NOTES
TO
FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
1 - INTERIM FINANCIAL STATEMENTS
The
unaudited financial statements as of September 30, 2007 and for the nine
months
ended September 30, 2007 and 2006 have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with instructions to Form 10-QSB. In the opinion
of
management, the unaudited financial statements have been prepared on the
same
basis as the annual financial statements and reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
financial position as of September 30, 2007 and the results of operations
and
cash flows for the periods ended September 30, 2007 and 2006. The financial
data
and other information disclosed in these notes to the interim financial
statements related to these periods are unaudited. The results for the three
month period ended September 30, 2007 is not necessarily indicative of the
results to be expected for any subsequent quarter of the entire year ending
December 31, 2007. The balance sheet at December 31, 2006 has been derived
from
the audited financial statements at that date.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to the Securities and
Exchange Commission’s rules and regulations. These unaudited financial
statements should be read in conjunction with our audited financial statements
and notes thereto for the year ended December 31, 2006 as included in our
report
on Form 10-KSB.
NOTE
2 - ORGANIZATION AND BUSINESS
China
Clean Energy, Inc. (“CCE”) was incorporated in the State of Delaware on November
12, 2004 under the name Hurley Exploration Inc. (“Hurley”). From inception to
October 24, 2006, Hurley was an exploration stage company.
On
October 24, 2006, CCE acquired 100% of the issued and outstanding common
shares
of China Clean Energy Resources Limited (“CCER”) in exchange for 15,995,000
newly issued shares of CCE common stock (the “Share Exchange”). In connection
with the Share Exchange, CCE accepted subscriptions for a total of 1,300,000
shares of common stock at a price of $1.00 per share and issued 1,605,000
shares
of common stock to certain consultants for financial consulting and advisory
services (together with the Share Exchange, the “Transaction”).
Prior
to
the Transaction, as adjusted for a 2.26187510124-for-1 reverse stock split
and
the cancellation of 8,842,222 post-split shares, CCE had 2,432,269 shares
of
common stock issued and outstanding. After the Transaction, CCE had 21,082,269
shares of common stock outstanding and the former shareholders of CCER owned
75.87% of the issued and outstanding shares. Accordingly, CCER is considered
the
acquirer for accounting purposes and the Share Exchange has been accounted
for
as a “reverse acquisition”.
As
a
result of the Share Exchange, CCER became a wholly-owned subsidiary of CCE
and
CCE succeeded to the business of Fujian Zhongde Technology Co., Ltd. (“Fujian
Zhongde”). Fujian Zhongde synthesizes and distributes renewable fuel products
and specialty chemicals to customers in both the People’s Republic of China
(“PRC”) and abroad.
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
CCER
was
formed on February 13, 2006 under the laws of the British Virgin Islands
as a
holding company to own Fujian Zhongde. Fujian Zhongde was incorporated in
the
province of Fujian, China, on July 10, 1995 under the name “Fuqing City Zhongde
Chemical Industry, Ltd.”. On December 10, 2003, it changed its name to “Fujian
Zhong De Technology Stock Co., Ltd”. On January 20, 2006, it changed its name to
“Fujian Zhongde Technology Co., Ltd.”
The
consolidated financial statements at September 30, 2007 include the accounts
of
CCE, CCER, and Fujian Zhongde (collectively the “Company”). All inter-company
balances and transactions have been eliminated in
consolidation.
NOTE
3 - INVENTORIES
Inventories
consist of:
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
Raw
materials
|
|
$
|
382,111
|
|
$
|
430,392
|
|
|
Work
in progress and packaging material
|
|
|
24,744
|
|
|
24,065
|
|
|
Finished
goods
|
|
|
305,771
|
|
|
487,476
|
|
|
Total
Inventories
|
|
$
|
712,626
|
|
$
|
941,933
|
|
NOTE
4 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment, net consist of:
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
Land
improvements
|
|
$
|
486,266
|
|
$
|
-
|
|
|
Buildings
|
|
|
2,227,928
|
|
|
2,051,056
|
|
|
Equipment
and machinery
|
|
|
4,959,403
|
|
|
4,419,551
|
|
|
Automobiles
|
|
|
37,898
|
|
|
20,529
|
|
|
Office
equipment
|
|
|
18,100
|
|
|
13,848
|
|
|
Construction
in progress
|
|
|
80,163
|
|
|
449,346
|
|
|
Total
|
|
|
7,809,758
|
|
|
6,954,330
|
|
|
Less
accumulated depreciation
|
|
|
(2,753,109
|
)
|
|
(2,262,130
|
)
|
|
Net
|
|
$
|
5,056,649
|
|
$
|
4,692,200
|
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
5 - INTANGIBLE ASSETS
Intangible
assets, net consist of:
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
Land
use rights
|
|
$
|
1,998,406
|
|
$
|
1,949,015
|
|
|
Patents
and licenses
|
|
|
1,209,800
|
|
|
1,179,900
|
|
|
Total
|
|
|
3,208,206
|
|
|
3,128,915
|
|
|
Less
accumulated amortization
|
|
|
(824,434
|
)
|
|
(698,411
|
)
|
|
Net
|
|
$
|
2,383,772
|
|
$
|
2,430,504
|
|
NOTE
6 - BANK INDEBTEDNESS
Bank
indebtedness consists of:
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
DBS
bank under revolving credit agreement,
|
|
|
|
|
|
|
|
|
interest
at 115% of PRC prime rate,
|
|
|
|
|
|
|
|
|
secured
by certain buildings and land
|
|
|
|
|
|
|
|
|
use
rights owned by Fujian Zhongde
|
|
$
|
997,664
|
|
$
|
1,282,462
|
|
|
DBS
bank, interest at 115% of PRC prime rate,
|
|
|
|
|
|
|
|
|
due
in monthly installments of principal
|
|
|
|
|
|
|
|
|
and
interest of $18,834 through
|
|
|
|
|
|
|
|
|
January
2010, secured by certain buildings
|
|
|
|
|
|
|
|
|
and
land use rights
|
|
|
477,379
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,475,043
|
|
|
1,282,462
|
|
|
Less
current portion
|
|
|
(1,190,273
|
)
|
|
(1,282,462
|
)
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
portion of bank indebtedness
|
|
$
|
284,770
|
|
$
|
-
|
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
7 - PENSION AND EMPLOYMENT LIABILITIES
At
September 30, 2007 and December 31, 2006, the Company had no liability for
pension or past employment benefits. The Company does not have a pension
or
other retirement plan.
NOTE
8 - RESTRICTED NET ASSETS
Relevant
PRC statutory laws and regulations permit payments of dividends by Fujian
Zhongde only out of its retained earnings, if any, as determined in accordance
with PRC accounting standards and regulations. In addition, PRC laws and
regulations require that annual appropriations of after-tax income should
be set
aside prior to payments of dividends as a reserve fund. As a result of these
PRC
laws and regulations, Fujian Zhongde is restricted in its ability to transfer
a
portion of its net assets in the form of dividends, loans or advances, which
restricted portion amounted to $294,580 and $291,692 at September 30, 2007
and
December 31, 2006, respectively.
NOTE
9 - INCOME TAXES
Income
taxes consist of:
|
|
|
Nine
months ended
September 30,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
Current:
|
|
|
|
|
|
|
PRC
|
|
$
|
-
|
|
$
|
683,963
|
|
|
United
States
|
|
|
-
|
|
|
-
|
|
|
Total
current
|
|
|
-
|
|
|
683,963
|
|
|
Deferred
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
-
|
|
$
|
683,963
|
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
Fujian
Zhongde has been subject to a PRC 33% standard enterprise income tax. In
2006,
Fujian Zhongde became a wholly-owned foreign enterprise (“WOFE”). PRC income tax
laws provide that certain WOFEs may be exempt from income taxes for two years,
commencing with their first profitable year of operations, after taking into
account any losses brought forward from prior years, and thereafter 50% exempt
for the next three years. In December 2006, Fujian Zhongde applied for PRC
approval of these income tax exemptions. In March 2007, the PRC tax authorities
approved a full income tax exemption for the year 2007 and a 12% income tax
rate
for years 2008, 2009 and 2010.
As
at
September 30, 2007, CCE had an unrecognized deferred United States income
tax
liability relating to undistributed earnings of Fujian Zhongde. These earnings
are considered to be permanently invested in operations outside the United
States. Generally, such earnings become subject to United States income tax
upon
the remittance of dividends and under certain other circumstances. Determination
of the amount of the unrecognized deferred United States income tax liability
with respect to such earnings is not practicable because the amount of PRC
foreign tax credits available to offset United States income taxes will depend
on the timing of future remittances, if any, and such timing is not known
or
predictable.
The
provision for income taxes differs from the amount computed by applying the
statutory United States federal income tax rate to income before income taxes.
A
reconciliation follows:
|
|
|
Nine
months ended
|
|
|
|
|
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
Expected
tax at 35%
|
|
$
|
709,941
|
|
$
|
685,100
|
|
|
Tax
effect of unutilized
|
|
|
|
|
|
|
|
|
losses
of CCE and CCER
|
|
|
184,044
|
|
|
14,827
|
|
|
Tax
effect of Fujian Zhongde
|
|
|
|
|
|
|
|
|
income
taxed at lower rate
|
|
|
(893,985
|
)
|
|
(39,996
|
)
|
|
Permanent
differences
|
|
|
-
|
|
|
24,032
|
|
|
Actual
provision for income taxes
|
|
$
|
-
|
|
$
|
683,963
|
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
10 - RELATED PARTY TRANSACTIONS
Fujian
Zhongde purchases raw materials from companies affiliated with the Company’s
majority stockholder. In the nine months ended September 30, 2007 and 2006,
such
purchases totaled $2,565,315 and $2,902,965, respectively. The Company believes
that these purchases were transacted at terms no less favorable than those
that
could have been conducted with unaffiliated third parties.
NOTE
11 - SEGMENT INFORMATION
The
Company operates in one industry segment - the synthesization and distribution
of renewable fuel products and specialty chemicals to customers in both the
PRC
and abroad. Substantially all of the Company’s identifiable assets at September
30, 2007 were located in the PRC.
Net
sales
consist of:
|
|
|
Nine
months ended
September 30,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
Specialty
chemicals products
|
|
$
|
10,856,614
|
|
$
|
7,260,080
|
|
|
Biodiesel
products
|
|
|
3,996,480
|
|
|
2,540,082
|
|
|
Total
|
|
$
|
14,853,094
|
|
$
|
9,800,162
|
|
In
2007,
two customers (for biodiesel products) accounted for 15.17% and 11.73%,
respectively, of net sales.
In
2006,
two customers (for biodiesel products) accounted for 12.26% and 10.36%,
respectively, of net sales.
NOTE
12 - COMMITMENTS AND CONTINGENCIES
Contract
for Purchase of Land Use Rights
On
December 25, 2006, CCER executed a contract with The Bureau of
Jiangyin Industrial Zone in Fujian Province to acquire land use rights for
50
years for certain land located in the Fujian Province of the PRC for a total
purchase price of 18,549,000 RMB ($2,467,388 translated at the September
30,
2007 exchange rate).
The
contract, which was originally expected to close in June 2007, contemplates
a
new affiliated company of CCER be formed to build a new biodiesel facility
on
the land with a total project cost of approximately $15,000,000. The contract
originally provided for payments of the purchase price in three periods:
50% (or
9,274,500 RMB) by January 4, 2007, another 30% (or 5,564,700 RMB) by March
25,
2007, and the last 20% (or 3,709,800 RMB) by June 25, 2007. In June 2007,
the
parties agreed to extend the closing date and due date of the remaining
3,709,800 RMB ($493,478 translated at the September 30, 2007 exchange rate)
to
December 2007. As of September 30, 2007, the Company has paid 14,839,200
RMB
($1,951,355 translated at the exchange rate on the dates of the respective
payments) of the 18,549,000 RMB total purchase price.
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
Registration
Rights
In
October and November 2006, CCE accepted subscriptions for a total of 1,300,000
shares of common stock at a price of $1.00 per share, or $1,300,000 total.
The
subscription agreements provided registration rights to the subscribers.
If CCE
fails to (1) file a Registration Statement with the SEC on or prior to 90
days
after the Closing, (2) obtain effectiveness of the Registration Statement
by the
SEC on or prior to 180 days after the Closing, or (3) maintain effectiveness
of
the Registration Statement for 12 months after the date of effectiveness,
CCE is
obligated to pay subscribers “Default Damages” equal to 1% of their
subscriptions. Upon the expiration of each month thereafter that CCE has
continued to fail to file, or to obtain or maintain the effectiveness of
the
Registration Statement, as the case may be, CCE is obligated to pay subscribers
additional Default Damages equal to 1% of their subscriptions, provided that
no
Default Damages shall be payable by CCE for any defaults that occur following
the one year anniversary of the Closing. If CCE fails to respond to the SEC,
within 30 days after receipt, to any questions and comments from the SEC
regarding the Registration Statement, CCE is obligated to pay subscribers
Default Damages equal to 1% of their subscriptions. Upon the expiration of
each
month thereafter that CCE has continued to fail to respond to the SEC, CCE
is
obligated to pay subscribers additional Default Damages equal to 1% of their
subscriptions, provided that no Default Damages shall be payable by CCE for
any
defaults that occur following the one year anniversary of the Closing.
The
Registration Statement was declared effective by the SEC on July 10,
2007.
PRC
Risks
Substantially
all of Fujian Zhongde’s business operations are conducted in the PRC and
governed by PRC laws and regulations. Because these laws and regulations
are
relatively new, the interpretation and enforcement of these laws and regulations
involve uncertainties.
The
PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the PRC. Under existing
PRC foreign exchange regulations, payment of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities
is
required where RMB is to be converted into foreign currency and remitted
out of
the PRC to pay capital expenses, such as the repayment of bank loans denominated
in foreign currencies. The PRC government may also at its discretion restrict
access in the future to foreign currencies for current account
transactions.