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EX-31.2 - RULE 13A-14(A) CERTIFICATION ? CFO - APOLLO SOLAR ENERGY, INC.apollosolarexh312.htm
EX-31.1 - RULE 13A-14(A) CERTIFICATION ? CEO - APOLLO SOLAR ENERGY, INC.apollosolarexh311.htm
EX-32.1 - RULE 13A-14(B) CERTIFICATION - APOLLO SOLAR ENERGY, INC.apollosolarexh322.htm
EXCEL - IDEA: XBRL DOCUMENT - APOLLO SOLAR ENERGY, INC.Financial_Report.xls


UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549
  
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended September 30, 2012
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from __________ to ____________
  
Commission File Number: 000-12122
  
APOLLO SOLAR ENERGY, INC.
 (Exact name of registrant as specified in its charter)
 
 Nevada
(State or other jurisdiction of incorporation or organization)
84-0601802
(I.R.S. Employer Identification No.)
 
No. 485 Tengfei Third,
Shuangliu Southwest Airport Economic Development Zone,
Shuangliu, Chengdu
People’s Republic of China, 610207
(Address of principal executive offices)
 
 Registrant’s Telephone Number, Including Area Code:  +86 (28) 8562-3888       
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý No  o
 
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  ý No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
    o  
Accelerated filer   
o
Non-accelerated filer 
    o
 Smaller reporting company  
ý
 (Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o   No  ý
 
There were 49,377,038 shares of common stock outstanding as of November 14, 2012.
 
 
 

 

APOLLO SOLAR ENERGY, INC.
 
 
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
 
For the Quarterly Period Ended September 30, 2012
 
ITEM
 
  Page
     
PART I
FINANCIAL INFORMATION 
  2
     
Item 1.
Financial Statements
2
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
20
     
Item 4.
Controls and Procedures
 20
     
PART II
 OTHER INFORMATION
20
     
Item 1.
Legal Proceedings
20
     
Item 1A.
Risk Factors
20
     
Item 6.
Exhibits
20
     
 
Signatures
21
 
 
 
1

 
 
APOLLO SOLAR ENERGY, INC
 
CONSOLIDATED BALANCE SHEETS
 
   
             
   
September 30,
2012
   
December 31,
2011
 
   
(Unaudited)
       
ASSETS
           
Current Assets
           
Cash
  $ 620,255     $ 363,771  
Accounts receivable
    392,977       804,577  
Inventories
    3,189,344       4,065,987  
Prepaid expenses and other current assets
    1,671,415       1,001,660  
Total Current Assets
    5,873,991       6,235,995  
                 
                 
Property, machinery and mining assets, net
    16,958,999       20,370,831  
Assets held for sale
    922,802       924,765  
Non-marketable investment
    55,389       55,506  
Investment in and advances to Joint Venture
    5,270,400       581,963  
Total Non-current Assets
    23,207,590       21,933,065  
                 
Total Assets
  $ 29,081,581     $ 28,169,060  
                 
LIABILITIES AND EQUITY
               
                 
Current Liabilities
               
Short-term loans
  $ 6,902,200     $ 4,050,374  
Account payable - trade
    336,008       202,853  
Account payable - construction vendors
    1,355,127       1,493,155  
Accrued expenses and other current liabilities
    2,668,586       2,677,948  
Due to stockholders and related parties
    272,155       214,213  
Total Current Liabilities
    11,534,076       8,638,543  
                 
Stockholders' Equity
               
Preferred stock:
    -       -  
 $0.001 par value, 25,000,000 shares authorized; 0 shares issued and outstanding as of September 20, 2012 and December 31, 2011, respectively
               
Common stock:
    51,796       51,796  
$0.001 par value, 100,000,000 shares authorized; 51,795,961 shares  issued and outstanding as of September 30, 2012 and December 31, 2011, respectively
               
Additional paid-in capital
    32,962,033       32,609,043  
Treasury stock 2,418,923 shares at cost
    (5,216,770 )     (5,216,770 )
Retained deficits
    (13,190,730 )     (10,897,576 )
Accumulated other comprehensive income
    2,941,176       2,984,024  
Total stockholders' Equity
    17,547,505       19,530,517  
                 
Total Liabilities and Stockholders' Equity
  $ 29,081,581     $ 28,169,060  

See accompanying notes to the consolidated financial statements

 
2

 
APOLLO SOLAR ENERGY, INC
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME(LOSS)
 
(Unaudited)
 
                         
   
For the Three months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Sales
  $ 1,013,320     $ 2,245,534     $ 3,873,700     $ 8,968,872  
                                 
Cost of goods sold
    (1,159,289 )     (1,920,272 )     (4,501,571 )     (7,518,345 )
                                 
Gross profit
    (145,969 )     325,262       (627,871 )     1,450,527  
                                 
Operating expenses:
                               
General and administrative expenses
    540,127       835,272       1,966,660       2,412,540  
Selling expense
    100,913       71,805       210,599       247,008  
Research and development expenses
    442,613       84,181       977,538       374,753  
Total operating expenses:
    1,083,653       991,258       3,154,797       3,034,301  
                                 
Operating loss
    (1,229,622 )     (665,996 )     (3,782,668 )     (1,583,774 )
                                 
Other income (expense)
                               
Interest (expense) income, net
    (80,691 )     (56,946 )     (333,907 )     630,851  
Loss on sale of assets
    -       (132,398 )     -       (132,398 )
Equity in loss of Joint Venture
    62,230       (141,078 )     (112,518 )     (388,666 )
Gain on investment in Joint Venture
    -       1,205,110       2,038,774       1,205,110  
Total other income
    (18,461 )     874,688       1,592,349       1,314,897  
                                 
Income(loss) before provision for income taxes
    (1,248,083 )     208,692       (2,190,319 )     (268,877 )
                                 
Provision for income taxes(credit)
    -       2,335       102,835       (123,443 )
                                 
Net income(loss)
    (1,248,083 )     206,357       (2,293,154 )     (145,434 )
                                 
Foreign Currency Translation Adjustment
    (34,254 )     285,338       (42,848 )     784,876  
Comprehensive income (loss)
  $ (1,282,337 )   $ 491,695     $ (2,336,002 )   $ 639,442  
                                 
Earnings(loss) per share
                               
Basic
  $ (0.02 )   $ 0.00     $ (0.04 )   $ (0.00 )
Diluted
  $ (0.02 )   $ 0.00     $ (0.04 )   $ (0.00 )
                                 
Weighted average shares outstanding
                               
Basic
    51,795,961       49,237,038       51,795,961       49,848,414  
Diluted
    51,795,961       49,237,038       51,795,961       49,848,414  
 
See accompanying notes to the consolidated financial statements

 
3

 

APOLLO SOLAR ENERGY, INC
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
   
   
For the Nine Months Ended
September 30,
 
   
2012
   
2011
 
             
Cash flows from operating activities:
           
             
Net Loss
  $ (2,293,154 )   $ (145,434 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Stock-based compensation
    352,990       482,594  
Interest income from related party loan
    -       (837,359 )
Gain on investment in Joint Venture
    (2,038,774 )     (1,205,110 )
Loss in equity of Joint Venture
    112,518       388,666  
Deferred tax assets
    -       (273,679 )
Inventory allowance
    324,533       -  
Depreciation and amortization
    698,033       730,076  
Loss on sale of assets
    -       132,398  
Changes in operating assets and liabilities:
               
Accounts receivable
    410,574       (219,396 )
Inventory
    544,927       3,109,783  
Prepaid expenses and other current assets
    (673,000 )     (1,227,911 )
Accounts payable-trade
    133,811       (201,883 )
Accounts payable-construction
    (135,084 )     (1,176,804 )
Accrued expenses and other current liabilities
    5,490       516,616  
Net cash provided by(used in) operating activities
    (2,557,136 )     72,557  
                 
Cash flows from investing activities:
               
                 
Proceeds from sale of assets
    -       769,622  
Purchase of property and equipment
    (144,787 )     (291,980 )
Net cash provided by (used in) investing activities
    (144,787 )     477,642  
                 
Cash flows from financing activities:
               
Short-term bank loans, net
    2,865,182       (1,152,886 )
Proceeds(repayment) to shareholder loan
    99,258       (1,637,789 )
Due to related parties
    (41,246 )     237,413  
Net cash provided by (used in)  financing activities
    2,923,194       (2,553,262 )
                 
Effect of exchange rate changes on cash
    35,213       (33,714 )
                 
Net increase (decrease) in cash
    256,484       (2,036,777 )
                 
Cash at beginning of period
    363,771       2,676,176  
Cash at end of period
  $ 620,255     $ 639,399  
                 
Supplemental disclosure of cash flow information
 
Income tax paid in cash
  $ 102,835     $ 12,009  
Interest paid in cash
  $ 332,709     $ 198,880  
Treasury stock acquired in exchange for loans from related parites
  $ -     $ 5,273,253  
Assets transferred to Joint Venture
  $ 2,790,967     $ 2,731,296  
Assets sold
  $ -     $ 942,955  
See accompanying notes to the consolidated financial statements
 
 
 
4

 
 
APOLLO SOLAR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012
(UNAUDITED)
 



NOTE 1. BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements of Apollo Solar Energy, Inc. (the “Company) reflect all material adjustments consisting of only normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of results for the interim periods.  Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures are adequate to make the information presented not misleading.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and those estimates.  Estimates that are particularly susceptible to change include assumptions used in determining the fair value of securities owned and non-readily marketable securities.
 
The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the entire year or for any future period.
 
The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the accompanying financial statements have been translated and presented in United States Dollars (“USD”).

Going concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has negative working capital of $5,660,085, did not generate cash from its operations, and has had operating losses during past two years. These circumstances, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 2. INVENTORIES

Inventories are valued at the lower of cost or net realizable value with cost determined on the weighted-average method. Work in progress and finished goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to complete and dispose.  The Company recorded an inventory mark-down of $324,533 and $0 for the nine months ended September 30, 2012 and 2011, respectively.
 
 
 
5

 
 
APOLLO SOLAR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012
(UNAUDITED)



NOTE 2. INVENTORIES (Continued)

Inventories consist of the following:
 
   
As of
 
   
September 30,
2012
   
December 31,
2011
 
             
Raw Materials
 
$
538,450
   
$
719,635
 
Work-in-progress
   
996,070
     
1,322,666
 
Finished goods
   
1,654,824
     
2,023,686
 
Total
 
$
3,189,344
   
$
4,065,987
 
 
NOTE 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist following:

 
 
September 30,
2012
   
December 31,
2011
 
             
Advances for purchases
  $ 1,490,566     $ 908,760  
Other receivable
    113,032       92,900  
Other prepaid expenses
    67,817       -  
Total
  $ 1,671,415     $ 1,001,660  
 
NOTE 4.  RELATED PARTIES TRANSACTIONS AND BALANCES
 
The breakdown of due from/due to related parties consists of the following:
   
   
As of
 
   
September 30,
2012
   
December 31,
2011
 
             
Due from (to) Xinju
 
$
38,192
   
$
(2,992)
 
Due to shareholders and related parties
   
(310,347
   
(211,221
Total
 
$
$(272,155)
   
$
(214,213)
 

Due to shareholders and due to/from Xinju are non-interest bearing and due on demand.
 
 
 
6

 
 
APOLLO SOLAR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012
(UNAUDITED)



NOTE 5. EQUITY METHOD INVESTMENT IN JOINT VENTURE
 
On November 9, 2009, Sichuan Apollo Solar Science & Technology Co. Ltd. (“Sichuan Apollo”), a wholly-owned foreign enterprise of the Company, entered into a joint venture agreement (the “JV Agreement”) with Bengbu Design & Research Institute for Glass Industry (“Bengbu”) and a local Chinese government agency (the “Agency”). The Joint Venture (“JV”) was formed to conduct research and development related to glass used in the production of thin film solar cells and manufacture thin film solar cells. As of September 30, 2012 the JV had not commenced the production of thin film solar cells. The Company accounts for its 35% interest in JV under the equity method of accounting.

Under the terms of the agreement, the JV was to be formed with an aggregate cash capital contribution of RMB 142,800,000 (approximately $22 million) by Bengbu and the Agency and the contribution by Sichuan Apollo’s of assets consisting of land, a manufacturing plant, equipment and three patents with a net book value of approximately $1.7 million with a fair market value of RMB 49,980,000 (approximately $7.3 million). Benghu and the Agency own an aggregate of 65% of the JV and Sichuan Apollo owns the remaining 35%. In addition, under the terms of the agreement, debt of Sichuan Apollo aggregating RMB 37,170,000 (approximately $5.4 million) owed to the Agency was assigned to the JV.  The value of the net assets contributed by Sichuan Apollo was equal to the proportionate value of the total capital contribution to be made to the JV taking into consideration the cash contribution by the other parties. The assets were valued by the Company’s management giving consideration to the valuation services provided by an independent third party. In accordance with ASC 805-40, Sichuan Apollo has reported a gain on the difference between the initial cost of the investment and the Company’s proportionate share of the fair value of the JV’s net equity, which, if treated as a consolidated subsidiary, would have resulted in negative goodwill to be recorded as a gain. From the year ended December 31, 2009 to September 30, 2012, the Company contributed net assets of approximately RMB 29 million (equivalent to $4.7 million) and a RMB 37,170,000 (equivalent to $5.9 million) loan payable to the Agency was assigned to the JV. This resulted in an excess of the proportionate share of the JV’s net assets at fair market value over the cost of the assets contributed of RMB 44.8 million (equivalent to $7.1 million). The Company’s equitable share of the excess was reported as income on the statement of operations for the nine months ended September 30, 2012. As of September 30, 2012, all parties has finished the total capital contribution of RMB142, 800,000 (approximately $22.7 million) to JV per agreement. All gain has been recognized as of September 30, 2012.
 
Summarized financial information for our investment in the JV assuming a 100% ownership interest is as follows: 
 
   
September 30,
 2012
   
September 30,
 2011
 
Statement of operations
           
Revenues                        
  $
-
    $
3,141
 
Cost of sales            
   
                -
     
 1,689
 
Gross profit
   
                -
     
1,443
 
Operating Loss       
   
 (321,480)
     
(707,410)
 
Loss before income tax   
  $
 (321,480)
    $
(707,410)
 
 
 
 
7

 
 
APOLLO SOLAR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012
(UNAUDITED)
 

 
NOTE 6.  ACCRUED EXPENSES, TAXES AND OTHER CURRENT LIABILITIES
 
Accrued expenses, taxes and other current liabilities are listed as below:
 
   
As of
 
 
September 30,
2012
 
December 31,
 2011
 
 
 
 
 
 
Accrued interest
819,263 
    $ 819,418  
Salaries and benefits
 
182,092 
      275,194  
Other taxes
 
290,990 
      715,277  
Professional fees
  82,042       102,779  
Accrued R&D expenses
  750,000       375,000  
Other payables and advances
  544,198       390,280  
               
   Total
2,668,585     $ 2,677,948  

 
 
8

 
APOLLO SOLAR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012
(UNAUDITED)
 


 NOTE 7.  SHORT-TERM LOAN
 
 Short-term loans consist of the following loans collateralized by assets of the Company:

 
 
 
September 30,
   
December 31,
 
     
2012
   
2011
 
                   
1) Loan payable to Chengdu Xihang Gang Construction & Investment Co., Ltd. due on demand, without interest collateralized by certain plant equipment of Sichuan Apollo
 
  $ 653,584     $ 654,974  
                   
2) Loan payable to Bank of Communication, Chengdu branch due on July 29, 2012, with interest at 8.53% per annum, collateralized by the buildings and land use right of Diye, which was paid in full on July 27, 2012
 
    -       317,179  
                   
3) Loan payable to Bank of China, Xihanggang Branch, Chengdu due on August 22, 2013, with interest at 8.4% per annum, collateralized  by the buildings of Sichuan Apollo
 
    727,963       792,947  
                   
4) Loan payable to Bank of China, Xihanggang Branch, Chengdu due on September 17, 2013, with interest at 7.74% per annum, collateralized by the buildings of Sichuan Apollo
 
    696,313       697,794  
                   
5) Loan payable to Bank of China, Xihanggang Branch, Chengdu due on December 25, 2012,with interest at 7.74% per annum, collateralized by the buildings of Sichuan Apollo
 
    1,582,528       1,585,894  
                   
6) Loan payable to Bank of China, Xihanggang Branch, Chengdu, due on March 28, 2012, with interest of 6.73% per annum.  The loan was paid in full in March 2012.
 
    -       1,586  
                   
7) Loan payable to Wuhan Economic Development Group through Industrial and Commercial Bank of China, Huangpu Branch, Wuhan due on October 31, 2012,with interest at 7.5% per annum, collateralized by Sichuan Xinlong's 100% ownership in Shimian. The Company is negotiating with the bank to extend the loan.
 
    1,266,023       -  
                   
8) Loan payable to Bank of China, Xihanggang Branch, Chengdu, due on September 20, 2013
      793       -  
                   
9) loan payable to an unrelated party, non-interest-bearing and due on November 20, 2012
      1,974,996       -  
      $ 6,902,200     $ 4,050,374  

 
 
9

 
 
APOLLO SOLAR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012
(UNAUDITED)



NOTE 8.  TAXES
 
Corporation income tax
 
The Company is incorporated in the United States of America and is subject to United States federal taxation. No provisions for income taxes have been made, as the Company had no U.S. taxable income for the three and nine months ended September 30, 2012 and 2011.

The Company’s Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning the privately run and foreign invested enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
  
On July 16, 2009, the Company’s subsidiary, Sichuan Xinlong, received government approval regarding the High-Tech Enterprise Certificate which allows the Company to enjoy a favorable tax rate of 15% effective January 1, 2009 through December 31, 2011. The Company is in the process of applying to renew this certificate for 2012 and the following years.

Based on management's present assessment, the Company has determined that it is more likely than not a deferred tax asset attributable to the future utilization of the net operating loss carry-forward as of September 30, 2012 will not be realized. Accordingly, the Company has provided a 100% allowance against the deferred tax asset in the financial statements at September 30, 2012. The Company will continue to review this valuation allowance and make adjustments as appropriate.

The Company has net operating loss carry-forwards in China and United States of approximately $3 million and $8 million, respectively, which expire between 2012 and 2022. The Company has a deferred tax asset resulting from the tax loss carry-forwards of approximately $4 million for which the Company has provided a 100% valuation allowance.

The comparison of income tax expense at the U.S. statutory rate of 35% in 2012 and 2011, to the Company’s effective tax is as follows:
 
   
Nine months ended September 30
 
   
2012
   
2011
 
             
U.S. Statutory rate of 35%
  $ (766,611 )   $ (94,108 )
Tax rate difference between China and U.S.
    354,415       83,369  
Change in valuation allowance
    412,196       (51,788 )
Tax paid for prior year
    102,835       -  
Permanent difference
    -       (60,916 )
Effective tax
  $ 102,835     $ (123,443 )
 
 
 
10

 
 
APOLLO SOLAR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012
(UNAUDITED)
 


The provisions for income taxes are summarized as follows:
 
   
Nine months ended September 30
 
   
2012
   
2011
 
Current
  $ 102,835     $ 150,238  
Deferred
    -       (273,681 )
Total
  $ 102,835     $ (123,443 )
 
Value added tax (“VAT”) 
 
Enterprises or individuals who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with the PRC laws. The value added tax standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished products.
 
As of September 30, 2012 and December 31, 2011, the Company had VAT tax receivable of $5,374 and payable of $62,511, respectively.
 
NOTE 9. PRC STATUTORY RESERVES
 
In accordance with the PRC Companies Law, the Company was required to transfer 10% of its profit after tax, as determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve. The statutory surplus reserve is non-distributable. As of September 30, 2012 and December 31, 2011, the Company did not accumulate any statutory reserve due to the accumulated deficit.
 
NOTE 10.  BUSINESS SEGMENTS

For the nine months ended September 30, 2012,
 
   
Manufacturing
   
Refining
   
Mining
   
Corporate &
Others
   
Consolidated
Total
 
                               
Revenue
  $ 380,463     $ 3,493,237     $ -     $ -     $ 3,873,700  
                                         
Operating loss
  $ (878,838 )   $ (1,911,980 )   $ (165,901 )   $ (825,949 )   $ (3,782,668 )
                                         
Depreciation and amortization
  $ 526,485     $ 147,260     $ 24,288     $ -     $ 698,033  
                              -          
Capital expenditures
  $ 53,659     $ 58,798     $ 2,330     $ -     $ 114,787  
 
For the nine months ended September 30, 2011,
 
   
Manufacturing
   
Refining
   
Mining
   
Corporate &
Others
   
Consolidated
Total
 
                               
Revenue
  $ -     $ 8,968,872     $ -     $ -     $ 8,968,872  
                                         
Operating loss
  $ (614,467 )   $ (69,593 )   $ (210,322 )   $ (689,392 )   $ (1,583,774 )
                                         
Depreciation and amortization
  $ 528,904     $ 177,355     $ 23,817     $ -     $ 730,076  
                                         
Capital expenditures
  $ 16,819     $ 210,663     $ 64,498     $ -     $ 291,980  
 
 
11

 
 
APOLLO SOLAR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012
(UNAUDITED)
 

 
 
For the three months ended September 30, 2012,
 
   
Manufacturing
   
Refining
   
Mining
   
Corporate &
Others
   
Consolidated
Total
 
                               
Revenue
  $ 205,931     $ 807,389     $ -     $ -     $ 1,013,320  
                                         
Operating loss
  $ (307,601 )   $ (628,746 )   $ (52,673 )   $ (240,602 )   $ (1,229,622 )
                                         
Depreciation and amortization
  $ 170,393     $ 51,018     $ 8,025     $ -     $ 229,436  
                                         
Capital expenditures
  $ 25,439     $ 1,533     $ -     $ -     $ 26,972  

For the three months ended September 30, 2011,
 
   
Manufacturing
   
Refining
   
Mining
   
Corporate &
Others
   
Consolidated
Total
 
                               
Revenue
  $ -     $ 2,245,534     $ -     $ -     $ 2,245,534  
                                         
Operating loss
  $ (232,140 )   $ (200,514 )   $ (59,448 )   $ (173,894 )   $ (665,996 )
           
                      -  
Depreciation and amortization
  $ 175,917     $ 60,083     $ 8,037     $ -     $ 244,037  
                                      -  
Capital expenditures
  $ 1,385     $ 188,073     $ 11,285     $ -     $ 200,743  
 
NOTE 11. CONCENTRATIONS

For the nine months ended September 30, 2012, two major customers accounted for approximately 16% and 15% of total sales, respectively.  For the nine months ended September 30, 2012, 10% of sales were made to customers in North America and 90% of sales were made to customers in Asia. Two vendors accounted for approximately 38% and 13% of total purchases, respectively.

For the nine months ended September 30, 2011, two major customers accounted for approximately 23% and 13% of total sales separately. For the nine months ended September 30, 2011, 24% of sales were made to customers in North America and 75% of sales were made to customers in Asia.

For the three months ended September 30, 2012, two major customers accounted for approximately 27% and 12% of total sales, respectively.  For the nine months ended September 30, 2012, 98% of sales were made to customers in Asia and 2% of sales were made to customers in North America. Four vendors accounted for approximately 49%, 15%, 13% and 11% of total purchases, respectively.

For the three months ended September 30, 2011, four major customers accounted for approximately 20%, 16%, 14% and 10% of total sales, respectively.  For the three months ended September 30, 2011, 18% of sales were made to customers in North America and 82% of sales were made to customers in Asia.

NOTE 12  SUBSEQUENT EVENTS
 
The Company has reviewed its subsequent events through the date these financial statements were issued and has determined that no additional material subsequent events have occurred through such date.
 
 
12

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion contains forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements regarding future events, our plans and expectations and financial projections. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Form 10-Q and in our Annual Report on Form 10-K filed on May 16, 2012. Unless the context otherwise requires, the terms “we,” the “Company,” “us,” or “Apollo” refers to Apollo Solar Energy, Inc. and our wholly-owned subsidiaries and variable interest entities.
 
Overview
 
We are a China-based vertically integrated refiner of tellurium, or Te, and high-purity tellurium-based metals for specific segments of the electronic materials market. Our main expertise is in the production of Te-based compounds used to produce thin-film solar cells, cell modules and solar electronic products. While no reserves under the SEC’s Industry Guide 7 can currently be delineated at our properties, we believe that the tellurium to be used in our products in the future will be primarily sourced from our Dashuigou project located in Sichuan Province, PRC. In addition, we expect to source tellurium from another property in Shimian, Majiagou, PRC, through variable interest entity agreements, or the VIE Agreements, executed in April, 2009, with Sichuan Xinju Mineral Resources Development Corporation and certain of its shareholders holding 51.6619% of its voting stock, which shareholders are our direct or indirect employees.  Under the terms of the VIE Agreements, we have been granted the exclusive exploration and mining rights to these two projects in accordance with a license granted by the Chinese government, which extends through January 2013 for mining activities at our Dashuigou property, through May 2013 for mining activities at our Majiagou property, and through January 2013. for exploration activities at our Dashuigou property, subject to potential renewal thereafter.

Currently, tellurium is produced as a by-product in the process of processing copper and other metals. As a result, costs are high. We believe that the Dashuigou and Majiagou projects are the only two known deposits in the world in which tellurium, one of the rarest metallic elements on earth, is the primary commodity of economic interest. By the end of 2012, we plan to obtain approximately 50% to 60% of the tellurium necessary for our products from the Dashuigou and Majiagou projects and believe this ability to be a significant competitive advantage because the cost of tellurium sourced from our own properties will be substantially lower than that purchased from an outside third party.  We will source the remaining 40% to 50% of our tellurium needs from third-party suppliers with whom we have established good business relationships over the past few years. By vertically integrating our processes, we believe we are able to achieve significant operating efficiencies and produce high-quality products that offer cost and quality benefits to our customers.  Currently, we are able to procure raw materials from the Dashuigou and Majiagou projects at a significant discount to prevailing market price.

Our refining operations are currently based in a 330,000 square foot facility in Chengdu, Sichuan Province, PRC. We expect this facility to eventually have the capacity to produce more than 300 tons of high-purity photovoltaic cell materials and 42 other types of electronic materials. Future expansion of this facility in vacant land leased to the Company will have a capacity to produce up to an additional 350 tons of high-purity photovoltaic cell materials.

 
13

 
 
We are currently in the exploration stage of operations in accordance with the requirements of SEC Industry Guide 7. However, we believe we are unique in that we expect to both mine and refine  our tellurium-based products, with primary refining capabilities as provided by Sichuan Xinju Mineral Resources Development Corporation pursuant to the VIE Agreements, and secondary refining capabilities directly through our Company. Our primary refining capabilities are such that we can treat metal concentrates (containing, for example, as little as 50% of the metals of interest), and extract and refine the metals of interest so that they can be fed to our secondary refining operations, where we attain a higher level of purity. Because we expect to mine the raw material in the future, and perform both refining functions, both directly and through our VIE Arrangement, we consider ourselves a supplier that will in the future have uniquely integrated capabilities. Our end-products are tellurium, cadmium, zinc and related compounds of 99.999% (five nines, or 5N) purity or above. Our products are critical precursors in a number of electronic applications, including the rapidly-expanding thin-film photovoltaic, or PV, market.

Thin film technologies, because of their relatively low usage of raw materials when compared with traditional silicon-based photovoltaic technologies, offer a potential cost advantage in the marketplace.  Accordingly, we believe these technologies are beginning to gain an ever increasing foothold in the market.   
 
Our Variable Interest Entity Agreements
 
As illustrated in the diagram below, we entered into various exclusive contractual arrangements on April 10, 2009 with Sichuan Xinju Mineral Resources Development Corporation, or the VIE, and certain of its shareholders who are our direct or indirect employees and who collectively own 51.6619% of the VIE.  Among other things, these VIE Agreements granted to our wholly-owned subsidiary a first option to purchase the exploration rights related to the Dashuigou area property and the mining rights related to that certain tellurium and bismuth property in Shimian Majiagou, which rights we collectively referred to as the Exploration Business.  Additionally, the VIE and certain of its shareholders who collectively own 51.6619% of the VIE granted to our wholly-owned subsidiary an exclusive right to purchase all of the products produced from the Exploration Business for a specified period of time.  As a result, we consolidate the financial results of the VIE related to the Exploration Business pursuant to FASB ASC 810-10, “Consolidation.”
 
 
14

 
 
 
 (1)  Agreements that provide us with effective control over Sichuan Xinju Mineral Resources Development Co. Ltd., or the VIE, include a purchase option agreement, a business operations agreement and an exclusive technical and consulting agreement.

The agreements between the VIE and our other affiliated entities or persons are summarized below:

·
First Option Exclusive Acquiring Agreement among Sichuan Xinlong Tellurium Industry & Technique Co., Ltd., Sichuan Xinju Mineral Resources Development Co., Ltd., Renyi Hou and Ling Yong, which grants to our wholly-owned subsidiary a first option to purchase the Mining Business at such time as the purchase becomes advisable, permissible and in our best interest.

·
Exclusive Sales Agreement between Sichuan Xinlong Tellurium Industry & Technique Co., Ltd. and Sichuan Xinju Mineral Resources Development Co., Ltd., which grant to our wholly-owned subsidiary the exclusive right to buy all of the output of the Mining Business.

·
Business Operation Agreement among Sichuan Xinlong Tellurium Industry & Technique Co., Ltd., Sichuan Xinju Mineral Resources Development Co., Ltd., Renyi Hou and Ling Yong, which imposes certain restrictions and obligations on the VIE and certain of its shareholders to support the VIE arrangement, including refraining from competing with our business and modifying the business operations of the VIE without the prior consent of our wholly-owned subsidiary.
 
·
 
Exclusive Technical and Consulting Agreement between Sichuan Xinlong Tellurium Industry & Technique Co., Ltd. and Sichuan Xinju Mineral Resources Development Co., Ltd., which requires the VIE to provide certain technical and consulting services exclusively to our wholly-owned subsidiary in connection with the Mining Business.  Our wholly-owned subsidiary agrees to provide up to $6.0 million in investing funding to the VIE in connection with its operation of the Mining Business, on such terms as the parties shall agree from time to time.
 
 
 
15

 
 
Results of Operations
 
Sales
 
Sales for the three months ended September 30, 2012 were $1,013,320, compared to the sales of $2,245,534 in the same period in 2011, a decrease of $1,232,214 or approximately 54.9%. Sales for the nine months ended September 30, 2012 were $3,873,700, compared to the sales of $8,968,872 in the same period in 2011, a decrease of $5,095,172 or approximately 56.8%.  The primary reasons for the reduction in sales were:

·
Decrease in overseas sales due to the financial crisis in Europe and slower than expected recovery of economy in USA.
·
Decrease in the selling price of Selenium due to weak demand.
·
Decrease in quantity of the product purchased by our customers due to uncertainty in the economy.

Gross profit
 
Although our sales fell by 54.9% and 56.8% in the three and nine months ended September 30, 2012, compared to the same periods of 2011, our cost of sales decreased by only 39.6% and 40.1% in the three and nine months ended September 30, 2012 comparing to the same periods of 2011. The disparity was attributable to increases in the cost of raw materials that we were unable to pass along to our customers.  As a result, we recorded a deficit in gross profit of $145,969 and $627,871for the three and nine months ended September 30, 2012, compared to gross profit of $325,262 and $1,450,527 in the three and nine months ended September 30, 2011.  
 
Selling expense
 
For the three months ended September 30, 2012, selling expenses were $100,913 compared to $71,805 for the three months ended September 30, 2011, representing an increase of 40.5%. For the nine months ended September 30, 2012, selling expenses were $210,599 compared to $247,008 for the nine months ended September 30, 2011, representing a decrease of 14.7%. This decrease was primarily due to our continued tighter controls over selling expenses in a weak market.
 
General and administrative expenses
 
We incurred general and administrative expenses of $540,127 and $1,966,660 for the three and nine months ended September 30, 2012, compared to $835,272 and $2,412,540 in the same period of 2011, representing a decrease of 35.3% for the three month period and 18.4% for the nine month period. Included in the general and administrative expenses was the amortization of stock based compensation and stock issued for services totaling $352,990 and $482,594 in the nine months ended September 30, 2012 and 2011, respectively. The decrease in our general and administrative expenses was primarily due to tighter budget controls.
 
 
 
16

 
 
Research and development expenses
 
For the three months ended September 30, 2012, we incurred research and development expenses of $442,613, compared to $84,181 for the three months ended September 30, 2011. This represents an increase of 426%. For the nine months ended September 30, 2012, we incurred research and development expenses of $977,538, compared to $374,753 for the nine months ended September 30, 2011. This represents an increase of 161%. The increase in the expenses was due to our increased effort on research and development for several new products.

Operating loss

Our operating loss for the three months ended September 30, 2012 was $1,229,622, which was 84.6% greater than our operating loss for the three months ended September 30, 2011. Our operating loss for the nine months ended September 30, 2012 was $3,782,668, which was 138.8% worse than our operating loss for the nine months ended September 30, 2011.

Other income (expense)

In 2009, we entered into a joint venture agreement, pursuant to which we acquired a 35% interest for the contribution of certain assets with a fair value of RMB49,980,000 (approximately $7.3 million) and debt of RMB37,170,000 (approximately $5.4 million).  Accounting standards require that we report a gain on the difference between the initial cost of the investment and our proportionate share of the fair value of the Joint Venture’s net equity. Accordingly, we recorded a gain of $2,038,774 during nine months ended September 30, 2012.

During the three and nine months ended September 30, 2012, the operations of the Joint Venture resulted in net income of $177,800 and net loss of $321,480, respectively.  Because we own 35% of the equity in the Joint Venture and account for that investment on the equity method, we recorded Equity in Gain of Joint Venture of $62,230 and Equity in Loss of Joint Venture of $112,518 for the three and nine months ended September 30, 2012, respectively.  During the three and nine months ended September 30, 2011, our equitable share of the Joint Venture’s losses totaled $141,078 and $388,666, respectively.

In addition, during the three and nine months ended September 30, 2012 we recorded net interest expense of $80,691 and $333,907, respectively.  By comparison, during the three months ended September 30, 2011 we recorded net interest expense of $56,946.  During the nine months ended September 30, 2011 we recorded net interest income of $630,851 due to the classification as interest income of a portion of a debt settlement that we entered into in the first quarter of 2011 with our largest shareholder.
 
 
17

 
 
Net income/loss
 
We recorded a net loss of $2,293,154 for the nine months ended September 30, 2012, which was 1477% greater than the net loss of $145,434 recorded in the same period of 2011. During the three months ended September 30, 2012 we recorded net loss of $1,248,083, compared to a net income of $206,357 recorded in the same period of 2011
 
Liquidity and Capital Resources
 
Net cash (used in) provided by operating activities.
 
Our operating activities during the nine months ended September 30, 2012 used $2,557,136 in cash.  The use of cash exceeded our net loss of $2,293,154 primarily because our net loss was reduced by the non-cash gain of $2,038,774 that we recorded as a result of our investment in the Joint Venture .  That gain was partially offset, however, by sizeable reductions in our inventory and accounts receivable balances, reflecting the recent decline in the level of our operations.

By comparison, net cash provided by operating activities for the nine months ended September 30, 2011 was $72,557, primarily due to a $3,109,783 reduction in our inventory level during that period.

Net cash (used in) investing activities.
 
Net cash used in investing activities for the nine months ended September 30, 2012 was $144,787, which resulted from the purchase of property and equipment.

Net cash provided by investing activities for the nine months ended September 30, 2011 was $477,642. Cash was generated for the nine months ended September 2011 which primarily resulted from the proceeds from sale of assets, less capital expenditures on the purchase of property and equipment.
 
Net cash (used in)/provided by financing activities.
 
We funded our operations during the nine months ended September 30, 2012 by taking short-term loans totaling $2,865,182.

Net cash used in financing activities for the nine months ended September 30, 2011 was $2,553,262, representing a payment to shareholder of $1,673,789, advance from a related party of $237,413 and payment with respect to a short-term loan of $1,152,886.

The Company believes that its cash flows generated internally may not be sufficient to sustain operations and repay short term bank loans for the next twelve months. Therefore, from time to time, the Company may require extra funding through short term borrowing from PRC banks or other financing activities.
 
 
18

 
 
Working capital

 The Company has a working capital deficit of $5,660,085 at September 30, 2012.  This represented an atrophy of $3,257,537 since December 31, 2011. The primary reason for the atrophy of working capital was the $2,293,154 loss that we incurred during nine months ended September 30, 2012, which we funded by taking short-term loans.

Contractual obligations
 
The following table describes our contractual commitments and obligations as of September 30, 2012:
 
   
Payments due by Period (in $)
 
 
Contractual Obligations
 
Total
   
Less Than 1 Year
    1 – 3
Years
    3 – 5
Years
   
More Than
5 Years
 
Short term loans
  $ 6,902,200     $ 6,902,200     $ -     $ -     $ -  
Loans from shareholder and related party
  $ 310,347     $ 310,347     $ -     $       $ -  

Off-Balance Sheet Transactions
 
We have no material off-balance sheet transactions.
 
Impact of Recent Currency Exchange Rate Increase
 
We use the U.S. dollar as the reporting currency for our financial statements. Our operations are conducted through our PRC operating subsidiary, Sichuan Apollo, and our functional currency is the RMB. On July 21, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar and, as a result, the RMB has appreciated against the U.S. dollar by approximately 8.26% from 1:8.27 on July 21, 2005 to 1:6.6023 on December 31, 2010 and 1:6.30559 on December 31, 2011. In converting our RMB income statement amounts into U.S. dollars we used the following RMB/$ exchange rates: 6.3085 and 6.3483 for the nine months ended September 30, 2012 and 2011 respectively. There is no guarantee that we will benefit from the exchange rate in the future and our operations may suffer if a less favorable exchange rate develops.
 
Future Capital Expenditures
 
On April 10, 2009, we signed the VIE Agreements to acquire the exploration rights of the Dashuigou area and the mining rights of the Majiahou mine. We expect to invest in exploration, mining equipment, and refinery facility in the future so that we can source tellurium internally. Additional capital for this objective may be required that is in excess of our current resources, requiring us to raise additional capital through additional equity offerings or secured or unsecured debt financing. The availability of additional capital resources will depend on prevailing market conditions, interest rates, and our existing material financial position and results of operations.
 
 
19

 
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not Applicable.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
(a) Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this report. That evaluation disclosed that the Company has material defects in its disclosure controls and procedures. Specifically management determined that there is a lack of expertise in U.S. GAAP among the Company’s management personnel. They also determined that the size of the Company’s accounting staff and low number of supervisory personnel prevented an appropriate segregation of accounting functions.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that were not effective as of September 30, 2012.
 
(b) Changes in Internal Controls
 
There were no changes in our internal control over financial reporting during the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
None.
 
ITEM 1A.  RISK FACTORS
 
In addition to other information set forth in this report, you should carefully consider the “Risk Factors” discussed in our Annual Report on Form 10-K filed on May 16, 2012, for our 2011 fiscal year. There have been no material changes to the “Risk Factors” previously disclosed in our Annual Report on Form 10-K.
 
ITEM 6. EXHIBITS

31.1
Rule 13a-14(a) Certification – CEO
   
31.2
Rule 13a-14(a) Certification – CFO
   
32
Rule 13a-14(b) Certification
   
101 INS
XBRL Instance Document*
   
101 SCH
XBRL Schema Document*
   
101 CAL
XBRL Calculation Linkbase Document*
   
101 DEF
XBRL Definition Linkbase Document*
   
101 LAB
XBRL Labels Linkbase Document*
   
101 PRE
XBRL Presentation Linkbase Document*

*           The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

 
20

 
SIGNATURES
 
         In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
Apollo Solar Energy, Inc.
 
     
Date: November 14, 2012
By:  /s/ Jingong Pan 
 
 
Jingong Pan
 
 
Chief Executive Officer
 
     
Date: November 14, 2012
By:  /s/ Hui Hua
 
 
Hui Hua
 
 
Chief Financial Officer
 

 
 
21