Attached files
file | filename |
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EX-99.17 - Xtreme Link, Inc. | v196079_ex99-17.htm |
EX-2.1 - Xtreme Link, Inc. | v196079_ex2-1.htm |
EX-3.3 - Xtreme Link, Inc. | v196079_ex3-3.htm |
EX-99.8 - Xtreme Link, Inc. | v196079_ex99-8.htm |
EX-99.7 - Xtreme Link, Inc. | v196079_ex99-7.htm |
EX-99.6 - Xtreme Link, Inc. | v196079_ex99-6.htm |
EX-99.9 - Xtreme Link, Inc. | v196079_ex99-9.htm |
EX-99.2 - Xtreme Link, Inc. | v196079_ex99-2.htm |
EX-99.3 - Xtreme Link, Inc. | v196079_ex99-3.htm |
EX-99.1 - Xtreme Link, Inc. | v196079_ex99-1.htm |
EX-99.4 - Xtreme Link, Inc. | v196079_ex99-4.htm |
EX-99.5 - Xtreme Link, Inc. | v196079_ex99-5.htm |
EX-99.14 - Xtreme Link, Inc. | v196079_ex99-14.htm |
EX-99.16 - Xtreme Link, Inc. | v196079_ex99-16.htm |
EX-99.12 - Xtreme Link, Inc. | v196079_ex99-12.htm |
EX-99.13 - Xtreme Link, Inc. | v196079_ex99-13.htm |
EX-99.11 - Xtreme Link, Inc. | v196079_ex99-11.htm |
EX-99.15 - Xtreme Link, Inc. | v196079_ex99-15.htm |
EX-99.10 - Xtreme Link, Inc. | v196079_ex99-10.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
report (Date of earliest event reported): September 7, 2010
XTREME
LINK, INC.
(Exact
name of small business issuer as specified in its charter)
NEVADA
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333-148098
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20-5240593
|
||
(State
or other jurisdiction of
incorporation
or organization)
|
(Commission
File No.)
|
(IRS
Employee Identification
No.)
|
1
Xingqing Road, Cuiting Plaza, Suite 2201
Xi’an,
Shaanxi Province
People’s Republic of China
710032
(Address
of Principal Executive Offices)
(86)
29-83213199
(Issuer
Telephone number)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
¨
|
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|
¨
|
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
¨
|
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
|
¨
|
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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Forward
Looking Statements
This
Current Report on Form 8-K (“Form 8-K”) and other
reports filed by the Registrant from time to time with the Securities and
Exchange Commission (collectively the “Filings”) contain or
may contain forward looking statements and information that are based upon
beliefs of, and information currently available to, the Registrant’s management
as well as estimates and assumptions made by the Registrant’s management. When
used in the filings the words “anticipate”, “believe”, “estimate”, “expect”,
“future”, “intend”, “plan” or the negative of these terms and similar
expressions as they relate to the Registrant or the Registrant’s management
identify forward looking statements. Such statements reflect the current view of
the Registrant with respect to future events and are subject to risks,
uncertainties, assumptions and other factors (including the risks contained in
the section of this report entitled “Risk Factors”) relating to the Registrant’s
industry, the Registrant’s operations and results of operations and any
businesses that may be acquired by the Registrant. Should one or more of these
risks or uncertainties materialize, or should the underlying assumptions prove
incorrect, actual results may differ significantly from those anticipated,
believed, estimated, expected, intended or planned.
Although
the Registrant believes that the expectations reflected in the forward looking
statements are reasonable, the Registrant cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, the
Registrant does not intend to update any of the forward-looking statements to
conform these statements to actual results. The following discussion should be
read in conjunction with the Registrant’s pro forma financial statements and the
related notes filed with this Form 8-K.
Item 1.01 Entry
into a Material Definitive Agreement
As more
fully described in Item 2.01 below, on September 7, 2010, Xtreme Link, Inc.
(“the Registrant”), executed a share exchange agreement (the “Exchange
Agreement”) by and between Orient New Energy Investments Limited, a British
Virgin Islands investment holding company (“Orient”), and the holders of 100% of
Orient’s issued and outstanding capital stock (the “Orient Stockholders”), on
the one hand, and the Registrant and Hong Gao (“Ms. Gao”) on the other hand. A
copy of the Exchange Agreement executed by the parties is included as
Exhibit 2.1 and filed with this current report on Form 8-K.
Orient
owns 100% of Orient New Energy Holdings Limited, a Hong Kong investment holding
company (“Orient Hong Kong”), which in turn owns 100% of Orient New Energy Xi’an
Ltd., a limited liability company organized in the People’s Republic of China
(“PRC” or “China”) and a wholly foreign-owned enterprise under PRC laws
(“Orient Xi’an”). Orient Xi’an has entered into a series of contractual
arrangements with Xi’an Orient Petroleum Group Co., Ltd., a PRC limited
liability company (“Orient Petroleum”). The contractual arrangements are
discussed below in Item 2.01 under the section titled “Description of Business –
Relationships with Orient Petroleum and its Owners.”
At the
closing of the Exchange Agreement (the “Closing”), which occurred on September
7, 2010 (the “Closing Date”), the Registrant issued 27,100,000 shares of
its common stock to the Orient Stockholders in exchange for 100% of the capital
stock of Orient (the “Exchange”). Concurrently, Ms. Gao cancelled 13,250,000
shares of the Registrant’s common stock held by her, which constituted 82.04% of
the Registrant’s issued and outstanding common stock immediately prior to the
Closing. Immediately after the Closing, the Registrant had a total of 30,000,000
shares of common stock issued and outstanding, with the Orient Stockholders
owning approximately 90.33% in the aggregate, and the balance held by those who
held the Registrant’s common stock prior to the Closing. Prior to the Exchange,
the Registrant was a public reporting “shell company,” as defined in Rule 12b-2
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a
result of the Exchange, the Orient Stockholders became the Registrant’s
controlling shareholders and Orient became the Registrant’s wholly-owned
subsidiary, and the Registrant acceded to the businesses and operations of
Orient, which are conducted by Orient Petroleum in China. Throughout this Form
8-K, Orient, Orient Hong Kong, Orient Xi’an and Orient Petroleum are sometimes
collectively referred to as “Orient Petroleum Group.”
Terms
and Conditions of the Share Exchange Agreement
The
following is a brief description of the terms and conditions of the Agreement
that are material to the Registrant:
Issuance of Common
Stock. On the Closing Date, the Registrant shall issue 27,100,000
shares of its common stock to the Orient Stockholders in exchange for 100% of
the issued and outstanding capital stock of Orient.
Cancellation of Common
Stock. On the Closing Date, Ms. Gao shall return all of the shares of the
Registrant’s common stock held by her to the Registrant for
cancellation.
2
Change in Management.
In connection with the Exchange, and as more fully described in Item 5.02
below, Terry Hahn, the Registrant’s sole executive officer immediately
prior to the Exchange, shall resign, and Anping Yao shall be appointed as the
Registrant’s new chief executive officer, and Bin Fu shall be appointed as the
Registrant’s new chief financial officer and secretary, effective at the
Closing. Additionally, Mr. Hahn, as the Registrant’s sole director
immediately prior to the Exchange, shall resign from the Registrant’s board of
directors, and Anping Yao and Yan Tian shall be appointed to replace him,
effective at Closing, with Mr. Yao as chairman of the board of
directors.
Item 2.01 Completion
of Acquisition or Disposition of Assets
On
September 7, 2010, the Registrant consummated the Exchange referenced in Item
1.01 of this Form 8-K, and acquired 100% of the capital stock of Orient. As a
result, the Registrant acquired control of the businesses and operations of
Orient Petroleum Group, which are conducted in China by Orient Petroleum and
controlled by Orient Xi’an through contractual arrangements between Orient Xi’an
and Orient Petroleum. The description of the material terms and conditions of
the Exchange Agreement as described in Item 1.01 above is incorporated herein by
reference.
The
Exchange Agreement and the transactions contemplated thereunder were approved by
the Registrant’s board of directors, as well as Orient’s board of directors and
the Orient Stockholders. Except for the Exchange Agreement and the transactions
contemplated thereunder, neither the Registrant nor its sole officer and
director serving immediately prior to the consummation of the Exchange had any
material relationship with Orient or any Orient Stockholder.
As a
result of the Exchange, the Registrant’s principal business is now that of
Orient Petroleum Group, as more fully described below. The information provided
hereinafter in this Item 2.01 with respect to Orient Petroleum Group is intended
to comply with the disclosure requirements of Form 10 prescribed under the
Exchange Act.
DESCRIPTION
OF BUSINESS
Except as
otherwise indicated by the context, references to “we”, “us” or “our”
hereinafter in this Form 8-K are to the combined business of Orient Petroleum
Group, except that references to “our common stock”, “our shares of common
stock” or “our capital stock” or similar terms shall refer to the common stock
of the Registrant.
Overview
Orient
Petroleum Group is engaged in two energy-related business segments in China, the
wholesale distribution of finished oil products and the operation of retail gas
stations. Our wholesale business currently covers eight provinces, and
includes gasoline, diesel and methanol gasoline supplied to us by various
petroleum distributors and refineries in Shaanxi Province. We maintain three
sales offices in Shaanxi Province where the majority of our current customers
are concentrated. We own one oil storage depot and lease another one, both
located in Xi’an, the capital of Shaanxi Province. We also have access to a
7-kilometer dedicated railway line at one of our depots, which connects to
state-owned railway. Tanker trucks deliver our products from our other depot
throughout Shaanxi Province and beyond. We are one of 19 non-state-owned
distributors in Shaanxi Province that are licensed to sell finished oil
products. We distributed 211,476.61 metric tons, 178,997.61 metric tons and
141,686.83 metric tons of finished oil products in our fiscal years ended March
31, 2010, 2009 and 2008, respectively, and 55,194.02 metric tons and 52,152.10
metric tons in the three months ended June 30, 2010 and 2009, respectively. We
plan to grow our wholesale business by expanding our distribution coverage of
both existing and new markets.
We are
also a retail distributor of all grades of gasoline and diesel, and currently
operate 13 retail gas stations in Shaanxi Province, the majority of which are
located in Xi’an. The average annual sales volume of each gas station is 3,153.8
metric tons for our fiscal year ended March 31, 2010, 2009 and 2008. We plan to
continue to expand our portfolio of retail gas stations through leasing
arrangements or acquisitions, and are continuously looking for high-traffic
locations within and outside of Xi’an.
Our net
sales and net income for the three months ended June 30, 2010 and 2009, and for
the years ended March 31, 2010, 2009 and 2008, are as follows (amounts in
million):
Three months ended
June 30,
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Years ended
March 31,
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|||||||||||||||||||
2010
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2009
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2010
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2009
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2008
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(unaudited)
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||||||||||||||||||||
Net
Sales
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$ | 52.6 | $ | 39.3 | $ | 173.7 | $ | 142.6 | $ | 95.6 | ||||||||||
Net
Income
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$ | 5.6 | $ | 3.5 | $ | 17.3 | $ | 9.9 | $ | 7.3 |
3
The
selling price and the cost basis of our products, however, are largely dependent
on the price of crude oil. The Chinese government has control on the sales price
of finished oil products and the price of crude oil.
Corporate
Organization
Orient is
an investment holding company established in British Virgin Islands on November
28, 2008. Other than holding 100% of the outstanding equity interests of Orient
Hong Kong, Orient has no separate operations of its own.
Orient
Hong Kong is an investment holding company established in Hong Kong Special
Administrative Region on March 12, 2009. Other than holding 100% of the
outstanding equity interests of Orient Xi’an, Orient Hong Kong has no separate
operations of its own.
Orient
Xi’an is a limited liability company organized in the PRC on July 30, 2010, with
registered capital of $16 million, 15% of which is required to be paid within 90
days from the date of organization and the balance of which is due within two
years from the issuance date of its business license. Because all of its
outstanding equity interests are held by Orient Hong Kong, Orient Xi’an is
deemed a wholly foreign owned enterprise, or WFOE, under applicable PRC law. The
principal purpose of Orient Xi’an is to manage, hold and own rights in and to
the businesses, operations and profits of Orient Petroleum, which it does
through a series of contractual arrangements.
Orient
Petroleum is a limited liability company organized in the PRC on December 4,
1996, with registered capital of 500,000 Renminbi (“RMB”). The registered
capital was subsequently increased, and is currently RMB 100 million, all of
which has been fully paid by its owners. Orient Petroleum has three equity
owners, including Anping Yao (92%), who has been appointed as the Registrant’s
chief executive officer and chairman of the board of directors in connection
with the Exchange referenced in Item 1.01 of this Form 8-K. All of our business
operations are conducted by Orient Petroleum, for which it has the necessary
licenses, permits and approvals.
Orient
Petroleum and its three owners entered into contractual arrangements with Orient
Xi’an on August 12, 2010. Concurrently, the owners entered into an entrustment
agreement and a call option agreement with Jia Rosales Yao, a Philippines
passport holder and the sole shareholder of Ultimate Sino Holdings Limited, a
British Virgin Islands company and the majority shareholder of Orient
(“Ultimate”). Through these two agreements, the owners acquired control of, and
have the right to acquire 100% ownership of Ultimate, thereby achieving indirect
control of Orient and establishing common control between Orient and Orient
Petroleum.
Contractual
Agreements with Orient Petroleum and its Owners
We do not
own any equity interests in Orient Petroleum, but control and receive the
economic benefits of its business operations through contractual arrangements.
According to the Catalogue for
the Guidance of Foreign Investment Industries jointly issued by State
Development and Reform Commission and Ministry of Commerce on October 31, 2007,
the wholesale of petroleum products and the operation of gas stations falls
within the category of restricted foreign investment industries, and a foreign
investor (including a WFOE) can only hold a minority ownership interest in a PRC
company engaged in wholesale of petroleum products or that has 30 or more gas
stations. In order to comply with such domestic ownership requirements, we have,
through Orient Xi’an, a series of exclusive contractual agreements with Orient
Petroleum and its owners (the “Owners”).
Through these contractual arrangements, we have the ability to, among other
things, substantially influence Orient Petroleum’s business operations, policies
and management and to approve all matters requiring owner approvals, and we have
the right to include 100% of the annual net income earned by Orient Petroleum as
part of our combined financial statements.
We have
been advised by our PRC counsel, Allbright Law Offices in Shanghai, that the
contractual arrangements constitute valid and binding obligations of the parties
of such agreements. Each of the contractual arrangements and the rights and
obligations of the parties thereto are enforceable and valid in accordance with
the laws of the PRC. The contractual arrangements, as currently in effect, are
comprised of the following:
Consulting Services
Agreement. Pursuant to the consulting services agreement,
Orient Xi’an shall provide Orient Petroleum with general consulting services
relating to its business operations, human resources and business development on
an exclusive basis. Additionally, Orient Xi’an shall own any
intellectual property rights that are developed during the course of providing
these services. Orient Petroleum shall pay a quarterly consulting
service fee in RMB equal to its net income for such quarter to Orient
Xi’an. The consulting services agreement is in effect unless and
until terminated by written notice of either party in the event that: (a) the
other party causes a material breach of the agreement, provided that if the
breach does not relate to a financial obligation of the breaching party, that
party may attempt to remedy the breach within 14 days following the receipt of
the written notice; (b) the other party becomes bankrupt, insolvent, is the
subject of proceedings or arrangements for liquidation or dissolution, ceases to
carry on business, or becomes unable to pay its debts as they become due; (c)
Orient Xi’an terminates its operations; (d) Orient Petroleum’s business license
or any other approval for its business operations is terminated, cancelled or
revoked; or (e) circumstances arise which would materially and adversely affect
the performance or the objectives of the agreement. Additionally,
Orient Xi’an may terminate the agreement without cause.
4
Operating
Agreement. To ensure that Orient Petroleum is able to perform
its obligations under the consulting services agreement, the operating agreement
provides that Orient Petroleum may not engage in any transactions that could
materially affect its assets, liabilities, rights or operations without Orient
Xi’an’s prior consent, including without limitation, incurrence or assumption of
any indebtedness, sale or purchase of any assets or rights, incurrence of any
encumbrance on any of its assets or intellectual property rights in favor of a
third party or transfer of any agreements relating to its business operation to
any third party. Additionally, Orient Petroleum must abide by the corporate
policies set by Orient Xi’an in connection with its daily operations, financial
management and personnel, and the Owners must appoint Orient Xi’an’s nominees as
directors and senior executives of Orient Petroleum. Orient Petroleum also
agrees to pledge all of its assets to Orient Xi’an. In return, Orient Xi’an
agrees to guarantee Orient Petroleum’s contractual performance of their
agreements with any third party. The term of this agreement is 20 years unless
sooner terminated upon a 30-day written notice from Orient Xi’an or by any other
agreements reached by all parties. The term may be extended only upon
Orient Xi’an’s written confirmation prior to the expiration of the agreement,
with the extended term to be mutually agreed upon by the parties.
Equity Pledge
Agreement. To further guarantee Orient Petroleum’s performance
of its obligations under the consulting services agreement and to provide Orient
Xi’an with an additional enforcement mechanism of its rights thereunder, the
Owners agree, under the equity pledge agreement, to pledge all of their equity
interests in Orient Petroleum to Orient Xi’an. During the term of the agreement,
which shall expire two years from the fulfillment of Orient Petroleum’s
obligations under the consulting services agreement, Orient Xi’an shall be
entitled to all dividends declared on or paid to the pledged equity interests,
and the Owners shall not dispose of the pledged equity interests or take any
actions that would prejudice Orient Xi’an’s interest. Additionally, if Orient
Petroleum or the Owners breach their respective contractual obligations, Orient
Xi’an, as pledgee, shall be entitled to certain rights, including, but not
limited to, the right to vote with, control and sell the pledged equity
interests. The Owners also grant Orient Xi’an an irrevocable power of
attorney to carry out the security provisions of the equity pledge agreement, to
take effect automatically upon the occurrence of any event of default. Under
Article 226 of The
PRC Property Law, the
pledge of the pledged equity interests shall take effect upon registration of
the pledge with the relevant Administration for Industry and Commerce. Prior to
such registration, Orient Xi’an shall be entitled to enforce the terms of equity
pledge agreement under The PRC
Contract Law.
Voting Rights Proxy
Agreement. To facilitate Orient Xi’an’s exercise of its rights
under the operating agreement, the Owners irrevocably grant Orient Xi’an,
pursuant to the voting rights proxy agreement, the right to exercise all their
voting rights as owners of Orient Petroleum. This agreement may not
be terminated without the unanimous consent of all parties, except that Orient
Xi’an may terminate the agreement with or without cause upon 30-day written
notice to the Owners.
Option
Agreement. In the event PRC law should change in the future so
as to allow Orient Xi’an to hold Xi’an Petroleum’s equity interests directly,
Orient Xi’an shall be able to do so under the option agreement, pursuant to
which the Owners irrevocably grant Orient Xi’an or its designee an exclusive
option to purchase all or part of the equity interests in Orient Petroleum for
the cost of the Owners’ original contributions to Orient Petroleum’s registered
capital or the minimum amount of consideration permitted by applicable PRC
law. Orient Xi’an or its designee has sole discretion to decide when
to exercise the option, whether in part or in full. The term of this
agreement is ten years from August 9, 2010, and may be extended prior to its
expiration by written agreement of the parties.
As a
result of the foregoing contractual arrangements, we are considered the primary
beneficiary of Orient Petroleum. Accordingly, we combine its results, assets and
liabilities in our financial statements.
5
Post-Exchange
Corporate Structure
The
following diagram illustrates our corporate structure after the Closing of the
Exchange:
|
(1)
|
From
and after the Exchange, the management of the Registrant includes: Anping
Yao as chairman of the board of directors and chief executive officer, Bin
Fu as chief financial officer and secretary, and Yan Tian also as a
director.
|
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(2)
|
The
management of Orient is comprised of Jia Rosales Yao as its
managing director. The Registrant is the sole shareholder of
Orient.
|
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(3)
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The
management of Orient Hong Kong is comprised of Jia Rosales Yao
as its managing director. Orient is the sole shareholder of Orient Hong
Kong.
|
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(4)
|
The
management of Orient Xi’an is comprised of Anping Yao as its executive
director. Orient Hong Kong is the sole shareholder of Orient Xi’an, and as
such, Orient Xi’an is a wholly-foreign owned enterprise or
WFOE.
|
|
(5)
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Orient
Xi’an controls Orient Petroleum through contractual arrangements,
including a consulting services agreement, operating agreement, equity
pledge agreement, voting rights proxy agreement and option
agreement.
|
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(6)
|
The
management of Orient Petroleum includes: Anping Yao as chairman, Gongping
He as vice president of operations, Ruike Yuan as vice president of
administration, Xuewu Chen as vice president of sales, Na Li as vice
president of financial affairs, Yadong Ma as services manager and Yong
Yang as sales manager. As of the date of this current report: Mr. Yao,
Xi’an Sea Petroleum & Chemical Co., Ltd., and Songling Tian own 92%,
5% and 3% of Orient Petroleum,
respectively.
|
6
Our
Business Operations
Wholesale
Distribution of Finished Oil Products
We sell
on a wholesale basis finished oil products including gasoline, diesel and
methanol gasoline. Gasoline and diesel represent the majority of finished oil
products consumed, with automobiles as the most important driver of gasoline
consumption. Diesel and methanol gasoline are mainly used in agricultural
machines and other vehicles with the appropriate engines. Wholesale distribution
of finished oil products accounted for approximately 71.63% and 75.37% of our
net sales for the three months ended June 30, 2010 and 2009, respectively, and
approximately 72.89%, 76.48% and 76.19% of our net sales for fiscal years ended
March 31, 2010, 2009 and 2008, respectively.
Customers
We
currently have over 200 wholesale customers, among which more than 180 are
located within Shaanxi Province. For the three months ended June 30, 2010 and
2009, our top five wholesale customers collectively represented approximately
20.5% and 10.9% of our net sales, respectively. For fiscal years ended March 31,
2010, 2009 and 2008, our top five wholesale customers collectively represented
approximately 12.8%, 17.9% and 16.2% of our net sales, respectively. For
the three months ended June 30, 2010, one customer, Changzhi Zhengrui
Petro-Chemical Co., Ltd., accounted for 13% of our total sales.
We enter
into supply contracts with our wholesale customers that are typically between
one and three years in length and that require the customers to purchase a
minimum amount of specified oil products at market price during each year of the
contract. Payments are due upon order. Customers may take delivery of their
purchases at our depots or pay us to deliver them to their
locations.
Sales
and Marketing
Our
wholesale distribution network currently covers eight provinces, including
Shaanxi, Sichuan, Henan, Shanxi, Gansu, Inner Mongolia, Hubei and Ningxia. We
currently employ 18 full-time salespersons in three sales offices located in
Shaanxi Province. We chose the locations of our sales office locations based on
their proximities to the majority of our customers and suppliers. As our
business expands, we intend to further expand our sales network and develop more
sales channels. We plan to increase our sales volume through increasing our
distribution footprint in both existing and new market (such as increasing
the number of salespersons and establishing more regional sales
offices).
We do not
offer discounts to our customers as the price of our products is primarily
determined by market price and subject to price cap set by the provincial
government. However, customers who purchase a large amount of products
may enjoy the priority of supply from us in case of oil
shortage.
Competition
Although
barriers to entry in our industry are high due to stringent licensing
requirements and the need for significant storage capacity, we face competition
from both state-owned and non-state-owned companies based in Shaanxi Province
and elsewhere that engage in wholesale distribution of finished oil products. In
addition to state-owned petroleum enterprises such as China Petroleum &
Chemical Corporation, also known as “SINOPEC”
and PetroChina Company Limited, there are currently 19 non-state-owned
enterprises (including us) in Shaanxi Province licensed to distribute finished
oil products. Of the non-state-owned enterprises, seven of them currently
distribute finished oil products similar to ours, including Shaanxi Dongda
Petro-Chemical Co., Ltd., China Integrated Energy, Inc. and Shaanxi Zhonglian
Petroleum Co., Ltd. Many of our competitors may have greater financial
resources, sales resources, storage capacity and transportation capacity than we
do, and may have exclusive supply and purchase arrangements with suppliers as a
result of long-term relationships.
We
believe we have the following advantages over our competitors:
|
●
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Mature
operational infrastructure. We were one of the first non-state-owned
enterprises to engage in the wholesale distribution of finished oil
products in Shaanxi Province. During the past 20 years, we have gradually
built up our operational infrastructure, including extensive distribution
channels, two oil storage depots and convenient access to strategic
railway lines. We also have the relevant licenses to conduct our wholesale
distribution business, which are becoming increasingly difficult for new
entrants to our industry to
obtain.
|
7
|
●
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Established
customer relationships. We have been in the wholesale finished oil
business for almost 20 years since the incorporation of our predecessor
Xi’an Lianhu Petroleum Chemical Co., Ltd. in 1991. We focus on customer
satisfaction and believe that we have consistently provided high quality
products and services to our customers. With our business approach to
achieve a consistent increase of sales volume while improving our
administrative efficiency, we began referring our smaller customers to
purchase from our larger customers that we have established long-term
relationships with. As a result, our number of wholesale customers has
decreased from 448 in fiscal 2008 to 222 in fiscal 2010 while our sales
volume has increased over the same period of
time.
|
|
●
|
Stable
supply source. Shaanxi Yanchang Petroleum (Group) Co., Ltd. (“Yanchang
Group”), one of the four largest crude oil and gas exploration enterprises
in China with over 10 million metric tons of refinery capacity, is our
largest oil supplier. We also maintain good relationships with other
state-owned oil suppliers such as PetroChina and China National Offshore
Oil Corporation.
|
|
●
|
Railway
access. We benefit from our dedicated railway line connecting one of our
oil depots to Shaanxi Province’s main railway. We stopped using the
railway line for our other depot, however, because the loading capacity at
the depot does not meet current requirement of the PRC Ministry of
Railways. We are trying to obtain the necessary governmental approval to
use the railway line, but we cannot give assurance that such approval will
be issued.
|
|
●
|
Storage
capability. We have an aggregate oil depot storage capacity of 18,000 m
3
(approximately 4.8 million gallons). Aside from large upfront capital
requirements, new entrants to this industry must also have significant
storage capacity to be able to compete, which is a barrier to entry for
new competitors.
|
Operating
Licenses
We hold a
Certificate for Wholesale Distribution of Finished Oil (the “Wholesale
License”), granted by the PRC government. The Wholesale License
allows us to sell our products to wholesale customers and other users of
gasoline, kerosene and diesel, and must be renewed every 5 years. We
hold this license at the discretion of the PRC government. We also
hold a Dangerous Chemical Distribution License (the “DCD License”) that allows
us and our personnel to handle and transport gasoline and diesel oil. The
DCD License is renewable upon expiration. The Constitution of the PRC
states that all mineral and oil resources belong to the
State. Therefore, without these licenses, we would not be able to
sell our products.
Operation
of Retail Gas Stations
In
addition to our wholesale distribution of finished oil products, we also sell
gasoline and diesel directly to end users through the retail gas stations that
we operate.
We
currently operate 13 retail gas stations, 10 of which are located in
Xi’an and the other three are located in nearby municipalities. All stations
sell gasoline and diesel. Our customers include automobile, bus and truck
drivers. The number of employees at each gas station varies from 11 to 20.
We own two of the gas stations (excluding their related land use rights)
and operate the other 11 on 10-15 years renewable leases that also give us
full management and operational rights during their terms. Our lessors pay the
expenses in connection with land use rights and annual inspection of
operating licenses for the leased gas stations. The
operating licenses for two of the leased gas stations are transferred
to us during the duration of the leases, which we will transfer back to the
lessors upon termination of lease. Our gas stations are located at streets and
highways with heavy traffic volumes, and are open 24 hours a day. We also have
road tankers that transport products from our oil depot to our gas
stations.
Retail
gas sales at our gas stations accounted for approximately 28.61% and 24.80% of
our net sales for the three months ended June 30, 2010 and 2009, and
approximately 27.37%, 23.74% and 24.08% of our net sales for fiscal years ended
March 31, 2010, 2009 and 2008, respectively.
Competition
We face
competition from both state-owned and private retail gas station operators. Such
companies may have greater financial resources, sales resources, storage
capacity and transportation capacity than we do, and may have exclusive supply
and purchase arrangements with suppliers as a result of long-term relationships.
We also face competition from international energy companies such as Royal Dutch
Shell, which currently operates 41 gas stations in Shaanxi
Province.
We
believe we have the following advantages over our retail gas station
competitors:
|
●
|
Location
of gas stations. Our retail gas stations are geographically concentrated
so that we are able to oversee their daily operations, and in
high-trafficked areas for steady customer
source.
|
8
|
●
|
Flexible
pricing strategy. Although the prices of finished oil products are subject
to government control, we can adjust our retail pricing within the
government price limit based on supply and demand conditions as well as
the local economy.
|
Operating
Licenses
In
addition to business licenses issued by the municipal Administration for
Industry and Commerce, each of our retail gas station holds a renewable
Operating License for Hazardous Chemical (the “Hazardous Chemical License”) and
a renewable Operating License for Retail Sale of Finished Oil (the “Retail
License”) that allows us to sell gasoline, kerosene and diesel. Both licenses
are subject to annual inspections - the Hazardous Chemical License by the
provincial Administration of Work Safety and the Retail License by the
provincial Department of Commerce - and failure to pass the annual inspection
may lead to their revocations.
Suppliers
We
purchase gasoline, diesel, naphtha (primarily used as addictive for methanol),
methanol and gasoline addictives from various petroleum refineries and suppliers
in Shaanxi Province. We enter into one-year contracts with our suppliers
that require us to purchase a minimum amount of specified oil products at market
price during the year, which are delivered to our depots through ground
transportation. Our contracts with our suppliers also require payment before
delivery.
Our
largest suppliers for the year ended March 31, 2010, by product type, are as
follows:
Type of Product
|
Name of Supplier
|
% of Total Purchase
|
||||
Gasoline
|
Shaanxi
Yanchang Petroleum (Group) Co., Ltd.
|
57.38 | ||||
Diesel
|
Shaanxi
Yanchang Petroleum (Group) Co., Ltd.
|
57.38 | ||||
Naphtha
|
Huawei
Commerce Co., Ltd.
|
100.00 | ||||
Methanol
|
Yulin
Gas Chemical Co., Ltd.
|
100.00 | ||||
Gasoline
Addictives
|
Xi’an
Putian Petroleum Co., Ltd.
|
100.00 |
While we
are dependent on these suppliers for our finished oil products, we are always
seeking other supply sources and believe that we can find alternative suppliers
with comparable terms within a reasonable amount of time without any significant
disruption in our operations.
Storage
We
currently use two oil storage depots, both located in Xi’an, which in the
aggregate have the capacity to store approximately 4.8 million gallons of
finished oil. We acquired one of the depots from a private petroleum company for
RMB 20.5 million in 2005. We lease the other depot for RMB 650,000 a year under
a 15-year renewable lease. Both depots are facilitated with oil tanks,
flow-lines, weighing machines and loading platforms. One of our oil storage
depots also has access to a 7-kilometer dedicated railway line which connects to
the main railway. Oil is currently delivered to and from the other depot by
tanker trucks.
Research
and Development
We are
currently researching and developing a methanol-based substitute for automobile
gasoline. However, we cannot provide assurance that this or any project that we
may conduct in the future will ultimately be successful or commercially viable.
Additionally, intellectual property rights and confidentiality protections in
China may not be as effective as in the United States or other countries, and we
cannot provide assurance that we will be able to meaningfully protect our rights
in connection with our research and development.
For the
years ended March 31, 2010, 2009 and 2008, we spent $29,473.31, $36,841.64 and
$22,104.98, respectively, for research and development. We did no
incur research and development expenses during the three months ended June
30, 2010 and 2009.
Intellectual
Properties
The
Company currently does not own any intellectual properties.
9
Government
Regulations
Finished
Oil Distribution
Prior to
2006, significant gaps existed in the laws and regulations pertaining to the
finished oil industry, and the relevant rules for this industry were, to some
extent, inconsistent and subject to the discretion of the relevant government
authorities.
In 2006,
greater specificity was added to the rules for commercial activities in the
finished oil industry with the enactment of the Measures on the Administration of
the Finished Oil Market (promulgated on December 4, 2006 by the PRC
Ministry of Commerce (“MOFCOM”) and effective as of January 1, 2007), or the
Measures. This regulation provides comprehensive details on the finished oil
wholesale and resale application procedures, qualification requirements, and
rules for annual inspections. Enterprises (foreign or domestic-funded) meeting
certain requirements can submit applications to the MOFCOM for a certificate of
approval to conduct gasoline and diesel (including bio-diesel) wholesale, retail
and storage businesses.
The first
step required in applying to engage in the wholesale of finished oil is a
preliminary examination by the provincial MOFCOM where the enterprise is
located. Thereafter, the provincial MOFCOM will forward the application
materials together with its opinions on the preliminary examination to the
MOFCOM, which will then decide on whether to grant the Certificate of Approval
for the Wholesale of Finished Oil.
An
enterprise applying to engage in the finished oil wholesale business must, among
other requirements, possess the following:
|
(i)
|
long-term and stable supply of
finished oil;
|
|
(ii)
|
a legal entity with a registered
capital of no less than RMB 30
million;
|
|
(iii)
|
a finished oil depot, which shall
have a capacity not smaller than 10,000 m 3 , conforming to the local
urban and rural planning requirements, and be approved by other relevant
administrative departments;
and
|
|
(iv)
|
Facilities
for unloading finished oil such as conduit pipes, special railway lines,
and transportation vehicles with a capacity of 10,000 metric tons or more
to transport refined oil on the highway or over water to
ports.
|
In
practice, it has become increasingly difficult for enterprises (particularly
foreign-funded enterprises) to meet the third requirement above. As both the
number of available oil depots and state land and resources are reaching full
capacity, it is becoming increasingly difficult to procure a finished oil depot
with a capacity not smaller than 10,000 m 3.
The
application procedure for the retail of finished oil is similar to that for
wholesale except that the preliminary examination takes place at the
administrative department for commerce at the municipal level, and the
certificate of approval is issued at the provincial level.
An
enterprise applying to engage in the finished oil retail business must, among
other requirements, possess the following:
|
(i)
|
long-term and stable channels to
finished oil supply and a supply agreement with an enterprise that has
been qualified to engage in the wholesale business of finished oil for a
period of three years or more in line with its business
scale;
|
|
(ii)
|
qualified professional and
technical personnel to handle inspections, metrology, storage and fire
safety and the safe production of finished oil;
and
|
|
(iii)
|
gas stations designed and built
to comply with the relevant national standards and approved by the
relevant administrative
department.
|
Enterprises
possessing certificates of approval are subject to annual inspection by the
relevant provincial MOFCOM which will review:
|
(i)
|
the execution and performance of
finished oil supply
agreements;
|
|
(ii)
|
the operation results of the
enterprise for the previous
year;
|
10
|
(iii)
|
whether the enterprise and its
supporting facilities are in compliance with the technical requirements
under the Measures; and
|
|
(iv)
|
The current measures, among other
measures, being taken by the enterprise regarding quality control,
metrology, fire safety, security and environmental
protection.
|
If we
pass the annual inspection, the certificates of approval we hold will continue
to be valid. An enterprise failing an annual inspection will be ordered to
rectify all deficiencies within a certain time limit by the MOFCOM and/or its
provincial branches. If such deficiencies have not been rectified within the
specified time limit, its certificates of approval shall be revoked by the
original issuing authority.
We
currently are in full compliance with the Measures, and hold valid operating
licenses to conduct our businesses. However, we cannot provide assurance that we
will not fail to satisfy the above mentioned requirements in the
future.
Pricing
for Finished Oil
The PRC
National Development and Reform Commission (“NDRC”) regulates domestic oil
prices as part of its macro-management over the economy in order to control
dramatic fluctuations in oil prices.
The Administrative Measures on Oil
Prices ( trial implementation ),
or the Price Measures, promulgated by the NDRC on May 7, 2009 stipulates that
the NDRC will adjust domestic finished oil prices when the international market
price for crude oil changes more than four percent over 22 consecutive working
days. By contrast, crude oil prices are determined solely by enterprises
engaging in this industry.
The NDRC
adjusts domestic finished oil prices by modifying the retail price cap for
gasoline and diesel in all provinces, autonomous regions, and directly
administered municipalities. Thereafter, the administrative authorities at the
provincial level adjust the wholesale price caps by deducting RMB 30 per metric
ton from the corresponding retail price caps. Where there are no specific
contractual arrangements for a supplier’s delivery to a retailer, the wholesale
price caps may be further deducted to take into account the retailer’s
transportation cost among other expenses.
The Price
Measures stipulate
that the domestic finished oil prices shall be calculated according to the
normal profit rate for refiners when the crude oil price on the international
market is lower than $80 per barrel. When the international crude oil market
price exceeds $130 per barrel, the NDRC will adopt certain fiscal and tax
policies to ensure the continuing production and supply of refined oil products.
Further, gasoline and diesel prices will only be increased slightly (if at all)
in consideration of manufacturers and consumers, as well as the stability of the
national economy.
The exact
formula for calculating finished oil prices domestically has not been published.
However, the NDRC has stated that such formula is based on the weighted average
of the international market prices, together with the average domestic
processing costs, taxes, fees incurred in distribution channels, and suitable
profits for refiners. Moreover, the NDRC adjusts the cost index seasonally in
accordance with the actual situation with respect to prices.
According
to the Price Measures,
Shaanxi Province Price Control Administration shall be responsible for
setting the retail price cap of gasoline and diesel oil in Shaanxi Province. We
are allowed, subject to the retail price cap set by the provincial government,
to determine the retail price of gasoline and diesel products sold at our gas
stations.
Environmental
Protection
The
relevant PRC governmental authorities set national and local environmental
protection standards, as well as examine and issue approvals on environmental
aspects of different stages of various projects. We are required to file an
environmental impact statement, or in some cases, an environmental impact
assessment outline, to obtain such approvals. The filing must demonstrate that
the project in question conforms to applicable environmental standards.
Generally speaking, environmental protection bureaus will issue approvals and
permits for projects using modern pollution control measurement
technology.
The PRC
national and local environmental laws and regulations impose fees for the
discharge of waste substances above prescribed levels, require the payment of
fines for serious violations and provide that the PRC national and local
governments may, at their own discretion, close or suspend any facility which
fails to comply with orders requiring it to cease or improve operations causing
environmental damage.
11
In
accordance with the requirements of the environmental protection laws of the
PRC, we have installed the necessary environmental protection equipment, adopted
advanced environmental protection technologies, established responsibility
systems for environmental protection, and reported to and registered with the
relevant local environmental protection department.
Dangerous
Chemicals
PRC laws
and regulations on dangerous chemicals require that a Dangerous Chemical
Distribution License, or the DCD License, be obtained for all companies that
handle and transport dangerous chemicals. We obtained the DCD License in May 24,
2010, which will expire on December 31, 2012. It can thereafter be renewed upon
application.
Foreign-invested
Enterprises Engaging in Oil-related Businesses
Under
the Catalogue of
Industries for Guiding Foreign Investment, jointly promulgated by the
MOFCOM and the NDRC on October 31, 2007 and effective as of December 1, 2007,
each of the following falls within the restricted category for foreign
investment: wholesale of oil products, the construction and operation of gas
stations, and the production of liquid bio-fuels (i.e., fuel ethanol,
biodiesel). Foreign investors can only engage in commercial activities involving
liquid bio-fuels or retail distribution of finished oil (where the foreign
investor possesses 30 or more gas stations or where it sells different brands of
oil through different distributors) through a joint venture with a Chinese
partner, and the Chinese partner must hold a controlling interest in the joint
venture. As a result of these restrictions, all of our business operations are
conducted by a domestic entity, Orient Petroleum.
SAFE
Regulations Pertaining to Overseas-Listed Companies
Circular
75
The PRC
State Administration of Foreign Exchange (“SAFE”) issued the Circular on Issues Relevant to
Foreign Exchange Control with Respect to the Round-trip Investment of Funds
Raised by Domestic Residents Through Offshore Special Purpose Vehicles
(“Circular 75”), on October 21, 2005. Circular 75 requires PRC residents
and citizens to register with their local SAFE branches before establishing or
acquiring the control of any company outside of China by using domestic assets
or equities for the purpose of equity financing. PRC residents and citizens who
are stockholders of offshore special purpose companies established before
November 1, 2005 were required to conduct overseas investment registration with
the local SAFE branches before March 31, 2006. Further, PRC residents and
citizens must register all major changes relating to capitalization (including
overseas equity or convertible bonds financing) within 30 days upon the
occurrence of such changes.
On May
29, 2007, the SAFE issued the Notice on Operating Procedures for the
Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’
Corporate Financing and Roundtrip Investment Through Offshore Special Purpose
Vehicles (“Notice 106”). Notice 106 clarifies
some outstanding issues with respect to Circular 75, and adds various
implementing rules. Specifically, it provides for seven schedules to be
established by the SAFE in order to track registration requirements for offshore
fundraising and roundtrip investments.
Failure
to comply with the registration procedures set forth in Circular 75 and any
other rules and regulations may result in restrictions on the relevant PRC
subsidiary, including the payment of dividends and other distributions to its
offshore parent or affiliate and the capital inflow from the offshore entity.
Non-compliance may also subject relevant PRC residents to penalties under PRC
foreign exchange administration regulations, and may result in liability under
PRC law for foreign exchange evasion.
At
present, however, many key terms and provisions in Circular 75 continue to
remain unclear and without consistent official interpretations. In addition,
implementation by central and local SAFE branches has been inconsistent since
adoption of these regulations, which often results in substantial delays in
application review and processing.
It is
uncertain how our business operations or future strategy will be affected by the
interpretations and implementation of Circular 75. It is anticipated that its
application will continued to be subject to significant administrative
interpretation, and we will need to closely monitor how the relevant PRC
governmental bodies apply the rules to ensure that our domestic and offshore
activities continue to comply with PRC law. Given the uncertainties regarding
interpretation and application of the new rules, we may need to expend
significant time and resources to maintain compliance.
12
Dividend
Distribution
The
principal laws, rules and regulations governing dividends paid by our PRC
affiliated entities include the Company Law of the PRC (1993), as amended in
2005, Wholly Foreign Owned Enterprise Law (1986), as amended in 2000, and Wholly
Foreign Owned Enterprise Law Implementation Rules (1990), as amended in 2001.
Under these laws and regulations, each of our combined PRC entities, including
wholly foreign owned enterprises, or WFOEs, and domestic companies in China may
pay dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, each of
our combined PRC entities, including WFOEs and domestic companies, is required
to set aside at least 10% of its after-tax profit based on PRC accounting
standards each year to its statutory surplus reserve fund until the accumulative
amount of such reserve reaches 50% of its respective registered capital. These
reserves are not distributable as cash dividends. As of March 31, 2010, the
accumulated balance of our statutory reserve funds reserves amounted to RMB 31.9
million (approximately $4.4 million) and the accumulated profits of Orient
Petroleum that were available for dividend distribution amounted to RMB 77.1
million (approximately $ 9.1 million).
Taxation
Under the
PRC Enterprise Income Tax Law, or EIT Law, enterprises are classified as
resident enterprises and non-resident enterprises. An enterprise established
outside of China with its “de facto management bodies” located within China is
considered a “resident enterprise,” meaning that it can be treated in a manner
similar to a Chinese enterprise for enterprise income tax purposes. The
implementing rules of the EIT Law define “de facto management bodies” as a
managing body that in practice exercises “substantial and overall management and
control over the production and operations, personnel, accounting, and
properties” of the enterprise; however, it remains unclear whether the PRC tax
authorities would deem our managing body as being located within China. Due to
the short history of the EIT Law and lack of applicable legal precedents, the
PRC tax authorities determine the PRC tax resident treatment of entities
organized under the laws of foreign jurisdictions on a case-by-case
basis.
If the
PRC tax authorities determine that we are a “resident enterprise” for PRC
enterprise income tax purposes, a number of PRC tax consequences could follow.
First, we may be subject to enterprise income tax at a rate of 25% on our
respective worldwide taxable income, as well as PRC enterprise income tax
reporting obligations. Second, although the EIT Law provides that “dividends,
bonuses and other equity investment proceeds between qualified resident
enterprises” is exempted income, and the implementing rules of the EIT Law
refers to “dividends, bonuses and other equity investment proceeds between
qualified resident enterprises” as the investment proceeds obtained by a
resident enterprise from its direct investment in another resident enterprise,
it is still unclear whether the dividends we receive from Shaanxi Biostar
constitute “dividend between qualified resident enterprises” and consequently
are qualified for tax exemption.
Moreover,
the State Administration of Taxation issued a circular, or Circular 698, on
December 10, 2009, that reinforces taxation on transfer of non-listed shares by
non-resident enterprises through overseas holding vehicles. Circular 698 apply
retroactively and were deemed to be effective as of January
2008. Pursuant to Circular 698, where (i) a foreign investor who
indirectly holds equity interest in a PRC resident enterprise through an
offshore holding company indirectly transfers equity interests in a PRC resident
enterprise by selling the shares of the offshore holding company, and (ii) the
offshore holding company is located in a jurisdiction where the effective tax
rate is lower than 12.5% or where the offshore income of its residents is not
taxable, the foreign investor is required to provide the tax authority in charge
of that PRC resident enterprise with certain relevant information within 30 days
of the transfer. The tax authorities in charge will evaluate the offshore
transaction for tax purposes. In the event that the tax authorities determine
that such transfer is abusing forms of business organization and there is no
reasonable commercial purpose other than avoidance of PRC enterprise income tax,
the tax authorities will have the power to conduct a substance-over-form
re-assessment of the nature of the equity transfer. A reasonable commercial
purpose may be established when the overall offshore structure is set up to
comply with the requirements of supervising authorities of international capital
markets. If the State Administration of Taxation’s challenge of a transfer is
successful, they will deny the existence of the offshore holding company that is
used for tax planning purposes. Since Circular 698 has a short history, there is
uncertainty as to its application.
Seasonality
Our
business is relatively stable and predictable and is not subject to changes of
seasonality.
Employees
The
following table sets forth the number of our employees for each of our areas of
operations and as a percentage of our total workforce as of June 30,
2010.
13
Number of
Employees
|
% of Employees
|
|||||||
Management
& Administration
|
9 | 3.2 | % | |||||
Finance
& Accounting
|
12 | 4.3 | % | |||||
Sales
& Marketing
|
11 | 3.9 | % | |||||
Transportation
|
9 | 3.2 | % | |||||
Retail
Gas Stations
|
200 | 70.9 | % | |||||
Wholesale
Distribution
|
15 | 5.3 | % | |||||
Storage
|
21 | 7.4 | % | |||||
Research
and Development
|
5 | 1.8 | % | |||||
TOTAL
|
282 | 100.0 | % |
Our
employees are interviewed and hired by our human resource department. We enter
into employment agreements with terms of one to three years with employees at
managerial and technical positions and short-term employment agreements with
part-time or temporary employees such as gas station employees. We believe that
our relationship with our employees is good. Management expects that our
access to reasonably priced and competent labor will continue into the
foreseeable future.
Environmental
Matters
We
believe that we are in compliance with present environmental protection
requirements in all material respects. Our production processes generate noise,
waste water, gaseous wastes and other industrial wastes. We have installed
various types of anti-pollution equipment in our facilities to reduce, treat,
and where feasible, recycle the wastes generated in our production process. Our
operations are subject to regulation and periodic monitoring by local
environmental protection authorities.
Corporate
Information
Our
principal executive office is located at 1 Xingqing Road, Cuiting Plaza, Suite
2201, Xi’an, Shaanxi Province, PRC 710032. Our main telephone number is (86)
29-83213199 and our facsimile number is (86) 29-83280286.
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this Form 8-K before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this Form 8-K that are not historic facts are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following events described in these risk factors actually occurs, our
business, financial condition or results of operations could be harmed. In that
case, the trading price of our common stock could decline, and you may lose all
or part of your investment.
Risks
Related to Our Business and Industry
We
rely on a limited number of third-party suppliers for our supply of finished oil
products and the loss of any such supplier, particularly our largest supplier,
could have a material adverse effect on our operations.
We are
dependent upon our relationships with third parties for our supply of finished
oil products. Our five largest suppliers provided 96.55%, 96.79% and 87.78% of
our finished oil requirements for fiscal years ended March 31, 2010, 2009 and
2008, respectively, with our largest supplier providing approximately 55.2%,
44.3% and 53.3%, respectively, in such periods. Should any of these suppliers,
and in particular our largest supplier, terminate their supply relationships
with us, fail to perform their obligations as agreed, or enter into the finished
oil products business in competition with us, we may be unable to procure
sufficient amounts of finished oil products to fulfill our demand. If we are
unable to obtain adequate quantities of finished oil products at economically
viable prices, our customers could seek to purchase products from other
suppliers, which could have a material adverse effect on our
revenues.
We
are highly dependent on the revenue contribution from our wholesale distribution
of finished oil. A reduction in sales from this segment would cause our revenues
to decline and materially harm our business.
We
currently derive a significant majority of our sales from our wholesale
distribution of finished oil products business segment, which accounted for
72.89%, 76.48% and 76.19% of our net sales in fiscal years ended March 31,
2010, 2009 and 2008, respectively. As a result, should there be an adverse
industry trend in the petroleum sector, our limited diversification could result
in our results of operations declining substantially and suffering
disproportionately compared to our competitors that have diversified their
revenue sources.
14
Our
ability to operate at a profit is partially dependent on market prices for
petroleum and diesel fuels, which are subject to government control in the PRC.
If petroleum and diesel prices drop significantly, we may be unable to maintain
our current profitability.
Our
results of operations and financial condition are affected by the selling prices
of petroleum products, which are subject to state-imposed pricing control.
According to the Administrative Measures on Oil
Prices, Shaanxi
Province Price Control Administration is responsible for setting the retail
price cap of gasoline and diesel oil products sold in Shaanxi Province. We are
allowed, subject to the retail price cap set by the provincial government, to
determine the retail price of our products.
During
the years ended March 31, 2010, 2009 and 2008, our average selling prices for
gasoline were $846.73, $820.38 and $679.11 per metric ton, respectively. Our
average selling price for diesel were $802.07, $760.67 and $671.94 per metric
ton during the years ended March 31, 2010, 2009 and 2008.
Although
the current price-setting mechanism for refined petroleum products in China
allows the PRC government to adjust prices in the PRC market when the average
international crude oil price fluctuates beyond certain levels within a certain
time period, the PRC government still retains full discretion as to whether or
when to adjust the refined petroleum products price. The PRC government can also
be expected to exercise price control over refined petroleum products once
international crude oil price experiences sustained growth or become
significantly volatile. As a result, our results of operations and financial
condition may be materially and adversely affected by the fluctuation of market
prices of crude oil and refined petroleum products as well as the discretionary
actions of the PRC government.
We
face substantial competition in our wholesale distribution of finished
oil.
Although
barriers to entry in our industry are high due to stringent licensing
requirements and the need for significant storage capacity for products, we face
competition from both state-owned and non-state-owned companies based in Shaanxi
Province and elsewhere that engage in wholesale distribution of finished oil
products. In addition to state-owned petroleum enterprises such as SINOPEC and
PetroChina, there are currently 19 non-state-owned enterprises (including us) in
Shaanxi Province licensed to distribute finished oil products. Of the
non-state-owned enterprises, seven of them currently distribute finished oil
products similar to ours, including Shaanxi Dongda Petro-Chemical Co., Ltd.,
China Integrated Energy, Inc. and Shaanxi Zhonglian Petroleum Co., Ltd. Many of
our competitors may have greater financial resources, sales resources, storage
capacity and transportation capacity than we do, and may have exclusive supply
and purchase arrangements with suppliers as a result of long-term
relationships.
An
increase in competition arising from an increase in the number or size of
competitors in the wholesale distribution of finished oil may result in price
reductions, reduced gross profit margins, loss of our market share and departure
of key management personnel, any of which could adversely affect our financial
condition and profitability.
The
distribution of finished oil is primarily dependent on the sufficiency of
necessary infrastructure and access to means of transport, including rail
transportation, which may not be available on a cost-effective basis, if at
all.
Our
wholesale distribution of finished oil depends heavily on the availability of
infrastructure and means of transportation, including but not limited to
adequate highway or rail capacity, including sufficient numbers of dedicated
tanker trucks or cars and sufficient storage facilities.
15
Of
our two oil depots, only one currently has use of a dedicated railway
line connecting to the main railway in Shaanxi Province, which enables us to
distribute our products to customers within and outside Shaanxi Province. We
stopped using the railway line connecting the other depot because the loading
capacity of such depot does not meet the requirement of the Ministry of
Railways. We are now trying to get the governmental approval to use the railway
line, but we do not provide assurance that this approval will be
issued.
Our
gross margins in our wholesale distribution of finished oil products and in our
operation of retail gas station segments are principally dependent on the spread
between the average purchase price and the average selling price. If the average
purchase price increases and the average selling price of our products does not
similarly increase or if the average selling price of our products decreases and
the average purchase price does not similarly decrease, our margins will
decrease and results of operations will be harmed.
Our gross
margins in the wholesale distribution of finished oil products and in the
operation of retail gas stations depend principally on the spread between the
average purchase price and the average selling price we are able to realize for
our products. The spread between the average purchase price for petroleum and
the average selling price of our products has been relatively stable since 2007.
Prices for petroleum in the PRC are primarily influenced by the guidance prices
set by the National Development and Reform Commission, or the NDRC, and supply
and demand for petroleum-based fuel, rather than production costs. Any decrease
in the spread between the average purchase price and the prices we are able to
realize for our products, whether as a result of an increase in purchase prices
or policy determinations by the NDRC, would adversely affect our financial
performance and cash flows.
We
depend on our key executives, and our business and growth may be severely
disrupted if we lose their services.
Our
future success depends substantially on the continued services of our key
executives. In particular, we are highly dependent upon Mr. Anping Yao, our
chairman, chief executive officer and president, who has established
relationships within the industries we operate. If we lose the services of one
or more of our current management, we may not be able to replace them readily,
if at all, with suitable or qualified candidates, and may incur additional
expenses to recruit and retain new officers with industry experience similar to
our current officers, which could severely disrupt our business and growth. In
addition, if any of our executives joins a competitor or forms a competing
company, we may lose some of our suppliers or customers. Furthermore, as we
expect to continue to expand our operations and develop new products, we will
need to continue attracting and retaining experienced management and key
research and development personnel.
Competition
for qualified candidates could cause us to offer higher compensation and other
benefits in order to attract and retain them, which could have a material
adverse effect on our financial condition and results of operations. We may also
be unable to attract or retain the personnel necessary to achieve our business
objectives, and any failure in this regard could severely disrupt our business
and growth.
The
current economic and credit environment could have an adverse effect on demand
for certain of our products and services, which would in turn have a negative
impact on our results of operations, our cash flows, our financial condition,
our ability to borrow and our stock price.
Since
late 2008, global market and economic conditions have been disrupted and
volatile. Concerns over increased energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market and a declining
residential real estate market in the U.S. have contributed to this increased
volatility and diminished expectations for the economy and the markets going
forward. These factors, combined with volatile oil prices, declining business
and consumer confidence and increased unemployment, have precipitated a global
recession.
It is
difficult to predict how long the current economic conditions will persist,
whether they will deteriorate further, and which of our products, if not all of
them, will be adversely affected. As a result, these conditions could adversely
affect our financial condition and results of operations.
Our
business will suffer if we cannot obtain, maintain or renew necessary permits or
licenses.
All PRC
enterprises engaging in the sale of finished oil products are required to obtain
from various PRC governmental authorities certain permits and licenses,
including, without limitation, the Certificate for Wholesale Distribution of
Finished Oil, the License for Retail Sale of Finished Oil and the Dangerous
Chemical Distribution License. We have obtained permits and licenses required
for the distribution of finished oil. Failure to obtain all necessary
approvals/permits may subject us to various penalties, such as fines or being
required to vacate from the facilities where we currently operate our
business.
16
These
permits and licenses are subject to periodic renewal and/or reassessment by the
relevant PRC government authorities and the standards of compliance required in
relation thereto may from time to time be subject to change. We intend to apply
for renewal and/or reassessment of such permits and licenses when required by
applicable laws and regulations, however, we cannot assure you that we can
obtain, maintain or renew the permits and licenses or accomplish the
reassessment of such permits and licenses in a timely manner. Any changes in
compliance standards, or any new laws or regulations that may prohibit or render
it more restrictive for us to conduct our business or increase our compliance
costs may adversely affect our operations or profitability. Any failure by us to
obtain, maintain or renew the licenses permits and approvals may have a material
adverse effect on the operation of our business. In addition, we may not be able
to carry on business without such permits and licenses being renewed and/or
reassessed.
Our
legal right to lease certain properties from third parties could be challenged
by property owners, regulatory authorities or other third parties, which could
prevent us from continuing to utilize our oil storage depots and retail gas
stations, which are located on such leased properties, or could increase the
costs associated with utilizing those facilities.
Although
all land in the PRC is owned by the government or by collectives, private
individuals and businesses are permitted to use, lease and develop land for a
specified term without owning the land, the duration of which depends on the
purpose of land use. These rights to use land are termed land use rights. We
rely on leases with third parties who either own the properties or lease the
properties from the ultimate property owner. There may be challenges to the
title of the properties which, if successful, could impair the development or
operations of our oil storage depots and retail gas stations on such properties.
In addition, we are subject to the risk of potential disputes with property
owners. Such disputes, whether resolved in our favor or not, may divert
management attention, harm our reputation or otherwise disrupt our
business.
In most
instances, our immediate lessors do not possess the ultimate land use rights or
proper property use rights, or have not obtained consents or approvals from the
holders of the land use rights or relevant regulatory authorities to sublease
the land or storage space to us. A lessor’s failure to duly obtain the title to
the property or to receive any necessary approvals from the ultimate holders of
the land use rights, the primary lease holder or relevant regulatory
authorities, as applicable, could potentially result in the invalidation of our
lease, the renegotiation of such lease leading to less favorable terms or, in
serious cases, require us to vacate the properties that we occupy or pay a fine.
The building ownership or leasehold in connection with our oil storage depots
and gas retail operations could be subject to similar challenges.
The
breach of leasing agreements by our lessors may materially affect our ability to
conduct retail gas business.
Of the 13
gas stations that we currently operate, 11 of them are through lease agreements,
according to which the lessors have the proprietary right to all the assets of
the gas stations while we have the full management and operational rights within
the valid term of the lease agreements.
Although
in the opinion of our PRC counsel, Allbright Law Offices, each of these
lease agreements is valid, binding and enforceable, and will not result in
any violation of PRC laws or regulations currently in effect, they may not be as
effective in providing us with control of the gas stations as direct ownership,
and expose us to the risk of potential breach of contract by the owners of these
gas stations.
The
owners of these gas stations may breach, or cause the gas stations to breach,
the contracts for a number of reasons. For example, the interests of these
owners and our interests may conflict and we may fail to resolve such conflicts;
the owners may believe that breaching the contracts will lead to greater
economic benefit for them; or the owners may otherwise act in bad faith. If any
of the foregoing were to happen, we may have to rely on legal or arbitral
proceedings to enforce our contractual rights, including specific performance or
injunctive relief, and claiming damages. Such arbitral and legal proceedings may
cost us substantial financial and other resources, and result in disruption of
our business, and we cannot assure you that the outcome will be in our
favor.
17
Accidents
or injuries in or around our oil storage depots or retail gas stations may
adversely affect our reputation and subject us to liability.
There are
inherent risks of accidents or injuries when working in or around our oil
storage depots or retail gas stations. Death and accidents could prevent us from
renewing our licenses and permits. One or more accidents or injuries at any of
our oil storage depots or retail gas stations could adversely affect our safety
reputation among customers and potential customers and increase our costs if we
are required to take additional measures to make our safety precautions more
effective. We do not have insurance policy covering accidents on our properties
or injuries of our employees. If accidents or injuries occur, we may be held
liable for costs related to the damages or injuries, which could significantly
reduce and put a strain on our available cash.
In
addition, we do not have any business disruption insurance coverage for our
operations to cover losses that may be caused by natural disasters or other
disruptive events, such as an epidemic of H1N1 virus, SARS or avian flu. Any
business disruption or natural disaster may result in our incurring substantial
costs and diversion of our resources.
Power
shortages, natural disasters, terrorist acts or other events could disrupt our
operations and have a material adverse effect on our business, financial
position or results of operations.
Our
business could be materially and adversely affected by power shortages, natural
disasters, terrorist attacks or other disruptive events in the PRC. For example,
in early 2008, parts of the PRC were affected by severe snow storms that
significantly impacted public transportation systems and the power supply in
those areas. In May 2008, Sichuan Province in the PRC suffered a strong
earthquake measuring approximately 8.0 on the Richter scale that caused
widespread damage and casualties. The May 2008 Sichuan earthquake had a material
adverse effect on the general economic conditions in the areas affected by the
earthquake and severely affected the transportation systems in those areas. Any
future natural disasters, terrorist attacks or other disruptive events in the
PRC could cause a reduction in usage of or other severe disruptions to, public
transportation systems and could have a material adverse effect on our business,
financial position or results of operations.
If
we require additional financing, we may not be able to find such financing on
satisfactory terms or at all.
Our
capital requirements may be accelerated as a result of many factors, including
timing of development activities, underestimates of budget items, unanticipated
expenses or capital expenditures, future product opportunities with
collaborators and future business combinations. Consequently, we may need to
seek additional debt or equity financing, which may not be available on
favorable terms, if at all, and which may be dilutive to our
stockholders.
We may
seek to raise additional capital through public or private equity offerings or
debt financings. To the extent we raise additional capital by issuing equity
securities, our stockholders may experience dilution. To the extent that we
raise additional capital by issuing debt securities, we may incur substantial
interest obligations, may be required to pledge assets as security for the debt
and may be constrained by restrictive financial and/or operational covenants.
Debt financing would also be superior to our stockholders’ interest in
bankruptcy or liquidation.
Risks
Related to Our Corporate Structure
If
the PRC government determines that the variable interest entity, or VIE,
structure for operating our business does not comply with PRC government
restrictions on foreign investment in the finished oil products industry, we
could face severe penalties.
Various
regulations in China currently restrict or prevent foreign-invested entities
from engaging in the wholesale and retail distribution of the finished oil
products. Because of these restrictions, our business operations are conducted
through our VIE, Orient Petroleum, a PRC company that is owned by three
Chinese nationals. However, Orient Petroleum is effectively controlled by
our subsidiary, Orient Xi’an, through a series of contractual arrangements. For
details of these contractual arrangements, see “Our Corporate History and
Structure.”
In the
opinion of our PRC counsel, Allbright Law Offices, (i) the structure for
operating our business and the business and operation model of each of our
subsidiaries and Orient Petroleum are in compliance with all existing PRC laws
and regulations, and (ii) each contract that Orient Xi’an entered into with
Orient Petroleum and its owners is valid and binding, and will not result in any
violation of PRC laws or regulations currently in effect. However, there are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations. Accordingly, we cannot assure you that the PRC regulatory
authorities will ultimately take a view that is consistent with the opinion of
our PRC counsel.
18
In
addition, new PRC laws, rules and regulations may be introduced from time to
time to impose additional requirements that may be applicable to our contractual
arrangements. For example, pursuant to the PRC Property Rights Law that became
effective on October 1, 2007, the pledge of any equity interests of a PRC
private entity shall become effective once it is duly registered with the local
branches of the State Administration for Industry and Commerce
(“SAIC”). Following the promulgation of the Property Law, SAIC
further issued the Administrative Measures for
Registrations of Share Pledge on September 1, 2008, which provided
detailed procedural guidance for the local SAIC offices to handle the
registrations of share pledge. The Equity Pledge Agreements entered by Orient
Xi’an and the owners of Orient Petroleum as part of the contractual arrangements
have created a legally binding obligation on the parties upon the execution
date; however, the pledge established under these agreements does not become
effective until due registration with local SAIC office.
If we are
found to be in violation of any existing or future PRC laws or regulations, the
relevant regulatory authorities would have broad discretion in dealing with such
violation, including levying fines, confiscating our income, revoking Orient
Petroleum’s or Orient Xi’an’s business or operating licenses, requiring us to
restructure the relevant ownership structure or operations, and requiring us to
discontinue all or any portion of our operations. Any of these actions could
cause significant disruption to our business operations.
Due
to the lack of certainty in the interpretation and implementation of PRC
regulations relating to the establishment of offshore special purpose companies
by PRC residents, we cannot give assurance that the PRC regulatory authorities
will not determine that we are not in compliance with such
regulations.
Under the
Circular on Issues Relevant to
Foreign Exchange Control with Respect to the Round-trip Investment of Funds
Raised by Domestic Residents Through Offshore Special Purpose Vehicles
(“Circular 75”) issued in October 2005 by the PRC State Administration of
Foreign Exchange (“SAFE”), PRC residents are required to register with the
competent local SAFE branch before establishing or acquiring control over an
offshore special purpose company, or SPV, for the purpose of engaging in an
equity financing outside of China on the strength of domestic PRC assets
originally held by those residents. Internal implementing guidelines issued by
SAFE, which became public in June 2007 (“Notice 106”), expanded the reach of
Circular 75 by (1) purporting to cover the establishment or acquisition of
control by PRC residents of offshore entities which merely acquire “control”
over domestic companies or assets, even in the absence of legal ownership; (2)
adding requirements relating to the source of the PRC resident’s funds used to
establish or acquire the offshore entity; covering the use of existing offshore
entities for offshore financings; (3) purporting to cover situations in which an
offshore SPV establishes a new subsidiary in China or acquires an unrelated
company or unrelated assets in China; and (4) making the domestic affiliate of
the SPV responsible for the accuracy of certain documents which must be filed in
connection with any such registration, notably, the business plan which
describes the overseas financing and the use of proceeds. Amendments to
registrations made under Circular 75 are required in connection with any
increase or decrease of capital, transfer of shares, mergers and acquisitions,
equity investment or creation of any security interest in any assets located in
China to guarantee offshore obligations, and Notice 106 makes the offshore SPV
jointly responsible for these filings. In the case of an SPV which was
established, and which acquired a related domestic company or assets, before the
implementation date of Circular 75, a retroactive SAFE registration was required
to have been completed before March 31, 2006; this date was subsequently
extended indefinitely by Notice 106, which also required that the registrant
establish that all foreign exchange transactions undertaken by the SPV and its
affiliates were in compliance with applicable laws and regulations. Failure to
comply with the requirements of Circular 75, as applied by SAFE in accordance
with Notice 106, may result in fines and other penalties under PRC laws for
evasion of applicable foreign exchange restrictions. Any such failure could also
result in the SPV’s affiliates being impeded or prevented from distributing
their profits and the proceeds from any reduction in capital, share transfer or
liquidation to the SPV, or from engaging in other transfers of funds into or out
of China.
The
owners of Orient Petroleum are PRC nationals. They did not, however, establish
Orient or Orient Hong Kong, and the equity interests of Ultimate Sino Holdings
Limited (“Ultimate”), our majority shareholder after the Exchange, will not
transfer to them until their option exercise under their option agreement with
the current shareholder of Ultimate, a Philippines passport holder. As such, we
have been advised by Allbright Law Offices, our PRC counsel, that SAFE
registration is presently not required. However, due to the continuing
uncertainty over how Circular 75 is interpreted and implemented, and how SAFE
will apply it to us, we cannot give assurance that the PRC regulatory
authorities will agree with our PRC counsel, or predict how it will affect our
business operations or future strategies.
19
Orient
Xi’an’s contractual arrangements with Orient Petroleum and its owners may not be
as effective in providing control over Orient Petroleum as direct ownership of
Orient Petroleum and the owners of Orient Petroleum may have potential conflicts
of interest with us.
We have
no ownership interest in Orient Petroleum and conduct substantially all of our
operations and generate substantially all our revenues through contractual
arrangements that our indirect subsidiary, Orient Xi’an, has entered into with
Orient Petroleum and its owners, and such contractual arrangements are designed
to provide us with effective control over Orient Petroleum. See “Our Corporate History and
Structure” for a description of these contractual arrangements. We depend
on Orient Petroleum to hold and maintain certain licenses necessary for its
wholesale and retail distribution of the finished oil products business. Orient
Petroleum also owns all of the necessary intellectual property, facilities and
other assets relating to our business operations, and employs personnel
necessary to operate our business.
Although
in the opinion of our PRC counsel, Allbright Law Offices, each of these
contractual arrangements is valid, binding and enforceable, and will not result
in any violation of PRC laws or regulations currently in effect, they may not be
as effective in providing us with control over Orient Petroleum as direct
ownership. If we had direct ownership of Orient Petroleum, we would be able to
exercise our rights as an owner to effect changes in the board of directors of
Orient Petroleum, which in turn could effect changes, subject to any applicable
fiduciary obligations, at the management level. Due to the VIE structure, we
have to rely on contractual rights to effect control and management of Orient
Petroleum, which exposes us to the risk of potential breach of contract by the
owners of Orient Petroleum. In addition, as Orient Petroleum is jointly owned by
its owners, it may be difficult for us to change Orient Petroleum’s corporate
structure if such owners refuse to cooperate with us.
The
owners, officers and/or directors of Orient Petroleum may breach, or cause
Orient Petroleum to breach, the contracts for a number of reasons. For example,
the interests of the owners of Orient Petroleum and our interests may conflict
and we may fail to resolve such conflicts; the owners may believe that breaching
the contracts will lead to greater economic benefit for them; or the owners may
otherwise act in bad faith. If any of the foregoing were to happen, we may have
to rely on legal or arbitral proceedings to enforce our contractual rights,
including specific performance or injunctive relief, and claiming damages. Such
arbitral and legal proceedings may cost us substantial financial and other
resources, and result in disruption of our business, and we cannot assure you
that the outcome will be in our favor.
In
addition, as all of these contractual arrangements are governed by PRC law and
provide for the resolution of disputes through either arbitration or litigation
in the PRC, they would be interpreted in accordance with PRC law and any
disputes would be resolved in accordance with PRC legal procedures. The legal
environment in the PRC is not as developed as in other jurisdictions, such as
the United States. As a result, uncertainties in the PRC legal system could
further limit our ability to enforce these contractual arrangements.
Furthermore, these contracts may not be enforceable in China if PRC government
authorities or courts take a view that such contracts contravene PRC laws and
regulations or are otherwise not enforceable for public policy reasons. In the
event we are unable to enforce these contractual arrangements, we may not be
able to exert effective control over Orient Petroleum, and our ability to
conduct our business may be materially and adversely affected.
Orient
Xi’an and Orient Petroleum’s contractual arrangements may result in adverse PRC
tax consequences to us.
Under the
Tax Collection and Management
Law and its implementation rules issued in 2001, and 2002, respectively,
arrangements and transactions among related parties may be subject to audit or
challenge by the PRC tax authorities. “Related parties” are defined as
organizations or entities that (1) have a director or indirect control
relationship in terms of capital, operation or sales/purchase; (2) are directly
or indirectly owned by a common third party; or (3) possess any other connected
relationship based on equity. In the Tax Management Procedures on the
Connected Transactions between Related Parties issued in 2004, it is
further stated that the management fee payable between the related parties shall
be determined on an arms-length basis. We could face material and adverse tax
consequences if the PRC tax authorities determine that the contractual
arrangements between Orient Xi’an and Orient Petroleum were not made on an arm’s
length basis and adjust our income and expenses for PRC tax purposes in the form
of a transfer pricing adjustment. A transfer pricing adjustment could result in
a reduction, for PRC tax purposes, of adjustments recorded by Orient Petroleum,
which could adversely affect us by (i) increasing Orient Petroleum’s PRC tax
liability without reducing Orient Xi’an’s PRC tax liability, which could further
result in claims being made against us for underpaid PRC taxes; or (ii) limiting
the ability of Orient Xi’an and Orient Petroleum to obtain preferential PRC tax
treatments and/or other financial incentives.
20
All
of our revenues have been, and will continue to be, generated through Orient
Petroleum, our VIE, and we rely on payments made by Orient Petroleum to Orient
Xi’an, our subsidiary, pursuant to contractual arrangements to make
payments to Orient Xi’an. Any restriction on such payments and any increase
in the amount of PRC taxes applicable to such payments may materially and
adversely affect our business and our ability to pay dividends to our
shareholders.
We
conduct substantially all of our operations through Orient Petroleum, our VIE,
which generates all of our revenues. As Orient Petroleum is not owned by
us, it is not able to make dividend payments to us. Instead, Orient Xi’an, our
subsidiary in China, entered into a number of contracts with Orient Petroleum,
pursuant to which Orient Petroleum pays Orient Xi’an for certain services that
Orient Xi’an provides to Orient Petroleum. However, depending on the nature of
services provided, certain of these payments may be subject to PRC
taxes at different rates, including business taxes and VAT, which effectively
reduce the payments that Orient Xi’an may receive from Orient Petroleum. We
cannot assure you that the PRC government will not impose restrictions on such
payments or change the tax rates applicable to such payments. Any such
restrictions on such payments or increases in the applicable tax rates may
materially and adversely affect our ability to receive payments from Orient
Petroleum or the amount of such payments, and may in turn materially and
adversely affect our business, our net income and our ability to pay dividends
to our shareholders.
Risks
Related to Doing Business in China
PRC
laws and regulations restrict foreign investment in China’s finished oil
products industry. We have entered into contractual agreements with Orient
Petroleum to control and realize the benefits of the business. We are relying
upon PRC laws and there is substantial uncertainty regarding the interpretation
and application of current or future PRC laws and regulations.
Since we
are deemed to be foreign persons or foreign-funded enterprises under PRC laws
and are restricted to invest in companies operating in the finished oil products
industry, we operate our businesses in China through Orient Petroleum, an
operating company that is owned by PRC citizens and not by us. Accordingly, our
Chinese subsidiary, Orient Xi’an, entered into a series of exclusive contractual
agreements with Orient Petroleum. Although we believe we are in compliance with
current PRC regulations, we cannot be sure that the PRC government would view
these contractual arrangements to be in compliance with PRC licensing,
registration or other regulatory requirements, with existing policies or with
requirements or policies that may be adopted in the future. Because this
structure has not been challenged or examined by PRC authorities, uncertainties
exist as to whether the PRC government may interpret or apply the laws governing
these arrangements in a way that is contrary to the opinion of our PRC counsel.
If we, our wholly owned subsidiaries, Orient Petroleum or its owners, were found
to be in violation of any existing PRC laws or regulations, the relevant
regulatory authorities would have broad discretion to deal with such violation,
including, but not limited to the following:
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levying
fines;
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confiscating
income;
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revoking
licenses;
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requiring
a restructure of ownership or operations;
and/or
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Requiring
the discontinuance of our
businesses.
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Any of
these or similar actions could cause significant disruption to our business
operations or render us unable to conduct our business operations and may
materially adversely affect our business, financial condition and results of
operations.
Adverse
changes in political and economic policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
materially and adversely affect our business.
All of
our operations are conducted in China and all of our sales are made in China.
Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The PRC economy differs from the economies of most
developed countries in many respects, including:
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the
amount of government involvement;
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the
level of development;
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the
growth rate;
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the
control of foreign exchange; and
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the
allocation of resources.
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While the
PRC economy has grown significantly since the late 1970s, the growth has been
uneven, both geographically and among various sectors of the economy. The PRC
government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures benefit the overall
PRC economy, but may also have a negative effect on us. For example, our
financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us.
21
The PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although the PRC government has in recent years implemented measures
emphasizing the utilization of market forces for economic reform, the reduction
of state ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of the productive
assets in China is still owned by the PRC government. The continued control of
these assets and other aspects of the national economy by the PRC government
could materially and adversely affect our business. The PRC government also
exercises significant control over economic growth in China through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies. Efforts by the PRC government to slow the
pace of growth of the PRC economy could result in decreased capital expenditure
by energy users, which in turn could reduce demand for our
products.
Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
energy investments and expenditures in China, which in turn could lead to a
reduction in demand for our products and consequently have a material adverse
effect on our business and prospects.
The
payment of dividends in the PRC is subject to limitations. We may not be able to
pay dividends to our stockholders.
We
conduct all of our business through our combined subsidiaries and affiliated
companies incorporated in the PRC. We rely on dividends paid by these combined
subsidiaries for our cash needs, including the funds necessary to pay any
dividends and other cash distributions to our stockholders, to service any debt
we may incur and to pay our operating expenses. The payment of dividends by
entities established in the PRC is subject to limitations. Regulations in the
PRC currently permit payment of dividends only out of accumulated profits as
determined in accordance with accounting standards and regulations in the PRC,
subject to certain statutory procedural requirements. Each of our PRC entities,
including wholly foreign owned enterprises is also required to set aside at
least 10.0% of their after-tax profit based on PRC accounting standards each
year to their general reserves or statutory reserve fund until the aggregate
amount of such reserves reaches 50.0% of their respective registered capital.
Our statutory reserves are not distributable as loans, advances or cash
dividends. In addition, if any of our PRC entities incurs debt on its own behalf
in the future, the instruments governing the debt may restrict its ability to
pay dividends or make other distributions to us. As of March 31, 2010, our PRC
entities had allocated RMB 31.9 million (approximately $4.4 million) to these
reserves, consisting of general and statutory reserves. Any limitations on the
ability of our PRC entities to transfer funds to us could materially and
adversely limit our ability to grow, make investments or acquisitions that could
be beneficial to our business, pay dividends and otherwise fund and conduct our
business.
Because
our assets are located overseas, shareholders may not receive distributions that
they would otherwise be entitled to if we were declared bankrupt or
insolvent.
All of
our assets are located in the PRC. Because our assets are located overseas, our
assets may be outside of the jurisdiction of U.S. courts to administer if we are
the subject of an insolvency or bankruptcy proceeding. As a result, if we
declared bankruptcy or insolvency, our shareholders may not receive the
distributions on liquidation that they would otherwise be entitled to if our
assets were to be located within the U.S., under U.S. Bankruptcy
Law.
There
are significant uncertainties under the EIT Law regarding our PRC enterprise
income tax liabilities, such as tax on dividends paid to us by our PRC
subsidiary and tax on any dividends we pay to our non-PRC corporate
stockholders.
The EIT
Law provides that enterprises established outside of the PRC whose “de facto
management bodies” are located in the PRC are considered as a “tax-resident
enterprise” and are generally subject to the uniform 25.0% enterprise income tax
rate on global income. Under the implementation regulations to EIT Law, “de
facto management body” refers to a managing body that in practice exercises
overall management control over the production and business, personnel,
accounting and assets of an enterprise. In addition, on April 22, 2009, the
State Administration of Taxation of the PRC issued the Notice on the Issues Regarding
Recognition of Overseas Incorporated Enterprises that are Domestically
Controlled as PRC Resident Enterprises Based on the De Facto Management Body
Criteria, which was retroactively effective as of January 1, 2008. This
notice provides that an overseas incorporated enterprise that is controlled
domestically will be recognized as a “tax-resident enterprise” if it satisfies
all of the following conditions: (i) the senior management responsible for daily
production/business operations are primarily located in the PRC, and the
location(s) where such senior management execute their responsibilities are
primarily in the PRC; (ii) strategic financial and personnel decisions are made
or approved by organizations or personnel located in the PRC; (iii) major
properties, accounting ledgers, company seals and minutes of board meetings and
stockholder meetings, etc, are maintained in the PRC; and (iv) 50.0% or more of
the board members with voting rights or senior management habitually reside in
the PRC. If the PRC tax authorities determine that we are a “tax-resident
enterprise,” we may be subject to enterprise income tax at a rate of 25.0% on
our worldwide income. This may have an impact on our effective tax rate, and may
result in a material adverse effect on our net income and results of operations.
In addition, dividends paid by us to our non-PRC corporate stockholders as well
as gains realized by such stockholders from the sale or transfer of our stock
may be subject to a PRC tax under the EIT Law, and we may be required to
withhold PRC tax on dividends paid to our non-PRC corporate
stockholders.
22
In
addition, under the EIT Law and the Arrangement between the PRC and the
Hong Kong Special Administrative Region on the Avoidance of Double Taxation and
Prevention of Fiscal Evasion, or the Double Taxation Arrangement, which
became effective on January 1, 2007, if both we and our Hong Kong subsidiary,
Orient Hong Kong, are considered as “non-tax-resident enterprises,” dividends
from our PRC subsidiaries paid to us through our Hong Kong subsidiary may be
subject to a withholding tax at a rate of 5.0%. Furthermore, the ultimate tax
rate will be determined by treaty between the PRC and the tax residence of the
holder of the PRC subsidiary. We are actively monitoring the application of the
withholding tax and are evaluating appropriate organizational changes to
minimize the corresponding tax impact.
We
face risks related to health epidemics and outbreak of contagious
disease.
Our
business could be materially and adversely affected by the effects of H1N1 flu
(swine flu), avian flu, severe acute respiratory syndrome or other epidemics or
outbreaks. In April 2009, an outbreak of H1N1 flu (swine flu) first occurred in
Mexico and quickly spread to other countries, including the U.S. and the PRC. In
the last decade, the PRC has suffered health epidemics related to the outbreak
of avian influenza and severe acute respiratory syndrome. Any prolonged
occurrence or recurrence of H1N1 flu (swine flu), avian flu, severe acute
respiratory syndrome or other adverse public health developments in the PRC may
have a material adverse effect on our business and operations. These health
epidemics could result in severe travel restrictions and closures that would
restrict our ability to ship our products. Potential outbreaks could also lead
to temporary closure of our production facilities, our suppliers’ facilities
and/or our end-user customers’ facilities, leading to reduced production,
delayed or cancelled orders, and decrease in demand for our products. Any future
health epidemic or outbreaks that could disrupt our operations and/or restrict
our shipping abilities may have a material adverse effect on our business and
results of operations.
23
Our
operations may not develop in the same way or at the same rate as might be
expected if the PRC economy were similar to the market-oriented economies of
member countries in the Organization for Economic Co-Operation and Development,
or OECD.
The
economy of the PRC has historically been a nationalistic, “planned economy,”
meaning it functions and produces according to governmental plans and pre-set
targets or quotas. In certain aspects, the PRC’s economy has been transitioning
to a more market-oriented economy. However, there can be no assurance of the
future direction of these economic reforms or the effects these measures may
have. The PRC economy also differs from the economies of most countries
belonging to OECD, an international group of member countries sharing a
commitment to democratic government and market economy. For
instance:
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•
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the number and importance of
state-owned enterprises in the PRC is greater than in most OECD
countries;
|
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•
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the level of capital reinvestment
is lower in the PRC than in most OECD countries;
and
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•
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Chinese policies make it more
difficult for foreign firms to obtain local currency in China than in OECD
jurisdictions.
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As a
result of these differences, our operations may not develop in the same way or
at the same rate as might be expected if the PRC economy were similar to those
of OECD member countries.
The
PRC economic cycle may negatively impact our operating results.
The rapid
growth of the PRC economy before 2008 generally led to higher levels of
inflation. The PRC economy has more recently experienced a slowing of its growth
rate. A number of factors have contributed to this slow-down, including
appreciation of the Renminbi, or RMB, the currency of China, which has adversely
affected China’s exports. In addition, the slow-down has been exacerbated by the
recent global crisis in the financial services and credit markets, which has
resulted in significant volatility and dislocation in the global capital
markets. It is uncertain how long the global crisis in the financial services
and credit markets will continue and the significance of the adverse impact it
may have on the global economy in general, or the Chinese economy in particular.
Slowing economic growth in China could result in slowing growth and demand for
our services which could reduce our revenues. In the event of a recovery in the
PRC, renewed high growth levels may again lead to inflation. Government attempts
to control inflation may adversely affect the business climate and growth of
private enterprise. In addition, our profitability may be adversely affected if
prices for our products rise at a rate that is insufficient to compensate for
the rise in inflation.
Fluctuation
in the value of the Renminbi may have a material adverse effect on your
investment.
The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in China’s political and economic
conditions. The conversion of Renminbi into foreign currencies, including U.S.
dollars, has historically been set by the People’s Bank of China. On July 21,
2005, the PRC government changed its policy of pegging the value of the Renminbi
to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate
within a band against a basket of certain foreign currencies, determined by the
Bank of China, against which it can rise or fall by as much as 0.3% each day.
This change in policy resulted in an approximately 17.5% appreciation in the
value of the Renminbi against the U.S. dollar between July 21, 2005 and December
31, 2009. Since the adoption of this new policy, the value of Renminbi against
the U.S. dollar has fluctuated on a daily basis within narrow ranges, but
overall has further strengthened against the U.S. dollar. There remains
significant international pressure on the PRC government to further liberalize
its currency policy, which could result in a further and more significant
appreciation in the value of the Renminbi against the U.S. dollar. Appreciation
or depreciation in the value of the Renminbi relative to the U.S. dollar would
affect our financial results reported in U.S. dollar terms without giving effect
to any underlying change in our business or results of operations. In addition,
if we decide to convert our Renminbi into U.S. dollars for the purpose of making
payments for dividends on our common stock or for other business purposes,
appreciation of the U.S. dollar against the Renminbi would have a negative
effect on the U.S. dollar amount available to us.
Changes
in foreign exchange regulations in the PRC may affect our ability to pay
dividends in foreign currency or conduct other foreign exchange
business.
The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC. We
receive substantially all of our revenues in Renminbi, which is currently not a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency-denominated obligations. Under existing
PRC foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange, or the SAFE, by complying with certain
procedural requirements. However, approval from appropriate governmental
authorities is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies.
24
The PRC
government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay certain of our expenses as they come
due.
Our
ability to implement our business plan is dependent on many factors, including
our ability to receive various governmental permits.
In
accordance with PRC laws and regulations, we are required to maintain various
licenses and permits in order to operate our business including, without
limitation, an Approval Certificate for Wholesale Distribution of Finished
Oil and a Dangerous Chemical Distribution License. We are required to comply
with applicable production safety standards in relation to our production
processes and our premises and equipment are subject to periodical inspections
by regulatory authorities to ensure compliance with the dangerous chemical
safety production laws and regulations and finished oil distribution and retail
laws and regulations. Failure to pass these inspections, or the loss or
suspension of some or all of our production activities, could disrupt our
operations and adversely affect our business.
PRC
regulations relating to mergers and acquisitions of domestic enterprises by
foreign investors may increase the administrative burden we face and create
regulatory uncertainties.
On August
8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, or
the MOFCOM, the State Assets Supervision and Administration Commission, or the
SASAC, the State Administration for Taxation, the State Administration for
Industry and Commerce, the China Securities Regulatory Commission, or the CSRC,
and the SAFE, jointly adopted the Regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A
Rule, which became effective on September 8, 2006. The M&A Rule purports,
among other things, to require SPVs, formed for overseas listing purposes
through acquisitions of PRC domestic companies and controlled by PRC companies
or individuals, to obtain the approval of the CSRC prior to publicly listing
their securities on an overseas stock exchange. Based on our understanding of
current PRC laws, we are not sure whether the M&A Rule would require us or
our entities in China to obtain the approval from the CSRC or any other
regulatory agencies in connection with the transaction contemplated by the
Exchange Agreement we entered into on September 7, 2010.
Further,
if the PRC government finds that we or our Chinese stockholders did not obtain
the CSRC approval, which the CSRC may think we should have obtained before
executing the Share Exchange Agreement or conducting this offering, we could be
subject to severe penalties. The M&A Rule does not stipulate the specific
penalty terms, so we are not able to predict what penalties we may face, and how
such penalties will affect our business operations or future
strategy.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
We are
dependent on our relationship with the local government in the province in which
we operate our business. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may be
harmed by changes in its laws and regulations, including those relating to
taxation, environmental regulations, land use rights, property and other
matters. The central or local governments of these jurisdictions may impose new,
stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations. Accordingly, government actions in the
future, including any decision not to continue to support recent economic
reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof, and could
require us to divest ourselves of any interest we then hold in Chinese
properties.
Future
inflation in China may inhibit our ability to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. During the past ten years, the rate of inflation in China
has been as high as 20.7% and as low as -2.2%. These factors have led to the
adoption by the Chinese government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth and
contain inflation. High inflation may in the future cause the Chinese government
to impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in China, and thereby harm the market for our
products.
25
You
may face difficulties in protecting your interests, and your ability to protect
your rights through the U.S. federal courts may be limited, because our
subsidiaries are incorporated in non-U.S. jurisdictions, we conduct
substantially all of our operations in China, and all of our officers reside
outside the United States.
Although
we are incorporated in Nevada, all of our business operations are conducted in
China by Orient Petroleum. All of our officers and directors reside in China and
some or all of the assets of those persons are located outside of the United
States. As a result, it may be difficult or impossible for you to bring an
action against us or against these individuals in China in the event that you
believe that your rights have been infringed under the securities laws or
otherwise. Even if you are successful in bringing an action of this kind, the
laws of the PRC may render you unable to enforce a judgment against our assets
or the assets of our directors and officers.
As a
result of all of the above, our public shareholders may have more difficulty in
protecting their interests through actions against our management, directors or
major shareholders than would shareholders of a corporation doing business
entirely within the United States.
Government
regulations on environmental matters in China may adversely impact on our
business.
Our
production facilities are subject to numerous laws, regulations, rules and
specifications relating to human health and safety and the environment. These
laws and regulations address and regulate, among other matters, wastewater
discharge, air quality and the generation, handling, storage, treatment,
disposal and transportation of solid and hazardous wastes and releases of
hazardous substances into the environment. In addition, third parties and
governmental agencies in some cases have the power under such laws and
regulations to require remediation of environmental conditions and, in the case
of governmental agencies, to impose fines and penalties. We make capital
expenditures from time to time to comply with applicable laws and
regulations.
Pursuant
to PRC environmental protection laws and regulations, construction or expansion
of a production facility is subject to certain environment impact assessment
procedures including obtaining the relevant environmental authorities' approval
for the construction project.
All
potential environmental liabilities may not have been identified or properly
quantified and a prior owner, operator, or tenant may have created an
environmental condition unknown to us. We may be potentially liable for damages
or cleanup, investigation or remediation costs in connection with the ownership
and operation of our properties (including locations to which we may have sent
waste in the past) and the conduct of our business.
State and
local environmental regulatory requirements change often. Future laws,
ordinances or regulations might impose material environmental liability or the
current environmental condition of the properties could in the future be
affected by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks), or by third
parties unrelated to us. Moreover, it is possible that compliance with a new
regulatory requirement could impose significant compliance costs on us. Such
costs could have a material adverse effect on our business, financial condition
and results of operations.
Uncertainties
with respect to the PRC legal system could adversely affect us and we may have
limited legal recourse under PRC law if disputes arise under our contracts with
third parties.
Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China in particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their non-binding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result, we
may not be aware of our violation of these policies and rules until some time
after violation.
The
Chinese government has enacted some laws and regulations dealing with matters
such as corporate organization and governance, foreign investment, commerce,
taxation and trade. However, their experience in implementing, interpreting and
enforcing these laws and regulations is limited, and our ability to enforce
commercial claims or to resolve commercial disputes is unpredictable. The
resolution of these matters may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the
legal merits of a particular matter or dispute may influence their
determination. Any rights we may have to specific performance, or to seek an
injunction under PRC law, in either of these cases, are severely limited, and
without a means of recourse by virtue of the Chinese legal system, we may be
unable to prevent these situations from occurring. The occurrence of any such
events could have a material adverse effect on our business, financial condition
and results of operations.
26
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business. Foreign
companies, including some of our competitors, are not subject to these
prohibitions. Certain of our suppliers are owned by the PRC government and our
dealings with them are likely to be considered to be with government officials
for these purposes. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in mainland China. If our
competitors engage in these practices, they may receive preferential treatment
from personnel of some companies, giving our competitors an advantage in
securing business or from government officials who might give them priority in
obtaining new licenses, which would put us at a disadvantage. We could suffer
severe penalties if our employees or other agents were found to have engaged in
such practices.
If
relations between the United States and China worsen, investors may be unwilling
to hold or buy our stock and our stock price may decrease.
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could reduce the price of our common
stock.
Risks
Related to an Investment in Our Securities
Our
common stock has limited liquidity, if at all.
Our
common stock is listed on the Over-the-Counter Bulletin Board, although
there is currently no trading activities.
Our
stock is categorized as a penny stock. Trading of our stock may be
restricted by the SEC’s penny stock regulations which may limit a shareholder’s
ability to buy and sell our stock.
Our stock
is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally
defines “penny stock” to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer’s confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules; the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock
rules. Consequently, these penny stock rules may affect the ability
of broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in and limit the marketability of our common
stock.
FINRA sales
practice requirements may also limit a shareholder’s ability to buy and sell our
stock.
In
addition to the “penny stock” rules described above, FINRA has adopted rules
that require that in recommending an investment to a customer, a broker-dealer
must have reasonable grounds for believing that the investment is suitable for
that customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer’s financial status, tax status, investment
objectives and other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative low priced securities
will not be suitable for at least some customers. The FINRA requirements make it
more difficult for broker-dealers to recommend that their customers buy our
common stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
27
We
expect to experience volatility in our stock price, which could negatively
affect shareholders’ investments.
The
market price for shares of our common stock may be volatile and may fluctuate
based upon a number of factors, including, without limitation, business
performance, news announcements or changes in general market
conditions.
Other
factors, in addition to the those risks included in this section, that may have
a significant impact on the market price of our common stock include, but are
not limited to:
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receipt
of substantial orders or order cancellations of
products;
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quality
deficiencies in services or
products;
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international
developments, such as technology mandates, political developments or
changes in economic
policies;
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changes
in recommendations of securities
analysts;
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shortfalls
in our backlog, revenues or earnings in any given period relative to the
levels expected by securities analysts or projected by
us;
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government
regulations, including stock option accounting and tax
regulations;
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energy
blackouts;
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acts
of terrorism and war;
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widespread
illness;
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proprietary
rights or product or patent
litigation;
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strategic
transactions, such as acquisitions and
divestitures;
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rumors
or allegations regarding our financial disclosures or practices;
or
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earthquakes
or other natural disasters concentrated in Shaanxi Province where a
significant portion of our operations are
based.
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In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its
securities. Due to changes in the volatility of our common stock
price, we may be the target of securities litigation in the
future. Securities litigation could result in substantial costs and
divert management’s attention and resources.
To
date, we have not paid any cash dividends and no cash dividends will be paid in
the foreseeable future.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay
dividends. Even if the funds are legally available for distribution,
we may nevertheless decide not to pay any dividends. We presently
intend to retain all earnings for our operations.
There
is currently no trading activities for our common shares, and you may be unable
to sell at or near ask prices or at all if you need to sell or liquidate a
substantial number of shares at one time.
We cannot
predict the extent to which an active public market for its common stock will
develop or be sustained. However, we do not rule out the possibility
of applying for listing on NASDAQ or the NYSE AlterNet (formerly known as the
American Stock Exchange) or other markets.
Our
common shares are currently traded, but currently with no volume, based on
quotations on the “Over-the-Counter Bulletin Board”, meaning that the number of
persons interested in purchasing our common shares at or near bid prices at any
given time may be relatively small or non-existent. This situation is
attributable to a number of factors, including the fact that we are a small
company which is still relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a
consequence, there may be periods of several days or more when trading activity
in our shares is minimal or non-existent, as compared to a seasoned issuer which
has a large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We cannot
give you any assurance that a broader or more active public trading market for
our common stock will develop or be sustained, or that trading levels will be
sustained.
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
“penny stocks” has suffered in recent years from patterns of fraud and
abuse. Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the
abuses that have occurred historically in the penny stock
market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
The occurrence of these patterns or practices could increase the future
volatility of our share price.
28
Our
corporate actions are substantially controlled by our principal shareholders and
affiliated entities.
Immediately
after the Exchange, our principal shareholders, which includes our officers and
directors, and their affiliated entities, own approximately 62.40% of our
outstanding shares of common stock. These shareholders, acting individually or
as a group, could exert substantial influence over matters such as electing
directors and approving mergers or other business combination
transactions. In addition, because of the percentage of ownership and
voting concentration in these principal shareholders and their affiliated
entities, elections of our board of directors will generally be within the
control of these shareholders and their affiliated entities. While all of our
shareholders are entitled to vote on matters submitted to our shareholders for
approval, the concentration of shares and voting control presently lies with
these principal shareholders and their affiliated entities. As such, it would be
difficult for shareholders to propose and have approved proposals not supported
by management. There can be no assurances that matters voted upon by our
officers and directors in their capacity as shareholders will be viewed
favorably by all of our shareholders.
The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by our company and
may discourage lawsuits against our directors, officers and
employees.
Our
Articles of Incorporation, as amended, contain a provision permitting us to
eliminate the liability of our directors for monetary damages to our company and
shareholders to the extent provided by Nevada law. We may also have contractual
indemnification obligations under our employment agreements with our officers.
The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards
against directors and officers, which we may be unable to
recoup. These provisions and resultant costs may also discourage our
company from bringing a lawsuit against directors and officers for breaches of
their fiduciary duties, and may similarly discourage the filing of derivative
litigation by our shareholders against our directors and officers even though
such actions, if successful, might otherwise benefit our company and
shareholders.
Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as
proposed legislative initiatives following the Enron bankruptcy are likely to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting
rules. These and other potential changes could materially increase
the expenses we report under generally accepted accounting principles, and
adversely affect our operating results.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent material
misstatements.
We are
subject to reporting obligations concerning our internal controls, under the
U.S. securities laws. The SEC, as required by Section 404 of the
Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to
include a management report on such company’s internal controls over financial
reporting in its annual report, which contains management’s assessment of the
effectiveness of our internal controls over financial reporting. In
addition, an independent registered public accounting firm must report on the
effectiveness of these controls beginning in 2009. Our management may
conclude that our internal controls over our financial reporting are not
effective. Moreover, even if our management concludes that our
internal controls over financial reporting are effective, our independent
registered public accounting firm may issue a report that is qualified if it is
not satisfied with our controls or the level at which our controls are
documented, designed, operated or reviewed. Our reporting obligations
as a public company will place a significant strain on our management,
operational and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to
sales revenue recognition, are necessary for us to produce reliable financial
reports and are important to help prevent material misstatements, or in certain
extreme cases, fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price of
our stock. Furthermore, we anticipate that we will incur considerable costs and
use significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.
29
SELECTED
FINANCIAL DATA
The
following tables summarize combined financial data regarding our business and
should be read together with “Management’s Discussion and Analysis
of Results of Operations and Financial Condition” and the combined
financial statements of Orient and the related notes included with those
financial statements. The selected financial information as of and
for the three months ended June 30, 2010 and 2009, and as of and for the fiscal
years ended March 31, 2010, 2009 and 2008, have been derived from the combined
financial statements for Orient. All monetary amounts are expressed
in thousands and in U.S. Dollars ($) unless otherwise indicated. The historical
results are not necessarily indicative of the results to be expected for any
future period.
Three months ended June 30,
|
Years ended March 31,
|
|||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2008
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
Income statement data:
|
||||||||||||||||||||
Net
sales
|
$ | 52,649 | $ | 39,264 | $ | 173,706 | $ | 142,572 | $ | 95,612 | ||||||||||
Cost
of sales
|
(44,276 | ) | (33,873 | ) | (146,647 | ) | (124,548 | ) | (82,356 | ) | ||||||||||
Gross
profit
|
$ | 8,373 | $ | 5,391 | $ | 27,059 | $ | 18,024 | $ | 13,256 | ||||||||||
Operating
expenses:
|
||||||||||||||||||||
Selling
expenses
|
$ | (702 | ) | $ | (663 | ) | $ | (2,899 | ) | $ | (2,360 | ) | $ | (1,813 | ) | |||||
General
and administrative
expenses
|
(143 | ) | (140 | ) | (592 | ) | (688 | ) | (334 | ) | ||||||||||
Total
operating expenses
|
$ | (845 | ) | $ | (803 | ) | $ | (3,491 | ) | $ | (3,048 | ) | $ | (2,147 | ) | |||||
Income
from operations
|
$ | 7,528 | $ | 4,588 | $ | 23,568 | $ | 14,976 | $ | 11,109 | ||||||||||
Other
income (expenses)
|
(74 | ) | 20 | (433 | ) | (356 | ) | (217 | ) | |||||||||||
Income
before income tax
|
$ | 7,454 | $ | 4,608 | $ | 23,135 | $ | 14,620 | $ | 10,892 | ||||||||||
Income
tax
|
(1,858 | ) | (1,151 | ) | (5,786 | ) | (4,720 | ) | (3,642 | ) | ||||||||||
Net
income
|
$ | 5,596 | $ | 3,457 | $ | 17,349 | $ | 9,900 | $ | 7,250 |
As of June 30,
|
As of March 31,
|
|||||||||||||||
2010
|
2010
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
||||||||||||||||
Balance sheet data:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 4,889 | $ | 1,733 | $ | 993 | $ | 229 | ||||||||
Working
capital
|
23,412 | 17,679 | 17,433 | 16,215 | ||||||||||||
Total
assets
|
63,020 | 50,038 | 33,659 | 28,150 | ||||||||||||
Total
liabilities
|
26,600 | 19,400 | 7,229 | 6,254 | ||||||||||||
Total
stockholders’ equity
|
$ | 36,420 | $ | 30,638 | $ | 26,430 | $ | 21,896 |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The
following discussion and analysis of the combined results of operations and
financial condition of Orient New Energy Investments Limited for the three
months ended June 30, 2010 and 2009, and for the fiscal years ended March 31,
2010, 2009 and 2008 should be read in conjunction with the Selected Financial
Data, the financial statements and related notes for the three months ended June
30, 2010 and 2009, and the audited financial statements and related notes for
the years ended March 31, 2010, 2009 and 2008, that are included elsewhere in
this Form 8-K. Our discussion includes forward-looking statements based upon
current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set
forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking
Statements and Business sections in this Form 8-K. We use words such as
“anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions
to identify forward-looking statements.
Overview
Orient
New Energy Investments Limited (“Orient” or the “Company”) is a British Virgin
Islands holding company in the businesses of wholesale distribution of finished
oil products and operation of retail gas stations. All of Orient’s business
operations are currently conducted in the People’s Republic of China (the “PRC”
or “China”) by Xi’an Orient Petroleum Group Co., Ltd. (“Orient Petroleum”), a
PRC limited liability company. Orient controls Orient Petroleum through a series
of contractual arrangements entered into with Orient Petroleum and its owners by
Orient New Energy Xi’an Ltd. (“Orient Xi’an”), a PRC company. Orient Xi’an is
wholly-owned by Orient New Energy Holdings Limited (“Orient Hong Kong”), a Hong
Kong company and Orient’s wholly-owned subsidiary. Please see “Relationships
with Orient Petroleum and its Owners” above and Note 1 to Orient’s combined
financial statements for the three months ended June 30, 2010 and 2009, and for
the years ended March 31, 2010, 2009 and 2008, included in this Form 8-K for a
description of these contractual arrangements and their impact on Orient’s
combined financial statements.
Critical
Accounting Policies and Estimates
Certain
of the Company’s accounting policies are important to the portrayal of the
Company’s financial condition, since they require management to make difficult,
complex or subjective judgments, some of which may relate to matters that are
inherently uncertain. Estimates associated with these policies are susceptible
to material changes as a result of changes in facts and
circumstances.
While our
significant accounting policies are more fully described in Note 2 to
our combined financial statements appearing at Exhibit 99.1, we believe
that the following accounting policies are the most critical to aid you in fully
understanding and evaluating this management discussion and
analysis:
Revenue
recognition
The
Company’s revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104. Revenue from the sales of goods is recognized
on the transfer of significant risks and rewards of ownership, which generally
coincides with the time when the goods are delivered and the title has passed to
the customers. Under these policies, no revenue is recognized unless persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collection is reasonably assured. Revenue excludes value-added
tax and is arrived at after deduction of trade discounts and
allowances.
Interest
income is recognized on a time proportion basis, taking into account the
principal amounts outstanding and the applicable interest rates.
Allowance for doubtful
accounts
The
allowance for doubtful accounts is the Company's best estimate of the amount of
probable credit losses in the Company's existing accounts receivable. Management
reviews the composition of accounts receivable and analyzes historical bad
debts, customer concentrations, customer credit worthiness, current economic
trends and changes in customer payment patterns to evaluate the adequacy of
these reserves. As of June 30, 2010, and March 31, 2010 and 2009, the management
determined no allowance for uncollectible amounts is required.
Use of
Estimates
The
preparation of combined 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 combined financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Areas that require estimates and assumptions include
valuation of accounts receivable and determination of useful lives of property,
plant and equipment.
31
Recent accounting
pronouncements
In June,
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140” (“SFAS No.166”). This statement
removes the concept of a qualifying special-purpose entity Statement 140 and
removes the exception from applying Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, to qualifying
special-purpose entities. SFAS No. 166 has not yet been codified and in
accordance with ASC 105, remains authoritative guidance until such time that it
is integrated in the FASB ASC. SFAS No. 166 is effective for financial asset
transfers occurring after the beginning of an entity’s first fiscal year that
begins after November 15, 2009 and early adoption is prohibited. The adoption of
this amendment will have no material effect on the Company’s financial condition
or results of operations.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R)
(“SFAS No. 167”), which amends the consolidation guidance applicable to variable
interest entities. The amendments affect the overall consolidation analysis
under FASB ASC 810, Consolidation and require an enterprise to perform an
analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest entity. SFAS No.
167 has not yet been codified and in accordance with ASC 105, remains
authoritative guidance until such time that it is integrated in the FASB ASC.
SFAS No. 167 is effective as of the beginning of the first fiscal year that
begins after November 15, 2009, early adoption is prohibited. The adoption of
this amendment will have no material effect on the Company’s financial condition
or results of operations.
In
December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860):
Accounting for Transfers of Financial Assets, codifies SFAS No. 166, Accounting
for Transfers of Financial Assets, which is a revision to Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. ASU No. 2009-16 eliminates the concept of a “qualifying
special-purpose entity” from Statement No.140 and removes the exception from
applying FASB Interpretation (FIN) No. 46 (revised December 2003), Consolidation
of Variable Interest Entities, to qualifying special-purpose entities. As a
result, most securitization entities that previously met the requirements of a
qualifying special-purpose entity under Statement No. 140 that are variable
interest entities (VIEs) are now required to be evaluated under the revised
guidance in the amendment to FIN 46(R). The Company does not expect the
provisions of ASU 2009-16 to have a material effect on the financial position,
results of operations, or cash flows of the Company.
In
December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810):
Improvements to Financial Reporting by Enterprises Involved with VIEs, codifies
Statement No. 167, Amendments to FASB Interpretation No. 46(R). Among other
provisions, this ASU amends FIN 46(R) to require an enterprise to perform an
analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a VIE. This analysis identifies the
primary beneficiary of a VIE as the enterprise that has both (a) the power to
direct the activities of a VIE that most significantly impact the entity’s
economic performance, and (b) the obligation to absorb losses of the entity that
could potentially be significant to the VIE or the right to receive benefits
from the entity that could potentially be significant to the VIE. Additionally,
ASU No. 2009-17 requires an enterprise to assess whether it has an implicit
financial responsibility to ensure that a VIE operates as designed when
determining whether it has the power to direct the activities of the VIE that
most significantly impact the entity’s economic performance. The Company does
not expect the provisions of ASU 2009-17 to have a material effect on the
financial position, results of operations, or cash flows of the
Company.
In
January, 2010, the FASB issued ASU 2010-3—Extractive Activities—Oil and Gas
(Topic 932): Oil and Gas Reserve Estimation and Disclosures. This article
discusses the ASU’s key provisions and changes in practice. As stated in the
adopting release of the SEC Final Rule, application was contingent on the FASB
conforming its standards to the requirements of the SEC Final Rule. ASU 2010-3
is effective for annual periods ending on or after March 31, 2010 and is applied
prospectively as a change in estimate. However, entities that became subject to
the disclosure requirements of Topic 932 solely due to the change to the
definition of significant oil and gas producing activities are permitted to
apply the disclosure provisions of Topic 932 in annual periods beginning after
March 31, 2010.The Company does not expect the provisions of ASU 2010-3 to have
a material effect on the financial position, results of operations, or cash
flows of the Company.
In
January, 2010, the FASB issued ASU 2010-04, Accounting for Various
Topics—Technical Corrections to SEC Paragraphs. The Company does not expect the
provisions of ASU 2010-4 to have a material effect on the financial position,
results of operations, or cash flows of the Company.
In
February, 2010, the FASB issued ASU 2010-08—Technical Corrections to Various
Topics. The Company does not expect the provisions of ASU 2010-8 to have a
material effect on the financial position, results of operations, or cash flows
of the Company.
32
In
February, 2010, the FASB issued Accounting Standards Update (ASU) 2010-09,
Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure
Requirements. Per this ASU, an SEC filer would no longer be required
to disclose the date through which subsequent events have been evaluated. The
ASU also refines the scope of the reissuance disclosure requirements to include
revised financial statements only. The Company does not expect the provisions of
ASU 2010-9 to have a material effect on the financial position, results of
operations, or cash flows of the Company.
In March,
2010, the FASB issued Accounting Standards Update No. 2010-10, Consolidation
(Topic 810): Amendments for Certain Investment Funds, which defers the effective
date of the amendments to the consolidation requirements made by FASB Statement
167 to a reporting entity’s interest in certain types of entities. The Update
also clarifies other aspects of the Statement 167 amendments. As a result of the
deferral, a reporting entity will not be required to apply the Statement 167
amendments to the Subtopic 810-10 consolidation requirements to its interest in
an entity that meets the criteria to qualify for the deferral. This Update
clarifies how a related party’s interests in an entity should be considered when
evaluating the criteria for determining whether a decision maker or service
provider fee represents a variable interest. In addition, the Update also
clarifies that a quantitative calculation should not be the sole basis for
evaluating whether a decision maker’s or service provider’s fee is a variable
interest. Reporting entities are required to apply the amended guidance as of
the beginning of its first annual reporting period that begins after November
15, 2009, and for interim periods within that first annual reporting period. The
Company does not expect the provisions of ASU 2010-10 to have a material effect
on the financial position, results of operations, or cash flows of the
Company.
Results
of Operations
Comparison
of Results of Operations for the Three months ended June 30, 2010 and
2009
Three months ended June 30,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
(Unaudited – amounts in thousands except percentages)
|
||||||||||||||||
Net
sales
|
$ | 52,649 | 100.00 | % | $ | 39,264 | 100.00 | % | ||||||||
Cost
of sales
|
(44,276 | ) | (84.10 | )% | (33,873 | ) | (86.27 | )% | ||||||||
Gross
profit
|
$ | 8,373 | 15.90 | % | $ | 5,391 | 13.73 | % | ||||||||
Operating
expenses:
|
||||||||||||||||
Selling
expenses
|
$ | (702 | ) | (1.33 | )% | $ | (663 | ) | (1.69 | )% | ||||||
General
and administrative expenses
|
(143 | ) | (0.27 | )% | (140 | ) | (0.36 | )% | ||||||||
Income
from operations
|
$ | 7,528 | 14.30 | % | $ | 4,588 | 11.69 | % | ||||||||
Other
income (expense)
|
(74 | ) | (0.14 | )% | 20 | 0.05 | % | |||||||||
Income
tax expenses
|
(1,858 | ) | (3.53 | )% | (1,151 | ) | (2.93 | )% | ||||||||
Net
income
|
$ | 5,596 | 10.63 | % | $ | 3,457 | 8.80 | % |
Net
Sales
We
operate two business segments: wholesale distribution of finished oil and
operation of retail gas stations. Net sales from our two business segments for
the three months ended June 30, 2010 increased by $13.4 million or 34.1% from
for the same period in 2009. The increase was mainly due to sales growth
generated by our gas stations, and increase in our average wholesale and retail
selling prices.
The
following table sets forth a breakdown of our net sales by business
segments for the periods indicated (amounts in thousands):
|
Three months ended June 30,
|
|||||||||||||||
|
2010
|
2009
|
||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Wholesale
distribution of finished oil
|
$ | 37,715 | 71.63 | % | $ | 29,593 | 75.37 | % | ||||||||
Retail
gas stations
|
15,061 | 28.61 | % | 9,736 | 24.80 | % | ||||||||||
Sales
tax and surcharges
|
(127 | ) | (0.24 | )% | (65 | ) | (0.17 | )% | ||||||||
Net
sales
|
$ | 52,649 | 100.00 | % | $ | 39,264 | 100.00 | % |
Sales
from wholesale distribution for the three months ended June 30, 2010 increased
by $8.1 million, or 27.4%, from the same period in 2009 due to increase in sale
prices, despite a decrease in sales volume, from 40,569 metric tons for the
three months ended June 30, 2009 to 40,066 metric tons for the same period in
2010, a drop of 503 metric tons or 1.2%. Average selling prices increased by
approximately 29% period over period.
33
Sales
from retail gas stations for the three months ended June 30, 2010 increased by
$5.3 million or 54.7%, from the same period in 2009. Sales volume for the three
months ended June 30, 2010 increased by 3,546 metric tons, or 30.6%, to 15,129
metric tons from 11,583 metric tons for the same period in 2009, due to the
increase in the number of gas stations that we operated, from 12 in the three
months ended June 30, 2009, to 13 in the same period of 2010, as well as from
increase in sales per gas station. In addition, average selling price increased
by approximately 18% period over period.
The
following table sets forth our average per metric ton selling prices by business
segments for the periods indicated:
Three months ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Wholesale
distribution of finished oil
|
$ | 941 | $ | 729 | ||||
Retail
gas stations
|
$ | 996 | $ | 841 |
Cost of Sales and Gross
Profit Margin
Cost of
sales includes inventory cost of products sold. The following table sets forth
our cost of sales and gross profit both in absolute amount and as a percentage
of net sales for the periods indicated (amounts in
thousands):
Three months ended June 30,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Net
sales
|
$ | 52,649 | 100.00 | % | $ | 39,264 | 100.00 | % | ||||||||
Cost
of sales
|
(44,276 | ) | (84.10 | )% | (33,873 | ) | (86.27 | )% | ||||||||
Gross
profit
|
$ | 8,373 | 15.90 | % | $ | 5,391 | 13.73 | % |
Cost of
sales increased by $10.4 million from the three months ended June 30, 2009 to
the three months ended June 30, 2010 due to increased sales activities. At the
same time, cost of sales as a percentage of net sales decreased, from 86.3% to
84.1%, as the rate of increase for retail sales, which had higher margins,
exceeded that of the wholesale segment. Consequently, gross margin as a
percentage of net sales increased to approximately 15.9% for the three months
ended June 30, 2010 from approximately 13.7% a year ago.
The
following table sets forth net sales, cost of sales, gross profit and gross
margin by business segments for the periods indicated (amounts in
thousands):
Three months ended June 30,
|
||||||||||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||||||||||
Net
sales
|
Cost of
sales
|
Gross
profit
|
Gross
margin
|
Net
sales
|
Cost of
sales
|
Gross
profit
|
Gross
margin
|
|||||||||||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||||||||||||||
Wholesale
distribution of finished oil
|
$ | 37,624 | $ | (31,801 | ) | $ | 5,823 | 15.48 | % | $ | 29,544 | $ | (26,397 | ) | $ | 3,147 | 10.65 | % | ||||||||||||||
Gas
stations
|
15,025 | (12,475 | ) | 2,550 | 16.97 | % | 9,720 | (7,476 | ) | 2,244 | 23.09 | % | ||||||||||||||||||||
Total
|
$ | 52,649 | $ | (44,276 | ) | $ | 8,373 | 15.90 | % | $ | 39,264 | $ | (33,873 | ) | $ | 5,391 | 13.73 | % |
Selling, General and
Administrative Expenses
Selling
expenses includes all expenses and taxes directly related to selling product.
Selling expenses increased by $39 thousand from the three months ended June 30,
2009 to the three months ended June 30, 2010. The increase was mainly due to
increased rental expense for our gas stations, which increased from $198
thousand to $287 thousand offset by decrease in freight from $228 thousand to
$148 thousand. Increased sales activities and the resulting increase in salary
expense, from $115 thousand to $144 thousand, also contributed to the
increase.
34
General
and administrative expenses were mainly comprised of salaries and payment to the
local water conservancy fund. General and administrative expenses for the
periods reported remained relatively unchanged in absolute amount, due to cost
control measures taken by the Company.
Interest
Expenses
Interest
expenses decreased to $84 thousand for the three months ended June 30, 2010 from
$98 thousand for the same period in 2009. This decrease was mainly due to the
decrease of our short-term loan interest rate, from 8.44% to 5.84%.
Income Tax
Expenses
Income
tax expenses for the three months ended June 30, 2010 increased by $707 thousand
from the same period in 2009. The increased income tax expenses resulted from
higher taxable income generated period over period.
Net
Income
Net
income from our two business segments for the three months ended June 30, 2010
increased by $2.1 million from the three months ended June 30, 2009. This
increase was mainly attributable to the increase in net sales offset by increase
in cost of sales and operating expenses.
Comparison
of Results of Operations for the Years ended March 31, 2010 and
2009
Years ended March 31,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
(Amounts
in thousands except percentages)
|
||||||||||||||||
Net
sales
|
$ | 173,706 | 100.00 | % | $ | 142,572 | 100.00 | % | ||||||||
Cost
of sales
|
(146,647 | ) | (84.42 | )% | (124,548 | ) | (87.36 | )% | ||||||||
Gross
profit
|
$ | 27,059 | 15.58 | % | $ | 18,024 | 12.64 | % | ||||||||
Operating
expenses:
|
||||||||||||||||
Selling
expenses
|
(2,899 | ) | (1.67 | )% | (2,360 | ) | (1.66 | )% | ||||||||
General
and administrative expenses
|
(592 | ) | (0.34 | )% | (688 | ) | (0.48 | )% | ||||||||
Income
from operations
|
$ | 23,568 | 13.57 | % | $ | 14,976 | 10.50 | % | ||||||||
Other
income (expense)
|
(433 | ) | (0.25 | )% | (356 | ) | (0.25 | )% | ||||||||
Income
tax expenses
|
(5,786 | ) | (3.33 | )% | (4,720 | ) | (3.31 | )% | ||||||||
Net
income
|
$ | 17,349 | 9.99 | % | $ | 9,900 | 6.94 | % |
Net
Sales
Net sales
from our two business segments for the year ended March 31, 2010 increased by
$31.1 million or 21.8 % from the year ended March 31, 2009. The increase was
mainly due sales growth generated by our gas stations and increase in our
average wholesale and retail selling prices.
The
following table sets forth a breakdown of our net sales, by business
segments, for the periods indicated (amounts in thousands):
Years ended March 31,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
Wholesale
distribution of finished oil
|
$ | 126,617 | 72.89 | % | $ | 109,043 | 76.48 | % | ||||||||
Retail
gas stations
|
47,549 | 27.37 | % | 33,844 | 23.74 | % | ||||||||||
Sales
tax and surcharges
|
(460 | ) | (0.26 | )% | (315 | ) | (0.22 | )% | ||||||||
Net
sales
|
$ | 173,706 | 100.00 | % | $ | 142,572 | 100.00 | % |
Sales
from wholesale distribution for the year ended March 31, 2010 increased $17.6
million or 16.1% from the year ended March 31, 2009. Sales volume for the year
ended March 31, 2010 was 160,243 metric tons, an increase of 19,728 metric tons
or 14% from 140,515 metric tons for the year ended March 31, 2009, as a result
of increased sales to existing customers. Average selling prices also increased
by approximately 2% year over year.
35
Sales
from retail gas stations for the year ended March 31, 2010 increased $13.7
million or 40.5% from the year ended March 31, 2009. Sales volume for the year
ended March 31, 2010 increased by 12,751 metric tons or 33.1% to 51,233 metric
tons, from 38,482 metric tons for the year ended March 31, 2009. The increased
resulted from the increase in the number gas stations, from 12 in 2009 to 13 in
2010, as well as increase in sales per gas station. Additionally, average
selling price increased by approximately 6% over the year.
The
following table sets forth our average per metric ton selling prices by business
segments for the periods indicated:
Years ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Wholesale
distribution of finished oil
|
$ | 790 | $ | 776 | ||||
Retail
gas stations
|
$ | 928 | $ | 879 |
Cost of Sales and Gross
Profit Margin
Cost of
sales includes inventory cost of products sold. The following table sets forth
our cost of sales and gross profit both in absolute amount and as a percentage
of net sales for the periods indicated (amounts in
thousands):
|
Years ended March 31,
|
|||||||||||||||
2010
|
2009
|
|||||||||||||||
Net
sales
|
$ | 173,706 | 100.00 | % | $ | 142,572 | 100.00 | % | ||||||||
Cost
of sales
|
(146,647 | ) | (84.42 | )% | (124,548 | ) | (87.36 | )% | ||||||||
Gross
profit
|
$ | 27,059 | 15.58 | % | $ | 18,024 | 12.64 | % |
Cost of
sales for the year ended March 31, 2010 increased by $22.1 million from the year
ended March 31, 2009 due to increased sales activities. At the same time, cost
of sales as a percentage of net sales decreased to approximately 84.4% from
approximately 87.4 %, as the rate of increase for retail sales, which had higher
margins, exceeded that of the wholesale segment. Consequently, gross margin as a
percentage of net sales increased to approximately 15.6% for the year ended
March 31, 2010 from approximately 12.6% for the year ended March 31,
2009.
The
following table sets forth net sales, cost of sales, gross profit and gross
margin by business segments for the periods indicated (amounts in
thousands):
|
Years ended March 31,
|
|||||||||||||||||||||||||||||||
|
2010
|
2009
|
||||||||||||||||||||||||||||||
|
Net
sales
|
Cost of
sales
|
Gross
profit
|
Gross
margin
|
Net
sales
|
Cost of
sales
|
Gross
profit
|
Gross
margin
|
||||||||||||||||||||||||
Wholesale
distribution of finished oil
|
$ | 126,283 | $ | (110,689 | ) | $ | 15,594 | 12.35 | % | $ | 108,804 | $ | (97,507 | ) | $ | 11,297 | 10.38 | % | ||||||||||||||
Gas
stations
|
47,423 | (35,958 | ) | 11,465 | 24.18 | % | 33,768 | (27,041 | ) | 6,727 | 19.92 | % | ||||||||||||||||||||
Total
|
$ | 173,706 | $ | (146,647 | ) | $ | 27,059 | 15.58 | % | $ | 142,572 | $ | (124,548 | ) | $ | 18,024 | 12.64 | % |
Selling, General and
Administrative Expenses
Selling
expenses for the year ended March 31, 2010 increased by $539 thousand from the
year ended March 31, 2009 due to increased rental expense for our gas stations.
Increased sales activities and the resulting increase in salary expense, from
$501 thousand to $592 thousand, also contributed to the increase.
General
and administrative expenses for the year ended March 31, 2010 decreased by $96
thousand from the year ended March 31, 2009 due to enhanced cost control in
administrative activities and decrease in administrative headcount. However, we
expect our general and administrative expenses will increase in tandem with any
expansion of our business operations.
Interest
Expenses
Interest
expenses increased to $573 thousand for the year ended March 31, 2010 from $393
thousand for the year ended March 31, 2009. The increase was mainly due to the
increase in the amount of our short-term loans year over year, from $2.0 million
to $3.5 million, to meet the Company’s working capital needs.
36
Income Tax
Expenses
Income
tax expenses for year ended March 31, 2010 increased $1.1 million from the year
ended March 31, 2009. As our income tax rate for 2010 has remained unchanged
from 2009, the increased income tax expenses resulted from higher taxable income
generated year over year.
Net
Income
Net
income from our two business segments for the year ended March 31, 2010
increased $7.4 million from in the year ended March 31, 2009. This increase was
mainly attributable to increase in net sales offset by increase in cost of sales
and operating expenses.
Comparison
of Results of Operations for the Years ended March 31, 2009 and
2008
Years ended March 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
(Amounts
in thousands, except percentages)
|
||||||||||||||||
Net
sales
|
$ | 142,572 | 100.00 | % | $ | 95,612 | 100.00 | % | ||||||||
Cost
of sales
|
(124,548 | ) | (87.36 | )% | (82,356 | ) | (86.14 | )% | ||||||||
Gross
profit
|
$ | 18,024 | 12.64 | % | $ | 13,256 | 13.86 | % | ||||||||
Operating
expenses:
|
||||||||||||||||
Selling
expenses
|
(2,360 | ) | (1.66 | )% | (1,813 | ) | (1.90 | )% | ||||||||
General
and administrative expenses
|
(688 | ) | (0.48 | )% | (334 | ) | (0.35 | )% | ||||||||
Income
from operations
|
$ | 14,976 | 10.50 | % | $ | 11,109 | 11.62 | % | ||||||||
Other
income (expense)
|
(356 | ) | (0.25 | )% | (217 | ) | (0.23 | )% | ||||||||
Income
tax expenses
|
(4,720 | ) | (3.31 | )% | (3,642 | ) | (3.81 | )% | ||||||||
Net
income
|
$ | 9,900 | 6.94 | % | $ | 7,250 | 7.58 | % |
Net
Sales
Net sales
from our two business segments for the year ended March 31, 2009 increased by
$47.0 million or 49.1% from for the same period in 2008. The increase was mainly
due to sales growth generated by our gas stations, and increase in our average
wholesale and retail selling prices.
The
following table sets forth a breakdown of our net sales by business
segments for the periods indicated (amounts in thousands):
Years ended March 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Wholesale
distribution of finished oil
|
$ | 109,043 | 76.48 | % | $ | 72,849 | 76.19 | % | ||||||||
Retail
gas stations
|
33,844 | 23.74 | % | 23,028 | 24.08 | % | ||||||||||
Sales
tax and surcharges
|
(315 | ) | (0.22 | )% | (265 | ) | (0.27 | )% | ||||||||
Total
net sales
|
$ | 142,572 | 100.00 | % | $ | 95,612 | 100.00 | % |
Sales
from wholesale distribution for the year ended March 31, 2009 increased by $36.2
million, or 49.7%, from the same period in 2008. Sales volume for the year ended
March 31, 2009 increased by 31,166 metric tons, or 28.5%, to 140,515 metric tons
from 109,349 metric tons for the same period in 2008, as a result of increased
sales to our existing customers. Average selling prices also increased by
approximately 7% year over year.
Sales
from retail gas stations for the year ended March 31, 2009 increased by $10.8
million or 47.0%, from the same period in 2008. Sales volume for the year ended
March 31, 2009 increased by 6,144 metric tons, or 19%, to 38,482 metric tons
from 32,338 metric tons for the same period in 2008, from increase in sales per
gas station. In addition, average selling prices increased by approximately 14%
year over year.
The
following table sets forth our average per metric ton selling prices by business
segments for the periods indicated:
Years ended March 31
|
||||||||
2009
|
2008
|
|||||||
Wholesale
distribution of finished oil
|
$ | 776 | $ | 723 | ||||
Retail
gas stations
|
$ | 879 | $ | 772 |
37
Cost of Sales and Gross
Profit Margin
Cost of
sales includes inventory cost of products sold. The following table sets
forth the components of our cost of sales and gross profit both in absolute
amount and as a percentage of net sales for the periods indicated (amounts in
thousands):
Years ended March 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Net
sales
|
$ | 142,572 | 100.00 | % | $ | 95,612 | 100.00 | % | ||||||||
Cost
of sales
|
(124,548 | ) | (87.36 | )% | (82,356 | ) | (86.14 | )% | ||||||||
Gross
profit
|
$ | 18,024 | 12.64 | % | $ | 13,256 | 13.86 | % |
Cost of
sales increased by $42.2 million from the year ended March 31, 2008 to the year
ended March 31, 2009 due to increased sales activities. At the same time, cost
of sales as a percentage of net sales increased from 86.1% to 87.3%.
Consequently, gross margin as a percentage of net sales decreased to
approximately 12.6% for the year ended March 31, 2009 from approximately 13.9% a
year ago.
The
following table sets forth net sales, cost of sales, gross profit and gross
margin by business segments for the periods indicated (amounts in
thousands):
|
Years ended March 31,
|
|||||||||||||||||||||||||||||||
|
2009
|
2008
|
||||||||||||||||||||||||||||||
|
Net
sales
|
Cost of
sales
|
Gross
profit
|
Gross
margin
|
Net
sales
|
Cost of
sales
|
Gross
profit
|
Gross
margin
|
||||||||||||||||||||||||
Wholesale
distribution of finished oil
|
$ | 108,804 | $ | (97,507 | ) | $ | 11,297 | 10.38 | % | $ | 72,648 | $ | (63,467 | ) | $ | 9,181 | 12.64 | % | ||||||||||||||
Gas
stations
|
33,768 | (27,041 | ) | 6,727 | 19.92 | % | 22,964 | (18,889 | ) | 4,075 | 17.75 | % | ||||||||||||||||||||
Total
|
$ | 142,572 | $ | (124,548 | ) | $ | 18,024 | 12.64 | % | $ | 95,612 | $ | (82,356 | ) | $ | 13,256 | 13.86 | % |
Selling, General and
Administrative Expenses
Selling
expenses increased by $547 thousand from the year ended March 31, 2008 to the
year ended March 31, 2009. The increase was mainly due to increased sales
activities, which resulted in increase freight expense. Increased rental expense
of our gas stations was also a contributing factor.
General
and administrative expenses increasing by $354 thousand from the year ended
March 31, 2008 to the year ended March 31, 2009, due to increase in payroll and
other administrative expenses.
Interest
Expenses
Interest
expenses increased to $393 thousand for the year ended March 31, 2009 from $313
thousand for the same period in 2008. The increase was mainly due to the
increase in the amount of our short-term loans year over year, from $3.0 million
to $2.0 million, to meet the Company’s working capital needs.
Income Tax
Expenses
Income
tax expenses for the year ended March 31, 2009 increased by $1.1 million from
the same period in 2008. Although our income tax rate changed from 33% to 25% on
January 1, 2008, higher taxable income generated period over period resulted in
the increased income tax expenses.
Net
Income
Net
income from our two business segments for the year ended March 31, 2009
increased by $2.7 million from the year ended March 31, 2008. This increase was
mainly attributable to the increase in net sales offset by increase in cost of
sales and operating expenses.
38
Liquidity
and Capital Resources
In
summary, our cash flows were as follows for the periods indicated (amounts in
thousands):
Three months ended
|
Years ended
|
|||||||||||||||||||
June 30,
|
March 31,
|
|||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2008
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
Net
cash provided by (used in) operating
activities
|
$ | 4,335 | $ | 4,720 | $ | 22,185 | $ | 14,044 | $ | (2,833 | ) | |||||||||
Net
cash (used in) provided by investing
activities
|
(260 | ) | (24 | ) | (5,192 | ) | (4,043 | ) | 27 | |||||||||||
Net
cash (used in) financing activities
|
$ | (942 | ) | $ | (4,465 | ) | $ | (16,254 | ) | $ | (9,247 | ) | $ | (2,817 | ) |
We
presently finance our operations primarily from the cash flow from our
operations and short term bank loans, and we anticipate that this will continue
to be our primary source of funds to finance our short-term cash needs. If we
require additional capital to expand or enhance our existing facilities, we may
consider debt or equity offerings or institutional borrowing as potential means
of financing.
Three months ended June 30,
2010
As of
June 30, 2010, we had cash and cash equivalents of $4.9 million, other current
assets of $45.1 million and current liabilities of $26.6 million.
Net cash
provided by operating activities for the three months ended June 30, 2010 was
$4.3 million as compared with net cash provided by operating activities of $4.7
million for the same period in 2009. This decrease was mainly attributable to
increased advance payment made to our suppliers as required by our agreements
with them.
Net cash
used in investing activities was $260 thousand for the three months ended June
30, 2010, compared with $24 thousand used in investing activities for the same
period in 2009. This increase in net cash used in investing activities was
mainly due to increase in purchase of fixed assets.
Net cash
used in financing activities was $1.0 million for the three months ended June
30, 2010, compared with $4.5 million net cash used in financing activities for
the same period in 2009. Orient Petroleum declared and paid $8 million in
dividends to its equity owners during the three months ended June 30, 2009,
while none was declared or paid during the same period in 2010, which resulted
in the decrease in net cash used in financing activities.
Year ended March 31,
2010
As of
March 31, 2010, we had cash and cash equivalents of $1.7 million, other current
assets of $35.3 million and current liabilities of $19.4 million.
Net cash
provided by operating activities for the year ended March 31, 2010 was $22.2
million compared with net cash provided by operating activities of $14.0 million
for the same period in 2009. This increase was mainly attributable to
increase in both net income and short-term notes payables.
Net cash
used in investing activities was approximately $5.2 million for the year ended
March 31, 2010, compared with $4.0 million used in investing activities for the
same period in 2009. This increase in net cash used in investing activities was
mainly due to increased long-term lease payments for our gas
stations.
39
Net cash
used in financing activities was $16.3 million for the year ended March 31,
2010, compared with $9.2 million net cash used in financing activities for the
same period in 2009. The increase in net cash used in financing activities was
mainly due to dividends totaling $23 million declared and paid by Orient
Petroleum to its equity owners through March 31, 2010, offset by their capital
injection to Orient Petroleum of $10 million made in December 2009. No dividends
were declared or paid by Orient Petroleum since then.
Year ended March 31,
2009
As of
March 31, 2009, we had cash and cash equivalents of $993 thousand, other current
assets of $23.7 million and current liabilities of $7.2 million.
Net cash
provided by operating activities for the twelve months ended March 31, 2009 was
$14.0 million compared with net cash provided by operating activities of $2.8
million for the same period in 2008. This increase was mainly attributable to
increase in both net income and short-term notes payables
Net cash
used in investing activities was $4.0 million for the twelve months ended March
31, 2009, compared with $27 thousand cash provided by investing activities for
the same period in 2008. This increase in net cash used in investing activities
was mainly due to increase in long-term lease payments for our gas
stations.
Net cash
used in financing activities was $9.2 million for the twelve months ended March
31, 2009, compared with $2.8 million net cash used in financing activities for
the same period in 2008. The increase in net cash used in financing activities
was mainly due to dividends totaling $6 million declared and paid by Orient
Petroleum to its equity owners through March 31, 2009, as well as repayment of
short-term borrowings over the period.
Off-Balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our combined financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an uncombined entity that serves as credit, liquidity or
market risk support to such entity. We do not have any variable interest in any
uncombined entity that provides financing, liquidity, market risk or credit
support to us or engages in leasing, hedging or research and development
services with us.
Contractual
Obligations and Commitments
The
following table summarizes our significant contractual obligations as of June
30, 2010 (amounts in thousands):
Payment Due by Period
|
||||||||||||||||||||
Less Than
|
After
|
|||||||||||||||||||
Contractual Obligations
|
Total
|
1 Year
|
1-3 Years
|
3-5 Years
|
5 Years
|
|||||||||||||||
(Amounts
expressed in thousands)
|
||||||||||||||||||||
Operating
leases
|
$ | 898 | $ | 88 | $ | 118 | $ | 118 | $ | 574 | ||||||||||
Total
contractual cash obligations
|
$ | 898 | $ | 88 | $ | 118 | $ | 118 | $ | 574 |
Quantitative
and Qualitative Disclosures about Market Risks
In the
normal course of business, we do not hold or issue financial instruments which
expose us to interest rate and foreign exchange rate risks. However, our
operations are affected by certain commodity price movements. We historically
have not used derivative instruments for hedging or trading purposes. Such
activities are subject to policies approved by our senior
management.
Interest Rate
Risk
We do not
hold any financial instruments that are sensitive to changes in interest rate.
Hence we do not have any interest risk exposure
40
Foreign Exchange Rate
Risk
The
RMB is not a freely convertible currency. Limitation in foreign exchange
transactions imposed by the PRC government could cause future exchange rates to
vary significantly from current or historical exchange rates.
Since our
business is conducted primarily in RMB, and we do not have any foreign currency
payments for imported equipments or materials, we do not have any foreign
exchange rate risk exposure.
Commodity Price
Risk
We
purchase gasoline, diesel, naphtha (primarily used as additive for methanol),
methanol and gasoline addictives from various petroleum refineries and suppliers
in the PRC. We enter into one-year contracts with our suppliers that require us
to purchase a minimum amount of specified oil products at market price during
the year. Market prices are affected by various factors such as changes in
global and regional politics and economy, the demand and supply of crude oil and
refined products. We do not use any derivative instruments to evade such price
risks.
DESCRIPTION
OF PROPERTY
The
following table provides a general description of our current offices and
facilities:
Principal Activities
|
Location
|
Area
(approximate
square meters)
|
Land Use Right or Lease Expiration
Date/Lease Term
|
|||
Headquarters
(1)
|
Xi’an
|
534.64
|
One
year term
|
|||
Storage
Depot (2)
|
Xi’an
|
15,333.33
|
April
30, 2025
|
|||
Storage
Depot (3)
|
Xi’an
|
12,333.33
|
March
31, 2023
|
|||
Sales
Offices (4)
|
Shaanxi
Province
|
128.33
|
Various
lease terms
|
|||
Gas
Stations – Owned (5)
|
Shaanxi
Province
|
N/A
|
N/A
|
|||
Gas
Stations – Leased (6)
|
|
Shaanxi
Province
|
|
N/A
|
|
10
to 15 years lease term
|
(1)
|
Our
headquarters is comprised of seven leases, including six for offices and
one for cafeteria. Five of the leases expire in January 2011 and two
expire in April 2011. Annual lease obligation for our headquarters in the
aggregate is RMB 16,167.
|
(2)
|
We
purchased the depot from a non-state owned petroleum company in 2005 for
RMB 20.5 million. Annual payment to retain our land use right is RMB
400,000.
|
(3)
|
Our
annual lease obligation is RMB
650,000.
|
(4)
|
We
maintain three sales offices in Shaanxi Province to support our whole
distribution business. The lease terms vary, expiring on December 31,
2011, December 31, 2012, and July 19, 2019, respectively. Annual lease
obligation for these offices in the aggregate is RMB
44,400.
|
(5)
|
We
own two gas stations, and their land use rights are retained by the
parties from whom we acquired the gas stations. Such parties are
responsible for all land use right related fees and
expenses.
|
(6)
|
We
currently operate 11 gas stations under renewable 10-15 years lease
agreements with their owners. Our annual lease obligation for these
stations in the aggregate is RMB
60,500.
|
All land
in the PRC is owned by the government and cannot be sold to any individual or
entity. Instead, the government grants landholders a land use right in exchange
for a purchase price for such right. The land use right allows its holder the
right to use the land for a specified long-term period of time and enjoys all
the interests of ownership of the land.
For more
details regarding our leases, please see Note 4, “Prepaid Expenses,” and Note
10, “Commitments and Contingencies” of the notes to our audited financial
statements for the three months ended June 30, 2010 and 2009, and for the years
ended March 31, 2010, 2009 and 2008 included elsewhere in this Form 8-K, which
sections are incorporated here by reference.
41
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security
Ownership Prior to Change of Control
The
following table sets forth information regarding the beneficial ownership of the
Registrant’s common stock as of September 6, 2010, for each of the following
persons, immediately prior to the Closing of the Exchange:
·
|
each
person who was a director or executive officer of the Registrant
immediately prior to the Closing the
Exchange;
|
·
|
all
such directors and executive officers as a group;
and
|
·
|
each
person (including any group) who is known by the Registrant as to own
beneficially five percent or more of the Registrant’s common stock
immediately prior the Closing of the
Exchange.
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the persons and
entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the shareholder’s name. The percentage
of class beneficially owned set forth below is based on 7,900,000 shares of
common stock issued and outstanding as of September 6, 2010, immediately prior
to the Closing of the Exchange.
Executive officers and directors:
|
Number of
Shares
beneficially
owned (1)
|
Percentage of
class beneficially
owned
|
||||
Terry
Hahn, President, CEO, CFO and sole Director (2)
|
0
|
0.00
|
%
|
|||
All
directors and executive officers as a group (one person)
|
0
|
0.00
|
%
|
|||
5%
Shareholders:
|
||||||
Hong
Gao (3)
|
13,250,000
|
82.04
|
%
|
(1)
|
Under
Rule 13d-3, a beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which includes
the power to vote, or to direct the voting of shares; and (ii) investment
power, which includes the power to dispose or direct the disposition of
shares. Certain shares may be deemed to be beneficially owned by more than
one person (if, for example, persons share the power to vote or the power
to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire the
shares (for example, upon exercise of an option) within 60 days of the
date as of which the information is provided. In computing the percentage
ownership of any person, the amount of shares outstanding is deemed to
include the amount of shares beneficially owned by such person (and only
such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does
not necessarily reflect the person's actual ownership or voting power with
respect to the number of shares of common stock actually outstanding on
September 6, 2010. Percentage totals may vary slightly due to
rounding.
|
(2)
|
Mr.
Hahn’s address is 21-10405 Jasper Avenue, Edmonton, Alberta, T5J 3S2,
Canada.
|
(3)
|
Ms.
Gao’s address is Suite 303, Building 19, Liulitunbeili, Chaoyang District,
Beijing, PRC.
|
Security
Ownership After Change of Control
The
following table sets forth information regarding the beneficial ownership of the
Registrant’s common stock as of September 7, 2010, for each of the following
persons, after the Closing of the Exchange:
·
|
each
person named to be a director and/or executive officer of the Registrant
in connection with the Exchange;
|
·
|
all
such directors and executive officers as a group;
and
|
·
|
each
person (including any group) who is known by the Registrant as to own
beneficially five percent or more of the Registrant’s common stock after
the Closing of the Exchange.
|
42
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the persons and
entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the shareholder’s name. The percentage
of class beneficially owned set forth below is based on 30,000,000 shares of
common stock issued and outstanding as of September 7, 2010, immediately
following the Closing of the Exchange.
Executive officers and directors: (1)
|
Number of
Shares
beneficially
owned (2)
|
Percentage of
class beneficially
owned (2)
|
||||||
Anping
Yao (3)
|
16,915,212
|
56.38
|
%
|
|||||
Bin
Fu (4)
|
55,800
|
*
|
||||||
Yan
Tian (5)
|
279,000
|
*
|
||||||
All
directors and executive officers as a group (three
persons)
|
17,250,012
|
57.50
|
%
|
|||||
5%
Shareholders: (1)
|
||||||||
Ultimate
Sino Holdings Limited (6)
|
18,386,100
|
61.29
|
%
|
* Less
than 1%.
(1)
|
Unless
otherwise noted, the address for each of the named beneficial owners is: 1
Xingqing Rd., Cuiting Plaza, Suite 2201, Xi’an, Shaanxi Province, PRC
710032.
|
|
(2)
|
Under
Rule 13d-3, a beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which includes
the power to vote, or to direct the voting of shares; and (ii) investment
power, which includes the power to dispose or direct the disposition of
shares. Certain shares may be deemed to be beneficially owned by more than
one person (if, for example, persons share the power to vote or the power
to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire the
shares (for example, upon exercise of an option) within 60 days of the
date as of which the information is provided. In computing the percentage
ownership of any person, the amount of shares outstanding is deemed to
include the amount of shares beneficially owned by such person (and only
such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does
not necessarily reflect the person's actual ownership or voting power with
respect to the number of shares of common stock actually outstanding on
September 7, 2010. Percentage totals may vary slightly due to
rounding.
|
|
(3)
|
Represents
shares held directly by Ultimate Sino Holdings Limited (“Ultimate”), a
British Virgin Islands company and majority shareholder of Orient
immediately prior to the Exchange. Pursuant to the terms of the
Exchange Agreement, the Registrant issued 18,386,100 common shares to
Ultimate at the Closing of the Exchange, of which Mr. Yao is an indirect
beneficiary of 16,915,212 common shares, as he holds an option to acquire
shares of Ultimate. Pursuant to a certain Call Option Agreement
dated August 12, 2010, Mr. Yao has the right to acquire 92% of the issued
and outstanding capital stock of Ultimate (equal to his percentage
ownership of Orient) from the sole shareholder of
Ultimate.
|
|
(4)
|
Represents
shares held directly by Dynasty Wisdom Limited (“Dynasty”), a British
Virgin Islands company and a minority shareholder of Orient immediately
prior to the Exchange. Pursuant to the terms of the Exchange Agreement,
the Registrant issued 1,395,000 common shares to Dynasty at the Closing of
the Exchange, of which Mr. Fu is an indirect beneficiary of 55,800 common
shares, equal to his percentage ownership of Dynasty.
|
|
(5)
|
Represents
shares held directly by Opal Treasure Limited (“Opal”), a British Virgin
Islands company and a minority shareholder of Orient immediately prior to
the Exchange. Pursuant to the terms of the Exchange Agreement, the
Registrant issued 1,143,900 common shares to Opal at the Closing of
the Exchange, of which Ms. Tian is an indirect beneficiary of 279,000
common shares, equal to her percentage ownership of
Opal.
|
|
(4)
|
The
address of Ultimate is Room AB, 22/F Cuiting Mansion, Xingqing Road Zhong
Duan, Xi’an, Shaanxi Province, PRC
710048.
|
43
DIRECTORS
AND EXECUTIVE OFFICERS
Directors
and Executive Officers Prior to Change of Control
The
Registrant’s officers and directors prior to the Closing of the Exchange
Transaction and information concerning them are as follows:
Name
|
Age
|
Position
|
||
Terry
Hahn
|
53
|
President,
Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and
Director
|
Biographical
Information
Terry Hahn, age 53, had been
the Registrant’s president, chief executive officer, chief financial
officer, treasurer and secretary since its inception, as well as its sole
director. From 1986 to date, Mr. Hahn has been involved in business start-ups,
business management, consulting and investment research, and has been involved
with businesses in the music, retail, insurance and property management
industries. Mr. Hahn graduated with Bachelor of Science in Electrical
Engineering at the University of Alberta in 1977.
Directors
and Executive Officers After Change of Control
Pursuant
to the Exchange Agreement, Mr. Hahn resigned as the Registrant’s president,
chief executive officer, chief financial officer, treasurer, secretary and sole
director, and the following persons were appointed in his place, effective as of
the Closing of the Exchange:
Name
|
Age
|
Position
|
||
Anping
Yao *
|
52
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
||
Bin
Fu *
|
51
|
Chief
Financial Officer and Secretary
|
||
Yan
Tian
|
48
|
Director
|
* Denotes
an executive officer
Biographical
Information
Anping Yao founded Xi’an
Lianhu Petroleum Chemical Co., Ltd. (“Lianhu Petroleum”) in September 1991,
which became Orient Petroleum on December 4, 1996. Mr. Yao currently serves as
the vice president of the Petroleum Association of Shaanxi Province, a
non-profit association organized by local petroleum companies to provide general
information on the petroleum industry and regulate the local petroleum market in
terms of environmental protection, quality control and staff training. Prior to
his founding of Lianhu Petroleum, Mr. Yao worked at Xi’an 7226 Factory from 1987
to 1990 and served in the Chinese Army from 1975 to 1986.
Bin Fu graduated from Shaanxi
Financial Institute in 1982 with a bachelor degree in Economics. Mr. Fu formerly
worked as the financial manager and financial supervisor consecutively at Xi’an
Shiji Jinhua Holding Company from January 1999 to September 2006. Mr. Fu
formerly worked as the financial supervisor at Shaanxi Haifujia Chunqiu Industry
Co., Ltd. from September 2006 to May 2010.
Yan Tian graduated from the
Lanzhou Military Medical School in May 1985 and formerly worked as a mid-level
clinical doctor at Xi’an 323 Hospital from June 1985 to October 2002. Ms. Tian
has been serving as the director and the general manager of human resources of
Orient Petroleum since she joined the Company in November 2002.
Family
Relationships
Other
than Anping Yao and Yan Tian, who are husband and wife, there are no family
relationships between or among any of the Registrant’s sole director and
executive officer serving prior to the Exchange and the directors and executive
officers appointed in connection with the Exchange.
Involvement
in Certain Legal Proceedings
There are
no orders, judgments, or decrees of any governmental agency or administrator, or
of any court of competent jurisdiction, revoking or suspending for cause any
license, permit or other authority to engage in the securities business or in
the sale of a particular security or temporarily or permanently restraining any
of the officers or directors appointed in connection with the Exchange from
engaging in or continuing any conduct, practice or employment in connection with
the purchase or sale of securities, or convicting such person of any felony or
misdemeanor involving a security, or any aspect of the securities business or of
theft or of any felony. Nor are any of the officers or directors of any
corporation or entity affiliated with the Registrant so enjoined.
44
Board
of Directors
In
connection with the Exchange, the Registrant’s board of directors is now
composed of two members. All members of the board of directors serve
in this capacity until the next annual meeting of the
shareholders. The Registrant’s bylaws provide that the authorized
number of directors will be not less than one and no more than
nine.
In
connection with the Exchange, Anping Yao has been appointed to the
Registrant’s board of directors as chairman. In this capacity Mr. Yao
will be responsible for meeting with the Registrant’s chief financial officer to
review financial and operating results, reviewing agendas and minutes of board
and committee meetings, and presiding at the meetings of the board of
directors.
Board
Committees; Director Independence
As of the
date of this Form 8-K, the Registrant’s board of directors has not appointed a
nominating committee, audit committee or compensation committee, or committees
performing similar functions, nor does it have a written nominating,
compensation or audit committee charter. The Registrant also does not have an
“audit committee financial expert” as such term is defined in the rules
promulgated under the Securities Act of 1933, as amended (the “Securities Act”) and the Exchange Act. The
functions ordinarily handled by these committees are currently handled by the
entire board of directors. The board of directors intends, however, to review
the governance structure and institute board committees as necessary and
advisable in the near future, to facilitate the management of the Registrant’s
business.
None of
the directors appointed in connection with the Exchange are considered
“independent” as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act. The Registrant is not currently subject to any law, rule or
regulation, however, requiring that all or any portion of its board of directors
include "independent" directors.
The
Registrant currently does not have any defined policy or procedure requirements
for shareholders to submit recommendations or nominations for directors. The
Registrant currently also does not have any specific or minimum criteria for the
election of nominees to the board of directors and does not have any specific
process or procedure for evaluating such nominees. The entire board of directors
assesses all candidates, whether submitted by management or shareholders, and
makes recommendations for election or appointment.
A
stockholder who wishes to communicate with the board of directors may do so by
directing a written request addressed to the Registrant’s chief executive
officer at the address appearing on the face page of this Form 8-K. The
Registrant does not have a policy regarding the attendance of board members at
the annual meeting of shareholders.
Code
of Ethics
The
Registrant has not adopted a code of ethics as of the date of this Form 8-K.
However, the Registrant intends to adopt a code of ethics in the near
future.
Section
16(a) Beneficial Ownership Compliance
Not
applicable.
Compensation
Committee Interlocks and Insider Participation
No
interlocking relationship exists between the Registrant’s board of directors and
the board of directors or compensation committee of any other company, nor has
any interlocking relationship existed in the past.
EXECUTIVE
COMPENSATION
Executive
Compensation
The
following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended March 31, 2010, 2009 and 2008,
by the Registrant’s chief executive officer, chief financial officer and each of
the other two highest paid executives, if any, whose total compensation exceeded
$100,000 during such periods.
45
Name and
Principal
Position
|
Year
ended
March
31,
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
Earnings
($)
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
|
2010
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
Anping
Yao
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
current CEO (1)
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
|
2010
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
Bin
Fu
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
current CFO (2)
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
Terry
Hahn
|
2010
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
former CEO and
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
CFO
(3)
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
(1)
|
Mr.
Yao was appointed as the Registrant’s chief executive officer on September
7, 2010, in connection with the Exchange. Mr. Yao’s compensation for the
periods reported was paid to him by Orient Petroleum. Mr. Yao’s
compensation, for reporting purposes, has been converted to U.S. Dollars
at the conversion rate of 6.8289 RMB to one U.S. dollar for 2010, 6.8671
RMB to one U.S. dollar for 2009, and 7.4535 RMB to one U.S. dollars for
2008.
|
(2)
|
Bin
Fu was appointed as the Registrant’s chief financial officer on September
7, 2010, in connection with the Exchange. Mr. Fu’s compensation for the
periods reported was paid to him by Orient Petroleum. Mr. Fu’s
compensation, for reporting purposes, has been converted to U.S. Dollars
at the conversion rate of 6.8289 RMB to one U.S. dollar for 2010, 6.8671
RMB to one U.S. dollar for 2009, and 7.4535 RMB to one U.S. dollars for
2008.
|
(3)
|
Mr.
Hahn resigned as the Registrant’s president, chief executive officer,
chief financial officer, treasurer and secretary on September 7, 2010, in
connection with the Exchange. Mr. Hahn’s compensation for the periods
reported are based on the Registrant’s prior fiscal year end of May 31,
which has been changed to March 31 in connection with the
Exchange.
|
Employment
Agreements
The
Registrant currently has no employment agreements with any of its executive
officers, nor any compensatory plans or arrangements resulting from the
resignation, retirement or any other termination of any of its executive
officers, from a change-in-control, or from a change in any executive officer’s
responsibilities following a change-in-control.
Employment
Agreements of Orient Petroleum
Orient
Petroleum has employment agreements with certain members of its management team,
including Gongping He, vice-president of operation, Ruike Yuan, vice-president
of administration, Xuewu Chen, vice-president of sales, Na Li, vice-president of
financial affairs, and Yong Yang, sales manager. These employment agreements
provide for a term of one year, commencing January 1, 2010, and a basic salary
that includes the premium for social insurance coverage. Orient Petroleum has
the right to adjust the basic salary based on its financial results. The
employment agreements are also subject to termination upon a 30-day notice by
any party.
Director
Compensation
Currently,
the Registrant does not pay any compensation to members of its board of
directors for their service on the board. However, the Registrant
intends to review and consider future proposals regarding board
compensation.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Share
Exchange Agreement
On
September 7, 2010, the Registrant executed the Exchange Agreement with Orient
and the Orient Stockholders. Orient owns 100% of Orient Hong Kong, which in
turns owns 100% of Orient Xi’an.
On the
Closing Date of the Exchange Agreement, the Registrant issued 27,100,000 shares
of its common stock to the Orient Stockholders in exchange for 100% of the
issued and outstanding common stock of Orient. After the Closing, the Registrant
has a total of 30,000,000 shares of common stock outstanding, with the Orient
Stockholders owning approximately 90.33% of the Registrant’s total issued and
outstanding common shares.
46
As a
result of the Exchange, the Orient Stockholders became the Registrant’s
controlling shareholders and Orient became the Registrant’s wholly owned
subsidiary. In connection therewith, the Registrant acquired the business and
operations of Orient Petroleum Group, which principal business activities are
conducted by Orient Petroleum in China.
LEGAL
PROCEEDINGS
Currently
there are no legal proceedings pending or threatened against the
Registrant. From time to time, however, the Registrant may become
involved in various lawsuits and legal proceedings which arise in the ordinary
course of business. Litigation is subject to inherent uncertainties,
and an adverse result in these or other matters may arise from time to time that
may harm the Registrant’s business.
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY
AND
RELATED SHAREHOLDER MATTERS
Market
Information
The
Registrant’s common stock is traded on the Over-The-Counter Bulletin Board
("OTCBB") under the symbol “XTML.OB”. Since inception, there has been no trading
in the Registrant’s shares.
Holders
As
of September 7, 2010, immediately after the Closing of the Exchange, there were
14 shareholders of record of the Registrant’s common stock based upon the
shareholders’ listing provided by the Registrant’s transfer agent, Empire Stock
Transfer, Inc., whose address is 1859 Whitney Mesa Drive, Henderson, Nevada
89014, and whose phone number is (702) 818-5898.
Dividends
The
Registrant has never paid cash dividends on its common stock. We
intend to keep future earnings, if any, to finance the expansion of our
business, and we do not anticipate that any cash dividends will be paid in the
foreseeable future. Our future payment of dividends will depend on
our earnings, capital requirements, expansion plans, financial condition and
other relevant factors that our board of directors may deem
relevant. Our retained earnings deficit currently limits our ability
to pay dividends.
RECENT
SALES OF UNREGISTERED SECURITIES
Reference
is made to Item 3.02 of this Form 8-K for a description of recent sales of
unregistered securities, which is hereby incorporated by reference.
DESCRIPTION
OF SECURITIES
General
The
Registrant’s authorized capital stock consists of 75,000,000 shares of common
stock at a par value of $0.001 per share. After the Closing of the
Exchange, the Registrant has 30,000,000 shares of common stock issued and
outstanding held by approximately 14 stockholders of record.
Common
Stock
Holders
of the Registrant’s common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders, including the election of
directors. Holders of common stock representing a majority of the voting power
of the Registrant’s capital stock issued, outstanding and entitled to vote,
represented in person or by proxy, are necessary to constitute a quorum at any
meeting of stockholders. A vote by the holders of a majority of the
Registrant’s outstanding shares is required to effectuate certain fundamental
corporate changes such as liquidation, merger or an amendment to the
Registrant’s Articles of Incorporation. The Registrant’s Articles of
Incorporation does not provide for cumulative voting in the election of
directors.
47
Holders
of common stock are entitled to share in all dividends that the board of
directors, in its discretion, declares from legally available
funds. In the event of liquidation, dissolution or winding up, each
outstanding share entitles its holder to participate pro rata in all assets that
remain after payment of liabilities and after providing for each class of stock,
if any, having preference over the common stock. Holders of common
stock have no pre-emptive rights or conversion rights, and there are no
redemption provisions applicable to the common stock.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Pursuant
to Nevada’s Revised Business Statutes, the Registrant adopted Bylaws with the
following indemnification provisions for its directors and
officers:
“(a)The
Directors shall cause the Corporation to indemnify a Director of former Director
of the Corporation and the Directors may cause the Corporation to indemnify a
director or former director of a corporation of which the Corporation is or was
a shareholder and the heirs and personal representatives of any such person
against all costs, charges and expenses, including an amount paid to settle an
action or satisfy a judgment, actually and reasonably incurred by him or them
including an amount paid to settle an action or satisfy a judgment inactive
criminal or administrative action or proceeding to which he is or they are made
a party by reason of his or here being or having been a Director of the
Corporation or a director of such corporation, including an action brought by
the Corporation or corporation. Each Director of the Corporation on
being elected or appointed is deemed to have contracted with the Corporation on
the terms of the foregoing indemnity.
(b)
The Directors may cause the Corporation to indemnify an officer, employee or
agent of the Corporation or of a corporation of which the Corporation is or was
a shareholder (notwithstanding that he is also a Director), and his or her heirs
and personal representatives against all costs, charges and expenses incurred by
him or them and resulting from his or her acting as an officer, employee or
agent of the Corporation or corporation. In addition, the Corporation
shall indemnify the Secretary or an Assistant Secretary of the Corporation (if
he is not a full-time employee of the Corporation and notwithstanding that he is
also a Director), and his or her respective heirs and legal representatives
against all costs, charges and expenses incurred by him or them and arising out
of the functions assigned to the Secretary by the Corporation Act or these
Articles and each such Secretary and Assistant Secretary, on being appointed is
deemed to have contracted with the Corporation on the terms of the foregoing
indemnity.
(c) The
Directors may cause the Corporation to purchase and maintain insurance for the
benefit of a person who is or was serving as a Director, officer, employee or
agent of the Corporation or as a director, officer, employee or agent of a
corporation of which the Corporation is or was a shareholder and his or her
heirs or personal representatives against a liability incurred by him as a
Director, officer, employee or agent.”
These
indemnification provisions may be sufficiently broad to permit indemnification
of the Registrant's executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities
Act.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to the Registrant’s directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. No
pending material litigation or proceeding involving the Registrant’s directors,
executive officers, employees or other agents as to which indemnification is
being sought exists, and the Registrant is not aware of any pending or
threatened material litigation that may result in claims for indemnification by
any of its directors or executive officers.
Item
3.02
|
Unregistered
Sales of Equity Securities
|
Exchange
On
September 7, 2010, and as described under Item 2.01 above, pursuant to the
Exchange Agreement, the Registrant issued 27,100,000 shares of its common stock
to the Orient Stockholders in exchange for 100% of the issued and outstanding
capital stock of Orient. The issuance of these shares was exempt from
registration pursuant to Regulation S promulgated under the Securities Act. The
Registrant made this determination based on the representations of the Orient
Stockholders, which included, in pertinent part, that such shareholders were not
a "U.S. person" as that term is defined in Rule 902(k) of Regulation S under the
Securities Act, and that such shareholders were acquiring the Registrant’s
common stock, for investment purposes for their own respective accounts and not
as nominees or agents, and not with a view to the resale or distribution
thereof, and that such shareholders understood that the shares of the
Registrant’s common stock may not be sold or otherwise disposed of without
registration under the Securities Act or an applicable exemption
therefrom.
48
Item
5.01
|
Changes
in Control of Registrant
|
As more
fully described in Items 1.01 and 2.01 above, on September 7, 2010, in
connection with the Exchange, the Registrant issued 27,100,000 shares of
its common stock to the Orient Stockholders in exchange for the transfer of 100%
of the outstanding shares of Orient’s capital stock by the Orient Stockholders
to the Registrant. As a result, the Orient Stockholders acquired control of the
Registrant because the common shares issued to them equal approximately 90.33%
of the Registrant’s outstanding shares of common stock (on a fully-diluted
basis) on the Closing Date. Each share of the Registrant’s outstanding common
stock entitles the holders of common stock to one vote. Thus, the Orient
Stockholders hold the majority number of the Registrant’s voting shares on a
fully diluted basis.
In
connection with the Closing of the Exchange, and as explained more fully in Item
2.01 above under the section titled “Management” and in Item 5.02 below,
effective on September 7, 2010, Terry Hahn resigned as the Registrant’s
president, chief executive officer, treasurer, chief financial officer,
secretary and sole director, and new officers and directors were appointed,
effective as of the Closing of the Exchange.
The
closing of the transactions under the Exchange Agreement, which resulted in the
change of control of the Registrant, occurred on September 7, 2010.
Item
5.02
|
Departure
of Directors or Certain Officers; Election of Directors; Appointment of
Certain Officers; Compensatory Arrangements of Certain
Officers.
|
As more
fully described in Items 1.01, 2.01 and 5.01 above, on September 7, 2010, in
connection with the Exchange, Terry Hahn resigned as the Registrant’s president,
chief executive officer, treasurer, chief financial officer, secretary and sole
director. In his place, Mr. Anping Yao was appointed president and chief
executive officer, and Mr. Bin Fu as chief financial officer and secretary,
effective September 7, 2010. Additionally, Mr. Yao and Ms. Yan Tian were
appointed to the board of the directors in place of Mr. Hahn effective September
7, 2010, with Mr. Yao as the chairman.
There are
no family relationships between or among any of the former and newly appointed
directors or executive officers. Other than the transactions in connection with
the Exchange, as described above in Item 2.01, no transactions occurred in the
last two years to which the Registrant was a party in which the above-mentioned
officers and/or directors had or is to have a direct or indirect material
interest.
Descriptions
of the business backgrounds and any compensation arrangements with the newly
appointed directors and officers can be found in Item 2.01 above, in the
sections titled “Management” and “Executive Compensation,” and such descriptions
are incorporated herein by reference.
Item
5.03
|
Amendments
to Articles of Incorporation or Bylaws; Change in Fiscal
Year
|
On
September 7, 2010, and pursuant to the Exchange Agreement, the Registrant
changed its fiscal year end from May 31 to March 31 to conform to the fiscal
year end of Orient Petroleum Group.
On
September 7, 2010, the Registrant’s board of directors adopted resolutions by
unanimous written consent to amend (i) Article I, Section 6(b) of the Bylaws in
order to change the quorum required to conduct a meeting of shareholders, and
(ii) Article I, Section 7 of the Bylaws in order to clarify the votes required
to carry an action at a meeting of shareholders. The Bylaws previously provided
that two shareholders present in person or by proxy constituted a quorum, and
did not specify the votes required to carry an action. A copy of the amended
Article I, Section 6(b) and Section 7 of the Bylaws is included as Exhibit 3.3
to this Form 8-K.
Item
5.06
|
Change
in Shell Company Status
|
As
explained more fully in Item 2.01 above, the Registrant was a "shell company"
(as such term is defined in Rule 12b-2 under the Exchange Act) immediately
before the Closing of the Exchange. As a result of the Exchange, Orient became
the wholly-owned subsidiary of the Registrant. Consequently, the Registrant
believes that the Exchange has caused it to cease to be a shell company. For
information about the Exchange, please see the information set forth above under
Item 2.01 of this Form 8-K above, which information is incorporated herein by
reference.
49
Item
9.01
|
Financial
Statement and Exhibits
|
As more
fully described in Item 2.01 above, on September 7, 2010, the Registrant
executed the Exchange Agreement with Orient and the Orient Stockholders. The
Closing of this Exchange Transaction occurred on September 7, 2010. Orient is
the registered owner of 100% of the registered capital of Orient Hong Kong,
which in turn owns 100% of Orient Xi’an. As a result of its acquisition of
Orient pursuant to the Exchange Agreement, the Registrant’s principal business
activities after the Exchange shall continue to be conducted through Orient
Xi’an.
(a)
|
Financial
statements of businesses acquired.
|
The
audited combined financial statements of Orient as of March 31, 2010, 2009 and
2008 are filed as Exhibit 99.1 to this Form 8-K and are incorporated herein by
reference.
(b)
|
Pro
forma financial information.
|
The
unaudited pro forma consolidated financial statements of the Company and Orient
Petroleum Group as of June 30, 2010 and March 31, 2010 are filed as
Exhibit 99.2 to this Form 8-K and are incorporated herein by
reference.
(c)
|
Shell
company transactions.
|
Reference
is made to Items 9.01(a) and 9.01(b) above and the exhibits referred to therein,
which are incorporated herein by reference.
(d)
|
Exhibits
|
INDEX TO
EXHIBITS
Exhibit
|
|
Description
|
2.1
|
Share
Exchange Agreement by and among Xtreme Link, Inc. (the “Registrant”), Hong
Gao, Orient New Energy Investments Limited (“Orient”) and the shareholders
of Orient dated September 7, 2010 *
|
|
3.1
|
Articles
of Incorporation of the Registrant (1)
|
|
3.2
|
By-Laws
of the Registrant (1)
|
|
3.3
|
Text
of Amendment to Bylaws of the Registrant*
|
|
99.1
|
Audited combined
financial statements of Orient for the years ended March 31, 2010, 2009
and 2008, and unaudited combined financial statements for the three months
ended June 30, 2010 and 2009, and accompanying notes to combined
financial statements*
|
|
99.2
|
Unaudited
pro forma consolidated financial statements of the Registrant and Orient
as of June 30, 2010 *
|
|
99.3
|
Consulting
Services Agreement entered into between Orient New Energy Xi’an Ltd.
(“Orient Xi’an”) and Xi’an Orient Petroleum Group Co., Ltd. (“Orient
Petroleum”) on August 12, 2010*
|
|
99.4
|
Operating
Agreement entered into among Orient Xi’an, Orient Petroleum and the owners
of Orient Petroleum on August 12, 2010*
|
|
99.5
|
Equity
Pledge Agreement entered into between Orient Xi’an and the owners of
Orient Petroleum on August 12, 2010*
|
|
99.6
|
Option
Agreement entered into between Orient Xi’an and the owners of Orient
Petroleum on August 12, 2010*
|
|
99.7
|
Voting
Rights Proxy Agreement entered into between Orient Xi’an and the owners of
Orient Petroleum on August 12, 2010*
|
|
99.8
|
Call
Option Agreement entered into between Jia Rosales Yao and the owners of
Orient Petroleum on August 12, 2010*
|
|
99.9
|
Entrustment
Agreement entered into between Jia Rosales Yao and the owners of Orient
Petroleum on August 12, 2010*
|
|
99.10
|
Oil
Storage Depot Lease Agreement entered into between Orient Petroleum and
Shaanxi Wanjie Trade Co., Ltd. on March 24, 2008*
|
|
99.11
|
Loan
Agreement between Orient Petroleum and China Construction Bank dated April
26, 2009*
|
|
99.12
|
Loan
Agreement between Orient Petroleum and EverBright Bank dated September 6,
2009*
|
99.13
|
Purchase
Agreement between Orient Petroleum and Yulin Gas Chemical Co., Ltd. dated
December 15, 2009
|
|
99.14
|
Purchase
Agreement between Orient Petroleum and Huawei Commerce Co., Ltd. dated
December 20, 2009
|
|
99.15
|
Purchase
Agreement between Orient Petroleum and Xi’an Putian Petroleum Co., Ltd.
dated December 20, 2009
|
|
99.16
|
Purchase
Agreement between Orient Petroleum and Shaanxi Yanchang Petroleum (Group)
Co., Ltd. dated December 23, 2009
|
|
99.17
|
|
Form
of Orient Petroleum’s Gas Station Lease
Agreement
|
*
|
|
Filed
herewith.
|
(1)
|
Filed
as an Exhibit to the Registration Statement on Form SB-2 filed with the
SEC on December 17, 2007.
|
50
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
XTREME
LINK, INC.
|
||
Dated: September
9, 2010
|
By:
|
/s/
Anping Yao
|
Anping
Yao
|
||
Chief
Executive Officer
|
51