The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the
Securities and Exchange Commissionon April 15, 2014. FORWARD-LOOKING STATEMENTS: This Quarterly Report on Form 10-Q for the three months ended March 31, 2014contains "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, including statements that include the words "believes," "expects," "anticipates," or similar expressions. These forward-looking statements include, among others, statements concerning our expectations regarding our working capital requirements, financing requirements, business, growth prospects, competition and results of operations, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The forward-looking statements in this Quarterly Report on Form 10-Q for the three months ended March 31, 2014involve known and unknown risks, uncertainties and other factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by the forward-looking statements contained herein.
OVERVIEW OF OUR BUSINESS
We primarily manufacture, market and sell silicon wafers to manufacturers of solar cells. In addition, we manufacture PV modules with solar cells purchased from third parties.
Product Line 1 - Silicon Wafers
We produce silicon wafers by extracting purified mono-crystalline silicon from virgin poly-silicon feedstock utilizing mono-crystalline silicon ingot growers. Then we cut the purified mono-crystalline silicon ingots into silicon wafers with multi-wire saws. Silicon wafers are one of the most important components in solar cells. As of
March 31, 2014, we have eleven mono-crystalline silicon ingot growers. Maximum production capacity of each mono-crystalline silicon ingot grower is approximately one ton of mono-crystalline silicon ingots per month. Our current mono-crystalline silicon ingot production capacity is approximately 132 tons per annum. We are also equipped with five multi-wire saws, each of which can produce approximately 70 silicon wafers per kilogram of mono-crystalline silicon ingot. Based on an estimated 2.8 watts (W) per silicon wafer, our current silicon wafer production capacity is approximately 20MW per annum.
During the three months ended
Product Line 2 - PV Modules
We have two semi-automatic production lines that manufacture PV modules. Our existing production capacity is approximately 20MW of PV modules per annum. During 2012, we produced various types of PV module samples; however we did not produce PV module products in commercial quantities. Currently, we purchase solar cells from third parties to manufacture PV modules. Our company makes some innovation that using the PV modules we produced into the irrigation system in agriculture industry. During the three months ended
March 31, 2014, the sales income of $24,650in this business part. 9 --------------------------------------------------------------------------------
Overview of Properties, Plant and Equipment
We have acquired land-use rights to 71,346 square meters for industrial usagein
Henan Province, PRC. The land use rights expire on July 23, 2060. We began the construction of our manufacturing facilities on this site in 2008. As of March 31, 2013, we have completed the construction of five workshops. Two of the five workshops are in operation with each comprises of 2,016 square meters.
Critical Accounting Policies
During the three months ended
March 31, 2014, there were no changes to our critical accounting policies and the use of estimates. For further information, please refer to "Critical Accounting Policies" included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013.
We are also expanding the production capacity of our existing product lines through the purchase of additional equipment and recruitment of personnel. We also plan to produce solar cells by ourselves and provide advanced applications of solar energy to complete the value chain of this industry.
RESULTS OF OPERATIONS
Comparison of Three Months ended
Revenues: In the current period, revenue was
$443,545,compared with the prior period in which we did't have the revenue .The increase was due to a increase of our silicon wafers sales and the PV Modules.. During the first quarter of 2013, the market condition of our silicon wafers was unexpectedly difficult. In this year, the market is getting better , as a result, the company decided to sales the silicon wafers in time , which resulted in a increase in our revenue.
Cost of Sales: Cost of sales was
Gross Loss: In the current period , gross profit was
$455, compare to gross loss of $604,018for the same period in previous year. The gross loss generated from the three months ended March 31, 2013was due to allowance of inventory charged into cost of sales. General and Administrative Expenses: General and administrative expenses consist primarily of salaries and other personnel-related costs, professional fees and other costs. General and administrative expenses were $92,883and $93,049for the three months ended March 31, 2014and 2013, respectively. The decrease was mainly due to tight cash flow status, which resulted in a reduction of operation. 10 -------------------------------------------------------------------------------- Selling expense: Selling expenses include exhibition and other selling expenses. Selling expenses for the three months ended March 31, 2014and 2013 were $279and $1,446, respectively, representing a decrease of $1,167or 80.7%. The decrease was primarily due to the company's cut in certain exhibition and other selling efforts because of its tight cash flow situation during the first quarter of 2014. Interest expenses: Interest expenses, net of interest income, decreased by $473or 0.4% from $122,829in the prior period to $122,356in the current period. The decrease was mainly due to decreased principal of loans.
Net Loss:In the current period, net loss decreased by
LIQUIDITY AND CAPITAL RESOURCES
March 31, 2014, we had total current assets of $1,395,927and total current liabilities of $1,866,581, resulting in a working capital deficit of $470,654. Cash and cash equivalents were $12,250at the beginning of the quarter ended March 31, 2014and decreased to $4,248at the end of the quarter ended March 31, 2014. During the quarter ended March 31, 2014, cash inflow in operations was $475,619, an increase of $586,590from cash outflow $110,971for the same period of 2013. The increase of inward cash-flow was mainly due to the following reasons: (1) prepaid expenses and other current assets provided net cash of $76,793during first quarter of 2014 compared to net cash spent of $12,884during same period of 2013; (2) cash flow about inventories were $444,480during the first quarter of 2014, comparing with net cash of $8,530spent on purchasing inventories during the same period of 2013; (3) during the first quarter of 2013, the Company charged $604,018and as allowance of inventory, and in the first quarter of 2014 we sold those products; (4) during three months ended March 31, 2014, net cash outflow resulting from increased accounts receivable was $19,153, as compared to net cash inflow of $94,602due to collection in the same period of 2013; and (5) during three months ended March 31, 2014, increased accrued expenses and other current liabilities provided net cash of $141,734, as compared to a net cash outflow of $5,489in the same period of 2013. Net cash used in investing activities for the current period is zero because there are no investing activities occured during the three months ended March 31, 2014, compared with $7,625net cash used in the prior period of 2013. Net cash flowing out by financing activities in the three months ended March 31, 2014were $483,411and flowing in were $521in 2013. The difference was mainly due to the repayment of RMB 2,950,000to related parties. The Company's difficult financial position, accumulated deficit and low share price and inactive stock trading volume have made it difficult for the Company to raise additional capital. 11
Related party loans
The following table presents amounts of related party loans:
Related parties Maturity date Interest rate March 31, 2014 December 31, 2013 Mr.
Wensheng Chen, Chief Executive Officer, Chairman of Board December 31, 2016 3.5% $ 3,200,626$ 3,201,752 Ms. Ling Chen, President December 31, 2016 3.5% 1,137,394 1,167,964 Zhuhai Yuemao Laser Facility Engineering Co., Ltd. ("Yuemao Laser") December 31, 2016 3.5% 476,933 481,242 Yuemao Science & Technology Group("Yuemao Technology") December 31, 2016 3.5% 8,911,682 9,638,498 Total 13,726,635 14,489,456
Both Yuemao Laser and Yuemao Technology are PRC companies and controlled by the Company's chairman and Chief Executive Officer, Mr.
December 31, 2013, the amount due to Mr. Wensheng Chenwas $3,201,752. During first quarter of 2014, no additional loans was borrowed from Mr. Wensheng Chen. As of March 31, 2014, amount due to Mr. Chenwas $3,200,626and the difference was due to exchange rate difference. Mr. Chenhas agreed that the Company can pay the accrued interest when its cash flow status allows.
During fiscal 2013, Ms.
Ling Chenpaid various expenses on behalf of the Company, the amount due to Ms. Ling Chenwas $1,167,964as of December 31, 2013. During first quarter of 2014, no additional loans was borrowed from Ms. Ling Chenand the difference was due to exchange rate difference. As of March 31, 2014, amount due to Ms. Ling Chenwas $1,137,394. Ms. Chen has agreed that the Company can make payment of accrued interest when its cash flow status allows.
Yuemao Technology is a private company established under the laws of the PRC and controlled by our Chairman and Chief Executive Officer, Mr.
Wensheng Chen. As of December 31, 2013, the amount due to Yuemao Technology was $9,638,498. During first quarter of 2014, the Company repaid RMB 2,950,000(approximately $480,000) loans to Yuemao Technology. As of March 31, 2014, the amount due to Yuemao Technology was $8,911,682. Yuemao Technology agreed that the Company can pay the accrued interest when its cash flow status allows.
Yuemao Laser is a private company established under the laws of the PRC and controlled by our Chairman and Chief Executive Officer, Mr.
Wensheng Chen. As of December 31, 2013, the amounts due to Yuemao Laser were $481,242. During first quarter of 2014, no additional loans was borrowed from Yuemao Laser. As of March 31, 2014, the amounts due to Yuemao Laser were $476,933and the difference was due to exchange rate difference. Yuemao Laser agreed that the Company can pay the accrued interest when its cash flow status allows. 12 --------------------------------------------------------------------------------
Future Cash Requirements
During 2014, the Company plans to raise approximately
The Company's cash requirements can be divided into two categories.
a public company, including legal fees, audit/review fees and other
professional fees; and costs incurred by the Company's operating subsidiary,
including wages, utilities and other operating costs. The Company expects its
cash requirements under this category to be approximately
to acquire an existing solar cell production facility.
March 31, 2014, the Company does not have sufficient capital to meet its planned expansion. Due to the negative profit margins during the three months ended March 31, 2014, the Company does not expect to achieve positive cash flow in the short-term. In addition, given the Company's short operating history, it is difficult to predict when the Company would begin to generate sufficient cash to support its operations. However, in the foreseeable future, related-parties intend to continue to provide financial resources to meet the Company's daily operating cash needs,including the Company's CEO, Mr. Wensheng Chen,Yuemao Technology, and Yuemao Laser. The Company plans to raise funds from domestic and foreign banks and/or financial institutions to increase working capital in order to meet its capital demand described in category (2) above.
Going forward, the Company anticipates that it will require an additional
Without additional funding, the Company will not be able to pursue its business model. If adequate funds are not available or are not available on acceptable terms when required, we would be required to significantly curtail our operations and would not be able to fund the development of the business envisioned by our business model. These circumstances could have a material adverse effect on our business, which could affect our ability to continue to operate as a going concern. The recent and unprecedented disruption in the credit markets has had a significant impact on a number of financial activities. Additional financing is desirable within the next nine months in order to meet our current and projected cash flow deficits from business operations and future development.
Off-Balance Sheet Arrangements
March 31, 2014, we have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any other parties. We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, operating results and cash flows.