apollo6300910q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 [ x ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended: June 30, 2009
 
or
 
 [   ]
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: 0-12122

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 including zip code)

Registrant’s Telephone Number, Including Area Code:  +86 755 2580 1888

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 ýNo 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 oNo 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 [   ]                                                                                     Accelerated filer  [   ]
 
Non-accelerated filer   [   ]                                                                                     Smaller reporting company [ x ]
 
(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 [   ]  No [ x ] 

There were 44,555,131 shares of common stock outstanding as of August 19, 2009.


 

 
 
 
 

 
APOLLO SOLAR ENERGY, INC.

TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
 
For the Quarterly Period Ended June 30, 2009
ITEM
    
Page
  
         
PART I
FINANCIAL INFORMATION 
      
Item 1.
Financial Statements
  
 
  
 
Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
     2  
 
Consolidated Statements of Operations for three and six months ended June 30, 2009 and June 30, 2008
     3  
 
Consolidated Statements of Cash Flows for six months ended June 30, 2009 and June 30, 2008
     4  
 
Notes to Consolidated Financial Statements
     5  
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
     9  
Item 4T.
Controls and Procedures
     15  
           
PART II
OTHER INFORMATION
        
Item 1.
    Legal Proceedings
     15  
Item 2.
    Unregistered Sales of Equity and Use of Proceeds
     15  
Item 3.
Defaults Upon Senior Securities
     15  
Item 4.
Submission of Matters to a Vote of Security Holders
     15  
Item 5.
    Other Information
     15  
Item 6.
Exhibits
     16  
           
 
Signatures
     16  

 

 

 
 
 
 

 



PART I – FINANCIAL INFORMATION


 
 ITEM 1 – FINANCIAL STATEMENTS
 

APOLLO SOLAR ENERGY, INC.
            
CONSOLIDATED BALANCE SHEETS
            
             
             
   
June 30,
    
December 31,
  
   
2009
    
2008
  
   
(Unaudited)
    
(Audited)
  
ASSETS
            
             
Current assets:
            
  Cash and cash equivalents
   $ 243,318     $ 4,874,044  
  Account receivable, net
     1,248,370       961,600  
  Inventories
     7,303,613       7,496,477  
  Value added taxes receivable
     5,574       494,387  
  Purchase deposit
     425,521       321,300  
  Due from related parties
     1,503,818       2,313,198  
  Deferred tax assets
     16,427       25,880  
  Other sundry current assets
     101,491       83,001  
     Total current assets
     10,848,132       16,569,887  
                 
Property, machinery and mining assets, net
     22,600,358       19,549,909  
                 
                 
Non-marketable  investment
     43,919       -  
                 
Total Assets
   $ 33,492,409     $ 36,119,796  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
                
                 
Current liabilities:
                
  Short-term loan
    $ 1,947,095      $ -  
  Account payable - trade
     573,965       876,221  
                                  - construction vendors
     2,493,349       2,546,890  
  Accrued expenses
     873,131       959,186  
  Due to shareholders
     -       9,032,382  
     Total current liabilities
     5,887,540       13,414,679  
                 
Long-term debt
     4,391,943       4,397,215  
Due to shareholders             5,831,258        -   
                 
                 
Shareholders' equity:
                
  Perferred stock, $.001 par value, 25,000,000 shares authorized,
                
       0 shares issued and outstanding at June 30, 2009 and December 31, 2008
                
  Common stock, $.001 par value, 100,000,000 shares authorized,
     44,555       44,555  
      44,555,131 issued and outstanding at June 30, 2009 and  December 31, 2008
                
  Additional paid-in capital
     17,575,261       17,347,905  
  Accumulated deficit
     (1,501,612 )     (383,221 )
  Accumulated other comprehensive income
     1,263,464       1,298,663  
     Total shareholders' equity
     17,381,668       18,307,902  
                 
Total Liabilities And Shareholders' Equity
   $ 33,492,409     $ 36,119,796  
                 
 
 


The accompanying notes are an integral part of these financial statements
-2-
 
 
 


 
            
APOLLO SOLAR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                       
 
                  
                       
                       
         
 Three months ended June 30,
Six months ended June 30,
         
2009
  
2008
  
2009
  
2008
                       
Sales
      
 $   1,681,755
  
 $  1,135,466
  
 $   3,990,374
  
 $      3,045,173
                       
Cost of sales
    
     (1,287,590)
  
      (981,218)
  
     (3,099,278)
  
       (2,098,713)
                       
Gross profit
    
         394,165
  
       154,248
  
         891,096
  
           946,460
                       
Operating expenses
                
  General and adminstrative expenses
         483,539
  
       254,838
  
      1,251,954
  
           361,506
  Stock based compensation
         173,082
  
                 -
  
         373,262
  
                     -
  Selling expenses
  
          51,220
  
         99,704
  
         121,717
  
           158,624
  Research and development
          38,944
  
         43,193
  
          49,962
  
             45,289
     Total Operating Expenses
         746,785
  
       397,735
  
      1,796,895
  
           565,419
                       
Operating income (loss)
  
       (352,620)
  
      (243,487)
  
       (905,799)
  
           381,041
                       
Interest income (expenses)
         (98,771)
  
           3,628
  
       (189,103)
  
             10,703
                       
Income (loss) before income taxes
       (451,391)
  
      (239,859)
  
     (1,094,902)
  
           391,744
                       
Provision for income taxes
          11,667
  
           2,482
  
          23,488
  
           158,717
                       
Net income (loss)
  
 $    (463,058)
  
 $   (242,341)
  
 $  (1,118,390)
  
 $        233,027
                       
Other Comprehensive Income
            
 
Foreign currency translation adjustment
 $      (35,199)
  
 $     464,322
  
 $        (6,270)
  
 $       (106,278)
                       
Comprehensive Income (loss)
 $  (1,153,589)
  
 $     697,349
  
 $    (469,328)
  
 $       (348,619)
                       
Basic and diluted income per common share
        
 
Basic
    
 $         (0.02)
  
 $          0.01
  
 $         (0.01)
  
 $            (0.01)
 
Diluted
    
 $         (0.02)
  
 $          0.01
  
 $         (0.01)
  
 $            (0.01)
                       
Weighted-average common shares outstanding
        
 
Basic
    
    44,555,131
 
   44,555,131
  
    44,555,131
  
       44,555,131
 
Diluted
    
    45,385,131
 
   44,555,131
  
    45,385,131
  
       44,555,131
                       



The accompanying notes are an integral part of these financial statements
-3-
 
 
 
 


                                                                                              APOLLO SOLAR ENERGY, INC.
            
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  
             
 
            
   
Six months ended
June 30,
  
   
2009
    
2008
  
             
Cash flows from operating activities:
            
  Net income (loss)
   $ (1,118,390 )   $ 233,027  
  Adjustments to reconcile net income to net cash
 
  Used in operating activities:
                
    Issurance of options for service
     373,262       -  
    Depreciation
     598,367       223,503  
    Deferred tax assets
     9,418       -  
                 
  Changes in assets and liabilities:
                
    Account receivable-trade
     (287,821 )     (540,239 )
    Inventory
     213,263       (4,929,909 )
    Other sundry current assets
     (18,581 )     (207,399 )
    Tax receivable
     488,047       -  
    Advance for purchases
     (174,461 )     (334,021 )
    Account payable-trade
     (301,101 )     102,239  
    Accounts payable - construction
     (50,469 )     -  
    Accrued expenses and other sundry currenty liabilities
     (223,704 )     429,509  
    Accrued interests
     184,785       -  
Net cash used in operating activities
     (307,385 )     (5,023,290 )
                 
Cash flows from investing activities:
                
  Non-marketable investment
     (43,904 )     -  
  Purchase of property & equipments
     (1,011,214 )     (5,542,889 )
  Government subsidy to purchase of fixed assets
     2,019,579          
  Acquisition of land use rights
     (3,673,545 )     -  
Net cash used in investing activities
     (2,709,084 )     (5,542,889 )
                 
Cash flows from financing activities:
                
  Proceeds from short-term borrowings
     1,956,358       -  
  Capital contribution
     -       7,146,383  
  Advance from (payment to) shareholders
     (3,202,661 )     144,775  
  Advance from (payment to) related party
     (361,671 )     531,613  
Net cash provided by (used in) financing activities
     (1,607,974 )     7,822,771  
                 
Effect of exchange rate changes on cash and cash equivalents
     (6,284 )     223,996  
                 
Net decrease in cash and cash equivalents
     (4,630,727 )     (2,519,412 )
                 
Cash and cash equivalents, beginning of period
     4,874,044       2,621,139  
                 
Cash and cash equivalents, end of period
   $ 243,318     $ 101,727  
      -          
Supplemental disclosures of cash flow information:
          
                 
Interest paid
   $ 5,163     $ -  
         Income taxes paid
   $ 9,862     $ -  
                 
                 
                 


The accompanying notes are an integral part of these financial statements
-4-
 
 
 
 
 


 
 
 
APOLLO SOLAR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2009


NOTE 1. BASE 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, 2008 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 six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the entire year or for any other period.
 
The Company’s functional currency in the Chinese Renminbi (“RMB”); however, the accompanying financial statements have been translated and presented in United States Dollars (“USD”).

NOTE 2. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
 
On October 14, 2008, the Company completed a reverse merger transaction with Apollo Solar Energy, Inc., (“ASE-Delaware”) by issuing 4,000 shares of its common stock in exchange for each outstanding share of ASE-Delaware’s common stock.  Under the terms of the merger agreement, all of the outstanding shares of common stock of ASE-Delaware were exchanged for 44,000,000 shares of common stock of the Company, resulting in the former shareholders of ASE-Delaware owning 98.75% of the Company’s issued and outstanding common stock.

For accounting purposes, ASE-Delaware became the surviving entity whereas the Company was recognized as the surviving entity for legal purposes.  Accordingly, the financial statements include the assets, liabilities and operations of ASE-Delaware.

On August 4, 2008, ASE-Delaware, an inactive company, acquired 100% of the registered capital of Sichuan Apollo Solar Science & Technology Co., Ltd. (“Sichuan Apollo”), in a transaction accounted for as a reorganization.

Sichuan Apollo was formed in June, 2006 in the People’s Republic of China and develops and manufactures high purity metals and compounds which are widely used in the field of national defense, navigation, spaceflight and the electronic industry.  In addition, the Company is developing semiconductor, photoelectrical, photoconductive and photovoltaic basic materials for thin film solar cells through its 100% owned subsidiary, Sichuan Xinlong Diye Tellurium Industry & Technique Co., Ltd ( “Diye”).

Effective August 22, 2008 Diye acquired 100% of the equity of Sichuan Xinju Shimian Dadu River Mining & Metallurgy Co., Ltd. (“Dadu River”) from significant shareholders of Apollo.  Dadu River owns the exclusive rights to the Dashuigou tellurium mine through at least January 2013.  Prior year financial statements have not been restated as the effects of this acquisition of the financial position and results of operations are immaterial.
 
The company 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 agreements granted to our wholly-owned subsidiary a first option to purchase the exploration rights related to the Dashuigou area mine and the mining rights related to that certain tellurium and bismuth mine in Shimian Majiagou (which rights are collectively referred to in this report as the Mining 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 Mining Business for a specified period of time.  As a result, we consolidate the financial results of the VIE related to the Mining Business.


Stock-Based Compensation

The Company account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award using the straight-line method.
Reclassifications

Certain previously reported amounts have been reclassified to conform to classifications adopted in the period ended June 30, 2009.

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

 
Inventories

Inventories are valued at the lower of cost or market with cost determined on the weighted-average method.

Property, machinery and mining assets

Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives.

Mineral exploration costs are expensed according to the term of the license granted to the Company by the PRC.  Extraction rights are stated at the lower of cost and recoverable amount.  When extraction rights are obtained from the government according to the mining industry practice in the PRC, extraction rights and other costs incurred prospectively to develop the property are capitalized as incurred and are amortized using the units-of-production ("UOP") method over the estimated life of the mineralized body based on estimated recoverable volume through to the end of the period over which the Company has extraction rights.  At the Company’s underground mines, these costs include the cost of building access ways, shaft sinking and access, lateral development, drift development, ramps and infrastructure development.

Major development costs incurred after the commencement of production are amortized using the UOP method based on estimated recoverable volume in mineralized material.  To the extent that these costs benefit the entire mineralized body, they are amortized over the estimated life of the mineralized body.  Costs incurred to access specific mineralized blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific mineralized block or area.  Interest cost allocable to the cost of developing mining properties and to constructing new facilities, if any, is capitalized until assets are ready for their intended use.



5 
 
 


Impairment of long-lived assets

The Company accounts for the impairment of long-lived assets in accordance with Statment of Financial Accounting Standard ("SFAS")  No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.  Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable.  For assets that are to be held and used, an impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.  Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.

No impairment loss was recorded for the six months ended June 30, 2009 and 2008 respectively.

Deferred income taxes

The Company accounts for income tax under the provisions of SFAS No.109 "Accounting for Income Taxes", which requires that deferred tax assets and liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  In addition, SFAS 109 requires recognition of future tax benefits, such as carryforwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax assets will not be realized.

Currency translation

Since the Company operates in the PRC, the Company’s functional currency is the RMB.  Revenue and expense accounts are translated at the average rates during the period, and balance sheet items are translated at year-end rates.  Translation adjustments arising from the use of different exchange rates from period to period are included as a component of owners’ equity.  Gains and losses from foreign currency transactions are recognized in current operations.

Fair value of financial instruments

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” requires that the Company disclose estimated fair value of financial statements.

The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued expenses, taxes payable, and other related party advances and borrowings, and short-term loans.

As of the balance sheet date, the estimated fair values of financial instruments were not materially different from their carrying values as presented on the balance sheet.  This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available from loans of similar remaining maturity and risk profile at the respective balance sheet dates.

Segment reporting

 SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting.  The management approach model is based on the way a company’s management organized segments within the company for making operating decisions and assessing performance.  Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

 
Recently issued accounting pronouncements
 
In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2007.  The Company has not determined the effect that the application of SFAS 160 will have on its consolidated financial statements.

In December 2007, SFAS 141(R), Business Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This replaces SFAS 141’s cost-allocation process, which required the cost of acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141R also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141R). SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2007 An entity may not apply it before that date. The Company is currently evaluating the impact that adopting SFAS No. 141R will have on its financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 amends FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, (“FIN 46(R)”) and changes the consolidation guidance applicable to a variable interest entity (“VIE”). It also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Previously, FIN 46(R) required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. SFAS 167 also requires enhanced disclosures about an enterprise’s involvement with a VIE. SFAS 167 will be effective as of the beginning of interim and annual reporting periods beginning after November 15, 2009. The Company is currently assessing the impact that SFAS 167 may have on its financial statements.


6
 
 
 
 
NOTE 3. INVENTORY
 
The Company's inventory consists of the following:


 
   
 
    
As of
    
   
June 30, 2009
    
December 31, 2008
  
             
Raw Materials
   $ 3,542,236     $ 4,351,326  
Work-in-progress
     1,366,974       1,080,390  
Finished goods
     2,394,403       2,064,761  
                 
Total
   $ 7,303,613     $ 7,496,477  
                 
                 


NOTE 4. DUE FROM RELATED PARTY
 
Amounts due from related party consist of amounts due from a related company partially owned by a majority shareholder of Apollo.  This loan is non-interest bearing and due on demand.
 
NOTE 5. NON-MARKETABLE INVESTMENT
 
On March 12, 2009, the Company entered into an agreement to invest RMB300,000 (equivalent to $43,900 at date of signing), for a 6% interest, with two non-affiliates  to establish a new company engaged in the green energy industry.  The total amount due was paid as of June 30, 2009. The Company accounted for this investment using the cost method of accounting.
 
NOTE 6.  SHORT-TERM LOAN
 
On January 1, 2009, the Company signed a loan contract with Chengdu Xihang Gang Construction & Investment Co., Ltd. (“Xihang Gang”), an unaffiliated company, for the amount of RMB 11,300,000 (equivalent to US $1,652,165  at the date of signing).  The term is from January 1, 2009 to August 31, 2009, with an interest rate of 5.31% per annum, and collateralized by certain plant equipment.
 
On February 2, 2009, the Company signed a loan agreement with Communication Bank of China, Sichuan Branch for RMB2,000,000 (equivalent to US$292,028  at the date of signing).  The term is from February 6, 2009 to February 5, 2010, bearing interest at 6.903% per annum, and collateralized by the buildings and land use right of Diye.

NOTE 7. DUE TO STOCKHOLDERS

Due to stockholders consist of non-interest bearing notes due on July 21, 2010.


 NOTE 8.  LONG-TERM DEBT

Long term debt consist of a note payable bearing interest at 6.57% per annum through May 31, 2009 and Bank of China’s rate for a three year loan thereafter. RMB10,000,000 (equivalent to $1,463,981) is due on July 16, 2010 and RMB20,000,000 (equivalent to $2,927,962) is due on June 5, 2010.

NOTE 9.  TAXES

Corporation income tax
 

The Company is 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 new statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

The comparison of income tax expense at the U.S. statutory rate of 35% in 2009 and 2008, to the Company’s effective tax rate is as follows:
               
 

 
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 June 30, 2009 and December 31, 2008, the Company had tax receivable of $5,574 and $494,387 respectively.
 

7
 
 

 NOTE 10. 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 June 30, 2009 and December 31, 2008, the Company did not accumulate any statutory reserve due to the accumulated deficit.


NOTE 11. SEGMENT OF BUSINESS

 
For the six months ended June 30, 2009:

 
                     
Corporate &
    
Consolidated
  
   
Manufacturing
    
Refining
    
Mining
    
Others
    
Total
  
                               
Revenue
   $ -     $ 3,990,374     $ -     $ -     $ 3,990,374  
Operating profit (loss)
     (372,328 )     178,444       (43,522 )     (668,393 )     (905,799 )
Depreciation and amortization
     240,849       344,079       13,439               598,367  
Capital expenditures
     2,413,269       149,540       102,372               2,665,180  
                                         

NOTE 12. CONCENTRATIONS


Sales to one major customer were 87% of total sales for both six months and three months ended June 30, 2009.


As of June 30, 2009, two customers accounted for 42% and 26% of the total accounts receivable outstanding. As of December 31, 2008, two customers accounted for 54% and 36% of the total accounts receivable outstanding.
 
For the six months ended June 30, 2009, 21% of sales were made to customers in North America and 75% of sales were made to customers in Asia. For the three months ended March 31, 2009, 88.7% of sales were made to customers in North America and 11.3% of sales were made to customers in Asia.
 

NOTE 13. VULNERABILITY DUE TO OPERATIONS IN PRC

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC.  Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRCs political, economic and social conditions.  There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

Substantially all of the Company’s businesses are transacted in RMB, which is not freely convertible.  The Peoples Bank of China or other banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the Peoples Bank of China.  Approval of foreign currency payments by the Peoples Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

Since the Company has its primary operations in the PRC, the majority of its revenues will be settled in RMB, not USD. Due to certain restrictions on currency exchanges that exist in the PRC, the Company’s ability to use revenue generated in RMB to pay any dividend payments to its shareholders outside of China may be limited.

The Company’s business depends on maintaining licenses of its current products from the Chinese government.  Failure to obtain the necessary licenses when needed can cause the Company’s business plan to be delayed.

In September 2006, the PRC changed the laws regarding transfer of equity in PRC companies in exchange for equity in non-PRC companies.  Approvals and registrations for such transfers are required and penalties may be imposed if the requirements are not met.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk are primarily cash and cash equivalents.



8 
 
 

 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The Private Securities Litigation Reform Act of 1995, or the Reform Act, contains certain safe harbors regarding forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding future events, our plans and expectations and financial projections and are generally identified by the words “may,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “could,??“would,” and similar expressions.  Because these forward-looking statements are subject to a number of risks and uncertainties, 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, in our Annual Report on Form 10-K filed on April 14, 2009 and in other documents we file from time to time with the Securities and Exchange Commission. 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 vertically integrated miner and refiner of tellurium (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. The tellurium used in our products is primarily sourced from our wholly-owned Dashuigou mine located in Sichuan Province, People’s Republic of China, or the PRC. In addition we source tellurium from another mine in Shimian, Majiagou, PRC, through a series of variable interest entity agreements, or VIE Agreements, 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 mines in accordance with a license granted by the government of the PRC, which extends through January, 2013, subject to potential renewal thereafter.
 
Currently, tellurium is produced as a product in the process of processing copper and other metals. As a result, costs are high. We believe that the Dashuigou and Majiagou mines 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 2010, we plan to obtain approximately 60% to 70% of the tellurium necessary for our products from these mines and believe this ability to be a significant competitive advantage because the cost of tellurium sourced from our own mines will be substantially lower than that purchased from an outside third party.  We source the rest of the tellurium from third-party suppliers that we have established good business relationships with 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 mines at a significant discount to prevailing market price.
  
Our operations are currently based in a 330,000 square foot facility in Chengdu, Sichuan Province, PRC. This newly built modern facility has 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.
 
We believe we are unique in that we are both a miner and refiner of 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 the 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 mine the raw material, and perform both refining functions, both directly and through our VIE arrangement, we consider ourselves a supplier with 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 (PV) 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 agreements granted to our wholly-owned subsidiary a first option to purchase the exploration rights related to the Dashuigou area mine and the mining rights related to that certain tellurium and bismuth mine in Shimian Majiagou (which rights are collectively referred to in this report as the Mining 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 Mining Business for a specified period of time.  As a result, we consolidate the financial results of the VIE related to the Mining Business pursuant to FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities."

9 
 
 







(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, between 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, between 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.

 
Critical Accounting Policies, Estimates and Assumptions
 
Management’s discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. The most significant estimates and assumptions include valuation of inventories, provisions for income taxes, allowance for doubtful accounts, and the recoverability of the long-lived assets. Actual results could differ from these estimates. Periodically, we review all significant estimates and assumptions affecting the financial statements and record the effect of any necessary adjustments.
 
The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:
 
Revenue recognition
Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, and no other significant obligations exist and collectability is reasonably assured.  Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
 
Currency Reporting
 
Amounts reported are stated in U.S. Dollars, unless stated otherwise. Our functional currency is the Renminbi, or RMB, the currency of the PRC. Foreign currency transactions (outside the PRC) are translated into RMB according to the prevailing exchange rate at the transaction dates. Assets and liabilities denominated in foreign currencies at the balance sheet dates are translated into RMB at period-end exchange rates. For the purpose of preparing the consolidated financial statements, our consolidated balance sheets have been translated into U.S. dollars at the current exchange rates as of the end of the respective periods and the consolidated statements of income have been translated into U.S. dollars at the weighted average exchange rates during the periods the transactions were recognized. The resulting translation gain adjustments are recorded as other comprehensive income in the statements of income and comprehensive income and as a separate component of statements of stockholders’ equity.

Accounts Receivable

Accounts receivable consist of trade receivables resulting from sales of products during the normal course of business.  As of June 30, 2009, two customers accounted for 42% and 26%, respectively, of the total accounts receivable outstanding. For the six months ended June 30, 2009 and the year ended December 31, 2008, allowance for uncollectible amounts were approximately $15,000 and $15,000, respectively.

Inventories
 
Inventories are composed of raw materials and packing materials for manufacturing, work in process, and finished goods. Inventories are valued at the lower of cost or market with cost determined on the weighted average method.



10 
 
 
 
Results of Operations
 
The following table sets forth certain information from our condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2009 and 2008 (unaudited):
 

   
Three months ended June 30,
    
Six months ended June 30,
  
   
2009
    
2008
    
2009
    
2008
  
                         
Sales
   $ 1,681,755     $ 1,135,466     $ 3,990,374     $ 3,045,173  
                                 
Cost of sales
     (1,287,590 )     (981,218 )     (3,099,278 )     (2,098,713 )
                                 
Gross profit
     394,165       154,248       891,096       946,460  
                                 
Operating Expenses
                                
  General and adminstrative expenses
     483,539       254,838       1,251,954       361,506  
  Stock based compensation
     173,082       -       373,262       -  
  Selling expenses
     51,220       99,704       121,717       158,624  
  Research and development
     38,944       43,193       49,962       45,289  
Total Operating Expenses
     746,785       397,735       1,796,895       565,419  
                                 
Operating income (loss)
     (352,620 )     (243,487 )     (905,799 )     381,041  
                                 
Interest income (expenses)
     (98,771 )     3,628       (189,103 )     10,703  
                                 
Income (loss) before income taxes
     (451,391 )     (239,859 )     (1,094,902 )     391,744  
                                 
Provision for income taxes
     11,667       2,482       23,488       158,717  
                                 
Net income (loss)
   $ (463,058 )   $ (242,341 )   $ (1,118,390 )   $ 233,027  
                                 
 
                                
                                 
As a Percentage of Sales
     100.00 %     100.00 %     100.00 %     100.00 %
                                 
Cost of sales
     76.56 %     86.42 %     77.67 %     68.92 %
                                 
Gross profit
     23.44 %     13.58 %     22.33 %     31.08 %
                                 
Operating Expenses:
                                
  General and adminstrative expenses
     28.75 %     22.44 %     31.37 %     11.87 %
  Stock based compensation
     10.29 %     0.00 %     9.35 %     0.00 %
  Selling expenses
     3.05 %     8.78 %     3.05 %     5.21 %
  Research and development
     2.32 %     3.80 %     1.25 %     1.49 %
Total Operating Expenses
     44.41 %     35.03 %     45.03 %     18.57 %
                                 
Operating income (loss)
     -20.97 %     -21.44 %     -22.70 %     12.51 %
                                 
Interest income (expenses)
     5.87 %     -0.32 %     4.74 %     -0.35 %
                                 
Income (loss) before income taxes
     -26.84 %     -21.12 %     -27.44 %     12.86 %
                                 
Provision for income taxes
     0.69 %     0.22 %     0.59 %     5.21 %
                                 
Net income (loss)
     -27.53 %     -21.34 %     -28.03 %     7.65 %
                                 
                                 
                              c  




11 
 
 


 
Three Months Ended June 30, 2009 and 2008
 
Sales
 
Sales for the three months ended June 30, 2009 was $1,681,755, compared to the sales of $1,135,466 in the same period in 2008. This increase of 48.1% was primarily attributable to our successful sales and marketing campaigns, improved product quality, and expansion of product categories. In 2007, we began shipment of tellurium to First Solar, the biggest CdTe-based thin film PV producer in the world.  In 2008, First Solar became our largest customer, and remained our largest customer during the second quarter of 2009. However, our sales during the second quarter of 2009 were below our planned target due to the global financial crisis. A significant number of our customers requested prolonged credit extensions during the second fiscal quarter of 2009, and after careful evaluation, we decided not to extend such longer credit terms to any of our customers.  As such, our business volume was reduced.
 
 
Cost of sales
 
Cost of sales for the three months ended June 30, 2009 was $1,287,590, compared to the cost of sales of $981,218 for the three months ended June 30, 2008. This increase in the dollar amount equaled 31.2% and was consistent with the increase in sales for the three months ended June 30, 2009.
 
 
Gross profit
 
Gross profit for the three months ended June 30, 2009 was $394,165, compared to the gross profit of $154,248 for the three months ended June 30, 2008. This represented an increase of $239,917, or 155.3%, over the same period of 2008. The gross profit margin for the three months ended June 30, 2009 was 23.4%, compared to that of 13.6% in the same period of 2008. Two primary factors contributed to the increase in gross profit margin. First, the costs of our tellurium were reduced as our processing techniques improved. Second, we had ongoing orders from customers that allowed us to continually operate our production facilities without interruptions that cause inefficiencies.
 
 
Selling and marketing expenses
 
For the three months ended June 30, 2009, selling and marketing expenses were $51,220, compared to $99,704 for the same period ended June 30, 2008. This represents a decrease of 48.6%. During the three months ended June 30, 2008, we employed an in-house sales team of eight people targeting the Chinese and North American markets. Most of the sales and marketing expenses from that period were traveling, lodging and entertainment related. In contrast, we have not run any advertisement campaigns in 2009, but still maintain an in-house sales team of eight people. In February 2009, we signed an agreement to appoint CERAC as our exclusive agent to distribute our products in North America, excluding First Solar. This outsourcing of services saved us a significant amount of marketing cost for the second quarter of 2009 when we target the North American market.
 
 
General and administrative expenses
 
We incurred general and administrative expenses of $483,593 for the three months ended June 30, 2009, when compared to that of $254,838 in the same period of 2008, representing an increase of 89.8%. The increase was primarily due to the growth in size and revenue of our Company, and the expenses we incurred as a public company. After our reverse merger in October 2008, we incurred significant amounts of audit fees, legal fees and financial advisory fees. We also expanded our accounting/finance department. Additional administrative staff was also added to support our listing functions and the reverse merger process. Depreciation expense for the three months ended June 30, 2009 was $123,053, compared to $127,404 for the same period in 2008.
 
 
 
Stock based Compensation expenses
 
    Stock based compensation expenses in the amount of $173,082 were incurred in the three months ended June 30, 2009. This expense did not exist in the same period of 2008. We granted a total of 830,000 stock options to our CFO and our four independent directors during the three months ended March 31, 2009. Stock based compensation expenses was a non-cash item.
 
 
Research and development expenses
 
For the three months ended June 30, 2009, we incurred R&D expenses of $38,944, compared to $43,193 for the three months ended June 30, 2008. This represents a decrease of 9.8% and was due to the decrease in our R&D headcount. We are committed to the improvement of product quality and the development of new products. We will continue to invest in R&D to ensure our products are of high quality and remain competitive.
 
 
Provision for income tax
 
The provision of income taxes is computed at the statutory rate of 25% for both the three months ended June 30, 2009 and 2008. Provision for income tax for the three months ended June 30, 2009 was $11,667, compared to that of $2,482 for the same period in 2008. Our effective tax rate for the three months ended June 30, 2009 was -2% compared to that of 1% for the same period in 2008. The decrease in the effective tax rate was due to the loss incurred in the current period.
 
 
Net income/loss
 
 
For the three months ended June 30, 2009 we had a net loss of $463,058, compared to net loss of $242,341 for the three months ended June 30, 2008. The main reason for the increase in net loss in the three months ended June 30, 2009 was an increase in costs, primarily in administrative costs representing professional fees. Included in the net loss for the three months ended June 30, 2009 was non-cash stock based compensation of $173,082 and professional fees of $60,301.
 


12
 
 
Six Months Ended June 30, 2009 and 2008
 
 
Sales
 
Sales for the six months ended June 30, 2009 was $3,990,374, compared to the sales of $3,045,173 in the same period in 2008. This increase of 31.0% was primarily attributable to our successful sales and marketing campaigns, improved product quality, and expansion of product categories. In 2007, we began shipment of tellurium to First Solar, the biggest CdTe-based thin film PV producer in the world. In 2008, First Solar became our largest customer, and remained our largest customer during the second quarter of 2009. However, our sale during the first six months of 2009 was below our planned target due to the global financial crisis. A significant number of our customers requested credit extensions during the first six months of 2009, and after careful evaluation, we decided not to extend long credit terms to any of our customers.  As such, our business volume was reduced.
 
 
Cost of sales
 
Cost of sales for the six months ended June 30, 2009 was $3,099,278, compared to the cost of sales of $2,098,713 for the period ended June 30, 2008. This increase in the dollar amount equaled 47.7% and was primarily due to the increase in revenue for the six months ended June 30, 2009.  Additionally, the costs of materials used in our products during the first quarter of 2009 were higher than those in the same period of 2008.
 
 
Gross profit
 
Gross profit for the six months ended June 30, 2009 was $891,096, compared to the gross profit of $946,460 for the same period ended June 30, 2008. This represented a decrease of $55,364, or 5.9%, over the same period of 2008. The gross profit margin for the six months ended June 30, 2009 was 22.3%, compared to that of 31.1% in the same period of 2008. Three primary factors contributed to the decrease in gross profit margin. First, we experienced an increase in the price of most of the feedstock we purchased from third party suppliers worldwide, especially that of tellurium. The price of tellurium feedstock increased more than 100% in 2008 over the price in 2007, and remained at this higher level during the second quarter of 2009.  We were not able to pass through the increase in cost to our customers. As a significant amount of our revenue was generated from the sale of high purity tellurium, our margin was impacted adversely. The situation began to improve towards the end of the first quarter of 2009 and continued to improve into the second quarter of 2009 as we increase our internal tellurium production and decrease our purchase from third parties. Second, labor costs began to increase significantly in the PRC in 2008 and continuing through the second quarter of 2009, and thus increased our cost. Third, the product mix we sold in the first six months of 2009 changed as compared to the product mix we sold during the same period in 2008. Specifically, we sold fewer other high purity metals (which ordinarily command very high margins) in the first six months of 2009 due to the global financial crisis. Consequently, the reduction in sales in these types of products impacted our gross margin adversely.
 
 
Selling and marketing expenses
 
For the six months ended June 30, 2009, selling and marketing expenses were $121,717, compared to $158,624 for the same period ended June 30, 2008. This represents a decrease of 23.3%. During the six months ended June 30, 2008, we employed an in-house sales team of eight people targeting the Chinese and North American markets. Most of the sales and marketing expenses from that period were traveling, lodging and entertainment related. In contrast, we have not run any advertisement in 2009, but still maintain an in-house sales team of eight people. In February 2009, we signed an agreement to appoint CERAC as our exclusive agent to distribute our products in North America, excluding First Solar. Sales and marketing costs for the North American market were therefore lower.
 
 
General and administrative expenses
 
We incurred general and administrative expenses of $1,251,954 for the six months ended June 30, 2009, when compared to that of $361,506 in the same period of 2008, representing an increase of 246.3%. The increase was primarily due to the growth in size and revenue of our Company, and the expenses we incurred as a public company. After our reverse merger in October 2008, we incurred significant amount of audit fees, legal fees and financial advisory fees. We also expanded our accounting/finance department. Additional administrative staff was also added to support our listing functions and the reverse merger process. Depreciation expense for the six months ended June 30, 2009 was $491,773, compared to $223,503 for the same period in 2008. In August 2008, our new factory was completed and depreciation began to be incurred. A total of $195,277 in professional fees was record for the first six months of 2009.
 
 
Stock based Compensation expenses
 
    Stock based compensation expenses in the amount of $373,262 were incurred in the six months ended June 30, 2009. This expense did not exist in the same period of 2008. We granted a total of 830,000 stock options to our CFO and  our four independent directors between December 2008 and March 2009. Stock based compensation expenses was a non-cash item.
 
 
Research and development expenses
 
For the six months ended June 30, 2009, we incurred R&D expenses of $49,962, compared to $45,289 for the six months ended June 30, 2008. This represents an increase of 10.3% and was due to the increase of R&D headcount. We are committed to the improvement of product quality and the development of new products. We will continue to invest in R&D to ensure our products are of high quality and remain competitive.
 
 
Provision for income tax
 
The provision of income taxes is computed at the statutory rate of 25% for both the six months ended June 30, 2009 and 2008. Provision for income tax for the six months ended June 30, 2009 was $23,488, compared to that of $158,717 for the same period in 2008. Our effective tax rate for the six months ended June 30, 2009 was -2% compared to that of 40% for the same period in 2008. The decrease in the effective tax rate was due to the loss incurred in the current period.
 
 
Net income/loss
 
For the six months ended June 30, 2009 we had a net loss of $1,118,390, compared to net income of $233,027 for the six months ended June 30, 2008. The main reason for decrease in net income in the six months ended June 30, 2009 was a decrease in gross margin and an increase in costs, primarily in administrative costs representing professional fees. Included in the net loss for the six months ended June 30, 2009 was non-cash stock based compensation of $373,262 for the options granted to the CFO and the independent directors.
 


13
 
 

Liquidity and Capital Resources
 
Our summary cash flow information is as follows:
 

 
Six Months Ended June 30,
   
2009
  
2008
    
     
Net cash (used in) provided by operating activities
　
 
$
           (307,385)
　
$
          (5,023,290)
　
  
Net cash (used in) provided by investing activities
　
　
             (2,709,084)
　
　
          (5,542,889)
　
  
Net cash (used in) provided by financing activities
　
　
            (1,607,974)
　
　
           7,822,771
　
  
Effect of exchange rate changes on cash
　
　
             (6,284)
　
　
             223,996
　
  
Net increase (decrease) in cash
　
$
            (4,630,727)
　
$
(2,519,412)
　
  
Cash at beginning of period
　
　
            4,874,044
　
　
              2,621,139
　
  
Cash at end of period
　
$
            243,318
　
$
        101,727
　
  
                 
 
Net cash (used in) provided by operating activities.
 
Net cash used in operating activities for the six months ended June 30, 2009 was $307,385, compared to net cash used of $5,023,290 in the same period in 2008. Cash used in operating activities was accounted for by an increase in accounts receivable of $287,821, decrease in inventory $213,263, decrease in tax receivable of $488,047, an increase in the advance for purchases of $174,461, decrease in accounts payable of $301,101, decrease in accrued expenses of $223,704, and increase in accrued interest of $184,785.
 
For the six months ended June 30, 2008, cash used in operating activities was accounted for substantially by an increase of inventory of $4,929,909, an increase in accounts receivable 0f $540,239, an increase of other assets of $207,399, an increase of advance for purchases of $334,021, and an increase in the accrued expenses of $429,508.
 
Net cash (used in) investing activities.
 
Net cash used in investing activities for the six months ended June 30, 2009 and June 30, 2008 was $2,709,084 and $5,542,889, respectively, primarily consisting of the purchase of land use rights, our plant and equipment. In the first six months of 2009, we received $2,019,579 in government subsidies from the PRC in connection with our successful listing as a public company in the United States. These subsidies are treated as offsets to their relevant asset classes and will reduce depreciation in future periods.
 

 
Net cash (used in)/provided by financing activities.
 
Net cash used in financing activities for the six months ended June 30, 2009 was $1,607,974, constituting the repayment of shareholder loans of $3,202,661 and payments to related party of $361,671, and net of the proceeds from a short-term loan of $1,956,358.
 
Net cash provided by financing activities for the six months ended June 30, 2008 was $7,822,771, constituting capital contribution of $7,146,383 and loans from stockholders and a related party of $676,388.

We believe that although our existing cash balances and cash flows are low, sufficient cash flows will be available to meet our business objectives for the next 12 months.

 
Seasonality
 
Our business is not cyclical and does not have a clear pattern of seasonality.
 
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 subsidiaries and variable interest entities, 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 17.5% from 1:8.27 on July 21, 2005 to 1:6.8225 on December 31, 2008. In converting our RMB income statement amounts into U.S. dollars we used the following exchange rates: 1:70591 for the six months ended June 30, 2008 and 1:6.8331 for the six months ended June 30, 2009. Our operating results in 2007 and 2008 have benefited as a result of appreciation of the RMB against the U.S. dollar. 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.


14 
 
 
ITEM 4T. CONTROLS AND PROCEDURES.
 
Disclosure Controls and Procedures
 
As required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.
 
Management conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and our Chief Financial Officer. Based upon, and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Significant deficiencies were identified and described in Management's Report on Internal Control over Financial Reporting  in our Annual Report on Form 10-K filed on April 14, 2009.  Please refer to our Annual Report for a description of the measures that we will implement or have implemented to remediate these significant deficiencies.
 
 
Changes in Internal Control over Financial Reporting
 
Other than the remediation measures we have been taking, as described in our Annual Report on Form 10-K filed on April 14, 2009, there were no changes in our internal control over financial reporting during the six months ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
 

 
PART II -- OTHER INFORMATION
 
ITEM 1 -- LEGAL PROCEEDING
 
None.
 
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.

ITEM 3 — DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
ITEM 5 -- OTHER INFORMATION
 
None.
 


15
 
 

ITEM 6. EXHIBITS

           
Incorporated by Reference
  
Exhibit
No
  
Exhibit Title
  
Filed
Herewith
  
Form
  
Exhibit
No.
  
File No.
  
Filing
Date
  
31.1
  
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
  
X
                  
31.2
  
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
  
X
                  
32.1
  
Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
  
X
                  


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: August 19, 2009                                                                                                           By:  /s/ Renyi Hou             
                 Renyi Hou
                    Chief Executive Officer

Date: August 19, 2009                                                                                                           By:  /s/ Heung Sang Fong
          Heung Sang Fong
          Chief Financial Officer



 


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