Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2010
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from_______to_______
Commission file number 333-156383
China Chemical Corp.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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26-3018106
(I.R.S. Employer Identification No.)
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1, Electric Power Road
Zhou Cun District
Zibo, P.R. China
(Address of principal executive offices)
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255330
(Zip Code)
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Registrant’s telephone number, including area code +86 0533-6168699
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No
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 of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed fiscal year was $66,011,295.
As of March 28, 2011, there were 30,015,000 shares of Common Stock, par value $0.0001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
CHINA CHEMICAL CORP.
Table of Contents
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Page
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PART I
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Item 1.
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Business.
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3 |
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Item 1A.
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Risk Factors.
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15 |
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Item 1B.
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Unresolved Staff Comments.
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29 |
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Item 2.
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Properties.
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29 |
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Item 3.
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Legal Proceedings.
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30 |
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Item 4.
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Reserved.
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30 |
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
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31 |
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Item 6.
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Selected Financial Data.
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31 |
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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32 |
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk.
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32 |
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Item 8.
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Financial Statements and Supplementary Data.
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43 |
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Item 9.
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
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44 |
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Item 9A(T).
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Controls and Procedures.
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44 |
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Item 9B.
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Other Information.
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44 |
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance.
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45 |
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Item 11.
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Executive Compensation.
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48 |
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
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49 |
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence.
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50 |
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Item 14.
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Principal Accountant Fees and Services.
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55 |
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules.
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56 |
2
PART I
Forward-Looking Statements
Forward-looking statements in this report, including without limitation, statements related to China Chemical Corp.’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) China Chemical Corp.’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of China Chemical Corp.; (ii) China Chemical Corp.’s plans and results of operations will be affected by China Chemical Corp.’s ability to manage growth; and (iii) other risks and uncertainties indicated from time to time in China Chemical Corp.’s filings with the Securities and Exchange Commission (“SEC”).
In some cases, you can identify forward-looking statements by terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘could,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ or ‘‘continue’’ or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this report.
Factors that might affect our forward-looking statements include, among other things:
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overall economic and business conditions;
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the demand for our goods and services;
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competitive factors in the industries in which we compete;
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changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations);
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the outcome of litigation and governmental proceedings;
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interest rate fluctuations and other changes in borrowing costs;
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other capital market conditions, including availability of funding sources;
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potential further impairment of our indefinite-lived intangible assets and/or our long-lived assets; and
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changes in government regulations related to the broadband and Internet protocol industries.
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China Chemical Corp. (the “Company”, “we”, “us” or “our”) was incorporated in the State of Delaware on July 16, 2008 under the name Bomps Mining, Inc.
On September 24, 2010, the Company entered into an Agreement and Plan of Merger and Reorganization with its newly formed wholly-owned subsidiary, China Chemical Corp. (the “Merger Sub”), pursuant to which the Merger Sub was merged into and with the Company. In connection with the merger, the Company changed its name from Bomps Mining, Inc. to China Chemical Corp. In accordance with §253 of the Delaware General Corporation Law (the “DGCL”), the Company was not required to obtain shareholder approval of the merger with its wholly-owned subsidiary. Pursuant to §253 of the DGCL, in any case in which at least 90% of the outstanding shares of each class of the stock of a corporation or corporations, of which class there are outstanding shares that, absent this subsection, would be entitled to vote on such merger, is owned by another corporation and one of the corporations is a corporation of the State of Delaware and the other or others are corporations of the State of Delaware, or any other state or states, or the District of Columbia and the laws of the other state or states, or the District permit a corporation of such jurisdiction to merge with a corporation of another jurisdiction, the corporation having such stock ownership may either merge the other corporation or corporations into itself and assume all of its or their obligations, or merge itself, or itself and 1 or more of such other corporations, into 1 of the other corporations by executing, acknowledging and filing a certificate of such ownership and merger setting forth a copy of the resolution of its board of directors to so merge and the date of the adoption. Further, if the surviving corporation is a Delaware corporation, it may change its corporate name by inclusion of a provision to that effect in the resolution of merger adopted by the directors of the parent corporation and set forth in the certificate of ownership and merger.
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In addition, on September 24, 2010, the Company effected a nine-to-one stock dividend whereby each stockholder of record of the Company as of October 7, 2010 (the “Record Date”) was issued 9 shares of common stock for each 1 share of common stock which they hold as of the Record Date (the “Stock Dividend”), unless otherwise indicated in this Annual Report, all share amounts reflect the Stock Dividend.
On September 30, 2010, the Company entered into a Share Exchange Agreement with Gold Champ Consultants Limited, a Hong Kong corporation (“Gold Champ”) and the shareholders of Gold Champ, pursuant to which the Company acquired 100% of the issued and outstanding capital of Gold Champ in exchange for 19,861,700 shares of the Company’s common stock, par value $0.0001 (the “Share Exchange”). Prior to the Share Exchange, the Company adopted the China Chemical Corp. 2010 Incentive Stock Plan (the “2010 Plan”) and reserved for issuance 500,000 shares of common stock for issuance as awards to officers, directors, employees, consultants and others. Upon the closing of the Share Exchange, the Company issued an aggregate of 38,300 shares of common stock to certain eligible individuals under the 2010 Plan. In addition, the Company issued 100,000 shares of common stock to its investor relations firm. Gold Champ is a holding company whose asset is 100% of the registered capital of Zibo Costar Information Consulting Co., Ltd. (“Zibo Costar Information Consulting”), a Wholly-Owned Foreign Enterprise ("WOFE") organized under the laws of the People’s Republic of China (“PRC”). All of Gold Champ's operations are conducted in China through Zibo Costar Information Consulting, and through contractual arrangements with Zibo Jiazhou Chemical Industry Co., Ltd., a limited liability enterprise organized under the laws of the People’s Republic of China (“Zibo Jiazhou Chemical”). Zibo Jiazhou Chemical is a manufacturing company that is based in Shandong, China. It is principally engaged in the manufacturing of organic chemical compounds. At the time of the Share Exchange, the Company was not engaged in any active business. Following the Share Exchange, we intend to carry on the business of Zibo Jiazhou Chemical, our PRC operating entity, as our sole line of business.
In connection with the Share Exchange, the following transactions took place:
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Doug Cole resigned as the Company’s President, Secretary, Treasurer on September 30, 2010. Following the Share Exchange, he will retain his position as a member of the Company’s Board of Directors.
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Lu Feng, Chairman of Gold Champ, Zibo Costar Information and Zibo Jiazhou Chemical, was elected to serve on the Company’s Board of Directors as Chairman, and was appointed as Chief Executive Officer and President of the Company.
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Lu Lingliang, Vice-Chairman of Zibo Jiazhou Chemical was elected to serve on the Company’s Board of Directors as Vice-Chairman.
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Yan Kai, Chief Operating and Administration Officer of Zibo Jiazhou Chemical, was appointed as Chief Operating and Administration Officer of the Company.
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Dean Huge was appointed as Chief Financial Officer and Treasurer of the Company.
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Zhang Lianjun, Chief Marketing Officer of Zibo Jiazhou Chemical, was appointed as Chief Marketing Officer of the Company.
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Li Bin, Chief Accounting Officer of Zibo Jiazhou Chemical, was appointed as Chief Accounting Officer of the Company.
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Chen Hui was elected to serve on the Company’s Board of Directors.
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Jared Wang was elected to serve on the Company’s Board of Directors.
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Immediately following the closing of the Share Exchange, under an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Liabilities (the “Conveyance Agreement”), the Company transferred all of its pre-Share Exchange assets and liabilities to its wholly-owned subsidiary, Bomps Mining Holdings, Inc. (“SplitCo”). Thereafter, pursuant to a stock purchase agreement (the “Stock Purchase Agreement”), the Company transferred all of the outstanding capital of SplitCo to one of its shareholders in exchange for the cancellation of 30,000,000 shares of the Company’s common stock (the “Split-Off Transaction”). Following the Share Exchange and the Split-Off Transaction, the Company discontinued its former business and is now engaged in the chemical manufacturing business.
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As a result of these transactions, the former shareholders of Gold Champ now own securities that in the aggregate represent approximately 66% of the equity in the Company.
Overview
Following the Share Exchange, we intend to carry on the business of Zibo Jiazhou Chemical, our PRC operating entity, as our sole line of business through certain contractual arrangements between Zibo Jiazhou Chemical and Zibo Costar Information Consulting as more fully described below. Zibo Jiazhou Chemical is a manufacturer of organic chemical compounds and other high-value fine chemicals. These chemicals are pure, single chemical substances that are commercially produced with chemical reactions into highly specialized applications which are custom-produced in smaller quantities for special uses. Gold Champ was incorporated in Hong Kong under Chapter 32 Companies Ordinance on July 15, 2010 as a limited company. The Company is a holding company whose primary asset is 100% of the registered capital of Zibo Costar Information Consulting, a company organized under the laws of the PRC.
To comply with the PRC laws and regulations while operating our chemical business in the PRC, Gold Champ, through its subsidiary, Zibo Costar Information Consulting, which is a WOFE in the PRC, entered into contractual agreements (known as a “variable interest entity” (VIE) arrangement) with Zibo Jiazhou Chemical on September 30, 2010, under which Zibo Costar Information Consulting provides exclusive management consulting services and exclusive technology consulting services (collectively, the “Service Agreements”) to Zibo Jiazhou Chemical in exchange for substantially all of the net income of Zibo Jiazhou Chemical. As collateral to ensure Zibo Jiazhou Chemical’s payments under the Service Agreements, the shareholders of Zibo Jiazhou Chemical, through an equity pledge agreement, pledged all of their rights and interests in Zibo Jiazhou Chemical, including voting rights and dividend rights, to Zibo Costar Information Consulting. In addition, the shareholders of Zibo Jiazhou Chemical, through an exclusive option agreement, granted to Zibo Costar Information Consulting an exclusive, irrevocable and unconditional right to purchase part or all of the equity interests in Zibo Jiazhou Chemical when the purchase becomes permissible under the relevant PRC Law.
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We need to use the following contractual arrangements to exercise effective control.
As further described below, Zibo Costar Information Consulting has entered into the following contractual arrangements with Zibo Jiazhou Chemical and the shareholders of Zibo Jiazhou Chemical, pursuant to which it exercises effective control over Zibo Jiazhou Chemical:
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Exclusive Management Consulting Services Agreement;
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Exclusive Technology Consulting Agreement;
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Proxy Letter;
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Purchase Option Agreement; and
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Equity Pledge Agreement.
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Agreements that Transfer Economic Benefits to Us
Pursuant to our contractual arrangements with Zibo Jiazhou Chemical and its shareholders, Lu Feng, Lu Lingliang, Zhang Meng and YLL Investment Group Limited, Zibo Costar Information Consulting provides exclusive management consulting services and exclusive technology consulting services to Zibo Jiazhou Chemical in exchange for service fees. The service fees shall equal to 50% of the net profit of Zibo Jiazhou Chemical under the exclusive management consulting services agreement and 50% of the net profit of Zibo Jiazhou Chemical under the exclusive technology consulting agreement.
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Agreements that Provide Effective Control over Zibo Jiazhou Chemical
Gold Champ’s wholly-owned subsidiary, Zibo Costar Information Consulting entered into the following agreements with Zibo Jiazhou Chemical and its shareholders, Lu Feng, Lu Lingliang, Zhang Meng and YLL Investment Group Limited that provide it with effective control over Zibo Jiazhou Chemical:
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An exclusive management consulting services agreement, pursuant to which Zibo Jiazhou Chemical irrevocably entrusts to Zibo Costar Information Consulting the right of management and operation of Zibo Jiazhou Chemical and the responsibilities and authorities of their shareholders and directors of Zibo Jiazhou Chemical;
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An exclusive technology consulting agreement, pursuant to which Zibo Jiazhou Chemical irrevocably entrusts to Zibo Costar Information Consulting the right to maintain the facilities and provide technical support to the operations of Zibo Jiazhou Chemical;
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A proxy letter, pursuant to which the shareholders of Zibo Jiazhou Chemical has granted the personnel designated by Zibo Costar Information Consulting the right to appoint directors and senior management of Zibo Jiazhou Chemical and to exercise all of their other voting rights as shareholders of Zibo Jiazhou Chemical, as the case may be, as provided under the articles of association of each such entity;
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A purchase option agreement, pursuant to which, among other things, Zibo Jiazhou Chemical:
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May not sell, transfer, pledge or through any other method dispose of any asset, business or rights and benefits of legal or beneficial income, or permit selling other guarantee rights concerning the same, without the prior written consent of Zibo Costar Information Consulting;
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Shall not engage in any transactions which materially affect the assets, responsibility, operation, shares and other legal rights, without the prior written consent of Zibo Costar Information Consulting;
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Shall not pay a dividend without the prior written consent of Zibo Costar Information Consulting; and
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Granted Zibo Costar Information Consulting or its designee an exclusive option to purchase all or part of the equity interests in Zibo Jiazhou Chemical, all or part of the equity interests in Zibo Jiazhou Chemical, or all or part of the assets of Zibo Jiazhou Chemical, in each case when and to the extent permitted by PRC law. In case of Zibo Costar Information Consulting exercising the purchase option in its sole discretion upon the occurrence of the situation in which such call option exercise become feasible under the relevant laws in PRC, any additional consideration paid other than the $1.00 which may be required under the laws of the PRC to effect such purchase to comply with such legal formalities shall be either cancelled or returned to the Company immediately with no additional compensation to the owners; and
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An equity pledge agreement pursuant to which each of shareholders of Zibo Jiazhou Chemical has pledged his or its equity interest in Zibo Jiazhou Chemical to Zibo Costar Information Consulting to secure their obligations under the relevant contractual control agreements, including but not limited to, the obligations of Zibo Jiazhou Chemical under the exclusive management consulting services agreement, the exclusive technology consulting agreement, the purchase option agreement, the voting rights proxy agreement described above, and each of them has agreed not to transfer, sell, pledge, dispose of or create any encumbrance on their equity interest in Zibo Jiazhou Chemical without the prior written consent of Zibo Costar Information Consulting.
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See “Related Party Transactions” for further information on our contractual arrangements with these parties.
In the opinion of Grandall Legal Group, our PRC legal counsel:
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The ownership structures of Zibo Costar Information Consulting and Zibo Jiazhou Chemical, both currently and after giving effect to this Share Exchange, are in compliance with existing PRC laws and regulations;
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The contractual arrangements among Zibo Costar Information, Zibo Jiazhou Chemical governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect; and
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The business operations of Zibo Costar Information Consulting and Zibo Jiazhou Chemical, as described in this Form 10-K, are in compliance with existing PRC laws and regulations in all material respects.
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However, in spite of the above, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities will not in the future take a view that is contrary to the above opinion of our PRC legal counsel. If the PRC government finds that the agreements that establish the structure for operating our PRC chemical business do not comply with PRC government restrictions on foreign investment in the chemical businesses, we could be subject to severe penalties.
Business of Zibo Jiazhou Chemical
We are a Zibo City, China-based manufacturer of organic chemical compounds used in high-performance plastics, PVC, electric fibers, paints, tires, insulation, flooring, adhesives, medicines, food processing, ink and paper. Our primary products are Phthalic Anhydride (PA) and Maleic Anhydride (MAH), which have a wide variety of applications in the construction, automotive, aviation, marine, and consumer goods industries. We currently have the capacity to produce 60,000 tons of MAH and 50,000 tons of PA annually. In addition, we began site development in October 2010 for a 50,000-ton-capacity 1,4 butanediol (BDO) co-generation plant. The Company actually produced 30,175 tons of PA and 22,142 tons of MAH over the last 12 months ending in December 31, 2010. Actual full operations of the expanded 30,000 metric tons of MAH were not fully operational until January of 2011.
We primarily sell our products through a “cash and carry” system whereby customers notify us of their anticipated requirements one month prior to pick-up. Prices are negotiated between Zibo Jiazhou Chemical and the customer based upon prevailing market prices. Customers are responsible for the pick-up and transport of their product orders.
We are an upstream chemical manufacturer that does not sell products to the retail marketplace. We currently sell PA and MAH to other chemical processing companies that add additional chemicals in their processes that create both retail and industrial uses in their manufacturing process for items we see in everyday life. Many products have automotive, construction, aviation, transportation, marine and medical industry applications.
The following table summarizes our top 5 customers for the years ended December 31, 2010 and 2009:
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Customers
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Sales
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Accounts Receivable
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2010
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2009
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December 31, 2010
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December 31, 2009
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Zibo Xinghua Resin Co., Ltd.
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22% | 25% | 41% | 39% | ||||||||||||
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Zouping Erkeri Chemical Co., Ltd
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6% | - | 21% | - | ||||||||||||
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Dongying Shenli Zhongya Chemecial Co., Ltd
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16% | 4% | 1% | - | ||||||||||||
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Kaifeng Taihua Chemical Co., Ltd
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6% | 4% | 1% | - | ||||||||||||
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Pingmei Group Kaifeng Xinghua Fine Chemical Factory
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9% | 25% | - | - | ||||||||||||
Current Product Offerings
MAH is an organic chemical used primarily in the production of unsaturated polyester and polyurethane resins. The primary MAH applications produced by us are unsaturated polyester resins. Unsaturated polyester resins are used to produce fiberglass reinforced high quality adhesives and paint for the automotive, construction, aviation, transportation and marine applications.
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PA is an organic chemical used primarily in the production of polyvinyl chloride (PVC). It is used as a high volume “commodity plastic” for packaging, film, magnetic tape, tires, pipes, hoses, containers, and other everyday products. The primary advantages of PA are:
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High strength / weight ratio
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Ideal for high volume product manufacturing;
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Low scrap and recyclability; and
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Diversified use across numerous industries.
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Planned Product Offerings
We began site development in October 2010 for a 50,000-ton capacity BDO co-generation facility. Construction is subject to financing. Accordingly, based upon current estimates, production of BDO will begin in 18 months after the BDO site specifications are completed. BDO is used primarily in the production of elastic fibers such as Spandex. It is also used in the production of soft and rigid foam used in dashboards, seating and insulation panels. Additional uses include durable wheels, tires and bumpers, artificial leather, flooring, insulation and high performance paints. In addition, it is used in the production of drugs, cosmetics and herbicides. The primary advantages of BDO include the following:
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Durability, elasticity, flexibility, and heat resistance;
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High demand engineered products;
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Low scrap and recyclability; and
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Diversified use across numerous industries.
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We believe that BDO will produce higher margins than MAH, which is used as a feedstock in the production of BDO. In addition, we believe that the introduction of BDO will widen our geographic distribution and sales networks into new domestic markets.
The following table summarizes our current and planned product offerings:
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Chemical Compound
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Capacity (Tons/Year)
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Status
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Phthalic Anhydride
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50,000
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No additional capacity is currently contemplated.
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Maleic Anhydride
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60,000
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30,000 tons/year expansion began startup in October 2010.
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Fumaric Acid
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3,500
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Byproduct of Phthalic Anhydride and Maleic Anhydride production. No additional capacity is currently contemplated.
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Acidic (Electrolyzed Water)
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15,200
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Byproduct of Phthalic Anhydride and Maleic Anhydride production. No additional capacity is currently contemplated.
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1,4-butanediol
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(50,000 planned)
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Planning and permitting completed. Site development began in October 2010.
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Tetrahydrofuran
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(3,000 planned)
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Downstream byproduct of 1,4-butanediol production. High-value polyurethane resin precursor.
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y-Butyrolactone
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(2,000 planned)
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Downstream byproduct of 1,4-butanediol production. High-value water soluble solvent.
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Steam
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Variable
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Byproduct of Phthalic Anhydride, Maleic Anhydride and 1,4-butanediol. Sold to local power generator.
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Raw Materials and Byproducts
Benzene is the raw material used in the chemical processes at Zibo Jiazhou Chemical.
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o-Xylene Benzene is used in the process for making phthalic anhydride.
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Coking Benzene is used in the process of making maleic anhydride.
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Benzene is introduced to catalysts which create 2 byproducts. Zibo Jiazhou Chemical has 2 processes which change the molecular structure of phthalic anhydride and maleic anhydride without having to introduce heat (cracking). These chemical reactions create the byproducts of vapor (steam) and acidic (electrolyzed water) “acid water”. They are sold in gigajoules and tons; respectively.
Acid water is a byproduct used by many industries inclusive of many industrial, health, fitness products, etc. It has the capabilities of killing bacteria and has many functions. The current capacity is only 11,000 tons/year. The acid water produced by both phthalic anhydride and maleic anhydride-plants are expected to be used in 2012 for the production of 1,4-butanediol when the plant is operational.
Steam is a byproduct which is sold to the electrical generating plant adjacent to the property, which is controlled by our Vice-Chairman and is purchased on an avoided cost calculation per gigajoule. The plant typically purchases all steam that is generated.
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Fumaric Acid is an additional process which is created by the introduction of another catalyst to acid water. Fumaric acid is only created when it is economically feasible to do so. Zibo Jiazhou Chemical sells either acid water and/or fumaric acid based on the spot market pricing.
Processing Fees are referred to the raw material processing for third parties for a net fixed fee. Zibo Jiazhou Chemical’s benefits from processing the raw materials of third parties are net revenue, free steam and free acid water.
Product Sales Distribution and Marketing
Zibo Jiazhou Chemical primarily sells its products through a “cash and carry” system whereby customers notify Zibo Jiazhou Chemical of their anticipated requirements one month prior to pick-up. Prices are negotiated between Zibo Jiazhou Chemical and the customer based upon prevailing market prices. Customers are responsible for the pick-up and transport of their product orders.
During the year ended December 31, 2010, Zibo Jiazhou Chemical had sales of $75,673,839, of which $55,770,402 or 73.7% were paid for in cash or by check by customers prior to pick-up and $19,903,437 or 26.3% were paid for by customers subsequent to pick-up.
Sales by Product
The following table summarizes Zibo Jiazhou Chemical’s sales by product for the years ended December 31, 2010 and 2009:
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For the Year Ended
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For the Year Ended
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December 31, 2010
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December 31, 2009
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Comparisons
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Product
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Amount
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Percentage of Revenues
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Amount
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Percentage of Revenues
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Change in Amount
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Increase (Decrease) in Percentage
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Phthalic Anhydride
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$
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33,944,237
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44.86%
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$
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27,296,046
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47.95%
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$
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6,648,191
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24.36%
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Maleic Anhydride
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$
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26,842,072
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35.47%
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$
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17,114,630
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30.07%
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$
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9,727,442
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56.84%
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Steam
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$
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6,026,436
|
7.96%
|
$
|
6,223,324
|
10.93%
|
$
|
(196,888)
|
(3.16)%
|
||||||
|
Acid Water
|
$
|
4,347,718
|
5.75%
|
$
|
3,134,331
|
5.51%
|
$
|
1,213,387
|
38.71%
|
||||||
|
Fumeric Acid
|
$
|
1,366,858
|
1.81%
|
$
|
305,184
|
0.54%
|
$
|
1,061,674
|
347.88%
|
||||||
|
Processing Fee
|
$
|
2,267,602
|
3.00%
|
$
|
1,504,479
|
2.64%
|
$
|
763,123
|
50.72%
|
||||||
|
Raw Material
|
$
|
878,916
|
1.16%
|
$
|
1,342,748
|
2.36%
|
$
|
(463,832)
|
(34.54)%
|
||||||
|
Total
|
$
|
75,673,839
|
100.00%
|
$
|
56,920,742
|
100.00%
|
$
|
18,753,097
|
32.95%
|
||||||
Intellectual Property
Zibo Jiazhou Chemical owns one registered trademark. The trademark is registered with the Trademark Bureau of State Administration for Industry and Commerce. It is valid until December 27, 2019.
On February 16, 2009, Zibo Jiazhou Chemical entered into an agreement with Davy Process Technology Limited, a British company (“Davy”), pursuant to which Davy licensed certain technology and know-how, technical documentation, contract equipment, contract catalyst, technical service and technical training to be supplied by Davy for the construction of a plant for Zibo Jiazhou Chemical to manufacture products, up to a maximum of 55,000 metric tons of 1,4-butanediol equivalent, on an annual basis (the “Davy Contract”).
11
The total contract price is Euro16,650,000 or $20,326,320 as of December 31, 2010 and is fixed, including (i) a fee for license of technology and know-how of Euro 7,700,000 or $ 9,400,160 as of December 31, 2010 ; (ii) a fee for contract equipment and contract catalyst of Euro 4,750,000 or $5,798,800 as of June 30, 2010; (iii) a fee for technical documentation of Euro 3,600,000 or $4,394,880 as of December 31, 2010; (iv) a fee for technical service at Euro 471,240 or $575,290 as of December 31, 2010; and (v) a fee for technical training at Euro 128,760 or $157,190 as of December 31, 2010. According to the payment schedule provided in the Davy Contract, the initial payment (20%) of the fees for the license of technology and know-how and the fee for technical documentation of Euro 2,260,000 or $3,190,888 as of July 17, 2009 (the “Initial Software Fee”) shall be made within 20 days after receipt of corresponding invoice issued by Davy; the initial payment (50%) of fee for contract equipment and contract catalyst of Euro2,375,000 or $3,353,257 as of July 27, 2009 (the “Initial Equipment Fee”) shall be made within 20 days after receipt of corresponding invoice issued by Davy; payments of subsequent installments and/or other fees shall be made after corresponding technical documentation, services and/or training been delivered. Zibo Jiazhou Chemical fully paid the initial software fee and the initial equipment fee on July 17, 2009 and July 27, 2009, respectively. The designing work is still in process within Davy’s office and Zibo Jiazhou Chemical has not received any technical documentation as of the date of this filing. The total amount paid to the Davy Contract as of December 31, 2010 was $7,642,487.
According to relevant PRC laws and regulations, a foreign entity cannot provide architecture or construction designing services directly in China, which means it has to set up a company in China to apply for necessary licenses or cooperate with a Chinese company having all necessary licenses. For the 1,4-butanediol project, Davy cooperated with Hua Lu Engineering Technology Co., Ltd. (the “Hua Lu”), a Chinese engineering company having Level I of PRC national standard engineering designing qualification. Zibo Jiazhou Chemical entered into a contract with Hua Lu on July 25, 2009. The total contract price is RMB5,750,000 or $846,975 as of December 31, 2010, in which RMB860,000 or $126,683 as of July 29, 2009 shall be paid as deposit within 10 days after execution of the contract and the other installments shall be paid within 10 days after delivery of corresponding designing documentation. It is reflected in a bank sheet that Zibo Jiazhou Chemical paid the deposit on July 29, 2009. As of the date of this Current Report, Zibo Jiazhou Chemical has not received any designing documentation from Hua Lu.
On January 11, 2006, Zibo Jiazhou Chemical entered into a licensing agreement with the Institute of Coal Chemistry, Chinese Academy of Sciences (the “Licensor”), pursuant to which the Licensor granted Zibo Jiazhou Chemical an exclusive license to certain technology utilized in the production of maleic anhydride. The license is valid until June 8, 2026.
Competition
Zibo Jiazhou Chemical's customer base is currently predominantly based in the Shandong Province. The Company does not believe that it currently faces any significant direct competition for the sale of its products in the Shandong Province. The chemical manufacturing industry in the PRC, however, is highly competitive. Larger, more well capitalized companies may emerge that may be able to satisfy Zibo Jiazhou Chemical’s customer requirements more readily than it is currently able to.
Zibo Jiazhou Chemical's primary competitors are as follows:
Shandong Hongxin Chemical Industry Co., Ltd Shandong Hongxin Chemical, located in Zibo City, which is approximately 100 km from the Zibo Jiazhou Chemical facilities, currently has the capacity to produce 13,000 tons/year of maleic anhydride and 80,000 tons/year of phthalic anhydride. The Company is not aware of any plans by Shandong Hongxin Chemical to expand its operations to include the production of 1,4-butanediol.
Dongying Lihuyi Chemical Industry Co., Ltd Dongying Lihuyi Chemical, located in Dongying City, which is approximately 100 km from the Zibo Jiazhou Chemical facilities, currently has the capacity to produce 20,000 tons/year of phthalic anhydride. The Company is not aware of any plans by Dongying Lihuyi Chemical to expand its operations to include the production of 1,4-butanediol. Pursuant to the Davy Contract, Davy may not transfer the 1,4-butanediol technology to another company in the Shandong Province.
Zibo Qifeng Chemical Industry Co., Ltd Zibo Qifeng Chemical, located in Zibo Linzi, which is approximately 100 km from the Zibo Jiazhou Chemical facilities, currently has the capacity to produce 8,000 tons/year of maleic anhydride. The Company is not aware of any plans by Zibo Qifeng Chemical to expand its operations to include the production of 1,4-butanediol.
Shijiazhuang Bailong Chemical Industry Co., Ltd Shijiazhuang Bailong Chemical, located in Shijiazhuang, which is approximately 400 km from the Zibo Jiazhou Chemical facilities, currently has the capacity to produce 20,000 tons/year of maleic anhydride and 50,000 tons/year of phthalic anhydride. The Company is not aware of any plans by Shijiazhuang Bailong Chemical to expand its operations to include the production of 1,4-butanediol.
Tianjin Taisen Chemical Industry Co., Ltd Tianjin Taisen Chemical, located in Tianjin, which is approximately 300 km from the Zibo Jiazhou Chemical facilities, currently has the capacity to produce 20,000 tons/year of phthalic anhydride. The Company is not aware of any plans by Tainjin Taisen Chemical to expand its operations to include the production of 1,4-butanediol.
12
Employees
As of March 28, 2011, we have a total of approximately 176 employees and skilled labor working in our offices and production facilities in the PRC. However, there can be no assurance that we will be able to maintain a prolonged good relationship with our existing or ex-employees and that no labor disruptions will occur in the future. Should any industrial action or labor unrest occur, our business operations could be adversely affected. The following table outlines the breakdown of the 176 employees:
|
Departments
|
Employee Amount
|
|
|
Management
|
8
|
|
|
Sales
|
5
|
|
|
Plant operations
|
106
|
|
|
Plant maintenance
|
7
|
|
|
Accounting
|
5
|
|
|
Employee support
|
16
|
|
|
Security
|
8
|
|
|
Other
|
21
|
|
|
Total
|
176
|
Government and Environmental Regulation
Industrial Products Production License
The Administration Rules on Industrial Products Production License was promulgated by the State Council on July 9, 2005, according to which enterprises intending to engage in production of important industrial product, including dangerous chemicals, shall meet with certain requirements and obtain a license from governmental quality supervision authority.
Zibo Jiazhou Chemical obtained its License of Producing Industrial Products on April 10, 2006, which has information registered therein as follows:
Certificate No.: XK13-216-00149
Scope of products: phthalic anhydride (PA)
Issued by: the State Bureau of Quality and Technical Supervision
Issuing Date: April 10, 2006
Valid Until: April 9, 2011
Although Zibo Jiazhou Chemical began to produce maleic anhydride in April 2007, maleic anhydride is not registered in the scope of products of its current Industrial Products Production License. If Zibo Jiazhou Chemical fails to do the filing, the relevant government authority may order Zibo Jiazhou Chemical to suspend production of the unregistered product and impose fines. Zibo Jiazhou Chemical recently applied with the relevant authority for the registration of maleic anhydride in this license and expects to obtain approval within a reasonable time.
Registration Certificate of Enterprise Producing Dangerous Chemicals
According to the Administration Rules on Registration of Dangerous Chemicals promulgated on October 8, 2002, enterprises producing dangerous chemicals shall file documents in relation to production, products’ specifications, safety management system, accident handling measures, etc. to the governmental registration centre for registration.
13
The Company obtained its initial registration certificate required under the said regulation on April 28, 2007 and renewed it on August 12, 2010. The information registered on the current certificate are as follows:
Certificate No.: 370312114
Registered Chemicals: phthalic anhydride (PA) and o-xylene(邻二甲苯)
Issued by: the Registration Centre of Dangerous Chemicals of the State Bureau of Work Safety
Issuing Date: August 12, 2010
Valid Until: August 11, 2013
Registration Certificate of Chemicals Subject to Supervision and Control
The Registration Certificate of Chemicals Subject to Supervision and Control promulgated by the State Council on December 27, 1995 provides that the activities of production, trading and using of chemicals which could be used to produce chemical weapons are under supervision and control of the government and every person intending to engage in such activities shall be registered with and approved by competent government authority before acting.
Zibo Jiazhou Chemical obtained its first Registration Certificate of Chemicals Subject to Supervision on December 19, 2003, which was renewed several times thereafter. The information in the current registration certificate is as follows:
Certificate No.: HW37C(001)号
Registered Chemicals: phthalic anhydride (PA) and maleic anhydride (MAH)
Issued by: Chemical Industry Administration Office of Zibo City
Issuing Date: November 10, 2010
Valid Until: November 9, 2011
Registration Certificate of Standardization
The information in the current registration certificate is as follows:
National Standard Registration Certificate (山东省企业产品执行标准登记证书)
Certificate No.: 370300-0510
Standard in Conformance: GB/T 3676-2008 for maleic anhydride (MAH); GB/T 15336-2006 for phthalic anhydride (PA)
Issued by: Quality and Technical Supervision Bureau of Shandong Province
Issuing Date: April 22, 2010
Valid Until: April 22, 2013
License of Heating Supply
Zibo Jiazhou Chemical is engaged in the sale of steam, which is produced as a byproduct of phthalic anhydride and maleic anhydride. According to the Administration Rules of Shandong Province on Heating Supply Permit and the Administration Rules of Shandong Province on Heating Supply promulgated by Shandong Provincial Government on February 27, 2006 and October 31, 2007 respectively, Zibo Jiazhou Chemical registered with the government authority for being in the business relating to public utility and obtained a license with information set forth as follows:
Certificate No.: 鲁淄热许字第10018号
Issued by: Public Utility Administration Bureau of Shandong Province
Issuing Date: June 7, 2010
Valid Until: June 7, 2013
Project Investment Approvals
According to relevant PRC regulations, for each project having fixed assets construction or enlargement, as a precondition for applying for other necessary approvals from various government authorities (such as land, layout, construction, fire control, etc.), the approval in regard of investment scale, capital sources, production capacity, profit prediction, resources consumption, etc. from competent level of governmental authority in charge of macro-economic control of this area shall be firstly obtained (the “Project Investment Approval”).
14
Zibo Jiazhou Chemical has three projects been built or in building:
|
(1)
|
Project of phthalic anhydride (“Project A”)
|
The construction of Project A was divided into two phases. Phase I, having annual production capability of 30,000 tons phthalic anhydride, began in February 2004 and completed in August 2006. Phase II, having annual production capability of 20,000 tons phthalic anhydride, began in October 2007 and completed in February 2008. The Company obtained the Project Investment Approval from the Economic and Trade Administration Committee of Zibo Municipal on June 3, 2004.
|
(2)
|
Project of maleic anhydride (“Project B”)
|
The construction of Project B was divided into three phases. Phase I, having annual production capability of 10,000 tons maleic anhydride, began in November 2004 and completed in April 2007. Phase II, having annual production capability of 20,000 tons maleic anhydride, began in October 2007 and completed in June 2008. Construction of Phase III, having the production capability of 30,000 tons maleic anhydride has already begun and operations will commence in October, 2010.
Zibo Jiazhou Chemical obtained the Project Investment Approval from the Economic and Trade Administration Committee of Zibo Municipal on March 11, 2006 for Phase I of Project B and obtained the Project Investment Approval from the Economic and Trade Administration Committee of Shandong Province on March 5, 2009 for Phase III of Project B.
|
(3)
|
Project of 1,4-butanediol (“Project C”)
|
Zibo Jiazhou Chemical obtained the Project Investment Approval for Project C, having annual production capacity of 50,000 tons/year 1,4-butanediol, from the Economic and Trade Administration Committee of Shandong Province on March 5, 2009. Construction of Project C is expected to begin in October 2010. Construction is expected to be completed within 18 months of the commencement of construction. Accordingly, based upon current estimates, production of 1,4-butanediol will begin in April 2012.
Our Strategies, Risks and Uncertainties
In order to enhance our position as one of the top chemical manufacturers in the PRC, we intend to expand our 1,4-butanediol production, expand our toll processing business to maximize capacity utilization and gain no-cost by-product revenues for acid water and steam sales, widen our geographic distribution and sales networks into new domestic and international markets, and further integrate Westerns management best practices and techniques to maximize profitability and financial controls.
These risks and uncertainties, along with others, are also described in the Risk Factors section of this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment.
Risks Associated with our Business
We have a relatively limited operating history.
We have a relatively limited operating history with respect to our current business strategy. Zibo Jiazhou Chemical, our PRC operating entity, through which we currently operate our business, commenced production of phthalic anhydride in 2001 and maleic anhydride in 2007. We have expanded MAH production from 30,000 to 60,000 tons with startup commencing operations on October of 2010. Our action was to insure that the Company would have enough internally generated feedstock, MAH, for producing the full capacity of the BDO plant without having to seek MAH from outside sources. In 2013 it is intended that the Company will sell only two chemicals, PA and BDO.
15
We are an upstream chemical manufacturer that does not sell products to the retail marketplace. We currently sell PA and MAH to other chemical processing companies that add additional chemicals in their processes that create both retail and industrial uses in their manufacturing process for items we see in everyday life. Many products have automotive, construction, aviation, transportation, marine and medical industry applications.
You should consider our future prospects in light of the risks and uncertainties typically experienced by companies such as ours in evolving industries such as the chemical industries in China and the Asia-Pacific region. Some of these risks and uncertainties relate to our ability to:
|
●
|
Offer new and innovative products to attract and retain a larger customer base;
|
|
●
|
Attract additional customers and increase spending per customer;
|
|
|
●
|
Increase awareness of our products and brands and continue to develop user and customer loyalty;
|
|
|
●
|
Raise sufficient capital to sustain and expand our business;
|
|
●
|
Maintain effective control of our costs and expenses;
|
|
|
●
|
Respond to changes in our regulatory environment;
|
|
|
●
|
Respond to competitive market conditions;
|
|
|
●
|
Manage risks associated with intellectual property rights;
|
|
|
●
|
Integrate any business acquisition properly;
|
|
|
●
|
Attract, retain and motivate qualified personnel; and
|
|
|
●
|
Upgrade our technology to support additional research and development of new products.
|
Because our contracts are individual purchase orders and not long-term agreements, the results of our operations can vary significantly from quarter to quarter.
We currently do not have any long-term contracts with our customers for our chemical products. We have been dependent in each year on a small number of customers who generate a significant portion of our business related to our chemical products, and these customers have changed from year to year. For the fiscal year ended December 31, 2010, 5 customers accounted for approximately 59% of our total revenues related to our chemical products.
The following table summarizes our top 5 customers for the years ended December 31, 2010 and 2009:
|
Customers
|
Sales
|
Accounts Receivable
|
|||||||||
|
2010
|
2009
|
December 31, 2010
|
December 31, 2009
|
||||||||
|
Zibo Xinghua Resin Co., Ltd.
|
22% | 25% | 41% | 39% | |||||||
|
Zouping Erkeri Chemical Co., Ltd
|
6% | - | 21% | - | |||||||
|
Dongying Shenli Zhongya Chemecial Co., Ltd
|
16% | 4% | 1% | - | |||||||
|
Kaifeng Taihua Chemical Co., Ltd
|
6% | 4% | 1% | - | |||||||
|
Pingmei Group Kaifeng Xinghua Fine Chemical Factory
|
9% | 25% | - | - | |||||||
16
We are looking to diversify our customers to become less dependent on large customers. In 2010 and 2009 we sold Zibo Xinghua Resin Co.,Ltd. 22% and 25%, respectively. We also sold products in 2010 and 2009 to Fine Chemical Factory 9% and 25%, respectively. Dongying Shenli Zhongya Chemecial Co., Ltd actually increased sales for 2010 and 2009 to 16% and 4%, respectively. The next two customers have 6% for sales each. Thus our actions of decreasing the amount of larger customers is being implemented but may not completely diversify for the foreseeable future.
For the fiscal years ended December 31, 2010 and 2009, 74.77% and 69.07% of revenue, respectively, was derived from the Shandong Province. We anticipate that our dependence on a limited number of customers in any given fiscal year will continue to decrease for the foreseeable future. There is a risk that existing customers will elect not to do business with us in the future or will experience financial difficulties. There is also a risk that our customers will attempt to impose new or additional requirements on us that reduce the profitability of those customers for us. If we do not develop relationships with new customers, we may not be able to increase, or even maintain, our revenue, and our financial condition, results of operations, business and/or prospects may be materially adversely affected.
Possible shortage in supply or price fluctuations of raw materials may have a detrimental effect on our profitability.
We have not entered into any long-term supply contracts with suppliers of major raw materials and cannot guarantee that we will be able to pass any future increases in raw material purchase prices on to consumers.
For the years ended December 31, 2010, 3 suppliers provided approximately 89% of our raw materials. For the year ended December 31, 2009, 4 suppliers provided approximately 91% of our raw materials that are used in our processes of approximately 55,000 metric tons annually prior to the MAH expansion. Within a 200km parameter of Zibo Jiazhou Chemical, there is an additional excess capacity of 150,000 metric tons annually or 273% of additional supply of raw materials. In the event that our relationships deteriorate with such suppliers, we may be unable to fulfill our customers’ needs. In the event that there is a significant shortage or change in the purchase price of raw materials in the future and we are unable to transfer resulting cost increases to our customers, our business operations and profitability may be adversely affected.
We face competition from other chemical producers and sellers. Therefore, the business and prospects may be adversely effected if we are not able to compete effectively.
We operate in markets where we compete with organic chemical producers and sellers of similar or larger size and scale in the PRC. In addition, a number of foreign companies have established chemical manufacturing enterprises in the PRC, and other foreign manufacturers may do so in the future. Such domestic and foreign competitors may have greater access to financial resources, higher levels of vertical integration, better operating efficiency and longer operating histories. Zibo Jiazhou Chemical produces over 50% of the supply of MAH currently, and 70% when the 30,000 metric ton expansion becomes fully operational in January, 2011. At current production level for PA it is an estimated 20% of the PA supply. If we are unable to improve product quality, performance and price competitiveness or if we are unable to anticipate and respond to changing market demand, maintain operating efficiency and economies of scale, and control costs in connection with the planned expansion, raw materials and energy, our business and prospects may be adversely affected and we may not be able to compete effectively.
The majority shareholder of Zibo Jiazhou Heat and Power Co., Ltd. has potential conflicts of interest with us, which may adversely affect our business.
Lu Lingliang, our Vice-Chairman, is the majority shareholder of Zibo Jiazhou Heat and Power Co., Ltd. Conflicts of interests between his duties to our company and Zibo Jiazhou Heat and Power Co., Ltd. may arise. As Lu Lingliang is a director of our company, he has a duty of loyalty and care to us under Delaware State law when there are any potential conflicts of interests between our company and Zibo Jiazhou Heat and Power Co., Ltd.. Zibo Jiazhou Heat and Power Co., Ltd. is indebted to our company in excess of $20 million with no fixed repayment term. We cannot assure, however, that when conflicts of interest arise, Lin Lingliang will act completely in our interests or that conflicts of interests will be resolved in our favor. If we cannot resolve any conflicts of interest between us and Lin Liagliang, we would have to rely on legal proceedings, which could result in the disruption of our business.
Our substantial amount of debt could adversely affect our financial health, which could adversely affect our results of operations.
We are highly leveraged. Our substantial indebtedness could have a material adverse effect on us by: making it more difficult for us to satisfy our payment obligations under our bank loans; limiting our ability to borrow money for working capital, restructurings, capital expenditures, research and development, investments, acquisitions or other purposes, if needed, and increasing the cost of any of these borrowings; requiring us to dedicate a substantial portion of our cash flow from operations to service our debt, which reduces the funds available for operations and future business opportunities; limiting our flexibility in responding to changing business and economic conditions, including increased competition and demand for new services; placing us at a disadvantage when compared to those of our competitors that have less debt; and making us more vulnerable than those of our competitors who have less debt to a downturn in our business, industry or the economy in general. Despite our substantial indebtedness, we may still incur significantly more debt, which could further exacerbate the risks described above.
17
Our business and operations require capital investment. Failure to raise sufficient capital in a timely manner may adversely effect the business and results of operations.
In accordance with our development plan, including the contemplated construction of the 1,4-butanediol production line, we intend to expand our operations in the Shandong Province of the PRC. Management may from time to time have other business expansion plans that require further capital. If we are unable to obtain such additional funding, we may not be able to pay for the necessary capital expenditures needed for expansion, or to implement proposed business strategies or at all. Any of the above could impede the implementation of our business strategies or prevent us from entering into transactions that would otherwise benefit business on commercially reasonable terms or at all and adversely effect its financial condition and results of operations.
Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
·Investors’ perception of, and demand for, securities of alternative chemical companies;
·Conditions of the U.S. and other capital markets in which we may seek to raise funds;
·Our future results of operations, financial condition and cash flows;
·PRC governmental regulation of foreign investment in chemical companies in China;
·Economic, political and other conditions in China; and
·PRC governmental policies relating to foreign currency borrowings.
We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us could have a material adverse effect on our liquidity and financial condition.
Our business is subject to operation risks beyond our control and could have a detrimental effect on our profitability.
Our financial performance is at all times subject to operational risks which may include factors that are beyond our control. The production process could face unforeseen operating problems and therefore production could be delayed and financial performance would be adversely affected. Unanticipated additional major maintenance of the plant would also impact upon production capacity and revenue projections. This potential downtime would impact upon our results. More specifically an example could be; if a catalyst fails on site and not during a normal maintenance period it would take time to have the new catalyst shipped by boat and the production would be down during this time period. Catalysts should last up to 3 years of operations.
Operations are subject to hazards and natural disasters that may not be fully covered by our insurance policies.
We make substantial investments in complex manufacturing and production facilities. Many of the production processes, raw materials and certain finished products are potentially destructive and dangerous in uncontrolled or catastrophic circumstances, including operating hazards, fires and explosions, and natural disasters such as typhoons, floods, earthquakes and major equipment failures for which insurance may not be obtainable at a reasonable cost or at all. Should an accident or natural disaster occur, it may cause significant property damage, disruption to operations and personal injuries and our insurance coverage may be inadequate to cover such loss. Should an uninsured loss or a loss in excess of insured limits occur, we could suffer from damage to our reputation or lose all or a portion of production capacity as well as future revenues anticipated to derive from the relevant facilities. Any material loss not covered by our insurance policies could materially and adversely effect our business, financial condition and operations.
18
We do not currently maintain any business interruption insurance policies.
We have not yet taken out a business interruption insurance policy. Our operations could be interrupted by fire, flood, earthquake and other events beyond our control for which we do not carry adequate insurance. While we have property damage insurance, we do not carry business disruption insurance, which is not readily available in China. Any disruption of the operations in our factories would have a significant negative impact on our ability to manufacture and deliver products, which would cause a potential diminution in sales, the cancellation of orders, damage to our reputation and potential lawsuits.
Furthermore, any defects in our chemical products could result in economic loss, adverse customer reaction, negative publicity, and additional expenditure to rectify the problems and/or legal proceedings instituted against us. We have not maintained any insurance policy against losses that may arise from such claims. Any litigation relating to such liability may be expensive and time consuming, and successful claims against us could result in substantial monetary liability or damage to our business reputation and disruption to our business operations.
We are dependent upon key personnel and the loss of key personnel, or the inability to hire or retain qualified personnel, could have an adverse effect on our business and operations.
Our success is heavily dependent on the continued active participation of Lu Feng, our Chief Executive Officer, President and Chairman, Yan Kai, our Chief Operating and Administration Officer, Zhang Lianjun, our Chief Marketing Officer, Li Bin, our Chief Accounting Officer. Loss of the services of Mr./Ms. Lu, Yan, Li or Zhang could have a material adverse effect upon our business, financial condition or results of operations. Further, our success and achievement of our growth plans depend on our ability to recruit, hire, train and retain other highly qualified technical and managerial personnel. Competition for qualified employees among companies in the chemical industry is intense, and the loss of any of such persons, or an inability to attract, retain and motivate any additional highly skilled employees required for the expansion of our activities, could have a materially adverse effect on us. The inability on our part to attract and retain the necessary personnel and consultants and advisors could have a material adverse effect on our business, financial condition or results of operations.
There are differences between PRC and U.S. Generally Accepted Accounting Principles.
Our profits are derived from our PRC operating entity. The profits available for distribution for companies established in the PRC are determined in accordance with PRC accounting standards, which may differ from the amounts, arrived at under US GAAP. In the event that the amount of the profits determined under the PRC accounting standard in a given year is less than that determined under the US GAAP, we may not have funds to allow distribution of profits to our stockholders.
We may fail to achieve our outline business objectives.
The future plans as set out in this document have been formulated on the basis of a number of assumptions in relation to future events, which by their nature are subject to changes and uncertainties and may not materialize. Although we will endeavor to execute such plans there is no assurance that our plans will materialize or be executed in accordance with the stated timeframe or that our objectives will be fully accomplished.
There is a risk of infringement of our intellectual property rights in the PRC.
Zibo Jiazhou Chemical owns one registered trademark in the PRC. There can be no assurance that the existing legal protection in the PRC will effectively prevent unauthorized use of our trademarks or the misappropriation by third parties of the technology associated with our applied/registered patents.
Policing unauthorized use of our trademarks and the proprietary technology may be difficult, costly and ineffective, and there can be no assurance that any steps taken by us will effectively prevent any such misappropriation or infringement from occurring. Unauthorized use of our trademarks and patented technology could adversely effect our performance and business reputation. Failure to renew our trademarks could also adversely effect our performance and business reputation.
Potential claims alleging infringement of third party’s intellectual property by us could harm our ability to compete and result in significant expense to us and loss of significant rights.
From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business. Any claims that our products or processes, whether in relation to the specific circumstances set out above or otherwise, infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending, and resolving such claims, and may divert the efforts and attention of our management and technical personnel away from the business. As a result of such intellectual property infringement claims, we could be required or otherwise decide it is appropriate to pay third-party infringement claims; discontinue manufacturing, using, or selling particular products subject to infringement claims; discontinue using the technology or processes subject to infringement claims; develop other technology not subject to infringement claims, which could be time-consuming and costly or may not be possible; and/or license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms. The occurrence of any of the foregoing could result in unexpected expenses or require us to recognize an impairment of our assets, which would reduce the value of the assets and increase expenses. In addition, if we alter or discontinue the production of affected items, our revenue could be negatively impacted.
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Pursuant to relevant regulations issued by the State government, land collectively owned by peasants can only be used for agriculture, building utilities for the inhabiting community or be used to build commercial or industrial facilities by business entities owned by the inhabiting community. Zibo Jiazhou Chemical is not an entity owned by the inhabiting community of the land, therefore it is not legal for Zibo Jiazhou Chemical to use the land in the current status. Zibo Jiazhou Chemical needs to apply with the local government for the using of this land and, if approved, the government will compensate the inhabiting community for transforming the nature of the land to “State-owned” and then grant the land use right to Zibo Jiazhou Chemical through appropriate procedure. Zibo Jiazhou Chemical received notification from the State Land Bureau of Zibo Municipal on August 10, 2010 that the land leasing relationship between Jiazhou Community and Zibo Jiazhou Chemical will be kept in its current status before the land being granted to Zibo Jiazhou Chemical in the nature of a State-owned land, which is undertaken to be happened within five years.
We depend on only one factory to manufacture our products and any disruption of the operations in this factory would damage our business.
All of our products are manufactured in our factory in the PRC which we depend on to produce the products that we sell. Our operations could be interrupted by fire, flood, earthquake and other events beyond our control. Any disruption of the operations in this factory would have a significant negative impact on our ability to deliver products, which would cause a potential diminution on sales, the cancellation of orders, damage to our reputation and potential lawsuits.
RISKS RELATING TO THE CHEMICAL INDUSTRY IN THE PRC
Our failure to comply with ongoing governmental regulations could hurt our operations and reduce our market share.
In China, the chemical industry is undergoing increasing regulations as environmental awareness increases in China. The trend is that the Chinese government toughens its regulations and penalties for violations of environmental regulations. New regulatory actions are constantly changing our industry. Although we believe we have complied with applicable government regulations, there is no assurance that we will be able to do so in the future.
RISKS RELATING TO DOING BUSINESS IN CHINA
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries and our affiliated entity to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from China State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies, repatriation of funds and direct investment. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our stockholders.
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt Practices Act (“FCPA”), which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. While our code of ethics have been adopted to ensure compliance with the FCPA and Chinese anti-corruption laws by all individuals involved with our company, our employees or other agents may engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
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The PRC economy may experience inflationary pressure, which may lead to an increase in interest rates and a slowdown in economic growth.
In response to concerns regarding the PRC’s high rate of growth, the PRC Government has taken measures to slow down economic growth to a more manageable level. Among the measures that the PRC Government has taken are restrictions on bank loans in certain sectors. These measures have contributed to a slowdown in economic growth in the PRC and a reduction in demand for consumer goods. Consequently, these measures and any additional measures, including a possible increase in interest rates, could contribute to a further slowdown in the PRC economy, which in turn could adversely affect the future demand of the our products and our operating results. If prices for our products rise at a rate that is insufficient to compensate for the rise in our costs, it may have an adverse effect on profitability.
Fluctuations in the exchange rate could have a material adverse effect upon our business.
We conduct our business in RMB. To the extent our future revenue are denominated in currencies other than the United States dollars, we would be subject to increased risks relating to foreign currency exchange rate fluctuations which could have a material adverse effect on our financial condition and operating results since our operating results are reported in United States dollars and significant changes in the exchange rate could materially impact our reported earnings.
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could negative impact our business.
Substantially all of our business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate and control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Since early 2004, the PRC government has implemented certain measures to control the pace of economic growth. Such measures may cause a decrease in the level of economic activity in China, which in turn could adversely effect our results of operations and financial condition.
Any deterioration of political relations between the United States and the PRC could impair our operations.
The relationship between the United States and the PRC is subject to sudden fluctuation and periodic tension. Changes in political conditions in the PRC and changes in the state of Sino-U.S. relations are difficult to predict and could adversely affect our operations or cause potential acquisition candidates or their goods and services to become less attractive. Such a change could lead to a decline in our profitability. Any weakening of relations between the United States and the PRC could have a material adverse effect on our operations.
Under the PRC Enterprise Income Tax Law, we and/or Gold Champ may be classified as a “resident enterprise” of the PRC. Such classification could result in PRC tax consequences to us, our non-PRC resident enterprise investors and/or Gold Champ
On March 16, 2007, the National People’s Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1, 2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define “de facto management bodies” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China. Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of a foreign (non-PRC) company on a case-by-case basis.
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If the PRC tax authorities determine that we and/or Gold Champ are a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, we and/or Gold Champ may be subject to the enterprise income tax at a rate of 25 percent on our and/or Gold Champ’s worldwide taxable income, as well as PRC enterprise income tax reporting obligations. Second, under the EIT Law and its implementing rules, dividends paid between “qualified resident enterprises” are exempt from enterprise income tax. As a result, if we and Gold Champ are treated as “qualified resident enterprises,” all dividends received by Gold Champ should be exempt from PRC tax.
If Gold Champ were treated as a PRC “non-resident enterprise” under the EIT Law, then dividends that Gold Champ receives from the PRC operating company (assuming such dividends were considered sourced within the PRC) may be subject to a 10 percent PRC withholding tax. Similarly, if we were treated as a “non-resident enterprise” under the EIT Law and Gold Champ were treated as a “resident enterprise” under the EIT Law, then dividends that we received by Gold Champ (assuming such dividends were considered sourced within the PRC) may be subject to a 10 percent PRC withholding tax. Any such taxes on dividends could materially reduce the amount of dividends, if any, we could pay to our shareholders.
Finally, the new “resident enterprise” classification could result in a situation in which a 10 percent PRC tax is imposed on dividends we pay to our enterprise (but not individual) investors that are not tax residents of the PRC (“non-resident investors”) and gains derived by them from transferring our securities, if such income or gain is considered PRC-sourced income by the relevant PRC tax authorities. In such event, we may be required to withhold a 10 percent PRC tax on any dividends paid to our non-resident investors. Our non-resident investors also may be responsible for paying PRC tax at a rate of 10 percent on any gain realized from the sale or transfer of our securities in certain circumstances. We would not, however, have an obligation to withhold PRC tax with respect to such gain under the PRC tax laws.
Moreover, the State Administration of Taxation (“SAT”) released Circular Guoshuihan No. 698 (“Circular 698”) on December 10, 2009 that reinforces the taxation of certain equity transfers by non-resident investors through overseas holding vehicles. Circular 698 addresses indirect equity transfers as well as other issues. Circular 698 is retroactively effective from January 1, 2008. According to Circular 698, where a non-resident investor who indirectly holds an equity interest in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers an equity interest in the PRC resident enterprise by selling an equity interest in the offshore holding company, and the latter is located in a country or jurisdiction where the actual tax burden is less than 12.5 percent or where the offshore income of its residents is not taxable, the non-resident investor is required to provide the PRC tax authority in charge of that PRC resident enterprise with certain relevant information within 30 days of the transfer. The tax authorities in charge will evaluate the offshore transaction for tax purposes. In the event that the tax authorities determine that such transfer is abusing forms of business organization and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking, the PRC tax authorities will have the power to re-assess the nature of the equity transfer under the doctrine of substance over form. A reasonable commercial purpose may be established when the overall international (including U.S.) offshore structure is set up to comply with the requirements of supervising authorities of international (including U.S.) capital markets. If the SAT’s challenge of a transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning purposes and subject the seller to PRC tax on the capital gain from such transfer. Since Circular 698 has a short history, there is uncertainty as to its application. We (or a non-resident investor) may become at risk of being taxed under Circular 698 and may be required to expend valuable resources to comply with Circular 698 or to establish that we (or such non-resident investor) should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations (or such non-resident investor’s investment in us).
If any PRC tax applies to a non-resident investor, the non-resident investor may be entitled to a reduced rate of PRC tax under an applicable income tax treaty and/or a deduction for such PRC tax against such investor’s domestic taxable income or a foreign tax credit in respect of such PRC tax against such investor’s domestic income tax liability (subject to applicable conditions and limitations). Investors should consult their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available deductions or foreign tax credits.
Restrictions on receipt of dividends from, and transfer of funds to, our PRC operating subsidiaries may be imposed.
Gold Champ is incorporated in Hong Kong and is the holding company of our operating subsidiary. At present, Zibo Costar Information Consulting is the only operating subsidiary. The ability of Zibo Costar Information Consulting and any future subsidiaries which are WOFEs to declare dividends and other payments to Gold Champ may be restricted by factors that include changes in applicable foreign exchange and other laws and regulations in the PRC and in Hong Kong.
In particular, under PRC law, profit available for distribution from the PRC operating subsidiaries is determined in accordance with generally accepted accounting principles in the PRC. This calculation may differ from the one performed in accordance with US GAAP. As a result of the potential difference in profit calculation, there is a risk that the PRC subsidiaries may not have sufficient profit to distribute so as to allow distributions to the stockholders in the future. In addition, distributions by our subsidiaries other than as dividends may be subject to governmental approval and taxation.
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Any transfer of funds to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, is subject to registration or approval of certain PRC governmental authorities, including the relevant administration of foreign exchange and/or the relevant examining and approval authority. Further, it is not permitted under PRC law for our PRC subsidiaries to lend money to each other/another member. Therefore, it is difficult to change our capital expenditure plans once the relevant funds have been remitted to our PRC subsidiaries. These limitations on the free flow of funds between our companies and our PRC subsidiaries could restrict our ability to act in response to changing market conditions and to reallocate funds from one PRC subsidiary to another in a timely manner.
Uncertainties with respect to the PRC legal system could adversely effect us.
Our operations in China are governed by PRC laws and regulations. We are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.
Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
Due to the nature of our business, we are subject to certain environmental regulation.
Our operations are subject to environmental and safety regulation in the PRC. Such regulation covers a wide variety of matters, including, without limitation, prevention of waste, pollution and protection of the environment, labor regulations and worker safety. We could also be subject, under such regulations, to clean up costs and liability for toxic and hazardous substances which may exist on or under any of our properties or which may be produced as a result of our operations. In particular, the acceptable level of pollution and the potential costs and obligations and liability for toxic or hazardous substances for which we may become liable as a result of our activities may be impossible to assess against the current legal framework and current enforcement practices of the PRC. In addition, environmental legislation and permit regime are likely to evolve in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and heightened degree of responsibility for companies and their directors and employees.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents.
The State Administration of Foreign Exchange in the PRC, or SAFE, issued a public notice, or “Notice 75,” in October 2005 requiring PRC residents and non-PRC residents who habitually reside in the PRC for economic reasons, or PRC Residents, to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies (referred to in the Notice 75 as an “offshore special purpose company”). PRC Residents that are shareholders of offshore special purpose companies established before November 1, 2005 were required to register with the local SAFE branch before March 31, 2006. To further clarify the implementation of Notice 75, SAFE issued Notice 106 on May 9, 2007. Under Notice 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders who are PRC residents in a timely manner.
Pursuant to the foregoing regulations, the failure of PRC resident shareholders to register with the local SAFE branch for its overseas investment, or to amend their SAFE registrations pursuant to the Notice 75 and Notice 106, or the failure of future shareholders of the Company who are PRC Residents to comply with the registration procedures set forth in the Notice 75 and Notice 106, may subject such beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional capital into the PRC subsidiaries, limit the ability of the PRC subsidiaries to distribute dividends to the Company or otherwise adversely affect the business.
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Our PRC legal counsel has advised that we are an overseas company established and controlled by foreign companies and foreign individuals and hence, do not fall within the definition of “offshore special purpose company” for the purposes of the Notice 75. Accordingly, the aforesaid registration requirements are not applicable to us and our PRC resident shareholders. If SAFE or other PRC regulatory authorities subsequently determines that SAFE registration is required for the establishment of the Company, we may suffer in the manner described above.
Foreign investment in the PRC is subject to industry restrictions which could adversely effect our growth.
Foreign investment in the PRC is subject to industry-specific restrictions and/or prohibitions set forth in a Catalogue Guiding Foreign Investment in Industry, or Catalogue. Local governments in the PRC may maintain further industry-specific restrictions or prohibitions. The Catalogue distinguishes between different industries in terms of whether foreign investment is “encouraged,” “restricted,” “prohibited” or “permitted” in such industries. The different categories generally indicate the disposition of the Ministry of Commerce (“MOC”) other PRC regulatory authorities to approve foreign investment in a given industry, as well as having certain tax and other implications. Investments in the encouraged and permitted categories are generally eligible for approval with relatively few restrictions. Investment in the “restricted” category is often subject to limitations on the amount of equity that a foreign investor can hold and to other restrictions. Moreover, government approval of investments in the “restricted” category is generally perceived to be harder to secure. Foreign investment in the “prohibited” category is barred altogether. Such restrictions on the nature and terms of the Company’s potential investments in the PRC may limit the opportunities available to us in the PRC.
Failure to make payments for the compulsory social insurance schemes in the PRC may result in late charges or third party claims.
Zibo Jiazhou Chemical is required to make payments for the compulsory social insurance schemes for their employees in accordance with the relevant PRC laws. Upon the failure to make such payments, the employees have the right to claim damages in connection with the non-payment of the social insurance. Although we have made payment of all outstanding premiums, to the extent we do not pay any amounts owed under the social insurance schemes, our operations and financial results may be adversely effected if any claim is made against us.
Our sales are derived entirely from the PRC market.
For the years ended December 31, 2010 and 2009, 100% of our total sales were derived from the PRC market, respectively. We expect that domestic sales will continue to account for a significant portion of our total sales. If there is any material adverse change in political, economic or legal conditions in the PRC market, our sales and profitability may be negatively impacted.
We rely on contractual arrangements with Zibo Jiazhou Chemical and shareholders for a substantial portion of our China operations, which may not be as effective in providing operational control as direct ownership.
We rely on contractual arrangements with Zibo Jiazhou Chemical and shareholders to operate our chemical manufacturing business. For a description of these contractual arrangements, see “Our Structure” above. These contractual arrangements may not be as effective in providing us with control over Zibo Jiazhou Chemical as direct ownership. If we had direct ownership of Zibo Jiazhou Chemical, we would be able to exercise our rights as a shareholder to effect changes in the Board of Directors of Zibo Jiazhou Chemical which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, as a legal matter, if Zibo Jiazhou Chemical or any of its subsidiaries and shareholders fails to perform its or his respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you to be effective. For example, if the shareholders of Zibo Jiazhou Chemical were to refuse to transfer his equity interest in Zibo Jiazhou Chemical to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if the shareholders of Zibo Jiazhou Chemical were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to fulfill their contractual obligations.
Many of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our operating entities, and our ability to conduct our business may be negatively affected.
Contractual arrangements we have entered into among our subsidiaries and affiliated entities may be subject to scrutiny by the PRC tax authorities and a finding that we owe additional taxes or are ineligible for our tax exemption, or both, could substantially increase our taxes owed, and reduce our net income and the value of your investment.
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Under PRC law, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. If any of the transactions we have entered into among our subsidiaries and affiliated entities are found not to be on an arm’s-length basis, or to result in an unreasonable reduction in tax under PRC law, the PRC tax authorities have the authority to disallow our tax savings, adjust the profits and losses of our respective PRC entities and assess late payment interest and penalties.
As a result of this risk, you should evaluate our results of operations and financial condition without regard to these tax savings.
We depend upon the acquisition and maintenance of licenses to conduct our business in the PRC.
In order to conduct business in the PRC, we need licenses from the appropriate government authorities, including general business licenses. The loss or failure to obtain or maintain these licenses in full force and effect will have a material adverse impact on our ability to conduct our business and on our financial condition.
Changes in the policies of the government in the PRC could significant impact our ability to operate profitably.
The economy of the PRC is a planned economy subject to five-year and annual plans adopted by the government that set down national economic development goals. Government policies can have significant effect on the economic conditions of the PRC. Although the government in the PRC has confirmed that economic development will follow a model of market economy under socialism, a change in the direction of government planning may materially affect our business, prospects and financial condition.
Our operations and assets in the PRC are subject to significant political and economic uncertainties.
Government policies are subject to rapid change, and the government of the PRC may adopt policies which have the effect of hindering private economic activity and greater economic decentralization. There is no assurance that the government of the PRC will not significantly alter its policies from time to time without notice in a manner which reduces or eliminates any benefits from its present policies of economic reform. In addition, a substantial portion of productive assets in the PRC remains government-owned. For instance, all lands are state owned and leased to business entities or individuals through governmental granting of state-owned land use rights. The granting process is typically based on government policies at the time of granting, which could be lengthy and complex. The government of the PRC also exercises significant control over its economic growth through the allocation of resources, controlling payment of foreign currency and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental policies and measures. In addition, changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency, the nationalization or other expropriation of private enterprises, as well as adverse changes in the political, economic or social conditions in the PRC, could have a material adverse effect on our business, results of operations and financial condition.
Recent regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas and cross-border investment activity, and a failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under PRC law.
The PRC National Development and Reform Commission, or NDRC, and SAFE recently promulgated regulations that require PRC residents and PRC corporate entities to register with and obtain approvals from relevant PRC government authorities in connection with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.
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Under the SAFE regulations, PRC residents who make, or have previously made, direct or indirect investments in offshore companies will be required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to file with the local branch of SAFE, with respect to that offshore company, any material change involving capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger, division, long term equity or debt investment or creation of any security interest over the assets located in China. If any PRC shareholder fails to make the required SAFE registration, the PRC subsidiaries of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation, to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into their PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
The PRC tax authorities may require us to pay additional taxes in connection with our acquisitions of offshore entities that conducted their PRC operations through their affiliates in China.
Our operations and transactions are subject to review by the PRC tax authorities pursuant to relevant PRC laws and regulations. However, these laws, regulations and legal requirements change frequently, and their interpretation and enforcement involve uncertainties. For example, in the case of some of our acquisitions of offshore entities that conducted their PRC operations through their affiliates in China, we cannot assure you that the PRC tax authorities will not require us to pay additional taxes in relation to such acquisitions. In the event that the sellers failed to pay any taxes required under PRC law in connection with these transactions, the PRC tax authorities might require us to pay the tax, together with late-payment interest and penalties.
Restrictions on currency exchange may limit our ability to utilize our revenues effectively.
Substantially all of our revenues and operating expenses are denominated in RMB. The RMB is currently convertible under the “current account”, which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account”, which includes foreign direct investment and loans. Currently, Zibo Costar Information Consulting may purchase foreign exchange for settlement of “current account transactions”, including payment of dividends to us, without the approval of the State Administration of Foreign Exchange. However, we cannot assure you that the relevant PRC governmental authorities will not limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenues will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenues generated in RMB to fund our business activities outside China, if any, or expenditures denominated in foreign currencies. Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration with, the State Administration of Foreign Exchange and other relevant PRC governmental authorities. This could affect Zibo Costar Information Consulting’s ability to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us.
Because our earnings and cash and cash equivalent assets are denominated in RMB and the net proceeds from this offering will be denominated in U.S. dollars, fluctuations in exchange rates between U.S. dollars and RMB will affect the relative purchasing power of these proceeds and our balance sheet and earnings per share in U.S. dollars following this offering. In addition, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Since July 2005 the RMB is no longer pegged solely to the U.S. dollar. Instead, it is reported to be pegged against a basket of currencies, determined by the People’s Bank of China. Change in policy has resulted in the gradual increase in the value of the RMB against the U.S. dollar over time. As of December 31, 2010, the RMB was 6.6026 against the U.S. dollar; July 31, 2005 the RMB was valued 8.10526 against the U.S. Dollar. The RMB may appreciate or depreciate significantly in value against the U.S. dollar in the long term, depending on the fluctuation of the basket of currencies against which it is currently valued or it may be permitted to enter into a full float, which may also result in a significant appreciation or depreciation of the RMB against the U.S. dollar. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue in the future which will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar-denominated investments we make in the future.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. We do not intend to enter into any hedging transactions. Even if we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency.
Our operations may not develop in the same way or at the same rate as might be expected if the PRC economy were similar to the market-oriented economies of most developed countries.
The economy of the PRC has historically been a nationalistic, “planned economy,” meaning it functions and produces according to governmental plans and pre-set targets or quotas. In certain aspects, the PRC’s economy has been making a transition to a more market-oriented economy, although the government imposes price controls on certain products and in certain industries. However, we cannot predict the future direction of these economic reforms or the effects these measures may have. The economy of the PRC also differs from the economies of most developed countries including with respect to the amount of government involvement, level of development, growth rate and control of foreign exchange and allocation of resources. As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the economy of the PRC were similar to those of other developed countries.
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Because our officers and directors reside outside of the United States, it may be difficult for you to enforce your rights against them or enforce United States court judgments against them in the PRC.
Our directors and our executive officers reside in the PRC and all of our assets are located in the PRC. It may therefore be difficult for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under federal securities laws. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement of criminal penalties of the federal securities laws.
We may have limited legal recourse under PRC law if disputes arise under contracts with third parties.
All of our agreements, which are made by our PRC subsidiaries, are governed by the laws of the PRC. The PRC legal system is a civil law system based on written statutes. Accordingly decided legal cases have little precedential value. The government of the PRC has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, these laws are relatively new and their experience in implementing, interpreting and enforcing these laws and regulations is limited. Therefore, our ability to enforce commercial claims or to resolve commercial disputes may be uncertain. The resolution of these matters may be subject to the exercise of considerable discretion by the parties charged with enforcement of the applicable laws. Any rights we may have to specific performance or to seek an injunction under PRC law may be limited, and without a means of recourse, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
Because we may not be able to obtain business insurance in the PRC, we may not be protected from risks that are customarily covered by insurance in the United States.
Business insurance is not readily available in the PRC. To the extent that we suffer a loss of a type which would normally be covered by insurance in the United States, such as product liability and general liability insurance, we would incur significant expenses in both defending any action and in paying any claims that result from a settlement or judgment.
Because our funds are held in banks which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
Fluctuations in the exchange rate could have a material adverse effect upon our business.
We conduct our business in the RMB. The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade old policy of pegging its currency to the U.S. currency. Under the current policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This Change in policy has resulted in the gradual increase in the value of the RMB against the U.S. dollar over time. As of December 31, 2010, the RMB was 6.6026 against the U.S. dollar; July 31, 2005 the RMB was valued 8.10526 against the U.S. Dollar. However, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. To the extent our future revenues are denominated in currencies other the United States dollars, we would be subject to increased risks relating to foreign currency exchange rate fluctuations which could have a material adverse effect on our financial condition and operating results since our operating results are reported in United States dollars and significant changes in the exchange rate could materially impact our reported earnings.
27
Certain of our stockholders control a significant amount of our common stock.
Approximately 66% of our outstanding common stock is owned by our Chairman, Lu Feng and Vice-Chairman Lu Lingliang. Accordingly, Lu Feng and Lu Lingliang presently have the voting power to elect all of the directors and approve any transaction requiring stockholder approval.
The terms on which we may raise additional capital may result in significant dilution and may impair our stock price.
We cannot assure you that we will be able to get additional financing on any terms, and, if we are able to raise funds, it may be necessary for us to sell our securities at a price which is at a significant discount from the market price and on other terms which may be disadvantageous to us. In connection with any such financing, we may be required to provide registration rights to the investors and pay damages to the investor in the event that the registration statement is not filed or declared effective by specified dates. The price and terms of any financing which would be available to us could result in both the issuance of a significant number of shares and significant downward pressure on our stock price.
RISKS ASSOCIATED WITH INVESTING IN OUR COMMON STOCK
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results and stockholders could lose confidence in our financial reporting.
Internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. Failure to achieve and maintain an effective internal control environment, regardless of whether we are required to maintain such controls, could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. Although we are not aware of anything that would impact our ability to maintain effective internal controls, we have not obtained an independent audit of our internal controls, and, as a result, we are not aware of any deficiencies which would result from such an audit. Further, at such time as we are required to comply with the internal controls requirements of Sarbanes Oxley, we may incur significant expenses in having our internal controls audited and in implementing any changes which are required.
Because we may be subject to the “penny stock” rules, you may have difficulty in selling our common stock.
Because our stock price is less than $5.00 per share, our stock may be subject to the SEC’s penny stock rules, which impose additional sales practice requirements and restrictions on broker-dealers that sell our stock to persons other than established customers and institutional accredited investors. The application of these rules may affect the ability of broker-dealers to sell our common stock and may affect your ability to sell any common stock you may own.
According to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
|
·
|
Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
|
|
·
|
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
|
|
·
|
“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
|
|
·
|
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
|
|
·
|
The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
|
28
As an issuer of “penny stock” the protection provided by the federal securities laws relating to forward looking statements does not apply to us.
Although the federal securities law provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, if we are a penny stock we will not have the benefit of this safe harbor protection in the event of any based upon an claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.
Our stock price may be affected by our failure to meet projections and estimates of earnings developed either by us or by independent securities analysts.
Although we do not make projections relating to our future operating results, our operating results may fall below the expectations of securities analysts and investors. In this event, the market price of our common stock would likely be materially adversely affected.
The volatility of and lack of a trading market in our common stock may make it difficult for you to sell our common stock for a positive return on your investment.
Our common stock has not been traded. Any future market price for our shares is likely to be very volatile. Further, the lack of an active market for our common stock may amplify the volatility of our stock. These factors may make it more difficult for you to sell shares of common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
N/A
ITEM 2. PROPERTIES
All land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants or allocates landholders a “land use right,” which we sometimes refer to informally as land ownership. There are four methods to acquire land use rights in the PRC: (1) grant of the right to use land; (2) assignment of the right to use land; (3) lease of the right to use land; and (4) allocated land use rights. In comparison with Western common law concepts, granted land use rights are similar to life estates and allocated land use rights are in some ways similar to leaseholds. Granted land use rights are provided by the government in exchange for a grant fee, and carry the rights to pledge, mortgage, lease, and transfer within the term of the grant. Land is granted for a fixed term, generally 70 years for residential use, 50 years for industrial use, and 40 years for commercial and other use. The term is renewable in theory. Unlike the typical case in Western nations, granted land use rights must be used for the specific purpose for which it was granted. Allocated land use rights are generally provided by the government for an indefinite period (usually by state-owned entities) and cannot be pledged, mortgaged, leased or transferred by the user. Allocated land cannot be reclaimed by the government at any time. Allocated land use rights may be converted into granted land use rights upon the payment of a grant fee to the government.
Zibo Jiazhou Chemical’s facilities are located at 1, Electric Power Plant Road, Zhou Cun District, Zibo, People’s Republic of China. Zibo Jiazhou Chemical holds the following land use rights:
|
Certificate No.
|
Location
|
Purpose
|
Area
|
Registration Date
|
Expiry Date
|
|
D01353
|
1, Electric Power Plant Road
Zhou Cun District, Zibo
|
Land Use Right for Industrial Use
|
3,459.47 square meters
|
July 10, 2009
|
December 26, 2016
|
|
D02646
|
South to Heng Xing Road and West to Zhou He River
Zhou Cun District
|
Land Use Right for Industrial Use
|
20,000 square meters
|
November 17, 2009
|
October 27, 2059
|
|
D00316
|
No. 526 Dongmen Rd.,
Zhou Cun District
|
Land Use Right for Industrial Use
|
29,276 square meters
|
September 7, 2010
|
December 30, 2014
|
|
D01866
|
The Northwest of Hengxing Rd.,
Zhou Cun District
|
Land Use Right for Industrial Use
|
20,000 square meters
|
September 7, 2010
|
August 31, 2056
|
29
In addition, on April 15, 2007, Zibo Jiazhou Chemical and a subordinate organization of the local government of Zhou Cun district in charge of area named “Jiazhou Community” in Zhou Cun district entered into a contract to lease the land of 63,603 square meters to Zibo Jiazhou Chemical, with the rent of RMB286,500 per year to be paid annually before the end of every March. The leasing term commenced from April 17, 2007 and to be ended on April 16, 2042.
Under the PRC legal system, the ownership of land are classified into two types, the “State-owned” and the “collectively owned by peasants.” State-owned lands are owned by the State and people can only be granted the right to use such land for a certain period of time approved by the government. Lands collectively owned by peasants are usually agriculture land owned by the peasant community inhabiting on the land. The 63,603 square meters land leased by Zibo Jiazhou Chemical is in the nature of “collectively owned by peasants” and according to a document issued by the State Land Bureau of Zibo Municipal on August 10, 2010, this land is owned by Jiazhou Community.
Pursuant to relevant regulations issued by the State government, land collectively owned by peasants can only be used for agriculture, building utilities for the inhabiting community or be used to build commercial or industrial facilities by business entities owned by the inhabiting community. Zibo Jiazhou Chemical is not an entity owned by the inhabiting community of the land, therefore it is not legal for Zibo Jiazhou Chemical to use the land in the current status. Zibo Jiazhou Chemical needs to apply with the local government for the using of this land and, if approved, the government will compensate the inhabiting community for transforming the nature of the land to “State-owned” and then grant the land use right to Zibo Jiazhou Chemical through appropriate procedures. Zibo Jiazhou Chemical received notification from the State Land Bureau of Zibo Municipal on August 10, 2010 that the land leasing relationship between Jiazhou Community and Zibo Jiazhou Chemical will be kept in its current status before the land being granted to Zibo Jiazhou Chemical is converted State-owned land, which is expected to occur within five years.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not a party to any legal proceeding and are not aware of any legal claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 4. [REMOVED AND RESERVED.]
30
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the OTC Bulletin Board under the symbol CHCC.OB since January 12, 2011. Prior to January 12, 2011, our common stock was quoted on the OTC.QB under the symbol CHCC. Trading of our common stock commenced on December 31, 2010. As of March 28, 2011, there were 442 holders of record of our common stock.
The following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
|
Year Ended December 31, 2010
|
High
|
Low
|
||||||
|
4th Quarter Ended December 31, 2010
|
$5.00 | 3.20 | ||||||
|
Year Ended December 31, 2011
|
High
|
Low
|
||||||
|
1st Quarter Ended March 31, 2011 (through March 25, 2011)
|
$5.00 | $3.06 | ||||||
The last reported sales price of our common stock on the OTC Bulletin Board on March 25, 2011 was $3.10 per share.
Dividend Policy
We have not declared nor paid any cash dividend on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business, and we do not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers significant.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10K.
Our Company engages in the business of manufacturing and selling maleic anhydride (“MAH”) and phthalic anhydride (“PA”) products. The Company’s products are primarily marketed and sold in the PRC.
Our Company currently has the capacity to produce 60,000 tons of maleic anhydride per year and 50,000 tons of phthalic anhydride per year. During the second quarter of fiscal year ended December 31, 2008, the Company started construction to expand the Company’s annual MAH capacity to 60,000 tons per year. The Company actually produced 30,175 ton of PA and 22,142 tons of MAH over the last 12 months ending in December 31, 2010. Full operations of the expanded 30,000 were not fully operational until January of 2011. For the year end of December 31, 2010, the Company’s total revenues were $75,673,839.
32
The information contained in this report, identifies additional factors that could cause our results or performance to differ materially from those we express in our forward-looking statements. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements which are included in this report and the exhibits and other documents incorporated herein by reference, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved.
Significant Accounting Policies and Management Estimates
This section should be read together with the Summary of Significant Accounting Policies included as Note 2 to the consolidated financial statements included in this report.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the time the estimates are made. Actual results could differ materially from those estimates.
Estimates affecting accounts receivable and prepayments for goods
The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect our reporting of assets and liabilities. These estimates are particularly significant where they affect the reported net realizable value of the Company’s accounts receivable and prepayments for goods.
At December 31, 2010, the Company provided no reserve against accounts receivable. Management’s estimate of no reserve on accounts receivable at December 31, 2010 was based on the aged nature of these accounts receivable. In making its judgment, management assessed its customers’ ability to continue to pay their outstanding invoices on a timely basis, and whether their financial position might deteriorate significantly in the future, which would result in their inability to pay their debts to the Company.
At December 31, 2010, the Company provided an allowance against its prepayments for goods amounting to $159,538. Management’s estimate of the appropriate reserve on the prepayments for goods at December 31, 2010 was based on the aged nature of these prepayments for goods. In making its judgment, management assessed its suppliers’ ability to continue to provide goods or repayment their outstanding debts on a timely basis, and whether their financial position might deteriorate significantly in the future, which would result in their inability to pay their debts to the Company.
While the Company currently believes that there is little likelihood that actual results will differ materially from these current estimates, if the financial condition of our customers or suppliers deteriorates in the near future, the Company could realize significant write downs for uncollectible accounts receivable or prepayments for goods.
Stock-Based Compensation
Stock-based compensation includes 1) common stock awards granted to employees and directors for services, and are accounted for under FASB ASC 718 “Compensation - Stock Compensation”, and 2) common stock awards granted to consultants which are accounted for under FASB ASC 505-50 “Equity – Equity-Based Payment to Non-Employees”.
All grants of common stock awards to employees, director and consultant are recognized in the financial statements based on their grant date fair values. The Company has elected to recognize compensation expense on their grant dates, with a corresponding charge to additional paid-in capital. The Company estimates fair value of common stock awards based on the number of shares granted and the quoted price or the bid price from an unrelated broker of the Company’s common stock on the date of grant.
33
Revenue Recognition
Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met:
|
·
|
Persuasive evidence of an arrangement exists,
|
|
·
|
Delivery has occurred or services have been rendered,
|
|
·
|
The seller’s price to the buyer is fixed or determinable, and
|
|
·
|
Collectability is reasonably assured.
|
Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuming collectability. The majority of the Company's revenue results from sales contracts with customers and revenue is recorded upon the shipment of goods.
New Accounting Pronouncements
There were no new accounting pronouncements not yet adopted by the Company that would have a material effect on the Company’s consolidated financial statements as of December 31, 2010.
34
Results of Operation
Our operating results are presented for the year ended December 31, 2010, as compared to the year ended December 31, 2009.
|
2010
|
2009
|
Comparisons
|
||||||||||||||||||||||
|
Amount
|
Percentage of Revnue
|
Amount
|
Percentage of Revnue
|
Change in Amount
|
Increase or (Decrease) in Percentage
|
|||||||||||||||||||
|
REVENUES
|
$ | 75,673,839 | 100.00% | $ | 56,920,742 | 100.00% | $ | 18,753,097 | 32.95% | |||||||||||||||
|
COST OF GOODS SOLD
|
58,689,379 | 77.56% | 46,030,417 | 80.87% | 12,658,962 | 27.50% | ||||||||||||||||||
|
GROSS PROFIT
|
16,984,460 | 22.44% | 10,890,325 | 19.13% | 6,094,135 | 55.96% | ||||||||||||||||||
|
General and administrative expenses
|
1,635,294 | 2.16% | 1,325,743 | 2.33% | 309,551 | 23.35% | ||||||||||||||||||
|
Selling and distribution expenses
|
29,236 | 0.04% | 11,725 | 0.02% | 17,511 | 149.35% | ||||||||||||||||||
|
INCOME FROM OPERATIONS
|
15,319,930 | 20.24% | 9,552,857 | 16.78% | 5,767,073 | 60.37% | ||||||||||||||||||
|
OTHER INCOME (EXPENSES)
|
||||||||||||||||||||||||
|
Lease income from a related party, net
|
2,868,505 | 3.79% | 3,261,702 | 5.73% | (393,197 | ) | (12.05%) | |||||||||||||||||
|
Interest expense, net
|
(2,529,972 | ) | (3.34%) | (1,398,369 | ) | (2.46%) | (1,131,603 | ) | 80.92% | |||||||||||||||
|
Other expenses, net
|
(52,264 | ) | 0.07% | (484 | ) | 0.00% | (51,780 | ) | 10,698.35% | |||||||||||||||
|
INCOME BEFORE INCOME TAXES
|
15,606,199 | 20.62% | 11,415,706 | 20.06% | 4,190,493 | 36.71% | ||||||||||||||||||
|
INCOME TAX EXPENSE
|
(1,885,491 | ) | (2.49%) | (1,410,314 | ) | (2.48%) | (475,177 | ) | 33.69% | |||||||||||||||
|
NET INCOME
|
13,720,708 | 18.13% | 10,005,392 | 17.58% | 3,715,316 | 37.13% | ||||||||||||||||||
|
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
|
22,423,126 | 19,861,700 | 2,561,426 | |||||||||||||||||||||
|
NET INCOME PER SHARE, BASIC AND DILUTED
|
$ | 0.61 | $ | 0.50 | $ | 0.11 | 22.00% | |||||||||||||||||
35
Revenue
The Company’s revenue for the year ended December 31, 2010 was $75,673,839, which represented an increase of 32.95% from the prior year. The increase was due to the increase in the average sales price and volume of the processes of maleic anhydride and phthalic anhydride as compared to last year.
Sales by Product
|
2010
|
2009
|
Comparisons
|
||||||||||||||||
|
Product
|
Amount
|
Percentage of Revenues
|
Amount
|
Percentage of Revenues
|
Change in Amount
|
Increase (Decrease) in Percentage
|
||||||||||||
|
Phthalic Anhydride
|
$
|
33,944,237
|
44.86%
|
$
|
27,296,046
|
47.95%
|
$
|
6,648,191
|
24.36%
|
|||||||||
|
Maleic Anhydride
|
$
|
26,842,072
|
35.47%
|
$
|
17,114,630
|
30.07%
|
$
|
9,727,442
|
56.84%
|
|||||||||
|
Steam
|
$
|
6,026,436
|
7.96%
|
$
|
6,223,324
|
10.93%
|
$
|
(196,888)
|
(3.16)%
|
|||||||||
|
Acid Water
|
$
|
4,347,718
|
5.75%
|
$
|
3,134,331
|
5.51%
|
$
|
1,213,387
|
38.71%
|
|||||||||
|
Fumeric Acid
|
$
|
1,366,858
|
1.81%
|
$
|
305,184
|
0.54%
|
$
|
1,061,674
|
347.88%
|
|||||||||
|
Processing Fee
|
$
|
2,267,602
|
3.00%
|
$
|
1,504,479
|
2.64%
|
$
|
763,123
|
50.72%
|
|||||||||
|
Raw Material
|
$
|
878,916
|
1.16%
|
$
|
1,342,748
|
2.36%
|
$
|
(463,832)
|
(34.54)%
|
|||||||||
|
Total
|
$
|
75,673,839
|
100.00%
|
$
|
56,920,742
|
100.00%
|
$
|
18,753,097
|
32.95%
|
|||||||||
The sale of phthalic anhydride increased by 24.36% to $33,944,237 for the year ended December 31, 2010 from $27,296,046 for the year ended December 31, 2009. The increase in volume of 8.33% was due to the increase of production for the year ended December 31, 2010 from December 31, 2009. The increase in sales price of 16.03% was due to the increase in average price per metric ton for the year ended December 31, 2010.
The sale of maleic anhydride increased by 56.84% to $26,842,072 for the year ended December 31, 2010 from $17,114,630 for the year ended December 31, 2009. The increase in volume of 8.21% was due to the increase of production for the year ended December 31, 2010 from December 31, 2009. The increase in sales price of 48.63% was due to the increase in average price per metric ton for the year ended December 31, 2010.
The sale of steam decreased by 3.16% to $6,026,436 for the year ended December 31, 2010 from $6,223,324 for the year ended December 31, 2009. This was due to the increase in sales volume, offset by the decrease in price of steam compared to last year.
The sale of acid water increased 38.71% to $4,347,718 for the year ended December 31, 2010 from $3,134,331 for the year ended December 31, 2009. Acid water is a byproduct created during the synthetic production process of both maleic anhydride and phthalic anhydride. The increase was due to an increase of sales volume and price compared to last year.
36
The sale of fumeric acid increased 347.88% to $1,366,858 for the year ended December 31, 2010 from $305,184 for the year ended December 31, 2009. Fumeric acid was processed from acid water that is the byproduct in the production process of both maleic anhydride and phthalic anhydride. The increase was due to an increase of sales volume and price compared to last year.
The sale of processing fee increased by 50.72% to $2,267,602 for the year ended December 31, 2010 from $1,504,479 for the year ended December 31, 2009. Processing fee is for using a customer’s raw material and processing of both maleic anhydride and phthalic anhydride. The increase was due to an increase of processing sales volume and price compared to last year.
The sale of raw material decreased 34.54% to $878,916 for the year ended December 31, 2010 from $1,342,748 for the year ended December 31, 2009. Excess raw materials of benzene are sold. The decrease was due to a decrease of sales volume and increase in price compared to last year.
The following is a breakdown of our revenues geographically:
|
2010
|
2009
|
Comparisons
|
|||||||||||||||||||
|
Amount
|
Percentage
of Revenue
|
Amount
|
Percentage
of Revenue
|
Change
in Amount
|
Increase (Decrease) in Percentage
|
||||||||||||||||
|
Shandong
|
$ | 56,581,729 | 74.77% | $ | 39,312,442 | 69.08% | $ | 17,269,287 | 43.93% | ||||||||||||
|
Henan
|
12,035,316 | 15.90% | 12,883,941 | 22.64% | (848,625 | ) | (6.59%) | ||||||||||||||
|
Hebei
|
2,789,187 | 3.69% | 1,090,221 | 1.92% | 1,698,966 | 155.84% | |||||||||||||||
|
Shanghai
|
1,410,609 | 1.86% | 190,567 | 0.33% | 1,220,042 | 640.22% | |||||||||||||||
|
Zhejiang
|
741,983 | 0.98% | 1,809,826 | 3.18% | (1,067,843 | ) | (59.00%) | ||||||||||||||
|
Tianjin
|
609,509 | 0.81% | 158,973 | 0.28% | 450,536 | 283.40% | |||||||||||||||
|
Jiangsu
|
589,510 | 0.78% | 284,459 | 0.50% | 305,051 | 107.24% | |||||||||||||||
|
Hubei
|
555,678 | 0.73% | 696,285 | 1.22% | (140,607 | ) | (20.19%) | ||||||||||||||
|
Guangdong
|
360,317 | 0.48% | 410,315 | 0.72% | (49,998 | ) | (12.19%) | ||||||||||||||
|
Anhui
|
- | 0.00% | 69,269 | 0.12% | (69,269 | ) | (100.00%) | ||||||||||||||
|
Neimeng
|
- | 0.00% | 14,444 | 0.03% | (14,444 | ) | (100.00%) | ||||||||||||||
|
Total
|
$ | 75,673,839 | 100.00% | $ | 56,920,742 | 100.00% | $ | 18,753,097 | 32.95% | ||||||||||||
For the year ended December 31, 2010, sales in Shandong Province increased by 43.93% as compared to last year. This increase was due to the Company’s reinforcement of its marketing strategy and expansion of the market share in the local area.
The sales for the year ended December 31, 2010 showed sales increased in 5 provinces totaling $20,943,882 while showed decreases in 6 other provinces by $2,190,785 as compared to last year. The increase was due to an increase in sales volume in both PA and MAH products.
Top 5 Customers:
|
% of Total Revenue
|
||||||
|
Customer
|
2010
|
2009
|
||||
|
Zibo Xinghua Resin Co., Ltd.
|
22%
|
|
25%
|
|
||
|
Dongying Shenli Zhongya Chemecial Co., Ltd
|
16%
|
4%
|
||||
|
Pingmei Group Kaifeng Xinghua Fine Chemical Factory
|
9%
|
25%
|
||||
|
Kaifeng Taihua Chemical Co., Ltd
|
6%
|
|
4%
|
|
||
|
Zouping Erkeri Chemical Co., Ltd
|
6%
|
-%
|
||||
For the year ended December 31, 2010, our top 5 customers have changed due to an increase in purchases made by Zouping Erkeri Chemical Co., Ltd who made no purchases last year.
Cost of Goods Sold (COGS)
Cost of goods sold for the year ended December 31, 2010 is $58,689,379 which is 77.56% of total revenues and represents a 27.50% increase as compared to $46,030,417 of which 80.87% of total revenues for the year ended December 31, 2009. This was due to an increase in both costs of goods sold and increase in sales volumes of products sold as compared to the same period of last year.
The increase in volume of the raw material, o-xylene, used for the production of PA was 8.33% due to the increase of production for the year ended December 31, 2010 from December 31, 2009. The increase in cost of o-xylene of 10.54% was due to the increase in average price per metric ton for the year ended December 31, 2010 and December 31, 2009, respectively.
37
The increase in volume of the raw material, coking benzene, used for the production of MAH was 8.21% due to the increase of production for the year ended December 31, 2010 from December 31, 2009. The increase in cost of coking benzene of 44.61% was due to the increase in average price per metric ton for the 12 months ending December 31, 2010 and December 31, 2009, respectively.
Cost of goods sold as a percentage of revenue may fluctuate in the future. This fluctuation may primarily be due to changes in the price of raw materials, which can have a significant impact on the cost of goods sold.
Gross Profit
|
2010
|
2009
|
Comparisons
|
|||||||||||||||||||
|
Amount
|
Percentage of Revenues
|
Amount
|
Percentage of Revenues
|
Change in Amount
|
Increase (Decrease) in Percentage
|
||||||||||||||||
|
Revenues
|
$
|
75,673,839
|
100.00%
|
$
|
56,920,742
|
100.00%
|
18,753,097
|
32.95%
|
|||||||||||||
|
Cost of Goods Sold
|
$
|
58.689,379
|
77.56%
|
$
|
46,030,417
|
80.87%
|
12,658,962
|
27.50%
|
|||||||||||||
|
Gross Profit
|
$
|
16,984,460
|
22.44%
|
$
|
10,890,325
|
19.13%
|
6,094,135
|
55.96%
|
|||||||||||||
The Company’s gross profit increased by $6,094,135, or 55.96%, to $16,984,460 for year 2010 as compared to $10,890,325 for year 2009. The increase was due to an increase of sales price and sales volume as compared to last year.
Operating Income
The Company’s operating income for the year ended December 31, 2010 increased 60.37% to $15,319,930 from $9,552,857 reported for the year ended December 31, 2009. The increase was due to the increase of sales price and sales volume of products as compared to last year.
Operating Expenses
General and administrative expenses
The Company incurred general and administrative expenses of $1,635,294 for the year ended December 31, 2010, representing an increase of $309,551 or 23.35%, as compared to $1,325,743 for the year ended December 31, 2009. The increase was due to an increase in professional and consulting fees of $162,403 associated with bringing the Company into the capital markets compared to last year. The Company incurred compensation expense of $75,000 related to the issuance of 15,000 common stock to a director.
Selling and distribution expenses
The Company incurred selling and distribution expenses of $29,236 for the year ended December 31, 2010, representing an increase of $17,511 or 149.35%, as compared to $11,725 for the year ended December 31, 2009.
Other Income (Expenses)
Lease Income from a Related Party, Net
The Company has lease income of $2,868,505 for the year ended December 31, 2010, representing a decrease of $393,197 or 12.05%, as compared to $3,261,702 for the year ended December 31, 2009. The decrease was due to the decrease in the rental fee.
Interest Expense, Net
Interest expense, net for the year ended December 31, 2010 was $2,529,972, which represents an 80.92% increase from $1,398,369 for the prior year. The increase was due to the increase in the short-term bank loan and financial lease obligation balances, therefore the cost of financing increased correspondingly.
Other Expenses, Net
Other expenses, net for the year ended December 31, 2010 was $52,264, which represents a 10,698.35% increase from other expense of $484 for the year ended December 31, 2009. Increase in other expense was due to a land use right deposit loss of $53,539 in 2010.
38
Income Tax
The Company incurred income tax expense of $1,885,491 for the year ended December 31, 2010, an increase of $475,177, or 33.69%, as compared to income tax expense of $1,410,314 for the year ended December 31, 2009. This was attributed to increase in revenue and income before income tax. The Company’s effective income tax rate was 12.5% for 2010 and 2009.
Net Income
The Company’s net income of $13,720,708 for the year ended December 31, 2010 represented an increase of $3,715,316 or 37.13%, as compared to $10,005,392 for the year ended December 31, 2009. This increase was due to the increase in the sales price and sales volume of products as compared to last year.
LIQUIDITY AND CAPITAL RESOURCES FOR YEAR ENDED DECEMBER 31, 2010
Liquidity
The Company has a working capital deficit of $17,730,782 at December 31, 2010. This was principally due to the Company used cash of approximately $33 million to purchase property, plant and equipment and construction in progress during 2010. The Company currently generates its cash flow through operating profit and obtaining debt. The Company had a net profit of $13,720,708 for the year ended December 31, 2010. As of the date of this report, the Company has not experienced any liquidity problems in settling payables in the normal course of business and repaying the bank loans when they become due. To improve liquidity, the Company may explore new expansion opportunities and funding sources from which the management may consider seeking external funding and financing. We believe the Company has sufficient cash to sustain operations for the next twelve months.
We have entered into the loan agreements with our primary lenders including but not limited to the Agricultural Bank of China, Bank Austria Beijing and Qishang Bank. As of December 31, 2010, we had an aggregate principal amount of $73,037,883 outstanding under both the long-term and short-term loan agreements, with maturities from January 2011 to July 2013 and interest rates from 3.7844% to 9.8770% per annum. The loan agreements contain customary affirmative and negative covenants and are mainly guaranteed by third parties and individual persons or secured by a lien on our restricted cash, raw material inventories, and land use rights. Historically, all debts due have been paid back by the Company on a timely manner. All short-term bank loans are revolving loans whose terms (at due date of payment) are extended by the lender. As of December 31, 2010, we were in material compliance with the terms of our loan agreements. As such, management expects all unpaid short-term bank loans balances can be extended at the due date, but reserves the right to negotiate with other banks on favorable terms. Depending on the capital needs, the Company evaluates whether to apply for additional long-term bank loans when they are paid back. The Company currently has sufficient lines of credits with the banks for both short-term and long-term borrowings.
We have entered into the notes payable agreements with banks to the amount of $75,546,569 for bank acceptance notes. As of December 31, 2010, we had an aggregate principal amount of $75,546,569 outstanding under the notes payable agreements, with maturities from January 2011 to September 2011 and are charged 0.05% of the principal for a total of $37,773 and interest expense of $-0- for the year ended December 31, 2010. The bank acceptance notes payable agreements contain customary affirmative and negative covenants and are mainly guaranteed by the Company’s restricted cash and third parties. Historically, all notes payable debts due have been paid back by the Company on a timely manner. All notes payable are whose terms (at due date of payment) are extended by the lender. As of December 31, 2010, we were in material compliance with the terms of our notes payable agreements. As such, management expects all unpaid notes payable balances can be extended at the due date, but reserves the right to negotiate with other third parties on favorable terms.
Capital Resources
As of December 31, 2010, the total assets were $258,131,117 and our total liabilities were $177,365,820. Our debt to asset ratio, calculated as total liabilities (including short-term debt and payables) over total assets, was 0.6871.
As of December 31, 2010, our total assets were $258,131,117 and our operating revenue was $75,673,839 reflecting a total asset turnover of 0.2932.
39
Cash Flows
|
2010
|
2009
|
|||||||
|
Net cash (used in) provided by
|
||||||||
|
Operating Activities
|
$
|
(6,728,131
|
)
|
$
|
10,549,639
|
|||
|
Investment Activities
|
$
|
(33,377,619
|
)
|
$
|
(33,000,668
|
)
|
||
|
Financing Activities
|
$
|
40,273,353
|
$
|
23,114,953
|
||||
|
Net Increase in cash and cash equivalents
|
$
|
167,603
|
$
|
663,924
|
||||
|
Effect of exchange rate changes on cash
|
$
|
2,263,775
|
$
|
15,096
|
||||
|
Cash and cash equivalents at the beginning of the year
|
$
|
828,921
|
$
|
149,901
|
||||
|
Cash and cash equivalents at year end
|
$
|
3,260,299
|
$
|
828,921
|
||||
Operating Activities
Net cash used in operating activities was $6,728,131 for the year ended December 31, 2010, which was primarily attributable to our net income of $13,720,708 adjusted by a non-cash depreciation and amortization of $6,074,039, adjusted by decrease in $94,522 for deferred taxes, and increase of common stock issued for compensation of $81,915, an increase of amortization of initial cost for financial obligation of $34,774, an increase of amortization of financial obligations, sale-leaseback of $375,912, an increase of $9,929,453 in accounts receivable, an increase of $11,675,094 in prepayments for goods, a $5,079,152 increase in inventory, a $250,788 decrease in prepaid expenses and other receivables, a $4,501,685 increase in due from a related party, offset by a $2,152,864 decrease in accounts payable, a $2,522,067 increase in other payables and accrued liabilities, a $1,016,552 decrease in customer deposits, a $1,402,243 increase in income taxes payable, a $1,362,633 decrease in payable to contractors, a $315,650 increase in due to related parties.
1) An increase of $10 million in accounts receivable.
The increase was due to 1) to keep long-term relationship with some old customers, the Company offered longer credit period to them; 2) the increased sales by 32.95% in 2010 also led to the increase of accounts receivable.
2) An increase of $12 million in prepayments.
The increase was due to 1) the sales in 2010 increased and the Company estimated the sales will increase in 2011 as well. Therefore, the Company prepaid more to the vendors to meet the future demand of production; 2) the Company prepaid more to purchase raw materials for the new production for the new MA project completed at the end of 2010.
3) An increase of $5 million in inventories.
The increase of inventories balance was mainly due to the increase of raw materials of approximately $5 million. The increase of raw materials was mainly due to the new MA project was completed at the end of 2010. Therefore, the Company purchased more raw materials for the future production.
4) An increase of $4 million in due from a related party.
The Company sells steam of $7 million and leases equipment of $7 million to ZJHP. The Company also purchases electricity power of $2 million from ZJHP. The increase was mainly due to the increase of sales in 2010.
ZJHP generated these due from related party balances through the nonpayment of the current balances of the sales of steam and lease of equipment to ZJHP less the purchases of electricity and interest income from ZJHP starting in 2007. This balance was the amount build up over the time period from 2007 to just prior to the merger that occurred on December 31, 2010. Mr. Lu Lingliang executed a personal guarantee for the total amount. In March 2011, ZJHP signed an agreement to repay all monies to the Company within the next 5-years ending May 2015. The agreement will be filed as an exhibit to this Form 10-K.
Investing Activities
Net cash used in investing activities was approximately $33,377,619 for the year ended December 31, 2010, which was primarily attributable to our repayments of notes receivable in the amount of $3,375,723, off-set by purchases of construction in progress in the amount of $33,882,476, receipts from a related party in the amount of $5,308,077, issuance of notes receivable in the amount of $5,925,917 and purchases of plant and equipment in the amount of $1,805,925 and deposit for land use right and fixed assets to a related party of $447,101.
Financing Activities
Net cash provided by financing activities was approximately $40,273,353 for the year ended December 31, 2010, which was primarily attributable to our proceeds of notes payable in the amount of $78,838,107, proceeds from short-term bank loans in the amount of $66,751,231, proceeds from long-term bank loans in the amount of $3,725,838, repayment from an employee of $2,933,756 and net proceeds from financial obligation sale-leaseback of $20,439,947, off-set by repayments of notes payable in the amount of $52,574,863, repayments of short-term bank loans of $47,345,678, restricted cash of $26,034,237, payments of initial cost for financial obligations of $625,941, repayments of long-term loans of $1,043,235 and repayments of financials obligations, sale-leaseback of $4,791,572.
40
Capital Expenditures
Capital expenditures were related to increasing the manufacturing capacity to 60,000 metric tons per year for producing MAH, which was completed by the end of 2010 and the prepayment for the 1-4 butanediol construction. These projects were funded by long-term bank loans and the Company’s cash.
The expansion for the MAH facility costed approximately $27 million and was completed in the fourth quarter in 2010. The costs that were expended through December 31, 2009 were $15 million. The costs that were expended in 2010 were $12 million.
The estimated total cost of building the BDO facility is approximately $82million. The costs that were expended through December 31, 2009 were $7 million. The costs that were expended in 2010 were $29 million. The costs that will be expended for the year ending December 31, 2011 will be $27 million. The remainder of the purchase price of $26 million will be paid by the end of 2012.
Quantitative and Qualitative Disclosures about Market Risk
The resin and polyvinyl chloride market segments have indirect influences over the demand for products MAH and PA produced by the Company. The markets for these segments are increasing due to the growth demands of China; though it is uncertain how long this trend will remain. We have put more effort into building a BDO plant over the next 2 years and to increase revenues to the Company. BDO is used in the manufacturing of industrial solvents, high performance paints and adhesives, pharmaceuticals, cosmetic herbicides, etc.
All the Company’s current products are manufactured using benzene as feedstock material. The market price of benzene has shown a stable trend; which will have a direct link to the cost of producing BDO. The Company intends to use its production of the MAH as feed stock to manufacture BDO. Recently, the People’s Republic of China has announced a policy to increase the import tariffs on BDO.
Both MAH and PA products have been experiencing an increase in sales volume. The sales volume has been steadily increasing since 2008 and the economic crisis. The Company intends to continue selling MAH and PA products, and has increase MAH capacity to follow the current trend.
41
Off Balance-Sheet Financing Arrangements
The Company does not have any off-balance sheet financing arrangements.
Interest Rates Risk
Our exposure to interest rate risk for changes in interest rates relates primarily to the interest bearing bank loans and interest income generated by the bank deposits. We have not used any derivative financial instruments in our investment portfolio or for cash management purposes. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed, and do not anticipate being exposed to material risks due to changes in interest rates. However, our future interest expense or interest income may expect to be increased of expectations due to changes in interest rates in the PRC.
Contractual Obligations
Material Commitments/Tabular Disclosure of Contractual Obligations
|
Payments Due by Period
|
||||||||||||||||||||
|
Less Than 1
|
1-3
|
3-5
|
More than 5
|
|||||||||||||||||
|
Total
|
Year
|
Years
|
Years
|
Years
|
||||||||||||||||
|
Bank Indebtedness
|
||||||||||||||||||||
|
Short-term bank loans
|
$
|
47,593,169
|
$
|
47,593,169
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
|
Interest payment of short-term bank loans
|
$
|
1,063,727
|
$
|
1,063,727
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
|
Notes Payable
|
$
|
75,546,569
|
$
|
75,546,569
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
|
Long-term bank loans
|
$
|
25,444,714
|
$
|
5,831,080
|
$
|
19,613,634
|
$
|
-
|
$
|
-
|
||||||||||
|
Interest payment of long-term bank loans
|
$
|
4,102,325
|
$
|
1,620,507
|
$
|
2,481,818
|
$
|
-
|
$
|
-
|
||||||||||
|
Operating Obligations
|
||||||||||||||||||||
|
Land lease obligations
|
$
|
1,323,641
|
$
|
42,698
|
$
|
85,396
|
$
|
85,396
|
$
|
1,110,151
|
||||||||||
|
Purchase obligations
|
||||||||||||||||||||
|
Purchase obligations of equipments
|
$
|
32,271,919
|
$
|
27,422,092
|
$
|
4,849,827
|
$
|
-
|
$
|
-
|
||||||||||
|
Purchase obligations of land use right and fixed assets
|
$
|
2,767,379
|
$
|
2,767,379
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
|
Capital Lease Obligations
|
||||||||||||||||||||
|
Financial obligations, sale-leaseback
|
$
|
16,284,823
|
$
|
5,893,002
|
$
|
10,391,821
|
$
|
-
|
$
|
-
|
||||||||||
42
ITEM 8. FINANCIAL STATEMENTS
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.)
AND SUBSIDIARIES
Consolidated Financial Statements
For The Years Ended
December 31, 2010 and 2009
43
Draft: March 28, 2011
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.)
AND SUBSIDIARIES
CONTENTS
|
PAGE
|
F - 2
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM OF WEINBERG & COMPANY, P.A. FOR THE YEAR ENDED DECEMBER 31, 2010
|
|
PAGE
|
F - 3
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM OF K.P. CHENG & COMPANY FOR THE YEAR ENDED DECEMBER 31, 2009
|
|
PAGE
|
F - 4-5
|
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2010 AND 2009
|
|
PAGE
|
F - 6
|
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
PAGE
|
F - 7
|
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
PAGE
|
F – 8-9
|
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
PAGE
|
F - 10-34
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM
To the Board of Directors and Shareholders of:
China Chemical Corp.
We have audited the accompanying consolidated balance sheet of China Chemical Corp. (formerly Bomps Mining, Inc.), and subsidiaries (the “Company”) as of December 31, 2010, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Chemical Corp. and subsidiaries as of December 31, 2010, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Weinberg & Company, P.A.
Boca Raton, Florida
March 29, 2011
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of:
China Chemical Corp.
We have audited the accompanying balance sheet of China Chemical Corp. (the “Company”) as of December 31, 2009, and the related statements of income and comprehensive income, changes in shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Chemical Corp. as of December 31, 2009, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ K.P. Cheng & Co.
K.P. Cheng & Co.
Certified Public Accountants
Hong Kong, People’s Republic of China
September 17, 2010
F-3
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
BALANCE SHEETS
|
ASSETS
|
||||||||
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
CURRENT ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 3,260,299 | $ | 828,921 | ||||
|
Restricted cash
|
57,718,999 | 31,684,762 | ||||||
|
Accounts receivable
|
19,903,437 | 9,973,984 | ||||||
|
Inventories
|
10,306,029 | 5,226,877 | ||||||
|
Notes receivable
|
2,727,968 | 132,019 | ||||||
|
Prepayments for goods, net of allowance of $159,538 and $155,329 at December 31, 2010 and 2009, respectively
|
15,782,623 | 4,107,529 | ||||||
|
Prepaid expenses and other receivables
|
184,498 | 435,286 | ||||||
|
Due from a related party
|
19,640,240 | 19,815,537 | ||||||
|
Due from an employee
|
- | 2,933,756 | ||||||
|
Deferred taxes
|
105,476 | 61,834 | ||||||
|
Total current assets
|
129,629,569 | 75,200,505 | ||||||
|
LONG-TERM ASSETS
|
||||||||
|
Property, plant and equipment, net
|
74,428,715 | 52,472,912 | ||||||
|
Construction in progress
|
32,151,137 | 21,362,696 | ||||||
|
Land use rights, net
|
3,224,995 | 3,363,622 | ||||||
|
Deposits with a related party for land use right and fixed assets
|
17,679,267 | 16,682,545 | ||||||
|
Initial cost for a financial obligation, sale-leaseback
|
600,778 | - | ||||||
|
Deferred taxes
|
416,656 | 364,240 | ||||||
|
Total long-term assets
|
128,501,548 | 94,246,015 | ||||||
|
TOTAL ASSETS
|
$ | 258,131,117 | $ | 169,446,520 | ||||
See accompanying notes to financial statements.
F-4
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
BALANCE SHEETS
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Accounts payable
|
$ | 4,972,972 | $ | 2,820,108 | ||||
|
Other payables and accrued liabilities
|
3,363,998 | 841,931 | ||||||
|
Short-term bank loans
|
47,593,169 | 26,994,508 | ||||||
|
Customer deposits
|
62,945 | 1,079,497 | ||||||
|
Notes payable
|
75,546,569 | 47,317,998 | ||||||
|
Income tax payable
|
2,917,250 | 1,515,007 | ||||||
|
Payable to contractors
|
633,522 | 1,996,155 | ||||||
|
Due to related parties
|
545,858 | 230,208 | ||||||
|
Current portion of financial obligations, sale-leaseback
|
5,892,988 | - | ||||||
|
Current portion of long-term bank loans
|
5,831,080 | 1,320,190 | ||||||
|
Total current liabilities
|
147,360,351 | 84,115,602 | ||||||
|
LONG-TERM LIABILITIES
|
||||||||
|
Long-term portion of financial obligations, sale-leaseback
|
10,391,835 | - | ||||||
|
Long-term bank loans
|
19,613,634 | 20,682,978 | ||||||
|
Total long-term liabilities
|
30,005,469 | 20,682,978 | ||||||
|
TOTAL LIABILITIES
|
177,365,820 | 104,798,580 | ||||||
|
COMMITMENTS AND CONTINGENCIES
|
||||||||
|
SHAREHOLDERS’ EQUITY
|
||||||||
|
Common stock, $0.0001 par value, 80,000,000 shares authorized, 30,015,000 and 19,861,700 shares issued and
outstanding at December 31, 2010 and 2009, respectively
|
3,002 | 1,986 | ||||||
|
Additional paid-in capital
|
12,184,672 | 12,103,773 | ||||||
|
Retained earnings (restricted portion is $1,857,451 at December 31, 2010 and 2009, respectively)
|
61,070,315 | 47,349,607 | ||||||
|
Accumulated other comprehensive income
|
7,507,308 | 5,192,574 | ||||||
|
TOTAL SHAREHOLDERS’ EQUITY
|
80,765,297 | 64,647,940 | ||||||
|
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
$ | 258,131,117 | $ | 169,446,520 | ||||
See accompanying notes to financial statements.
F-5
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
2010
|
2009
|
|||||||
|
(Consolidated)
|
||||||||
|
REVENUES
|
$ | 75,673,839 | $ | 56,920,742 | ||||
|
COST OF GOODS SOLD
|
58,689,379 | 46,030,417 | ||||||
|
GROSS PROFIT
|
16,984,460 | 10,890,325 | ||||||
|
General and administrative
|
1,635,294 | 1,325,743 | ||||||
|
Selling and distribution
|
29,236 | 11,725 | ||||||
|
INCOME FROM OPERATIONS
|
15,319,930 | 9,552,857 | ||||||
|
OTHER INCOME (EXPENSES)
|
||||||||
|
Lease income from a related party, net
|
2,868,505 | 3,261,702 | ||||||
|
Interest expense, net
|
(2,529,972 | ) | (1,398,369 | ) | ||||
|
Other expenses, net
|
(52,264 | ) | (484 | ) | ||||
|
INCOME BEFORE INCOME TAXES
|
15,606,199 | 11,415,706 | ||||||
|
INCOME TAX EXPENSE
|
(1,885,491 | ) | (1,410,314 | ) | ||||
|
NET INCOME
|
13,720,708 | 10,005,392 | ||||||
|
OTHER COMPREHENSIVE INCOME
|
||||||||
|
Foreign currency translation gain
|
2,314,734 | 15,380 | ||||||
|
COMPREHENSIVE INCOME
|
$ | 16,035,442 | $ | 10,020,772 | ||||
|
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
|
22,423,126 | 19,861,700 | ||||||
|
NET INCOME PER SHARE, BASIC AND DILUTED
|
$ | 0.61 | $ | 0.50 | ||||
See accompanying notes to financial statements.
F-6
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
Common Stock
|
Additional Paid-in | Accumulated Other Comprehensive | ||||||||||||||||||||||
|
Shares
|
Par Value
|
Capital
|
Retained Earnings |
Income
|
Total | |||||||||||||||||||
|
BALANCE AT JANUARY 1, 2009
|
19,861,700 | $ | 1,986 | $ | 8,783,637 | $ | 37,344,215 | $ | 5,177,194 | $ | 51,307,032 | |||||||||||||
|
Capital contribution
|
- | - | 3,320,136 | - | - | 3,320,136 | ||||||||||||||||||
|
Foreign currency translation gain
|
- | - | - | - | 15,380 | 15,380 | ||||||||||||||||||
|
Net income
|
- | - | - | 10,005,392 | - | 10,005,392 | ||||||||||||||||||
|
BALANCE AT JANUARY 1, 2010
|
19,861,700 | $ | 1,986 | $ | 12,103,773 | $ | 47,349,607 | $ | 5,192,574 | $ | 64,647,940 | |||||||||||||
|
Recapitalization
|
10,000,000 | 1,000 | (1,000 | ) | - | - | - | |||||||||||||||||
|
Common stock issued to a consultant
|
100,000 | 10 | 4,990 | - | - | 5,000 | ||||||||||||||||||
|
Common stock issued to employees
|
38,300 | 4 | 1,911 | - | - | 1,915 | ||||||||||||||||||
|
Common stock issued to a director
|
15,000 | 2 | 74,998 | - | - | 75,000 | ||||||||||||||||||
|
Foreign currency translation gain
|
- | - | - | - | 2,314,734 | 2,314,734 | ||||||||||||||||||
|
Net income
|
- | - | - | 13,720,708 | - | 13,720,708 | ||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2010 (Consolidated)
|
30,015,000 | $ | 3,002 | $ | 12,184,672 | $ | 61,070,315 | $ | 7,507,308 | $ | 80,765,297 | |||||||||||||
See accompanying notes to financial statements.
F-7
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
2010
|
2009
|
|||||||
|
(Consolidated)
|
||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net income
|
$ | 13,720,708 | $ | 10,005,392 | ||||
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
||||||||
|
Depreciation and amortization
|
6,074,039 | 6,104,082 | ||||||
|
Deferred taxes
|
(94,522 | ) | (108,007 | ) | ||||
|
Stock based compensation
|
81,915 | - | ||||||
|
Amortization of initial cost for a financial obligation, sale-leaseback
|
34,774 | - | ||||||
|
Amortization of financial obligations, sale-leaseback
|
375,912 | - | ||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
(Increase) Decrease In:
|
||||||||
|
Accounts receivable
|
(9,929,453 | ) | (8,659,667 | ) | ||||
|
Prepayments for goods
|
(11,675,094 | ) | 4,451,266 | |||||
|
Inventories
|
(5,079,152 | ) | 4,367,983 | |||||
|
Prepaid expenses and other receivables
|
250,788 | 32,055 | ||||||
|
Due from a related party
|
(4,501,685 | ) | (4,979,448 | ) | ||||
|
Increase (Decrease) In:
|
||||||||
|
Accounts payable
|
2,152,864 | (1,323,689 | ) | |||||
|
Other payables and accrued liabilities
|
2,522,067 | 49,395 | ||||||
|
Customer deposits
|
(1,016,552 | ) | (254,911 | ) | ||||
|
Income taxes payable
|
1,402,243 | 898,836 | ||||||
|
Payable to contractors
|
(1,362,633 | ) | - | |||||
|
Due to related parties
|
315,650 | (33,648 | ) | |||||
|
Net cash (used in) provided by operating activities
|
(6,728,131 | ) | 10,549,639 | |||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchases of property, plant and equipment
|
(1,805,925 | ) | (64,899 | ) | ||||
|
Purchases of construction in progress
|
(33,882,476 | ) | (20,143,206 | ) | ||||
|
Purchase of land use right
|
- | (1,493,410 | ) | |||||
|
Issuance of notes receivable
|
(5,925,917 | ) | (2,600,311 | ) | ||||
|
Repayments of notes receivable
|
3,375,723 | 2,976,804 | ||||||
|
Deposit for land use right and fixed assets to a related party
|
(447,101 | ) | (8,434,565 | ) | ||||
|
Due from a related party
|
5,308,077 | (3,241,081 | ) | |||||
|
Net cash used in investing activities
|
$ | (33,377,619 | ) | $ | (33,000,668 | ) | ||
See accompanying notes to financial statements.
F-8
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
2010
|
2009
|
|||||||
|
(Consolidated)
|
||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Restricted cash
|
$ | (26,034,237 | ) | $ | (13,913,797 | ) | ||
|
Repayments from (payments to) an employee
|
2,933,756 | (2,933,756 | ) | |||||
|
Proceeds from short-term bank loans
|
66,751,231 | 34,069,208 | ||||||
|
Repayments of short-term bank loans
|
(47,345,678 | ) | (31,064,043 | ) | ||||
|
Proceeds from notes payable
|
78,838,107 | 117,684,695 | ||||||
|
Repayments of notes payable
|
(52,574,863 | ) | (106,050,497 | ) | ||||
|
Payment of initial cost for a financial obligation, sale-leaseback
|
(625,941 | ) | - | |||||
|
Capital contribution from a shareholder
|
- | 3,320,136 | ||||||
|
Proceeds from long-term loans
|
3,725,838 | 22,003,007 | ||||||
|
Repayments of long-term loans
|
(1,043,235 | ) | - | |||||
|
Proceeds from financial obligations sale-leaseback, net
|
20,439,947 | - | ||||||
|
Repayments of financial obligations, sale-leaseback
|
(4,791,572 | ) | - | |||||
|
Net cash provided by financing activities
|
40,273,353 | 23,114,953 | ||||||
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
167,603 | 663,924 | ||||||
|
Effect of exchange rate changes on cash
|
2,263,775 | 15,096 | ||||||
|
Cash and cash equivalents at beginning of year
|
828,921 | 149,901 | ||||||
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
$ | 3,260,299 | $ | 828,921 | ||||
|
SUPPLEMENTARY CASH FLOW INFORMATION
|
||||||||
|
Income taxes paid
|
$ | 648,669 | $ | 619,501 | ||||
|
Interest paid
|
$ | 2,421,712 | $ | 1,786,729 | ||||
|
SUPPLEMENTAL NON-CASH DISCLOSURES:
|
|
1. During 2010 and 2009, $23,950,029 and $0, respectively, were transferred from construction in progress to property, plant and equipment.
|
|
2. During 2010 and 2009, $0 and $146,687 of notes payable were settled by bank acceptance notes, respectively.
|
|
See accompanying notes to financial statements.
|
F-9
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Chemical Corp. (formerly Bomps Mining, Inc.) was incorporated in California on July 16, 2008. Effective September 24, 2010, Bomps Mining, Inc. changed its name to China Chemical Corp. (“CHCC”).
Gold Champ Consultants Limited, a Hong Kong corporation (“Gold Champ”) is a holding company whose asset is 100% of the registered capital of Zibo Costar Information Consulting Co., Ltd. ("Zibo Costar "), a Wholly-Owned Foreign Enterprise ("WOFE") organized under the laws of the People's Republic of China ("PRC").
Zibo Jiazhou Chemical Industry Co., Ltd. ("ZBJZ"), a limited liability enterprise organized under the laws of the PRC is a manufacturing company that is based in Shandong, China. It is principally engaged in the manufacturing of organic chemical compounds.
|
(a)
|
Share Exchange Agreements
|
On September 30 2010, CHCC entered into a Share Exchange Agreement (the “share exchange”) with Gold Champ and the shareholders of Gold Champ. As a result of the share exchange, CHCC acquired 100% of the issued and outstanding capital of Gold Champ in exchange for 19,861,700 shares of CHCC’s common stock, par value $0.0001, thereby providing the former shareholders of Gold Champ approximately 66% ownership equity in CHCC at September 30, 2010.
F-10
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
|
|
(b)
|
Variable Interest Entity Arrangements
|
On September 30, 2010, Zibo Costar entered into a series of contractual agreements (known as a “variable interest entity” (VIE) arrangement, which are more fully described below) with ZBJZ and its shareholders to govern Zibo Costar’s relationships with ZBJZ. These contractual arrangements allow Zibo Costar to obtain effective control over ZBJZ through the ability to exercise all the rights of ZBJZ's shareholders, the rights to absorb substantially all of the economic residual benefits and the obligation to fund all of the expected losses of ZBJZ. Zibo Costar has been determined to be the primary beneficiary of ZBJZ because it is most closely associated with ZBJZ due to its obligation to provide unlimited financial support and its ability to determine strategic business decisions of ZBJZ through voting rights. In accordance with SEC Regulation SX-3A-02 and Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810 “Consolidation”, CHCC, through Zibo Costar, consolidates the operating results of ZBJZ.
The VIE arrangements comprise following significant terms:
|
i.
|
Exclusive service agreement: Under these agreements Zibo Costar provides exclusive management and technical services and exclusive technology consulting services to ZBJZ in exchange for substantially all of the net income of ZBJZ.
|
|
ii.
|
Equity pledge agreement: As collateral to ensure ZBJZ’s payments under the exclusive service agreements, the shareholders of ZBJZ, through an equity pledge agreement, pledged all of their rights and interests in ZBJZ, including voting rights and dividend rights, to Zibo Costar.
|
|
iii.
|
Exclusive option agreement: In addition, the shareholders of ZBJZ, through an exclusive option agreement, granted to Zibo Costar an exclusive, irrevocable and unconditional right to purchase part or all of the equity interests in ZBJZ when the purchase becomes permissible under the relevant PRC Law.
|
After the share exchange and VIE arrangements, Gold Champ and Zibo Costar became wholly-owned subsidiaries of CHCC, and ZBJZ became the principal operating VIE. The exchange transaction was accounted for as a reverse acquisition in accordance with FASB ASC 805-10 “Business Combinations”. The acquisition is accounted for as the recapitalization of CHCC. Accordingly, the consolidated statements of income include the results of operations of ZBJZ from January 1, 2010 and 2009, and the results of operations of CHCC from the acquisition date through December 31, 2010.
F-11
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
|
On September 30, 2010, CHCC had outstanding common stock of 3,000,000 shares. On September 24, 2010, CHCC declared a nine share for one share dividend and the dividend was delivered on October 4, 2010. As a result of the stock dividend issuance, CHCC’s outstanding common stock was 30,000,000 on October 4, 2010. The 19,861,700 shares to effectuate the share exchange were transfers of common stock at the time of the stock dividend and not newly issued shares. All comparative common stock amounts have been adjusted to reflect the stock dividend and recapitalization.
The following financial statement amounts and balances of the VIE were included in the accompanying consolidated financial statements：
|
December 31,
2010
|
December 31,
2009
|
|||||||
|
Total assets
|
$ | 258,027,059 | $ | 169,446,520 | ||||
|
Total liabilities
|
$ | 177,224,014 | $ | 104,798,580 | ||||
|
Year Ended December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Revenues
|
$ | 75,673,839 | $ | 56,920,742 | ||||
|
Net income
|
$ | 13,842,184 | $ | 10,005,392 | ||||
|
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(a)
|
Principles of Consolidation
|
The consolidated financial statements include the accounts of CHCC, its subsidiaries and VIE (the “Company”) as follows:
I. Subsidiaries and holding companies:
|
a)
|
Gold Champ is a wholly-owned subsidiary of CHCC and incorporated in Hong Kong.
|
|
b)
|
Zibo Costar is a wholly-owned subsidiary of Gold Champ and incorporated in PRC.
|
F-12
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(a)
|
Principles of Consolidation (Continued)
|
II. VIE - Business in organic chemical compounds:
ZBJZ is incorporated under the laws of the PRC. The principal activity of ZBJZ is producing organic chemical compounds. ZBJZ is wholly-owned by certain related parties or directors of the Company.
Inter-company balances and transactions have been eliminated in consolidation.
|
(b)
|
Concentrations
|
The Company has major customers who accounted for the following percentage of total sales and accounts receivable:
|
Customers
|
Sales
|
Accounts Receivable
|
||||||||||
|
2010
|
2009
|
December 31, 2010
|
December 31, 2009
|
|||||||||
|
Zibo Xinghua Resin Co., Ltd.
|
22% | 25% | 41% | 39% | ||||||||
|
Zouping Erkeri Chemical Co., Ltd
|
6% | - | 21% | - | ||||||||
|
Dongying Shenli Zhongya Chemecial Co., Ltd
|
16% | 4% | 1% | - | ||||||||
|
Kaifeng Taihua Chemical Co., Ltd
|
6% | 4% | 1% | - | ||||||||
|
Pingmei Group Kaifeng Xinghua Fine Chemical Factory
|
9% | 25% | - | - | ||||||||
The Company has major suppliers who accounted for the following percentage of total purchases and accounts payable:
|
Suppliers
|
Purchases
|
Accounts Payable
|
||||||||||
|
2010
|
2009
|
December 31, 2010
|
December 31, 2009
|
|||||||||
|
C&S Chem Ltd.
|
45% | 45% | 75% | - | ||||||||
|
Qingzhou Ousinuo Chemical Co., Ltd
|
37% | 25% | - | - | ||||||||
|
Weifang Zhenxing Risheng Chemical Co., Ltd
|
7% | 10% | - | 40% | ||||||||
F-13
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(c)
|
Use of Estimates
|
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the time the estimates are made. Actual results could differ materially from those estimates.
|
(d)
|
Fair Value of Financial Instruments
|
These tiers include:
•Level 1—defined as observable inputs such as quoted prices in active markets;
•Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
•Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The assets measured at fair value on a recurring basis subject to the disclosure requirements of FASB ASC 820-10 as of December 31, 2010 are as follows:
|
Fair Value Measurements at Reporting Date Using
|
|||||||||||||||||||
|
Carrying Value as of
December 31, 2010
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
||||||||||||||||
|
Long-term bank loans
|
$ | 25,444,714 | $ | - | $ | 25,444,714 | $ | - | |||||||||||
|
Financial obligations, sale-leaseback
|
$ | 16,284,823 | $ | - | $ | 16,284,823 | $ | - | |||||||||||
Cash and cash equivalents consist primarily of high rated money market funds at a variety of well-known PRC and international institutions with original maturities of three months or less. Restricted cash represents time deposits on account for bank acceptance notes, open letter credit and short-term bank loans. The original cost of these assets approximates fair value due to their short-term maturity.
F-14
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(d)
|
Fair Value of Financial Instruments (Continued)
|
The carrying amounts of other financial assets and liabilities, such as accounts receivable, notes receivable, prepaid expenses and other receivables, due from an employee, due from a related party, accounts payable, other payables and accrued liabilities, short-term bank loans, customer deposits, notes payable, income tax payable, due to related parties, payable to contractors, current portion of financial obligation, sale-leaseback and current portion of long-term bank loans approximate their fair values because of the short maturity of these instruments. The fair value of the Company’s long-term bank loans and long-term financial obligations, sale-leaseback is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Under this method, the Company’s fair value of long-term bank loans and long-term financial obligations, sale-leaseback was not significantly different from the carrying value at December 31, 2010.
|
(e)
|
Restricted Cash
|
Restricted cash represents time deposits reserved for settlement of notes payable, open letters of credit in connection with inventory purchases and short-term bank loans. The cash is held in the custody of the bank issuing the notes payable, letter of credit or short-term bank loan and is restricted as to withdrawal or use, and is currently earning interest.
|
(f)
|
Inventories
|
Inventories are stated at the lower of cost or net realizable value (market value). The cost of raw materials is determined on a weighted-average basis. Finished goods costs are determined on a weighted average basis and comprise direct materials, direct labor and an appropriate proportion of overhead.
Net realizable value is based on estimated selling prices less any further costs expected to be incurred for completion and disposal.
|
(g)
|
Prepayments for Goods
|
Prepayments for goods represent cash paid in advance to suppliers for purchases of raw materials. An estimate for doubtful accounts is made when realization of the full amount is no longer probable. At December 31, 2010 and 2009, the Company has an allowance for doubtful accounts of $159,538 and $155,329, respectively.
F-15
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(h)
|
Customer Deposits
|
Customer deposits consist of amounts paid to the Company in advance for the sale of products in the PRC. The Company receives these amounts and recognizes them as a current liability until the revenue can be recognized when the goods are delivered.
|
(i)
|
Property, Plant and Equipment
|
Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives are as follows:
|
Buildings
|
30 years
|
|
Machinery
|
3-13 years
|
|
Motor Vehicles
|
8 years
|
|
Office equipment
|
5 years
|
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
|
(j)
|
Construction in Progress
|
Construction in progress represents direct costs of construction or the acquisition cost of buildings or machinery and prepayments. Capitalization of these costs ceases and the construction in progress is transferred to fixed assets when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until the assets are completed and ready for their intended use.
|
(k)
|
Capitalized Interest
|
The interest cost associated with debt relating to construction projects is capitalized and included in the cost of the project. When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using weighted-average cost of the Company’s outstanding borrowings. Capitalization of interest ceases when the project is substantially completed or development activity is suspended for more than a brief period. Capitalized interest for the years ended December 31, 2010 and 2009 was $1,462,582 and $455,671, respectively.
F-16
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(l)
|
Land Use Rights
|
According to the laws of China, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. The land use rights granted to the Company are being amortized using the straight-line method over the lease term from seven to fifty years.
|
(m)
|
Impairment of Long-Term Assets
|
Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in FASB ASC 360-10-35-17 “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company also periodically evaluates the amortization periods of its depreciable assets to determine whether subsequent events and circumstances warrant revised estimates of the useful lives. There was no impairment for the years ended December 31, 2010 and 2009.
|
(n)
|
Revenue Recognition
|
Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met:
-Persuasive evidence of an arrangement exists,
-Delivery has occurred or services have been rendered,
-The seller’s price to the buyer is fixed or determinable, and
-Collectability is reasonably assured.
|
(o)
|
Retirement Benefits
|
Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to operations as incurred. Retirement benefits amounting to $65,257 and $61,914 were charged to operations for the years ended December 31, 2010 and 2009, respectively.
F-17
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(p)
|
Foreign Currency Translation
|
The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The consolidated financial statements are translated into United States dollars from RMB at period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
|
December 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Year end RMB: US$ exchange rate
|
6.6026 | 6.8172 | ||||||
|
Average yearly RMB: US$ exchange rate
|
6.7099 | 6.8173 | ||||||
|
(q)
|
Income Taxes
|
The Company accounts for income tax using the liability method. Deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future utilization is uncertain.
|
(r)
|
Comprehensive Income
|
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to recognize under current accounting standards as components of comprehensive income should be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s current component of other comprehensive income is the foreign currency translation adjustment.
|
(s)
|
Earnings Per Share
|
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings 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. The Company does not have dilutive securities for the years ended December 31, 2010 and 2009.
F-18
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(t)
|
Segment
|
The Company operates in one business segment, the design, development, manufacture, and commercialization of organic chemical materials, such as phthalic anhydride and maleic anhydride and their byproducts mainly in the PRC. The Company had no sales outside of the PRC for the years ended December 31, 2010 and 2009.
|
(u)
|
Stock-Based Compensation
|
Stock-based compensation includes 1) common stock awards granted to employees and directors for services, and are accounted for under FASB ASC 718 “Compensation - Stock Compensation”, and 2) common stock awards granted to consultants which are accounted for under FASB ASC 505-50 “Equity – Equity-Based Payment to Non-Employees”.
All grants of common stock awards to employees, director and consultant are recognized in the financial statements based on their grant date fair values. The Company has elected to recognize compensation expense on their grant dates, with a corresponding charge to additional paid-in capital. The Company estimates fair value of common stock awards based on the number of shares granted and the quoted price or the bid price from an unrelated broker of the Company’s common stock on the date of grant.
|
(v)
|
New Accounting Pronouncements
|
No new accounting pronouncements have been adopted that will have a material effect on the consolidated financial statements.
|
|
3. LIQUIDITY
|
The Company has a working capital deficit of $17,730,782 at December 31, 2010. This was principally due to the Company used cash of approximately $33 million to purchase property, plant and equipment and construction in progress during 2010. The Company currently generates its cash flow through operations and obtaining debt. The Company had net income of $13,720,708 for the year ended December 31, 2010. As of the date of this report, the Company has not experienced any liquidity problems in settling payables in the normal course of business and repaying bank loans when they become due. To improve liquidity, the Company may explore new expansion opportunities and funding sources from which the management may consider seeking external funding and financing.
|
4. INVENTORIES
|
Inventories consist of the following:
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Raw materials
|
$ | 9,422,808 | $ | 3,930,087 | ||||
|
Work-in-progress
|
199,017 | 175,566 | ||||||
|
Finished goods
|
684,204 | 1,121,224 | ||||||
|
Total inventories
|
$ | 10,306,029 | $ | 5,226,877 | ||||
The net book value of $9,422,808 and $1,834,912 of raw materials inventory is pledged as collateral for certain short-term bank loans at December 31, 2010 and 2009, respectively. See Note 11.
F-19
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
5. NOTES RECEIVABLE
|
Notes receivable consist of the following:
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Bank Acceptance Notes (aggregated by month):
|
||||||||
|
Due June, 2010 (Settled on its due date)
|
$ | - | $ | 14,669 | ||||
|
Due May, 2010 (Settled on its due date)
|
- | 88,012 | ||||||
|
Due March, 2010 (Settled on its due date)
|
- | 29,338 | ||||||
|
Subtotal
|
- | 132,019 | ||||||
|
Notes Receivable From Unrelated Companies (aggregated by month):
|
||||||||
|
Due February, 2011 (Settled on their due dates)
|
2,727,968 | - | ||||||
|
Total notes receivable
|
$ | 2,727,968 | $ | 132,019 | ||||
All the bank acceptance notes and notes receivable from unrelated companies are interest free.
|
6. RELATED PARTY TRANSACTIONS
|
|
(I) Due From a Related Party
|
|
December 31, 2010
|
December 31, 2009
|
|||||||||||
|
(Consolidated)
|
||||||||||||
|
Zibo Jiazhou Heat and Power Co., Ltd. (“ZJHP”), no fixed repayment term, interest free, unsecured, guaranteed by the vice chairman of the Company
|
a | ) | $ | 19,640,240 | $ | 14,636,667 | ||||||
|
ZJHP, no fixed repayment term, interest rate at 5.91% per annum, unsecured
|
a | ) | - | 5,178,870 | ||||||||
|
Total due from a related party
|
$ | 19,640,240 | $ | 19,815,537 | ||||||||
|
(II) Due From an Employee
|
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Current
|
$ | - | $ | 2,933,756 | ||||
| Total due from an employee b) | $ | - | $ | 2,933,756 | ||||
|
(III) Deposits with a Related Party For Land Use Right and Fixed Assets
|
|
December 31, 2010
|
December 31, 2009
|
|||||||||||
|
(Consolidated)
|
||||||||||||
|
Zibo Eagle Texile Co.,Ltd (“Eagle”)
|
c | ) | $ | 17,679,267 | $ | 16,682,545 | ||||||
|
(IV) Due To Related Parties
|
|
December 31, 2010
|
December 31, 2009
|
|||||||||||
|
(Consolidated)
|
||||||||||||
|
Lu Feng
|
d | ) | $ | 367,661 | 172,065 | |||||||
|
Due to employees
|
e | ) | 178,197 | 58,143 | ||||||||
|
Total due to related parties
|
$ | 545,858 | $ | 230,208 | ||||||||
F-20
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
6. RELATED PARTY TRANSACTIONS (CONTINUED)
|
|
a) ZJHP is controlled by the vice chairman of the Company.
|
For the years ended December, 2010 and 2009, the Company had transactions with ZJHP as follows:
|
2010
|
2009
|
|||||||
|
Sales of steam to ZJHP
|
$ | 6,809,872 | $ | 6,223,324 | ||||
|
Lease of equipment to ZJHP
|
6,810,782 | 7,164,973 | ||||||
|
Purchases of electricity from ZJHP
|
2,308,188 | 2,052,909 | ||||||
|
Interest income from ZJHP
|
163,654 | 306,069 | ||||||
On January 1, 2010 and January 5, 2009, the Company signed a one year lease agreement for equipment and buildings with ZJHP with an annual rental fee of $6,810,782 and $7,164,973, respectively. During 2010 and 2009, machinery and buildings with a net book value of $32,718,263 and $36,620,001, respectively, were leased to ZJHP. For the years ended December 31, 2010 and 2009, depreciation for the property was $3,601,738 and $3,545,022, respectively, and related business tax for the leases were $340,539 and $358,249, respectively. For the years ended December 31, 2010 and 2009, the net lease income was $2,868,505 and $3,261,702, respectively. See Notes 7 and 8.
On March 26, 2011, ZJHP signed an agreement with the Company to repay $19,640,240 within the next 5 years ending May 1, 2015. See Note 18.
|
b) Due from an employee represented time deposits paid to an employee as collateral for three bank acceptance notes and one bank acceptance note at December 31, 2009. The balance was unsecured, interest free, had no fixed repayment terms and was settled in 2010.
|
|
|
c) Eagle is controlled by the vice chairman of the Company. On December 23, 2007, the Company entered into an agreement with Eagle to purchase a land use right and fixed assets on the land with a total contract amount of $20,446,646. The balances represented deposits paid to Eagle, and they are refundable, if the land and fixed assets are not transferred to the Company. See Note 17.
|
F-21
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
6. RELATED PARTY TRANSACTIONS (CONTINUED)
|
|
d) Lu Feng is the CEO of the Company. He is also the brother of the vice chairman of the Company. The balances represent business and travel related expenses paid by Lu Feng on behalf of the Company. The outstanding balance is unsecured, interest free and has no fixed repayment term. Lu Feng also provided a personal guarantee for the short-term bank loans and bank acceptance notes borrowed by the Company. See Notes 11 and 12.
|
|
e) Due to employees are interest-free, unsecured and have no fixed repayment terms. The amounts primarily represent business and travel related expenses paid by employees on behalf of the Company.
|
|
7. PROPERTY, PLANT AND EQUIPMENT, NET
|
Property, plant and equipment consist of the following:
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
At cost:
|
||||||||
|
Buildings
|
$ | 1,303,725 | $ | 1,262,675 | ||||
|
Machinery
|
3,516,104 | 23,829,638 | ||||||
|
Motor Vehicles
|
1,107,575 | 755,526 | ||||||
|
Office equipment
|
127,143 | 57,513 | ||||||
|
Leased fixed assets
|
43,699,158 | 42,323,223 | ||||||
|
Assets recorded under financial obligations, sale-leaseback
|
46,867,709 | - | ||||||
| 96,621,414 | 68,228,575 | |||||||
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Less : Accumulated depreciation
|
||||||||
|
Buildings
|
$ | 169,051 | $ | 118,231 | ||||
|
Machinery
|
1,686,085 | 8,177,410 | ||||||
|
Motor Vehicles
|
430,040 | 326,096 | ||||||
|
Office equipment
|
51,757 | 43,830 | ||||||
|
Leased fixed assets
|
10,980,895 | 7,090,096 | ||||||
|
Assets recorded under financial obligations, sale-leaseback
|
8,874,871 | - | ||||||
| 22,192,699 | 15,755,663 | |||||||
|
Property, plant and equipment, net
|
$ | 74,428,715 | $ | 52,472,912 | ||||
For the years ended December 31, 2010 and 2009, depreciation expense was $5,830,027 and $5,888,845, respectively. See Notes 6, 8 and 14.
F-22
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
8. OPERATING LEASE TO A RELATED PARTY
|
On January 1, 2010 and January 5, 2009, the Company signed a one year lease agreement for buildings and machinery with ZJHP with an annual rental fee of $6,810,782 and $7,164,973 respectively. The Company leased the assets to ZJHP because the Company is not at an operating capacity to fully utilize the assets. In the future the Company may cease leasing the assets if its capacity increases, or they may lease the assets to another company. The Company’s property on operating lease by major classes consists of the following:
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
At cost:
|
||||||||
|
Buildings
|
$ | 755,125 | $ | 731,349 | ||||
|
Machinery
|
42,944,033 | 41,591,874 | ||||||
| 43,699,158 | 42,323,223 | |||||||
|
Less : Accumulated depreciation
|
||||||||
|
Buildings
|
94,528 | 61,035 | ||||||
|
Machinery
|
10,886,367 | 7,029,061 | ||||||
| 10,980,895 | 7,090,096 | |||||||
|
Leased fixed assets, net
|
$ | 32,718,263 | $ | 35,233,127 | ||||
For the years ended December 31, 2010 and 2009, depreciation expense for the leased fixed assets was $3,601,738 and $3,545,022, respectively, which was recorded in the Company’s statements of income and comprehensive income as a cost of lease income from a related party. See Notes 6 and 7.
On January 1, 2011, the Company signed a one-year lease agreement for the buildings and machinery with an unrelated company with an annual rental fee of $7,224,427. See Note 18.
|
9. LAND USE RIGHTS, NET
|
Land use rights consist of the following:
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Cost of land use rights
|
$ | 3,930,389 | $ | 3,806,635 | ||||
|
Less: Accumulated amortization
|
705,394 | 443,013 | ||||||
|
Land use rights, net
|
$ | 3,224,995 | $ | 3,363,622 | ||||
Amortization expense for the years ended December 31, 2010 and 2009 was $244,012 and $215,237, respectively.
Amortization expense for the next five years and thereafter is as follows:
|
Year ended December 31, 2011
|
$ | 247,979 | ||
|
2012
|
247,979 | |||
|
2013
|
247,979 | |||
|
2014
|
247,979 | |||
|
2015
|
51,742 | |||
|
Thereafter
|
2,181,337 | |||
|
Total
|
$ | 3,224,995 | ||
All of land use rights are pledged as collateral for a long-term bank loan at December 31, 2010 and 2009. See Note 13.
F-23
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
10. CONSTRUCTION IN PROGRESS
|
Construction in progress consists of the following:
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Buildings
|
$ | 1,877,304 | $ | 1,206,536 | ||||
|
Machinery
|
30,273,833 | 20,156,160 | ||||||
|
Total construction in progress
|
$ | 32,151,137 | $ | 21,362,696 | ||||
Capitalized interest for the years ended December 31, 2010 and 2009 is $1,462,582 and $455,671, respectively. See Note 13.
|
11. SHORT-TERM BANK LOANS
|
Short-term bank loans consist of the following:
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Qishang Bank due October 29, 2011, interest rate 9.877%, guaranteed by Shandong Jide Ecological Technology Co., Ltd. (“Jide”), Zibo Lanyan Group Co. Ltd (“Lanyan”) (See Note 17) and the CEO of the Company (See Note 6)
|
$ | 2,726,219 | $ | - | ||||
|
Shanghai Pudong Development Bank due July 20, 2011, interest at 6.391% per annum, guaranteed by Shandong Fengyang Group Co., Ltd (“Shandong Fengyang”) (See Note 17), and the CEO of the Company (See Note 6)
|
3,029,133 | - | ||||||
|
Bank Austria Beijing due June 8, 2011. Interest rate at 7.553% per annum, guaranteed by restricted cash of $1,135,925, the CEO of the Company (See Note 6) and secured by raw material inventories (See Note 4)
|
7,572,832 | - | ||||||
|
China Merchant Bank of Jinan Branch due May 31, 2011, interest rate 6.1525% per annum. guaranteed by Jide, Lanyan (See Note 17) and the CEO of the Company (See Note 6)
|
3,029,133 | - | ||||||
|
Agricultural Bank of China Zhoucun Branch due May 16, 2011, interest rate at 7.553% per annum, guaranteed by Jide (See Note 17)
|
1,514,566 | - | ||||||
|
Huaxia Bank due May 5, 2011, interest rate at 5.31% per annum, guaranteed by Lanyan (See Note 17)
|
4,543,699 | - | ||||||
|
Qilu Bank due April 30, 2011, interest rate at 6.972% per annum, guaranteed by Jide (See Note 17)
|
3,029,133 | - | ||||||
|
Qishang Bank, due March 25, 2010, interest rate at 9.027% per annum, guaranteed by Jide，Lanyan (See Note 17) and the CEO of the Company (See Note 6)
|
2,120,393 | - | ||||||
F-24
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
11. SHORT-TERM BANK LOANS (CONTINUED)
|
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Agricultural Bank of China Zhoucun Branch due March 18, 2011, interest rate at 7.553% per annum, guaranteed by Jide (See Note 17)
|
$ | 4,089,329 | $ | - | ||||
|
Agricultural Bank of China Zhoucan Branch due March 13, 2011, interest rate 3.8016% per annum, guaranteed by Jide (See Note 17)
|
1,496,195 | - | ||||||
|
Agricultural Bank of China Zhoucan Branch due March 9, 2011, interest rate 3.8034% per annum, guaranteed by Jide (See Note 17), (Repaid on its due date)
|
959,705 | - | ||||||
|
Rizhao Bank due February 23, 2011, interest rate at 6.972% per annum, guaranteed by Jide (See Note 17), the CEO of the Company (See Note 6), and secured by raw material inventory (See Notes 4), (Repaid on its due date)
|
4,543,699 | - | ||||||
|
Agricultural Bank of China Zhoucan Branch due February 23, 2011, interest rate 3.7875% per annum, guaranteed by Jide (See Note 17), (Repaid on its due date)
|
1,463,451 | - | ||||||
|
Agricultural Bank of China Zhoucan Branch due February 21, 2011, interest rate 3.7844% per annum, guaranteed by Jide (See Note 17), (Repaid on its due date)
|
1,038,776 | - | ||||||
|
Agricultural Bank of China Zhoucan Branch due February 16, 2011, interest rate 7.553% per annum, guaranteed by Jide (See Note 17), (Repaid on its due date)
|
1,893,208 | - | ||||||
|
China Citic Bank due January 20, 2011, interest rate at 6.391% per annum, guaranteed by the CEO of the Company (See Note 6) and secured by raw material inventories (See Note 4), (Repaid on its due date)
|
4,543,698 | - | ||||||
F-25
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
11. SHORT-TERM BANK LOANS ((CONTINUED)
|
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Due before December 31, 2010, subsequently
repaid on due dates
|
$ | - | $ | 26,994,508 | ||||
|
Total short-term bank loans
|
$ | 47,593,169 | $ | 26,994,508 | ||||
Interest expense for short-term bank loans was $2,444,343 and $1,786,729 for the years ended December 31, 2010 and 2009, respectively.
|
12. NOTES PAYABLE
|
|
December 31, 2010
|
December 31,
2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Bank Acceptance Notes:
|
||||||||
|
Due September 25, 2011, guaranteed by Jide (See Note 17) and restricted cash
|
$ | 3,332,046 | $ | - | ||||
|
Due July 13, 2011, guaranteed by Jide (See Note 17) and restricted cash
|
908,740 | - | ||||||
|
Due June 18, 2011, guaranteed Jide (See Note 17) and restricted cash
|
3,029,133 | - | ||||||
|
Due June 1, 2011, guaranteed by restricted cash
|
3,029,133 | - | ||||||
|
Due May 24, 2011, guaranteed by restricted cash and Jide (See Note 17) and the CEO of the Company (See Note 6)
|
1,514,565 | - | ||||||
|
Due May 10. 2011, guaranteed by restricted cash
|
3,029,133 | - | ||||||
|
Due May 9, 2011, guaranteed by restricted cash and Shandong Zibo Deyuan Leather Co. Ltd (“Deyuan”)
|
9,087,398 | - | ||||||
|
Due April 13, 2011, guaranteed by restricted cash, Deyuan and the CEO of the Company (See Note 6)
|
3,029,133 | - | ||||||
|
Due April 9, 2011, guaranteed by restricted cash
|
3,029,133 | - | ||||||
|
Due February 26, 2011, guaranteed by restricted cash (Repaid on its due date)
|
10,723,130 | - | ||||||
F-26
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
12. NOTES PAYABLE (CONTINUED)
|
December 31, 2010
|
December 31,
2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Due February 18, 2011, guaranteed by restricted cash (Repaid on its due date)
|
$ | 4,543,699 | $ | - | ||||
|
Due January 28, 2011, (Repaid on its due date)
|
4,543,699 | - | ||||||
|
Due January 27, 2011, (Repaid on its due date)
|
6,058,265 | - | ||||||
|
Due January 27, 2011, guaranteed by restricted cash and Lanyan (Repaid on its due date)
|
3,029,133 | - | ||||||
|
Due January 22, 2011, (Repaid on its due date)
|
3,029,133 | - | ||||||
|
Due January 22, 2011, guaranteed by restricted cash and Lanyan (Repaid on its due date)
|
9,087,398 | - | ||||||
|
Due January 16, 2011, (Repaid on its due date)
|
4,543,698 | - | ||||||
|
Bank Acceptance Notes:
|
||||||||
|
Due before December 31, 2010, subsequently
repaid on due dates
|
- | 42,686,150 | ||||||
|
Subtotal
|
75,546,569 | 42,686,150 | ||||||
|
Notes Payable to Unrelated Companies:
|
||||||||
|
Due before December 31, 2010, subsequently
repaid on due dates
|
- | 4,631,848 | ||||||
|
Subtotal
|
- | 4,631,848 | ||||||
|
Total
|
$ | 75,546,569 | $ | 47,317,998 | ||||
Notes payable represents short-term notes payable issued by financial institutions in connection with the Company’s purchases that entitle the Company’s suppliers to receive the full face amount from the financial institutions at maturity, which generally range from six to twelve months from the date of issuance. The notes payable were secured by the Company’s restricted cash of $54,645,554.
F-27
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
13. LONG-TERM LOANS
|
Long-term bank loans consist of the following:
|
December 31, 2010
|
December 31,
2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Agriculture Bank of China, due July 13, 2013, interest rate at 6.556% per annum, guaranteed by Zibo Fengyang Color Steel Co., Ltd. (“Zibo Fengyang”) (See Note 17) and secured by land use rights (See Note 9). Principal is to be repaid every 3 months in 13 unequal installments from July 13, 2010, and interest is paid quarterly.
|
$ | 3,786,416 | $ | - | ||||
|
Agriculture Bank of China, due July 13, 2013, interest rate at 6.336% per annum, guaranteed by Shandong Qingyuan Group Co., Ltd., Zibo Qingtian Properties Co., Ltd., Shangdong Qingtian Plastic Industry Co., Ltd., and Shandong Qingyuan Asphalt Technology Co., Ltd.. Principal is to be repaid every 3 months in 13 unequal installments from July 13, 2010, and interest is paid quarterly. (Subsequently repaid $1,045,072 on its due date)
|
15,145,663 | 14,668,779 | ||||||
|
Agriculture Bank of China, due July 13, 2013, interest rate at 6.336% per annum, guaranteed by Zibo Fengyang. (See Note 17) and secured by land use rights (See Note 9). Principal is to be repaid every 3 months in 13 unequal installments from July 13, 2010, and interest is paid quarterly.
|
6,512,635 | 7,334,389 | ||||||
|
Total long-term bank loans
|
25,444,714 | 22,003,168 | ||||||
|
Less: current portion
|
5,831,080 | 1,320,190 | ||||||
|
Long-term portion
|
$ | 19,613,634 | $ | 20,682,978 | ||||
F-28
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
13. LONG-TERM LOANS (CONTINUED)
|
Interest expense for years ended December 31, 2010 and 2009 amounted to $1,462,582 and $455,671, respectively, and was capitalized in construction in progress. See Note 10.
The repayment schedule for the long-term bank loans is as follows:
|
Year ended December 31, 2011
|
$ | 5,831,080 | ||
|
2012
|
11,737,889 | |||
|
2013
|
7,875,745 | |||
|
Total
|
$ | 25,444,714 |
|
14. FINANCIAL OBLIGATIONS, SALE-LEASEBACK
|
In May 2010 and November 2010, the Company refinanced its machinery under sale-leaseback agreements A and B, respectively.
Under the sale-leaseback agreement A, the machinery was sold for $2,597,481 and concurrently, the Company leased the machinery back for $2,597,481 with a weighted-average annual interest rate of 27.53%, payable in periodic instalments through June 2013. Of the $2,597,481 selling price, $1,514,566 was received in cash, and the remaining balance of $1,082,915 was treated as an advance payment to purchase the machinery back at the expiration date of the lease. The transaction was accounted for as a financing arrangement, wherein the property remains on the Company’s books continues to be depreciated. A financial obligation in the amount of $1,514,566, representing the net proceeds of the financial obligation, has been recorded under “Financial obligations, sale-leaseback” in the Company’s balance sheets, and is being reduced based on lease payments under the financial obligation.
F-29
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
14. FINANCIAL OBLIGATIONS, SALE-LEASEBACK (CONTINUED)
|
Under the sale-leaseback agreement B, the machinery was sold for $18,174,796 and concurrently, the Company leased the machinery back for $18,174,796 with a weighted-average annual interest rate of 12.11%, payable in periodic instalments through November 2013. Of the $18,174,796 selling price, $15,448,577 was received in cash, and the remaining balance of $2,726,219 was treated as a security deposit to be applied to the future lease payments. The initial cost for the financial obligation is $636,118 and is being amortized over the term of the lease. For 2010, $34,774 of amortization of initial cost was recognized as interest expense. The transaction was accounted for as a financing arrangement, wherein the property remains on the Company’s books continues to be depreciated. A financial obligation in the amount of $15,448,577, representing the net proceeds of the financial obligation, has been recorded under “Financial obligations, sale-leaseback” in the Company’s balance sheets, and is being reduced based on lease payments under the financial obligation. The Company has an option to purchase the machinery for $15,146 at the expiration date of the lease.
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Financial obligations, sale-leaseback
|
$ | 19,224,977 | $ | - | ||||
|
Less: Accumulated amortization
|
2,940,154 | - | ||||||
|
Financial obligations, sale-leaseback
|
16,284,823 | - | ||||||
|
Less: Current portion
|
5,892,988 | - | ||||||
|
Long-term portion
|
$ | 10,391,835 | $ | - | ||||
As of December 31, 2010, future minimum payments required under non-cancellable sale-leaseback are:
|
Year ended December 31, 2011
|
$ | 7,704,086 | ||
|
2012
|
7,609,426 | |||
|
2013
|
3,911,465 | |||
|
Total minimum lease payments
|
19,224,977 | |||
|
Less: Amount representing interest
|
2,940,154 | |||
|
Present value of net minimum lease payments
|
$ | 16,284,823 |
Amortization of the financial obligations for the year ended December 31, 2010 was $375,912.
|
15. TAXES
|
|
(I) Corporation Income Tax (“CIT”)
|
The Company has not recorded a provision for U.S. federal income tax for the year ended December 31, 2010 due to the net operating loss carry forward in the United States. Net operating loss carry forward in the United States as of December 31, 2010 was $161,977 and it will expire in year 2029.
The CIT rate applicable to our subsidiaries and VIE is 25%. However, in accordance with the relevant taxation laws in the PRC, from the time that a company has its first profitable tax year, a foreign investment company is exempt from corporate income tax for its first two years and is then entitled to a 50% tax reduction for the succeeding three years. For the Company, the first profitable year for income tax purposes as a foreign investment company was 2006. The tax rate to ZBJZ is 12.5% for the years ended December 31, 2010 and 2009.
Effective January 1, 2007, the Company adopted FASB ASC 740-10. The interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.
In June 2006, the FASB issued FASB ASC 740-10 which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in an income tax return. FASB ASC 740-10 presents a two-step process for evaluating a tax position. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, based on the technical merits of the position. The second step is to measure the benefit to be recorded from tax positions that meet the more likely than not recognition threshold, by determining the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement, and recognizing that amount in the financial statements. At the date of adoption, and as of December 31, 2010, the Company does not have a liability for unrecognized tax benefits. There was no effect on financial condition or results of operations as a result of implementing FASB ASC 740-10.
F-30
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
15. TAXES (CONTINUED)
|
Income tax expense for the years ended December 31, 2010 and 2009 are summarized as follows:
|
2010
|
2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Current CIT expense
|
$ | (1,980,013 | ) | $ | (1,518,321 | ) | ||
|
Deferred CIT benefit
|
94,522 | 108,007 | ||||||
|
Income tax expense
|
$ | (1,885,491 | ) | $ | (1,410,314 | ) | ||
The Company’s income tax expense differs from the “expected” tax expense as follows:
|
2010
|
2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Computed “expected” expense
|
$ | (3,901,550 | ) | $ | (2,853,926 | ) | ||
|
Favorable tax rate effect
|
1,950,775 | 1,426,963 | ||||||
|
Permanent differences
|
65,284 | 16,649 | ||||||
|
Income tax expense
|
$ | (1,885,491 | ) | $ | (1,410,314 | ) | ||
The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of December 31, 2010 and 2009 are as follows:
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Deferred tax assets:
|
||||||||
|
Current:
|
||||||||
|
General and administrative expenses
|
$ | 47,818 | $ | 14,758 | ||||
|
Cost of goods sold
|
48,125 | 46,703 | ||||||
|
Interest expense
|
3,978 | 373 | ||||||
|
Other operating expense
|
5,555 | - | ||||||
|
Subtotal
|
105,476 | 61,834 | ||||||
|
Non-current:
|
||||||||
|
Amortization
|
92,268 | 64,225 | ||||||
|
Depreciation
|
324,388 | 300,015 | ||||||
|
Subtotal
|
416,656 | 364,240 | ||||||
|
Net deferred tax assets
|
$ | 522,132 | $ | 426,074 | ||||
F-31
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
15. TAXES (CONTINUED)
|
|
(II) Value Added Tax (“VAT”)
|
Enterprises or individuals who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with the PRC laws. The value added tax standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished products.
The VAT payable balance of $2,132,437 and $235,295 at December 31, 2010 and 2009, respectively, are included in other payables and accrued expenses in the accompanying balance sheets.
|
(III) Tax Holiday
|
For the years ended December 31, 2010 and 2009 the PRC corporate income tax rate was 25%. The Company is entitled to favourable tax rates of 12.5% for the years ended December 31, 2010 and 2009.
The pro forma effect of the favourable tax rates available to the Company for the years ended December 31, 2010 and 2009 are as follows:
|
2010
|
2009
|
|||||||
|
(Consolidated)
|
||||||||
|
Tax holiday effect
|
$ | (1,950,775 | ) | $ | (1,426,963 | ) | ||
|
Basis net income per share excluding tax holiday effect
|
$ | 0.52 | $ | 0.43 | ||||
|
16. STOCK-BASED COMPENSATION
|
On September 30, 2010 the shareholders of the Company approved the stock incentive plan (the “2010 Plan”), which allows the Company’s board of directors, at its discretion, to offer stock options and common stock awards to participants (directors, officers, consultants, advisors and employees) of the Company.
The Company reserved a total of 500,000 shares of common stock for issuance pursuant to the 2010 Plan. The term of the options granted under the 2010 Plan should be no more than 10 years from the grant date. Options will be granted with an exercise price not less than the fair market value of a share of common stock on the date of the grant.
On September 30, 2010, the Company issued 38,300 shares of common stock to 383 employees of the Company under the 2010 Plan. The fair value of the common stock was $1,915 at the date of grant, which was determined by the bid price of the Company’s common stock from an unrelated broker at the date of grant. The related compensation expense of $1,915 is recognized in general and administrative expenses immediately at the grant date.
On September 30, 2010, the Company issued 100,000 shares of common stock to an investor relationship consultant firm. The fair value of the common stock was $5,000 at the date of grant, which was determined by the bid price of the Company’s common stock from an unrelated broker at the date of grant. The related compensation expense of $5,000 is recognized in general and administrative expenses immediately at the grant date.
On November 11, 2010, the Company issued 15,000 shares of common stock to a director of the Company. The fair value of the common stock was $75,000 at the date of grant, which was determined by the quoted price of the Company’s common stock at the date of grant. The related compensation expense of $75,000 is recognized in general and administrative expenses immediately at the grant date.
F-32
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
17. COMMITMENTS AND CONTINGENCIES
|
|
(I) Contingencies
|
As of December 31, 2010, the Company provided corporate guarantees for bank loans borrowed and bank acceptance note issued by Lanyan, Shandong Fengyang, Zibo Fengyang and Jide, which are incorporated in the PRC. As a part of the corporate guarantees, Lanyan, Shandong Fengyang, Zibo Fengyang and Jide also provided cross guarantees for the short-term bank loans of $35,476,638, and bank acceptance notes of $ 8,814,776 and long-term bank banks of $7,572,832 borrowed by the Company. See Notes 11, 12 and 13. If Lanyan, Shandong Fengyang, Zibo Fengyang or Jide defaults on the repayment of its bank loans, the Company is required to repay the outstanding balance. As of December 31, 2010, the guarantee provided for the bank acceptance notes and bank loans borrowed by Lanyan, Shandong Fengyang, Zibo Fengyang and Jide was approximately $30,291,327, which consists of the following:
|
Due January 24, 2011 (Settled)
|
$ | 7,572,832 | ||
|
Due March 26, 2011
|
3,029,133 | |||
|
Due April 19, 2011
|
1,514,566 | |||
|
Due May 11, 2011
|
1,514,566 | |||
|
Due August 30, 2011
|
4,543,699 | |||
|
Due September 9, 2011
|
3,029,133 | |||
|
Due September 14, 2011
|
1,514,566 | |||
|
Due November 30, 2011
|
7,572,832 | |||
|
Total
|
$ | 30,291,327 |
A default by Lanyan, Shandong Fengyang, Zibo Fengyang or Jide is considered remote by the management. Based on the information available to the management, the fair values of the guarantees granted by the Company are not considered material and therefore no liability for the guarantor's obligation under the guarantees was recognized as of December 31, 2010.
|
(II) Lease Commitment
|
In April 2007, the Company signed a land lease agreement with Zhoucun District People’s Government Zhoujia Community Committees (“Committees”). The Company leased land from Committees for 35 years. Annual lease fee for the land is RMB286,500 (approximately $42,698). For the years ended December 31, 2010 and 2009, the lease expense was $42,698 and $42,026, respectively.
|
|
F-33
CHINA CHEMICAL CORP.
(FORMERLY BOMPS MINING, INC.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
|
As of December 31, 2010, the Company has outstanding commitments with respect to non-cancellable operating lease for the land, which fall due as follows:
|
Year ended December 31, 2011
|
$ | 42,698 | ||
|
2012
|
42,698 | |||
|
2013
|
42,698 | |||
|
2014
|
42,698 | |||
|
2015
|
42,698 | |||
|
Thereafter
|
1,110,151 | |||
|
Total
|
$ | 1,323,641 | ||
|
(III) Capital Commitments
|
In 2010 and 2009, the Company entered certain agreements toward the purchases of certain licensed technology and equipment to be used in the butanediol project with contract amount of $61,759,565. As of December 31, 2010, the Company made payments of $29,487,546, for the butanediol project. The Company is required to pay the remaining purchase price of $27,422,092 and $4,849,627 in the next first year and second year, respectively. The amount paid is recorded in construction in progress. The Company used its working capital and borrowed money from a local bank to fund the project. The Company estimates completion of the project in 2012.
As of December 31, 2010, the Company entered into an agreement and made payments of $17,679,267 toward the purchase of a land use right and fixed assets from Eagle. The Company is required to pay the remaining purchase price of approximately $2,767,379 at the end of 2011. See Note 6.
|
18. SUBSEQUENT EVENTS
|
On January 1, 2011, the Company signed a one-year lease agreement for the buildings and machinery with an unrelated company with an annual rental fee of $7,224,427. See note 8.
On March 26, 2011, ZJHP signed an agreement to repay $19,640,240 to the Company within the next 5 years ending May 1, 2015. The principal is to be repaid in 5 unequal installments from October 1, 2011. The interest rate is 6.00% per annum.
F-34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
Controls and Procedures
We carried out an evaluation, 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 defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of December 31, 2010, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of the year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
|
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
|
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
|
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.
Based on our assessment, our management has concluded that, as of December 31, 2010, our internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permanently exempt smaller reporting companies..
44
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The executive officers and directors of the Company are:
|
Name
|
Age
|
Positions with the Company
|
||
|
Lu Feng
|
50
|
Chief Executive Officer, President and Chairman of the Board of Directors
|
||
|
Lu Lingliang
|
63
|
Vice-Chairman of the Board of Directors
|
||
|
Yan Kai
|
53
|
Chief Operating and Administration Officer
|
||
|
Dean Huge
|
54
|
Chief Financial Officer and Treasurer
|
||
|
Zhang Lianjun
|
47
|
Chief Marketing Officer
|
||
|
Li Bin
|
34
|
Chief Accounting Officer
|
||
|
Doug Cole
|
55
|
Director
|
||
|
Chen Hui
|
55
|
Director
|
||
|
Jared Wang
|
41
|
Director
|
All directors hold office until the next annual meeting of our shareholders and until their successors have been elected and qualify. Officers serve at the pleasure of the Board of Directors.
Lu Feng, Chief Executive Officer, President and Chairman of the Board of Directors. Lu Feng was appointed as Chief Executive Officer, President and Chairman of the Company’s Board of directors on September 30, 2010. Lu Feng has served as Chief Executive Officer, President and Chairman of the Board of Directors, Zibo Jiazhou Chemical since September 2005. Lu Feng received a degree in chemical technology from the Shandong University of Technology in 1982. He is the brother of the Company’s Vice-Chairman, Lu Lingliang. Lu Feng’s experience as Chief Executive Officer of Zibo Jiazhou Chemical and technical experience and knowledge led to the conclusion that he should serve on the Company’s Board of Directors, given the Company’s business and structure.
Lu Lingliang, Vice-Chairman of the Board of Directors. Lu Lingliang was appointed as Vice-Chairman of the Board of Directors on September 30, 2010. Lu Lingliang has served as Vice-Chairman of the Board of Directors of Zibo Jiazhou Chemical since March 2001. Lu Lingliang graduated from Shandong University of Technology in 1970. He is the brother of Lu Feng, the Company’s Chief Executive Officer, President and Chairman of the Board of Directors. Lu Lingliang’s experience as Vice Chairman of Zibo Jiazhou and technical experience and knowledge led to the conclusion that Lu Lingliang should serve on the Company’s board of directors, given the Company’s business and structure.
Yan Kai, Chief Operating and Administration Officer. Yan Kai was appointed as the Company’s Chief Operating and Administration Officer on September 30, 2010. Yan Kai has served as Vice General Manager of Zibo Jiazhou Chemical since September 2005. Yan Kai graduated from the College of Engineering of Shandong University of Technology in 1982. He received his MBA from Northwestern Polytechnical University in 1984.
Dean Huge, Chief Financial Officer and Treasurer. Dean Huge was appointed as the Company’s Chief Financial Officer and Treasurer on September 30, 2010. Dean Huge previously served as Senior Business Consultant with International Profit Association, a small business consulting firm, from 2008 through 2009. Mr. Huge also served as President of Major Marketing Concepts, Inc., a marketing services provider from 2000 through 2008. Mr. Huge received Bachelors of Science Degrees in Accounting and Finance from Southern Illinois University.
Zhang Lianjun, Chief Marketing Officer. Zhang Lianjun was appointed as the Company’s Chief Marketing Officer on September 30, 2010. Zhang Lianjun has served as Chief Sales Officer of Zibo Jiazhou Chemical since September 2005. Zhang Lianjun received a degree in marketing from the Shandong University of Technology in 1985.
Li Bin, Chief Accounting Officer. Li Bin was appointed as the Company’s Chief Accounting Officer on September 30, 2010. Lin Bin has served as Chief Financial Officer of Zibo Jiazhou Chemical since September 2005. She graduated from Harbin Industrial University, Weihai College with a Degree in Finance and Accounting in 1997.
Doug Cole, Director. Mr. Cole was appointed as a member of the Company’s Board of Directors and as President, Secretary and Treasurer on April 8, 2010. On September 30, 2010, in connection with the Share Exchange, he resigned from his positions as President, Secretary and Treasurer. Following the closing of the Share Exchange, he will remain a member of the Company’s Board of Directors. Mr. Cole currently serves as Managing Partner of Great Bear, LLC, a corporate consulting firm. Mr. Cole has also served as a member of the Board of Directors and as a member of the compensation, nominating and audit committees of Longwei Petroleum Investment Holding Limited since March 22, 2010. Mr. Cole has also worked with Objective Equity LLC, a boutique investment bank based in New York since 2006. Mr. Cole served as Executive Vice Chairman and Executive Vice President of Trinity Companies, a continuing education company since 2002 and was its Chief Executive Officer until February 1, 2006, when the Company relocated its corporate headquarters to Texas. From 1998 through 2000, Mr. Cole served as Chairman and Chief Executive Officer of RateXchange Corporation (formerly NetAmerica.com) and as a director of two of its subsidiaries, RateXchange I, Inc. and PolarCap, Inc. He served as Chairman, Chief Executive Officer, President and Principal Accounting Officer of RateXchange from 1999 through 2000. Mr. Cole was the founder, Chief Executive Officer and Executive Vice President of Star Press (formerly Great Bear Technology) from its inception in 1992 until its merger with Graphite Zone Inc. in 1996. Mr. Cole is a 1978 graduate of the University of California, Berkeley. Mr. Cole’s financial and business management experience and knowledge led to the conclusion that he should serve on the Company’s board of directors, given the Company’s business and structure.
45
Chen Hui, Director. Chen Hui was appointed as a member of the Company’s Board of Directors on September 30, 2010. Chen. Hui has served as a member of the Board of Directors of Zibo Jiazhou Chemical since September 2005. Chen Hui formerly served as the chairman of federation business for the Zibo Chamber of Commerce. Chen Hui received his Masters of Business Administration from the Shandong Institute of Economics in 1976. Chen Hui’s experience on the Board of Directors of Zibo Jiazhou Chemical led to the conclusion Chen Hui should serve on the Company’s Board of Directors, given the Company’s business and structure.
Jared Wang, Director. Jared Wang was appointed as a member of the Company’s Board of Directors on September 30, 2010. Mr. Wang is a partner at Grant Thorton in their Shanghai office. Prior to joining Grant Thorton, Mr. Wang was the chief partner at a major accounting firm in Shanghai. Mr. Wang graduated from Tongi University in Shanghai, and has been awarded a Masters degree in Applied Accounting from the Chinese University of Hong Kong. Mr. Wang is a Certified Public Accountant, a Certified Public Valuer and a Real Estate Evaluator in China. Mr. Wang’s financial and accounting knowledge and experience led to the conclusion Mr. Wang should serve on the Company’s Board of Directors, given the Company’s business and structure.
Board Leadership Structure and Role in Risk Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to combine these roles. Lu Feng has served as Chairman and Chief Executive Officer of the Company since the Share Exchange. Due to the small size and early stage of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined.
Our board of directors is primarily responsible for overseeing our risk management processes, and acts as our audit committee. The board of directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The board of directors focuses on the most significant risks facing our Company and our Company’s general risk management strategy, and also ensure that risks undertaken by our Company are consistent with the board’s appetite for risk. While the board oversees our Company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our Company and that our board leadership structure supports this approach.
Committees of the Board of Directors
On September 30, 2010, the Board of Directors appointed an Audit Committee, Compensation Committee, and Nominating Committee and adopted charters relative to its Audit Committee, Compensation Committee and Nominating Committee.
Audit Committee
Jared Wang, Doug Cole, and Chen Hui currently serve on the Audit Committee. Jared Wang serves as the Chairman of the Audit Committee and as the audit committee financial expert. The Audit Committee’s duties are to recommend to our Board of Directors the engagement of independent auditors to audit our financial statements and to review our accounting and auditing principles. The Audit Committee reviews the scope, timing and fees for the annual audit and the results of audit examinations performed by independent public accountants, including their recommendations to improve the system of accounting and internal controls. The Audit Committee oversees the independent auditors, including their independence and objectivity. However, the committee members are not acting as professional accountants or auditors, and their functions are not intended to duplicate or substitute for the activities of management and the independent auditors. The Audit Committee is empowered to retain independent legal counsel and other advisors as it deems necessary or appropriate to assist the Audit Committee in fulfilling its responsibilities, and to approve the fees and other retention terms of the advisors. Our Audit Committee member possesses an understanding of financial statements and generally accepted accounting principles.
46
Compensation Committee
Doug Cole, Lu Feng, and Lu Lingliang currently serve on the Compensation Committee. Doug Cole serves as the Chairman of the Compensation Committee The Compensation Committee has certain duties and powers as described in its charter, including but not limited to periodically reviewing and approving our salary and benefits policies, compensation of executive officers, administering our stock option plans and recommending and approving grants of stock options under such plans.
Nominating Committee
Lu Feng, Doug Cole, Jared Wang and Chen Hui currently serve on the Nominating Committee. The Nominating Committee considers and makes recommendations on matters related to the practices, policies and procedures of the board and takes a leadership role in shaping our corporate governance. As part of its duties, the Nominating Committee assesses the size, structure and composition of the board and its committees, coordinates evaluation of board performance and reviews board compensation. The Nominating Committee also acts as a screening and nominating committee for candidates considered for election to the board. The Nominating Committee considers, among other things, the diversity of potential board member’s backgrounds, including their professional experience, education, skills and other individual attributes in assessing their potential appointment to the board.
Code of Ethics
Our Board of Directors has approved, and we have adopted, a Code of Ethics that applies to all of our directors, officers and employees. We will provide a copy of the Code of Ethics free of charge upon request to any person submitting a written request to our Chief Executive Officer.
47
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The table below sets forth, for the last two fiscal years, the compensation earned by (i) each individual who served as our principal executive officer or principal financial officer during the last fiscal year and (ii) our most highly compensated executive officer, other than those listed in clause (i) above, who were serving as executive officers at the end of the last fiscal year (together, the “Named Executive Officers”). No other executive officer had annual compensation in excess of $100,000 during the last fiscal year.
|
Name and Principal Position
|
Year
|
Salary
($)(1)
|
Bonus
($)(2)
|
Nonequity Incentive Plan Compensation ($)
|
All Other Compensation ($)
|
Total
($)
|
|||||||||||||||
|
Lu Feng
|
2010
|
$
|
29,527
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
29,527
|
||||||||||
|
Chief Executive Officer
|
2009
|
$
|
30,000
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
30,000
|
||||||||||
|
Zhang Lianjun
|
2010
|
$
|
8,662
|
$
|
1,444
|
$
|
-
|
$
|
-
|
$
|
10,126
|
||||||||||
|
Chief Sales Officer
|
2009
|
$
|
8,801
|
$
|
1,467
|
$
|
-
|
$
|
-
|
$
|
10,268
|
||||||||||
|
Yan Kai
|
2010
|
$
|
8,662
|
$
|
1,444
|
$
|
-
|
$
|
-
|
$
|
10,126
|
||||||||||
|
Chief Operating Officer
|
2009
|
$
|
8,801
|
$
|
1,467
|
$
|
-
|
$
|
-
|
$
|
10,268
|
||||||||||
|
Li Bin
|
2010
|
$
|
8,662
|
$
|
1,444
|
$
|
-
|
$
|
-
|
$
|
10,126
|
||||||||||
|
Chief Accounting Officer
|
2009
|
$
|
8,801
|
$
|
1,467
|
$
|
-
|
$
|
-
|
$
|
10,268
|
||||||||||
|
Dean Huge
|
2010
|
$
|
9,000
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
9,000
|
||||||||||
|
Chief Financial Officer
|
2009
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
(1) The Company pays salaries in RMB to all executive officers and directors of the board every month. The RMB amount is translated into USD when the Company files SEC documents. The exchange rates used were the average rates of 2010, i.e. 6.7099.
48
Director Compensation
|
Name
|
Fees Earned or
Paid in Cash
|
Stock Awards
|
Option Awards
|
Non-Equity Incentive Plan Compensation
|
Change in Pension Value and Nonqualified Deferred Compensation Earnings
|
All Other Compensation
|
Total
|
|||||||||||||||||||||
|
Lu Lingliang
|
$
|
29,527
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
29,527
|
||||||||||||||
|
Doug Cole
|
$
|
$
|
75,000
|
$
|
$
|
$
|
$
|
$
|
75,000
|
|||||||||||||||||||
Outstanding Equity Awards at Fiscal Year-End
Other than as set forth below, there were no outstanding unexercised options, unvested stock, and/or equity incentive plan awards issued to our named executive officers as of December 31, 2010
|
Option Award
|
Stock Award
|
||||||||
|
Name
|
Number of Securities Underlying Unexercised Options
(#) Exercisable
|
Number of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Equity Incentive Plan Awards:
Number of Securities Underlying Unexercised Unearned Options
|
Option Exercise Price
($)
|
Option Expiration Date
|
Number of Shares or Units of Stock That Have Not Vested
|
Market Value of Shares or Units of Stock That Have Not Vested
($)
|
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#)
|
Equity Inventive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($)
|
Employment Agreements
We are not party to any employment agreements.
Risk Management
The Company does not believe risks arising from its compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of March 28 2011 by the following:
|
§
|
Each shareholder who beneficially owns more than 5% of our common;
|
|
§
|
Each of our named executive officers;
|
|
§
|
Each of our directors; and
|
|
§
|
Executive officers and directors as a group.
|
Beneficial ownership is determined in accordance with the rules of the SEC, which deem a person to beneficially own any shares the person has or shares voting or dispositive power over and any additional shares obtainable within 60 days through the exercise of options, warrants or other purchase rights. Shares of our common stock subject to options, warrants or other rights to purchase that are currently exercisable or are exercisable within 60 days of March 28, 2011 (including shares subject to restrictions that lapse within 60 days of March 28, 2011) are deemed outstanding for purposes of computing the percentage ownership of the person holding such shares, options, warrants or other rights, but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Unless otherwise indicated, each person possesses sole voting and investment power with respect to the shares identified as beneficially owned.
49
|
Name and Address of Beneficial Owner(1)
|
Amount and Nature
of Beneficial
Ownership
|
Percentage
of Class
|
||||||
|
Lu Feng
|
9,866,675
|
32.9
|
%
|
|||||
|
Lu Lingliang
|
7,941,785
|
26.5
|
%
|
|||||
|
Yan Kai
|
40,000
|
*
|
||||||
|
Dean Huge
|
-
|
-
|
||||||
|
Zhang Lianjun
|
20,000
|
*
|
||||||
|
Li Bin
|
20,000
|
*
|
||||||
|
Doug Cole
|
15,000
|
*
|
||||||
|
Chen Hui
|
-
|
-
|
||||||
|
Jared Wang
|
-
|
-
|
||||||
|
All such directors and executive officers as a group (9 persons)
|
17,903,460
|
59.7
|
%
|
|||||
*Represents less than 1%
(1) All shares are owned of record and beneficially. Except as otherwise noted, each shareholder’s address is c/o China Chemical Corp. Electric Power Road, Zhou Cun District, Zibo, People’s Republic of China.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements Among Zibo Costar Information Consulting Co., Ltd., Zibo Jiazhou Chemical Co., Ltd. and Its Shareholders
Zibo Costar Information Consulting entered into a series of contractual arrangements with Zibo Jiazhou Chemical, and its shareholders, Lu Feng, Lu Lingliang, Zhang Meng and YLL Investment Group Limited, including contracts relating to the provision of services and certain shareholder rights and corporate governance matters.
The following is a summary of the material provisions of these agreements. For more complete information you should read these agreements in their entirety which are attached to this Form 8-K as exhibits.
Transfer of Ownership When Permitted by Law
Pursuant to the purchase option agreement by and among Zibo Costar Information Consulting, Zibo Jiazhou Chemical, and Zibo Jiazhou Chemical’s shareholders dated as of September 30, 2010, each of Zibo Jiazhou Chemical, Zibo Jiazhou Chemical’s shareholders has granted Zibo Costar Information Consulting or its designee an exclusive option to purchase all or part of their equity interests in Zibo Jiazhou Chemical, or all or part of the assets of Zibo Jiazhou Chemical, in each case, at any time determined by Zibo Costar Information Consulting and to the extent permitted by PRC law.
50
Voting Arrangement
Pursuant to the voting rights proxy agreement by and among Zibo Costar Information Consulting, Zibo Jiazhou Chemical, Zibo Jiazhou Chemical’s shareholders and subsidiaries dated as of September 30, 2010, the shareholders of Zibo Jiazhou Chemical have granted the personnel designated by Zibo Costar Information Consulting the right to appoint directors and senior management of Zibo Jiazhou Chemical and to exercise all of their other voting rights as shareholders of Zibo Jiazhou Chemical, as the case may be, as provided under the articles of association of each such entity. Under the voting rights proxy agreement, there are no restrictions on the number, to the extent allowed under the respective articles of association of Zibo Jiazhou Chemical, or identity of those persons we can appoint as directors and officers.
Equity Pledge Agreement
Pursuant to the equity pledge agreement by and among Zibo Costar Information Consulting, Zibo Jiazhou Chemical, Zibo Jiazhou Chemical’s shareholders, dated as of September 30, 2010, each of shareholders has pledged his or its equity interest in Zibo Jiazhou Chemical, as the case may be, to Zibo Costar Information Consulting to secure their obligations under the relevant contractual control agreements to which each is a party, including but not limited to, the obligations of Zibo Jiazhou Chemical under the exclusive management consulting services agreement, exclusive technology consulting agreement, call option agreement and voting rights proxy agreement entered into with Zibo Costar Information Consulting. Under this equity pledge agreement, shareholders have agreed not to transfer, assign, pledge or otherwise dispose of their interest in Zibo Jiazhou Chemical, as the case may be, without the prior written consent of Zibo Costar Information Consulting.
Exclusive Management Consulting Services Agreement
Pursuant to the exclusive management consulting services agreement by and among Zibo Costar Information Consulting, Zibo Jiazhou Chemical and its shareholders, dated September 30, 2010, Zibo Jiazhou Chemical and its shareholders irrevocably entrust to Zibo Costar Information Consulting the right of management and operation of Zibo Jiazhou Chemical. The service fee to be paid by Zibo Jiazhou Chemical shall equal to 50% of net profit of Zibo Jiazhou Chemical.
Exclusive Technology Consulting Agreement
Pursuant to the exclusive technology consulting agreement by and among Zibo Costar Information Consulting, Zibo Jiazhou Chemical and its shareholders, dated September 30, 2010, Zibo Jiazhou Chemical and its shareholders irrevocably entrust to Zibo Costar Information Consulting the right maintain the facilities and provide technical support to the operations of Jiazhou Chemical. The service fee to be paid by Zibo Jiazhou Chemical shall equal to 50% of net profit of Zibo Jiazhou Chemical.
51
Transactions Involving Zibo Jiazhou Heat and Power Co., Ltd.
Mr. Lu Lingliang, is the Chairman of Zibo Jiazhou Heat and Power Co, Lt. (“ZJHP”). Zibo Jiazhou Chemical enters into many transactions with ZJHP, however, only certain of these transactions are covered by written agreements. Zibo Jiazhou Chemical has the following written agreements with ZJHP:
|
(1)
|
ZJHP has an arrangement with Zibo Jiazhou Chemical to supply it with electricity and water at market price. Similarly, Zibo Jiazhou Chemical has an arrangement with ZJHP whereby it supplies ZJHP all the steam generated in its production at market prices.
|
|
(2)
|
Leasing Agreements dated January 4, 2008, January 5, 2009 and January 1, 2010, respectively. Under the three agreements annually signed between Zibo Jiazhou Chemical and ZJHP, Zibo Jiazhou Chemical would have granted the assets described above on lease to ZJHP for three years until December 31, 2010, for which ZJHP would be required to pay rent in the aggregate amount of RMB136,224,558 or $19,824,030 as of December, 2010. ZJHP has made payments of approximately $1.6 million towards this amount as of the date of this Current Report.
|
52
As of December 31, 2010 and December 31, 2009, ZJHP was indebted to Zibo Jiazhou Chemical in the following amounts:
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
ZJHP, no fixed payment term, interest free, secured by Lu Lingliang
|
$
|
19,640,240
|
$
|
14,636,667
|
||||
|
ZJHP, no fixed payment term, interest rate at 5.91% per annum, unsecured (subsequently settled)
|
$
|
-
|
$
|
5,178,870
|
||||
On March 26, 2011, ZJHP signed an agreement to repay $19,640,240 to the Company within the next 5 years ending May 1, 2015. The principal is to be repaid in 5 unequal installments from October 1, 2011. The interest rate 6.00% per annum.
In addition to the above Zibo Jiazhou Chemical also engaged in the following transactions with ZJHP during the years ended December 31, 2010 and 2009:
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
Sales of Steam to ZJHP
|
$
|
6,809,872
|
$
|
6,223,324
|
||||
|
Lease of Equipment to ZJHP
|
$
|
6,810,782
|
$
|
7,164,973
|
||||
|
Purchases of Electricity from ZJHP
|
$
|
2,308,188
|
$
|
2,052,909
|
||||
|
Interest Income from ZJHP
|
$
|
163,654
|
$
|
306,069
|
||||
On January 1, 2010 and January 5, 2009, the Company signed a one year lease agreement for equipment and buildings with ZJHP with an annual rental fee of $6,809,782 and $7,164,973, respectively. During 2010 and 2009, machinery and buildings with a net book value of $32,718,263 and $36,620,001, respectively, were leased to ZJHP. For the year ended December 31, 2010 and 2009, depreciation for the property was $3,601,738 and $3,545,022, respectively, and related business tax for the leases were $340,539 and $358,249, respectively. For the year ended December 31, 2010 and 2009, the net lease income was $2,868,505 and $3,261,702, respectively.
ZJHP provided guarantee of certain short-term bank loans borrowed by Zibo Jiazhou Chemical.
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
Qishang Bank, due April 17, 2010, interest rate at 9.03% per annum, guaranteed by ZJHP and Zibo Lanyan Group Co., Ltd. (repaid on its due date)
|
$
|
-
|
$
|
2,053,629
|
||||
|
Qishang Bank, due April 17, 2010, interest rate at 9.03% per annum, guaranteed by ZJHP, Zibo Jiazhou Hotel Co., Ltd, and Zibo Lanyan Group Co., Ltd. (repaid on its due date)
|
$
|
-
|
$
|
1,056,152
|
||||
|
Qishang Bank, due January 26, 2010, interest rate at 9.03% per annum, guaranteed by ZJHP and Zibo Jiazhou Hotel Co., Ltd. (repaid on its due date)
|
$
|
-
|
$
|
2,640,380
|
||||
Transactions Involving Employees
During the year ended December 31, 2009, Zibo Jiazhou Chemical transferred $2,933,756 to an employee as collateral for a bank acceptance note. The balance was subsequently settled on March 9, 2010. As of December 31, 2010, the balance of this amount was $0.
53
Transactions Involving Zibo Eagle Textile Co., Ltd.
Mr. Lu Lingliang, is the Chairman of Zibo Eagle Textile Co., Ltd. On December 23, 2007, the Company entered into an agreement with Eagle to purchase a land use right and fixed assets on the land with a total contract amount of $20,446,646. The balances represent deposits paid to Eagle, and they are refundable, if the land and fixed assets are not transferred to the Company. The land use right and fixed assets were pledged as collateral against certain short-term bank loans borrowed by Zibo Jiazhou Chemical as detailed below
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
Agriculture Bank of China, due March 26, 2010, interest rate at 6.90% per annum, guaranteed by Eagle’s land use right and fixed assets (repaid on its due date)
|
$
|
-
|
$
|
3,960,570
|
||||
54
Transactions Involving Lu Feng
During the years ended December 31, 2010 and 2009, Zibo Jiazhou Chemical was indebted to Lu Feng, the CEO of the Company, in the amounts of $367,661, and $172,065, respectively. Such amounts represented business and travel related expenses paid by Lu Feng on behalf of Zibo Jiazhou Chemical. The outstanding balance is unsecured, interest-free and has no fixed repayment term. Lu Feng also provided a personal guarantee for certain short-term bank loans of Zibo Jiazhou Chemical as detailed below:
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
Qishang Bank due October 29, 2011, interest rate 9.877%, guaranteed by Shandong Jide Ecological Technology Co., Ltd.(“Jide”), Zibo Lanyan Group Co. Ltd (“Lanyan”) and the CEO of the Company
|
2,726,219
|
|||||||
|
Shanghai Pudong Development Bank due July 20, 2011, interest at 6.391% per annum, guaranteed by Shandong Fengyang Group Co., Ltd (“Shandong Feng Yang”) and the CEO of the Company
|
3,029,133
|
|||||||
|
Bank Austria Beijing due June 8, 2011. Interest rate at 7.553% per annum, guaranteed by the restricted cash of 1,135,9025, the CEO of the Company and secured by raw material inventories
|
7,572,832
|
|||||||
|
China Merchant Bank of Jinan Branch due May 31, 2011, interest rate 6.1525% per annum. guaranteed by Jide, Lanyan and the CEO of the Company
|
3,029,133
|
|||||||
|
Qishang Bank, due March 25, 2010, interest rate at 9.027% per annum, guaranteed by Jide，Lanyan and the CEO of the Company
|
2,120,393
|
|||||||
|
Rizhao Bank due February 23, 2011, interest rate at 6.972% per annum, guaranteed by Jide and the CEO of the Company (repaid on its due date)
|
4,543,699
|
|||||||
|
China Citic Bank, due January 20, 2011, interest rate at 6.391% per annum, guaranteed by the CEO of the Company and secured by raw materials inventory (repaid on its due date)
|
4,543,698
|
|||||||
|
Shanghai Pudong Development Bank, due May 12, 2010, interest rate at 5.84% per annum, guaranteed by Shandong Fengyang Co., Ltd. and the CEO of the Company (repaid on its due date)
|
$
|
-
|
$
|
2,933,756
|
||||
For the year ended December 31, 2010, the total fees charged to the company for audit services, including quarterly reviews were $152,355, for audit-related services were $0, for tax services were $0 and for other services were $0.
55
ITEM 15. EXHIBITS
Exhibits
|
Exhibit No.
|
Description
|
|
|
3.1
|
Articles of Incorporation (filed with Registration Statement on Form S-1 (SEC File Number 333-156383) filed on December 22, 2008 and incorporated herein by reference)
|
|
|
3.2
|
Bylaws (filed with Registration Statement on Form S-1 (SEC File Number 333-156383) filed on December 22, 2008 and incorporated herein by reference)
|
|
|
10.1
|
Share Exchange Agreement dated September 30, 2010 among the Company, Gold Champ Consultants Limited, and the shareholders of Gold Champ Consultants Limited (filed with 8-K filed on October 1, 2010 and incorporated herein by reference)
|
|
|
10.2
|
Exclusive Management Consulting Services Agreement dated September 30, 2010 by and between Zibo Costar Information Consulting Co, Ltd, Zibo Jiazhou Chemical Industry Co., Ltd., and the shareholders of Zibo Jiazhou Chemical Industry Co., Ltd. (filed with 8-K filed on October 1, 2010 and incorporated herein by reference)
|
|
|
10.3
|
Exclusive Technology Consulting Agreement dated September 30, 2010 by and between Zibo Costar Information Consulting Co, Ltd, Zibo Jiazhou Chemical Industry Co., Ltd., and the shareholders of Zibo Jiazhou Chemical Industry Co., Ltd. (filed with 8-K filed on October 1, 2010 and incorporated herein by reference)
|
|
|
10.4
|
Equity Pledge Agreement dated September 30, 2010 by and between Zibo Costar Information Consulting Co, Ltd, Zibo Jiazhou Chemical Industry Co., Ltd., and the shareholders of Zibo Jiazhou Chemical Industry Co., Ltd. (filed with 8-K filed on October 1, 2010 and incorporated herein by reference)
|
|
|
10.5
|
Purchase Option Agreement dated September 30, 2010 by and between Zibo Costar Information Consulting Co, Ltd, Zibo Jiazhou Chemical Industry Co., Ltd., and the shareholders of Zibo Jiazhou Chemical Industry Co., Ltd. (filed with 8-K filed on October 1, 2010 and incorporated herein by reference)
|
|
|
10.6
|
Form of Proxy Letter dated September 30, 2010
|
|
|
10.7
|
Agreement with Davy Process Technology Limited dated February 16, 2009 (filed with 8-K filed on October 1, 2010 and incorporated herein by reference)
|
|
|
10.8
|
Agreement with Hua Lu dated July 25, 2009(filed with 8-K filed on October 1, 2010 and incorporated herein by reference)
|
|
|
10.9
|
Loan Agreement With Agriculture Bank of China Zhou Cun Branch of Zibo Municipal (filed with 8-K filed on October 1, 2010 and incorporated herein by reference)
|
|
|
10.10
|
License Agreement dated January 11, 2006 with Institute of Coal Chemistry, Chinese Academy of Sciences (filed with 8-K filed on October 1, 2010 and incorporated herein by reference)
|
|
| 10.11 | Plan of Repayment* | |
| 10.12 | Land Lease Agreement* | |
| 10.13 | Capital Lease Agreement* | |
|
16.1
|
Letter from Kyle L. Tingle, CPA, LLC dated November 5, 2010 (filed with 8-K filed on November 5, 2010, and incorporated herein by reference)
|
|
|
31.1
|
Section 302 Certification of Principal Executive Officer*
|
|
|
31.2
|
Section 302 Certification of Principal Financial Officer*
|
|
|
32.1
|
Section 906 Certification of Principal Executive Officer*
|
|
|
32.2
|
Section 906 Certification of Principal Financial Officer*
|
|
|
* Filed herewith.
|
56
SIGNATURES
Pursuant to the requirements of Section 13(a) or 15(d) 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 Chemical Corp.
|
||
|
By:
|
/s/ Lu Feng | |
|
Lu Feng
|
||
|
Chief Executive Officer
(Principal Executive Officer)
|
||
|
By:
|
/s/ Dean Huge | |
|
Dean Huge
|
||
|
Chief Financial Officer
(Principal Financial Officer)
|
||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
| /s/ Lu Feng |
Chief Executive Officer and Chairman
(Principal Executive Officer)
|
March 30, 2011
|
||
|
Lu Feng
|
||||
| /s/ Lu Lingliang |
Director and Vice-Chairman
|
March 30, 2011
|
||
|
Lu Lingliang
|
||||
| /s/ Dean Huge |
Chief Financial Officer
|
March 30, 2011
|
||
|
Dean Huge
|
(Principal Financial Officer)
|
|||
| /s/ Li Bin |
Chief Accounting Officer
|
March 30, 2011
|
||
|
Li Bin
|
(Principal Accounting Officer)
|
|||
| /s/ Doug Cole |
Director
|
March 30, 2011
|
||
|
Doug Cole
|
||||
| /s/ Chen Hui |
Director
|
March 30, 2011
|
||
|
Chen Hui
|
||||
| /s/ Jared Wang |
Director
|
March 30, 2011
|
||
|
Jared Wang
|
57