UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





FORM 10-Q





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





For the quarterly period ended June 30, 2012





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





For the transition period __________ to __________





Commission File Number: 333-145910





SunSi Energies Inc.


(Exact name of registrant as specified in its charter)





Nevada

20-8584329(State or other jurisdiction ofincorporation or organization)

(IRS Employer Identification No.)





245 Park Avenue, 24th Floor

New York, New York

10167(Address of principal executive offices)

(Zip Code)





212-672-1786


(Issuer’s telephone number)





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





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





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.





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





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





State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 30,794,543 common shares as of August 14, 2012.













PagePART I – FINANCIAL INFORMATIONItem 1:
Financial Statements


3Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations


4Item 3:
Quantitative and Qualitative Disclosures About Market Risk


18Item 4:
Controls and Procedures


18PART II – OTHER INFORMATIONItem 1:
Legal Proceedings


19Item 1A:
Risk Factors


19Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds


19Item 3:
Defaults Upon Senior Securities


19Item 4:
Mine Safety Disclosures


19Item 5:
Other Information


19Item 6:
Exhibits


20





2





PART I - FINANCIAL INFORMATION





ITEM 1.       FINANCIAL STATEMENTS





Our unaudited financial statements included in this Form 10-Q are as follows:F-1
Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011F-2
Interim Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2012 and 2011F-3
Interim Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011F-4
Notes to Interim Unaudited Consolidated Financial Statements





3





SUNSI ENERGIES INC.


Consolidated Balance Sheets





June 30,


December 31,2012


2011(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
356,029


$
674,291Accounts receivable, net


3,516,584



3,773,556Notes receivable


78,700



559,325Inventory, net


536,793



657,287Prepaid expenses and other current assets


114,123



207,837Total current assets


4,602,229



5,872,296Investment in TransPacific Energy, Inc.


623,996



—Property, plant and equipment


7,676,501



7,890,132Goodwill


603,208



608,953Intangible assets, net


2,825,480



3,142,997Accounts receivable, net – non-current


324,363



—Related party receivables – trade


571,644



489,595Other assets


21,532



21,737Total assets

$
17,248,953


$
18,025,710LIABILITIES AND EQUITYCurrent liabilities:Accounts payable

$
3,507,373


$
3,333,500Accrued liabilities


429,695



373,802Loans payable


129,600



—Related party payables


5,608,575



5,665,245Income taxes payable


519,850



886,050Total current liabilities


10,195,093



10,258,597Long-term debt


100,000



100,000Total liabilities


10,295,093



10,358,597Commitments and contingencies


—



—Equity:SunSi Energies Inc. stockholders' equity:Preferred stock, $0.001 par value. 25,000,000 shares authorized; zero sharesissued and outstanding


—



—Common stock, $0.001 par value. 75,000,000 shares authorized; and 30,412,234 and 30,005,628 sharesissued and outstanding as of June 30, 2012 and December 31, 2011, respectively


30,412



30,006Additional paid-in capital


9,589,072



8,855,271Accumulated deficit


(4,782,127
)


(3,701,526
)Accumulated other comprehensive income


229,477



280,024Total SunSi Energies Inc. stockholders' equity


5,066,834



5,463,775Noncontrolling interests


1,887,026



2,203,338Total equity


6,953,860



7,667,113Total liabilities and equity

$
17,248,953


$
18,025,710





The accompanying notes are an integral part of the consolidated financial statements.




F-1





SUNSI ENERGIES INC.


Consolidated Statements of Operations and Comprehensive Loss (Unaudited)





Three Months Ended June 30,


Six Months Ended June 30,2012


2011


2012


2011Sales

$
526,590


$
10,129,024


$
1,034,217


$
15,630,387Cost of goods sold


513,219



8,304,477



988,544



13,291,393Gross margin


13,371



1,824,547



45,673



2,338,994Operating expenses:Professional fees


148,014



317,892



289,724



409,597General and administrative


823,282



1,217,596



1,428,401



1,388,135Total operating expenses


971,296



1,535,488



1,718,125



1,797,732Income (loss) from operations


(957,925
)


289,059



(1,672,452
)


541,262Other income (expense)Equity earnings (loss) from investment in TransPacfic Energy, Inc.


(1,211
)


—



(1,211
)


—Interest expense, net


(2,518
)


—



(4,768
)


—Total other income (expense)


(3,729
)


—



(5,979
)


—Income (loss) before income taxes


(961,654
)


289,059



(1,678,431
)


541,262Provision for income taxes (benefit)


(167,342
)


231,955



(281,518
)


348,350Net income (loss)


(794,312
)


57,104



(1,396,913
)


192,912Less: Net income (loss) attributable to noncontrolling interests


(178,244
)


140,470



(316,312
)


260,827Net loss attributable to SunSi Energies Inc. common shareholders

$
(616,068
)

$
(83,366
)

$
(1,080,601
)

$
(67,915
)Basic and diluted earnings (loss) per share

$
(0.02
)

$
(0.00
)

$
(0.04
)

$
(0.00
)Weighted-average number of common shares outstanding:Basic and diluted


30,115,174



29,570,104



30,067,901



29,032,783Comprehensive income (loss):Net income (loss)

$
(794,312
)

$
57,104


$
(1,396,913
)

$
192,912Foreign currency translation adjustment


(59,310
)


121,525



(50,547
)


161,533Comprehensive income (loss)


(853,622
)


178,629



(1,447,460
)


354,445Comprehensive income (loss) attributable to noncontrolling interests


(178,244
)


140,470



(316,312
)


260,827Comprehensive income (loss) attributable to SunSi Energies Inc.


(675,378
)


38,159



(1,131,148
)


93,618





The accompanying notes are an integral part of the consolidated financial statements.




F-2





SUNSI ENERGIES INC.


Consolidated Statements of Cash Flows (Unaudited)





Six Months Ended June 30,2012


2011Cash flows from operating activities:Net income (loss)

$
(1,396,913
)

$
192,912Adjustments to reconcile net income (loss) to cash used in operating activities:Depreciation and amortization


619,247



366,302Provision for doubtful account


389,874



—Provision for excess or obsolete inventory


(21,090
)


—Equity earnings (loss) from investment in TransPacific Energy, Inc.


1,211



—Common stock issued in exchange for services


24,000



114,192Changes in operating assets and liabilities:Accounts receivable


(493,392
)


(816,264
)Notes receivable


477,769



(1,223,460
)Inventory


135,964



(1,372,764
)Prepaid expenses and other current assets


92,346



78,023Related party receivables - trade


(112,110
)


(211,087
)Other assets


—



154,891Accounts payable


154,333



2,341,629Accrued liabilities


149,459



(181,081
)Income taxes payable


(359,663
)


34,803Net cash used in operating activities


(338,965
)


(521,904
)Cash flows from investing activities:Cash consideration for acquisition of business


(150,000
)


(445,075
)Cash acquired in acquisition of business


—



972,446Purchase of property, plant and equipment


(190,017
)


(344,774
)Purchase of intangible assets – land lease and use rights


—



(387,063
)Net cash provided by (used in) investing activities


(340,017
)


(204,466Cash flows from financing activities:Proceeds from issuance of common stock, net of issuance costs


195,000



774,000Proceeds from loans payable


129,600



—Proceeds from related party payables


40,000



387,233Net cash provided by financing activities


364,600



1,161,233Effect of exchange rates on cash and cash equivalents


(3,880
)


6,332Net increase (decrease) in cash and cash equivalents


(318,262
)


441,195Cash and cash equivalents at beginning of period


674,291



576,286Cash and cash equivalents at end of period

$
356,029


$
1,017,481Supplemental disclosure of cash flow information:Cash paid for interest

$
4,768


$
—Cash paid for income taxes

$
—


$
—Supplemental disclosure of non-cash investing and financing activities:Estimated beginning fair value of assets and liabilities received on consolidation:Assets acquired

$
—


$
16,013,998Liabilities assumed

$
—


$
(10,294,200
)Noncontrolling interests

$
—


$
(2,956,294
)Total net assets acquired

$
—


$
2,763,504Identified intangible assets on acquisitions

$
—


$
3,093,070Issuance of common stock related to acquisitions

$
475,207


$
5,354,109Stock issued to reduce accounts payable

$
40,000


$
—





The accompanying notes are an integral part of the consolidated financial statements.




F-3





SUNSI ENERGIES INC.


Notes to Interim Unaudited Consolidated Financial Statements


June 30, 2012


(Expressed in United States dollars)





1.
NATURE OF OPERATIONS





On January 30, 2007, SunSi Energies Inc. (“the Company” or “SunSi”) was incorporated in the State of Nevada. Through its operations based in the People’s Republic of China (“China” or “PRC”), SunSi is a manufacturer and distributor of the specialty chemical trichlorosilane (“TCS”). SunSi’s focus is to acquire and develop a portfolio of high quality TCS producing facilities and distribution rights that provide the potential for significant future growth and expansion. TCS is primarily used in the production of polysilicon; an essential raw material required in the production of solar cells for photovoltaic (“PV”) solar panels. A renewable energy source, PV panels convert solar radiation, or sunlight, into direct current electricity.





Prior to its December 8, 2010 acquisition of a 90% equity interest in Zibo Baokai Commerce and Trade Co., Ltd. (“Baokai”), SunSi was a Development Stage Company as defined by ASC Topic 915. Upon completion of this transaction, the Company emerged from development stage status and started generating revenues.





2.
SUMMARY OF  SIGNIFICANT ACCOUNTING POLICIES





Basis of Presentation and Principles of Consolidation





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





Change of Fiscal Year-End





On December 8, 2011, the Company changed its fiscal year-end to December 31 from May 31. This change has no impact on this Quarterly Report on Form 10-Q or on historical financial data shown within this Report.





Use of Estimates





The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company continually evaluates its estimates, including but not limited to those related to the valuation of accounts receivable, inventories, deferred income taxes, goodwill and intangible assets, and the estimation on the useful lives of property, plant and equipment. The Company bases its estimates on historical experience, known or expected trends and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.





The Company believes that the following critical accounting policies govern its more significant judgments and estimates used in the preparation of its consolidated financial statements:





F-4





Financial Instruments





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





As of June 30, 2012, $352,939 of the cash and cash equivalents were in banks in China; a Wendeng branch of Industrial & Commercial Bank of China and a Central District, Hong Kong branch of HSBC Bank. The remittance of these funds out of China is subject to exchange control restrictions imposed by the Chinese government. Deposits in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. Management believes the probability of a bank failure, causing loss to the Company, is remote.





Concentration of Credit Risk





Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At June 30, 2012 and December 31, 2011, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the United States, Hong Kong and the PRC, which management believes are of high credit quality.





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





Allowance for doubtful accounts





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





Bad debts are written off when identified. The Company extends unsecured credit to substantially all of its customers in the normal course of business. In many cases, this is necessary to remain competitive in the marketplace in which the Company operates. Potential customers for the Company’s products are finite in nature, and typically are larger, well capitalized companies. The Company does not accrue interest on aged trade accounts receivable as it is not a customary practice in the jurisdictions in which the Company operates. Historically, losses from uncollectible accounts have not significantly deviated from the specific allowance estimated by management. This specific provisioning policy has not changed since establishment and the management considers that the aforementioned specific provisioning policy is adequate and does not expect to change this established policy in the near future.





F-5





Inventory





Inventories are stated at the lower of cost or market value. Cost is determined on weighted average basis and includes all expenditures incurred in bringing the goods in a saleable condition to the point of sale. The Company’s inventory reserve requirements generally fluctuate based on projected demands and market conditions. In determining the adequate level of inventories to have on hand, management makes judgments as to the projected inventory demands as compared to the current or committed inventory levels. Inventory quantities and condition are reviewed regularly and provisions for excess or obsolete inventory are recorded based on the condition of inventory and the Company’s forecast of future demand and market conditions.





Intangible assets – land use rights





Land use rights are stated at cost less accumulated amortization. Amortization is provided using the straight-line method over the terms of 50 years. The lease term is obtained from the relevant PRC land authority.





Property, plant and equipment





Property, plant and equipment is stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.





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





Service life (year)


Estimated

residual rate

%


Annual

depreciation rate

%Building


20



5



2.05Furniture and equipment


5



5



3.17Machines and equipment


10



5



7.34Automotive equipment


5



5



10.93Office equipment


5



5



8.64





F-6





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





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





Construction in progress





The value of construction in progress comprises buildings and plants under construction, as well as machines and equipment being installed and commissioned, specifically comprises the costs of property, plant and equipment and other direct costs, relevant interest expenses accrued during the construction period and profits and losses from foreign exchange transactions.





Depreciation will not start until the construction in progress is completed and put into operation.





Impairment of Assets





The Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its long-lived assets, management performs an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining depreciation or amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows.





Each year, the Company performs a transitional test for impairment of goodwill and other indefinite-lived intangible assets. This test is performed by comparing, at the reporting unit level, the carrying value of goodwill to its fair value. The Company assesses fair value based upon its best estimate of the present value of future cash flows that it expects to generate by the reporting unit. In conjunction with its recent change in fiscal year-end, the Company’s annual fair value assessment is performed each December 31 on subsidiaries with material goodwill on their respective balance sheets. However, changes in expectations as to the present value of the reporting unit’s future cash flows might impact subsequent years’ assessments of impairment.





Goodwill and Intangible Assets





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





F-7





The impairment test involves a two-step approach. Under the first step, the Company determines the fair value of each reporting subsidiary to which goodwill has been assigned. The Company then compares the fair value of each reporting subsidiary to its carrying value, including goodwill. The Company estimates the fair value of each reporting subsidiary by estimating the present value of the reporting subsidiaries' future cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss.





Under the second step, the Company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit, as determined in the first step. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.





Income Taxes





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





The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We assess the validity of our conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit. We have determined that there were no uncertain tax positions for the periods ended June 30, 2012 and December 31, 2011.





Basic and Diluted Net Income (Loss) Per Share





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





Fair value of financial instruments





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





F-8





Revenue Recognition





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





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





Advertising expenses





Advertising costs are expensed as incurred.





Shipping and handling costs





All shipping and handling costs are included in cost of sales expenses.





Foreign Currency Translation





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





Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.





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





F-9





Comprehensive Gain or Loss





ASC 220,“Comprehensive Income”, establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As of June 30, 2012, the Company has items that represent comprehensive income and, therefore, has included a schedule of comprehensive income (loss) in the financial statements.





3.
THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS





Accounting Standards Updates through ASU 2012-02 which contain technical corrections to existing guidance or affect specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.





4.
ACCOUNTS RECEIVABLE, NET





Accounts receivable at June 30, 2012 and December 31, 2011 were comprised of the following:





June 30,

2012


December 31,

2011Trade receivables

$
4,254,465


$
3,799,420Allowance for doubtful accounts


(413,518
)


(25,864
)Total


3,840,947



3,773,556Less: Current portion


(3,516,584
)


(3,773,556
)Accounts receivable, non-current

$
324,363


$
—





At December 31, 2011, the Company established an allowance for doubtful accounts by recording a bad debt expense of $23,163 related to its trade accounts receivable. During the six months ended June 30, 2012, the Company increased its provision by recording a bad debt expense of $389,874.
 
 As of June 30, 2012, three customers accounted for approximately 10%, 38% and 49%, respectively, or approximately 97% of total accounts receivable. Additionally, one of these three customers accounted for 66% of the Company’s revenues for the six months ended June 30, 2012.





As of December 31, 2011, three customers accounted for approximately 11%, 22% and 65%, respectively, or approximately 98% of total accounts receivable.





F-10




5.
NOTES RECEIVABLE





Notes receivable at June 30, 2012 and December 31, 2011 were comprised of the following:





June 30,

2012


December 31,

2011Notes receivable

$
78,700


$
559,325Total

$
78,700


$
559,325





Notes receivable represent negotiable commercial paper which can be utilized to acquire new goods or to satisfy invoices due third parties in China.





6.
INVENTORY





Inventory at June 30, 2012 and December 31, 2011 was comprised of the following:





June 30,

2012


December 31,

2011Raw materials

$
185,457


$
187,224Finished goods


413,685



554,189Allowance for excess or obsolete inventory


(62,349
)


(84,126
)Total

$
536,793


$
657,287





At December 31, 2011, the Company established a provision for excess or obsolete inventory by recording a charge of $82,706 to cost of goods sold. The provision represented an adjustment from cost to the lower market value of trichlorosilane as determined by period sales. During the six months ended June 30, 2012, the Company recorded a decrease to its cost of goods sold of $21,090 and corresponding adjustment to its inventory allowance as the result of amounts realized from period sales.
 
 During the three months ended March 2012, the Company received inventory (polysilicon) as payment in lieu of cash for transportation services rendered to a third party. The inventory was recorded as finished goods at its fair value of $126,898. The Company recorded the resulting income in general and administrative expenses as an offset to the related service expense incurred.
 
 No other provisions for excess or obsolete inventory were made at June 30, 2012.





F-11





7.
PREPAID EXPENSES AND OTHER CURRENT ASSETS





Prepaid expenses and other current assets at June 30, 2012 and December 31, 2011 were comprised of the following:





June 30,

2012


December 31,

2011Advances to suppliers, net of allowance

$
88,528


$
46,632Prepaid expenses


24,568



157,222Other


1,027



3,983Total

$
114,123


$
207,837





Advances made to suppliers are for the purchase of raw materials which are expected to be recovered in one year. At December 31, 2011, the Company established a provision for doubtful accounts by recording a bad debt expense of $9,314 related to its advances to suppliers. No additional bad debt expense was recorded during the six months ended June 30, 2012. Prepaid expenses and other assets represent normal course prepayments made by the Wendeng segment.





8.
INVESTMENT IN TRANSPACIFIC ENERGY, INC.





On May 10 and May 17, 2012, the Company entered into two share exchange agreements (the “Agreements”) with shareholders of TransPacific Energy, Inc. (“TPE”) to acquire an aggregate controlling equity interest in TPE.TransPacific Energy is a high tech corporation focused on renewable energy that designs, builds, owns, operates, sells and installs proprietary modular Organic Rankine Cycles utilizing multiple refrigerant mixtures to maximize heat recovery and convert waste heat directly from industrial processes, solar and geothermal, biomass converting it into electrical energy.





On June 14, 2012, the Company paid $150,000 in cash and issued 251,432 shares of its common stock, valued at approximately$475,207 or $1.89 per share, in exchange for 7,920,130 shares of TPE’s common stock in accordance with the terms of the Agreements. The investment represents approximately a 31% equity interest in the common stock of TPE.





The Company accounts for its investment in TransPacific Energy as prescribed in ASC 323, “Investment — Equity Method and Joint Venture”.  Accordingly, the Company adjusts the carrying amount of its investment in TPE to recognize its share of earnings or losses. As of June 30, 2012, the Company’s recorded investment in TPE was $623,966. During the six months ended June 30, 2012, the Company recorded an equity loss from its investment in TPE of $1,211.




F-12




9.
PROPERTY, PLANT AND EQUIPMENT





Property, plant and equipment at June 30, 2012 and December 31, 2011 was comprised of the following:





June 30, 2012





December 31, 2011Accumulated


Net book





Accumulated


Net bookCost


Depreciation


Value


Cost


Depreciation


ValueBuilding

$
3,710,532


$
(240,110
)

$
3,470,422


$
3,745,873


$
(145,042
)

$
3,600,831Furniture and equipment


9,641



(1,771
)


7,870



9,733



(773
)


8,960Machinery and equipment


3,838,833



(516,588
)


3,322,245



3,875,396



(318,543
)


3,556,853Automotive equipment


318,608



(61,859
)


256,749



172,375



(33,685
)


138,690Office equipment


12,205



(2,536
)


9,669



11,558



(1,287
)


10,271Construction in Progress


609,546



—



609,546



574,527



—



574,527Total

$
8,499,365


$
(822,864
)

$
7,676,501


$
8,389,462


$
(499,330
)

$
7,890,132





Depreciation expense for the six months ended June 30, 2012 and 2011 totaled $329,917 and $203,879, respectively.





Differences may arise in the amount of depreciation expense reported in the Company's operating results as compared to the corresponding change in accumulated depreciation due to foreign currency translation. These translation adjustments are reflected in accumulated other comprehensive income, a separate component of the Company's stockholders' equity.





F-13





10.
BUSINESS COMBINATIONS





During the years ended December 31, 2011 and 2010, the Company completed acquisitions of equity interests in both Zibo Baokai Commerce and Trade Co., Ltd. and Wendeng He Xie Silicon Co., Ltd., respectively. These acquisitions were accounted for as business combinations under the acquisition method of accounting.





Acquisition of Zibo Baokai Commerce and Trade Co., Ltd





Description of Transaction





On December 8, 2010, SunSi HK acquired a 90% equity interest in Zibo Baokai Commerce and Trade Co., Ltd (“Baokai”) for cash consideration of $263,647. As part of the closing, Baokai was re-formed as a joint venture business under Chinese law and issued a new business license.





Founded in January 2008, Baokai is located in the city of Zibo in the Shandong province of the People’s Republic of China. Baokai maintains the right to distribute the trichlorosilane production of Zibo Baoyun Chemical Plant both domestically and internationally. Trichlorosilane (“TCS”), a chemical primarily used in the production of polysilicon, is an essential raw material used in the production of solar cells for photovoltaic panels which convert sunlight into electricity.





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





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





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





Consideration:Cash and cash equivalents

$
263,647Fair value of total consideration transferred


263,647Recognized amount of identifiable assets acquired and liabilities assumed:Total identifiable net assets

$
—Noncontrolling interest in Baokai


(29,294
)Goodwill


292,941$
263,647





F-14





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





The following summarizes unpaid purchase consideration included in the accompanying Balance Sheet at June 30, 2012 and December 31, 2011:





June 30,

2012


December 31,

2011Purchase consideration related to the Baokai acquisition, unpaid and accrued

$
163,647


$
163,647





Acquisition of Wendeng He Xie Silicon Co., Ltd





Description of Transaction





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





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





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





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





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





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





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





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





F-15





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





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





Consideration:Cash and cash equivalents

$
445,075Common stock, 1,574,566 shares of SunSi common stock (1)


2,645,271Redeemable common stock, 1,349,628 shares of SunSi common stock (2)


2,708,838Fair value of total consideration transferred

$
5,799,184Recognized amount of identifiable assets acquired and liabilities assumed:Financial assets

$
3,613,721Inventory


473,354Other current assets


309,329Related party receivables


1,131,548Property, plant and equipment


7,392,976Identifiable intangible assets:Land use leasehold


1,559,070Customer relationships


1,534,000Financial liabilities


(10,294,200
)Total identifiable net assets


5,719,798Noncontrolling interest in Wendeng


(2,927,000
)Goodwill


3,006,386$
5,799,184





(1)
The $1.68 per share price was determined by reference to recent private placement shares issued, less a discount for marketability. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820.(2)
Represents the redeemable option price granted by SunSi to the shareholder.





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





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





F-16





Below is a summary of the methodologies and significant assumptions used in estimating the fair value of intangible assets and noncontrolling interests.





●
Intangible assets— The fair value of the acquired intangible assets was determined using a variety of valuation approaches. In estimating the fair value of the acquired intangible assets, the Company utilized the valuation methodology determined to be most appropriate for the individual intangible asset being valued as described below. The acquired intangible assets include the following:





Valuation

Method (2)

Estimated

Fair Value


Estimated

Useful Lives (1)(in years)Cu     Customer relationships
Multi-Period Excess Earnings

$
1,534,000



3





(1)
Determination of the estimated useful lives of the individual categories of intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with definite lives is recognized over the shorter of the respective lives of the agreement or the period of time the assets are expected to contribute to future cash flows.





(2)
The multi-period excess earnings method estimates an intangible asset’s value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The value attributed to these intangibles was based on projected net cash inflows from existing contracts or customer relationships. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820.





Some of the more significant estimates and assumptions inherent in determining the fair value of the customer relationships are associated with forecasting cash flows and profitability. The primary assumptions used were generally based upon the present value of anticipated cash flows, assuming a three year customer attrition rate, discounted to present value at a 25% rate.





●
Noncontrolling interests— The fair value of the noncontrolling interests of $2.9 million was estimated by applying the income approach. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820. Key assumptions include (i) a compound annual sales growth rate of 33% for the five year period after the measurement date, (ii) a weighted average cost of capital of 19%, (iii) a terminal value based on a long-term sustainable growth rate of 3.5% and (iv) adjustments for lack of control and lack of marketability that market participants would consider when estimating the fair value of the noncontrolling interest in Wendeng.





F-17





11.
GOODWILL AND  INTANGIBLE ASSETS, NET





The carrying amount of goodwill at June 30, 2012 and December 31, 2011 was comprised of the following:





June 30,

2012


December 31,

2011Goodwill – Wendeng He Xie Silicon Co., Ltd

$
583,183


$
583,183Foreign currency translation adjustments


20,025



25,770Goodwill, net

$
603,208


$
608,953





Intangible assets at June 30, 2012 and December 31, 2011 were comprised of the following:





June 30, 2012

December 31, 2011Amortization

Gross





Net


Gross





NetPeriod

Carrying


Accumulated


Book


Carrying


Accumulated


Book(Years)

Amount


Amortization


Value


Amount


Amortization


ValueIntangible assets subject to amortization:Customer relationships

3.0

$
1,586,675


$
(683,152
)

$
903,523


$
1,601,787


$
(419,105
)

$
1,182,682Land leasehold and use rights

50.0


1,972,033



(50,076
)


1,921,957



1,990,816



(30,501
)


1,960,315Total



$
3,558,708


$
(733,228
)

$
2,825,480


$
3,592,603


$
(449,606
)

$
3,142,997





Amortization expense for intangible assets subject to amortization for the six months ended June 30, 2012 and 2011 totaled $289,330 and $162,423, respectively.





Differences may arise in the amount of amortization expense reported in the Company's operating results as compared to the corresponding change in accumulated depreciation due to foreign currency translation. These translation adjustments are reflected in accumulated other comprehensive income, a separate component of the Company's stockholders' equity.





F-18





12.
RELATED PARTY RECEIVABLES - TRADE





Related party receivables were comprised of the following at June 30, 2012 and December 31, 2011:





June 30,

2012


December 31,

2011Wendeng Huahai Chemical Co., Ltd.

$
571,644


$
489,595Total

$
571,644


$
489,595





The amount represents trade receivables due from a related party; an entity in which a shareholder of the Company maintains an equity interest. The receivable is interest-free, unsecured and payable in accordance with the Company’s standard trade terms.





13.
OTHER ASSETS





Other assets were comprised of the following at June 30, 2012 and December 31, 2011:





June 30,

2012


December 31,

2011Deposit – Department of Extra budgetary Fund, Wendeng

$
21,532


$
21,737Total

$
21,532


$
21,737





F-19





14.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts payable and accrued liabilities were comprised of the following at June 30, 2012 and December 31, 2011:





June 30,

2012


December 31,

2011Accounts payable

$
3,507,373


$
3,333,500Accrued liabilities


429,695



373,802Total

$
3,937,068


$
3,707,302





Accounts payable and accrued liabilities primarily represent trade payables of the Company’s Chinese operating subsidiaries.





15.
LOANS PAYABLE





Loans payable at June 30, 2012 and December 31, 2011 were comprised of the following:





June 30,

2012


December 31,

2011Loans payable

$
129,600


$
—Total

$
129,600


$
—





On May 1, 2012, the Company executed a letter agreement with a third party lender whereby it could borrow up to $100,000 Canadian dollars if needed. All borrowings under the agreement are unsecured, bear interest at a rate of 10% annually and mature effective December 31, 2012. In May and June 2012, the Company received proceeds aggregating $79,600 from the lender under the agreement; all of which remained unpaid at June 30, 2012.





On June 12, 2012, the Company received loan proceeds totaling $50,000 from a demand note entered into with a third party lender. All borrowings on the note are unsecured, bear interest at a rate of 12% annually and are payable on demand.




F-20




16.
RELATED PARTY PAYABLES





Related party payables were comprised of the following at June 30, 2012 and December 31, 2011:





June 30,

2012


December 31,

2011Advances from minority shareholder of noncontrolling interest (Wendeng)

$
5,404,928


$
5,501,598Purchase consideration due minority shareholder of noncontrolling interest (Baokai)


163,647



163,647Advances from officer


40,000



—Total

$
5,608,575


$
5,665,245





The minority shareholder of the Company’s Wendeng subsidiary made a series of advances, both pre and post-acquisition, to fund capital expenditures and plant expansion. These advances were made on an interest-free basis, are unsecured and payable on demand. Additionally, an officer of SunSi made a series of advances to fund working capital. These advances were also made on an interest-free basis, are unsecured and payable on demand.





The amount due to the minority shareholder of its Baokai subsidiary represents unpaid purchase consideration from the Company’s December 8, 2010 acquisition (see “Note 10 – Business Combinations”). This amount bears no interest, is unsecured and payable on demand.





17.
INCOME TAXES





Income taxes payable were comprised of the following at June 30, 2012 and December 31, 2011:





June 30,

2012


December 31,

2011United States income taxes payable

$
—


$
—Foreign income taxes payable


519,850



886,050Total

$
519,850


$
886,050




F-21





Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has incurred a net operating loss of approximately $2,790,000 which expires in 2031. Pursuant to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. Potential benefit of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.





As a result of operations recorded at Baokai and Wendeng located in China, the Company recorded a net tax benefit of $281,518 for the six months ended June 30, 2012 based upon their estimated effective tax rates. Pursuant to the new PRC’s enterprise income tax (“EIT”) law, the Company is subject to EIT at the statutory rate of 25%. Income taxes in the statements of operations and comprehensive income (loss) represent current taxes for the periods ended June 30, 2012 and 2011. The effective income tax rate has no material difference with the PRC statutory income tax rate of 25% for the periods ended June 30, 2012 and 2011.





The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provision of FASB ASC 740. The Company has recorded no deferred tax assets or liabilities as of June 30, 2012 and December 31, 2011, since nearly all differences in tax basis and financial statement carrying values are permanent differences.





The tax years 2009 through 2011 remain open to examination by federal authorities and state jurisdictions where the Company operates.





18.
DEBT





Debt was comprised of the following at June 30, 2012 and December 31, 2011:





June 30,

2012


December 31,

20119% Unsecured, convertible debenture

$
100,000


$
100,000Loan discount on unsecured, convertible debenture


—



—Total debt


100,000



100,000Less: Current portion


—



—Long term debt

$
100,000


$
100,000





F-22





The following table summarizes the issuance of all unsecured, convertible debentures during the six month period ended June 30, 2012 and year ended December 31, 2011:





Issue Date

Interest Rate

Face Value

Maturity Date

Conversion Rate of

Face Value to Common Shares10/15/2011

9%

$
100,000

10/15/2014

0.25Total



$
100,000





On October 15, 2011, the Company completed the private placement of an unsecured, convertible debenture in the amount of $100,000. The debenture carries an interest rate of 9% per annum, payable semiannually each April 15 and October 15, for a three-year term with a fixed conversion price of $4.00 per share, or 25,000 shares of the Company’s common stock.





No debt was issued prior to October 15, 2011.





19.
STOCKHOLDERS’ EQUITY





SunSi is authorized to issue 75,000,000 shares of common stock at a par value of $0.001 and had 30,412,234 and 30,005,628 shares of common stock issued and outstanding as of June 30, 2012 and December 31, 2011, respectively.





Beginning September 10, 2009, the Company conducted a private placement of its common stock at a price of $2.00 per share and a maximum issuance of 8,000,000 shares. The offer and sale of these securities was exempt from registration under the Securities Act of 1933 pursuant to Rule 506 of Regulation D. As such, all common shares issued under this private placement are restricted and subject to a minimum six month holding period. During the year ended December 31, 2011, the Company accepted subscription agreements from investors pursuant to this offering and issued 917,500 shares of its common stock for gross proceeds totaling $1,875,000. The cost of these issuances was $187,500.




On September 5, 2011, the Company closed this offering and commenced a new offering of 3.0 million shares at $3.00 per share. In October 2011, the Company accepted a subscription agreement from an investor for 40,000 shares of its common stock pursuant to this new offering. At December 31, 2011, the Company had received $120,000 in gross proceeds and incurred issuance costs of $12,000 as a result of the offering. In February, 2012, the Company issued an additional 20,000 shares of its common stock to the investor as a result of the offering amendment described below.




In February 2012, the Company amended this offering by reducing the share price from $3.00 to $2.00 per share. Since the amendment, the Company accepted subscription agreements from investors and issued 25,000 shares of its common stock for gross proceeds totaling $50,000. The cost of these issuances was $5,000. Additionally, the Company accepted subscription agreements from two of its officers and issued 75,000 shares of its common stock for gross proceeds totaling $150,000. The purchase of these shares is consistent with the terms of the Company’s private placement described above. There was no cost associated with the officer issuances.





During the six month period ended June 30, 2012, the Company issued 20,000 shares of its common stock valued at $2.00 per share in lieu of cash to settle outstanding accounts payable aggregating $40,000. Furthermore, the Company issued 15,174 shares of its common stock valued at $24,000, or approximately $1.58 per share, to its three independent directors in accordance with their board compensation agreements.





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





F-23





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





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





On June 14, 2012, the Company exchanged 251,432 shares of its common stock in connection with its equity investment in TransPacific Energy, Inc. (see “Note 8 – Investment in TransPacific Energy, Inc”).





20.
COMMITMENTS





SunSi entered into various engagement agreements for advisory and consulting services on a non-exclusive basis to obtain equity capital. In the event that the Company completes a financing from a funding source provided by one of the consultants, then such consultant will receive a finders or referral fee at closing ranging from seven percent (7%) to ten percent (10%) of the amount received by the Company. The terms and condition of financing are subject to Company approval.


On November 10, 2009, the Company entered into an agreement to pay its Director of Business Development an annual amount of $60,000 plus any documented out of pocket business expenses. On May 15, 2009, the Company entered into an agreement to pay its Head Representative in China an annual amount of $60,000. On February 9, 2010, the Company entered into an agreement to pay its Chief Executive Officer an annual amount of $60,000 plus any documented out of pocket business expenses.


21.
SEGMENT INFORMATION





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





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





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





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





F-24





Segment Results





The following table sets forth operations by segment for the three and six months ended June 30, 2012 and 2011:


Three Months Ended June 30,


Six Months Ended June 30,2012


2011


2012


2011Sales:Baokai

$
527,052


$
5,516,328


$
762,011


$
9,762,245Wendeng


(462
)


4,612,696



272,206



5,868,142Corporate


—



—



—



—Total

$
526,590


$
10,129,024


$
1,034,217


$
15,630,387Cost of goods sold:Baokai

$
516,511


$
5,385,315


$
746,771


$
9,545,379Wendeng


(3,292
)


2,919,162



241,773



3,746,014Corporate


—



—



—



—Total

$
513,219


$
8,304,477


$
988,544


$
13,291,393Gross margin:Baokai

$
10,541


$
131,013


$
15,240


$
216,866Wendeng


2,830



1,693,534



30,433



2,122,128Corporate


—



—



—



—Total

$
13,371


$
1,824,547


$
45,673


$
2,338,994Operating expenses:Baokai

$
110,836


$
37,148


$
110,836


$
37,148Wendeng


571,903



1,151,470



1,060,909



1,200,337Corporate


288,557



346,870



546,380



560,247Total

$
971,296


$
1,535,488


$
1,718,125


$
1,797,732Other income (expense):Baokai

$
—


$
—


$
—


$
—Wendeng


—



—



—



—Corporate


(3,729
)


—



(5,979
)


—Total

$
(3,729
)

$
—


$
(5,979
)

$
—Provision for income taxes:Baokai

$
(25,074
)

$
23,466


$
(23,899
)

$
44,929Wendeng


(142,268
)


208,489



(257,619
)


303,421Corporate


—



—



—



—Total

$
(167,342
)

$
231,955


$
(281,518
)

$
348,350Net income (loss):Baokai

$
(75,221
)

$
70,399


$
(71,697
)

$
134,789Wendeng


(426,805
)


333,575



(772,857
)


618,370Corporate


(292,286
)


(346,870
)


(552,359
)


(560,247
)Total

$
(794,312
)

$
57,104


$
(1,396,913
)

$
192,912
 
 Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported. The negative sales amount reported by the Company’s Wendeng segment during the three month period ended June 30, 2012 is attributable to foreign currency translation adjustments as it did not record any sales during the period. Furthermore, the negative cost of goods sold amount reported by the Wendeng segment is as a result of an adjustment to its provision for excess or obsolete inventory offet in part by actual expenses realized.


F-25





Total Assets





The following table sets forth the total assets by segment at June 30, 2012 and December 31, 2011:





Total assets by segment:

June 30,

2012


December 31,

2011Baokai

$
1,606,468


$
840,280Wendeng


14,990,484



16,986,030Corporate


652,001



199,400Total

$
17,248,953


$
18,025,710





Goodwill, Intangible and Long-Lived Assets





The following table sets forth the carrying amount of goodwill by segment at June 30, 2012 and December 31, 2011:





Goodwill by segment:

June 30,

2012


December 31,

2011Baokai

$
—


$
—Wendeng


603,208



608,953Corporate


—



—Total

$
603,208


$
608,953





The following table sets forth the carrying amount of intangible assets by segment at June 30, 2012 and December 31, 2011:





Intangible assets by segment:

June 30,

2012


December 31,

2011Baokai

$
—


$
—Wendeng


2,825,480



3,142,997Corporate


—



—Total

$
2,825,480


$
3,142,997





The following table sets forth the carrying amount of property, plant and equipment by segment at June 30, 2012 and December 31, 2011:





Property, plant and equipment by segment:

June 30, 2012


December 31, 2011Baokai

$
—


$
—Wendeng


7,676,501



7,890,132Corporate


—



—Total

$
7,676,501


$
7,890,132





F-26





Amortization expense for Wendeng totaled $289,330 for the six months ended June 30, 2012. Depreciation expense for Wendeng totaled $329,917 for the six months ended June 30, 2012. Capital expenditures for Wendeng totaled $190,017 during the six months ended June 30, 2012. Baokai did not record any depreciation or amortization expense, nor did it incur any capital expenditures during the six months ended June 30, 2012.




Customer information





For the six month period ended June 30, 2012, one customer accounted for 89% of Baokai's sales and one customer accounted for 100% of Wendeng’s sales.





For the six month period ended June 30, 2011, one customer accounted for approximately 99% of Baokai's sales. For the six month period ended June 30, 2011, three customers accounted for approximately 84% of Wendeng’s sales. Concentration levels for these three customers were 13%, 34% and 37% of Wendeng’s total sales. No other customer accounted for more than 10% of either segment’s revenue for six months ended June 30, 2012.





At June 30, 2012, one customer accounted for approximately 95% of Baokai’s accounts receivable. At June 30, 2012, two customers accounted for approximately 99% of Wendeng’s accounts receivable. Concentration levels for these two customers were 17% and 82% of Wendeng’s total trade receivables. No other single customer accounted for 10% or more of either segment’s trade accounts receivable at June 30, 2012.





Geographic Information





All of the Company’s long-lived assets are located in the People’s Republic of China. During the six months ended June 30, 2012 and 2011, all of the Company’s sales as determined by shipping destination were located within the People’s Republic of China.





22.
DEFINED CONTRIBUTION PLAN





Pursuant to the relevant PRC regulations, the Company is required to make contributions at a rate of 28% of employees’ salaries and wages to a defined contribution retirement plan organized by a state-sponsored social insurance plan in respect of the retirement benefits for the Company’s employees in the PRC. The only obligation of the Company with respect to the retirement plan is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in the future years. The defined contribution plan contributions were charged to the statements of operations. The Company contributed $11,710 for the six month period ended June 30, 2012.





23.
SUBSEQUENT EVENTS





Since June 30, 2012, the Company has accepted various subscription agreements for 550,000 shares of its common stock from investors under its private placement and received $1,100,000 in gross proceeds. The Company has not yet issued 210,000 of these shares.





On July 5, 2012, the Company repaid the principal amount totaling $50,000 on its demand note payable (see “Note 15 – Loans Payable”).





In July and August 2012, the Company increased its investment in TPE to approximately 51% (a controlling interest) by investing an additional $370,000 in cash and exchanging 218,318 shares of its common stock valued at approximately $490,018 pursuant to the terms of the acquisition agreement (see “Note. 8 – Investment in TransPacific Energy, Inc.”). The Company has not yet issued 189,447 of these shares.
 
 The Company has evaluated subsequent events from the balance sheet through the date the financial statements were issued, and determined there are no other events to disclose.





F-27





ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Forward-Looking Statements





Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Some of the factors that could cause results or events to differ materially from current expectations include, but are not limited to: general economic, market or business conditions; general stock market performance; the performance of the solar energy industry in general; increasingly competitive environment; changing regulatory conditions or requirements; changing government incentive programs for solar energy projects; changing alternative energy technologies; the price of TCS sold within China and outside of China; the price of, and demand for, polysilicon; the price of, and demand for, solar PV panels; the level of production by the Wendeng factory; Baokai's success in attaining new clients under its TCS distribution agreement; the decision by potential investors who have signed subscription agreements not to pay for such SunSi common shares; the decision by the NASDAQ Capital Market to reject the Company's application for listing; our ability to successfully manage a business in China; the re-opening of our Wendeng facility; that Wendeng is one of the lowest cost producers of TCS and that we will emerge as one of the strongest TCS manufacturers in late 2012; and that Wendeng is one of the few remaining stand-alone TCS makers that can still produce TCS at current market pricing levels. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.


Overview





SunSi Energies is a company whose products focus on the energy industry as well related synergistic products.SunSi is also a significant producer of trichlorosilane (“TCS”) in China. TCS is a chemical primarily used in the production of polysilicon, which is an essential raw material in the production of solar cells for PV panels that convert sunlight to electricity. TCS is considered to be the first product in the solar PV value chain before polysilicon, and is also the principal source of ultrapure silicon in the semiconductor industry. SunSi currently owns 45% of TransPacific Energy, Inc. (“TPE”), a U.S. based renewable energy technology provider, and expects to acquire controlling interest by late August 2012. TPE’s technology uses proprietary multiple component fluids that are environmentally sound, non-toxic and non-flammable. Custom formulated mixtures efficiently capture and convert heat directly from the heat source at temperatures ranging from 100 °F to 1000 °F. TPE’s technology offers applications at broader temperature ranges than other energy recovery systems. TPE’s systems in certain applications reduce operating and maintenance costs and significantly improves return on capital expenditures; thus making the purchase of waste heat recovery systems that previously yielded nominal savings, economically viable.





4





Acquisition of Zibo BaokaiCommerce and Trade Co. Ltd.





On December 8, 2010, SunSi Energies Hong Kong Limited (“SunSi HK”) acquired 90% of Zibo Baokai Commerce and Trade Co. Ltd.(“Baokai”) for $263,647, an acquisition which gave us the exclusive domestic and international distribution rights to 100% of the production of trichlorosilane from Zibo BaoyunChemical Plant (“ZBC”); however, we did not acquire any interest or ownership position in the ZBC factory. ZBC has an annual production capacity of 25,000 metric tons (“MT”).





As part of the Baokai distribution rights, ZBC agreed to sell Baokai all of its TCS production at a price of cost, plus a 10% to 15% mark-up depending on the nature of the sale. By mutual agreement with ZBC, Baokaiwill earn a profit margin of 2% on these sales because the sales came from existing customers of ZBC and from the efforts of the ZBC sales force.





Baokai has one client which comprised approximately 97% of their sales for the six month period ended June 30, 2012. The facility is easily accessible via rail and major highways, in addition to being well equipped for handling chemical products. We believe we can expand Baokai’s client base in the future, although there can be no assurances.





Acquisition of Wendeng He Xie Silicon Co. Ltd





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





5





As of March 18, 2011, Wendeng had a production capacity of approximately 20,000 MT tons of Trichlorosilane. As a result of closing the Wendeng Acquisition, SunSi began to immediately consolidate all of Wendeng’s revenues, and 60% of its profits. In October 2011, we expanded Wendeng’s production capacity to 30,000 MT.





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





TCS Market and our Future Strategy





During calendar year 2011, the world polysilicon prices decreased approximately 60% as the top five producers more than doubled output, according to data compiled by Bloomberg News. Polysilicon sold for as much as $400 per kilogram (“kg”) approximately four years ago and as recently as August 2011 was selling for $55 per kg. For the week ended August 8, 2012, the polysilicon spot price averaged approximately $21.00 per kg. As a result of historically low prices for polysilicon in November and December of 2011, about 90 percent of China’s polysilicon plants, comprising half of the country’s production suspended output in November and December according to the China Nonferrous Metals Industrial Association, which acts as a conduit between industry and government. This oversupply situation has continued throughout 2012 with an estimated 50-80% of China’s polysilicon capacity currently idle.





Since November 2011, the low price of polysilicon coupled with the significant oversupply of polysiliconhas had a material adverse impact on the price that we could sell TCS for and the level of plant utilization at Wendeng and our exclusive supplier to Baokai, ZBC. This has negatively impacted our revenues and results of operations. Due to the current polysilicon oversupply situation we believe that an industry consolidation is occurring where we will emerge as one of the strongest entities and lowest cost producers. The ZBC facility which supplies TCS for Baokai has been open for portions of 2012. Our Wendeng facility has been closed since December 2011. We had expected Wendeng to open in 2012; however, the ongoing low pricing of polysilicon and the dumping of polysilicon inventories below cost by many polysilicon companies in order to generate cash flow has resulted in low price bids from our customers to supply them TCS at levels which would not enable us to operate profitably. Currently during the shutdown period, the Baokai distribution segment is at a breakeven level because we are not incurring any significant marketing or business development expenses directly associated with Baokai operations.





6





During 2012, our cash operating losses at Wendeng were approximately $20,000per month. These losses are significantly less than the loss we would have incurred by producing TCS and selling it at the market price during 2012. Therefore, our operating losses were lower by staying closed rather than manufacturing TCS at a significantly higher loss.





Our Wendeng facility has sold some of its existing inventory during 2012 at a loss; however, it has not manufactured any TCS during 2012. In early August 2012, Wendeng received a firm order to produce 1000 MT of TCS at price of approximately $635 per MT. This price will enable Wendeng to manufacture at a cash profit. Wendeng has signed a firm commitment with the buyer of this TCS and is contractually required to deliver it at the agreed upon price. As a result, Wendeng has recalled its employees and is preparing to open the factory at the end of August or in early September 2012. Additionally, as a result of this order Wendeng will produce an additional 500 metric tons of TCS during September 2012 to fill a small backlog of existing orders from small clients. Wendeng management believes it can maintain sales of 1,500 MT per month for the immediate future because it believes the current buyer of the 1,000 MT will purchase this quantity each month for the immediate future. We believe that Wendeng is one of the few remaining TCS producers in China that can produce TCS at these price levels and make a cash profit (excluding depreciation expense on equipment) on TCS production. There can be no assurances that Wendeng can maintain these levels of sales in subsequent months or that the price of polysilicon will not continue to fall.


Acquisition of TransPacific Energy, Inc.





On May 10 and May 17, 2012, we entered into two share exchange agreements with shareholders of TransPacific Energy, Inc. (“TPE”), respectively, to purchase an aggregate controlling equity interest in TPE.





TPE is a high tech corporationfocused on renewable energy that designs, builds, owns, operates, sells and installs proprietary modular Organic Rankine Cycles(“ORC”) utilizing multiple refrigerant mixtures to maximize heat recovery and convert waste heat directly from industrial processes, solar and geothermal, biomass converting it into electrical energy. TPE technology can also be utilized as an alternative to cooling towers, steam condensers and use heat released to efficiently generate electricity with air cooled or water cooled condensers. TPE converts waste heat into clean electricity using multi component fluids environmentally sound non-toxic, non-flammable, in contrast to the typical Organic Rankine Cycle that uses binary cycles and organic fluids such as pentane, isobutene, butane, propane and ammonia instead of water. Other applications include solar, geothermal energy as well as warm ocean waters.





Potential applications include any process that generates waste heat/flue gas such as industrial smokestacks, landfills, geothermal, solar, landfills, garbage incinerators, warm ocean waters and many other applications. For example, TPE is now bidding on an ORC application/TPE fluids for a huge data room in China where computers throw off heat and want to re-cycle it into clean electricity at a lower cost than can be purchased from the utility/grid.





According to the International Energy Agency (“IEA”) electricity demand is expected to double by 2030 and by then $11 trillion is expected to be spent worldwide on energy infrastructure; with there newable energy segment that TPE operates in, expected to be a $500 billion component by 2017.





The first share exchange agreement was entered into between SunSi, TPE and its shareholders ABH Holdings, LLC, Acme Energy, Inc., and Apela Holdings LLC, pursuant to which SunSi agreed to purchase from such shareholders 11,667,101 shares of the total 31,543,336 outstanding shares of TPE. The TPE shares being sold to SunSi are valued at $0.06 per share and the SunSi consideration for such TPE shares shall be shares of SunSi common stock valued at the price equal to the 30 day weighted-average closing trading price of SunSi’s common stock as quoted on the OTCQB or NASDAQ immediately prior to the respective closing date. The first closing was scheduled to occur at such time SunSi purchased from TPE an additional $150,000 in the common stock of TPE, payable in cash, which had to occur prior to June 15, 2012, and thereafter, there may occur a subsequent closing at each time SunSi purchases an additional $100,000 of TPE common stock, until a final closing at such time as SunSi has purchased a total of $500,000 of TPE common stock, which must occur prior to September 30, 2012. All purchases of TPE common stock there under are priced at $0.06 per share.





7





The second share exchange agreement was entered into between SunSi and Soffimat Holdings SA, a shareholder of TPE, pursuant to which SunSi shall purchase from such shareholder 4,420,000 shares of TPE common stock. This transaction was scheduled to occur before June 15, 2012.





As of June 30, 2012 the Company was in compliance with all terms of each agreement and had paid TPE $150,000 and had exchanged 251,432 of its shares valued at $1.89 per share in return for approximately a 31% interest in TPE. Subsequent to June 30, 2012, the Company increased its ownership percentage to approximately 45% and expects to gain controlling interest (over 50%) in August 2012.





Results of Operations for the three and six months ended June 30, 2012 and 2011





In December 2010 and March 2011, we completed the acquisitions of our Baokai and Wendeng subsidiaries, respectively. As a result, we emerged from Development Stage Company as defined by ASC Topic 915 and began to generate revenue from our operations. Comparisons between the three and six months ended June 30, 2012 and 2011 may not be indicative of current trends.





Segment Results





The following table sets forth operations by segment for the three and six months ended June 30, 2012 and 2011:
 
 Three Months Ended June 30,


Six Months Ended June 30,2012


2011


2012


2011Sales:Baokai

$
527,052


$
5,516,328


$
762,011


$
9,762,245Wendeng


(462
)


4,612,696



272,206



5,868,142Corporate


—



—



—



—Total

$
526,590


$
10,129,024


$
1,034,217


$
15,630,387Cost of goods sold:Baokai

$
516,511


$
5,385,315


$
746,771


$
9,545,379Wendeng


(3,292
)


2,919,162



241,773



3,746,014Corporate


—



—



—



—Total

$
513,219


$
8,304,477


$
988,544


$
13,291,393Gross margin:Baokai

$
10,541


$
131,013


$
15,240


$
216,866Wendeng


2,830



1,693,534



30,433



2,122,128Corporate


—



—



—



—Total

$
13,371


$
1,824,547


$
45,673


$
2,338,994Operating expenses:Baokai

$
110,836


$
37,148


$
110,836


$
37,148Wendeng


571,903



1,151,470



1,060,909



1,200,337Corporate


288,557



346,870



546,380



560,247Total

$
971,296


$
1,535,488


$
1,718,125


$
1,797,732Other income (expense):Baokai

$
—


$
—


$
—


$
—Wendeng


—



—



—



—Corporate


(3,729
)


—



(5,979
)


—Total

$
(3,729
)

$
—


$
(5,979
)

$
—Provision for income taxes:Baokai

$
(25,074
)

$
23,466


$
(23,899
)

$
44,929Wendeng


(142,268
)


208,489



(257,619
)


303,421Corporate


—



—



—



—Total

$
(167,342
)

$
231,955


$
(281,518
)

$
348,350Net income (loss):Baokai

$
(75,221
)

$
70,399


$
(71,697
)

$
134,789Wendeng


(426,805
)


333,575



(772,857
)


618,370Corporate


(292,286
)


(346,870
)


(552,359
)


(560,247
)Total

$
(794,312
)

$
57,104


$
(1,396,913
)

$
192,912
 
 Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported. The negative sales amount reported by our Wendeng segment during the three month period ended June 30, 2012 is attributable to foreign currency translation adjustments as it did not record any sales during the period. Furthermore, the negative cost of goods sold amount reported by the Wendeng segment is as a result of an adjustment to its provision for excess or obsolete inventory offet in part by actual expenses realized.




8





Revenue





Sales for the three months ended June 30, 2012 totaled $526,590, compared to $10,129,024 for the three months ended June 30, 2011. Sales for the three months ended June 30, 2012 and 2011 were comprised of $527,052 and $5,516,328, respectively, from our Baokai segment and ($462) and $4,612,696, respectively, from our Wendeng segment. The negative sales amount reported by our Wendeng segment during the three month period ended June 30, 2012 is attributable to foreign currency translation adjustments as it did not record any sales during the period. All sales during these periods were recorded within China.





Sales for the six months ended June 30, 2012 totaled $1,034,217, compared to $15,630,387 for the six months ended June 30, 2011. Sales for the six months ended June 30, 2012 and 2011 were comprised of $762,011 and $9,762,245, respectively, from our Baokai segment and $272,206 and $5,868,142, respectively, from our Wendeng segment. All sales during these periods were recorded within China.





The price of TCS in China is typically based on short-term contracts and spot prices; enabling both the buyer and the seller to adapt to changing market conditions. During 2011, the price of TCS ranged from a high of approximately $1,600 per metric ton to a low of approximately $635 per metric ton. This decline in TCS pricingwas consistent with the decrease in the price of polysilicon, which fell approximately 50%-60% from January 2011. Furthermore, a global oversupply of polysilicon has continued to materially reduce both the price and demand for TCS since the fourth quarter 2011. These factors have adversely impacted our Chinese subsidiaries’ operating results.





As of August 2012, the spot price of TCS in China was approximately $635 per metric ton.In early August 2012, Wendeng received a firm order to produce 1000 MT of TCS at price of approximately $635 per MT. This price will enable Wendeng to manufacture at a cash profit. Wendeng has signed a firm commitment with the buyer of this TCS and is contractually required to deliver it at the agreed upon price. Wendeng’s management believes it can maintain sales of 1,500 MT per month for the immediate future because it believes the current buyer of the 1,000 MT will purchase this quantity each month for the immediate future. There can be no assurances that Wendeng can maintain these levels of sales in subsequent months.





Gross Margin





We calculate gross margin by subtracting cost of goods sold from sales. Gross margin percentage is calculated by dividing gross margin by sales.





Gross margin for the three months ended June 30, 2012 was $13,371, compared to $1,824,547 for the three months ended June 30, 2011. Gross margin percentage for the three months ended June 30, 2012 was 2.5%, compared to 18.0% for the three months ended June 30, 2011.





Gross margin for the six months ended June 30, 2012 was $45,673, compared to $2,338,994 for the six months ended June 30, 2011. Gross margin percentage for the six months ended June 30, 2012 was 4.4%, compared to 15.0% for the six months ended June 30, 2011.





The decrease in gross margin is primarily attributable to the decreased level of sales and sales prices realized compared to the prior year periods. Our gross margin and gross margin percentage continue to be adversely impacted by the low price levels and demand for polysilicon.





9





For the three months ended June 30, 2012, we realized a gross margin percentage of 2.0% at our Baokai segment, compared to a gross margin percentage of 2.4% in the prior year period. For the six months ended June 30, 2012, we realized a gross margin percentage of 2.0% at our Baokai segment, compared to a gross margin percentage of 2.2% in the prior year period. Our margins are currently fixed at 2% on sales recorded at our Baokai segment.We are a distributor of TCS produced by Zibo Baoyun Chemical Factory. Our purchase price is fixed to the percentage of the selling price; therefore, our gross margin percentage is not affected by market price fluctuations. We have the opportunity to realize greater margin percentages, potentially up to 10-15%, at our Baokai segment if we introduce new customers to ZBC. There can be no assurances that we will be successful in generating new customers or realizing these higher margin opportunities.





For the three months ended June 30, 2012, we realized an effective gross margin percentage of 0% at our Wendeng segment as the result of no period sales, compared to a gross margin percentage of 36.7% in the prior year period. For the six months ended June 30, 2012, we realized a gross margin percentage of 11.8% at our Wendeng segment, compared to a gross margin percentage of 36.1% in the prior year period. The decrease in gross margin and gross margin percentage at our Wendeng segment is directly attributable to the decline in the segment’s product sales and sale prices as described above.





Professional Fees





Professional fees totaled $148,014 for the three months ended June 30, 2012, compared to $317,892 for the three months ended June 30, 2011. Professional fees totaled $289,724 for the six months ended June 30, 2012, compared to $409,597 for the six months ended June 30, 2011.





Professional fees consist of legal, accounting and other consulting or service provider fees. Most of our professional services are attributable to our status as a publicly traded company. The decrease in our professional fees when compared to the prior year periods are largely attributable to the increased audit accounting review and compliance services related to the acquisitions of our Chinese subsidiaries in late 2010 and early 2011, which were paid during 2011.





General and Administrative Expenses





General and administrative (“G&A”) expenses totaled $823,282 for the three months ended June 30, 2012, compared to $1,217,596 for the three months ended June 30, 2011. G&A expenses totaled $1,428,401 for the six months ended June 30, 2012, compared to $1,388,135 for the six months ended June 30, 2011.
 
 The primary components of our G&A expenses include salaries and benefits not directly associated with our manufacturing processes, depreciation on non-production capital assets, amortization, facility costs and maintenance, investor relations activities and various administrative and office expenses. The decrease in our G&A expenses for the three months ended June 30, 2012 when compared to the prior year period is largely attributable to the temporary closure of our Wendeng facility as described above. This is offset in part by an increased provision for doubtful accounts of $389,874 recorded in the second quarter 2012. Our G&A expenses for the six months ended June 30, 2012 increased approximately 3% over the prior year period. The increase is the result of the inclusion of a full six months of operating results from our Wendeng segment in 2012, compared to that of a partial period in 2011 following our acquisition of the segment on March 18, 2011. This is offset in part by the temporary closure of our Wendeng facility as described above.
  Provision for Income Taxes (Benefit)





We recorded an income tax benefit of ($167,342) for the three months ended June 30, 2012, compared to a provision for income taxes of $231,955 for the three months ended June 30, 2011. We recorded an income tax benefit of ($281,518) for the six months ended June 30, 2012, compared to a provision for income taxes of $348,350 for the six months ended June 30, 2011.
 
 These provisions for income taxes or income tax benefits are recorded as a result of the operations realized at our Chinese subsidiaries for each of the periods ended June 30, 2012 and 2011.They are recorded at a 25% tax rate, which is the statutory rate in China for all earnings. Any profits generated in China are not available to be offset against net operating losses in the United States.





10





Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has generated a net operating loss from its U.S.-based operations of approximately $2,790,000 which expires in 2031. Pursuant to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses in the United States carried forward in future years.





Net loss





For the three months ended June 30, 2012, we incurred a net loss of ($794,312), compared to net income of $57,104 for the three months ended June 30, 2011. For the six months ended June 30, 2012, we incurred a net loss of ($1,396,913), compared to net income of $192,912 for the six months ended June 30, 2011.


The weighted average number of basic and fully diluted shares outstanding for the three months ended June 30, 2012 was 30,115,174, compared to 29,570,104 for the three months ended June 30, 2011. The weighted average number of basic and fully diluted shares outstanding for the six months ended June 30, 2012 was 30,067,901, compared to 29,032,783 for the six months ended June 30, 2011.





There are no dilutive equivalents included in our calculation of fully diluted shares for the three and six months ended June 30, 2012, since their inclusion would be anti-dilutive due to our net loss per share.





Liquidity and Capital Resources





At June 30, 2012, we had cash on hand of $356,029. Of this amount, $3,090 was on deposit with institutions located in the United States, $352,592 in China and $347 in Hong Kong. For the foreseeable future, we do not intend to repatriate any funds from China to support our operations within the United States. Our U.S.-based operations consist solely of a holding company that incurs expenses and has no revenue generating activities. Proceeds generated from private placements of our common stock and loans have been the primary sources of funding for our U.S.-based operations. We believe our current cash position and ability to raise funds through the sale of new equity will be sufficient to fund our U.S. activities for the next twelve months. Furthermore, we expect to generate positive cash flow from our Chinese operations over the next twelve months.





At June 30, 2012, we had a working capital deficit of $5,592,864. The deficit is primarily attributable to the related party payable of $5,404,928 due to the minority shareholder of Wendeng. These funds were used to build and expand the Wendeng facility. Our Wendeng subsidiary minority shareholder is currently not requesting repayment of this amount; however, since this is an interest free demand loan to the Company, it has been categorized as a current liability.





Net cash used in operating activities was $338,965 for the six months ended June 30, 2012, compared to net cash used in operating activities of $521,904 for the six months ended June 30, 2011. The decrease in 2012 compared to 2011 is attributable to a significant improvement in the net change in operating assets and liabilities (defined here as accounts receivable, inventory and accounts payable) over the prior year period; offset by an increase in thenet loss of ($1,396,913) compared to net income of $192,912 for the prior year period, and an increase in non-cash depreciation and amortization expense to $619,247 included in the 2012 operating loss, compared to $366,302 included in 2011 net income.





Net cash used in investing activities was $340,017 for the six months ended June 30, 2012, compared to net cash used in investing activities of $204,466 for the six months ended June 30, 2011. The net cash used in the current period is attributable to the purchase of $190,017 in capital assets to support our ongoing efforts to expand the capacity of our Wendeng production facility and $150,000 to acquire common stock in TransPacific Energy, Inc. (see “Acquisition of TransPacific Energy, Inc.” above). During the six months ended June 30, 2011, we realized a net cash increase of $527,371 from our acquisition of Wendeng, which was mostly funded with shares of our common stock. Capital expenditures in the prior year period totaled $344,744 for property, plant and equipment and $387,063 for intangible assets (land use rights).





Net cash provided by financing activities was $364,600 for the six months ended June 30, 2012, compared to $1,161,233 for the six months ended June 30, 2011. We received $195,000 in net proceeds from the issuance of new equity, compared to $774,000 in the prior year period. Additionally, we received $129,600 in short term loan proceeds and a $40,000 advance from an officer to help fund our corporate expenditures. In the prior year, we received $387,233 from our Wendeng subsidiary minority shareholder. These funds were utilized towards the improvement and expansion of our Wendeng manufacturing facility.





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Critical Accounting Policies





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





Use of Estimates





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





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





Financial Instruments





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





At June 30, 2012, cash and cash equivalents totaling $352,939 were held in banks in China; a Wendeng branch of Industrial & Commercial Bank of China and a Central District, Hong Kong branch of HSBC Bank. The remittance of these funds out of China is subject to exchange control restrictions imposed by the Chinese government. Deposits in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. Management believes the probability of a bank failure, causing loss to the Company, is remote.





Concentration of Credit Risk





Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At June 30, 2012 and December 31, 2011, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the United States, Hong Kong and the PRC, which management believes are of high credit quality.





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





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Allowance for doubtful accounts





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





Bad debts are written off when identified. The Company extends unsecured credit to substantially all of its customers in the normal course of business. In many cases, this is necessary to remain competitive in the marketplace in which the Company operates. Potential customers for the Company’s products are finite in nature, and typically are larger, well capitalized companies. The Company does not accrue interest on aged trade accounts receivable as it is not a customary practice in the jurisdictions in which the Company operates. Historically, losses from uncollectible accounts have not significantly deviated from the specific allowance estimated by management. This specific provisioning policy has not changed since establishment and the management considers that the aforementioned specific provisioning policy is adequate and does not expect to change this established policy in the near future.





Inventory





Inventories are stated at the lower of cost or market value. Cost is determined on weighted average basis and includes all expenditures incurred in bringing the goods in a saleable condition to the point of sale. The Company’s inventory reserve requirements generally fluctuate based on projected demands and market conditions. In determining the adequate level of inventories to have on hand, management makes judgments as to the projected inventory demands as compared to the current or committed inventory levels. Inventory quantities and condition are reviewed regularly and provisions for excess or obsolete inventory are recorded based on the condition of inventory and the Company’s forecast of future demand and market conditions.





Intangible assets – land use rights





Land use rights are stated at cost less accumulated amortization. Amortization is provided using the straight-line method over the terms of 50 years. The lease term is obtained from the relevant PRC land authority.





13





Property, plant and equipment





Property, plant and equipment is stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.





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





Service life (year)


Estimated

residual rate

%


Annual

depreciation rate

%Building


20



5



2.05Furniture and equipment


5



5



3.17Machines and equipment


10



5



7.34Automotive equipment


5



5



10.93Office equipment


5



5



8.64





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





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





Construction in progress





The value of construction in progress comprises buildings and plants under construction, as well as machines and equipment being installed and commissioned, specifically comprises the costs of property, plant and equipment and other direct costs, relevant interest expenses accrued during the construction period and profits and losses from foreign exchange transactions.





Depreciation will not start until the construction in progress is completed and put into operation.





14





Impairment of Assets





The Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its long-lived assets, management performs an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining depreciation or amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows.





Each year, the Company performs a transitional test for impairment of goodwill and other indefinite-lived intangible assets. This test is performed by comparing, at the reporting unit level, the carrying value of goodwill to its fair value. The Company assesses fair value based upon its best estimate of the present value of future cash flows that it expects to generate by the reporting unit. In conjunction with its recent change in fiscal year-end, the Company’s annual fair value assessment is performed each December 31 on subsidiaries with material goodwill on their respective balance sheets. However, changes in expectations as to the present value of the reporting unit’s future cash flows might impact subsequent years’ assessments of impairment.





Goodwill and Intangible Assets





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





The impairment test involves a two-step approach. Under the first step, the Company determines the fair value of each reporting subsidiary to which goodwill has been assigned. The Company then compares the fair value of each reporting subsidiary to its carrying value, including goodwill. The Company estimates the fair value of each reporting subsidiary by estimating the present value of the reporting subsidiaries' future cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss.





Under the second step, the Company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit, as determined in the first step. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.





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Income Taxes





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





The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We assess the validity of our conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit. We have determined that there were no uncertain tax positions for the periods ended June 30, 2012 and December 31, 2011.





Basic and Diluted Net Income (Loss) Per Share





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





Fair value of financial instruments





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





16





Revenue Recognition





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





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





Advertising expenses





Advertising costs are expensed as incurred.





Shipping and handling costs





All shipping and handling costs are included in cost of sales expenses.





Foreign Currency Translation





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





Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.





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





17





Comprehensive Gain or Loss





ASC 220,“Comprehensive Income”, establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As of June 30, 2012, the Company has items that represent comprehensive income and, therefore, has included a schedule of comprehensive income (loss) in the financial statements.





Off Balance Sheet Arrangements





As of June 30, 2012, there were no off balance sheet arrangements.





ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





ITEM 4.  CONTROLS AND PROCEDURES





Disclosure Controls and Procedures





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





Changes in Internal Control over Financial Reporting





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





18





PART II – OTHER INFORMATION





ITEM 1.  LEGAL PROCEEDINGS





None.





ITEM 1A.  RISK FACTORS





Information on risk factors can be found in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the transition period ended December 31, 2011, filed with the Securities and Exchange Commission on April 16, 2012. There were no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the transition period ended December 31, 2011.





ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





During the three months ended June 30, 2012, the Company accepted subscription agreements from investors and correspondingly sold 75,000 shares of its common stock pursuant to its current private placement offering, and received $150,000 in gross proceeds. The offer and sale of the securities was exempt from registration under the Securities Act of 1933 pursuant to Rule 506 of Regulation D.





ITEM 3.  DEFAULTS UPON SENIOR SECURITIES





None.





ITEM 4.  MINE SAFETY DISCLOSURES





None.





ITEM 5.  OTHER INFORMATION





None.





19





ITEM 6.  EXHIBITS





Exhibit  Number

Description of Exhibit31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





20





SIGNATURES





In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





SUNSI ENERGIES INC.August 20, 2012
By:
/s/ David NatanDavid NatanChief Executive Officer





August 20, 2012
By:
/s/ Jason WilliamsJason WilliamsChief Accounting and Financial Officer








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