ITEM 1. BUSINESS
ORGANIZATIONAL HISTORY
Universal Solar Technology, Inc. was incorporated in the State of Nevada on July 24, 2007. It operates through its wholly owned subsidiary, Kuong U Science & Technology (Group) Ltd. (“Kuong U”), a company incorporated in Macau, People’s Republic of China (“PRC”) on May 10, 2007 and its subsidiary, Nanyang Universal Solar Technology Co., Ltd. (“NUST”), a wholly foreign owned enterprise (“WFOE”) registered on September 8, 2008 under the wholly foreign-owned enterprises laws of the PRC.
In 2009, prior to construction of NUST’s factory, which is located in Henan province, PRC, we subcontracted the manufacture of photovoltaic (“PV”) modules and solar lighting systems to Zhuhai Yuemao Laser Facility Engineering Co., Ltd. (“Yuemao Laser”), a related party. In July 2010, NUST’s newly constructed factory started operations, and in September 2010, began shipping silicon wafers to the market in China. Since then, we have been devoting ourselves to extending our product lines to include higher value-added products, expanding production capacity, lowering production costs and increasing our market share.
OVERVIEW OF OUR BUSINESS
We primarily manufacture, market, and sell silicon wafers to manufacturers of solar cells. In addition, we manufacture PV modules with solar cells purchased from third parties.
Product Line 1 - Silicon Wafers
We produce silicon wafers by extracting purified mono-crystalline silicon from virgin poly-silicon feedstock utilizing mono-crystalline silicon ingot growers. Then, we cut the purified mono-crystalline silicon ingots into silicon wafers with multi-wire saws. Silicon wafers are one of the most important components in solar cells.
As of December 31, 2013, we have eleven mono-crystalline silicon ingot growers. The maximum production capacity of each mono-crystalline silicon ingot grower is approximately one ton of mono-crystalline silicon ingots per month. Our current mono-crystalline silicon ingot production capacity is approximately 132 tons per annum.
We are also equipped with five multi-wire saws, each of which can produce approximately 70 silicon wafers per kilogram of mono-crystalline silicon ingot. Based on an estimated 2.8 watts (W) per silicon wafer, our current silicon wafer production capacity is approximately 20MW per annum.
During 2013, due to a significant decrease in the selling price of our products, we were forced to suspend the production of our silicon wafer production.
Product Line 2 - PV Modules
We have two semi-automatic production lines that manufacture PV modules. Our existing production capacity is approximately 20MW of PV modules per annum. During 2013, we did not produce PV module products in commercial quantities.
Overview of Properties, Plant and Equipment
We have acquired land-use rights to 71,346 square meters in Henan Province, PRC for industrial usage. The land use rights expire on July 23, 2060. We began the construction of our manufacturing facilities on this site in 2008. As of December 31, 2013, we have completed the construction of five workshops. Two out of the five workshops are in operation with each comprises of 2,016 square meters.
As of December 31, 2013, the net book value of our property, plant and equipment was $2,914,789.
Operation
In fiscal 2013, we shipped our silicon wafers to customers primarily located in China. We plan to expand sales of our products to the EU, North America and Africa in the future.
We plan to expand the production capacity of our existing product lines through purchasing additional equipment and recruiting more employees. We also plan to produce solar cells by ourselves and provide advanced applications of solar energy to complete the value chain of this industry.
Key Financial Indicators
During fiscal 2013 and 2012, we had net sales of $159,075 and $649,616, respectively, representing a decrease of $490,541 or 76% for the fiscal year of 2013, compared to the prior comparable period. During fiscal 2013, our business generated a gross loss of $334,235; comparably, we realized a gross loss of $704,872 during fiscal year 2012. Losses from operations for fiscal 2013 and 2012 were $797,296 and $5,192,643, respectively. The net losses for fiscal 2013 and 2012 were $1,288,725 and $5,663,510, respectively.
As of December 31, 2013, we had cash of $12,250, and a net book value for property, plant, equipment and land-use rights of $3,339,350. At December 31, 2013, we had total liabilities of $16,250,596 and an accumulated deficit of $11,175,906.
During fiscal 2013, the net cash used in our operating activities was $224,376; we also raised $105,886 through related parties’ loans.
STRATEGY
Our growth strategy covers various aspects of our business.
Operating Strategies
Our operating strategy is to increase our current products’ profitability by doing the following:
(1)
Reduce production cost per unit by increasing existing production capacity and implementing tighter control over production costs;
(2)
Increase selling price of our products by actively expanding our products to potential markets; and
(3)
Lower raw materials purchasing price by increasing the amount of purchase. It is estimated that unit price of raw materials will decrease by 10% if we buy in bulk.
Expanding our production capacity will require additional equipment which will require significant cash. Also, we will need significant working capital to purchase raw materials and defray production overhead. In addition, increasing our market share will require significant marketing efforts which will also require significant capital. Our current financial condition makes raising the necessary capital extremely difficult and there is no guarantee that we will be able to do so in the near future or at all.
In fiscal 2013, the silicon wafers production industry in China underwent a major re-organization. As a result of this reorganization there are fewer although potentially stronger competitors.
Developing strategies
Our developing strategy aims to complete the value chain of solar energy industry by acquiring the ability to produce solar cells. There are two alternatives to achieve this goal.
(1).
Construct a solar cell production facility. We have reserved a block of land within our existing manufacturing facility in Henan province of the PRC, which can be utilized for three to four new workshops to produce solar cells. The advantages of constructing our own solar cell production facility include:
a)
Complete product family - The completion of a solar cell manufacturing facility will enable us to produce a full range of products for the solar energy industry, including silicon ingots, silicon wafers, solar cells, and PV modules.
b)
Higher profitability - We will gain access to substantially all added-value of the industry chain. Moreover, our overall profitability will be increased due to lower transportation costs of semi-finished products within the production processes, and better quality control of products.
Building our own solar cell manufacturing facility will require a significant investment in equipment and workshops. We estimate that we will need approximately $18 million to construct and equip a solar cell production facility. Other barriers also exist, including the lack of advanced technology, for instance, techniques to produce high quality solar cells in commercial quantities; and the shortage of qualified personnel.
(2).
Alternatively, we will look for opportunities to form strategic relationships with existing solar cell manufacturers. Developing strategic relationships in the form of long-term supply agreements with solar cell manufacturers is a quick and flexible way to indirectly gain access to solar cell production capacity.
OUR MARKET
As worldwide demand for electricity continues to increase, the electric power industry now faces several challenges:
·
Fossil fuel supply constraints: Limited supply and escalating consumption of coal, oil, and natural gas continue to drive up wholesale electricity prices, resulting in higher electricity costs for consumers.
·
Infrastructure constraints: In many parts of the world, electricity demand exceeds the capacity of existing electricity generation, transmission and distribution infrastructure.
·
Desire for energy security: As political and economic instability in key oil and natural gas producing regions increases, governments are increasingly focusing on developing reliable and secure energy sources.
·
Environmental concerns: Long-term use of fossil fuels is associated with a range of environmental issues including global warming, air and water pollution, the increased prevalence of which is driving an increased environmental awareness.
Electricity Production
The past two decades have witnessed China’s significant increase of electricity production. According to United Nations Statistical Commission, China’s gross electricity production increased from 621,200 million Kilowatt-hours in 1990 to 3,281,553 million Kilowatt-hours in 2007, with compound annual growth rate of 10.3%. Comparably, during the same period, United State’s gross electricity production increased from 3,179,247 million Kilowatt-hours to 4,348,856 million Kilowatt-hours, representing compound annual growth rate of 1.9%. Obviously, China is becoming one of the world’s largest producers of electricity. The following chart underlines gross electricity production of several major countries during the period of 1990 to 2007.
Data source: United Nations Statistical Commission (http://data.un.org)
Electricity Production Using Solar Power
Solar power, or solar energy is a source of energy that uses radiation emitted by the Sun. It is a renewable energy source that has been used in many traditional technologies for centuries. Solar power is also in widespread use where other power supplies are absent, such as in remote locations and in space. In recent years, solar energy has been used greatly in the generation of electricity.
Producing electricity with solar power has the following benefits:
Environmental Friendliness and Renewability: Solar power is one of the most environmentally friendly renewable resources available for electricity generation. It does not produce air or water emissions, noise, vibrations or any waste generation.
Peak Energy Generation Ability: Solar power is well-suited to match peak energy needs as maximum sunlight hours generally correspond to peak demand periods when electricity prices are at their highest.
Easily Located with End Users: Unlike other renewable resources such as hydroelectric and wind power, solar power can be utilized anywhere that receives sunlight and directly at the site where the power will be shed. As a result, solar power avoids the expense of, and energy losses associated with, transmission and distribution of electricity from large-scale electrical plants to end users.
No Fluctuations in Operating Costs: Unlike fossil or nuclear fuel, solar energy does not have fuel price volatility. Although there is variability in the amount and timing of sunlight over the day, season and year, a properly sized and configured system can be designed for high reliability while supplying electricity on a long-term, fixed-cost basis.
Reliability and Durability: Without moving parts or the need for periodic maintenance, solar power systems are among the most reliable forms of electricity generation. Accelerated aging tests have shown that solar modules can operate for at least 25 to 30 years without requiring major maintenance.
Modularity: Solar systems are easily modularized and scalable, and therefore can be deployed in many different sizes and configurations to meet the specific needs of the user. Solar modules are increasingly used to serve as both a power generator and the exterior of a building. Like architectural glass, PV modules can be installed on the roofs and facades of residential and commercial buildings.
Given the apparent advantages of solar power-based electricity production, many countries across the world are developing their electricity production capability with solar energy. According to United Nations Statistical Commission, in 1997 Germany produced 8 million Kilowatt-hours with solar power, while it produced 3,075 million Kilowatt-hours in 2007, denoting annual compound annual growth rate of 81.3% but only accounts for 0.5% of Germany’s gross electricity production of the 2007.
Although China has been producing much more electricity than before, its ability of producing electricity with solar power remains weak.
Data source: United Nations Statistical Commission (http://data.un.org)
The market for solar electricity production in China is promising. We believe higher demand for solar energy, furthered by concerns about global warming, will drive increases in the annual revenues of the global solar equipment industry. The interest manifested by many electricity customers in solar cells as a “green” alternative to fossil fuels is also likely to spur increases in production of high-purity silicon required for the cells, according to the report by Photon Consulting, a German research group.
Value Chain of Solar Energy Industry
Currently, Universal Solar plans to emphasize the use of silicon based technologies in its products as a majority of installed solar systems around the world employ crystalline silicon technologies. Crystalline silicon cells are manufactured using mono-crystalline silicon, multi-crystalline silicon or string ribbon technology. The crystalline silicon-based solar power manufacturing value chain starts with the processing of quartz sand to produce metallurgical-grade silicon. This material is further purified into semiconductor-grade or solar-grade polysilicon feedstock.
In the most widely used crystalline silicon-based solar manufacturing process, feedstock is melted in mono-crystalline silicon ingot growers, and then formed into ingots through a crystallization process. Ingots are cut and shaped, then sliced into wafers using high precision cutting techniques. Wafers are manufactured into solar cells through a multiple step manufacturing process that entails etching, doping, coating and applying electrical contacts. Solar cells are then interconnected and packaged to form solar modules, which together with system components such as batteries and inverters, are distributed to installers, systems integrators, service providers or directly to end-users, for installation for on-grid or off-grid systems.
Currently, we are capable of producing silicon ingots with virgin poly-silicon feedstock; cutting silicon ingots into wafers; and manufacturing PV modules with solar cells purchased from outside vendors. We plan to manufacture solar cells and other advanced applications to complete the value chain of this industry.
OUR PRODUCTS
Currently, we have two primary product lines: (1) silicon wafers and (2) PV modules.
Silicon Wafers
Currently, we are producing various types of silicon wafers. Silicon wafers are made of mono-crystalline silicon with purity over 99.9999%. Resistivity varies from one to three ohms.
The shape of silicon wafer is a square with rounded corners. Side length of square is 125mm with diameter of rounded corners of 150mm or 165mm.
PV Modules
Our PV modules are designed for large scale, grid-connected solar power plants. Currently, we purchase solar cells from outside vendors to produce PV modules.
Solar modules GYSP-160
Characteristics
Open circuit voltage (Voc): 43.2V
Optimum operating voltage (Vmp): 35V
Short circuit current (Isc): 5.1A
Optimum operating current (Imp): 4.59A
Peak power(Pm): 160W
Specifications
Monocrystalline silicon
Dimension (mm):
1588×802×45
Tolerance: ± 5%
Weight: 15.6kg
Maximum system voltage:
1000V DC
Solar modules GYSP-175
Characteristics
Open circuit voltage(Voc): 44.06V
Optimum operating voltage:
(Vmp) 35.5V
Short circuit current (Isc): 5.25A
Optimum operating current(Imp):
4.95A
Peak power(Pm): 175W
Specifications
Monocrystalline silicon
Dimension(mm):
1580×808×37
Tolerance: ±5%
Weight: 15.3kg
Maximum system voltage:
1000V DC
Solar modules GYSP-180
Characteristics
Open circuit voltage(Voc): 44.9V
Optimum operating voltage:
(Vmp) 38.6V
Short circuit current (Isc): 5.1A
Optimum operating current(Imp): 4.68A
Peak power(Pm): 180W
Specifications
Monocrystalline silicon
Dimension(mm):
1715×802×45
Tolerance: ±5%
Weight: 16.9kg
Maximum system voltage:
1000V DC
OUR PROPERTIES
Land:
On December 1, 2008, NUST acquired approximately 71,345.70 square meters in Fangcheng County, Nanyang City, Henan province of the PRC for a cost of RMB 2,886,300 (approximately $422,843). On July 27, 2010, “Certificate of Right of Use of Land” for this land was issued to NUST.
Factory:
As of December 31, 2013, we have completed five workshops, two of which are in operation. We have also built office building, dormitory and canteen in NUST’s manufacturing facility in Nanyang City, Henan province of the PRC.
RAW MATERIALS
We do not currently have agreements with any suppliers for our raw materials. Currently, the raw materials used in the manufacture of our products are readily available and to date we have not experienced any difficulty in obtaining any raw materials. We believe that these raw materials will continue to be readily available for the foreseeable future, and we do not anticipate any difficulties in obtaining any raw materials.
TARGET MARKETS AND PRINCIPAL CUSTOMERS
Our management team has engineering, product development, and international sales backgrounds in advanced laser technologies, solar cell manufacturing, and solar manufacturing machinery design and sales. We intend to leverage our strong industry contacts and relationships to develop a strong global customer pipeline.
At current stage, we mainly provide our products to meet demand of the Chinese market. We also plan to sell our solar cell and solar PV module products to customers in the EU, North America, Asia and Africa when time is right.
In fiscal 2013, four customers accounted for approximately 48%, 20%, 18% and 11% of sales, no other customer accounted for over 10% of sales. During fiscal 2012, two customers accounted for approximately 52% and 25% of our sales, comparably.
SALES AND MARKETING
We intend to develop several sales channels - direct sales, industry specific / country specific manufacturer’s sales representatives, and international strategic partnerships. The Company’s sales strategy is designed to capitalize its existing strong management relationships, rapidly growing market segments and emerging trends. Currently, the Company is focusing most of its sales efforts on Chinese market and we plan to explore markets in other countries in the future.
Direct Sales
Our executive team has the unique advantage of being able to leverage relationships from our strategic partner, Yuemao, whose business interests include steel trade, silicon laser technologies, water purifying facilities and real estate investments. The team has developed strong domestic and international relationships through their success in launching and developing an advanced laser technology company, Yuemao Laser, which focuses on serving the needs of the solar wafer and solar industry.
The executive team also handles direct sales activities, while managing operations, product line enhancements, customer care, as well as vendor and agent relationships. A dedicated direct sales force and senior sales executives will be hired to sell to targeted trade channels in China, the US and Europe. This expanded direct sales team is expected to be the major force behind our growth. Emphasis will be given to growing and qualifying large accounts, and/or high margin products across markets in the European Union member countries.
Manufacturers’ Sales Representatives
We also intend to align ourselves with a number of specialized representatives and performance based contractors. These consist of individuals or small groups, who dedicate their respective sales and marketing efforts to either a limited number of companies or particular industry segments. They are small firms, each with 1-5 salespeople that we may have under contract. They will introduce our higher margin products to potential new customers in new industry segments.
International Distribution & Strategic Partners
We are evaluating potential contracts with a number of strategic distributors and partners in international markets in Asia (outside of China), South America, and Eastern Europe. These distributors will be encouraged to enter into agreements with the Company which require each organization to produce a minimum annual “dollar” sales amount per territory.
Public Relations
We are committed to raising our profile and leveraging additional publicity. To this end, we plan to expand our dialogue with leading industry analysts and trade publications. We plan to have members of our management speak at trade conferences, and contribute articles and press releases to market-specific publications. This will encourage industry analysts to view us as a keen innovator, activist, and campaigner in the promotion of solar power across a variety of applications.
We are planning a communications campaign focusing on trade events, panel discussions, speaking engagements, white papers, pitch letters, press announcements, direct marketing and advertising. The primary goal is to reinforce sales efforts by promoting positive testimonials and success stories from our initial base of clients, while also being an advocate and educator for renewable and sustainable energy sources. By participating in seminars and industry conferences, our management team intends to develop stronger awareness and relationships with current and potential customers.
Advertising
We intend to initiate a conservative, yet effective advertising campaign in major trade publications which will identify us as a quality purveyor of new, innovative, and attractively designed solar modules and technologies.
COMPETITION
The solar energy and renewable energy industries are both highly competitive and continually evolving as participants strive to distinguish themselves within their markets and compete within the larger electric power industry. Within the renewable energy industry, Universal Solar believes that the main sources of competition are crystalline silicon solar module manufacturers, other thin film solar module manufacturers and companies that develop solar thermal and concentrated photovoltaic technologies. Among photovoltaic module and cell manufacturers, the principal methods of competition are price per watt, production capacity, conversion efficiency and reliability. We believe that we can compete favorably with respect to these factors; however, we also believe that our growing focus on providing aesthetically pleasing modular solutions and an array of value added services and products helps further differentiate us from similar peers.
Our product designs, price points, relationships, infrastructure, quality control standards, and industry contacts represent substantial competitive advantages. We maintain a substantially lower cost structure than competitors based in the US and Europe. Foreign competitors currently cannot match us on pricing, technological innovation, and efficient use of low cost manufacturing resources. Furthermore, our competitive advantage in China is protected by significant knowledge of government regulations, business practices, and strong relationships.
With respect to our Chinese competitors, we view our strong marketing abilities and flexibility in rapidly bringing new products to market as our key advantages. It should be noted that many competitors are larger and have more financial resources, larger production capacities and greater brand name recognition which may, as a result, put them in a better position to adapt to changes in the industry or the economy as a whole. Additionally, because global supply of pure silicon is becoming scarce due to high demand in solar-powered appliances and technologies, we are evaluating opportunities to acquire and/or enter into a joint-venture with a silicon mine which will help control cost pressures of related rising silicon prices.
PRINCIPAL OFFICE
Our principal office is located at No. 1 Pingbei Road 2, Nanping Science & Technology Industrial Park, Zhuhai City, Guangdong Province, the People’s Republic of China 519060.
EMPLOYEES AND ORGANIZATION
As of December 31, 2013, we had 12 full-time employees. Senior management includes 2 senior officers. We have 3 employees in our administration and accounting departments and 7 employees dedicated to production at NUST. None of our employees are covered by a collective bargaining agreement and we have never experienced a work stoppage, and we consider our labor relations to be excellent.
RESEARCH AND DEVELOPMENT
Due to financial restraints, we were unable to devote any resources to research and development in 2013 and 2012 as planned.
Subject to receipt of additional financing, we plan to devote continuously a substantial amount of resources to research and development by focusing our efforts on the following areas.
Improving conversion efficiency of solar modules: One of the most promising ways of increasing the conversion efficiency of solar modules is to maximize the number of photons that reach the absorption layer of the semiconductor material so that they can be converted into electrons, maximizing the number of electrons that reach the surface of the cadmium telluride and minimizing the electrical losses between the semiconductor layer and the back metal conductor. We believe that our ability to achieve higher module efficiencies is primarily a function of rapidly transferring new technology developments into high-throughput module production and continuously making incremental improvements to the solar module and the manufacturing process internally or in conjunction with outsourced manufactures.
Optimization of Systems: We are planning to commit resources to reduce the cost and optimize the effectiveness of components in its photovoltaic system by collecting filed performance data to identify opportunities for module and process improvement and improve the performance of systems that use our modules. In addition, the Company uses this data to enhance predictive models and simulations for the end-users.
Flexibility in Design & Quick Implementation of Innovations: We are committed to being flexible to meet customer needs and being able to evolve quickly with market innovations and demands. The Company closely monitors trends and developing technologies in order to help insure its ability to meet both current and future customer preferences.
Providing Attractive & Flexible Lighting Systems and Solar Modules: Often overlooked by competitors, we are keen to implement and market new module designs and lighting systems that allow for better building and environmental integration. Staying in tune with architectural preferences and ahead of peers will help the Company thrive and prosper.
GOVERNMENT REGULATION
This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders’ rights to receive dividends and other distributions from us.
Renewable Energy Law and Other Government Directives
In February 2005, China enacted its Renewable Energy Law, which became effective on January 1, 2006. The Renewable Energy Law sets forth policies to encourage the development and use of solar energy and other non-fossil energy. The renewable energy law sets out the national policy to encourage and support the use of solar and other renewable energy and the use of on-grid generation. It also authorizes the relevant pricing authorities to set favorable prices for the purchase of electricity generated by solar and other renewable power generation systems.
The law also sets out the national policy to encourage the installation and use of solar energy water-heating systems, solar energy heating and cooling systems, solar photovoltaic systems and other solar energy utilization systems. It also provides the general principles regarding financial incentives for the development of renewable energy projects. The projects, as listed in the renewable energy industry development guidance catalogue, may obtain preferential loans from financial institutions and can enjoy tax preferences. The State Council is authorized to stipulate the specific tax preferential treatments. However, so far, no rules have been issued by the State Council pertaining to this matter. In January 2006, China’s National Development and Reform Commission promulgated two implementation directives of the Renewable Energy Law. These directives set out specific measures in setting prices for electricity generated by solar and other renewal power generation systems and in sharing additional expenses occurred. The directives further allocate the administrative and supervisory authorities among different government agencies at national and provincial levels and stipulate responsibilities of electricity grid companies and power generation companies with respect to the implementation of the Renewable Energy Law.
China’s Ministry of Construction also issued a directive in June 2005, which seeks to expand the use of solar energy in residential and commercial buildings and encourages the increased application of solar energy in different townships. In addition, the State Council promulgated a directive in July 2005 which sets out specific measures to conserve energy resources.
Environmental Regulations
We are subject to a variety of foreign, federal, state and local governmental regulations related to environmental protection. The major environmental regulations applicable to our proposed manufacturing facility include the Environmental Protection Law of the PRC, the Law of PRC on the Prevention and Control of Water Pollution, Implementation Rules of the Law of PRC on the Prevention and Control of Water Pollution, the Law of PRC on the Prevention and Control of Air Pollution, Implementation Rules of the Law of PRC on the Prevention and Control of Air Pollution, the Law of PRC on the Prevention and Control of Solid Waste Pollution, and the Law of PRC on the Prevention and Control of Noise Pollution.
Our proposed research and development activities and manufacturing facility are expected to use, generate and discharge toxic, volatile or otherwise hazardous chemicals and wastes. If we failed to comply with present or future environmental laws and regulations, we could be subject to fines, suspension of production or a cessation of operations. In addition, under some foreign, federal, state and local statutes and regulations, a governmental agency may seek recovery and response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for the release or otherwise was not at fault.
Intellectual Property Rights
The Patent Law (1984), as amended by the Decision on Amending the Patent Law (2000), and the Implementing Rules of the Patent Law (2001), as amended by the Decision on Amending the Implementing Rules of the Patent Law (2002) provide the application and protection of patents. An invention patent shall be valid for twenty years and an external design patent and a utility model patent shall be valid for ten years, commencing on their application dates, respectively. Any persons or entities using a patent without the consent of the patent owner, making counterfeits of patented products, or conducting other activities which infringe upon patent rights will be held liable for compensation to the patent owner, fines charged by the administrative authorities and even criminal punishment.
Our success depends, in part, on our ability to conduct business without infringing on the proprietary rights of others. We rely primarily on a combination of trade secrets, as well as employee and third party confidentiality agreements to safeguard our intellectual property.
ITEM 1A.
ITEM 1A. RISK FACTORS
An investment in our common stock is speculative and involves an extremely high degree of risk and uncertainty. You should carefully consider the risks described below, together with the other information contained in this annual report, including the consolidated financial statements and notes thereto of our Company, before deciding to invest in our common stock. The risks described below are not the only ones facing our Company. Additional risks not presently known to us or that we presently consider immaterial may also adversely affect our Company. If any of the following risks occur, our business, financial condition, results of operations, and the value of our common stock could be materially and adversely affected.
RISKS RELATED TO OUR COMPANY
We are an early stage company and have limited operating history from which to evaluate our potential for future success.
Our company was formed in July 2007, and has only a short period of formation, planning, analysis and testing. In addition, we have very limited operating history under our proposed business model from which you can evaluate our business and prospects.
There can be no assurance that we will derive significant revenues from products sales.
We are an early stage company. You must consider the risks and uncertainties frequently encountered by early stage companies in new and rapidly evolving markets, including competing technologies, lack of customer acceptance of a new or an improved service or product and obsolescence of the technology before it can be fully commercialized. If we failed to address these risks and uncertainties, our business, results of operations, and financial condition will be materially and adversely affected.
If we do not obtain additional capital, we may be unable to sustain our business.
We are actively seeking additional funding, but to date have not entered into any agreements or other arrangements for such financing. There can be no assurance that the required additional financing will be available on terms favorable to us or at all.
Without additional funding, the company will not be able to pursue its business model. If adequate funds are not available or are not available on acceptable terms when required, we would be required to significantly curtail our operations and would not be able to fund the development of the business envisioned by our business model. These circumstances could have a material adverse effect on our business and ability to continue to operate as a going concern. If additional funds are raised through the issuance of equity or convertible debt securities, our then existing shareholders may experience substantial dilution, and such securities may have rights, preferences, and privileges senior to those of our common stock.
If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
As we implement our growth strategies, we may experience increased capital needs and we may not have enough capital to fund future operations without additional capital investments. Our capital needs will depend on numerous factors, including (1) our profitability; (2) the release of competitive products by competitors; (3) the level of our investment in research and development; and (4) the amount of our capital expenditures. We cannot assure you that we will be able to obtain capital in the future to meet our needs.
If we cannot obtain additional funding, we may be required to:
·
reduce our investments in research and development;
·
limit our marketing efforts; and
·
decrease or eliminate capital expenditures.
Such reductions could have a material adverse effect on our business and our ability to compete.
Even if we do find a source of additional capital, we may not be able to negotiate acceptable terms and conditions for receiving such capital. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.
We may have difficulty raising necessary capital to fund operations as a result of market price volatility of our shares of common stock.
If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies and to expand into new markets. The exploitation of our technologies may, therefore, be dependent upon our ability to obtain equity financing through debt and equity or other means. In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performance, underlying asset values or prospects of such companies.
For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces beyond our control. Such volatility may make it more difficult to find investors who are willing to invest in our common stock, or to negotiate equity financing or terms that are acceptable to us.
We have incurred losses in certain prior periods and may incur losses in the future.
We incurred a gross loss of $334,235, representing a gross loss margin of 210% during fiscal 2013; comparably our principal business generated gross loss of $704,872 during 2012, representing a gross loss margin of 109%. We have also incurred net losses of $1,288,725 and $5,663,510 for the years ended December 31, 2013 and 2012, respectively. We may incur losses in the future. We expect our costs and expenses to increase as we expand our operations. Our ability to achieve and maintain profitability depends on the growth rate of the solar power market, the continued global market acceptance of solar power products in general and our future products in particular, the pricing trend of solar power products, the competitiveness of our proposed products as well as our ability to provide new products to meet the demands of our customers and our ability to control our costs and expenses. We may not be able to achieve or sustain profitability on a quarterly or an annual basis.
There are significant risks in executing our business strategy and our business plans could change.
To execute our business plan, we will need to recruit additional employees, complete our manufacturing facility, establish a distribution channel and secure purchase orders from customers. Our ability to manage each of these factors is subject to substantial risks, including our ability to finance the costs. For example, the cost to equip our manufacturing facility and expand solar cells product lines is estimated to be approximately $18 million. If we are unable to successfully execute on our business plan, our business, results of operations, and financial condition will be materially and negatively impacted.
To maximize our potential for future growth and achieve our expected revenues, we need to manage growth in our current operations.
In order to maximize potential growth, we believe that we must establish our manufacturing and marketing operations. This will place a significant strain on our management and our operational, accounting, and information systems. We expect that as we grow we will need to improve our financial controls, operating procedures, and management information systems to handle increased operations. We will also need to effectively train, motivate, and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.
We cannot assure you that our organic growth strategy will be successful.
One of our growth strategies is to grow organically by increasing the distribution and sales of our products in new markets outside of China. However, entering new markets faces many obstacles, including the costs to entering into new markets, developing and implementing effective marketing efforts abroad, and maintaining attractive foreign exchange ratios. We cannot assure you that we will be able to successfully overcome such obstacles and establish our products in any additional markets. Our inability to successfully implement our organic growth strategy may have a negative impact on our growth strategy, our future financial condition, results of operations, and cash flows.
We cannot assure you that our acquisition growth strategy will be successful.
In addition to our organic growth strategy, we also expect to grow through strategic acquisitions. We intend to pursue opportunities to acquire businesses that are complementary or related to our existing product lines or may execute a potential joint venture or acquisition with a silicon mine or other strategic partner. We may not be able to locate suitable acquisition or joint venture candidates at prices that we successfully consider appropriate. If we do identify an appropriate candidate, we may not be able to successfully negotiate the terms of an acquisition, finance the acquisition on terms that are satisfactory to us or if the acquisition occurs successfully, integrate the acquired business into our existing business. Acquisitions of businesses or other material operations may require debt financing or additional equity financing, resulting in leverage or dilution of ownership. Integration of acquired business operations could disrupt our business by diverting management away from day-to-day operations. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. We also may not be able to maintain key employees or customers of an acquired business or realize cost efficiencies or synergies or other benefits we anticipated when selecting our acquisition candidates. In addition, we may need to record write-downs from future impairments of intangible assets, which could reduce our future reported earnings. At times, acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition which will be required to comply with laws of the People’s Republic of China (“PRC”), to the extent applicable. There can be no assurance that any proposed acquisition will be able to comply with PRC requirements, rules and/or regulations, or that we will successfully obtain governmental approvals to the extent required, which may be necessary to consummate such acquisitions.
If we are not able to implement our strategies to achieve our business objectives, our business operations and financial performance may be adversely affected.
Our business plan and growth strategy are based on currently prevailing circumstances and the assumption that certain circumstances will or will not occur, as well as the inherent risks and uncertainties involved in various stages of development. However, there is no assurance that we will be successful in implementing our strategies or that our strategies, even if implemented, will lead to the successful achievement of our objectives. If we are not able to successfully implement our strategies, our business operations and financial performance may be adversely affected.
We depend on our key management personnel and the loss of their services could adversely affect our business.
Our business management and operations significantly relied on key personnel’s services. If key personnel terminated their services with the Company, we may have risk of inability to identify qualified suitable personnel to replace them in a timely manner, and therefore, our business could be adversely affected should that occur.
Failure to attract and retain personnel could have an adverse impact on our operations.
Our future success depends on our ability to identify, attract, hire, retain and motivate other well-qualified managerial, technical, sales and marketing personnel. There is intense competition for these individuals, and there can be no assurance that these professionals will be available in the market or that we will be able to meet their compensation requirements.
RISKS RELATED TO OUR BUSINESS
If PV technology is not suitable for widespread adoption, or sufficient demand for PV products does not develop or takes longer to develop than we anticipated, our sales may not continue to increase or may even decline, and we may be unable to sustain profitability.
The PV market is at a relatively early stage of development and the extent to which PV products will be widely adopted is uncertain. Market data in the PV industry are not as readily available as those in other more established industries where trends can be assessed more reliably from data gathered over a longer period of time. If PV technology proves unsuitable for widespread adoption or if demand for PV products fails to develop sufficiently, we may not be able to grow our business or generate sufficient revenues to achieve profitability. In addition, demand for PV products in our targeted markets, including China, may not develop or may develop to a lesser extent than we anticipated. Many factors may affect the viability of widespread adoption of PV technology and demand for PV products, including:
·
availability of government subsidies and incentives to support the development of the PV industry;
·
cost-effectiveness of PV products compared to conventional and other non-solar energy sources and products;
·
performance and reliability of PV products compared to conventional and other non-solar energy sources and products;
·
success of other alternative energy generation technologies, such as fuel cells, wind power and biomass;
·
fluctuations in economic and market conditions that affect the viability of conventional and non-solar alternative energy sources, such as increases or decreases in the prices of oil, coal, natural gas and other fossil fuels;
·
cost and availability of credit, loans and other funding mechanisms to finance the installation and maintenance of PV systems. For example, a rise in interest rates would likely render existing financings more expensive and be an obstacle for potential financings that would otherwise spur the growth of the PV industry;
·
capital expenditures by end users of PV products, which tend to decrease when the economy slows down; and
·
deregulation of the electric power industry and broader energy industry.
We potentially face intense competition from other companies producing solar energy and other renewable energy products.
The PV market is intensely competitive and rapidly evolving. According to Photon International’s survey in March 2006, as of the end of 2005, 94 companies in the world produced PV cells and 153 companies produced PV modules. The solar PV industry also saw a boom in silicon production facilities around the world, responding to silicon feedstock shortages of recent years. Solar PV manufacturers were signing long-term contracts to ensure a growing supply, and silicon manufacturers are consistently announcing plans to build new plants. By the end of 2007, more than 70 silicon manufacturing facilities were being constructed or planned. (http://www.ren21.net/pdf/RE2007_Global_Status_Report.pdf, Page 19). Many of our potential competitors have established more prominent market positions, and if we fail to attract and retain customers and establish successful distribution networks in our target markets for our products, we will be unable to generate sales. Our competitors include PV divisions of large conglomerates such as Royal Sanyo Group and Sharp Corporation, specialized cell manufacturers such as Q-Cells AG, as well as integrated manufacturers of PV products such as Renewable Energy Corporation and SolarWorld AG. Some of our potential competitors have also become vertically integrated, from upstream silicon wafer manufacturing to PV system integration. We expect to compete with future entrants to the PV market that offer new technological solutions. We may also face competition from semiconductor manufacturers, a few of which have already announced their intention to start production of PV cells. Many of our potential competitors are developing or currently producing products based on new PV technologies, including thin film, ribbon, sheet and nano-technologies, which they believe will ultimately cost the same as or less than crystalline silicon technologies similar to ours. In addition, the entire PV industry also faces competition from conventional and non-solar renewable energy technologies. Due to the relatively high manufacturing costs compared to most other energy sources, solar energy is generally not competitive without government incentive programs.
Most of our potential competitors have substantially greater financial, technical, manufacturing and other resources than we do. Greater size in some cases provides them with a competitive advantage with respect to manufacturing costs because of their economies of scale and their ability to purchase raw materials at lower prices. For example, those companies that also manufacture semiconductors may source both semiconductor grade silicon wafers and solar grade silicon wafers from the same supplier. As a result, those companies may have stronger bargaining power with the supplier and have an advantage over us in negotiating favorable pricing, as well as securing silicon ingot and silicon wafer supplies at times of shortages. Many of our potential competitors also have greater brand name recognition, more established distribution networks and larger customer bases. In addition, many of our potential competitors have well-established relationships with our current and potential distributors and have extensive knowledge of our target markets. As a result, they may be able to devote greater resources to the research, development, promotion and sale of their products or respond more quickly to evolving industry standards and changes in market conditions than we can. Our failure to adapt to changing market conditions and to compete successfully with existing or new entrants may materially and adversely affect our financial condition and results of operations. Our failure to develop and introduce new PV products could render our products uncompetitive or obsolete, and reduce our sales and market share.
The PV industry is rapidly evolving and competitive. We will need to invest significant financial resources in research and development to keep pace with technological advances in the PV industry and to effectively compete in the future. However, research and development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our research results. Our significant expenditures on research and development may not reap corresponding benefits. A variety of competing PV technologies that other companies may develop could prove to be more cost-effective and have better performance than our PV products. Therefore, our development efforts may be rendered obsolete by the technological advances of others. Breakthroughs in PV technologies that do not use crystalline silicon could mean that companies such as us that currently rely entirely on crystalline silicon would encounter a sudden, sharp drop in sales. Our failure to develop and introduce new PV products could render our products uncompetitive or obsolete, and result in a decline in our market share.
Intense competition from existing and new entities may adversely affect our revenues and profitability.
We compete with other companies, many of whom are developing, or can be expected to develop, products similar to ours. Some of our competitors are more established than we are, and have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our competitors have greater name recognition and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. We intend to create greater brand awareness for our brand name so that we can successfully compete with our competitors. We cannot assure you that we will be able to compete effectively with current or future competitors or that the competitive pressures we face will not harm our business.
Our dependence on a limited number of customers may cause significant fluctuations or declines in our revenues.
We plan to sell a substantial portion of our wafers and PV modules to a limited number of customers, including distributors, engineering design firms, system integrators, other value-added resellers, as well as integrated manufacturers of PV modules. To date, we have not had any customers or any sales. We plan to conduct our sales to customers typically through non-exclusive, short-term arrangements where the contract prices are typically agreed upon between our customers and us on a quarterly basis, and as such, our actual revenues can vary significantly. We anticipate that our dependence on a limited number of customers would continue for the foreseeable future. Consequently, any one of the following events may cause material fluctuations or declines in our revenues and have a material adverse effect on our results of operations:
·
reduction, delay or cancellation of orders from one or more significant customers;
·
selection by one or more significant customers of products competitive with ours;
·
loss of one or more significant customers and our failure to identify additional or replacement customers; and
·
failure of any significant customers to make timely payment for our products.
Changes to existing regulations over the utility sector and the PV industry may present technical, regulatory and economic barriers to the purchase and use of PV products, which may significantly reduce demand for our products.
The market for power generation products is heavily influenced by government regulations and policies concerning the electric utility industry, as well as the internal policies of electric utilities companies. These regulations and policies often relate to electricity pricing and technical interconnection of end user-owned power generation. In a number of countries, these regulations and policies are being modified and may continue to be modified. End users’ purchases of alternative energy sources, including PV products, could be deterred by these regulations and policies, which could result in a significant reduction in the potential demand for our PV products. For example, utility companies commonly charge fees to larger, industrial customers for disconnecting from the electricity transmission grid or for having the capacity to use power from the electricity transmission grid for back-up purposes. These fees could increase end users’ costs of using our PV products and make our PV products less desirable, thereby having an adverse effect on our business, prospects, results of operations and financial condition.
We anticipate that our PV products and their installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters in various countries. It is also burdensome to track the requirements of individual localities and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our PV products may result in significant additional expenses to us, our distributors and end users and, as a result, could cause a significant reduction in demand for our PV products.
The reduction or elimination of government subsidies and economic incentives for on-grid solar energy applications could cause demand for our products and our revenues to decline.
Almost all of our solar cells sold are eventually utilized in the on-grid market, where the solar power systems are connected to the utility grid and generate electricity to feed into the grid. We believe that the near-term growth of the market for on-grid applications depends in large part on the availability and size of government subsidies and economic incentives. The reduction or elimination of subsidies and economic incentives may adversely affect the growth of this market or result in increased price competition, either of which could cause our revenues to decline.
Today, when upfront system costs are factored into cost per kilowatt, the cost of solar power substantially exceeds the cost of power furnished by the electric utility grid in many locations. As a result, national and local governmental bodies in many countries, most notably in Germany, Spain, Italy, the United States and China, have provided subsidies and economic incentives in the form of feed-in tariffs, rebates, tax credits and other incentives to distributors, system integrators and manufacturers of solar power products to promote the use of solar energy in on-grid applications and to reduce dependence on other forms of energy. These government economic incentives could potentially be reduced or eliminated altogether. The solar power industry is currently moving towards the economies of scale necessary for solar power to become cost-effective in a non-subsidized market. Reductions in, or eliminations of, subsidies and economic incentives for on-grid solar energy applications could result in decreased demand for our products and cause our revenues to decline.
We may incur significant costs to ensure compliance with U.S. corporate governance and accounting requirements.
We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements and other rules implemented by the Securities and Exchange Commission and the NASDAQ OTCBB. We expect all of these applicable rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
We have limited insurance coverage and may incur losses resulting from product liability claims or business interruptions.
If we secure any PV product sales, we would be exposed to risks associated with product liability claims in the event that the use of the PV products sold results in injury. Since our proposed products are electricity producing devices, it is possible that users could be injured or killed by the products, whether by product malfunctions, defects, improper installation or other causes. We have not sold any products and, due to limited historical experience, we are unable to predict whether product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. Moreover, we may have only limited product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim against us. The successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments. In addition, as the insurance industry in China is still in an early stage of development, business interruption insurance available in China offers limited coverage compared to that offered in many other countries.
Acts of terrorism, responses to acts of terrorism and acts of war may impact our business and our ability to raise capital.
Future acts of war or terrorism, national or international responses to such acts, and measures taken to prevent such acts may harm our ability to raise capital or our ability to operate, especially to the extent we depend upon activities conducted in foreign countries, such as China. In addition, the threat of future terrorist acts or acts of war may have effects on the general economy or on our business that are difficult to predict. We are not insured against damage or interruption of our business caused by terrorist acts or acts of war.
RISKS RELATED TO DOING BUSINESS IN CHINA
Currency conversion and exchange rate volatility could adversely affect our financial condition.
The PRC government imposes control over the conversion of Renminbi into foreign currencies. Under the current unified floating exchange rate system, the People's Bank of China publishes an exchange rate, which we refer to as the People’s Bank of China exchange rate, based on the previous day's dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the People’s Bank of China exchange rate according to market conditions. Pursuant to the Foreign Exchange Control Regulations of the PRC issued by the State Council which came into effect on April 1, 1996, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which came into effect on July 1, 1996, regarding foreign exchange control, conversion of Renminbi into foreign exchange by Foreign Investment Enterprises, for use on current account items, including the distribution of profits to foreign investors, is permissible. Conversion of Renminbi into foreign currencies for capital account items, including direct investment, loans, and security investment, is still under certain restrictions. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, which provides that the PRC government shall not impose restrictions on recurring international payments and transfers under current account items.
Enterprises in the PRC (including Foreign Investment Enterprises) which require foreign exchange for transactions relating to current account items, may, without approval of the State Administration of Foreign Exchange, or SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.
China’s economic policies could affect our business.
To the extent our assets will be located in China and to the extent our revenue will be derived from our operations in China, our results of business and prospects would be subject to the economic, political and legal developments in China.
While China’s economy has experienced a significant growth in the past twenty years, growth has been irregular, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China, but may also have a negative effect on us. For example, our sales results and financial condition may be adversely affected by the government control over capital investments or changes in tax regulations with our future customers.
The economy of China has been transitioning from a planned economy to a more market-oriented economy. In recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets and the establishment of corporate governance in business enterprises; however, a substantial portion of productive assets in China are still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over China's economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Because our assets and operations might be located in China, you may have difficulty enforcing any civil liabilities against us under the securities and other laws of the U.S. or any state.
We are a holding company, and all of our assets might be located in the Republic of China. In addition, our directors and officers are non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon these non-residents, or to enforce against them judgments obtained in United States courts, including judgments based upon the civil liability provisions of the securities laws of the United States or any state.
There is uncertainty as to whether courts of the Republic of China would enforce:
l
Judgments of United States courts obtained against us or these non-residents based on the civil liability provisions of the securities laws of the United States or any state; or
l
In original actions brought in the Republic of China, liabilities against us or non-residents predicated upon the securities laws of the United States or any state. Enforcement of a foreign judgment in the Republic of China also may be limited or otherwise affected by applicable bankruptcy, insolvency, liquidation, arrangement, moratorium or similar laws relating to or affecting creditors' rights generally and will be subject to a statutory limitation of time within which proceedings may be brought.
The PRC legal system embodies uncertainties, which could limit law enforcement availability.
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, decided legal cases have little precedence. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past 33 years has significantly enhanced the protections afforded to various forms of foreign investment in China. Each of our PRC operating subsidiaries and affiliates is subject to PRC laws and regulations. However, these laws and regulations change frequently and the interpretation and enforcement involve uncertainties. For instance, we may have to resort to administrative and court proceedings to enforce the legal protection that we are entitled to by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting statutory and contractual terms, it may be difficult to evaluate the outcome of administrative court proceedings and the level of law enforcement that we would receive in more developed legal systems. Such uncertainties, including the inability to enforce our contracts, could affect our business and operation. In addition, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the industries in which we operate, including the promulgation of new laws. This may include changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the availability of law enforcement, including our ability to enforce our agreements with the government entities and other foreign investors.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the establishment or acquisition of control by PRC residents of offshore entities which merely acquire "control" over domestic companies or assets, even in the absence of legal ownership; (2) adding requirements relating to the source of the PRC resident's funds used to establish or acquire the offshore entity; (i) covering the use of existing offshore entities for offshore financings; (3) purporting to cover situations in which an offshore SPV establishes a new subsidiary in China or acquires an unrelated company or unrelated assets in China; and (4) making the domestic affiliate of the SPV responsible for the accuracy of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the use of proceeds. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations, and Notice 106 makes the offshore SPV jointly responsible for these filings. In the case of an SPV which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006; this date was subsequently extended indefinitely by Notice 106, which also required that the registrant establish that all foreign exchange transactions undertaken by the SPV and its affiliates were in compliance with applicable laws and regulations. Failure to comply with the requirements of Circular 75, as applied by SAFE in accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.
We believe our stockholders who are PRC residents as defined in Circular 75 have registered with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries' ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75. We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with Circular 75, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries' ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and RMB, and between those currencies and other currencies in which our sales may be denominated. For example, if we need to convert U.S. dollars into RMB for our operational needs and the RMB appreciates against the U.S. dollar at that time, our financial position, our business, and the price of our common stock may be harmed. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.
We may be exposed to liabilities under the foreign corrupt practices act, and any determination that we violated the foreign corrupt practices act could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties and we make sales in China. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
RISKS RELATED TO CORPORATE AND STOCK MATTERS
Our stock is a penny stock. Trading of our stock may be restricted by the SEC's penny stock regulations which may limit a stockholder's ability to buy and sell our stock.
Our stock is a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation.
In addition, Rule 15g-2 requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii)reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of our restricted stock in the public marketplace could reduce the price of our common stock.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act ("Rule 144"), subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a one-year holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading -volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our company that has satisfied a two-year holding period. Any substantial sale of common stock pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse effect on the market price of our securities.
We have a high concentration of stock ownership and control, and a small number of shareholders have the ability to exert significant control in matters requiring shareholder votes and may have interests that conflict with yours.
Our common stock ownership is highly concentrated. See “Principal Shareholders.” As a result, a relatively small number of shareholders, acting together, have the ability to control all matters requiring shareholder approval, including the election of directors and approval of mergers and other significant corporate transactions. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company. It could also deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and it may affect the market price of our common stock. In deciding how to vote on such matters, those shareholders’ interests may conflict with yours.
ITEM 1B
ITEM 1B UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
Our principal executive offices are located at No. 1 Pingbei Road 2, Nanping Science & Technology Industrial Park, Zhuhai City, Guangdong Province, the People’s Republic of China 519060. This is the office of our Chairman and CEO, Mr. Wensheng Chen. Our telephone number at our principal executive office is 86-756-8682610.
We are in the process of constructing manufacturing facilities in Nanyang City, Henan Province in China. We currently have two product lines: silicon wafers and PV modules. As of December 31, 2013, five workshops, one office building, one dormitory and one canteen had been completed.
On December 1, 2008, NUST acquired land-use rights for a piece of land in the size of 71,345.70 square meters for fifty years for RMB 2,886,300 ($422,843). The land-use cost of RMB 2,886,300 ($422,843 converted at the currency exchange rate of US$1 = RMB 6.825 as of December 31, 2009) is being amortized using the straight line method over the fifty years. On July 27, 2010, the “Certificate of Right of Use of Land” has been issued to NUST, which will expire on July 23, 2060.
We maintain an Internet website at www.ustnevada.com in both Chinese and English. Information on our website is not part of this report.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are currently not involved in any litigation that could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of the Company’s subsidiaries or of the Company's subsidiaries' officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Prior to August 21, 2009, there was no active market for our securities. On August 21, 2009, our common stock began to be quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “UNSS.” The following table sets forth for the indicated periods, the high and low bid prices as reported on the OTCBB. The quotations represent inter-dealer prices without retail markup, mark down or commission, and may not necessary represent actual transactions.
SHAREHOLDERS OF RECORD
As of March 28, 2014, there were 31 holders of record of our common stock, not including holders who hold their shares in street name.
DIVIDENDS
We have never paid cash dividend on our common stock. We intend to keep future earnings, if any, to finance the expansion of our business, and we do not anticipate that any cash dividend will be paid in the foreseeable future. Our future payment of dividend will depend on our earnings, capital requirements, expansion plans, financial condition, and other relevant factors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATE
Not required for smaller reporting company.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW OF OUR BUSINESS
We primarily manufacture, market and sell silicon wafers to manufacturers of solar cells. In addition, we produce PV modules utilizing solar cells purchased from outside vendors.
Product Line 1 - Silicon Wafers
We produce silicon wafers by extracting purified mono-crystalline silicon from virgin poly-silicon feedstock utilizing mono-crystalline silicon ingot growers. Then we cut the purified mono-crystalline silicon ingots into silicon wafers with multi-wire saws. Silicon wafers are one of the most important components of solar cells.
As of December 31, 2013, we had eleven mono-crystalline silicon ingot growers. Maximum production capacity of each mono-crystalline silicon ingot grower is approximately one ton of mono-crystalline silicon ingots per month. Thus, our current production capacity is approximately 132 tons of mono-crystalline silicon ingots per annum.
We are also equipped with five multi-wire saws, each of which can produce approximately 70 silicon wafers per kilogram of mono-crystalline silicon ingot. Based on an estimated 2.8W per silicon wafer, our current production capacity is approximately 20MW per annum.
During fiscal 2013, due to a significant decrease in the selling price of our products, we were forced to suspend the production of silicon wafer.
Product Line 2 - PV Modules
We have two semi-automatic PV module production lines. Our existing production capacity is approximately 20MW of PV modules per annum. During fiscal 2013, we did not produce commercial quantities of PV modules.
Overview of Properties, Plant and Equipment
We have acquired land-use rights to 71,346 square meters in Henan province, PRC for industrial use. The land use rights expire on July 23, 2060. In 2008, we began construction of our manufacturing facilities on this site. As of December 31, 2013, we completed the construction of five workshops, two out of five are in operation.
As of December 31, 2013 and 2012, net book value of our property, plant and equipment was $2,914,789 and $3,003,289, respectively.
Operations
In fiscal 2013, we did not manufacture silicon wafers. We sold our products from existing inventory to customers primarily located in China.
Due to a significant decrease in demand of solar energy products in China, we were forced to reduce the selling price of our products by approximately 60%. This significant price decrease materially impaired our profitability. During fiscal 2013, we incurred a gross loss of $334,235, representing a gross loss margin of 210%.
During fiscal 2013 and 2012, net cash used in operating activities was $224,376 and $1,289,137, respectively.
In fiscal 2014 we plan to promote our current products’ profitability through reducing cost per unit and increasing selling price of our products. We also plan to expand our market to other countries and/or regions when time is right.
RESULTS OF OPERATIONS
Comparison of Years ended December 31, 2013 to December 31, 2012:
Revenue. Our revenue for the year ended December 31, 2013 decreased by $490,541 or 76% to $159,075, compared to $649,616 for the prior comparable period. The decrease was mainly due to a decreased amount of products sold, resulted from unexpectedly low selling price of our products.
Cost of Sales. Our cost of sales decreased by $861,178 from $1,354,488 for the year ended December 31, 2012 to $493,310 for the same period in 2013. The decrease in cost of sales was mainly due to a decreased amount of products sold, resulting from a reduction in the average selling price of our products during fiscal 2013. Gross loss margin increased from 109% in 2012 to 210% in 2013. The significant increase of gross loss margin is mainly resulting from a reduction in the average selling price of our products.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and other personnel-related costs, professional fees, etc. General and administrative expenses were $459,513 for the year ended December 31, 2013 a decrease of $250,442 or 35%, compared to $709,955 for the same period in 2012. The decrease was mainly due to tight cash flow status, which resulted in a reduction of operation.
Selling expenses. Selling expenses include salaries of sales personnel, advertising, and other selling expenses. Selling expense for the year ended December 31, 2013 and 2012 was $3,548 and $22,400, respectively. The decreased amount of selling expenses was mainly due to the restraint of our financial resources.
Impairment loss. At the end of 2012, we determined that we could no longer justify recording the book value of our equipment at its carrying value, since the reduction in the average selling price of our products, gross loss from sales and continuing losses from operation put in question our prior estimation of the anticipated cash flows from the factory. As a result, we recorded an impairment charge of $3,755,416 on the book value of the equipment. This added that amount to our operating expenses for the year. No impairment loss charged during 2013.
Non-operating Income. Non-operating income includes income generated from sales of scrap, such as worn-out carton boxes and steel wire. Non-operating income for the fiscal year of 2013 and 2012 was $8,829 and $16,132.
Interest expenses. Interest expense increased by $13,259 or 3% from $486,999 in fiscal 2012 to $500,258 in fiscal 2013. The increase in interest expense was mainly due to increased amounts borrowed from related parties.
Net Loss. The net loss decreased by $4,374,785 or 77% from $5,663,510 for the year ended December 31, 2012 to $1,288,725 for 2013. The decrease in net loss is mainly due to the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2013, we had total assets of $5,587,490 and total liabilities of $16,250,596. Cash and cash equivalents at December 31, 2013 were $12,250.
During the year ended December 31, 2013, the net cash used in operations was $224,376 and $1,289,137, for fiscal year ended 2013 and 2012, representing a decrease of $1,064,761 or 83%. The decrease was mainly due to the following: (1) during fiscal 2012, we spent $852,813 building up inventory, compared to decreased inventory of $285,136 for 2013; (2) we used $55,728 to pay accounts payable to our suppliers in fiscal 2012, comparing with $134,505 paid to our suppliers during fiscal 2013; (3) during 2013 and 2012, the Company’s depreciation of property and equipment wewe $194,127 and $644,573, respectively; and (4) during 2013 and 2012, changes of bad debt provision resulted $25,008 cash outflow and $60,614 cash inflow, respectively.
The net cash used in investing activities was $20,840 during the year ended December 31, 2013, which was used to purchase property and equipment. During the same period of 2012, the Company invested $106,508 in acquisition of property and equipment and received $150,572 from government subsidiary on property and equipment.
The net cash provided by financing activities in the fiscal year of 2013 was $105,886, a 92% decrease from $1,353,837 for the year in 2012. This decrease was mainly due to a decrease in advances received from related parties. During fiscal 2013, the Company received $105,886 from related parties, compared to $1,829,328 for the same period of 2012. However, the Company repaid $475,491 to a local financial institution during fiscal 2012.
As of December 31, 2013 and 2012, the Company had a stockholders’ deficiency of $10,663,106 and 9,191,918, respectively. Further, the Company had accumulated deficit of $11,175,906 since inception. The Company’s difficult financial position, continuous losses and low share price and inactive stock trading volume have caused difficulties for raising funds from financial market.
Related Party Loans
Mr. Wensheng Chen, Chairman and Chief Executive Officer of the Company.
As of December 31, 2013 and 2012, the amount due to Mr. Wensheng Chen was $3,201,752 and $3,204,603, respectively. During fiscal 2013 and 2012, all loans borrowed from Mr. Wensheng Chen bear an interest at the rate of 3.5% per annum, and the Company accrued interest on these loans of $117，773 and $116,775, respectively. Mr. Chen has agreed the Company can pay the accrued interest when the Company’s cash flow allows.
Ms. Ling Chen, President of the Company
During fiscal 2012, Ms. Ling Chen paid various expenses on behalf of the Company, the amount due to Ms. Ling Chen was $1,167,964 and $1,134,893 as of December 31, 2013 and 2012, respectively. During fiscal 2013 and 2012, all loans borrowed from Ms. Ling Chen bear an interest at the rate of 3.5% per annum, and the Company accrued interest on these loans of $40,253 and $29,440, respectively. Ms. Chen has agreed that the Company can pay the accrued interest when its cash flow status allows.
Yuemao Science & Technology Group (“Yuemao Technology”)
Yuemao Technology is a private company established under the laws of the PRC and controlled by our Chairman and Chief Executive Officer, Mr. Wensheng Chen. As of December 31, 2013 and 2012, the amount due to Yuemao Technology was $9,638,498 and $9,262,609, respectively. During fiscal 2013 and 2012, Yuemao Technology paid various expenses on behalf of the Company and all loans borrowed from Yuemao Technology bear an interest at the rate of 3.5% per annum. The Company accrued interest on these loans of $324,342 and $301,197, respectively. Yuemao Technology has agreed the Company can pay the accrued interest when the Company’s cash flow allows.
Zhuhai Yuemao Laser Facility Engineering Co., Ltd. (“Yuemao Laser”)
Yuemao Laser is a private company established under the laws of the PRC and controlled by our Chairman and Chief Executive Officer, Mr. Wensheng Chen. As of December 31, 2013 and 2012, the amount due to Yuemao Laser was $481,242 and $475,284, respectively. During fiscal 2013 and 2012, Yuemao Laser paid various expenses on behalf of the Company, and all loans borrowed from Yuemao Laser bear an interest at the rate of 3.5% per annum. The Company accrued interest on these loans of $16,727 and $16,499, respectively. Yuemao Laser has agreed the Company can pay the accrued interest when the Company’s cash flow allows.
Future Cash Requirements
During fiscal 2013, the Company completed the construction of three new workshops, thus NUST has five workshops in total. During fiscal 2014, the Company plans to raise approximately $18 million to complete construction of a solar cell production facility. As a result, the Company expects to require significantly greater capital resources compared to the previous fiscal year.
The Company’s cash requirements can be divided into two categories.
(1)
Capital demand in daily operations. This includes costs associated with being a public company, including legal fees, audit/review fees and other professional fees; and costs incurred by the Company’s operating subsidiary, including wages, utilities and other operating costs. The Company expects its cash requirements under this category to be approximately $120,000 per month.
(2)
Capital demand for the construction of its solar cell production facility or acquiring a company with existing solar cell production capacity. For example, if the Company’s cash flow allows, it plans to invest $18 million in NUST to further expand the Company’s current workshops in order to enable the Company to produce solar cells.
As of December 31, 2013, the Company does not have sufficient capital to meet its planned expansion. In the short-term, due to low profit margins, the Company does not expect to achieve positive cash flow. In addition, given the Company’s short operating history, it is difficult to predict when the Company would begin to generate sufficient cash to support its operations. Therefore, in the foreseeable future related-parities including the Company’s CEO, Mr. Wensheng Chen and companies that he controls intend to provide financial resources to meet the Company’s daily cash needs, as referred to in categories (1) above. The Company plans to raise funds from domestic and foreign banks and/or financial institutions to increase working capital in order to meet capital demands described in category (2) above.
Going forward, the Company anticipates that it will require an additional $18 million to build new solar cells manufacturing facilities if the Company is able to raise the funds.
Without additional funding, the Company will not be able to pursue its business model. If adequate funds are not available or are not available on acceptable terms when required, we would be required to significantly curtail our operations and would not be able to fund the development of the business envisioned by our business model. These circumstances could have a material adverse effect on our business and result in our ability to continue to operate as a going concern.
CRITICAL ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant inter-company accounts and transactions have been eliminated. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Our functional currency is the Chinese Renminbi (RMB); however, the accompanying financial statements have been translated and presented in United States dollars (USD).
Certain amounts included in the 2012 financial statement have been reclassified to conform to the 2013 financial statement presentation.
Uses of estimates in the preparation of financial statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost, determined on the weighted average method, and net realizable value. Work in progress and finished goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to complete and dispose.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight line method for financial reporting purposes, whereas accelerated methods are used for tax purposes.
Maintenance, repairs and minor renewals are charged to expense when incurred. Replacements and major renewals are capitalized.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For assets that are to be held and used, an impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.
Research and development costs
Research and development costs are charged to expenses as incurred.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
Currency translation
Since the Company operates primarily in the PRC, the Company’s functional currency is the Chinese Yuan (”RMB”). Revenue and expense accounts are translated at the average rates during the period, and balance sheet items are translated at year-end rates. Translation adjustments arising from the use of differing exchange rates from period to period are included as a separate component of shareholders’ equity. Gains and losses from foreign currency transactions are recognized in current operations.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
Income (loss) per common share
Basic income (loss) per common share amounts are calculated by dividing net income (loss) by weighted-average common stock outstanding during the period. Diluted income (loss) per common share are calculated using weighted-average shares outstanding, adjusted for the dilutive effect of shares issuable upon the assumed exercise of common stock equivalents. As of December 31, 2013 and 2012 there were no common stock equivalents outstanding.
Comprehensive income
Comprehensive income is defined to include all changes in equity except those resulting from investments by shareholders and distributions to shareholders. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation gain, net of tax.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2013, the FASB issued Accounting Standards Update No. 2013-05, Foreign Currency Matters, (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05), to resolve a diversity in accounting for the cumulative translation adjustment of foreign currency upon derecognition of a foreign subsidiary or group of assets. ASU 2013-05 requires the parent to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. Further, ASU 2013-05 clarified that the parent should apply the guidance in subtopic 810-10 if there is a sale of an investment in a foreign entity, including both (1) events that result in the loss of a controlling financial interest in a foreign entity and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date. Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events. ASU 2013-05 is effective prospectively for the Company in its first quarter of fiscal 2014, with early adoption permitted. The Company does not expect ASU 2013-05 to have a significant impact on its consolidated results of operations and financial condition.
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Income Taxes (Topic 740)(ASU 2013-11). The amendments in this update provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Company does not expect ASU 2013-11 to have a significant impact on its consolidated results of operations and financial condition.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The full text of our audited financial statements as of December 31, 2013 and 2012 begins on page of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures as defined in SEC Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this Annual Report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our CEO and CFO, to allow timely decisions regarding required disclosures. Based on their evaluation, our CEO and CFO have concluded that, as of December 31, 2013, our disclosure controls and procedures were not effective.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published consolidated financial statements. Internal control over financial reporting is promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Therefore, even effective internal control over financial reporting can only provide reasonable assurance with respect to the financial statement preparation and presentation.
Our management has conducted, with the participation of our CEO and CFO, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of December 31, 2012. Management’s assessment of internal control over financial reporting was conducted using the criteria in Internal Control over Financial Reporting - Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on such evaluation, management identified deficiencies that were determined to be a material weakness.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Because of the material weakness described below, management concluded that our internal control over financial reporting was ineffective as of December 31, 2013.
The specific material weakness identified by the Company’s management as of December 31, 2013 is described as follows:
·
The current staff in the accounting department are inexperienced in U.S. GAAP and they were primarily engaged in ensuring compliance with PRC accounting and reporting requirements. Since our operating subsidiaries are based in China, and in accordance to PRC laws and regulations, they are required to apply PRC GAAP, rather than U.S. GAAP. Our internal accounting staff need substantial training in US GAAP in order to fully meet the requirements as a U.S. public company. The accounting skills and understanding necessary to fulfill the requirements of U.S. GAAP-based reporting, including the preparation of financial statements and consolidation, are inadequate. The Company did not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of U.S. GAAP commensurate with the Company’s financial reporting requirements, which was determined to be a material weakness.
·
The Company lacks qualified resources to perform the internal audit functions properly. In addition, the scope and effectiveness of the Company’s internal audit function are yet to be developed.
·
We currently do not have an audit committee.
Remediation Initiative
·
We are committed to identifying and hiring personnel with accounting knowledge and experience to fulfill the requirements of U.S. GAAP-based reporting including the preparation of financial statements and consolidation.
·
We are committed to establishing the internal audit functions but due to limited qualified resources in the region, we were not able to hire sufficient internal audit resources before the end of 2013. However, internally we established a central management center to recruit more senior qualified people in order to improve our internal control procedures. Externally, we are looking forward to engage an accounting firm to assist the Company in improving the Company’s internal control system based on COSO Framework. In the future, we also will increase our efforts to hire the qualified resources.
·
We intend to establish an audit committee of the board of directors as soon as practicable. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls.
Conclusion
The Company does not have adequate staffing and supervision within the bookkeeping and accounting operations of our Company. The relatively small number of employees who have bookkeeping and accounting functions prevents us from segregating duties within our internal control system. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews.
As we are not aware of any instance in which the company failed to identify or resolve a disclosure matter or failed to perform a timely and effective review, we determined that the addition of personnel to our bookkeeping and accounting operations is not an efficient use of our resources at this time and not in the interest of shareholders.
Despite the material weakness and deficiencies reported above, the Company’s management believes that its consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations, and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this Annual Report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal year ended December 31, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
MANAGEMENT AND BOARD OF DIRECTORS
The following table sets forth the names and ages of our current directors and executive officers, their principal offices and positions and the date each such person became a director or executive officer of our company. Our executive officers are elected annually by the Board of Directors. Our directors serve one year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. In addition, there were no arrangements or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer. Currently, directors are not compensated for serving on the Board of Directors. We have not established compensation or executive committees. Currently, our entire board of directors serves as our audit committee. Because of the small size of the Company and the risk attendant to a small public company, we are currently unable to attract an audit committee financial expert to our Board of Directors. None of our directors are independent within the meaning set forth in the rules of NASDAQ as currently in effect.
BIOGRAPHIES OF OFFICERS AND DIRECTORS
Wensheng Chen, Chief Executive Officer & Chairman of the Board
Mr. Wensheng Chen is the founder of Universal Solar and currently serves as the Company’s Chief Executive Officer and Chairman. On December 28, 2010, our Board of Directors appointed Mr. Wensheng Chen as Interim Acting Chief Financial Officer of the Company and he served in that capacity until March 28, 2011.
Mr. Chen has over 40 years executive experience in technology manufacturing, sales, and product innovation. He is also the Founder and a current Board Member of Yuemao Laser which supplies laser scribing, cutting, welding, and grooving to solar cell and modules manufacturers such as SunTech Power Holdings. Mr. Chen worked as manager and executive at Shenyang Liming Machine Making Company from 1958 to 1984. In 1984 he founded a trading company in Beijing. In 1999, Mr. Chen established Yuemao Laser in Zhuhai City. He studied at Liaoning University and majored in TV Broadcasting from 1964 to 1967. In 1967 he continued his education by majoring in politics and philosophy. As the founder of the Company, Mr. Chen has a wealth of experience in running businesses in China, which has given him broad management expertise and a knowledge and understanding of business issues in China.
Ling Chen, President and Director
Ms. Ling Chen currently serves as the President, Treasurer, Secretary and member of the Board of Directors of Universal Solar.
Ms. Ling Chen has over twenty-five years of business consulting and advisory experience. She is the daughter of Mr. Wensheng Chen and has been a shareholder and advisor to Yuemao Laser since 1999. Ms. Ling Chen held various management positions with Shenyang Associates, a retail shopping mall company from October 1982 to November 1990. From November 1991 to 1997 she held various positions with Shenyang Shopping Mall. Ms. Chen’s experience of exploring new markets in China enables her to provide the Board with an understanding of the operation of the Chinese markets.
Mr. Weilei Lv, Chief Financial Officer
Mr. Weilei Lv, age 27, has served since December 2009 as Vice General Manager of Nanyang Universal Solar Technology Co., Ltd. (“NUST”), the Company’s wholly owned subsidiary. As the Vice General Manager of NUST, Mr. Lv was responsible (after the General Manager) for the company’s day to day operations, including purchasing, production, sales and administrative and financial operations. Prior to joining NUST from August 2008 to November 2009 Mr. Weilei Lv was the administrative assistant to the CEO of Zhuhai Yuemao Laser Facility Engineering Co., Ltd. Mr. Weilei Lv graduated from Nanchang Institute of Technology in July 2008. Mr. Lv’s extensive knowledge of solar energy and experience in marketing enables him to provide the Board with insights of solar energy industry that the Company is operating in.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of incorporation limit the liability of directors to the maximum extent permitted by Nevada law. This limitation of liability is subject to exceptions including intentional misconduct, obtaining an improper personal benefit and abdication or reckless disregard of director duties. Our articles of incorporation and bylaws provide that we may indemnify its directors, officer, employees and other agents to the fullest extent permitted by law. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We currently do not have such an insurance policy.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted for our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Director Compensation
Currently, the Company’s Board of Directors does not include any independent members and the Company does not compensate any member for his or her service on the Company's Board.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires executive officers and directors and persons who own more than 10% of a registered class of equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities on forms 3, 4 and 5 respectively. We do not have a class of securities registered under the Securities Exchange Act of 1934. As a result, our officers and directors and 10% shareholders are not subject to the reporting requirements of Section 16(a).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Mr. Wensheng Chen received no compensation as Chief Executive Officer during fiscal 2013 and 2012.
Mr. Weilei Lv received a salary of RMB 10,000 per month (approximately $1,600) during years ended December 31, 2013 and 2012. Mr. Lv is also entitled to a three (3) month severance package of salary and benefits if his employment is terminated without cause or in the event of a merger, sale of assets, or dissolution of the Company.
Ms. Ling Chen served as President, Treasurer and Secretary and received no compensation for the years ended December 31, 2013 and 2012.
No other executive officer earned more than $100,000 during 2013 or 2012.
Option exercises and vested stock
None of our executive officers exercised any options or vested in any restricted stock in 2013.
Outstanding equity awards
None of our executive officers has any outstanding options, unvested stock or equity incentive plan awards.
Employment Agreements; Termination of Employment and Change of Control Arrangements
On December 29, 2011, our Board of Directors appointed Weilei Lv as Chief Financial Officer.
On April 14, 2014, the Company extended its employment agreement with Mr. Weilei Lv for two years, which the Company will pay Mr. Lv a salary of RMB 10,000 per month (approximately $1,600). Mr. Lv is also entitled to a three (3) month severance package of salary and benefits if his employment is terminated without cause or in the event of a merger, sale of assets, or dissolution of the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial ownership of common stock as of March 28, 2014 by each of our directors, each of our named executive officers; all executive officers and directors as a group and each person who is known by us to beneficially own more than 5% of our outstanding common stock. Except as otherwise indicated, all persons listed below have (i) sole voting power and investment power with respect to their shares of Common Stock, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their shares of stock. The percentage of beneficial ownership is based upon 22,599,974 shares of Common Stock outstanding as of March 28, 2014. Unless otherwise identified, the address of the directors, officers of the Company listed above is the company’s principal business address.
* Less than 1%.
(1) Includes 5,000,000 shares held by Yumin Liu, Mr. Chen’s wife.
(2) Shares are held by Xiaodong Wu, Ms. Chen’s husband.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Founders of Universal Solar and Kuong U were previously engaged in developing PV modules and PV applications through the solar energy department at Yuemao Laser. Yuemao Laser's parent company is Yuemao Science & Technology Group (“Yuemao Technology”). Yuemao Technology’s shareholders are our Chairman and largest shareholder, Mr. Wensheng Chen with 50% ownership, Ms. Hui Chen 25% ownership, and Ms. Ling Chen 25% ownership. Hui Chen and Ling Chen (our President and member of the Board) are daughters of Wensheng Chen (our Chairman of the Board and Chief Executive Officer).
Mr. Wensheng Chen, Chairman and Chief Executive Officer of the Company.
As of December 31, 2013 and 2012, the amount due to Mr. Wensheng Chen was $3,201,752 and $3,204,603, respectively. During fiscal 2013 and 2012, all loans borrowed from Mr. Wensheng Chen bear an interest at the rate of 3.5% per annum, and the Company accrued interest on these loans of $117，773 and $116,775, respectively. Mr. Chen has agreed the Company can pay the accrued interest when the Company’s cash flow allows.
Ms. Ling Chen, President of the Company
During fiscal 2012, Ms. Ling Chen paid various expenses on behalf of the Company, the amount due to Ms. Ling Chen was $1,167,964 and $1,134,893 as of December 31, 2013 and 2012, respectively. During fiscal 2013 and 2012, all loans borrowed from Ms. Ling Chen bear an interest at the rate of 3.5% per annum, and the Company accrued interest on these loans of $40,253 and $29,440, respectively. Ms. Chen has agreed that the Company can pay the accrued interest when its cash flow status allows.
Yuemao Science & Technology Group (“Yuemao Technology”)
Yuemao Technology is a private company established under the laws of the PRC and controlled by our Chairman and Chief Executive Officer, Mr. Wensheng Chen. As of December 31, 2013 and 2012, the amount due to Yuemao Technology was $9,638,498 and $9,262,609, respectively. During fiscal 2013 and 2012, Yuemao Technology paid various expenses on behalf of the Company and all loans borrowed from Yuemao Technology bear an interest at the rate of 3.5% per annum. The Company accrued interest on these loans of $324,342 and $301,197, respectively. Yuemao Technology has agreed the Company can pay the accrued interest when the Company’s cash flow allows.
Zhuhai Yuemao Laser Facility Engineering Co., Ltd. (“Yuemao Laser”)
Yuemao Laser is a private company established under the laws of the PRC and controlled by our Chairman and Chief Executive Officer, Mr. Wensheng Chen. As of December 31, 2013 and 2012, the amount due to Yuemao Laser was $481,242 and $475,284, respectively. During fiscal 2013 and 2012, Yuemao Laser paid various expenses on behalf of the Company, and all loans borrowed from Yuemao Laser bear an interest at the rate of 3.5% per annum. The Company accrued interest on these loans of $16,727 and $16,499, respectively. Yuemao Laser has agreed the Company can pay the accrued interest when the Company’s cash flow allows.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDITOR FEES AND SERVICES IN OUR 2013 AND 2012 FISCAL YEARS
Our registered independent public accounting firm is Paritz & Company, P.A. The fees billed by Paritz & Company, P.A. in 2013 and 2012 are as follows:
Audit Fees consist of fees billed for professional services rendered for the audit of the Company’s consolidated annual financial statements, and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Paritz & Company, P.A. in connection with statutory and regulatory filings or engagements.
AUDIT-RELATED FEES
Audit-Related Fees include accounting consultations related to accounting, financial reporting or disclosure matters not classified as “Audit Fees.”
TAX FEES
Tax Fees include tax compliance, tax advice and tax planning services. These services related to the preparation of various state and federal tax returns and review of Section 409A compliance.
ALL OTHER FEES
We incurred no other fees for the 2013 and 2012 fiscal years.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
Since we did not have a formal audit committee, our board of directors served as our audit committee. We have not adopted pre-approval policies and procedures with respect to our accountants in fiscal 2013. All of the services provided and fees charged by our independent registered accounting firms in fiscal 2012 were approved by the board of directors.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
Set forth below is a list of our audited financial statements included in Item 8 of this annual report on Form 10-K.
(2) Financial Statement Schedules
Schedule I: Parent Only Financial Statements (page S-1)
(b) Index to Exhibits required by Item 601 of Regulation S-K.
*Filed herewith
(1) Filed as an exhibit to the Company’s Registration Statement on Form S-1 on May 9, 2008.
(2) Filed as an exhibit to the Company’s Annual Report on Form 10-K on March 31, 2010.
(3) Filed as an exhibit to the Company’s Annual Report on Form 10-K/A on December 30, 2010.
(4) Filed as an exhibit to the Current Report on Form 8-K on June 23, 2010.
(5) Filed as an exhibit to the Current Report on Form 8-K on March 28, 2011.
(6) Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q on May 6, 2011.
(7) Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q on August 12, 2011.
(8) Filed as an exhibit to the Current Report on Form 8-K on December 30, 2011.
(9) Filed as an exhibit to the Company’s Annual Report on Form 10-K on March 28, 2013.
(10) Filed as an exhibit to the Company’s Annual Report on Form 10-K on March 28, 2013.
(11) Filed as an exhibit to the Company’s Annual Report on Form 10-K on March 30, 2011.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: April 14, 2014
Universal Solar Technology, Inc.
By
/s/ Wensheng Chen
Wensheng Chen
Chief Executive Officer, Chairman of the Board of Directors
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Board of Directors and the Stockholders of
Universal Solar Technology, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Universal Solar Technology Inc. and Subsidiaries as of December 31, 2013 and 2012 and the related consolidated statements of comprehensive loss, changes in stockholders’ deficiency and cash flows for the years then ended. Our audit also included the financial statement Schedule I. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Universal Solar Technology, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in Note 3 to the accompanying financial statements, the Company had not generated cash from its operation, had a stockholders’ deficiency of $ 10,663,106 and had incurred net loss of $ 11,175,906 since inception. These circumstances, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Paritz & Company, P.A.
Hackensack, New Jersey
April 14, 2014
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
1.
BUSINESS DESCRIPTION
Universal Solar Technology, Inc. (the “Company”) was incorporated in the State of Nevada on July 24, 2007. The Company operates through its wholly-owned subsidiaries, Kuong U Science & Technology (Group) Ltd. (“Kuong U”), a company incorporated in Macau, Peoples Republic of China (“PRC”) on May 10, 2007, and Nanyang Universal Solar Technology Co., Ltd. (“NUST”), a company incorporated in Nanyang, PRC on September 8, 2008. The Company sells silicon wafers and solar photovoltaic (“PV”) modules.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant inter-company accounts and transactions have been eliminated. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
Currency translation
The reporting currency of the Company is the United States dollar. The functional currency of Kuong U is the Hong Kong dollar. The functional currency of NUST is the Chinese Yuan (”RMB”). Revenue and expense accounts of our two subsidiaries are translated into United States dollars at the average rates during the period, and balance sheet items are translated at year-end rates, except for equity accounts which are translated at historical rates. Translation adjustments arising from the use of differing exchange rates from period to period are included as a separate component of shareholders’ equity. Gains and losses from foreign currency transactions are recognized in current operations.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
Uses of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. Actual results could differ from those estimates.
Cash
The Company maintains cash with financial institutions both in the United States and the People’s Republic of China (“PRC”). The financial institutions in PRC are not insured or otherwise protected. Should any of these institutions holding the Company’s cash become insolvent, or if the Company is unable to withdraw funds for any reason, the Company could lose the cash on deposit with that institution.
Accounts Receivable
Accounts receivables represent customer accounts receivables. The allowance for doubtful accounts is based on a combination of current sales, historical charge-offs and specific accounts identified as high risk. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when all reasonable efforts to collect the amounts due have been exhausted. Such allowances, if any, would be recorded in the period the impairment is identified. The Company performs ongoing credit evaluations of its customers and establishes an allowance for doubtful accounts when amounts are not considered fully collectable. The allowance for doubtful accounts was $37,776 and $61,384 for the year ended December 31, 2013 and 2012, respectively.
UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Inventories
Inventories are stated at the lower of cost, determined on the weighted average method, and net realizable value. Work in progress and finished goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to complete and dispose. The Company recorded inventory markdown allowance of $176,432 and $403,501 for the year 2013 and 2012, respectively.
Property and equipment
Property and equipment are recorded at cost. Once placed in service, depreciation is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight line method.
Maintenance, repairs and minor renewals are charged to expense when incurred. Replacements and major renewals are capitalized.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For assets that are to be held and used, an impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value. At the end of 2012, the Company determined that it could no longer justify recording the book value of the equipment at its carrying value and recorded an impairment charge of $3,755,416 on the book value of the equipment.
Revenue recognition
Revenue from product sales is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) the price is fixed or determinable, (3) collectibility is reasonably assured, and (4) delivery has occurred. Persuasive evidence of an arrangement and fixed price criteria are satisfied through purchase orders. Collectibility criterion is satisfied through credit approvals. Delivery criterion is satisfied when the products are shipped to a customer and title and risk of loss pass to the customer in accordance with the terms of sale. The Company has no obligation to accept the return of products sold other than for replacement of damaged products. Other than quantity price discounts negotiated with customers prior to billing and delivery (which are reflected as a reduction in sales), the Company does not offer any sales incentives or other rebate arrangements to customers.
Research and development costs
Research and development costs are charged to expenses as incurred. The research and development costs were zero for both the fiscal years of 2013 and 2012.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Income (loss) per common share
Basic income (loss) per common share amounts is calculated by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted income (loss) per common share are calculated using weighted-average shares outstanding, adjusted for the dilutive effect of shares issuable upon the assumed exercise of common stock equivalents. As of December 31, 2013 and 2012 there were no common stock equivalents outstanding.
Comprehensive income (loss)
Comprehensive income (loss) is defined to include all changes in equity except those resulting from investments by shareholders and distributions to shareholders. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income (loss) are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income (loss) and the foreign currency translation adjustment, net of tax.
Fair value of financial instruments
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying values of cash and cash equivalents, trade receivables and payables, and accrued liabilities approximate their fair values due to their short maturities.
There were no assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2013 and 2012.
Recent accounting pronouncements
In March 2013, the FASB issued Accounting Standards Update No. 2013-05, Foreign Currency Matters, (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05), to resolve a diversity in accounting for the cumulative translation adjustment of foreign currency upon derecognition of a foreign subsidiary or group of assets. ASU 2013-05 requires the parent to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. Further, ASU 2013-05 clarified that the parent should apply the guidance in subtopic 810-10 if there is a sale of an investment in a foreign entity, including both (1) events that result in the loss of a controlling financial interest in a foreign entity and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date. Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events. ASU 2013-05 is effective prospectively for the Company in its first quarter of fiscal 2014, with early adoption permitted. The Company does not expect ASU 2013-05 to have a significant impact on its consolidated results of operations and financial condition.
UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Income Taxes (Topic 740)(ASU 2013-11). The amendments in this update provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Company does not expect ASU 2013-11 to have a significant impact on its consolidated results of operations and financial condition.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
3.
GOING CONCERN
The financial statements have been prepared on a “going concern” basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. At December 31, 2013, the Company had not generated cash from its operations, had a stockholders’ deficiency of $10,663,106, and has incurred net losses of $11,175,906 since inception. These factors, among others, raise substantial doubt as to the Company’s ability to continue as a going concern. The Company plans to improve its financial condition by raising capital in a private placement of its securities. However, there can be no assurance that the Company will be successful in accomplishing this objective. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. The Company’s CEO, Mr. Wensheng Chen and companies that he controls intend to provide financial resources to meet the Company’s daily cash needs. The Company plans to raise funds from domestic and foreign banks and/or financial institutions to increase working capital in order to meet capital demands.
4.
INVENTORIES
As of December 31, 2013 and 2012, inventories, net, consist of:
5.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of December 31, 2013 and 2012, prepaid expenses and other current assets consist of:
UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
6.
LAND-USE RIGHT
On December 1, 2008, NUST acquired the right to use a block of land of 71,345.70 square meters for fifty years the local government in the PRC, which is used for its office and production facilities. The cost of RMB 2,886,300 ($422,843 translated at the December 31, 2009 exchange rate) is being amortized using the straight line method over the fifty years’ time. On July 27, 2010, the “Certificate of Right of Use of Land” has been issued to NUST.
As of December 31, 2013 and 2012, the net value of land use right was $424,561 and $421,420, respectively.
7.
PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2013 and 2012, property, plant and equipment, net, consist of:
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 2013 and 2012, accrued expenses and other current liabilities consist of:
9.
DUE TO RELATED PARTIES
Due to related parties consists of:
Both Yuemao Laser and Yuemao Technology are PRC companies and controlled by the Company’s chairman and Chief Executive Officer, Mr. Wensheng Chen.
UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Mr. Wensheng Chen, Chairman and Chief Executive Officer of the Company.
As of December 31, 2013 and 2012, the amount due to Mr. Wensheng Chen was $3,201,752 and $3,204,603, respectively. During fiscal 2013 and 2012, all loans borrowed from Mr. Wensheng Chen bear an interest at the rate of 3.5% per annum, and the Company accrued interest on these loans of $117，773 and $116,775, respectively. Mr. Chen has agreed the Company can pay the accrued interest when the Company’s cash flow allows.
Ms. Ling Chen, President of the Company
During fiscal 2012, Ms. Ling Chen paid various expenses on behalf of the Company, the amount due to Ms. Ling Chen was $1,167,964 and $1,134,893 as of December 31, 2013 and 2012, respectively. During fiscal 2013 and 2012, all loans borrowed from Ms. Ling Chen bear an interest at the rate of 3.5% per annum, and the Company accrued interest on these loans of $40,253 and $29,440, respectively. Ms. Chen has agreed that the Company can pay the accrued interest when its cash flow status allows.
Yuemao Science & Technology Group (“Yuemao Technology”)
Yuemao Technology is a private company established under the laws of the PRC and controlled by our Chairman and Chief Executive Officer, Mr. Wensheng Chen. As of December 31, 2013 and 2012, the amount due to Yuemao Technology was $9,638,498 and $9,262,609, respectively. During fiscal 2013 and 2012, Yuemao Technology paid various expenses on behalf of the Company and all loans borrowed from Yuemao Technology bear an interest at the rate of 3.5% per annum. The Company accrued interest on these loans of $324,342 and $301,197, respectively. Yuemao Technology has agreed the Company can pay the accrued interest when the Company’s cash flow allows.
Zhuhai Yuemao Laser Facility Engineering Co., Ltd. (“Yuemao Laser”)
Yuemao Laser is a private company established under the laws of the PRC and controlled by our Chairman and Chief Executive Officer, Mr. Wensheng Chen. As of December 31, 2013 and 2012, the amount due to Yuemao Laser was $481,242 and $475,284, respectively. During fiscal 2013 and 2012, Yuemao Laser paid various expenses on behalf of the Company, and all loans borrowed from Yuemao Laser bear an interest at the rate of 3.5% per annum. The Company accrued interest on these loans of $16,727 and $16,499, respectively. Yuemao Laser has agreed the Company can pay the accrued interest when the Company’s cash flow allows.
10.
MAJOR CUSTOMER
During the year 2013, four customers accounted for approximately 47.6%, 20.4%, 17.9% and 10.5% of sales, respectively. No other single customer accounted for over 10% of sales. During the twelve months ended December 31, 2012, the Company has sold all of its products to customers located in China. Two customers accounted for 51.6% and 24.5% of sales, respectively.
11.
INCOME TAXES
The Company’s Chinese subsidiaries are governed by Income Tax Law of the PRC concerning private-run enterprises, which are generally subject to taxes at a statutory rate of 25% on income reported in the statutory financial statements prepared in accordance with PRC GAAP after appropriate tax adjustments. Operating loss can be carryforwarded for five years in China and 20 years in the U.S.
As of December 31, 2013, the Company had approximately $10,500,000 and $600,000 of net operating loss carryforwards for income tax purposes in China and the United States, respectively, which will expire between 2014 and 2030.
Based on management's present assessment, the Company has determined that it is more likely than not a deferred tax asset attributable to the future utilization of the net operating loss carry-forward as of December 31, 2013 will not be realized. Accordingly, the Company has provided a 100% allowance against the deferred tax asset in the financial statements at December 31, 2013. The Company will continue to review this valuation allowance and make adjustments as appropriate.
UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
The comparison of income tax expense at the U.S. statutory rate of 35% in 2013 and 2012, to the Company's effective tax rate is as follows:
12.
COMMITMENTS AND CONTINGENCIES
Vulnerability due to operations in PRC
The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years, there is no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.
The PRC has adopted currency and capital transfer regulations. These regulations require that the Company comply with complex regulations for the movement of capital. Because most of the Company’s future revenues will be in RMB, any inability to obtain the requisite approvals, or any future restrictions on currency exchanges, will limit the Company’s ability to fund its business activities outside China or to pay dividends to its shareholders.
The Company’s assets will be predominantly located inside China. Under the laws governing foreign invested enterprises in China, dividend distribution and liquidation are allowed, but subject to special procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to the relevant government agency’s approval and supervision, as well as the foreign exchange control.
In addition, the results of business and prospects are subject, to a significant extent, to the economic, political and legal developments in China.
While China’s economy has experienced significant growth in the past twenty years, growth has been irregular, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China, but may also have a negative effect on the Company. The Company’s sales and financial condition may be adversely affected by the government control over capital investments or changes in tax regulations.
Foreign companies conducting operations in the PRC face significant political, economic and legal risks. The Communist regime in the PRC includes a stifling bureaucracy which may hinder Western investment. Any new government regulations or utility policies pertaining to the Company’s PV products may result in significant additional expenses to the Company, Company distributors and end users and, as a result, could cause a significant reduction in demand for the Company’s PV products.
13.
SUBSEQUENT EVENTS
In accordance with ASC 855, “Subsequent Events,” the Company has evaluated subsequent events that have occurred after the date of the balance sheet through the date of issuance of these financial statements and has determined that there was no material event need to be disclosed, other than discussed above.
Schedule I: Condensed Parent Only Financial Statements
S-1
S-2
S-3