ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is quoted on the OTC Bulletin Board under the symbol “CGRE.”
The following table sets forth, for the periods indicated, the high and low closing bid prices of our common stock. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
(1)
The above table sets forth the range of high and low closing bid prices per share of our common stock as reported by www.quotemedia.com for the periods indicated.
Approximate Number of Holders of Our Common Stock
As of April 13, 2012, there were approximately 277 holders of record of our common stock. This number excludes the shares of our common stock owned by stockholders holding stock under nominee security position listings.
Dividend Policy
We have never declared dividends or paid cash dividends. Any future decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our stockholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
We do not have any compensation plans in effect under which our equity securities are authorized for issuance.
Recent Sales of Unregistered Securities
We have not sold any equity securities during the 2011 fiscal year that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the 2011 fiscal year.
Purchases of Equity Securities
No repurchases of our common stock were made during the fourth quarter of 2011.
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements. Our financial statements are prepared in U.S. dollars and in accordance with United States generally accepted accounting principles.
Overview
We manufacture and distribute clean technology-based consumer products, including LEVs and cryogen-free refrigerators. We also manufacture and distribute network and HDMI cables. We sell some of our products under our own brand name of “BEST” and the balance of our products as an OEM for other companies, who are our customers. On January 25, 2011, we acquired the “NICONIA LEV” brand name which we believe will compliment our line of LEVs. At end of 2011, we have expanded our LEVs Market and sustained a steady group of distributions.
We will make greater effort to expand LEVs Market in 2012, especially around U.S. and Europe, where green energy technology is in high demand.
Our corporate headquarters and manufacturing base are located in Changzhou, PRC, where we own an aggregate of approximately 46,800 square meters of manufacturing facilities and office space. We own the right to use a total of 49,900 square meters of land in China. Our annual manufacturing capacity for our LEVs, Cryogen-free refrigerators and sets of network and HDMI cables (combined) is 35,000 units, 115,000 units and 25 million sets, respectively.
Executive Overview of Financial Results
Principal Factors Affecting our Financial Performance
We believe that the following factors will continue to affect our financial performance:
Growth of China’s LEV and Small Appliances Markets. The Chinese market for LEVs is very large and has been growing rapidly. According to the China Electronic Components Association, 29.7 million LEVs were sold in China in 2011 with 2004 to 2011 CAGR of 23%. We believe the rapid growth of the markets will increase the demand for our products.
Heightened Environmental Awareness. As people become more aware of the significance of environmental protection, we believe that many consumers will choose products with clean technology such as cryogen-free refrigerators or LEVs which will help reduce carbon dioxide emissions.
Government Policies Promoting the Use of Clean Technology. China has increased its investment in clean technology in recent years. Its economic stimulus package invested $221 billion in technology for reducing greenhouse-gas emissions. We believe that the government policies will have a positive impact on the sales of our products.
Results of Operations
The following table sets forth key components of our results of operations during the fiscal years ended December 31, 2011 and 2010, both in dollars and as a percentage of our revenues.
Revenues. Our revenues decreased by $3.7 million, or 12.9%, to $24.9 million in 2011, from $28.6 million in 2010. The decrease was due primarily to a decrease in sales of both cable products and refrigerators. Revenue of cable products decreased by 26.7% from $18.4 million in 2010 to $13.5 million in 2011. The decrease was mainly due to reduced customer demand as a result of general market decline and the loss of a larger customer in the latter half of 2010. Revenue from refrigerators decreased by 54.7% from $9.5 million in 2010 to $4.3 million in the 2011. The decrease was mainly due to reduced customer demand as a result of general market decline. We experienced an increase in LEV sales from $0.7 million in 2010 to $7.2 million in 2011. The increase was largely attributable to the acquisition of the Niconia LEV brand. We were able to increase our production volume to satisfy expected orders with our existing manufacturing capacity.
On a geographic basis, revenues generated from outside of China was approximately $10.5 million, or 42.4% of the total revenues, for 2011, as compared to $10.5 million, or 36.8% of the total revenues, for 2010. The increase was mainly resulted from our efforts to expand product penetration into new and existing markets and foster acceptance of our products in the international markets.
The following table sets forth revenues by business segment and by geography for the years ended December 31, 2011 and 2010.
Cost of revenues. Cost of revenues consists primarily of materials costs, wages, employee compensation, depreciation and amortization and other costs, which are directly attributable to the production of products. Our cost of revenues increased by $0.7 million, or 3.3%, to $21.1 million in 2011, from $20.4 million in 2010. As a percentage of revenues, our cost of revenues increased from 71.3% in 2010 to 84.6% in 2011. The increase was primarily due to increased raw material prices and fixed production costs .
Gross profit. Our gross profit is equal to the difference between our revenue and our cost of revenues. Our gross profit decreased by $4.4 million, or 53.2%, to $3.8 million in 2011, from $8.2 million in 2010. Such decrease was generally in line with our increased cost of revenues, attributed to the increase in raw material costs and fixed production costs. Gross profit as a percentage of revenue was 15.4% and 28.7% for the years ended December 31, 2011 and 2010, respectively. Such decrease was principally attributed to the increase in raw material cost. Copper is one of the key raw materials for our HDMI cable product. In 2011, copper prices fluctuated significantly worldwide beyond our expectations, especially during the third quarter of the year. During the year, we locked down selling prices of cables with certain customers, however, we did not lock down purchase prices of copper with our suppliers. As a result, the gross profit on cable sales were significantly reduced. Since first quarter of 2012, the copper prices have become stable. We have also implemented a new approach in order to manage gross profit, whereby, we will lock down prices of key raw materials before we lock down selling prices with customers.
In addition, we expanded LEV production in 2011 as a result of the newly purchased brand name of Niconia LEV. Accordingly, we identified new suppliers throughout the year but we were not able to manage costs for LEV materials in the first year of LEV production. At end of 2011, we have established a group of selective and stable suppliers with who we have negotiated competitive prices based on long-term relationships. We believe the cost of LEV materials will be more manageable and will reduce accordingly.
General and administrative expenses. General and administrative expenses consist primarily of office expenses, professional fees, certain reserves and provisions, entertainment, traveling expenses, staff welfare, consumables, labor protection and salaries and wages which are incurred at the administrative level and foreign exchange differences. Our general and administrative expenses increased by $2.1 million, or 102.5%, to $4.1 million in 2011, from $2.0 million in 2010. Such increase was attributable to increased payroll expenses by approximately $0.7 million resulting from an increase in staff due to the expansion of the LEV business, as well as additional bad debt reserve by approximately $1.0 million due to the aging of trade accounts receivable and provision for loans and guaranty obligation for loans to others by approximately $0.3 million, which was not accrued in fiscal year 2010.
Selling expenses. Selling expenses consist primarily of advertising, salaries and transportation costs incurred in connection with selling activities. Our selling expenses increased by $0.6 million, or 87.7%, to $1.2 million in 2011, from $0.6 million in 2010. The increase was primarily attributable to increased spending on marketing and exhibitions for all products lines by approximately $0.2 million compared to that in 2010.
Interest expenses. Our interest expenses increased by $0.3 million, or 62.1%, to $0.8 million for 2011, from $0.5 million for 2010. Such increase was mainly due to an increase in bank loans.
Income (loss) before income taxes. Our income (loss) before income taxes decreased $7.9 million, to a $2.3 million loss in 2011, from $5.6 million in income in 2010, as a result of the factors described above.
Income taxes. We had no income expense for 2011, a decrease of $1.4 million from an income tax expense of $1.4 million for 2010. This decrease in income tax expense was due to the decrease in our taxable profit.
Net income (loss). As a result of the factors described above, we generated a net loss of $2.3 million in 2011, a decrease of $6.4 million, from a net income of $4.1 million in 2010.
Liquidity and Capital Resources
As of December 31, 2011, we had cash and cash equivalents of approximately $1.0 million, primarily consisting of cash on hand and demand deposits. The following table provides a summary of our net cash flows from operating, investing, and financing activities.
Cash Flow
Operating Activities
Net cash used in operating activities was $4.4 million for 2011, as compared to $3.3 million net cash provided by operating activities for 2010. The decrease was primarily attributable to (i) net income decreasing by $6.4 million, (ii) increase in inventories of $1.2 million, (iii) increase in prepayments and other current assets by $4.7 million, and (iv) decrease in payables (including accounts payable, accrued liabilities and other payables and income tax payable) of $10.1 million, mostly offset by an increase in trade accounts receivable of $9.8 million.
Investing Activities
Net cash used in investing activities for 2011 was $10.3 million, as compared to $6.1 million for 2010. The increase in net cash used in investing activities was mainly attributable to (i) an increase in spending on intangible assets by $2.0 million primarily resulting from the purchase of the Niconia LEV brand and (ii) additional restricted cash deposit requirements of $7.3 million as a result of the issuance of bills payable.
Financing Activities
Net cash provided by financing activities for 2011 was $14.6 million, as compared to $3.1 million for 2010. The increase was mainly attributable to increase in bills payable of $12.7 million, partially offset by an increase in bank loans of $1.2 million.
As of the date of the report, we are party to several loan and bill acceptance agreements as follows:
Loan Agreements:
Loan Agreement between Best Cable and Wujin Rural Commercial Bank, pursuant to which Wujin Rural Commercial Bank provided a loan with a total amount of RMB1,450,000 (approximately $227,800) at December 31, 2011. The loan matures on June 20, 2012. The annual interest rate is 8.75%. The loan outstanding at December 31, 2011 totaled approximately $227,800.
Loan Agreements between Best Cable and Wujin Agriculture Bank, pursuant to which we borrowed RMB3,000,000 (approximately $471,300) in August 2011, for a term maturing June 25, 2012. The annual interest rate is 7.21%. We borrowed RMB5,000,000 (approximately $785,500) in November 2011, for a term maturing February 2012. The annual interest rate is 6.41%. We borrowed RMB10,000,000 (approximately $1,571,000) in December 2011, for a term maturing March 2012. The annual interest rate is 6.41%. For the RMB5,000,000 loan that matured in February 2012, the Company extended the loan through May 31, 2012. For the RMB 10,000,000 loan, which matured in March 2012, the Company repaid the loan in March 2012. The amount outstanding at December 31, 2011 totaled approximately $2,827,800.
Loan Agreement between Best Cable and Wujin ICBC, pursuant to which Wujin ICBC provided loans with a total amount available to borrow of RMB17, 000,000 (approximately $2,670,70) at December 31, 2011. The loan will mature in October 2012. The annual interest rate is 6.56%. The loan outstanding at December 31, 2011 totaled approximately $2,670,700.
Loan Agreement between Best Appliances and Wujin Rural Commercial Bank for a loan with a total amount available to borrow of RMB19,670,000 (approximately $3,090,200) at December 31, 2011. The annual interest rate ranges is 9.72% and the loan will mature in November 2012. The amount outstanding at December 31, 2011 approximately totaled $3,090,200.
Loan Agreement between Best Appliance and Wujin Rural Commercial Bank, pursuant to which Wujin Rural Commercial Bank provided a loan with a total amount available to borrow of RMB5,000,000 (approximately $785,500) at December 31, 2011. The loan matures on April 15, 2012. The annual interest rate is 8.75%. The amount outstanding at December 31, 2011 totaled approximately $785,500.
Loan Agreement between Best Cable and Pudong Development Bank Changzhou Branch, pursuant to which Pudong Development Bank Changzhou Branch provided a loan with a total amount available to borrow of RMB 10,000,000 (approximately $1,571,000) at December 31, 2011. The loan matured on March 19, 2012 and was extended to December 14, 2012. The annual interest rate is 7.93%. The amount outstanding at December 31, 2011 totaled approximately $1,571,000.
Loan Agreement between Best Appliance and Wujin ICBC, pursuant to which Wujin ICBC provided loans with a total amount of RMB10,000 (approximately $1,600) at December 31, 2011. Wujin ICBC loaned RMB10,000 (approximately $1,600) to Best Appliance, which will mature in February 2012 . The annual interest rate is 6.10%. When the loan matured in February 2012, the Company repaid the loan. The loan outstanding at December 31, 2011 totaled approximately $1,600.
Certain bank loans are secured by our buildings and land rights. Other unsecured bank loans were guaranteed by Mr. Shi, our Chairman and Chief Executive Officer, his wife Ms. Xueqin Wang, and three non-related parties.
Bill Acceptance Agreements:
Commercial Bill Acceptance Agreement, between Best Cable and Pudong Development Bank Changzhou Branch, pursuant to which Pudong Development Bank Changzhou Branch provided commercial bills with a total amount of RMB40,000,000 (approximately $6,284,000) at December 31, 2011. The agreement matures on January 10, 2013, however, the bills payable at December 31, 2011 become due at various times through March 2012. As we incur future expenses, we will borrow additional funds under these arrangements. The amount outstanding at December 31, 2011 totaled $6,284,000.
Commercial Bill Acceptance Agreement, between Best Cable and Communication Bank Fangzhicheng Subbranch, pursuant to which Communication Bank Fangzhicheng Subbranch provided commercial bills with a total amount of RMB10,000,000 (approximately $1,571,000) at December 31, 2011. The agreement matured on March 28, 2012. The bills payable at December 31, 2011 become due at various times through March 2012. As we incur future expenses, we will borrow additional funds under these arrangements. The amount outstanding at December 31, 2011 totaled $1,571,000.
Commercial Bill Acceptance Agreement, between Best Cable and Wujin Agricultural Bank, pursuant to which Wujin Agricultural Bank provided two commercial bills with a total amount available to borrow of RMB7,000,000 (approximately $1,099,700) at December 31, 2011. The agreement matures on December 13, 2012, guaranteed by our CEO Mr. Shi, Ms. Wang, and KK Lighting, an unrelated party. The bills payable at December 31, 2011become due at various times through May 2012. As we incur future expenses, we will borrow additional funds under these arrangements. The amount outstanding at December 31, 2011 totaled $1,099,700.
Bank Acceptance Agreement, between Best Cable and Wujin Rural Commercial Bank pursuant to which Wujin Rural Commercial Bank provided a bill with a total amount of RMB24,000,000 (approximately $3,770,400) at December 31, 2011. The agreement matures on April 15, 2012, however, the bills payable at December 31, 2011 become due at various times through June 2012. As we incur future expenses, we will borrow additional funds under these arrangements. The amount outstanding at December 31, 2011 totaled $3,770,400.
Bank Acceptance Agreement, between Best Cable and Wujin ICBC pursuant to which Wujin ICBC provided a bill with a total amount of RMB10,000,000 (approximately $1,571,000) at December 31, 2011. The agreement matures on October 31, 2013. As we incur future expenses, we will borrow additional funds under these arrangements. The amount outstanding at December 31, 2011 totaled $1,571,000.
Bank Acceptance Agreement, between Best Cable and Wujin Construction Bank pursuant to which Wujin Construction Bank provided a bill with a total amount available to borrow of RMB9,000,000 (approximately $1,413,900) at December 31, 2011. The agreement matures on January 14, 2014. As we incur future expenses, we will borrow additional funds under these arrangements. The amount outstanding at December 31, 2011 totaled $1,413,900.
Bank Acceptance Agreement, between Best Appliance and Jiangsu Bank University Subbranch pursuant to which Jiangsu Bank University Subbranch provided a bill with a total amount of RMB27,450,000 (approximately $4,312,400) at December 31, 2011. The agreement matures on December 14, 2012, however, the bills payable at December 31, 2011 become due at various times through June 2012. As we incur future expenses, we will borrow additional funds under these arrangements. The amount outstanding at December 31, 2011 totaled approximately $4,312,400.
Capital Expenditures
Our capital expenditures for 2011 and 2010 were $3.3 million and $2.9 million, respectively, representing the total amount of investment activities. Our capital expenditures during 2011 consisted of capital expenditures relating to the purchase of the Niconia LEV brand and certain equipment and improvements of office buildings and workshops, as compared to 2010, when we acquired certain equipment.
Going concern
To date, we have financed our operations primarily through cash flows from operations, augmented by short-term bank loans and equity contributions by stockholders. We believe that cash on hand and cash flow from operations will meet a portion of our present cash needs and will require additional cash resources, including equity investment, to meet expected capital expenditures and working capital requirements for the next 12 months. We may, however, in the future, require additional cash resources due to changed business conditions, implementation of management’s strategy to expand our marketing efforts and increase brand awareness, or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict operations. Financing may not be available in amounts or on terms acceptable to the Company, if at all. Any failure by management to raise additional funds on terms favorable to the Company, or at all, could limit the Company’s ability to expand business operations and could harm overall business prospects. The Company currently does not have any agreements to extend or refinance the debts beyond one year term. In addition, the Company has experienced a significant net loss in 2011. As a result of these factors, there is substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to that might result from the outcome of this uncertainty.
Obligations Under Material Contracts
Except with respect to the loan obligations disclosed above, we have no material obligations to pay cash or deliver cash to any other party.
Seasonality
Our operating results and operating cash flows historically have been subject to seasonal variations. Our revenues usually increase over each quarter of the calendar year with the first quarter usually the slowest quarter because fewer projects are undertaken during and around the Chinese spring festival.
Inflation
Inflation and changing prices have a material effect on our business, and due to the inflation and changing prices in 2011, the cost of sales increased while the sales decreased, and the gross margin decreased from 29% in 2010 to 15% in 2011. Inflation, rising raw material prices and labor costs may materially affect our business in the foreseeable future. However, our management will closely monitoring price changes in the Chinese economy and in our industry and continually tries to maintain effective cost controls in operations.
Off-Balance Sheet Arrangements
Except as set forth below, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.
As of December 31, 2011 and 2010, we had capital commitments amounting to $590,382 and $610,242, respectively, with respect to the acquisition of property, plant and equipment that were contracted for but not provided in the consolidated financial statements. Such commitments will be recorded to the financial statements when the property, plant and equipment is received.
As of December 31, 2011 and 2010, we acted as guarantor for bank loans granted to certain business associates totaling $6,393,970 and $6,272,100, respectively. The maximum amount that can be drawn on these guaranteed loans is $9,221,770 at December 31, 2011 and these guarantees expire at various times through November 2012. None of our directors or executive officers are involved in the normal operations or have invested in the business of the guaranteed business associates. All the business associates have a healthy record of paying back the loans in a timely manner.
All the above guarantees have no recourse provisions that would enable us to recover from the business associates any amounts paid under the guarantees and any assets held as collateral that we can obtain or liquidate to recover all or a portion of the amounts that could be paid under the guarantees. If the business associates fail to perform under their contractual obligation, we are obligated to make future payments including the contractual principal amounts, related interest and penalties.
Management has assessed the fair value of the obligation arising from the above financial guarantees and recognized $255,759 and $0 as of December 31, 2011 and 2010, which is included in accrued liabilities and other payables in the consolidated financial statements.
Critical Accounting Policies
Trade and other accounts receivables
Trade and other accounts receivables are recorded at the sales value, net of allowances for doubtful accounts and sales returns. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing trade and other accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. Changes in allowance for doubtful accounts are included in the general and administrative expenses.
Outstanding accounts balances are reviewed individually for collectability. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as they have yet to exhaust all means of collection.
Loans and Investments in Privately Held Entities
From time-to-time, the Company makes investments in and/or loans to privately-held companies. The Company determines whether the fair values of any investments in privately held entities have declined below their carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considers any such decline to be other than temporary (based on various factors, including historical financial results, and the overall health of the investee’s industry), a write-down to estimated fair value is recorded. On a quarterly basis, the Company reviews outstanding loans receivable to determine if a provision for doubtful loans is necessary. These reviews include discussions with senior management of the investee, and evaluations of, among other things, the investee’s progress against its business plan, its product development activities and customer base, industry market conditions, historical and projected financial performance, expected cash needs and recent funding events. The Company has assessed the loans for potential uncollectibility and has recorded a loan reserve.
Inventories
Inventories are stated at the lower of cost and market. The cost of inventories is determined using weighted average cost method, and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of finished goods and work in progress, cost includes materials, labor and an appropriate share of production overhead based on normal operating capacity.
The Company regularly reviews the cost of inventories against their estimated fair market value and may record a write-down for inventories that have cost in excess of estimated market value. Also for the obsolete inventories, the Company has assessed its inventories and has recorded a provision.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Depreciation is provided on the straight-line basis (after taking into account the respective estimated residual values) over the estimated useful lives of property, plant and equipment.
Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.
Construction in progress mainly represents expenditures in respect of the Company’s offices and factories under construction. All direct costs relating to the acquisition or construction of the Company’s offices and factories are capitalized as construction in progress. No depreciation is provided in respect of construction in progress.
Variable interest entities
Each of the VIEs and Mr. Jianliang Shi ("Mr. Shi") and Ms. Xueqin Wang ("Mrs. Shi") entered into the following agreements with Best Green Changzhou, pursuant to which the VIEs became the VIE of Best Green Changzhou.
Consulting Agreement
Under a Consulting Agreement, Best Green Changzhou provides exclusive technical, business and management consulting services to the VIEs in exchange for service fees equal to 100% of the total annual net profits of the VIEs.
Business Operation Agreement
Business Operation Agreement imposes restrictions on the operations of the VIEs. Under the Business Operation Agreement, the VIEs are each prohibited from engaging in any transaction which may materially affect their assets, obligations, rights or business operations without prior consent from Best Green Changzhou. The VIEs are also required to accept policies and suggestions provided by Best Green Changzhou from time to time with respect to employment or dismissal of employees, corporate management and financial management systems. The VIEs are also required to appoint the directors and members of senior management that Best Green Changzhou designates.
Equity Interest Pledge Agreement
Mr. and Mrs. Shi have pledged their entire equity interests in the VIEs to Best Green Changzhou pursuant to an Equity Interest Pledge Agreement. The equity interests are pledged as collateral security for the obligations of the VIEs under the Consulting Agreement and the Business Operation Agreement.
Proxy Agreement
The Proxy Agreement among Best Green Changzhou and Mr. and Mrs. Shi requires Mr. and Mrs. Shi to vote all of the equity interests in the VIEs at any shareholders’ meeting or other time when shareholders of the VIEs vote in accordance with Best Green Changzhou’s instructions.
Revenue recognition
The Company recognizes revenues in accordance with ASC 605-10-S99, “Revenue Recognition” when the significant risks and rewards of ownership have been transferred to the customer pursuant to applicable laws and regulations. Accordingly, all of the following criteria must be met in order for the Company to recognize revenue:
1.
Persuasive evidence of an arrangement exists;
2.
Delivery has occurred or services have been rendered;
3.
The seller's price to the buyer is fixed or determinable; and
4.
Collectibility is reasonably assured.
Net sales of products represent the value of goods, net of value added taxes (“VAT”), sales returns, trade discounts and allowances. The Company is subject to VAT which is levied on majority of their products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales. Provision for sales returns are recorded as a reduction of revenue in the same period that revenue is recognized. The provision for sales returns, which is based on historical sales returns data, is the Company’s best estimate of the amounts of goods that will be returned from their customers. During the reporting periods, there were no sales returns and the Company did not recognize any provision for sales returns.
Recently issued accounting pronouncements
In June 2011, the FASB (Financial Accounting Standards Board) issued ASU No. 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of change in stockholders’ equity. Instead, ASU 2011-05 requires entities to report all non-owner changes in stockholders’ equity in either a single continuous statement of comprehensive income, or in two separate, but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income, or when an item must be reclassified to net income. ASU 2011-05 requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect that this authoritative guidance will have any material effect on the Company’s financial statements.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS”. The objective of this amendment is to achieve common fair value measurement and disclosure requirements in US GAAP and IFRS. This amendment is to ensure that fair value has the same meaning in US GAAP and IFRS and their respective fair value measurement and disclosure requirements are the same. This guidance is effective for the first quarter of 2012. The Company does not expect that this authoritative guidance will have any material effect on the Company’s financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
The full text of our audited consolidated financial statements as of December 31, 2011 and 2010 begins on page of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer, Mr. Jianliang Shi, and Chief Financial Officer, Ms. Jianfeng Xu, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011. Based on that evaluation, Mr. Shi and Ms. Xu concluded that, because of the material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2011.
Notwithstanding management’s assessment that our internal control over financial reporting was ineffective as of December 31, 2011 due to the material weaknesses described below, we believe that the consolidated financial statements included in this report correctly present our financial condition, results of operations and cash flows for the fiscal years covered thereby in all material respects.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:
(1)
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
(3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this evaluation, management used the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on this assessment, Management concluded the Company did not maintain effective internal control over financial reporting as of December 31, 2011.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Management conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and our Chief Financial Officer. Based upon, and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2011, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting described below:
- We failed to record adequate loan reserves and guaranty loan reserves which were not in compliance with US GAAP.
- We had certain prohibitive transactions, as defined by the Sarbanes-Oxley Act, with an officer of one of the VIEs, where Company funds were commingled with personal accounts for various periods of time resulting in loans to officers.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
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 our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Remediation Initiative
During the year, we failed to properly apply US GAAP in accounting for shares issued for services. We have implemented procedures, whereby any capital transactions entered into by the Company will be reviewed to determine whether the fair value of the issuance is properly calculated.
During the year, we also inappropriately recorded certain transactions as additional paid-in capital which was not in compliance with US GAAP. Although allowable under Chinese law, we have taken steps to discuss any future capital transactions with our consulting firm which has US GAAP experience to ascertain whether the transactions contemplated as appropriate before they occur.
During the year, we failed to adequately reserve for doubtful accounts. We have implemented procedures to better track aged account balances and set up reserves for customers with delinquent payments, based on specified aging requirements.
We continue to engage a consulting firm to help us modify our accounting policies and procedures based on US GAAP. The modifications are being reviewed by the management, and they will be released and implemented upon approval of the management and the audit committee.
Management is committed to improving its internal control over financial reporting and will continue to work to put effective controls in place. The reportable conditions and other areas of our internal control over financial reporting identified by us as needing improvement have not resulted in a material restatement of our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Changes in Internal Controls over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
Other than in connection with the implementation of the remedial measures described above, there have been no changes in our internal control over financial reporting during the fourth quarter of fiscal year 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
We have no information to disclose that was required to be disclosed in a report on Form 8-K during fourth quarter of fiscal year 2011, but was not reported.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following sets forth information about our directors and executive officers as of the date of this report:
Mr. Jianliang Shi. Mr. Shi has served as our Chairman, Chief Executive Officer and President since June 9, 2010, the day that we consummated our reverse acquisition of Best Green BVI. Mr. Shi founded our VIEs in 1990 and became the chairman and chief executive officer of our VIEs at that time. He is currently the honored executive member of Wujin Light Industry Chamber of Commerce. He was also acknowledged as a Top 10 Entrepreneur by local government each year from 2002 to 2009.
Mr. Zhengxing Shangguan. Mr. Shangguan has served as our Executive Vice President and as a member of our Board of Directors since June 9, 2010, the day that we consummated our reverse acquisition of Best Green BVI. He has served as a director and executive vice president of our VIEs since 1996. He has more than 10 years of experience in management positions as production and sales manager, focusing on sales and production.
Ms. Jianfeng Xu. Ms. Xu has served as our Chief Financial Officer since June 9, 2010, the day that we consummated our reverse acquisition of Best Green BVI. She has served as the chief financial officer of our VIEs since 2000. Prior to joining our company, she worked at Wujin Dyeing Machine Company from 1993 to 1999. Ms. Xu received bachelor’s degree in accounting from Changzhou Institute of Technology in 2003.
Ms. Haoru Tao. Ms. Tao has served as a member of our Board of Directors since January 6, 2011. She has served as a Senior Manager at Shanghai ThinkBridge Certified Public Accountants, a member of HLB International since 2010. Prior to joining ThinkBridge, she was the Asia Pacific Financial Controller for Ascend Performance Materials, a chemical manufacturing company. From 2002 to 2009, Ms. Tao served various senior finance, accounting and internal audit positions in the United States at Levi Strauss & Co., New York Times Co. and Analog Devices Inc. Prior to that, she was a Senior Auditor at Arthur Andersen LLP Shanghai Office from 1999 to 2002. Ms. Tao is a Certified Public Accountant in both USA and China. She is also a Certified Internal Auditor. Ms. Tao holds a Master’s degree in Accounting from Boston College and a Bachelor’s degree in Finance from Fudan University, China.
Ms. Ying Wang. Ms. Wang has served as a member of our Board of Directors since January 6, 2011. She has served as director of Changzhou Tsinghua New Energy Vehicle Engineering and Technology Research Institute since 2009. From 2006 to 2009, Ms. Wang worked in a postdoctoral program in new energy vehicle research of China National 863 Program at Tsinghua University. Ms. Wang received her Doctor’s degree in engineering from Southwest Jiaotong University in 2006. Ms. Wang holds 25 patents in fuel cell and new energy vehicles.
Mr. Jinrong Shen. Mr. Shen has served as a member of our Board of Directors since January 6, 2011. He has served as technology director of Hohai University, Changzhou School since 2002. From 1994 to 2002, Mr. Shen served as a faculty member of Hohai University. Mr. Shen received his Master’s degree in Engineering from Hohai University, where he majored in electronics and mechanical engineering.
Directors are elected until their successors are duly elected and qualified.
Except as set forth in our discussion below in Item 13 “Certain Relationships and Related Transactions, and Director Independence-Transactions with Related Persons,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
There are no agreements or understandings for any of our executive officers or directors to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.
Director Qualifications
Directors are responsible for overseeing our business consistent with their fiduciary duty to stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. The Board believes that there are general requirements for service on our Board of Directors that are applicable to all directors and that there are other skills and experience that should be represented on the Board as a whole, but not necessarily by each director. The Board considers the qualifications of directors and director candidates individually and in the broader context of the Board’s overall composition and our current and future needs.
Qualifications for All Directors
In its assessment of each potential candidate, including those recommended by stockholders, the Board considers the nominee’s judgment, integrity, experience, independence, understanding of our business or other related industries and such other factors the Board determines are pertinent in light of the current needs of the Board. The Board also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company.
The Board requires that each director be a recognized person of high integrity with a proven record of success in his or her field. Each director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all directors, the Board assesses intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially.
The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for Board membership. Diversity is important because a variety of points of view contribute to a more effective decision-making process.
Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole
The Board has identified particular qualifications, attributes, skills and experience that are important to be represented on the Board as a whole, in light of our current needs and business priorities. We are a U.S. public company that manufactures and sells clean technology-based consumer products, including LEVs and cryogen-free refrigerators, as well as network and HDMI cables. Therefore, the Board believes that a diversity of professional experiences in these industries, specific knowledge of key geographic growth areas, and knowledge of U.S. capital markets and of U.S. accounting and financial reporting standards should be represented on the Board.
Summary of Qualifications of Directors
Set forth below is a narrative disclosure that summarizes some of the specific qualifications, attributes, skills and experiences of our directors. For more detailed information, please refer to the biographical information for each director set forth above.
Mr. Jianliang Shi. Mr. Shi founded our VIEs in 1990 and became the chairman and chief executive officer of our VIEs at that time. He contributes invaluable long-term knowledge of our business and operations to our Board.
Mr. Zhengxing Shangguan. Mr. Shangguan has served as a director and executive vice president of our VIEs since 1996. He has more than 10 years of experience in management positions as production and sales manager, focusing on sales and production. He contributes invaluable long-term knowledge of our business and operations, as well as extensive experience, to our Board.
Ms. Haoru Tao. Ms. Tao has served in various senior finance, accounting and internal audit positions, both with accounting firms and private companies. She is a Certified Internal Auditor. Her extensive financial experience makes her a valuable member of our Board.
Ms. Ying Wang. Ms. Wang has extensive knowledge of the new energy vehicle industry. She also holds a Doctor’s degree in engineering and holds 25 patents in fuel cell and new energy vehicles. She contributes invaluable knowledge of the new energy vehicle industry to our Board.
Mr. Jinrong Shen. Mr. Shen contributes invaluable technical knowledge to the Board, having served as technology director of Hohai University, Changzhou School since 2002. He also holds a Master’s degree in engineering.
Family Relationships
There are no family relationships among any of our officers or directors.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers, directors and beneficial owner of more than 10% of a registered class of our equity securities to file with the SEC statements of ownership and changes in ownership. The same persons are required to furnish us with copies of all Section 16(a) forms they file. Except as set forth below, we believe that all of our executive officers, directors and beneficial owner of more than 10% of a registered class of our equity securities complied with the applicable filing requirements during fiscal year 2011.
In making these statements, we have relied upon examination of the copies of all Section 16(a) forms provided to us and the written representations of our executive officers, directors and beneficial owner of more than 10% of a registered class of our equity securities.
Code of Ethics
On January 6, 2011, our board of directors adopted a code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. The code of ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code. A copy of the Code of Ethics can be found as Exhibit 14.1 to our current report on Form 8-K filed on January 6, 2011.
Board Composition and Committees
The Company is governed by a Board of Directors that currently consists of five members: Mr. Jianliang Shi, Mr. Zhengxing Shangguan, Ms. Haoru Tao, Ms. Ying Wang and Mr. Jinrong Shen. Our “independent” directors, within the meaning of the NASDAQ Marketplace Rules, are Ms. Haoru Tao, Ms. Ying Wang and Mr. Jinrong Shen. All actions of the Board of Directors require the approval of a majority of the directors in attendance at a meeting at which a quorum is present.
The Board has established three standing committees: the Audit Committee, the Compensation Committee and the Governance and Nominating Committee. Each of the Audit Committee, Compensation Committee and Governance and Nominating Committee are comprised entirely of independent directors. From time to time, the Board may establish other committees. The Board has adopted a written charter for each of the Committees, which can be found as Exhibits 99.2, 99.3 and 99.4 to our current report on Form 8-K filed on January 6, 2011.
Audit Committee and Audit Committee Financial Expert
Our Audit Committee is currently composed of five members, Ms. Haoru Tao, Ms. Ying Wang and Mr. Jinrong Shen. Our Board of Directors determined that each member of the Audit Committee meets the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership and is an “independent” director within the meaning of the NASDAQ Marketplace Rules. Each Audit Committee member also meets NASDAQ’s financial literacy requirements. Ms. Tao serves as Chair of the Audit Committee.
Our Audit Committee oversees our accounting and financial reporting processes and the audits of our financial statements. Our Audit Committee is responsible for, among other things:
selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent auditors;
reviewing with our independent auditors any audit problems or difficulties and management’s response;
reviewing and approving all proposed related-party transactions;
discussing the annual audited financial statements with management and our independent auditors;
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant internal control deficiencies;
annually reviewing and reassessing the adequacy of our Audit Committee charter;
meeting separately and periodically with management and our internal and independent auditors;
reporting regularly to the full Board of Directors; and
such other matters that are specifically delegated to our Audit Committee by our Board of Directors from time to time.
Our Board of Directors has determined that Ms. Tao is the “audit committee financial expert” as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC and also meets NASDAQ’s financial sophistication requirements.
Compensation Committee
Our Compensation Committee is currently composed of five members, Ms. Haoru Tao, Ms. Ying Wang and Mr. Jinrong Shen, each of whom is “independent” within the meaning of the NASDAQ Marketplace Rules. Ms. Wang serves as Chair of the Compensation Committee.
Our Compensation Committee assists the Board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Our Chief Executive Officer may not be present at any committee meeting during which his compensation is deliberated.
The Compensation Committee is responsible for, among other things:
approving and overseeing the compensation package for our executive officers;
reviewing and making recommendations to the Board with respect to the compensation of our directors;
reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, and setting the compensation level of our chief executive officer based on this evaluation; and
reviewing periodically and making recommendations to the Board regarding any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
Governance and Nominating Committee
Our Governance and Nominating Committee is currently composed of five members, Ms. Haoru Tao, Ms. Ying Wang and Mr. Jinrong Shen, each of whom is “independent” within the meaning of the NASDAQ Marketplace Rules. Mr. Shen serves as Chair of the Governance and Nominating Committee.
The Governance and Nominating Committee assists the Board in identifying individuals qualified to become our directors and in determining the composition of the Board and its committees.
The Governance and Nominating Committee is responsible for, among other things:
identifying and recommending to the Board nominees for election or re-election to the Board, or for appointment to fill any vacancy;
reviewing annually with the Board the current composition of the Board in light of the characteristics of independence, age, skills, experience and availability of service to us; and
identifying and recommending to the Board the directors to serve as members of the Board’s committees,
Material Changes to Director Nomination Procedures
There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since such procedures were last disclosed.
Summary Compensation Table - Fiscal Years Ended December 31, 2011 and 2010
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officer received total annual salary and bonus compensation in excess of $100,000.
Employment Agreements
We have entered into employment agreements with most of our officers, managers and employees other than our CEO, for which we currently have no agreement with.
We have not provided retirement benefits (other than a state pension scheme in which all of our employees in China participate) or severance or change of control benefits to our named executive officer
Outstanding Equity Awards at Fiscal Year End
For the year ended December 31, 2011, no director or executive officer has received compensation from us pursuant to any compensatory or benefit plan. There is no plan or understanding, express or implied, to pay any compensation to any director or executive officer pursuant to any compensatory or benefit plan.
Compensation of Directors
The following table sets forth the total compensation earned by our directors for their services as directors during fiscal year ended December 31, 2011:
We have entered into separate independent director contracts with our independent directors, Ms. Haoru Tao, Ms. Ying Wang and Mr. Jinrong Shen. Under the terms of the independent director’s contracts, we agreed to pay Ms. Tao an annual fee of $30,000, and Ms. Wang and Mr. Shen an annual fee of $10,000 each, as compensation for the services to be provided by them as independent directors.
Mr. Jianliang Shi and Mr. Zhengxing Shangguan are paid in their capacity as executive officers of the Company and they do not receive any additional compensation for their service as directors.
It is our practice to reimburse our directors for reasonable travel expenses related to attendance at Board and Committee meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial ownership of our common stock as of April 13, 2012 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, Jiangsu Wujin Lijia Industrial Park, Lijia Town, Wujin District, Changzhou City, Jiangsu Province, 213176, People’s Republic of China.
* Less than 1%
(1)
Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock.
(2)
A total of 23,625,911 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) as of April 13, 2012. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.
(3)
Includes 20,734,531 shares held by Best Green Investments Limited. Best Green Investments Limited is owned and controlled by our CEO, Mr. Jianliang Shi, and his wife, Ms. Xueqin Wang. Mr. Shi and Ms. Wang own 51% and 49% equity interest of Best Green Investments, respectively.
Changes in Control
We are not aware of any arrangements which if consummated may result in a change of control of our Company.
Securities Authorized for Issuance Under Equity Compensation Plans
We do not have any compensation plans in effect under which our equity securities are authorized for issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons
The following includes a summary of transactions since the beginning of the 2010 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under Item 11
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Independent Auditors’ Fees
PKF, Certified Public Accounts, California (“PKF California”) was engaged as the Company’s independent registered public accounting firm on January 7, 2011. Prior to this, PKF, Certified Public Accounts, Hong Kong (“PKF Hong Kong”) was the Company’s auditor. The fees for the year ended December 31, 2010 were billed by PKF Hong Kong and the fees for the year ended December 31, 2011 were billed by PKF California.
The following is a summary of the fees billed to the Company for professional services rendered for the fiscal years ended December 31, 2011 and 2010:
“Audit Fees” consisted of fees billed for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-K and 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
“Audit-Related Fees” consisted of fees billed for assurance and related services by the principal accountant that were reasonably related to the performance of the audit or review of our financial statements and are not reported under the paragraph captioned “Audit Fees” above.
“Tax Fees” consisted of fees billed for professional services rendered by the principal accountant for tax returns preparation.
“All Other Fees” consisted of fees billed for products and services provided by the principal accountant, other than the services reported above under other captions of this Item 14.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our board of directors to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our board of directors pre-approved the audit service performed by PKF Certified Public Accountants for our financial statements as of and for the year ended December 31, 2011.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements and Schedules
The following documents are filed as part of this Report:
(2)
Financial Statement Schedules: All Schedules are omitted because the information called for is not applicable, is not required, or because the financial information is set forth in the financial statements or notes thereto.
Exhibit List
The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference.
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 16, 2012
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.
Signature Title Date
/s/ Jianliang Shi
Chairman and Chief Executive Officer
April 16, 2012
Jianliang Shi (Principal Executive Officer)
/s/ Jianfeng Xu
Chief Financial Officer April 16, 2012
Jianfeng Xu (Principal Financial and Accounting Officer)
/s/ Zhengxing Shangguan Director April 16, 2012
Zhengxing Shangguan
/s/ Haoru Tao Director April 16, 2012
Haoru Tao
/s/ Ying Wang
Director April 16, 2012
Ying Wang
/s/ Jinrong Shen
Director April 16, 2012
Jinrong Shen
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CHINA GREEN ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED ANNUAL FINANCIAL STATEMENTS
December 31, 2011 AND 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
China Green Energy Industries, Inc.
Changzhou City, Jiansgsu Province, PRC
We have audited the accompanying consolidated balance sheets of China Green Energy Industries, Inc. (the “Company”) as of December 31, 2011 and 2010 and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for the years then ended. These consolidated 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 have conducted our audits in accordance with the 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 consolidated 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 controls over financial reporting. Our audit included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstance, 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide 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 China Green Energy Industries, Inc. as of December 31, 2011 and 2010, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1 to the consolidated financial statements, the Company has experienced negative cash flows from operations and is dependent upon future financing in order to meet its planned operating activities. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ PFK
April 16, 2012 PKF
San Diego California Certified Public Accountants
A Professional Corporation
China Green Energy Industries, Inc.
Consolidated Balance Sheets
As of December 31, 2011 and December 31, 2010
See the accompanying Notes to Consolidated Financial Statements
China Green Energy Industries, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Years ended December 31, 2011 and 2010
See the accompanying Notes to Consolidated Financial Statements
China Green Energy Industries, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Years ended December 31, 2011 and 2010
See the accompanying Notes to Consolidated Financial Statements
China Green Energy Industries, Inc.
Consolidated Statements of Cash Flows
For the Years ended December 31, 2011 and
See the accompanying Notes to Consolidated Financial Statements
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
1.
Corporation information
China Green Energy Industries, Inc. (the “Company”) was incorporated in the State of Nevada on December 7, 2007 under the name of TradeOn, Inc. for the purpose of pursuing a business combination through a Reverse Takeover (“RTO”).
On June 9, 2010, the Company entered into and closed a share exchange agreement (the “Share Exchange Agreement”) with Best Green Energy Industries Limited (“Best Green BVI”), a British Virgin Islands company incorporated on March 31, 2010, and its sole shareholder, Best Green Investments Limited (“Best Green Investments”), pursuant to which the Company acquired 100% of the issued and outstanding capital stock of Best Green BVI in exchange for 20,734,531 shares of the Company’s common stock, par value $0.0001, issued to Best Green Investments which after giving effect to the Cancellation Agreement disclosed below, constituted 88.1% of the Company’s issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Share Exchange Agreement.
As a condition precedent to the consummation of the Share Exchange Agreement, on June 9, 2010, the Company entered into a cancellation agreement, (the “Cancellation Agreement”), with Mr. Haifeng Lu, who was the major stockholder of the Company immediately before the Share Exchange Agreement, whereby Mr. Lu agreed to the cancellation of 4,000,000 shares of the Company’s common stock owned by him of the then 6,794,384 shares outstanding. The Company assumed the remaining 2,794,384 shares along with certain cash balances of TradeOn, Inc. as part of the RTO. Mr. Haifeng Lu served as the Company’s sole director and officer from May 10, 2010 until June 9, 2010 when he was replaced by Mr. Jianliang Shi (“Mr. Shi”), a founder of Jiangsu Best Electrical Appliances Co., Ltd. (“Best Appliances”) and Changzhou City Wujin Best Electronic Cables Co., Ltd. (“Best Cables”). Mr. Shi and his spouse, Ms. Xueqin Wang (“Mrs. Shi”), together own the entire interests in Best Appliances and Best Cables, respectively.
Mr. Shi was appointed as the Company’s director and chief executive officer effective upon the closing of the above share exchange. In addition, the Company’s executive officers were replaced by the executive officers of Best Appliances and Best Cables upon the closing of the share exchange.
As a result of the share exchange, the Company now owns all of the issued and outstanding capital stock of Best Green BVI, which in turn owns 100% of the outstanding capital stock of Best Green Energy (Changzhou) Co., Ltd. (“Best Green Changzhou”), a wholly-foreign-owned enterprise incorporated in the People’s Republic of China (the “PRC”) on May 6, 2010.
PRC law places certain restrictions on roundtrip investments through the acquisition of a PRC entity by PRC residents. To comply with these restrictions, in conjunction with the RTO, the Company, via Best Green Changzhou, entered into and consummated certain contractual arrangements with Best Appliances, Best Cables, and Mr. and Mrs. Shi pursuant to which the Company provides Best Appliances and Best Cables with technical, business and management consulting services and appoints their senior executives and approves all matters requiring shareholders’ approval. As a result of these contractual arrangements, which obligates Best Green Changzhou to absorb a majority of the risk of loss from the activities of Best Appliances and Best Cables and enables Best Green Changzhou to receive a majority of their expected residual returns, the Company accounts for the two entities as variable interest entities (“VIE”) pursuant to Accounting Standards Codification (“ASC”) 810 (the “VIE Arrangement”). The VIE Arrangements are set out in note 2. Best Appliances and Best Cables are collectively referred to as the “VIEs” herein after and are consolidated with the Company which has been deemed the primary beneficiary of both VIEs.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
1.
Corporate information (cont’d)
Before the closing of the share exchange, on April 24, 2010, Mr. and Mrs. Shi entered into an option agreement (the “Option Agreement”) with Mr. Marsel Gilyazov, the sole shareholder and director of Best Green Investments, pursuant to which Mr. and Mrs. Shi were granted options, exercisable 60 days after the date on which a current report on Form 8-K is filed with the Securities and Exchange Commission (the “SEC”) in respect of the Share Exchange Agreement, to acquire 51% and 49% equity interest of Best Green Investments, and ending on the fifth annual anniversary of that date. After Mr. and Mrs. Shi have exercised these options, they will be the Company’s controlling stockholders. On October 20, 2010, Mr. and Mrs. Shi exercised their options to purchase the equity interest of Best Green Investments. As a result, Mr. and Mrs. Shi own an aggregate of 20,734,531 of the total outstanding shares of the Company’s capital stock and 88% total voting power of all of the Company’s outstanding voting securities.
The acquisition of Best Green BVI was accounted for as a recapitalization effected by a share exchange, wherein Best Green BVI is considered the acquirer for accounting and financial reporting purposes. The Company’s assets and liabilities have been brought forward at their book value and no goodwill has been recognized. In addition, the reverse takeover accounting was used to account for the VIE Arrangement as the VIEs were under common control of Mr. and Mrs. Shi before and after the RTO (by virtue of the Option Agreement) and the VIE Arrangement. These financial statements, issued under the name of the Company, represent the continuation of the consolidated financial statements of the VIEs.
Following the RTO and the VIE Arrangement, the Company, through the VIEs, is primarily engaged in the manufacture and distribution of clean technology-based consumer products, which consist of light electrical vehicles (“LEV”), cryogen-free refrigerators, and network and HDMI cables. The Company operates manufacturing and distribution primarily in the PRC and sells some of their products under their own brand name of “BEST”. In 2010, the Company acquired the Niconia brand for which it sells certain LEV’s under.
In connection with the RTO, the Company’s Board of Directors on July 30, 2010 approved a change in the Company’s fiscal year end from October 31 to December 31 to be consistent with the fiscal year end of Best Green BVI. On September 1, 2010, the Company changed its name to China Green Energy Industries, Inc.
Going concern
The Company has reported a net loss of $2,310,821 and negative cash flow from operations of $4,441,115 for the year ended December 31, 2011. To date, the Company has financed its operations primarily through cash flows from operations, augmented by short-term bank loans and equity contributions by stockholders. Management believes that cash on hand and cash flow from operations will meet a portion of the Company’s present cash needs and will require additional cash resources, including equity investment, to meet expected capital expenditures and working capital requirements for the next 12 months. The Company may, however, in the future, require additional cash resources due to changed business conditions, implementation of management’s strategy to expand our marketing efforts and increase brand awareness, or acquisitions the Company may decide to pursue. If the Company’s own financial resources are insufficient to satisfy capital requirements, the Company may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require the Company to agree to operating and financial covenants that would restrict operations. Financing may not be available in amounts or on terms acceptable to the Company, if at all. Any failure by management to raise additional funds on terms favorable to the Company, or at all, could limit the Company’s ability to expand business operations and could harm overall business prospects. Management intends to re-finance the short-term debts with the existing lenders. However, the Company currently does not have any agreements to extend or re-finance the debt beyond the one year terms. As a result of these factors, there is substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
2.
Summary of significant accounting policies
Basis of presentation
The accompanying consolidated financial statements of the Company, its subsidiaries and the VIEs have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The financial statements of Best Appliances and Best Cables for the years ended December 31, 2011 and 2010 have been combined and presented in these consolidated financial statements on the basis that the entities are under the common control and management of Mr. and Mrs. Shi.
Principles of consolidation
The consolidated financial statements include the accounts of the Company, its subsidiaries and the VIEs. All significant inter-company accounts and transactions have been eliminated in consolidation.
Variable interest entities
Each of the VIEs and Mr. and Mrs. Shi entered into the following agreements with Best Green Changzhou, pursuant to which the VIEs became the VIEs of Best Green Changzhou.
Consulting Agreement
Under the Consulting Agreement, Best Green Changzhou provides exclusive technical, business and management consulting services to the VIEs in exchange for service fees equal to 100% of the total annual net profits of the VIEs. Best Green Changzhou is obligated to absorb a majority of the risk of loss from the activities of the VIEs.
Business Operation Agreement
The Business Operation Agreement imposes restriction on the operations of the VIEs. Under the Business Operation Agreement, the VIEs are prohibited from engaging in any transaction which may materially affect its assets, obligations, rights or business operation without prior consent from Best Green Changzhou. The VIEs are also required to accept policies and suggestions provided by Best Green Changzhou from time to time with respect to employment or dismissal of employees, corporate management and financial management systems. The VIEs are also required to appoint the directors and members of senior management that Best Green Changzhou designates.
Equity Interest Pledge Agreement
Mr. and Mrs. Shi have pledged their entire equity interests in the VIEs to Best Green Changzhou pursuant to the Equity Interest Pledge Agreement. The equity interests are pledged as collateral security for the obligations of the VIEs under the Consulting Agreement and the Business Operation Agreement.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
2.
Summary of significant accounting policies (cont’d)
Proxy Agreement
The Proxy Agreement among Best Green Changzhou and Mr. and Mrs. Shi requires Mr. and Mrs. Shi to vote all of the equity interests in the VIEs at any shareholders’ meeting or other time when shareholders of the VIEs vote in accordance with Best Green Changzhou’s instructions.
Use of estimates
In preparing financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of trade and other receivables, inventories, valuation of potential impairment for guaranteed loans, valuation of potential impairment on loans to related parties and third parties, intangibles, deferred income taxes and the estimation on useful lives and residual values of property, plant and equipment. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, trade accounts receivables and other receivables. As of December 31, 2011 and December 31, 2010, the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC, which management believes are of high credit quality. With respect to trade accounts receivables, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade accounts receivables.
During the reporting periods, customers representing 10% or more of the Company’s revenues are as follows:
Details of customers representing 10% or more of the Company’s trade accounts receivables as of December 31, 2011 and 2010, are as follows:
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
2.
Summary of significant accounting policies (cont’d)
During the reporting periods, suppliers representing 10% or more of the Company’s purchase are as follows:
Cash and cash equivalents
Cash and cash equivalents include all cash, deposits in banks and other highly liquid investments with initial maturities of three months or less. As of December 31, 2011 and December 31, 2010, most of the Company’s cash and cash equivalents were denominated in Renminbi (“RMB”) and were placed with banks in the PRC. They are not freely convertible into foreign currencies and the remittance of these funds out of the PRC is subject to exchange control restrictions imposed by the PRC government. The remaining balances of cash and cash equivalents were denominated in USD dollars (“USD”).
Trade and other accounts receivables
Trade and other accounts receivables are recorded at the sales value, net of allowances for doubtful accounts and sales returns. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing trade and other accounts receivables. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. Changes in allowance for doubtful accounts are included in the general and administrative expenses.
Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as they have yet to exhaust all means of collection.
Loans and investments in privately held entities
From time-to-time, the Company makes investments in and/or loans to privately-held companies. The Company determines whether the fair values of any investments in privately held entities have declined below their carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considers any such decline to be other than temporary (based on various factors, including historical financial results, and the overall health of the investee’s industry), a write-down to estimated fair value is recorded. On a quarterly basis, the Company reviews outstanding loans receivable to determine if a provision for doubtful loans is necessary. These reviews include discussions with senior management of the investee, and evaluations of, among other things, the investee’s progress against its business plan, its product development activities and customer base, industry market conditions, historical and projected financial performance, expected cash needs and recent funding events. The Company has assessed the loans for potential impairment and has recorded a loan reserve.
Inventories
Inventories are stated at the lower of cost or market. The cost of inventories is determined using weighted average cost method, and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of finished goods and work in progress, cost includes materials, labor and an appropriate share of production overhead based on normal operating capacity.
The Company regularly reviews the cost of inventories against their estimated fair market value and may record a write-down for inventories that have cost in excess of estimated fair market value. Also for the obsolete inventories, the Company has assessed its inventories and has recorded a provision.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
2.
Summary of significant accounting policies (cont’d)
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Depreciation is provided on the straight-line basis (after taking into account the respective estimated residual values) over the estimated useful lives of property, plant and equipment. The principal useful lives and residual value are as follows:
Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.
Construction in progress mainly represents expenditures for the Company’s offices and factories under construction. All direct costs relating to the acquisition or construction of the Company’s offices and factories are capitalized as construction in progress. No depreciation is provided for on construction in progress.
Land use rights
Land use rights are stated at cost less accumulated amortization. Amortization is provided using the straight-line method over the terms of the lease of 50 years obtained from the relevant PRC land authority.
Intangible assets
The determination of fair value requires significant judgment and estimates, and the ultimate allocation of purchase price may change. Acquired intangibles with definite lives will be amortized on a straight-line basis over the remaining estimated economic useful life of the underlying assets. Intangible assets with indefinite lives are not amortized. The Company reviews its indefinite and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. The Company conducts an impairment analysis annually and as necessary if changes in facts and circumstances indicate that the fair value of the Company’s purchased intangible assets may be less than its carrying amount. The Company assesses its long-lived assets for impairment and identified no such impairment loss as of December 31, 2011 and 2010.
The amortization is provided on the straight-line basis over the estimated useful life of intangible asset. The estimated useful life of the brand name is 20 years.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
2.
Summary of significant accounting policies (cont’d)
Impairment of long-lived assets
Long-lived assets are tested for impairment in accordance with Accounting Standards Codification (“ASC”) 360-10-45 “Impairment or Disposal of Long-Lived Assets”. The Company periodically evaluates potential impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets. During the reporting periods, the Company did not identify any indicators that would require testing for impairment as of December 31, 2011 and December 31, 2010.
Revenue recognition
The Company recognizes revenues in accordance with ASC 605-10-S99, “Revenue Recognition” when the significant risks and rewards of ownership have been transferred to the customer pursuant to applicable laws and regulations. Accordingly, all of the following criteria must be met in order for the Company to recognize revenue:
1.
Persuasive evidence of an arrangement exists;
2.
Delivery has occurred or services have been rendered;
3.
The seller's price to the buyer is fixed or determinable; and
4.
Collectibility is reasonably assured.
Net sales of products represent the value of goods, net of value added taxes (“VAT”), sales returns, trade discounts and allowances. The Company is subject to VAT which is levied on majority of their products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales. Provision for sales returns are recorded as a reduction of revenue in the same period that revenue is recognized. The provision for sales returns, which is based on historical sales returns data, is the Company’s best estimate of the amounts of goods that will be returned from their customers. During the reporting periods, there were no sales returns and the Company did not recognize any provision for sales returns.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
2.
Summary of significant accounting policies (cont’d)
Cost of revenues
Cost of revenues consists primarily of materials costs, wages, employee compensation, depreciation and amortization and related costs, which are directly attributable to the production of products. Write-down of inventories to the lower of cost or market is also recorded in cost of revenues.
General and administrative expenses
General and administrative expenses consist primarily of bad debt expenses, loan provision, guaranty obligation provision, professional service fees, office expenses, entertainment, traveling expenses, staff welfare, consumables, labor protection and salaries and wages which are incurred at the administrative level and foreign exchange differences.
Selling expenses
Selling expenses consist primarily of shipping, advertising, sampling salaries, and traveling costs incurred during the selling activities.
Advertising and shipping
Advertising and shipping are charged to expense as incurred.
Advertising expenses amounting to $384,415 and $159,327 for the years ended December 31, 2011 and 2010, respectively, are included in selling expenses.
Shipping expenses amounting to $343,617 and $274,581 for the years ended December 31, 2011 and 2010, respectively, are included in selling expenses.
Income taxes
The Company uses the asset and liability method of accounting for income taxes pursuant to ASC 740 “Income Taxes”. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. 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 Company accounts for income tax uncertainties using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit to be recognized in the financial statements. The Company expenses any penalties or interest associated with tax obligations as non-operating expenses. As of December 31, 2011 and 2010, the Company has no accrued interest or penalties related to uncertain tax positions.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
2.
Summary of significant accounting policies (cont’d)
Comprehensive income (loss)
The Company has adopted ASC 220 “Comprehensive Income”, which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Components of comprehensive income include net income (loss) and foreign currency translation adjustments.
Foreign currency translation
The functional currency of the Company is RMB. The Company maintains their financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods.
For financial reporting purposes, the financial statements of the Company prepared using the functional currency has been translated into US Dollars (“USD”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity (deficit) is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income (loss) but are included in accumulated other comprehensive income, a component of stockholders’ equity. There was no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.
For the year ended December 31, 2011 and 2010, the Company recorded foreign currency translation losses of $76,394 and $159,973, respectively. The losses were primarily due to the weakening of the US dollar. Foreign currency translation losses were recognized and recorded as non-operating expense as incurred.
Fair value of financial instruments
Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data, such as the reporting entity's own data (Level 3). A description of each category in the fair value hierarchy is as follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets which the Company can participate.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement, and include inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
For a further discussion of Fair Value Measurement, refer to Note 21.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
2.
Summary of significant accounting policies (cont’d)
Dividends
During the reporting periods, the Company did not declare any dividends.
Reclassifications
Certain prior year balances have not been reclassified to adhere to the current year presentation.
Basic and diluted earnings (loss) per share
Basic earnings (loss) per share are computed using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares of the Company represents the average number of common stock outstanding during the reporting periods.
Diluted earnings (loss) per share are computed using the sum of weighted average number of shares outstanding and dilutive potential shares outstanding during the periods presented. During the year ended December 31, 2011 and 2010, there were no potentially dilutive shares.
Recently issued accounting pronouncements
In June 2011, the FASB (Financial Accounting Standards Board) issued ASU No. 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of change in stockholders’ equity. Instead, ASU 2011-05 requires entities to report all non-owner changes in stockholders’ equity in either a single continuous statement of comprehensive income, or in two separate, but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income, or when an item must be reclassified to net income. ASU 2011-05 requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect that this authoritative guidance will have any material effect on the Company’s financial statements.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS”. The objective of this amendment is to achieve common fair value measurement and disclosure requirements in US GAAP and IFRS. This amendment is to ensure that fair value has the same meaning in US GAAP and IFRS and their respective fair value measurement and disclosure requirements are the same. This guidance is effective for annual periods beginning after December 15, 2011. The Company does not expect that this authoritative guidance will have any material effect on the Company’s financial statements.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
3.
Restricted cash and bills payable
The restricted cash at December 31, 2011 and 2010 represents bank deposits held as collateral for bills payable issued by the Company. When the Company intends or is requested to settle its suppliers by issuance of bills, it is required to place deposits with banks equal to 50% to 100% of the bills amount at the time of issuance. These deposits will be used to settle the bills at maturity. As of December 31, 2011, the Company has issued $20,022,395 in bills which will be funded from various banks under which the Company has entered into such arrangements. These bills will be paid at various times through June 2012, at which point the Company will issue additional bills to its suppliers.
4.
Trade accounts receivables, net
5.
Prepayments and other current assets
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
6.
Inventories, net
Additional allowance for obsolete inventories of $112,554 and $0 were recognized during the years ended December 31, 2011 and 2010, respectively.
7.
Loans to third parties
Notes:
(a)
The loan is interest-bearing at 6% per annum, unsecured and repayable on May 18, 2012.
(b)
Loans of $785,500 and $1,099,700 are interest-bearing at 6% per annum, unsecured and repayable on May 17, 2012 and May 20, 2012, respectively.
Loans measured at historical cost are reported at their outstanding principal balances. The allowance for loan loss represents the estimated probable credit losses on funded loans.
The loan reserve is calculated using loss rates delineated by a risk rating. Factors considered when assessing loss rates include the value of the underlying collateral, if applicable, the industry of the obligor, and the obligor’s liquidity and other financial indicators along with certain qualitative factors. The risk rating is updated for changes in economic and business conditions, including uncertainties that affect the Company’s estimate of probable losses including domestic and global economic uncertainty and large single name defaults.
A loan is considered nonaccruing or impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and/or interest, according to the contractual terms of the agreement. Once a loan has been identified as impaired, management measures impairment and a specific reserve is established. The Company has assessed the loans for potential impairment but did not identify any impairment at December 31, 2011 and 2010. However, the Company has recorded a general loan reserve of $103,686 and $0 as of December 31, 2011 and 2010, respectively. The loan reserve is recorded in general and administration expenses.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
7.
Loans to third parties (cont’d)
When a loan is placed on nonaccrual status, accrued interest receivable is reversed. Interest collections on nonaccruing loans for which the ultimate collectability of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to income when received. The Company ceased accruing interest on loans to third parties and related party during the year while they continued to extend the loans since the Company believes the loans are collectible.
8.
Loans to a related party
The Company has $3,276,170 and $3,159,388 of loans to a related party, Jiangsu Dachao Electronic Vehicle Technology Company Limited at December 31, 2011 and 2010, respectively. The loans are interest-bearing at 6% per annum and unsecured. Of this, $518,430, $1,186,740 and $1,571,000 are repayable in December 2012, May 2012 and June 2012, respectively. The Company assessed the loans for potential impairment but did not identify any impairment as of December 31, 2011 or 2010. However, the Company has recorded a loan reserve of $98,285 and $0 as of December 31, 2011 and 2010, respectively, which is included in general and administrative expenses (see Note 7 for the policy for determining the loan reserve).
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
9.
Amounts due from/to related parties
The amounts due to and due from related parties are interest-free, unsecured and repayable on demand. All the related parties are controlled by certain family members of the officers of the Company. The Company assessed the amounts due from related parties of potential impairment and recorded a reserve of $12,165 and $0 as of December 31, 2011 and 2010, respectively (see Note 7 for the policy for determining the loan reserve)
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
10.
Long-term equity investment
Long-term equity investment represented the Company’s investment in Jiangnan Rural Commercial Bank (“Jiangnan Rural Bank”), an unlisted corporation. Jiangnan Rural Bank is located in Jiangsu Province of the PRC and is primarily engaged in banking and financing services. The Company owns 0.17% of Jiangnan Rural Bank, and accordingly, applies the cost method to account for the investment.
11.
Property, plant and equipment, net
During the reporting periods, depreciation is included in:
As of December 31, 2011 and 2010, property and plant with net book values of $1,737,163 and $1,598,264, respectively, were pledged as collateral under certain loan arrangements (Note 15).
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
12.
Intangible assets, net
Intangible assets represent the brand name of “Niconia” for LEV’s purchased for a total consideration of RMB 20 million. The Company acquired the brand in January 2011 for which $2,241,447 has been paid and the remaining $900,553 is due in 2012. The brand name is amortized on the straight-line basis over the estimated useful life of 20 years. The estimated amortization expense for each year following December 31, 2011 is approximately $157,100 per year.
13.
Land use rights
The Company obtained the right from the relevant PRC land authority for a period of fifty years to use the land on which the office premises, production facilities and warehouses of the Company are situated.
As of December 31, 2011 and 2010, land use rights with net book values of $1,052,814 and $1,037,606, respectively, were pledged as collateral under certain loans agreements (Note 15).
Amortization for the year ended December 31, 2011 and 2010 amounted to $26,034 and $21,746, respectively. The estimated amortization expense for each year following December 31, 2011 is approximately $26,000 per year.
14.
Accrued liabilities and other payables
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
15.
Short-term bank loans
All bank loans are repayable within one year.
The bank loans as of December 31, 2011 and 2010 carried annual interest from 6.10% to 9.72% and 5.10% to 6.23%, respectively, and are due at various dates through December 2012.
The short term bank loans were secured by the Company’s following assets, which are presented at their net book values:
The unsecured bank loans as of December 31, 2011 and 2010 were guaranteed by Mr. and Mrs. Shi and three non-related parties. Each of the aforementioned parties did not receive any compensation for acting as guarantors for the Company. During the reporting periods, there were no covenant requirements under the bank loans granted to the Company.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
16.
Income tax
United States
The Company is subject to the United States of America federal tax rate of 34%. No provision for the US federal income taxes has been made as the Company had no taxable income in this jurisdiction for the reporting periods. The Company has not recognized a deferred tax liability for the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2011 and 2010, because the Company currently does not expect those unremitted earnings to reverse and become taxable to the Company in the foreseeable future. A deferred tax liability will be recognized when the Company no longer plans to permanently reinvest undistributed earnings. Calculation of related unrecognized deferred tax liability is not practicable.
BVI
Best Green BVI was incorporated in the British Virgin Islands and, under the current laws of the British Virgin Islands, is not subject to income tax.
PRC
Best Green Changzhou and the VIEs, which are established in the PRC, are subject to PRC enterprise income tax (“EIT”) at the statutory rate of 25% on their assessable profits for the years ended December 31, 2011 and 2010.
The components of the provision for income taxes are:
A reconciliation between the income tax computed at the U.S statutory rate and the Company’s provision for income tax for the years of ended December 31, 2011 and 2010 are as follows:
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
16.
Income tax (cont’d)
The management evaluated the Company’s tax positions in accordance with ASC 740 and considered that no provision for uncertainty in income taxes was necessary as of December 31, 2011 and 2010. All income tax returns of the Combined Entities are subject to examination by PRC tax jurisdictions.
Current deferred tax assets as of December 31, 2011 and 2010 were composed of:
Non current deferred tax assets as of December 31, 2011 and 2010 were composed of:
The ultimate realization of benefits of the Company’s deferred tax assets has some uncertainty, accordingly, the Company has recorded a valuation allowance to reduce some of these benefits. The valuation allowance increased by $450,496 during the year ended December 31, 2011. There were no valuation allowances previously.
17.
Defined contribution plan
Pursuant to the relevant PRC regulations, the Company is required to make contributions at a certain percentage of the employees’ salaries and wages to a defined contribution retirement plan organized by a state-sponsored social insurance plan in respect of the retirement benefits for the Company’s employees in the PRC. The only obligation of the Company with respect to the retirement plan is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in future years. The defined contribution plan contributions were charged to the consolidated statements of operations and comprehensive income (loss). The Company contributed $70,497 and $41,239 during the years ended December 31, 2011 and 2010, respectively.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
18.
Commitments and contingencies
Capital commitment
As of December 31, 2011 and 2010, the Company had capital commitments amounting to $590,382 and $610,242, respectively, with respect to the acquisition of property, plant and equipment that were contracted for but not provided in the consolidated financial statements. Such commitments will be recorded to the financial statements when the property, plant and equipment is received.
Contingencies
As of December 31, 2011 and 2010, the Company acted as guarantor for bank loans granted to certain business associates totaling $6,393,970 and $6,272,100, respectively. The maximum amount that can be drawn on these guaranteed loans is $9,221,770 at December 31, 2011 and these guarantees expire at various times through November 2012. None of the Company’s directors or executive officers are involved in the normal operations or have invested in the business of the guaranteed business associates.
All the above guarantees have no recourse provisions that would enable the Company to recover from the business associates any amounts paid under the guarantees and any assets held as collateral that the Company can obtain or liquidate to recover all or a portion of the amounts that could be paid under the guarantees. If the business associates fail to perform under their contractual obligation, the Company is obligated to make future payments including the contractual principal amounts, related interest and penalties.
Management has assessed the fair value of the obligations arising from the above financial guarantees and recognized a provision of $255,759 and $0 as of and for the years ended December 31, 2011 and 2010, respectively, which are recorded in general and administrative expenses.
19.
Related party transactions
Apart from the transactions and information as disclosed in notes 8 and 9 to the consolidated financial statements, the Company had the following transactions with its related parties during the years ended December 31, 2011 and 2010, respectively.
The Company believes that the terms obtained and consideration received in connection with the transactions described above were no less favorable than those that would have been obtained by the Company in arm’s-length transactions with an unrelated party.
20.
Stockholders’ equity
In June 2011, the Board of Directors issued 96,500 unregistered shares of common stock at par value of $0.0001 with a fair value of $193,000 as consideration for services provided by certain vendors. The fair value per share was determined to be the stock price on the day when shares were issued.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
21.
Fair Value Measurement
The Company utilizes fair value measurements to determine fair value disclosures. Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, the Company uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments.
Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximates fair value.
Restricted cash: The carrying amounts of restricted cash approximates fair value.
Loans, net: Fair values of loans to third parties and related parties are estimated using discounted cash flow analyses, using interest rates currently being offered by the People’s Bank of China for loans with similar terms to borrowers. The resulting amounts are adjusted to estimate loan reserve. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Short-term bank loans: The carrying amounts of short-term bank loans approximates fair value.
Bills Payable: The carrying amounts of bills payable approximates fair value.
Off-balance-sheet commitment and contingency: Fair values of the obligations arising from the financial guarantees for third party loans are estimated using discounted cash flow analysis, using interest rates currently being offered by the People’s Bank of China for the guaranteed loans with similar terms to borrowers. The resulting amounts are adjusted to estimate guarantee obligation provision.
The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company’s consolidated balance sheets are as follows as of December 31:
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
22.
Segment information
The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the reportable segments. Management, including the chief operating decision maker, reviews the operating results solely by monthly revenue of cryogen-free refrigerators, cable products and light electric vehicles of the Company. As such, the Company has determined that there are three operating segments as defined by ASC 280 “Segment Reporting”: Cryogen-free refrigerators, cable products and light electric vehicles.
Reconciliation is provided for unallocated amounts relating to corporate operations which are not included in the segment information.
China Green Energy Industries, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2011 and 2010
22.
Segment information (cont’d)
All of the Company’s long-lived assets are located in the PRC. Geographic information about the revenues, which are classified based on the customers, is set out as follows:
23.
Subsequent event
In March 2012, the Company repaid the short term loan of RMB10,000,000 (Approximately $1,571,000) to Wujin Agriculture Bank.
EXHIBIT INDEX
*Filed herewith.