advanced manufacturing and engineering capabilities,
including bellows expansion joints and connecting bend pipes used for waste heat
recycling in steel production and in ultra-high-voltage electricity transmission
grids, as well as industrial pressure vessels. Our products provide clean
technology solutions for China’s increasing energy demand and environmental
issues.
We
operate through two wholly owned subsidiaries organized under the laws of the
PRC – Liaoning Creative Bellows Co., Ltd. (“Creative Bellows”) and Liaoning
Creative Wind Power Equipment Co., Ltd. (“Creative Wind Power”). Creative
Bellows, which was incorporated on September 17, 2007, is our wholly
foreign-owned enterprise (“WFOE”) and it owns 100% of Creative Wind Power, which
was incorporated on May 26, 2009. Creative Bellows produces bellows expansion
joints, pressure vessels and other fabricated metal specialty products. Creative
Wind Power markets and sells wind towers designed and manufactured by Creative
Bellows.
On June
18, 2010, CleanTech Innovations, Inc. (FKA: Everton Capital Corporation), a U.S.
shell company incorporated in the State of Nevada on May 9, 2006, authorized an
8-for-1 forward split of its common stock, effective on July 2, 2010. Prior to
the forward split, CleanTech had 5,501,000 shares of common stock outstanding,
and, after giving effect to the forward split, CleanTech had 44,008,000 shares
of common stock outstanding. CleanTech authorized the forward stock split to
provide a sufficient number of shares to accommodate the trading of its common
stock in the OTC marketplace after the acquisition of Creative Bellows as
described below.
On July
2, 2010, Creative Bellows signed a share exchange agreement with CleanTech,
whereby the shareholders of Creative Bellows and their designees received
15,122,000 shares in CleanTech. Concurrent with the share exchange agreement,
CleanTech’s principal shareholder cancelled 40,000,000 shares in CleanTech for
$40,000. The cancelled shares were retired. CleanTech had 4,008,000 shares
outstanding after the cancellation of the shares. After giving effect to the
foregoing transactions, the shareholders of Creative Bellows owned 79.05% of the
19,130,000 shares outstanding of CleanTech. The transaction was accounted for as
a recapitalization of CleanTech and not as a business combination.
Simultaneously with the share exchange agreement, CleanTech changed its year end
from August to December.
On July
12, 2010, CleanTech completed a closing of a private placement of Units (as
defined below) pursuant to which CleanTech sold 3,333,322 Units at $3.00 per
Unit for $10,000,000. Each “Unit” consisted of one share of CleanTech’s common
stock and a three-year warrant to purchase 15% of one share of CleanTech’s
common stock at $3.00 per share. The warrants are immediately exercisable,
expire on the third anniversary of their issuance, and entitle the purchasers of
the Units to purchase up to 499,978 shares of CleanTech’s common stock at $3.00
per share. The warrants may be called by CleanTech at any time after (i) the
registration statement registering the common stock underlying the warrants
becomes effective, (ii) the common stock is listed on a national securities
exchange and (iii) the trading price of the common stock exceeds $4.00.
CleanTech also issued warrants to purchase 333,332 shares of common stock to the
placement agents in the offering. The warrants granted to these placement agents
had the same terms and conditions as the warrants granted in the offering. The
warrants are exercisable into a fixed number of shares, solely redeemable by the
Company and not redeemable by warrant holders. Accordingly, the warrants are
classified as equity instruments.
Critical
Accounting Policies
While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements, we believe the following accounting policies
are the most critical to aid you in fully understanding and evaluating this
management discussion and analysis.
Basis
of Presentation
The
Company’s financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America (“US
GAAP”).
Principles
of Consolidation
The
consolidated financial statements include the accounts of CleanTech, Creative
Bellows and Creative Wind Power. All intercompany transactions and account
balances are eliminated in consolidation.
Use
of Estimates
In
preparing financial statements in conformity with US GAAP, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting year. Significant estimates, required by
management, include the recoverability of long-lived assets and the valuation of
inventories. Actual results could differ from those estimates.
Accounts
Receivable and Retentions Receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves.
The
retention rate generally was 10% of the sales price with a term of one to two
years, but no later than the termination of the warranty period.
Inventories
The
Company’s inventories are valued at the lower of cost or market with cost
determined on a weighted average basis. The Company compares the cost of
inventories with the market value and allowance is made for writing down the
inventories to their market value, if lower.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 104 (codified in
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 605). Sales revenue, including the final 10% of the purchase
price, is recognized after delivery is complete, customer acceptance of the
product occurs and collectability is reasonably assured. Customer acceptance
occurs after the customer puts the product through a quality inspection, which
normally is completed within one to two weeks from customer receipt of the
product. The customer is responsible for installation and integration of our
component products into their end products. Payments received before
satisfaction of all relevant criteria for revenue recognition are recorded as
unearned revenue. Unearned revenue consists of payments received from customers
prior to customer acceptance of the products.
Sales
revenue represents the invoiced value of goods, net of value-added tax (VAT).
The Company’s products sold and services provided in the PRC are subject to VAT
of 17% of the gross sales price. This VAT may be offset by VAT paid by the
Company on raw materials and other materials included in the cost of producing
their finished product. The Company recorded VAT payable and VAT receivable net
of payments in the financial statements. The VAT tax return is filed offsetting
the payables against the receivables.
Warranties
The
Company offers a warranty to its customers on its products for up to 24 months
depending on the terms negotiated with each customer. During the warranty
period, the Company will repair or replace defective products free of charge.
The Company commenced production in 2009 and, as of September 30, 2010, has yet
to incur any warranty expense. The Company has implemented a stringent set of
internal manufacturing protocols to ensure product quality beginning at the time
raw materials are received into our facilities up to the final inspection at the
time products are shipped to the customer. The Company’s protocol establishes
stringent requirements and specifications products must meet before they are
allowed to move into the next phase of the manufacturing process. This process
was established to ensure each individual piece of work in progress meets strict
technical standards. During the manufacturing process, both our internal quality
control staff and our customers’ full time onsite inspectors track and inspect
the work in progress. The products are allowed to move to the next phase of the
manufacturing process only after both parties have approved of the product
quality. Prior to shipping the products, the Company performs non-destructive
tests on the products for defect detection, including radiological (x-ray),
ultrasonic, pneumatic, hydraulic and gas leakage tests. Additionally, our
products are tested by the Bureau of Quality and Technical Supervision under
national standards. Upon receiving the products, our customers will inspect the
products further prior to acceptance. The Company has analyzed the need to make
warranty accruals and concluded that such accrual is not necessary because of
the following:
|
§
|
Clearly
defined procedures in our manufacturing protocol to ensure product quality
based on technical parameters;
|
|
§
|
Existence
of redundancies in testing and inspection of our products;
and
|
|
§
|
Short
term of our warranty period, which is no more than 24
months.
|
However,
the Company will monitor warranty claims and accrue for warranty expense
accordingly, using ASC Topic 450 to account for our standard
warranty.
The
Company provides its warranty to all customers and does not consider it an
additional service; rather, the warranty is considered an integral part of the
product’s sale. There is no general right of return indicated in the contracts
or purchase orders. If a product under warranty is defective or malfunctioning,
the Company is responsible for fixing it or replacing it with a new product. The
Company’s products are the only deliverables.
The
Company provides after-sales services at a charge after expiration of the
warranty period. We recognize such revenue when service is
provided.
Foreign
Currency Translation and Transactions and Comprehensive Income
(Loss)
The
accompanying consolidated financial statements are presented in United States
Dollars (“USD”). The Company’s functional currency is the USD, while the
Company’s wholly owned subsidiaries’ functional currency is the Renminbi
(“RMB”). The functional currencies of the Company’s foreign operations are
translated into USD for balance sheet accounts using the current exchange rates
in effect as of the balance sheet date and for revenue and expense accounts
using the average exchange rate during the fiscal year. The translation
adjustments are recorded as a separate component of stockholders’ equity,
captioned “Accumulated other comprehensive income (loss).” Gains and losses
resulting from transactions denominated in foreign currencies are included in
other income (expense) in the consolidated statements of operations. There have
been no significant fluctuations in the exchange rate for the conversion of RMB
to USD after the balance sheet date.
Segment
Reporting
SFAS 131,
“Disclosures about Segments of an Enterprise and Related Information” (codified
in FASB ASC Topic 280), requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure or any other manner
in which management disaggregates a company.
Management
determined that all of its product lines – wind towers, bellows expansion joints
and pressure vessels – constituted a single reportable segment in accordance
with ASC 280. The Company operates exclusively in one business: the design and
manufacture of highly engineered clean technology metal components for heavy
industry. The manufacturing processes for each of our products, principally the
rolling and welding of raw steel materials, make use of the same pool of
production workers and engineering talent for design, fabrication, assembly and
testing. Our products are characterized and marketed by their ability to
withstand temperature, pressure, structural load and other environmental
factors. Our products are used by major electrical utilities and large-scale
industrial companies in China specializing in heavy industry, and our sales
force sells our products directly to these companies, who utilize our components
in their finished products. All of our long-lived assets for production are
located in our facilities in Tieling, Liaoning Province, China, and operate
within the same environmental, safety and quality regulations governing
industrial component manufacturing companies. We established our subsidiary,
Creative Wind Power, solely for the purpose of marketing and selling our wind
towers, which constitute the structural support cylinder for an industrial wind
turbine installation. Management believes that the economic characteristics of
our product lines, specifically costs and gross margin, will be similar as
production increases and labor continues to be shared across
products.
Our
initial sales in 2009 consisted primarily of bellows expansion joints and
pressure vessels and reflected pricing based on lower sales volume of higher
margin products with unique customer design requirements, which resulted in
gross margins of approximately 51%. This concentration of higher margin products
and low sales volume created higher gross margins for these products as of the
nine months ended September 30, 2009, that management believes are not
sustainable as production volume increases and products become more diversified.
At nine months ended September 30, 2010, in the aggregate, the gross margins for
our bellows expansion joints and pressure vessels decreased as our mix of
bellows expansion joints and pressure vessels broadened to include more
components with lower margins. We expect a further decrease in the gross
margins going forward for bellows expansion joints and pressure
vessels as these products continue to broaden and normalize.
We
initiated sales of our wind towers in the second quarter of 2010 and we expect
the majority of our sales going forward will be of wind towers. Initial gross
margins of our wind towers were impacted by one-time startup costs of
approximately $100,000, production inefficiencies associated with the
introduction of a new product line and lower sales volume. We experienced an
increase in gross margins for our wind towers in the third quarter ended
September 30, 2010, over the second quarter ended June 30, 2010, because of
increased sales volume, improved production efficiencies and the elimination of
certain startup costs. We expect a further increase in the gross margins of our
wind towers going forward. In addition, our blended gross margin of
approximately 29% for the nine months ended September 30, 2010, was lower than
for the six months ended June 30, 2010, largely because the gross profits from
bellows expansion joints and pressure vessels trended downward toward more
sustainable levels from their unusually high levels of 51% in 2009.
As our
overall mix of products and product gross margins broadens and sales volume
increases, we expect the gross margins of all our product lines to converge and
stabilize toward the current blended gross margin of approximately 29%. As a
result, management views the Company’s business and operations for all product
lines as a blended gross margin when determining future growth, return on
investment and cash flows. Accordingly, management has concluded the Company had
one reportable segment in accordance with ASC 280 because (i) all of our
products are created with similar production processes, in the same facilities,
under the same regulatory environment and sold to similar customers using
similar distribution systems; and (ii) gross margins of all product lines have
and should continue to converge.
RESULTS
OF OPERATIONS
Nine
Months Ended September 30, 2010, compared to the Nine Months Ended September 30,
2009
The
following table presents the consolidated results of operations for the nine
months ended September 30, 2010, compared to the nine months ended September 30,
2009.
|
|
2010
|
|
|
2009
|
|
|
|
$
|
|
|
% of Sales
|
|
|
$
|
|
|
% of Sales
|
|
Net
sales
|
|
|
14,739,702 |
|
|
|
100 |
% |
|
|
978,623 |
|
|
|
100 |
% |
Cost
of goods sold
|
|
|
10,519,685 |
|
|
|
71 |
% |
|
|
478,343 |
|
|
|
49 |
% |
Gross
profit
|
|
|
4,220,017 |
|
|
|
29 |
% |
|
|
500,280 |
|
|
|
51 |
% |
Operating
expenses
|
|
|
1,012,202 |
|
|
|
7 |
% |
|
|
241,636 |
|
|
|
25 |
% |
Income
from operations
|
|
|
3,207,815 |
|
|
|
22 |
% |
|
|
258,644 |
|
|
|
26 |
% |
Other
income, net
|
|
|
691,956 |
|
|
|
5 |
% |
|
|
136,211 |
|
|
|
14 |
% |
Income
tax expense
|
|
|
(996,785 |
) |
|
|
(7 |
)% |
|
|
(98,714 |
) |
|
|
(10 |
)% |
Net
income
|
|
|
2,902,986 |
|
|
|
20 |
% |
|
|
296,141 |
|
|
|
30 |
% |
NET
SALES
Net sales
for the nine months ended September 30, 2010, increased to $14,739,702 from
$978,623 for the nine months ended September 30, 2009. Net sales for the nine
months ended September 30, 2010, consisted of $13.59 million in sales of wind
towers and $1.14 million in sales of bellows expansion joints and pressure
vessels, while our net sales for the same period in 2009 consisted entirely of
bellows expansion joints and pressure vessels. The increase in net sales was
attributable to our commencement of production and sales of wind towers in the
second and third quarters of 2010.
COST OF
GOODS SOLD
Cost of
goods sold for the nine months ended September 30, 2010, increased to
$10,519,685 from $478,343 for the nine months ended September 30, 2009. Cost of
goods sold includes material costs, primarily steel, and labor costs and related
overhead. The increase in cost of goods sold is attributed to the introduction
and significant increase of production and sales volume of our wind tower
products in the nine months ended September 30, 2010. Cost of goods sold as a
percentage of net sales for the nine months ended September 30, 2010, were 71%
compared to 49% for the same period in 2009. The increase in cost of goods sold
as a percentage of sales was mainly due to the commencement and increased sales
and production of wind towers in 2010 and by certain one-time startup and
production costs of approximately $100,000 that were not associated with our
other more established products. Additionally, cost of goods sold as a
percentage of net sales increased as sales volume increased and our mix of
bellows expansion joints and pressure vessels shifted to include lower margin
offerings in the product lines.
GROSS
PROFIT
Gross
profit for the nine months ended September 30, 2010, increased to $4,220,017
from $500,280 for the nine months ended September 30, 2009. Gross profit margin
decreased to 29% for the nine months ended September 30, 2010, from 51% for the
same period in 2009.
Our
initial sales in 2009 consisted primarily of bellows expansion joints and
pressure vessels, which reflected pricing based on lower sales volume of higher
margin products with unique customer design requirements and resulted in a
significantly higher gross profit margins of 51%. The concentration of higher
margin products and low sales volume in the nine months ended September 30, 2009
created a high gross profit margin that management does not believe is
sustainable in the future. In the nine months ended September 30, 2010, gross
profit margins for our bellows expansion joint and pressure vessel products
decreased as expected by management as we sold a more diversified mix of
products. In the nine months ended September 30, 2010, the Company increased its
sales of wind towers, which also reduced overall gross profit margins.
Management believes the sales of bellows expansion joints and pressure vessels
will continue to diversify and as wind tower production continues to increase
along with manufacturing efficiency and the elimination of one-time startup
costs of approximately $100,000, the gross profit margins of all three product
lines will converge toward the current blended gross profit margin of
approximately 29%.
OPERATING
EXPENSES
Operating
expenses for the nine months ended September 30, 2010, increased to $1,012,202
from $241,636 for the nine months ended September 30, 2009. Operating expenses
consists of selling, general and administrative expenses. The increase in
operating expenses resulted from increased selling costs of our products and the
general expansion of our business, including the expansion of our sales team.
Operating expenses as a percentage of net sales for the nine months ended
September 30, 2010, was 7% compared to 25% for the same period in 2009. This
decrease was the result of increased efficiencies resulting from higher
sales.
NET
INCOME
Net
income for the nine months ended September 30, 2010, increased to $2,902,986
from $296,141 for the nine months ended September 30, 2009. Net income as a
percentage of net sales for the nine months ended September 30, 2010, was 20%
compared to 30% for the same period in 2009. This increase in net income was
attributable to our increased sales of our products and increase in our subsidy
income, which was a grant from the Administrative Committee of Liaoning Province
Tieling Economic & Technological Development Zone to attract businesses with
high-tech products. The grant is not required to be repaid.
Quarter
Ended September 30, 2010, compared to the Quarter Ended September 30,
2009
The
following table sets forth the results of operations for the three months ended
September 30, 2010, compared to the three months ended September 30, 2009,
indicated as a percentage of net sales.
|
|
2010
|
|
|
2009
|
|
|
|
$
|
|
|
% of Sales
|
|
|
$
|
|
|
% of Sales
|
|
Net
sales
|
|
|
13,056,465 |
|
|
|
100 |
% |
|
|
706,228 |
|
|
|
100 |
% |
Cost
of goods sold
|
|
|
9,324,522 |
|
|
|
71 |
% |
|
|
318,407 |
|
|
|
45 |
% |
Gross
profit
|
|
|
3,731,943 |
|
|
|
29 |
% |
|
|
387,821 |
|
|
|
55 |
% |
Operating
expenses
|
|
|
540,374 |
|
|
|
5 |
% |
|
|
108,767 |
|
|
|
15 |
% |
Income
from operations
|
|
|
3,191,569 |
|
|
|
24 |
% |
|
|
279,054 |
|
|
|
40 |
% |
Other
expenses, net
|
|
|
(61,641 |
) |
|
|
0 |
% |
|
|
(25,410 |
) |
|
|
(4 |
)
% |
Income
tax expense
|
|
|
(808,059 |
) |
|
|
(6 |
)% |
|
|
(62,109 |
) |
|
|
(9 |
)% |
Net
income
|
|
|
2,321,869 |
|
|
|
18 |
% |
|
|
191,535 |
|
|
|
27 |
% |
NET
SALES
Net sales
for the three months ended September 30, 2010, increased to $13,056,465 from
$706,228 for the three months ended September 30, 2009. Net sales for the three
months ended September 30, 2010, consisted of $12.61 million in sales of wind
towers and $0.45 million in sales of bellows expansion joints and pressure
vessels, while our net sales for the same period in 2009 consisted entirely of
bellows expansion joints and pressure vessels. The increase in net sales was
attributable to our commencement of production and sales of wind towers in the
second quarter of 2010 with a significant increase in the third
quarter.
COST OF
GOODS SOLD
Cost of
goods sold for the three months ended September 30, 2010, increased to
$9,324,522 from $318,407 for the three months ended September 30, 2009. Cost of
goods sold includes material costs, primarily steel, and labor costs and related
overhead. The increase in cost of goods sold is attributed to the introduction
and significant increase of production and sales volume of our wind tower
products in the three months ended September 30, 2010. Cost of goods sold as a
percentage of net sales for the three months ended September 30, 2010, were 71%
compared to 45% for the same period in 2009. The increase in cost of goods sold
as a percentage of sales was mainly due to the commencement and increased sales
and production of wind towers in 2010 and by certain one-time startup and
production costs of approximately $100,000 that were not associated with our
other more established products. Additionally, cost of goods sold as a
percentage of net sales increased as sales volume increased and our mix of
bellows expansion joints and pressure vessels shifted to include lower margin
offerings in the product lines.
GROSS
PROFIT
Gross
profit for the three months ended September 30, 2010, increased to $540,374 from
$108,767 for the three months ended September 30, 2009. Gross profit margin
decreased to 29% for the three months ended September 30, 2010, from 55% for the
same period in 2009.
Our
initial sales in 2009 consisted primarily of bellows expansion joints and
pressure vessels, which reflected pricing based on lower sales volume of higher
margin products with unique customer design requirements and resulted in a
significantly higher gross profit margins of 55%. The concentration of higher
margin products and low sales volume in the nine months ended September 30, 2009
created a high gross profit margin that management does not believe is
sustainable in the future. In the nine months ended September 30, 2010, gross
profit margins for our bellows expansion joint and pressure vessel products
decreased as expected by management as we sold a more diversified mix of
products. In the nine months ended September 30, 2010, the Company increased its
sales of wind towers, which also reduced overall gross profit margins.
Management believes the sales of bellows expansion joints and pressure vessels
will continue to diversify and as wind tower production continues to increase
along with manufacturing efficiency and the elimination of one-time startup
costs of approximately $100,000, the gross profit margins of all three product
lines will converge toward the current blended gross profit margin of
approximately 29%.
OPERATING
EXPENSES
Operating
expenses for the three months ended September 30, 2010, increased to $540,374
from $108,767 for the three months ended September 30, 2009. Operating expenses
consists of selling, general and administrative expenses. The increase in
operating expenses resulted from increased selling costs of our products and the
general expansion of our business, including the expansion of our sales team.
Operating expenses as a percentage of net sales for the three months ended
September 30, 2010, was 5% compared to 15% for the same period in 2009. This
decrease was the result of increased efficiencies resulting from higher
sales.
NET
INCOME
Net
income for the three months ended September 30, 2010, increased to $2,321,869
from $191,535 for the three months ended September 30, 2009. Net income as a
percentage of net sales for the three months ended September 30, 2010, was 18%
compared to 27% for the same period in 2009. This increase in net income was
attributable to our increased sales of our products.
LIQUIDITY
AND CAPITAL RESOURCES
Nine
Months Ended September 30, 2010, compared to the Nine Months Ended September 30,
2009
Operations
and liquidity needs are funded primarily through cash flows from operations,
short-term borrowings and shareholder contributions. The cash is used in
operations and plant construction.
As of
September 30, 2010, the Company had cash and equivalents of $397,876, other
current assets of $18,262,889, and current liabilities of $10,201,808. Working
capital was $8,098,479 at September 30, 2010. The ratio of current assets to
current liabilities was 1.8-to-1 as of September 30, 2010.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the nine months ended September 30, 2010 and 2009,
respectively:
|
|
2010
|
|
|
2009
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
(9,334,523 |
) |
|
$ |
(1,671,529 |
) |
Investing
activities
|
|
|
(3,032,517 |
) |
|
|
(311,117 |
) |
Financing
activities
|
|
|
11,355,553 |
|
|
|
2,195,518 |
|
Net cash
used in operating activities was $9,334,523 in the nine months ended September
30, 2010, compared to net cash used in operating activities of $1,671,529 in the
comparable period of 2009. The increase in net cash used in operating activities
during the nine months ended September 30, 2010, was mainly due to increased
outstanding accounts receivable, retention receivable and other receivables
despite a significant increase in net income, as well as increased payment of
advance to suppliers and inventory, and increased restricted cash as a
performance guarantee to customers resulting from our increased
sales.
Net cash
used in investing activities was $3,032,517 during the nine months ended
September 30, 2010, compared to net cash used in investing activities of
$311,117 during the comparable period of 2009. The cash used in investing
activities in 2010 was for the purchase of property and equipment of $2.08
million, purchase of a patent of $74,988 and construction in progress of
$876,207, while cash used in investing activities in the nine months ended
September 30, 2009, was mainly for a long term investment of $87,821 into a
local credit union and construction in progress of $195,698.
Net cash
provided by financing activities was $11,355,553 in the nine months ended
September 30, 2010, compared to net cash provided by financing activities of
$2,195,518 in the same period of 2009. The increase in cash inflow in 2010
consisted of $2.43 million in cash contributions by shareholders, net proceeds
of $8.25 million received through a private placement offering, and $675,795 net
cash proceeds from bank loans net of repayment. In the same period of 2009, we
had $2.19 million in proceeds from bank loans.
Our
standard payment terms in our arrangements with our customers generally provide
that 30% of the purchase price is due upon the placement of an order, 30% is due
upon reaching certain milestones in the manufacturing process and 30% is due
upon customer inspection and acceptance of the product, which customers normally
complete within one to two weeks after delivery. As a common practice in the
manufacturing business in China, payment of the final 10% of the purchase price
is due no later than the termination date of the product warranty period, which
can be up to 24 months from the customer acceptance date. Payment terms are
negotiated on a case-by-case basis and these payment percentages and terms may
differ for each customer. We may experience payment delays from time to time of
up to six months from the due date, but we fully expect to receive all payments
based on the contracted terms despite any customer delays in payment. Our
collections are reasonably assured because the majority of our customers are
large, well-capitalized state-owned and publicly traded utility and industrial
companies with stable operations. Furthermore, we do not believe the delays have
a significant negative impact on our liquidity as payment delays are very common
in the manufacturing industry in China.
As of
September 30, 2010, the Company had an accounts receivable balance of
$11,056,451, of which $6,454,506 was current, $3,016,898 had aging over 30 days,
$1,210,276 had aging over 90 days and $374,771 had aging over 180 days. The
Company expects all accounts receivable, including those aged over 180 days as
of September 30, 2010, to be collected because the respective customers are
large state-owned or publicly listed utilities and we are confident that payment
will be received.
Recent
Accounting Pronouncements
In April
2010, the FASB codified the consensus reached in Emerging Issues Task Force
Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB Accounting
Standards Update (“ASU”) No. 2010-17 provides guidance on defining a milestone
and determining when it may be appropriate to apply the milestone method of
revenue recognition for research and development transactions. FASB ASU No.
2010-17 is effective for fiscal years beginning on or after June 15, 2010, and
is effective on a prospective basis for milestones achieved after the adoption
date. The Company does not expect this ASU will have a material impact on its
financial position or results of operations when it adopts this update on
January 1, 2011.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815,
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging – Embedded Derivatives –
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU was effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have
a material impact on the Company’s consolidated financial
statements.
On
February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855,
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of US GAAP. The FASB believes these amendments remove
potential conflicts with the SEC’s literature. The adoption of this ASU did not
have a material impact on the Company’s consolidated financial
statements.
In
October 2009, the FASB issued ASU No. 2009-13 on ASC 605, Revenue Recognition –
Multiple Deliverable Revenue Arrangement – a consensus of the FASB Emerging
Issues Task Force (ASU 2009-13). ASU 2009-13 amended guidance related to
multiple-element arrangements which requires an entity to allocate arrangement
consideration at the inception of an arrangement to all of its deliverables
based on their relative selling prices. The consensus eliminates the use of the
residual method of allocation and requires the relative-selling-price method in
all circumstances. All entities must adopt the guidance no later than the
beginning of their first fiscal year beginning on or after June 15, 2010.
Entities may elect to adopt the guidance through either prospective application
for revenue arrangements entered into, or materially modified, after the
effective date or through retrospective application to all revenue arrangements
for all periods presented. We are currently evaluating the impact, if any, of
ASU 2009-13 on our financial position and results of operations.
Off-Balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts indexed to our shares and classified as stockholder’s
equity or not reflected in our consolidated financial statements. Furthermore,
we do not have any retained or contingent interest in assets transferred to an
unconsolidated entity that serves as credit, liquidity or market risk support to
such entity. We do not have any variable interest in any unconsolidated entity
that provides financing, liquidity, market risk or credit support to us or
engages in leasing, hedging or research and development services with
us.
Contractual
Obligations
On June
2, 2009, the Company borrowed $1,398,931 and $809,907 from two Credit Unions.
Both of the loans bore interest of 10.459% with maturity dates on May 26, 2010.
These loans were not subject to any covenants and were paid in full in August
2010.
On
December 31, 2009, the Company borrowed $957,163 and $73,629 from two Credit
Unions. Both of the loans bore interest of 9.558% with maturity dates on May 26,
2010. These loans were not subject to any covenants and were paid in full in
August 2010.
All the
above loans were collateralized by the Company’s land use right, one of its
buildings and other long-lived assets.
In
February and March 2010, the Company borrowed $5,565,156 from a bank. The short
term loan bore interest of 4.425%. On March 18, 2010, the Company repaid the
loan. This loan was collateralized by one of the Company’s buildings and its
land use right.
On May
27, 2010, the Company borrowed $387,997 with interest of 5.346% from a bank. The
maturity date is November 24, 2010. The loan is collateralized by raw material
inventory and the personal guarantee of the Company’s CEO together with a third
party’s guarantee.
On
September 13, 2010, the Company borrowed $1,716,136, $895,375 and $969,990 from
three different Credit Unions, respectively. All of the loans bore interest of
7.2% with maturity dates on September 12, 2011. These loans were collateralized
by one of the Company’s buildings and its land use right.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
Not
required.
Item
4. Controls and Procedures.
Disclosure
Controls and Procedures
As of the
end of the period covered by this report, the Company conducted an evaluation
under the supervision and with the participation of the Company’s management,
including the Chief Executive Officer (“CEO”), its principal executive officer,
and Chief Financial Officer (“CFO”), its principal financial officer, of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
Act). Based on that evaluation, the CEO and CFO concluded that the
Company’s disclosure controls and procedures were effective as of the date of
that evaluation to ensure that information required to be disclosed in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Changes
in Internal Control over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during its most recently completed fiscal quarter that have materially affected,
or are reasonably likely to materially affect, its internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
CleanTech
may occasionally become involved in various lawsuits and legal proceedings
arising in the ordinary course of business. However, litigation is subject to
inherent uncertainties and an adverse result in these or other matters may arise
from time to time that may have an adverse affect on our business, financial
conditions or operating results. CleanTech is currently not aware of any such
legal proceedings or claims that will have, individually or in the aggregate, a
material adverse affect on our business, financial condition or operating
results.
Item 1A. Risk Factors.
Not
required.
Item 2. Unregistered Sales of Equity
Securities and Use of
Proceeds.
None.
Item 3. Defaults Upon Senior
Securities.
None.
Item 5. Other Information.
All
information required to be reported in a report on Form 8-K during the period
covered by this Form 10-Q has been reported.
Item 6. Exhibits.
Exhibit No.
|
|
Document Description
|
10.9
|
|
Short
Term Loan Agreement between Strong Growth Capital Ltd. and CleanTech
Innovations, Inc., dated October 14, 2010
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, as signed by the Chief Executive
Officer
|
|
|
|
32.2
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, as signed by the Chief Financial
Officer
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
CLEANTECH INNOVATIONS, INC.
|
|
|
(Registrant)
|
|
|
|
Date:
November 3, 2010
|
By:
|
/s/ Bei Lu
|
|
|
Bei
Lu
Chief
Executive Officer
(Principal
Executive
Officer)
|