Attached files
file | filename |
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EX-32.1 - China Integrated Energy, Inc. | v201166_ex32-1.htm |
EX-31.1 - China Integrated Energy, Inc. | v201166_ex31-1.htm |
EX-31.2 - China Integrated Energy, Inc. | v201166_ex31-2.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
þ
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
quarterly period ended September 30, 2010.
or
q
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
transition period from to __________.
Commission
File Number 000-25413
CHINA
INTEGRATED ENERGY, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
65-0854589
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
Dongxin
Century Square, 7th Floor
Hi-Tech
Development District
Xi’an, Shaanxi Province,
People’s Republic of China, 710043
(Address
of Principal Executive Offices including zip code)
+86 29 8268
3920
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes þ No
q
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every, Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). *Yes q No q* The registrant has not
yet been phased into the interactive data requirements.
Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company
Large
Accelerated Filer o
|
Accelerated
Filer o
|
Non-Accelerated
Filer o
|
Smaller
reporting company þ
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act).
Yes o No þ
As of
November 5, 2010, 33,830,091 shares of the issuer’s common stock, par value
$0.0001, were outstanding.
TABLE OF
CONTENTS
Part
I FINANCIAL INFORMATION
|
|
||
ITEM
1
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
1
|
|
ITEM
2
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
23
|
|
ITEM
3
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
33
|
|
ITEM
4T.
|
CONTROLS
AND PROCEDURES.
|
33
|
|
Part
II OTHER INFORMATION
|
|
||
ITEM
1
|
LEGAL
PROCEEDINGS
|
34
|
|
ITEM
1A.
|
RISK
FACTORS
|
34
|
|
ITEM
2
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
34
|
|
ITEM
3
|
DEFAULTS
UPON SENIOR SECURITIES
|
34
|
|
ITEM
4
|
OTHER
INFORMATION
|
34
|
|
ITEM
5
|
EXHIBITS
|
36
|
Part
I
FINANCIAL
INFORMATION
ITEM
1
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
CHINA
INTEGRATED ENERGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
September30,
2010
|
December31,
2010
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 79,653,492 | $ | 62,415,443 | ||||
Accounts
receivable
|
7,853,650 | 3,099,587 | ||||||
Other
receivables and deposits
|
4,729,002 | 7,231,586 | ||||||
Prepaid
expenses
|
3,115,795 | 3,145,502 | ||||||
Advance
to suppliers
|
33,065,887 | 34,544,100 | ||||||
Inventories,
net
|
23,132,881 | 20,954,851 | ||||||
Total
current assets
|
151,550,707 | 131,391,069 | ||||||
Prepaid
rents
|
30,355,870 | 24,620,685 | ||||||
Property,
plant and equipment, at cost
|
10,328,600 | 10,017,987 | ||||||
Construction
in progress
|
12,800,346 | - | ||||||
Less
accumulated depreciation
|
(2,826,408 | ) | (2,456,080 | ) | ||||
Property,
plant and equipment , net
|
20,302,538 | 7,561,907 | ||||||
Intangible
asset, net
|
14,289,470 | - | ||||||
Total
noncurrent assets
|
64,947,878 | 32,182,592 | ||||||
TOTAL
ASSETS
|
$ | 216,498,585 | $ | 163,573,661 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Advance
from customers
|
$ | 12,104,710 | $ | 1,903,124 | ||||
Taxes
payable
|
856,851 | 1,242,931 | ||||||
Other
payables and accruals
|
1,046,248 | 2,700,988 | ||||||
Loans
payable
|
4,483,970 | 4,395,025 | ||||||
Total
current liabilities
|
18,491,779 | 10,242,068 | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Series
A Convertible Preferred stock, $.001 par
value; authorized shares 3,000,000; issued and outstanding
989,000 and 1,000,000 shares at September 30, 2010 and December 31, 2009,
respectively
|
989 | 1,000 | ||||||
Series
B Convertible Preferred stock, $.001 par
value; authorized shares 7,000,000; issued and outstanding
1,605,753 and 2,115,753 shares at September 30, 2010 and December 31,
2009, respectively
|
1,605 | 2,115 | ||||||
Common
stock, $.0001 par value; authorized shares
79,000,000; issued and outstanding 33,830,091 and 33,269,091
shares at September 30, 2010 and December 31, 2009,
respectively
|
3,382 | 3,326 | ||||||
Additional
paid in capital
|
79,240,858 | 75,858,994 | ||||||
Statutory
reserve
|
4,920,114 | 4,920,114 | ||||||
Accumulated
other comprehensive income
|
8,264,637 | 5,473,420 | ||||||
Retained
earnings
|
105,575,221 | 67,072,624 | ||||||
Total
stockholders' equity
|
198,006,806 | 153,331,593 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 216,498,585 | $ | 163,573,661 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
1
CHINA
INTEGRATED ENERGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
For
The Three Months
Ended
September 30,
|
For
The Nine Months
Ended
September 30,
|
|||||||||||||||
(Unaudited)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Sales
|
$ | 106,794,714 | $ | 72,401,010 | $ | 320,634,654 | $ | 196,303,917 | ||||||||
Cost
of goods sold
|
90,790,112 | 61,544,988 | 275,795,810 | 168,295,024 | ||||||||||||
Gross
profit
|
16,004,602 | 10,856,022 | 44,838,844 | 28,008,893 | ||||||||||||
Selling,
general and administrative expenses
|
1,988,110 | 996,604 | 5,859,828 | 2,163,179 | ||||||||||||
Income
from operations
|
14,016,492 | 9,859,418 | 38,979,016 | 25,845,714 | ||||||||||||
Non-operating
income (expenses)
|
||||||||||||||||
Interest
expense
|
(40,931 | ) | (22,048 | ) | (138,649 | ) | (91,228 | ) | ||||||||
Subsidy
income
|
21,870 | 38,210 | 21,870 | 155,174 | ||||||||||||
Other
expense
|
(253,778 | ) | (2,132 | ) | (359,640 | ) | (8,226 | ) | ||||||||
Total
non-operating expenses
|
(272,839 | ) | 14,030 | (476,419 | ) | 55,720 | ||||||||||
Net
income
|
13,743,653 | 9,873,448 | 38,502,597 | 25,901,434 | ||||||||||||
Other
comprehensive item
|
||||||||||||||||
Foreign
currency translation gain (Loss)
|
1,758,939 | 69,861 | 2,791,217 | 55,787 | ||||||||||||
Comprehensive
Income
|
$ | 15,502,592 | $ | 9,943,309 | $ | 41,293,814 | $ | 25,957,221 | ||||||||
Basic
and diluted weighted average shares outstanding
|
||||||||||||||||
Basic
|
33,829,656 | 27,287,040 | 33,621,516 | 27,287,040 | ||||||||||||
Diluted
|
43,328,716 | 35,757,432 | 43,117,860 | 35,017,932 | ||||||||||||
|
||||||||||||||||
Basic
and diluted net earnings per share available to common
stockholders
|
||||||||||||||||
Basic
|
$ | 0.41 | $ | 0.36 | $ | 1.15 | $ | 0.95 | ||||||||
Diluted
|
$ | 0.32 | $ | 0.28 | $ | 0.89 | $ | 0.74 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
2
CHINA
INTEGRATED ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF EQUITY
Preferred
stock
|
Common
stock
|
Additional
paid-in
|
Statutory
|
Other
comprehen-sive
|
Retained
|
Total
stockholders’
|
||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
reserves
|
income
|
earnings
|
equity
|
||||||||||||||||||||||||||||
Balance
at December 31, 2008
|
3,465,753 | $ | 3,465 | 27,169,091 | $ | 2,716 | 44,434,250 | $ | 4,920,114 | $ | 5,337,003 | $ | 29,201,661 | $ | 83,899,209 | |||||||||||||||||||||
Preferred
B conversion
|
(350,000 | ) | (350 | ) | 350,000 | 35 | 315 | – | – | – | – | |||||||||||||||||||||||||
Shares
issued to employees
|
– | – | – | – | 30,056 | – | – | – | 30,056 | |||||||||||||||||||||||||||
Stock
purchase option - directors
|
– | – | – | – | 155,104 | – | – | – | 155,104 | |||||||||||||||||||||||||||
Stock-based
compensation
|
– | – | – | – | 555,710 | – | – | – | 555,710 | |||||||||||||||||||||||||||
Net
income for the year
|
– | – | – | – | – | – | – | 37,870,963 | 37,870,963 | |||||||||||||||||||||||||||
Issuance
of common stock
|
– | – | 5,750,000 | 575 | 30,683,559 | – | – | – | 30,684,134 | |||||||||||||||||||||||||||
Foreign
currency translation gain
|
– | – | – | – | – | – | 136,417 | – | 136,417 | |||||||||||||||||||||||||||
Balance
at December 31, 2009
|
3,115,753 | 3,115 | 33,269,091 | 3,326 | 75,858,994 | 4,920,114 | 5,473,420 | 67,072,624 | 153,331,593 | |||||||||||||||||||||||||||
Preferred
A conversion
|
(11,000 | ) | (11 | ) | 50,000 | 5 | 6 | – | – | – | – | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Preferred
B conversion
|
(510,000 | ) | (510 | ) | 510,000 | 51 | 459 | – | – | – | – | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Stock
purchase option - directors
|
– | – | – | – | 182,106 | – | – | – | 182,106 | |||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Stock-based
compensation - consultants
|
– | – | – | – | 1,065,097 | – | – | – | 1,065,097 | |||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Employee
stock option compensation
|
– | – | – | – | 2,127,156 | – | – | – | 2,127,156 | |||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Exercise
Employee stock option
|
– | – | 1,000 | – | 7,040 | – | – | – | 7,040 | |||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Net
income for the period
|
– | – | – | – | – | – | – | 38,502,597 | 38,502,597 | |||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Foreign
currency translation gain
|
– | – | – | – | – | – | 2,791,217 | – | 2,791,217 | |||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Balance
at September 30, 2010
|
2,594,753 | $ | 2,594 | 33,830,091 | $ | 3,382 | $ | 79,240,858 | $ | 4,920,114 | $ | 8,264,637 | $ | 105,575,221 | $ | 198,006,806 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
3
CHINA
INTEGRATED ENERGRY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW
For
the Nine Months Ended September 30
|
||||||||
Unaudited
|
2010
|
2009
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 38,502,597 | $ | 25,901,434 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Loss
on disposal of property and equipment
|
238,975 | – | ||||||
Depreciation
and amortization
|
1,015,039 | 883,778 | ||||||
Stock
based compensation
|
3,374,359 | 256,679 | ||||||
(Increase)
decrease in current assets:
|
||||||||
Accounts
receivable
|
(4,597,028 | ) | 2,733,209 | |||||
Other
receivables, deposits and prepaid expenses
|
(2,710,890 | ) | 3,638,603 | |||||
Advance
to suppliers
|
2,147,630 | (7,495,285 | ) | |||||
Inventories
|
(1,702,813 | ) | 1,322,620 | |||||
Prepaid
expenses - Rents, non-current
|
(8,162,645 | ) | (10,043,265 | ) | ||||
Increase
(decrease) in current liabilities:
|
||||||||
Accounts
payable
|
– | 889,211 | ||||||
Advance
from customers
|
10,058,995 | 2,024,552 | ||||||
Taxes
payable
|
(405,670 | ) | 91,211 | |||||
Other
payables and accrued expenses
|
(2,172,560 | ) | (939,882 | ) | ||||
Net
cash provided by operating activities
|
35,585,989 | 19,262,865 | ||||||
|
||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Acquisition
of property and equipment
|
(91,990 | ) | (204,646 | ) | ||||
Acquisition
of gas stations
|
(6,845,104 | ) | ||||||
Construction
in progress
|
(12,744,538 | ) | – | |||||
|
||||||||
Net
cash used in investing activities
|
(19,681,632 | ) | (204,646 | ) | ||||
|
||||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Restricted
cash released
|
– | 919,367 | ||||||
Repayment
of auto loans and notes payable
|
– | (2,243,366 | ) | |||||
Net
cash used in financing activities
|
– | (1,323,999 | ) | |||||
|
||||||||
EFFECT
OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
|
1,333,692 | 46,805 | ||||||
|
||||||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
17,238,049 | 17,781,025 | ||||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
62,415,443 | 23,119,028 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 79,653,492 | $ | 40,900,053 | ||||
|
||||||||
Supplemental
Cash flow data:
|
||||||||
Income
tax paid
|
$ | – | $ | – | ||||
Interest
paid
|
$ | 178,726 | $ | 105,966 | ||||
Non-cash
activities:
|
||||||||
Financing
activities
|
||||||||
Conversion
of preferred stock to common stock
|
$ | 61 | $ | – | ||||
Transferring:
|
||||||||
Transferring
from other receivables and prepaid rents to intangible
assets
|
$ | 7,994,143 | $ | – |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
4
CHINA
INTEGRATED ENERGY INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements of the
Company and its subsidiaries have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission including the instructions
to Form 10-Q and Regulation S-X. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America have been
condensed or omitted from these statements pursuant to such rules and regulation
and, accordingly, they do not include all the information and notes necessary
for comprehensive consolidated financial statements and should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 2009, included in our Annual Report on Form 10-K for the year
ended December 31, 2009.
In the
opinion of the management of the Company, all adjustments, which are of a normal
recurring nature, necessary for a fair statement of the results for three-month
period have been made. Results for the interim periods presented are not
necessarily indicative of the results that might be expected for the entire
fiscal year. When used in these notes, the terms “Company,” “we,” “us” or “our”
means China Integrated Energy Inc. and all entities included in our consolidated
financial statements.
The
unaudited condensed consolidated financial statements include the financial
statements of the Company, and its wholly owned or controlled subsidiaries and
all other entities that it has a controlling financial interest in or is
considered to be the primary beneficiary, pursuant to the rules of the
Accounting Standards Codification. All significant inter-company transactions
and balances between the Company, its subsidiaries and VIEs are eliminated upon
consolidation. The Company has included the results of operations of its
subsidiaries from the dates of acquisition.
The
Company, its subsidiaries and VIEs referenced above are hereinafter collectively
referred to as the (“Company”).
Principle
of Consolidation
The
accompanying consolidated financial statements include our accounts and the
accounts of our wholly owned subsidiaries, Baorun Group and Redsky Industrial,
and our consolidated subsidiary, Xi’an Baorun Industrial (collectively, the
“Company”). All significant inter-company accounts and transactions have been
eliminated in consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets, allowance for doubtful accounts, and the
reserve for obsolete and slow-moving inventories. Actual results could differ
from those estimates.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
5
Accounts
Receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Based on historical collections, no
allowance was deemed necessary at September 30, 2010 and December 31, 2009 as
the Company did not experience any uncollectible accounts receivable and bad
debt write-off over the past years.
Advance
to Suppliers
Advance
to suppliers consist of prepayments to the suppliers for products that have not
yet been received. Any amount paid to the suppliers prior to the Company’s
acceptance of petroleum products and biodiesel feedstock are recorded as advance
to suppliers. The Company will record the prepayment as inventory at the time of
accepting delivery of petroleum products and biodiesel feedstock from suppliers.
Advance to suppliers as of September 30, 2010 and December 31, 2009 were
$33,065,887 and $34,544,100, respectively. Based on the customers’ purchase
plans and our inventory needs, we usually work with suppliers by advancing
prepayments to secure needed inventory to ensure on time delivery to meet
customers’ demands.
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods comprises
direct material, direct labor, and an allocated portion of production
overheads.
Advances
from Customers
Advances
from customers consist of prepayments to the Company for products that have not
yet been shipped to the customers. Any amounts received prior to satisfying the
Company’s revenue recognition criteria are recorded as deferred revenue or
advances from customers. The Company will recognize the prepayments from the
customers as revenue at the time the delivery of goods is made. Advances from
customers as of September 30, 2010 and December 31, 2009 were $12,104,710 and
$1,903,124, respectively.
Property,
Plant, and Equipment
Property,
plant, and equipment are stated at the actual cost on acquisition less
accumulated depreciation and amortization. Depreciation and amortization are
provided for in amounts sufficient to relate the cost of depreciation assets to
operations over their estimated service lives, principally on a straight-line
basis. Most property, plant and equipment have a residual value of 5% of actual
cost. The estimated lives used in determining depreciation are:
Years
|
||||
Building
|
20
|
|||
Vehicle
|
5
|
|
||
Office
Equipment
|
5
|
|
||
Production
Equipment
|
10
|
In
accordance with Statement of accounting standards codification, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” the Company examines the
possibility of decreases in the value of fixed assets when events or changes in
circumstances reflect the fact that their recorded value may not be recoverable.
There was no fixed asset impairment.
Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
6
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted 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 assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily
determinable.
Intangible
Assets
Our
intangible assets consist of definite-lived assets subject to amortization such
as gas station operating rights, land usage rights of a gas station, and land
usage right of agricultural plantation for a pilot program cultivating biodiesel
feedstock. In January 2010,and in July 2010, we acquired Jinzheng retail gas
station and Xinyuan gas station, respectively; and allocated the purchase prices
to tangible assets, gas station operating rights, and land usage rights, based
on appraised value. The useful lives of the gas station operating rights and
land usage rights are determined by the gas station purchase agreements. The gas
station operating right and land usage right of Jinzheng gas station are each
forty years. The gas station operating right and land usage right of Xinyuan gas
station are each seventeen and one half years. The useful life of the
agricultural plantation is seventy years and determined by the purchase
agreement, as well. We calculate amortization of the definite-lived intangible
assets on a straight-line basis over the useful lives of the related intangible
assets.
Income
Taxes
The
Company utilizes accounting standards codification, “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 adopted the provisions of accounting standards codification, “Accounting
for Uncertainty in Income Taxes,” on January 1, 2007. As a result of the
implementation of the accounting standards codification, the Company made a
comprehensive review of its portfolio of tax positions in accordance with
recognition standards established by the accounting standards codification. As a
result of the implementation of the accounting standards codification, the
Company recognized no material adjustments to liabilities or stockholders
equity. When tax returns are filed, it is highly certain that some positions
taken would be sustained upon examination by the taxing authorities, while
others are subject to uncertainty about the merits of the position taken or the
amount of the position that would be ultimately sustained. The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset
or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. Interest
associated with unrecognized tax benefits are classified as interest expense and
penalties are classified in selling, general and administrative expenses in the
statements of income. The adoption of the accounting standards codification did
not have a material impact on the Company’s financial statements.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Securities and
Exchange Commission (SEC) Staff Accounting Bulletin. For distribution of
finished oil, heavy oil products, and biodiesel, sales revenue is recognized at
the date of shipment to customers when a formal arrangement exists, the price is
fixed or determinable, the delivery is completed, no other significant
obligations of the Company exist and collectability is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition
are recorded as unearned revenue. For gas station retail sales,
revenue is recognized and cash is collected upon completion of fuel sales to
customers.
7
Sales
revenue represents the invoiced value of goods sold, net of value-added tax
(“VAT”). All of the Company’s products that are sold in the PRC are subject to
Chinese value-added tax of 17% of the gross sales price. This VAT may be offset
by VAT paid by the Company on raw materials and other materials or services
included in the cost of producing their finished product. The Company records
VAT payable and VAT receivable net of payments in the financial statements. The
VAT tax return is filed offsetting the payables against the
receivables.
There
were no sales returns and allowances for the three months ended September 30,
2010 and 2009. The Company does not provide unconditional right of return, price
protection or any other concessions to its customers.
Cost
of Goods Sold
Cost of
goods sold consists primarily of material costs, direct labor, manufacturing
overhead and related expenses, which are directly attributable to the production
of products. Write-down of inventory to lower of cost or market is also recorded
in cost of goods sold.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable and other receivables. The Company does not
require collateral or other security to support these receivables. The Company
conducts periodic reviews of its customers’ financial conditions and customer
payment practices to minimize collection risk on accounts
receivable.
The
operations of the Company are located in the PRC. Accordingly, the Company’s
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy.
Statement
of Cash Flows
In
accordance with accounting standards codification, “Statement of Cash Flows,”
cash flows from the Company’s operations is calculated based upon the local
currencies. As a result, amounts related to assets and liabilities reported on
the statement of cash flows may not necessarily agree with changes in the
corresponding balances on the balance sheet due to fluctuation in currency
exchange.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States dollars (“USD”) as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date, except for fixed assets, intangible assets,
and prepaid rent that are stated at the historical cost. Revenues and expenses
are translated at the average rate of exchange prevailing during the reporting
period. Translation adjustments caused by different exchange rates from period
to period are included as a component of stockholders’ equity as “Accumulated
other comprehensive income.” Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
On July
21, 2005, the central government of China allowed the RMB to fluctuate, ending
its decade old valuation peg to the U.S. dollar. Historically, the Chinese
government has benchmarked the RMB exchange ratio against the U.S. dollar,
thereby mitigating the associated foreign currency exchange rate fluctuation
risk. Since then the RMB has strengthened and risen more than 21% against the
USD. On June 19, 2010, the Chinese central bank announced that it
would further the reform the RMB exchange rate mechanism to improve flexibility.
At September 30, 2010, Renminbi appreciated approximately 1.34% from June 30,
2010. The Company anticipates that appreciation of Renminbi will continue. The
Company does not believe the currency fluctuation risk is significant. This
fluctuation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People’s Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People’s Bank of
China.
8
The
Company uses Statement of accounting standards codification “Reporting
Comprehensive Income.” Comprehensive income is comprised of net income and all
changes to the statements of stockholders’ equity, except those due to
investments by stockholders, changes in paid-in capital and distributions to
stockholders. Comprehensive income for the three months ended September 30, 2010
and 2009 were included net income and foreign currency translation
adjustments.
Fair
value of financial instruments
The
accounting standards codification, “Disclosures about Fair Value of Financial
Instruments,” requires that the Company disclose estimated fair values of
financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
On
January 1, 2008, the Company adopted accounting standards codification, “Fair
Value Measurements.” The accounting standards codification defines fair value,
establishes a three-level valuation hierarchy for disclosures of fair value
measurement and enhances disclosures requirements for fair value measures. The
carrying amounts reported in the balance sheets for receivables and current
liabilities each qualify as financial instruments and are a reasonable estimate
of fair value because of the short period of time between the origination of
such instruments and their expected realization and their current market rate of
interest. The three levels are defined as follow:
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
As of
September 30, 2010, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair value.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with the
accounting standards codification, “Share-Based Payment.” The Company measures
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award and other
equity-based compensation to employees and non-employees, and recognizes that
cost over the requisite service period. For the three months ended September 30,
2010, the Company recorded $1,090,211 of stock compensation expense, for the
nine months ended September 30, 2010, the Company recorded $ 3,374,359 of stock
compensation expense that was included in the selling, general and
administrative expenses, in accordance with accounting standards codification,
“Share-Based Payment.” Refer to Note 17 for additional information
regarding the Company’s stock non-qualified plan (Plan).
Consolidation
of Variable Interest Entities
VIE’s are
entities that lack one or more voting interest entity characteristics. The
Company consolidates VIEs in which it is the primary beneficiary of the VIEs
economic gains or losses. The FASB has issued the accounting standards
codification (Revised December 2004), “Consolidation of Variable Interest
Entities.” The accounting standards codification clarifies the application of
Consolidated Financial Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. It separates
entities into two groups: (1) those for which voting interests are used to
determine consolidation and (2) those for which variable interests are used to
determine consolidation. The accounting standards codification clarifies how to
identify a variable interest entity and how to determine when a business
enterprise should include the assets, liabilities, non-controlling interests and
results of activities of a variable interest entity in its consolidated
financial statements.
9
Reclassification
Certain
reclassifications have been made to the prior years’ financial statements to
conform to the current year presentation. In presenting the Company’s condensed
consolidated statements of cash flow for the nine months ended September 30,
2009, the Company presented $ 6,404,662 in the decrease in other receivables
deposits and prepaid expenses. In presenting the Company’s condensed
consolidated statements of cash flow for the nine months ended September 30,
2010, the 2009 comparative figures have been reclassified to conform to the
current period’s presentation. After the reclassification, the Company presented
$ 3,638,603 in the decrease in other receivables deposits and $ 10,043,265 in
the increase in prepaid rents for the nine months ended September 30, 2009.
These reclassifications had no effect on previously reported results or retained
earnings.
Litigation
In the
normal course of business, the Company may be involved in legal proceedings. The
Company accrues a liability for such matters, when it is probable that a
liability has been incurred and the amount can be reasonably estimated. When
only a range of possible loss can be established, the most probable amount in
the range is accrued. If no amount within this range is a better estimate than
any amount within the range, the minimum amount in the range is accrued. The
accrual for a litigation loss contingency might include, for example, estimates
of potential damages, outside legal fees and other directly related costs
expected to be incurred. There is no material litigation against the
Company.
New
Accounting Pronouncements
Stock
based Compensation
In April
2010, the FASB issued an Accounting Standard update, an amendment of the
accounting standards codification Topic 718, “Compensation – Stock
Compensation.” The amendment clarifies that a share-based payment award with an
exercise price denominated in the currency of a market in which a substantial
portion of the entity’s equity securities trades should not be considered to
contain a condition that is not a market, performance, or service condition.
Therefore, such an award should not be classified as a liability if it otherwise
qualifies as equity.
The
amendment in the update is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2010. The
amendment in this update should be applied by recording a cumulative-effect
adjustment to the opening balance of retained earnings. The cumulative-effect
adjustment should be calculated for all awards outstanding as of the beginning
of the fiscal year in which the amendment is initially applied, as if the
amendment had been applied consistently since the inception of the award. The
cumulative-effect adjustment should be presented separately. Earlier application
is permitted. The Company does not believe that amendment of the accounting
standards codification would have material effect on the Company’s financial
statements and disclosures.
2. CASH
IN BANK ACCOUNTS
Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the PRC. Total cash in state-owned banks at September
30, 2010 and December 31, 2009 amounted to $76,732,225 and $41,905,658,
respectively, of which no deposits are covered by insurance. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
risks on its cash in bank accounts.
10
3. PREPAID
RENT
Prepaid
expenses mainly consisted of prepaid rents for the gas stations (see Note 13 -
Commitments) and other expenses. At September 30, 2010 and December 31, 2009,
the current portion of prepaid rental expenses of gas stations was $2,721,361
and $2,732,546, respectively. At September 30, 2010 and December 31, 2009, the
noncurrent portion of prepaid expenses amounted $30,355,870 and $24,620,685,
respectively, which represents the prepaid rents that will be expensed after one
year.
4. INVENTORIES
Inventories
consisted of the following:
September
30,
2010
(Unaudited)
|
December 31,
2009
(Audited)
|
|||||||
Finished
goods
|
||||||||
Petroleum
|
$ | 11,057,700 | $ | 10,449,525 | ||||
Diesel
|
6,384,879 | 5,601,725 | ||||||
Raw
material for manufacturing biodiesel
|
5,690,302 | 4,903,601 | ||||||
Total
|
$ | 23,132,881 | $ | 20,954,851 |
5. OTHER
RECEIVABLES AND DEPOSITS
At
September 30, 2010, other receivables mainly represented deposits made for
acquisitions and purchase of equipment in the amount of $4,729,002, of which
$2,989,313 was a deposit to acquire Shenmu Gas Station located in Yulin City,
Shaanxi Province and $1,494,657 was a deposit to acquire Chongqing Tianrun
Energy Co., Ltd located in Chongqing City. At December 31, 2009, other
receivables represented deposits made for purchase of equipments and short term
cash advances to third parties in the amount of $7,231,586, of which $6,973,439
was a deposit for the purchase of Jinzheng gas station, which was completed in
the first quarter of 2010.
6. PROPERTY,
PLANT, AND EQUIPMENT, NET
September 30,
2010
|
December 31,
2010
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Building
|
$ | 525,908 | $ | 336,051 | ||||
Biodiesel
Processing Equipment
|
8,415,141 | 8,360,404 | ||||||
Office
Equipment
|
142,987 | 145,456 | ||||||
Other
Equipment
|
299,435 | 34,047 | ||||||
Motor
Vehicles
|
945,129 | 1,142,029 | ||||||
Total
Cost
|
$ | 10,328,600 | $ | 10,017,987 | ||||
Less:
Accumulated Depreciation
|
(2,826,408 | ) | (2,456,080 | ) | ||||
Net
book value
|
7,502,192 | 7,561,907 | ||||||
Construction
in progress
|
12,800,346 | - | ||||||
Total
|
$ | 20,302,538 | $ | 7,561,907 |
Depreciation
expense for the nine months ended September 30, 2010 and 2009 were $787,560 and
$883,778, respectively; and $271,523 and $297,000 for the three months ended
September 30, 2010 and 2009, respectively.
7. INTANGIBLE
ASSETS
In
January 2010, the Company completed an acquisition of an agricultural
plantation, located in Xianyan Chuanhua, Shaanxi Province, PRC, with 20,000 Mu
(approximately 3,295 acres) in size. The agricultural plantation will
used for pilot programs exploring and experimenting with new feedstock for
the Company’s biodiesel production. The purchase price of the
plantation was $1,025,521 (RMB 7,000,000) for a 70-year land usage right, where
the land is owned by the government. The payment was made in 2009 and
recorded as a deposit. The amount was reclassified as agricultural
plantation land usage right upon completion of transfer of title in January
2010. See note 14 for gas station operating right and gas station land
usage right.
11
Intangible
assets are summarized as follows:
September
30,
2010
(Unaudited)
|
December
31,
2009
(Audited)
|
|||||||
Gas
station operating right
|
$ | 9,882,628 | $ | – | ||||
Gas
station land usage right
|
3,608,800 | – | ||||||
Agricultural
plantation land usage right
|
1,025,521 | – | ||||||
|
14,516,949 | – | ||||||
Less:
Accumulated Amortization
|
(227,479 | ) | – | |||||
Total
|
$ | 14,289,470 | $ | – |
Amortization
expense for the nine months ended September 30, 2010 and 2009 were $227,479 and
$-0-, respectively; and $101,171 and $-0-for the three months ended September
30, 2010 and 2009, respectively. Future amortization of intangible assets is as
follow:
Years
Ending December 31,
|
Amount | |||
2011
|
$ | 486,000 | ||
2012
|
486,000 | |||
2013
|
486,000 | |||
2014
|
486,000 | |||
2015
|
486,000 | |||
Years
thereafter
|
11,717,000 | |||
Total
|
$ | 14,147,000 |
8. MAJOR
CUSTOMERS AND VENDORS
For the
three months ended September 30, 2010, ten customers accounted for approximately
43.3% of the Company’s total sales; of which three major customers accounted for
approximately 25.3% of the Company’s total sales, and these three customers
accounted for approximately 19.3% of the Company’s outstanding accounts
receivable. No other major customers accounted for over 5% of the Company’s
total sales. For the three months ended September 30, 2009, one major customer
accounted for approximately 25.6% of the Company’s total sales, and this
customer accounted for approximately 19.8% of the Company’s outstanding accounts
receivable.
For the
three months ended September 30, 2010, ten vendors accounted for approximately
79.8% of the Company’s total purchase; of which two vendors provided
approximately 33.9% of the Company’s total purchases, and each of these vendors
provided more than 10% of the Company’s total purchase. For the three
months ended September 30, 2009, one vendor accounted for approximately 50.3% of
the Company’s total purchases. There were no accounts payables due to this
vendor at September 30, 2010.
For the
nine months ended September 30, 2010, three major customers accounted for
approximately 37.2% of the Company’s total sales, and each of these customers
provided more than 10% of the Company’s total sales.
For the
nine months ended September 30, 2010, ten vendors accounted for approximately
69.0% of the Company’s total purchase; two vendors provided approximately 30.1%
of the Company’s total purchases, and each of these vendors provided more than
10% of the Company’s total purchase.
9. TAX
PAYABLE
Tax
payable consisted of the following at September 30, 2010 and December 31,
2009:
September
30,
2010
(Unaudited)
|
December
31,
2009
(Audited)
|
|||||||
Value
added tax payable
|
$ | 788,108 | $ | 1,150,725 | ||||
Urban
maintenance and construction tax payable
|
55,168 | 80,551 | ||||||
Other
tax payable
|
13,575 | 11,655 | ||||||
$ | 856,851 | $ | 1,242,931 |
12
10. INCOME
TAXES
Baorun
Industrial obtained approval from the PRC tax authority for the exemption of
income taxes from 2004 to the end of 2010 as the incentive from the Government
for bio energy products.
Effective
January 1, 2008, the PRC government implemented a new corporate income tax law
with a new maximum corporate income tax rate of 25%. Despite the income tax
exemption of Baorun Industrial, the Company is governed by the Income Tax Law of
the PRC concerning privately-run enterprises, which are generally subject to tax
at a statutory rate of 25% (33% prior to 2008) on income reported in the
statutory financial statements after appropriate tax adjustments. Redsky had a
net operating loss of approximately $20,000 and $4,000 for the nine months ended
September 30, 2010 and 2009, respectively; and $309
and $-0- for the three months ended September 30, 2010 and
2009, respectively. A 100% valuation allowance has been established
due to the uncertainty of its realization.
Baorun
China Group Limited is subject to Hong Kong profits tax rate of 16.5%, and has
insignificant net operating losses for three months ended September 30, 2010 and
2009, and has loss carryover of approximately $178,600 at December 31,
2009. The net operating loss carries forward infinitely for the Hong
Kong profits tax, and may be available to reduce future years’ taxable income.
Management believes that the realization of the benefits from these losses
appears not more than likely due to the Company’s limited operating history and
continuing losses for the Hong Kong profits tax purpose. Accordingly, the
Company has provided a 100% valuation allowance on the deferred tax asset
benefit to reduce the asset to zero. Management will review this valuation
allowance periodically and make adjustments as needed.
The
parent company, China Integrated Energy, Inc. is incorporated in the United
States and has incurred an aggregate net operating loss of $3,374,000 and
$389,000 for the nine months ended September 30, 2010 and 2009, respectively;
and approximately $1,090,000 and $183,000 for the three months ended September
30, 2010 and 2009, respectively,subject to the Internal Revenue Code Section
382, which places a limitation on the amount of taxable income that can be
offset by net operating losses after a change in ownership. The net operating
loss carries forward for the United States income taxes, and may be available to
reduce future years’ taxable income. These carryforwards will expire, if not
utilized, through 2029. Management believes that the realization of the benefits
from these losses appears not more than likely due to the Company’s limited
operating history and continuing losses for the United States income tax
purposes. Accordingly, the Company has provided a 100% valuation allowance on
the deferred tax asset benefit to reduce the asset to zero. Management will
review this valuation allowance periodically and make adjustment as
warranted
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the taxable years.
2010
|
2009
|
|||||||
US
statutory rates
|
34 | % | 34 | % | ||||
Tax
rate difference
|
(9 | )% | (9 | )% | ||||
Effect
of tax holiday
|
(25 | )% | (25 | )% | ||||
Valuation
allowance
|
- | % | - | % | ||||
Tax
per financial statements
|
- | - |
The
following table gives the unaudited consolidated pro forma financial impact had
the PRC taxes not been abated.
For the three months ended
September 30,
|
For the nine months ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income before income taxes
|
$ | 13,743,653 | $ | 9,873,448 | $ | 38,502,597 | $ | 26,294,718 | ||||||||
Tax
provision
|
(3,709,213 | ) | (2,514,186 | ) | (10,487,492 | ) | (6,573,680 | ) | ||||||||
Net
income
|
10,034,440 | 7,359,262 | 28,015,105 | 19,721,038 | ||||||||||||
Earnings
per share (Basic)
|
$ | 0.30 | $ | 0.27 | $ | 0.83 | $ | 0.72 | ||||||||
Earnings
per share (diluted)
|
$ | 0.23 | $ | 0.20 | $ | 0.65 | $ | 0.56 |
13
11. OTHER
PAYABLES AND ACCRUALS
Other
payables mainly consisted of payables for the unpaid acquisition cost of the gas
station, payables for purchase of equipment and other obligations. Other
payables balances at September 30, 2010 and December 31, 2009 were $1,046,248
and $2,700,988, respectively. At December 31, 2009, there was payable of
$1,816,610 for remaining unpaid leasing cost of the new gas
station.
12. LOANS
PAYABLE
The
Company was obligated under one short term loan from a commercial bank in the
PRC. The loan was entered into on October 26, 2009 with maturity to October 25,
2010. The principal will be repaid at maturity and the interest is payable per
quarter, currently the Company’s rate is at 5.841% per annum. This loan is
guaranteed by Xi’an City Economic & Technology Investment Guarantee Co., Ltd
and Shaanxi Security & Trust Guarantee Co. Xi’an City Economic &
Technology Investment Guarantee Co insured $2,930,017 (RMB 20,000,000). Shaanxi
Security & Trust Guarantee Co insured $1,465,008 (RMB 10,000,000). The
guarantee fee was 2.375% of total loan amount or $110,478 (RMB 754,110). Mr. Gao
Xincheng, Chairman and CEO, provided counter guarantee to the guarantee
companies to secure the loan. The Company collateralized its diesel processing
equipment and inventory in the value of approximately $3,516,000 (RMB
24,000,000) for the guarantee. At September 30, 2010 and December 31, 2009, the
loan carried a balance of $4,483,970 and $4,395,025 (RMB 30,000,000),
respectively. On October 25, 2010, the loan was repaid, and the Company is in
the process of renewing the annual revolving credit facility..
13. COMMITMENTS
Lease
Agreements
On
January 4, 2010, the Company entered into a 15-year non-cancelable and renewable
operating lease agreement with Northwest Naihuo Material Factory from January 5,
2010 to January 4, 2025 for the purpose of constructing a new 50,000-ton
biodiesel production plant. The annual lease payment is $117,000 (RMB
800,000). The Company has paid approximately $352,000 (RMB 2,400,000) in
advance. The amount represented prepaid lease payments over the next three years
and will be amortized accordingly.
On
January 5, 2010, the Company leased a gas station for operation under a ten-year
operating lease with expiration date on January 7, 2010. The annual lease
payment is approximately $381,000 (RMB 2,600,000). The Company is required to
pay in advance of 80% of the sum of the ten year lease payments approximately
$3,047,000 (RMB 20,800,000) upon executing the lease agreement, and pay the
remaining 20% of the sum of the ten-year lease payments approximately $762,000
(RMB 5,200,000) upon delivery of operating permits and related documents from
the lessor.
On
January 9, 2010, the Company leased a gas station for operation under a
fifteen-year operating lease with expiration date on January 9, 2025. The annual
lease payment is approximately $337,000 (RMB 2,300,000). The Company is required
to pay in advance of 80% of the sum of the fifteen-year lease payments
approximately $4,043,000 (RMB 27,600,000) upon executing the lease agreement,
and pay the remaining 20% of the sum of the fifteen-year lease payments
approximately $1,011,000 (RMB 6,900,000) upon delivery of operating permits and
related documents from the lessor.
These
operating lease agreements require that the Company pays certain operating
expenses applicable for the leased premises. According to the lease agreements,
the Company has prepaid lease payments for some or all of the lease terms, and
recorded prepaid lease payments as prepaid rent that will be amortized over the
terms of the lease agreements. Future minimum rental expense recognitions and
total obligations required under these operating leases are as
follows:
Years
Ending December 31,
|
Amount | |||
2011
|
$ | 3,790,000 | ||
2012
|
3,790,000 | |||
2013
|
3,755,000 | |||
2014
|
3,686,000 | |||
2015
|
3,686,000 | |||
Years
thereafter
|
33,233,000 | |||
Total
|
$ | 51,940,000 |
14
Total
rental expense for the nine months ended September 30, 2010 and 2009 amounted to
approximately $2,601,000 and $1,606,000, respectively; and approximately
$870,000 and $595,000 for the three months ended September 30, 2010 and 2009,
respectively.
Shipping
Agreement
In
February 2010, the Company entered a shipping agreement with a transportation
company for transporting petroleum products among the Company’s facilities from
February 1, 2010 through January 31, 2011. The shipping cost varies ranging from
RMB 10/ton, RMB 70/ton, and RMB 80/ton to transport petroleum products from
facility to facility. For the nine months ended September 30, 2010 and 2009, the
shipping cost paid to this transportation company was approximately $323,000 and
$543,000, respectively; and approximately $111,000 and $224,000, respectively,
for the three months ended September 30, 2010 and 2009.
Construction
Contracts
On
February 25, 2010, the Company entered into a contract with Tongchuan Gaoyuan
Construction Co., Ltd. to contract infrastructure for a new 50,000-ton biodiesel
production plant, which will be located at Northwest Naihuo Material Factory
adjacent to the current 100,000-ton biodiesel production plant. The
construction began March 16, 2010 and was expected to be completed by July 30,
2010. As of October 31, 2010, there is still a small portion of the
infrastructure that has yet to be completed due to inclement weather
condition. The total construction cost is approximately $1,977,400
(RMB 13,500,000). Based on the contract, the Company paid
approximately $585,900 (RMB 4,000,000) or 30% of total construction cost upon
commencement of the construction, and will pay approximately $1,281,600 (RMB
8,7500,000) or 65% of the total construction cost within 3 days after a
satisfactory inspection of completed infrastructure. The remaining
approximately $109,900 (RMB 750,000) serves as retainage for quality assurance,
and will be paid by the Company 180 days after the commencement of
operations.
On
February 26, 2010, the Company entered into a contract with Northwest Naihuo
Material Factory “the landlord” to reimburse the landlord approximately $292,900
(RMB 2,000,000) for the cost of demolition. Based on the contract,
the Company paid approximately $175,800 (RMB 1,200,000) within 10 days after
execution of the agreement, and paid the remaining balance within 5 days after
completion of demolition.
On April
30, 2010, the Company entered into a contract with Shaanxi Pinyi Decoration
Construction Co., Ltd. to renovate storage tanks, raw material storage,
production building, and research and development facility for the new
50,000-ton biodiesel production plant that located at Northwest Naihuo Material
Factory adjacent to the current 100,000-ton biodiesel production
plant. The construction began May 1, 2010 and would be completed by
July 30, 2010. As of October 31, 2010, there is still a portion of
the renovation work that has yet to be completed due to inclement weather
condition. The total construction cost is approximately $1,459,900
(RMB 9,900,000). Based on the contract, the Company paid
approximately $442,000 (RMB 3,000,000) or 30% of total construction cost upon
commencement of the construction, and will pay approximately $943,700 (RMB
6,400,000) or 65% of the total construction cost within 3 days after a
satisfactory inspection of completed infrastructure. The remaining
approximately $73,700 (RMB 500,000) serves as retainage for quality assurance,
and will be paid by the Company 180 days after the commencement of
operations.
15
Equipment Purchase
Agreements
On March
5, 2010, the Company entered into an equipment purchase agreement with Japan
Micro Energy Corporation (JMEC) to purchase biodiesel production equipment. The
purchase price is approximately $5,858,900 (RMB 40,000,000). At the
execution of the purchase agreement, the Company paid approximately $3,808,300
(RMB 26,000,000) or 65% of the purchase price as a down payment, and paid
approximately $1,757,700 (RMB 12,000,000) or 30% of the purchase price 5 days
before of the shipment. The remaining balance of approximately
$292,900 (RMB 2,000,000) or 5% of purchase price will be paid within 12 months
after the delivery. JMEC is committed to deliver the equipment within
150 days after execution of the purchase agreement, and will provide technical
personnel to assist installation, testing of the equipment. As of
September 30, 2010, a portion of the equipment was delivered to and received by
the facility, and the residual pieces of the equipment were in the process of
customs clearance. JMEC will further provide training to the Company’s personnel
to operate and maintain the equipment, and provide free service and maintenance
in one year after satisfactory installation and testing of the
equipment.
On March
8, 2010, the Company entered into an equipment purchase agreement with Japan
Shinwa Shouji Co., Ltd. (JSSC) to purchase biodiesel production
equipment. The purchase price is approximately $3,368,900 (RMB
23,000,000). At the execution of the purchase agreement, the paid approximately
$1,516,000 (RMB 10,350,000) or 45% of the purchase price as a down payment, and
paid approximately $1,684,400 (RMB 11,500,000) or 50% of the purchase price 7
days before of the shipment. The remaining balance of approximately
$168,400 (RMB 1,150,000) or 5% of purchase price will be paid within 12 months
after the delivery. JSSC is committed to deliver the equipment within
150 days after execution of the purchase agreement, and will provide technical
personnel to assist installation, testing of the equipment. As of
September 30, 2010, a portion of the equipment was delivered to and received by
the facility, and the residual pieces of the equipment were in the process of
customs clearance. JMEC will further provide training to the Company’s personnel
to operate and maintain the equipment, and provide free service and maintenance
in one year after satisfactory installation and testing of the
equipment.
14. BUSINESS
ACQUISITION
In
January 2010, the Company completed an acquisition of 100% of Xianyang Jinzheng
gas station, a privately owned service gas station, located in Xiangyang City,
Shaanxi Province, PRC. The acquisition furthers the Company’s growth
strategy and expansion in operation of its retail gas station business
segment. The total purchase price of Xianyang Jinzheng gas station
was approximately $9,962,202 (RMB 68,000,000) in cash with no assumption of
liabilities. The first installment payment of approximately
$6,973,440 (RMB 47,600,000) was made in 2009 and recorded as a
deposit. In January 2010, the Company paid approximately $2.5 million
of the unpaid balance. The total amount was reclassified to
fixed assets and intangible assets according to the appraised valuation.
Assets of Xianyang Jinzheng gas station consists of a 40-year land usage right
of 7 Mu (approximately 1.15 acres) of land, which is owned by the government; a
two-story building with 196 square meters (approximately 2,130 square feet)
in size; 12 gas pumps; 5 petroleum storage tanks; and gas station including
business office and fueling stations with 988 square meters
(approximately 10,620 square feet) in size.
In July
2010, the Company completed an acquisition of 100% of Xinyuan gas station, a
privately owned service gas station, located in Xi’an City, Shaanxi Province,
PRC. The Company previously leased the gas station. The acquisition
furthers the Company’s growth strategy and expansion in operation of its retail
gas station business segment. The total purchase price of Xinyuan gas
station was approximately $ 4,355,064 (RMB 29,600,000) in cash with no
assumption of liabilities. Assets of Xinyuan gas station consists of
a 17.5-year land usage right of 7,000 square meters (approximately 10.5 Mu or
1.73 acres) of land, which is owned by the government; a building with 140
square meters (approximately 1,507 square feet) in size; 6 gas pumps; 4
petroleum storage tanks; and gas station including business office and fueling
stations with 500 square meters (approximately 5,382 square feet) in
size.
The
acquisition was accounted for using the purchase method of
accounting. The total cost of the acquisition has been allocated to
the assets acquired based on their appraised fair value at the date of the
acquisition. Total assets and expected revenue of Xianyang Jinzheng and
Xinyuan are immaterial to the Company’s total assets and total revenue,
accordingly pro forma financial information was not presented.
16
The
following represents the allocation of the total purchase price.
Purchase
Price Allocation
|
||||||||||||
Assets
|
Xianyang
Jinzheng
(Unaudited)
|
Xinyuan
(Unaudited)
|
Total
(Unaudited)
|
|||||||||
Tangible
fixed assets
|
$ | 443,640 | $ | 382,198 | $ | 825,838 | ||||||
Land
usage right
|
2,490,009 | 1,118,791 | 3,608,800 | |||||||||
Gas
station operating right
|
7,028,553 | 2,854,075 | 9,882,628 | |||||||||
Total
|
$ | 9,962,202 | $ | 4,355,064 | $ | 14,317,266 | ||||||
Paid
in 2009 and transferred from other receivables and prepaid rents to
intangible assets
|
6,973,440 | - | 6,973,440 | |||||||||
Paid
in period ended September 30, 2010
|
2,490,040 | 4,355,064 | 6,845,104 | |||||||||
The
unpaid balance as at September 30, 2010
|
$ | 498,722 | $ | - | $ | 498,722 |
15.
BASIC AND DILUTED EARNING PER SHARES (EPS)
Basic EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similar to basic net income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Diluted net earnings per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. The following table presents a reconciliation of basic and diluted
earnings per share:
For
the Three Months Ended,
September
30
|
For
the Nine Months Ended,
September
30
|
|||||||||||||||
(Unaudited)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Net
income available to common shareholders
|
$ | 13,743,653 | $ | 9,873,448 | $ | 38,502,597 | $ | 25,901,434 | ||||||||
Weighted
average shares outstanding – basic
|
33,829,656 | 27,287,040 | 33,621,516 | 27,287,040 | ||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Convertible
preferred stock
|
6,101,208 | 6,893,259 | 6,308,974 | 6,893,259 | ||||||||||||
Unexercised
warrants and options
|
3,397,852 | 1,577,133 | 3,187,370 | 837,633 | ||||||||||||
Weighted
average shares outstanding – diluted
|
43,328,716 | 35,757,432 | 43,117,860 | 35,017,932 | ||||||||||||
Earnings
per share – basic
|
0.41 | 0.36 | 1.15 | 0.95 | ||||||||||||
Earnings
per share – diluted
|
$ | 0.32 | $ | 0.28 | $ | 0.89 | $ | 0.74 |
16. STOCKHOLDERS’
EQUITY
On
January 22, 2010, the Company and the investor executed agreements to amend the
warrant anti-dilution protection provisions of the warrant agreements for series
warrant A-1 and series warrant A-2 in relation to the Series A Convertible
Preferred Stock Agreement, dated October 23, 2007. Certain expired terms were
deleted from the agreements. Certain terms were modified to reflect current
market conditions. The execution of the amendments solidified the prior verbal
agreement.
On March
17, 2010, the investor converted 300,000 shares of Series B Convertible
Preferred stock to 300,000 shares of common stock. The conversion had
no cash impact.
On May
11, 2010, the investor converted 11,000 shares of Series A Convertible Preferred
stock into 50,000 shares of common stock, at a conversion rate of one share of
Series A Convertible Preferred stock for 4.54 shares of common stock. The
conversion had no cash impact.
On May
13, 2010, the investor converted 210,000 shares of Series B Convertible
Preferred stock to 210,000 shares of common stock. The conversion had
no cash impact.
17
Following
is a summary of warrant activity for the nine months ended September 30,
2010:
Number
of Shares
|
Average
Exercise Price per Share
|
Weighed
Average Remaining Contractual Term in Years
|
||||||||||
Outstanding
at December 31, 2009
|
4,007,273 | 3.82 | 3.43 | |||||||||
Exercisable
at December 31, 2009
|
3,977,273 | 3.80 | 3.44 | |||||||||
Granted
|
30,000 | 10.00 | 2.29 | |||||||||
Exercised
|
– | – | – | |||||||||
Forfeited
|
– | – | – | |||||||||
Outstanding
at September 30, 2010
|
4,037,273 | 3.86 | 2.61 | |||||||||
Exercisable
at September 30, 2010
|
4,007,273 | 3.82 | 2.59 |
17. SHARED-BASED
PAYMENT ARRANGEMENTS
On
September 10, 2009, the Company issued a stock option to a financial advisory
consultant to purchase 310,320 shares of common stock and to an investor
relations consultant to purchase 206,880 shares of common stock. The exercise
prices of both stock options are $4.50 per share. The stock options are provided
as remuneration for the financial advisory and investor relations consulting
services. The options were accounted for using the fair value method. The
options expire one year from the date of grant and immediately vested on the
grant date. The Company recognized compensation expense
of approximately $994,000 and $86,000 for the nine months ended
September 30, 2010 and 2009, respectively; and approximately $284,000 and
$86,000 for the three months ended September 30, 2010 and 2009,
respectively.
On
December 16, 2009, the Company issued a stock option to a financial advisory
consultant to purchase 20,000 shares of common stock. The exercise price of the
stock option is $7.09 per share. The stock option is a part of partial
remuneration for the financial advisory consulting service to be provided over
the course of 12 months. The option was accounted for using the fair value
method. The option expires six years from the grant date and is vested annually.
The Company recognized approximately $71,000 of compensation expense for this
option for the nine months ended September 30, 2010; and approximately $24,000
for the three months ended September 30, 2010.
On
January 4, 2010, the Company renewed service contracts with the three
independent directors and issued non-transferable stock purchase options to two
independent directors to purchase 20,000 shares of common stock each. The
exercise price is at $7.30 per share. These options were accounted for using the
fair value method. The option shall be terminated on the earlier of (i) the
tenth anniversary of the date of the agreement or (ii) the date as of which the
option has been fully exercised. The option is vested and becomes exercisable
after three months from the grant date. The option is vested in a 25% increment
every 3 months, in which each director provides directorship service to the
Company. The Company recognized approximately $182,100 of
compensation expense for these options for the nine months ended September 30,
2010; and approximately $60,700 for the three months ended September 30,
2010.
In
February 2010, the Company renewed the service contract with an investor
relations consulting firm for investor relations services. As a part of investor
relations consulting fee, the Company issued the investor relations consulting
firm warrants to purchase 30,000 shares of the Company’s common stock with a
strike price at $10.00 per share. The warrants vest on the one year anniversary
of the contract signature date, are exercisable only for cash and will expire 18
months from the date of vesting.
Stock
Option Grants under the 2003 Incentive Plan
On
October 10, 2009, the Board of Directors and the Compensation Committee
authorized and approved granting stock option awards to employees under the 2003
Incentive Plan (Plan). The Plan provides for the granting of non-qualified and
incentive stock options to officers, employees, and others. The stock
option exercise price is determined by the grant-date fair value of the
award. On January 1, 2010, the Company granted 2,752,000 of options
to employees with the exercise price at $7.04 per share. The options are vest
ratably by quarter over a 5-year period and expire 6 years from the date of
grant.
18
On June
23, 2010, the Company granted a 60,000 stock option award to the newly recruited
vice president of investor relations. The exercise price of the stock option is
$8.9 per share. The options vest ratably by quarter over a 5-year period and
expire 6 years from the date of grant.
The
Company uses the Black-Scholes option pricing model to estimate the fair value
of the grants, and amortizes the fair value of the grants over the applicable
vesting period. The Black-Scholes option-pricing model incorporates
expected various and highly subjective assumptions, including expected
forfeiture and expected volatility. The Company estimates the expected
forfeiture of the grants using the Company’s employment termination patterns,
which it believes are representative of future behalf. The Company
estimates the expected volatility of of its common stock using a
weighted-average historical volatility of the Company’s common stock. The risk
free interest rate assumption is determined using the Federal Reserve nominal
rates for U.S. Treasury zero-coupon bonds with maturities similar to those of
the expected term of the award being valued. The Company has not paid
dividend and anticipates not to pay dividend over the term of the
grants. Therefore, there is no expected dividend yield. The
accounting standards codification requires the Company to estimate option
forfeiture at the time of grant and periodically revise those estimates in
subsequent periods, if actual forfeitures differ from the
estimates. The Company records stock-based compensation expense only
for those awards expected to vest using an estimated forfeiture
rate.
Following
is a summary of stock option activity through the year ended September 30,
2010:
Options
|
Weighted
Average Exercise Price
|
Weighed
Average Remaining Contractual Term in Years
|
Aggregate
Intrinsic Value
|
|||||||||||||
Outstanding
at December 31, 2009
|
577,200 | $ | 4.56 | 1.41 | $ | 1,546,728 | ||||||||||
Issued
|
2,852,000 | $ | 7.08 | 6.31 | ||||||||||||
Exercised
|
518,200 | – | – | |||||||||||||
Cancelled/Forfeited
|
25,000 | – | – | |||||||||||||
Outstanding
at September 30, 2010
|
2,886,000 | $ | 7.04 | 6.46 | $ | - | ||||||||||
Exercisable
at September 30, 2010
|
343,100 | $ | 6.72 | 6.74 | $ | - |
Following
is a summary of non-vested options as September 30, 2010 and changes during the
three months then ended:
Options
|
Weighted
Average Fair Value at Grant Date
|
|||||||
Non-vested options
as of December 31, 2009
|
20,000 | $ | 7.09 | |||||
Issued
|
2,852,000 | $ | 7.08 | |||||
Exercised
|
1,000 | $ | 7.04 | |||||
Cancelled/
Forfeited
|
25,000 | $ | 7.04 | |||||
Vested
|
330,200 | $ | 7.08 | |||||
Non-vested
options as of September 30, 2010
|
2,541,800 | $ | 7.09 |
18.
SEGMENT REPORTING
The
accounting standards codification, “Disclosures about Segments of an Enterprise
and Related Information” requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products, services,
and channels. The management has determined that the Company has
three operating segments as defined by the accounting standards codification:
wholesale distribution of finished oil and heavy oil products, production and
sale of biodiesel, and operation of retail gas stations.
19
For
the three months ended September 30, 2010 and 2009
Wholesale
Distribution of Finished Oil and Heavy Oil
|
Production
and Sale of Biodiesel
|
Operation
of Retail Gas Stations
|
Total
|
|||||||||||||
2010
(Unaudited)
|
||||||||||||||||
Sales
|
$ | 64,012,831 | $ | 20,291,638 | $ | 22,490,244 | $ | 106,794,714 | ||||||||
Cost
of goods sold
|
56,871,516 | 14,234,708 | 19,683,887 | 90,790,112 | ||||||||||||
Segment
profit
|
7,141,315 | 6,056,930 | 2,806,357 | 16,004,602 | ||||||||||||
Selling,
general and administrative expenses
|
1,988,110 | |||||||||||||||
Income
from operations
|
14,016,492 | |||||||||||||||
Non-operating
income (expenses)
|
(272,839 | ) | ||||||||||||||
Net
income
|
13,743,653 | |||||||||||||||
Segment
assets
|
134,329,151 | 34,162,791 | 48,006,643 | 216,498,585 | ||||||||||||
Capital
expenditures
|
81,193 | 4,421,177 | 4,355,064 | 8,857,434 | ||||||||||||
2009
(Unaudited)
|
||||||||||||||||
Sales
|
$ | 47,234,076 | $ | 14,941,786 | $ | 10,225,148 | $ | 72,401,010 | ||||||||
Cost
of goods sold
|
42,099,609 | 10,538,597 | 8,906,782 | 61,544,988 | ||||||||||||
Segment
profit
|
5,134,467 | 4,403,189 | 1,318,366 | 10,856,022 | ||||||||||||
Selling,
general and administrative expenses
|
966,604 | |||||||||||||||
Income
from operations
|
9,859,418 | |||||||||||||||
Non-operating
income (expenses)
|
14,030 | |||||||||||||||
Net
income
|
9,873,448 | |||||||||||||||
Segment
assets
|
82,004,195 | 20,270,489 | 18,540,992 | 120,815,676 | ||||||||||||
Capital
expenditures
|
113,470 | - | - | 113,470 |
For
the nine months ended September 30, 2010 and 2009
Wholesale
Distribution of Finished Oil and Heavy Oil
|
Production
and Sale of Biodiesel
|
Operation
of Retail Gas Stations
|
Total
|
|||||||||||||
2010
(Unaudited)
|
||||||||||||||||
Sales
|
$ | 204,521,458 | $ | 53,668,922 | $ | 62,444,274 | $ | 320,634,654 | ||||||||
Cost
of goods sold
|
183,651,691 | 37,348,541 | 54,795,579 | 275,795,810 | ||||||||||||
Segment
profit
|
20,869,767 | 16,320,381 | 7,648,696 | 44,838,844 | ||||||||||||
Selling,
general and administrative expenses
|
5,859,828 | |||||||||||||||
Income
from operations
|
38,979,016 | |||||||||||||||
Non-operating
income (expenses)
|
(476,419 | ) | ||||||||||||||
Net
income
|
38,502,597 | |||||||||||||||
Segment
assets
|
134,329,151 | 34,162,791 | 48,006,643 | 216,498,585 | ||||||||||||
Capital
expenditures
|
91,990 | 12,744,538 | 6,845,104 | 19,681,632 | ||||||||||||
2009
(Unaudited)
|
||||||||||||||||
Sales
|
$ | 129,797,293 | $ | 40,137,252 | $ | 26,369,372 | $ | 196,303,917 | ||||||||
Cost
of goods sold
|
116,273,857 | 29,194,733 | 22,826,434 | 168,295,024 | ||||||||||||
Segment
profit
|
13,523,436 | 10,942,519 | 3,542,938 | 28,008,893 | ||||||||||||
Selling,
general and administrative expenses
|
2,163,179 | |||||||||||||||
Income
from operations
|
25,845,714 | |||||||||||||||
Non-operating
income (expenses)
|
55,720 | |||||||||||||||
Net
income
|
25,901,434 | |||||||||||||||
Segment
assets
|
82,004,195 | 20,270,489 | 18,540,992 | 120,815,676 | ||||||||||||
Capital
expenditures
|
204,646 | - | - | 204,646 |
20
19.
SUBSEQUENT EVENTS
On
October 18, 2010, the Company entered and executed a definitive purchase
agreement to acquire Chongqing Tianrun Energy Development Co., Ltd, a biodiesel
production plant with 50,000 tons of biodiesel production capacity, for a total
cash consideration of approximately $16.5 million (RMB 110,000,000). The
acquisition furthers the Company’s growth strategy and expansion in production
and sale of biodiesel business segment. The acquisition is accounted for asset
purchase with no assumption of liabilities. Assets of Chongqing Tianrum Energy
consists of land, tangible fixed assets including but not limited to biodiesel
production equipment, building, and related infrastructure, intangible assets,
intellectual properties of biodiesel production process. The Company will pay
60% of the total purchase price or approximately $9.9 million (RMB 66,000,000)
upon execution of the definitive purchase agreement. The Company will pay 30% of
the total purchase price or approximately $5.0 million (RMB 33,000,000) upon
transfer of title of the assets. The remaining 10% or approximately $1.6 million
(RMB 11,000,000) will be paid in 30 days after transfer of title.
On
October 19, 2010, the Company completed an acquisition of 100% of Shenmu gas
station, a privately owned service gas station, located in Shenmu County, Yulin
City, Shaanxi Province, PRC. The acquisition furthers the Company’s growth
strategy and expansion in operation of its retail gas station business
segment. The total purchase price of Shenmu gas station was
approximately $ 9,180,235 (RMB 61,000,000) in cash with no assumption of
liabilities. Assets of Shenmu gas station consists of a 50-year land
usage right of 13 Mu (approximately 2.14 acres) of land, which is owned by the
government; 10 gas pumps; 6 petroleum storage tanks; and gas station including
business office and fueling stations with 1,200 square meters (approximately
12,920 square feet) in size along with a diesel generator and a electricity
transformer. Upon execution of the purchase agreement, the Company will pay 60%
of the total purchase price or approximately $5,508,100 (RMB 36,660,000). The
Company will pay 30% of the total purchase price or approximately $2,754,000
(RMB 18,300,000) upon transfer of the operation permits, gas station operating
right and land usage right. The remaining 10% of the total purchase price or
approximately $918,000 (RMB 6,100,000) will be paid on one year anniversary from
the execution of the purchase agreement.
20. OPERATING
RISK
(a)
Country risk
Currently,
the Company’s revenues are mainly derived from sale of oil products and
bio-diesel in the central and western region of PRC. The Company hopes to expand
its operations in other regions of PRC, however, such expansion has not been
commenced and there are no assurances that the Company will be able to achieve
such an expansion successfully. Therefore, a downturn or stagnation in the
economic environment of the PRC could have a material adverse effect on the
Company’s financial condition.
(b)
Products risk
The
Company competes with larger companies, who have greater resources available for
expansion, marketing, research and development and the ability to attract more
qualified personnel. There can be no assurance that the Company will remain
competitive with larger competitors.
(c)
Exchange risk
The
Company cannot guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate could
fluctuate depending on changes in the political and economic environments
without notice.
21
(d)
Political risk
Currently,
the PRC is in a period of growth and is openly promoting business development in
order to bring more business into the PRC. Additionally, the PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company’s ability to operate
in the PRC could be affected.
(e) Key
personnel risk
The
Company’s future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
22
ITEM
2
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Forward
Looking Statements
This
quarterly report on Form 10-Q and other reports filed by the Company from time
to time with the Securities and Exchange Commission (collectively the “Filings”)
contain or may contain forward-looking statements and information that are based
upon the belief of, and information currently available to, the Company’s
management, as well as estimates and assumptions made by Company management.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date hereof.
When used in the filings, the words “anticipate,” “believe,” “estimate,”
“expect,” “future,” “intend,” “plan,” or the negative of these terms and similar
expressions as they relate to the Company or the Company’s management identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors (including the risks contained in the section of
this report entitled “Risk Factors”) relating to the Company’s industry, the
Company’s operations and results of operations, and any businesses that the
Company may acquire. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may differ significantly from those anticipated, believed, estimated,
expected, intended, or planned.
Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance, or achievements. Except as required by applicable law,
including the securities laws of the United States, the Company does not intend
to update any of the forward-looking and consider the various disclosures
made throughout the entirety of this quarterly report, as well as in the
Company’s other Filings, which include other disclosures of the risks and
factors that may affect our business, financial condition, results of
operations, and prospects.
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. Our financial statements would be affected to the extent
there are material differences between these estimates and actual results. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in its application.
There are also areas in which management’s judgment in selecting any available
alternative would not produce a materially different result.
OVERVIEW
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is intended to help the reader understand our
operations and our present business environment. MD&A is provided as a
supplement to—and should be read in conjunction with—our consolidated financial
statements and the accompanying notes thereto contained in “Item 1. Financial
Statements of this report. This overview summarizes the MD&A, which includes
the following sections:
·
|
Our Business—a general
overview of our three business segments, the material opportunities and
challenges of our business.
|
·
|
Critical Accounting Policies
and Estimates—a discussion of accounting policies that require
critical judgments and estimates.
|
·
|
Results of
Operations—an analysis of our Company’s consolidated results of
operations for the two years presented in our consolidated financial
statements. Except to the extent that differences among our operating
segments are material to an understanding of our business as a whole, we
present the discussion in the MD&A on a consolidated
basis.
|
·
|
Liquidity, Capital Resources
and Financial Position—an analysis of cash flows; an overview of
financial position.
|
23
The
following discussion contains forward-looking statements that involve risks,
uncertainties, and assumptions such as statements of our plans, objectives,
expectations, and intentions. Our actual results may differ materially from
those discussed in these forward-looking statements because of the risks and
uncertainties inherent in future events.
Our
Business
Company
Overview
We are a
leading non-state-owned integrated energy company in China engaged in three
business segments, wholesale distribution of finished oil and heavy oil
products, production and sale of biodiesel, and operation of retail gas
stations.
We now
operate four oil depots located in Xi’an, Shaanxi Province, have access to a
2.65 kilometer special transportation rail track to transport petroleum
products. We own and operate one 100,000 ton biodiesel production plant located
in Tongchuan City, Shaanxi Province, China with a goal of doubling biodiesel
production capacity to 200,000 tons in 2010 through both internal expansion and
an acquisition. We are currently constructing a 50,000-ton biodiesel production
plant in adjacent to the existing 100,000-ton biodiesel production facility. The
completion of the newly-constructed 50,000-ton biodiesel production facility has
been slightly delayed, due to recent inclement weather and a holdup on equipment
clearance by customs. However, we expect to commence testing and
ramp-up of the newly constructed biodiesel production facility in December 2010.
On October 18, 2010, we executed a definitive purchase agreement to acquire a
50,000 metric ton biodiesel production facility located in Chongqing City, China
from Chongqing Tianrun Energy Development Co., Ltd. and expect to ramp up
production and distribution of biodiesel product from this facility immediately
after the acquisition. The acquired facility uses first generation biodiesel
production technology, similar to the production process used in the Company’s
current 100,000-ton production plant. The Company’s expertise in biodiesel
production and its established distribution network should allow the acquired
facility to achieve gross margins of approximately 30%, We are the only
non-state owned biodiesel producer with a nationwide distribution license. We
will pay approximately $16.5 million in cash for the Chongqing Tianrun biodiesel
production facility. and expect the acquisition to add approximately $32 million
in revenue and $8 million in pretax income in 2011. The Chongqing Tianrun
biodiesel plant is subject to 15% corporate income tax rate. The Company will
fund the acquisition with cash on hand, which was approximately $79.7 million as
of September 30, 2010.
Our only
market is China. Currently, our products are sold in 14 provinces and
municipalities of China covering Shaanxi Province, Henan Province, Hebei
Province, Shangdong Province, Shanxi Province, Hunan Province, Hubei Province,
Sichuan Province, Guizhou Province, Yunnan Province, Fujian Province, Xinjiang
Province, Beijing, and Shanghai. On October 19, 2010, we acquired Shenmu
gas station located in Ylin City, Shenmu County, Shaanxi Province, PRC. We have
acquired land use right, gas station operating rights, and all of the assets of
Shenmu gas station for a total cash payment of approximately $9.2
million The gas station distributes both gasoline and diesel, which
may include blended biodiesel in the future. During the past twelve months, the
acquired gas station sold approximately 8,000 tons of fuel and generated
revenues of approximately $8.2 million. For the fiscal year of 2011, the Company
estimates the Shenmu gas station will sell approximately 12,000 tons of fuel and
generate approximately $12.3 million in revenues. We currently also operate 13
gas stations surrounding Xi’an city.
Fluctuations
in Fuel Prices During 2010
Until
2008, China’s fuel prices had been controlled by the National Development and
Reform Commission (NDRC) and not set by market supply and demand. Effective
January 1, 2009, the Chinese government implemented a new pricing regime for
refined oil products, aimed to link domestic oil prices more closely to changes
in the global crude oil prices in a controlled manner.
24
From 2006
to 2008, there were only two oil price adjustments in each year. However,
there were eight oil price adjustments in 2009. There have been two oil price
adjustments in 2010. We expect that oil prices in China will be adjusted more
frequently fluctuating in line with global oil prices.
In first
quarter of 2010, the average sales price for our oil products, which include
gasoline, diesel and heavy oil was $846 per ton (equivalent to approximately
$2.48 per gallon of gasoline and $2.80 per gallon of petro-diesel), compared to
an average price of $832 per ton (equivalent to approximately $2.44 per gallon
of gasoline and $2.67 per gallon of petro-diesel), during the fourth quarter of
2009. The global crude oil price had been stable from November 2009 to
March 2010.
On April
14, 2010, NDRC subsequently increased the prices of gasoline and diesel by RMB
320 or $46.9 per ton or 4.5% and RMB 320 or $46.9 per ton or 5.0%, respectively,
when global crude oil price reached $87 per barrel.
On June
1, 2010, NDRC subsequently decreased the prices of gasoline and diesel by RMB
230 or $33.7 per ton or 3.1% and RMB 220 or $32.2 per ton or 3.2%, respectively,
when global crude oil price declined $74 per barrel.
On
October 26, 2010, NDRC increased the retail selling price of gasoline and diesel
by RMB 230 or $34.5 per ton or 3.2% and RMB 220 or $33.0 per ton or 3.4%,
respectively, when global crude oil price stayed at $82 per barrel.
Tax
Exemptions
NDRC, the
Ministry of Finance and other governmental departments are formulating relevant
policies such as subsidies, refund of Value Added Taxes (“VAT”), relief on
consumption tax, corporate tax, and fuel tax to encourage bio-diesel
consumption. As a result, Xi’an Baorun is exempt from the fuel tax and corporate
income taxes. Xi’an Baorun is exempted from the corporate income tax
through the end of calendar year 2010.
Growth
and Expansion Plans
Management
plans to grow its biodiesel production, its distribution business, and expand
the footprint of its retail gas stations with a focus on expanding the biodiesel
segment. On the distribution and retail sides, we benefit from our advantageous
location, well-established supplier relationships, as well as an extensive
distribution network that has valuable railway access to reach remote parts of
China that other distribution companies located in Shaanxi Province cannot
currently reach. We plan to strengthen our outreach in certain key distribution
areas. We have demonstrated growth in sales volume of our distribution business
year-on-year, quarter-on-quarter as the results of our continuous efforts in
expanding distribution territories and in-depth penetration of existing customer
base creating more demand for oil products as their businesses grow and expand.
For the nine months ended September 30, 2010, sales volume of wholesale
distribution has increased by 32.5% from the same period in 2009. On October 19,
2010, we acquired Shenmu retail gas station located in Yulin City, Shenmu
County, Shaanxi Province, for a total cash consideration of approximately $9.2
million. We also plan to add one or two more retail gas stations through
acquisition or lease in 2010, which we believe will benefit our overall
distribution profit margins. We are currently operating 13 gas stations
including the Shenmu gas station that we just acquired.
We also
plan to expand our current biodiesel production capacity of 100,000 tons to
200,000 tons, and we commenced construction to increase our current capacity in
the third quarter of 2009. We anticipate $15 million in capital expenditures in
2010 to accomplish this goal. The completion of the newly-constructed 50,000-ton
biodiesel production facility has been slightly delayed, due to recent inclement
weather and a holdup on equipment clearance by customs. However, we
expect to commence testing and ramp-up of the newly constructed biodiesel
production facility in December 2010. We have secured enough raw materials to
supply 150,000 tons of capacity, but will also continue to work towards securing
more long-term sources of raw materials and new technology in the bio-energy
field. On October 18, 2010, we executed a definitive purchase agreement to
acquire Chongqing Tianrun Energy Development Co., Ltd., a biodiesel production
facility with 50,000 tons of biodiesel production capacity. We believe that
profit margins of the acquired company are similar to our current biodiesel
production. The acquisition cost approximately $17.1 million. We continue
pursuing strategic acquisitions that will quickly provide financial benefits to
us.
25
Management
believes the increase in sales volume from these initiatives will not only
offset the impact from fluctuations in fuel pricing, but also favorably impact
overall profits and cash flow.
Basis
of Presentations
Our
financial statements are prepared in accordance with the U.S. GAAP and the
requirements of Regulation S-X promulgated by the Securities and Exchange
Commission.
Critical
Accounting Policies and Estimates
Accounts
Receivable
Our
policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Based on historical collections,
no allowance was deemed necessary at September 30, 2010 and December 31, 2009,
as the Company did not experience any uncollectible accounts receivable and bad
debt write-off over the past years.
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods
comprises direct material, direct labor and an allocated portion of production
overheads.
Property,
Plant and Equipment
Property,
plant, and equipment are stated at the actual cost on acquisition less
accumulated depreciation and amortization. Depreciation and amortization are
provided for in amounts sufficient to relate the cost of depreciation assets to
operations over their estimated service lives, principally on a straight-line
basis. Most property, plant and equipment have a residual value of 5% of actual
cost. The estimated lives used in determining depreciation are:
Building
|
20
years
|
Vehicle
|
5
years
|
Office
Equipment
|
5
years
|
Production
Equipment
|
10
years
|
In
accordance with Statement of accounting standards codification, “Accounting for
the Impairment or Disposal of Long-Lived Assets”, we examine the possibility of
decreases in the value of fixed assets when events or changes in circumstances
reflect the fact that their recorded value may not be recoverable. The Company
believes that there were no impairments of its long-lived assets as of September
30, 2010 and December 31, 2009,.
Intangible
Assets
Our
intangible assets consist of definite-lived assets subject to amortization such
as gas station operating right, land usage right of a gas station, and land
usage right of agricultural plantation for a pilot program cultivating biodiesel
feedstock. We calculate amortization of the definite-lived intangible assets on
a straight-line basis over the useful lives of the related intangible
assets.
26
Revenue
Recognition
Our
revenue recognition policies are in compliance with Securities and Exchange
Commission Staff Accounting Bulletin 104. Sales revenue is recognized at the
date of shipment to customers when a formal arrangement exists, the price is
fixed or determinable, the delivery is completed, no other significant
obligations of the Company exist and collectability is reasonably assured.
Payments received prior to meeting all relevant criteria for revenue recognition
are recorded as unearned revenue. For Retail gas station sales, revenue is
recognized and cash is collected upon completion of fuel sales to
customers,
Foreign
Currency Translation
Our
functional currency is the Renminbi (“RMB”). For financial reporting purposes,
RMB has been translated into United States dollars (“USD”) as the reporting
currency. Assets and liabilities are translated at the exchange rate in effect
at the balance sheet date, except for fixed assets, intangible assets, and
prepaid rent that are stated at the historical cost. Revenues and expenses are
translated at the average rate of exchange prevailing during the reporting
period. Translation adjustments caused by different exchange rates from period
to period are included as a component of stockholders’ equity as “Accumulated
other comprehensive income.” Gains and losses resulting from foreign currency
transactions are included in income. On June 19, 2010, the Chinese central bank
announced that it would further the reform of the RMB exchange rate mechanism to
improve flexibility. At September 30, 2010, Renminbi has appreciated
approximately 1.34% from June 30, 2010. The Company does not believe that its
foreign currency exchange rate fluctuation risk is significant in a short period
of time. We anticipate that appreciation of Renminbi will continue. This
fluctuation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People’s Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People’s Bank of
China. There has been no significant fluctuation in exchange rate for the
conversion of RMB to USD after the balance sheet date.
Income
Tax Recognition
We
account for income taxes under accounting standards codification, “Accounting
for Income Taxes.” “Accounting for Income Taxes” requires the recognition of
deferred tax assets and liabilities for both the expected impact of differences
between the financial statements and the tax basis of assets and liabilities,
and for the expected future tax benefit to be derived from tax losses and tax
credit carry forwards. “Accounting for Income Taxes” additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.
Xi’an
Baorun Industrial has obtained income tax exemption for the years from 2004 to
the end of 2010, due to the fact that it uses waste gas, water and residue in
the production of its products. We believe that this exemption is in effect for
all periods presented. Currently, the PRC is in a period of growth and is openly
promoting business development in order to bring more business into the PRC. Tax
exemption is one of the many methods used to promote such business development.
If the exemption should be rescinded for future periods, Xi’an Baorun Industrial
would be subjected to tax liabilities. Had the abatement for income taxes
not been in effect for Baorun Industrial, we estimate that the consolidated pro
forma financial impact would be as follows:
For
the three months ended
September
30,
|
For
the nine months ended
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income before income taxes
|
$ | 13,743,653 | $ | 9,873,448 | $ | 38,502,597 | $ | 26,294,718 | ||||||||
Tax
provision
|
(3,709,213 | ) | (2,514,186 | ) | (10,487,492 | ) | (6,573,680 | ) | ||||||||
Net
income
|
$ | 10,034,440 | $ | 7,359,262 | $ | 28,015,105 | $ | 19,721,038 | ||||||||
Earnings
per share (Basic)
|
$ | 0.30 | $ | 0.27 | $ | 0.83 | $ | 0.72 | ||||||||
Earnings
per share (diluted)
|
$ | 0.23 | $ | 0.20 | $ | 0.65 | $ | 0.56 |
Xi’an
Baorun Industrial and Redsky Industrial, two PRC companies, entered into a
series of contracts whereby Redsky Industrial exercises significant control over
Xi’an Baorun Industrial, including the right to receive 100% of the net income
generated by Xi’an Baorun Industrial. While, as noted above, Xi’an Baorun
Industrial is exempt from income tax for the years from 2004 through 2010,
Redsky Industrial is not exempt from tax in those periods and is obligated for
applicable PRC taxes under PRC tax laws. We account for all income taxes in
accordance with “Accounting for Income Taxes” and “Accounting for Uncertainty in
Income Taxes,”
27
We
believe that the series of contracts entered into between Xi’an Baorun
Industrial and Redsky Industrial do not constitute taxable income for the
purposes of Redsky Industrial. Since commencement of these series of contracts,
Xi’an Baorun Industrial has not remitted any income to Redsky Industrial, nor
has Redsky Industrial demanded any remittance of income, nor is remittance
expected in the future, as Xi’an Baorun Industrial is anticipating to use its
undistributed earnings for future bio-energy development as was anticipated when
it obtained its original tax exemption. We have examined our tax position and
have determined that our tax position with regards to both these entities is in
compliance with applicable PRC tax laws. Pursuant to the accounting standards
codification, we have determined that we will reinvest indefinitely our earnings
to the biodiesel production facility and biodiesel production technology, and
accordingly no accrual of deferred tax liabilities was required as of September,
2010 and December 31, 2009 We have also analyzed the status of Redsky
Industrial and have determined that based on the aforementioned series of
contracts, if Redsky Industrial should be sold, dissolved or otherwise disposed
of, the obligations of Xi’an Baorun Industrial would be terminated under the
series of contracts, including Redsky Industrial’s right to 100% of Xi’an Baorun
Industrial’s net income. In addition, in accordance with “Accounting for
Uncertainty in Income Taxes”, we have examined our tax position in the context
of “Accounting for Contingencies.” Accounting for Uncertainty in Income
Taxes is an accounting requirement that discusses tax issues that have an
element of uncertainty. In accordance with “Accounting for Contingencies”, we
have determined that it is probable that our tax position with regards to both
Redsky Industrial and Xi’an Baorun Industrial is correct. Accordingly, no
deferred tax liability has been provided for.
Consolidation
of Variable Interest Entities
VIE’s are
entities that lack one or more voting interest entity characteristics. The
Company consolidates VIEs in which it is the primary beneficiary of its economic
gains or losses. The FASB has issued an accounting standards codification
(Revised December 2004), Consolidation of Variable Interest Entities.
Consolidation of Variable Interest Entities clarifies the application of
Accounting Research Bulletin, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. It separates entities into two groups: (1) those for
which voting interests are used to determine consolidation and (2) those for
which variable interests are used to determine consolidation. Consolidation of
Variable Interest Entities clarifies how to identify a variable interest entity
and how to determine when a business enterprise should include the assets,
liabilities, non-controlling interests and results of activities of a variable
interest entity in its consolidated financial statements.
In
December 2009, the FASB issued guidance for Consolidations – Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities (
Topic 810 ). The amendments in this update are a result of incorporating the
provisions of accounting standards codification, “Consolidation of Variable
Interest Entities”, Amendments to accounting standards codification, “, and
accounting standards codification, “Interpretation of Consolidation of Variable
Interest Entities, revised December 2004.” Management believes this Statement
will have immaterial impact on the financial statements of the
Company.
Contingencies
Management
assesses the probability of loss for certain contingencies and accrues a
liability and/or discloses the relevant circumstances, as appropriate when
Management believes that any liability to the Company that may arise as a result
of having to pay out additional expenses that may have a material adverse effect
on the financial condition of the Company taken as a whole.
Litigation
In the
normal course of business, the Company may be involved in legal proceedings. The
Company accrues a liability for such matters, when it is probable that a
liability has been incurred and the amount can be reasonably estimated. When
only a range of possible loss can be established, the most probable amount in
the range is accrued. If no amount within this range is a better estimate than
any amount within the range, the minimum amount in the range is accrued. The
accrual for a litigation loss contingency might include, for example, estimates
of potential damages, outside legal fees and other directly related costs
expected to be incurred. There is no material litigation against the
Company.
28
Results
of Operations
For
the three months ended September 30, 2010 and 2009
Wholesale
Distribution
of Finished Oil and Heavy Oil
|
Production
and Sale of Biodiesel
|
Operation
of Retail Gas Stations
|
Total
|
|||||||||||||
2010
(Unaudited)
|
||||||||||||||||
Sales
|
$ | 64,012,831 | $ | 20,291,638 | $ | 22,490,244 | $ | 106,794,714 | ||||||||
Cost
of goods sold
|
56,871,516 | 14,234,708 | 19,683,887 | 90,790,112 | ||||||||||||
Segment
profit
|
7,141,315 | 6,056,930 | 2,806,357 | 16,004,602 | ||||||||||||
Selling,
general and administrative expenses
|
1,988,110 | |||||||||||||||
Income
from operations
|
14,016,492 | |||||||||||||||
Non-operating
income (expenses)
|
(272,839 | ) | ||||||||||||||
Net
income
|
13,743,653 | |||||||||||||||
Segment
assets
|
134,329,151 | 34,162,791 | 48,006,643 | 216,498,585 | ||||||||||||
Capital
expenditures
|
81,193 | 4,421,177 | 4,355,064 | 8,857,434 | ||||||||||||
2009
(Unaudited)
|
||||||||||||||||
Sales
|
$ | 47,234,076 | $ | 14,941,786 | $ | 10,225,148 | $ | 72,401,010 | ||||||||
Cost
of goods sold
|
42,099,609 | 10,538,597 | 8,906,782 | 61,544,988 | ||||||||||||
Segment
profit
|
5,134,467 | 4,403,189 | 1,318,366 | 10,856,022 | ||||||||||||
Selling,
general and administrative expenses
|
966,604 | |||||||||||||||
Income
from operations
|
9,859,418 | |||||||||||||||
Non-operating
income (expenses)
|
14,030 | |||||||||||||||
Net
income
|
9,873,448 | |||||||||||||||
Segment
assets
|
82,004,195 | 20,270,489 | 18,540,992 | 120,815,676 | ||||||||||||
Capital
expenditures
|
113,470 | - | - | 113,470 |
Net sales. Net sales for the
three months ended September 30, 2010 were approximately $106.8 million compared
to the same period in 2009 of approximately $72.4 million, an increase in
revenues of $34.4 million, or 47.5%. The increase was mainly due to strong
market demand for finished oil and heavy oil products, sales volume growth
generated by the gas stations, and increase in average selling prices. Sales
from wholesale distribution for the three months ended September 30, 2010 was
$64.0 million, compared to $47.2 million in the same period of 2009, an increase
of $16.8 million, or 35.5%. For the three months ended September 30, 2010 and
2009, sales volume of wholesale distribution were 82,600 tons and 62,000 tons,
respectively, with an increase of 21,000 tons or 33.2% from the same period in
2009, as a result of increase of sales to our existing customers to support
their business growth and increase the number of our distributors and end
customers. Average selling prices of wholesale distribution finished oil
products and heavy oil products increased by 11.6% and 40.5%, respectively from
same period in 2009. Sales from production and sale of biodiesel segment for the
three months ended September 30, 2010 was $20.3 million, compared to $14.9
million in the same period of 2009, an increase of $5.4 million or 35.8%. Sales
volume of biodiesel for the three months ended September 30, 2010 and 2009 were
24,000 tons and 19,700 tons, respectively, with a increased of 4,300 tons or
21.8%, compared to the same period of 2009. Furthermore, average
selling price of biodiesel increased approximately by 11.4% along with increases
of average selling prices in finished oil products. Sales from our retail gas
station for the three months ended September 30, 2010 was $22.5 million,
compared to $10.2 million in the same period of 2009, an increase of $12.3
million or 120.0%. Sales volume of gas stations for the three months ended
September 30, 2010 and 2009 were 22,800 tons and 12,000 tons, respectively, an
increased by 10,800 tons or 90% from the same period in 2009. The increased was
attributed to an increase of number gas stations from 7 gas stations in the
third quarter of 2009 to 12 gas stations in the same period of 2010.
Furthermore, average selling price of retail gas station increased by
approximately 15.8% from the same period in 2009.
29
Cost of sales. Cost
of sales for the third quarter of 2010 was approximately $90.8 million compared
to the cost of sales in the same period of 2009 of approximately $61.5 million,
an increase of $29.3 million, or 47.5%. The increase in cost of sales was
attributable to an increase in production and sales activities during the third
quarter of 2010. Cost of sales as a percentage of sales was approximately 85.0%
for the three months ended September 30, 2010 and 2009.
Gross profit. Gross profit
was approximately $16.0 million for the three months ended September 30, 2010 as
compared to approximately $10.9 million for the same period of 2009,
representing same gross margins of approximately 15.0% for both periods. During
the third quarter of 2010, the gross profit margin for wholesales distribution
of finished oil and heavy oil products was approximately 11.2%, the gross profit
margin for production and sale of biodiesel was approximately 29.8%, the gross
margin for operation of retail gas stations was approximately 12.5%, versus
10.9%, 29.5%, and 12.9%, respectively, compared to the same period of
2009. The increase in gross profit in wholesale distribution business was
due to change of product sales mix as a result of sales volume of heavy oil
products that have high gross margin increased by 342.1% from the same period of
2009.
Operating expenses.
Selling, general and administrative expenses for the third quarter of 2010 were
approximately $2.0 million while it was $1.0 million for the same period of 2009
with an increase of $1.0 million or 105.7%. This increase was mainly attributed
approximately $0.7 million of employee stock option expense and approximately
$0.4 million of stock options awarded to consulting advisors. Total operating
expenses as a percentage of sales was 1.9% and 1.3% for the third quarter of
2010 and 2009, respectively. We expect our professional fees will at least
maintain at current level for the remainder of 2010, as we continue to engage an
outside consulting firm to work on our Sarbanes Oxley compliance, and recognize
compensation expense to employee stock option awards. We also expect to have an
increase in other general and administrative expenses in future reporting
periods, as our business expands.
Income from Operations.
Income from operations for the three months ended September 30, 2010 was $14.0
million compared to $9.9 million in the same period of 2009. Income from
operations as a percentage of sales for the three months ended September 30,
2010 and 2009 were 13.1% and 13.6%, respectively. The decrease in income from
operations as a percentage of sales was attributable to the additional selling,
general and administrative expenses.
Net income. The net
income for the third quarter of 2010 was $13.7 million as compared to $9.9
million in the same period of 2009. It was an increase of $3.9 million in
net profit or 39.2%. This increase was attributable to economies of scale
combined with rapid growth in revenue from wholesale distribution of finished
oil and heavy oil products and operation of retail gas stations segments.
Management believes that the net income increase is the result of the fast and
continuing revenue growth. Net income will continue to increase as
we will continue to increase sales volume in wholesale distribution and
operation of retail gas stations. Upon completion of the newly constructed
50,000-ton biodiesel production plant in the fourth quarter of 2010, and
completion of the acquisition and intergration of biodiesel producer with
50,000-ton production capacity in the fourth quarter 2010, we expect that
biodiesel segment will significantly contribute to the growth in revenue and net
income in 2011..
For
the nine months ended September 30, 2010 and 2009
Wholesale
Distribution of Finished Oil and Heavy Oil
|
Production
and Sale of Biodiesel
|
Operation
of Retail Gas Stations
|
Total
|
|||||||||||||
2010
(Unaudited)
|
||||||||||||||||
Sales
|
$ | 204,521,458 | $ | 53,668,922 | $ | 62,444,274 | $ | 320,634,654 | ||||||||
Cost
of goods sold
|
183,651,691 | 37,348,541 | 54,795,579 | 275,795,810 | ||||||||||||
Segment
profit
|
20,869,767 | 16,320,381 | 7,648,696 | 44,838,844 | ||||||||||||
Selling,
general and administrative expenses
|
5,859,828 | |||||||||||||||
Income
from operations
|
38,979,016 | |||||||||||||||
Non-operating
income (expenses)
|
(476,419 | ) | ||||||||||||||
Net
income
|
38,502,597 | |||||||||||||||
Segment
assets
|
134,329,151 | 34,162,791 | 48,006,643 | 216,498,585 | ||||||||||||
Capital
expenditures
|
91,990 | 12,744,538 | 6,845,104 | 19,681,632 | ||||||||||||
2009
(Unaudited)
|
||||||||||||||||
Sales
|
$ | 129,797,293 | $ | 40,137,252 | $ | 26,369,372 | $ | 196,303,917 | ||||||||
Cost
of goods sold
|
116,273,857 | 29,194,733 | 22,826,434 | 168,295,024 | ||||||||||||
Segment
profit
|
13,523,436 | 10,942,519 | 3,542,938 | 28,008,893 | ||||||||||||
Selling,
general and administrative expenses
|
2,163,179 | |||||||||||||||
Income
from operations
|
25,845,714 | |||||||||||||||
Non-operating
income (expenses)
|
55,720 | |||||||||||||||
Net
income
|
25,901,434 | |||||||||||||||
Segment
assets
|
82,004,195 | 20,270,489 | 18,540,992 | 120,815,676 | ||||||||||||
Capital
expenditures
|
204,646 | - | - | 204,646 |
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
Nine
months ended, September, 2010
|
Nine
months ended, September, 2009
|
|||||||||||||||
$
|
% of Sales
|
$
|
% of Sales
|
|||||||||||||
Net
sales
|
320,634,654 | 100.0 | % | 196,303,917 | 100.0 | % | ||||||||||
Cost
of goods sold
|
275,795,810 | 86.0 | % | 168,295,024 | 85.7 | % | ||||||||||
Gross
profit
|
44,838,844 | 14.0 | % | 28,008,893 | 14.3 | % | ||||||||||
Total
operating expenses
|
5,859,828 | 1.8 | % | 2,163,179 | 1.1 | % | ||||||||||
Income
from Operation
|
38,979,016 | 12.2 | % | 25,845,714 | 13.2 | % | ||||||||||
Other
income (expenses)
|
(476,419 | ) | -0.1 | % | 55,720 | - | % | |||||||||
Net
income
|
38,502,597 | 12.1 | % | 25,901,434 | 13.2 | % |
Operations
Results for the Nine months Ended September 30, 2009
Net sales. Net sales for the
nine months ended September 30, 2010 were approximately $320.6 million compared
to $196.3 million in the same period in 2009, an increase of $124.3 million, or
63.3%. The increase was mainly attributed to the growths in wholesale
distribution and retail gas station sectors and selling price increases. We have
continued to expand new sales channels and territories. We have also increased
in-depth penetration to our existing customers creating more demand for oil
products as their businesses grow and expand. For the nine months ended
September 30, 2010 and 2009, sales volume of wholesale distribution were 255,000
tons and 192,300 tons, respectively, with an increase of 62,700 tons or 32.6%
from the same period in 2009. Secondly, in our retail gas station segment we had
increased revenue of $36.1 million or 136.8% compared to the same period in 2009
as the result of addition of 5 new fully operational gas stations. Sales volume
of gas stations for the nine months ended September 30, 2010 and 2009 were
64,500 tons and 33,900 tons, respectively, an increased by 30,600 tons or 90.3%
from the same period in 2009. Sales volume of biodiesel for the nine months
ended September 30, 2010 and 2009 were 64,800 tons and 57,800 tons,
respectively, an increased by 7,000 tons or 12.1% from the same period in 2009.
Furthermore, for the nine months ended of September, 2010 the average selling
price of wholesale distribution of finished oil and heavy oil products,
production and sale of biodiesel and operation of retail gas station increased
18.8%, 19.3%, and 24.4%, respectively from the same period in 2009.
30
Cost of sales. Cost of sales
for the nine months ended September 30, 2010 was approximately $275.8 million
compared to $168.3 million in the same period of 2009, an increase of $107.5
million, or 63.9%. The increase in cost of sales was attributable to an increase
in production and sales activities during the nine months of 2009. Cost of sales
as a percentage of sales was approximately 86.0% for the nine months of 2010 and
85.7% for the same period in 2009.
Gross profit. Gross profit
was approximately $44.8 million for the nine months ended September 30, 2010 as
compared to approximately $28.0 million for the same period in 2009,
representing gross margins of approximately 14.0% and 14.3%, respectively. For
the nine months ended September 30, 2010, the gross profit margin for production
and sales of biodiesel oil was approximately 30.4%, and the gross profit margin
for wholesale distribution of finished oil and heavy oil products, such as
gasoline and diesel oil, was approximately 10.2%, versus 27.3% and 10.4%,
respectively, in the same period of 2009. The decrease in gross margin of oil
distribution was attributed to favorable frequent pricing adjustments by the
NDRC reflecting global crude oil pricing in 2009. The increase in the gross
margin of biodiesel was attributed to the higher selling price compared to the
same period in 2009. The gross profit margin of retail gas stations was
approximately 12.2% for the nine months of 2010, as compared to 13.4% in the
same period of 2009. The decrease was attributed to the inefficiency of and the
promotion for the new gas stations we leased and acquired in the first quarter
of 2010. We expect our gross margin to maintain at least at the current level
with improvements from upwards pricing adjustments in the China domestic market,
significant increase in automobiles, and efficiency improvements from the
operation retail gas stations.
Operating expenses. Selling,
general and administrative expenses for the nine months ended September 30, 2010
were approximately $5.9 million compared to $2.2 million for the same period in
2009, an increase of $3.9 million or 170.9%. This increase was mainly attributed
approximately $2.1 million of employee stock option expense and approximately
$1.3 million of stock options awarded to consulting advisors. Total operating
expenses as a percentage of sales was 1.8% and 1.1% for the nine months ended
September 30, 2010 and 2009, respectively. We expect our professional fees will
at least maintain at current level for the remainder of 2010, as we continue to
engage an outside consulting firm to work on our Sarbanes Oxley compliance, and
recognize compensation expense to employee stock option awards. We also expect
to have an increase in other general and administrative expenses in future
reporting periods, as our business expands.
Net income. The net income
for the nine months ended September 30, 2010 was $38.5 million compared to $25.9
million in the same period in 2009, an increase of $12.6 million or 48.7%. This
increase was attributable to economies of scale combined with rapid growth in
revenue in our distribution and retail business segments. Management believes
that the net income increase is the result of the rapid and continuing revenue
growth, as well as controlling costs and operating expenses.
Liquidity
and Capital Resources
As of
September 30, 2010 and December 31, 2009, we had cash and cash equivalents of
approximately $79.7 million and $62.4 million, respectively. At September 30,
2010, current assets were approximately $151.6 million and current liabilities
were approximately $18.5 million, as compared to current assets of approximately
$131.4 million and current liabilities of approximately $10.2 million at
December 31, 2009. Working capital equaled approximately $133.6 million at
September 30, 2010, compared to $121.1 million at December 31, 2009, a increase
of 10.3%. The
increase in working capital in the nine months ended September 30, 2010 was
mainly due to an increase in net income of $12.6 million. The current
ratio was 8.2-to-1 at September, 2010, compared to 12.8-to-1 at the December 31,
2009.
We
believe we have sufficient working capital to sustain our current business due
to expected increased sales volume, revenue and net income from operations. We
intend to continue the expansion of our current operations by (i) extending oil
distribution network to other provinces outside of our current territory, (ii)
acquiring biodiesel production plants; (iii) acquiring new technology of
biodiesel production capability, (iv) expanding our 100,000 ton biodiesel
manufacturing facility to 200,000 tons by constructing a new 50,000-ton of
biodiesel production plant and acquiring a Chongqing City based biodiesel
proudcer with a 50,000-ton biodiesel production capacity; and (v) acquiring or
leasing several additional gas stations to broaden retail channels over the in a
near future. We expect to finance such expansion through our cash on
hand, bank loans, the issuance of debt or equity securities, or a
combination thereof. Failure to obtain such financing could have an
adverse effect on our business expansion.
31
Our
future capital requirements will depend on a number of factors,
including:
|
·
|
Development
of new sales territories, sales offices, and sales force for our wholesale
distribution of finished oil and heavy oil products and required working
capital to sustain our existing market share and support the growth in
this business segment. This development can be achieved by organic growth
or through acquisition;
|
|
·
|
Expanding
of market share for our retail gas stations both in terms of quantity and
geographic location and required working capital to support the
growth;
|
|
·
|
Our
ability to maintain our existing oil suppliers and establish collaborative
relationships with new suppliers;
|
|
·
|
Increase
our biodiesel production capacity through completion of a strategic
acquisition of a biodiesel producer with 50,000-ton production capacity
and construction of a new facility with 50,000-ton of production capacity
in 2010; and continue pursuing expansion of biodiesel production capacity
through both internal build-out and mergers and acquisitions;
and
|
|
·
|
Development
and commercialization of new technology in biodiesel production capacity
and apply the new technology to the new biodiesel
facilities.
|
We
anticipate incurring immaterial research and development expenses during the
next 12 months as a result of us working with research centers of local
universities and colleges.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the years ended September 30, 2010 and
2009.
Nine
months Ended September 30,
|
||||||||
2010
(Unaudited)
|
2009
(Unaudited)
|
|||||||
Cash
provided by (used in):
|
||||||||
Operating
Activities
|
$ | 35,585,989 | $ | 19,262,865 | ||||
Investing
Activities
|
(19,681,632 | ) | (204,646 | ) | ||||
Financing
Activities
|
– | (1,323,999 | ) |
Net cash
provided operating activities was $35.6 million in the nine months ended
September 30, 2010, compared to $19.3million of cash provided by operation in
the same period of 2009. The net cash inflow increased during the nine months of
2010 was primarily due to a large increase in net income of $12.6 million, with
an increase in advance from customer amounting to $10.0 million offset by
increases in accounts receivable of $4.6 million and prepaid expenses of $2.7
million.
Net cash
used in investing activities was $19.7 million in the nine months ended
September of 2010. During the nine months ended September of 2010, we spent
approximately $12.8 million to purchase equipments for constructing a 50,000-ton
biodiesel manufacturing facility, and approximately $2.5 million and $4.3
million to complete acquisition of Xianyang Jinzheng and to purchase Xinyuan gas
station.
There was
no financing activity in the nine months ended September 30, 2010. In the nine
months ended September, 2009, we paid off approximately $2.2 million of
revolving credit facilities with local banks, and we received approximately $0.9
million released from the escrow agreement as a result of us having satisfied
the escrow requirements.
32
Inflation
We do not
believe that inflation had a significant negative impact on our results of
operations during the nine months ended September 30, 2010. However, there
is concern of inflation for the remainder of 2010.
Off-Balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
stockholders’ equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
Contractual
Obligations and Commitments
As a
smaller reporting company we are not required to provide information required by
this Item.
Recently
Issued Accounting Pronouncements
Refer to
Note 2 of Notes to Consolidated Financial Statements for a discussion of recent
accounting standards and pronouncements.
ITEM
3
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
As a
smaller reporting company we are not required to provide information required by
this Item.
ITEM
4T.
|
CONTROLS
AND PROCEDURES.
|
We
maintain “disclosure controls and procedures,” as such term is defined under
Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We have carried out an
evaluation as required by Rule 13a-15(d) under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of September 30, 2010. Based upon their
evaluation and subject to the foregoing, the Chief Executive Officer and Chief
Financial Officer concluded that as of September 30, 2010 our disclosure
controls and procedures were effective in ensuring that material information
relating to us, is made known to the Chief Executive Officer and Chief Financial
Officer by others within our company during the period in which this report was
being prepared.
There
were no changes in our internal controls over financial reporting identified in
connection with the evaluation that occurred during the quarter ended September
30, 2010 that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.
33
Part
II
OTHER
INFORMATION
ITEM
1
|
LEGAL
PROCEEDINGS
|
None.
ITEM
1A.
|
RISK
FACTORS
|
None.
ITEM
2
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
On
November 4, 2009, we consummated a public offering pursuant to a Registration
Statement on Form S-1 (File No. 333 - 161831), which was declared effective by
the SEC on October 29, 2009, of 5,000,000 shares of common stock at a public
offering price of $5.75 per share, and subsequently on November 18, 2009, we
consummated a public offering of an additional 750,000 shares of common stock at
the same price as a result of the exercise of the over-allotment
option. Aggregate gross proceeds were approximately $33.1 million and
we received net proceeds of approximately $30.7 million from the offering, after
deducting underwriting discounts and estimated offering expenses of
approximately $2.4 million.
Since the
consummation of the offering, we have so far used approximately $12.7
million of the net proceeds from the offering to begin construction of a new
biodiesel facility and expect to spend approximately additional $2.3 million to
complete the construction. We just executed a definitive agreement to acquire
Chongqing Tianrun Energy Development Co., Ltd., located in Chongqing City, and
expect to use approximately $16.5 million of the net proceeds from the offering
to close the acquisition.
ITEM
3
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4
|
OTHER
INFORMATION
|
None.
ITEM
5
|
EXHIBITS
|
The
exhibits listed on the Exhibit Index are filed as part of this
report.
(a) Exhibits:
31.1 Certification
by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification
by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification
by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
34
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CHINA
INTEGRATED ENERGY, INC.
|
|||
Dated:
November 5, 2010
|
By:
|
/s/
Xincheng Gao
|
|
Name:
Xincheng Gao
|
|||
Title:
Chief Executive Officer and President
|
35
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
|
31.1
|
Certification
by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
by Chief Executive Officers and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
36