Form 6-K DAQO NEW ENERGY CORP. For: Dec 23
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� UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 � |
FORM 6-K |
� REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934 � |
For the month of December 2014 � Commission File Number: 001-34602 � |
DAQO NEW ENERGY CORP. |
� 666 Longdu Avenue Wanzhou, Chongqing 404000 People’s Republic of China (86-23) 6486-6666 � |
(Address of principal executive offices) � � |
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
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� | Form 20-F | x | Form 40-F | o |
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Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):��������������
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Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):��������������
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SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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� | DAQO NEW ENERGY CORP. | |
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� | By: | /s/ Gongda Yao |
� | Name: | Gongda Yao |
� | Title: | Chairman and Chief Executive Officer |
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Date: December 23, 2014
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EXHIBIT INDEX
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Exhibit 99.1 — Unaudited Condensed Consolidated Financial Statements
Exhibit 99.2 — Discussion of Unaudited Financial Results of Nine Months Ended September 30, 2014 and 2013
EX-101.INS XBRL Taxonomy Instance Document
EX-101.SCH XBRL Taxonomy Extension Schema Document
EX-101.CAL XBRL Taxonomy Calculation Linkbase Document
EX-101.DEF XBRL Taxonomy Extension Definition Linkbase Document
EX-101.LAB XBRL Taxonomy Label Linkbase Document
EX-101.PRE XBRL Taxonomy Presentation Linkbase Document
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Exhibit 99.1
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DAQO NEW ENERGY CORP.
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DAQO NEW ENERGY CORP.
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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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DECEMBER 31, 2013 AND SEPTEMBER 30, 2014
(In U.S. dollars, except share data)
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� | � | � | � | |||||
� | � | As�of�December�31,�2013 | � | � | As�of�September�30,�2014 | � | ||
ASSETS: | � | � | � | � | � | � | � | � |
Current assets: | � | � | � | � | � | � | � | � |
Cash and cash equivalents | � | $ | 7,831,084 | � | � | $ | 12,611,947 | � |
Restricted cash | � | � | 8,826,110 | � | � | � | 17,410,074 | � |
Accounts receivable, net of allowance for doubtful accounts of $7,160,782 and $3,424,366 as of December�31, 2013 and September 30, 2014 | � | � | 9,909,662 | � | � | � | 6,848,729 | � |
Notes receivables | � | � | 15,929,627 | � | � | � | 36,752,248 | � |
Prepaid expenses and other current assets | � | � | 23,870,690 | � | � | � | 12,128,970 | � |
Advances to suppliers | � | � | 860,546 | � | � | � | 2,401,354 | � |
Inventories | � | � | 10,500,256 | � | � | � | 11,314,047 | � |
Amount due from related parties | � | � | 13,416,452 | � | � | � | 9,523,297 | � |
� | � | � | � | � | � | � | � | � |
Total current assets | � | � | 91,144,427 | � | � | � | 108,990,666 | � |
� | � | � | � | � | � | � | � | � |
Property, plant and equipment, net | � | � | 488,504,183 | � | � | � | 517,946,921 | � |
Prepaid land use rights | � | � | 30,377,493 | � | � | � | 29,487,807 | � |
Other non-current assets | � | � | 173,440 | � | � | � | 171,060 | � |
� | � | � | � | � | � | � | � | � |
TOTAL ASSETS | � | $ | 610,199,543 | � | � | $ | 656,596,454 | � |
� | � | � | � | � | � | � | � | � |
LIABILITIES: | � | � | � | � | � | � | � | � |
Current liabilities: | � | � | � | � | � | � | � | � |
Short-term borrowings, including current portion of long-term borrowings | � | $ | 118,870,857 | � | � | $ | 129,872,718 | � |
Accounts payable | � | � | 17,695,490 | � | � | � | 14,601,266 | � |
Notes payable | � | � | 1,573,646 | � | � | � | 28,655,861 | � |
Advances from customers | � | � | 13,217,775 | � | � | � | 9,566,995 | � |
Payables for purchases of property, plant and equipment | � | � | 51,766,695 | � | � | � | 37,308,771 | � |
Accrued expenses and other current liabilities | � | � | 7,461,621 | � | � | � | 8,530,082 | � |
Amount due to related parties | � | � | 88,537,790 | � | � | � | 74,684,185 | � |
� | � | � | � | � | � | � | � | � |
Total current liabilities | � | � | 299,123,874 | � | � | � | 303,219,878 | � |
Long-term borrowings | � | � | 134,870,287 | � | � | � | 116,564,967 | � |
Advance from customers | � | � | 11,924,121 | � | � | � | 4,616,813 | � |
Deferred government subsidies | � | � | 26,954,700 | � | � | � | 27,025,148 | � |
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Total liabilities | � | � | 472,872,982 | � | � | � | 451,426,806 | � |
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Commitments (Note 17)
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DAQO NEW ENERGY CORP.
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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS—(Continued)
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DECEMBER 31, 2013 AND SEPTEMBER 30, 2014
(In U.S. dollars, except share data)
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� | � | As�of�December�31,�2013 | � | � | As�of�September�30,�2014 | � | ||
EQUITY: | � | � | � | � | � | � | � | � |
Daqo New Energy Corp. shareholders’ equity: | � | � | � | � | � | � | � | � |
Ordinary shares; | � | � | � | � | � | � | � | � |
$0.0001 per value 500,000,000 shares authorized as of December 31, 2013 and September 30, 2014 , respectively; 175,714,103 and 240,714,103 shares issued as of December 31, 2013 and September 30, 2014, respectively and 173,427,853 and 223,577,853 shares outstanding as of December 31, 2013 and September 30, 2014, respectively | � | � | 17,343 | � | � | � | 22,358 | � |
Additional paid in capital | � | � | 146,676,163 | � | � | � | 202,983,882 | � |
Retained accumulated losses | � | � | (32,667,469 | ) | � | � | (19,624,288 | ) |
Accumulated other comprehensive income | � | � | 23,699,196 | � | � | � | 22,186,368 | � |
Treasury Stock, at cost (2,286,250 and 2,286,250 shares as of December 31, 2013 and September 30, 2014, respectively) | � | � | (398,672 | ) | � | � | (398,672 | ) |
Total Daqo New Energy Corp. shareholders’ equity | � | � | 137,326,561 | � | � | � | 205,169,648 | � |
Noncontrolling interest | � | � | — | � | � | � | — | � |
Total equity | � | � | 137,326,561 | � | � | � | 205,169,648 | � |
TOTAL LIABILITIES AND EQUITY | � | $ | 610,199,543 | � | � | $ | 656,596,454 | � |
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See notes to unaudited condensed consolidated financial statements.
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DAQO NEW ENERGY CORP.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
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� | � | For the nine months ended September 30, | � | |||||
� | � | 2013 | � | � | 2014 | � | ||
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Revenues | � | � | 71,960,751 | � | � | � | 133,099,930 | � |
-Sales to third parties | � | � | 56,805,859 | � | � | � | 111,538,097 | � |
-Sales to related parties | � | � | 8,691,577 | � | � | � | 13,361,026 | � |
-Service fee | � | � | 6,463,315 | � | � | � | 8,200,807 | � |
Cost of revenues | � | � | 99,022,311 | � | � | � | 102,397,164 | � |
Gross (loss) profit | � | � | (27,061,560 | ) | � | � | 30,702,766 | � |
Operating expenses: | � | � | � | � | � | � | � | � |
Selling, general and administrative expenses | � | � | 14,116,823 | � | � | � | 5,554,943 | � |
Research and development expenses | � | � | 2,242,606 | � | � | � | 1,331,265 | � |
Other operating income | � | � | (5,286,349 | ) | � | � | (605,602 | ) |
Long-lived asset impairment | � | � | 158,424,827 | � | � | � | — | � |
Total operating expenses | � | � | 169,497,907 | � | � | � | 6,280,606 | � |
(loss) income from operations | � | � | (196,559,467 | ) | � | � | 24,422,160 | � |
Interest expense | � | � | 15,150,183 | � | � | � | 11,622,300 | � |
Interest income | � | � | 101,202 | � | � | � | 298,887 | � |
Exchange (gain) loss | � | � | (10,021 | ) | � | � | 55,566 | � |
Income (loss) before income taxes | � | � | (211,598,427 | ) | � | � | 13,043,181 | � |
Income tax expense | � | � | 1,212,309 | � | � | � | — | � |
Net (loss) income | � | � | (212,810,736 | ) | � | � | 13,043,181 | � |
Net (loss) attributable to non-controlling interest | � | � | (149,881,562 | ) | � | � | — | � |
Net (loss) income attributable to Daqo New Energy Corp. ordinary shareholders | � | $ | (62,929,174 | ) | � | $ | 13,043,181 | � |
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NET (LOSS) EARNINGS PER ORDINARY SHARE | � | � | � | � | � | � | � | � |
Basic—ordinary shares | � | $ | (0.36 | ) | � | $ | 0.07 | � |
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Diluted—ordinary shares | � | $ | (0.36 | ) | � | $ | 0.06 | � |
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ORDINARY SHARES USED IN CALCULATING EARNINGS PER ORDINARY SHARE | � | � | � | � | � | � | � | � |
Basic—ordinary shares | � | � | 172,955,579 | � | � | � | 200,643,909 | � |
� | � | � | � | � | � | � | � | � |
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Diluted—diluted shares | � | � | 172,955,579 | � | � | � | 205,664,904 | � |
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See notes to unaudited condensed consolidated financial statements.
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DAQO NEW ENERGY CORP.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
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� | � | For the nine months ended September, 30 | � | |||||
� | � | 2013 | � | � | 2014 | � | ||
Net (loss) income | � | $ | (212,810,736 | ) | � | $ | 13,043,181 | � |
Other comprehensive income (loss): | � | � | � | � | � | � | � | � |
Foreign currency translation adjustments | � | � | 4,532,901 | � | � | � | (1,512,828 | ) |
Total other comprehensive income (loss) | � | � | 4,532,901 | � | � | � | (1,512,828 | ) |
Comprehensive (loss) income | � | � | (208,277,835 | ) | � | � | 11,530,353 | � |
Comprehensive (loss) attributable to noncontrolling interest | � | � | (148,274,720 | ) | � | � | — | � |
Comprehensive (loss) income attributable to Daqo New Energy Corp. shareholders | � | $ | (60,003,115 | ) | � | $ | 11,530,353 | � |
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See notes to unaudited condensed consolidated financial statements.
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DAQO NEW ENERGY CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
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FOR THE YEAR ENDED DECEMBER 31, 2013 AND NINE MONTHS ENDED SEPTEMBER 30, 2014
(In U.S. dollars, except share data)
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� | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | Accumulated | � | � | � | � | � | � | � | ||||||||
� | � | � | � | � | � | � | � | � | � | � | Additional | � | � | Retained | � | � | other | � | � | � | � | � | � | � | ||||||||
� | � | Ordinary shares | � | � | Treasury | � | � | paid in | � | � | accumulated | � | � | comprehensive | � | � | Noncontrolling | � | � | � | � | |||||||||||
� | � | Number | � | � | $ | � | � | stock | � | � | capital | � | � | losses | � | � | income | � | � | interest | � | � | Total | � | ||||||||
Balance at December�31, 2012 | � | � | 172,877,433 | � | � | � | 17,288 | � | � | � | (494,928 | ) | � | � | 144,755,902 | � | � | � | 38,276,015 | � | � | � | 19,551,006 | � | � | � | 138,772,130 | � | � | � | 340,877,413 | � |
� | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � |
Net loss | � | � | — | � | � | � | — | � | � | � | — | � | � | � | — | � | � | � | (62,929,173 | ) | � | � | — | � | � | � | (149,881,562 | ) | � | � | (212,810,735 | ) |
Other comprehensive income | � | � | — | � | � | � | — | � | � | � | — | � | � | � | — | � | � | � | — | � | � | � | 2,926,059 | � | � | � | 1,606,842 | � | � | � | 4,532,901 | � |
Share-based compensation | � | � | — | � | � | � | — | � | � | � | — | � | � | � | 1,288,794 | � | � | � | — | � | � | � | — | � | � | � | — | � | � | � | 1,288,794 | � |
Options Exercise | � | � | 547,920 | � | � | � | 55 | � | � | � | 95,820 | � | � | � | 38,678 | � | � | � | — | � | � | � | — | � | � | � | — | � | � | � | 134,553 | � |
Balance at September�30, 2013 | � | � | 173,425,353 | � | � | $ | 17,343 | � | � | $ | (399,108 | ) | � | $ | 146,083,374 | � | � | $ | (24,653,158 | ) | � | $ | 22,477,065 | � | � | $ | (9,502,590 | ) | � | $ | 134,022,926 | � |
� | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � |
Balance at December�31, 2013 | � | � | 173,427,853 | � | � | � | 17,343 | � | � | � | (398,672 | ) | � | � | 146,676,163 | � | � | � | (32,667,469 | ) | � | � | 23,699,196 | � | � | � | — | � | � | � | 137,326,561 | � |
Net Income | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | 13,043,181 | � | � | � | � | � | � | � | � | � | � | � | 13,043,181 | � |
Other comprehensive loss | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | (1,512,828 | ) | � | � | � | � | � | � | (1,512,828 | ) |
Share-based compensation | � | � | � | � | � | � | � | � | � | � | � | � | � | � | 1,642,618 | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | 1,642,618 | � |
Follow-on equity offering | � | � | 50,000,000 | � | � | � | 5,000 | � | � | � | � | � | � | � | 54,633,036 | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | 54,633,036 | � |
Exercise of Options | � | � | 150,000 | � | � | � | 15 | � | � | � | � | � | � | � | 37,065 | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | 37,080 | � |
� | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � | � |
Balance at September�30, 2014 | � | � | 223,577,853 | � | � | � | 22,358 | � | � | � | (398,672 | ) | � | � | 202,983,882 | � | � | � | (19,624,288 | ) | � | � | 22,186,368 | � | � | � | — | � | � | � | 205,169,648 | � |
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See notes to unaudited condensed consolidated financial statements.
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DAQO NEW ENERGY CORP.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
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� | � | For the nine months ended September, 30 | � | |||||
� | � | 2013 | � | � | 2014 | � | ||
Operating activities: | � | $ | � | � | $ | � | ||
Net (loss) income | � | � | (212,810,736 | ) | � | � | 13,043,181 | � |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | � | � | � | � | � | � | � | � |
Long-lived assets impairment | � | � | 158,424,827 | � | � | � | — | � |
Share-based compensation | � | � | 1,288,795 | � | � | � | 1,642,618 | � |
Inventory write-down | � | � | 5,305,701 | � | � | � | 177,596 | � |
Allowance (reversal of allowance) for bad debts | � | � | 4,230,273 | � | � | � | (3,622,321 | ) |
Depreciation of property, plant and equipment | � | � | 40,275,455 | � | � | � | 20,956,076 | � |
Changes in operating assets and liabilities: | � | � | � | � | � | � | � | � |
Accounts receivable | � | � | 12,115,229 | � | � | � | 6,547,250 | � |
Notes receivable | � | � | (7,030,700 | ) | � | � | (21,041,244 | ) |
Prepaid expenses and other current assets | � | � | 105,198 | � | � | � | 11,414,111 | � |
Advances to suppliers | � | � | (816,238 | ) | � | � | (1,552,618 | ) |
Inventories | � | � | (421,926 | ) | � | � | (1,135,496 | ) |
Amount due from related parties | � | � | (5,011,959 | ) | � | � | 5,628,360 | � |
Prepaid land use rights | � | � | (34,668 | ) | � | � | 472,775 | � |
Other non-current assets | � | � | 4,591,859 | � | � | � | — | � |
Accounts payable | � | � | 2,382,202 | � | � | � | (2,851,365 | ) |
Notes payable | � | � | (16,366,321 | ) | � | � | 27,103,812 | � |
Accrued expenses and other current liabilities | � | � | 847,287 | � | � | � | 1,170,866 | � |
Advances from customers | � | � | (5,074,450 | ) | � | � | (10,613,030 | ) |
Amount due to related parties | � | � | — | � | � | � | (119,148 | ) |
Deferred government subsidies | � | � | (47,801 | ) | � | � | 440,383 | � |
Deferred tax assets | � | � | 1,212,309 | � | � | � | — | � |
� | � | � | � | � | � | � | � | � |
Net cash (used in) provided by operating activities | � | � | (16,835,664 | ) | � | � | 47,661,806 | � |
� | � | � | � | � | � | � | � | � |
Investing activities: | � | � | � | � | � | � | � | � |
Purchases of property, plant and equipment | � | � | (14,150,282 | ) | � | � | (72,256,692 | ) |
(Decrease)/increase in restricted cash | � | � | 2,053,970 | � | � | � | (8,705,096 | ) |
� | � | � | � | � | � | � | � | � |
Net cash used in investing activities | � | � | (12,096,312 | ) | � | � | (80,961,788 | ) |
� | � | � | � | � | � | � | � | � |
Financing activities: | � | � | � | � | � | � | � | � |
Advances from related parties | � | � | 116,612,426 | � | � | � | 229,983,975 | � |
Repayment of amounts due to related parties | � | � | (33,240,562 | ) | � | � | (242,732,541 | ) |
Proceeds from bank borrowings | � | � | 70,963,516 | � | � | � | 115,252,336 | � |
Repayment of bank borrowings | � | � | (121,374,194 | ) | � | � | (119,056,752 | ) |
Proceeds from options exercised | � | � | 158,778 | � | � | � | 37,080 | � |
Proceeds from follow-on equity offering | � | � | — | � | � | � | 58,000,000 | � |
Insurance cost for follow-on equity offering | � | � | — | � | � | � | (3,366,964 | ) |
Net cash provided by financing activities | � | � | 33,119,964 | � | � | � | 38,117,134 | � |
� | � | � | � | � | � | � | � | � |
Effect of exchange rate changes | � | � | (95,737 | ) | � | � | (36,289 | ) |
Net increase in cash and cash equivalents | � | � | 4,092,251 | � | � | � | 4,780,863 | � |
Cash and cash equivalents at the beginning of the year | � | � | 6,679,024 | � | � | � | 7,831,084 | � |
� | � | � | � | � | � | � | � | � |
Cash and cash equivalents at the end of September 30 | � | � | 10,771,275 | � | � | � | 12,611,947 | � |
�
�
�
�
�
See notes to unaudited condensed consolidated financial statements.�
F-7 |
� |
�
DAQO NEW ENERGY CORP.
�
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
� | � | For the nine months ended September, 30 | � | |||||
� | � | 2013 | � | � | 2014 | � | ||
� | � | � | � | � | � | � | ||
Supplemental disclosure of cash flow information: | � | � | � | � | � | � | � | � |
Interest paid | � | $ | 13,742,609 | � | � | $ | 13,064,363 | � |
Supplemental schedule of non-cash investing activities: | � | � | � | � | � | � | � | � |
Purchases of property, plant and equipment included in payable | � | $ | 51,766,695 | � | � | $ | 37,308,771 | � |
Purchase of property, plant and equipment included in amount due to related parties | � | � | 940,135 | � | � | � | 614,756 | � |
�
�
See notes to unaudited condensed consolidated financial statements.
�
�
�
�
F-8 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
1. | ORGANIZATION AND PRINCIPAL ACTIVITIES |
�
The consolidated financial statements include the financial statements of Daqo New Energy Corp. (the “Company”), its wholly owned subsidiaries, Chongqing Daqo New Energy Co., Ltd. (“Chongqing Daqo”), Xinjiang Daqo New Energy Co., Ltd (“Xinjiang Daqo”), Daqo Solar Energy North America (“Daqo America”) (which was liquidated in 2013) and Daqo New Energy Holdings (Canada) Ltd.(“Daqo Canada”) (which was liquidated in 2013) and its consolidated variable interest entity (“VIE”) Daqo New Material Co., Ltd. (“Daqo New Material”) (which was deconsolidated on December 31, 2013) (collectively, the “Group”).
�
The Company was incorporated on November�22, 2007 in the Cayman Islands. Chongqing Daqo, and Xinjiang Daqo were incorporated by the Company on January�14, 2008, and February�22, 2011, respectively, in the Peoples’ Republic of China (“PRC”). Daqo America was incorporated by the Company in January 2009, in California, USA. Daqo Canada was incorporated by the Company in April 2011, in Hamilton, Ontario, Canada.
�
Daqo New Material and the Company were under common control by Daqo New Material’s ultimate shareholders prior to November 11, 2009. Daqo New Material was established by Daqo Group, an affiliate of the Company on November�16, 2006, for the primary purpose of developing a photovoltaic business. Daqo New Material’s activities included acquiring land use rights and constructing certain polysilicon production infrastructure, including buildings and production machinery and equipment. Chongqing Daqo acquired additional machinery and equipment that are used in connection with Daqo New Material’s land and production infrastructure.
�
Subsequent to its establishment, Chongqing Daqo entered into a lease agreement with Daqo New Material to rent all of Daqo New Material’s land, production infrastructure and machinery and equipment for the Group’s polysilicon production. The lease period is from July�1, 2008 to December�31, 2013, with monthly lease payments that have been renegotiated periodically and are eliminated in consolidation. The lease agreement also provided that if Daqo New Material transferred the ownership of the leased assets to any third party, the lease agreement would remain effective and enforceable against the new owner. One month before the expiry of the lease period, Chongqing Daqo had the option to renew the lease on the same terms and conditions for an additional five-year periods. Furthermore, Chongqing Daqo has the option to purchase, or to designate any person to purchase, the leased assets at the then fair value at any time during the lease period or within one year following the lease period, if permitted by the PRC laws and regulations. If Daqo New Material desires to transfer the ownership of the leased assets to a third party, Chongqing Daqo has the right of first refusal to acquire the leased assets under the same conditions. If the leased assets are transferred to a third party, the lease agreement will remain effective and enforceable against the new owner.
�
F-9 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
1. | ORGANIZATION AND PRINCIPAL ACTIVITIES-Continued |
�
Because the aggregate value of the monthly rental payments that Chongqing Daqo is contractually obligated to make to Daqo New Material represents the majority of the value of Daqo New Material’s assets, Chongqing Daqo has the majority of investment risk in Daqo New Material. Further, the Group has concluded that the arrangement results in Chongqing Daqo providing an implicit guarantee to protect Daqo Group from absorbing losses incurred by Daqo New Energy, thus Daqo New Material is considered to be a variable interest entity of Chongqing Daqo. Furthermore, the operating activities of Daqo New Material are most closely associated with Chongqing Daqo and the management of Chongqing Daqo also acts as the management of Daqo New Material. Based on these factors, Chongqing Daqo has the power to control Daqo New Material and is considered the primary beneficiary of Daqo New Material. The assets and liabilities of Daqo New Material are consolidated at historical cost given they were held by entities under common control at the time of the lease agreement. Daqo Group’s total equity interests in Daqo New Material are presented as a noncontrolling interest.
�
On December 31, 2013, Chongqing Daqo and Daqo New Material terminated the lease agreement. As a result, the Company deconsolidated Daqo New Material on December 31, 2013. As of December 31, 2013 and September 30, 2014, the Company is in the process of relocating significant production assets from Daqo New Material to its Xinjiang plant.
�
�
2. | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES |
�
a)� Basis of presentation
�
The Company is responsible for the unaudited condensed consolidated financial statements included in this document, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared these statements following the requirements of the U.S. Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by US GAAP for annual financial statements. These statements should be read in combination with the consolidated financial statements in the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
�
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to generate cash flows from operations, and the Company’s ability to arrange adequate financing arrangements, including the renewal or rollover of its bank borrowings, to support its working capital requirements.
�
As of September 30, 2014, the Company’s current liabilities exceed its current assets by $194,229,212. While the Company had cash and cash equivalents of $12,611,947 and short-term borrowings of $77,740,238 will be due within one year. The current portion of long-term borrowings amounting to $52,132,480 is restricted to purchase fixed assets and required to be paid off upon due dates. Additionally, the Company has capital commitment of $35.4 million to be fulfilled in the next twelve months.
�
F-10 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
2. | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-Continued |
�
a) | Basis of presentation |
�
However, the Company regards the going concern assumption as appropriate considering the following plans and actions:
�
� | On December 15, 2014, the Company obtained a letter of financial support from Daqo Group which has committed to provide sufficient financial support to the Company to ensure the Company has the funds required to satisfy its obligations as they come due in the normal course during the twelve months ending September 30, 2015. Further, the support letter provides that Daqo Group will not require the Company to pay the amount owed to the Daqo Group and subsidiaries of Daqo Group, Daqo Solar and Xinjiang Daqo Investment as of September 30, 2014, before October 1, 2015. |
� |
� | The Company has or in the process of taking a number of cost reduction initiatives, including the new hydrochlorination system, technology improvement and polysilicon capacity expansion in Xinjiang. After the fully ramp up of the capacity of 12,150MT by the end of the second quarter of 2015, the unit production cost and cash cost expect to be approximately $12.0/kg and $9.4/kg, respectively, which is lower than current average selling price. |
� |
� | The Company has performed a review of its cash flow forecast for the twelve months ending September 30, 2015, and believes that its operating cash flow will be positive during the twelve months ending September 30, 2015. |
� |
� | While there can be no assurance that the Company will be able to refinance its short-term bank borrowings as they become due, historically, the Company has renewed or rolled over most of its short-term bank loans upon the maturity date of the loans and believes it will continue to be able to do so. |
�
Based on the above factors, management believes that adequate sources of liquidity will exist to fund the Company’s working capital and capital expenditures requirements, and to meet its short term debt obligations, other liabilities and commitments as they become due.�
�
(b) | Basis of consolidation |
�
The unaudited condensed consolidated financial statements include the financial statements of the Group. All intercompany transactions and balances have been eliminated on consolidation.
�
F-11 |
� |
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
2. | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-Continued |
�
(c) | Use of estimates |
�
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The company bases its estimates on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management has made significant estimates in a variety of areas, including but not limited to allowance for doubtful accounts, inventories valuation, useful lives and residual values of long-lived assets, impairment for long lived assets, consolidation of Daqo New Material, valuation allowances for deferred tax assets, interest capitalization, warranty accrual and certain assumption used in the computation of share-based compensation and related forfeiture rates.
�
(d) | Concentration of credit risk |
�
Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivables.
�
The Group places its cash and cash equivalents in various financial institutions in the PRC. The Group believes that no significant credit risk exists as these banks are principally government-owned financial institutions with high credit ratings.
�
Accounts receivable represent those receivables derived in the ordinary course of business. The Group conducts credit evaluations of customers to whom credit terms are extended. The Group establishes an allowance for doubtful accounts mainly based on aging of the receivables and other factors surrounding the credit risk of specific customers. The allowance for doubtful accounts is $7,160,782 and $3,424,366 as of December�31, 2013 and September 30, 2014, respectively, based on the aging of the receivables and the Company’s assessment of the customers’ credit risk.
�
The following customers accounted for 10% or more of accounts receivable:
�
� | As of December 31, | � | � | As of September 30, | � | |||
Accounts receivable | � | 2013 | � | � | 2014 | � | ||
Customer A | � | $ | 1,507,576 | � | � | $ | 3,867,527 | � |
Customer B | � | $ | * | � | � | $ | 738,000 | � |
Customer C | � | $ | * | � | � | $ | 734,008 | � |
Customer D | � | $ | 1,225,831 | � | � | $ | * | � |
Customer E | � | $ | 3,673,455 | � | � | $ | * | � |
��
* | � | Represents less than 10% |
�
�
F-12 |
� |
�
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
2. | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-Continued |
�
(d) | Concentration of credit risk-continued |
�
Sales of polysilicon to the Group’s largest customers whose sales constitute over 10% of revenue accounted for approximately 30% and 14% of revenues for the nine months ended September 30, 2013 and 2014, respectively. The Group was substantially dependent upon the continued participation of these customers in order to maintain its total revenues. Significantly reducing the Group’s dependence on these customers is likely to take time and there can be no guarantee that the Group will succeed in reducing that dependence.
�
The following customers accounted for 10% or more of revenues:�
�
� | For the nine months ended September 30, | � | ||||||
� | � | 2013 | � | � | 2014 | � | ||
Customer H | � | $ | 12,242,947 | � | � | $ | 19,573,703 | � |
Customer I | � | $ | 8,691,577 | � | � | $ | * | � |
Customer O | � | � | * | � | � | $ | 13,391,019 | � |
�
* | � | Represents less than 10% |
�
Furthermore, all of the Group's long-term borrowings are guaranteed by Daqo Group, our related party, who has also committed to provide financial support to meet the Group's short term borrowings obligations, other liabilities and commitments as they become due (see Note 2(a)). The Group's access to credit is significantly reliant on Daqo Group's ability and willingness to continue to provide sufficient financial support.
�
(e) | Property, plant and equipment |
�
Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is recognized on a straight-line basis over the following estimated useful lives:
�
Buildings and plant | � | � | 30�years | � |
Machinery and equipment | � | � | 15 years | � |
Furniture, fixtures and equipment | � | � | 3-5�years | � |
Motor vehicles | � | � | 6 years | � |
�
The Company reassesses the reasonableness of the estimates of useful lives and residual values of long-lived assets when events or changes in circumstances indicate that the useful lives and residual values of a major asset or a major category of assets may not be reasonable. Factors that the Company considers in deciding when to perform an analysis of useful lives and residual values of long-lived assets include, but are not limited to, significant variance of a business or product line in relation to expectations, significant deviation from industry or economic trends, and significant changes or planned changes in the use of the assets. The analysis will be performed at the asset or asset category with the reference to the assets’ conditions, current technologies, market, and future plan of usage and the useful lives of major competitors.
�
In 2013, the Company made the decision to relocate a majority of Chongqing’s polysilicon assets to Xinjiang. As part of the decision to make significant investment to relocate the assets, the Company revisited the expectation as to the useful lives of these assets. Based on this review, the Company determined that the condition of its major assets, having now been in operations for a meaningful percentage of the original estimated lives, were in better condition, than the original useful life expectation had predicted, accordingly, the Company engaged an independent valuation firm to assist in reassessing the remaining economic useful life of the polysilicon assets in both Chongqing and Xinjiang. The analysis was completed in the first quarter of 2014.
�
F-13 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
2. | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-Continued |
�
(e) | Property, plant and equipment-continued |
�
Therefore, the Company revised the estimates of expected useful lives of long-lived assets from January 1, 2014. The useful lives of machinery and equipment were expended from 10 years to 15 years, while buildings and structures were expended from 20 years to 30 years. No changes were made to furniture, fixtures and equipment, or motor vehicles. During the nine months ended September 30, 2014, the change in useful lives reduced depreciation expense of approximately $14.0 million, majority of which was recorded in "Cost of revenues", accordingly the impact on net income and basic net income per share is $14.0 million and $0.05 per ordinary share.
�
Costs incurred on construction are capitalized and transferred to property, plant and equipment upon completion, at which time depreciation commences.
�
�Interest expense incurred for construction of property, plant, and equipment is capitalized as part of the cost of such assets. The Company capitalizes interest to the extent that expenditures to construct an asset have occurred and interest costs have been incurred. Interest expense capitalized for the nine months ended September 30, 2013 and 2014 was $nil and $1,428,357, respectively.
�
(f) | Impairment of long-lived assets |
�
The Group evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Factors that the Group considers in deciding when to perform an impairment review include, but are not limited to significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planed changes in the use of the assets. An impairment analysis is performed at the lowest level of identifiable independent cash flows for an asset or asset group. The Group makes subjective judgments in determining the independent cash flows that can be related to a specific asset group based on the asset usage model and manufacturing capabilities. The Group measures the recoverability of assets that will continue to be used in the operations by comparing the carrying value of the asset group to the estimate of the related total future undiscounted cash flows. If an asset group’s carrying value is not recoverable through the related undiscounted cash flows, the impairment loss is measured by comparing the difference between the asset group’s carrying value and its fair value. The Group determines the fair value of an asset or asset group utilizing estimated future discounted cash flows and incorporates assumptions that it believes marketplace participants would utilize.
�
During the nine months ended September 30, 2013 and 2014, the impairment changes were $158,424,827 and nil, respectively. The impairment loss incurred during the nine months ended September 30, 2013 was related to the buildings and plant of polysilicon asset group in Chongqing Daqo and Daqo New Material, and was triggered primarily by the significant decrease in average selling prices for polysilicon and the Group's decision of relocating significant machinery and equipment located at Chongqing Daqo to Xinjiang Daqo as a part of its expansion plan. As for the wafer asset group, the Company concluded the estimated sum of the undiscounted cash flows expected to result from the use and eventual disposition of the wafer asset group substantially exceeded the carrying amount, and no impairment was recognized during the nine months ended September 30, 2013 and 2014.
�
(e) | Variable Interest Entity |
�
The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities. The approach focuses on identifying which enterprise has the power to direct the activities that most significantly impact the variable interest entity's economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits from the variable interest entity. In the event that the Company is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity will be included in the Company's Consolidated Financial Statements. The equity interest of Daqo New Material (the "VIE") is wholly owned by Daqo Group, which has been presented as non-controlling interest on the consolidated balance sheets.
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F-14 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
2. | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-Continued |
��
(f) | Recently issued accounting pronouncements |
�
On August 27, 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements (or within one year after the date on which the financial statements are available to be issued, when applicable). Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern.” The ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early adoption is permitted. The Company is in the process of evaluating the impact on its consolidated financial statements upon adoption.
�
�
In May 2014, the FASB issued a new pronouncement which affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.
�
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
�
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
�
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.
�
An entity should apply the amendments in this ASU using one of the following two methods:
�
1. Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:
�
� | For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period. |
� | For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods. |
� | For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue. |
�
2. Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:
�
� | The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the guidance that was in effect before the change. |
� | An explanation of the reasons for significant changes. |
�
The Company is in the process of evaluating the impact on its consolidated financial statements upon adoption.
F-15 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
3. | EXIT and DISPOSAL ACTIVITIES |
�
Relocation of Polysilicon Operations to Xinjiang
�
As of December 31, 2013, the Company had a plan to expand the capacity at the Xinjiang plant and is in the process of relocating significant production assets, with a carrying value of $ 144.7 million, from Chongqing Daqo to its Xinjiang plant. In connection with this relocation plan, the Company determined i) to cease a retooling project at its polysilicon production line located at Chongqing Daqo in the second quarter of 2013, and ii) it was more practical to relocate its machinery and equipment located at Chongqing Daqo, to Xinjiang as part of the expansion plan. Therefore, the Company recorded an impairment charge in connection with this decision of $158.4 million in the second quarter of 2013 and subsequently terminated its lease arrangement with Daqo New Material on December 30, 2013. The Company expects to complete the relocation by the end of the second quarter of 2015, and approximately $2.5 million of expected relocation costs will occur. As of December 31, 2013, the Company has incurred approximately $0.8 million in employee termination costs and $0.5 million in connection with relocation costs, all of which were recorded in selling, general and administrative expenses. During the nine months ending September 30, 2014, additional $0.6 million relocation cost occurred, which was recorded in selling, general and administrative expenses. No material liabilities, including contract termination costs, are recorded in connection with this relocation plan as of December 31, 2013 and September 30, 2014.
�
4. | FOLLOW-ON EQUITY OFFERING |
�
In May 2014, the Company issued and sold 2,000,000 America depositary shares ("ADSs"), representing 50,000,000 ordinary shares, through a follow-on public offering. The proceeds, net of issuance cost of $3.4 million, were $54.6 million.
�
5. | ALLOWANCES FOR DOUBTFUL RECEIVABLES |
�
Analysis of allowances for accounts receivable is as follows:
�
� | � | As of December 31, | � | � | As of September 30, | � | ||
� | � | 2013 | � | � | 2014 | � | ||
Beginning of the year | � | $ | 1,592,467 | � | � | $ | 7,160,782 | � |
Allowances (reversals) made during the year | � | � | 5,482,019 | � | � | � | (3,622,321 | ) |
Foreign exchange effect | � | � | 86,296 | � | � | � | (114,095 | ) |
Closing balance | � | $ | 7,160,782 | � | � | $ | 3,424,366 | � |
�
�
6. | PREPAID EXPENSE AND OTHER CURRENT ASSETS |
�
Prepaid expense and other current assets consist of the following:
�
� | � | As of December 31, | � | � | As of September 30, | � | ||
� | � | 2013 | � | � | 2014 | � | ||
Spare parts | � | $ | 6,264,805 | � | � | $ | 6,159,125 | � |
Prepaid value added tax (“VAT”) | � | � | 13,546,880 | � | � | � | 5,408,717 | � |
Prepaid insurance fee | � | � | 1,016,625 | � | � | � | 71,317 | � |
Others | � | � | 3,042,380 | � | � | � | 489,811 | � |
Total | � | $ | 23,870,690 | � | � | $ | 12,128,970 | � |
�
F-16 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
�
7. | INVENTORIES |
�
Inventories consist of the following:
�
� | � | As of December 31, | � | � | As of September 30, | � | ||
� | � | 2013 | � | � | 2014 | � | ||
Raw materials | � | $ | 2,084,050 | � | � | $ | 1,801,628 | � |
Work-in-process | � | � | 4,666,821 | � | � | � | 4,909,452 | � |
Finished goods� | � | � | 3,749,385 | � | � | � | 4,602,967 | � |
Total | � | $ | 10,500,256 | � | � | $ | 11,314,047 | � |
�
Inventory write-down was $5,305,701 and $177,596 for the nine months ended September 30, 2013 and 2014, respectively.
�
�
8. | PROPERTY, PLANT AND EQUIPMENT, NET |
�
Property, plant and equipment, net, consist of the following:
�
� | � | As of December 31, | � | � | As of September 30, | � | ||
� | � | 2013 | � | � | 2014 | � | ||
Cost | � | � | � | � | � | � | � | � |
Buildings and plant | � | $ | 235,690,310 | � | � | $ | 232,739,777 | � |
Machinery and equipment | � | � | 355,429,034 | � | � | � | 356,677,850 | � |
Furniture, fixtures and equipment | � | � | 21,329,752 | � | � | � | 17,198,867 | � |
Motor vehicles | � | � | 262,562 | � | � | � | 260,279 | � |
Less: Accumulated depreciation | � | � | (145,031,714 | ) | � | � | (164,088,834 | ) |
Property, plant and equipment, net | � | � | 467,679,944 | � | � | � | 442,787,939 | � |
Construction in process | � | � | 20,824,239 | � | � | � | 75,158,982 | � |
Total | � | $ | 488,504,183 | � | � | $ | 517,946,921 | � |
�
Depreciation expense was $40,275,455 and $20,956,076 for the nine months ended September 30, 2013 and 2014, respectively.
�
The Company recognized impairments for long-lived assets of $158,424,827 during the nine months ended September 30, 2013 and there is no impairment recognized during the nine months ended September 30, 2014.
�
F-17 |
� |
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
9. | BORROWINGS |
�
The Group’s bank borrowings consisted of the following:
�
� | � | As of December 31, | � | � | As of September 30, | � | ||
� | � | 2013 | � | � | 2014 | � | ||
Short-term bank borrowings | � | $ | 68,821,014 | � | � | $ | 77,740,238 | � |
Long-term bank borrowings, current portion | � | � | 50,049,843 | � | � | � | 52,132,480 | � |
Total borrowings, current | � | � | 118,870,857 | � | � | � | 129,872,718 | � |
Long-term bank borrowings, non-current portion | � | � | 134,870,287 | � | � | � | 116,564,967 | � |
Total | � | $ | 253,741,144 | � | � | $ | 246,437,685 | � |
�
�Short-term borrowings
�
The Group’s short-term bank borrowing consisted of the following:
�
� | � | As of December 31, | � | � | As of September 30, | � | ||
� | � | 2013 | � | � | 2014 | � | ||
Short-term borrowing guaranteed by Daqo Group and Mr.�Guangfu Xu and Mr.�Xiang Xu | � | � | 28,080,770 | � | � | � | 27,695,380 | � |
Short-term borrowing guaranteed by Daqo Group and a third party | � | � | 11,562,670 | � | � | � | 11,403,980 | � |
Short-term credit borrowing | � | � | 29,177,574 | � | � | � | 38,640,878 | � |
Total | � | $ | 68,821,014 | � | � | $ | 77,740,238 | � |
�
The Company has $18.2 million and $17.9 million of short-term bank facilities with various banks available as of December 31, 2013 and September 30, 2014, respectively.
�
The average interest rate on the short-term bank borrowing was 6.4% and 6.5% as of December�31, 2013 and September 30, 2014, respectively.
�
Long-term borrowings
�
The major bank borrows are as follows:
��
On January�21, 2009, Chongqing Daqo entered into a six-year long term facility agreement with China Construction Bank. Such borrowing is restricted to the purchase of fixed assets and has a maximum borrowing amount $65.1 million (RMB400 million), bearing standard five-year long term interest rate issued by People’s Bank of China. The borrowing is guaranteed by Daqo Group. As of September 30, 2014, Chongqing Daqo had drawn down $65.1 million (RMB400 million), repaid $58.6 million (RMB360 million) and had no facility available for future draw down. There are no financial covenants associated with the facility.
�
�
F-18 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
9. | BORROWINGS-Continued |
�
On September�28, 2011, Chongqing Daqo entered into a four-year credit facility agreement with Huaxia Bank with maximum amount of $65.1 million (RMB400 million). As of September 30, 2014, Chongqing Daqo drew down $61.9 million (RMB380 million), including: $21.2 million (RMB130 million) with fixed interest rate of 6.65%, which is designated for working capital and $40.7 million (RMB250 million) with fixed interest rate of 6.9% which is restricted to the purchase of fixed assets. Chongqing Daqo used the remaining facility of $3.3 million (RMB20 million) through use of bank acceptance notes. As of September 30, 2014, Chongqing Daqo had repaid 26.7 million (RMB164 million) and had no facility available for future draw down. This credit facility is guaranteed by Daqo Group and also collateralized by Chongqing Daqo’s land use right, which has a book value of $2.1 million (RMB13 million). The facility contains a covenant which requires the Company to maintain a certain debt to asset ratio, which Chongqing Daqo was in compliance with as of December 31, 2013 and September 30, 2014.
�
On September�30, 2011, Xinjiang Daqo entered into a six-year bank borrowing agreement with Bank of China. Such borrowing is restricted to the purchase of fixed assets and has a maximum borrowing amount of $159.6 million (RMB980 million) and bears interest at standard five-year long term interest rate issued by People’s Bank of China plus 5%. The borrowing contains a debt to asset ratio financial covenant, which Xinjiang Daqo was in compliance with as of September 30, 2014. The borrowing is guaranteed by Daqo Group, Daqo New Material, two affiliated companies under Daqo Group and Mr.�Guangfu Xu. As of September 30, 2014, Xinjiang Daqo had drawn down $122.2 million (RMB750 million) and repaid $9.8 million (RMB 60 million), so Daqo still had $37.5 million (RMB230 million) facility available for future draw down. The loan was in compliance with the covenants as of September 30, 2013 and September 30, 2014.
�
On October�26, 2011, Chongqing Daqo entered into a four-year credit facility agreement with Chongqing Rural Commercial Bank. Such borrowing is restricted to the purchase of fixed assets and has a maximum borrowing amount $40.0 million (RMB 245.5 million) and bears interest at three to five-year long term interest rate issued by People’s Bank of China plus 10%. The borrowing is guaranteed by Daqo Group, and two directors of the Company. As of September 30, 2014, Chongqing Daqo had drawn down $40.6 million (RMB 245.5 million) and repaid $25.4 million (RMB 156 million). There are no financial covenants associated with the facility.
�
The weighted average interest rate as of December�31, 2013 and September 30, 2014 for the Group’s long-term bank borrowings was 7.2% and 6.9%, respectively.
�
The principal maturities of these long-term bank borrowings as of September 30, 2014 are as follows:
�
December 31, | � | Amount | � | |
2014 | � | $ | 21,015,906 | � |
2015 | � | � | 69,482,821 | � |
2016 | � | � | 40,728,500 | � |
2017 | � | � | 37,470,220 | � |
Total | � | $ | 168,697,447 | � |
�
\
F-19 |
� |
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
10. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
�
Accrued expenses and other current liabilities consist of the following:
�
� | � | As of December 31, | � | � | As of September 30, | � | ||
� | � | 2013 | � | � | 2014 | � | ||
Accrued payroll and welfare | � | $ | 2,588,312 | � | � | $ | 2,957,303 | � |
Accrued professional fees | � | � | 624,825 | � | � | � | 481,771 | � |
Other tax payable | � | � | 1,378,963 | � | � | � | 2,360,987 | � |
Interest payable | � | � | 305,087 | � | � | � | 153,672 | � |
Government subsidy | � | � | 908,496 | � | � | � | — | � |
Accrued freight | � | � | 196,033 | � | � | � | 257,082 | � |
Others | � | � | 1,459,905 | � | � | � | 2,319,267 | � |
Total | � | $ | 7,461,621 | � | � | $ | 8,530,082 | � |
�
11. | ADVANCES FROM CUSTOMERS |
�
Advances from customers represent prepayments from customers and are recognized as revenue in accordance with the Group’s revenue recognition policy.
�
Advances from customers consist of the following and is analyzed as long and short portion respectively:
�
� | � | As of December 31, | � | � | As of September 30, | � | ||
� | � | 2013 | � | � | 2014 | � | ||
Customer E* | � | $ | 15,987,573 | � | � | $ | 9,308,736 | � |
Customer F | � | � | 4,220,355 | � | � | � | 3,364,155 | � |
Customer G | � | � | 2,996,550 | � | � | � | 1,086,393 | � |
Others | � | � | 1,937,418 | � | � | � | 424,524 | � |
Total | � | $ | 25,141,896 | � | � | $ | 14,183,808 | � |
Less: Current portion of Advance from customers | � | $ | 13,217,775 | � | � | $ | 9,566,995 | � |
Long term advance from customers | � | $ | 11,924,121 | � | � | $ | 4,616,813 | � |
�
* Pursuant to the terms of the Company's revised supply agreement with this customer the Company will deliver monthly amounts of polysilicon, totaling no less than $0.4 million from April 2014 to September 2016, or until such time as the advance has been fully utilized.
F-20 |
� |
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
12. | FAIR VALUE MEASUREMENTS |
�
The following table presents the financial instruments for which fair value does not approximate carrying value as of December�31, 2013 and September 30, 2014:
�
� | � | As of December�31, 2013 | � | � | As of September 30, 2014 | � | ||||||||||
� | � | Carrying�Value | � | � | Fair Value | � | � | Carrying�Value | � | � | Fair Value | � | ||||
Long-term bank borrowing, non-current portion | � | $ | 134,870,287 | � | � | $ | 124,047,823 | � | � | $ | 116,564,967 | � | � | $ | 108,740,003 | � |
�
�
Nonrecurring Fair Value Measurements
�
The following table displays assets and liabilities that were measured at fair value on a non-recurring basis after initial recognition:
�
� | � | For the nine months ended September 31, 2013 | � | |||||||||||||||||
Description | � | � | Carrying amount | � | � | � | Quoted�Prices�in Active Markets for Identical Assets (Level 1) | � | � | � | Significant Other Observable Inputs�(Level�2) | � | � | � | Significant Unobservable Inputs�(Level�3) | � | � | � | Total�Losses | � |
Long-lived assets held and used | � | $ | 324,921,592 | � | � | $ | — | � | � | $ | 166,496,765 | � | � | $ | — | � | � | $ | 158,424,827 | � |
�
�
During the nine months ended September 30, 2013, long-lived assets held and used with a carrying amount of $324 million were written down to their fair value of $166 million, resulting in an impairment charge of $158 million, about $143 million of this amount related to Daqo New Material. Based on the nature of the property being assessed, buildings and land use rights, the fair value was estimated using direct comparison method under the market approach. The direct comparison method is a set of procedures in which a value indication is derived by comparing the real estate being appraised to similar real estate that have been sold recently. Then applying appropriate units of comparison and making adjustments to the sale prices of the comparable based on the elements of comparison such as differences in location, size, decoration and year of completion, etc. to derive at the fair value of the real estate.
�
�No assets and liabilities that were measured at fair value for the nine months ended September 30, 2014.
�
F-21 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
13. | INCOME TAXES |
�
The effective tax rate is based on expected income and statutory tax rates. For interim financial reporting, the Group estimates the annual tax rate based on projected taxable income for the full year and records a quarterly income tax provision in accordance with ASC No. 740-270 “Income tax— Interim reporting". As the year progresses, the Company refines the estimates of the year’s taxable income as new information becomes available. This continual estimation process often results in a change to the expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision (benefit) during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate.
�
The Company considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company's experience with tax attributes expiring unused and tax planning alternatives. Valuation allowances have been established for deferred tax assets based on a more-likely-than-not threshold. The Company's ability to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carryforward periods provided for in the tax law.�
�
� The Group's effective tax rate for the nine months periods ended September 30, 2013 and 2014 was 0.6% and 0.0% respectively.
�
14. | SHARE BASED COMPENSATION |
�
On August�5, 2009, the Company adopted the 2009 Share Incentive Plan (the “Option Plan”) to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants, and promote the success of the Company’s business. As of December�31, 2009, share options to purchase of no more than 15,000,000 ordinary shares were authorized and 5,350,000 share options were granted under the Option Plan.
�
�During the nine months ended September 30, 2013 and 2014, the Company granted 140,000 and 6,274,166 share options respectively to its officers, directors and employees, respectively.
�
�
F-22 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
14. SHARE BASED COMPENSATION-Continued
�
On April 3, 2013, the Company modified the exercise price for a total number of 6,796,975 options granted before to $0.25, in order to provide appropriate incentives to the relevant employees and executive officers of the Company. The fair value of the options under revised terms for four batches granted on October 31, 2009, October 6, 2010, December 3, 2010, January 9, 2012 was $0.11, $0.12, $0.11 and $0.13, respectively. The total incremental cost associated with the modification was $191,000, of which $153,085 was recognized immediately for the options vested prior to the date of the modification and the remaining share-based compensation charges of $37,915 will be recognized over a weighted-average period of 1.21 years.
�
On April 3, 2013, the Company granted options to acquire 140,000 ordinary shares to an independent director pursuant to the Option Plan. Thirty percent (30%) of the options will vest one year following the service inception date, thirty percent (30%) of the options will vest on the second year of service inception date, and the remaining forty percent (40%) of the options will vest on the third anniversary of the service inception date. The exercise price is $0.25.
�
On January 28, 2014, the Company granted options to acquire 566,666 ordinary shares to independent directors of the Company pursuant to the Option Plan. Twenty-five percent (25%) of the options will vest half- year following the service inception date, twenty-five percent (25%) of the options will vest on the second half year of service inception date, and the remaining forty percent (50%) of the options will vest in twenty-four equal installments over the next two years. The exercise price is $1.49.
�
On January 28, 2014, the Company granted options to acquire 5,707,500 ordinary shares to employees and executive officers of the Company pursuant to the Option Plan. Twenty-five percent (25%) of the options will vest half- year following the service inception date, twenty-five percent (25%) of the options will vest on the second half year of service inception date, and the remaining forty percent (50%) of the options will vest in thirty-six equal installments over the next three years. The exercise price is $1.49.
�
The Company utilized the Binomial option pricing model to evaluate the fair value of the stock options with reference to the closing price of the Company on the measurement dates.
�
F-23 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
14. SHARE BASED COMPENSATION-Continued
�
The following assumptions were used in the Binomial option pricing model:
�
� | � | Nine months Ended September, 2013 | ||||||||
Options granted | � | Average risk-free rate of return | � | Exercise multiple | � | Volatility rate | � | Dividend yield | � | Post-vesting forfeiture rate |
April 3, 2013 | � | 2.29% | � | 2.8 times | � | 51.8% | � | 0% | � | 3% |
�
�
� | � | Nine months Ended September, 2014 | ||||||||||
Options granted | � | Average risk-free rate of return | � | Exercise multiple | � | Volatility rate | � | Dividend yield | � | Post-vesting forfeiture rate | ||
January 28, 2014 | � | 2.77% | � | 3.0~3.5 times | � | 93.0% | � | 0% | � | 3-9.5% |
�
The risk-free rate of return is based on the yield curve of China USD sovereign bond commensurate with the same maturity at the respective grant dates. The exercise multiple is estimated by reference to the proprietary research and empirical studies. The expected volatility is based on the average of historical daily annualized share price volatility of 6 comparable companies over a normalized period that commensurate with the option life of 10 years. The post-vesting forfeiture rate is based on the historical data and management’s best estimation.
�
A summary of the aggregate option activity and information regarding options outstanding as of September 30, 2014 is as follows:
�
� | � | Number�of Options | � | � | Weighted Average Exercise Price | � | � | Weighted Average Remaining Contract�Life | � | � | Aggregate Intrinsic Value | � | ||||
Options outstanding on January�1, 2014 (after modification of exercise price) | � | � | 6,371,250 | � | � | $ | 0.25 | � | � | � | � | � | � | � | � | � |
Granted | � | � | 6,274,166 | � | � | $ | 1.49 | � | � | � | � | � | � | � | � | � |
Forfeited | � | � | (105,000 | ) | � | $ | 1.49 | � | � | � | � | � | � | � | � | � |
Exercised | � | � | (150,000 | ) | � | $ | 0.25 | � | � | � | � | � | � | � | � | � |
Options outstanding on September 30, 2014 | � | � | 12,390,416 | � | � | $ | 0.87 | � | � | � | 7.51 | � | � | $ | 10,487,398 | � |
Options vested or expected to vest on September 30, 2014 | � | � | 8,533,983 | � | � | $ | 0.47 | � | � | � | 6.30 | � | � | $ | 10,582,575 | � |
Options exercisable on September 30, 2014 | � | � | 7,201,896 | � | � | $ | 0.51 | � | � | � | 6.35 | � | � | $ | 8,630,797 | � |
�
The share-based compensation charge related to the share options of approximately$1,305,150 and $1,646,281 was recognized by the Company for the nine months ended September 30, 2013 and 2014, respectively.
�
The weighted average grant date fair value of options granted during the nine months ended September 30, 2013 and 2014 was $0.11 and $0.98, respectively.
�
�
F-24 |
� |
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
As of September 30, 2014, there was approximately $5.3 million in total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of 3.16 years.
�
15. | RELATED PARTY TRANSACTIONS AND BALANCES |
�
(1) | � | The relationships between the Group and related party are as follows: |
��
Name of the related party |
� |
Relationship |
Daqo Group | � | Daqo Group and the Company are controlled by same group of shareholders. |
Zhengjiang�Daqo�Solar�Co.�Ltd(“Zhenjiang�Daqo)� | � | An affiliated company which is 100% held by Daqo Group |
Daqo Solar Co. Ltd (“Daqo Solar”) | � | An affiliated company which is 100% held by Daqo Group |
Nanjing Daqo | � | An affiliated company which was 100% held Daqo Group |
Daqo Xinjiang Investment Co., Ltd. ("Xinjiang Daqo Investment") | � | An affiliated company which is 100% held by Daqo Group |
Daqo New Material Co., Ltd. ("Daqo New Material") | � | An affiliated company which is 100% held by Daqo Group, and was consolidated by the Company as VIE on December 31, 2013 |
�
(2) | � | Related party balances: |
�
The balance with Daqo Group and its subsidiaries was as follows:
�
The balances due from related parties mainly include amount due from Zhenjiang Daqo for the sales of wafer and polysilicon and Daqo Group for the consideration for the transfer of 100% ownership of Nanjing Daqo. Such balances are unsecured, interest-free, and are payable on demand. The balances are as follows:
�
� | � | As�of�December�31, | � | � | As�of�September�30, | � | ||
� | � | 2013 | � | � | 2014 | � | ||
Amount due from related party | � | � | � | � | � | � | � | � |
Zhenjiang Daqo | � | $ | 6,898,980 | � | � | $ | 1,151,359 | � |
Daqo Group | � | � | 6,465,561 | � | � | � | 6,935,700 | � |
Others | � | � | 51,911 | � | � | � | 1,436,238 | � |
Total | � | $ | 13,416,452 | � | � | $ | 9,523,297 | � |
�
Balances due to related parties related to interest free loans received primarily for working capital purposes from Daqo Solar, Xinjiang Daqo Investment and Daqo New Material, wholly-owned subsidiaries of Daqo Group. The balances are payable on demand and are as follows:
�
� | � | As�of�December�31, | � | � | As�of�September�30, | � | ||
� | � | 2013 | � | � | 2014 | � | ||
Amount due to related party | � | � | � | � | � | � | � | � |
Daqo Group | � | $ | 461,796 | � | � | $ | 1,303,377 | � |
Xinjiang Daqo Investment | � | � | 18,482,300 | � | � | � | 21,395,707 | � |
Nanjing Daqo | � | � | 1,651,810 | � | � | � | — | � |
Daqo Solar | � | � | 66,750,009 | � | � | � | 43,310,377 | � |
Daqo New Material | � | � | — | � | � | � | 8,059,967 | � |
Others | � | � | 1,191,875 | � | � | � | 614,757 | � |
Total | � | $ | 88,537,790 | � | � | $ | 74,684,185 | � |
F-25 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
15. RELATED PARTY TRANSACTIONS AND BALANCES-Continued
�
(3) | � | The transactions with Daqo Group and its subsidiaries were as follows: |
�
Name of Related parties | � | Nature | � | 2013 | � | � | 2014 | � | ||
Daqo Group | � | Purchase-Fixed asset | � | $ | 7,586,517 | � | � | $ | 488,742 | � |
� | � | Financing-cash in | � | � | 830,331 | � | � | � | 8,940,616 | � |
� | � | Financing-cash out | � | � | - | � | � | � | 8,110,285 | � |
Zhenjiang Daqo | � | Sales | � | � | 8,691,577 | � | � | � | 4,387,248 | � |
Daqo Solar | � | Sales | � | � | - | � | � | � | 8,973,778 | � |
� | � | Financing-cash in | � | � | 71,485,351 | � | � | � | 128,831,023 | � |
� | � | Financing-cash out | � | � | 9,594,639 | � | � | � | 150,210,334 | � |
Nanjing Daqo | � | Related party interest bearing loan | � | � | 1,869,360 | � | � | � | - | � |
� | � | Interest charged | � | � | 116,681 | � | � | � | - | � |
� | � | Financing-cash out | � | � | - | � | � | � | 2,270,880 | � |
Xinjiang Daqo Investment | � | Financing-cash in | � | � | 44,296,744 | � | � | � | 83,969,041 | � |
� | � | Financing-cash out | � | � | 23,645,923 | � | � | � | 80,750,864 | � |
Daqo New Material | � | Rental expense | � | � | - | � | � | � | 802,918 | � |
� | � | Financing-cash in | � | � | - | � | � | � | 8,243,295 | � |
� | � | Financing-cash out | � | � | - | � | � | � | 1,390,178 | � |
�Others subsidiaries under Daqo Group | � | Purchase-Fixed asset | � | � | 31,691 | � | � | � | 1,125,674 | � |
� | � | Purchase-Raw material | � | � | - | � | � | � | 7,494 | � |
� | � | Service expense | � | � | - | � | � | � | 68,580 | � |
Total | � | Sales | � | $ | 8,691,577 | � | � | $ | 13,361,026 | � |
� | � | Purchase-Fixed asset | � | $ | 7,618,208 | � | � | $ | 1,614,416 | � |
� | � | Purchase-Raw material | � | $ | - | � | � | $ | 7,494 | � |
� | � | Rental expense | � | $ | - | � | � | $ | 802,918 | � |
� | � | Service expense | � | $ | - | � | � | $ | 68,580 | � |
� | � | Interest expense | � | $ | 116,681 | � | � | $ | - | � |
� | � | Proceeds from interest free loans | � | $ | 116,612,426 | � | � | $ | 229,983,975 | � |
� | � | Repayment of interest free loans | � | $ | 33,240,562 | � | � | $ | 242,732,541 | � |
�
�
F-26 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
��
16. | EARNINGS PER SHARE |
�
The calculation of earnings per share is as follows:
�
� | � | For the nine months ended September 30, | � | |||||
� | � | 2013 | � | � | 2014 | � | ||
Numerator used in basic and diluted earnings per share: | � | � | � | � | � | � | � | � |
Net (loss) income attributable to Daqo New Energy Corp. ordinary shareholders—basic and diluted | � | $ | (62,929,174 | ) | � | $ | 13,043,181 | � |
Denominator used in basic and diluted earnings per share: | � | � | � | � | � | � | � | � |
Weighted average number of ordinary shares outstanding used in computing earnings per share—basic | � | � | 172,955,579 | � | � | � | 200,643,909 | � |
Plus: share options | � | � | — | � | � | � | 5,020,995 | � |
Weighted average number of ordinary shares outstanding used in computing earnings per share—diluted | � | � | 172,955,579 | � | � | � | 205,664,904 | � |
NET (LOSS) INCOME ATTRIBUTABLE TO DAQO NEW ENERGY CORP. PER ORDINARY SHARE—Basic | � | $ | (0.36 | ) | � | $ | 0.07 | � |
NET (LOSS) INCOME ATTRIBUTABLE TO DAQO NEW ENERGY CORP. PER ORDINARY SHARE—Diluted | � | $ | (0.36 | ) | � | $ | 0.06 | � |
��
Outstanding employee options totaling of 6,371,250 and 6,169,166 were excluded from the computation of diluted earnings per share as their effects would have been anti-dilutive for the year ended December�31, 2013 and nine months ended September 30, 2014, respectively.
��
17. | COMMITMENTS |
�
Capital commitments
�
As of September 30, 2014, commitments outstanding for the purchase of property, plant and equipment approximated $35.4 million, which will be due subsequent to receipt of the purchases.
�
Lease commitments
�
The Group has operating lease commitments principally for facility in Daqo New Material. The lease expense was $105,961 and $844,075 for the nine months ended September 30, 2013 and 2014, respectively.
�
Future minimum lease payments are as follows:
�
For the years ended December 31, | � | � | USD | � |
2014 | � | � | 267,660 | � |
2015 | � | � | 1,070,639 | � |
2016 | � | � | 1,070,639 | � |
Total | � | $ | 2,408,938 | � |
�
�
F-27 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
18. | VARIABLE INTEREST ENTITY |
�
The equity interests in Daqo New Material, the VIE, are funded by Daqo Group. Daqo New Material was structured to acquire land use rights and to erect certain facilities for the future use of the Group.
�
The lease agreement with the VIE is structured such that Chongqing Daqo protect Daqo Group from potential losses from Daqo New Material. As a result of this agreement, Chongqing Daqo is the primary beneficiary of Daqo New Material. Lease income and expenses and associated receivables and payables are eliminated upon consolidation as intercompany transactions. Net income of the VIE is reflected as an adjustment to noncontrolling interest. The Company relies on the lease agreements with Daqo New Material for material property, plant and equipment necessary for production. If Daqo New Material fails to perform or terminates the lease agreement for any reason, including, for example, due to its breach of the agreement or the unavailability of any required governmental approvals, or if it refuses to extend or renew the lease agreement when the agreement expires, and the Company cannot find an immediately available alternative source for leasing similar property, plant and equipment, then the Company’s ability to carry on the operations will be impaired. If Daqo New Material fails to perform its obligations, the Company may need to initiate legal procedures to enforce the agreement.
�
On December 31, 2013, Chongqing Daqo and Daqo New Material terminated this lease agreement. As a result of the change, Chongqing Daqo no longer has the power to direct the activities that most significantly impact Daqo New Material's operations, and as such Chongqing Daqo ceased to be the primary beneficiary of Daqo New Material and deconsolidated the entity on the date the lease arrangement was terminated, December 30, 2013. No gain or loss was recorded on termination of VIE arrangement. After deconsolidation, Daqo New Material remains a related party of the Group. On January 1, 2014, Chongqing Daqo signed a new operating lease agreement with Daqo New Material with respect to certain limited facilities, including the dining hall, office space and portions of the employee dormitory which it uses for its wafer business located nearby. The term of the lease is three years and the annual rental for these facilities is approximately $1 million.
�
Daqo New Material leased all of its assets for use in the Group’s operations. Significant assets, liabilities, revenues, operating costs and expenses and net income of the VIE are as follows:�
�
� | � | For the nine months ended September 30, | � | |||||
� | � | 2013 | � | � | 2014 | � | ||
Revenues | � | $ | - | * | � | $ | N/A | � |
Operating costs and expenses | � | $ | 149,881,562 | � | � | $ | N/A | � |
Net loss | � | $ | (149,881,562 | ) | � | $ | N/A | � |
� | � | � | � | � | � | � | � | � |
�
* The lease term was amended at the beginning of 2013 and reduced the rent to $0 per month and was later terminated on December 30, 2013.
F-28 |
� |
�
DAQO NEW ENERGY CORP.
�
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
�
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014
(In U.S. dollars, except share data)
�
19. | SEGMENT INFORMATION |
�
The Group’s chief operating decision maker has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Group. Following entering into the wafer business in 2011, the Group operated and viewed its performance in two segments. Furthermore, the Group's chief operating decision maker is not provided with asset information by segment. As such, no asset information by segment is presented. The following tables summarized the Company’s revenue and cost generated from different revenue streams. Substantially all of its revenues are derived in the PRC. The Group’s long-lived assets and operations are substantially all located in the PRC.
�
The following table summarizes the Group’s revenue by segment:
�
For the nine months ended September 30, 2013 | � | Polysilicon | � | � | Wafer | � | � | Elimination | � | � | Total | � | ||||
Revenue - External | � | $ | 50,725,532 | � | � | $ | 21,235,219 | � | � | $ | — | � | � | $ | 71,960,751 | � |
Revenue - Intersegment | � | � | 9,354,297 | � | � | � | — | � | � | � | (9,354,297 | ) | � | � | — | � |
Total revenue | � | � | 60,079,829 | � | � | � | 21,235,219 | � | � | � | (9,354,297 | ) | � | � | 71,960,751 | � |
Total Cost | � | � | 87,016,677 | � | � | � | 21,359,931 | � | � | � | (9,354,297 | ) | � | � | 99,022,311 | � |
Gross loss | � | $ | (26,936,848 | ) | � | $ | (124,712 | ) | � | $ | — | � | � | $ | (27,061,560 | ) |
�
For the nine months ended September 30, 2014 | � | � | Polysilicon | � | � | � | Wafer | � | � | � | Elimination | � | � | � | Total | � |
Revenue - External | � | $ | 93,951,366 | � | � | $ | 39,148,564 | � | � | $ | — | � | � | $ | 133,099,930 | � |
Revenue - Intersegment | � | � | 19,188,662 | � | � | � | — | � | � | � | (19,188,662 | ) | � | � | — | � |
Total revenue | � | � | 113,140,028 | � | � | � | 39,148,564 | � | � | � | (19,188,662 | ) | � | � | 133,099,930 | � |
Total Cost | � | � | 86,477,229 | � | � | � | 33,799,568 | � | � | � | (17,879,633 | ) | � | � | 102,397,164 | � |
Gross profit | � | $ | 26,662,799 | � | � | $ | 5,348,996 | � | � | $ | (1,309,029 | ) | � | $ | 30,702,766 | � |
�
�
The following customers accounted for 10% or more of revenues:
�
� | � | For the nine months ended September 30, | � | |||||
� | � | 2013 | � | � | 2014 | � | ||
Customer H | � | $ | 12,242,947 | � | � | $ | 19,573,703 | � |
Customer I | � | $ | 8,691,577 | � | � | $ | * | � |
Customer O | � | � | * | � | � | $ | 13,391,019 | � |
�
�
* | � | Represents less than 10% |
�
F-29 |
�
�
Exhibit 99.2
�
DISCUSSION OF UNAUDITED FINANCIAL RESULTS OF NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
�
Results of Operations
�
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
��
Revenues
�
Revenues were $133.1 million in the nine months ended September 30, 2014, an increase from $72.0 million in the nine months ended September 30, 2013. Revenues from sales of polysilicon were $94.0 million in the nine months ended September 30, 2014, an increase from $50.7 million in the nine months ended September 30, 2013. The increase in revenues generated from the sale of polysilicon between the nine months ended September 30, 2013 and September 30, 2014 was primarily due to higher sales volume and higher average selling prices.
�
Revenues from sales of wafers were $39.1 million in the nine months ended September 30, 2014, an increase from $21.2 million in the nine months ended September 30, 2013. The increase in revenues generated from the sale of wafers between the nine months ended September 30, 2013 and September 30, 2014 was primarily due to higher sales volumes and higher average selling prices. In November 2013, we successfully increased our wafer annual manufacturing capacity from 36 million pieces to 72 million pieces.
�
Gross profit and margin
�
Gross profit was $30.7 million in the nine months ended September 30, 2014, compared to gross loss of $27.1 million in the nine months ended September 30, 2013.
�
Gross margin was 23.1% in the nine months ended September 30, 2014, a substantial improvement from negative 37.6% in the nine months ended September 30, 2013. The improvement in gross profit and gross margin was mainly attributable to higher average selling prices and lower production costs for both polysilicon and wafer. The lower production costs were resulted from our technology improvement and the decrease in depreciation expense of approximately $14.0 million.
�
Since January 1, 2014, we revised the estimate of the expected useful lives of our machinery and equipment from 10 years to 15 years, and our buildings and structures from 20 years to 30 years, to better reflect the economic lives of these assets. The change in estimate was in part based on an analysis provided by a third-party valuation firm to assess the useful lives of these fixed assets. We believe the revised estimate of the useful lives is consistent with industry averages. The change in useful lives reduced depreciation expenses that would otherwise have been recorded in the nine months ended September 30, 2014 by approximately $14.0 million, and we expect a similar impact prospectively.
�
Selling, general and administrative expenses
�
Selling, general and administrative expenses were $5.6 million in the nine months ended September 30, 2014, compared to $14.1 million in the nine months ended September 30, 2013. Included in selling, general and administrative expenses in the nine months ended September 30, 2013 were $4.3 million expense of bad debt provision for long aging accounts receivable. While in the nine months ended September 30, 2014, included in selling, general and administrative expenses were reversal of bad debt provision of $3.6 million, due to the subsequent collection of certain long aging outstanding accounts receivables in the prior periods.
�
Research and development expenses
�
Research and development expenses were $1.3 million in the nine months ended September 30, 2014, compared to $2.2 million in the nine months ended September 30, 2013.
�
1 |
� |
�
Other operating income
�
Other operating income was $0.6 million in the nine months ended September 30, 2014, compared to $5.3 million in the nine months ended September 30, 2013. Other operating income mainly comprised unrestricted cash subsidies that we received from local government authorities, which fluctuates from period to period.
�
Impairment of long-lived assets
�
In the nine months ended September 30, 2014 and 2013, the impairment charges of long-lived assets were nil and $158.4 million, respectively. The impairment loss incurred in the nine months ended September 30, 2013 was related to buildings and plant of the polysilicon facilities in Chongqing Daqo and Daqo New Material, and was triggered primarily by the significant decrease in average selling prices of polysilicon and our decision of relocating a significant portion of machinery and equipment located at Chongqing Daqo to Xinjiang Daqo as a part of our expansion plan.
�
Operating income/(loss) and margin
�
As a result of the foregoing, operating income was $24.4 million in the nine months ended September 30, 2014, compared to operating loss of $196.6 million in the nine months ended September 30, 2013. Operating margin was 18.3% in the nine months ended September 30, 2014, compared to negative 273.1% in the nine months ended September 30, 2013.
�
Income taxes
�
Our effective tax rate for the nine months ended September 30, 2013 and 2014 was 0.6% and 0.0%, respectively. Our effective tax rate of 0.6% for the nine months ended September 30, 2013 was mainly due to the change in valuation allowance of deferred tax assets from prior years.
�
Net income/(loss) attributable to our shareholders and Income/(loss) per ADS
�
As a result of the foregoing, net income attributable to our shareholders was $13.0 million in the nine months ended September 30, 2014, compared to net loss attributable to our shareholders of $62.9 million in the nine months ended September 30, 2013.
�
Income per ADS was $1.61 in the nine months ended September 30, 2014, compared to loss per ADS of $9.10 in the nine months ended September 30, 2013.
�
Liquidity and Capital Resources
�
Our primary sources of liquidity in the nine months ended September 30, 2014 were proceeds from operating activities, bank borrowings and financial supports from our parent Daqo Group.
�
As of September 30, 2014, we had $17.4 million in restricted cash and $12.6 million in cash and cash equivalents. Approximately $6.9 million, $18.1 million and $5.0 million of our restricted cash and cash equivalents were held by Chongqing Daqo New Energy Co., Ltd., Xinjiang Daqo New Energy Co., Ltd. and Daqo New Energy Corp., respectively.
�
The following significant developments have impacted our liquidity in the nine months ended September 30, 2014. As of September 30, 2014, our current liabilities exceed the current assets by $194.2 million. While we had cash and cash equivalents of $12.6 million, the short-term borrowings of $77.7 million will be due within one year, and the current portion of long-term borrowings amounting to $52.1 million is restricted to purchase fixed assets and required to be paid off upon due dates. Additionally, we have capital commitment mainly relating to our polysilicon capacity expansion of $35.4 million to be fulfilled in the next twelve months.
�
We believe there are adequate sources of liquidity to fund our working capital and capital expenditures requirements, and to meet short term debt obligations, other liabilities and commitments as they become due. The main sources of liquidity in the next 12 months will continue to be operating cash flows, renewal and roll-over of our bank credit facilities, and financial supports from Daqo Group.
�
2 |
� |
�
The following table sets forth certain unaudited cash flow statements data for the periods indicated.
�
� | � | Nine months ended September 30, | � | |||||
� | � | 2013 | � | � | 2014 | � | ||
Net cash (used in) provided by operating activities | � | � | (16,835,664 | ) | � | � | 47,661,806 | � |
Net cash used investing activities | � | � | (12,096,312 | ) | � | � | (80,961,788 | ) |
Net cash provided by financing activities | � | � | 33,119,964 | � | � | � | 38,117,134 | � |
Effect of exchange rate changes | � | � | (95,737 | ) | � | � | (36,289 | ) |
Net increase in cash and cash equivalents | � | � | 4,092,251 | � | � | � | 4,780,863 | � |
Cash and cash equivalents at the beginning of the period | � | � | 6,679,024 | � | � | � | 7,831,084 | � |
Cash and cash equivalents at the end of the period | � | � | 10,771,275 | � | � | � | 12,611,947 | � |
Supplemental disclosure of cash flow information: | � | � | � | � | � | � | � | � |
Interest paid | � | � | 13,742,609 | � | � | � | 13,064,363 | � |
Supplemental schedule of non-cash investing activities | � | � | � | � | � | � | � | � |
Purchases of property, plant and equipment included in accounts payable | � | � | 51,766,695 | � | � | � | 37,308,771 | � |
Purchases of property, plant and equipment included in amount due to related party | � | � | 940,135 | � | � | � | 614,756 | � |
�
Operating Activities
�
Net cash provided by operating activities in the nine months ended September 30, 2014 was $47.7 million, primarily resulting from $162.5 million we received from the sale of our products, partially offset by our payments for raw materials and utilities of $88.4 million, employee and welfare payments of $13.3 million and interest expense payments of $13.1 million.
�
Our operating cash flow during the nine months ended September 30, 2014 improved significantly compared to the nine months ended September 30, 2013, during which net cash used in operating activities was $16.8 million. The improvement was primarily due to the recovery of sales prices associated with improvements in the overall solar market and our continuous cost reduction efforts at our Xinjiang facilities.
�
3 |
� |
�
Investing Activities
�
Net cash used in investing activities in the nine months ended September 30, 2014 was $81.0 million, primarily resulting from payments of $72.3 million for the purchase of property, plant and equipment and an increase in restricted cash of $8.7 million that we placed in our bank accounts as guarantee deposits for the banks’ issuance of short term letters of credit and the notes in support of our purchases of property, plant and equipment.
�
In the nine months ended September 30, 2014, net cash used in investing activities increased significantly from the nine months ended September 30, 2013, during which net cash used in investing activities was $12.1 million. The increase was mainly related to the expansion of and the technology improvement project at our Xinjiang polysilicon facilities.
�
Financing Activities
�
Net cash provided by financing activities in the nine months ended September 30, 2014 was $38.1 million, primarily resulting from cash received from related parties in the amount of $230.0 million offset by the repayment of amounts due to related parties in the amount of $242.7 million, proceeds received from the bank borrowings in the amount of $115.3 million offset by the repayment of bank borrowings in the amount of $119.1 million, and net proceeds received from a follow-on public offering of our ADSs in May 2014 in the amount of $54.6 million. Net cash provided by financing activities in the nine months ended September 30, 2013 was $33.1 million, primarily resulting from cash received from related parties in the amount of $116.6 million partially offset by the repayment of amounts due to related parties in the amount of $33.2 million and proceeds received from the bank borrowings in the amount of $71.0 million offset by the repayment of bank borrowings in the amount of $121.4 million. In the nine months ended September 30, 2014, net cash provided by financing activities increased by $5.0 million compared to the same period of 2013. The increase was primarily due to the follow-on public offering of our ADSs in May 2014. Daqo Group and its affiliates will not require us to repay our debt to them before October 1, 2015.
�
In May 2014, we issued and sold 2,000,000 ADSs through a follow-on public offering priced at US$29.00 per ADS. We received the net proceeds from the offering after deducting offering expenses of $54.6 million. We have used and will continue to use the net proceeds mainly for the expansion of and technology improvement at our Xinjiang polysilicon facility. As of September 30, 2014, the Company had spent approximately $63.7 million on the expansion of and technology improvement project in our Xinjiang polysilicon facility, among which $51.6 million was from the proceeds of the follow-on offering.
�
Capital Expenditures
�
In the nine months ended September 30, 2014, we made capital expenditures of $72.3 million for technical improvements and equipment enhancements for our wafer facilities in Chongqing and polysilicon facilities in Xinjiang, compared to $14.1 million in the nine months ended September 30, 2013. We expect our capital expenditures to increase in the future. We expect that total capital expenditures related to the capacity expansion project in our Xinjiang polysilicon facilities will be approximately $100 million, of which approximately $63.7 million was spent prior to September 30, 2014.
�
4 |
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