SEC Company Response from CHINA ENERGY SAVINGS TECHNOLOGY, INC. (CIK 0001119601) — Jun 27, 2005
CHINA ENERGY SAVINGS TECHNOLOGY, INC. (CIK 0001119601)
Date: June 27, 2005 · CIK: 0001119601 · Accession: 0001076542-05-000162
AI Filing Summary & Sentiment
File numbers found in text: 000-31047
Referenced dates: April 19, 2005
Letter
RE: CHINA ENERGY SAVINGS TECHNOLOGY, INC. FORM 10-KSB FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004 FORM 10-QSB FOR THE QUARTER ENDED DECEMBER 31, 2004 FILE NO. 000-31047
RICHARDSON & PATEL LLP 10900 Wilshire Boulevard Suite 500 Los Angeles, CA 90024 Telephone (310) 208-1182 Facsimile (310) 208-1154
June 15, 2005
VIA EDGAR AND FEDERAL EXPRESS
Securities and Exchange Commission Division of Corporation Finance 450 Fifth Street, N.W. Washington DC, 20549 Attn.: Patrick Enunwaonye Gary Todd
Messrs. Enunwaonye and Todd:
On behalf of China Energy Savings Technology, Inc. (the "Company"), we enclose our proposed Amendment No. 2 to Form-10KSB for the fiscal year ended September 30, 2004 and Amendment No. 2 to Form 10-QSB for the quarter ended December 31, 2004 (collectively, the "Amended Reports"). The Amended Reports contain revisions that have been made in response to the comments received from the staff ("Staff") of the Securities and Exchange Commission in their letter dated April 19, 2005. Set forth below are the Company's responses to the Staff's comments. We have reproduced the Staff's comments and have followed each comment with our response. References in this letter to "we," "our" or "us" mean the Company or its advisors, as the context may require. Two marked copies of the Amended Reports are being provided with a copy of this letter for the convenience of the Staff.
FORM 10-KSB FOR THE FISCAL YEAR SEPTEMBER 30, 2004
1. We see that your revenues for the twelve months ended December 31, 2003 exceeded $25 million. We generally consider the consummation of a reverse merger to be an in-substance initial registration of the private operating company. Since revenues exceeded $25 million in your most recently completed fiscal year you would not have been eligible for Small Business
<PAGE>
Securities and Exchange Commission Division of Corporation Finance June 15, 2005 Page 2 --------------------------------------------------------------------------------
status in any actual initial registration. Accordingly, it appears that you were not Small Business eligible upon consummation of the merger. Either revise to file on Form 10-K and to provide any additional disclosures required by Regulation S-X; or if you believe you are appropriately a small business filer, support your position in a supplemental analysis. We may have further comment upon review of that response.
RESPONSE:
While the Company determined that the presentation of consolidated financial statements would be more meaningful to the readers instead of presenting single line items under the equity method of accounting due to the fact that the shareholders of the Company exercise significant control over Starway Management Limited (see, response to comment 3), the Company was able to acquire only 50% of the equity interest of Starway Management Limited as of June 30, 2004 and another 15% as of November 17, 2004. As such, the Company had a legal claim to only $15,528,939 (50% of $31,057,877) as of June 30, 2004 and only $20,187,620 (65% of $31,057,877) as of November 17, 2004. Thus, the Company had less than $25,000,000 in revenues and was a small business issuer at the time it completed these two acquisitions.
In addition, while the Company notes that you stated that "we generally consider the consummation of a reverse merger to be an in-substance initial registration," we have failed to find any authorities supporting this proposition for purposes of determining the appropriate use of Regulation S-B. If there are statutes, regulations, telephone interpretations, case or other published authorities supporting such proposition, please point it out to us for our review. Absent such authority, Section a.2 of Item 10 of Regulation S-B clearly provides rules for entering and exiting the Small Business Disclosure System. The Company plans to fully abide by such regulations in determining whether it is required to make disclosures under Regulation S-X and will take your comment into consideration in making future filings.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - PAGES 16-22
CRITICAL ACCOUNTING POLICIES - PAGE 16
2. Critical accounting policy disclosure should provide insight about complex judgments, estimates and uncertainties that underlie your key accounting policies. That information should generally expand upon and not merely repeat your basic accounting policies. The revenue recognition discussion does not achieve the objective of the disclosure since it is essentially a
<PAGE>
Securities and Exchange Commission Division of Corporation Finance June 15, 2005 Page 3 --------------------------------------------------------------------------------
factual statement of the basic policy. Please revise to make disclosure about complex estimates, judgments and uncertainties associated with your revenue practices and about the susceptibility of those estimates and judgments to change. Refer to FR-60 and Exchange Act release 34-48960 for future guidance.
RESPONSE:
In response to your comment, the Company has revised its Form 10KSB to include discussions about complex judgments, estimates and uncertainties that underlie key accounting policies. Specifically, the discussion is regarding the manner in which the Company recognizes revenue, carries its notes receivables and the basis of presentation of financial statements with respect to its ownership of Starway.
3. It is unusual to consolidate a 50% owned entity. Make detailed and specific disclosure about the facts and circumstances leading you to conclude that such presentation is appropriate. That disclosure should identify and describe the aspects of the underlying agreements and the accounting literature on which you based the accounting. The disclosure presented in Note 1 under "Basis of Presentation" is not sufficient for this purpose. This matter would appear to meet the criteria for critical accounting policy disclosure.
RESPONSE:
The Company has issued consolidated financial statements even though it only owns 50% of Starway. The Company exercises significant control over Starway because of the following:
New Solomon Consultants Limited owns a majority of the shares in the Company. The shareholders of New Solomon Consultants Limited are also the shareholders of Eurofaith Holdings, Inc., which at September 30, 2004 owned 15% of Starway. The director of Eurofaith at September 30, 2004 is also a director and corporate secretary of the Company. In November 2004, the Company acquired the remaining 15% from Eurofaith Holdings, Inc. for 3,346,100 shares of the Company which were issued to New Solomon Consultants Limited. The Company has obtained voting control over Starway through New Solomon Consultants Limited.
Based upon the above facts, the Company determined that the presentation of consolidated financial statements would be more meaningful to the readers instead of presenting a single line item under the equity method of accounting.
<PAGE>
Securities and Exchange Commission Division of Corporation Finance June 15, 2005 Page 4 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
4. We see the significance of accounts and note receivable to your assets. With respect to note receivable, make more specific disclosure about how recorded amounts are measured. For both accounts and notes receivable, expand to present reasonably detailed disclosure about how you evaluate receivables for potential bad debts. Also, make specific disclosure about why there is apparently no reserve for long-term receivables. To the extent you rely on collateral in securing long-term receivables, disclose how you determine the fair value of such collateral.
RESPONSE:
The Company's notes receivable represent amounts due on energy savings sharing contracts and are stated at the present value of the discounted sales price.
The breach of any terms stated in the contract by the customer can lead to the return of the energy savings equipment to the Company. The Company will write off the deficiency of the total receipts over the notes receivable outstanding as bad debts in the income statement and increase its closing inventories after the return of the equipment or the collateral.
Accounts and notes receivable are analyzed for potential bad debts on an annual basis. The Company requires each new customer to go through credit review in order for it to approve the extension of credit. Once the sale is made the Company performs reviews on a monthly basis to ensure that the customer is adhering to the terms of the payment schedule. If the customer does not adhere to the payment schedule, then the Company follows up with the customer as to collection of the payments. At the end of each year management reviews the individual accounts and notes receivable for status of collections and payment terms, payment history and order status, customer's financial condition if available to determine if such account receivable are considered uncollectible. Generally all amounts over one year old are reserved for or written off as bad debts.
The fair value of the energy savings equipment secured under the energy savings sharing contract is determined by comparing the market price of the equipment at the date of repossession.
The Company has added the above disclosure to the Liquidity and Capital Resources section of the Form 10KSB.
<PAGE>
Securities and Exchange Commission Division of Corporation Finance June 15, 2005 Page 5 --------------------------------------------------------------------------------
ITEM 8A. CONTROLS AND PROCEDURES - PAGE 24
5. We see that management evaluated disclosure controls and procedures as of a date within 90 DAYS before the filing date of the annual report. Please amend to disclosure management's conclusion regarding the effectiveness of disclosure controls and procedures as OF THE END OF THE PERIOD COVERED BY THE ANNUAL REPORT. Refer to Item 307 of Regulation S-B and Part II.F of Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports (Release No. 33-8238).
RESPONSE:
The Company has revised the disclosure to clarify that the evaluation was conducted as of the end of the period covered by the report.
6. Please revise the language used in the disclosure about changes in internal control over financial reporting to indicate whether there was any change to internal control over financial reporting that has MATERIALLY AFFECTED, or that is reasonably likely to MATERIALLY AFFECT, internal control over financial reporting. Refer to the language used in amended Item 308(c) of Regulation S-B.
RESPONSE:
The Company did not make any changes that would change its internal control over financial reporting that has materially affected, or that is reasonably likely to materially affect, internal control over financial reporting. The Company will revise the language in the disclosure in accordance with this comment.
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - PAGE F-2
7. We see that your auditors have been located in Florida and in California. We also see that your operations appear to be solely in China. Tell us where your accounting records are located, where the audit fieldwork was performed (including who performed that fieldwork), and whether any fieldwork in Asia was performed by employees of your US based auditors. Also identify the language in which your accounting records are maintained and on what basis of GAAP. If the accounting records and supporting documents are in other than English, tell us how your auditors were able to read those documents. Describe your company's internal expertise in US GAAP; and, if your underlying accounting records are not maintained
<PAGE>
Securities and Exchange Commission Division of Corporation Finance June 15, 2005 Page 6 --------------------------------------------------------------------------------
according to US GAAP, tell us who converted those records to US GAAP. Overall, your response should fully explain how your US based auditors were able to successfully complete the audits of your Chinese operations. Respond separately for each audit firm. We are particularly concerned about fiscal 2003 where your audit fees totaled less than $9,000 while your assets and revenues exceeded $21 million and $31 million, respectively. We may have additional questions after reviewing your response.
RESPONSE:
The Company's accounting records are located in China and are maintained in accordance with Chinese GAAP. The Company's current U.S. auditors, Moore Stephens Wurth Frazer and Torbet, LLP (referred to as Moore Stephens) have been performing audits of US listed public companies with their operations located in China for the past six years. Moore Stephens sent an engagement team from the US, consisting of Dean Yamagata, partner, Susan XL Woo, partner and two staff persons, to the Company's offices in China to conduct the audit the Company.
Language is not an obstacle of the Company's U.S. based auditors since most of the documents written in Chinese were translated into English. Moreover, Ms. Woo and the staff auditors of Moore Stephens working on this engagement are fluent in speaking, reading and writing Chinese as well as English. All of such auditors have received degrees and college education in the U.S.
The Company's CFO is familiar with International Accounting Standards ("IAS") and, with the assistance from the Company's U.S. Auditors, has the ability to translate all of the financial statements of the Company from IAS to US GAAP.
The Company's prior auditor, Webb & Company P.A. (Florida) who performed the audits of Starway for the years ended December 31, 2003 and 2002 has been performing audits of companies located in China for four years. Webb & Company used a correspondent firm in China to translate all the required documents into English. Derek M. Webb performed the audits for December 2003 and 2002 in China over a period of two weeks in 2004. Mr. Brian Pybus, the concurring reviewer, joined Mr. Webb at the end of the aud
Show Raw Text
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RICHARDSON & PATEL LLP
10900 Wilshire Boulevard
Suite 500
Los Angeles, CA 90024
Telephone (310) 208-1182
Facsimile (310) 208-1154
June 15, 2005
VIA EDGAR AND FEDERAL EXPRESS
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington DC, 20549
Attn.: Patrick Enunwaonye
Gary Todd
RE: CHINA ENERGY SAVINGS TECHNOLOGY, INC.
FORM 10-KSB FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004
FORM 10-QSB FOR THE QUARTER ENDED DECEMBER 31, 2004
FILE NO. 000-31047
Messrs. Enunwaonye and Todd:
On behalf of China Energy Savings Technology, Inc. (the "Company"), we
enclose our proposed Amendment No. 2 to Form-10KSB for the fiscal year ended
September 30, 2004 and Amendment No. 2 to Form 10-QSB for the quarter ended
December 31, 2004 (collectively, the "Amended Reports"). The Amended Reports
contain revisions that have been made in response to the comments received from
the staff ("Staff") of the Securities and Exchange Commission in their letter
dated April 19, 2005. Set forth below are the Company's responses to the Staff's
comments. We have reproduced the Staff's comments and have followed each comment
with our response. References in this letter to "we," "our" or "us" mean the
Company or its advisors, as the context may require. Two marked copies of the
Amended Reports are being provided with a copy of this letter for the
convenience of the Staff.
FORM 10-KSB FOR THE FISCAL YEAR SEPTEMBER 30, 2004
1. We see that your revenues for the twelve months ended December 31, 2003
exceeded $25 million. We generally consider the consummation of a reverse
merger to be an in-substance initial registration of the private operating
company. Since revenues exceeded $25 million in your most recently
completed fiscal year you would not have been eligible for Small Business
<PAGE>
Securities and Exchange Commission
Division of Corporation Finance
June 15, 2005
Page 2
--------------------------------------------------------------------------------
status in any actual initial registration. Accordingly, it appears that you
were not Small Business eligible upon consummation of the merger. Either
revise to file on Form 10-K and to provide any additional disclosures
required by Regulation S-X; or if you believe you are appropriately a small
business filer, support your position in a supplemental analysis. We may
have further comment upon review of that response.
RESPONSE:
While the Company determined that the presentation of consolidated
financial statements would be more meaningful to the readers instead of
presenting single line items under the equity method of accounting due to
the fact that the shareholders of the Company exercise significant control
over Starway Management Limited (see, response to comment 3), the Company
was able to acquire only 50% of the equity interest of Starway Management
Limited as of June 30, 2004 and another 15% as of November 17, 2004. As
such, the Company had a legal claim to only $15,528,939 (50% of
$31,057,877) as of June 30, 2004 and only $20,187,620 (65% of $31,057,877)
as of November 17, 2004. Thus, the Company had less than $25,000,000 in
revenues and was a small business issuer at the time it completed these two
acquisitions.
In addition, while the Company notes that you stated that "we generally
consider the consummation of a reverse merger to be an in-substance initial
registration," we have failed to find any authorities supporting this
proposition for purposes of determining the appropriate use of Regulation
S-B. If there are statutes, regulations, telephone interpretations, case or
other published authorities supporting such proposition, please point it
out to us for our review. Absent such authority, Section a.2 of Item 10 of
Regulation S-B clearly provides rules for entering and exiting the Small
Business Disclosure System. The Company plans to fully abide by such
regulations in determining whether it is required to make disclosures under
Regulation S-X and will take your comment into consideration in making
future filings.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - PAGES 16-22
CRITICAL ACCOUNTING POLICIES - PAGE 16
2. Critical accounting policy disclosure should provide insight about complex
judgments, estimates and uncertainties that underlie your key accounting
policies. That information should generally expand upon and not merely
repeat your basic accounting policies. The revenue recognition discussion
does not achieve the objective of the disclosure since it is essentially a
<PAGE>
Securities and Exchange Commission
Division of Corporation Finance
June 15, 2005
Page 3
--------------------------------------------------------------------------------
factual statement of the basic policy. Please revise to make disclosure
about complex estimates, judgments and uncertainties associated with your
revenue practices and about the susceptibility of those estimates and
judgments to change. Refer to FR-60 and Exchange Act release 34-48960 for
future guidance.
RESPONSE:
In response to your comment, the Company has revised its Form 10KSB to
include discussions about complex judgments, estimates and uncertainties
that underlie key accounting policies. Specifically, the discussion is
regarding the manner in which the Company recognizes revenue, carries its
notes receivables and the basis of presentation of financial statements
with respect to its ownership of Starway.
3. It is unusual to consolidate a 50% owned entity. Make detailed and specific
disclosure about the facts and circumstances leading you to conclude that
such presentation is appropriate. That disclosure should identify and
describe the aspects of the underlying agreements and the accounting
literature on which you based the accounting. The disclosure presented in
Note 1 under "Basis of Presentation" is not sufficient for this purpose.
This matter would appear to meet the criteria for critical accounting
policy disclosure.
RESPONSE:
The Company has issued consolidated financial statements even though it
only owns 50% of Starway. The Company exercises significant control over
Starway because of the following:
New Solomon Consultants Limited owns a majority of the shares in the
Company. The shareholders of New Solomon Consultants Limited are also the
shareholders of Eurofaith Holdings, Inc., which at September 30, 2004 owned
15% of Starway. The director of Eurofaith at September 30, 2004 is also a
director and corporate secretary of the Company. In November 2004, the
Company acquired the remaining 15% from Eurofaith Holdings, Inc. for
3,346,100 shares of the Company which were issued to New Solomon
Consultants Limited. The Company has obtained voting control over Starway
through New Solomon Consultants Limited.
Based upon the above facts, the Company determined that the presentation of
consolidated financial statements would be more meaningful to the readers
instead of presenting a single line item under the equity method of
accounting.
<PAGE>
Securities and Exchange Commission
Division of Corporation Finance
June 15, 2005
Page 4
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
4. We see the significance of accounts and note receivable to your assets.
With respect to note receivable, make more specific disclosure about how
recorded amounts are measured. For both accounts and notes receivable,
expand to present reasonably detailed disclosure about how you evaluate
receivables for potential bad debts. Also, make specific disclosure about
why there is apparently no reserve for long-term receivables. To the extent
you rely on collateral in securing long-term receivables, disclose how you
determine the fair value of such collateral.
RESPONSE:
The Company's notes receivable represent amounts due on energy savings
sharing contracts and are stated at the present value of the discounted
sales price.
The breach of any terms stated in the contract by the customer can lead to
the return of the energy savings equipment to the Company. The Company will
write off the deficiency of the total receipts over the notes receivable
outstanding as bad debts in the income statement and increase its closing
inventories after the return of the equipment or the collateral.
Accounts and notes receivable are analyzed for potential bad debts on an
annual basis. The Company requires each new customer to go through credit
review in order for it to approve the extension of credit. Once the sale is
made the Company performs reviews on a monthly basis to ensure that the
customer is adhering to the terms of the payment schedule. If the customer
does not adhere to the payment schedule, then the Company follows up with
the customer as to collection of the payments. At the end of each year
management reviews the individual accounts and notes receivable for status
of collections and payment terms, payment history and order status,
customer's financial condition if available to determine if such account
receivable are considered uncollectible. Generally all amounts over one
year old are reserved for or written off as bad debts.
The fair value of the energy savings equipment secured under the energy
savings sharing contract is determined by comparing the market price of the
equipment at the date of repossession.
The Company has added the above disclosure to the Liquidity and Capital
Resources section of the Form 10KSB.
<PAGE>
Securities and Exchange Commission
Division of Corporation Finance
June 15, 2005
Page 5
--------------------------------------------------------------------------------
ITEM 8A. CONTROLS AND PROCEDURES - PAGE 24
5. We see that management evaluated disclosure controls and procedures as of a
date within 90 DAYS before the filing date of the annual report. Please
amend to disclosure management's conclusion regarding the effectiveness of
disclosure controls and procedures as OF THE END OF THE PERIOD COVERED BY
THE ANNUAL REPORT. Refer to Item 307 of Regulation S-B and Part II.F of
Management's Reports on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports (Release No.
33-8238).
RESPONSE:
The Company has revised the disclosure to clarify that the evaluation was
conducted as of the end of the period covered by the report.
6. Please revise the language used in the disclosure about changes in internal
control over financial reporting to indicate whether there was any change
to internal control over financial reporting that has MATERIALLY AFFECTED,
or that is reasonably likely to MATERIALLY AFFECT, internal control over
financial reporting. Refer to the language used in amended Item 308(c) of
Regulation S-B.
RESPONSE:
The Company did not make any changes that would change its internal control
over financial reporting that has materially affected, or that is
reasonably likely to materially affect, internal control over financial
reporting. The Company will revise the language in the disclosure in
accordance with this comment.
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - PAGE F-2
7. We see that your auditors have been located in Florida and in California.
We also see that your operations appear to be solely in China. Tell us
where your accounting records are located, where the audit fieldwork was
performed (including who performed that fieldwork), and whether any
fieldwork in Asia was performed by employees of your US based auditors.
Also identify the language in which your accounting records are maintained
and on what basis of GAAP. If the accounting records and supporting
documents are in other than English, tell us how your auditors were able to
read those documents. Describe your company's internal expertise in US
GAAP; and, if your underlying accounting records are not maintained
<PAGE>
Securities and Exchange Commission
Division of Corporation Finance
June 15, 2005
Page 6
--------------------------------------------------------------------------------
according to US GAAP, tell us who converted those records to US GAAP.
Overall, your response should fully explain how your US based auditors were
able to successfully complete the audits of your Chinese operations.
Respond separately for each audit firm. We are particularly concerned about
fiscal 2003 where your audit fees totaled less than $9,000 while your
assets and revenues exceeded $21 million and $31 million, respectively. We
may have additional questions after reviewing your response.
RESPONSE:
The Company's accounting records are located in China and are maintained in
accordance with Chinese GAAP. The Company's current U.S. auditors, Moore
Stephens Wurth Frazer and Torbet, LLP (referred to as Moore Stephens) have
been performing audits of US listed public companies with their operations
located in China for the past six years. Moore Stephens sent an engagement
team from the US, consisting of Dean Yamagata, partner, Susan XL Woo,
partner and two staff persons, to the Company's offices in China to conduct
the audit the Company.
Language is not an obstacle of the Company's U.S. based auditors since most
of the documents written in Chinese were translated into English. Moreover,
Ms. Woo and the staff auditors of Moore Stephens working on this engagement
are fluent in speaking, reading and writing Chinese as well as English. All
of such auditors have received degrees and college education in the U.S.
The Company's CFO is familiar with International Accounting Standards
("IAS") and, with the assistance from the Company's U.S. Auditors, has the
ability to translate all of the financial statements of the Company from
IAS to US GAAP.
The Company's prior auditor, Webb & Company P.A. (Florida) who performed
the audits of Starway for the years ended December 31, 2003 and 2002 has
been performing audits of companies located in China for four years. Webb &
Company used a correspondent firm in China to translate all the required
documents into English. Derek M. Webb performed the audits for December
2003 and 2002 in China over a period of two weeks in 2004. Mr. Brian Pybus,
the concurring reviewer, joined Mr. Webb at the end of the aud