Attached files
file | filename |
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EX-31.1 - EX-31.1 - Andatee China Marine Fuel Services Corp | v193303_ex31-1.htm |
EX-32.1 - EX-32.1 - Andatee China Marine Fuel Services Corp | v193303_ex32-1.htm |
EX-32.2 - EX-32.2 - Andatee China Marine Fuel Services Corp | v193303_ex32-2.htm |
EX-31.2 - EX-31.2 - Andatee China Marine Fuel Services Corp | v193303_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
Quarterly Period Ended June 30, 2010
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ____________ to __________
Commission
file number 001-34608
ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
80-0445030
|
|
(State or Other Jurisdiction of
|
(IRS Employer)
|
|
Incorporation or Organization)
|
Identification No.)
|
Dalian
Ganjingzi District, Dalian Wan Lijiacun
Unit
C, No. 68 West Binhai Road, Xigang District Dalian
People’s
Republic of China
011
(86411) 8360 4683
(Address
of Principal Executive Offices)(Zip Code)
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x 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 ¨ 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. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
|
Non-accelerated
Filer ¨
|
Smaller
Reporting Company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
APPLICABLE
ONLY TO CORPORATE ISSUERS
As of August 10, 2010, the Company had
9,610,159 shares of its common stock, par value $0.001 per share, issued and
outstanding.
ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
Table
of Contents
Page
|
||
PART
I
|
||
FINANCIAL
INFORMATION
|
2
|
|
Item
1.
|
Financial
Statements
|
2
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
31
|
Item
4T.
|
Controls
and Procedures
|
32
|
PART
II
|
||
OTHER
INFORMATION
|
34
|
|
Item
1.
|
Legal
Proceedings
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34
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Item
1A.
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Risk
Factors
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34
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
34
|
Item
3.
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Defaults
Upon Senior Securities
|
34
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Item
4.
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Removed
and Reserved
|
34
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Item
5.
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Other
Information
|
34
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Item
6.
|
Exhibits
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34
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SIGNATURES
|
35
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|
EXHIBIT
INDEX
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36
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i
PART
I
FINANCIAL
INFORMATION
Item
1. Financial Statements
ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION.
COMBINED
AND CONSOLIDATED BALANCE SHEETS
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 13,426,813 | $ | 1,539,009 | ||||
Accounts
receivable, net
|
2,209,445 | 2,515,403 | ||||||
Other
receivables, net
|
1,365,753 | 1,307,474 | ||||||
Inventories
|
17,051,730 | 13,302,530 | ||||||
Advances
to suppliers
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10,859,388 | 7,691,266 | ||||||
Related
party receivable
|
- | 122,667 | ||||||
Deferred
expense
|
- | 150,943 | ||||||
Deferred
tax assets
|
113,216 | 112,743 | ||||||
Total
current assets
|
45,026,345 | 26,742,035 | ||||||
Property,
plant and equipment, net
|
11,973,600 | 10,441,246 | ||||||
Construction
in progress
|
456,544 | 632,202 | ||||||
Intangible
assets, net
|
2,778,511 | 2,691,974 | ||||||
Goodwill
|
1,122,619 | 1,117,923 | ||||||
Total
assets
|
$ | 61,357,619 | $ | 41,625,380 | ||||
LIABILITIES
AND EQUITY
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 179,992 | $ | 565,802 | ||||
Short-term
loan
|
5,140,558 | 10,238,109 | ||||||
Taxes
payable
|
9,828,743 | 11,001,715 | ||||||
Advances
from customers
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2,116,712 | 456,715 | ||||||
Dividends
payable
|
232,835 | 231,861 | ||||||
Other
payable
|
159,911 | 287,914 | ||||||
Total
current liabilities
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17,658,751 | 22,782,116 | ||||||
Total
liabilities
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17,658,751 | 22,782,116 | ||||||
Commitments
and contingencies
|
||||||||
Equity
|
||||||||
Stockholder’s
equity of the Company
|
||||||||
Common
stock: par value $.001; 50,000,000 shares
|
||||||||
authorized;
9,610,159 and 6,000,000 shares issued
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||||||||
and
outstanding at June 30, 2010 and December 31,
|
||||||||
2009
respectively
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9,610 | 6,000 | ||||||
Additional
paid-in capital.
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29,533,555 | 9,533,619 | ||||||
Other
comprehensive income
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634,239 | 488,640 | ||||||
Retained
earnings
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11,591,168 | 7,543,994 | ||||||
Total
stockholders' equity of the Company
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41,768,572 | 17,572,253 | ||||||
Noncontrolling
interest
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1,930,296 | 1,271,011 | ||||||
Total
equity
|
43,698,868 | 18,843,264 | ||||||
Total
liabilities and equity
|
$ | 61,357,619 | $ | 41,625,380 |
The
accompanying notes are an integral part of these combined and consolidated
financial statements.
2
ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION.
COMBINED
AND CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
Revenues
|
$ | 44,053,481 | $ | 27,843,394 | $ | 73,834,571 | $ | 53,080,312 | ||||||||
Cost
of revenues
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38,781,366 | 24,435,690 | 64,982,061 | 46,671,231 | ||||||||||||
Gross
profit
|
5,272,115 | 3,407,704 | 8,852,510 | 6,409,081 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Selling
expenses
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736,327 | 436,150 | 1,473,878 | 1,255,722 | ||||||||||||
General
and administrative expenses
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676,750 | 611,243 | 1,301,045 | 807,670 | ||||||||||||
Total
operating expenses
|
1,413,077 | 1,047,393 | 2,774,923 | 2,063,392 | ||||||||||||
Income
from operations
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3,859,038 | 2,360,311 | 6,077,587 | 4,345,689 | ||||||||||||
Other
income (expense)
|
||||||||||||||||
Interest
income
|
- | (24,560 | ) | - | - | |||||||||||
Interest
expense
|
(131,615 | ) | (65,667 | ) | (252,079 | ) | (65,667 | ) | ||||||||
Other
expense
|
2,029 | (1,593 | ) | 1,857 | (1,593 | ) | ||||||||||
Total
other income (expense)
|
(129,586 | ) | (91,820 | ) | (250,222 | ) | (67,260 | ) | ||||||||
Net
income before tax provision
|
3,729,452 | 2,268,491 | 5,827,365 | 4,278,429 | ||||||||||||
Tax
provision
|
1,047,664 | 467,562 | 1,614,400 | 974,402 | ||||||||||||
Net
income
|
2,681,788 | 1,800,929 | 4,212,965 | 3,304,027 | ||||||||||||
Net
income attributable to the noncontrolling interest
|
24,799 | 61,022 | 165,791 | 114,003 | ||||||||||||
Net
income attributable to the Company
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$ | 2,656,989 | $ | 1,739,907 | $ | 4,047,174 | $ | 3,190,024 | ||||||||
Foreign
currency translation adjustment
|
166,015 | 363 | 145,599 | 14,542 | ||||||||||||
Comprehensive
income attributable to the Company
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2,823,004 | 1,740,270 | 4,192,773 | 3,204,566 | ||||||||||||
Comprehensive
income attributable to the noncontrolling interest
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24,799 | 61,022 | 165,791 | 114,003 | ||||||||||||
Comprehensive
income
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$ | 2,847,803 | $ | 1,801,292 | $ | 4,358,564 | $ | 3,318,569 | ||||||||
Basic
and diluted weighted average shares outstanding
|
9,606,313 | 6,000,000 | 9,014,261 | 6,000,000 | ||||||||||||
Basic
and diluted net earnings per share
|
$ | 0.28 | $ | 0.29 | $ | 0.45 | $ | 0.53 |
The
accompanying notes are an integral part of these combined and consolidated
financial statements.
3
ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION.
COMBINED
AND CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income attributable to the Company
|
$ | 4,047,174 | $ | 3,190,024 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Noncontrolling
interest
|
165,791 | 114,003 | ||||||
Option
issued for services
|
63,938 | - | ||||||
Depreciation
|
253,187 | 92,038 | ||||||
Amortization
|
23,119 | 34,735 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
305,806 | (764,788 | ) | |||||
Inventories
|
(3,749,200 | ) | (3,190,129 | ) | ||||
Other
receivables
|
(109,917 | ) | 1,187,582 | |||||
Advances
to suppliers
|
(3,168,122 | ) | (882,440 | ) | ||||
Prepaid
expense
|
150,943 | (13,411 | ) | |||||
Accounts
payable
|
(385,810 | ) | 481,323 | |||||
Advances
from customers
|
1,659,997 | 275,906 | ||||||
Taxes
payable
|
(1,173,445 | ) | 609,841 | |||||
Other
payable
|
(195,403 | ) | 913,754 | |||||
Net
cash provided by (used in) operating activities
|
(2,111,942 | ) | 2,048,438 | |||||
Cash
flows from investing activities
|
||||||||
Consideration
for acquisition
|
(534,618 | ) | (2,209,483 | ) | ||||
Certificate
of deposit
|
- | 1,519,750 | ||||||
Purchase
of property and equipment
|
(132,708 | ) | (3,266 | ) | ||||
Construction
contracts
|
(491,319 | ) | (4,898,381 | ) | ||||
Payment
received from related party
|
122,667 | 4,357,376 | ||||||
Net
cash used in investing activities
|
(1,035,978 | ) | (1,234,004 | ) | ||||
Cash
flows from financing activities
|
||||||||
Proceeds
from shareholders
|
19,989,504 | - | ||||||
Repayment
of short term loans
|
(5,097,551 | ) | (876,779 | ) | ||||
Net
cash provided by (used in) financing activities
|
14,891,953 | (876,779 | ) | |||||
Effect
of exchange rate on cash
|
143,771 | 6,775 | ||||||
Net
increase in cash and cash equivalents
|
11,887,804 | (55,570 | ) | |||||
Cash
and cash equivalents, beginning of period
|
$ | 1,539,009 | $ | 4,923,913 | ||||
Cash
and cash equivalents, end of period
|
$ | 13,426,813 | $ | 4,868,343 | ||||
Supplemental
cash flow information:
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | 260,518 | $ | 176,259 | ||||
Income
taxes
|
$ | 1,276,549 | $ | 653,682 |
The
accompanying notes are an integral part of these combined and consolidated
financial statements.
4
ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010 and 2009
1.
Description of Business, Organization, VIE and Basis of Consolidation and
Combination
Andatee
China Marine Fuel Services Corporation (“Andatee” or “the Company”) was
incorporated in the State of Delaware on July 10, 2009. Upon incorporation, the
Company had authorized 50,000,000 common stock shares, par value $0.001per
share. On October 16, 2009 the Company issued 8,000,000 shares in the share
exchange with Goodwill Rich, as described below. On October 19, 2009, the
Company affected a reverse share split on the basis of the 1-for-1.333334 ratio.
As a result of the split, the number of common stock issued and outstanding has
decreased from 8,000,000 to 6,000,000 shares. The effect of reverse share split
has been retroactively reflected for all periods presented herein.
The
Company was organized as a holding company to acquire Goodwill Rich
International Limited (“Goodwill Rich”), a company incorporated in Hong Kong,
and its subsidiary in connection with a contemplated initial public offering of
the Company’s common stock on the Nasdaq Stock Market. Goodwill Rich was
incorporated on October 28, 2008.
Andatee
became the owner of 100% of the outstanding common stock of Goodwill Rich as the
result of a share exchange arrangement entered in August 2009 and completed on
October 16, 2009, in which 8,000,000 common share of Andatee (on a pre-reverse
stock split basis or 6,000,000 common shares after the effect of the reverse
stock split) were exchanged for all of the outstanding shares of Goodwill Rich.
The stockholders of Andatee and the stockholders of Goodwill Rich were the same,
and therefore the August 2009 share exchange was accounting for as a
recapitalization of Goodwill Rich. As a result, Goodwill is deemed to be the
predecessor of Andatee for financial reporting purposes, and the financial
statements of Andatee for the periods prior to the share exchange as presented
here are the historical financial statements of Goodwill Rich for those periods,
after being adjusted to retroactively reflect the effects of the
recapitalization to 6,000,000 issued and outstanding shares.
In March
2009, Goodwill Rich established a subsidiary company in Dalian, People’s
Republic of China (the “PRC”), named Dalian Fusheng Consulting Company
(“Fusheng”), which afterward was changed to “Dalian Fusheng Petrochemical
Company” in March 2010.
Dalian
Xingyuan Marine Bunker Co., Ltd. (“Xingyuan”) was established in September 2001
with a registered capital of RMB7 million and began providing refueling services
to the marine vessels in Dalian Port in Dalian City. Xingyuan holds 100%
ownership of Donggang Xingyuan Marine Fuel Company (“Donggang Xingyuan”), a
company incorporated in Dalian, PRC, in April, 2008. In addition, in December
2008, Xingyuan acquired 90% ownership of Rongcheng Xinfa Petroleum Company
(“Xinfa”) and 63% ownership of Xiangshan Yongshi Nanlian Petroleum Company
(“Nanlian”), respectively.
5
On March
26, 2009, Fusheng, Xingyuan and the stockholders of Xingyuan entered into a
series of agreements, as described below (the Consulting Services Agreement, the
Operating Agreement, the Equity Pledge Agreement, the Option Agreement and the
Proxy and Voting Agreement). Under these agreements Goodwill Rich obtained the
ability to direct the operations of Xingyuan and its subsidiaries and to obtain
the economic benefit of their operations. Therefore, management determined that
Xingyuan became a variable interest entity (“VIE”) under the provisions of
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 810 (originally issued as FASB Interpretation (“FIN”) No. 46(R)
“Consolidated Variable Interest Entities - an interpretation of ARB No. 51”),
and Goodwill Rich (and the Company after the October 16, 2009 share exchange
described above) was determined to be the primary beneficiary of Xingyuan and
its subsidiaries. Accordingly, beginning March 26, 2009, Goodwill Rich (and the
Company after the October 16, 2009 share exchange described above) has
consolidated the assets, liabilities, results of operations and cash flows of
Xingyuan and its subsidiaries its financial statements. The agreements between
the Goodwill Rich and Xingyuan were entered into to facilitate raising capital
for the operations of Xingyuan through an offering of the Company’s common stock
on the Nasdaq Capital Market, and Goodwill Rich paid no consideration to
Xingyuan or its stockholders for entering into the agreements under which
Xingyuan became a VIE, provided, however, that Mr. An Fengbin, the principle
stockholder of Xingyuan became the chairman and CEO of the Company, and Mr. An
Fengbin and the other stockholders of Xingyuan have certain rights or
options to acquire the 6,000,000 shares of the Company’s common stock issued in
the share exchange between the Company and Goodwill Rich at later dates when
permitted by PRC laws and regulations. Mr. An Fengbin remains the principle
stockholder of Xingyuan after the completion of the share exchange between
Goodwill Rich and Andatee described above.
Upon the
October 28, 2008 incorporation of Goodwill Rich, Goodwill Rich and the
stockholders of Xingyuan has entered into a series of separate agreements under
which Goodwill Rich and Xingyuan were deemed, until March 2009, to be under the
common control of the stockholders of Xingyuan. Those separate agreements
provided that the majority stockholder of Goodwill Rich appointed Mr. An Fengbin
to (i) act as a director of Xingyuan, Xingyuan’s majority stockholder, and
Fusheng, (ii) act for the majority stockholder of Goodwill Rich at any meetings
of the directors, managers, financial controllers or other senior management of
Xingyuan, Xingyuan’s majority stockholder, and Fusheng, (iii) exercise all
voting and dispositive rights over the common stock of Xingyuan, Xingyuan’s
majority stockholder, and Fusheng. The agreements further provided that the
majority stockholder of Xingyuan would not appoint any additional directors to
the boards of any of these entities without Mr. An Fengbin’s approval. As a
result, Mr. An Fengbin was deemed to control Goodwill Rich and Fusheng, and
those companies and Xingyuan were deemed to be under common
control.
All of
the transactions among Andatee, Goodwill Rich, Fusheng and Xingyuan were deemed
to be transactions between companies under common control, and therefore the
bases of the assets and liabilities in each of the companies was not adjusted in
any of the transactions.
As a
result of the above, the accompanying combined and consolidated financial
statements contain:
|
•
|
for the period from October 28,
2008 to March 26, 2009, the assets, liabilities, results of operations and
cash flows of Goodwill Rich and its subsidiary (adjusted for the effects
of the August, 2009 recapitalization with Andatee) combined with those of
Xingyuan and its subsidiaries;
and
|
|
•
|
for the period from March 26,
2009 to June 30, 2010, the assets, liabilities, results of operations and
cash flows of Goodwill Rich and its subsidiary (adjusted for the effects
of the August, 2009 recapitalization with Andatee) consolidated with those
of its VIE, Xingyuan, and its
subsidiaries.
|
The
Company, its subsidiaries, its VIE and its VIE’s subsidiaries (collectively the
“Group”) are principally engaged in the production, storage, distribution and
trading of blended marine fuel oil for cargo and fishing vessels in the
PRC.
Consulting Services
Agreement. Pursuant to the exclusive consulting services
agreement between Fusheng and Xingyuan, Fusheng has the exclusive right to
provide to Xingyuan business consulting and related services in connection with
the production and sale of marine bunker (the “Services”). Under this agreement,
Fusheng owns the intellectual property rights arising from the performance of
the Services, including, but not limited to, any trade secrets, copyrights,
patents, know-how, un-patented methods and processes and otherwise, whether
developed by Fusheng or Xingyuan based on Fusheng’s provision of Services under
the agreement. Xingyuan pays 50% of its total net profit to Fusheng on a
quarterly basis as consulting service fee. The consulting services agreement is
in effect for a term of 10 years starting from March 26, 2009 unless terminated
by (a) Xingyuan upon six-months prior written notice and payment to Fusheng of
(i) RMB2,000,000 as liquidated damages and (ii) all of Fusheng’s losses
resulting from such early termination; (b) Fusheng upon Xingyuan’s breach of the
agreement; or (c) Fusheng at any time upon thirty-days written notice to
Xingyuan. This agreement may be renewed at Fusheng’s sole
discretion.
6
Operating
Agreement. Pursuant to the operating agreement among Fusheng,
Xingyuan and the stockholders of Xingyuan who collectively hold all of the
outstanding shares of Xingyuan (collectively “Xingyuan Stockholders”), Fusheng
provides guidance and instructions on Xingyuan’s daily operations, financial
management and employment issues. The stockholders of Xingyuan must appoint the
candidates recommended by Fusheng to Xingyuan’s board of directors. Fusheng has
the right to appoint personnel to high level managerial positions of Xingyuan,
including General Manager and Chief Financial Officer. In addition, Fusheng
agrees to guarantee Xingyuan’s performance under any agreements, contracts or
transactions executed by Xingyuan relating to Xingyuan’s business. Xingyuan, in
return, agrees to pay Fusheng a quarterly fee equal to 50% of Xingyuan’s total
net profits for such quarter. Moreover, Xingyuan agrees that without the prior
consent of Fusheng, Xingyuan will not engage in any transactions that could
materially affect the assets, obligations, rights or the business of Xingyuan,
including, without limitation, (a) borrowing money from a third party or
assuming any debt, (b) selling to a third party or acquiring from a third party
any assets or rights, including without limitation, any plant, equipment, real
or personal property, or any intellectual property rights, (c) providing any
guaranty for any third party obligations, (d) assigning to a third party any
agreements related to Xingyuan’s business, (e) engaging in any other business
consulting agreements with a third party or engaging in any other business
activities other than the business of producing and selling marine bunker, and
(f) pledging any of Xingyuan’s assets or intellectual property rights to a third
party as a security interest. The term of this agreement is 10 years from March
26, 2009 and will be automatically renewed for additional 10 year period upon
the expiration of the initial term or any renewal term, unless previously
terminated. Fusheng may terminate the agreement at any time upon thirty (30)
days written notice to Xingyuan and the Xingyuan Stockholders.
Equity Pledge
Agreement. Under the equity pledge agreement between Xingyuan,
the Xingyuan Stockholders and Fusheng, the Xingyuan Stockholders pledged all of
their equity interests in Xingyuan to Fusheng to guarantee Xingyuan’s
performance of its obligations under the following agreements entered into by
Fusheng and Xingyuan: (a) the Exclusive Consulting Agreement dated March 26,
2009, (b) the Operating Agreement dated March 26, 2009 and (c) any other
agreements to be entered into by and between Fusheng and Xingyuan from time to
time with respect to Fusheng’s provision of services to Xingyuan and Fusheng’s
collection of appropriate charges from Xingyuan (collectively, (a), (b) and (c)
are the “Service Agreements”). If Xingyuan or Xingyuan’s Stockholders breach its
respective contractual obligations, Fusheng, as pledgee, will be entitled to
certain rights, including but not limited to the right to sell the pledged
equity interests. The stockholders of Xingyuan agreed that without Fusheng’s
prior written consent, they will not transfer any equity interest, create or
permit to exist any pledge that may damage Fusheng’s rights or interests in the
pledged equity interests, or cause Xingyuan’s meeting of stockholders or board
of directors to pass any resolutions about the sale, transfer, pledge or other
disposal of the lawful right to derive income from any equity interest in
Xingyuan or about the permission of the creation of any other security interests
thereon. The term of this agreement is the same as the longest of the Service
Agreements. If the term of any Service Agreement is renewed, the term of this
agreement will extend accordingly.
Option
Agreement. Under the option agreement between Xingyuan,
the Xingyuan Stockholders and Fusheng, the Xingyuan Stockholders irrevocably,
unconditionally and exclusively granted Fusheng a purchase option (the “Purchase
Option”) whereby, to the extent permitted under Chinese law, Fusheng has the
right to request the Xingyuan Stockholders transfer, to it or its designated
entity or person, the total equity interests held by them in the registered
capital of Xingyuan, which as a group equals 100% of the outstanding equity of
Xingyuan. Fusheng has sole discretion to decide the specific time, method and
number of the exercise of the Purchase Option. At the time of each exercise of
the Purchase Option by Fusheng, the total consideration to be paid to Xingyuan
Stockholders by Xingyuan or its designated entity or person shall be determined
from one of following two prices i) RMB 10.00; or ii) the lowest price permitted
under PRC laws. This agreement will terminate after 100% of the outstanding
equity of Xingyuan has been duly transferred to Fusheng and/or Fusheng’s
designee(s).
Proxy and Voting
Agreements. Pursuant to the proxy and voting agreements
between Fusheng, Xingyuan, and each of Xingyuan’s Stockholders, Xingyuan’s
Stockholders agreed to irrevocably entrust the person designated by Fusheng with
his stockholder voting rights and other stockholder rights for representing him
to exercise such rights at the stockholders’ meeting of Xingyuan in accordance
with applicable laws and its Article of Association, including, but not limited
to, the right to sell or transfer all or any of his equity interest in Xingyuan,
and appoint and vote for the directors and Chairman as the authorized
representative of the Xingyuan Stockholders. The term of each Proxy and Voting
Agreement is twenty (20) years from March 26, 2009 and may be extended prior to
its expiration by written agreement of the parties.
7
2010
Business Acquistion
In May
2010, Xingyuan acquired 52% equity interest of Rongcheng Mashan Xingyuan Marine
Bunker Co., Ltd. (“Mashan”) (see more details in Note 3 “Business
Acquisitions”).
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited interim combined and consolidated financial statements of
Andatee have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules of the Securities and
Exchange Commission (“SEC”), and should be read in conjunction with the audited
financial statements and notes thereto contained in the Company’s latest Annual
Report filed with the SEC on Form 10-K. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full
year. Notes to the financial statements which would substantially
duplicate the disclosure contained in the audited financial statements for the
most recent fiscal year, 2009, as reported in Form 10-K have been
omitted.
Basis
of Consolidation
The
combined and consolidated financial statements include the combined revenues,
expenses and cash flows of Xingyuan and its subsidiaries as of and for the
period ended March 26, 2009 and on a consolidated basis from the date that
Xingyuan became a consolidated VIE of the Company (see Note 1). All intercompany
transactions and balances have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Foreign
Currency Translation
The
Company’s functional and reporting currency is the United States dollar (“U.S.
dollar”). The functional currency of the Company’s subsidiary in Hong Kong is
the U.S. dollar while the local currency of the Company’s subsidiary, VIE and
its subsidiaries in China is the Renminbi (“RMB”). Accordingly, assets and
liabilities of the China entities are translated at the current exchange rate in
effect at the balance sheet date, and revenues and expenses are translated at
the average exchange rates in effect during the reporting period to U.S. dollar.
Gains and losses resulting from foreign currency translation to reporting
currency are recorded in accumulated other comprehensive income in the
statements of changes in shareholders’ equity for the years
presented.
Foreign
currency transactions are translated at the applicable rates prevailing at the
dates of the transactions. Monetary assets and liabilities denominated in
foreign currencies at the balance sheet date are remeasured at the applicable
rates of exchange in effect at that date. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations.
8
For the
six months ended June 30, 2010, foreign currency translation adjustment of
$145,599 have been reported as accumulated other comprehensive income in the
consolidated statements of changes in the stockholders’ equity.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash on hand and cash on deposit, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Restricted
Cash
In
accordance with FASB ASC Topic 210 (originally Accounting Review Board (“ARB”)
No. 43, Chapter 3A “Current Assets and Current Liabilities”), cash which is
restricted as to withdrawal is considered a non-current asset.
Accounts
Receivable
Accounts
receivable are recognized and carried at original invoiced amount less an
allowance for uncollectible accounts, as needed.
When
evaluating the adequacy of its allowance for doubtful accounts, the Company
reviews the collectability of accounts receivable, historical write-offs, and
changes in sales policies, customer credibility and general economic
tendency.
Inventories
Inventories
are stated at the lower of cost and current market value. Costs include the cost
of raw materials, freight, direct labor and related manufacturing overhead.
Inventories are stated at cost upon acquisition.
The cost
of inventories is calculated using the weighted average method. Any excess of
the cost over the net realizable value of each item of inventories is recognized
as a provision for diminution in the value of inventories.
Net
realizable value is the estimated selling price in the normal course of business
less the estimated costs to completion and the estimated expenses and related
taxes to make the sale.
Reusable
materials include low-value consumables and other materials, which can be in use
for more than one year but do not meet the definition of fixed assets. Reusable
materials are amortized in half when received for use and in another half when
cease to work for any purpose. The amounts of the amortization are included in
the cost of the related assets or profit or loss.
Concentration
of Risks
All of
the Group’s sales and a majority of its expense transactions are denominated in
RMB and a significant portion of the Group’s assets and liabilities are
denominated in RMB. RMB is not freely convertible into foreign currencies. In
the PRC, certain foreign exchange transactions are required by law to be
transacted only by authorized financial institutions at exchange rates set by
the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by
the Group in China must be processed through the PBOC or other China foreign
exchange regulatory bodies which require certain supporting documentation in
order to affect the remittance.
As of
June 30, 2010, all of the Company’s cash was on deposit at financial
instructions in the PRC where there is currently no regulation requiring such
financial institutions to maintain insurance to cover bank deposits
in the event of bank failure.
9
For the
six months ended June 30, 2010, two of the Company’s customers accounted for
13.7% and 11.5% of the Company’s total revenues, respectively. One customer
accounted for 11.4% of the total revenues for the six months ended June 30,
2009.
For the
six months ended June 30, 2010, 33.7% and 30.7% of the Company’s raw materials
came from two suppliers. The advances to these two suppliers were $1,782,879 and
$1,785,073 at June 30, 2010, respectively. The advances to these two suppliers
were $791,459 and $1,774,425 at December 31, 2009, respectively. The total
balance to suppliers at June 30, 2010 was $10,859,388, which was non-interest
bearing and unsecured.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost, less accumulated depreciation.
Expenditures for maintenance and repairs, which are not considered improvements
and do not extend the useful life of the asset, are expensed as incurred;
additions, renewals and betterments are capitalized. When assets are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in the statement
of operations in cost of blended products.
Depreciation
is provided to recognize the cost of the asset in the results of operations. The
Company calculates depreciation using the straight-line method with estimated
useful life as follows:
Items
|
Useful Life
|
|
Property
and buildings
|
40 years
|
|
Marine
bunker
|
15 years
|
|
Boiler
equipment
|
12 years
|
|
Laboratory
equipment
|
8 years
|
|
Transportation
vehicles
|
8 years
|
|
Office
equipment
|
4 years
|
|
Electronic
equipment
|
3 years
|
Construction
in Progress
Construction
in progress represents property and buildings under construction and consists of
construction expenditure, equipment procurement, and other direct costs
attributable to the construction. Construction in progress is not depreciated.
Upon completion and ready for intended use, construction in progress is
reclassified to the appropriate category of property, plant and
equipment.
Impairment
of Long-Lived Assets
In
accordance with FASB ASC Topic 360 (originally Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”), certain assets such as property, plant, and equipment, and
purchased intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Intangible assets are tested for impairment annually.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
There were no events or changes in circumstances that necessitated a review of
impairment of long lived assets as of June 30, 2010 and December 31, 2009,
respectively.
10
Goodwill
Goodwill
represents the excess of the purchase price over the net of the fair value of
the identifiable tangible and intangible assets acquired and the fair value of
liabilities assumed in business acquisitions. The Company performs its
impairment test at the end of every fiscal year on an annual basis and whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable
The
Company determined that there was no impairment of goodwill as of June 30,
2010.
Intangible
Assets
Intangible
assets consist mainly of land use rights and software. The intangible assets are
amortized using straight-line method over the life of the rights and
assets.
The
details of land use rights are as follows:
Location
|
Land Size
|
Amount
|
Terms
|
||||||
|
(square
meter)
|
||||||||
Nanhui
Village, Shipu Town, Zhejiang Province
|
8,906.90
|
$
|
2,207,502
|
April
1, 2004 – May 12, 2047
|
|||||
Development
Zone, Donggang, Liaoning Province
|
21,994.80
|
$
|
567,755
|
July
16, 2008 – May 15, 2058
|
|||||
Mashan
Village, Chengshan Town, Shandong Province
|
3,659.57
|
$
|
109,656
|
Government
assignment
|
Noncontrolling
Interests in Consolidated Financial Statements
In
December 2007, the FASB issued SFAS No. 160 (now codified at FASB ASC Topic
810), “Noncontrolling Interests in Consolidated Financial Statements” (“ASC
810”), which amends Accounting Research Bulletin 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. ASC 810 also changes the way
the consolidated income statement is presented by requiring consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. ASC 810
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests
of the parent owners and the interests of the noncontrolling owners of a
subsidiary. ASC 810 is effective for fiscal periods, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The Company adopted
ASC 810 for the accompanying consolidated financial statements.
Noncontrolling
interest represents a 37% equity interest in Nanlian, a 10% equity interest in
Xinfa and a 48% equity interest in Mashan for the minority owners.
Revenue
Recognition
The
Company recognizes revenues in accordance with the guidance in the Securities
and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104.
Revenue is recognized when persuasive evidence of an arrangement exists, when
the selling price is fixed or determinable, when delivery occurs and when
collection is probable.
Delivery
is typically conveyed via pipeline or tanker and sales revenues are recognized
when customers take possession of goods in accordance with the terms of purchase
order agreements that evidence agreed upon pricing and when collectability is
reasonably assured.
11
Advances
from customers represent monies that customers have paid in advance for the
Company’s marine fuel products as down payments and where the delivery of these
marine fuel products is not yet complete. Supply and demand for our products
determines the circumstances requiring advances from customers. As an industry
wide practice, we require advances from customers for substantially all
sales.
Stock-Based
Compensation
In
December 2004, the FASB issued SFAS No.123(R), “Share-Based Payment”, (now
codified at FASB ASC Topic 718) which prescribes accounting and reporting
standards for all stock based compensation plans, including employee stock
options, restricted stock, employee stock purchase plans and stock appreciation
rights. ASC 718 requires compensation expense to be recorded using the fair
value method.
Environmental
Expenditures
Environmental
expenditures that relate to current ongoing operations or to conditions caused
by past operations are expensed as incurred.
Research
and Development Costs
Research
and development costs are recognized in the income statement when
incurred.
Income
Taxes
The
Company provides for income taxes in accordance with FASB ASC Topic 740
(originally SFAS No. 109, “Accounting for Income Taxes”) which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates, applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
Defined
Contribution Plan
Pursuant
to the relevant laws and regulations in the PRC, the Company participates in
various defined contribution retirement plans organized by the respective
divisions in municipal and provincial governments for its employees. The Company
is required to make contributions to the retirement plans in accordance with the
contribution rates and basis as defined by the municipal and provincial
governments. The contributions are charged to the respective assets or the
income statement on an accrual basis. When employees retire, the respective
divisions are responsible for paying their basic retirement benefits. The
Company does not have any other obligations in this respect.
The
Company contributed $17,841 and $16,759 for the six months ended June
30, 2010 and 2009, respectively.
Housing
Fund and Other Social Insurance
In
addition to retirement benefits, the Company makes contributions to the housing
fund and other social insurances such as basic medical insurance, unemployment
insurance, worker injury insurance and maternity insurance for its employees in
accordance with relevant laws and regulations. The Company makes monthly
contributions to the housing fund and the above insurances based on the
applicable rates of the employee salaries. The contributions are charged to the
respective liability account and the income statement on an accrual
basis.
12
Earnings
per Share
Basic
earnings per share are computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period.
Diluted
earnings per share are similar to basic earnings per share except that the
denominator is increased to included the number of additional common shares that
would have been outstanding if the potentially dilutive common shares had been
issued. Conversion or exercise of the potential common shares is not reflected
in diluted earnings per share unless the effect is dilutive. The dilutive
effect, if any, of outstanding common share equivalents is reflected in diluted
earnings per share by application of the if-converted and the treasury stock
method, as applicable. In determining whether outstanding stock options would be
considered for their dilutive effect, the average market price of the common
stock for the period has to exceed the exercise price of the outstanding common
share equivalent.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is defined as the change in equity of a company during a period
from transactions and other events and circumstances excluding transactions
resulting from investments from owners and distributions to owners. Accumulated
other comprehensive income (loss), as presented on the accompanying consolidated
balance sheets, consists of the cumulative foreign currency translation
adjustment.
Segment
Reporting
The
Company operates and manages its business as a single segment. As the Company
primarily generates its revenues from customers in the PRC, no geographical
segments are presented.
Recent
Accounting Pronouncements
Subsequent
Events – Amendments to Certain Recognition and Disclosure
Requirements
In
February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855)
Amendments to Certain Recognition and Disclosure Requirements ("ASU
2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An
entity that is an SEC filer is not required to disclose the date through which
subsequent events have been evaluated. This change alleviates potential
conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is
effective for interim and annual periods ending after June 15, 2010. The
Company does not expect the adoption of ASU 2010-09 to have a material impact on
its consolidated results of operations or financial position.
Technical
Corrections to Various Topics
In
February 2010 the FASB issued ASC Update 2010-08, which contains technical
corrections to various Topics within the ASC. Those corrections are effective
for interim and annual periods beginning after February 2, 2010. The Company is
currently evaluating the potential effects of ASC Update 2010-08.
Fair
Value Measurements and Disclosures – Improving Disclosures About Fair Value
Measurements
In
February, 2010, the FASB issued FASB ASC Update 2010-06, “Fair Value
Measurements and Disclosures – Improving Disclosures About Fair Value
Measurements,” ASU Update 2010-06 adds new requirements for disclosures of
significant transfers into and out of Levels 1, 2 and 3 of the fair value
hierarchy, the reasons for the transfers and the policy for determining when
transfers are recognized. ASU 2010-06 also adds new requirements for disclosures
about purchases, sales, issuances and settlements on a gross rather than net
basis relating to the reconciliation of the beginning and ending balances of
Level 3 recurring fair value measurements. It also clarifies the level of
disaggregation to require disclosures by “class” rather than by “major category
of assets and liabilities” and clarifies that a description of inputs and
valuation techniques used to measure fair value is required for both recurring
and nonrecurring fair value measurements classified as Level 2 or 3. ASU
Update 2010-06 is effective January 1, 2010 except for the requirements to
provide the Level 3 activity of purchases, sales, issuances and settlements
on a gross basis which are effective January 1, 2011. The adoption of ASU
2010-06 is not expected to have a material impact on the Company’s results of
operations or financial position.
13
Accounting
and Reporting for Decreases in Ownership of a Subsidiary- a Scope
Clarification
In
January 2010, FASB issued ASU 2010-2 Accounting and Reporting for Decreases
in Ownership of a Subsidiary- a Scope Clarification ("ASU 2010-2"). ASU
2010-2 addresses implementation issues related to the changes in ownership
provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of
the FASB Accounting Standards Codification, originally issued as FASB
Statement No. 160, Noncontrolling Interests in Consolidated Financial
Statements. Subtopic 810-10 establishes the accounting and reporting
guidance for noncontrolling interests and changes in ownership interests of a
subsidiary. An entity is required to deconsolidate a subsidiary when the entity
ceases to have a controlling financial interest in the subsidiary. Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value. The gain or loss includes any gain or loss associated with the difference
between the fair value of the retained investment in the subsidiary and its
carrying amount at the date the subsidiary is deconsolidated. In contrast, an
entity is required to account for a decrease in ownership interest of a
subsidiary that does not result in a change of control of the subsidiary as an
equity transaction. ASU 2010-2 is effective for the Company starting
January 3, 2010. The implementation of this issue did not have a material impact
on the Company’s financial position and results of operations.
Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles
In June
2009, the FASB approved the “FASB Accounting Standards
Codification” (“Codification”, “FASB ASC”) as the single source of
authoritative generally accepted accounting principles (GAAP) and created a new
Topic 105, Generally Accepted
Accounting Principles , in the General Principles and Objective Section
of the Codification. Topic 105 is effective for interim and annual periods
ending after September 15, 2009, and its adoption did not have an impact on our
financial condition or results of operations.
Consolidation
of Variable Interest Entities – Amendments to FASB Interpretation No.
46(R)
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)”, which has been codified as an update to FASB ASC Topic 810 which
requires ongoing analyses to determine whether an entity’s variable interest
gives it a controlling financial interest in a variable interest entity (“VIE”),
making it the primary beneficiary, based on whether the entity (i) has the
power to direct activities of the VIE that most significantly impact its
economic performance, including whether it has an implicit financial
responsibility to ensure the VIE operates as designed, and (ii) has the
obligation to absorb losses or the right to receive benefits of the VIE that
could potentially be significant to the VIE. Enhanced disclosures regarding an
entity’s involvement with variable interest entities are also required under the
provisions of FASB ASC 810. These requirements are effective January 1,
2010. The adoption of these requirements did not have a material impact on
the Company’s financial statements.
3.
Business Acquisitions
On May
11, 2010, we entered into an agreement with Mashan Group Ltd to acquire 52%
ownership of its wholly own subsidiary, Rongcheng Mashan Marine Bunker Company
(“Mashan”). Mashan was established in Shandong province, People’s Republic of
China (the “PRC”) on March 12, 2010 with registered capital of RMB 7 million.
The principal activities of Mashan are storage, distribution and trading of
blended marine fuel oil for cargo and fishing vessels.
The
acquisition price was RMB3.64 million (approximately $0.53 million) consisted
entirely of cash and was paid in full in May 2010. The acquisition of Mashan was
accounted for using the purchase accounting. The financial positions and results
of operations of Mashan have been included in our consolidated financial
statements since the acquisition date together with the 48% noncontrolling
interest that we did not acquire. The revenue and net income contributed by our
acquisition of Mashan is not significant as we only obtained 52% ownership of
the company and hence no pro forma information was provided.
14
The
purchase price of the Mashan acquisition was allocated to the acquired net
assets based on their estimated fair values appraised by an independent
valuation expert. The following table summarizes the estimated fair values of
the assets acquired and liabilities assumed at the date of
acquisition:
Mashan
|
||||
Property
and equipment
|
$ | 1,095,512 | ||
Payables
|
(67,400 | ) | ||
Noncontrolling
interests
|
(493,494 | ) | ||
Net
Assets Acquired
|
$ | 534,618 | ||
Cash
Paid
|
$ | 534,618 |
4.
Accounts Receivables
The
Company’s account receivables at June 30, 2010 and December 31, 2009 are
summarized as follows:
As of
|
||||||||
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
|
||||||||
Trade
accounts receivables
|
$
|
2,245,836
|
$
|
2,551,642
|
||||
Allowances
for doubtful accounts
|
(36,391
|
)
|
(36,239
|
)
|
||||
Accounts
receivables, net
|
$
|
2,209,445
|
$
|
2,515,403
|
5.
Other Receivables
The
Company’s other receivables at June 30, 2010 and December 31, 2009 are
follows:
As of
|
||||||||
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
|
||||||||
Other
receivables
|
$
|
1,782,227
|
$
|
1,722,206
|
||||
Allowances
for doubtful accounts
|
(416,474
|
)
|
(414,732
|
)
|
||||
Other
receivables
|
$
|
1,365,753
|
$
|
1,307,474
|
6.
Inventories
Inventories
at June 30, 2010 and December 31, 2009 consisted of the following:
|
As of
|
|||||||
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Marin
Fuel
|
$
|
17,019,953
|
$
|
13,298,794
|
||||
Other
consumables
|
31,778
|
3,736
|
||||||
Total
|
$
|
17,051,730
|
$
|
13,302,530
|
15
As of
June 30, 2010 and December 31, 2009, $0 and $5,022,679, respectively, of Dalian
Xingyuan’s inventory has been pledged as the collateral for a loan from Shenzhen
Development Bank (“SD Bank”).
7.
Property Plant and Equipment
The
Company’s property, plant and equipment at June 30, 2010 and December 31, 2009
are as follows:
As of
|
||||||||
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
|
||||||||
Property
and buildings
|
$
|
12,005,098
|
$
|
10,226,544
|
||||
Laboratory
equipment
|
337,825
|
336,412
|
||||||
Boiler
equipment
|
228,713
|
227,756
|
||||||
Marine
bunker
|
207,427
|
206,559
|
||||||
Transportation
vehicles
|
531,610
|
529,386
|
||||||
Office
equipment
|
35,038
|
34,891
|
||||||
Electronic
equipment
|
51,273
|
49,895
|
||||||
Total
|
13,396,984
|
11,611,443
|
||||||
Less:
Accumulated depreciation
|
(1,423,384
|
)
|
(1,170,197
|
)
|
||||
Net
Value
|
$
|
11,973,600
|
$
|
10,441,246
|
The
depreciation expenses were $253,187 and $92,038 for six months ended June 30,
2010 and 2009, respectively.
As of
June 30, 2010, $1,145,530 of Xingyuan’s property has been pledged as the
collateral for a loan from Shanghai Pudong Development Bank (“SPD
Bank”).
8.
Construction in Progress
The
Company’s construction in progress at June 30, 2010 and December 31, 2009 are
summarized as follows:
As of
|
||||||||
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
|
||||||||
Construction
in progress, cost
|
$
|
456,544
|
$
|
632,202
|
||||
Total
|
$
|
456,544
|
$
|
632,202
|
The
construction projects as of June 30, 2010 and December 31, 2009 were
constructions to build facilities to expand production capacity in Donggang and
Nanlian. Balances represent mainly construction expenditures and equipment
cost.
The
following table states costs incurred as each of the balance sheet date
presented:
As of
|
||||||||
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
|
||||||||
Berth
and berth improvement
|
$
|
172,043
|
$
|
437,109
|
||||
Oil
blending and storage tank
|
284,501
|
195,093
|
||||||
Total
|
$
|
456,544
|
$
|
632,202
|
16
9.
Intangible Assets
As of
|
||||||||
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
|
||||||||
Land
use rights
|
$
|
2,884,913
|
$
|
2,763,649
|
||||
Software
|
4,406
|
4,388
|
||||||
Total
|
2,889,319
|
2,768,037
|
||||||
Less:
accumulated amortizations
|
(110,808
|
)
|
(76,063
|
)
|
||||
Intangible
assets, net
|
$
|
2,778,511
|
$
|
2,691,974
|
Nanlian’s
land use rights of $2,149,915 have been pledged as collateral for a loan from
Baotou Commerce Bank as of June 30, 2010.
Donggang
Xingyuan’s land use rights of $550,772 have been pledged as collateral for a
loan from Shanghai Pudong Development Bank as of June 30, 2010.
Amortization
expenses for the six months ended June 30, 2010 and 2009 were $23,119 and
$34,735 respectively.
10. Related Party
Transactions
The
amounts due from related parties were as follows:
As of
|
||||||||
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
|
||||||||
Amount
due from An Fengbin
|
-
|
122,667
|
||||||
Total
|
$
|
-
|
$
|
122,667
|
In
November, 2009 Xingyuan advanced $122,667 to Donggang Aquatic Product Trading
Center and Donggang Xingyuan Ship Repair Yard, both companies were under the
common control of Mr. An Fengbin. The fund was used to construct facilities in
the Donggang port area that would provide marine services to complement the
services offered by the Company. Mr. An Fengbin is personally liable
to the Company for these advances.
In March,
2010 Donggang Aquatic Product Trading Center and Donggang Xingyuan Ship Repair
Yard repaid the amount in full to the Company.
11.
Short Term Loans
Interest
Rate
|
|||||||||||||
(Per Annum)
|
06-30-10
|
12-31-09
|
Terms
|
||||||||||
SD
Bank
|
5.84
|
%
|
$
|
-
|
$
|
1,462,587
|
December
9, 2009 – June 9, 2010
|
||||||
SD
Bank
|
4.86
|
%
|
-
|
1,901,363
|
December
11, 2009 – June 11, 2010
|
||||||||
SD
Bank
|
4.86
|
%
|
-
|
1,755,104
|
December
15, 2009 – June 15, 2010
|
||||||||
SPD
Bank
|
5.31
|
%
|
2,203,096
|
2,193,881
|
November
30, 2009 – July 27, 2010
|
||||||||
SPD
Bank
|
5.84
|
%
|
1,028,112
|
1,023,811
|
August
27, 2009 – July 27, 2010
|
||||||||
Baotou
Commerce Bank
|
5.84
|
%
|
1,909,350
|
1,901,363
|
July
22, 2009 – July 22, 2010
|
||||||||
Total
|
$
|
5,140,558
|
$
|
10,238,109
|
17
12.
Stock Options
On
January 25, 2010, the Company granted non-qualified stock options under the
Company’s 2009 Equity Incentive Plan to its directors. The exercise prices were
determined by the Board at the time of grant. The stock options granted become
exercisable (“vested”) immediately upon the grant date. Unless earlier
terminated, these stock options granted shall expire three years after the grant
date.
The fair
value of stock options granted was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Expected Life
|
Expected
Volatility
|
Dividend Yield
|
Risk Free
Interest Rate
|
Grant Date Fair
Value
|
||||||||||||
3
Years
|
86.91
|
%
|
0
|
%
|
1.40
|
%
|
$
|
3.10
|
Expected
Life: The expected life was determined based on the
option’s contractual term and employees’ expected early exercise and
post-vesting employment termination behavior.
Expected
Volatility: The
expected volatility is computed based on the standard deviation of the
continuously compounded rate of return of days when the stock price changed over
the past four years. Since the Company’s shares were not publicly traded until
January 2010, the expected volatility was calculated based on the average
volatilities of three comparable publicly listed companies.
Dividend
Yield: The expected dividend yield is
zero. The Company has not paid a dividend and does not anticipate
paying dividends in the foreseeable future.
Risk Free
Rate: Risk-free interest rate of 1.4% was
used. The risk-free interest rate was based on U.S. Treasury yields
with a remaining term that corresponds to the expected term of the option
calculated on the granted date.
Stock
compensation expense was recognized based on awards expected to
vest. There was no estimated forfeiture as the Company has a short
history of issuing options. FASB ASC Topic 718 requires forfeiture to
be estimated at the time of grant and revised in subsequent periods, if
necessary, if actual forfeitures differ from those estimates.
During
the first quarter ended March 31, 2010, the Company granted 13,125 stock options
to its directors. All options were vested immediately and the Company recognized
$40,738 for the 13,125 option as stock compensation expense during the quarter
ended March 31, 2010. The Company did not issue any options during the second
quarter ended June 30, 2010.
The
following is a summary of the stock options activity:
Number of
Options
Outstanding
|
Weighted
Average
Exercise Price
|
|||||||
Balance
at December 31, 2009
|
-
|
$
|
-
|
|||||
Granted
|
13,125
|
$
|
6.30
|
|||||
Forfeited
|
-
|
$
|
-
|
|||||
Exercised
|
-
|
$
|
-
|
|||||
Balance
at June 30, 2010
|
13,125
|
$
|
6.30
|
18
13.
Initial Public Offering
On
January 26, 2010, the Company completed its initial public offering of common
stock (“IPO”) of 3,134,921 shares of common stock at an offering price of $6.30
per share resulting in net proceeds to the Company of approximately $17.2
million, after deducting offering costs of $2.5 million.
On March
4, 2010 the underwriters of the initial public offering of common stock had
exercised their over-allotment option, which resulted in the issuance of an
additional 470,238 shares of common stock resulting in net proceeds of $2.6
million to the Company, after deducting offering costs of $227,750.
The
combined and consolidated financial statements, including share and per share
amounts, include the effects of the IPO because it was completed at January 26,
2010. Costs directly associated with the Company’s IPO have been recorded as a
reduction of the proceeds received in arriving at the amount to be recorded in
additional paid-in capital as of June 30, 2010. The Company filed its
initial Form S-1 with the SEC on August 27, 2009 and closed its IPO on
March 4, 2010.
14.
Restricted Net Assets
The
Company’s ability to pay dividends is primarily dependent on the Company
receiving distributions of funds from its subsidiaries. Relevant PRC statutory
laws and regulations permit payments of dividends by the Group’s PRC subsidiary
only out of their retained earnings, if any, as determined in accordance with
PRC accounting standards and regulations. The results of operations reflected in
the financial statements prepared in accordance with U.S. GAAP differ from those
reflected in the statutory financial statements of the Company’s subsidiary and
VIE.
In
accordance with the Regulations on Enterprises with Foreign Investment of China
and their articles of association, a foreign invested enterprise established in
the PRC is required to provide certain statutory reserves, namely general
reserve fund, the enterprise expansion fund and staff welfare and bonus fund
which are appropriated from net profit as reported in the enterprise’s PRC
statutory accounts. A wholly-owned foreign invested enterprise is required to
allocate at least 10% of its annual after-tax profit to the general reserve
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. Appropriations to the enterprise
expansion fund and staff welfare and bonus fund are at the discretion of the
board of directors for all foreign invested enterprises. The aforementioned
reserves can only be used for specific purposes and are not distributable as
cash dividends. Fusheng were established as a wholly-owned foreign invested
enterprise and therefore are subject to the above mandated restrictions on
distributable profits.
Additionally,
in accordance with the Company Law of the PRC, a domestic enterprise is required
to provide statutory common reserve at least 10% of its annual after-tax profit
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. A domestic enterprise is also required
to provide for discretionary surplus reserve, at the discretion of the board of
directors, from the profits determined in accordance with the enterprise’s PRC
statutory accounts. The aforementioned reserves can only be used for specific
purposes and are not distributable as cash dividends. Xingyuan and its
subsidiaries were established as domestic invested enterprises and therefore are
subject to the above mandated restrictions on distributable
profits.
As
a result of these PRC laws and regulations that require annual appropriations of
10% of after-tax income to be set aside prior to payment of dividends as general
reserve fund, the Company’s PRC subsidiary and VIE are restricted in their
ability to transfer a portion of their net assets to the Company.
Amounts
restricted include paid-in capital and statutory reserve funds of the Company’s
PRC subsidiary and VIE as determined pursuant to PRC generally accepted
accounting principles, totaling approximately US$2,074,000 and US$2,065,000 as
of June 30, 2010 and December 31, 2009, respectively; therefore in
accordance with Rules 504 and 4.08 (e) (3) of Regulation S-X, the condensed
parent company only financial statements as of March 31, 2010 and December 31,
2009, for each of the years in the period ended June 30, 2010 and December 31,
2009 are disclosed in Note 17.
19
15. Taxes Payable
Taxes
Payable as of June 30, 2010 and December 31, 2009 were made up of the
followings:
June
30, 2010
|
December
31, 2009
|
|||||||
Income
Tax Payable
|
$ |
3,534,614
|
$ |
3,248,283
|
||||
VAT
Payable
|
6,157,101
|
7,504,252
|
||||||
Other
Tax Payable
|
137,028
|
249,180
|
||||||
Total
|
$ |
9,828,743
|
$ |
11,001,715
|
Value Added Tax
(“VAT”)
The
Group’s PRC entities are subject to VAT at an effective rate of 17% of the
revenues.
Donggang
City provided special tax exemptions to the enterprises incorporated in
Donggang. Donggang Xingyuan is entitled to enjoy a special 15% tax exemption of
its monthly paid VAT as a refund to the Company.
Income
Taxes
Goodwill
Rich is subject to income taxes in Hong Kong at the rate of 16.5%.
The
Group’s PRC entities are subject to Chinese new Enterprise Income Tax(“EIT”) of
25% effective January 1, 2008. Prior to 2008, the EIT rate was
33%
Donggang
Xingyuan was granted a special tax exemption by Donggang City whereby 20% of its
paid EIT will be refunded to the Company.
No
provision for US tax is made as the Company has no assessable income in the US
for the six months ended June 30, 2010 and 2009. The Corporation income tax of
US is 35%.
16.
Commitment and Contingency
Lease
Obligation
The
Company has entered into several tenancy agreements for the lease of storage
facilities, offices premises and berth use rights. The Company’s commitment for
minimum lease payments under these operating leases for the next five years and
thereafter is as follows:
For
the year 2010
|
234,552 | |||
For
the year 2011
|
496,753 | |||
For
the year 2012
|
— | |||
For
the year 2013
|
— | |||
Thereafter
|
— | |||
Total
|
$ | 731,305 |
Rental
expenses, including storage tank leasing charges and office rental charges, were
approximately $235,638 and $291,469, for six months ended June 30, 2010 and
2009, respectively, and were charged to the statement of operations as
incurred.
Share
Purchase Agreement
In
December 2008, the Company entered into a share purchase agreement with Chen
Weiwen to purchase its 63% ownership of Xiangshan Yongshinanlian Petroleum
Company, according to the foresaid agreement, the Company is bound to pay RMB
8,880,000 (approximately $1.3 million) for the remaining 37% ownership of Nalian
to Mr. Chen upon his request after the year of 2010.
20
Litigation
and Claims
On
January 16, 2008, Xingyuan obtained a judgment in its favor in the sales
contract dispute at the trial court level against Yantai Development Zone
Fuchang Bunker Co., Ltd. (“Fuchang”). Under this judgment for specific
performance, Fuchang is required to deliver approximately 163 tons of marine
fuel to Xingyuan within 20 days following the court decision or to pay to
Xingyuan a restitution amount of RMB 791,473 (approximately $116,000) plus legal
expenses of the lawsuit of RMB 16,510 (approximately $2,400).
On May 6,
2008, Xingyuan, obtained a judgment in a contractual dispute in its favor
against Dalian Dafangshen Ocean Fishery Co., Ltd. (“Dafangshen”) in the amount
of RMB 1,431,487 (approximately $209,000) and the penalty of approximately RMB
1,000,000 (approximately $146,000). Dafangshen did not appeal the judgment and,
therefore, the Company intends to collect on this judgment to the full extent
permissible under the PRC law.
In June
2008, in a separate joint-cooperation contract dispute by and between Dalian
Xingyuan and Fuchang, Fuchang obtained a judgment against Dalian Xingyuan
following a trial in the amount of RMB1,000,000. On August 15, 2009, the
people’s court of first instance formed a new collegial panel and rendered its
judgment in favor of Dalian Xingyuan, as a result of which judgment Dalian
Xingyuan will not be required to pay the RMB1,000,000 penalty to Fuchang.
Fuchang has appealed the verdict and lost on the appeal with the people’s court,
thereby exhausting all of its appeals in this matter. Dalian Xingyuan is in the
process of enforcing and collecting upon the judgment in this
matter.
17.
Subsequent Events
On July
15, 2010, Dalian Xingyuan obtained bank acceptance notes of RMB 50 million
(approximately $7.4million) with SD Bank by depositing RMB 15 million
(approximately $2.2 million) in advance for six months, maturing on January 19,
2010.
On July
20, 2010, the Company entered into an agreement with Tianjin Hailong LTD to
acquire 52% ownership of the company for RMB 346 million (approximately $0.5
million).
On July
22, 2010, Nanlian repaid its bank loan of RMB 13 million (approximately $1.9
million) with Baotou Commerce Bank.
On July
23, 2010, the Company filed with the SEC a registration statement on Form S-8 to
register 5,000,000 shares (subject to adjustment to prevent dilution from stock
dividends, stock splits, recapitalization or similar transactions) of the
Company's common stock issuable under the Company's 2009 Equity Incentive Plan
(the "Plan"). Under the Plan, the Compensation Committee of the Board may grant,
from time to time, awards in the form of incentive stock options, as defined in
Section 422 of the Internal Revenue Code, as well as options which do not so
qualify, stock units, stock awards, stock appreciation rights and other
stock-based awards to the Company's executive officers, directors, employees,
outside consultants and advisors. As of the date hereof, the Company has issued
173,125 options under the Plan, with 4,826,875 options available for
issuance.
On July
27, 2010, Dalian Xingyuan repaid its bank loan of RMB 22 million (approximately
$3.2 million) with Shanghai Pudong Development Bank.
On August
2, 2010, the Company secured a credit line of up to RMB 30 million
(approximately $4.4 million) from Shanghai Pudong Development Bank.
21
18.
Parent Company Only Condensed Financial Information
Condensed
Balance Sheets
As of
|
||||||||
June
30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
|
||||||||
ASSETS
|
|
|
||||||
Noncurrent
assets
|
|
|
||||||
Investment
in subsidiaries
|
41,768,572 | 17,572,253 | ||||||
Total
noncurrent assets
|
41,768,572 | 17,572,253 | ||||||
Total
assets
|
$ | 41,768,572 | $ | 17,572,253 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Commitments
and contingencies
|
— | — | ||||||
Stockholders'
equity
|
||||||||
Common
stock; par value $0.001; 50,000,000 shares authorized; 9,605,159 and
6,000,000 shares issued and outstanding as of March 31, 2010 and December
31, 2009 respectively
|
9,610 | 6,000 | ||||||
Additional
paid in capital
|
29,533,555 | 9,533,619 | ||||||
Retained
earnings (Deficit)
|
11,591,168 | 7,543,994 | ||||||
Other
comprehensive income
|
634,239 | 488,640 | ||||||
Total
stockholders’ equity
|
41,768,572 | 17,572,253 | ||||||
Total
liabilities and stockholders' equity
|
$ | 41,768,572 | $ | 17,572,253 |
Condensed
Statements of Income:
As of
|
||||||||
June 30,
|
June 30,
|
|||||||
2010
|
2009
|
|||||||
|
||||||||
Operating
income
|
||||||||
Equity
in profit of subsidiaries & VIE
|
4,047,174
|
3,190,024
|
||||||
Net
income attributable to the Company
|
4,047,174
|
3,190,024
|
Condensed
Cash Flow Statements
As of
|
||||||||
June 30,
|
June 30,
|
|||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$
|
4,047,174
|
$
|
3,190,024
|
||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Equity
in profit of subsidiaries & VIE
|
(4,047,174
|
)
|
(3,190,024
|
)
|
||||
Net
cash provided by operating activities
|
—
|
—
|
||||||
Net
change in cash and cash equivalents
|
—
|
—
|
||||||
Cash
and cash equivalents, beginning of period
|
—
|
—
|
||||||
Cash
and cash equivalents, end of period
|
$
|
—
|
$
|
—
|
Basis
of Presentation
For the
presentation of the parent company only condensed financial information, the
Company records its investment in subsidiaries under the equity method of
accounting as prescribed in APB opinion No. 18, “ The Equity Method of Accounting for
Investments in Common Stock ”. Such investment is presented on the
balance sheet as “Investment in Subsidiaries” and 100% of the subsidiaries
profit or loss as “Equity in profit or loss of subsidiaries” on the statement of
income.
22
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
This
Quarterly Report on Form 10-Q (including the section regarding Management’s
Discussion and Analysis of Financial Condition and Results of Operations)
contains certain “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, as well as information relating to Andatee
China Marine Fuel Services Corporation that is based on management’s exercise of
business judgment and assumptions made by and information currently available to
management. Although forward-looking statements in this Quaterly Report reflect
the good faith judgment of our management, such statements can only be based on
facts and factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. When used in this document and
other documents, releases and reports released by us, the words “anticipate,”
“believe,” “estimate,” “expect,” “intend,” “the facts suggest” and words of
similar import, are intended to identify any forward-looking statements. You
should not place undue reliance on these forward-looking statements. These
statements reflect our current view of future events and are subject to certain
risks and uncertainties as noted below. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, our
actual results could differ materially from those anticipated in these
forward-looking statements. Actual events, transactions and results may
materially differ from the anticipated events, transactions or results described
in such statements. Although we believe that our expectations are based on
reasonable assumptions, we can give no assurance that our expectations will
materialize. Many factors could cause actual results to differ materially from
our forward looking statements. Other unknown, unidentified or unpredictable
factors could materially and adversely impact our future results. You should
read the following discussion and analysis in conjunction with our unaudited
financial statements contained in this report , as well as the audited financial
statements, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and “Risk Factors” contained in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009. We undertake no
obligation and do not intend to update, revise or otherwise publicly release any
revisions to our forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of any unanticipated
events.
Except
where the context otherwise requires and for purposes of this Quarterly
Report:
|
·
|
the
terms “we,” “us,” “our company,” “our” refer to Andatee China Marine Fuel
Services Corporation, a Delaware corporation, its subsidiaries Goodwill
Rich International Limited and Dalian Fusheng Consulting Co. Ltd., its
variable interest entity (VIE), Dalian Xingyuan Marine Bunker Co. Ltd.,
through which entity we conduct all of our business operations, and the
subsidiaries of our VIE entity, which are Donggang Xingyuan Marine Bunker
Company Ltd., Xiangshan Yongshinanlian Petrol Company Ltd., Rongcheng
Mashan Marine Bunker Company and Rongcheng Xinfa Petrol Company
Ltd.;
|
|
·
|
the
term “Andatee” refers to Andatee China Marine Fuel Services Corporation,
the parent company;
|
|
·
|
the
term Goodwill’’ refers to Goodwill Rich International Limited, a
subsidiary of Andatee, which for financial reporting purposes is the
predecessor to Andatee; and
|
|
·
|
“China”
and “PRC” refer to the People’s Republic of China, and for the purpose of
this Annual Report only, excluding Taiwan, Hong Kong and
Macau.
|
23
Critical
Accounting Policies
We
prepare financial statements in conformity with U.S. GAAP, which requires us to
make estimates and assumptions that affect the amounts reported in our combined
and consolidated financial statements and related notes. We periodically
evaluate these estimates and assumptions based on the most recently available
information, our own historical experience and various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Since the use of estimates is
an integral component of the financial reporting process, actual results could
differ from those estimates. We believe the following accounting policies
involve the most significant judgments and estimates used in the preparation of
our financial statements.
Revenue
Recognition
We
primarily generate revenue from blended products sales to distributors and end
users. We also generate revenue from raw materials sales. We consider revenue
from the sale of our blended products and raw materials realized or realizable
and earned upon meeting all of the following criteria: persuasive evidence of a
sale arrangement exists, delivery has occurred, the price to the distributor is
fixed or determinable, and collectability of payment is reasonably assured.
These criteria are met at the time of shipment when the risk of loss passes to
the distributor or end user. Revenue represents the invoiced value of sold
goods, net of VAT. Our products, all of which are sold in China, are subject to
a Chinese VAT at a rate of 17% of the gross sales price or at a rate approved by
the Chinese local government. This VAT may be offset by VAT we paid on raw
materials and other materials included in the cost of producing the finished
product. The VAT amounts paid and available for offset are maintained in our
current liabilities.
Accounts
Receivables
During
the normal course of business, we extend to some of our customers interest-free
unsecured credit for an initial term of 30 - 60 days, depending on a
customer’s credit history, as well as local market practices. Our accounts
receivable turnover in days for the six months ended June 30, 2010 and 2009 were
5.8 and 7.0 days, respectively. We review our accounts receivables quarterly and
determined the amount of allowances, if any, necessary for doubtful accounts.
Historically, we have not had any bad debt write-offs and, as such, we do not
provide an arbitrary reserve amount for possible bad debts based upon a
percentage of sales or accounts receivable balances. Rather, we review our
accounts receivable balances to determine whether specific reserves are required
due to such issues as disputed balances with customers, declines in customers’
credit worthiness, or unpaid balances exceeding agreed-upon terms. Based upon
the results of these reviews, we determine whether a specific provision should
be made to provide a reserve for possible bad debt write-offs.
In
addition, we also communicate with our customers each month to identify any
potential issues and reassess our credit limits and terms with them based on
their prior payment history and practice. We also plan to continue building upon
our existing relationships and history with each of our customers to assist us
in the full and timely collection of outstanding payments.
As of
June 30, 2010 and December 31, 2009, we had outstanding accounts receivable
totaling US$2.25 million and US$2.55 million, respectively, among which we
identified and provided for doubtful debts of US$36,391 and US$36,239,
respectively. We believe that the remaining outstanding amounts will be
collected pursuant to the terms, conditions, and within the time frames agreed
upon between our customers and us primarily due to the enhanced collection
measures.
During
the reported periods, we did not experience any material problems relating to
distributor payments and our only bad debt write off, recorded in 2009 and
included in other expense, related to certain 2007 advances to suppliers which
we determined to be unrecoverable.
Assessment
of Impairment for Long-lived Assets
Our
long-lived assets include fixed assets, intangible assets and goodwill. Fixed
assets comprise property and buildings, marine bunker, boiler equipment,
laboratory equipment, transportation vehicles and other office equipment, and
are depreciated over the estimated useful lives of the assets on a straight-line
basis. Intangible assets mainly comprise land use right and other finite-lived
intangible assets. We amortize the cost of intangible assets over their expected
future economic lives. Goodwill represents the excess of the purchase price over
the net of the fair value of the identifiable tangible and intangible assets
acquired and the fair value of liabilities assumed upon the business
acquisitions. Goodwill is stated at cost less provision for impairment loss.
Management’s judgment is required in the assessment of the economic lives of
intangible assets and useful lives of the fixed assets. Based on the existence
of one or more indicators of impairment, we measure any impairment of fixed
assets, intangible assets and goodwill based on a projected discounted cash flow
method using a discount rate determined by our management which is commensurate
with the risk inherent in our business model. An impairment charge would be
recorded if we determined that the carrying value of fixed assets, intangible
assets and goodwill may not be recoverable. Our estimates of future cash flows
require significant judgment based on our historical results and anticipated
results and are subject to many factors.
24
Determination
of Functional Currencies
Our
reporting currency is the U.S. dollar. The functional currency of Andatee and
Goodwill are the U.S. dollar. The functional currency of our PRC subsidiary, our
VIE and its subsidiaries in China is the RMB. An entity’s functional currency is
the currency of the primary economic environment in which it operates. Normally,
that is the currency of the environment in which it primarily generates and
expends cash. Management’s judgment is essential in the determination of the
functional currency which is made by assessing various indicators, such as cash
flows, sales price and market, expenses, financing and inter-company
transactions and arrangements. Assets and liabilities of our subsidiary and VIE
entities in China are translated into U.S. dollars, our reporting currency, at
the exchange rate in effect at the balance sheet date and revenues and expenses
are translated at the current exchange rate in effect during the reporting
period. Foreign currency translation adjustments are not included in determining
net income for the period but are accumulated in a separate component of
consolidated equity on the balance sheet. The accumulated foreign currency
translation adjustment as of June 30, 2010 and 2009 was a gain of $145,599 and
$14,542, respectively.
Business
and Operations Overview
Andatee
China Marine Fuel Services Corporation is a Delaware corporation. Our
executive offices are located in the City of Dalian, a key international
shipping hub and international logistics center in North China. Our main offices
are located in the city of Dalian, Dalian Ganjingzi District, Dalian Wan
Lijiacun, at Unit C, No. 68 West Binhai Road, Xigang District Dalian,
China
We carry
out all of our business through our Hong Kong subsidiary, Goodwill, and its
wholly-owned Chinese subsidiary, Fusheng, and Fusheng’s variable interest entity
(VIE), Dalian Xingyuan, and Dalian Xingyuan’s subsidiaries (Dalian Xingyuan and
its subsidiaries collectively referred to as the VIE
entities). Through these VIE entities, we are engaging in the
production, storage, distribution and wholesale purchases and sales of blended
marine fuel oil for cargo and fishing vessels with operations mainly in
Liaoning, Shandong and Zhejiang Provinces in People’s Republic of China
(PRC). Our operations in China are conducted through our VIE, Dalian
Xingyuan Marine Bunker Company, Ltd. and its four subsidiaries: Donggang
Xingyuan Marine Bunker Company, Ltd. (located in Dandong City, Liaoning
Province, and established in April 2008 under the laws of the PRC), Xiangshan
Yongshi Nanlian Petrol Company, Ltd. (located in Xiangshan City, Zhejiang
Province, and established in May 1997 under the laws of the PRC), Rongcheng
Xinfa Petrol Company, Ltd. (located in Rongcheng City, Shandong Province, and
established in September 2007 under the laws of the PRC) and Rongcheng Mashan
Xingyuan Marine Bunker Company, Ltd. (located in Rongcheng City, Shandong
Province, and established in April 2010 under the laws of the
PRC). We compete by providing our customers value added benefits,
such as single-supplier convenience, competitive pricing, logistical support and
fuel quality control.
Currently,
we sell approximately 51% of our products through distributors and approximately
49% to retail customers. Our products are substitutes for diesel used throughout
east coast of China fishing industry by small to medium sized cargo vessels. Our
core facilities include storage tanks, berths (the space allotted to a vessel at
the wharf), marine fuel pumps, blending facilities and tankers. Our sales
network covers major depots along the towns of Dandong, Shidao and Shipu along
the east coast of China.
Our
marine fuel for cargo vessels is classified as CST180 and CST120; our marine
fuel for fishing boats/vessels, - #2 fuel (for engines with 1,800 rpm capacity),
#3 fuel (for engines with 1,600 rpm capacity) and #4 fuel (for engines with
1,400 rpm capacity). We also produce blended marine fuel according to customer
specifications using our proprietary blending technology. Our own blend of
marine diesel oil, #3 fuel and #4 fuel are substitutes for the traditional
diesel oil, commonly known as #0 diesel oil, used by most small to medium
vessels. We generate virtually all of our revenues from our own brands of
blended oil products.
25
Our
overall strategies are to (i) increase our share of retail sales since such
sales are less price-sensitive than sales to the distributors, (ii) acquire our
own retail facilities to reduce the risk of opportunistic negotiations from our
retail customers during periods of volatile oil prices and (iii) build retail
points in strategic locations (often close to recently acquired locations) to
capture a majority of active local markets.
During
the first half of 2010, crude oil prices fluctuated around $79 a barrel, an
average increase of approximately $24 per barrel as compared with the same
period in 2009. We had seen that the demand from fishing industry has
been substantially picking up, as the water temperature returned to normal
level, the whole industry has stepped up its efforts in a bid to gain back what
they missed in the first quarter. From Donggang in the north down to
Zhejiang province, the fishing activities have surged as compared with the first
quarter, which boosted the demand for our marine fuel products. Therefore,
the revenue for the six months ended June 30, 2010 has increased by 39.1% to
$73.8 million as compared with the same period in 2009, along with that the
sales volume has increased by 4.3% to 120,000 tons as compared with the same
period in 2009. The increase in revenue is mainly due to the rise of the average
marine fuel product price, growth in sales volume and the increase in revenue
from retail customers. In the first half of 2010, 48.8% of our sales were to
retail customers as compared with 38% in 2009.
We
believe that improving our retail sales and distribution channels will
generate stable gross margins which, in turn, will offset the pressure imposed
on our profit margin by crude oil prices. We believe that higher retail sales
and closer ties with our end users as well as wider distribution network are at
the core of our strength and business viability going forward. We intend to (i)
control more facilities closer to end markets, through business acquisitions,
partner cooperation, building local platform for our products and added-value
services, which would enhance the brand awareness of the “Xingyuan” brand and
(ii) expand our product line and upgrade production facilities to explore the
increasing markets opportunities and increase our share in retail
market.
We
maintained gross profit margins of 12% for both of the six months ended June 30,
2010 and 2009, respectively. We had revenues of US$73.8 million and US$53.1
million and net income attributable to our shareholders of US$4.1 million and
US$3.2 million for the six months ended June 30, 2010 and 2009,
respectively. This is mainly due to higher revenues and higher
general and administrative expenses in the subject period.
Principal
Factors Affecting our Financial Performance
We
believe that the following factors will continue to affect our financial
performance:
•
|
Increasing
demand for blended marine fuel - The increasing
demand for blended marine fuel has a positive impact on our financial
position. The strong growth in the blended marine fuel industry since 2002
has been driven by several factors, including, among others, steady
population growth in the PRC, improvements in the living standards,
national energy conservation
efforts.
|
•
|
Expansion
of our sources of supply, production capacity and sales
network - To meet the
increasing demand for our products, we need to expand our sources of
supply and production capacity. We plan to make capital improvements in
our existing production facilities, which would improve both their
efficiency and capacity. In the short-run, we intend to increase our
investment in our reliable supply network, personnel training, information
technology applications and logistic system
upgrades.
|
•
|
Fluctuations
in Crude Oil Price - We use oil refinery
by-products as raw materials for our production. The recent increase in
oil prices had a direct impact on the price we pay for these products.
However, we mitigated this in the short-term by increasing the price of
our products and passing the entirety of the increase to our
customers.
|
26
Results of
Operations
Comparison
of second quarters and six months ended June 30, 2010 and 2009
Revenue
Our
revenue increased by US$16.2 million, or 58.2%, from US$27.8 million for the
second quarter ended June 30, 2009 to US$44.1 million for second quarter ended
June 30, 2010. The increase in our revenues was due to the increased sales
volume and higher average crude oil price. The sales volume increase by 13,000
tons, or 22%, from 60,000 tons for the second quarter ended June 30, 2009 to
73,000 tons for the second quarter ended June 30, 2010. While the international
crude oil price has rised from $63 per barrel in the second quarter of 2009 to
$79 per barrel in the second quarter of 2010. The increase in sales volume was
mainly the result of growing fishing activities in fishing industry, which tried
to make up the loss in the first quarter of 2010 due to the lower water
temperature.
Our
revenue increased by US$20.7 million, or 39.1%, from US$53.1 million for the six
months ended June 30, 2009 to US$73.8 million for six months ended June 30,
2010. The increase in our revenues was the result of increased
retail sales due to the expansion of our sales network, increased sales volume
and higher average international crude oil price. The portion of retail sales in
our total revenues had increased to 48.8% for the first half of 2010 from 38%
for the first half of 2009. During the six months ended June 30, 2010 the
international oil prices stayed around the level of $79 per barrel in comparison
to average oil price of $55 per barrel in the first half of 2009.
Our
overall sales volume increased by 4.3% or 5,000 tons, from115,000 tons for the
six months period ended June 30, 2009 to approximately 120,000 tons for the six
months period ended June 30, 2010. During the second quarter of 2010, as the
water temperature returned to normal level fishing industry increased its
working hours to make up the loss its experienced in the first quarter,
which, in turn, resulted in higher demand for our fuel products.
For the
six months ended June 30, 2010, 2# marine fuel represented 9.5% of our
sales, 3# marine fuel represented 10.0% of our sales, 4# marine fuel
represented 65.1% of our sales, 180CST represented 10.3% of our sales
and 120CST represented 5.1% of our sales. In 2009, 2# marine fuel
represented 8.7% of our sales; 3# marine fuel represented 10.5% of our
sales, 4# marine fuel represented 70.9% of our sales, 180CST represented 8.4% of
our sales and 120CST represented 1.5% of our sales.
Cost
of Revenue
Our cost
of revenues increased by US$14.3 million, or 58.7%, from US$24.4 million for the
second quarter ended June 30, 2009 to US$38.8 million for the second quarter
ended June 30, 2010 due to higher sales.
Our cost
of revenues increased by US$18.2 million, or 39.2%, from US$46.7 million for the
six months ended June 30, 2009 to US$64.9 million for the six months ended June
30, 2010 due to higher sales.
However,
as a percentage of revenues, the cost of revenues remained flat at 88.1% for the
six months ended June 30, 2010 and 2009.
Gross
Profit
As a
result of the efforts discussed above, our gross profit increased by US$1.8
million, or 54.7%, to US$5.3 million for the second quarter of 2010 as compared
to US$3.4 million in the second quarter of 2009. As a percentage of revenues,
our gross profit margin was 12% for the second quarter of 2010 and 2009,
respectively.
Our gross
profit increased by US$2.4 million, or 38.1%, to US$8.8 million for the first
half of 2010 as compared to US$6.4 million in 2009. As a percentage of revenues,
our gross profit margin was 11.9% for the first half of 2010 and 2009,
respectively. The increase in our gross profit percentage resulted primarily
from an increase in the sale of products with higher gross profit margin. As the
result of our expansion and acquisition of retail distribution facilities in
Xinfa, Nanlian and Mashan, our sales to retail
customers, which generally carry a higher gross profit margin, increased from
38% of total sales for the first half of 2009 to 48.8% of sales in the first
half of 2010.
27
Selling
Expenses
Selling
expenses increased by US$0.3 million, or 68.8%, from US$0.4 million for the
second quarter of 2009 to US$0.7 million in second quarter of 2010. The increase
was primarily due to the increase in sales employees’ compensation as a result
of increased sales and an increase in promotional expense to market our products
in the area of Mashan, where our newly acquired subsidiary is located. As a
percentage of revenues, selling expenses increased from 1.6% for the second
quarter of 2009 to 1.7% for 2010.
Selling
expenses increased by US$0.2 million, or 17.4%, from US$1.3 million for the
first half of 2009 to US$1.5 million in 2010. The increase was primarily due to
the increase in sales employees’ compensation and other promotional expenses in
Donggang and Mashan areas. As a percentage of revenues, selling expenses
decreased from 2.4% for the first half of 2009 to 2.0% for 2010.
General
and Administrative Expenses
General
and administrative expenses increased by US$65,507, or 10.7%, from US$611,243
for the second quarter of 2009 to US$676,750 for the second quarter of 2010. The
increase was primarily due to increased professional and other various expenses
associated with maintaining the public company status in the United
States. As a percentage of revenues, general and administrative
expenses decreased from 2.2% for the second quarter of 2009 to 1.5% for
2010.
General
and administrative expenses increased by US$0.5 million, or 61.1%, from US$0.8
million for the first half of 2009 to US$1.3 million for the first half of 2010.
The increase was primarily due to increased professional and other various
expenses associated with maintaining the public company status in the United
States. As a percentage of revenues, general and administrative
expenses increased from 1.5% for the first half 2009 to 1.7% for the first half
of 2010.
Operating
Income
As a
result of the factors discussed above, our operating income increased by US$1.5
million, or 63.5%, from US$2.4 million for the second quarter of 2009 to US$3.9
million for the second quarter of 2010. As a percentage of revenues, our
operating income increased from 8.5% for the second quarter of 2009 to 8.8% for
2010.
Our
operating income increased by US$1.7 million, or 39.8%, from US$4.3 million for
the first half of 2009 to US$6.0 million for the first half of 2010. As a
percentage of revenues, our operating income increased from 8.1% for the first
half of 2009 to 8.2% for the first half of 2010.
Interest
Expense
Interest
expense increased by USD$65,948, or 100.0%, from US$65,667 for the second
quarter of 2009 to US$131,615 for the second quarter of 2010. The increase in
interest expense was the result of increase in the level of our loan
financing.
Interest
expense increased by USD$186,412, or 283.8%, from US$65,667 for the first half
of 2009 to US$252,079 for the first half of 2010. The increase in interest
expense was the result of increase in the level of our loan
financing.
Provision
for Income Taxes
Provision
for income taxes increased US$0.6 million, or 124%, from US$0.4 million for the
second quarter of 2009 to US$1.0 million for the second quarter of 2010. This
increase in the provision for income taxes was primarily attributable to the
increase in our pre-tax income by 64.4% over 2009.
28
Provision
for income taxes increased US$0.7 million, or 65.7%, from US$0.9 million for the
first half of 2009 to US$1.6 million for the first half of 2010. This increase
in the provision for income taxes was primarily attributable to the increase in
our pre-tax income by 36.2% over 2009. Our effective tax rates were 27.7% in
2010 and 23% in 2009.
Net
Income
As a
result of the foregoing, net income increased by US$0.9 million, or 52.7%, from
US$1.7 million for the second quarter of 2009 to US$2.6 million for
2010.
Net
income increased by US$0.9 million, or 26.9%, from US$3.2 million for the first
half of 2009 to US$4.1 million for the first half of 2010.
Liquidity
and Capital Resources
We
believe our ability to generate cash from operating activities is one of our
fundamental financial strengths. In addition to cash from operating activities,
we also maintain a revolving loan arrangement with Shenzhen Development Bank
Co., Ltd., as discussed below, for our capital requirements. Our
future capital expenditures will include building new fueling facilities,
improving and upgrading our existing production facilities, expanding product
lines, research and development capabilities, and making acquisitions as we deem
appropriate.
We
estimate $8.1 million will be needed in the fiscal 2010 to fund the construction
projects for new manufacturing facilities and the improvement and upgrades of
our existing manufacturing facilities. In addition, we intend to reserve
approximately $5.3 million for future acquisitions.
On May
18, 2010, Xingyuan acquired 52% ownership of Rongcheng Mashan Marine Bunker
Company (“Mashan”), for a total consideration of RMB3.64 million (approximately
$0.53 million) in cash, which was fully paid in May 2009.
On
January 26, 2010, the Company completed its initial public offering of common
stock (“IPO”) of 3,134,921 shares of common stock at an offering price of $6.30
per share resulting in net proceeds to the Company of approximately $17.2
million, after deducting offering costs of $2.5 million. On March 4, 2010 the
underwriters of the initial public offering of common stock had exercised their
over-allotment option, which resulted in the issuance of an additional 470,238
shares of common stock. The Company received proceeds of another $2.6 million,
net of offering costs of $227,750.
We
believe that the net proceeds of approximately $20 million from our IPO,
together with our cash flow from operating activities and bank borrowings, will
be sufficient to meet our anticipated cash requirements for the next 12 months.
If we need additional cash, we may seek to raise capital either through the
issuance of stock or increase our borrowing level with our lender.
We
maintain a revolving line of credit with Shenzhen Development Bank Co., Ltd. in
the amount of up to RMB60 million (US$8.6 million). The term of the loan is six
months at the interest rate of 5.84% per annum. The loan agreement contemplates
a 50% penalty interest in the event of our failure to repay the note in a timely
manner. As of June 30, 2010, we had no borrowing on this line of
credit.
As of
June 30, 2010, we had cash of US$13.4 million in our bank accounts and a working
capital surplus of $27.4 million. The increase in our cash balance as at June
30, 2010 reflects proceeds received from a successful IPO of $20
million. Regarding our current level of borrowing, see the discussion
below on our existing short-term notes. There is no seasonal fluctuation in
our borrowing requirements.
29
The
following table sets forth a summary of our cash flows for the periods
indicated:
As of June 30,
|
||||||||
|
2010
|
2009
|
||||||
Cash
flow data:
|
|
|
|
|
|
|||
Net
cash provided by (used in) operating activities
|
$ |
(2,111,942
|
)
|
$ |
2,048,438
|
|||
Net
cash used in investing activities
|
(1,035,978
|
)
|
(1,234,004
|
)
|
||||
Net
cash provided by (used in) financing activities
|
14,891,953
|
(876,779
|
)
|
|||||
Effect
of exchange rate on cash
|
143,771
|
6,775
|
||||||
Net
changes in cash
|
11,887,804
|
(55,570
|
) | |||||
Cash
at beginning of period
|
1,539,009
|
4,923,913
|
||||||
Cash
at end of period
|
$ |
13,426,813
|
$ |
4,868,343
|
Operating
Activities
Net cash
used in operating activities for six months ended June 30, 2010 was US$2.1
million, which was primarily as a result of the following factors: (1)
net income of US$4.0 million, (2) a decrease in accounts receivable of US$0.3
million as a result of increased revenue in cash, (3) an increase in inventories
of US$3.7 million resulting from inventory rebuilding in order to meet
increasing demand, as discussed below, (4) an increase in advances to suppliers
of $3.2 million, (5) an increase in other receivables of US$0.1 million,
(6) an increase in advance from customers of US$1.6 million due to increased
revenue, (7) a decrease in accounts payable of US$0.4 million in line with
increased purchasing, and (8) a decrease in other payable of US$0.2
million.
The
increase in our inventories at June 30, 2010 reflects both our increased sales
and inventories established to meet the requirements of expanding sales
network. As a result, we need more inventories to keep all outlets
running to generate revenue growth for the second quarter of 2010.
Net cash
provided by operating activities for the six months ended June 30, 2009 was
US$2.05 million, which was primarily attributable to the following factors: (1)
net income of US$3.19 million, (2) an increase in accounts receivables of
US$0.76 million as a result of increased revenue, (3) an increase in inventories
of US$3.19 million resulting from inventory rebuilding in order to meet
increasing demand, (4) a decrease in other receivables of US$1.19 million, (5)
an increase in advances to suppliers of US$0.88 million in line with the policy
of inventory rebuilding, (6) an increase in tax payable of US$0.61 million due
to increased revenue and earnings, and (7) an increase in other payable of
US$0.91 million.
Investing
Activities
Cash used
in investing activities was US$1.1 million for the six months ended June 30,
2010, which was attributable to (1)
consideration paid for acquisition of Mashan of US$0.5 million, (2) expenditures
in construction projects of US$0.5 million to expand the production capacity in
Nanlian, Zhejiang province, (3) expenditures in purchase of property and
equipment of US$0.1 million, and (4) collection of related party receivables of
$0.1 million.
Cash used
in investing activities was US$1.23 million for the six months ended June 30,
2009, which was attributable to (1) consideration paid for acquisition of
Xingshan Nanlian of US$2.21 million, (2) US$1.52 million certificate of deposits
collected back from Shanghai Pudong Development Bank, (3) expenditures in
construction projects of US$4.90 million to expand the production capacity in
Donggang, Liaoning province, and (4) collection of related party receivables of
$4.36 million.
Financing
Activities
Cash
provided by financing activities was US$15 million for the six months ended June
30, 2010. It consists of capital contributions from shareholders, borrowings
from and repayments to our short-term notes and proceeds from our IPO. In the
six months ended June 30, 2010, the cash used to repay the bank loans was US$5.1
million.
30
Cash used
in financing activities was US$0.88 million for the six months ended June 30,
2009, due to repayment of short term loans.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
Inflation
The
amounts presented in the financial statements do not provide for the effect of
inflation on our operations or financial position. The net operating losses
shown would be greater than reported if the effects of inflation were reflected
either by charging operations with amounts that represent replacement costs or
by using other inflation adjustments.
Item
3. Quantitative and Qualitative Disclosures
About Market Risk
Interest
Rate Risk
We are
exposed to interest rate risk due primarily to our short-term notes. Although
the interest rates on our short-term notes are fixed during their respective
terms, the terms are typically 12 months or less and interest rates are subject
to change upon renewal. The interest rates on our short-term notes are
determined by reference to the benchmark interest rates set by the People’s Bank
of China, or the PBOC. Since April 28, 2006, the PBOC has increased the
benchmark interest rate of RMB bank notes with a term of 6 to 12 months 12
times, seven consecutive increases followed by five consecutive decreases, by
0.27% on most occasions. As a result, from 2006 to the six months ended June 30,
2010, the benchmark interest rate for these RMB bank notes increased from 5.85%
to 7.47% then decreased to 5.31% and the interest rate applicable to us
increased from 6.696% to 8.217% then decreased to 5.31% over the same period.
Any future increase in the PBOC’s benchmark interest rate will result in an
increase in our interest expenses. A 1.0% increase in the annual interest rates
for all of our credit facilities as of June 30, 2010 would decrease income from
continuing operations before income taxes by approximately RMB87,500($12,802)
for the quarter ended June 30, 2010. We monitor interest rates in conjunction
with our cash requirements to determine the appropriate level of debt balances
relative to other sources of funds. We have not entered into any hedging
transactions in an effort to reduce our exposure to interest rate
risk.
Foreign
Exchange Rate Risk
Although
the conversion of the RMB is highly regulated in China, the value of the RMB
against the value of the U.S. dollar (or any other currency) may fluctuate and
be affected by, among other things, changes in China’s political and economic
conditions. Under the currency policy in effect in China today, the RMB is
permitted to fluctuate in value within a narrow band against a basket of certain
foreign currencies. China is currently under significant international pressures
to liberalize this currency policy, and if such liberalization occurs, the value
of the RMB could appreciate or depreciate against the U.S. dollar.
While our
reporting currency is the U.S. dollar, to date all of our revenue and expenses
are denominated in RMB and the majority of our assets and liabilities are
denominated in RMB. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between U.S. dollar and RMB. If the RMB depreciates against the
U.S. dollar, the value of our RMB revenues and assets as expressed in our U.S.
dollar financial statements will decline. The fluctuations in the exchange rate
would affect our financial results translated in U.S. dollar terms without
giving effect to any underlying change in our business or results of
operations.
31
In
addition, fluctuations in the exchange rate between the U.S. dollar and the RMB
will affect the relative purchasing power of the proceeds from this offering,
our balance sheet and our financial results in U.S. dollars following this
offering. For example, to the extent that we need to convert U.S. dollars
received in this offering into RMB for our operations, appreciation of the RMB
against the U.S. dollar would have an adverse effect on the RMB amount that we
receive from the conversion. Assuming we were to convert the net proceeds
received in this offering into RMB, a 1.0% increase in the value of the RMB
against the U.S. dollar would decrease the amount of RMB we receive by RMB
million. Conversely, if we decide to convert our RMB into U.S. dollars for the
purpose of business purposes, appreciation of the U.S. dollar against the RMB
would have a negative effect on the U.S. dollar amount available to us. Since
our exposure to foreign exchange risks is limited, we have not used any forward
contracts or currency borrowings to hedge our exposure and do not currently
intend to do so.
The
following table sets forth the noon buying rates for U.S. dollars in effect in
New York City for cable transfers of Renminbi as certified for customs purposes
by the Federal Reserve Bank of New York, for the periods indicated.
Renminbi per U.S. Dollar Noon Buying Rate
|
||||||||||||||||
Average(1)
|
High
|
Low
|
Period-End
|
|||||||||||||
Year
ended December 31,
|
||||||||||||||||
2004(1)
|
8.2768
|
8.2774
|
8.2764
|
8.2765
|
||||||||||||
2005(1)
|
8.1826
|
8.2765
|
8.0702
|
8.0702
|
||||||||||||
2006(1)
|
7.9579
|
8.0702
|
7.8041
|
7.8041
|
||||||||||||
2007(1)
|
7.5806
|
7.8127
|
7.2946
|
7.2946
|
||||||||||||
2008(1)
|
6.9193
|
7.2946
|
6.7800
|
6.8225
|
||||||||||||
2009(1)(2)
|
6.8408
|
6.8430
|
6.7880
|
6.8372
|
||||||||||||
For
the months of
|
||||||||||||||||
January
2010
|
6.8346
|
6.8295
|
6.7836
|
6.8369
|
||||||||||||
February
2010
|
6.8376
|
6.8336
|
6.7941
|
6.8367
|
||||||||||||
March
2010
|
6.8359
|
6.8268
|
6.8136
|
6.8361
|
||||||||||||
April
2010
|
6.8328
|
6.8280
|
6.7471
|
6.8358
|
||||||||||||
May
2010
|
6.8365
|
6.8315
|
6.8000
|
6.8315
|
||||||||||||
June
2010
|
6.8309
|
6.8233
|
6.7616
|
6.8086
|
||||||||||||
July
2010
|
6.7861
|
6.7813
|
6.7595
|
6.789
|
||||||||||||
August
2010(2)
|
6.7827
|
6.7745
|
6.7547
|
6.7852
|
(1) The
average rate of exchange is calculated using the average of the exchange rates
on the last day of each month during the period.
(2)
Through August 4, 2010.
Our
business is primarily conducted in China and all of our revenues are denominated
in Renminbi. This report contains translations of Renminbi amounts into U.S.
dollars at specified rates solely for the convenience of the reader. Unless
otherwise noted, all translations from Renminbi to U.S. dollars were made at the
noon buying rate in New York City for cable transfers in Renminbi per U.S.
dollar as certified for customs purposes by the Federal Reserve Bank of New
York. On May 9, 2010, the noon buying rate was approximately RMB6.8357 to $1.00.
No representation is made that the Renminbi amounts referred to in this report
could have been or could be converted into U.S. dollars at any particular rate
or at all. Since July 2005, the Renminbi has not been pegged solely
to the U.S. dollar. Instead, it is pegged against a basket of currencies,
determined by the People’s Bank of China, against which it can rise or fall by
as much as 0.5% each day. The Renminbi may appreciate or depreciate
significantly in value against the U.S. dollar in the future.
Item
4T. Controls and Procedures
As of the
end of the period covered by this Quarterly Report, under the supervision and
with the participation of management, including the Chief Executive Officer and
Chief Financial Officer (the “Certifying Officers”), the Company conducted an
evaluation of its disclosure controls and procedures. Based on this evaluation,
the Certifying Officers have concluded that the Company’s disclosure controls
and procedures were effective as of June 30, 2010 such that the material
information required to be filed in our SEC reports is recorded, processed,
summarized and reported within the required time periods specified in the SEC
rules and forms.
32
There was
no change in the Company’s internal control over financial reporting during the
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
33
PART
II
OTHER
INFORMATION
Item
1. Legal
Proceedings
At
present, the Company is not engaged in or the subject of any material pending
legal proceedings.
Item
1A. Risk
Factors
Except as
set forth below, there were no material changes from the risk factors as
previously disclosed in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the year ended December 31, 2009.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
During
the three months ended June 30, 2010, the Company issued 5,000 unregistered
shares of common stock to RedChip Companies, Inc. for consulting services with
regard to investor relations. This transaction was exempt from the registration
requirement of the Securities Act of 1933, as amended (the “Act”), pursuant to
Section 4(2) under the Act, as the recipient is an “accredited investor” as
defined in the Act.
The
Company did not repurchase any of its equity securities during the same fiscal
period.
Item
3. Defaults
Upon Senior Securities
N/A.
Item
4. Removed
and Reserved
Item
5. Other
Information
None.
Item
6. Exhibits
The
exhibits listed in the accompanying Exhibit Index are furnished as part of this
report.
34
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Andatee
China Marine Fuel Services Corporaiton
|
||
Date:
August 12, 2010
|
By:
|
/s/ An Fengbin
|
An
Fengbin President, Chief Executive Officer
|
||
(Principal
Executive Officer)
|
||
Date:
August 12, 2010
|
By:
|
/s/ Wen Tong
|
Wen
Tong, Chief Financial Officer
|
||
(Princial
Financial
Officer)
|
35
EXHIBIT
INDEX
Number
|
Exhibit
Table
|
|
3.1(i)
|
Certificate
of Incorporation(1).
|
|
3.1.1(i)
|
Amendment
to the Certificate of Incorporation(1).
|
|
3.1(ii)
|
By-Laws(1).
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the SOX of
2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the SOX of
2002.
|
|
32.1
|
Certificate
of Chief Executive Officer pursuant to 18
U.S.C.ss.1350.
|
|
32.2
|
Certificate
of Chief Financial Officer pursuant to 18
U.S.C.ss.1350.
|
(1) Incorporated
by reference to the exhibit with the same number to the Company’s Registration
Statement on Form S-1 (SEC File No. 333-161577) effective as of January 25,
2010.
36