UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2014

 

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ___________

 

Commission file number 001-34608

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware	80-0445030
(State or Other Jurisdiction of	(IRS Employer)
Incorporation or Organization)	Identification No.)

 

Unit C, No.68 of West Binhai Road, Xigang District

Dalian, P.R. of China

011 (86411) 8240 8939

(Address of Principal Executive Offices)(Zip Code)

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 x 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 for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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 ¨	Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of August 8, 2014, the Company had 10,255,813 shares of common stock outstanding.

  

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION

Table of Contents

 

		Page
	PART I
FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 4.	Controls and Procedures	14
	PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Mine Safety Disclosures	17
Item 5.	Other Information	17
Item 6.	Exhibits	17
SIGNATURES		17
EXHIBIT INDEX		18

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

   

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

 

INDEX TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS  AS OF JUNE 30, 2014 AND DECEMBER 31, 2013		F-2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013		F-3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013		F-4
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		F-5-21

  

  

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

  

		June 30, 2014				December 31, 2013
ASSETS
Current assets
Cash and cash equivalents		$	788,239			$	22,638,820
Restricted cash			53,671,690				99,659,597
Accounts receivable, net			15,184,416				45,818,721
Inventories, net			36,149,447				3,893,530
Advances to suppliers, net			843,089				25,930,533
Deposits for land use rights			714,844				720,084
Deferred financing costs			2,727,307				4,373,603
Equity investment			1,352,960				1,351,428
Other current assets			6,939,575				517,320
Total current assets			118,371,567				204,903,636
Property, plant and equipment, net			53,048,313				54,292,903
Construction in progress			70,357,294				17,781,162
Intangible assets, net			15,940,128				16,289,315
Total assets		$	257,717,302			$	293,267,016
LIABILITIES AND EQUITY
Current liabilities
Short-term bank borrowings		$	24,044,710			$	27,821,419
Bank note payable			141,345,529				191,257,528
Accounts payable and accrued liabilities			26,179,240				3,156,079
Advances from customers			167,636				1,693,875
Loan from third parties			97,479				98,193
Related party loans payable			875,512				1,595,594
Taxes payable			4,640,796				6,254,057
Other liabilities			2,975,438				1,149,298
Total current liabilities			200,326,340				233,026,043
Warrant liability			272,085				290,687
Total liabilities			200,598,425				233,316,730
Commitments and contingencies
Equity
Common stock, $0.001 par value; 50,000,000 shares authorized; 10,255,813 shares issued; 10,164,621 shares outstanding			10,256				10,256
Treasury stock, at cost; 91,192 shares			(497,693	)			(497,693	)
Additional paid-in capital			31,578,788				29,998,994
Accumulated other comprehensive income			3,914,424				6,206,460
Retained earnings			17,481,285				17,990,881
Statutory reserve			3,932,585				3,932,585
Total stockholders' equity of the Company			56,419,645				57,641,483
Noncontrolling interest			699,232				2,308,803
Total equity			57,118,877				59,950,286
Total liabilities and equity		$	257,717,302			$	293,267,016

   

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

  

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

  

		Three months ended June 30,								Six months ended June 30,
		2014				2013				2014				2013
Revenues		$	175,529,194			$	75,766,037			$	217,485,835			$	129,397,690
Cost of revenues			166,381,021				71,818,195				205,473,413				121,982,431
Gross profit			9,148,173				3,947,842				12,012,422				7,415,259
Operating expenses
Selling expenses			239,831				357,975				471,152				817,031
General and administrative expenses			2,344,079				2,486,902				4,678,306				4,136,767
Total operating expenses			2,583,910				2,844,877				5,149,458				4,953,798
Income from operations			6,564,263				1,102,965				6,862,964				2,461,461
Other income (expense)
Interest income			943,030				13,628				1,135,030				225,048
Interest expense			(4,461,157	)			(1,167,686	)			(8,390,891	)			(2,081,214	)
Income (loss) from equity investment			5,140				(8,566	)			11,397				16,350
Change in fair value of warrants			17,366				10,150				18,602				10,150
Other income (expense)			(13,738	)			(33,496	)			(22,095	)			(169	)
Total other income (expense), net			(3,509,359	)			(1,185,970	)			(7,247,957	)			(1,829,835	)
Income (loss) before income tax provision			3,054,904				(83,005	)			(384,993	)			631,626
Provision for income taxes			21,820				52,668				143,559				469,254
Net income (loss)			3,033,084				(135,673	)			(528,552	)			162,372
Less: net loss attributable to noncontrolling interest			120,656				(56,259	)			(18,956	)			(93,184	)
Net income (loss) attributable to Andatee China Marine Fuel Services Corporation		$	2,912,428			$	(79,414	)		$	(509,596	)		$	255,556
Comprehensive income (loss)
Net income (loss)			3,033,084				(135,673	)			(528,552	)			162,372
Foreign currency translation adjustment			(81,640	)			1,032,940				(432,984	)			1,615,051
Comprehensive income (loss)			3,114,724				897,267				(961,536	)			1,777,423
Less: comprehensive income (loss) attributable to non-controlling interest			1,433,612				(4,207	)			1,609,571				(198,671	)
Comprehensive income attributable to Andatee China Marine Fuel Services Corporation			4,548,336				893,060				648,035				1,578,752
Weighted average number of shares:
Basic			10,255,813				9,674,048				10,255,813				9,642,103
Diluted			10,383,420				9,674,048				10,255,813				9,642,103
Earnings (losses) per share:
Basic		$	0.28			$	(0.01	)		$	(0.05	)		$	0.03
Diluted		$	0.28			$	(0.01	)		$	(0.05	)		$	0.03

   

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

  

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Six months ended June 30,
		2014				2013
Cash flows from operating activities
Net (loss) income		$	(528,552	)		$	162,372
Adjustments to reconcile net income(loss) to net cash used in operating activities:
Depreciation			1,242,318				1,079,611
Amortization			204,826				253,656
Bad debt provision			782,621				1,584,462
Recovery of bad debt provision			(529,088	)			-
Change in inventory reserve			164,605				55,864
Deferred tax provision (benefit)			-				(205,650	)
Amortization of deferred financing costs			5,616,212				-
Amortization of stock-based compensation to directors			68,250				67,500
Income from equity investment			(11,397	)			(16,350	)
Change in fair value of warrants			(18,602	)			(10,150	)
Changes in operating assets and liabilities:
Accounts receivable			29,592,905				(30,016,665	)
Inventories			(32,530,365	)			(11,172,857	)
Advances to suppliers			25,490,658				(5,904,874	)
Other current assets			(6,376,100	)			(1,904,385	)
Accounts payable and accrued liabilities			24,234,126				12,122,383
Advances from customers			(1,517,732	)			(1,450,003	)
Taxes payable			(1,571,699	)			95,056
Other liabilities			675,587				(904,182	)
Net cash provided by (used in) operating activities			44,988,573				(36,164,212	)
Cash flows from investing activities
Acquisition of equity method investee			-				(1,282,154	)
Additions to property and equipment			(390,750	)			(69,053	)
Additions to construction in progress			(52,838,609	)			-
Addition to intangible assets			(37,753	)			(1,602,693	)
Cash paid for acquiring non-controlling interest			(1,905,631	)			-
Net cash used in investing activities			(55,172,743	)			(2,953,900	)
Cash flows from financing activities
Proceeds from short-term loans			19,137,743				19,152,176
Repayments of short-term loans			(22,720,980	)			(9,406,202	)
Proceeds from bank notes			141,702,363				91,674,012
Repayments of bank notes			(190,344,805	)			(19,873,387	)
Restricted cash, net			45,376,812				(37,147,199	)
Deferred financing costs			(3,997,672	)			-
Repayment of loan from unrelated parties			-				(7,180,063	)
Proceeds (repayment) of loans from related parties			(709,947	)			3,742,096
Net cash (used in) provided by financing activities			(11,556,486	)			40,961,433
Effect of exchange rate changes on cash and cash equivalents			(109,925	)			53,377
Net (decrease) increase  in cash and cash equivalents			(21,850,581	)			1,896,698
Cash and cash equivalents, beginning of period		$	22,638,820			$	1,625,705
Cash and cash equivalents, end of period		$	788,239			$	3,522,403
Supplemental cash flow information
Interest paid		$	6,664,759			$	2,582,788
Income taxes paid		$	969,050			$	315,620
Transfer from advances to suppliers to construction in progress		$	51,483,406			$	-

 

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

  

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - BASIS OF PRESENTATION

 

Andatee China Marine Fuel Services Corporation (the” Company”), its subsidiaries, its variable interest entities (“VIE”) and its VIE’s subsidiaries (collectively the “Group”) are principally engaged in the production, storage, distribution and trading of blended marine fuel oil for cargo and fishing vessels in the PRC.

 

The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the interim period ended June 30, 2014 and 2013 are not necessarily indicative of the results than may be expected for the fiscal year ending December 31, 2014. The information included in the Form 10-Q should be read in conjunction with the Management’s Discussion and Analysis, and the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission on March 31, 2014.

 

NOTE 2 - LIQUIDITY

 

As reflected in the Company’s unaudited condensed consolidated financial statements, the Company had a net loss for the six months ended June 30, 2014. The Company also has a working capital deficit at June 30, 2014. The Company relies upon cash from its financing activities to fund its ongoing operations as it has not been able to generate sufficient cash from operating activities and there is no assurance that it will be able to do so in the future.

 

In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand, its ability to renew bank facilities, and its operating and capital expenditure commitments. Its principal liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. The Company plans to fund continuing operations through additional bank borrowings, financial support by a shareholder and cutting costs to improve profitability and replenish working capital.

 

Management believes that the foregoing measures collectively will provide sufficient liquidity for the Company to meet its future liquidity and capital obligations.

 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of consolidation

 

The accompanying unaudited condensed consolidated financial statements of Andatee reflect the principal activities of the following entities. The non-controlling interests represent the minority stockholders’ interest in the Group’s majority owned subsidiaries. All material intercompany transactions have been eliminated.  

 

Name of the entity		Place of Incorporation		Ownership Percentage
Andatee China Marine Fuel Services Corp.		Delaware			Parent
Goodwill Rich International Corp., (“Goodwill Rich”)		Hong Kong			100	%
Dalian Fusheng Petrochemical Company ("Fusheng") (“WOFE”)		Dalian, China			WOFE,100	%
Dalian Xingyuan Marine Bunker Co., Ltd (“Xingyuan”) (“VIE”)		Dalian, China			VIE,100	%
Dalian Xifa Petrochemical Company, Ltd.(“Dalian Xifa”),		Dalian, China			100	%
Shandong Xifa Prochemical Company, Ltd. (“Shandong Xifa”)		Shandong, China			100	%
Shenzhen Shengfu Petrochemical Company, Ltd.( “Shenzhen Shengfu”)		Shenzhen, China			100	%
Donggang Xingyuan Marine Fuel Company (“Donggang Xingyuan”)		Donggang, China			100	%
Rongcheng Zhuoda Trading Co (“Zhuoda”)		Shandong, China			100	%
Wujiang Xinlang Petrochemical Company ("Xinglang")		Wujiang, China			90	%
Xiangshan Yongshi Nanlian Petroleum Company (“Nanlian”)		Zhejiang, China			100	%
Rongcheng Xinfa Petroleum Company (“Xinfa”)		Shandong, China			90	%
Suzhou Fusheng Petrochemical Company ("Suzhou Fusheng") (A)		Suzhou, China			100	%
Hailong Petrochemical Company (“Hailong”)		Tianjin, China			52	%
Rongcheng Mashan Xingyuan (“Mashan Xingyuan”)		Shandong, China			52	%
Shanghai Fusheng Petrochemical Company, Ltd.( “Shanghai Fusheng”)		Shanghai, China			100	%
Lianyungang Fusheng Petrochemical Co., Ltd. (“Lianyungang Fusheng”)		Lianyungang, China			100	%
Lianyungang Xingyuan Marine Bunker Co., Ltd. (“Lianyungang Xingyuan”)		Lianyungang, China			100	%
Xinniu Development Co., Ltd.		Dalian, China			100	%
Qingdao Grand New Energy Co., Ltd. (“Qingdao Energy”) (B)		Qingdao, China			100	%

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note A:  During the quarter ended June 30, 2014, Dalian Fusheng acquired the remaining 39% of capital shares from Suzhou Fusheng’s minority shareholders Mr. Zhongbin and Wujiang Coal and Petroleum Co., Ltd. for cash consideration of RMB 11.7 million (US $1.9 million) .  Suzhou Fusheng completed the registration change with the local State Administration of Industry and Commerce (the “SAIC”) on May 23, 2014 to reflect the share structure change.  After the acquisition, Suzhou Fusheng became a wholly controlled subsidiary of the Company. The ownership change in Suzhou Fusheng was accounted for as an equity transaction and no gain or loss was recognized in the consolidated statements of net income (loss) and comprehensive income (loss).

 

Note B:  During the quarter ended June 30, 2014, the Company, through a related party share transfer, acquired 100% ownership interest in Qingdao Grand New Energy Co., Ltd. (See Note 14 below).

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date of the financial statements.

 

Actual results could differ from those estimates. Significant estimates required to be made by management include, but are not limited to, useful lives of property, buildings and equipment, intangible assets, the recoverability of long-lived assets, the valuation of accounts receivable, inventories, deposits, advances to suppliers and the fair value of warrants liability. Actual results could differ from those estimates.

 

Foreign Currency Translation

 

The functional currency of the Company’s subsidiary in Hong Kong is the US dollar while the local currency of the Company’s subsidiaries, VIE and its subsidiary in China is the Renminbi (“RMB”). Accordingly, assets and liabilities of the China entities are translated into US dollars at the spot rates in effect as of the balance sheet date. Revenues, costs and expenses are translated using monthly average exchange rates during the reporting period. The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. Due to the fact that cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Gains and losses resulting from foreign currency translation to reporting currency are recorded in accumulated other comprehensive income in the statements of changes in shareholders’ equity for the periods presented.

 

Foreign currency transactions are translated at the spot rates on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency transactions are included in the unaudited condensed consolidated statements of operations and other comprehensive income (loss).

 

 Translation of amounts from RMB into the US dollar has been made at the following exchange rates for the respective period:

 

		June 30, 2014				December 31, 2013				June 30, 2013
Period end RMB : USD exchange rate			6.1552				6.1104				6.1732
Average RMB : USD exchange rate			6.1397				6.1905				6.2395

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Financial Instruments

 

ASC 820, “Fair Value Measurements” and ASC 825, Financial Instruments, requires an entity to use observable inputs and minimize the use of unobservable inputs when measuring fair value. It establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. It prioritizes the inputs into three levels that may be used to measure fair value:

 

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. The Company’s level 2 financial instruments consist principally of a warrant liability, which is measured on a recurring basis using a model based valuation technique. The warrants do not meet the conditions for equity classification pursuant to ASC 815, “Derivatives and Hedging”. Therefore, these warrants were classified as a long-term liability. The fair value of the warrants is calculated using the Black-Scholes options pricing model (See Note 16 for valuation of warrant liability). 

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

Unless otherwise disclosed, the fair value of the Company’s financial instruments substantially included cash and cash equivalents, restricted cash, accounts receivable, advances to suppliers, accounts payable, short term loans, bank notes payable and accrued liabilities.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand and cash on deposit, certificates of deposit and all highly liquid debt instruments with maturities of three months or less when acquired.

 

Restricted Cash

 

Restricted cash consists of cash equivalents used as collateral to secure short-term bank notes payable. The Company is required to maintain escrow deposit amounts ranging between 30% and 50% of the total bank acceptance note amounts as a guarantee. Upon the maturity of the bank acceptance notes, the Company is required to deposit the remainder to the escrow account to settle the bank notes payable.

 

Accounts Receivable

 

Accounts receivable are recognized and carried at original invoiced amount less an allowance for uncollectible accounts, as estimated needed. The Company grants credit to customers with good credit standing with a maximum of 180 days and determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect all amounts due to it. The allowance is based on management's best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against trade and other receivables balances, with a corresponding charge recorded in the consolidated statements of operations and comprehensive income (loss). Actual amounts received may differ from management's estimate credit worthiness and the economic environment. In the event the accounts become overdue, the Company would continue its best efforts to collect from customers until events or circumstances indicate that the amounts might not be collectible, then, a reserve against specific uncollectible amounts will be recorded.

  

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Advances to suppliers

 

Advances to suppliers represent the payments made and recorded in advance for the purchase of certain materials and fuels to be received. Advances to suppliers are short-term in nature and are reviewed periodically to determine whether their carrying value has become impaired. The Company considers the assets to be impaired if the collectability of the advance become doubtful. The Company uses the aging method to estimate the allowance for uncollectible balances.

 

Historically, if the Company cannot receive goods within 180 days, and if the possibility of the suppliers repaying the advance becomes doubtful, the Company’s policy is to provide an allowance.

 

Inventories

 

Inventories are stated at the lower of cost or current market value. Costs include the cost of raw materials, freight, direct labor and related production overhead. The cost of inventories is calculated using the weighted average method. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories.

 

Net realizable value is the estimated selling price in the normal course of business and the estimated expenses and related taxes to make the sale.

 

Raw materials include low-value consumables and other materials, which can be in use for more than one year but do not meet the definition of fixed assets. Reusable materials are amortized in half when received for use and in another half when cease to work for any purpose. The amounts of the amortization are included in the cost of the related assets or profit or loss.

 

Deferred financing cost

 

Deferred financing costs represent the prepaid interest expense incurred in connection with discount of bank acceptance notes. The deferred financing cost is amortized over the terms of the bank acceptance notes ranging up to six months, using the straight-line method, which approximates the effective interest method. Amortization of these costs is charged to interest expense in the consolidated statements of operations and comprehensive income (loss). As of June 30, 2014 and December 31, 2013, accumulated amortization of deferred financial cost was $1,260,299 and $3,779,111, respectively.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs, which are not considered improvements and do not extend the useful life of the asset, are expensed as incurred; additions, renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in the statement of operations in other income and expenses.

 

Depreciation is provided to recognize the cost of the asset in the results of operations. The Company calculates depreciation using the straight-line method with estimated useful life as follows:

 

Items		Useful Life
Property and buildings		40 years
Marine bunkers		15 years
Equipment		3-12 years
Transportation vehicles		8 years

 

Construction-in-Progress

 

Construction-in-progress represents property and buildings under construction and consists of construction expenditures, equipment procurement, and other direct costs attributable to the construction. Construction-in-progress is not depreciated. Upon completion and ready for intended use, construction-in-progress is reclassified to the appropriate category within property, plant and equipment.

 

Intangible Assets other than Goodwill

 

Intangible assets consist primarily of land use rights, leasehold right and licenses and permits. Intangible assets are amortized using the straight-line method with the following estimated useful lives:

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Items		Useful Life
Land use rights		50 years
Leasehold right		20 years
Licenses and permits		Contract Terms
Software		5 years

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in business acquisitions.

 

In the fourth quarter of 2013, the Company impaired its goodwill that was previously recognized in acquisitions. The impairment to goodwill was made after the Company estimated the fair values of businesses acquired and determined that the implied fair value of goodwill was lower than the carrying value of goodwill. The fair value of goodwill was established based on future cash flows (level 3 inputs). Accordingly, the Company recorded an impairment charge totaling $1,234,709 during the fourth quarter in the year ended December 31, 2013.

 

Impairment of Long-Lived Assets

 

Certain assets such as property, plant, and equipment, and purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets are tested for impairment annually. Recoverability of assets that are held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no events or changes in circumstances that necessitated a review of impairment of long lived assets as of June 30, 2014.

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of an arrangement exists, when the selling price is fixed or determinable, when delivery occurs and when collection is probable.

 

Delivery is typically conveyed via pipeline or tanker and sales revenues are recognized when customers take possession of goods in accordance with the terms of purchase order agreements that evidence agreed upon pricing and when collectability is reasonably assured.

 

As an industry wide practice, the Company requires advances from customers for substantially all sales. Such advances are not recognized as revenues when received as they represent down payments from customers for the marine fuel products and the delivery is not yet completed.

 

In the PRC, value added tax (VAT) of 17% of the invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities. The VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing or acquiring its finished products. The Company recorded a VAT payable net of payments in the accompanying financial statements.

 

Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740-10, “Accounting for Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In the normal course of business, the Company may be subject to challenges from taxing authorities regarding the amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions. Management determines whether the benefits of its tax positions are more-likely-than-not of being sustained upon audit based on the technical merits of the tax position. The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. As of June 30, 2014, the Company has no liabilities for uncertain tax positions. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.

 

Earnings (loss) per Share

 

The Company computes net earnings (loss) per share in accordance with ASC Topic 260 Earnings Per Share, which requires presentation of both basic and diluted earnings (loss) per share (EPS) on the face of the income statement.

 

Basic net income (loss) per share is computed by dividing net income by the weighted average number of common shares outstanding for that period.

 

Diluted net income (loss) per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential shares consist of incremental common shares issuable upon exercise of stock options, vesting of restricted stock units and conversion of preferred stock (none outstanding) for all periods, except in situations where inclusion is anti-dilutive.

 

Stock-Based compensation

 

The fair value of the stock issued is used to measure the fair value of services received as the Company believes such approach is a more reliable method of measuring the fair value of the services. Fair value is measured based on the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is calculated and then recorded as compensation expense over the requisite performance period.

 

Accounting for changes in ownership

 

On July 29, 2013, the Company completed the acquisition of a 37% noncontrolling interest in its subsidiary Xiangshan Nanlian. In addition, on May 22, 2014, the Company completed the acquisition of a 39% noncontrolling interest in its subsidiary Suzhou Fusheng. In accordance with ASC 810 “Consolidation”, changes in a parent’s ownership while the parent retains its controlling financial interest in its subsidiary should be accounted for as an equity transaction. Therefore, no gain or loss is recognized in consolidated net income (loss) or comprehensive income (loss). The carrying amount of the controlling and non-controlling interest is adjusted to reflect the change in its ownership interest in the subsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted is recognized in equity attributable to the parent. If a change in a parent’s ownership interest occurs in a subsidiary that has accumulated other comprehensive income, the carrying amount of accumulated other comprehensive income is adjusted to reflect the change in the ownership interest in the subsidiary through a corresponding charge or credit to equity attributable to the parent.

  

Equity Investment

 

The Company accounts for its investments in unconsolidated entities by the equity method. The Company’s share of earnings (loss) in the unconsolidated entity is included in other income (loss) on the consolidated statements of operations and comprehensive income (loss) (after elimination intra-company profit and losses). The carrying value of the Company’s investments in unconsolidated entities is recorded in the Equity Investment line of the Consolidated Balance Sheets. The Company records losses of the unconsolidated entities only to the extent of the Company’s investment.

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We evaluate our equity method investment for impairment when there are indicators of impairment. If indicators suggest impairment, we will perform an impairment test to assess whether an adjustment is necessary. The impairment test considers whether the fair value of our equity method investment has declined and if such decline is other than temporary. If a decline in fair value is determined to be other than temporary, the investment’s carrying value if written down to fair value.

 

Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a significant impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance in this Update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers. This ASU is effective retrospectively for the Company for fiscal years, and interim periods within those years beginning after December 15, 2016. Management is evaluating the effect, if any, on the Company’s financial position and results of operations.

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation-Stock Compensation: Topic 718. This amendment requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company does not expect the adoption of this guidance will have a significant impact on the Company’s consolidated financial statements.

 

NOTE 4 - ACCOUNTS RECEIVABLE, NET

 

The Company’s accounts receivable is as follows:

 

		June 30, 2014				December 31, 2013
Trade accounts receivable		$	16,746,601			$	46,604,189
Less: allowances for doubtful accounts			(1,562,185	)			(785,468	)
Accounts receivables, net		$	15,184,416			$	45,818,721

 

NOTE 5 - INVENTORIES, NET

 

The Company’s inventory consists of the following:

 

		June 30, 2014				December 31, 2013
Marine Fuel		$	35,228,070			$	3,911,101
Other raw materials			1,103,011				-
Less: inventory reserve			(181,634	)			(17,571	)
Total Inventory, net		$	36,149,447			$	3,893,530

 

NOTE 6 - ADVANCES TO SUPPLIERS, NET

 

Advances to suppliers represent the payments made to suppliers in advance for the purchase of certain materials and fuels. Advances to suppliers consisted of the following:

 

		June 30, 2014				December 31, 2013
Advances to suppliers		$	843,089			$	26,462,158
Less: allowance for doubtful accounts			-				(531,625	)
Advances to suppliers, net		$	843,089			$	25,930,533

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 – OTHER CURRENT ASSETS

 

The Company’s other current assets consist of the following:

 

		June 30, 2014				December 31, 2013
VAT tax recoverable		$	6,308,168			$	-
Notes receivable and other receivable			609,068				429,102
Prepaid insurance			22,339				88,218
Total other current assets, net		$	6,939,575			$	517,320

 

NOTE 8 - PROPERTY, PLANT AND EQUIPMENT, NET

 

The Company’s Property, Plant and Equipment are as follows:

 

		June 30, 2014				December 31, 2013
Property and buildings		$	48,327,702			$	48,643,214
Machinery, boiler and marine bunker equipment			10,953,392				10,714,150
Transportation vehicles			1,525,904				1,537,092
Office equipment			87,500				53,883
Leasehold improvement			68,508				69,011
Total			60,963,006				61,017,350
Less: Accumulated depreciation			(7,914,693	)			(6,724,447	)
Property, Plant and Equipment, net		$	53,048,313			$	54,292,903

 

Depreciation expense was $633,493 and $599,817 for the three months ended June 30, 2014 and 2013, respectively. Depreciation expense was $1,242,318 and $1,079,611 for the six months ended June 30, 2014 and 2013, respectively.

 

Property and equipment with a net book value $ 21,086,236 and $44,976,316 has been pledged as collateral for certain bank acceptance notes and bank loans at June 30, 2014 and December 31, 2013, respectively (See Note 12 and Note 13).

 

NOTE 9 - CONSTRUCTION-IN-PROGRESS

 

The construction projects in progress are to build facilities to expand production capacity in Lianyungang, Donggang, Rongcheng and Wujiang areas. Construction costs mainly represent construction expenditures and equipment costs not yet in service. In December 31, 2013, the Company started to construct a new chemical and fuel oil blending project in Lianyungang city after the Company obtained a land use right in October 2013. Total estimated contract price for this new project is approximately $73 million (or RMB 450 million) after the Company signed a supplemental contract with the contractor. The Company advanced $17 million (equivalent to RMB 100 million) to the contractor to start the project in December 2013, paid an additional $16.2 million (equivalent to RMB 100 million) to the contractor in March 2014 and paid an additional $34.8 million (equivalent to RMB 216.9 million) to the contractor in May 2014. As of June 30, 2014, the accumulated advances on this project approximated $68 million.

 

The Company’s construction-in-progress is as follows:

 

		June 30, 2014				December 31, 2013
Berth and berth improvements		$	693,725			$	698,812
Oil blending and chemical project at Lianyungang			68,012,333				16,418,320
Capitalized interest			1,651,236				664,030
Total		$	70,357,294			$	17,781,162

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 - INTANGIBLE ASSETS, NET

 

The Company’s intangible assets with finite lives are summarized as follows:

 

		June 30, 2014				December 31, 2013
Land use rights		$	13,271,350			$	13,368,652
Leasehold right			2,737,522				2,757,594
Licenses and permits			1,137,250				1,145,588
Software			76,272				38,897
Total			17,222,394				17,310,731
Less: accumulated amortization			(1,282,266	)			(1,021,416	)
Intangible assets, net		$	15,940,128			$	16,289,315

 

Land use rights with a net book value of $9,284,501 and $9,352,573 were pledged as collateral for certain loans and bank notes at June 30, 2014 and December 31, 2013, respectively (see Note 12 and Note 13).

 

Amortization expense for the three months ended June 30, 2014 and 2013 were $112,214 and $127,451, respectively. Amortization expense for the six months ended June 30, 2014 and 2013 were $204,826 and $253,656, respectively.

 

The estimated future amortization expense is as follows:

 

For the twelve months ending June 30,
2015		$	533,895
2016			528,614
2017			525,056
2018			525,056
2019			525,056
Thereafter			13,302,451
Total		$	15,940,128

 

NOTE 11- EQUITY INVESTMENT

  

In January 2013, the Company, together with two third-parties, Dalian Lianzon Marine Group (“Lianzon”) and Dalian Lianye Investment Consulting Co., Ltd. (“Lianye”), jointly formed a new entity, Dalian Haode Petroleum and Chemical Co., Ltd. (“Haode”), in which the Company invested RMB 8 million (approximately $1.30 million) for a 20% ownership interest in Haode. Haode engages in chemical product sales, marine fuel material purchases and trading, logistics and other consulting services in the PRC.

 

Total allocated income (loss) from the unconsolidated entity amounted to $5,140 and $(8,566) for the three months ended June 30, 2014 and 2013, respectively, and $11,397 and $16,350 for the six months ended June 30, 2014 and 2013, respectively, which are included in “Income (loss) from equity investment” in the unaudited condensed consolidated statements of operations and other comprehensive income (loss). As of June 30, 2014, the total assets and liabilities of the unconsolidated entity were approximately $6.6 million and $3.5 million, respectively.

 

Subsequently, on July 15, 2014, the Company transferred its 20% ownership interest in Dalian Haode to related party Dalian Dongfangzheng Co., ltd. (See Note 21- subsequent event).

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 – SHORT-TERM BANK BORROWINGS

 

The following is a summary short-term bank borrowings: 

 

				June 30, 2014				December 31, 2013
Bohai Bank:
Interest at 6.3%, payable on February 3, 2014		(1)		$	-			$	4,909,663
Fuxin Bank:
Interest at 6.5%, payable on March 26, 2014		(1)			-				8,182,770
Interest at 7.2%, payable on June 17, 2015		(2)			1,624,643				-
CITIC Bank:
Interest at 7.5%, payable on April 18, 2014		(3)			-				6,546,216
Interest at 7.5%, payable on September 24, 2014		(4)			8,123,213				8,182,770
Interest at 6.636%, payable on October 26, 2014		(5)			6,498,570				-
Guangfa Bank:
Interest at 7.5%, payable on February 6, 2015		(6)			7,798,284				-
Total				$	24,044,710			$	27,821,419

 

	(1)	The loans were fully repaid upon maturity in the first quarter of 2014.
	(2)	On June 17, 2014, the Company’s subsidiary, Dalian Xingyuan entered into a short-term bank loan agreement with Fuxin Bank to borrow RMB 10 million ( US $1,624,643) as a working capital for one year. The loans bear variable interest rates of 7.2% plus 20 basis points, adjustable on a quarterly basis. A third-party, Dalian Guotou Investment Guarantee Co., Ltd. signed a maximum guarantee agreement with the bank to guarantee the borrowing.  There was no additional collateral requirement for this loan.
	(3)	The Loan was fully repaid upon maturity on April 18, 2014.

 

	(4)	On September 25, 2013, the Company's subsidiary, Dalian Xingyuan entered into a short-term bank loan agreement with Citic Bank to borrow RMB 50 million ( US $ 8,123,213) as a working capital loan for approximately one year (from September 25, 2013 to September 24, 2014). The loan bears an interest rate of 7.5 %. There is no collateral requirement for this loan.
	(5)	On April 25, 2014, the Company’s subsidiary, Dalian Fusheng entered into a short-term bank loan agreement with CITIC bank to borrow RMB 40 million (US$6,498,570) as a working capital loan for six months (from April 25, 2014 to October 25, 2014). The loan bears a variable interest rate plus 18.5 basis points. The Company's subsidiaries Dalian Xingyuan and Xiangshan Nanlian and our major shareholder, Mr. An Fengbin separately signed a maximum guarantee agreement with the bank, to provide a maximum RMB 200 million guarantee for any bank borrowings that Dalian Fusheng borrows from CITIC bank during April 24, 2014 through April 24, 2016. There was no additional collateral requirement for this loan.

 

(6)

On February 7, 2014, the Company’s subsidiary, Dalian Xinguan entered into a short term bank loan agreement with Guangfa Bank to borrow RMB 48 million (US $7,798,284) as a working capital loan for one year (from February 7, 2014 to February 6, 2015). The loan bears a variable interest rate of 7.5%, plus 30 basis points on a quarterly basis. The Company is required to deposit 50% of the proceeds as collateral to secure this bank loan. In addition, the Company’s subsidiary, Dalian Fusheng and the Company’s major shareholder signed guarantee agreements with the bank to guarantee this loan.

 

NOTE 13 - BANK NOTE PAYABLE

 

The Company has various credit facilities with Citic Bank, Fuxin Bank, Guangfa Bank and Xingye Bank that provide for working capital in the form of bank acceptance notes. The terms of the notes are six months or one year, with an interest rate in the range of 3.6% to 8.5%. The Company is required to deposit 30% to 100% of restricted cash to guarantee the bank notes. As of June 30, 2014 and December 31, 2013, $53.7 million and $99.7 million of restricted cash were deposited in banks.

 

During January 2014 to June 2014, $141.7 million (RMB 870 million) of bank notes were borrowed from the various banks in total, and $190.3 million (RMB 1.17 billion) were repaid upon maturity.

 

In connection with these borrowings, the Company has pledged the following assets as collateral:

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

·

Fuel oil tanks;

 

·

Land use right of 46,142 square meters, oil storage tank and other fixed assets;

 

·

Land use right of 1,610,671 square meters;

 

In addition, two related parties, Panjing Fusheng Petrol Co., Ltd. and Donggang Xingyuan Fishery Wharf Gas Station pledged land use rights and fixed assets as additional collateral for these bank notes. The Company’s major shareholder and his wife Ms. Wang Jing and wife of the CEO Ms. Zhou Yanping have also pledged their personal assets and credits to guarantee these bank notes. Another related party, Dalian Dingfangzheng Co., Ltd. has also signed a loan guarantee agreement with the banks to guarantee these borrowings. The Company's subsidiaries, Dalian Xingyuan and Xiangshan Nanlian and our major shareholder Mr. An Fengbin also separately signed a maximum guarantee agreement with the bank, to provide maximum RMB 200 million guarantee against these borrowings.

 

A portion of these bank notes has been used by the Company’s subsidiary, Lianyungang Fusheng to make advances to the contractor to construct our new chemical and fuel oil blending project in Lianyungang city, and approximately $1.65 million (RMB 10.2 million) of interest has been capitalized as of June 30, 2014 (See Note 9).

 

NOTE 14 – ACQUISITION OF A RELATED PARTY

 

On May 19, 2014, the Company entered into a Share Transfer Transaction with shareholders of Qingdao Grand New Energy Co., Ltd. (“Qingdao Energy”) to acquire 100% ownership interest in Qingdao Energy for cash consideration of RMB 476,800 (US $77,338).

 

Qingdao Energy was an entity controlled by the Company’s major shareholder, Mr. An Fengbin, and is engaged in R&D, production, sale and service of air-driven products. Its products use compressed air as a driving force, which can be used in irrigation, petroleum extraction among other areas. Its primary line of business is Energy Performance Contracting.

 

The Share Transfer Transaction between the Company and Qingdao Energy qualified as a business combination between entities under common control and no gain or loss was recognized in the consolidated statements of net income (loss) and comprehensive income (loss). Qingdao Energy’s assets, liabilities and operating results have been consolidated in the unaudited condensed consolidated financial statements for the six months ended June 30, 2014, rather than from the beginning of the earliest period presented due to immateriality.  

 

On the acquisition date, Qingdao Energy’s total assets were approximately $1.7 million, accounting for only 0.7% of the Company’s consolidated total assets; and total liabilities were approximately $2.3 million, accounting for 1.2% of the Company’s consolidated total liabilities. The assets acquired consisted of cash and cash equivalents, advance to vendors, inventory, VAT input tax recoverable and property and equipment. The liabilities consisted of accounts payable, other accounts payable, related party loan payable and accrued expenses. There were no revenue reported since its inception and Qingdao Energy reported a net loss of $81,978 and $6,394 for the three months ended June 30, 2014 and 2013, respectively, and a net loss of $212,561 and $19,181for the six months ended June 30, 2014 and 2013, respectively.

 

NOTE 15 - RELATED PARTY TRANSACTIONS

 

During the normal course of the business, the Company, from time to time, temporarily borrows money from its principal shareholders or officers to finance its working capital as needed. The amounts are usually unsecured, non-interest bearing and due on demand.

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following summarizes the Company’s loans payable to related parties:

 

		June 30, 2014				December 31, 2013
Shanghai Xifa Petrochemical Co., Ltd. (1)		$	-			$	396,999
Wujiang Huayuan Petrochemical Co., Ltd. (1)			-				724,829
Donggang Xingyuan Shipyard Co., Ltd. (1)			-				369,329
Dallian Dongfangzheng  (2)			413,390				-
Chen Weiwen, legal representative of Xiangshan Nanlian			81,233				81,828
Zhou Yanping, wife of the CEO (3)			325,822				-
An Fengbin, major shareholder of the Company			55,067				22,609
Total		$	875,512			$	1,595,594

 

	(1)	Shanghai Xifa Petrochemical Co., Ltd., Wujiang Huayuan Petrochemical Co., Ltd. and Donggang Xingyuan Shipyard Co., Ltd. are entities controlled by the Company’s major shareholder. Loans from these related parties have been fully repaid during the second quarter of 2014.
	(2)	Dalian Dongfangzheng is an entity controlled by the Company’s major shareholder, Mr. An Fengbin.

 

(3)

Ms. Zhou Yanping, wife of the CEO, Mr. Wang Hao, has provided personal funds to the Company as working capital. In addition, she deposited personal cash of $4.9 million (equivalent to RMB 30 million) with Xingye Bank as restricted cash to guarantee certain bank notes that the Company borrowed from Xingye Bank.

 

In connection with the Company’s bank loans and bank notes borrowed from PRC Banks, the Company’s major shareholder, his wife and several other related parties controlled by the major shareholder provided loan guarantees for the Company’s bank borrowings. (See Note 12 and Note 13)

 

On May 14, 2014, a Share Transfer Agreement has been signed between Oriental Excel Enterprises Limited, a British Virgin Island company controlled by the Company’s major shareholder, Mr. An Fengbin and his wife Ms, Wang Jing, and Hao De International Limited, a Seychelles International Business Company controlled by the CEO, Mr. Wang Hao. Pursuant to the terms and conditions of this Agreement, Oriental Excel Enterprises Limited agreed to sell, assign, transfer and deliver 4,890,451 shares of the Company’s common stock it owns (representing 50.2% of the issued and outstanding common shares of the Company) to Hao De International Limited at cash consideration of $9,780,902. The purchase price shall be paid in four installments, of which the first 40% installment payment was to be paid upon the execution of the agreement; the second installment of 20% will be paid on May 5, 2015; the third installment payment of 20% will be paid on November 5, 2015 and the fourth installment payment of 20% will be paid on May 5, 2016. After this share transfer transaction, Mr. Wang Hao will become the largest shareholder of the Company.

 

Note 16– EQUITY

 

On June 7, 2013, the Company issued 250,000 shares to a third-party consultant for consulting services. The consulting service period is from June 8, 2013 to June 8, 2014. The fair value of this compensation is based on the closing stock price on the grant date. The total $425,000 stock compensation expense has been fully recognized for services provided during the year ended December 31, 2013.

 

On June 7, 2013, the Company also issued warrants to purchase 200,000 shares at an exercise price of $1.50 to this Consultant. These warrants vested on June 30, 2014 and are exercisable three years from date of issuance.

  

The fair value of the warrants was calculated using the following assumptions: volatility 137%, risk free interest rate at 0.52% and 0.66% on the grant date and June 30, 2013, respectively, and expected term of 3.5 years. The fair value of these warrants was $102,836 at the grant date, $290,687 on December 31, 2013 and $272,085 on June 30, 2014. The Company recognized a gain of $17,366 and $18,602 from the change in fair value of the warrants for the three and six months ended June 30, 2014, respectively. The Company recognized a gain of $10,150 and $10,150 from the change in fair value of the warrants for the three and six months ended June 30, 2013, respectively. The related amortization of share-based compensation expense was $17,139 and $8,570 for the three months ended June 30, 2014 and 2013, respectively. The related amortization of share-based compensation expense was $42,848 and $8,570 for the six months ended June 30, 2014 and 2013, respectively.

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

These warrants are included in diluted weighted average shares calculation for the three months ended June 30, 2014, but the impact of all potential dilutive securities outstanding was anti-dilutive due to the Company's net loss for the six months ended June 30, 2014.

 

Pursuant to the terms of the Company’s 2009 Equity Incentive Plan (the “2009 Plan”), on September 25, 2013, the Company’s Board of Directors approved and adopted the following changes to the executive and independent director compensation: (i) Independent director equity compensation – the Board granted to each independent director shares of the Company’s common stock in the amounts equivalent to each independent director’s annual commitments, i.e. Wen Jiang and Yudong Hou - $15,000, respectively, and Zhenyu Wu - $18,000, and (ii) Executive management equity compensation – the Board granted to An Fengbin, the Company’s former CEO, and Wang Hao, the Company’s former CFO and current CEO, shares of the Company’s common stock in the amounts equivalent to their respective annual base salaries, i.e. An Fengbin - $150,000, and Wang Hao - $75,000. The stock price on the grant date was $0.69 per share, which represents the average closing price of the Company’s common stock over the 30 day period preceding the grant date. All of these stock grants are to vest as follows: ½ of each such grant vesting on the date of the grant and the remaining ½ - 6 months from the grant date. $34,125 and $68,250 of stock compensation expense was recognized for services provided during the three and six months ended June 30, 2014, respectively.

 

NOTE 17 - RESTRICTED NET ASSETS

 

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s PRC subsidiary only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s subsidiary and VIE.

 

In accordance with the Regulations on Enterprises with Foreign Investment of China and their articles of association, a foreign invested enterprise established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A wholly-owned foreign invested enterprise is required to allocate at least 10 % of its annual after-tax profit to the general reserve until such reserve has reached 50 % of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign invested enterprises. These reserves can only be used for specific purposes and are not distributable as cash dividends. Fusheng were established as a wholly-owned foreign invested enterprise and therefore are subject to the above mandated restrictions on distributable profits.

 

Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide statutory common reserve at least 10% of its annual after-tax profit until such reserve has reached 50 % of its respective registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for discretionary surplus reserve, at the discretion of the board of directors, from the profits determined in accordance with the enterprise’s PRC statutory accounts. These reserves can only be used for specific purposes and are not distributable as cash dividends. Xingyuan and its subsidiaries were established as domestic invested enterprises and therefore are subject to the mandated restrictions on distributable profits.

 

As a result of these PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as a general reserve fund, the Company’s PRC subsidiary and VIE are restricted in their ability to transfer a portion of their net assets to the Company. The restricted amounts as determined pursuant to PRC statutory laws totaled approximately $3,933,000 as of June 30, 2014 and December 31, 2013.

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 18 - TAXES

 

(a) Corporate Income Taxes

 

The Company is subject to income taxes on an entity basis on income arising in or derived from the location in which each entity is domiciled.

 

Entity		Income Tax Jurisdiction
Andatee Marine Fuel Services Corp.		U.S.A
Goodwill Rich International		Hong Kong, PRC
Fusheng, Xingyuan and their subsidiaries		Mainland, PRC

 

United States

 

The parent Company Andatee China Marine Fuel Services Corp. was incorporated in the United States and has incurred net operating losses for U.S. federal income tax purposes as of June 30, 2014. Andatee had loss carry forwards of approximately $902,000 for U.S. income tax purposes available for offsetting against future taxable U.S. income, expiring in 2033. Management believes that the realization of the benefits from these losses is uncertain due to its history of continuing losses in the United States. Accordingly, a full valuation allowance has been provided against the gross deferred tax asset. The valuation allowance as of June 30, 2014 and December 31, 2013 was approximately $307,000.

   

Hong Kong, PRC

 

The Company’s wholly owned subsidiary Goodwill Rich was incorporated in Hong Kong and is subject to Hong Kong corporate income tax at a rate of 16.5 % on the estimated assessable profits arising from Hong Kong. Goodwill Rich has not earned any income that was derived in Hong Kong since inception and therefore was not subject to Hong Kong income tax. As of June 30, 2014, the estimated net operating loss carry forwards for Hong Kong income tax purposes amounted to approximately $4,260,000, which may be available to reduce future years’ taxable income. Management believes that the realization of the benefits arising from this loss appears to be uncertain due to the Company’s limited operating history and continuing losses for Hong Kong income tax purposes. Accordingly, the Company has provided a 100% valuation allowance at June 30, 2014 and December 31, 2013 against the gross deferred tax asset. The valuation allowance as of June 30, 2014 and December 31, 2013 was approximately $700,000 and $632,000, respectively.

 

Mainland, PRC

 

The Company’s wholly owned subsidiaries in China are governed by the Income Tax Law of the People’s Republic of China, which are currently subject to tax at a statutory rate of 25 % on net income reported after appropriated tax adjustments.

 

The following table reconciles the statutory rates to the Company’s effective tax rate for the periods indicated:

 

		June 30, 2014				June 30, 2013
U.S. Statutory rates			34.0	%			34.0	%
Foreign income not recognized in the U.S.			(34.0	)			(34.0	)
Hong Kong income tax			-				-
China Statutory income tax rate			25.0				25.0
Non-deductible expenses-permanent difference (1)			-				(46.5	)
Changes in valuation allowance			(62.3	)			(22.1	)
Effective tax rate			(37.3	)%			(43.6	)%

  

(1)

Non-deductible expenses primarily included legal, accounting and other consulting expenses of Hong Kong Goodwill Rich and PRC subsidiaries which are not expected to be deductible for income taxes in the future.

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The income tax provision (benefit) for the three and six months ended June 30, 2014 and 2013 is as follows:

 

		For the Three Months Ended June  30,								For the six Months Ended June 30,
		2014				2013				2014				2013
Current		$	21,820			$	52,668			$	143,559			$	674,904
Deferred			-				-				-				(205,650	)
Total		$	21,820			$	52,668			$	143,559			$	469,254

 

Deferred income taxes reflect the net effects of temporary difference between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes, and operating loss carry-forward. Some of the Company’s subsidiaries have loss carryovers that can only be used to offset their own future taxable income. The loss carry forward for those subsidiaries amounted to approximately $4,642,000 as of June 30, 2014 and expire through 2018. The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of the deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized.

 

The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience, expectation of future income, the carry forward periods available for tax reporting purposes, and other relevant factors.

 

For the three and six months ended June 30, 2014, management believes that the realization of the benefit arising from the losses of certain PRC subsidiaries appears to be uncertain and may not be realizable in the near future. Therefore, a full valuation allowance has been provided.

 

The components of deferred tax assets consist of the following:

 

		June 30, 2014				December 31, 2013
Net operating loss of subsidiaries		$	1,193,001			$	1,467,611
Temporary differences			(65,996	)			(571,972	)
Effect of foreign currency exchange rate			2,844				(11,589	)
Total			1,129,849				884,050
Less: valuation allowance			(1,129,849	)			(884,050	)
Deferred tax assets		$	-			$	-

 

The net change in the valuation allowance was a decrease of approximately $594,000 and an increase of approximately $246,000 for the three and six months ended June 30, 2014. As of June 30, 2014, the tax years ended December 31, 2008 through December 31, 2013 for the Company’s PRC entities remain open for statutory examination by PRC tax authorities.

 

(b) Value added tax

 

The Company is subject to a value added tax (“VAT”) for selling merchandise. The applicable VAT rate is 17 % for products sold in the PRC. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of the PRC, the Company pays VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued.

 

In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty based on the amount of the taxes which are determined to be late or deficient, and will be expensed in the period if and when a determination is made by the tax authorities.

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(c) Taxes Payable

 

Taxes Payable consisted of the followings:

 

		June 30, 2014				December 31, 2013
Income Tax Payable		$	728,205			$	1,024,169
VAT Payable			3,092,587				4,243,761
Other Tax Payable			820,004				986,127
Total		$	4,640,796			$	6,254,057

  

NOTE 19 - COMMITMENT AND CONTINGENCIES

 

Lease Obligation

 

The Company has entered into several agreements for the lease of storage facilities, offices premises and berth use rights.

 

The leases are for a period of one to ten years, and may be extended at management’s option. Management believes that they will remain at these facilities for the next ten years and have estimated that the commitments for minimum lease payments under these operating leases are approximately $2.2 million.

 

The Company’s commitment for minimum lease payments under these operating leases is as follows:

 

For the twelve months ending June 30,
2015		$	303,761
2016			274,443
2017			274,443
2018			274,443
2019			274,443
Thereafter			823,329
Total		$	2,224,862

 

Supply Agreements

 

The Company executed a 10-year agreement expiring in August 2020 to supply marine fuel to Haiyu Fishery Limited Corporation ("Haiyu") and Jinghai Group ("Jinghai"). Both Haiyu and Jinghai are located in Rongcheng City, Shandong province.

 

Under the terms of the agreement with Jinghai, the Company is to supply Jinghai with up to 20,000 tons of marine fuel per year at local market wholesale prices within that particular geographic area. The agreement also provides Jinghai with a rebate equivalent to an annual payment of RMB 0.3 million (approximately USD 0.05 million) for ten years if annual sales of 20,000 tons of fuels are achieved. For the three and six months ended June 30, 2014 and 2013, Jinhai did not achieve the sales target and accordingly no rebate was provided to Jinhai.

 

NOTE 20 - CONCENTRATION OF RISKS

 

All of the Group’s sales and a majority of its expense transactions are denominated in RMB and a significant portion of the Group’s assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Group in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.

 

As of June 30, 2014, all of the Company’s cash was on deposit at financial institutions in the PRC where there currently is no rule or regulation requiring such financial institutions to maintain insurance to cover bank deposits in the event of bank failure.

 

For the three and six months ended June 30, 2014, one customer accounted for 11.7% and 11.1% of the Company’s total revenue, respectively. For the three and six months ended June 30, 2013, two customers accounted for 28.2% and one customer accounted for 12.8% of the Company’s total revenue, respectively. As of June 30, 2014, three customers collectively accounted for approximately 64.5% of total accounts receivable. As of June 30, 2013, four customers collectively accounted for approximately 47.0% of total accounts receivable. 

 

 

ANDATEE CHINA MARINE FUEL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the three and six months ended June 30, 2014, four vendors accounted for 53.8% and 62.3% of the Company’s total purchases, respectively. For the three and six months ended June 30, 2013, three vendors accounted for 43.5% and 38.2% of the Company’s total purchases, respectively. As of June 30, 2014, three vendors accounted for 85.5% of total advances to suppliers. As of June 30, 2013, two vendors accounted for approximately 71.7% of total advances to suppliers.

 

 NOTE 21 - SUBSEQUENT EVENTS

 

On July 15, 2014, Dalian Fusheng entered into Share Transfer Agreement with a related party, Dalian Dongfangzheng (an entity controlled by the Company’s major shareholder, Mr. An Fengbin) and agreed to sell its 20% equity investment and ownership interest in Dalian Haode to Dalian Dongfangzheng at RMB 8 million (or $1.3 million).  

   

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q (including the section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, as well as information relating to Andatee China Marine Fuel Services Corporation that is based on management’s exercise of business judgment and assumptions made by and information currently available to management. Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. When used in this document and other documents, releases and reports released by us, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “the facts suggest” and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Many factors could cause actual results to differ materially from our forward looking statements. Other unknown, unidentified or unpredictable factors could materially and adversely impact our future results.

 

Except where the context otherwise requires and for purposes of this Quarterly Report:

 

• the terms “we,” “us,” “our company,” “our” refer to Andatee China Marine Fuel Services Corporation, a Delaware corporation, its subsidiaries Goodwill Rich International Limited and Dalian Fusheng Consulting Co. Ltd., its subsidiaries, Dalian Xifa Petrochemical Company, Ltd., Shandong Xifa Prochemical Company, Ltd., Shanghai Fusheng Petrochemical Company, Donggang Xingyuan Marine Bunker Company Ltd., Rongcheng Xinfa Petroleum Company Ltd., Rongcheng Mashan Xingyuan Marine Bunker Co. Ltd., Rongcheng Zhuoda Trading Co., Ltd., Suzhou Fusheng Petrol Co. Ltd., Wujiang Xinlang Petrol Co., Ltd, Lianyungang Fusheng Petrochemical Company, Ltd., and its previous variable interest entity (VIE), Dalian Xingyuan Marine Bunker Co. Ltd., through which entity we conducted all of our business operations and since we have transferred most of them under the direct control of Dalian Fusheng Petrol Co. Ltd. , and only two subsidiaries of the VIE, which is Xiangshan Yongshi Nanlian Petrol Company Ltd.; and Lianyungang Xingyuan Marine Bunker Co., Ltd.;

• the term “Andatee” refers to Andatee China Marine Fuel Services Corporation, the parent company;

• the term Goodwill’’ refers to Goodwill Rich International Limited, a subsidiary of Andatee, which for financial reporting purposes is the predecessor to Andatee; and

• “China” and “PRC” refer to the People’s Republic of China, and for the purpose of this Annual Report only, excluding Taiwan, Hong Kong and Macau.

  

Business and Operations Overview

 

Andatee China Marine Fuel Services Corporation is a leading marine fuel supplier along the coast of east China.

 

Our products include cargo vessel fuel classified as CST180 and CST120, fishing boat fuel classified as #1, #2, #3 and #4, which are close substitutes for diesel used throughout the region’s fishing industry. We produce, store, distribute and trade the blended marine fuel oil for cargo and fishing vessels.

 

We carry out all of our business through our Hong Kong subsidiary, Goodwill, its wholly-owned Chinese subsidiary, Fusheng, and Fusheng’s variable interest entity (VIE), Xingyuan, and Xingyuan’s subsidiaries (Xingyuan and its subsidiaries being collectively referred to as the VIE entities). A VIE is an entity under ASC 810, “Consolidation”, where equity investors do not have the characteristics of a controlling financial interest (see Note 1 of Notes to Consolidated Financial Statements). Through Xingyuan, we are a leading marine fuel supplier along the coast of east China. Our products include cargo vessel fuel classified as CST180 and CST120, fishing boat fuel classified as#1, #2, #3 and #4, which are close substitutes for diesel used throughout the region’s fishing industry. We produce, store, distribute and trade the blended marine fuel oil for cargo and fishing vessels. Backed by core facilities, including storage tanks, tankers and berths, our sales network covers major depots along the towns of Dandong, Shidao, Shanghai and Shipu, which are famous for their fishing tradition and industry.

 

  

Andatee China Marine Fuel Services Corporation was incorporated in July 2009 under the laws of the State of Delaware. We were organized as a holding company to acquire Goodwill Rich, a company incorporated in Hong Kong, and its subsidiary in connection with the initial public offering of the Company on the NASDAQ Capital Market, which was completed in January 2010. Goodwill Rich was incorporated on October 28, 2008.

 

Andatee became the owner of 100% of the outstanding common stock of Goodwill Rich as the result of a share exchange arrangement entered in August 2009 and completed on October 16, 2009, in which 6,000,000 common share of Andatee were exchanged for all of the outstanding shares of Goodwill Rich. The stockholders of Andatee and the stockholders of Goodwill Rich were the same, and therefore the August 2009 share exchange was accounting for as a recapitalization of Goodwill Rich. As a result, Goodwill is deemed to be the predecessor of Andatee for financial reporting purposes, and the financial statements of Andatee for the periods prior to the share exchange as presented here are the historical financial statements of Goodwill Rich for those periods, after being adjusted to retroactively reflect the effects of the recapitalization to 6,000,000 issued and outstanding shares.

 

In March 2009, Goodwill Rich established a subsidiary company in Dalian, PRC named Dalian Fusheng Consulting Company (“Fusheng”). Fusheng has several 100% controlled subsidiaries including Dalian Xifa Petrochemical Company, Ltd. (“Dalian Xifa”), Shandong Xifa Prochemical Company, Ltd. (“Shandong Xifa”), Shenzhen Shengfu Petrochemical Company, Ltd. (“Shenzhen Shengfu”). In July 2010, Fusheng acquired a 52% ownership of Hailong Petrochemical Company (“Hailong”). In December 2011, Fusheng acquired a 61% equity interest in Suzhou Fusheng Petrochemical Company (“Suzhou Fusheng”) for RMB 12.2 million (approximately $1.93 million). Suzhou Fusheng owns storage tanks and land use rights to develop a riverside fuel oil pump station in Suzhou Wujiang City, Jiangsu Province. In December 2011, Fusheng acquired a 100% equity interest in Rongcheng Zhuoda Trading Co (“Zhuoda”) for RMB 13 million (approximately US$ 2 million). Zhuoda owns storage tanks with a capacity of 13,000 cubic meters in Rongcheng City, Shandong Province. In December 2011, Fusheng’s subsidiary Dalian Xifa Petrol Company acquired a 90% equity interest in Wujiang Xinlang Petrochemical Company (“Xinglang”) for RMB 2.36 million (approximately $383,000). Xinglang owns land use rights to develop a riverside fuel oil pump station in Wujiang City, Jiangsu Province. On April 27, 2013, Dalian Fusheng formed a new subsidiary Lianyungang Fusheng Petrochemical Co., Ltd. (“Lianyungang Fusheng”) in the city of Lianyungang under the laws of the PRC with initial registered capital of $4.69 million (RMB 29 million). Based upon the Board Resolutions, Dalian Fusheng increased the registered and paid in capital of Lianyungang Fusheng to RMB 53.68 million on November 1, 2013 and then increased to RMB 153.68 million on December 27, 2013. On January 9, 2014, the Company’s new subsidiary, Xinniu Development Co., Ltd. invested additional RMB 100 million (about $16.2 million) to increase the registered and paid in capital of Lianyungang Fusheng to RMB 253.68 million.

 

Xingyuan was established in September 2001 with an initial registered capital of RMB 30.01 million (approximate to $4.9 million). Its registered capital was increased to RMB 60.05 million (or $9.7 million) in 2008. Xingyuan originally held 100% ownership of Donggang Xingyuan Marine Fuel Company (“Donggang Xingyuan”), a company incorporated in Dalian, PRC, in April, 2008. In addition, in December 2008, Xingyuan acquired 90% ownership of Rongcheng Xinfa Petroleum Company (“Xinfa”) and 63% ownership of Xiangshan Yongshi Nanlian Petroleum Company (“Nanlian”). During 2011, the Company entered into a corporate reorganization, in which Xingyuan transferred its 90% ownership in Xinfa and 52% ownership in Mashan to Dalian Xifa Petrol Company, and transferred its 100% ownership in Donggang Xingyuan to Fusheng. The reorganization was accounted for at book value, as they were transactions between entities under common control. On April 27, 2013, Dalian Xingyuan formed a new subsidiary Lianyungang Xingyuan Marine Bunker Co., Ltd. (“Lianyungang Xingyuan”) in the city of Lianyungang under the laws of the PRC with registered capital of $3.4 million (RMB 21,000,000). During the third quarter of 2013, Dalian Xingyuan acquired 37% capital shares from Xiangshan Nanlian’s minority shareholder, Mr. Chen Wenwei for a cash consideration of RMB 11.2 million. Xiangshan Nanlian completed the registration change with local State Administration of Industry and Commerce (the “SAIC”) on July 29, 2013 to reflect the share structure change. After the acquisition, Xiangshan Nanlian became the 100% controlled subsidiary of Dalian Xingyuan. The acquisition was treated as a related party transaction because formal minority shareholder Mr. Chen Weiwen still serves as the legal representative of Xiangshan Nanlian after the acquisition.

 

  

On December 31, 2013, Dalian Fusheng, Dalian Xingyuan and Dalian Xifa jointly formed a new subsidiary Xinniu Development Co., Ltd. (“Xinniu”) in the city of Dalian under the laws of the PRC with registered capital of $32.5 million (RMB 200 million), among which $16.4 million has been paid to local State Administration for Industry & Commerce (“SAIC”) for registration purposes as of December 31, 2013.

 

  On May 19, 2014, Dalian Xifa completed its acquisition of Qingdao Grand New Energy Co., Ltd. (“Qingdao Energy”) through a related party share transfer transaction. Qingdao Energy is engaged in R&D, production, sale and service of the air-driven products. Its products use compressed air as driving force, which can be used in irrigation, petroleum extraction, among other areas. Its primary line of business is Energy Performance Contracting.

 

During the quarter ended June 30, 2014, Dalian Fusheng acquired the remaining 39% capital shares from Suzhou Fusheng’s minority shareholders, Mr. Zhong bin and Wujiang Coal and Petroleum Co., Ltd. for  cash consideration of RMB 11.7 million.  Suzhou Fusheng completed the registration change with the local SAIC on May 23, 2014 to reflect the share structure change.  After the acquisition, Suzhou Fusheng became a wholly owned subsidiary of the Company.

  

On March 26, 2009, Fusheng, Xingyuan and the stockholders of Xingyuan entered into a series of agreements (the Consulting Services Agreement, the Operating Agreement, the Equity Pledge Agreement, the Option Agreement and the Proxy and Voting Agreement). Under these agreements Goodwill Rich obtained the ability to direct the operations of Xingyuan and its subsidiaries and to obtain the economic benefit of their operations. Therefore, management determined that Xingyuan became a variable interest entity (“VIE”) under the provisions of Accounting Standards Codification (“ASC”) Topic 810 and the Company was determined to be the primary beneficiary of Xingyuan and its subsidiaries. Accordingly, the Company has consolidated the assets, liabilities, results of operations and cash flows of Xingyuan and its subsidiaries its financial statements. The agreements between the Goodwill Rich and Xingyuan were entered into to facilitate raising capital for the operations of Xingyuan through an offering of the Company’s common stock on the Nasdaq Capital Market, and Goodwill Rich paid no consideration to Xingyuan or its stockholders for entering into the agreements under which Xingyuan became a VIE, provided, however, that Mr. An Fengbin, the principle stockholder of Xingyuan became the chairman and CEO of the Company, and Mr. An Fengbin and the other stockholders of Xingyuan have certain rights or options to acquire the 6,000,000 shares of the Company’s common stock issued in the share exchange between the Company and Goodwill Rich at later dates when permitted by PRC laws and regulations.

 

Goodwill Rich and the stockholders of Xingyuan had a series of separate agreements under which Goodwill Rich and Xingyuan were deemed, until March 2009, to be under the common control of the stockholders of Xingyuan. Those separate agreements provided that the majority stockholder of Goodwill Rich appointed Mr. An Fengbin to (i) act as a director of Xingyuan, Xingyuan’s majority stockholder, and Fusheng, (ii) act for the majority stockholder of Goodwill Rich at any meetings of the directors, managers, financial controllers or other senior management of Xingyuan, Xingyuan’s majority stockholder, and Fusheng, (iii) exercise all voting and dispositive rights over the common stock of Xingyuan, Xingyuan’s majority stockholder, and Fusheng. The agreements further provided that the majority stockholder of Xingyuan would not appoint any additional directors to the boards of any of these entities without Mr. An Fengbin’s approval. As a result, Mr. An Fengbin was deemed to control Goodwill Rich and Fusheng, and those companies and Xingyuan were deemed to be under common control.

 

The Company, its subsidiaries, its VIE and its VIE’s subsidiaries (collectively the “Group”) are currently principally engaged in the production, storage, distribution and trading of blended marine fuel oil for cargo and fishing vessels in the PRC.

 

 

Business Development and Outlook

 

We have taken several steps to increase investment in facilities and product line expansion in order to provide our customers with easier access to our products and services and to build a delivery network closer to target market. These steps include acquiring additional local companies and facilities, and development of new products, all aimed at meeting customer demands in various markets. Historically, we have funded these activities from our working capital.

 

We continue to ramp up expansion of our distribution network by expanding organically through the opening of new sales and marketing branches in new port locations, building new facilities improving our existing facilities, and signing sole supply agreements with long-term supply partners.

 

Furthermore, we are setting up market developing offices in large cities, such as Shanghai, Shenzhen, etc. to recruit capable local hands in a bid to establish effective network of information for providing solid foundations to pursue our acquisition-driven growth strategy in neighboring areas around the cities.

  

Facility Expansion

 

In April 2011, we commenced the construction of Tengda wharf and storage tanks located in Rongcheng City, Shandong Province. The Tengda projects will expand the existing wharf and storage tanks. The capital expenditure for expanding the wharf and tank storage is estimated to be RMB 46 million (US$7.47 million). The construction of Tengda wharf has been completed in 2013 after it passed the inspection conducted by local the government agencies.

 

In July 2011, we commenced the constructions of new blending facilities in Xinfa in Rongcheng City, Shandong province, which is designed to improve our production capabilities in blending with 20,000 cm tanks on site. The capital expenditure is estimated to be RMB 25 million (US$ 4.06 million). The construction of the blending facilities in Xinfa has also been completed in 2013 after it passed the inspection conducted by local the government agencies.

 

In September, 2011, our subsidiary Suzhou Fusheng entered into a 10 year oil storage tank lease agreement with third-party Wujiang Coal & Oil Company Limited, to lease the use right for 14 oil tanks with total volume of 16,000 cubic meters, with annual lease price of RMB 1.685 million (or total lease price of RMB 16.85 million for 10 years).

 

On January 7, 2013, our subsidiary, Lianyungang Fusheng entered into a cooperative agreement with local government Jiangsu Guanyun County Lingang Industrial Park Management Committee, and agreed to invest about RMB 2 Billion (about USD $324.6 million) in Lingang Industrial Park to start a chemical material manufacturing project. On October 18, 2013, we obtained a Certificate of Land Use Right for the first batch of land totaling 1.6 million square meters at a cost of RMB 53.3 million. In December 2013, we have advanced approximately RMB 100 million to the contractor to start the chemical and fuel oil blending project, in March 2014, we advanced an additional RMB 100 million and in May 2014, we advanced additional RMB 216.9 million for the CIP project, which is expected to be completed by early 2015.

 

Facility and Business Acquisitions

 

We continue to strategically identify, research, and where appropriate, acquiring entities with desired facilities in various areas that fit into Andatee’s strategic growth plans.

 

In May 2010, we acquired a 52% equity interest in Mashan Xingyuan Marine Fuel Company (“Mashan”). In July 2010, we acquired a 52% ownership of Hailong Petrochemical Company (“Hailong”).

 

In December 2011, we acquired a 90% equity interest in Wujiang Xinlang Petrochemical Company (“Xinglang”) for RMB 2.36 million (approximately US$ 370,000). Xinglang owns land use rights to develop a riverside fuel oil pump station in Wujiang City, Jiangsu Province.

 

 

In December 2011, we acquired a 61% equity interest in Suzhou Fusheng Petrochemical Company (“Suzhou Fusheng”) for RMB 12.2 million (approximately $1.93 million). Suzhou Fusheng owns storage tanks and land use rights to develop a riverside fuel oil pump station in Suzhou Wujiang City, Jiangsu Province. During the quarter ended June 30, 2014, Dalian Fusheng acquired the remaining 39% capital shares from Suzhou Fusheng’s minority shareholder, Mr. Zhong bin and Wujiang Coal and Petroleum Co., Ltd. for cash consideration of RMB 11.7 million. After this acquisition, Suzhou Fusheng became our 100% controlled subsidiary.

 

In December 2011, we acquired a 100% equity interest in Rongcheng Zhuoda Trading Co (“Zhuoda”) for RMB 13 million (approximately US$ 2 million). Zhuoda owns storage tanks with a capacity of 13,000 cubic meters in Rongcheng City, Shandong Province.

 

Shanghai Fusheng was incorporated by Dalian Xifa on April 6, 2012 with original paid in capital of RMB 1 million(approximately US$ 0.16 million), on July 11, 2012, Dalian Xifa increased the paid in capital in Shanghai Fusheng by RMB 14 million (approximately US$ 2.27 million). As a result, the final paid in capital of Shanghai Fusheng is RMB 15 million (approximately US$ 2.43 million).

 

 On April 27, 2013, Dalian Fusheng formed a new subsidiary Lianyungang Fusheng Petrochemical Co., Ltd. (“Lianyungang Fusheng”) in the city of Lianyungang under the laws of the PRC with initial registered capital of $4.70 million (RMB 29,000,000). Based upon the Board Resolutions, Dalian Fusheng increased the registered and paid in capital of Lianyungang Fusheng to RMB 53.68 million on November 1, 2013 and then increased to RMB 153.68 million on December 27, 2013. On January 9, 2014, the Company’s new subsidiary, Xinniu Development Co., Ltd. invested additional RMB 100 million (about $16.2 million) to increase the registered and paid in capital of Lianyungang Fusheng to RMB 253.68 million.

 

On April 27, 2013, Dalian Xingyuan formed a new subsidiary Lianyungang Xingyuan Marine Bunker Co., Ltd. (“Lianyungang Xingyuan”) in the city of Lianyungang under the laws of the PRC with registered capital of $3.4 million (RMB 21,000,000). During the third quarter of 2013, Dalian Xingyuan acquired 37% capital shares from Xiangshan Nanlian’s minority shareholder, Mr. Chen Wenwei for cash consideration of RMB 11.2 million. Xiangshan Nanlian completed the registration change with local State Administration of Industry and Commerce (the “SAIC”) on July 29, 2013 to reflect the share structure change. After the acquisition, Xiangshan Nanlian became the 100% controlled subsidiary of Dalian Xingyuan. The acquisition was treated as a related party transaction because a former minority shareholder, Mr. Chen Weiwen still serves as the legal representative of Xiangshan Nanlian after the acquisition.

 

On December 31, 2013, Dalian Fusheng, Dalian Xingyuan and Dalian Xifa jointly formed a new subsidiary Xinniu Development Co., Ltd. (“Xinniu”) in the city of Dalian under the laws of the PRC with registered capital of $32.5 million (RMB 200 million), among which $16.4 million has been paid to local State Administration for Industry & Commerce (“SAIC”) for registration purposes as of December 31, 2013. Subsequently, on January 22, 2014, Xinniu Development completed its registration and obtained the business license from local SAIC.

 

On May 19, 2014, Dalian Xifa completed its acquisition of Qingdao Grand New Energy Co., Ltd. (“Qingdao Energy”) through a related party share transfer transaction. Qingdao Energy is engaged in R&D, production, sale and service of the air-driven products. Its products use compressed air as driving force, which can be used in irrigation, petroleum extraction, among other areas. Its primary line of business is Energy Performance Contracting.

 

The acquisitions are consistent with Andatee’s strategy of expanding its geographic base and increasing market share along China’s rivers and coastal line.

 

Supply Agreements

 

We have established strong ties with our upstream suppliers. Our top 5 raw material suppliers are either state-owned enterprises or supported by state-owned enterprises, from which we received in excess of 54% of our total raw supplies purchases in six months ended June 30, 2013 and in excess of 67% of our total raw materials purchased in six months ended June 30, 2014. We also benefit from these relationships by being able to lease advanced facilities from our suppliers, which reduces our transportation costs and time and expedites deliveries of raw materials and, thus, improves customer service.

 

  

In September 2010, the Company executed 10-year agreements to supply marine fuel to Haiyu Fishery Limited Corporation (“Haiyu”) and Jinghai Group (“Jinghai”). Both Haiyu and Jinghai are located in Rongcheng City, Shandong province. Under the terms of the agreement with Jinghai, the Company is to supply Jinghai with up to 20,000 tons of marine fuel per year at local market wholesale prices within that particular geographic area. The agreement also provides Jinghai with a rebate equivalent to an annual payment of RMB 0.3 million (approximately USD 0.05 million) for ten years if annual sales of 20,000 tons of fuels are achieved. For the three and six ended June 30, 2014 and 2013, Jinhai did not achieve the sales target and accordingly no rebate was provided to Jinhai.

 

Operational Initiatives in 2014

 

In the first six months of 2014, we continue to undertake the following steps designed to reduce the overall production and transportation costs:

•

built and/or acquired other distributing facilities to increase our profit margin and sales, enhance our brand and minimize the adverse impact of oil price volatility

•

established regional purchase center to timely collect all information for sales and purchase analysis, to process order making and logistics planning. This allows us to negotiate favorable pricing and volume discounts and maintain an appropriate sale levels

•

worked closely with the managements of the acquired companies to obtain an in-depth knowledge of local markets and developed a list of suppliers to reduce the purchase cost of certain raw materials.

•

relocated our production and storage centers closer to our end users who provide us more opportunity to develop an efficient and flexible manufacturing and operational infrastructure and enjoy savings on transportation costs.

 

 In 2014 and beyond, our overall strategy will be to (i) increase our share of retail sales since such sales had shown to be less price-sensitive than our sales to the distributors, (ii) acquire our own retail facilities to reduce the risk of opportunistic negotiations from our retail customers during periods of volatile oil prices, (iii) build retail points in strategic locations (often close to other, recently acquired locations) to capture a majority of active local markets and (iv) add more products to our current product line to further satisfy customers’ diversifying demands .

 

We believe that maintaining our retail sales and distribution channels will lead to stable gross margins which can help offset the pressure imposed on our profit margin by crude oil price downturn. We believe that higher retail sales and closer ties with our customers as well as wider distribution network are at the core of our strength and business viability going forward.

 

We intend to (i) control more facilities closer to end markets, through business acquisitions, partner cooperation, building local platform for our products and added-value services, which would enhance the brand awareness of the “Xingyuan” brand and (ii) expand our product line and upgrade our production facilities to explore the markets opportunities and increase our share in retail market.

 

Principal Factors Affecting our Financial Performance

 

We believe that the following factors will continue to affect our financial performance:

 

•

Increasing demand for blended marine fuel — The increasing demand for blended marine fuel has a positive impact on our financial position. The strong growth in the blended marine fuel industry has been driven by several factors, including, among others, steady population growth in the PRC, improvements in the living standards, national energy conservation efforts.

 

•

Expansion of our sources of supply, production capacity and sales network — To meet the increasing demand for our products, we need to expand our sources of supply and production capacity. We plan to make capital improvements in our existing production facilities, which would improve both their efficiency and capacity. In the short-run, we intend to increase our investment in our reliable supply network, personnel training, information technology applications and logistic system upgrades.

 

 

•

Fluctuations in Crude Oil Price — We use oil refinery by-products as raw materials for our production. The recent increase in oil prices had a direct impact on the price we pay for these products. However, we mitigated this in the short-term by increasing the price of our products and passing the entirety of the increase to our customers.

 

Results of operations- Comparison of the three and six months ended June 30, 2014 and 2013

 

Revenue

 

For three months ended June 30, 2014, our revenue increased by $99.8 million, or 131.7%, from $75.8 million in three months ended June 30, 2013 to $175.5 million in 2014.

 

For the six months ended June 30, 2014, our revenue increased by $88 million or 68.1%, from $129.4 million in six months ended June 30, 2013 to $217.5 million in 2014.

 

The increase in our revenues was mainly due to increased sales volume. Our overall sales volume increase by 148,598 tons, or 177.1%, from 83,896 tons for the second quarter ended June 30, 2013 to 232,494 tons for the second quarter ended June 30, 2014. For the six months ended June 30, 2014, our overall sales volume increased by 129,793 tons, or 82.7%, from 156,907 tons for the six months ended June 30, 2013 to 286,700 tons for the six months ended June 30, 2014.

 

The increase in revenue was affected by the following factors:

 

·

The increase in our sales volume was primarily driven by increased market demand for our  #1 and #4 blended fuel oil which has a relatively competitive market price targeting a broad range of fishing boat and cargo vessel customers. Among our total sales volume in the second quarter of 2014, approximately 23.1% was from sales of our #1 fuel oil and approximately 64.7% was from sales of our #4 fuel oil. Among our total sales volume for the six months ended June 30, 2014, approximately 23.4% was from sales of our #1 fuel oil and approximately 59.6% was from sales of our #4 fuel oil. The increase in sales volume was largely affected by our focus on massive sales of fuel oils to several large wholesalers with competitive price offerings as discussed below.

 

·

The increase in our revenue was affected by changes in our selling price on certain key products. When comparing the second quarter ended June 30, 2014 to the same period of 2013, the average selling price of our best-seller, #4 fuel oil decreased about 3.5%, and the average selling price for our #1 fuel oil decreased about 26.2%.   When comparing the six months ended June 30, 2014 to the same period of 2013, the average selling price of our best-seller, #4 fuel oil decreased about 6.6%, and the average selling price for #1 fuel oil decreased about 30.6%.  The decrease in selling prices for these products positively stimulated customer’s purchase demand and led to the increase in our sales volume.

 

·

Also, we shifted our strategy from retail sales of  fuel oil to wholesale sales of fuel oil to large wholesalers located at extended geographic markets, such as in Shanghai and Zhejiang Province. Our wholesales business also helped to increase the sales volume.

 

·

In addition, certain other factors (such as the general slow-down of the Chinese economy, seasonality impact on the fishing industry, as well as the global crude oil price fluctuation, etc.) also negatively impacted our sales trend.

 

For the three months ended June 30, 2014, #1 marine fuel represented 23.1% of our sales, #2 marine fuel represented 0.3% of our sales, #3 marine fuel represented 10.1% of our sales, #4 marine fuel represented 61.9% of our sales, 180CST represented 1.8% of our sales and 120CST represented 2.8% of our sales.

 

For the three months ended June 30, 2013, #1 marine fuel represented 4.9% of our sales, #2 marine fuel represented 6.7% of our sales, #3 marine fuel represented 4.3% of our sales, #4 marine fuel represented 64.7% of our sales, 180CST represented 19.4% of our sales and no sales reported on 120CST.

 

  

For the six months ended June 30, 2014, #1 marine fuel represented 23.4% of our sales, #2 marine fuel represented 1.9% of our sales, #3 marine fuel represented 9.3% of our sales, #4 marine fuel represented 59.6% of our sales, 180CST represented 2.6% of our sales and 120CST represented 3.3% of our sales.

 

 For six months ended June 30, 2013, #1 marine fuel represented 8.8% of our sales, #2 marine fuel represented 8.7% of our sales, #3 marine fuel represented 7.7% of our sales, #4 marine fuel represented 62.1% of our sales, 180CST represented 11.6% of our sales and 120CST represented 0.9% of our sales.

 

The revenues we report are net of value-added taxes, or VAT, levied on our products. Currently, our products, all of which were sold in China, are subject to a VAT at a rate of 17% of the gross sales price or at a rate approved by the Chinese government. Pursuant to the Provisional Regulation of China on Value Added Tax and its implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of processing, repairs and replacement services and the importation of goods in China are generally required to pay the VAT.

 

Cost of Revenue

 

Our cost of revenue consists primarily of direct costs to purchase and produce our products, including raw material costs, salaries and related manufacturing personnel expenses, transportation costs, and repair and maintenance costs.

 

Our cost of revenues increased by $94.6 million, or 131.7%, from $71.8 million for the second quarter ended June 30, 2013 to $166.4 million for the second quarter ended June 30, 2014, primarily due to increased sales volume from 83,896 tons for the second quarter ended June 30, 2013 to 232,494 tons for the second quarter ended June 30, 2014.

 

For the six months period, our cost of revenues increased by $83.5 million, or 68.4%, from $121.9 million for the six months ended June 30, 2013 to $205.5 million for the six months ended June 30, 2013 due to increased sales volume from 156,907 tons for the six months ended June 30, 2013 to 286,700 tons for the six months ended June 30, 2014.

 

The increase in our cost of revenue was primarily due to the following reasons:

 

•

Cost of revenue increased due to increased sales volume as discussed above. As more quantity was sold, more costs have been allocated to the volume of products been sold.

 

•

The Company’s weighted inventory costs was largely affected by global oil price fluctuation (the global crude oil trading prices increased from $98 per barrel in August 2013 to about $102 in late December 2013 and then slightly dropped to $99 per barrel in March 2014 and then slightly increased to $104 per barrel. Due to the crude oil price fluctuation, the Company’s raw material costs and production costs also fluctuated), because the Company purchases the oil and fuel from upstream suppliers for blend and re-sale, its cost of sales was largely determined by the purchase costs incurred and then allocated to the products sold.

 

•

The average cost per unit decreased from $856 per ton in second quarter ended June 30, 2013 to $716 per ton in second quarter ended June 30, 2014. For the six months ended June 30, 2014, our average unit cost per ton was $717  as compared to $777 for the same period of 2013. The decrease in our average unit cost was a result of our efforts to import fuel oils from overseas markets since the second half of 2013, which enabled the Company to avoid incurring higher purchase costs from domestic suppliers only. The overall increase in cost of revenue was primarily affected by the increased sales volume as discussed above and not cost per unit.

 

 

Gross Margins

 

Our gross profit increased by $5.2 million, or 131.9%, to $9.1 million for the quarter ended June 30, 2014 as compared to $3.9 million in the quarter ended June 30, 2013. As a percentage of revenues, our gross profit margin was 5.2% and 5.2% for the second quarter of 2014 and 2013, respectively.

 

Our gross profit increased by $4.6 million, or 62.1%, to $12 million for the six months ended June 30, 2014 as compared to $7.4 million for the six months ended June 30, 2013. As a percentage of revenues, our gross profit margin was 5.5% and 5.7% for the six months ended June 30, 2014 and 2013, respectively. 

 

The gross profit and gross profit margin was also affected by the following factors, including:

 

•

The gross profit margin of our six major products is different. Fuel #3 and fuel #4 has a higher gross profit margin than other products, and fuel 120CST and fuel 180CST has the lowest margin. Therefore, the sales of the different product mix in different reporting periods impacted our gross profit.

 

 

•

We retail our products to end users and also wholesale to distributors as well. Gross profit from our retail side is normally higher than the wholesale side because we can set the selling price higher and can control the operating costs more easily. Accordingly, an increase or decrease in the retail sales will impact our gross profit to a certain extent.

 

•

The increase and decrease in the average selling price and average unit cost will also impact our gross margin.

 

For the three and six months ended June 30, 2014, the increase in our gross margin was largely attributable to increased sales volume and decreased unit costs as compared to the same period of 2013, as discussed above. However, the slight decrease in our GP% was due to the shifting of our sales mix from retail side to wholesale side.

 

With the completion of the Company’s distribution network setup in Shandong, Jiangsu and Zhejiang, we intend to increase our sales in these regions in the near future and also improve our gross profit margin. We expect to have a margin recovery as the new market gains sales momentum and recovery of macroeconomic conditions in the energy industry. Moreover, we are working on research and development of better formulas for blended fuel products to decrease our costs to increase our gross profit margin.

 

Selling Expenses

 

Our selling expenses consist primarily of employee compensation and benefits for our sales and marketing staff, promotional and advertising activities and for leasing the oil storage tanks.

 

Selling expenses decreased by $118,114, or 33.0%, from $357,975 for the three months ended June 30, 2013 to $239,831 for the three months ended June 30, 2014. This decrease is mainly due to reduced sales promotions, oil storage tank and other facility lease expenses. As a percentage of revenues, selling expenses decreased from 0.5% for the three months ended June 30, 2013 to 0.1% for the three months ended June 30, 2014.

 

Selling expenses decreased by $345,879, or 42,3%, from $817,031 for the six months ended June 30, 2013 to $471,152 for the six months ended June 30, 2014. This decrease is mainly due to reduced sales promotion expenses and lease expenses. As a percentage of revenues, selling expenses decreased from 0.6% for the six months ended June 30, 2013 to 0.2% for the six months ended June 30, 2014. 

 

In the near term, we expect that certain components of our selling expenses will increase as we step up efforts to expand our presence in new markets in China. Specifically, we expect that product promoting expenses will increase as we improve the awareness among customers in Shanghai City, Jiangsu and Zhejiang Province. In addition, we also expect salary expenses to increase as we continue to hire additional sales representatives to help broaden our end-user customer base. This anticipated increase in selling expenses is a part of our plan to grow and support our extensive distribution network.

 

  

General and Administrative Expenses

 

Our general and administrative expenses consist primarily of employee compensation and benefits for our general management, finance and administrative staff, depreciation and amortization with respect to equipment used for general corporate purposes, professional, legal and consultancy fees, and other expenses incurred for general corporate purposes.

 

General and administrative expenses decreased $142,823, or 5.7%, from $2.49 million for the three months ended June 30, 2013 to $2.34 million for the three months ended June 30, 2014. The decrease was because of decreases in bad debt reserves due to our efforts to collect the outstanding accounts receivable and realization of the outstanding advance payments to vendors. Also, due to terminating the oil storage tank lease, amortization on leaseholds decreased as well. As a percentage of revenues, general and administrative expenses increased from 3.3% for the three months ended June 30, 2013 to 1.3% for the three months ended June 30, 2014.

 

 General and administrative expenses increased by $541,539, or 13.1%, from $4.14 million for the six months ended June 30, 2013 to $4.68 million for the six months ended June 30, 2014. The increase was caused by increases in depreciation expense, professional services fees and consulting fees. As a percentage of revenues, general and administrative expenses decreased from 3.2% for the six months ended June 30, 2013 to 2.2% for the six months ended June 30, 2014.

 

We expected that our overall general and administrative expenses would increase in connection with our re-organizing our corporate structure, and hire more experienced management personnel in the near future.

 

Interest Expense

 

Interest expense increased by $3.3 million, from $1.17 million for the three months ended June 30, 2013 to $4.46 million for the three months ended June 30, 2014.

 

Interest expense increased by $6.3 million, from $2.1 million for the six months ended June 30, 2013 to $8.4 million for the six months ended June 30, 2014.

 

The increase in interest expense was due to increased amortization of prepaid interest expense incurred on the bank acceptance bills and short-term bank loans for the three and six months ended June 30, 2014. Also, prepaid interest expense decreased about $2.7 million which was included in “prepaid expenses and other current assets” as of June 30, 2014. 

 

The increase in interest was due to our increased borrowing of short-term loans and bank notes bills for working capital and capital expenditures.

 

Provision for Income Taxes

 

For the three months ended June 30, 2014, we reported income tax expense of $21,820. For the three months ended June 30, 2013, we reported income tax expense of $52,668.

 

For the six months ended June 30, 2014, we reported income tax expense of $143,559. For the six months ended June 30, 2013, we reported income tax expense of $469,254 after application of an income tax benefit due to operating losses incurred during this period.

 

Net Income (loss) Attributable to the Company

 

Net income attributable to the Company increased by $3.0 million, from net loss of $79,414 for the three months ended June 30, 2013 to net income of $2.9 million for the three months ended June 30, 2014. The increase in our net income was mainly the result of our increase in revenues, decrease in selling and general and administrative expense, and affected by an increase in interest expense as discussed above.

 

 

Net loss attributable to the Company increased by $0.8 million, from a net income of $255,556 for the six months ended June 30, 2013 to net loss of $509,596 for the six months ended June 30, 2014. The increase in net loss was mainly the result of an increase in interest expense for the period indicated. 

 

Liquidity and Capital Resources

 

As of June 30, 2014, we had cash of approximately $0.8 million in our bank accounts, and additionally, we have set aside $53.7 million of restricted cash on our bankers’ acceptance notes. We received a credit rating of AA- from our banks. Therefore we believe that we will be able to renew our current short-term bank loans upon maturity and obtain additional new bank loans, if necessary, during 2014. Currently, we are under negotiation with Guangfa Bank and Harbin Bank and are expected to obtain RMB 70 million new bank loans in the near future. We are expecting to generate additional cash flows in the coming period of time from our new sales regions and increase our revenue during the sales season. We believe our existing cash and cash equivalents will be sufficient to maintain our operations at present level for at least the next 12 months.

 

As of June 30, 2014, our balance sheet reported a working capital deficit of $81.9 million, primarily because we raised short-term bank loans and bank notes borrowings since the third and fourth quarters of 2013 and continued to borrow additional bank note bills during the first and second quarter of 2014. As of June 30 2014, about $68 million in bank borrowings have been used for construction in process and purchasing property, equipment and intangible assets. In addition, during first and second quarter of 2014, we started to stockpile inventory in order to prepare for the upcoming sales season, which led to an increase in accounts payable as of June 30, 2014.

 

On an on-going basis, we will take steps to identify and plan our needs for liquidity and capital resources, to fund our planned ongoing construction and day-to-day business operations. In addition to providing working capital to support our routine activities, we also need funds for the construction and upgrade of our strategic facilities, acquisition of assets and/or equity acquisition, and repayment of our debts.

 

 Our future capital expenditures will include building new fueling facilities, increasing our blending and storage capacity, berth improvements, expanding our product lines, research and development capabilities, and making acquisitions when deemed appropriate.

 

Our operating and capital requirements in connection with supporting our expanding operations and introducing our products to the expanded areas have been and will continue to be significant to us. Our growth strategy, which is initially focused on accretive acquisitions and organically expanding our products into expanded areas will require substantial capital which we may not be able to satisfy solely through cash flows from our operations.

 

The petrochemical business is a capital intensive business. Our ability to maintain and increase our revenues, net income and cash flows depends upon continued capital spending.

 

In September 2010, the Company executed a 10-year agreements to supply marine fuel to Haiyu Fishery Limited Corporation (“Haiyu”) and Jinghai Group (“Jinghai”). Both Haiyu and Jinghai are located in Rongcheng City, Shandong province. Under the terms of the agreement with Jinghai, the Company is to supply Jinghai with up to 20,000 tons of marine fuel per year at local market wholesale prices within that particular geographic area. The agreement also provides Jinghai with a rebate equivalent to an annual payment of RMB 0.3 million (approximately USD 0.05 million) for ten years if annual sales of 20,000 tons of fuels are achieved. For three and six months ended June 30, 2014 and 2013, Jinhai did not achieve the sales target and accordingly no rebate was provided to Jinhai.

 

If and to the extent we require additional capital, we would likely have to raise such additional capital through the issuance of our equity or equity-linked securities, which may result in significant additional dilution to our current investors. Our ability to raise additional capital is dependent on, among other things, the state of the financial markets at the time of any proposed offering. There is no assurance that additional funding will be available on acceptable terms, or at all. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, our operations could be materially negatively impacted.

 

 

The following table sets forth a summary of our cash flows for the periods indicated:

 

		For six months ended June 30,
		2014				2013
Cash flow data:
Net cash provided by (used in) operating activities		$	44,988,573			$	(36,164,212	)
Net cash used in investing activities			(55,172,743	)			(2,953,900	)
Net cash (used in) provided by financing activities			(11,556,486	)			40,961,433
Effect of exchange rate on cash			(109,925	)			53,377
Net changes in cash			(21,850,581	)			1,896,698
Cash at beginning of period			22,638,820				1,625,705
Cash at end of period		$	788,239			$	3,522,403

  

Operating Activities

 

Net cash provided by operating activities for the six months ended June 30, 2014 was approximately $45.0 million, which was primarily as a result of the following factors:

 

•

Decrease in accounts receivable of $29.6 million because we expedited the cash collection after credit sales.

 

•

Increase in inventory purchases of $32.5 million in order to stockpile of inventory when crude oil price were relatively low and  to prepare for satisfying expected increased customer demand.

 

	•	Decrease in advances to suppliers of $25.5 million because certain prior year advance payments to suppliers for inventory purchases have been realized during 2014.
	•	Increase  in other current assets of $6.4 million because about RMB 33.9 million VAT Input tax and RMB 4.9 million prepaid income tax has been recorded due to timing difference.

 

•

Increase in accounts payable of $24.2 million because of our purchase of inventory on credit from several suppliers for inventory stockpile purposes.

 

•

Decrease in tax payable of $1.6 million because we delayed the payment of prior year VAT tax and income tax until January 2014 due to timing difference between bookkeeping and filing the tax returns.

 

Net cash used in operating activities for the six months ended June 30, 2013 was approximately $36.2 million, which was primarily a result of the following factors:

  

·

An increase in accounts receivable of $30.0 million as a result of our increased credit sales and delayed collections;

 

·

Purchase of inventories of $11.2 million as a result of anticipating increased sales volume in the expanded distribution network and upcoming fishing season;

 

·

An increase in advances to suppliers of $5.9 million because more advance payments have been paid to suppliers for the inventory purchase;

 

	·	A decrease in advances from customers of $1. 5 million because the same amount has been recognized as revenue when products have been delivered to customers and when revenue recognition criteria have been met;
	·	An increase in accounts payable of $12.1 million due to increased purchase of materials in anticipation of future purchase price increases and in order to prepare for next sales peak season.

 

·

An increase in prepaid expense and other current assets by $1.9 million because of increased prepaid interest expense on our outstanding notes bills.

 

 

 

Investing Activities

 

Cash used in investing activities was $55.2 million for the six months ended June 30, 2014, which was primarily attributable to: 

 

	·	Our expenditures on our construction in progress of $52.8 million, because our subsidiary, Lianyungang Fusheng paid an additional RMB 316.9  million to contractor to start the construction of a new chemical and fuel oil blending project in Lianyungang City
	·	Cash paid for acquiring a non-controlling interest of $1.9 million because the Company acquired the 39% non-controlling interest in Suzhou Fusheng.

 

Cash used in investing activities was $3.0 million for the six months ended June 30, 2013, which was primarily attributable to:

 

·

An equity investment of $1.3 million to an unconsolidated entity, Dalian Haode, in which we have a 20% equity interest

 

·

Prepayment for land use right of $1.6 million because the Company’s newly formed subsidiary, Lianyungang Fusheng expects to obtain a land use right from the local government to build a new manufacturing plant on this land.

 

Financing Activities

 

Cash used in financing activities was $11.6 million for the six months ended June 30, 2014. It consists of net proceeds from short-term bank loans of $19.1 million, repayments of bank loans of $22.7 million, proceeds from bank notes of $141.7 million while repaying bank notes of $190.3 million, restricted cash collected of $45.4 million due to the decrease in our bank notes payable, repayment of $0.8 million of loans from related parties, and payments for deferred financing costs of $4.0 million.

 

Cash provided by financing activities was $40.9 million for the six months ended June 30, 2013. It consists of net bank proceeds of $19.1 million, less repayment of bank loans of $9.4 million, proceeds of bank notes of $91.6 million, less repayment of bank notes of $19.8 million, proceeds from related party loans of $3.7 million and an increase in restricted cash of $37.1 in connection with the increased bank notes. 

 

Seasonality

 

We are also subject to the reduced commercial activity during the Chinese New Year, the most important of the traditional Chinese holidays. During this time, both cargo and fishing traffic decrease and we expect the demand for our products to decrease accordingly. During the slow season of marine fuel products, we adjust our marketing strategy by increasing the trading of our products.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Inflation

 

The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.

 

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Report, our management conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer (the “Evaluating Officers”), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based on that evaluation, the Evaluating Officers concluded that our disclosure controls and procedures were not effective as of the period covered by this report. The foregoing conclusion was due to the continued presence of material weaknesses in internal control over financial reporting, as discussed under “Management’s Report on Internal Control Over Financial Reporting” in the Company’s previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the “Annual Report”). Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses described below are remediated.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected and corrected on a timely basis. As reported in the Annual Report, our management was aware of several material weaknesses in the Company’s internal control over financial reporting, including weaknesses related to (i) control environment, (ii) control activities, (iii) information and communications, and (iv) internal control monitoring. Our current accounting staff remains relatively inexperienced in U.S. GAAP-based reporting and requires additional training so as to meet with the higher demands necessary to fulfill the requirements of U.S. GAAP-based reporting and SEC rules and regulations. Our Evaluating Officers concluded that those issues persisted at the time of their most recent evaluation, which considered the factors, including:

 

-

the number of adjustments proposed by our independent auditors during our quarterly review and annual audit processes;

-

the significance of the audit adjustments’ impact on the overall financial statements;

-

how adequately we complied with U.S. GAAP on transactions; and

-

how accurately we prepared supporting information to provide to our independent auditors on a quarterly and annual basis.

 

We are in the process of reviewing and, where necessary, modifying controls and procedures throughout the Company. Our management intends to focus its remediation efforts in the near term on installing a new financial system and documenting formal policies and procedures surrounding transaction processing, period-end account analyses and providing for additional review and monitoring procedures and periodically assess the need for additional accounting resources as the business develops and resources permit. Management is also committed to taking further action and implementing enhancements or improvements as resources permit. The implementation of additional measures, however, may take considerable time.

 

Changes in Internal Controls over Financial Reporting

 

Except as described above, there was no change in our internal control over financial reporting during our second quarter of 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

From time to time, the Company is involved in legal matters arising in the ordinary course of business. Management currently is not aware of any legal matters or pending litigation that would have a significant effect on the Company’s financial statements as of June 30, 2014.

 

Item 1A.

Risk Factors

 

Except as set forth below, there were no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2013.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company did not engage in any unregistered sales of equity securities during the fiscal quarter ended June 30, 2014. The Company did not repurchase any of its equity securities during the same fiscal period.

 

Item 3.

Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

The exhibits listed in the accompanying Exhibit Index are furnished as part of this report.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	Andatee China Marine Fuel Services Corporation
Date: August 14, 2014		By:	/s/ Wang Hao
			Wang Hao
			President, Chief Executive Officer
			(Principal Executive Officer)
Date: August 14, 2014		By:	/s/ Quan Zhang
			Quan Zhang
			Interim Chief Financial Officer
			(Principal Financial and Accounting Officer)

 

 

EXHIBIT INDEX

 

Number		Exhibit Table
3.1(i)		Certificate of Incorporation (1).
3.1.1(i)		Amendment to the Certificate of Incorporation (1).
3.1(ii)		By-Laws (1).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the SOX of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the SOX of 2002.
32.1		Certificate of Chief Executive Officer pursuant to 18 U.S.C.ss.1350.
32.2		Certificate of Chief Financial Officer pursuant to 18 U.S.C.ss.1350.

 

(1)

Incorporated by reference to the exhibit with the same number to the Company’s Registration Statement on Form S-1 (SEC File No. 333-161577) effective as of January 25, 2010.

 

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

XBRL Taxonomy Extension Definition Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase