17. VARIABLE INTEREST ENTITY

The equity interests in Daqo New Material, the VIE, are funded by Daqo Group. Daqo New Material was structured to acquire land use rights and to erect certain facilities for the future use of the Group.

The lease agreement with the VIE is structured such that Chongqing Daqo protect Daqo Group from potential losses from Daqo New Material. As a result of this agreement, Chongqing Daqo is the primary beneficiary of Daqo New Material. Lease income and expenses and associated receivables and payables are eliminated upon consolidation as intercompany transactions. Net income of the VIE is reflected as an adjustment to noncontrolling interest. The Company relies on the lease agreements with Daqo New Material for material property, plant and equipment necessary for production. If Daqo New Material fails to perform or terminates the lease agreement for any reason, including, for example, due to its breach of the agreement or the unavailability of any required governmental approvals, or if it refuses to extend or renew the lease agreement when the agreement expires, and the Company cannot find an immediately available alternative source for leasing similar property, plant and equipment, then the Company’s ability to carry on the operations will be impaired. If Daqo New Material fails to perform its obligations, the Company may need to initiate legal procedures to enforce the agreement.

The VIE is principally engaged in leasing all its assets for use in the Group’s operations. Total assets, liabilities, net revenues, operating costs and expenses and net income of the VIE are as follows:


	Year ended December 31,
	2010		2011
Cash	$	23,149,850	$	1,006,246
Property, plant and equipment	$	171,998,285	$	170,199,299
Prepaid land use rights	$	6,544,471	$	6,703,454
Total Assets	$	203,931,862	$	193,774,946
Payable for property, plant and equipment	$	1,739,404	$	—
Long-term borrowings, including current portion	$	68,157,900	$	52,334,370
Total Liabilities	$	71,004,182	$	52,926,950


	Year ended December 31,
	2009			2010		2011
Revenues	$	11,623,287		$	16,637,925	$	16,852,928
Operating costs and expenses	$	12,522,251		$	16,043,237	$	15,262,768
Net income (loss)	$	(898,964	)	$	594,688	$	1,590,160