Attached files
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EX-3.4 - Wave Sync Corp. | v210858_ex3-4.htm |
EX-10.9 - Wave Sync Corp. | v210858_ex10-9.htm |
EX-10.4 - Wave Sync Corp. | v210858_ex10-4.htm |
EX-10.8 - Wave Sync Corp. | v210858_ex10-8.htm |
EX-10.5 - Wave Sync Corp. | v210858_ex10-5.htm |
EX-10.2 - Wave Sync Corp. | v210858_ex10-2.htm |
EX-10.1 - Wave Sync Corp. | v210858_ex10-1.htm |
EX-10.7 - Wave Sync Corp. | v210858_ex10-7.htm |
EX-10.6 - Wave Sync Corp. | v210858_ex10-6.htm |
EX-10.3 - Wave Sync Corp. | v210858_ex10-3.htm |
EX-10.10 - Wave Sync Corp. | v210858_ex10-10.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of
1934
Date of
Report (Date of Earliest Event Reported): February 11, 2011 (February 10,
2011)
CHINA
BIO-ENERGY CORP.
(Exact
name of registrant as specified in its charter)
Delaware
|
0-20532
|
74-2559866
|
||
(State
or other jurisdiction
of
incorporation)
|
(Commission
File
Number)
|
(IRS
Employer
Identification
No.)
|
Pudong
Building, 2nd
Floor, Jiulong Avenue, Longwen District
Zhangzhou
City, Fujian Province
363000,
China
|
(Address
of principal executive offices)
|
Registrant’s
telephone number, including area code: 86 -596
2967018
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation to the registrant under any of the following
provisions:
¨
|
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))
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
information contained in this Current Report on Form 8-K include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The statements herein which are not historical reflect our
current expectations and projections about our future results, performance,
liquidity, financial condition, prospects and opportunities and are based upon
information currently available to us and our management and our management’s
interpretation of what is believed to be significant factors affecting the
business, including many assumptions regarding future events. Such
forward-looking statements include statements regarding, among other
things:
|
·
|
our
ability to reach widespread commercial
viability;
|
|
·
|
our
growth strategies;
|
|
·
|
our
anticipated future operation and
profitability;
|
|
·
|
our
future financing capabilities and anticipated need for working
capital;
|
|
·
|
the
anticipated trends in our industry;
|
|
·
|
our
ability to expand our marketing and sales
capabilities;
|
|
·
|
acquisitions
of other companies or assets that we might undertake in the
future;
|
|
·
|
our
operations in China and the regulatory, economic and political conditions
in China; and
|
|
·
|
current
and future competition.
|
Forward-looking statements, which
involve assumptions and describe our future plans, strategies, and expectations,
are generally identifiable by use of the words “may,” “should,” “expect,”
“anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of
these words or other variations on these words or comparable
terminology. Actual results, performance, liquidity, financial
condition, prospects and opportunities could differ materially from those
expressed in, or implied by, these forward-looking statements as a result of
various risks, uncertainties and other factors, including the ability to raise
sufficient capital to continue our operations. Actual events or
results may differ materially from those discussed in forward-looking statements
as a result of various factors, including, without limitation, the risks
outlined under “Risk Factors” and matters described in this Current Report on
Form 8-K generally. In light of these risks and uncertainties, there
can be no assurance that the forward-looking statements contained herein will in
fact occur.
Potential
purchasers of our common stock or other securities should not place undue
reliance on any forward-looking statements. Except as expressly required by the
federal securities laws, there is no undertaking to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events, changed circumstances or any other reason.
EXPLANATORY
NOTE
This
Current Report on Form 8-K being filed in connection with a series of
transactions consummated by the Registrant, and certain related events and
actions taken by the Registrant.
This
Current Report on Form 8-K includes the following items on Form
8-K:
Item
2.01
|
Completion
of Acquisition or Disposition of Assets
|
Item
3.02
|
Unregistered
Sales of Equity Securities
|
Item
5.01
|
Changes
in Control of Registrant
|
Item
5.02
|
Departure
of Directors or Principal Officers; Election of Directors; Appointment of
Principal Officers
|
Item
5.03
|
Amendments
to Articles of Incorporation or Bylaws; Change in Fiscal
Year
|
Item
5.06
|
Change
in Shell Company Status
|
Item
9.01
|
Financial
Statements and Exhibits
|
Certain
Definitional Conventions Used in this Current Report
In this Current Report on Form 8-K,
unless the context requires or is otherwise specified, references to the
“Registrant,” “Company,” “we,” “us,” “our” and similar expressions include the
following entities, after given effective to the Acquisition (as defined
herein):
|
(i)
|
China
INSOnline Corp., a Delaware company (most commonly referred to herein as
the “Registrant” or “CHIO” as the context requires), which is our publicly
traded parent company;
|
|
(ii)
|
Ding
Neng Holdings Limited, a British Virgin Islands company and a wholly-owned
subsidiary of the Registrant (“Ding Neng
Holdings”);
|
|
(iii)
|
Ding
Neng Bio-technology Co., Limited, a Hong Kong company (“Ding Neng HK”) and
a wholly owned subsidiary of Ding Neng
Holdings;
|
|
(iv)
|
Zhangzhou
Fuhua Biomass Energy Technology Co., Ltd., a wholly owned subsidiary of
Ding Neng HK incorporated in the PRC as a wholly foreign-owned enterprise
(“WFOE” or “Fuhua”); and
|
|
(v)
|
Fujian
Zhangzhou Ding Neng Bio-technology Co., Ltd. (“Ding Neng Bio-tech”), our
principal operating subsidiary, which is a Chinese variable interest
entity that the WOFE controls through certain contractual
arrangements.
|
Item
2.01 Completion of Acquisition or Disposition of Assets
On
December 6, 2010, China INSOnline Corp. (the “Registrant” or the “Company”)
entered into an Amendment (the “Amendment”) to the Share Exchange Agreement (as
amended, the “Share Exchange Agreement”), dated November 12, 2010, with Ding
Neng Holdings Limited, a British Virgin Islands holding company (“Ding Neng
Holdings”), which owns 100% of Ding Neng Bio-technology Co., Limited, a Hong
Kong company (“Ding Neng HK”), which owns 100% of Zhangzhou Fuhua Biomass Energy
Technology Co., Ltd. (“WOFE” or “Fuhua”), a foreign investment enterprise
organized under the laws of the People’s Republic of China, or PRC, and which
has, through various contractual agreements, management control and the rights
to the profits of Fujian Zhangzhou Ding Neng Bio-technology Co., Ltd. (“Ding
Neng Bio-tech”), a corporation organized under the laws of the PRC as a variable
interest entity. Ding Neng Bio-tech engages in the production,
refinement and distribution of bio-diesel fuel in southern
China.
The Share
Exchange Agreement and the Amendment provides for an acquisition transaction
(the “Acquisition”) in which the Registrant, through the issuance of shares of
its common stock, par value $0.001 (the “Common Stock”) representing 90% of the
Common Stock issued and outstanding immediately following the closing of the
Acquisition, will acquire 100% of Ding Neng Holdings. Upon completion
of the Acquisition, the existing shareholders of the Registrant will own an
aggregate of 4% of the post-acquisition entity. In addition, Mr.
Zhenyu Wang, the former Chief Executive Officer and a shareholder of the
Registrant, will receive an additional 1% of the post-acquisition entity
immediately after the completion of the Acquisition upon entering into a
consulting agreement with the Company (“Consulting Agreement”), plus 0.25% of
the amount of issued and outstanding Common Stock as of the Closing Date, to be
issued on the first anniversary of the Consulting Agreement, and an additional
0.25% of the amount of issued and outstanding Common Stock as of the Closing
Date, to be issued on the second anniversary of the Consulting
Agreement.
The
closing of the Acquisition (the “Closing”) took place on February 10, 2011 (the
“Closing Date”). On the Closing Date, pursuant to the terms of the
Share Exchange Agreement as amended, the Registrant acquired all of the
outstanding equity securities of Ding Neng Holdings from the shareholders of
Ding Neng Holdings; and the shareholders of Ding Neng Holdings transferred and
contributed all of their issued and outstanding shares of Ding Neng Holdings to
the Registrant. In exchange, the Registrant issued to the
shareholders of Ding Neng Holdings an aggregate of 25,875,000 newly issued
shares of the Registrant’s Common Stock.
On
January 20, 2011, Fuhua entered into an Amended Consulting Service
Agreement which entitles Fuhua to substantially all of the economic
benefits of Ding Neng Bio-tech in consideration of services provided
by Fuhua to Ding Neng Bio-tech. In addition, Fuhua entered into
certain agreements with each of Xinfeng Nie and Sanfu Huang, (the “Ding Neng
Bio-tech shareholders”), including (i) an Amended Option Agreement
allowing Fuhua to acquire the shares of Ding Neng Bio-tech as permitted by
PRC laws, (ii) an Amended Voting Rights Proxy Agreement that provides
Fuhua with the voting rights of the Ding Neng Bio-tech shareholders and
(iii) an Amended Equity Pledge Agreement that pledges the shares in Ding Neng
Bio-tech to Fuhua. These amended agreements supersede the same
agreements executed in November 2010 by and between Fuhua, Ding Neng Bio-tech,
and the then Ding Neng Bio-tech shareholders. This VIE structure
provides Fuhua, a wholly-owned subsidiary of Ding Neng HK, with control over the
operations and benefits of Ding Neng Bio-tech without having a direct equity
ownership in Ding Neng Bio-tech (Ding Neng Holdings, Ding Neng HK, Ding Neng
Bio-tech, and Fuhua are collectively referred to herein as the
“Group”).
As
all of the companies in the Group are under common control, this has been
accounted for as a reorganization of entities and the financial statements have
been prepared as if the reorganization had occurred
retroactively. The Registrant has consolidated Ding Neng Bio-tech’s
operating results, assets and liabilities within its financial
statements.
1
FORM
10 INFORMATION
Information
in response to this Item 2.01 below is keyed to the item numbers of Form
10.
Part
I
Item
1. Description of Business.
Overview
China
INSOnline Corp. (“CHIO”) was incorporated on December 23, 1988 as a Delaware
corporation. It became a shell company in June 2010 as a result of
winding down all of its operations. Through the Acquisition, the Registrant
acquired Ding Neng Holdings and its principal operating subsidiary, Ding Neng
Bio-tech. A summary of the business of Ding Neng Bio-tech is
described below.
General
Ding Neng
Holdings, a British Virgin Islands business company, acts as a holding company
and indirectly controls Ding Neng Bio-tech, a variable interest entity in
China. Ding Neng Holdings’ sole source of income and operations is
through its indirect, contractual control of Ding Neng Bio-tech.
Based in
the city of Zhangzhou, Fujian Province, China, Ding Neng Bio-tech is principally
engaged in the production, refinement and distribution of biodiesel
fuel. Ding Neng Bio-tech has approximately 81 full-time
employees. It operates a biodiesel manufacturing facility in
Zhangzhou, the annual aggregate capacity of which has increased from
approximately 20,000 tons in 2009 to approximately 40,000 tons in
2010. Ding Neng Bio-tech believes its rapid growth in recent years
has been supported by the continuing expansion of the market for biodiesel in
the PRC. According to China Commodities Daily, this market was
forecasted to reach 1 million tons in 2010, which is 20% more than the expected
domestic biodiesel production volume in the PRC.
Currently
the raw materials used in Ding Neng Bio-tech’s production of biodiesel are
refined animal fats and crude and refined vegetable oils. The
multi-feedstock technology employed in its biodiesel production process enables
it to utilize different feedstocks based on availability and price. Ding Neng
Bio-tech acquired a 1000mu (approximately 165 acres) Sapindus “mother-tree”
plantation located in Zhejiang Province in 2010. Ding Neng Bio-tech
expects to use the “mother-tree” plantation as the foundation for its intended
expansion to a 1,000,000 mu (approximately165,000 acres) Sapindus
forest in the next 3-5 years, which, if successful, is expected to provide
one-third of the total feedstock required for its biodiesel
production beginning in 2013.
Ding Neng
Bio-tech currently markets its products to various oil companies located in
Fujian province.
The
executive office of the Company is located at Pudong Building, 2nd Floor,
Jiulong Avenue, Longwen District, Zhangzhou City, Fujian Province 363000,
China.
2
Organization and Consolidated
Subsidiaries
Ding Neng
Holdings’ organizational structure was crafted to abide by the laws of the PRC
and maintain tax benefits as well as internal organizational
efficiencies. Ding Neng Holdings’ post–acquisition organization
structure is summarized below:
Overview
of the Biodiesel Market
The
Global Bio-fuel Market
Biofuels
are liquid or gaseous fuels derived from renewable biomass. They are used as
replacements for petroleum-based gasoline or diesel in motor vehicles as well as
for stationary applications. The most widespread biofuels are ethanol and
biodiesel. The global biofuel market amounted to approximately $76 billion in
2010, the majority of which consists of ethanol products. The dual drivers of
constrained oil production and pollution prevention are pushing governments
worldwide to support and incentivize the production of biofuel to offset
petroleum demand. In a detailed analysis of biofuels for transportation, the
Organization for Economic Co-operation and Development (OECD) and Food and
Agriculture Organization of the United Nations (FAO) (2008) expected the global
use of bioethanol and biodiesel to nearly double from 2005-2007 to
2017.
The
Global Biodiesel Market
Biodiesel
fuels are derived from a variety of renewable resources such as vegetable oils,
animal fats and cooking oils. Rapeseed is the most common feedstock for
biodiesel production; other common feed stocks are jatropha, soybean, palm oil,
waste vegetable oil, and used food. Transportation fuel is the primary
application for biodiesel products, comprising 70% of its consumption. Global
biodiesel production in 2009 was 5.1billion gallons, a 17.9% increase over 2008
levels. For the period between 2001 and 2009, biodiesel production grew at an
average annual rate of 41.9%. The value of the market is expected to grow from
$8.6 billion in 2009 to approximately $12.6 billion in 2014. Currently the
Asia-Pacific region produces just 4.4% of global biodiesel, dwarfed by Europe’s
49.8%, and the America’s 32.8%, but by 2015 the PRC is expected to become the
second fastest growing market. From 2009 to 2020 the annual growth rate of
biodiesel production is expected to average 10.1%, reaching a total output of
more than 15 billion gallons in 2020.
3
The Chinese Biodiesel
Industry
China’s
biodiesel industry is still in its infancy stage and dominated by small-scale
operators using animal fats or used cooking oil as feedstock. In 2007, there
were more than 2,000 biodiesel production plants in China, most of which were
small scale producers making between 100 to 20,000 metric tons (“MT”) per year.
However, the prospect of government support is attracting larger market entrants
as well as foreign investment. Compared with the ethanol sector, the biodiesel
industry is largely unregulated and there is significant involvement from the
private sector.
According
to Chen Deming, former vice chairman of the National Development and Reform
Commission of the PRC, China aims to consume 2 million MT of biodiesel annually
by 2020.
Official
data on biodiesel production and subsidies in China
The
increase in biodiesel production in China is fueled by China’s rapid economic
growth, which requires ever increasing use of transport fuel, estimated to grow
at an annual rate of 5.1% through 2030. China now imports more than 50% of the
oil products it consumes. The Chinese National Bureau of Statistics predicts
that by 2020 it will import more than 60% of its oil. For reasons both economic
and strategic, the PRC government has committed itself to increasing the supply
of non-petroleum based transportation fuel in order to reduce its dependence on
foreign oil. To date, ethanol has been the greatest beneficiary of this policy
as it was the first mover in the Chinese biofuel industry, but ethanol competes
with food supply for its feedstock, and the government has also placed a high
priority on independence in food supply. As a result, the expansion of ethanol
plants has been restricted. However, biodiesel has more feedstock options that
do not compete with food supply (although it may compete for arable land in some
places), and is often made from food refuse. Base on those characteristics,
biodiesel is expected to enjoy a larger market share in the Chinese biofuel
market in the near future.
4
Source:
China’s Alternative Energy Landscape, Deutsche Bank, November 2007.
Supportive
Government Policies and Legislation in the PRC
During
the past decade, the Chinese government has launched a series of policy
initiatives in support of the biofuel market. In 2005, the Standing Committee of
the National People’s Congress passed “The Renewable Energy Law of the People’s
Republic of China”. The legislation aims to “promote the development and
utilization of renewable energy, improve the energy structure, diversify energy
supplies, safeguard energy security, protect the environment and realize the
sustainable development of the economy and society.” This legislation states
that fuel retail businesses must begin to include “biological liquid fuel”, or
biofuels, in their enterprises or they will be fined.
In 2006,
the National Development and Reform Commission (“NDRC”) of the PRC set a target
of 15% of transportation energy needs in 2020 to be met by biofuels. Despite
being the third largest consumer of biofuels in the world, China accounts for
just 3% of global production. In order to achieve the goals set by NDRC, China
must increase production of biofuels to more than 25 million MT by 2020. On
April 20, 2006, Chinese premier Wen Jiabao convened the Second National
Leadership Conference on Energy to consider the Medium and Long-term Development
Plan for Renewable Energy, stating that equal emphasis shall be placed on
development and conservation, and that stronger measures shall be taken to
promote comprehensive energy conservation and to vigorously develop renewable
energy. In May 2006, the Chinese government established a fund that encourages
research and development and production of biodiesel facilities.
5
On
December 9, 2008, the State Administration of Taxation and the Ministry of
Finance of the PRC jointly issued Policies for Products Generated from
Comprehensive Utilization of Resources (Cai Shui [2008] No. 156), a circular on
Value-Added Tax (“VAT”), which stipulates that a VAT refund would be applicable
to enterprises that produce biodiesel by making use of wasted animal oil or
plant oil as at least 70 percent of their raw materials. This VAT incentive
policy became effective July 1, 2008. To obtain the VAT refund, an enterprise
must first apply for and obtain the relevant “Comprehensive Utilization of
Resources Verification Certificate” and then apply for the refund.
In 2009,
the PRC government provided an RMB 10 billion subsidy to automakers to
incentivize development of alternative fuel vehicles in order to stimulate
demand for biofuels. Total financial support from the PRC government for ethanol
and biodiesel is expected to reach approximately RMB 8 billion by
2020.
In
December 2010, the Ministry of Finance of the PRC and the State Administration
of Taxation of the PRC announced an elimination of the consumption tax on
vegetable oil and animal fat-based biodiesel. Such tax exemption retroactively
applies to any purchases made after January 1, 2009. The PRC government will
issue refunds for taxes already paid by consumers prior to such
date.
Production
Process
Biodiesel
is produced by a process known as transesterification. In the
transesterification process, an alcohol (like methanol) reacts with the
triglyceride oils contained in vegetable oils, animal fats, or recycled greases,
forming fatty acid alkyl esters (biodiesel) and glycerin. The reaction requires
heat and a strong base catalyst, such as sodium hydroxide or potassium
hydroxide. The multi-feedstock technology that we employ in our biodiesel
production process enables us to reduce our costs by utilizing different
feedstocks based on availability and price. The simplified transesterification
reaction is shown below.
6
Products
The
principal products we produce are biodiesel and acidified oil.
Biodiesel
Biodiesel
is a high-lubricity, clean-burning alternative fuel produced from feedstock,
which are domestic, renewable resources such as refined animal fats and crude
and refined vegetable oils. Biodiesel is primarily used in compression ignition
(diesel) engines and may also be used as home heating oil. Biodiesel provides
environmental benefits over petroleum-based diesel, including reduced emissions
of carbon dioxide, carbon monoxide, particulate matter, and sulfur. Biodiesel’s
physical and chemical properties, as they relate to operation of diesel engines,
are similar to petroleum-based diesel fuel. As a result, blends containing 20%
biodiesel and 80% petroleum-based diesel may be used in most standard diesel
engines without requiring any engine modifications.
We
derived approximately 81% of our revenue from the sale of biodiesel during the
nine month period ended September 30, 2010. Biodiesel sales accounted for
approximately 91% and 100% of our revenue for the fiscal years ended December
31, 2009 and 2008, respectively.
Acidified
Oil
Acidified
oil is recovered through distillation of the residue oil from the biodiesel
manufacturing process. Through further refinement, acidified oil can be used as
feedstock to produce biodiesel. We produced a small amount of acidified oil
prior to 2010, but did not start marketing it until January 2010. For the nine
months ended September 30, 2010, revenue from acidified oil was $2,570,860, or
approximately 10% of total revenue.
Feedstock
The
primary restriction on production and growth in the biodiesel industry is the
availability and pricing of feedstock, which is the raw material used to produce
biodiesel. A wide range of feedstock may be used to produce biodiesel, including
vegetable oils (such as soybean and canola oils), palm oils, animal fat (such as
tallows and lard), and yellow grease (such as recycled cooking oil and tallows
blended together).
Historically,
the majority of biodiesel produced in China has been made using waste food oil
and residues from fat refining as feedstock, which consist of the
following:
|
§
|
Acidified
oil, which is recovered distillation of the residue oil from vegetable oil
refining plants;
|
|
§
|
Grease
recovered from restaurants kitchen sewage systems from washing of pots and
dishes;
|
|
§
|
Slop
oil recovered from restaurants;
|
|
§
|
Waste
cooking oil produced from frying oil of restaurants;
and
|
|
§
|
Animal
fat, oil and grease from packinghouses such as tallow, lard, and
suet.
|
Since
65-70% of biodiesel feedstock is indirectly derived from edible crops, the input
prices are highly volatile, and their use for fuel production is at times a
divisive political issue. It is of vital importance for companies in this
industry to have access to long-term feedstock supplies, preferably by owning
supply sources.
7
Currently
the raw materials used in Ding Neng Bio-tech’s production of biodiesel are
refined animal fats and crude and refined vegetable oils. In an
effort to obtain its own supply sources, in 2009, Ding Neng Bio-tech entered
into a purchase contract with TianTai County Manyuanchun Agricultural
Development Co., Ltd (“TianTai”), which is located in Zhejiang
province. Ding Neng Bio-tech spent $2,932,200 to acquire
approximately 165 acres (1,000 mu) forest land use rights and forest in 2010
where there are more than 50,000 6-8 year old Sapindus “mother trees”. Sapindus
trees are a source of natural raw material used for producing detergent, and the
core of Sapindus is good raw material for producing biodiesel. Ding Neng
Bio-tech believes the Sapindus trees owned by TianTai provide the best Sapindus
seeds, and they are expected to be used to develop the Sapindus forest, which
Ding Neng Bio-tech expects will provide approximately one-third of its total raw
materials demand beginning in 2013. See “Certain Relationships
and Related Party Transactions.”
Major
Suppliers
Typical
sources for our feedstock are producers from Fujian province. The followings are
three tables which identify the Company’s major suppliers as of September 30,
2010 and the end of fiscal years 2008 and 2009, respectively.
8
Name
of the Major Suppliers
|
Purchase
Amount
|
Percentage
of Total Purchase
|
||||||
For
the Nine Month period Ended September 30, 2010
|
||||||||
Zhangzhou
City ShuangDe Materials Recycling Ltd.
|
$ | 2,094,692.81 | 14 | % | ||||
FuJian
HuaRen Oil Ltd.
|
2,075,640.32 | 13 | % | |||||
Zhangzhou
HengNeng Materials Recycling Ltd.
|
2,034,986.00 | 13 | % | |||||
Xiamen
YouXingHua Materials Recycling Ltd.
|
1,735,342.50 | 11 | % | |||||
Xiamen
JinShan Materials Recycling Ltd.
|
1,339,094.36 | 9 | % | |||||
Xiamen
City JiaCheng Commerce Ltd.
|
1,101,546.62 | 7 | % | |||||
Xiamen
City FengShengYuan Commerce Ltd.
|
996,767.33 | 6 | % | |||||
Xiamen
XinJiaCheng Materials Recycling Ltd.
|
954,788.32 | 6 | % | |||||
Xiamen
City YuanXin Commerce Ltd.
|
931,939.47 | 6 | % | |||||
YiHaiJiaLi
Food Commerce Ltd.- Xiamen Subsidiary
|
545,078.66 | 4 | % | |||||
For
the Fiscal Year Ended December 31, 2009
|
||||||||
Xiamen
City YuanXin Commerce Ltd.
|
2,337,935.38 | 21 | % | |||||
Xiamen
YouXingHua Materials Recycling Ltd.
|
2,145,269.41 | 19 | % | |||||
FuJian
HuaRen Oil Ltd.
|
1,232,612.60 | 11 | % | |||||
Zhangzhou
HengNeng Materials Recycling Ltd.
|
1,166,960.57 | 10 | % | |||||
Shangdong
Province Boxing County XiangChi Phospholipid Ltd.
|
1,141,688.47 | 10 | % | |||||
Xiamen
City JiaCheng Commerce Ltd.
|
1,031,651.02 | 9 | % | |||||
Zhangzhou
City ShuangDe Materials Recycling Ltd.
|
952,271.52 | 8 | % | |||||
Hubei
Sun And Moon Oil Ltd.
|
477,530.04 | 4 | % | |||||
Guangdong
RunHua Oil Ltd.
|
471,432.40 | 4 | % | |||||
YiHaiJiaLi
Food Commerce Ltd.- Xiamen Subsidiary
|
320,180.34 | 3 | % | |||||
For
the Fiscal Year Ended December 31, 2008
|
||||||||
FuJian
HuaRen Oil Ltd.
|
$ | 1,512,188.59 | 21 | % | ||||
Xiamen
City FengShengYuan Commerce Ltd.
|
1,501,312.71 | 21 | % | |||||
Shanghai
RuiYi Commerce Ltd.
|
1,072,070.74 | 15 | % | |||||
Xiamen
YouXingHua Materials Recycling Ltd.
|
817,358.59 | 12 | % | |||||
YuShang
Oil Technology Commerce Ltd.
|
640,151.63 | 9 | % | |||||
Xiamen
City YuanXin Commerce Ltd.
|
526,252.60 | 7 | % | |||||
Xiamen
City JiaCheng Commerce Ltd.
|
421,334.45 | 6 | % | |||||
Zhangzhou
YouCheng Commerce Ltd.
|
374,495.97 | 5 | % | |||||
Yongding
Country Coal Development Ltd.
|
188,507.94 | 3 | % |
Major
Customers
Our
biodiesel is sold primarily to various oil companies located in Fujian Province.
In addition, we expect to continue and strengthen our relationship with China
National Offshore Oil New Energy (Hainan) Bio-energy Oil and Chemical Ltd.,
which is indirectly controlled by China National Offshore Oil Corp., one of the
largest state-owned oil companies, and the largest offshore oil and gas producer
in China. The followings are three tables which identify the Company’s major
customers as of September 30, 2010 and the end of fiscal years 2008 and 2009,
respectively.
9
Name
of the Major Customers
|
Sales
Amount
|
Percentage
of Total
Sales
|
||||||
For
the Nine Month period Ended September 30, 2010
|
||||||||
Jiangmen
City Pengjiang District JiangDe Chemical Ltd.
|
3,321,310.78 | 14 | % | |||||
Fujian
Economic Technology District ChengXing Fuel Ltd.
|
2,997,957.47 | 12 | % | |||||
Fujian
Province New Century Creation Bio-energy Technology Ltd.
|
2,736,388.74 | 11 | % | |||||
China
National Offshore Oil New Energy (Hainan) Bio-energy Oil And Chemical
Ltd.
|
2,570,860.13 | 11 | % | |||||
Fujian
Union Oil And Chemical Ltd.
|
2,486,453.32 | 10 | % | |||||
Zhangzhou
City TengDe Oil And Chemical Ltd.
|
2,112,890.05 | 9 | % | |||||
Fujian
HongYun Oil And Chemical Ltd.
|
2,020,721.93 | 8 | % | |||||
Xiamen
ZhongHe Industry Ltd.
|
1,793,128.22 | 7 | % | |||||
Xiamen
City HaiYan Commerce Ltd.
|
1,681,365.43 | 7 | % | |||||
Xiamen
HaiJi Oil And Chemical Ltd.
|
1,459,741.05 | 6 | % | |||||
For
the Fiscal Year Ended December 31, 2009
|
||||||||
Fujian
Province New Century Creation Bio-energy Technology Ltd.
|
3,265,569.41 | 21 | % | |||||
Zhangzhou
City TengDe Oil And Chemical Ltd.
|
2,565,055.17 | 17 | % | |||||
Xiamen
City HaiYan Commerce Ltd.
|
2,460,791.49 | 16 | % | |||||
Fujian
Economic Technology District ChengXing Fuel Ltd.
|
2,333,830.28 | 15 | % | |||||
Jiangmen
City Pengjiang District JiangDe Chemical Ltd.
|
1,705,981.24 | 11 | % | |||||
Xiamen
ZhongHe Industry Ltd.
|
1,301,420.38 | 9 | % | |||||
Fujian
HongYun Oil And Chemical Ltd.
|
803,243.72 | 5 | % | |||||
Fujian
Union Oil And Chemical Ltd.
|
569,331.99 | 4 | % | |||||
Fujian
NanYing Ceramics Ltd.
|
284,155.80 | 2 | % | |||||
For
the Fiscal Year Ended December 31, 2008
|
||||||||
Zhangzhou
City TengDe Oil And Chemical Ltd.
|
1,723,840.44 | 19 | % | |||||
Fujian
Province New Century Creation Bio-energy Technology Ltd.
|
1,520,180.32 | 17 | % | |||||
Fujian
Economic Technology District ChengXing Fuel Ltd.
|
1,415,020.53 | 16 | % | |||||
Xiamen
City HaiYan Commerce Ltd.
|
1,330,955.78 | 15 | % | |||||
Jiangmen
City Pengjiang District JiangDe Chemical Ltd.
|
809,295.37 | 9 | % | |||||
Xiamen
ZhongHe Industry Ltd.
|
759,103.14 | 8 | % | |||||
Fujian
Union Oil And Chemical Ltd.
|
633,072.52 | 7 | % | |||||
Fujian
HongYun Oil And Chemical Ltd.
|
478,996.97 | 5 | % | |||||
Fujian
NanYing Ceramics Ltd.
|
367,847.39 | 4 | % |
Competition
China’s
biodiesel industry is largely dominated by small-scale operators using animal
fats or waste cooking oil as feedstock. By stark contrast to ethanol, Chinese
biodiesel projects are scattered and small, and utilization rates are said to be
lower. In 2007, there were more than 2,000 biodiesel production plants in China,
most of which were small scale producers making between 100-20,000MT per year.
Sharp input price increases in 2008, combined with the drop in oil prices from
their peak, caused many to idle their plants, and many to be pushed out of the
business. However, the prospect of government support is attracting larger
market entrants as well as foreign investment. Compared with the ethanol sector,
the biodiesel industry is largely unregulated and there is significant
involvement from the private sector.
10
In the
area of biodiesel production, we are aware of the existence of at least three
main domestic competitors: China Biodiesel International Holdings Co., Ltd.,
Gushan Environmental Energy Ltd., and Zhejiang Eastriver Energy S&T Co.,
Ltd.
Utilities,
Energy & Infrastructure
Our
biodiesel plant requires a significant and uninterrupted supply of electricity,
coal, and water to operate. Power is supplied to our plant by Pinghe County
Electric Corporation. We procure water from underground wells on the site of our
facility. We entered into an agreement with Yongding Township Coal Development
Company to purchase approximately 8,000 tons of coal annually for our biodiesel
production.
Our
Growth Strategy
In the
next three years, we seek to grow our business by pursuing the following
strategies:
|
§
|
Increase
manufacturing, sales and distribution capabilities through potential
acquisitions and organic growth;
|
|
§
|
Enhance
R&D efforts to improve biodiesel production technology and efficiency
and to develop new biodiesel products (such as solid bio-fuel and other
specialty bio-fuels);
|
|
§
|
Continue
to search for and develop alternative feedstock (such as microalgae) to
enhance the availability of raw materials;
and
|
|
§
|
Strengthen
relationships with key suppliers.
|
Our
Strengths and Competitive Advantages
We
believe we are well positioned to achieve our business objectives and to execute
our strategies due to the following competitive strengths:
|
§
|
Technological
Advantages
|
We have a
special refining technique that can process multiple types of feedstock.
Refining multiple feedstocks through a single process allows us to reduce
operational costs and maintain access to multiple supply sources at any given
time from which we can select the most cost-efficient feedstock. We recently
applied for a patent for our refining process and the process is expected to
take two years to complete. Our refining process also produces high
viscosity lubricant as a by-product, which we intend to start marketing later in
2011.
|
§
|
Cost
Advantages
|
Most
feedstock for first generation biofuel is food stock. Since 2007, the Chinese
government has triggered a series of policy shifts in the industrial use of
grain. There is intensive pressure to find alternative feedstock. This has
created a bottleneck restricting the profitability of many biodiesel
enterprises, and driving many small producers out of business. We significantly
reduced this risk by diversifying our sources of raw materials via long-term
contracts with suppliers and internal supply of oils from our Sapindus
plantation.
We do not
believe any other biodiesel producer in China uses Sapindus as a feedstock to
refine its fuel. Wild Sapindus itself is not perfectly suitable for biodiesel
production and requires certain hybridization and breeding techniques to reach
full productivity. The Company’s R&D team has spent more than a year
developing these techniques. We believe the investment of time for research of
breeding techniques and the five to eight years the trees need to reach maturity
constitutes a considerable barrier to use of Sapindus by any
competitor.
11
Marketing
Biodiesel
is generally sold directly to users in the local area as there are no official
distribution channels. Ding Neng Bio-tech has only 3 employees in sales,
consistent with its strategy to seek large, long-term customers rather than
trying to develop a large number of small customers.
Pricing
& Backlog
To date,
we price our biodiesel based on the price of diesel fuel. We sell our biodiesel
primarily to oil companies on an as-needed basis. Due to the variability of the
market price of biodiesel, there is no fixed price at which we sell our
products. Although normally we do not have long-term sales contracts, we intend
to maintain close business relationships with our major customers.
R&D
Research
and development (“R&D”) expenses include salaries, material, contract and
other outside service fees, facilities and overhead costs. In accordance to the
FASB’s accounting standards for research and development costs, the Company
expenses the costs associated with the research and development activities when
incurred. The research and development expenses are included in general and
administrative expenses and totaled $556,071 and $223,057 for the years ended
December 31, 2009 and 2008, respectively.
We
currently have 8 employees in our R&D department. We expect to invest
resources to retain more qualified employees and update our R&D equipments.
We expect to work closely with leading universities and research and development
institutes that specialize in agricultural research to develop new technologies
for more efficient and cost-effective biodiesel production. We will also
continue to search for alternative feedstock to enhance the availability of raw
materials and reduce costs of feedstock for biodiesel production.
Seasonality
Our
operating results and operating cash flows historically have not been subject to
seasonal variations.
Logistics
The
Company recently entered into a partnership with a warehouse adjacent to the
harbor in Xiamen City, Fujian Province. The Company rented two 2,000 ton tankers
in 2010 and two more 2,000 ton tankers in 2011, which are all located in Xiamen
port. The Company expects to rent four additional ships in Xiamen in 2011. It
expects to use these ships for transportation of its biodiesel products to
achieve greater efficiencies and cost savings compared to its previous highway
based distribution system provided by third party contractors.
12
Employees
Substantially
all of our employees are located in China. As of December 31, 2010,
we had 81 employees. There are no collective bargaining contracts covering any
of our employees. We believe our relationship with our employees is
satisfactory.
We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including medical insurance, unemployment
insurance and workers’ compensation insurance, and a housing assistance fund, in
accordance with relevant regulations. Ding Neng Bio-tech is currently
paying social insurance for its 42 full-time employees. Ding Neng
Bio-tech has also purchased non-compulsory accident insurance for its
workers who work on the production line. Ding Neng Bio-tech has not paid
social insurance for 23 of its full-time employees whose personal
identification files cannot be transferred to Ding Neng Bio-tech since they are
not registered residents in Zhangzhou, Fujian Province. Ding Neng Bio-tech also
has 16 of its full-time employees who voluntarily elected, in writing, not
to obtain social insurance through Ding Neng Bio-tech. We expect the amount
of contribution to the government’s social insurance funds to increase in the
future as we expand our workforce and operations.
Insurance
companies in China offer limited business insurance products. While business
interruption insurance is available to a limited extent in China, we have
determined that the risks of interruption, cost of such insurance and the
difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. As a result, we could
face liability from the interruption of our business.
Forward-Looking
Statements
Forward-looking
statements are subject to numerous risks and uncertainties that could cause
actual results to differ materially from those anticipated and you should not
rely on them as predictions of future events. Although information is based on
our current estimates, forward-looking statements depend on assumptions, data or
methods which may be incorrect or imprecise. You are cautioned not to place
undue reliance on this information as we cannot guarantee that any future
expectations and events described will happen as described or that they will
happen at all. You can identify forward-looking statements by the use of
forward-looking terminology such as “believes,” “expects,” “may,” “should,”
“seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or
“anticipates” or the negative of these words and phrases or similar words or
phrases. You can also identify forward-looking statements by discussions of
strategy, plans or intentions.
Intellectual
Property
Currently we have three granted patents
and one pending patent application in the PRC, all of which are related to the
manufacturing process of biodiesel fuel. We also have one registered trademark
for the fuel products and four pending trademark applications in the PRC, three
of which are with respect to Chinese tea products and one is with respect to
flower, fruit, vegetable and mushroom products.
Government
Regulation and Environment Regulation
We
believe that we have been compliant to date with all registrations and
requirements for the issuance and maintenance of all licenses required by the
applicable governing authorities in China and that such laws, rules and
regulations do not currently have a material impact on our
operations:
We are
subject to rules and regulations with respect to environmental protection and
work safety promulgated by both the central government of China and various
local governmental agencies.
13
According
to the Ministry of Environmental Protection and the State Administration of Work
Safety of China, all chemical and biodiesel manufacturing facilities are
required to obtain a Discharge Permit and a Safe Production Permit. These
permits are valid for three years, which can be extended for additional periods
upon renewal. A temporary Discharge Permit is valid for one year which can be
extended upon renewal of such permit. The municipal environmental protection
agencies conduct routine inspections on waste-water systems and gas and solid
waste discharge systems installed in the facilities owned by local companies and
issue examination reports periodically. A company must have such inspections
completed for three consecutive years before its request for a renewal of
Discharge Permit can be approved. In addition, in order for a Safe Production
Permit to be renewed, a company must not have had any reportable accident in its
facility during the preceding three years.
We
currently hold a valid Safe Production Permit and a temporary Discharge Permit
for our manufacturing facility located in Pinghe County. We are now working on
applying for a Discharge Permit valid for three years. In addition, we have
obtained other necessary permits to conduct our operations, including a waste
discharge permit and boiler permits. We have also equipped our facility with
air, wastewater and noise purification and treatment systems which consist of a
centrifugal scrubber system, a 200,000 ton/per day sewage treatment system, a
2,000 cubic meter purification pool, an anti-overflow dike, an oil separation
tank, a recycling pool and an individual sound insulation generator room. In
addition, we will be subject to discharge fees which will be calculated on the
basis of amount of the waste our facility discharges.
On
January 5, 2007, the General Administration of Quality Supervision, Inspection
and Quarantine and the State Standardization Supervision Committee of China
jointly promulgated the National Standard of Biodiesel Blend Stock (BD100) for
Diesel Engine Fuels, which took effect as of May 1,
2007. This is a recommended standard which biodiesel
manufacturers in China are encouraged to comply with pursuant to relevant laws
and regulations. All of our biodiesel products currently satisfy or exceed the
BD100 standard.
Governmental
regulation of the environment changes constantly in the PRC. It is possible that
more stringent environmental rules or regulations could be adopted, which would
increase our operating costs and expenses. It is also possible that
environmental rules or regulations could be adopted that could have an adverse
effect on the use of biodiesel.
Tax
Benefits
On
December 9, 2008, the State Administration of Taxation and the Ministry of
Finance of the PRC jointly issued Policies for Products Generated from
Comprehensive Utilization of Resources (Cai Shui [2008] No. 156), which is a
circular on Value-Added Tax (“VAT”) which stipulates that a VAT refund would be
applicable to enterprises that produce biodiesel by making use of wasted animal
oil or plant oil as at least 70 percent of their raw materials. This VAT
incentive policy is effective July 1, 2008. To obtain the VAT refund, an
enterprise must first apply for and obtain the relevant “Comprehensive
Utilization of Resources Verification Certificate” and then apply for the
refund. We currently have such verification certificate valid through from
January 1, 2010 through December 31, 2011 and thus receive VAT refunds as
discussed above.
We have
been enjoying preferential enterprise income tax treatment in the PRC due to our
status as a foreign invested manufacturing company. A full exemption
from PRC enterprise income tax applied in our fiscal years of 2008 and 2009 and
a 50% exemption from PRC enterprise income tax applies in our fiscal years of
2010, 2011 and 2012.
14
Properties
Our
corporate headquarters is located at Pudong Building, 2nd Floor, Jiulong Avenue,
Longwen District, Zhangzhou City, Fujian Province 363000, China. We lease a
total of approximately 500 square meters (approximately 5,382 square feet) of
office space at the aforementioned address pursuant to two lease agreements.
Pursuant to those two agreements, which will expire October 30, 2011 and July
20, 2011, respectively, the monthly rents are approximately RMB 6,500
(approximately $985) and RMB 6,720 (approximately $1,018),
respectively.
Our
manufacturing facility is located on a parcel of land with an area of
approximately 37,868 square meters in Shange Town, Pinghe County, Zhangzhou
City, Fujian Province. As of January 2011, the plant is fully
operational and has a production capacity of 40,000 tons of biodiesel per year.
We own certain rights with respect to the land based on a Land Use Agreement
between Mr. Nie, our Chairman, and the local government of Shange Town,
regarding the purchase of the land from the State for the construction of the
manufacturing facility.
For more
details please refer to the section titled “Risks Related to Ding Neng’s
Business” included in “Item 1A Risk Factors” below.
Item
1A. Risk
Factors.
Our business, operations and financial condition
are subject to various risks. Some of these risks are described below and
you should take these risks into account in making a decision to invest in our
Common Stock. If any of the following risks actually occurs, we may not be
able to conduct our business as currently planned and our financial condition
and operating results could be seriously harmed. In that case, the market
price of our Common Stock could decline and you could lose all or part of your
investment in our Common Stock.
Risks
Related to Ding Neng’s Business and Operations
Risks
Related to Ding Neng’s Overall Business
Ding
Neng Bio-tech has a limited operating history, which makes it difficult to
evaluate its financial position and future success.
Ding Neng
Bio-tech began generating revenue in 2006. Accordingly, there is a limited prior
operating history by which to evaluate the likelihood of success or its ability
to continue as a going concern. Although Ding Neng Bio-tech has been producing
and selling biodiesel from its plant in Zhangzhou, Fujian Province, China since
its inception, there is no assurance its production capacity and sales will keep
increasing in a profitable manner.
Ding
Neng Holdings is a holding company and there are significant limitations on its
ability to receive distributions from its subsidiaries.
Ding Neng
Holdings conducts substantially all of its operations through subsidiaries and
through contractual arrangements with Ding Neng Bio-tech, an affiliated variable
interest entity (“VIE”), and is dependent on dividends and other intercompany
transfers of funds from its subsidiaries and affiliated VIE to meet its
financial obligations. Ding Neng Holdings’ subsidiaries have not made
significant distributions to it and may not have funds legally available for
dividends or distributions in the future. In addition, Ding Neng Holdings may
enter into credit or other agreements that would contractually restrict its
subsidiaries or affiliated VIE from paying dividends or making distributions.
Any inability of Ding Neng Holdings to receive funds from its subsidiaries or
from Ding Neng Bio-tech can be expected to impair its ability to pay dividends
on the Common Stock and may otherwise have an adverse effect on our future
operating or growth prospects.
15
New
environmental laws, new interpretations of existing environmental laws,
increased governmental enforcement of environmental laws or other developments
could require the Group to make additional significant expenditures. Continued
government and public emphasis on environmental issues can be expected to result
in increased future expenditures for environmental controls at Ding Neng
Bio-tech’s production facilities.
Ding Neng
Bio-tech is and will continue to be subject to extensive air, water and other
environmental regulations and will need to obtain a number of environmental
permits to construct and operate its plant. If for any reason any of these
permits are not granted, construction costs for the plants may increase, or the
plants may not be constructed at all. If constructed, there may be
substantial regulatory restrictions and other compliance matters that would have
an effect on Ding Neng Bio-tech’s operations. Additionally, any
changes in environmental laws and regulations, whether at the state and local
level, could require Ding Neng Holdings to spend considerable resources to
comply with future environmental regulations. The expense of compliance could be
significant and could harm our results of operations.
The
Company could also be subject to environmental or nuisance claims from adjacent
property owners or residents in the area arising from possible foul smells or
other air or water discharges from the plant. Such claims may result in an
adverse decision by a court if Ding Neng Bio-tech is deemed to engage in a
nuisance that substantially impairs the fair use and enjoyment of real estate.
If new laws or regulations are passed relating to the production, disposal or
emissions of chemicals used, generated or produced as a by-product of its
operations,, Ding Neng Bio-tech may be required to incur significant costs to
comply with such new laws or regulations.
Ding
Neng Bio-tech’s production is entirely dependent on the operations of its
biodiesel production facility in Zhangzhou City. An operational disruption at
this facility could suspend or halt our
manufacturing operations.
All of
Ding Neng Holdings’ revenues are, and in the near-term will continue to be,
derived from the sale of biodiesel produced at Ding Neng Bio-tech’s production
facility in Zhangzhou City. It may construct and operate other biodiesel plants
in China in the future. Manufacturing operations are subject to inherent risks,
all of which could have a material adverse effect on its financial condition or
results of operations. Risks affecting operations include:
·
|
unexpected
changes in regulatory requirements;
|
·
|
political
and economic instability;
|
·
|
terrorism
and civil unrest;
|
·
|
equipment
and machinery breakdowns;
|
·
|
injuries
or accidents at our facilities
|
·
|
severe
weather or other natural disasters;
|
·
|
work
stoppages or strikes;
|
·
|
difficulties
in staffing and managing operations;
and
|
·
|
variations
in tariffs, quotas, taxes and other market
barriers.
|
Some of
these hazards may cause severe damage to, or destruction of, property and
equipment or environmental damage, and may result in suspension of operations
and the imposition of civil or criminal penalties. Any such delay or disruption
can be expected to harm Ding Neng Holdings’ financial condition, results of
operations and future growth prospects.
16
Ding
Neng Bio-tech has not obtained formal land use rights certificates to the land
where its manufacturing facility is located, a building ownership certificate
for the facility, or the approval for the change in the use of land from
agricultural to industrial purposes, and the failure to have such certificates
and approvals could materially and adversely affect its right to use such
land.
Ding Neng
Bio-tech's manufacturing facility is located on a parcel of land with an area of
approximately 37,868 square meters in Shange Town, Pinghe County, Zhangzhou
City, Fujian Province. The land is collectively-owned by Shange Town
and was designated for agricultural use. Although Mr. Nie, Ding
Neng Holders' chairman had entered into a Land Use Agreement with the local
government of Shange Town regarding the purchase of the land for the
construction of the manufacturing facility and a majority of the purchase price
has been paid by Ding Neng Bio-tech, it is still in the process of
obtaining the relevant land use rights and building ownership certificates for
the facility, and the approval to change the use of the land from agricultural
to industrial purposes.
A
certification jointly issued by the local government of Shange Town and the
Bureau of Land and Resources of Pinghe County dated July 17, 2007 confirms that
the review of Ding Neng Bio-tech’s application for such certificates and
approvals was in process. On May 26, 2010, the local government of Shange Town
issued a written statement clarifying that the land was assigned to Ding Neng
Bio-Tech for the construction of a biodiesel production project and that the
related applications for the land use rights certificate and related approvals
were being reviewed. Another certification issued by the Bureau of Land and
Resources of Pinghe County dated October 14, 2010 also verifies that such
applications are currently being reviewed. Upon obtaining the relevant
certificates for these properties, Ding Neng Bio-tech will have the legal right
to occupy, lease, transfer and mortgage the property. However, there is no
guarantee Ding Neng Bio-tech will be able to obtain all of the certificates and
approvals it currently lacks, in which case its rights as owner or
occupier of the land and the facility may be adversely affected. As a result of
the absence of the formal certificates or approvals as described above, Ding
Neng Bio-tech may be subject to lawsuits or other actions by the government,
such as fines, or modifications to, or removal or confiscation of, some or all
of the buildings located on the property. Any such result can be expected to
have a material adverse effect on Ding Neng Bio-tech's financial condition and
results of operations.
Even
if Ding Neng Bio-tech were granted the land use rights as referenced
above, its business would suffer if it lost such land use
rights.
There is
no private ownership of land in China and all land ownership is held by the
government of China, its agencies and collectives. In the case of land used for
business purposes, land use rights can be obtained from the government for a
period up to 50 years, and are typically renewable. Land use rights can be
granted upon approval by the land administrative authorities of China (the State
Land Administration Bureau) upon payment of the required land granting fee, the
entry into a land use agreement with a competent governmental authority and
certain other ministerial procedures. We cannot, however, give any assurance
that Ding Neng Bio-tech's land use rights, if granted, would be renewed in the
future. If the land use right certificates were not renewed, Ding Neng Bio-tech
could lose production facilities or employee accommodations that would be
difficult or even impossible to replace. Should it have to
relocate, its workforce may be unable or unwilling to work in the new
location and its business operations will be disrupted during the
relocation. The relocation or loss of facilities could materially harm sales or
increase Ding Neng Bio-tech's costs of production, which would negatively
impact its financial results and hinder future growth.
17
Ding Neng
Bio-tech’s business will suffer if it cannot maintain necessary permits or
licenses.
Ding Neng
Bio-tech’s operations require licenses and permits and from various governmental
authorities. Ding Neng Bio-tech’s ability to obtain and maintance such licenses
and permits on acceptable, commercially viable terms are subject to change based
on potential changes in the regulations and policies of the applicable
governmental authorities. Ding Neng Bio-tech’s inability to obtain or extend a
license or a loss of any of these licenses or permits may have a material
adverse effect on its financial condition and future operating
prospects.
Gross margins are principally
dependent on the spread between feedstock prices and biodiesel prices.
If the cost of feedstock
increases and the cost of biodiesel does not similarly increase or if the cost
of biodiesel decreases and the cost of feedstock does not similarly decrease,
gross margins will decrease and Ding Neng Holdings’ results of operations could
be harmed.
Ding Neng
Holdings’ gross margins depend principally on the spread between feedstock and
biodiesel prices. This spread has fluctuated significantly in recent
periods.
From 2006
to the fall of 2008, prices for all varieties of feedstock increased to record
levels. The price of petroleum diesel and biodiesel increased at approximately a
similar pace. In the fall of 2008, the global economic downturn created
significant declines in prices for petroleum diesel and biodiesel. In 2009,
prices increased slowly. In general, higher feedstock prices produce lower
profit margins and, therefore, represent unfavorable market conditions. This is
especially true when market conditions do not allow Ding Neng Bio-tech to pass
along increased feedstock costs to its customers. The price of feedstock is
influenced by general economic, market and regulatory factors. These factors
include weather conditions, farmer planting decisions, government policies and
subsidies with respect to agriculture and international trade and global supply
and demand. The significance and relative impact of these factors on the price
of feedstock is difficult to predict. Factors such as severe weather or crop
disease could have an adverse impact on Ding Neng Bio-tech’s business. Any event
that tends to negatively impact the supply of Ding Neng Bio-tech’s chosen
feedstock or the demand for biodiesel will potentially harm its financial
condition and results of operation.
Consumer
acceptance or rejection of biodiesel will have a material impact on Ding Neng
Holdings’ future prospects.
The
market in China for biodiesel has only recently begun to develop and is rapidly
evolving. Therefore, widespread acceptance of biodiesel is not assured and
depends on market acceptance of biodiesel as an addition, or an alternative, to
petroleum diesel or other petroleum products. Because this market is new, it is
difficult to predict its potential size or future growth rate. In addition, a
long-term customer base has not been adequately defined. Ding Neng Bio-tech’s
success in generating revenue in this emerging market will depend, among other
things, on its ability to educate potential customers and end-users about the
practical benefits of biodiesel. In the event a substantial market for biodiesel
fails to materialize, or if we fail to properly capitalize on such market, our
growth and future operating prospects will be materially harmed.
Unanticipated
problems or delays with product quality or product performance could result in a
decrease in customers and revenue, unexpected expenses and loss of market
share.
Ding Neng
Holdings’ cash flow depends on its ability to timely and economically operate
its Zhangzhou biodiesel refinery. Refinery operations require significant
amounts of capital to procure and process feedstock before receiving payment for
finished biodiesel.
18
The
production of biodiesel is complex, and Ding Neng Bio-tech’s product must meet
detailed quality requirements. Concerns about fuel quality may impact its
ability to successfully market its biodiesel to a larger market. If its
biodiesel does not meet industry quality standards, its credibility and the
market acceptance and sales of its biodiesel could be negatively affected. In
addition, actual or perceived problems with quality control in the industry
generally may lead to a lack of consumer confidence in biodiesel. Prolonged
problems may threaten the commercial viability of biodiesel generally or Ding
Neng Bio-tech’s refinery specifically.
Ding Neng Bio-tech primarily sells
its biodiesel through distributors and if its relationships with one or more of
those distributors were to end, its operating results could be
harmed.
Ding Neng
Bio-tech markets and distributes a substantial portion of its biodiesel through
independent distributors. Ding Neng Bio-tech’s operating results and financial
condition could be significantly disrupted by the loss of one or more of its
current distributors, order cancellations or the failure of its distributors to
successfully sell its products.
Ding
Neng Bio-tech’s operations are subject to hazards that may cause personal injury
or property damage, thereby subjecting it to liabilities and possible losses
that may not be covered by insurance and which could have a material adverse
effect on its results of operations and financial condition.
Ding Neng
Bio-tech’s workers are subject to the hazards associated with producing
biodiesel fuel. Operating hazards can cause personal injury and loss
of life, damage to, or destruction of, property, plant and equipment and
environmental damage. Hazards and risks, such as fires, natural
disasters, explosions and abnormal pressures and blowouts associated with
producing and transporting biodiesel fuel also may result in personal injury and
other claims. Should any such event occur, it can be expected that Ding
Neng Bio-tech will devote substantial time, personnel and other resources to
such issue, thereby diverting such resources from its daily operations. In
the event Ding Neng Bio-tech does not have adequate insurance coverage, its
financial condition and results of operations may be materially
harmed.
Financial
instability in the Chinese financial markets could materially and adversely
affect our results of operations and financial condition.
The
Chinese financial markets and the Chinese economy are influenced by economic and
market conditions in other countries, particularly in other Asian emerging
market countries and the United States. Financial turmoil in Asia, Russia and
elsewhere in the world in recent years has affected the Chinese economy.
Although economic conditions are different in each country, investors’ reactions
to developments in one country can have adverse effects on the securities of
companies operating in other countries, including China. A loss in investor
confidence in the financial systems of other countries may cause increased
volatility in Chinese financial markets and, indirectly, in the Chinese economy
in general. Financial disruptions could harm Ding Neng Bio-tech’s operation or
its stock price, results of operations and financial condition.
Natural
calamities could have a negative impact on the Chinese economy and harm Ding
Neng Bio-tech’s business.
China has
experienced natural calamities such as earthquakes, floods, droughts and a
tsunami in recent years. The extent and severity of these natural disasters
determines their impact on the economies in the local communities that
experience these calamities. Ding Neng Bio-tech’s plant is located very near the
ocean and prolonged spells of abnormal rainfall and other natural calamities
could subject its facility to flooding or other damage which would have a
negative effect on Ding Neng Bio-tech’s operations and its business. In
addition, natural disasters could have an adverse impact on the economies in the
geographic regions in which it operates, which could adversely affect its
operating and growth prospects.
19
The
biodiesel production and marketing industry is extremely competitive. Many of
Ding Neng Bio-tech’s competitors have greater financial and other resources and
one or more of these competitors could use such resources to gain market share
at Ding Neng Bio-tech’s expense.
The
primary type of fuel used in China is petroleum diesel. Ding Neng Bio-tech
competes with existing oil companies as well as other biodiesel production
companies. They currently compete for the sale of its products primarily on a
regional basis within Fujian Province. Ding Neng Bio-tech’s primary competitors
in these areas are Gushan Environmental Energy Ltd. and Zhejiang Eastriver
Energy Technology Ltd. These competitors have substantially greater production,
financial, personnel and marketing resources. As a result, its competitors are
able to compete more aggressively and sustain that competition over a longer
period of time. Ding Neng Bio-tech’s lack of resources relative to these
competitors may cause them to fail to anticipate or respond adequately to new
developments and other competitive pressures. This failure could reduce their
competitiveness and cause a decline in market share, sales and
profitability.
Ding Neng
Bio-tech also faces competition from other producers of biodiesel with respect
to the procurement of feedstock. Such competition could intensify, thus driving
up the cost of feedstock and reducing profit margin. Competition will likely
increase as the commodities market prices of hydrocarbon-based energy, including
petroleum and biodiesel, rise as they have in recent years. Additionally, new
companies are constantly entering the market, thus increasing competition,
although barriers to entry are relatively high.
These
companies may have greater success in the recruitment and retention of qualified
employees, as well as in conducting their own refining and fuel production and
sales operations, and may have greater access to feedstock, market presence,
economies of scale, financial resources and engineering, technical and marketing
capabilities which may give them a competitive advantage. If Ding Neng Bio-tech
is unable to compete effectively or adequately respond to competitive pressures,
this may materially adversely affect Ding Neng Holdings’ results of operation
and financial condition.
Growth
may impose a significant burden on Ding Neng Bio-tech’s administrative and
operational resources which, if not effectively managed, could impair its
growth.
Ding
Neng’s strategy envisions a period of rapid growth that may impose a significant
burden on its administrative and operational resources. The growth of its
business will require significant investments of capital and management’s close
attention. Ding Neng Bio-tech’s ability to effectively manage its growth will
require it to substantially expand the capabilities of its administrative and
operational resources and to attract, train, manage and retain qualified
management, technicians and other personnel. Ding Neng Bio-tech’s failure to
successfully manage its growth could result in its sales not increasing
commensurately with capital investments. If Ding Neng Bio-tech is unable to
successfully manage its growth, the Company may be unable to achieve its growth
goals.
20
Ding
Neng Bio-tech may be unable to protect its intellectual property, which could
negatively affect its ability to compete.
Ding Neng
Bio-tech relies on a combination of patent, registered trademark,
confidentiality agreements, and other contractual restrictions on disclosure to
protect its intellectual property rights. Ding Neng Bio-tech also enters into
confidentiality agreements with its employees, consultants, and corporate
partners, and controls access to and distribution of its confidential
information. These measures may not preclude the disclosure of its confidential
or proprietary information. Despite efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use Ding Neng
Bio-tech’s proprietary technologies and information. Monitoring unauthorized use
of confidential information is difficult, and Ding Neng Bio-tech cannot be
certain that the steps it takes to prevent unauthorized use of its proprietary
technologies and confidential information, particularly in foreign countries
where the laws may not protect proprietary rights as fully as in the U.S., will
be effective. Failure to protect our intellectual property rights can be
expected to have a material, adverse impact on our competitive advantage and
potentially on our financial condition, stock price and future growth
prospects.
Ding
Neng Bio-tech will be required to hire and retain skilled technical and
managerial personnel.
Personnel
qualified to operate and manage biodiesel plants are in demand. Ding Neng
Bio-tech’s success depends in large part on its ability to attract, train,
motivate and retain qualified management and highly-skilled employees,
particularly managerial, technical, sales and marketing personnel, technicians,
and other critical personnel. Any failure to attract and retain such personnel
may have a negative impact on the operations of Ding Neng Bio-tech, which would
have a negative impact on revenues.
Ding
Neng Bio-tech is dependent upon its officers and directors for management and
direction and the loss of any of these persons could adversely affect its
operations and results.
Ding Neng
Bio-tech is dependent upon its officers and directors for implementation and
execution of its business plan. The loss of any of its officers or directors
could have a material adverse effect upon its results of operations and
financial position. Ding Neng Bio-tech does not maintain “key person” life
insurance for any of its officers. The loss of any of its officers or directors
could delay or prevent the achievement of its business objectives.
Ding
Neng Holdings’ lack of business diversification could result in the devaluation
of its securities if it does not generate revenue from its primary products, or
such revenues decrease.
Ding Neng
Bio-tech’s current business consists solely of the production and sale of
biodiesel in China. Currently, sales of biodiesel products account for 100% of
Ding Neng Holdings’ revenues. The lack of business diversification
could cause you to lose all or some of your investment, since Ding Neng Holdings
does not have any other lines of business or alternative revenue
sources.
Failure
to fully comply with PRC labor laws, including laws relating to social
insurance, may expose Ding Neng Bio-tech to potential liability and
increased costs.
Companies
operating in China must comply with a variety of labor laws, including certain
pension, health insurance, unemployment insurance and other welfare-oriented
payment obligations. Ding Neng Bio-tech is currently paying
social insurance for 43 of its full-time employees. Ding Neng Bio-tech has
also purchased non-compulsory accident insurance for its workers who work
on the production line. Ding Neng Bio-tech has not paid social insurance
for 25 of its full-time employees whose personal identification files
cannot be transferred to Ding Neng Bio-tech since they are not registered
residents in Zhangzhou, Fujian Province. Ding Neng Bio-tech also has 16
of its full-time employees who voluntarily elected, in writing, not to
obtain social insurance through Ding Neng Bio-tech. If the PRC regulatory
authorities take the view that Ding Neng Bio-tech is required to pay social
insurance for all of its full-time employees, its failure to make
previous payments may be in violation of applicable PRC labor laws and we cannot
assure you that PRC governmental authorities will not impose penalties on Ding
Neng Bio-tech for failure to comply. In addition, in the event that any
current or former employee files a complaint with the PRC government, Ding Neng
Bio-tech may be required to make up the social insurance payment obligations as
well as paying administrative fines. The total cost of these payments and
any related fines or penalties could have a material adverse effect on Ding
Neng Bio-tech's financial condition and results of operations.
21
In
addition, the new PRC Labor Contract Law took effect January 1, 2008 and governs
standard terms and conditions for employment, including termination and lay-off
rights, contract requirements, compensation levels and consultation with labor
unions, among other topics. In addition, the law limits
non-competition agreements with senior management and other employees who have
access to confidential information to two years and imposes restrictions or
geographical limits. This new labor contract law will
increase Ding Neng Bio-tech's labor costs, which could adversely
impact its results of operations.
Risks
Related to the VIE Agreements
The
PRC government may determine that the VIE Agreements are not in compliance with
applicable PRC laws, rules and regulations.
Ding Neng
Holdings manages and operates the business of Ding Neng Bio-tech through Fuhua
pursuant to the rights it holds under the VIE Agreements. Almost all economic
benefits and risks arising from Ding Neng Bio-tech’s operations are transferred
to Ding Neng Holdings under these agreements.
There are
risks involved with the operation of Ding Neng Bio-tech’s business in reliance
on the VIE Agreements, including the risk that the VIE Agreements may be
determined by PRC regulators or courts to be unenforceable. If the
VIE Agreements were for any reason determined to be in breach of any existing or
future PRC laws or regulations, the relevant regulatory authorities would have
broad discretion in dealing with such breach, including:
•
|
imposing
economic penalties;
|
•
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discontinuing
or restricting the operations of Fuhua or Ding Neng
Bio-tech;
|
•
|
imposing
conditions or requirements in respect of the VIE Agreements with which the
Group may not be able to comply;
|
•
|
requiring
Ding Neng Holdings to restructure the relevant ownership structure or
operations;
|
•
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taking
other regulatory or enforcement actions that could adversely affect its
business; and
|
•
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revoking
the business licenses or certificates of Ding Neng Bio-tech and/or voiding
the VIE Agreements.
|
Any of
these actions could adversely affect Ding Neng Holdings’ ability to manage,
operate and gain the financial benefits of Ding Neng Bio-tech, which represents
its sole operations, which would have a material adverse impact on its business,
financial condition and results of operations.
Ding
Neng Holdings’ ability to manage and operate Ding Neng Bio-tech under the VIE
Agreements may not be as effective as direct ownership.
Ding Neng
Holdings’ plans for future growth are based substantially on growing the
operations of Ding Neng Bio-tech. However, the VIE Agreements may not
be as effective in providing Ding Neng Holdings with control over Ding Neng
Bio-tech as direct ownership. Under the current
VIE arrangements, as a legal matter, if Ding Neng Bio-tech fails to perform its
obligations, Ding Neng Holdings may have to (i) incur substantial costs and
resources to enforce such arrangements, and (ii) rely on legal remedies under
PRC law, which it cannot be sure would be effective. Therefore, if
Ding Neng Holdings is unable to effectively control Ding Neng Bio-tech, it may
have an adverse effect on its ability to achieve its business objectives and
grow its revenues.
22
Risks
Related to Doing Business in the PRC
The
Chinese government exerts substantial influence over the manner in which Ding
Neng Bio-tech must conduct its business activities.
Ding Neng
Bio-tech is dependent on its relationship with the local government in Fujian
province where it operates. The Chinese government has exercised and
continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership. Ding Neng
Bio-tech’s 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 the PRC may impose new, stricter regulations or interpretations
of existing regulations that would require additional expenditures and efforts
on Ding Neng Bio-tech’s part to ensure 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
Ding Neng Holdings to divest itself of any interest it then holds in Chinese
properties.
Future
inflation in China may inhibit Ding Neng Bio-tech’s ability to conduct business
in China. In recent years, the Chinese economy has experienced periods of rapid
expansion and high rates of inflation. Rapid economic growth can lead
to growth in the money supply and rising inflation. If prices for
Ding Neng Bio-tech’s products rise at a rate that is insufficient to compensate
for the rise in the costs of supplies, it may have an adverse effect on
profitability. 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 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 biodiesel
products.
Ding
Neng Bio-tech’s operations and assets in China are subject to significant
political and economic uncertainties and Ding Neng Holdings may lose all of its
assets and operations if the Chinese government alters its policies to further
restrict foreign participation in business operating in the PRC.
Changes
in PRC laws and regulations, or their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion, imports and sources
of supply, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on
Ding Neng Bio-tech’s business, results of operations and financial
condition. Under its current leadership, the Chinese government has
been pursuing economic reform policies that encourage private economic
activities and greater economic decentralization. There is no
assurance, however, that the Chinese government will continue to pursue these
policies, or that it will not significantly alter these policies from time to
time without notice. Ding Neng Holdings may
lose all of its assets and operations if the Chinese government alters its
policies to further restrict foreign participation in business operating in the
PRC.
23
Ding
Neng Holdings derives all of its sales in China and a slowdown or other adverse
development in the PRC economy may materially and adversely affect Ding Neng
Bio-tech’s customers, demand for its products and its business.
All of
Ding Neng Bio-tech’s sales are generated in China and it anticipates that sales
of its biodiesel fuel in China will continue to represent all of its total sales
in the near future. Although the PRC economy has grown significantly
in recent years, no assurances can be given that such growth will
continue. The industry in which Ding Neng Bio-tech is involved in the
PRC is relatively new and growing, but Ding Neng Bio-tech does not know how
sensitive it is to a slowdown in economic growth or other adverse changes in the
PRC economy which may affect demand for biodiesel products. In
addition, the Chinese government also exercises significant control over Chinese
economic growth 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 Chinese government to slow the pace of growth of the Chinese economy
could result in reduced demand for biodiesel products. A slowdown in
overall economic growth, an economic downturn or recession or other adverse
economic developments in the PRC may materially reduce the demand for biodiesel
products and materially and adversely affect the business, results of operations
and future operating prospects of Ding Neng Bio-tech.
Currency
fluctuations and restrictions on currency exchange may adversely affect Ding
Neng Bio-tech’s business, including limiting the ability to convert Chinese
Renminbi into foreign currencies and, if Chinese Renminbi were to decline in
value, reducing Ding Neng Holdings’ financial results in U.S. dollar
terms.
Ding Neng
Holdings’ reporting currency is the U.S. dollar and Ding Neng Bio-tech’s
operations in China use its local currency as its functional
currency. Substantially all of Ding Neng Holdings’ revenues and
expenses are in the Chinese currency, the Renminbi, or RMB. Ding Neng
Holdings is subject to the effects of exchange rate fluctuations with respect to
both of these currencies. For example, the value of the Renminbi
depends to a large extent on Chinese government policies and China’s domestic
and international economic and political developments, as well as supply and
demand in the local market. Since 1994, the official exchange rate
for the conversion of the Renminbi to the U.S. dollar had generally been stable
and the Renminbi had appreciated slightly against the U.S. dollar. In
July 2005, the Chinese government changed its policy of pegging the value of the
Renminbi to the U.S. dollar. Under this policy, which was halted in
2008 due to the worldwide financial crisis, the Renminbi was permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. In June 2010, the Chinese government announced its
intention to again allow the Renminbi to fluctuate within the 2005
parameters. It is possible that the Chinese government could adopt an
even more flexible currency policy, which could result in more significant
fluctuation of Renminbi against the U.S. dollar, or it could adopt a more
restrictive policy. Thus, no assurance can be given that the Renminbi
will remain stable against the U.S. dollar or any other foreign
currency.
Ding Neng
Holdings’ financial statements are translated into U.S. dollars at the average
exchange rates in each applicable period. To the extent the U.S.
dollar strengthens against the RMB, the translation of RMB-denominated
transactions will result in reduced revenue, operating expenses and net income.
Similarly, to the extent the U.S. dollar weakens against the RMB, the
translation of RMB-denominated transactions will result in increased revenue,
operating expenses and net income. Ding Neng Holdings is also exposed
to foreign exchange rate fluctuations as it converts the financial statements of
its foreign consolidated subsidiaries into U.S. dollars in
consolidation. If there is a change in RMB exchange rates, such
conversion into U.S. dollars will lead to a translation gain or loss which is
recorded as a component of other comprehensive income. Ding Neng
Holdings has not entered into agreements or purchased instruments to hedge its
exchange rate risks, although it may do so in the future. The
availability and effectiveness of any hedging transaction may be limited and
Ding Neng Holdings may not be able to effectively hedge its exchange rate
risks.
24
The
State Administration of Foreign Exchange (“SAFE”) restrictions on currency
exchange may limit Ding Neng Holdings’ ability to receive and use its funds
effectively and to pay dividends.
All of
Ding Neng Holdings’ sales revenue and expenses are denominated in
RMB. Under PRC law, the Renminbi is currently convertible under the
“current account,” which includes dividends and trade and service-related
foreign exchange transactions, but not under the “capital account,” which
includes foreign direct investment and loans. Currently, Ding Neng
Bio-tech may purchase foreign currencies for settlement of current account
transactions, including distributions in the form of consulting fees and
payments of dividends to Ding Neng Holdings, without the approval of SAFE, by
complying with certain procedural requirements. However, the relevant
PRC government authorities may limit or eliminate Ding Neng Bio-tech’s ability
to purchase foreign currencies in the future.
All of
Ding Neng Holdings’ income is derived from the consulting fees it receives from
Ding Neng Bio-tech through the VIE Agreements. SAFE restrictions may
delay the payment of dividends, since Ding Neng Bio-tech has to comply with
certain procedural requirements and it may experience difficulties in completing
the administrative procedures necessary to obtain and remit foreign currency for
the distribution of consulting fees or payment of dividends.
Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including
SAFE. In particular, if Ding Neng Bio-tech borrows foreign currency
through loans from Ding Neng Holdings or other foreign lenders, these loans must
be registered with SAFE, and if Ding Neng Bio-tech is financed by means of
additional capital contributions, these capital contributions must be approved
by certain PRC government authorities, including the PRC Ministry of Commerce,
or their respective local counterparts. These limitations could
affect Ding Neng Bio-tech’s ability to conduct foreign exchange through debt or
equity financing.
The PRC
government also may at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange
control system prevents Ding Neng Bio-tech from obtaining foreign currency, it
may be unable to pay dividends or meet obligations that may be incurred in the
future that require payment in foreign currency.
SAFE restrictions on the use of
offshore holding companies in mergers and acquisitions in China may create
regulatory uncertainties that could restrict or limit Ding Neng Bio-tech’s
ability to operate.
In
November 2005, SAFE issued a public notice, known as Circular 75, concerning
foreign exchange registrations that are required in order to use offshore
holding companies in mergers and acquisitions in China. The public
notice provides that if an offshore company controlled by PRC residents intends
to acquire a PRC company, such acquisition will be subject to registration with
the relevant foreign exchange authorities. The public notice also
suggested that registration with the relevant foreign exchange authorities is
required for any sale or transfer by PRC residents of shares in an offshore
holding company that owns an onshore company. PRC residents must each
submit a registration form to the local SAFE branch with respect to their
ownership interests in the offshore company, and must also file an amendment to
such registration if the offshore company experiences material events, such as
changes in the share capital, share transfer, mergers and acquisitions, spin-off
transactions or use of assets in China to guarantee offshore
obligations.
25
Additionally,
in accordance with The
Provisions on the Takeover of Domestic Enterprises by Foreign Investors
(No. 10 [2006]) issued by six ministries and commissions of the PRC State
Council, where a domestic company, enterprise or individual intends to take over
its domestic affiliated company in the name of a company which it lawfully
established or controls, it shall be subject to the examination and approval of
the Ministry of Commerce. The parties concerned shall not avoid the
aforesaid requirements by making investments within China through the
foreign-funded enterprise, or by other means.
Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by, among other things,: (i)
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; (ii) adding requirements
relating to the source of the PRC resident’s funds used to establish or acquire
the offshore entity and (iii) covering the use of existing offshore entities for
offshore financings. The PRC regulatory authorities may take the view
that Ding Neng Holdings’ acquisition of indirect ownership and controlling
interest in Ding Neng Bio-tech through the VIE Agreements shall be subject to
SAFE approval and registration. Any adverse action taken by PRC regulatory
authorities could significantly and negatively impact Ding Neng Bio-tech’s
operations.
Based
on our understanding, such provisions do not apply to the contractual
arrangement between Fuhua and Ding Neng Bio-Tech. However, a PRC
government authority may make further amendments
or revisions to such rules which may require approval for such
arrangements in the future.
Because
all of Ding Neng Holdings’ assets are located outside of the United States and
some of its directors, including its Chairman, and the majority of its officers
reside outside of the United States, it may be difficult for you to enforce your
rights against Ding Neng Holdings based on United States federal securities laws
or against these persons in the United States or to enforce judgments of United
States courts against Ding Neng Holdings or the officers or directors of Ding
Neng Holdings in the PRC.
The
Chairman of the Board of Directors and principal executive officer of Ding Neng
Holdings, Mr. Nie, resides in China. In addition, another of its
directors and a majority of its officers are also located in
China. Furthermore, the operating subsidiary, Ding Neng Bio-tech, is
located in the PRC and all of its assets are located outside of the United
States. China does not have a treaty with United States providing for
the reciprocal recognition and enforcement of judgments of courts. It
may therefore be difficult for investors in the United States to enforce their
legal rights based on the civil liability provisions of the United States
federal securities laws against Ding Neng Holdings in the courts of either the
United States or the PRC and, even if civil judgments are obtained in courts of
the United States, to enforce such judgments in the PRC
courts. Further, it is unclear if extradition treaties now in effect
between the United States and the PRC would permit effective enforcement against
Ding Neng Holdings or its officers and directors of criminal penalties, under
the United States federal securities laws or otherwise.
26
Ding Neng Holdings may
have limited legal recourse under PRC laws if disputes arise under contracts
with third parties.
The
Chinese government has enacted 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 Ding Neng Holdings’
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 Ding Neng Bio-tech may have to
specific performance, or to seek an injunction under PRC laws, in either of
these cases, are severely limited, and without a means of recourse by virtue of
the Chinese legal system, Ding Neng Bio-tech may be unable to prevent these
situations from occurring. The occurrence of any such events could
have a material adverse effect on Ding Neng Holdings’ business, financial
condition and results of operations. Although legislation in China
has significantly improved the protection afforded to various forms of foreign
investment and contractual arrangements in China, these laws, regulations and
legal requirements are relatively new and their interpretation and enforcement
involve uncertainties, which could limit the legal protection available to Ding
Neng Bio-tech and foreign investors. The inability to enforce or
obtain a remedy under any of Ding Neng Bio-tech’s future agreements could result
in a significant loss of business, business opportunities or capital and could
have a material adverse impact on Ding Neng Holdings’ results of operations and
future business prospects.
If
Ding Neng Holdings makes equity compensation grants to persons who are PRC
citizens, they may be required to register with SAFE. Ding Neng
Bio-tech may also face regulatory uncertainties that could restrict its ability
to adopt equity compensation plans for its directors and employees and other
parties under PRC laws.
On April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also know as “Circular 78.” It is
not clear whether Circular 78 covers all forms of equity compensation plans or
only those which provide for the granting of stock options. For any plans which
are so covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the
plan.
Ding Neng
Holdings may adopt an equity incentive plan and make numerous stock option
grants under the plan to its officers, directors and employees, some of whom are
PRC citizens and may be required to register with SAFE. If it is
determined that any of Ding Neng Holdings’ equity compensation plans are subject
to Circular 78, failure to comply with such provisions may subject it and
participants of its equity incentive plan who are PRC citizens to fines and
legal sanctions and prevent Ding Neng Holdings from being able to grant equity
compensation to PRC employees. In that case, Ding Neng Holdings’ ability to
compensate its and Ding Neng Bio-tech’s employees, officers and directors
through equity compensation would be hindered and business operations may be
adversely affected.
Due
to various restrictions under PRC laws on the distribution of dividends by PRC
operating subsidiaries and VIE affiliates, Ding Neng Holdings may not be able to
pay dividends to its stockholders.
The
Wholly-Foreign Owned Enterprise Law (1986), as amended, and the Wholly-Foreign
Owned Enterprise Law Implementing Rules (1990), as amended, and the Company Law
of the PRC (2006) contain the principal regulations governing dividend
distributions by wholly foreign owned enterprises. Under these regulations,
wholly foreign owned enterprises, such as Fuhua, may pay dividends only out of
their accumulated profits, if any, as determined in accordance with PRC
accounting standards and regulations. Additionally, Fuhua is required to set
aside a certain amount of their accumulated profits each year, if any, to fund
certain reserve funds. These reserves are not distributable as cash
dividends except in the event of liquidation and cannot be used for working
capital purposes.
Furthermore,
if the consolidated subsidiaries incur debt on their own in the future, the
instruments governing the debt may restrict Ding Neng Holdings’ ability to pay
dividends or make other payments. If Ding Neng Holdings or its consolidated
subsidiaries and VIE affiliate are unable to receive all of the revenues from
operations due to these contractual or dividend arrangements, Ding Neng Holdings
may be unable to pay dividends.
27
Ding Neng Holdings may have
difficulty establishing adequate management, governance, legal and financial
controls in the PRC.
The PRC
historically has been deficient in western style management, governance and
financial reporting concepts and practices, as well as in modern banking, and
other control systems. Ding Neng Holdings’ current management has
little experience with western style management, governance and financial
reporting concepts and practices, and it may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the
PRC. As a result of these factors, and especially given that Ding
Neng Holdings expects to be a publicly listed company in the U.S. and subject to
regulation as such, it may experience difficulty in establishing management,
governance legal and financial controls, collecting financial data and preparing
financial statements, books of account and corporate records and instituting
business practices that meet western standards. Ding Neng Holdings
may have difficulty establishing adequate management, governance, legal and
financial controls in the PRC. Therefore, it may, in turn, experience
difficulties in implementing and maintaining adequate internal controls as
required under Section 404 of the Sarbanes-Oxley Act of 2002 and other
applicable laws, rules and regulations. This may result in
significant deficiencies or material weaknesses in its internal controls which
could impact the reliability of its financial statements and prevent it from
complying with SEC rules and regulations and the requirements of the
Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack
of compliance could have a materially adverse effect on Ding Neng Holdings’
business and the public announcement of such deficiencies could adversely impact
its stock price.
Risks
Related to Our Common Stock
Trading
in our Common Stock over the last 12 months has been non-existent, so investors
may not be able to sell as many of their shares as they want at prevailing
prices.
Shares of
our Common Stock are quoted on the Pink Sheets under the symbol
“CHIO.PK”. If limited trading in the Common Stock continues, it may
be difficult for investors to sell such shares in the public market at any given
time at prevailing prices. Also, the sale of a large block of Common
Stock could depress the market price of the Common Stock to a greater degree
than a company that has a higher volume of trading of its
securities.
An
active and visible trading market for our Common Stock may not
develop.
We cannot
predict whether an active market for our Common Stock will develop in the
future. In the absence of an active trading market:
|
·
|
Investors
may have difficulty buying and selling or obtaining market
quotations;
|
|
·
|
Market
visibility for our Common Stock may be limited;
and
|
|
·
|
A
lack of visibility for our Common Stock may have a depressive effect on
the market price for our Common
Stock.
|
The OTCBB
is an unorganized, inter-dealer, over-the-counter market that provides
significantly less liquidity than NASDAQ or the NYSE AMEX. The
trading price of the Common Stock is expected to be subject to significant
fluctuations in response to variations in quarterly operating results, changes
in analysts’ earnings estimates, announcements of innovations by us or our
competitors, general conditions in the industry in which we operate and other
factors. These fluctuations, as well as general economic and market
conditions, may have a material or adverse effect on the market price of our
Common Stock.
28
The
market price for our stock may be volatile.
The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:
|
·
|
actual
or anticipated fluctuations in our quarterly operating
results;
|
|
·
|
changes
in financial estimates by securities research
analysts;
|
|
·
|
announcements
by us or our competitors of acquisitions, strategic partnerships, joint
ventures or capital commitments;
|
|
·
|
addition
or departure of key personnel;
|
|
·
|
fluctuations
of exchange rates between RMB and the U.S.
dollar;
|
|
·
|
intellectual
property or other litigation; and
|
|
·
|
general
economic or political conditions in
China.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also
materially and adversely affect the market price of our stock.
Our
controlling stockholders may exercise significant influence over
us.
Our
controlling stockholders, Mr. Xinfeng Nie and Mr. Sanfu Huang, together own
approximately 37.28% of our outstanding Common Stock as of the closing of the
Acquisition. Mr. Nie (currently our Chairman and a holder of 22.58%
of our Common Stock) and Mr. Huang (currently our CEO and a director and a
holder of 14.70% of our Common Stock), both individually and collectively, have
substantial influences in determining the outcome of any corporate transaction
or other matters submitted to our stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors, and other significant corporate actions. Mr. Nie and
Mr. Huang also have the power to prevent or cause a change in
control. In addition, without the consent of Mr. Nie and Mr. Huang,
we could be prevented from entering into transactions that could be beneficial
to us.
Compliance
with changing regulation of corporate governance and public disclosure, and our
management’s inexperience with such regulations will result in additional
expenses and creates a risk of non-compliance.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets and
public reporting. Our management team will need to invest significant
management time and financial resources to comply with both existing and
evolving standards for public companies, which will lead to increased general
and administrative expenses and a diversion of management time and attention
from revenue generating activities to compliance activities. In
addition, our management located in the PRC has little experience with
compliance with U.S. laws (including securities laws). This
inexperience may cause us to fall out of compliance with applicable regulatory
requirements, which could lead to enforcement action against us and a negative
impact on our stock price.
29
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
We are
subject to reporting obligations 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 its internal controls over
financial reporting. In addition, an independent registered public
accounting firm must attest to and report on management’s assessment of the
effectiveness of our internal controls over financial
reporting. 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 still decline
to attest to our management’s assessment or 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, or if it interprets the relevant
requirements differently from us. 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
revenue recognition, are necessary for us to produce reliable financial reports
and are important to prevent 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.
We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not
plan to declare or pay any cash dividends on our shares of Common Stock in the
foreseeable future and currently intend to retain any future earnings for
funding growth. As a result, investors should not rely on an investment in our
securities if they require the investment to produce dividend income. Capital
appreciation, if any, of our shares may be investors’ sole source of gain for
the foreseeable future. Moreover, investors may not be able to resell their
Common Stock at or above the price they paid for them.
Item
2. Financial Information.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Ding Neng
Holdings prepared the following discussion and analysis to help you better
understand its financial condition, changes in its financial condition, and
results of operations for the fiscal years ended December 31, 2009 and
2008, and the nine month periods ended September 30, 2010 and
2009. This discussion should be read in conjunction with the
financial statements and related notes for Ding Neng Holdings for the fiscal
years ended December 31, 2009 and 2008 and the unaudited financial statements
and related notes for the nine month periods ended September 30, 2010 and
2009.
30
Cautionary
Statements Regarding Forward Looking Statements
Some of
the information in this section contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue," or similar words. You should read statements that
contain these words carefully because they:
● discuss
future expectations;
● contain
projections of future results of operations or of financial condition;
and
● state
other "forward-looking" information.
Ding Neng
Holdings believes it is important to communicate its expectations. However, it
undertakes no duty to update any forward-looking statements contained herein,
even though its situation may materially change in the future. There may be
events in the future that Ding Neng Holdings is not able to accurately predict
or over which it has no control. Ding Neng Holdings’ actual results
and the timing of certain events could differ materially from those anticipated
in these forward-looking statements as a result of numerous factors, many of
which are beyond its control.
Business
Overview
Ding Neng
Bio-tech, the sole operating entity of Ding Neng Holdings, is in the business of
the production, refinement and distribution of bio-diesel fuel produced from
animal oil, plant oil and other various sources, and generates revenue from the
sale of biodiesel and crude biodiesel products. Ding Neng Bio-tech’s
production capacity doubled in 2009 comparable to 2008, which resulted in an
increase in revenues and profits. Ding Neng Bio-tech seeks to expand
its production capabilities in 2011 in an attempt to further increase its
revenues and profits.
Ding Neng
Bio-tech’s operating results are largely driven by the price at which it can
sell its biodiesel, the cost of feedstock and its other operating
costs. Revenues are generally impacted by such factors as the
available supply and demand for biodiesel, the price and availability of the raw
materials required to produce biodiesel, the price of diesel fuel (with which
biodiesel prices often correlate), general economic conditions, weather, the
competitive nature of the industry, the extensive environmental laws that
regulate the industry, new legislation at the national, province or local level
and changes in national biodiesel tax incentives.
The
primary components of cost of goods used in the production of biodiesel are
feedstock (primarily animal fats and plant oil) and other raw materials
(methanol and other chemicals), freight, energy (coal, water and electricity),
and labor and depreciation on processing equipment. The cost of feedstock is the
largest single component of the cost of biodiesel production, typically
accounting for approximately 88% of the overall cost of producing biodiesel.
Changes in the price or supply of feedstock are subject to and determined by
market forces and other factors over which Ding Neng Bio-tech has no control,
including government policies. Although Ding Neng Bio-tech takes some action to
pass price fluctuations on to suppliers, it still experiences a large variation
in the cost of feedstock.
Ding Neng
Holdings expects to fund the operations of Ding Neng Bio-tech during the next
twelve months using cash flows from continuing operations and financing from the
capital markets. Management is directing its efforts toward
increasing production and operating efficiencies, while maintaining or
decreasing operating costs. For the fiscal year 2009, Ding Neng Bio-tech
increased its production output rate from approximately 85% in 2008 to
approximately 90%. Ding Neng Bio-tech seeks to reduce feedstock costs
by continuing to produce biodiesel from less-costly feedstocks, such as animal
fat and cooked oil.
31
Since
inception, Ding Neng Bio-tech has produced biodiesel on an as-ordered
basis. This helps to insure that production does not significantly
exceed orders on hand and keeps inventory and warehousing costs
down.
Although
Ding Neng Bio-tech has historically experienced lower demand before and during
the Chinese Spring Festival month (normally in January or February), there is no
other seasonal demand fluctuation throughout the year.
Organization
and Basis of Presentation
The
consolidated financial statements consist of the financial statements of Ding
Neng Holdings, DBT, Fuhua and Ding Neng Bio-tech. Ding Neng Holdings’
sole source of income and operations is through its indirect, contractual
(variable interest entity) relationship with Ding Neng Bio-tech.
Critical
Accounting Policies
The
accompanying consolidated financial statements have been prepared by Ding Neng
Holdings in accordance with accounting principles generally accepted in the
United States of America. The consolidated financial statements
include the accounts of Ding Neng Holdings and its subsidiaries and variable
interest entity. All significant inter-company balances and
transactions have been eliminated in consolidation including those of its
variable interest entity.
The
Acquisition is accounted for as a common control transaction and a
recapitalization of the subsidiaries with retroactive effect in the accompanying
financial statements. The financial statements have been prepared as if the
existing corporate structure had been in existence throughout all periods and
the reorganization had occurred as of the beginning of the earliest period
presented in the accompanying financial statements.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. (“GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Future results could be materially affected if actual results
were to differ from these estimates and assumptions.
Revenue Recognition
Policies
Ding Neng
Holdings recognizes revenue net of value added tax (VAT) when persuasive
evidence of an arrangement exists, delivery of the goods has occurred, customer
acceptance has been obtained (which means the significant risks and ownership
have been transferred to the customer), the price is fixed or determinable and
collectability is reasonably assured. No return allowance is made as products
returns are insignificant based on historical experience. Costs of distributing
products to Ding Neng Bio-tech’s customers are included in selling
expenses.
32
Results
of Operations
TWELVE
MONTHS ENDED DECEMBER 31, 2009 COMPARED WITH TWELVE MONTHS ENDED DECEMBER 31,
2008
Revenue
Ding Neng
Holdings’ total revenue increased by $6,251,066, or approximately 69%, from
$9,038,313 in the twelve months ended December 31, 2008 to $15,289,379 in the
twelve months ended December 31, 2009. This increase was primarily attributable
to significant increased sales volume of biodiesel. Revenue in 2008
was entirely attributable to sales of biodiesel, while in 2009 biodiesel revenue
increased by $4,949,646 to $13,987,959. Another production, called crude
(or unrectified) biodiesel, produced revenue of $1,301,420, representing
approximately 9% of total revenue in the twelve months ended December 31,
2009.
Cost
of Revenue
Overall
cost of revenue increased by $4,909,507, or approximately 66%, from $7,389,447
in the twelve months ending December 31, 2008, to $12,298,954 for the twelve
months ending December 31, 2009. This increase was primarily caused by the
increase in production volume and increased transportation costs due to the
increase in sales. Total biodiesel production cost increased by
$3,904,611, or approximately 53%, from $7,389,447 in 2008 to $11,294,058 in
2009. The freight-in cost increased to $410,699 in 2009, comparable to $62,077
in 2008. This is due to the increase in revenue.
The
difference between revenue increase percentage and overall cost increase
percentage is approximately 3%. This is attributable to improved production
techniques and a stable purchase price for Ding Neng Bio-tech’s
products. Techniques and systems improvements contributed to the
increased production efficiency.
Selling
Expenses
Selling
expenses increased by $146,182, or approximately 140%, to $250,426 for the
twelve months ended December 31, 2009, compared to $104,244 for the same period
in 2008. Below is a description of Ding Neng Holdings’ selling
expenses.
Description
|
2009
|
2008
|
||||||
Business
taxes
|
$
|
5,905
|
$
|
3,103
|
||||
Freight
– Outbound
|
$
|
197,347
|
$
|
87,074
|
||||
Salaries
- sales
|
$
|
20,254
|
$
|
11,120
|
||||
Port
storage fee
|
$
|
26,920
|
$
|
2,947
|
||||
Subtotal
|
$
|
250,426
|
$
|
104,244
|
In
conjunction with the increase in sales revenue, both outbound freight and port
storage costs increased significantly as well. Ding Neng Bio-tech has
only 3 employees in sales, consistent with its strategy to seek large, long-term
customers rather than trying to develop a large number of small
customers. Much of its time and resources is spent on research and
development to improve production quality.
Research and
Development Expenses
Ding Neng
Holdings’ research and development expenses increased by $333,014, or
approximately 149%, to $556,071 for the twelve months ended December 31, 2009
from $223,057 for the twelve months ended December 31, 2008. Production capacity
was 10,000 tons in 2008 and increased to 20,000 tons in 2009 without doubling
production facilities or equipment purchases. The major contribution to
increased production came from system redesign and technology improvements,
which required additional equipment, raw materials and technical support
personnel. Certain technical personnel come from outside institutions or
consulting companies, while others are employees from Ding Neng Bio-tech’s
research and investigation department. Ding Neng Holdings expects
expenditures on research and development to increase year by year in the
future.
33
General
and Administrative Expenses
General
and administrative expenses increased by $83,044, or approximately 81%, to
$185,394 for the twelve months ended December 31, 2009, from $102,350 for the
twelve months ended December 31, 2008. This represented only 1% of
total revenue in both 2008 and 2009. A majority of the general and
administrative expenses were employee wages and benefits.
Wage and
benefits expenses increased by $52,042, or approximately 70%, to $126,019 in the
twelve months ended December 31, 2009 from $73,977 in the twelve months ended
December 31, 2008.
Interest
Expense
Interest
income increased $1,621, or approximately 148%, to $2,721 for the twelve months
ended December 31, 2009 from $1,100 for the twelve months ended December 31,
2008. This was due to increased cash on hand and increased interest
rates.
Net
Income
Net
income increased by $836,618, or approximately 69%, to $2,056,593 for the twelve
months ended December 31, 2009 from $1,219,975 for the twelve months ended
December 31, 2008. The increase is primarily due to the increased sales in 2009,
as discussed above.
Liquidity
and Capital Resources
Net cash
provided by operating activities was $1,385,966 for the twelve months ended
December 31, 2009, compared to net cash outflow of $1,054,563 for the twelve
months ended December 31, 2008.
Net cash
used in investing activities was $1,248,921 for the twelve month period ended
December 31, 2009, representing a prepayment of $1,220,690 for a long-term
capital investment and a $28,231 purchase of property and equipment, compared to
$0 for the twelve months ended December 31, 2008. In 2009, Ding Neng
Bio-tech entered into a purchase contract with TianTai County Manyuanchun
Agricultural Development Co., Ltd (“TianTai”), which is located in Zhejiang
province. Tiantai is owned, in part, by Mr. Sanfu Huang, Ding Neng
Holdings’ CEO and a director. See “Certain Relationships and Related
Party Transactions”. In 2010, Ding Neng Holdings spent $2,932,200 to
acquire 165 acres of forest land use rights and forest where there are more than
50,000 6-8 year old Sapindus “mother trees”. Sapindus is a natural raw material
for producing detergent, and the core of Sapindus is good raw material for
producing biodiesel. In parallel with Ding Neng Bio-tech’s
anticipated production capacity increase, it will need to purchase more raw oil
to support the increase in output. Ding Neng Bio-tech believes the
trees owned by TianTai provide the best Sapindus seeds, and they are expected to
be used as the foundation for our intended expansion to a 165,000 acre Sapindus
forest, which, if successful, Ding Neng Bio-tech expects will provide
approximately one-third of its total raw materials demand beginning
in 2013. As of September 30, 2010 and December 31, 2009, Ding
Neng Bio-tech made prepayments of $2,256,783 and $1,220,690, respectively,
towards the total purchase price to TianTai.
Net cash
used in financing activities was $130,702 for the twelve months ended December
31, 2009. Net cash provided by financing activities was $1,033,983 for the
twelve months ended December 31, 2008. Shareholders increased capital
contributions by $590,069 in 2008. By the end of 2009, Ding Neng Holdings did
not have any loans due to or borrowings from, third parties, but did incur
related party debt for working capital purposes. Net borrowings from
related parties were $443,914 for fiscal year 2008 and net repayment to related
parties was $130,702 for fiscal year 2009.
34
Working
Capital
As of
December 31, 2009, Ding Neng Holdings had $85,248 of cash and cash equivalents
and had $77,487 as of December 31, 2008. As of December 31, 2009,
Ding Neng Holdings had $1,626,414 of accounts receivables from five customers,
which was $1,181,654 from four customers as of December 31, 2008.
As of
December 31, 2009, Ding Neng Holdings had $721,042 of inventory on hand, which
was $398,040 as of December 31, 2008. Because Ding Neng Bio-tech’s
production is based on orders on hand, its inventory liquidity was in good
condition, and no value reduction was estimated for the short-term inventory
reserve.
As of
December 31, 2009, Ding Neng Holdings had $203,842 prepayments for various
research and development expenses. Ding Neng Holdings had $131,186 of
prepaid expenses outstanding as of December 31, 2008.
As of
December 31, 2009, Ding Neng Holdings had current assets of $2,636,546 and
current liabilities of $2,909,065, which resulted in negative working capital of
($272,519) compared to negative working capital of ($1,359,970) as of December
31, 2008.
NINE
MONTHS ENDED SEPTEMBER 30, 2010 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30,
2009
Revenue
Ding Neng
Holdings’ total revenue increased by $12,955,455 or approximately 113%, from
$11,488,352 in the nine months ended September 30, 2009 to $24,443,807 in the
nine months ended September 30, 2010. This increase was primarily attributable
to significant increased sales of biodiesel. Revenue from biodiesel
sales in the nine months ended September 30, 2010 increased by $9,181,119 to
$19,773,599, compared to $10,592,480 in the nine months ended September 30,
2009. Biodiesel production contributed 81% of total revenue in the
nine months ended September 30, 2010, and 92% for the nine months ended
September 30, 2009. Crude biodiesel revenue was $2,098,095, or
approximately 9% of total revenue in the nine months ended September 30,
2010. The revenue from crude biodiesel in the nine months ended
September 30, 2009 was $895,872, approximately 8% of total revenue. Ding Neng
Bio-tech also introduced a new product called acidified oil in
January, 2010. In the nine months ended September 30, 2010, revenue from
acidified oil was $2,570,860, or approximately 10% of total revenue through such
date.
Cost
of Revenue
Ding Neng
Holdings’ overall cost of revenue increased by $7,174,102, or approximately
78%,from $9,151,977 in the nine months ending September 30, 2009 to $16,326,079
in the nine months ending September 30, 2010. This increase was primarily due to
increased costs from the significant increase in sales. Total
biodiesel production cost increased by $4,537,339, or approximately 56%, from
$8,168,234 in the nine months ending September 30, 2009 to $12,705,573 in the
nine months ending September 30, 2010. Although a significant increase in
purchases occurred, Ding Neng Holdings was able to benefit from economies of
scale in transportation, allowing freight-in cost to remain
stable. The cost of crude biodiesel revenue was $1,471,722 in the
nine months ending September 30, 2010, compared to $663,591 in the nine months
ending September 30, 2009. The cost of acidified oil revenue was $1,849,581 for
the nine months ending September 30, 2010.
35
The
difference between revenue increase percentage and overall cost increase
percentage is approximately 35%. This improvement was due to
following:
(1)
For the nine months ended September 30, 2009, sales volume was 14,572 tons and
the average sales price was $727/ton. In nine months ended September 30, 2010,
sales volume was 26,272 tons, and the average sales price was
$753/ton. The increase in sales volume was 80% and the decrease in
sales price was approximately 3.5%.
(2) For
cost of revenue, the average cost for the nine months ended
September 30, 2009 was $561/ton. The average cost for same period of
2010 was $484/ton. The increase in sales volume was 80% and the
decrease in average cost of revenue per ton was 13.7%.
Ding Neng
Holdings concluded that cost efficiency was the main factor attributable to
its improved production output. Other factors include new techniques and updated
processing systems.
Selling
Expenses
Ding Neng
Holdings’ selling expenses increased by $55,704, or approximately 35%, to
$214,376 for the nine months ended September 30, 2010, compared to $158,672 for
the nine months ended September 30, 2009.
Below is
the description of detailed selling expenses:
Description
|
|
Nine
Months
Ended
September
30, 2010
|
|
|
Nine
Months
Ended
September
20, 2009
|
|
||
Business
taxes
|
$
|
17,100
|
$
|
4,421
|
||||
Freight
– outbound
|
$
|
173,197
|
$
|
134,267
|
||||
Salaries
– sales
|
$
|
20,628
|
$
|
14,390
|
||||
Miscellaneous
other fees
|
$
|
3,451
|
$
|
5,594
|
||||
Subtotal
|
$
|
214,376
|
$
|
158,672
|
Corresponding
with the increase in sales, outbound freight costs increased
significantly.
Research
and Development Expenses
Ding Neng
Holdings’ research and development expenses increased by $261,717, or
approximately 73%, to $618,814 for the nine months ended September 30, 2010,
from $357,097 for the nine months ended September 30, 2009. Ding Neng Bio-tech’s
production capacity limit was 20,000 tons in 2009 and 40,000 tons by the end of
2010. Ding Neng Bio-tech has increased production capacity in recent
years without a commensurate increase in production facilities and equipment
expenditures. The major contribution to increased production came from system
redesign and technology improvements, which required some additional equipment,
raw materials and technical support personnel. Certain technical personnel come
from outside institutions or consulting companies, while others are employees
from Ding Neng Bio-tech’s research and investigation department. Ding
Neng Holdings expects expenditures on research and development to increase in
the future.
36
General
and Administrative Expenses
Ding Neng
Holdings’ total general and administrative expenses increased by $353,364, or
approximately 305%, to $469,066 in the nine months ended September 30, 2010 from
$115,702 in the nine months ended September 30, 2009. This
represented only 1% to 2% of total revenues in both periods. The main components
of the general and administrative expense increase were employee wages and
benefits, as well as certain non-capitalized research and development related
expenses.
Ding Neng
Holdings saw wages and benefits expenses increase by $83,747, or approximately
91%, to $176,157 in the nine months ended September 30, 2010 from $92,410 in the
nine months ended September 30, 2009.
Net
Income
Net
income increased by $4,433,171, or approximately 252%, to $6,195,079 for the
nine months ended September 30, 2010, from net income of $1,761,908 for the nine
months ended September 30, 2009. The increase is primarily due to the increase
in sales as discussed herein.
Ding Neng
Holdings has incurred income taxes since January 1, 2010, despite having a
waiver of income tax obligations in 2008 and 2009 (due to net losses in 2006 and
2007), and has received a 50% reduction of its income tax obligations in 2010,
2011 and 2012. For the nine months ended September 30, 2010, Ding
Neng Holdings incurred $885,011 in income tax expenses.
Liquidity
and Capital Resources
Net cash
provided from operating activities was $5,935,394 for the nine months ended
September 30, 2010, compared to net cash provided from operating activities of
$2,224,283 for the nine months ended September 30, 2009. Net cash
used in investing activities was $1,403,491 for the nine month period ended
September 30, 2010, compared with $0 for the nine months ended September 30,
2009.
As of
September 30, 2010 and December 31, 2009, Ding Neng Holdings has made $2,323,494
and $1,220,690 respectively, in prepayments towards the total purchase price
pursuant to the agreement with TianTai disclosed above.
Net cash
used in financing activities was $2,018,656 and $325,667 for the nine months
ended September 30, 2010 and 2009, respectively. Net cash used in financing
activities for the nine months ended September 30, 2010 represented net cash
repayments to related parties and former shareholders, and net cash receipts
from bank borrowing and related party borrowing. Net cash used in financing
activities for the nine months ended September 30, 2009 represented net cash
repayments to the related parties.
Working
Capital
As of
September 30, 2010, Ding Neng Holdings had $2,683,673 of cash and cash
equivalents, compared to $85,248 at December 31, 2009. As of
September 30, 2010, Ding Neng Holdings had $12,615,245 in accounts receivables,
compared to $1,626,414 as of December 31, 2009.
37
As of
September 30, 2010, Ding Neng Holdings had $895,064 of inventory on hand,
compared to $721,042 as of December 31, 2009. Because Ding Neng
Bio-tech’s production is based on orders on hand, its inventory liquidity was in
good condition and no value reduction was estimated for the short-term inventory
reserve.
As of
September 30, 2010, Ding Neng Holdings had $1,244,324 of prepaid expenses,
compared to $203,842 of prepaid expenses as of December 31, 2009. As
of September 30, 2010, Ding Neng Holdings had current assets of $7,438,306 and
current liabilities of $2,672,701, which resulted in working capital of
$4,765,605, compared to a working capital deficit of $(272,519) as of December
31, 2009.
Item
3. Properties.
Our
corporate headquarters is located at Pudong Building, 2nd Floor, Jiulong Avenue,
Longwen District, Zhangzhou City, Fujian Province 363000, China. The office
space consists of 500 rentable square meters. We occupy this office under two
separate leases that commenced November 1, 2009 and July 21, 2010 and ends on
October 30, 2011 and July 29, 2011, respectively. The base rent for a portion of
the office space in the size of 260 square meters is RMB 19,500 /per
quarter, and the base rent for the other portion of the office space in the size
of 240 square meters is RMB 20,160 /per quarter.
Our
manufacturing facility is located on a parcel of land with an area of
approximately 37,868 square meters in Shange Town, Pinghe County, Zhangzhou
City, Fujian Province. As of January 2011, the plant is fully
operational and has a production capacity of 40,000 tons of biodiesel per year.
We own certain rights with respect to the land based on a Land Use Agreement
between Mr. Nie, our Chairman, and the local government of Shange Town regarding
the purchase of the land from the State for the construction of the
manufacturing facility.
For more
details please refer to the section titled “Risks Related to Ding Neng’s General
Business” included in Item 1A Risk Factors above.
Item
4. Security Ownership of Certain Beneficial Owners and
Management.
The
following table sets forth information known to us with respect to the
beneficial ownership of Common Stock immediately after the consummation of the
Acquisition by each person who beneficially owns more than 5% of the Common
Stock and each post-acquisition officer and director, and all post-acquisition
officers and directors as a group.
Common
Stock which an individual or group has a right to acquire within 60 days
pursuant to the exercise or conversion of options, warrants or other similar
convertible or derivative securities are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group,
but are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person shown in the
table.
38
Name and Address of Beneficial Owner (1)
|
|
Number of Shares
Beneficially Owned
|
|
Percent
|
|
Xinfeng
Nie
|
6,492,038
|
22.58%
|
|||
Sanfu
Huang
|
4,225,905
|
14.70%
|
|||
Jingmei
Weng
|
*
|
-
|
|||
Zhibin
Jin
|
*
|
-
|
|||
Jianjun
Xu
|
*
|
-
|
|||
Mingyong
Hu
|
*
|
-
|
|||
Fulun
Su
|
*
|
-
|
|||
Bin
Zhao
|
*
|
-
|
|||
All
directors and officers as a group (8 persons)
|
10,717,943
|
37.28%
|
|||
5%
Shareholders
|
|||||
Zewen
Holding Co., Ltd.
|
2,679,098
|
9.32%
|
|||
Wealth
Index Capital Group LLC (2)
|
1,474,875
|
5.13%
|
*
|
Less
than 1% of the issued and outstanding shares of Common Stock of the
post-Acquisition entity.
|
(1)
|
Unless
otherwise indicated, the address for each stockholder listed in the above
table is c/o Ding Neng Holdings Ltd., P.O. Box 957, Offshore,
Incorporations Center, Road Town, Tortola, British Virgin
Islands.
|
(2)
|
Principal
business address is Naaman’s Building, Suite 206, 3501 Silverside Road,
Wilmington, Delaware.
|
Change
in Control
Reference is made to Item 5.01 for a
description of the change in control of the Registrant as a result of the
transactions disclosed herein.
Item
5. Directors and Executive Officers.
The Board
and executive officers of the Company are as follows:
Directors and Executive
Officers
|
|
Age
|
|
Position / Title
|
Xinfeng
Nie
|
39
|
Chairman
of the Board
|
||
Sanfu
Huang
|
53
|
Chief
Executive Officer and Director
|
||
Jingmei
Weng
|
34
|
Chief
Financial Officer and Director
|
||
Zhibin
Jin
|
29
|
Secretary
|
||
Jianjun
Xu
|
36
|
Director
|
||
Mingyong
Hu
|
32
|
Director
|
||
Fulun
Su
|
62
|
Director
|
||
Bin
Zhao
|
45
|
Director
|
Mr. Xinfeng Nie is the
co-founder of Ding Neng Bio-tech and has served as its Chairman since its
inception in 2006. Mr. Nie served as a manager of Foiujian Baijia
Hongyi Oil Refinery Factory from 2003 to 2005. Mr. Nie obtained his Bachelors
Degree in Oil Engineering from the Zhengzhou Institute of Technology in Henan
province in 1996. Mr. Nie was chosen to be a member of the board based on his
substantial experience in the oil and biodiesel industry. Mr. Nie
still leads Ding Neng Bio-tech’s technology research and development team to
improve its production and volume capacity.
39
Mr. Sanfu Huang joined Ding
Neng Bio-tech in November 2009 and serves as the Chief Executive Officer and
Director. Mr. Huang has been the Chairman of Jiangsu Yancheng Sanfu
Daily Makeup Production Ltd since 2002 and the Chairman of Jianhu Qinglong
Forest Development Co., Ltd since 2009. Mr. Huang obtained his
Bachelors Degree in Chemistry from TaiWan Culture University in 1976. He has
been the General Secretary of the China-Taiwan Agriculture Exchange Committee
since 1998. Mr. Huang was chosen to be a member of the board based on
his experience researching and developing the economic and medical value of
Sapindus for more than 10 years and is considered an expert in Sapindus’ growth
and utilization.
Ms. Jingmei Weng joined Ding
Neng Holdings in January 2010 as the Chief Financial Officer and a director of
Ding Neng Bio-tech. Ms. Weng was the chief financial officer and
executive director of Tsingda Century Education Investment Consulting Ltd from
August 2007 to June 2009. From April 2006 to August 2007, she was the
senior associate in Systems and Processes Audit Department of
PricewaterhouseCoopers Consulting Ltd in Beijing. Ms. Weng obtained
her Bachelors Degree in Foreign Accounting from the Central University of
Finance and Economics in 1998. She received a Masters Degree in
International Banking from Loughborough University in United Kingdom in 2004.
Ms. Weng was chosen to be a member of the board based on her deep understanding
and cross-industry practice with both PRC and U.S. GAAP. She is also
experienced with Sarbanes-Oxley compliance and audit and internal risk
management.
Mr. Zhibin Jin joined Ding
Neng Bio-tech in October 2010 serving as its Corporate
Secretary. From July 2009 through September 2010, Mr. Jin helped
manage his family’s real estate investments in China and the
U.S. From October 2007 to June 2009, he was a financial manager at
Wan Xiang De Nong Seed Ltd., where he was responsible for compiling consolidated
financial statements and monitoring financial reporting systems. From
October 2004 through October 2007, Mr. Jin was an audit project manager at
Jonten Certified Public Accountants. Mr. Jin graduated from the
Institute of Disaster Prevention with a degree in Accounting in
2001.
Mr. Bin Zhao was appointed as
director of Ding Neng Holdings in November, 2010. Mr. Zhao has been a partner
and the deputy chief accountant and deputy general manager of Daxin Certified
Public Accountants LLP in China since 2002. He has served as an
independent director for Anhui Tianda Oil Pipe Company Limited (HKEX: 00839)
since July 2006. Mr. Zhao obtained his Ph.D from the University of
Mining & Technology of China in 2006. As a Chinese Certified Public
Accountant and a Chinese Certified Public Evaluator, he has extensive experience
with financial audits, financial management, risk management and internal
control processes. Mr. Zhao has substantial experience and
understanding of PRC GAAP and IAS practices. Being a partner of an accounting
firm and a non-executive director of a Hong Kong listed company for more than 4
years, Mr. Zhao was chosen to be a member of the board due to his understanding
of PRC GAAP and IAS practice.
Mr. Fulun Su was appointed as
director of Ding Neng Holdings in November, 2010. Mr. Su has served as President
of Fujian Quanzhou Business Association, Chairman of Shanxi HongYuan Real Esate
Development Ltd and Chairman of ZHR Capital Ltd. since 1992. Mr. Su
was chosen to be a member of the board based on his wealth of experience in
business management and corporate governance. As a well-known
president of various business associations, Mr. Su has devoted much time and
effort to supporting local economic development and to investing in and creating
new companies and technologies.
Mr. Mingyong Hu was appointed
as a director of Ding Neng Holdings in November, 2010. Mr. Hu has been a Chief
Analyst at Wealth Index Capital Group since June 2007. From
April 2005 to June 2007, he was a senior project manager at China Consultants of
Advisory and Finance Management Co., Ltd. Mr. Hu obtained his
Bachelors Degree in Accounting from Hu Nan University, in 2001. He became a
China CPA Chartered Holder in 2002. Mr.Hu has operated seven oversea
listing projects for Wealth Index since 2007. He is familiar with corporate
governance and internal financial risk management. It is these experiences
and qualifications upon which Mr. Hu was chosen to be a member of our
board.
40
Mr. Jianjun Xu was appointed
as a director of Ding Neng Holdings in November, 2010. Mr. Xu has been a
Researcher in the China National Institute of Standardization since April
2004. Mr. Xu obtained his Ph.D in Technical Science from Jiangnan
University in Chian in 2004. Mr. Xu is a member of Standardization
Administration Committee of the National Food Quality Supervision Committee. As
a project research leader, he was in charge or joined more than 30 projects
related to food safety and quality standardization in recent years. Mr. Xu has
taken part in the establishment of 7 national standards, and published 5
professional articles. Based on such professional experience, Mr. Xu
was chosen to be a member of the post-acquisition board. This
experience will inure to its benefit as it seeks to streamline its production
processes and maintain high product quality.
Independence
of Directors
Mr.
Jianjun Xu, Mr. Fulun Su, Mr. Mingyong Hu and Mr. Bin Zhao are “independent
directors” as defined by the NASDAQ Marketplace Rules and will meet the
independence standards set forth in Rule 10A-3 of the Exchange Act.
Board
Committees
The
Company’s audit, compensation and nominating committees consist solely of
independent directors as such term is defined in the NASDAQ Marketplace Rules,
and with respect to its audit committee members, meets the independence
standards set forth in Rule 10A-3 of the Exchange Act.
The
Company’s audit committee consists of Mr. Bin Zhao, Mr. Fulun Su and Mr.
Mingyong Hu, with Mr. Bin Zhao serving as the chairman and “financial
expert”. The nominating committee consists of Mr. Fulun Su, Mr.
Mingyong Hu and Mr. Bin Zhao, with Mr. Fulun Su serving as the
chairman. The Company’s compensation committee consists of Mr.
Mingyong Hu, Mr. Bin Zhao and Mr. Jianjun Xu, with Mr. Mingyong Hu serving as
its chairman.
Item
6. Executive Compensation
The
following table sets forth compensation information for services rendered by
Ding Neng Bio-tech’s chief executive officer during the last two (2) completed
fiscal years (ended December 31, 2009 and 2008). No other officer received more
than $100,000 in total compensation during those years.
SUMMARY COMPENSATION TABLE
|
||||||||||||||||||||||||||||||||||
Name and
Principal
Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compens-ation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Xinfeng
Nie,
CEO
(1)
|
2009
|
35,750
|
—
|
—
|
—
|
—
|
—
|
—
|
35,750
|
|||||||||||||||||||||||||
2008
|
16,800
|
16,800
|
||||||||||||||||||||||||||||||||
Sanfu
Huang
CEO
(2)
|
2009
|
3,595
|
—
|
—
|
—
|
—
|
—
|
—
|
3,595
|
41
(1)
|
Resigned
as CEO on October 31, 2009
|
(2)
|
Began
employment on November 1, 2009
|
Each of Mr. Xinfeng Nie (in his capacity as President of Ding Neng
Bio-tech), Mr. Sanfu Huang (in his capacity as CEO of Ding Neng Bio-tech), Ms.
Jingmei Weng (in her capacity as CFO of Ding Neng Bio-tech) and Mr. Zhibin Jin
(in his capacity as Secretary of Ding Neng Bio-tech) has a written employment
agreement with Ding Neng Bio-tech, each for a term of two years. Each
of Mr. Nie and Mr. Huang receives an annual salary of $180,000. Ms.
Weng receives $160,000 annually and Mr. Jin receives a salary of
$100,000. None of these officers and directors receives any other
compensation or reimbursement from the Group.
Item
7. Certain Relationships and Related Transactions, and Director
Independence.
The
Registrant
From
January 2008 through December 2010, Mr. Zhenyu Wang, the former Chief Executive
Officer and Chairman of the Board, advanced funds to the Registrant in the
aggregate amount of US$709,587 (“Wang Loans”). These advances were
non-interest bearing, unsecured and had no fixed repayment terms. On
January 26, 2011, Mr. Wang forgave and cancelled the Wang Loans.
.
Ding
Neng
Reorganization
Related Transactions
On
January 20, 2010, Fuhua entered into a Consulting Service Agreement which
entitles Fuhua to substantially all of the economic benefits of Ding Neng
Bio-tech in consideration of services provided by Fuhua to Ding Neng Bio-tech.
In addition, Fuhua entered into certain agreements with Xinfeng Nie, our
Chairman, and Sanfu Huang, our Chief Executive Officer and Director (the “Ding
Neng Bio-tech Shareholders”), including an Option Agreement allowing Fuhua to
acquire the shares of Ding Neng Bio-tech as permitted by PRC laws, a Voting
Rights Proxy Agreement that provides Fuhua with the voting rights of the Ding
Neng Bio-tech shareholders and an Equity Pledge Agreement that pledges the
shares in Ding Neng Bio-tech to Fuhua. Effective control of Ding Neng Bio-tech
was transferred to Fuhua through these series of contractual arrangements
without transferring legal ownership in Ding Neng Bio-tech to Fuhua (the
“Reorganization”). As a result, Ding Neng Bio-tech became a variable interest
entity (“VIE”) and is included in the consolidated group. This VIE structure
provides Fuhua, a wholly-owned subsidiary of Ding Neng HK, with control over the
operations and benefits of Ding Neng Bio-tech without having a direct equity
ownership in Ding Neng Bio-tech.
Other
Transactions
On
November 23, 2009, Ding Neng Bio-tech entered into an agreement with TianTai, a
company controlled by Mr. Sanfu Huang, our CEO and a director, to purchase 1000
mu (approximately 165 acres) of Sapindus forest and the forest land use
rights for RMB 20,000,000 (approximately $2.9 million). The forest
ownership and land use right certificate is subject to the Zhejiang Provenience
Forestry Administration’s approval after the completion of certain
administrative processes. As of September 30, 2010, $2,256,783
of this amount has been paid to the seller. Ding Neng Bio-Tech also
paid TianTai approximately $50,000 in fiscal year 2009 for land and forest
maintenance fees.
42
On
January 3, 2010, Ding Neng Bio-tech entered into a technical cooperation
research and development agreement with TianTai to mutually develop techniques
to produce biodiesel and other daily-used chemicals from Sapindus for
consideration of approximately $661,000. The agreement terminates on
January 2, 2012. As of September 30, 2010, Ding Neng Bio-tech had
paid approximately $464,400 of the total consideration.
On July
9, 2010, China Minsheng Banking Corp., Ltd., Xiamen Branch (the “Bank”) and
Jianhu Qinglong Forest Development Co., Ltd. (“Jianhu”), a company controlled by
Mr. Sanfu Huang, entered into a Guaranty Agreement, under which Jianhu signed as
a guarantor for an RMB 20,000,000 (approximately U.S. $2,937,000) credit line
granted by the Bank to Ding Neng Bio-tech.
On
September 28, 2010, Mr. Nie Xinfeng and Ding Neng Bio-tech entered into a
Vehicle Rent Agreement, in which Mr. Nie Xinfeng rented four vehicles owned by
him to Ding Neng Bio-tech, for a period from October 1, 2010 through September
30, 2015. The aggregate rental is RMB 350,000 (approximately U.S.
$51,400) per annum. Ding Neng Holdings believes this arrangement is
on terms similar to those it could have negotiated in an arms length transaction
with an unrelated third party.
At
September 30, 2010, Ding Neng Bio-tech's outstanding borrowings for working
capital purposes was $561,820 from Mr. Nie and $513,930 from Mr.
Huang.
Board
Meetings and Committees
The
Company’s audit committee consists of Mr. Bin Zhao, Mr. Fulun Su and Mr.
Mingyong Hu, with Mr. Bin Zhao serving as the chairman and “financial
expert”. The nominating committee consists of Mr. Fulun Su, Mr.
Mingyong Hu and Mr. Bin Zhao, with Mr. Fulun Su serving as the
chairman. The Company’s compensation committee consists of Mr.
Mingyong Hu, Mr. Bin Zhao and Mr. Jianjun Xu, with Mr. Mingyong Hu serving as
its chairman.
Item
8. Legal Proceedings.
We have
no material proceedings pending nor are we aware of any pending investigation or
threatened litigation by any third party.
Item
9. Market Price of and Dividends on the Registrant’s Common Equity and Related
Stockholder Matters.
Since
February 3, 2011, the effective date of the Reverse Stock Split and Name Change
as disclosed in a Form 8-K filed with the Securities and Exchange Commission on
February 8, 2011, our Common Stock has been traded on the Pink Sheets under the
symbol “CHIOD.PK”. From November 24, 2010 to February 2, 2011, our Common Stock
was traded on the Pink Sheets under the symbol "CHIO.PK." From July 2008
through November 23, 2010 our Common Stock was quoted on the NASDAQ Capital
Market. The following table sets forth on a per share basis for the
periods shown, the high and low sales prices (or bid price on or after November
24, 2010) of our Common Stock. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
43
|
Fiscal Year
Ended June 30,
2009
|
Fiscal Year Ended
June 30, 2010
|
|||||||||||||||
|
Low
|
High
|
Low
|
High
|
|||||||||||||
First
Quarter ended September 30
|
$
|
3.00
|
$
|
4.74
|
$
|
0.87
|
$
|
1.92
|
|||||||||
Second
Quarter ended December 31
|
$
|
1.09
|
$
|
3.69
|
$
|
0.62
|
$
|
1.64
|
|||||||||
Third
Quarter ended March 31
|
$
|
0.17
|
$
|
1.69
|
$
|
0.40
|
$
|
0.95
|
*
|
||||||||
Fourth
Quarter ended June 30
|
$
|
0.42
|
$
|
2.17
|
$
|
0.33
|
$
|
0.42
|
|
Fiscal Year Ended
June 30, 2011
|
|||||||
|
Low
|
High
|
||||||
First
Quarter ended September 30, 2010
|
$
|
0.18
|
$
|
0.38
|
||||
Second
Quarter ended December 31, 2010
|
$
|
0.01
|
$
|
0.31
|
||||
January
1, 2011 to February 2, 2011
|
$
|
0.04
|
$
|
0.092
|
||||
February
3 to February 9, 2011
|
$
|
2.60
|
$
|
3.50
|
On
February 9, 2011, the closing price for our Common Stock, as reported by the
Pink Sheets, was $ 2.85 per
share. As of February 9, 2011, the Company had an aggregate
of 1,150,000
shares of Common Stock issued and outstanding and 249 shareholders of
record.
Dividends
We have
never declared or paid any cash dividends or distributions on our Common Stock.
We currently intend to retain our future earnings to support operations and to
finance future growth and expansion and, therefore, do not anticipate paying any
cash dividends on our Common Stock in the foreseeable future.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table discloses information as of June 30, 2010 with respect to
compensation plans (including individual compensation arrangements) under
which our equity securities are authorized for issuance.
|
(a)
|
(b)
|
(c)
|
||||||||||
Plan Category
|
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)
|
||||||||||
Equity
Compensation
plans
approved by
security
holders
|
-
|
-
|
6,000,000
|
(1)
|
|||||||||
Equity
Compensation plans not approved by security holders
|
-
|
-
|
-
|
||||||||||
Total
|
-
|
-
|
6,000,000
|
(1)
In June 2010, CHIO’s shareholders approved and adopted the 2010 Stock Option
Plan, which authorized the potential issuance of up to 6,000,000 shares of
Common Stock to employees, directors and consultants. Options granted
under the 2010 Stock Option Plan generally have a term of ten years from the
date of grant unless otherwise specified in the option agreement. The 2010 Stock
Option Plan expires in June 2020.
44
Subsequent
to June 30, 2010, CHIO made the following issuances of unregistered
securities:
On July
8, 2010, CHIO issued options to two engineering consultants to purchase an
aggregate of up to 3,000,000 shares of Common Stock as compensation for IT
consulting and advisory services. The options had an exercise
price of $0.001 per share and were scheduled to expire on July 8,
2020. On July 19, 2010, the consultants exercised the options for all
3,000,000 shares. CHIO relied upon the exemption from registration
under Section 4(2) in connection with these issuances.
On July 15, 2010, CHIO issued options
to two financial consultants to purchase an aggregate of up to 3,000,000 shares
of Common Stock as compensation to provide public relations services in (1)
referring investment banks, funds, investors and potential merger and
acquisition targets to CHIO and assisting CHIO in negotiating contractual terms,
(2) assisting CHIO to make a marketing and investor relations plan to improve
the liquidity of the Common Stock, (3) arranging road shows for CHIO and meeting
with potential investors and potential merger and acquisition targets, and (4)
providing other financial advisory and services. The options had
an exercise price of $0.001 per share and were scheduled to expire on July 15,
2020. On July 21, 2010, the financial consultants exercised the
options for all 3,000,000 shares. CHIO relied upon the exemption from
registration under Section 4(2) in connection with these
issuances.
Item
10. Recent Sales of Unregistered Securities.
Reference
is made to Item 3.02 for a description of the Share Exchange Agreement, as
amended.
On July
8, 2010, CHIO issued options to two engineering consultants to purchase an
aggregate of up to 3,000,000 shares of Common Stock as compensation for IT
consulting and advisory services. The options had an exercise
price of $0.001 per share and were scheduled to expire on July 8,
2020. On July 19, 2010, the consultants exercised the options for all
3,000,000 shares. CHIO relied upon the exemption from registration
under Section 4(2) in connection with these issuances.
On July 15, 2010, CHIO issued options
to two financial consultants to purchase an aggregate of up to 3,000,000 shares
of Common Stock as compensation to provide public relations services in (1)
referring investment banks, funds, investors and potential merger and
acquisition targets to CHIO and assisting CHIO in negotiating contractual terms,
(2) assisting CHIO to make a marketing and investor relations plan to improve
the liquidity of the Common Stock, (3) arranging road shows for CHIO and meeting
with potential investors and potential merger and acquisition targets, and (4)
providing other financial advisory and services. The options had
an exercise price of $0.001 per share and were scheduled to expire on July 15,
2020. On July 21, 2010, the financial consultants exercised the
options for all 3,000,000 shares. CHIO relied upon the exemption from
registration under Section 4(2) in connection with these
issuances.
Item
11. Description of Registrant’s Securities
The
Company’s authorized capital stock currently consists of One Hundred Million
(100,000,000) shares of Common Stock, par value $0.001 per share, of which there
are 28,750,000 shares of common stock issued and outstanding as of the date of
this Report. There are no shares of preferred stock authorized, issued or
outstanding. Holders of Common Stock are entitled to one (1) vote for each share
on all matters to be voted on by the Company’s stockholders. Holders of Common
Stock do not have cumulative voting rights. Holders of Common Stock are entitled
to share ratably in dividends, if any, as may be declared from time to time by
the Board in its discretion from funds legally available therefore. In the event
of any liquidation, dissolution or winding up, the holders of Common Stock are
entitled to a pro-rata share of all assets remaining after payment in full of
all liabilities and preferential payments, if any, to holders of preferred
stock. Holders of Common Stock have no preemptive rights to purchase additional
Common Stock. Furthermore, there are no conversion or redemption rights or
sinking fund provisions with respect to the Common Stock.
45
Anti-Takeover
Effects of Provisions of Delaware Law
Provisions
of Delaware law could make acquisition of the Company through a tender offer, a
proxy contest or other means more difficult and could make the removal of
incumbent officers and directors more difficult. The Company expects these
provisions to discourage coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of the Company to first
negotiate with its Board of Directors. The Company believes that the benefits
provided by its ability to negotiate with the proponent of an unfriendly or
unsolicited proposal outweigh the disadvantages of discouraging these proposals.
The Company believes the negotiation of an unfriendly or unsolicited proposal
could result in an improvement of its terms.
Item
12. Indemnification of Officers and Directors.
Our
Certificate of Incorporation (as amended) provides that no director shall be
personally liable to the Company or its stockholders for monetary damages for
any breach of fiduciary duty by such director as a director. Notwithstanding the
foregoing sentence, a director shall be liable to the extent provided by
applicable law, (i) for breach of the director’s duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) pursuant to
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit. No amendment or
repeal shall apply to or have any affect on the liability of any director of the
Company for or with respect to any acts or omissions of such director occurring
prior to such amendment.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, it is the opinion of the SEC that such indemnification is
against public policy as expressed in the act and is therefore
unenforceable.
Item
13. Financial Statements and Supplementary Data.
See Item
9.01 of this Form 8-K for the financial statements required
hereunder.
Item
14. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item
15. Financial Statements and Exhibits.
The exhibits are listed and described
in Item 9.01 of this Form 8-K.
46
Item
3.02 Unregistered Sale of Equity Securities
The
Share Exchange Agreement
On
December 6, 2010, the Company entered into an Amendment (the “Amendment”) to the
Share Exchange Agreement (as amended, the “Share Exchange Agreement”), dated
November 12, 2010, with Ding Neng Holdings, which owns 100% of Ding Neng HK,
which owns 100% of Fuhua, which has, through various contractual agreements,
management control and the rights to the profits of Ding Neng
Bio-tech.
The Share
Exchange Agreement provides for an acquisition transaction (the “Acquisition”)
in which the Company, through the issuance of shares of its Common Stock
representing 90% of the Common Stock issued and outstanding immediately
following the closing of the Acquisition, will acquire 100% of Ding Neng
Holdings. Upon completion of the Acquisition and satisfactory
performance of the Consulting Agreement, the existing shareholders of the
Company will own an aggregate of 5.5% of the post-acquisition
entity.
The
closing of the Acquisition (the “Closing”) took place on February 10, 2011 (the
“Closing Date”). On the Closing Date, pursuant to the terms of the
Share Exchange Agreement, the Company acquired all of the outstanding equity
securities of Ding Neng Holdings from the shareholders of Ding Neng Holdings;
and the shareholders of Ding Neng Holdings transferred and contributed all of
their issued and outstanding shares of Ding Neng Holdings to the
Company. In exchange, the Company issued to the shareholders of Ding
Neng Holdings an aggregate of 25,875,000 newly issued shares of the Common
Stock.
Item
5.01 Changes in Control of Registrant
On the
Closing Date, CHIO acquired all of the issued and outstanding capital stock of
Ding Neng Holdings from the Ding Neng Stockholders in exchange for
25,875,000 newly-issued shares of
Common Stock. As a result of the Acquisition, the Ding Neng Stockholders control
90% of the voting stock of CHIO.
On
February 10, 2011, a change in the majority of CHIO’s Board occurred in
connection with the change of control of CHIO that is described in this Report
and seven (7) incoming directors were appointed to the Board (as detailed in
Item 5.02 herein below).
Item
5.02 Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers
(a)
Resignation of Directors and Officers
47
At the
Closing Date, Zhenyu Wang, Mingfei Yang, Yuefeng Wang, Yinan Zhang, Renbin Yu,
Yong Bian and Xiaoshuang Chen resigned as directors and officers of the
Company.
At the
Closing, Mr. Zhenyu Wang and the Company entered into a Consulting Agreement,
pursuant to which, Mr. Wang, the former Chief Executive Officer of the Company,
was employed by the Company as a consultant for a term of two years at an annual
salary of $150,000 and for equity of the post-acquisition entity equal to 1%
upon execution of the consulting agreement, plus an additional 0.5% of the
amount of issued and outstanding Common Stock as of the Closing Date over the
term of the consulting agreement (0.25% after the first year and 0.25% after the
second year).
(b)
Appointment of Directors and Officers
At the
Closing Date, the following persons were appointed as our directors and
officers:
Directors and Executive
Officers
|
|
Age
|
|
Position / Title
|
Xinfeng
Nie
|
39
|
Chairman
of the Board
|
||
Sanfu
Huang
|
53
|
Chief
Executive Officer and Director
|
||
Jingmei
Weng
|
34
|
Chief
Financial Officer and Director
|
||
Zhibin
Jin
|
29
|
Secretary
|
||
Jianjun
Xu
|
36
|
Director
|
||
Mingyong
Hu
|
32
|
Director
|
||
Fulun
Su
|
62
|
Director
|
||
Bin
Zhao
|
45
|
Director
|
For
further information on these individuals, please see the Section entitled “Item
5 Directors and Executive Officers” herein above.
(c)
Employment Agreements
Each of
Mr. Xinfeng Nie (in his capacity as President of Ding Neng Bio-tech), Mr. Sanfu
Huang (in his capacity as CEO of Ding Neng Bio-tech), Ms. Jingmei Weng (in her
capacity as CFO of Ding Neng Bio-tech) and Mr. Zhibin Jin (in his capacity as
Secretary of Ding Neng Bio-tech) has a written employment agreement with Ding
Neng Bio-tech, each for a term of two years. Each of Mr. Nie and Mr.
Huang receives an annual salary of $180,000. Ms. Weng receives
$160,000 annually and Mr. Jin receives a salary of $100,000. None of
these officers and directors receives any other compensation or reimbursement
from the Group.
Item
5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
In
connection with the Acquisition, the Company effectuated a 1:40 reverse split of
its Common Stock on February 3, 2011, effectively reducing the number of issued
and outstanding shares of Common Stock to 28,750,000 shares. The Company also
changed its name to China Bio-Energy Corp effective on February 3,
2011.
The
Company filed an amendment to its Certificate of Incorporation to reflect the
Reverse Split and Name Change on February 2, 2011.
48
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 defined in Rule 12b-2
under the Exchange Act) immediately before the Closing of the Acquisition. As a
result of the Acquisition, Ding Neng Holdings became wholly owned subsidiary and
Ding Neng Bio-tech became the main operational business of the Registrant, which
is no longer a shell company. Reference is made to Item 2.01 for a more complete
description of the transaction and the business of the Registrant subsequent to
the Closing date.
Item
9.01 Financial Statements and Exhibits
|
(a)
|
Financial
statements of the business
acquired.
|
Exhibit 99.1 – Audited financial
statements of Ding Neng Bio-Tech for the fiscal years ended December 31, 2009
and 2008
Exhibit 99.2 – Unaudited Financial
Statements of Ding Neng Bio-Tech for the nine months ended September 30, 2010
and 2009
|
(b)
|
Exhibits.
|
Exhibit No.
|
Description
|
2.1
|
Share
Exchange Agreement, dated November 12, 2010, by and among the Registrant,
Ding Neng Holdings and Shareholders of Ding Neng Holdings
(1)
|
2.2
|
Amendment
to the Share Exchange Agreement, by and among the Registrant, Ding Neng
Holdings and Shareholders of Ding Neng Holdings (2)
|
3.1
|
Certification
of Incorporation of the Registrant (3)
|
3.2
|
Certificate
of Amendment to the Company’s Certificate of Incorporation, dated February
26, 2008 (4)
|
3.3
|
Certificate
of Amendment to the Company's Certificate of Incorporation, dated
January 31, 2011 *
|
3.4
|
Amended
and Restated Bylaws of the Registrant (4)
|
10.1
|
Consulting
Services Agreement, dated January 20,2011, between Ding Neng Bio-tech and
the WFOE *
|
10.2
|
Operating
Agreement, dated January 20,2011, by and among Ding Neng Bio-tech, its
shareholders and the WFOE *
|
10.3
|
Voting
Rights Proxy Agreement, dated January 20,2011, by and among Ding Neng
Bio-tech, its shareholders and the WFOE *
|
10.4
|
Equity
Pledge Agreement, dated January 20,2011, by and among Ding Neng Bio-tech,
its shareholders and the WFOE *
|
10.5
|
Option
Agreement, dated January 20,2011, by and among Ding Neng Bio-tech, its
shareholders and the WFOE *
|
10.6
|
Unofficial
Translation of Forest and Plants Transfer Agreement, by and between
Tiantai County Manyuanchun Agriculture and Forestry Development Co., Ltd.,
and Fujian Zhangzhou Ding Neng Bio- Tech Co., Ltd., dated November 23,
2009*
|
10.7
|
Unofficial
Translation of Employment Agreement between Ding Neng Bio-tech and Xinfeng
Nie dated June 1, 2010*
|
10.8
|
Unofficial
Translation of Employment Agreement between Ding Neng Bio-tech and Sanfu
Huang dated June 1, 2010*
|
10.9
|
Unofficial
Translation of Employment Agreement between Ding Neng Bio-tech and Jingmei
Weng dated July 1, 2010*
|
10.10
|
Unofficial
Translation of Employment Agreement between Ding Neng Bio-tech and Zhibin
Jin dated October 1, 2010*
|
99.1
|
Audited
financial statements of Ding Neng Holdings Ltd. and Subsidiaries for the
fiscal years ended December 31, 2009 and 2008 (5)
|
99.2
|
Unaudited
Financial Statements of Ding Neng Holdings Ltd. and Subsidiaries for the
nine months ended September 30, 2010 and 2009
(5)
|
49
*
Filed herewith
(1)
|
Incorporated
by reference to Annex A to the Registrant’s Schedule 14(c), filed on
December 30, 2010.
|
(2)
|
Incorporated
by reference to Annex B to the Registrant’s Schedule 14(c), filed on
December 30, 2010.
|
(3)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K as filed with the
SEC on December 20, 2007
|
(4)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the period
ended March 31, 2008
|
(5)
|
Incorporated
by reference to the Consolidated Financial Statements For the Nine
Months Ended September 30, 2010 and 2009 (Unaudited) and For the
Fiscal Years Ended December 31, 2009 and 2008 Of Ding Neng
Holdings Ltd. and Subsidiaries’ in the Registrant’s Schedule 14(c), filed
on December 30, 2010.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.
February
11, 2011
|
CHINA
BIO-ENERGY CORP.
|
|
By:
|
/s/
Sanfu Huang
|
|
Name:
|
Sanfu Huang
|
|
Title:
|
Chief
Executive Officer and
Director
|
50