ANDATEE CHINA MARINE FUEL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2011 and 2010
(Unaudited)
1.
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Description of Business, Organization, VIE and Basis of Consolidation
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Andatee China Marine Fuel Services Corporation (“Andatee” or “the Company”) was incorporated in the State of Delaware on July 10, 2009. Upon incorporation, the Company had authorized 50,000,000 common stock shares, par value $0.001per share. On October 16, 2009 the Company issued 8,000,000 shares in the share exchange with Goodwill Rich International Limited ("Goodwill Rich"), as described below. On October 19, 2009, the Company affected a 1.33334:1 reverse share split. As a result of the split, the number of common stock issued and outstanding has decreased from 8,000,000 to 6,000,000 shares.
The Company was organized as a holding company to acquire Goodwill Rich, a company incorporated in Hong Kong, and its subsidiary in connection with a contemplated initial public offering of the Company’s common stock on the Nasdaq Stock Market. Goodwill Rich was incorporated on October 28, 2008.
Andatee became the owner of 100% of the outstanding common stock of Goodwill Rich and its subsidiary as the result of a share exchange arrangement consummated on October 16, 2009. The stockholders of Andatee and the stockholders of Goodwill Rich were the same, and therefore the August 2009 share exchange was accounting for as a recapitalization of Goodwill Rich. As a result, Goodwill is deemed to be the predecessor of Andatee for financial reporting purposes.
In March 2009, Goodwill Rich established a subsidiary company in Dalian, People’s Republic of China (the “PRC”), named Dalian Fusheng Consulting Company (“Fusheng”), which afterward was changed to “Dalian Fusheng Petrochemical Company” in March 2010.
Dalian Xingyuan Marine Bunker Co., Ltd. (“Xingyuan”) was established in September 2001 with a registered capital of RMB7 million and began providing refueling services to the marine vessels in Dalian Port in Dalian City. Xingyuan holds 100% ownership of Donggang Xingyuan Marine Fuel Company (“Donggang Xingyuan”), a company incorporated in Dalian, PRC, in April, 2008. In addition, in December 2008, Xingyuan acquired 90% ownership of Rongcheng Xinfa Petroleum Company (“Xinfa”) and 63% ownership of Xiangshan Yongshi Nanlian Petroleum Company (“Nanlian”), respectively.
On March 26, 2009, Fusheng, Xingyuan and the stockholders of Xingyuan entered into a series of agreements, as described below (the Consulting Services Agreement, the Operating Agreement, the Equity Pledge Agreement, the Option Agreement and the Proxy and Voting Agreement - collectively "the Agreements"). Under the agreements, as further described below, Goodwill Rich obtained the ability to direct the operations of Xingyuan and its subsidiaries and to obtain the economic benefit of their operations. Therefore, management determined that Xingyuan became a variable interest entity (“VIE”) under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 (originally issued as FASB Interpretation (“FIN”) No. 46(R) “Consolidated Variable Interest Entities - an interpretation of ARB No. 51”), and the Company was determined to be the primary beneficiary of Xingyuan and its subsidiaries. Accordingly, the Company has consolidated the assets, liabilities, results of operations and cash flows of Xingyuan and its subsidiaries its financial statements. The Agreements were entered into to facilitate the raising of capital for the operations of Xingyuan through an offering of the Company’s common stock on the Nasdaq Capital Market, and Goodwill Rich paid no consideration to Xingyuan or its stockholders for entering into the agreements under which Xingyuan became a VIE, provided, however, that Mr. An Fengbin, the principle stockholder of Xingyuan became the chairman and CEO of the Company, and Mr. An Fengbin and the other stockholders of Xingyuan have certain rights or options to acquire the 6,000,000 shares of the Company’s common stock issued in the share exchange between the Company and Goodwill Rich at later dates when permitted by PRC laws and regulations. Mr. An Fengbin remains the principle stockholder of Xingyuan after the completion of the share exchange between Goodwill Rich and Andatee described above.
Upon the October 28, 2008 incorporation of Goodwill Rich, Goodwill Rich and the stockholders of Xingyuan has entered into a series of separate agreements under which Goodwill Rich and Xingyuan were deemed, until March 2009, to be under the common control of the stockholders of Xingyuan. The Agreements provided that the majority stockholder of Goodwill Rich appointed Mr. An Fengbin to (i) act as a director of Xingyuan, Xingyuan’s majority stockholder, and Fusheng, (ii) act for the majority stockholder of Goodwill Rich at any meetings of the directors, managers, financial controllers or other senior management of Xingyuan, Xingyuan’s majority stockholder, and Fusheng, (iii) exercise all voting and dispositive rights over the common stock of Xingyuan, Xingyuan’s majority stockholder, and Fusheng. The Agreements further provided that the majority stockholder of Xingyuan would not appoint any additional directors to the boards of any of these entities without Mr. An Fengbin’s approval. As a result, Mr. An Fengbin was deemed to control both Goodwill Rich and Fusheng, and those companies and Xingyuan were deemed to be under common control.
All of the transactions among Andatee, Goodwill Rich, Fusheng and Xingyuan were deemed to be transactions between companies under common control, and therefore the bases of the assets and liabilities in each of the companies was not adjusted in any of the transactions.
The Company, its subsidiaries, its VIE and its VIE’s subsidiaries (collectively the “Group”) are principally engaged in the production, storage, distribution and trading of blended marine fuel oil for cargo and fishing vessels in the PRC.
Consulting Services Agreement. Pursuant to the exclusive consulting services agreement between Fusheng and Xingyuan, Fusheng has the exclusive right to provide to Xingyuan business consulting and related services in connection with the production and sale of marine bunker (the “Services”). Under this agreement, Fusheng owns the intellectual property rights arising from the performance of the Services, including, but not limited to, any trade secrets, copyrights, patents, know-how, un-patented methods and processes and otherwise, whether developed by Fusheng or Xingyuan based on Fusheng’s provision of Services under the agreement. Xingyuan pays 50% of its total net profit to Fusheng on a quarterly basis as consulting service fee. The consulting services agreement is in effect for a term of 10 years starting from March 26, 2009 unless terminated by (a) Xingyuan upon six-months prior written notice and payment to Fusheng of (i) RMB2,000,000 ($313,062 at September 30, 2011) as liquidated damages and (ii) all of Fusheng’s losses resulting from such early termination; (b) Fusheng upon Xingyuan’s breach of the agreement; or (c) Fusheng at any time upon thirty-days written notice to Xingyuan. This agreement may be renewed at Fusheng’s sole discretion.
Operating Agreement. Pursuant to the operating agreement among Fusheng, Xingyuan and the stockholders of Xingyuan who collectively hold all of the outstanding shares of Xingyuan (collectively “Xingyuan Stockholders”), Fusheng provides guidance and instructions on Xingyuan’s daily operations, financial management and employment issues. The stockholders of Xingyuan must appoint the candidates recommended by Fusheng to Xingyuan’s board of directors. Fusheng has the right to appoint personnel to high level managerial positions of Xingyuan, including General Manager and Chief Financial Officer. In addition, Fusheng agrees to guarantee Xingyuan’s performance under any agreements, contracts or transactions executed by Xingyuan relating to Xingyuan’s business. Xingyuan, in return, agrees to pay Fusheng a quarterly fee equal to 50% of Xingyuan’s total net profits for such quarter. Moreover, Xingyuan agrees that without the prior consent of Fusheng, Xingyuan will not engage in any transactions that could materially affect the assets, obligations, rights or the business of Xingyuan, including, without limitation, (a) borrowing money from a third party or assuming any debt, (b) selling to a third party or acquiring from a third party any assets or rights, including without limitation, any plant, equipment, real or personal property, or any intellectual property rights, (c) providing any guaranty for any third party obligations, (d) assigning to a third party any agreements related to Xingyuan’s business, (e) engaging in any other business consulting agreements with a third party or engaging in any other business activities other than the business of producing and selling marine bunker, and (f) pledging any of Xingyuan’s assets or intellectual property rights to a third party as a security interest. The term of this agreement is 10 years from March 26, 2009 and will be automatically renewed for additional 10 year period upon the expiration of the initial term or any renewal term, unless previously terminated. Fusheng may terminate the agreement at any time upon thirty (30) days written notice to Xingyuan and the Xingyuan Stockholders.
Equity Pledge Agreement. Under the equity pledge agreement between Xingyuan, the Xingyuan Stockholders and Fusheng, the Xingyuan Stockholders pledged all of their equity interests in Xingyuan to Fusheng to guarantee Xingyuan’s performance of its obligations under the following agreements entered into by Fusheng and Xingyuan: (a) the Exclusive Consulting Agreement dated March 26, 2009, (b) the Operating Agreement dated March 26, 2009 and (c) any other agreements to be entered into by and between Fusheng and Xingyuan from time to time with respect to Fusheng’s provision of services to Xingyuan and Fusheng’s collection of appropriate charges from Xingyuan (collectively, (a), (b) and (c) are the “Service Agreements”). If Xingyuan or Xingyuan’s Stockholders breach its respective contractual obligations, Fusheng, as pledgee, will be entitled to certain rights, including but not limited to the right to sell the pledged equity interests. The stockholders of Xingyuan agreed that without Fusheng’s prior written consent, they will not transfer any equity interest, create or permit to exist any pledge that may damage Fusheng’s rights or interests in the pledged equity interests, or cause Xingyuan’s meeting of stockholders or board of directors to pass any resolutions about the sale, transfer, pledge or other disposal of the lawful right to derive income from any equity interest in Xingyuan or about the permission of the creation of any other security interests thereon. The term of this agreement is the same as the longest of the Service Agreements. If the term of any Service Agreement is renewed, the term of this agreement will extend accordingly.
Option Agreement. Under the option agreement between Xingyuan, the Xingyuan Stockholders and Fusheng, the Xingyuan Stockholders irrevocably, unconditionally and exclusively granted Fusheng a purchase option (the “Purchase Option”) whereby, to the extent permitted under Chinese law, Fusheng has the right to request the Xingyuan Stockholders transfer, to it or its designated entity or person, the total equity interests held by them in the registered capital of Xingyuan, which as a group equals 100% of the outstanding equity of Xingyuan. Fusheng has sole discretion to decide the specific time, method and number of the exercise of the Purchase Option. At the time of each exercise of the Purchase Option by Fusheng, the total consideration to be paid to Xingyuan Stockholders by Fusheng or its designated entity or person shall be determined from one of following two prices i) RMB 10.00; or ii) the lowest price permitted under PRC laws. This agreement will terminate after 100% of the outstanding equity of Xingyuan has been duly transferred to Fusheng and/or Fusheng’s designee(s).
Proxy and Voting Agreements. Pursuant to the proxy and voting agreements between Fusheng, Xingyuan, and each of Xingyuan’s Stockholders, Xingyuan’s Stockholders agreed to irrevocably entrust the person designated by Fusheng with his stockholder voting rights and other stockholder rights for representing him to exercise such rights at the stockholders’ meeting of Xingyuan in accordance with applicable laws and its Article of Association, including, but not limited to, the right to sell or transfer all or any of his equity interest in Xingyuan, and appoint and vote for the directors and Chairman as the authorized representative of the Xingyuan Stockholders. The term of each Proxy and Voting Agreement is twenty (20) years from March 26, 2009 and may be extended prior to its expiration by written agreement of the parties.
In May 2010, Xingyuan acquired 52% equity interest of Rongcheng Mashan Xingyuan Marine Bunker Co., Ltd. (“Mashan”), furthermore, in July 2010, Fusheng acquired 52% ownership of Hailong Petrochemical Co., Limited (“Hailong”).
2. Summary of Significant Accounting Policies
The accompanying unaudited interim condensed consolidated financial statements of Andatee have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year, 2010, as reported in Form 10-K have been omitted.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and those variable interest entities in which the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date of the financial statements. Actual results could differ from those estimates.
Foreign Currency Translation
The functional currency of the Company’s subsidiary in Hong Kong is the US dollars while the local currencies of the Company’s subsidiary, VIE and its subsidiaries in China is the Renminbi (“RMB”). Accordingly, assets and liabilities of the China entities are translated into US dollars at the spot rates in effect as of the balance sheet date. Revenues, costs and expenses are translated using monthly average exchange rates during the reporting period. Gains and losses resulting from foreign currency translation to reporting currency are recorded in accumulated other comprehensive income in the statements of changes in shareholders’ equity for the periods presented.
Foreign currency transactions are translated at the spot rates on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations.
Financial Instruments
ASC 820, “Fair Value Measurements” and ASC 825, Financial Instruments, requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. It establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. It prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company’s financial instruments consist principally of cash and cash equivalent, accounts receivable, advances to suppliers, accounts payable, short term loans, bank notes payable and accrued liabilities. Pursuant to ASC 820 and 825, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
Treasury Stock
We account for treasury stock under the cost method and include treasury stock as a component of stockholders’ equity.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash on deposit, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
Restricted Cash
In accordance with FASB ASC Topic 210 (originally Accounting Review Board (“ARB”) No. 43, Chapter 3A “Current Assets and Current Liabilities”), cash which is restricted as to withdrawal is considered a non-current asset.
Accounts Receivable
Accounts receivable are recognized and carried at original invoiced amount less an allowance for uncollectible accounts, as needed.
When evaluating the adequacy of its allowance for doubtful accounts, the Company reviews the collectability of accounts receivable, historical write-offs, and changes in sales policies, customer credibility and general economic tendency.
Inventories
Inventories are stated at the lower of cost and current market value. Costs include the cost of raw materials, freight, direct labor and related manufacturing overhead. Inventories are stated at cost upon acquisition.
The cost of inventories is calculated using the weighted average method. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories.
Net realizable value is the estimated selling price in the normal course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
Reusable materials include low-value consumables and other materials, which can be in use for more than one year but do not meet the definition of fixed assets. Reusable materials are amortized over two years on a straight line basis. The amounts of the amortization are included in the cost of the related assets or profit or loss.
Concentration of Risks
All of the Group’s sales and a majority of its expense transactions are denominated in RMB and a significant portion of the Group’s assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Group in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.
As of September 30, 2011, all of the Company’s cash was on deposit at financial institutions in the PRC where there is currently no rule or regulation requiring such financial institutions to maintain insurance to cover bank deposits in the event of bank failure.
For the nine months ended September 30, 2011, two customers accounted for 13.2% and 10.6% of the Company’s total revenues, respectively. There were no customers that accounted for more than 10% of accounts receivable at September 30, 2011. For the nine months ended September 30, 2010, two of the Company’s customers accounted for 13.7% and 11.5% of the Company’s total revenues, respectively.
For the nine months ended September 30, 2011, the company purchased 22.5% and 20.4% of its raw materials from two suppliers. The balances of advances to these two suppliers were $266,254 and $1,547,684 at September 30, 2011, respectively. The balances of advances to these two suppliers were $48,963 and $6,124,167 at December 31, 2010, respectively. The total balance of advances to suppliers at September 30, 2011 and December 31, 2010 was $10,322,198 and $14,396,859, which was non-interest bearing and unsecured.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs, which are not considered improvements and do not extend the useful life of the asset, are expensed as incurred; additions, renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in the statement of operations in other income and expenses.
Depreciation is provided to recognize the cost of the asset in the results of operations. The Company calculates depreciation using the straight-line method with estimated useful life as follows:
Items
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|
Estimated
Useful Life
|
|
|
|
Property and buildings
|
|
40 years
|
|
|
|
Marine bunker
|
|
15 years
|
|
|
|
Boiler equipment
|
|
12 years
|
|
|
|
Laboratory equipment
|
|
8 years
|
|
|
|
Transportation vehicles
|
|
8 years
|
|
|
|
Office equipment
|
|
4 years
|
|
|
|
Electronic equipment
|
|
3 years
|
Construction in Progress
Construction in progress represents property and buildings under construction and consists of construction expenditure, equipment procurement, and other direct costs attributable to the construction. Construction in progress is not depreciated. Upon completion and ready for intended use, construction in progress is reclassified to the appropriate category of property, plant and equipment.
Impairment of Long-Lived Assets
In accordance with FASB ASC Topic 360 (originally Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”), certain assets such as property, plant, and equipment, and purchased intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Intangible assets are tested for impairment annually. Recoverability of assets that are held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no events or changes in circumstances that necessitated a review of impairment of long lived assets as of September 30, 2011 and December 31, 2010, respectively.
Goodwill
Goodwill represents the excess of the purchase price over the net of the fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities assumed in business acquisitions. The Company performs its impairment test on an annual basis. The Company determined that there was no impairment of goodwill as of September 30, 2011 and December 31, 2010.
Intangible Assets
Intangible assets consist mainly of land use rights and software. The intangible assets are amortized using straight-line method over the life of the rights and assets.
The cost of land use rights are as follows:
Location
|
|
Land Size
|
|
|
Amount
|
|
Terms
|
|
|
(square meter)
|
|
|
|
|
|
Nanhui Village, Shipu Town, Zhejiang Province
|
|
|
8,906.90 |
|
|
$ |
2,352,665 |
|
April 1, 2004 – May 12, 2047
|
Development Zone, Donggang, Liaoning Province
|
|
|
21,994.80 |
|
|
$ |
605,090 |
|
July 16, 2008 – May 15, 2058
|
Mashan Village, Chengshan Town, Shandong Province
|
|
|
3,659.57 |
|
|
$ |
116,866 |
|
Government assignment
|
Total Land Use Rights
|
|
|
|
|
|
$ |
3,074,621 |
|
|
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”), which amends Accounting Research Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 (now codified at FASB ASC Topic 810) also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to both the Company and to the noncontrolling interest holders. FASB ASC Topic 810 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary.
Noncontrolling interest represents a 37% equity interest in Nanlian, a 10% equity interest in Xinfa and a 48% equity interest in Mashan and Hailong, respectively, for the minority owners.
Revenue Recognition
The Company recognizes revenues in accordance with the guidance in the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 (now codified at FASB ASC Topic 605). Revenue is recognized when persuasive evidence of an arrangement exists, when the selling price is fixed or determinable, when delivery occurs and when collection is probable.
Delivery is typically conveyed via pipeline or tanker and sales revenues are recognized when customers take possession of goods in accordance with the terms of purchase order agreements that evidence agreed upon pricing and when collectability is reasonably assured.
As an industry wide practice, the Company requires advances from customers for substantially all sales. Such advances are not recognized as revenues when received as they represent down payments from customers for the marine fuel products and the delivery is not yet completed .
Stock-Based Compensation
The Company measures share-based compensation at fair value, using the Black-Scholes options pricing model to determine the fair value of stock options. The fair value of the Company’s restricted stock unit is calculated based on the fair market value of the Company’s stock on the date of grant. The determination of the fair value of stock-based payment awards on the date of grant using an option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables.
Environmental Expenditures
Environmental expenditures that relate to current ongoing operations or to conditions caused by past operations are expensed as incurred.
Research and Development Costs
Research and development costs are recognized in the income statement when incurred.
Income Taxes
The Company provides for income taxes in accordance with FASB ASC Topic 740 (originally SFAS No. 109, “Accounting for Income Taxes”) which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. As of September 30, 2011 and 2010, the Company has no liabilities for uncertain tax positions. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.
Housing Fund and Other Social Insurance
In addition to retirement benefits, the Company makes contributions to the housing fund and other social insurances such as basic medical insurance, unemployment insurance, worker injury insurance and maternity insurance for its employees in accordance with relevant laws and regulations. The Company makes monthly contributions to the housing fund and the above insurances based on the applicable rates of the employee salaries. The contributions are charged to the respective liability account and the income statement on an accrual basis.
Earnings per Share
The Company computes net earnings per share in by dividing net income by the weighted average number of common shares outstanding for that period.
Diluted net income per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential shares consist of incremental common shares issuable upon exercise of stock options, vesting of restricted stock units and conversion of preferred stock (none outstanding) for all periods, except in situations where inclusion is anti-dilutive.
Comprehensive Income (Loss)
Comprehensive income consists of net income and net unrealized foreign currency translation adjustments and is presented in the consolidated statements of stockholders' equity and comprehensive income.
Segment Reporting
The Company operates and manages its business as a single segment. As the Company primarily generates its revenues from customers in the PRC, no geographical segments are presented.
Recent Accounting Pronouncements
In April 2011, the FASB amended the fair value measurement guidance in order to achieve common measurement and disclosure requirements between U.S. generally accepted accounting principles and the International Financial Reporting Standards. These amendments are also intended to provide increased transparency around valuation inputs and investment categorization and, for the Company, are effective for 2012 reporting. The adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.
In September 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance eliminates the current option to report other comprehensive income within the statement of changes in equity and requires an entity to present the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or alternatively in two, but consecutive, statements. The new guidance is effective for 2012 reporting. The adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.
3. Accounts Receivable
The Company’s Accounts Receivable are summarized as follows:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$ |
3,131,555 |
|
|
$ |
6,383,678 |
|
Allowances for doubtful accounts
|
|
|
(185,226 |
) |
|
|
(180,016 |
) |
Accounts receivable, net
|
|
$ |
2,946,329 |
|
|
$ |
6,203,662 |
|
4. Other Receivables
The Company’s Other Receivables consist of deposits for services, advances to employees and other business associations, etc. These amounts are related to operations of the Company, are unsecured, non-interest bearing, and generally short term in nature. Other receivables are reviewed annually as to whether their carrying value has become impaired. As of September 30, 2011 and December 31, 2010, no allowance for the uncollectible accounts is considered necessary.
5. Inventories
The Company’s inventory consists of the following:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Marine fuel
|
|
$ |
12,093,282 |
|
|
$ |
12,537,974 |
|
Other consumables
|
|
|
- |
|
|
|
4,447 |
|
Total
|
|
$ |
12,093,282 |
|
|
$ |
12,542,421 |
|
As of September 30, 2011 and December 31, 2010, $8,061,461 and $7,529,080, respectively, of Dalian Xingyuan’s inventory has been pledged as the collateral for Bankers Acceptance Notes and loans from Huaxia Bank.
6. Property Plant and Equipment
The Company’s Property Plant and Equipment are summarized as follows:
|
|
As of
|
|
|
|
September 30, |
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Property and buildings
|
|
$ |
39,916,957 |
|
|
$ |
20,676,056 |
|
Laboratory equipment
|
|
|
1,196,809 |
|
|
|
491,142 |
|
Boiler equipment
|
|
|
340,422 |
|
|
|
318,946 |
|
Marine bunkers
|
|
|
221,066 |
|
|
|
213,600 |
|
Transportation vehicles
|
|
|
1,180,530 |
|
|
|
1,140,660 |
|
Office equipment
|
|
|
52,288 |
|
|
|
48,128 |
|
Electronic equipment
|
|
|
81,579 |
|
|
|
76,330 |
|
Leasehold improvements
|
|
|
99,753 |
|
|
|
96,385 |
|
Total
|
|
|
43,089404 |
|
|
|
23,061,247 |
|
Less: Accumulated depreciation
|
|
|
(2,487,483 |
) |
|
|
(1,618,106 |
) |
Net Value
|
|
$ |
40,601,921 |
|
|
$ |
21,443,141 |
|
Depreciation was $869,377 and $428,433 for nine months ended September 30, 2011 and 2010, respectively.
As of September 30, 2011, $1,147,335 of Xingyuan’s property in gross value has been pledged as the collateral for a loan from Huaxia Bank.
7. Construction in Progress
The construction projects as of September 30, 2011and December 31, 2010 were construction to build facilities to expand production capacity in Tianjin, Donggang, Panjin, Dongying and Nanlian. Balances represent mainly construction expenditures and equipment cost.
The following table states the details about costs incurred at each of the balance sheet date presented:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Berth and berth improvement
|
|
$
|
327,186
|
|
|
$
|
64,725
|
|
Oil blending and storage tanks
|
|
|
1,481,611
|
|
|
|
14,557,884
|
|
Total
|
|
$
|
1,808,797
|
|
|
$
|
14,622,609
|
|
8. Intangible Assets
The Company’s Intangible Assets are summarized as follows:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Land use rights
|
|
$
|
3,074,621
|
|
|
$
|
2,970,782
|
|
Software
|
|
|
20,349
|
|
|
|
19,662
|
|
Total
|
|
|
3,094,970
|
|
|
|
2,990,444
|
|
Less: accumulated amortization
|
|
|
(220,473
|
)
|
|
|
(151,061
|
)
|
Intangible assets, net
|
|
$
|
2,874,497
|
|
|
$
|
2,839,383
|
|
Nanlian’s land use rights of $2,325,665 in gross value have been pledged as collateral for a loan from Baotou Commerce Bank as of September 30, 2011.
Donggang Xingyuan’s land use rights of $605,090 in gross value have been pledged as collateral for a loan from Huaxia Bank as of September 30, 2011.
Amortization expenses for the nine months ended September 30, 2011 and 2010 were $63,145 and $51,580 respectively.
The estimated aggregate amortization expense for intangible assets for each of the five succeeding year is $345,920 for years 2011 to 2015.
9. Short Term Loans
The Company has loans payable to financial institutions with interest rates ranging from 6.89% to 7.87% and various maturity dates through August 19, 2012.
|
|
Interest Rate
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
(Per Annum)
|
|
|
September 30, 2011
|
|
|
2010
|
|
|
Terms
|
Baotou Commerce Bank
|
|
|
6.89 |
% |
|
|
2,034,906 |
|
|
|
2,570,404 |
|
|
August 5, 2011 – July 15, 2012
|
Huaxia Bank
|
|
|
7.87 |
% |
|
|
1,408,782 |
|
|
|
1,966,182 |
|
|
August 19, 2011 – August 19, 2012
|
Huaxia Bank
|
|
|
7.27 |
% |
|
|
782,656 |
|
|
|
- |
|
|
February 28, 2011 – February 6, 2012
|
Total
|
|
|
|
|
|
$ |
4,226,344 |
|
|
$ |
4,536,586 |
|
|
|
The loans are secured by certain properties, inventories and land use right of the Company(see Notes 5, 6 and 8).
10. Bank Notes Payable
The Company has credit facilities with Shenzhen Development Bank (“SD Bank”), Yingkou Bank (“YK Bank”) and Huaxia Bank that provide for working capital in the form of the following bank acceptance notes.
Beneficiary
|
|
Endorser
|
|
Origination
Date
|
|
|
Maturity
Date
|
|
|
Amount
|
|
Dalian Xingyuan
|
|
Huaxia Bank
|
|
|
6-16-2011
|
|
|
|
12-16-2011
|
|
|
$
|
7,043,907
|
|
Dalian Xingyuan
|
|
SD Bank
|
|
|
09-07-2011
|
|
|
|
03-07-2012
|
|
|
|
7,200,438
|
|
Dalian Fusheng
|
|
SD Bank
|
|
|
09-14-2011
|
|
|
|
03-14-2012
|
|
|
|
4,695,938
|
|
Dalian Fusheng
|
|
SD Bank
|
|
|
09-16-2011
|
|
|
|
03-16-2012
|
|
|
|
4,695,938
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,636,221
|
|
Borrowings under these credit facilities are made on a when-and-as-needed basis at the Company’s discretion. The Company has pledged ten thousand tons of marine fuel as collateral against credit default. In addition, the Company is required to hold Restricted Cash with the above financial institutions as additional collateral against these bank acceptance notes. The restricted cash balances at September 30, 2011 and December 31, 2010 were $10,715,348 and $17,022,770, respectively
11. Restricted Net Assets
The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s PRC subsidiary only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s VIE and related subsidiaries.
In accordance with the Regulations on Enterprises with Foreign Investment of China and their articles of association, a foreign invested enterprise established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A wholly-owned foreign invested enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign invested enterprises. The aforementioned reserves only can be used for specific purposes and are not distributable as cash dividends. Fusheng was established as a wholly-owned foreign-invested enterprise and therefore is subject to the above mandated restrictions on distributable profits.
Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide statutory common reserve at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise also is required to provide for discretionary surplus reserve, at the discretion of the board of directors, from the profits determined in accordance with the enterprise’s PRC statutory accounts. The aforementioned reserves only can be used for specific purposes and are not distributable as cash dividends. Xingyuan and its subsidiaries were established as domestic invested enterprises and therefore are subject to the above mandated restrictions on distributable profits.
As a result of these PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as general reserve fund, the Company’s VIE and related PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company.
Amounts restricted include paid-in capital and statutory reserve funds of the Company’s VIE and related PRC subsidiaries as determined pursuant to PRC generally accepted accounting principles, totaling approximately US$3,085,000 and US$3,078,000 as of September 30, 2011 and December 31, 2010; therefore in accordance with Rules 504 and 4.08 (e) (3) of Regulation S-X, the condensed parent company only financial statements as of September 30, 2011 and December 31, 2010, for each period ended September 30, 2011 and December 31, 2010 are presented in Note 15.
12. Taxes Payable
Taxes Payable consisted of the followings:
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
Income Tax Payable
|
|
|
346,136
|
|
|
|
4,216,770
|
|
VAT Payable
|
|
|
544,608
|
|
|
|
5,138,502
|
|
Other Tax Payable
|
|
|
375,924
|
|
|
|
840,148
|
|
Total
|
|
|
1,266,668
|
|
|
|
10,195,420
|
|
Value Added Tax (“VAT”)
The Group’s PRC entities are subject to VAT at an effective rate of 17% of the revenues.
Donggang City provided special tax exemptions to the enterprises incorporated in Donggang. Donggang Xingyuan is entitled to a special 15% tax exemption of its monthly paid VAT as a refund to the Company. The exemption policy will apply to the Company as long as Donggang Xingyuan maintains its operational status in Donggang City.
Income Taxes
Goodwill Rich is subject to taxes in Hong Kong at a rate of 16.5%.
Under Chinese income tax laws, prior to January 1, 2008, companies were subject to an income tax at an effective rate of 33% (30% state income taxes plus 3% local income taxes) on income as reported in their statutory financial statements after appropriate tax adjustments. Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the income tax laws. The new standard EIT rate of 25% replaced the 33% rate (or other reduced rates previously granted by tax authorities). The new standard rate of 25% has been applied to calculate certain deferred tax benefits that are expected to be realized in future periods.
13. Commitments and Contingencies
Lease Obligation
The Company has entered into several tenancy agreements for the lease of storage facilities, offices premises and berth use rights. The leases are for one year and are renewable at the management’s discretion. Management believes that they will remain at these facilities for the next three years and have estimated that the commitments for minimum lease payments under these operating leases are approximately $1.5 million.
The Company’s commitment for minimum lease payments under these operating leases for the next five years and thereafter is as follows:
For the year 2011
|
|
|
165,581
|
|
For the year 2012
|
|
|
615,385
|
|
For the year 2013
|
|
|
692,308
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
1,473,274
|
|
In connection with Xingyuan's purchase of the 63% ownership interest in Nalian in December 2005, the Company is contingently obligated to purchase the remaining 37% ownership interest in Nalian not owned for RMB 8,880,000 (approximately $1.3 million), upon exercise of the minority shareholder's put option.
Supply Agreements
In September 2010, the Company signed 10-year exclusive sales agreements with Haiyu Fishery Limited Corporation ("Haiyu") and Jinghai Group ("Jinghai") to supply marine fuel. Both Haiyu and Jinghai are located in Rongcheng City, Shandong province.
Under the terms of the agreement with Jinghai, the Company has the right and obligation to supply Jinghai with up to 18,000 tons of marine fuel per year, for a period of 10 years, at local wholesale market value within that particular area. The agreement provides Jinghai with a rebate equivalent to an annual payment of RMB 1 million (approximately USD 0.15 million) for the first three years of the agreement if certain volume levels are achieved.
As of September 30, 2011, approximately 10,465 tons of marine fuels were sold to Jinghai.
14. Subsequent Events
On October 14, 2011, Fusheng issued bank notes of RMB 48 million (approximately $7.5 million) to Shenzhen Development Bank. The bank notes bear interest at annual rate of 8.4%, mature on April 14, 2012, and primarily for working capital purposes.
15. Parent Company Only Condensed Financial Information
Condensed Balance Sheets
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
55,456,440
|
|
|
|
47,588,487
|
|
Total noncurrent assets
|
|
|
55,456,440
|
|
|
|
47,588,487
|
|
Total assets
|
|
$
|
55,456,440
|
|
|
$
|
47,588,487
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock: par value $.001; 50,000,000 shares authorized; 9,610,159 shares issued and 9,518,967 shares outstanding, at September 30, 2011 and December 31, 2010 respectively
|
|
|
9,610
|
|
|
|
9,610
|
|
Treasury stock, at cost
|
|
|
(497,693
|
)
|
|
|
(497,693
|
)
|
Additional paid in capital
|
|
|
29,888,556
|
|
|
|
29,827,160
|
|
Retained earnings
|
|
|
3,682,019
|
|
|
|
1,806,405
|
|
Other comprehensive income
|
|
|
22,373,948
|
|
|
|
16,443,005
|
|
Total stockholders’ equity
|
|
|
55,456,440
|
|
|
|
47,588,487
|
|
Total liabilities and stockholders' equity
|
|
$
|
55,456,440
|
|
|
$
|
47,588,487
|
|
Condensed Statements of Income:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
Equity in profit of subsidiaries & VIE
|
|
|
5,930,943
|
|
|
|
8,899,011
|
|
Net income attributable to the Company
|
|
|
5,930,943
|
|
|
|
8,899,011
|
|
Condensed Cash Flow Statements
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
5,930,943
|
|
|
$
|
8,899,011
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Equity in profit of subsidiaries & VIE
|
|
|
(5,930,943
|
)
|
|
|
(8,899,011
|
)
|
Net cash provided by operating activities
|
|
|
—
|
|
|
|
—
|
|
Net change in cash and cash equivalents
|
|
|
—
|
|
|
|
—
|
|
Cash and cash equivalents, beginning of period
|
|
|
—
|
|
|
|
—
|
|
Cash and cash equivalents, end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Basis of Presentation
For the presentation of the parent company only condensed financial information, the Company records its investment in subsidiaries under the equity method of accounting as prescribed in ASC 323 Investments—Equity Method and Joint Ventures (formerly APB opinion No. 18, “ The Equity Method of Accounting for Investments in Common Stock ”). Such investment is presented on the balance sheet as “Investment in Subsidiaries” and 100% of the subsidiaries profit or loss as “Equity in profit or loss of subsidiaries” on the statement of income.