Attached files

file filename
EX-32.0 - CERTIFICATION OF CEO AND CFO - ForceField Energy Inc.ssieex32.htm
EX-31.0 - CERTIFICATION - ForceField Energy Inc.ssie_ex31.htm
EXCEL - IDEA: XBRL DOCUMENT - ForceField Energy Inc.Financial_Report.xls


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

þ
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended August 31, 2011

¨
Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period  __________ to __________

Commission File Number: 333-145910
 
SunSi Energies Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
  
20-8584329
(State or other jurisdiction of
incorporation or organization)
  
(IRS Employer Identification No.)

45 Main Street, Suite 309
Brooklyn, New York
 
11201
(Address of principal executive offices)
 
(Zip Code)
 
646-205-0291
(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days þ Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ  No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer
o
Accelerated filer
o
Non-Accelerated filer
o
Smaller reporting company
þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes  þ No

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 29,959,628 common shares as of October 10, 2011. 
 


 
 

 
     
Page
 
PART I – FINANCIAL INFORMATION
   
       
Item 1:
Financial Statements
 
3
       
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
4
       
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
 
14
       
Item 4:
Controls and Procedures
 
14
       
 
PART II – OTHER INFORMATION
   
       
Item 1:
Legal Proceedings
 
15
       
Item 1A:
Risk Factors
 
15
       
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
 
15
       
Item 3:
Defaults Upon Senior Securities
 
15
       
Item 4:
[Removed and Reserved]
 
15
       
Item 5:
Other Information
 
15
       
Item 6:
Exhibits
 
15
 
 
2

 
 
PART I - FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

Our unaudited financial statements included in this Form 10-Q are as follows:
 
F-1
Consolidated Balance Sheet as of August 31, 2011 (Unaudited) and May 31, 2011;
   
F-2
Interim Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended August 31, 2011 and August 31, 2010
   
F-3
Interim Unaudited Consolidated Statements of Cash Flows for the Three Months Ended August 31, 2011 and August 31, 2010 
   
F-4
Notes to Interim Unaudited Consolidated Financial Statements;
 
 
3

 
 
SUNSI ENERGIES INC.
Consolidated Balance Sheets
 
   
August 31,
   
May 31,
 
   
2011
   
2011
 
   
(Unaudited)
       
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 1,213,642     $ 640,880  
Accounts receivable, net
    3,780,964       4,669,490  
Notes receivable
    1,586,522       941,314  
Inventory
    1,006,432       563,579  
Prepaid expenses and other current assets
    72,191       399,086  
Total current assets
    7,659,751       7,214,349  
Fixed assets
    7,741,571       7,559,369  
Goodwill
    3,411,073       3,357,277  
Intangible assets, net
    3,290,229       3,025,489  
Related party receivables
    1,529,985       1,177,204  
Other assets
    21,448       248,879  
Total assets
  $ 23,654,057     $ 22,582,567  
                 
LIABILITIES AND EQUITY
 
Current liabilities:
               
Accounts payable
  $ 4,600,572     $ 5,320,381  
Accrued liabilities
    775,548       256,444  
Related party payables
    5,615,675       5,535,149  
Income taxes payable
    1,449,070       1,561,112  
Total current liabilities
    12,440,865       12,673,086  
Total liabilities
    12,440,865       12,673,086  
                 
Commitments and contingencies
    -       -  
Redeemable common stock and capital in excess of $0.001 par value.  1,349,628 shares,
               
included in issued and outstanding below
    -       2,707,488  
                 
Equity:
               
SunSi Energies Inc. stockholders' equity:
               
Preferred stock, $0.001 par value. 25,000,000 shares authorized; zero shares
               
issued and outstanding
    -       -  
Common stock, $0.001 par value. 75,000,000 shares authorized; 29,947,128 and 29,436,928 shares
         
issued and outstanding as of August 31, 2011 and May 31, 2011, respectively
    29,947       29,437  
Additional paid-in capital
    8,700,812       5,057,252  
Retained earnings (accumulated deficit)
    (1,288,144 )     (1,253,344 )
Accumulated other comprehensive income
    215,743       100,896  
Total SunSi Energies Inc. stockholders' equity
    7,658,358       3,934,241  
Noncontrolling interests
    3,554,834       3,267,752  
Total equity
    11,213,192       7,201,993  
Total liabilities and equity
  $ 23,654,057     $ 22,582,567  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-1

 
 
SUNSI ENERGIES INC.
Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
 
   
Three Months Ended August 31,
 
   
2011
   
2010
 
             
Sales
  $ 10,266,791     $ -  
Cost of goods sold
    8,230,394       -  
Gross margin
    2,036,397       -  
Operating expenses:
               
Professional fees
    227,067       117,237  
General and administrative
    1,465,092       41,159  
Total operating expenses
    1,692,159       158,396  
Income (loss) from operations before income taxes
    344,238       (158,396 )
Provision for income taxes
    146,748       -  
Net income (loss)
    197,490       (158,396 )
Less: Net income attributable to noncontrolling interests
    232,290       -  
Net loss attributable to SunSi Energies Inc. common shareholders
  $ (34,800 )   $ (158,396 )
                 
Basic and diluted earnings (loss) per share
  $ (0.00 )   $ (0.01 )
                 
Weighted-average number of common shares outstanding:
               
Basic and diluted
    29,665,127       27,428,995  
                 
Comprehensive income (loss):
               
Net income (loss)
  $ 197,490     $ (158,396 )
Foreign curreny translation adjustment
    169,639       -  
Comprehensive income (loss)
    367,129       (158,396 )
Comprehensive income attributable to noncontrolling interests
    287,082       -  
Comprehensive income (loss) attributable to SunSi Energies Inc.
  $ 80,047     $ (158,396 )
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-2

 
 
SUNSI ENERGIES INC.
Consolidated Statements of Cash Flows (Unaudited)
 
   
Three Months Ended August 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income (loss)
  $ 197,490     $ (158,396 )
Adjustments to reconcile net income (loss) to cash provided by (used) in operating activities:
         
Depreciation and amortization
    297,556       -  
Common stock issued in exchange for services
    45,600       -  
Changes in operating assets and liabililites:
               
Accounts receivable
    953,373       -  
Notes receivable
    (623,600 )     -  
Inventory
    (429,330 )     -  
Prepaid expenses and other current assets
    329,640       -  
Related party receivables
    (330,460 )     -  
Other assets
    229,023       -  
Accounts payable
    (794,628 )     (51,950 )
Accrued liabilities
    510,825          
Income taxes payable
    (135,637 )        
Related party payables
    -       (5,671 )
Net cash provided by (used in) operating activities
    249,852       (216,017 )
                 
Cash flows from investing activities:
               
Purchase of property, plant and equipment
    (217,701 )     -  
Purchase of intangible assets
    (354,319 )     -  
Net cash used in investing activities
    (572,020 )     -  
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock
    890,982       240,300  
Proceeds from related party payables
    43,202       -  
Repayments of related party payables
    (50,000 )     -  
Proceeds from advances payable
    -       26,700  
Repayments of advances payable
    -       (179,000 )
Net cash provided by financing activities
    884,184       88,000  
                 
Effect of exchange rates on cash and cash equivalents
    10,746       -  
Net increase (decrease) in cash and cash equivalents
    572,762       (128,017 )
Cash and cash equivalents at beginning of period
    640,880       598,468  
Cash and cash equivalents at end of period
  $ 1,213,642     $ 470,451  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ -     $ -  
Cash paid for income taxes
  $ -     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Accrued share issuance costs
  $ -     $ 26,700  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-3

 
 
SUNSI ENERGIES INC.
Notes to Interim Unaudited Consolidated Financial Statements
August 31, 2011
(Expressed in United States dollars)
 
 
1.
NATURE OF OPERATIONS

SunSi Energies Inc. (“the Company”, or “SunSi”) was incorporated on January 30, 2007 in the State of Nevada. SunSi, through its operations in The People’s Republic of China (“China” or “PRC”), is a specialty chemical manufacturer and distributor whose focus is to acquire and develop a portfolio of high quality trichlorosilane (“TCS”) producing facilities and distribution rights that possess a potential for future growth and expansion. TCS, a chemical primarily used in the production of polysilicon, is an essential raw material utilized in the production of solar cells for photovoltaic (“PV”) energy producing panels which convert sunlight into electricity. Prior to December 9, 2010, SunSi was a Development Stage Company as defined by ASC Topic 915. After its December 9, 2010 acquisition of a 90% equity interest in Zibo Baokai Commerce and Trade Co., Ltd. ("Baokai"), the Company emerged from development stage status and started generating revenues.

2.
SUMMARY OF  SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and are expressed in United States dollars. The Company’s fiscal year-end is May 31. The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary SunSi Energies Hong Kong Limited (“SunSi HK”), SunSi HK's 90% owned subsidiary Zibo Baokai Commerce and Trade Co., Ltd. and SunSi HK's 60% owned subsidiary Wendeng He Xie Silicon Industry Co., Ltd. (“Wendeng”). All intercompany accounts have been eliminated in consolidation. As a result of the acquisitions of Baokai and Wendeng, the Company transitioned from a development stage company to planned operations. Consequently, the need to disclose certain historical data required as a development stage company and presented in prior company filings is no longer necessary.

The Company’s significant accounting policies are as follows:

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods.   These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation on useful lives of property, plant and equipment.  Actual results could differ from those estimates.

Financial Instruments

The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost and consist solely of bank deposits held in the United States, Hong Kong and the PRC. The carrying amount of cash and cash equivalents approximates fair value.

At August 31, 2011, cash and cash equivalents totaling $728,584 were held in banks in China; the Wendeng Branch of ICBC (Industrial & Commercial Bank of China). The remittance of these funds out of China is subject to exchange control restrictions imposed by the Chinese government. Deposits in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. Management believes the probability of a bank failure, causing loss to the Company, is remote.
 
 
F-4

 
 
Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable.  At August 31, 2011 and May 31, 2011, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the United States, Hong Kong and the PRC, which management believes are of high credit quality.  

With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition.  The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of accounts receivable.

Allowance for doubtful accounts
 
The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables.  A considerable amount of judgment is required in assessing the amount of the allowance.  The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future.  If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a specific allowance will be required.

Bad debts are written off when identified.  The Company extends unsecured credit to customers up to one month in the normal course of business.  The Company does not accrue interest on trade accounts receivable. Historically, losses from uncollectible accounts have not significantly deviated from the specific allowance estimated by the management.  This specific provisioning policy has not changed since establishment and the management considers that the aforementioned specific provisioning policy is adequate and does not expect to change this established policy in the near future.

Inventory
 
Inventories are stated at the lower of cost or market value.  Cost is determined on weighted average basis and includes all expenditures incurred in bringing the goods in a saleable condition to the point of sale.   The Company’s inventory reserve requirements generally fluctuate based on projected demands and market conditions. In determining the adequate level of inventories to have on hand, management makes judgments as to the projected inventory demands as compared to the current or committed inventory levels. Inventory quantities and condition are reviewed regularly and provisions for excess or obsolete inventory are recorded based on the condition of inventory and the Company’s forecast of future demand and market conditions.
 
No provisions for excess or obsolete inventory were made as of August 31, 2011 or May 31, 2011.

Intangible assets – 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 50 years. The lease term is obtained from the relevant PRC land authority.
 
Property, plant and equipment

Property, plant and equipment is 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.

The property, plant and equipment of the Company will be depreciated with straight-line method according to the following estimated residual value and service life.
 
 
F-5

 
 
   
Service life (year)
   
Estimated
residual rate
%
   
Annual
depreciation rate
%
 
                   
Building
   
20
     
5
     
  2.05
 
Furniture and equipment
   
  5
     
5
     
  3.17
 
Machines and equipment
   
10
     
5
     
  7.34
 
Automotive equipment
   
  5
     
5
     
10.93
 
Office equipment
   
  5
     
5
     
  8.64
 

The residual value and service life of property, plant and equipment will be reviewed on each balance sheet date, and adjusted if necessary.

The Company capitalizes the interest expenses incurred before property, plant and equipment are built and installed to the usable state, and capitalizes other loan interest expenses.
 
Construction in progress

The value of construction in progress comprises buildings and plants under construction, as well as machines and equipment being installed and commissioned, specifically comprises the costs of property, plant and equipment and other direct costs, relevant interest expenses accrued during the construction period and profits and losses from foreign exchange transactions.
 
Depreciation will not start until the construction in progress is completed and put into operation.
 
Impairment of Assets

The Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its long-lived assets, management performs an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining depreciation or amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows.
 
Each year, the Company performs a transitional test for impairment of goodwill and other indefinite-lived intangible assets. This test is performed by comparing, at the reporting unit level, the carrying value of goodwill to its fair value. The Company assesses fair value based upon its best estimate of the present value of future cash flows that it expects to generate by the reporting unit. The Company’s annual fair value assessment is performed each May 31 on subsidiaries with material goodwill on their respective balance sheets. However, changes in expectations as to the present value of the reporting unit’s future cash flows might impact subsequent years’ assessments of impairment.
 
Goodwill and Intangible Assets

Under ASC 350, the Company is required to perform an annual impairment test of the Company’s goodwill and indefinite-lived intangibles. On an annual basis, management assesses the composition of the Company’s assets and liabilities, as well as the events that have occurred and the circumstances that have changed since the most recent fair value determination. If events occur or circumstances change that would more likely than not reduce the fair value of goodwill and indefinite-lived intangibles below their carrying amounts, they will be tested for impairment. The Company will recognize an impairment charge if the carrying value of the asset exceeds the fair value determination. The impairment test that the Company has selected historically consisted of a ten year discounted cash flow analysis including the determination of a terminal value, and requires management to make various assumptions and estimates including revenue growth, future profitability, peer group comparisons, and a discount rate which management believes are reasonable.
 
 
F-6

 
 
The impairment test involves a two-step approach. Under the first step, the Company determines the fair value of each reporting subsidiary to which goodwill has been assigned. The Company then compares the fair value of each reporting subsidiary to its carrying value, including goodwill. The Company estimates the fair value of each reporting subsidiary by estimating the present value of the reporting subsidiaries future cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss.
 
Under the second step, the Company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit, as determined in the first step. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.
 
Income Taxes

The Company accounts for income taxes under FASB ASC 740 Accounting for Income Taxes. Under FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities 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. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FASB ASC 740-10-05 Accounting for Uncertainty in Income Taxes prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.

The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We assess the validity of our conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit.  We have determined that there were no uncertain tax positions for the periods ended August 31, 2011 and May 31, 2011.
 
Basic and Diluted Net Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with ASC 260 “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.

Fair value of financial instruments

The Company adopted FASB ASC 820 on June 1, 2010.  The adoption of FASB ASC 820 did not materially impact the Company's financial position, results of operations or cash flows.  FASB ASC 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which the fair value option was not elected.  The carrying amounts of both the financial assets and liabilities approximate to their fair values due to short maturities or the applicable interest rates approximate the current market rates.
 
 
F-7

 

Revenue Recognition

Revenue from the sales of the Company’s products is recognized upon customer acceptance. This occurs at the time of delivery to the customer, provided persuasive evidence of an arrangement exists, such as a signed sales contract. The significant risks and rewards of ownership are transferred to the customers at the time when the products are delivered and there is no significant post-delivery obligation to the Company. In addition, the sales price is fixed or determinable and collection is reasonably assured.  The Company does not provide customers with contractual rights of return for products.  When there are significant post-delivery performance obligations, revenue is recognized only after such obligations are fulfilled.  The Company evaluates the terms of the sales agreement with its customer in order to determine whether any significant post-delivery performance obligations exist.  Currently, the sales do not include any terms which may impose any significant post-delivery performance obligations on the Company.

Revenue from the sales of the Company’s products represents the invoiced value of goods, net of the value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17 percent of the gross sales price. This VAT may be offset by the VAT paid by the Company on raw and other materials that are included in the cost of producing the Company’s finished products.
 
Advertising expenses
 
Advertising costs are expensed as incurred.
 
Shipping and handling costs
 
All shipping and handling costs are included in cost of sales expenses.

Foreign Currency Translation

The Company’s functional and reporting currency is the United States dollar. Transactions may occur in Renminbi (“RMB”) dollars and management has adopted ASC 830 “Foreign Currency Matters”. The RMB is not freely convertible into foreign currencies.  Monetary assets denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Average monthly rates are used to translate revenues and expenses. The Company has not, to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
 
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 for the respective periods.

Assets and liabilities of the Company’s operations are translated into the reporting currency, United States dollars, at the exchange rate in effect at the balance sheet dates. Revenue and expenses are translated at average rates in effect during the reporting periods. Equity transactions are recorded at the historical rate when the transaction occurred. The resulting translation adjustment is reflected as accumulated other comprehensive income, a separate component of stockholders' equity in the statement of stockholders' equity.  

Comprehensive Gain or Loss

ASC 220 “Comprehensive Income,” establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As of August 31, 2011, the Company has items that represent comprehensive income and, therefore, has included a schedule of comprehensive income (loss) in the financial statements.
 
 
F-8

 

3.
THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

The following Accounting Standards Codification Updates have been issued prior to, or will become effective after the end of, the period covered by these financial statements. The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
 
Pronouncement   Issued   Title
         
ASU No. 2010-25   September 2010   Plan Accounting—Defined Contribution Pension Plans (Topic 962) Reporting Loans to Participants by Defined Contribution Pension Plans EITF consensus
ASU No. 2010-26
 
October 2010
 
Financial Services—Insurance (Topic 944) Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts EITF consensus
ASU No. 2010-27
 
December 2010
 
Other Expenses (Topic 720) Fees Paid to the Federal Government by Pharmaceutical Manufacturers EITF consensus
ASU No. 2010-28
 
December 2010
 
Intangibles—Goodwill and Other (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts  EITF consensus
ASU No. 2010-29
 
December 2010
 
Business Combinations (Topic 805) Disclosure of Supplementary Pro Forma Information for Business Combinations EITF consensus
ASU No. 2011-01
 
January 2011
 
Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20
ASU No. 2011-02
 
April 2011
 
Receivables (Topic 310) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring
ASU No. 2011-03
 
April 2011
 
Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements
ASU No. 2011-04
 
May 2011
 
Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
ASU No. 2011-05
 
June 2011
 
Comprehensive Income (Topic 220): Presentation of Comprehensive Income
ASU No. 2011-06
 
July 2011
 
Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers
ASU No. 2011-07
 
July 2011
 
Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities
ASU No. 2011-08
 
September 2011
 
Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment
ASU No. 2011-09
 
September 2011
 
Compensation – Retirement Benefits – Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan
 
To the extent appropriate, the guidance in the above Accounting Standards Codification Updates is already reflected in our financial statements and management does not anticipate that these accounting pronouncements will have any future effect on our financial statements.
 
4.
ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
 
Accounts receivable and notes receivable at August 31, 2011 and May 31, 2011 were comprised of the following:
 
   
August 31, 2011
   
May 31, 2011
 
             
Accounts receivable
 
$
3,780,964
   
$
4,669,490
 
Notes receivable
   
1,586,522
     
941,314
 
                 
Total
 
$
5,367,486
   
$
5,610,804
 
 
Notes receivable represent negotiable commercial paper which can be utilized to acquire new goods or to satisfy invoices due third parties in China.
 
 
F-9

 

5.
INVENTORY
 
Inventory at August 31, 2011 and May 31, 2011 was comprised of the following:
 
   
August 31, 2011
   
May 31, 2011
 
             
Raw materials
 
$
882,140
   
$
526,753
 
Finished goods
   
124,292
     
36,826
 
                 
Total
 
$
1,006,432
   
$
563,579
 

No provision for excess or obsolete inventory was made at August 31, 2011 or May 31, 2011.
 
6. 
PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
Prepaid expenses and other current assets at August 31, 2011 and May 31, 2011 were comprised of the following:
 
   
August 31, 2011
   
May 31, 2011
 
             
Advances to suppliers
 
$
67,986
   
$
360,113
 
Prepaid expenses
   
     
36,101
 
Other
   
4,205
     
2,872
 
                 
Total
 
$
72,191
   
$
399,086
 
 
Advances made to suppliers are for the purchase of raw materials and are expected to be recovered within one year.
 
 
F-10

 
 
7. 
PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at August 31, 2011 and May 31, 2011 was comprised of the following:
                                                                                                                                                          
         
August 31, 2011
         
May 31, 2011
 
         
Accumulated
   
Net book
         
Accumulated
   
Net book
 
   
Cost
   
Depreciation
   
Value
   
Cost
   
Depreciation
   
Value
 
                                     
Building
 
$
3,696,069
   
$
(83,171
)
  $
3,612,898
   
$
3,637,779
   
$
(36,604
)
  $
3,601,175
 
Furniture and equipment
   
4,179
     
(439
)
   
3,740
     
4,113
     
(193
)
   
3,920
 
Machinery and equipment
   
3,815,161
     
(181,159
)
   
3,634,002
     
3,637,067
     
(78,255
)
   
3,558,812
 
Automotive equipment
   
170,083
     
(18,980
)
   
151,103
     
167,401
     
(8,157
)
   
159,244
 
Office equipment
   
9,865
     
(553
)
   
9,312
     
4,260
     
(210
)
   
4,050
 
Construction in Progress
   
330,516
     
     
330,516
     
232,168
     
     
232,168
 
                                                 
Total
 
$
8,025,873
   
$
(284,302
)
 
$
7,741,571
   
$
7,682,788
   
$
(123,419
)
 
$
7,559,369
 
 
8. 
BUSINESS COMBINATIONS

During the year ended May 31, 2011, the Company completed its acquisitions of equity interests in both Zibo Baokai Commerce and Trade Co., Ltd. and Wendeng He Xie Silicon Industry Co., Ltd. These acquisitions were accounted for as business combinations under the acquisition method of accounting.

Acquisition of Zibo Baokai Commerce and Trade Co., Ltd.

Description of Transaction

On December 8, 2010, SunSi HK acquired a 90% equity interest in Zibo Baokai Commerce and Trade Co., Ltd (“Baokai”) for cash consideration of $263,647. As part of the closing, Baokai was re-formed as a joint venture business under Chinese law and issued a new business license.
 
Founded in January 2008, Baokai is located in the city of Zibo in the Shandong province of the People’s Republic of China. Baokai maintains the right to distribute the trichlorosilane production of Zibo Baoyun Chemical Plant both domestically and internationally. Trichlorosilane (“TCS”), a chemical primarily used in the production of polysilicon, is an essential raw material used in the production of solar cells for photovoltaic panels which convert sunlight into electricity.

The acquisition was accounted for as a business combination under the acquisition method of accounting in accordance with generally accepted accounting principles.
 
 
F-11

 

Fair Value of Consideration Transferred and Recording of Assets Acquired, Liabilities Assumed and Noncontrolling Interests

The following table summarizes the acquisition date fair value of the consideration transferred, identifiable assets acquired, liabilities assumed and noncontrolling interests including an amount for goodwill:

Consideration:
     
Cash and cash equivalents
 
$
263,647
 
Fair value of total consideration transferred
   
263,647
 
         
Recognized amount of identifiable assets acquired and liabilities assumed:
       
Total identifiable net assets
 
$
 
Noncontrolling interest in Baokai
   
(29,294
)
Goodwill
   
292,941
 
   
$
263,647
 

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the acquisition is attributable to the general reputation of the business. The goodwill is not expected to be deductible for tax purposes.

The following summarizes unpaid purchase consideration included in the accompanying Balance Sheet at August 31, 2011 and May 31, 2011:

   
August 31, 2011
   
May 31, 2011
 
Purchase consideration related to the Baokai acquisition, unpaid and accrued
 
$
163,647
   
$
213,647
 
 
 
F-12

 
 
Acquisition of Wendeng He Xie Silicon Industry Co., Ltd.

Description of Transaction

On March 18, 2011, SunSi HK acquired a 60% equity interest in Wendeng He Xie Silicon Industry Co., Ltd. (“Wendeng”) in exchange for total consideration of approximately $5.8 million comprised of the following:

(1)  
$445,075 of cash consideration;
(2)  
1,349,628 restricted shares of SunSi common stock, such shares carry an optional right of redemption whereby the Company shall buy such shares back from shareholder if shareholder exercises the option within six months at a price equivalent to RMB 18,000,000 on the transfer date; and
(3)  
1,574,566 restricted shares of SunSi common stock, transferred by an affiliate of SunSi.

As part of the closing, Wendeng was re-formed as a joint venture business under Chinese law and issued a new business license.

On June 13, 2011, SunSi HK executed an Addendum with Mr. Dongqiang Liu, the 40% minority shareholder of Wendeng, for the purpose of amending the terms to the Equity Transfer Agreement dated November 22, 2010, as amended on December 15, 2010 (collectively the “Original Agreement”), between the parties for the purchase of a 60% equity interest in Wendeng.

Under the terms of the Original Agreement,  the Company would have had an obligation, upon receiving formal notice from Mr. Dongqiang Liu, to buy back 1,349,628 shares of its common stock at a value of RMB 18,000,000 (approximately USD $2.00 per share) from Mr. Dongqiang Liu. The Addendum cancelled any potential obligation of the Company to buy back such shares and confirms that all purchase consideration is fully paid.

As a result of the Addendum, the Company reclassified the value of the common shares previously subject to the buyback provision, approximately $2.7 million, as additional paid-in capital. These shares were presented as redeemable common stock on the Company’s consolidated balance sheets in the prior period.

Founded in April 2008, Wendeng is located in Weihai City in the Shandong province of the People’s Republic of China. Wendeng manufactures and distributes trichlorosilane, a chemical primarily used in the production of polysilicon and an essential raw material utilized in the production of solar cells for photovoltaic panels which convert sunlight into electricity. All of Wendeng’s sales are to destinations within the People’s Republic of China.

The acquisition was accounted for as a business combination under the acquisition method of accounting in accordance with generally accepted accounting principles.

Fair Value of Consideration Transferred and Recording of Assets Acquired, Liabilities Assumed and Noncontrolling Interests

The following table summarizes the acquisition date fair value of the consideration transferred, identifiable assets acquired, liabilities assumed and noncontrolling interests including an amount for goodwill:
 
 
F-13

 

Consideration:
     
Cash and cash equivalents
 
$
445,075
 
Common stock, 1,574,566 shares of SunSi common stock (1)
   
2,645,271
 
Redeemable common stock, 1,349,628 shares of SunSi common stock (2)
   
2,708,838
 
Fair value of total consideration transferred
 
$
5,799,184
 
         
Recognized amount of identifiable assets acquired and liabilities assumed:
       
Financial assets
 
$
3,613,721
 
Inventory
   
473,354
 
Other current assets
   
309,329
 
Related party receivables
   
1,131,548
 
Property, plant and equipment
   
7,392,976
 
Identifiable intangible assets:
       
Land use leasehold
   
1,559,070
 
Customer relationships
   
1,534,000
 
Financial liabilities
   
(10,294,200
)
Total identifiable net assets
   
5,719,798
 
Noncontrolling interest in Wendeng
   
(2,927,000
)
Goodwill
   
3,006,386
 
   
$
5,799,184
 
 
(1)
The $1.68 per share price was determined by reference to recent private placement shares issued, less a discount for marketability. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820.
(2)
Represents the redeemable option price granted by SunSi to the shareholder.

The Company utilized an alternative valuation method for the restricted commons stock issued due to the limited public trading volume of its common stock prior to the measurement date. The recent average daily trading volume of the Company’s common shares was below levels considered by management to be representative of an active market.

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the acquisition is attributable to the general reputation of the business and the collective experience of the management and employees. The goodwill is not expected to be deductible for tax purposes.
 
 
F-14

 
 
Below is a summary of the methodologies and significant assumptions used in estimating the fair value of intangible assets and noncontrolling interests.
 
 
 
Intangible assets — The fair value of the acquired intangible assets was determined using a variety of valuation approaches. In estimating the fair value of the acquired intangible assets, the Company utilized the valuation methodology determined to be most appropriate for the individual intangible asset being valued as described below. The acquired intangible assets include the following:

   
Valuation
Method (2)
   
Estimated
Fair Value
   
Estimated
Useful Lives (1)
 
               
(in years)
 
Cu     Customer relationships
 
Multi-Period
Excess Earnings
    $ 1,534,000       3  
                         
Tot    Total  acquired intangible assets
          $ 1,534,000          
 
(1)
Determination of the estimated useful lives of the individual categories of intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with definite lives is recognized over the shorter of the respective lives of the agreement or the period of time the assets are expected to contribute to future cash flows.
 
(2)
The multi-period excess earnings method estimates an intangible asset’s value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The value attributed to these intangibles was based on projected net cash inflows from existing contracts or customer relationships. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820.
 
Some of the more significant estimates and assumptions inherent in determining the fair value of the customer relationships are associated with forecasting cash flows and profitability. The primary assumptions used were generally based upon the present value of anticipated cash flows, assuming a three year customer attrition rate, discounted to present value at a 25% rate.
 
 
 
Noncontrolling interests — The fair value of the noncontrolling interests of $2.9 million was estimated by applying the income approach. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820. Key assumptions include (i) a compound annual sales growth rate of 33% for the five year period after the measurement date, (ii) a weighted average cost of capital of 19%, (iii) a terminal value based on a long-term sustainable growth rate of 3.5% and (iv) adjustments for lack of control and lack of marketability that market participants would consider when estimating the fair value of the noncontrolling interest in Wendeng.

9. 
GOODWILL AND  INTANGIBLE ASSETS, NET

The carrying amount of goodwill at August 31, 2011 and May 31, 2011 was comprised of the following:
 
   
August 31, 2011
   
May 31, 2011
 
             
Goodwill – Zibo Baokai Commerce and Trade Co., Ltd
  $ 292,941     $ 292,941  
Goodwill – Wendeng He Xie Silicon Industry Co., Ltd
    3,006,386       3,006,386  
Foreign currency translation adjustments
    111,746       57,950  
                 
Goodwill, net at August 31, 2011
  $ 3,411,073     $ 3,357,277  
 
 
F-15

 
 
Intangible assets at August 31, 2011 and May 31, 2011 were comprised of the following:
 
   
August 31, 2011
 
May 31, 2011
 
 
 Amortization
 
Gross
         
Net
   
Gross
         
Net
 
 
Period
 
Carrying
   
Accumulated
   
Book
   
Carrying
   
Accumulated
   
Book
 
 
(Years)
 
Amount
   
Amortization
   
Value
   
Amount
   
Amortization
   
Value
 
                                                   
Intangible assets subject to amortization:
                                                 
Customer relationships
  3.0
 
$
1,580,491
   
$
(237,924
)
 
$
1,342,567
   
$
1,555,565
   
$
(104,541
)
 
$
1,451,024
 
Land lease
50.0
   
1,964,347
     
(16,685
)
   
1,947,662
     
1,580,988
     
(6,523
)
   
1,574,465
 
                                                   
Total
   
$
3,544,838
   
$
(254,609
)
 
$
3,290,229
   
$
3,136,553
   
$
(111,064
)
 
$
3,025,489
 
 
Amortization expense for intangible assets subject to amortization for the three months ended August 31, 2011 and 2010 totaled $140,297 and nil, respectively.
 
10. 
RELATED PARTY RECEIVABLES

Related party receivables were comprised of the following at August 31, 2011 and May 31, 2011:
 
   
August 31, 2011
   
May 31, 2011
 
             
Wendeng Huahai Chemical Co., Ltd.
 
$
1,529,985
   
$
1,177,204
 
                 
Total
 
$
1,529,985
   
$
1,177,204
 

Related party receivables represent trade receivables due from a related company, in which a SunSi shareholder has an equity interest. Sales to the related party customer were $335,856 for the three months ended August 31, 2011. The Company did not record any sales with the related party customer for the three months ended August 31, 2010; which was prior to its March 18, 2011 acquisition of Wendeng.
 
11. 
OTHER ASSETS

Other assets were comprised of the following at August 31, 2011 and May 31, 2011:
 
   
August 31, 2011
   
May 31, 2011
 
             
Deposit – Department of Extrabudgetary Fund, Wendeng
 
$
21,448
   
$
21,110
 
Deposit – TCS Management Association, Wendeng
   
     
7,715
 
Deposit – Intangible assets, Wendeng
   
     
220,054
 
                 
Total
 
$
21,448
   
$
248,879
 
 
 
F-16

 
 
12. 
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities were comprised of the following at August 31, 2011 and May 31, 2011:
 
   
August 31, 2011
   
May 31, 2011
 
             
Accounts payable
 
$
4,600,572
   
$
5,320,381
 
Accrued liabilities
   
775,548
     
256,444
 
                 
Total
 
$
5,376,120
   
$
5,576,825
 
 
Accounts payable and accrued liabilities primarily represents trade payables due for Chinese operations.
 
13. 
RELATED PARTY PAYABLES    
                                                                     
Related party payables were comprised of the following at August 31, 2011 and May 31, 2011:
 
   
August 31, 2011
   
May 31, 2011
 
             
Dongqiang Liu – Advances, Wendeng
 
$
5,452,028
   
$
5,321,502
 
Yuhua Song – Purchase consideration, Baokai acquisition
   
163,647
     
213,647
 
                 
Total
 
$
5,615,675
   
$
5,535,149
 
 
The payables due to Mr. Liu and Mr. Song represents amounts due to related parties, of which a shareholder of the Company has an equity interest, and are interest-free, unsecured and repayable on demand.
 
 
F-17

 
 
14.
INCOME TAXES                     
 
Income taxes payable were comprised of the following at August 31, 2011 and May 31, 2011:

    
August 31, 2011
   
May 31, 2011
 
             
United States income taxes payable
 
$
   
$
 
Foreign income taxes payable
   
1,449,070
     
1,561,112
 
    Total
 
$
1,449,070
   
$
1,561,112
 
 
Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has incurred a net operating loss of approximately $1,998,000 which expires in 2031. Pursuant to ASC 740 the Company is required to compute tax asset benefits for net operating losses carried forward. Potential benefit of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.

As a result of profits recorded at Baokai and Wendeng located in China, the Company recorded a tax provision of $146,748 for the three months ended August 31, 2011 based upon their estimated effective tax rates. Pursuant to the new PRC’s enterprise income tax (“EIT”) law, the Company is subject to EIT at the statutory rate of 25%.  Income taxes in the statements of operations and comprehensive income represent current taxes for the periods ended August 31, 2011 and 2010. The effective income tax rate has no material difference with the PRC statutory income tax rate of 25% for the periods ended August 31, 2011 and August 31, 2010.

The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provision of FASB ASC 740. The Company has recorded no deferred tax assets or liabilities as of August 31, 2011 and May 31, 2011, since nearly all differences in tax basis and financial statement carrying values are permanent differences.
 
15.
STOCKHOLDERS’ EQUITY

SunSi is authorized to issue 75,000,000 shares of common stock at a par value of $0.001 and had 29,947,128 and 29,436,928 shares of common stock issued and outstanding as of August 31, 2011 and May 31, 2011, respectively.

Since September 10, 2009, the Company has conducted a private placement of its common stock at a price of $2.00 per share and a maximum issuance of 8,000,000 shares (“Offering”). During the year ended May 31, 2011, the Company accepted subscription agreements from investors and correspondingly issued 711,000 shares of its common stock pursuant to the Offering, and received $1,422,000 in gross proceeds. The cost of this issuance was $142,200.

During the three months ended August 31, 2011, the Company accepted subscription agreements from investors and correspondingly issued 495,000 shares of its common stock pursuant to the Offering, and received $989,980 in gross proceeds. The cost of this issuance was $98,998. Further, the Company issued 15,200 shares of common stock in exchange for consulting, professional and other services rendered. The value of these services aggregated $45,600.

 On September 5, 2011, the Company closed this offering and commenced a new offering of 3.0 million shares at $3.00 per share. The Company has not sold any shares under this new offering to date.
 
On June 13, 2011, SunSi HK executed an Addendum with Mr. Dongqiang Liu, the 40% minority shareholder of Wendeng, for the purpose of amending the terms to the Equity Transfer Agreement dated November 22, 2010, as amended on December 15, 2010 (collectively the “Original Agreement”), between the parties for the purchase of a 60% equity interest in Wendeng.

Under the terms of the Original Agreement,  the Company would have had an obligation, upon receiving formal notice from Mr. Dongqiang Liu, to buy back 1,349,628 shares of its common stock at a value of RMB 18,000,000 (approximately USD $2.00 per share) from Mr. Dongqiang Liu. The Addendum cancelled any potential obligation of the Company to buy back such shares and confirms that all purchase consideration is fully paid.

As a result of the Addendum, the Company reclassified the value of the common shares previously subject to the buyback provision, approximately $2.7 million, as additional paid-in capital. These shares were presented as redeemable common stock on the Company’s consolidated balance sheets in the prior period.
 
 
F-18

 
  
16.
COMMITMENTS
 
SunSi entered into various engagement agreements for advisory and consulting services on a non-exclusive basis to obtain equity capital. In the event that the Company completes a financing from a funding source provided by one of the consultants, then such consultant will receive a finders or referral fee at closing ranging from seven percent (7%) to ten percent (10%) of the amount received by the Company. The total financing sought is in the amount of $9.0 million in equity. The maximum potential amount of fees that can be paid totals $0.9 million. The terms and condition of financing are subject to Company approval.
 
On November 10, 2009, the Company entered into an agreement to pay its Director of Business Development an annual amount of $60,000 plus any documented out of pocket business expenses. On February 9, 2010, the Company entered into an agreement to pay its Chief Executive Officer an annual amount of $60,000 plus any documented out of pocket business expenses. On May 15, 2009, the Company entered into an agreement to pay its Head Representative in China an annual amount of $60,000.

17. 
SEGMENT INFORMATION

As a result of the acquisition of its equity interest in Wendeng, the Company reassessed its requirement for segment reporting based on the operating and reporting structure of the combined company.

The Company utilized several criteria, including (i) the Company’s organizational structure, (ii) the manner in which the Company’s operations are managed, (iii) the criteria used by the Company’s Chief Executive Officer, the Chief Operating Decision Maker (“CODM”), to evaluate segment performance and (iv) the availability of separate financial information, as a basis to identify its operating segments.

The Company determined that it has two reportable business segments, Baokai and Wendeng. The Baokai segment consists of the business of Zibo Baokai Commerce and Trade Co., Ltd., a company based in the Shandong province of the People’s Republic of China that distributes the trichlorosilane production of Zibo Baoyun Chemical Plant. The Wendeng segment consists of the operations of Wendeng He Xie Silicon Industry Co., Ltd., a company based in the Shandong province of the People’s Republic of China that directly manufactures and sells trichlorosilane.

The accounting policies of the reportable segments are the same as those described in Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements. The Company’s CODM reviews financial information presented on a consolidated basis, accompanied by disaggregated information by segment for purpose of evaluating financial performance.

Segment Results

The following table sets forth operations by segment for the three months ended August 31, 2011 and August 31, 2010:
 
 
F-19

 

   
Three Months Ended August 31,
 
   
2011
   
2010
 
Sales:
           
Baokai
 
$
3,960,018
   
$
 
Wendeng
   
6,306,773
     
 
Corporate
   
     
 
Total
 
$
10,266,791
   
$
 
Cost of goods sold:
               
Baokai
 
$
3,901,763
   
$
 
Wendeng
   
4,328,631
     
 
Corporate
   
     
 
Total
 
$
8,230,394
   
$
 
Gross margin:
               
Baokai
 
$
58,255
   
$
 
Wendeng
   
1,978,142
     
 
Corporate
   
     
 
Total
 
$
2,036,397
   
$
 
Operating expenses:
               
Baokai
 
$
19,000
   
$
 
Wendeng
   
1,430,405
     
 
Corporate
   
242,754
     
158,396
 
Total
 
$
1,692,159
   
$
158,396
 
Provision for income taxes:
               
Baokai
 
$
9,814
   
$
 
Wendeng
   
136,934
     
 
Corporate
   
     
 
Total
 
$
146,748
   
$
 
Net income (loss):
               
Baokai
 
$
29,441
   
$
 
Wendeng
   
410,803
     
 
Corporate
   
(242,754
)
   
(158,396
)
Total
 
$
197,490
   
$
(158,396
)

Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported.
 
 
F-20

 
  
Total Assets

The following table sets forth the total assets by segment at August 31, 2011 and May 31, 2011:

             
Total assets by segment:
           
Baokai
 
$
1,198,573
   
$
2,028,632
 
Wendeng
   
21,970 427
     
20,458,838
 
Corporate
   
485,057
     
95,097
 
Total
 
$
23,654,057
   
$
22,582,567
 

Goodwill, Intangible and Long-Lived Assets

The following table sets forth the carrying amount of goodwill by segment at August 31, 2011 and May 31, 2011:

             
Goodwill by segment:
           
Baokai
 
$
313,573
   
$
308,627
 
Wendeng
   
3,097,500
     
3,048,650
 
Total
 
$
3,411,073
   
$
3,357,277
 

The following table sets forth the carrying amount of intangible assets by segment at August 31, 2011 and May 31, 2011:

             
Intangible assets by segment:
           
Baokai
 
$
   
$
 
Wendeng
   
3,290,229
     
3,025,489
 
Total
 
$
3,290,229
   
$
3,025,489
 

The following table sets forth the carrying amount of property, plant and equipment by segment at August 31, 2011 and May 31, 2011:

             
Property, plant and equipment by segment:
           
Baokai
 
$
   
$
 
Wendeng
   
7,741,571
     
7,559,369
 
Total
 
$
7,741,571
   
$
7,559,369
 
 
 
F-21

 

Depreciation and amortization expense for Wendeng totaled $157,259 and $140,297, respectively, for the three months ended August 31, 2011. Capital expenditures for Wendeng totaled $217,701 for the three months ended August 31, 2011.

Baokai did not record any depreciation or amortization expense, nor did it incur any capital expenditures for the three months ended August 31, 2011.

The Company had no goodwill, intangible or long-lived assets prior to December 9, 2010.

Geographic Information

All of the Company’s long-lived assets and revenues, as determined by shipping destination, are located within The People’s Republic of China.
 
18.
DEFINED CONTRIBUTION PLAN

Pursuant to the relevant PRC regulations, the Company is required to make contributions at a rate of 28% of 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 the future years. The defined contribution plan contributions were charged to the statements of operations.  The Company contributed $9,021 for the three month period ended August 31, 2011.
 
19.
SUBSEQUENT EVENTS

The Company has evaluated subsequent events from the balance sheet through the date the financial statements were issued, and determined there are no other events required to be disclosed.
 
 
F-22

 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Some of the factors that could cause results or events to differ materially from current expectations include, but are not limited to: general economic, market or business conditions; general stock market performance; the performance of the solar energy industry in general; increasingly competitive environment; changing regulatory conditions or requirements; changing government incentive programs for solar energy projects; changing alternative energy technologies; raising sufficient capital to fund the expansion of Wendeng to 75,000 MT and acquisition of other TCS manufacturing facilities; our ability to find suitable TCS acquisition targets, our ability to complete the Wendeng expansion on budget and on time, the price of TCS sold within China and outside of China; the price of, and demand for, polysilicon; the price of, and demand for, solar PV panels; attaining projected revenue of $20-$25 million per year at Wendeng; the level of production by the Wendeng factory; Baokai's success in attaining new clients under its TCS distribution agreement; the decision by potential investors who have signed subscription agreements not to pay for such SunSi common shares; the decision by the NASDAQ Capital Market to reject the Company's application for listing; our ability to successfully manage a business in China; and success in implementing productivity initiatives. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
 
Overview

SunSi’s goal is to acquire and develop a portfolio of high quality TCS producing facilities (and in some cases distribution rights) that are strategically located and possess a potential for future growth and expansion. TCS is the main feedstock of the solar energy industry, used in the production of silicon, which in turn is used in the production of solar PV energy producing panels.
 
 
4

 
 
Acquisition of Zibo Baokai Trade and Commerce Co. Ltd.
  
During a significant portion of 2009 and into early 2010, we performed due diligence and negotiated with the shareholders of ZBC, a 25,000 MT TCS production factory located in Zibo China, to acquire their facility. On December 12, 2009, prior to our determining whether or not we would buy ZBC, we secured the exclusive international distribution rights (“international rights”) for all of the TCS produced by the ZBC factory. These international rights which were secured by SunSi HK, for nominal consideration, were not contingent on our purchasing ZBC. The international rights entitled us to sell TCS produced by the ZBC factory outside of China only. It gave us no rights to sell ZBC’s production within China. ZBC granted us these international rights because they were hopeful we could generate new customers for their TCS production outside of China.  Historically, all of ZBC’s sales have been within China.

In early 2010, we determined that despite our best efforts, we could not acquire ZBC, as planned, on terms that would be beneficial to SunSi. Therefore, we discontinued our efforts to acquire the ZBC factory, and instead negotiated with ZBC to obtain the exclusive domestic distribution rights, for the TCS produced by ZBC within China to supplement the exclusive international distribution rights which we acquired on December 12, 2009 (described above).
 
On December 8, 2010, SunSi HK acquired 90% of Baokai for $263,647, an acquisition which gave us the exclusive distribution rights to 100% of ZBC’s production both internationally and domestically; however, we did not acquire any interest or ownership position in the ZBC factory.

As part of the Baokai distribution rights, ZBC agreed to sell Baokai all of its TCS production at a price of cost, plus a 10% to 15% mark-up depending on the nature of the sale. During the period ended February 28, 2011, we generated approximately $4.6 million in revenues with a gross margin of approximately 2.0%. By mutual agreement with ZBC, Baokai agreed to earn a smaller profit margin than originally anticipated on these sales because the sales came from existing customers of ZBC and from the efforts of the ZBC sales force. We are in discussions with a number of international clients who are interested in purchasing TCS from Baokai.  These new purchases would generate significantly higher gross margins for Baokai than the 2.0%; however, there can be no assurances that we will be successful in obtaining sales from these new customers.

Baokai has one client which comprised approximately 97.4% of their sales for the three month period ended August 31, 2011. The facility is easily accessible via rail and major highways, in addition to being well equipped for handling chemical products. We believe we can expand Baokai’s client base in the future, although there can be no assurances.

Acquisition of Wendeng He Xie Silicon Co. Ltd

 On March 18, 2011, we acquired (“Wendeng Acquisition”) a 60% interest in Wendeng, a trichlorosilane manufacturing company, from Liu Dongqiang, a Chinese individual.  Wendeng is located in the Shandong province of China close to strategic ports, including Weihai and Qingdao. The state-of-the-art Wendeng facility was built in 2008 and currently has an annual capacity of 30,000 MT of TCS. The Wendeng facility was designed and is currently managed by Zhang Fahe, who possesses over 30 years of experience in the Chinese chemical industry. Mr. Fahe has been working in the TCS field since 2001 where he developed efficient TCS production technologies. As part of the closing, Wendeng was re-formed as a joint venture business under Chinese law and issued a new business license.
 
 
5

 
 
As of March 18, 2011, Wendeng had a production capacity of approximately 20,000 MT tons of Trichlorosilane. As a result of closing the Wendeng Acquisition, SunSi began to immediately consolidate all of Wendeng’s revenues, and 60% of its profits.

On June 13, 2011, we amended the terms of the Wendeng Acquisition, whereby Mr. Liu canceled our obligation to buy back the 1,349,628 shares of our stock and confirmed that the purchase price for the 60% equity interest in Wendeng is fully paid. Such shares had been classified as “Redeemable Common Stock” on the Registrant balance sheet and excluded from Stockholders’ Equity and are now included in the Company’s Stockholders’ Equity section of the balance sheet at a value of approximately $2.7 million.

Our plan after acquisition is to expand the manufacturing capacity of Wendeng to 75,000 MT per year. In August 2011, the construction of the expanded capacity from 20,000 to 30,000 MT was substantially completed. The cost of this 10,000 MT ton expansion was approximately $1.5 million. The Company intends to complete quality control measures and other tests by mid October. The expanded capacity is expected to be fully operational at that time. We estimate the total amount of funding required by SunSi to complete the Wendeng expansion from 30,000 MT to 75,000 MT is currently approximately $15.0 million. Mr. Liu, our 40% minority partner in the facility, is expected to contribute between $3-5 million towards this expansion. Our portion of this expansion will be approximately $10-12 million.

If we are unable to raise this amount through the sale of equity securities, we will have to secure additional debt financing to complete the acquisition and the planned expansion project.  If necessary, we intend to negotiate terms of a revolving line of credit and/or conditions for a construction/term loan with various banking institutions.  However, there is no assurance that debt financing will be available or, if available, on terms that are favorable to us.  In addition, if we are unable to raise sufficient equity capital to commence development of the plant expansion, we may pursue the plant expansion through alternative ownership structures, such as joint ventures with other entities. We currently have no commitment for either equity or debt financing. There can be no assurances that the Company will be successful in raising sufficient funds to complete the expansion.
 
Results of Operations for the three months ended August 31, 2011 and 2010

During our fiscal year ended May 31, 2011, we consummated the acquisitions of Baokai in December, 2010 and Wendeng in March 2011 as described throughout this Report. As a result of these acquisitions, we emerged from a Development Stage company into planned operations.  The results of operations include a full  three months of operations for Baokai and Wendeng, respectively for the three months ended August 31, 2011, compared to nil in the comparable period of the prior year.  Therefore, comparisons between 2011 and 2010 may not be indicative of current trends.
 
Segment Results

The following table sets forth operations by segment for the three months ended August 31, 2011 and August 31, 2010:
 
 
6

 

   
Three Months Ended August 31,
 
   
2011
   
2010
 
Sales:
           
Baokai
 
$
3,960,018
   
$
 
Wendeng
   
6,306,773
     
 
Corporate
   
     
 
Total
 
$
10,266,791
   
$
 
Cost of goods sold:
               
Baokai
 
$
3,901,763
   
$
 
Wendeng
   
4,328,631
     
 
Corporate
   
     
 
Total
 
$
8,230,394
   
$
 
Gross margin:
               
Baokai
 
$
58,255
   
$
 
Wendeng
   
1,978,142
     
 
Corporate
   
     
 
Total
 
$
2,036,397
   
$
 
Operating expenses:
               
Baokai
 
$
19,000
   
$
 
Wendeng
   
1,430,405
     
 
Corporate
   
242,754
     
158,396
 
Total
 
$
1,692,159
   
$
158,396
 
Provision for income taxes:
               
Baokai
 
$
9,814
   
$
 
Wendeng
   
136,934
     
 
Corporate
   
     
 
Total
 
$
146,748
   
$
 
Net income (loss):
               
Baokai
 
$
29,441
   
$
 
Wendeng
   
410,803
     
 
Corporate
   
(242,754
)
   
(158,396
)
Total
 
$
197,490
   
$
(158,396
)

Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported.
 
 
7

 
 
Net Revenue
 
Revenue for the three months ended August 31, 2011 totaled $10,266,791 as compared to nil for the same period ended August 31, 2010. The revenues generated in fiscal 2011 were as a result of two acquisitions (Baokai and Wendeng) described throughout this Report. The revenue for the three month period ended August 31, 2011 was comprised of $3,960,018 in revenue at Baokai and $6,306,773 at Wendeng. With the exception of approximately $188,000 in revenue recorded from shipments to a polysilicon company in Russia, from our Wendeng segment, all of these revenues were recorded within China. The price of TCS in China is typically based on short term contracts and the spot market enabling both the buyer and the seller to adapt to market conditions. Currently, the price of TCS within China is approximately $1,250-$1,500 USD per metric ton. These prices include 17% V.A.T. taxes. For GAAP accounting purposes V.A.T. taxes included in the selling price to customers are excluded when determining net revenues. Although the price of polysilicon, of which TCS is an essential raw material required to make polysilicon, has come down approximately 35% since January 2011, the price of TCS has come down approximately 15% during this period. We believe the price of TCS has not come down proportionally because there are a limited number of quality TCS facilities in the world and polysilicon manufacturers are beginning to outsource their TCS rather than deploy capital to expand TCS plant capacity. There can be no assurance that the price of TCS will not decline further in the next 12 months, which if it occurred would reduce our gross margin and profitability.
 
Gross Margin

Gross margin is calculated by subtracting cost of sales from net revenue. The gross margin percentage is calculated by dividing the gross margin by net revenues. The gross margin percentage of approximately 19.8% for the period ended August 31, 2011 is attributable to a 31.4% percent margin on sales at Wendeng for the quarter, offset by an approximate 2.0% margin earned on net revenues at Baokai. Margins are approximately 2.0% at Baokai because we are a distributor of TCS produced by the ZBC factory and our purchase price is fixed. The gross margin at Baokai is fixed at 2.0% for all existing customers, but will increase if we can bring new customers to Baokai that will purchase TCS from the ZBC TCS factory which Baokai buys all of its TCS from. There can be no assurances that we will be successful in doing so.  If the price of TCS fluctuates at Baokai, we should still earn a 2.0% margin; however, if there are price fluctuations either up or down for TCS, the gross margin percentage at Wendeng will be impacted.

Professional Fees

We incurred professional fees of $227,067 and $117,237, respectively, for the three months ended August 31, 2011 and 2010, respectively. Professional fees consist of legal, accounting and other due diligence fees. The increase in 2011 professional fees, which were primarily incurred in the United States associated with public company activity compared to the same period in 2010, is attributable to an increase in accounting, legal and business valuation services incurred in connection with our Wendeng acquisition.

General and Administrative Expenses

General and administrative expenses (“G&A”) totaled $1,465,092 for the three months ended August 31, 2011 compared to $41,159 for the period ended August 31, 2010. The increase in G&A expense in 2011 is primarily attributable to the inclusion of G&A expenses at Wendeng in 2011 due to the acquisition of Wendeng on March 18, 2011. Additionally, we incurred significantly higher investor relations and promotion expenses of approximately $204,000 related to our efforts to increase the visibility of SunSi. The primary components of G&A expenses include office expense, salaries and benefits not directly associated with manufacturing process, and building expenses and maintenance.

Provision for Income Taxes

The provision for income taxes was $146,748, or 42.6%, for the period ended August 31, 2011 compared to nil, or 0%, for the same period ended August 31, 2010.

As a result of profits recorded at the Baokai subsidiary and Wendeng subsidiaries located in China for the period ended August 31, 2011, we have recorded a tax provision of $146,748, or a 25% tax rate which is the statutory rate in China for all earnings. The profits generated in China are not available to be offset against net operating losses in the United States.

Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has incurred a U.S net operating loss of approximately $1,998,000 which expires in 2031. Pursuant to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. Potential benefit of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses in the United States carried forward in future years.
 
 
8

 

Net loss

For the three months ended August 31, 2011, we had a loss of $34,800, or ($0.00) per share, compared to a loss of $158,396, or ($.01) per share, for the comparable period ended August 31, 2010.  During 2010, we were a development stage company with no revenues and only expenses.  During the third and fourth quarters of 2011, we consummated two acquisitions. Approximately $298,000 of our loss was non-cash in nature due to depreciation and amortization for the period ended August 31, 2011.  

The weighted average number of basic and fully diluted shares outstanding for the periods ended August 31, 2011 and 2011 were 29,665,127 and 27,428,995, respectively. There are no dilutive equivalents included in our calculation of fully diluted shares in either period, nor are there any fully diluted equivalents that would have been included if we had been profitable in either period.
 
Liquidity and Capital Resources

At August 31, 2011, we had cash on hand of $1,213,642.  Of this amount, $478,868 was in the United States and $728,584 was in China and $6,190 was in Hong Kong. For the foreseeable future, we do not intend to repatriate any funds from China to support operations in the United States.  U.S. operations are comprised of a holding company with expenses and no business operating activities that are revenue generating.  Historically, the sole source of funding for U.S. corporate activities has been in the form of private placements of our common stock. We believe our current cash on hand and our ability to continue raising funds from the sale of equity will be sufficient to fund our U.S. activities for the next year.

We expect to generate positive cash flow from Chinese operations during the next year.  We are in the process of seeking funding in the form of equity or debt to expand our Wendeng facility from 30,000 MT to 75,000 MT. We estimate that this expansion will cost approximately $15.0 million, of which we expect our 40% minority partner to contribute $5.0 million. We believe we will be successful in raising these funds; however, there can be no assurances.

At August 31, 2011, we had a working capital deficit of $4,781,114. The deficit is primarily attributable to the related party payable of $5,452,028 due to the 40% minority shareholder of Wendeng. These funds were used to build and expand the Wendeng facility. The minority shareholder is currently not requesting repayment of this amount; however, since this is an interest free demand loan to the Company, it has been categorized as a current liability.

Net cash provided by operating activities was $249,852 for the three months ended August 31, 2011 as compared to net cash used in operating activities of $216,017 for the comparable period in the prior year. The increase in 2011 compared to 2010 is attributable to a net change in operating assets and liabilities offset by a decrease in net loss.

Net cash used in investing activities was $572,020 for the three months ended August 31, 2011 as compared to no activity for the comparable period in the prior year. The net cash used in the current period is directly attributable to the purchase of approximately $218,000 in capital assets and $354,000 in land use rights to support our ongoing efforts to expand the capacity of our Wendeng production facility.

Net cash provided by financing activities was $884,184 for the three months ended August 31, 2011 as compared to $88,000 for the same period in 2010.  The proceeds received in both periods are primarily attributable to the sale of equity through private placements.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
 
9

 
 
In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods.   These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation on useful lives of property, plant and equipment.  Actual results could differ from those estimates.

Financial Instruments

The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost and consist solely of bank deposits held in the United States, Hong Kong and the PRC. The carrying amount of cash and cash equivalents approximates fair value.

At August 31, 2011, cash and cash equivalents totaling $728,584 were held in banks in China; the Wendeng Branch of ICBC (Industrial & Commercial Bank of China). The remittance of these funds out of China is subject to exchange control restrictions imposed by the Chinese government. Deposits in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. Management believes the probability of a bank failure, causing loss to the Company, is remote.
 
Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable.  At August 31, 2011 and May 31, 2011, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the United States, Hong Kong and the PRC, which management believes are of high credit quality.
 
 
With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of accounts receivable.

Allowance for doubtful accounts

The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a specific allowance will be required.

Bad debts are written off when identified. The Company extends unsecured credit to customers up to one month in the normal course of business. The Company does not accrue interest on trade accounts receivable. Historically, losses from uncollectible accounts have not significantly deviated from the specific allowance estimated by the management. This specific provisioning policy has not changed in the past since establishment and the management considers that the aforementioned specific provisioning policy is adequate and does not expect to change this established policy in the near future.
 
 
10

 
 
Inventory
 
Inventories are stated at the lower of cost or market value. Cost is determined on weighted average basis and includes all expenditures incurred in bringing the goods in a saleable condition to the point of sale. The Company’s inventory reserve requirements generally fluctuate based on projected demands and market conditions. In determining the adequate level of inventories to have on hand, management makes judgments as to the projected inventory demands as compared to the current or committed inventory levels. Inventory quantities and condition are reviewed regularly and provisions for excess or obsolete inventory are recorded based on the condition of inventory and the Company’s forecast of future demand and market conditions.
 
No provisions for excess or obsolete inventory were made at August 31, 2011 and May 31, 2011.

Intangible assets – 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 50 years. The lease term is obtained from the relevant PRC land authority.
 
Property, plant and equipment

Property, plant and equipment is 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.

The property, plant and equipment of the Company will be depreciated with straight-line method according to the following estimated residual value and service life.
 
   
Service life (year)
   
Estimated
residual rate
%
   
Annual
depreciation rate
%
 
                   
Building
    20       5       2.05  
Furniture and equipment
    5       5       3.17  
Machines and equipment
    10       5       7.34  
Automotive equipment
    5       5       10.93  
Office equipment
    5       5       8.64  

The residual value and service life of property, plant and equipment will be reviewed on each balance sheet date, and adjusted if necessary.

The Company capitalizes the interest expenses incurred before property, plant and equipment are built and installed to the usable state, and capitalizes other loan interest expenses.
 
Construction in progress

The value of construction in progress comprises buildings and plants under construction, as well as machines and equipment being installed and commissioned, specifically comprises the costs of property, plant and equipment and other direct costs, relevant interest expenses accrued during the construction period and profits and losses from foreign exchange transactions.
 
Depreciation will not start until the construction in progress is completed and put into operation.
 
 
11

 

Impairment of Assets
 
The Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its long-lived assets, management performs an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining depreciation or amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows.
 
Each year, the Company performs a transitional test for impairment of goodwill and other indefinite-lived intangible assets. This test is performed by comparing, at the reporting unit level, the carrying value of goodwill to its fair value. The Company assesses fair value based upon its best estimate of the present value of future cash flows that it expects to generate by the reporting unit. The Company’s annual fair value assessment is performed each May 31 on subsidiaries with material goodwill on their respective balance sheets. However, changes in expectations as to the present value of the reporting unit’s future cash flows might impact subsequent years’ assessments of impairment.
 
Goodwill and Intangible Assets

Under ASC 350, the Company is required to perform an annual impairment test of the Company’s goodwill and indefinite-lived intangibles. On an annual basis, management assesses the composition of the Company’s assets and liabilities, as well as the events that have occurred and the circumstances that have changed since the most recent fair value determination. If events occur or circumstances change that would more likely than not reduce the fair value of goodwill and indefinite-lived intangibles below their carrying amounts, they will be tested for impairment. The Company will recognize an impairment charge if the carrying value of the asset exceeds the fair value determination. The impairment test that the Company has selected historically consisted of a ten year discounted cash flow analysis including the determination of a terminal value, and requires management to make various assumptions and estimates including revenue growth, future profitability, peer group comparisons, and a discount rate which management believes are reasonable.
 
The impairment test involves a two-step approach. Under the first step, the Company determines the fair value of each reporting subsidiary to which goodwill has been assigned. The Company then compares the fair value of each reporting subsidiary to its carrying value, including goodwill. The Company estimates the fair value of each reporting subsidiary by estimating the present value of the reporting subsidiaries future cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss.
 
Under the second step, the Company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit, as determined in the first step. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.

Income Taxes

The Company accounts for income taxes under FASB ASC 740 Accounting for Income Taxes. Under FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities 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. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FASB ASC 740-10-05 Accounting for Uncertainty in Income Taxes prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.

The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We assess the validity of our conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit. We have determined that there were no uncertain tax positions for the periods ended August 31, 2011 and May 31, 2011.
 
 
12

 
 
Basic and Diluted Net Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with ASC 260 “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.

Fair value of financial instruments

The Company adopted FASB ASC 820 on June 1, 2010.  The adoption of FASB ASC 820 did not materially impact the Company's financial position, results of operations or cash flows.  FASB ASC 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which the fair value option was not elected.  The carrying amounts of both the financial assets and liabilities approximate to their fair values due to short maturities or the applicable interest rates approximate the current market rates.

Revenue Recognition

Revenue from the sales of the Company’s products is recognized upon customer acceptance. This occurs at the time of delivery to the customer, provided persuasive evidence of an arrangement exists, such as a signed sales contract. The significant risks and rewards of ownership are transferred to the customers at the time when the products are delivered and there is no significant post-delivery obligation to the Company. In addition, the sales price is fixed or determinable and collection is reasonably assured.  The Company does not provide customers with contractual rights of return for products.  When there are significant post-delivery performance obligations, revenue is recognized only after such obligations are fulfilled.  The Company evaluates the terms of the sales agreement with its customer in order to determine whether any significant post-delivery performance obligations exist.  Currently, the sales do not include any terms which may impose any significant post-delivery performance obligations on the Company.

Revenue from the sales of the Company’s products represents the invoiced value of goods, net of the value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17 percent of the gross sales price. This VAT may be offset by the VAT paid by the Company on raw and other materials that are included in the cost of producing the Company’s finished products.
 
Advertising expenses
 
Advertising costs are expensed as incurred.
 
Shipping and handling costs
 
All shipping and handling costs are included in cost of sales expenses.

Foreign Currency Translation

The Company’s functional and reporting currency is the United States dollar. Transactions may occur in Renminbi (“RMB”) dollars and management has adopted ASC 830 “Foreign Currency Matters”. The RMB is not freely convertible into foreign currencies.  Monetary assets denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Average monthly rates are used to translate revenues and expenses. The Company has not, to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

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 for the respective periods.
 
 
13

 
 
Assets and liabilities of the Company’s operations are translated into the reporting currency, United States dollars, at the exchange rate in effect at the balance sheet dates. Revenue and expenses are translated at average rates in effect during the reporting periods. Equity transactions are recorded at the historical rate when the transaction occurred. The resulting translation adjustment is reflected as accumulated other comprehensive income, a separate component of stockholders' equity in the statement of stockholders' equity.  

Comprehensive Gain or Loss

ASC 220 “Comprehensive Income,” establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As of August 31, 2011, the Company has items that represent comprehensive income and, therefore, has included a schedule of comprehensive income (loss) in the financial statements.

Off Balance Sheet Arrangements

As of August 31, 2011, there were no off balance sheet arrangements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A smaller reporting company is not required to provide the information required by this Item.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our management has evaluated, under the supervision and with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
14

 
 
PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
 
None. 

ITEM 1A.  RISK FACTORS
 
Information on risk factors can be found in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended May 31, 2011, filed with the Securities and Exchange Commission on September 12, 2011. There were no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended May 31, 2011.
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the three months ended August 31, 2011, the Company accepted subscription agreements from investors and correspondingly sold 495,000 shares of its common stock pursuant to its current private placement offering, and received $989,980 in gross proceeds. The offer and sale of the securities was exempt from registration under the Securities Act of 1933 pursuant to Rule 506 of Regulation D.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None
 
ITEM 4.  [REMOVED AND RESERVED]

ITEM 5.  OTHER INFORMATION

None
 
ITEM 6.  EXHIBITS
 
Exhibit  Number
 
Description of Exhibit
     
31  
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32  
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL INSTANCE DOCUMENT
     
101.SCH   XBRL TAXONOMY EXTENSION SCHEMA
     
101.CAL   XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
     
101.DEF   XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
     
101.LAB   XBRL TAXONOMY EXTENSION LABEL LINKBASE
     
101.PRE   XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
 
 
15

 
 
SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
SUNSI ENERGIES INC.
 
       
October 14, 2011 By:
/s/ David Natan
 
   
David Natan
 
   
Chief Executive Officer
 
 
In accordance with Section 13 or 15(d) of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
By:
 
   
/s/ Kebir Ratnani
 
Kebir Ratnani
 
Director
 
October 14, 2011
 
   
/s/ Richard St-Julien
 
Richard St-Julien
 
Secretary, Vice President and Director
 
October 14, 2011
 
   
/s/ David Natan
 
David Natan
 
Chief Executive Officer, Chief Financial and
Accounting Officer, Director
 
October 14, 2011
 
 
 
 
16