FORM
SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
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CHINA
CLEAN ENERGY INC.
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(Name
of small business issuer in its charter)
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Delaware
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237130
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87-0700927
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(State
or jurisdiction of
Incorporation
or organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer Identification No.)
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Sonya
Ma
China
Clean Energy Inc.
17
Candlewood Drive
West
Windsor, New Jersey 08550
(609)
799-8921
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(Address
and telephone number of principal executive offices)
(Address
of principal place of business or intended principal place of
business)
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Sonya
Ma
China
Clean Energy Inc.
17
Candlewood Drive
West
Windsor, New Jersey 08550
(609)
799-8921
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(Name,
address and telephone number of agent for service)
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Copies
of all communications, including communications sent to agent for
service,
should be sent to:
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Harvey
J. Kesner, Esq.
Haynes
and Boone, LLP
153
East 53
rd
Street
Suite
4900
New
York, New York 10022
Tel
(212) 659-7300
Fax
(212) 918-8989
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Approximate
date of commencement of proposed sale to the public:
As soon
as practicable after the effective date of this Registration
Statement.
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box.
o
CALCULATION
OF REGISTRATION FEE
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TITLE
OF EACH
CLASS
OF SECURITIES
TO
BE REGISTERED
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AMOUNT
TO BE
REGISTERED
(1)
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PROPOSED
MAXIMUM
AGGREGATE
OFFERING PRICE
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AMOUNT
OF REGISTRATION FEE
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Common
Stock, $.001 par value
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10,000,000
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$
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18,700,000
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$
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734.91
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Common
Stock underlying warrants
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6,200,000
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$
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11,594,000
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$
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455.64
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Total
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$
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1,190.55
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(1)
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Pursuant
to Rule 416 under the Securities Act, the shares of common stock
offered
hereby also include an indeterminate number of additional shares
of common
stock as may from time to time become issuable by reason of anti-dilution
provisions, stock splits, stock dividends, recapitalizations or other
similar transactions.
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(2)
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With
respect to the shares of common stock offered by the selling stockholders
named herein, estimated at $1.87 per share, the average of the high
and
low prices of the common stock as reported on the OTC Bulletin Board
regulated quotation service on January 29, 2008, for the purpose
of
calculating the registration fee in accordance with Rule 457(c) under
the
Securities Act.
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(3)
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Estimated
at $1.87 per share, the average of the high and low prices of the
common
stock as reported on the OTC Bulletin Board regulated quotation service
on
January 29, 2008, for the purpose of calculating the registration
fee in
accordance with Rule 457(g)(3) under the Securities Act.
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The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and we are not soliciting an offer to buy these securities
in
any state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED FEBRUARY 1, 2008
PRELIMINARY
PROSPECTUS
16,200,000
Shares
China
Clean Energy Inc.
Common
Stock
This
prospectus relates to the sale by the selling stockholders identified in this
prospectus of up to 16,200,000 shares of our common stock, which includes (i)
10,000,000 shares issued to investors in a private placement and (ii) 6,200,000
shares issuable upon the exercise of warrants with an exercise price of $2.00
per share. All of these shares of our common stock are being offered for resale
by the selling stockholders.
The
prices at which the selling stockholders may sell shares will be determined
by
the prevailing market price for the shares or in negotiated transactions. We
will not receive any proceeds from the sale of these shares by the selling
stockholders. However, we will receive proceeds from the exercise of the
warrants if they are exercised by the selling stockholders.
We
will
bear all costs relating to the registration of these shares of our common stock,
other than any selling stockholders’ legal or accounting costs or
commissions.
Our
common stock is quoted on the regulated quotation service of the OTC Bulletin
Board under the symbol “CCGY.OB”. The last reported sale price of our common
stock as reported by the OTC Bulletin Board on January 29, 2008, was $1.76
per
share.
Investing
in our common stock is highly speculative and involves a high degree of risk.
You should carefully consider the risks and uncertainties described under the
heading “Risk Factors” beginning on page 4 of this prospectus before making a
decision to purchase our common stock.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is
,
2008
TABLE
OF CONTENTS
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Page
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Prospectus
Summary
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1
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Risk
Factors
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4
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Special
Note Regarding Forward Looking Statements
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17
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Use
of Proceeds
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17
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Market
for Our Common Stock and Related Stockholder Matters
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17
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Dividend
Policy
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17
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Management’s
Discussion and Analysis or Plan of Operation
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18
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Business
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24
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Management
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34
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Executive
Compensation
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35
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Certain
Relationships and Related Transactions
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37
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Security
Ownership of Certain Beneficial Owners and Management
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38
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Selling
Stockholders
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39
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Description
of Securities
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44
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Plan
of Distribution
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47
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Legal
Matters
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49
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Experts
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49
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Where
You Can Find Additional Information
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49
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Index
to Financial Statements
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F-1
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You
should rely only on the information contained in this prospectus. We have not
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely
on
it. We are not making an offer to sell these securities in any jurisdiction
where an offer or sale is not permitted. You should assume that the information
appearing in this prospectus is accurate only as of the date on the front cover
of this prospectus. Our business, financial condition, results of operations
and
prospects may have changed since that date.
PROSPECTUS
SUMMARY
The
following summary highlights information contained elsewhere in this prospectus.
It may not contain all the information that may be important to you. You should
read this entire prospectus carefully, including the sections entitled “Risk
Factors” and “Management’s Discussion and Analysis or Plan of Operation,” and
our historical financial statements and related notes included elsewhere in
this
prospectus. In this prospectus, unless the context requires otherwise,
references to the “Company,” “we,” “our” and “us” for periods prior to the
closing of our reverse merger on October 24, 2006, refer to China Clean Energy
Resources, Ltd., a private British Virgin Islands corporation that is now our
wholly-owned subsidiary, and references to the “Company,” “we,” “our” and “us”
for periods subsequent to the closing of the reverse merger on October 24,
2006,
refer to China Clean Energy Inc., a publicly traded company, and its subsidiary,
China Clean Energy Resources, Ltd.
Overview
We
synthesize and distribute renewable fuel products and specialty chemicals to
customers in both the People’s Republic of China and abroad. Our strategy is to
profitably commercialize our patented, proprietary technology and become the
industry leader in the production of biodiesel and specialty chemicals located
within the People’s Republic of China. We currently own a refinery which can
both continuously produce biodiesel and specialty chemicals in the Fulong
Industrial Zone within Fuqing City, Fujian Province of the People’s Republic of
China. Our refinery is capable of producing 10,000 tons of biodiesel per year
and 18,000 tons of specialty chemicals per year. Moreover, we are in the process
of building a second biodiesel refinery at the nearby Jiangyin Industrial Park
with an annual biodiesel production capacity of 100,000 tons or 30 million
gallons per year.
Our
biodiesel can be used in diesel engines with no modifications as 100% biodiesel
(B100) or mixed with petroleum diesel—most commonly as a 20% biodiesel blend
(B20). A blended biodiesel may enhance petroleum diesel because it has the
ability to extend engine life and decrease operating expense due to the increase
in engine lubricity. Furthermore, biodiesel is biodegradable, nontoxic and
essentially free of sulfur and aromatics. Currently, the key markets for
biodiesel are mass transit vehicles, commercial fleets and marine fleets, as
well as for general use in environmentally-sensitive areas.
Our
History
We
were
formed in the State of Delaware on November 12, 2004 as a Canadian based
resource exploration company. On October 24, 2006 we entered into a Share
Exchange Agreement with China Clean Energy Resources, Ltd., its shareholders
and
both Chet Kurzawski and Doug Reid, our sole officers and directors at the time.
Upon closing of the transactions contemplated by the Share Exchange Agreement,
the shareholders of China Clean Energy Resources, Ltd. exchanged their entire
interest in China Clean Energy Resources, Ltd. for an aggregate of 15,995,000
shares of our common stock, thus causing China Clean Energy Resources, Ltd.
to
become our wholly-owned subsidiary.
At
the
time we negotiated the Share Exchange Agreement we had yet to complete any
mineral exploration activities and thus decided to abandon this line of business
in favor of manufacturing and distributing biodiesel and specialty chemicals
from renewable resources inside the People’s Republic of China. In anticipation
of this transition, on October 13, 2006 we both changed our corporate name
from
Hurley Exploration Inc. to China Clean Energy Inc. and effectuated a
1-for-2.26187510124 reverse stock split.
The
chart
below depicts our current corporate structure. As depicted below:
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·
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we
own 100% of the capital stock of China Clean Energy Resources, Ltd.
and
have no other direct subsidiaries;
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·
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China
Clean Energy Resources, Ltd. owns 100% of the capital stock of Fujian
Zhongde Technology Co., Ltd. and has no other subsidiaries;
and
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·
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Fujian
Zhongde Technology Co., Ltd., a wholly-owned direct subsidiary of
China
Clean Energy Resources, Ltd., has no
subsidiaries.
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·
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Fujian
Zhongde Energy Co., Ltd, a wholly-owned direct subsidiary of China
Clean
Energy Resources, Ltd., has no
subsidiaries.
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All
of
our operations are conducted by and through Fujian Zhongde Technology Co.,
Ltd.
and Fujian Zhongde Energy Co., Ltd., in the People’s Republic of
China.
The
Offering
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Common
stock offered by the selling stockholders::
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16,200,000
shares, consisting of 10,000,000 shares issued to investors in a
private
placement and 6,200,000 shares issuable upon the exercise of outstanding
warrants.
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Offering
price:
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Market
price or privately negotiated prices.
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Common
stock outstanding after this offering:
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31,512,269
shares (1)
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Use
of proceeds:
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We
will not receive any proceeds from the sale of the shares of common
stock
but will receive proceeds from the exercise of the warrants which
proceeds
will be used for working capital purposes.
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OTC
Bulletin Board symbol:
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CCGY.OB
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Risk
Factors:
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You
should carefully consider the information set forth in this prospectus
and, in particular, the specific factors set forth in the “Risk Factors”
section beginning on page 4 of this prospectus before deciding whether
or
not to invest in shares of our common
stock.
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(1)
The
number of outstanding shares after the offering is based upon 31,512,269 shares
outstanding as of February 1, 2008.
The
number of shares of common stock outstanding after this offering
excludes:
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·
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6,200,000
shares of common stock issuable upon the exercise of currently outstanding
warrants with an exercise price of $2.00 per share;
and
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·
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1,330,000
shares of common stock issuable upon the exercise of currently outstanding
options with exercise prices ranging from $2.50 to $3.00 and having
a
weighted average exercise price of $2.75 per
share.
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RISK
FACTORS
Investing
in our common stock involves a high degree of risk. Before investing in our
common stock you should carefully consider the following risks, together with
the financial and other information contained in this prospectus. If any of
the
following risks actually occurs, our business, prospects, financial condition
and results of operations could be adversely affected. In that case, the trading
price of our common stock would likely decline and you may lose all or a part
of
your investment.
Risks
Relating to Our Business
We
have a limited history of producing biodiesel, which makes it difficult to
evaluate our business.
Currently,
we have only one manufacturing facility, which began producing biodiesel in
2005. We began selling biodiesel in December 2005. Our limited operating history
as a manufacturer and distributor of biodiesel makes it difficult for
prospective investors to evaluate our business. Therefore, our proposed
operations are subject to all of the risks inherent in the initial expenses,
challenges, complications and delays frequently encountered in connection with
the formation of any new business, as well as those risks that are specific
to
the biodiesel industry. Investors should evaluate us in light of the problems
and uncertainties frequently encountered by companies attempting to develop
markets for new products, services, and technologies. Despite best efforts,
we
may never overcome these obstacles to financial success.
Our
business is speculative and dependent upon the implementation of our business
plan, as well as our ability to enter into agreements with third parties for
the
provision of necessary feedstock sources and the sale and distribution of our
biodiesel on terms that will be commercially viable for us. There can be no
assurance that our efforts will be successful or result in revenue or profit.
There is no assurance that we will earn significant revenues or that investors
will not lose their entire investment.
Unanticipated
problems in our engineering and construction operations may harm our business
and viability.
Our
future cash flow depends on our ability to timely design, construct and complete
two or three new biodiesel refineries. If our engineering and construction
operations are disrupted and/or the economic integrity of these projects is
threatened for unexpected reasons (including, but not limited to, technical
difficulties, poor weather conditions, and business interruptions due to
terrorism or otherwise), our business may experience a substantial setback.
Because we are at the early stages of constructing a new facility, we are
particularly vulnerable to events such as these. Prolonged problems may threaten
the commercial viability of construction of our planned facilities. Moreover,
the occurrence of significant unforeseen conditions or events in connection
with
construction of our new facility may require us to reexamine our business model.
Any change to our business model may adversely affect our business.
Our
results of operations, financial position and business outlook will be highly
dependent on commodity prices, which are subject to significant volatility
and
uncertainty, and the availability of supplies, so our results could fluctuate
substantially.
Our
results are substantially dependent on commodity prices, especially prices
for
feedstock, specialty chemicals, biodiesel, petroleum diesel and materials used
in the construction of our proposed refineries. As a result of the volatility
of
the prices for these items, our results may fluctuate substantially and we
may
experience periods of declining prices for our products and increasing costs
for
our raw materials, which could result in operating losses. Although we may
attempt to offset a portion of the effects of fluctuations in prices by entering
into forward contracts to supply biodiesel or purchase feedstock or other items
or by engaging in transactions involving exchange-traded futures contracts,
the
amount and duration of these hedging and other risk mitigation activities may
vary substantially over time and these activities also involve substantial
risks.
The
price
of feedstock is influenced by market demand, weather conditions, animal
processing and rendering plant decisions and factors affecting crop yields,
farmer planting decisions and general economic, market and regulatory factors.
These factors include government policies and subsidies with respect to
agriculture and international trade, and global and local demand and supply
as
well as foreign currency exchange rates compared to RMB, which may affect our
specialty chemical exports and some feedstock imports. The significance and
relative effect of these factors on the price of feedstock is difficult to
predict. Any event that tends to negatively affect the supply of feedstock,
such
as increased demand, foreign exchange rate fluctuation, adverse weather or
crop
disease, could increase feedstock prices and potentially harm our business.
In
addition, we may also have difficulty, from time to time, in physically sourcing
feedstock on economical terms due to supply shortages. Such a shortage could
require us to suspend operations until feedstock is available at economical
terms, which would have a material adverse effect on our business, results
of
operations and financial position. The price we pay for feedstock at a facility
could increase if an additional multi-feedstock biodiesel production facility
is
built in the same general vicinity or if alternative uses are found for lower
cost feedstock.
Biodiesel
is a commodity whose price is determined based on the price of petroleum diesel,
world demand, supply and other factors, all of which are beyond our control.
World prices for crude oil and biodiesel have fluctuated widely in recent years.
We expect that prices will continue to fluctuate in the future. Price
fluctuations will have a significant impact upon our revenue, the return on
our
investment in biodiesel refineries and on our general financial condition.
Price
fluctuations for biodiesel may also impact the investment market, and our
ability to raise investor capital. Any future decreases in the prices of
biodiesel or petroleum diesel fuel may have a material adverse effect on our
financial condition and future results of operations.
We
may be unable to obtain the additional capital required to implement our
business plan, which will negatively impact our ability to grow our business.
We
expect
that current capital and other existing resources will be sufficient only to
provide a limited amount of working capital. On their own, the revenues
generated from the designing and building biodiesel refineries and the proceeds
from our recently completed private placement of securities IS not currently
sufficient to fully fund operations and planned growth. We will require an
estimated $11 million of additional capital to continue to expand our business
beyond the initial phase. If we are unable to obtain required additional
financing, we may be forced to restrain our growth plans or cut back existing
operations.
Future
construction and operation of biodiesel refineries, capital expenditures to
build and operate our refineries, hiring qualified management and key employees,
complying with licensing, registration and other requirements, maintaining
compliance with applicable laws, production and marketing activities,
administrative requirements, such as salaries, insurance expenses and general
overhead expenses, legal compliance costs and accounting expenses will all
require a substantial amount of additional capital and cash flow.
We
will
be required to pursue sources of additional capital through various means,
including joint venture projects, debt financing, equity financing or other
means. There is no assurance that we will be successful in locating a suitable
financing transaction in a timely fashion or at all. In addition, there is
no
assurance that we will be successful in obtaining the capital we require by
any
other means. Future financings through equity investments are likely, and these
are likely to be dilutive to the existing stockholders, as we issue additional
shares of common stock to investors in future financing transactions. Also,
the
terms of securities we issue in future capital transactions may be more
favorable for our new investors. Newly issued securities may include
preferences, superior voting rights, the issuance of warrants or other
derivative securities, and the issuances of incentive awards under equity
employee incentive plans, which may have additional dilutive effects. Further,
we may incur substantial costs in pursuing future capital and/or financing,
including investment banking fees, legal fees, accounting fees, securities
law
compliance fees, printing and distribution expenses and other costs. We may
also
be required to recognize non-cash expenses in connection with certain securities
we may issue, such as convertible notes and warrants, which will adversely
impact our financial condition.
Our
ability to obtain needed financing may be impaired by such factors as the
capital markets, both generally and specifically in the biodiesel industry,
the
fact that we are a new enterprise without a proven operating history, the
location of our biodiesel refineries in the People’s Republic of China and the
price of biodiesel and oil on the commodities market, which will impact the
amount of available asset-based financing. Furthermore, if petroleum or
biodiesel prices on the commodities markets decrease, then our revenues will
likely decrease and decreased revenues may increase our requirements for
capital. Some of the contractual arrangements governing our operations may
require us to maintain minimum capital, and we may lose our contract rights
if
we do not have the required minimum capital. If the amount of capital we are
able to raise from financing activities, together with our revenues from
operations, is not sufficient to satisfy our capital needs, even to the extent
that we reduce our operations accordingly, we may be required to cease
operations.
Our
reliance upon a limited number of feedstock suppliers may hinder our ability
to
be profitable.
Eight
feedstock suppliers collectively provide us with approximately 100% of our
feedstock and our two largest suppliers, Fuqing Zhongde Waste Oil Recycling
Co.,
Ltd. and Fujian Quanzhou Zhongyuanlong Chemical Company Ltd,. each supplied
approximately 52.91% and 20.45% of our feedstock respectively in 2007. Should
any of these suppliers terminate their supply relationships with us, sell to
other buyers, or enter into the biodiesel manufacturing business in competition
with us, we may be unable to procure sufficient feedstock to satisfy demand
for
our end products. Moreover, there is presently a finite number of feedstock
suppliers within the People’s Republic of China. Thus, as demand for biodiesel
products continues to increase, feedstock supplies will likely decrease, causing
the price of feedstock to increase proportionally. If we are unable to obtain
adequate quantities of feedstock at economically viable prices, our business
could become unprofitable and investors could suffer a loss with respect to
their investment in us.
Price
declines in petro-based diesel due to alternative energy discoveries or enhanced
supply of oil could negatively impact demand for our
biodiesel.
Our
biodiesel product is currently sold in the People’s Republic of China as a
substitute to petro-based diesel As a result, demand for our biodiesel could
be
negatively impacted should the Chinese government lower the retail prices of
fuel, including diesel, due to the discovery of new oil fields or energy
technology inventions.
Strategic
relationships upon which we may rely are subject to change, leading to
uncertainty and a negative impact on our business.
Our
ability to identify and enter into commercial arrangements with feedstock
suppliers, construction contractors, equipment fabricators and customers will
depend on developing and maintaining close working relationships with industry
participants. Our success in this area will also depend on our ability to select
and evaluate suitable projects, as well as to consummate transactions in a
highly competitive environment. These realities are subject to change and may
impair our ability to grow.
To
develop our business, we will use the business relationships of management
in
order to form strategic relationships. These relationships may take the form
of
joint ventures with other private parties or local government bodies,
contractual arrangements with other companies, including those that supply
feedstock that we will use in our business, or minority investments from third
parties. There can be no assurances that we will be able to establish these
strategic relationships, or, if established, that the relationships will be
maintained, particularly if members of the management team leave us. In
addition, the dynamics of our relationships with strategic partners may require
us to incur expenses or undertake activities we would not otherwise be inclined
to incur or undertake in order to fulfill our obligations to these partners
or
maintain these relationships. If we do not successfully establish or maintain
strategic relationships, our business may be negatively impacted.
A
large portion of our sales is concentrated in a few major customers; loss of
any
of those customers would have a material adverse impact on our
revenues.
Our
five
largest customers accounted for approximately 32.84% of our sales in 2006 and
48.67 % of our sales in 2007. Our two largest customers accounted for more
than
21.19% of sales in 2006 and for more than 26.53% of sales in 2007. If not
replaced, the loss of any of these customers could significantly reduce our
revenues and adversely affect the value of an investment in us.
We
are dependent on others for sales of a significant portion of our products,
which may place us at a competitive disadvantage and reduce profitability.
We
only
have a small sales force of our own to market our biodiesel and specialty
chemical products. As such, we expect to contract with third parties to market
and distribute some of our specialty chemical products. We have no definitive
agreements at this time. As a result, we will be somewhat dependent on whomever
we contract with to market our biodiesel and specialty chemical products. There
is no assurance that we will be able to enter into contracts with any specialty
chemical products brokers or distributors on acceptable terms. If any of our
distributors breaches its contract with us or does not have the ability, for
financial or other reasons, to market all of the specialty chemicals products
we
produce, we will not have any other readily available means to sell our
products. Our lack of a sufficient sales force and reliance on third parties
to
sell and market our products may place us at a competitive disadvantage. Our
failure to sell all of our biodiesel or specialty chemical products may result
in less income from sales.
The
success of our business depends upon the continuing contributions of our Chief
Executive Officer and other key personnel and our ability to attract other
employees to expand our business.
We
rely
heavily on the services of Tai-ming Ou, our Chief Executive Officer, as well
as
several other senior management personnel. Loss of the services of any of such
individuals would adversely impact our operations. In addition, we believe
that
our technical personnel represent a significant asset and provide us with a
competitive advantage over many of our competitors. We believe that our future
success will depend upon our ability to retain these key employees and our
ability to attract and retain other skilled financial, engineering, technical
and managerial personnel. For example, we presently do not have any directors
or
officers, other than Gary Zhao, our Chief Financial Officer, who have experience
with preparing disclosure mandated by U.S. securities laws and we will be
required to engage such persons, and independent directors, in order to satisfy
the initial listing standards of the major exchanges on which we may seek to
list our common stock. In addition, if we fail to engage qualified personnel,
we
may be unable to meet our responsibilities as a public reporting company under
the rules and regulations of the Securities and Exchange Commission. We do
not
currently maintain any “key man” life insurance with respect to any of such
individuals.
We
plan to grow very rapidly, which will place strains on management and other
resources.
We
plan
to grow rapidly and significantly expand our operations. This growth will place
a significant strain on management systems and resources. We will not be able
to
implement our business strategy in a rapidly evolving market without an
effective planning and management process. We have a relatively short operating
history and have not implemented sophisticated managerial, operational and
financial systems and controls. We are required to manage multiple relationships
with various strategic partners, technology licensors, users, advertisers and
other third parties. These requirements will be strained in the event of rapid
growth or in the number of third party relationships, and our systems,
procedures or controls may not be adequate to support our operations and
management may be unable to manage growth effectively. To manage our expected
growth, we will be required to significantly improve or replace existing
managerial, financial and operational systems, procedures and controls, and
to
expand, train and manage our growing employee base. We will be required to
expand our finance, administrative and operations staff. We may be unable to
complete in a timely manner the improvements to our systems, procedures and
controls necessary to support future operations, management may be unable to
hire, train, retain, motivate and manage required personnel and management
may
be unable to successfully identify, manage and exploit existing and potential
market opportunities.
Increases
in our energy expenses will negatively impact operating results and financial
condition.
Our
biodiesel and specialty chemical production costs will be dependent on the
costs
of the energy sources used to run our refineries. These costs are subject to
fluctuations and variations in different locales in which we intend to operate,
and we may not be able to predict or control these costs. If these costs exceed
our expectations, this may adversely affect our results of operations.
We
may be unable to locate suitable properties and obtain the development rights
needed to build and expand our business.
Our
business plan focuses on designing, building and operating biodiesel refineries
for our own account. Although we were able to successfully enter into an
agreement to purchase land use rights in Jiang Yin, People’s Republic of China
to construct our second biodiesel refinery for our own account, our ability
to
acquire quality and reliable properties and facilities in the future may be
unpredictable and we may be required to delay construction of our facilities,
which will create unanticipated costs and delays. In the event that we are
not
successful in identifying and obtaining development rights on suitable
properties for building and operating biodiesel refineries, our future prospects
for profitability will likely be substantially limited, and our financial
condition and resulting operations may be adversely affected.
The
production, sale and distribution of biodiesel are dependent on the sufficiency
of necessary infrastructure which may not occur on a timely basis, if at all,
and our operations could be adversely affected by infrastructure disruptions.
Substantial
development of infrastructure will be required by persons and entities outside
our control for our operations, and the biodiesel industry generally, to grow.
Areas requiring expansion include, but are not limited to:
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adequate
highway or rail capacity, including sufficient numbers of dedicated
tanker
trucks or cars;
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sufficient
storage facilities for feedstock and biodiesel;
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increases
in truck fleets capable of transporting biodiesel within localized
markets; and
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expansion
of independent filling stations
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Substantial
investments required for these infrastructure changes and expansions may not
be
made or they may not be made on a timely basis. Any delay or failure in making
the changes to or expansion of infrastructure could hurt the demand or prices
for our products, impede our delivery of products, impose additional costs
on us
or otherwise have a material adverse effect on our results of operations or
financial position. Our business is dependent on the continuing availability
of
infrastructure and any infrastructure disruptions could have a material adverse
effect on our business.
Our
commercial success will depend in part on our ability to obtain and maintain
protection of our intellectual property.
Our
success will depend in part on our ability to maintain or obtain and enforce
patent and other intellectual property protection for our technologies and
to
preserve our trade secrets, and to operate without infringing upon the
proprietary rights of third parties. We have obtained or developed rights to
one
patent and one patent application in the People’s Republic of China, and may, in
the future, seek rights from third parties to other patent applications or
patented technology. Significant aspects of our technology are currently
protected as trade secrets, for which we intend to file patent applications
when
appropriate. There can be no assurance that a patent will issue from the patent
application filed or that the scope of any claims granted in any patent will
provide us with proprietary protection or a competitive advantage. We cannot
be
certain that the creators of our technology were the first inventors of
inventions covered by our patent and patent application or that they were the
first to file. Accordingly, there can be no assurance that our patent and patent
application are valid or will afford us with protection against competitors
with
similar technology. The failure to obtain or maintain patent or other
intellectual property protection on the technologies underlying our biodiesel
refining and specialty chemical manufacturing processes may have a material
adverse effect on our competitive position and business prospects. It is also
possible that our technologies may infringe on patents or other intellectual
property rights owned by others. We may have to alter our products or processes,
pay licensing fees, defend an infringement action or challenge the validity
of
the patents in court, or cease activities altogether because of patent rights
of
third parties, thereby causing additional unexpected costs and delays to us.
There can be no assurance that a license will be available to us, if at all,
upon terms and conditions acceptable to us or that we will prevail in any
intellectual property litigation. Intellectual property litigation is costly
and
time consuming, and there can be no assurance that we will have sufficient
resources to pursue such litigation. If we do not obtain a license under such
intellectual property rights, are found liable for infringement or are not
able
to have such patents declared invalid, we may be liable for significant money
damages and may encounter significant delays in bringing products and services
to market.
We
face significant competition, which may negatively impact our future growth.
We
face
competition from other producers of biodiesel with respect to the procurement
of
feedstock, obtaining suitable properties for the construction of biodiesel
refineries and selling biodiesel and related products. Such competition could
be
intense thus driving up the cost of feedstock and driving down the price for
our
products. Competition will likely increase as prices of energy on the
commodities market, including petroleum and biodiesel, rise, as they have in
recent years. Additionally, new companies are constantly entering the market,
thus increasing the competition. Increased competition could also have a
negative impact on our ability to obtain additional capital from investors.
Larger foreign owned and domestic companies that have been engaged in this
business for substantially longer periods of time may have access to greater
resources. These companies may have greater success in the recruitment and
retention of qualified employees, as well as in conducting their own refining
and fuel marketing operations, which may give them a competitive advantage.
In
addition, actual or potential competitors may be strengthened through the
acquisition of additional assets and interests. If we are unable to compete
effectively or adequately respond to competitive pressures, this may materially
adversely affect our results of operation and financial condition.
Our
business is subject to local legal, political, and economic factors that are
beyond our control.
We
believe that the current political environment for construction of biodiesel
refineries is sufficiently supportive to enable us to plan and implement our
operations. However, there are risks that conditions will change in an adverse
manner. These risks include, but are not limited to, laws or policies affecting
mandates or incentives to promote the use of biodiesel, environmental issues,
land use, air emissions, water use, zoning, workplace safety, restrictions
imposed on the biodiesel industry such as restrictions on production,
substantial changes in product quality standards, restrictions on feedstock
supply, price controls and export controls. Any changes in biodiesel, financial
incentives, investment regulations, policies or a shift in political attitudes
are beyond our control and may adversely affect our business and future
financial results.
Our
business will suffer if we cannot obtain or maintain necessary permits or
licenses.
Our
operations require licenses, permits and in some cases renewals of these
licenses and permits from various governmental authorities within the People’s
Republic of China. We believe that we either hold or will be able to obtain
all
necessary licenses and permits to carry on the activities that we contemplate,
and that we will be able to obtain the licenses and permits necessary for our
future biodiesel refineries and operations. However, our ability to obtain,
sustain, or renew such licenses and permits on acceptable terms are subject
to
change, as, among other things, the regulations and policies of applicable
governmental authorities may change. Our inability to obtain, loss of, or denial
of, extension as to any of these licenses or permits may have a material adverse
effect on our operations and financial condition.
Penalties
we may incur could impair our business.
Failure
to comply with government regulations could subject us to civil and criminal
penalties, require us to forfeit property rights and may affect the value of
our
assets. We may also be required to take corrective actions, including, but
not
limited to, installing additional equipment, which could require us to make
substantial capital expenditures. We could also be required to indemnify our
employees in connection with any expenses or liabilities that they may incur
individually in connection with regulatory action against them. These could
result in a material adverse effect on our prospects, business, financial
condition and our results of operation.
We
are subject to financial reporting and other requirements for which our
accounting, internal audit and other management systems and resources may not
be
adequately prepared.
We
are
subject to reporting and other obligations under the Securities Exchange Act
of
1934, as amended. Under these rules, among other things, we must evaluate the
effectiveness of our internal controls over financial reporting. These reporting
and other obligations will place significant demands on our management,
administrative, operational, internal audit and accounting resources. We
anticipate that we will need to upgrade our systems; implement additional
financial and management controls, reporting systems and procedures; implement
an internal audit function; and hire additional accounting, internal audit
and
finance staff. If we are unable to accomplish these objectives in a timely
and
effective fashion, our ability to comply with our financial reporting
requirements and other rules that apply to reporting companies could be
impaired. Any failure to maintain effective internal controls could have a
material adverse effect on our business, operating results and stock price.
Our
operations are susceptible to interruption from natural disasters.
Our
refineries are located in Fuqing City, Fujian Province of the People’s Republic
of China. Historically, this region has suffered damage from typhoons or other
natural disasters. Should any of these natural events occur, it would likely
slow down our new refinery development and construction plans, thus adversely
impacting current operations and future growth plans.
Risks
Related to Doing Business in the People’s Republic of
China
We
face the risk that changes in the policies of the government of the People’s
Republic of China could have a significant impact upon our business and
profitability.
The
economy of the People’s Republic of China is in a transition from a planned
economy to a market oriented economy subject to five-year and annual plans
adopted by the government that set national economic development goals. Policies
of the People’s Republic of China can have significant effects on the economic
conditions of the People’s Republic of China. The government of the People’s
Republic of China has confirmed that economic development will follow the model
of a market economy. Under this direction, we believe that the People’s Republic
of China will continue to strengthen its economic and trading relationships
with
foreign countries and business development in the People’s Republic of China
will follow market forces. While we believe that this trend will continue,
there
can be no assurance that this will be the case. A change in policies by the
government of the People’s Republic of China could adversely affect our
interests by, among other factors:
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imposition
of new regulations or the interpretations of such regulations,
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restrictions
on currency conversion, imports or sources of supplies, or
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the
expropriation or nationalization of private enterprises.
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Although
the government of the People’s Republic of China has been pursuing economic
reform policies for more than two decades, there is no assurance that the
government will continue to pursue such policies or that such policies may
not
be significantly altered, especially in the event of a change in leadership,
social or political disruption, or other circumstances affecting political,
economic and social life in the People’s Republic of China.
The
laws and regulations of the People’s Republic of China governing our current
business operations are sometimes vague and uncertain. Any changes in these
laws
and regulations may have a material and adverse effect on our
business.
There
are
substantial uncertainties regarding the interpretation and application of laws
and regulations of the People’s Republic of China, including but not limited to,
the laws and regulations governing our business, or the enforcement and
performance of our arrangements with customers in the event of the imposition
of
statutory liens, death, bankruptcy and criminal proceedings. We are considered
a
foreign person or foreign funded enterprise under the laws of the People’s
Republic of China, and, as such, we are required to comply with the laws and
regulations of the People’s Republic of China. These laws and regulations are
sometimes vague and may be subject to future changes, and their official
interpretation and enforcement may involve substantial uncertainty. The
effectiveness of newly enacted laws, regulations or amendments may be delayed,
resulting in detrimental reliance by foreign investors. New laws and regulations
that affect existing and proposed future businesses may also be applied
retroactively. We cannot predict what effect the interpretation of existing
or
new laws or regulations of the People’s Republic of China may have on our
businesses.
A
slowdown or other adverse developments in the economy of the People’s Republic
of China may materially and adversely affect our customers, demand for our
products and our business.
Much
of
our operations are conducted in the People’s Republic of China. In the fiscal
year 2007, approximately 67.54% of our revenue was generated from sales in
the
People’s Republic of China. Although the economy of the People’s Republic of
China has grown significantly in recent years, we cannot assure investors that
such growth will continue. The renewable energy industry in the People’s
Republic of China is relatively new and growing, and we therefore do not know
how sensitive it is to a slowdown in economic growth or other adverse changes
in
the economy of the People’s Republic of China. A slowdown in overall economic
growth, an economic downturn or recession or other adverse economic developments
in the People’s Republic of China could materially reduce the demand for our
products and materially and adversely affect our business.
Inflation
in the People’s Republic of China could negatively affect our profitability and
growth.
While
the
People’s Republic of China economy has experienced rapid growth, such growth has
been uneven among various sectors of the economy and in different geographical
areas of the country. Rapid economic growth can lead to growth in the money
supply and rising inflation. If prices for our products rise at a rate that
is
insufficient to compensate for the rise in the costs of supplies, it may have
an
adverse effect on profitability. In order to control inflation in the past,
the
People’s Republic of China has imposed controls on bank credits, limits on loans
for fixed assets and restrictions on state bank lending. Such an austere policy
can lead to a slowing of economic growth. On October 28, 2004, the People’s Bank
of China, the People’s Republic of China’s central bank, raised interest rates
for the first time in nearly a decade and indicated in a statement that the
measure was prompted by inflationary concerns. Repeated rises in interest rates
by the central bank would likely slow economic activity in the People’s Republic
of China, which could, in turn, materially increase our costs and also reduce
demand for our products.
Governmental
control of currency conversion may affect the value of an investment in
us.
The
government of the People’s Republic of China imposes controls on the
convertibility of Renminbi into foreign currencies and, in certain cases, the
remittance of currency out of the People’s Republic of China. In 2007,
approximately 67.54 % of our revenues was received in Renminbi, which is
currently not a freely convertible currency. Shortages in the availability
of
foreign currency may restrict our ability to remit sufficient foreign currency
to pay dividends, or otherwise satisfy foreign currency dominated obligations.
Under existing People’s Republic of China foreign exchange regulations, payments
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 People’s Republic of China State Administration of
Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate governmental authorities is required whenever Renminbi
is to be converted into foreign currency and remitted out of the People’s
Republic of China to pay capital expenses, such as the repayment of bank loans
denominated in foreign currencies.
The
People’s Republic of China may also at its discretion restrict access in the
future to foreign currencies for current account transactions. If the foreign
exchange control system prevents us from obtaining sufficient foreign currency
to satisfy our currency demands, we may not be able to pay certain of our
expenses as they come due.
The
fluctuation of the Renminbi may materially and adversely affect investments
in
us.
The
value
of the Renminbi against the U.S. dollar and other currencies may fluctuate
and
is affected by, among other things, changes in the political and economic
climate of the People’s Republic of China. As part of our business relies on
revenues earned in the People’s Republic of China, any significant revaluation
of the Renminbi may materially and adversely affect our cash flows, revenues
and
financial condition. For example, to the extent that we need to convert U.S.
dollars we receive from an offering of our securities into Renminbi for our
operations, appreciation of the Renminbi against the U.S. dollar could have
a
material adverse effect on our business, financial condition and results of
operations. Conversely, if we decide to convert our Renminbi into U.S. dollars
for the purpose of making payments for dividends on our common stock or for
other business purposes and the U.S. dollar appreciates against the Renminbi,
the U.S. dollar equivalent of the Renminbi that we convert would be reduced.
In
addition, the depreciation of significant U.S. dollar denominated assets could
result in a charge to our income statement and a reduction in the value of
these
assets.
On
July
21, 2005, the People’s Republic of China changed its decade-old policy of
pegging the value of the Renminbi to the U.S. dollar. Under the new policy,
the
Renminbi is permitted to fluctuate within a narrow and managed band against
a
basket of certain foreign currencies. This change in policy has resulted in
an
approximately 12% appreciation of the Renminbi against the U.S. dollar as of
December 31, 2007. While the international reaction to the Renminbi revaluation
has generally been positive, pressure remains on the People’s Republic of China
to adopt an even more flexible currency policy, which could result in a further
and more significant appreciation of the Renminbi against the U.S.
dollar.
Recent
People’s Republic of China State Administration of Foreign Exchange (“SAFE”)
Regulations regarding offshore financing activities by residents of the People’s
Republic of China have undergone a number of changes that may increase the
administrative burden we face. The failure by our stockholders who are residents
of the People’s Republic of China to make any required applications and filings
pursuant to such regulations may prevent us from being able to distribute
profits and could expose us and our People’s Republic of China resident
stockholders to liability under the laws of the People’s Republic of
China.
SAFE
issued a public notice (the “October Notice”) effective November 1, 2005 that
requires registration with SAFE by the People’s Republic of China resident
stockholders of any foreign holding company of a People’s Republic of China
entity. Without registration, the People’s Republic of China entity cannot remit
any of its profits out of the People’s Republic of China as dividends or
otherwise. However, it is uncertain how the October Notice will be interpreted
or implemented regarding specific documentation requirements for a foreign
holding company formed prior to the effective date of the October Notice, such
as in our case. While our local counsel has advised us that only the People’s
Republic of China resident stockholders who receive the ownership of the foreign
holding company in exchange for ownership in the People’s Republic of China
operating company are subject to the October Notice, there can be no assurance
that SAFE will not require our other People’s Republic of China resident
stockholders to make disclosure. In addition, the October Notice requires that
any monies remitted to residents of the People’s Republic of China outside of
the People’s Republic of China be returned within 180 days. However, there is no
indication of what the penalty will be for failure to comply or if stockholder
non-compliance will be considered to be a violation of the October Notice by
us
or otherwise affect us.
In
the
event that the proper procedures are not followed under the SAFE October Notice,
we could lose the ability to remit monies outside of the People’s Republic of
China and would therefore be unable to pay dividends or make other
distributions. Our People’s Republic of China resident stockholders could be
subject to fines, other sanctions and even criminal liabilities under the
People’s Republic of China Foreign Exchange Administrative Regulations
promulgated January 29, 1996, as amended.
Our
current tax status is uncertain, exposing us to potential
liability.
Pursuant
to the relevant laws and regulations in the People’s Republic of China, Fujian
Zhongde Technology Co., Ltd., as a wholly-owned foreign enterprise (“WOFE”) in
the People’s Republic of China, is entitled to an exemption from the People’s
Republic of China enterprise income tax in 2007 and 50% relief from the People’s
Republic of China enterprise income tax for the next three years beginning
in
2008. However, since our new subsidiary, Fujian Zhongde Energy Co., Ltd., is
a
newly registered WOFE, the corporate income tax status for this new subsidiary
is not clear at this point.
Further,
there can be no assurance that the central government will not audit our
previous tax returns and payments and require that we pay additional taxes
and
penalties in the future that could materially and adversely affect our business
and financial condition.
Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our
operations.
A
renewed
outbreak of SARS or another widespread public health problem in the People’s
Republic of China, where much of our revenue is derived, could have an adverse
effect on our operations. Our operations may be impacted by a number of
health-related factors, including quarantines or closures of some of our offices
that would adversely disrupt our operations. Any of the foregoing events or
other unforeseen consequences of public health problems could adversely affect
our operations.
Because
our principal assets are located outside of the U.S. and all of our directors
and officers reside outside of the U.S., it may be difficult for investors
to
enforce their rights based on U.S. federal securities laws against us and our
officers and directors in the U.S. or to enforce a U.S. court judgment against
us or them in the People’s Republic of China.
All
of
our directors and officers reside outside of the U.S. In addition, Fujian
Zhongde Technology Co., Ltd. and Fujian Zhongde Energy Co., Ltd., our operating
subsidiaries, are located in the People’s Republic of China and substantially
all of their assets are located outside of the U.S. It may therefore be
difficult or impossible for investors in the U.S. to enforce their legal rights
based on the civil liability provisions of the U.S. federal securities laws
against us in the courts of either the U.S. or the People’s Republic of China
and, even if civil judgments are obtained in U.S. courts, to enforce such
judgments in the People’s Republic of China courts. Further, it is unclear if
extradition treaties now in effect between the U.S. and the People’s Republic of
China would permit effective enforcement against us or our officers and
directors of criminal penalties, under the U.S. federal securities laws or
otherwise.
We
may have difficulty establishing adequate management, legal and financial
controls in the People’s Republic of China.
The
People’s Republic of China historically has not adopted a western style of
management and financial reporting concepts and practices, as well as in modern
banking, computer and other control systems. We may have difficulty in hiring
and retaining a sufficient number of qualified employees to work in the People’s
Republic of China. As a result of these factors, we may experience difficulty
in
establishing management, legal and financial controls, collecting financial
data
and preparing financial statements, books of account and corporate records
and
instituting business practices that meet western standards.
Risks
Relating to Our Organization
Our
executive officers beneficially own a substantial percentage of our outstanding
common stock, which gives them control over certain major decisions on which
our
stockholders may vote, which may discourage an acquisition of
us.
Tai-ming
Ou, our Chief Executive Officer, beneficially owns, in the aggregate,
approximately 27% of our outstanding common stock and our directors and
executive officers as a group collectively own approximately 34% of our
outstanding shares. The interests of management may differ from the interests
of
other stockholders. As a result, our executive management will have the right
and ability to exert significant influence over all corporate actions requiring
stockholder approval, irrespective of how our other stockholders may vote,
including the following actions:
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electing
or defeating the election of directors;
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amending
or preventing amendment of our Certificate of Incorporation or By-laws;
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effecting
or preventing a merger, sale of assets or other corporate transaction;
and
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the
outcome of any other matter submitted to the stockholders for vote.
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Our
management’s stock ownership may discourage a potential acquirer from seeking to
acquire shares of our common stock or otherwise attempting to obtain control
of
us, which in turn could reduce our stock price or prevent our stockholders
from
realizing a premium over our stock price.
Because
we became public by means of a reverse merger, we may not be able to attract
the
attention of major brokerage firms.
There
may
be risks associated with us becoming public through a reverse merger.
Specifically, securities analysts of major brokerage firms may not provide
coverage of us because there is no incentive to brokerage firms to recommend
the
purchase of our common stock. No assurance can be given that brokerage firms
will, in the future, want to conduct any secondary offerings on our
behalf.
Risks
Relating to Our Common Stock
Our
stock price may be volatile, so investors could lose their
investment.
The
market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including the following:
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technological
innovations or new products and services by us or our competitors;
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additions
or departures of key personnel;
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limited
“public float” in the hands of a small number of persons whose sales or
lack of sales could result in positive or negative pricing pressure
on the
market price for the common stock;
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sales
of the common stock, particularly following effectiveness of the
resale
registration statement of which this prospectus forms a part;
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our
ability to execute our business plan;
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operating
results that fall below expectations;
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economic
and other external factors; and
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period-to-period
fluctuations in our financial results.
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In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance
of
particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.
There
may be a limited market for our securities and we may fail to qualify for a
listing on a national securities exchange such as the NASDAQ Stock Market or
the
American Stock Exchange.
Although
we plan on applying for listing of our common stock on a national stock exchange
such as the NASDAQ Stock Market or the American Stock Exchange once we meet
the
qualifications, there can be no assurance that our initial listing application
will be granted, when the required listing criteria will be met or when, or
if,
our application will be granted. Thereafter, there can be no assurance that
trading of our common stock on such a market will be sustained or desirable.
In
the event that our common stock fails to qualify for initial or continued
inclusion, our common stock could thereafter only be quoted on the OTC Bulletin
Board or in what are commonly referred to as the “pink sheets.” Under such
circumstances, a stockholder may find it more difficult to dispose of, or to
obtain accurate quotations, for our common stock, and our common stock would
become substantially less attractive to certain purchasers, such as financial
institutions, hedge funds, and large investors.
Furthermore,
for companies whose securities are quoted on the OTC Bulletin Board, it is
more
difficult to obtain coverage for significant news events because major wire
services generally do not publish press releases about such companies, and
to
obtain needed capital.
Our
common stock is currently deemed a “penny stock,” which could make it more
difficult for investors to sell their shares.
Our
common stock is currently subject to the “penny stock” rules adopted under
section 15(g) of the Securities Exchange Act of 1934, as amended. The penny
stock rules apply to companies whose common stock is not listed on a national
securities exchange and trades at less than $5.00 per share or that have
tangible net worth of less than $5,000,000 ($2,000,000 if the company has been
operating for three or more years). These rules require, among other things,
that brokers who trade penny stock to persons other than “established customers”
complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the security,
including a risk disclosure document and quote information under certain
circumstances. Many brokers have decided not to trade penny stocks because
of
the requirements of the penny stock rules and, as a result, the number of
broker-dealers willing to act as market makers in such securities is limited.
If
we remain subject to the penny stock rules for any significant period, it could
have an adverse effect on the market, if any, for our securities. Because our
securities are currently subject to the penny stock rules, stockholders will
find it more difficult to dispose of our securities.
Offers
or availability for sale of a substantial number of shares of our common stock
may cause the price of our common stock to decline.
If
our
stockholders sell substantial amounts of common stock in the public market,
including shares issued upon the effectiveness of the registration statement
of
which this prospectus forms a part, or upon the expiration of any statutory
holding period under Rule 144 of the Securities Act of 1933, as amended, it
could create a circumstance commonly referred to as an “overhang” and in
anticipation of which the market price of our common stock could fall. The
existence of an overhang, whether or not sales have occurred or are occurring,
also could make it more difficult for us to secure additional financing through
the sale of equity or equity-related securities in the future at a time and
price that we deem reasonable or appropriate.
Provisions
of our Certificate of Incorporation and Delaware law could deter a change of
control, which could discourage or delay offers to acquire
us.
Provisions
of our Certificate of Incorporation and Delaware law may make it more difficult
for someone to acquire control of us or for our stockholders to remove existing
management, and might discourage a third party from offering to acquire us,
even
if a change in control or in management would be beneficial to stockholders.
For
example, our Certificate of Incorporation allows us to issue shares of preferred
stock without any vote or further action by stockholders.
Our
Certificate of Incorporation authorizes the board to create new series of
preferred stock without further approval by stockholders, which could adversely
affect the rights of the holders of common stock.
Pursuant
to our Certificate of Incorporation, our Board of Directors has the authority
to
fix and determine the relative rights and preferences of our preferred stock.
The Board of Directors also has the authority to issue preferred stock without
further stockholder approval. As a result, the Board of Directors could
authorize the issuance of a series of preferred stock that grants holders a
liquidation preference, the right to receive dividend payments before dividends
are distributed to the holders of common stock and the right to have their
shares redeemed by us, together with a premium, prior to the any redemption
of
our common stock. In addition, our Board of Directors could authorize the
issuance of a series of preferred stock that has greater voting power than
the
common stock or that is convertible into common stock, which could decrease
the
relative voting power of our common stock or result in dilution to our existing
stockholders.
Volatility
in our common stock price may subject us to securities litigation.
The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers. In the period since the OTC Bulletin Board
began quoting our common stock on July 6, 2006 through January 29, 2008, our
high and low bid prices were $3.10 and $0.22 , respectively. We expect that
our
share price will continue to be more volatile than a seasoned issuer for the
indefinite future. In the past, plaintiffs have often initiated securities
class
action litigation against a company following periods of volatility in the
market price of its securities. We may, in the future, be the target of similar
litigation. Securities litigation could result in substantial costs and
liabilities and could divert management’s attention and resources.
The
elimination of monetary liability against our directors under Delaware law
and
the existence of indemnification rights to our directors may result in
substantial expenditures by us and may discourage lawsuits against our
directors.
Our
Certificate of Incorporation provides that, to the fullest extent that the
General Corporation Law of the State of Delaware permits, none of our directors
shall be personally liable to either us or our stockholders for any breach
in
his or her fiduciary duties as a director. This provision creates an
indemnification obligation by us that could ultimately cause us to incur
substantial expenditures to cover the cost of settlement or damage awards
against our directors. This provision and resultant costs may also discourage
us
from bringing a lawsuit against directors for breaches of their fiduciary duties
and may similarly discourage the filing of derivative litigation by our
stockholders against our directors even though such actions, if successful,
might otherwise benefit us and our stockholders.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains “forward-looking statements,” which include information
relating to future events, future financial performance, strategies,
expectations, competitive environment and regulations. Words such as “may,”
“should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,”
“anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and
similar expressions, as well as statements in future tense, identify
forward-looking statements. Forward-looking statements should not be read as
a
guarantee of future performance or results and will probably not be accurate
indications of when such performance or results will be achieved.
Forward-looking statements are based on information we have when those
statements are made or our management’s good faith belief as of that time with
respect to future events, and are subject to risks and uncertainties that could
cause actual performance or results to differ materially from those expressed
in
or suggested by the forward-looking statements. You should review carefully
the
section entitled “Risk Factors” beginning on page of this prospectus for a
discussion of the risks that relate to our business and investing in shares
of
our common stock.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale of common stock by the selling
stockholders.
A
portion
of the shares covered by this prospectus are issuable upon exercise of warrants
to purchase our common stock, which warrants have a cashless exercise option.
If, however, a selling stockholder were to exercise its warrants for cash,
the
selling stockholder would pay us the exercise price of the
warrants.
MARKET
FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our
common stock has been quoted on the OTC Bulletin Board since July 6, 2006.
From
July 6, 2006 through October 22, 2006, our trading symbol was HXPL.OB and since
October 23, 2006 our trading symbol has been CCGY.OB. Prior to October 23,
2006,
there was no active market for our common stock. The following table sets forth
the high and low bid prices for our common stock for the periods indicated,
as
reported by the OTC Bulletin Board. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
|
Fiscal
Year 2008
|
|
High
|
|
Low
|
|
|
First
Quarter (through January 29, 2008)
|
|
$
|
2.29
|
|
$
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2007
|
|
|
High
|
|
|
Low
|
|
|
First
Quarter
|
|
$
|
3.10
|
|
$
|
1.85
|
|
|
Second
Quarter
|
|
$
|
2.74
|
|
$
|
1.35
|
|
|
Third
Quarter
|
|
$
|
2.25
|
|
$
|
1.10
|
|
|
Fourth
Quarter
|
|
$
|
2.81
|
|
$
|
1.60
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2006
|
|
|
High
|
|
|
Low
|
|
|
Fourth
Quarter (from October 23, 2006)
|
|
$
|
2.70
|
|
$
|
0.22
|
|
The
last
reported sales price of our common stock on the OTC Bulletin Board on January
29, 2008, was $1.77 per share. As of January 17, 2008, there were approximately
108 holders of record of our common stock.
DIVIDEND
POLICY
In
the
past, we have not declared or paid cash dividends on our common stock, and
we do
not intend to pay any cash dividends on our common stock. Rather, we intend
to
retain future earnings, if any, to fund the operation and expansion of our
business and for general corporate purposes.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Company
Overview
We
were
originally incorporated in Delaware under the name “Hurley Exploration Inc.” on
November 12, 2004 to conduct mineral exploration activities. On October 13,
2006, in anticipation of our acquisition of China Clean Energy Resources, Ltd.,
we abandoned this enterprise and changed our name to China Clean Energy Inc.
On
October 24, 2006, we acquired China Clean Energy Resources, Ltd. pursuant to
the
terms of a Share Exchange Agreement. This transaction was accounted for as
a
reverse acquisition (recapitalization), with China Clean Energy Resources,
Ltd.
deemed to be the accounting acquirer and us as the legal acquirer. Accordingly,
the financial statements are those of China Clean Energy Resources, Ltd. and
its
subsidiary to October 24, 2006. The basis of the assets, liabilities and
retained earnings of China Clean Energy Resources, Ltd., the accounting
acquirer, were carried over in the recapitalization. Upon the closing of this
transaction, we became a Chinese renewable resource-based biodiesel and
specialty chemicals manufacturer and distributor.
China
Clean Energy Resources, Ltd. was incorporated in the British Virgin Islands
on
February 13, 2006 for the sole purpose of holding a 100% interest in Fujian
Zhongde Technology Co., Ltd. As such, China Clean Energy Resources, Ltd. does
not conduct any substantive operations of its own, but rather conducts its
primary business operations through Fujian Zhongde Technology Co., Ltd., a
Chinese company that was incorporated in the Province of Fujian, China on July
10, 1995.
Discussion
and Analysis of Financial Condition and Results of
Operations
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006.
Revenues.
During
the quarter ended September 30, 2007, we had net sales of $5,459,688 (29.29%
from biodiesel sales and 70.71% from specialty chemicals sales), as compared
to
net sales of $3,687,425 (23.72% from biodiesel sales and 76.28% from specialty
chemical sales) during the quarter ended September 30, 2006, an increase of
approximately 48.06%. This increase was attributable to production capacity
increases both in the biodiesel and specialty chemical product lines, increased
sales volume, increased selling prices for our exported specialty chemical
products and increased sales force.
Gross
Profit.
Cost of
goods sold, which consists of direct labor, feedstock, direct materials,
overhead and product costs, and depreciation of production facilities, was
$4,033,402 for the quarter ended September 30, 2007, as compared to cost of
goods sold of $2,644,263 for the quarter ended September 30, 2006. We had a
gross profit of $1,426,286 for the quarter ended September 30, 2007, as compared
to gross profit of $1,043,162 for the quarter ended September 30, 2006,
representing gross margins of approximately 26.12% and 28.29%, respectively.
The
increase in gross profits is the result of a significant increase in selling
prices and sales volume in our specialty chemical export businesses as well
as a
sales volume increase in our biodiesel business. The decrease in our gross
margin percentage is attributable to a decrease in Chinese government export
tax
rebates from 13% to 5% effective on July 1, 2007. Although all of our
international customers had agreed with to an average 8% price increase on
our
exported specialty chemical products, the full price increase only went
effective in August 2007. Additionally, our feedstock prices have been quite
stable over the last two years. We have entered into annual contracts with
the
top 10 feedstock suppliers among our 50 current feedstock suppliers. Our
feedstock costs (including transportation costs) were between $350 and $363
per
ton in the third quarter of 2006 and between $311 and $347 per ton in the third
quarter of 2007.
Selling
Expenses.
Selling
expenses, which consist of advertising and promotion expenses, freight charges,
exporting expenses, and wages and salaries totaled $164,642 for the quarter
ended September 30, 2007, as compared to $100,356 for the quarter ended
September 30, 2006, an increase of approximately 64.06%. This increase is
primarily attributable to the increase in our special chemical product exports
(approximately $1,920,240 and $1,454,781 in the quarter ended September 30,
2007
and the quarter ended September 30, 2006, respectively) and related export
and
freight charges, and our expanded sales team and activities that are in turn
reflected in our increased sales. We believe that our selling expenses will
continue to increase slightly as sales continue to grow and our specialty
chemical export business continues to increase.
General
and Administrative Expenses.
General
and administrative expenses totaled $345,436 for the quarter ended September
30,
2007, as compared to $103,172 for the quarter ended September 30, 2006, an
increase of approximately 234.82%. This increase is primarily attributable
to
the increase in auditing, legal, investor relations, and financial advisory
fees, hiring of new talents, and filings with the Securities and Exchange
Commission incurred as a public company, as compared to our limited expenditures
in general and administrative as a private company during the quarter ended
September 30, 2006.
Net
Income.
We had
net income of $834,586 for the quarter ended September 30, 2007, as compared
to
net income of $500,698 for the quarter ended September 30, 2006, an increase
of
approximately 66.68%. This increase in net income was attributable to the
$1,772,263 increase in net sales and the $266,017 decrease in income taxes
off
set by the increase in cost of goods sold, selling expenses, and general
administrative expenses, which totaled $1,389,139, $64,286 and $242,264,
respectively. On March 9, 2007, our principal subsidiary received official
approval from the Chinese Tax authority for corporate income tax exemption
in
2007 and income tax reduction with a reduced income tax rate of 12%, as apposed
to the standard tax rate of 25% between January 1, 2008 and December 31, 2010
as
a result of our WFOE (Wholly Foreign Owned Enterprise) status
approval.
Year
Ended December 31, 2006 Compared to the Year Ended December 31,
2005
Revenues.
During
the year ended December 31, 2006, we had net sales of $13,489,710, as compared
to net sales of $10,040,188 during the year ended December 31, 2005, an increase
of approximately 34.36%. This increase is attributable to our expanded sales
force and the introduction of new products.
Gross
Profit.
Cost of
goods sold, which consists of direct labor, overhead and product costs, was
$9,699,164 for the year ended December 31, 2006, as compared to cost of goods
sold of $7,270,006 for the year ended December 31, 2005. We had a gross profit
of $3,790,546 for the year ended December 31, 2006, as compared to gross profit
of $2,770,182 for the year ended December 31, 2005, representing gross margins
of approximately 28.10% and 27.59%, respectively. The increase in gross profits
is attributable to increased sales.
Selling
Expenses.
Selling
expenses, which consist of advertising and promotion expenses, freight charges,
exporting expenses, and wages and salaries totaled $411,850 for the year ended
December 31, 2006, as compared to $390,259 for the year ended December 31,
2005,
an increase of approximately 5.53%. This increase is primarily attributable
to
our expanded sales team and activities that are in turn reflected in our
increased sales. We believe that our selling expenses will continue to increase
as sales continue to grow.
General
and Administrative and Other Operating Expenses.
General
and administrative and other operating expenses totaled $1,233,646 for the
year
ended December 31, 2006, as compared to $373,171 for the year ended December
31,
2005, an increase of approximately 230.58%. This increase is primarily
attributable to the increase in auditing, legal, investor relations, and
financial advisory fees incurred in 2006 and our “reverse acquisition” of China
Clean Energy Resources, Ltd. on October 24, 2006. Expenses for the year ended
December 31, 2006, include a nonrecurring, one time charge of $464,550 for
consulting fees paid in cash and stock relating to the “reverse acquisition” of
China Clean Energy Resources, Ltd.
Net
Income.
We had
net income of $1,269,860 for the year ended December 31, 2006, as compared
to
net income of $1,310,211 for the year ended December 31, 2005, a decrease of
approximately 3%. This decrease in net income was attributable to the $860,475
increase in general and administrative and other operating expenses and the
$122,810 increase in income taxes, offset by the $1,020,364 increase in gross
profit. Without the nonrecurring one time charge of $464,550 relating to the
“reverse acquisition” of China Clean Energy Resources Ltd., the net income for
the year ended December 31, 2006 would have been $1,734,410, an increase of
approximately 32%.
Liquidity
and Capital Resources
General
As
of
September 30, 2007 and December 31, 2006, we had cash and cash equivalents
of
$1,330,791 and $2,241,712, respectively. The decrease in cash and cash
equivalents was due primarily to the $2,619,375 used in investing activities,
largely resulting from the $1,856,322 deposit paid in connection with the
contract for land usage rights for our Jiangyin plant and related land
improvement costs.
The
land
usage rights at Jiangyin industrial park, Fujian province and related land
improvement costs are associated with our plan to build a second biodiesel
refinery with an annual capacity of 100,000 tons, with construction already
started on December 19, 2007. Construction is expected to take around 10
months.
The
$1,218,752 net cash provided by operating activities during the nine months
ended September 30, 2007 was primarily attributable to $2,028,402 of net income,
$533,014 of depreciation and amortization expenses and a $261,341 increase
in
accounts payable and accrued liabilities, offset by a $876,934 increase in
accounts receivable, a $710,177 increase in advance payments to suppliers and
a
$117,964 decrease in income taxes payable.
The
$192,581 of net cash provided by financing activities during the nine months
ended September 30, 2007 was primarily attributable to a $477,379 increase
in
long term bank loans and was offset by a $284,798 decrease in short term bank
loans.
We
have
historically met our liquidity and capital requirements from a variety of
sources, including internally generated cash, short-term borrowings from both
related parties and financial institutions, and sales of common
stock.
At
the
moment, we have only one refinery which produces both specialty chemicals and
biodiesel products. The production capacities for specialty chemicals and
biodiesel are at 18,000 tons per annum and 10,000 tons (or 3 million gallons)
per annum, respectively.
On
December 25, 2006, we executed a contract to acquire land usage rights for
50
years for certain land located in the Fujian Province of the Peoples Republic
of
China for a total purchase price of approximately $2,46,388. 50% of the purchase
price was paid in December 2006 and January 2007, 30% was paid on March 2007,
and 20% was paid in December 2007. The contract also contemplates that a new
affiliated company of ours will build a new biodiesel facility with 100,000
tons
(or 30 million gallons) per year of biodiesel production capacity on this land.
The new refinery will cost approximately $15,000,000, including $2.5 million
for
land usage rights, $8.5 million for buildings, capital equipment and
installation, and $4 million for working capital.
As
of
now, we have received various approvals from the local Chinese government on
our
new biodiesel refinery at the Jiangyin Industrials park, including: “Safety
Approval for Risky Chemical Production project” from Fuzhou City Safe Production
Monitoring Agency; “Approval for Fujian Zhongde Limited Environmental Impact
from the 100,000 Biodiesel Production Facility” from Fuzhou City Environmental
Protection Agency; “Approval for The Establishment and Construction of 100,000
Tons additional Annual Production of Biodiesel Project” from the Jiangyin
Industrial Park Authority of Fuzhou City; and “Approval for Foreign Investment
Enterprise” from Foreign Trade Commission of Fuzhou City. We have also received
the final approval and the business license from Fuzhou City Industry and
Commerce Bureau on November 5, 2007.
On
November 1, 2007, the Chinese government raised the retail and whole sales
prices for gasoline and diesel by 8% to reflect a recent surge of crude oil
prices to above $95 per barrel. As a result, the retail price for
petroleum-based diesel in the People’s Republic of China had increased from $636
per ton to $695 per ton. Going forward, our whole sales price for biodiesel
will
be increased by approximately 8% from $633 per ton to $684 effective on November
1, 2007.
Private
Placement
On
January 9, 2008, we completed a private placement, pursuant to which we issued
10,000,000 shares of common stock and five-year warrants to purchase 5,000,000
shares of common stock at an initial exercise price of $2.00 per share for
aggregate gross proceeds of $15,000,000. In connection with this private
placement, we incurred placement agent fees of approximately $1,200,000, and
issued the placement agent a five-year warrants to purchase an aggregate of
1,200,000 shares of common stock at an initial exercise price of $2.00 per
share. In addition, we incurred other professional fees and expenses totaling
approximately $90,000 in connection with the private placement. The proceeds
from the above financing will be used, in part, to construct a second biodiesel
facility, as discussed above, as well as for working capital
purposes.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition presented in this section
are
based upon the consolidated financial statements of us and our subsidiaries,
which have been prepared in accordance with the generally accepted accounting
principles in the United States. During the preparation of the financial
statements we are required to make estimates and judgment that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates and judgments, including those related to sales, returns,
pricing concessions, bad debts, inventories, investments, fixed assets,
intangible assets, income taxes and other contingencies. We base our estimates
on historical experience and on various other assumptions that we believe are
reasonable under current conditions. Actual results may differ from these
estimates under different assumptions or conditions.
In
response to the Securities and Exchange Commission’s Release No. 33-8040,
“Cautionary Advice Regarding Disclosure About Critical Accounting Policy,” we
identified the most critical accounting principals upon which our financial
status depends. We determined that those critical accounting principles are
related to the use of estimates, inventory valuation, revenue recognition,
income tax and impairment of intangibles and other long-lived assets. We present
these accounting policies in the relevant sections in this management’s
discussion and analysis, including the Recently Issued Accounting Pronouncements
discussed below.
Revenue
Recognition.
We
recognize sales when the revenue is realized or realizable, and has been earned,
in accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 104, “Revenue Recognition in Financial Statements”. Our sales are related to
sales of product. Revenue for product sales is recognized as risk and title
to
the product transfer to the customer, which usually occurs at the time shipment
is made. Substantially all of our products are sold FOB (“free on board”)
shipping point. Title to the product passes when the product is delivered to
the
freight carrier.
Sales
revenue represents the invoiced value of goods, net of a value-added tax (VAT).
All of our products that are sold in the People’s Republic of China are subject
to a local value-added tax at a rate of 17% of the gross sales price or at
a
rate approved by the local government. This VAT may be offset by VAT paid by
us
on raw materials and other materials included in the cost of producing their
finished product.
Accounts
Receivable, Trade and Allowance for Doubtful Accounts.
Much of
our business operations are conducted in the People’s Republic of China. During
the normal course of business, we extend unsecured credit to our customers.
Accounts receivable, trade outstanding at September 30, 2007 and December 31,
2006 amounted to $2,645,196 and $1,768,262, respectively. Management reviews
accounts receivable on a regular basis to determine if the allowance for
doubtful accounts is adequate. An estimate for doubtful accounts is recorded
when collection of the full amount is no longer probable. As of September 30,
2007 and December 31, 2006, allowances for doubtful accounts were $394,390
and
$228,604, respectively.
Inventories.
Inventories are stated at the lower of cost (first in, first out method) or
at
market. We review our inventory on a regular basis or to determine if any
reserves are necessary for potential obsolescence. As of September 30, 2007
and
December 31, 2006, we determined that no reserves were necessary.
Patent
Expense.
We
capitalize all direct incremental costs associated with initial patent filing
costs and amortize the costs over the estimated remaining life of such patent.
Patents are reviewed regularly and the remaining carrying amount of any patents
deemed not commercial or cost effective are written off.
Off-Balance
Sheet Arrangements.
We have
not entered into any financial guarantees or other commitments to guarantee
the
payment obligations of any third parties. We have not entered into any
derivative contracts that are indexed to our shares and classified as
stockholder’s equity or that are not reflected in our financial statements.
Furthermore, we do not have any retained or contingent interest in assets
transferred to an unconsolidated entity that serves as credit, liquidity or
market risk support to such entity. We do not have any variable interest in
any
unconsolidated entity that provides financing, liquidity, market risk or credit
support to us or engages in leasing, hedging or research and development
services with us.
Inflation.
We
believe that inflation has not had a material effect on our operations to
date.
Income
Taxes.
We
adopted Statement of Financial Accounting Standards No. 109, “Accounting for
Income Taxes” (SFAS 109). SFAS 109 requires the recognition of deferred income
tax liabilities and assets for the expected future tax consequences of temporary
differences between income tax basis and financial reporting basis of assets
and
liabilities. Provision for income taxes consist of taxes currently due plus
deferred taxes. Since we had no operations within the U.S., there is no
provision for U.S. income taxes and there are no deferred tax amounts at
September 30, 2007 and December 31, 2006. The charge for foreign income taxes
is
based on the results for the year as adjusted for nontaxable income and
nondeductible expenses. It is calculated using tax rates that have been enacted
or substantively enacted by the balance sheet date.
Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount
of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principal, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probable that
taxable profit will be available against which deductible temporary differences
can be utilized. Deferred tax is calculated at the tax rates that are expected
to apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when it
relates to items credited or charged directly to equity, in which case the
deferred tax is also dealt with in equity. Deferred tax assets and liabilities
are offset when they relate to income taxes levied by the same taxation
authority and we intend to settle current tax assets and liabilities on a net
basis.
Our
subsidiaries, Fujian Zhongde Technology Co., Ltd. and Fujian Zhongde Energy
Co.,
Ltd., are governed by the Income Tax Law of the People’s Republic of China
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws (the “Income Tax Laws”). Under the Income Tax Laws, WOFEs
generally are subject to an income tax at an effective rate of 25% on income
as
reported in their statutory financial statements after appropriate tax
adjustments unless the enterprise is located in specially designated regions
of
cities for which more favorable effective tax rates apply.
Upon
approval by the People’s Republic of China tax authorities, WOFE’s scheduled to
operate for a period of 10 years or more and engaged in manufacturing and
production 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 with a 50% exemption for the
next three years.
As
Fujian
Zhongde Technology Co., Ltd. became a WOFE starting February 20, 2006 when
it
merged with China Clean Energy Resources, Ltd., it received the above described
WOFE tax benefit upon approval from the People’s Republic of China. Fujian
Zhongde Technology Co., Ltd. was exempt from income taxes in 2007 and thereafter
50% exempt for the next three years beginning in 2008.
Value
Added Tax (VAT).
Enterprises or individuals who sell commodities, engage in repair and
maintenance or import and export goods in the People’s Republic of China are
subject to a value added tax in accordance with People’s Republic of China laws.
The value added tax standard rate is 17% of the gross sales price. A credit
is
available whereby VAT paid on the purchases of semi-finished products or raw
materials used in the production of our finished products can be used to offset
the VAT due on sales of the finished product.
Fujian
Zhongde Technology Co., Ltd. received a 13% refund on the VAT amount paid for
exported products before July 1, 2007. Since July 1, 2007, the Chinese
government had reduced the VAT refund to 5% from 13% for our exported specialty
chemical products.
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Standards No. 157 (SFAS
No. 157), “Fair Value Measurements.” This new standard establishes a framework
for measuring the fair value of assets and liabilities. This framework is
intended to provide increased consistency in how fair value determinations
are
made under various existing accounting standards that permit, or in some cases
require, estimates of fair market value. SFAS No. 157 also expands financial
statement disclosure requirements about a company’s use of fair value
measurements, including the effect of such measures on earnings. SFAS No. 157
is
effective for fiscal years beginning after December 15, 2007. We are currently
evaluating the impact, if any, that SFAS No. 157 will have on our financial
position and results of operations.
In
February 2007, FASB issued statement of Financial Accounting Standard No. 159
(SFAS No. 159), “The Fair Value Option for Financial Assets and Liabilities -
including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for fiscal years beginning after November
15,
2007. We are currently evaluating the impact, if any, SFAS No. 159 will have
on
our financial statements and results of operations.
Seasonality
Our
quarterly sales and operating results may vary significantly from quarter to
quarter as a result of seasonal changes in market demand as well as weather.
Historically, sales are highest during the third and fourth quarters as a result
of good weather and robust bookings in the second quarter.
BUSINESS
Overview
We,
through our wholly-owned subsidiary, Fujian Zhongde Technology Co., Ltd., are
engaged in the development, manufacturing, and distribution of biodiesel and
specialty chemical products made from renewable resources. Fujian Zhongde
Technology Co., Ltd. was incorporated in the Fujian Province of the People’s
Republic of China in 1995 and Fujian Zhongde Energy Co., Ltd. was incorporated
and officially granted business license on November 5, 2007. Since inception,
we
have been engaged in the manufacture of high-quality specialty chemical products
from renewable resources. Through cooperation with outside experts at various
research institutes and our research and development efforts, we formulated
a
proprietary process for refining biodiesel from waste vegetable oils and waste
grease. Using this proprietary process, we began producing biodiesel in 2005
and
commenced selling biodiesel commercially in December 2005.
Products
Biodiesel
Segment
In
November 2005 we filed an application with the State Intellectual Property
Office (SIPO) of the People’s Republic of China for patent protection for our
method of producing biodiesel from monomer acid. The patent application is
still
pending and the patent has not yet been issued. In December 2005, we began
producing biodiesel and currently sell our biodiesel to regional service
stations.
The
term
“biodiesel” generally refers to methyl esters (sometimes called “fatty acid
methyl esters”) made by transesterification, a chemical process that reacts a
“feedstock” oil or fat with methanol and a potassium hydroxide catalyst. The
“feedstock” can be vegetable oil, such as that derived from oil-seed crops (e.g.
soy, sunflower, cottonseed, rapeseed, etc.), or used frying oil (e.g. yellow
grease from restaurants). In addition to biodiesel, our production process
typically yields co-products that can be turned into an array of valuable
specialty chemicals. We believe that this specialty chemical co-production
capability improves the economic viability of producing biodiesel.
According
to the National Biodiesel Board (in the United States), “biodiesel” is a
clean-burning alternative fuel produced from domestic, renewable resources
for
use in compression ignition (diesel) engines. Biodiesel is comprised of
mono-alkyl esters of long chain fatty acids derived from vegetable oils or
animal fats. Biodiesel is produced from feedstock, which comes from animal
fats
or vegetable oils.
According
to the National Biodiesel Board, biodiesel can be used in virtually any diesel
engine without modification. It can be used in its pure form (called B100)
or as
a blend with petroleum diesel at any ratio. It can also be stored in the same
containers as petroleum diesel, which allows it to use the current fuel supply
infrastructure that is already in place. Biodiesel has a higher flash point
(the
point at which fuel ignites) than petroleum diesel, according to the National
Biodiesel Board. This characteristic makes biodiesel safer than petroleum diesel
because it will not combust as easily.
A
commonly used form of biodiesel is a 20% blend of biodiesel with 80% petroleum
diesel, known as B20. This has become a common practice of balancing benefits
with costs and addressing cold weather and solvency considerations associated
with biodiesel. Biodiesel provides similar horsepower and fuel economy as
petroleum diesel with superior lubricity to reduce wear and tear on
engines.
Chemicals
Segment
We
manufacture and sell a variety of industrial products using
environmentally-focused chemicals derived from renewable resources, such as
waste vegetable oils. Our product categories include polyamide hot-melt
adhesives, printing inks, alcohol and benzene-soluble polyamide resins and
various fatty acids, such as dimer acid. We believe that our vegetable oil-based
products will be viewed as an increasingly attractive alternative to products
made with petroleum-based chemicals as a result of rising oil prices and
possible shortages, as well as increased awareness and concern for protecting
the environment.
Hot-
Melt Adhesives.
We
manufacture dimer acid-based polyamide hot-melt adhesives and a wide variety
of
high-performance polyamide hot-melt adhesives. We offer products with varying
softening points, tensile strengths, viscosities and adhesion strengths. These
products are used in a wide range of applications, from book-binding and
adhesion of fabrics, leather, plastic and wood to cementation of metal, ceramics
and electronic components.
Polyamide
Resins.
We offer
a wide variety of alcohol-soluble and benzene-soluble polyamide resins for
use
in printing inks. Our alcohol-soluble resins have good glossiness, adhesion,
heat stability and anti-freeze ability and are used primarily in various kinds
of bucked plate plastic-based inks such as polypropylene, polyethylene,
terylene, cellophane and paper. Our benzene-soluble polyamide resins are
characterized by good dissolving ability, leveling and liberation, excellent
glossiness, excellent anti-gelling properties and adhesion to plastic membranes.
They are used primarily in gravure printing inks and are compatible with gravure
printers that have varying rotating speed capabilities. In addition, we
manufacture low molecular weight liquid polyamide resin, a flexibilizer and
curing agent for epoxy resin. It is used in epoxy coating, epoxy adhesive,
epoxy
casting seal and epoxy varnish.
Dimer,
Stearic and Monomer Acids.
These
are fatty acids that are used for a variety of lubricating, flexibilizing,
surfactant and emulsifying applications . Dimer acid is used in the production
of resins, lubricants, coatings and corrosion-resistant agents. Stearic acid,
produced by hydrolysis and rectification of various kinds of vegetable oils,
is
widely used in plastic flexibilizers, stabilizers, surfactants and soap bases.
Monomer acid, a by-product from dimer and oleic acid processing, is used in
plastics, lubricants, leather agents, detergents, soaps and alkyd
resins.
Printing
Inks.
We
manufacture a variety of printing inks for gravure surface printing, gravure
inner printing and flexible typographic printing on plastic, aluminum foil
and
paper.
The
following table shows our total sales volume broken down by product category
for
the twelve-month period from January 1, 2007 through December 31, 2007. As
shown
in the table, during the twelve-month period ending December 31, 2007, dimer
acid was our top selling product, accounting for 36.97% of total sales. However,
biodiesel was our fastest growing product in terms of sales volume in
2007.
|
|
|
Products
Sold
|
|
%
of Total Sales for the Period
|
|
|
1.
|
|
Dimer
Acid
|
|
|
36.97
|
%
|
|
2.
|
|
Biodiesel
|
|
|
26.54
|
%
|
|
3.
|
|
Polyamide
Resin
|
|
|
21.84
|
%
|
|
4.
|
|
Vegetable
Asphaltun
|
|
|
5.30
|
%
|
|
5.
|
|
Polyamide
Hot Melt Adhesive
|
|
|
3.36
|
%
|
|
6.
|
|
Printing
Ink
|
|
|
3.20
|
%
|
|
7.
|
|
Fatty
Acid
|
|
|
1.31
|
%
|
|
8.
|
|
Stearic
Acid
|
|
|
0.66
|
%
|
|
9.
|
|
Liquid
Resin 651#
|
|
|
0.36
|
%
|
|
10.
|
|
Gluewater
|
|
|
0.29
|
%
|
The
following table shows our total sales volume broken down by product category
for
the twelve-month period from January 1, 2006 through December 31, 2006. As
shown
in the table, during the twelve month period ended December 31, 2006, dimer
acid
was our top selling product, accounting for 36.97% of total sales.
|
|
|
Products
Sold
|
|
%
of Total Sales for the Period
|
|
|
1.
|
|
Dimer
Acid
|
|
|
26.15
|
%
|
|
2.
|
|
Biodiesel
|
|
|
24.89
|
%
|
|
3.
|
|
Polyamide
Resin
|
|
|
22.58
|
%
|
|
4.
|
|
Printing
Ink
|
|
|
10.11
|
%
|
|
5.
|
|
Fatty
Acid
|
|
|
4.77
|
%
|
|
6.
|
|
Polyamide
Hot Melt Adhesive
|
|
|
4.62
|
%
|
|
7.
|
|
Stearic
Acid
|
|
|
3.15
|
%
|
|
8.
|
|
Vegetable
Asphaltun
|
|
|
2.69
|
%
|
|
9.
|
|
Oleic
Acid
|
|
|
0.68
|
%
|
|
10.
|
|
Gluewater
|
|
|
0.35
|
%
|
Biodiesel
Benefits
Significant
Reductions in Greenhouse Gas and Other Emissions on a “Well-to-Wheels”
Basis.
We
believe that the main benefit derived from using biodiesel comes from the
reduction in carbon dioxide and other emissions generated when using this
biodegradable, low toxicity fuel.
Petroleum
diesel, in contrast to biodiesel, produces high levels of carbon dioxide (CO2),
a greenhouse gas that is widely believed to be a significant contributor to
global warming. It also produces other harmful pollutants, namely:
|
|
·
|
carbon
monoxide (CO), a poisonous gas that causes
smog;
|
|
|
·
|
particulates
that contribute to respiratory infections, including
asthma;
|
|
|
·
|
sulfur,
which contributes to the formation of acid rain;
and
|
|
|
·
|
unburned
aromatic hydrocarbons that create smog and may be a contributing
cause of
cancer.
|
By
comparison, whether used in its pure form or blended with petroleum diesel,
biodiesel produces significantly lower levels of harmful emissions of carbon
monoxide, particulates and unburned aromatic hydrocarbons. In addition, because
biodiesel is virtually free of sulfur, we believe that the use of biodiesel
will
not contribute to acid-rain pollution.
Moreover,
according to The Office of Renewable Fuels and Co-Products of the Iowa
Department of Agriculture and Land Stewardship, when comparing biodiesel and
petroleum diesel, a 100% biodiesel blend (B100) lowers carbon monoxide (CO)
emissions by 44%, particulate matter emissions by 40% and sulfate emissions
by
100%. A blend of blend of 20% biodiesel and 80% petroleum diesel (B20), on
the
other hand, lowers carbon monoxide (CO) emissions by 9%, particulate matter
emissions by 8% and sulfate emissions by 20%. When B20 is used along with an
oxidation catalyst, it reduces particulate matter by 45%, carbon monoxide by
41%
and total hydrocarbons by 65%.
Biodegradability.
According to a study performed at the University of Idaho in 2004, biodiesel
tends to degrade more rapidly than petroleum diesel.
Improved
Safety.
According to the U.S. Department of Energy, the flash point, or temperature
at
which fuel “autocombusts” under pressure, of biodiesel blends increases as the
percentage of biodiesel increases. Therefore, pure biodiesel or blends of
biodiesel with petroleum diesel are safer to store, handle, and use than
petroleum diesel.
Better
Lubricity.
According to the National Biodiesel Board, the addition of biodiesel, even
in
very small quantities, has been shown to provide increases in fuel lubricity
using a variety of bench scale test methods.
Alternative
Fuel Performance.
According to a 1998 study jointly sponsored by the U.S. Department of
Agriculture and the U.S. Department of Energy, biodiesel and petroleum diesel
have very similar energy efficiencies.
Biodiesel
Drawbacks
Biodiesel
has long been shown to reduce all regulated emissions, with the exception of
nitrous oxide (NOx) emissions, which are a contributing factor in the localized
formation of smog and ozone. Certain studies suggest a slight increase in NOx
emissions, which varies widely based upon the type engine and type of biodiesel
used. NOx emission increases range from 1-15%. NOx emissions can be reduced
through additives in the biodiesel. Emissions can also be reduced through the
lowering of the combustion temperature of the fuel, which will decrease NOx
emissions to, or below, the conventional fossil diesel level of NOx
emissions.
Another
issue with biodiesel is the effect of extreme cold weather. According to the
National Biodiesel Board, Biodiesel has a higher flash point compared to
conventional fossil diesel, which could cause diesel engine startup problems
in
cold weather areas when using high content biodiesel (such as B50 or B100).
Cold
temperatures cause wax crystals to form which plug fuel filters. Different
derivatives of biodiesel result in different temperature thresholds, for
example, soy biodiesel can be used down to -1C, and cooking oil biodiesel can
be
used down to -9-12C. Conventional fossil diesel goes down to -29C. In order
to
compensate for cold temperatures a number of things can be done. Additives
can
be added to the fuel, and electrical elements, fuel tank heaters, and coolant
operated fuel heaters can be added which heat the fuel. Other than these issues
biodiesel is easily compatible with current fuel infrastructure and diesel
engines.
Other
concerns, according to The Diesel Technology Forum, include potential oxidation,
microbial growth and changes in performance characteristics in vehicles when
stored in underground over a period of time without use.
From
an
economic perspective, average cost of biodiesel generally exceeds that of
petroleum diesel fuel, though its pump price is often subsidized to make it
competitive with regular diesel fuel. Use of biodiesel can also result in some
reduction in fuel economy depending on the blend due to biodiesel’s slightly
lower energy content.
The
Specialty Chemical and Biodiesel Markets
We
believe that oil price trends, global warming, and other environmental
sustainability issues are rapidly increasing the demand for chemicals and fuels
derived from renewable resources. Global prices for gasoline, diesel fuels
and
chemicals have been rising in the past few years as oil prices continue to
increase and supply concerns accelerate. Elevated oil prices not only drive
gasoline and diesel fuel prices higher but also create pressure on a wide range
of petrochemical derivatives such as nylon (polyamides). In addition,
technological innovations, profit motive, and the desire to reduce reliance
on
oil have moved bio-based chemistry and fuel production to the forefront of
the
global marketplace. As a result, we believe the economic, social, and
environmental benefits of a new generation of bio-refinery products are rapidly
becoming integrated into global economies.
People’s
Republic of China Specialty Chemicals Market
We
view
the People’s Republic of China as the world’s most attractive market for
commodity and specialty chemicals alike. We believe that the long-term demand
for commodity and specialty chemicals is likely to grow at a faster rate in
the
People’s Republic of China than in North America and Western Europe. As such, we
believe that the People’s Republic of China will be a very attractive market for
commodity and specialty chemicals for the foreseeable future. Demand comes
from
both rising domestic consumption and the country’s thriving exporters. Demand
for our specialty chemical products (printing inks, adhesives, resins, and
intermediary substances) continues to accelerate with the rise in domestic
consumption, expansion of the People’s Republic of China’s exports and an
increasing global appetite for non-petroleum based, specialty chemical products.
Building and construction continues to grow at increasing rates in the People’s
Republic of China and domestic consumers with more disposable income are
creating new and increased demand for a wide range of products, many of which
contain our adhesives, inks, polyamides, resins and related
products.
In
addition, the People’s Republic of China’s export manufacturing base continues
to expand. The global chemical market is experiencing fundamental changes in
how
it operates as economic, environmental, and political pressures force the
industry to rely less on petroleum products. A wave of renewable or biotech
products is already replacing petroleum-based raw materials in a wide array
of
markets such as plastics, fibers, adhesives, resins and more. We believe the
main drivers behind the acceptance of chemicals derived from renewable resources
as replacements for petrochemicals are price, performance, and environmental
sustainability.
Petroleum,
waste, regulatory, and environmental cost pressures are now evident throughout
the supply chain for chemical products. As oil prices rise and companies
continue to disassociate themselves from any chemical in their supply chain
that
is recognized as being hazardous or harmful to the environment, petrochemicals
are being replaced by environmentally pleasing chemistry
alternatives.
People’s
Republic of China Biodiesel Market
The
People’s Republic of China biodiesel industry is still very much in its infancy.
We estimate that the current total production of biodiesel nationwide is only
approximately 100,000 tons while the total consumption of petroleum diesel
in
the People’s Republic of China is in excess of 100 million tons annually. With
soaring oil prices and worsening pollution, the People’s Republic of China is
expected to promote low-polluting alternatives to foreign oil and we anticipate
biodiesel being recognized as a leading near term solution. Further, we believe
the integration of biodiesel into the fuel supply of the People’s Republic of
China can be swift and immediate, as biodiesel can be blended at any level
with
petroleum diesel or used in its pure form (B100) and biodiesel also make use
of
the existing petroleum infrastructure; i.e., tankers, storage depots, and
filling stations.
Today,
the government of the People’s Republic of China and an increasing number of
governments around the world are encouraging the introduction of biodiesel
into
their transport fuel mix to reduce harmful carbon dioxide emissions, improve
air
quality, and lessen dependence on imported fuels.
People’s
Republic of China Legislation.
Recently, the Standing Committee of the National People’s Congress passed “The
Renewable Energy Law of the People’s Republic of China”. The legislation aims to
“promote the development and utilization of renewable energy, improve the energy
structure, diversify energy supplies, safeguard energy security, protect the
environment and realize the sustainable development of the economy and society.”
This legislation states that fuel retail businesses must begin to include
“biological liquid fuel” in their enterprises or they will suffer imposed
fines.
Potential
for Increase in Diesel Engines.
The
People’s Republic of China central government introduced an updated Auto Policy
in 2004, which stipulates that gasoline consumption should decline 15% by 2010.
The People’s Republic of China’s recent gasoline shortages and the enforcement
of this new policy may be likely to increase the adoption of diesel cars over
the next several years.
We
believe that in comparison to gasoline-powered cars, diesel-powered cars are
more fuel-efficient, more environmentally friendly, better suited for urban
driving, safer, and more durable.
Competition
Renewable
Resource Chemicals
We
have
several major competitors that also produce specialty chemicals from renewable
resources. For instance, Jiangsu Yonglin Oil & Grease Chemicals Co., Ltd.,
located in the northern part of Jiangsu Province, produces polyamide resins
from
oleic acid. Shanghai Jiangqiao Chemical Factory, a private company located
in a
suburb of Shanghai, produces dimer acid from oleic acid. Zhejiang Henghua
Huagong Co., Ltd., located in the Zhejiang Province, manufactures alkyd resin
and polyamide resin from oleic acid. Zhejiang Huangyan Resin Chemical Industry
Co., Ltd., located in Zhejiang Province, manufactures polyamide resin from
oleic
acid.
Biodiesel
In
the
area of biodiesel production, we are aware of the existence of at least three
main domestic competitors: Gushan Environmental Energy Ltd. with operations
in
Handan, Hebei Province, Fuzhou, Fujian Province, and Mianyang, Sichuan Province
, China Biodiesel International Holding Co., Ltd., located in Longyan, and
Fujian Province, and Wuxi Huahong Bio-fuel Co., Ltd., located in Wuxi, Jiangsu
Province.
In
addition, we may face competition from foreign competitors if such competitors
choose to export their biodiesel to the People’s Republic of China.
Competitive
Advantages and Strategy
Chemicals
We
believe that our product formulations, price points, relationships,
infrastructure, quality control standards, and reputation provide us with
competitive advantages. We are currently able to maintain a lower cost structure
than competitors based in the U.S. and Europe. Furthermore, we believe our
competitive advantage in the People’s Republic of China is protected by our
knowledge of government regulations, business practices, and strong
relationships.
In
comparison to our competitors in the People’s Republic of China, we believe we
possess greater technological expertise, marketing knowledge and global
relationships. We also view our proprietary line of multi-purpose hot-melt
adhesives as key technological advantages. In addition, we believe domestic
competitors typically lack the global marketing capability and reputation that
we currently enjoy and are continuing to strengthen.
Biodiesel
We
believe that we enjoy a material presence in the biodiesel industry in Fuqing
City, Fujian Province, as there are only a handful of other companies currently
in the country and the markets are extremely local due to transportation costs,
some of the potential competitors are still months or even years away from
actual production. In addition, we believe our industry relationships, contracts
with feedstock suppliers, cost efficient manufacturing methods and an ability
to
sell diesel co-products to our specialty chemical customers places us at a
competitive advantage.
Growth
Strategy
With
growing global demand for transport fuels and clean technologies, we are focused
on increasing our biodiesel production capacity. We plan to initially expand
our
existing 311,000 square-foot biodiesel and specialty chemical production
facility located in the Fujian Province, People’s Republic of China. In
addition, we are preparing to build several new biodiesel-focused production
plants in
|
|
·
|
Jiangyin,
a newly developed chemical industry zone near the harbor in the Fujian
Province (approximately 15 kilometers from our existing plant to
obtain
synergies, greater efficiency and cost
effectiveness);
|
|
|
·
|
in
the Hebei Province; and/or
|
|
|
·
|
in
the Xinjiang Province.
|
As
we
grow and secure more customers, we will build more plants in strategic locations
throughout the People’s Republic of China.
To
this
end, on December 25, 2006, we signed a contract to purchase land usage rights
for 50 years for the construction of a new biodiesel factory located in the
new
Fuqing Jiangyin Industrial Park in the Fujian Province, People’s Republic of
China. We already broke the ground on the new biodiesel facility on December
19,
2007.
Our
vision is to be the global market leader for the development and manufacturing
of energy products and specialty chemicals made from renewable resources.
Management intends to grow our business by pursuing the following
strategies:
|
|
·
|
grow
capacity and capabilities in line with market demand
increases;
|
|
|
·
|
enhance
our technology through innovation, research and study, and obtain
global
patent protection;
|
|
|
·
|
continue
to improve operational efficiencies and use of nearly all resource
by-products;
|
|
|
·
|
further
expand into global markets and diverse industry sectors;
and
|
|
|
·
|
build
a strong market reputation to foster and capture future growth in
the
People’s Republic of China and
abroad.
|
We
also
plan to expand our existing refining facilities and launch additional plants,
in
addition to growing our specialty chemical business lines.
Existing
Plant (Fulong Industrial Zone)
Our
311,000 square-foot manufacturing facility was originally erected in 1995 with
a
core focus on developing and manufacturing high-quality specialty chemical
products from renewable resources. This ISO9001-certified plant is located
in
Fuzhou City’s technology and industrial zone in the Fulong Industrial Zone of
the People’s Republic of China. We are currently in the process of improving the
value of our specialty chemical products.
We
anticipate that expansion of this plant will be completed with minimal
disruption to our current infrastructure and production schedules.
Existing
Production:
|
|
·
|
Annual
Capacity - biodiesel: 10,000 tons or approximately 3 million
gallons
|
|
|
·
|
Annual
Capacity - specialty chemicals: 18,000
tons
|
After
Expansion:
|
|
·
|
Approximately
$1,500,000 will be invested by us to install a high performance hot
melt
adhesive production line using our proprietary
technology.
|
|
|
·
|
Engineering
effort is primarily focused on increasing biodiesel and hot-melt
adhesive
production yields while maintaining the current quality
standards.
|
|
|
·
|
Production
will maintain current yields while new equipment is installed, minimizing
production downtime and lost sales.
|
|
|
·
|
The
improvement project has already begun and is expected to be completed
within three months.
|
Sales
and Marketing
Specialty
Chemicals
To
date,
we have developed relationships with current and future potential customers
primarily through our participation and use of seminars, trade shows, industry
conferences, websites and direct sales calls. We hope to continue to build
on
our success by expanding our sales force in the People’s Republic of China and
increasing our focus on international markets. As our business expands, we
intend to develop several sales channels - direct sales, industry-specific
manufacturer representatives and international strategic partnerships. Our
sales
strategy is designed to capitalize on our reputation, current industry trends
and new market segments that have shown the most promise.
Biodiesel
We
currently plan on concentrating our sales efforts on the local market in the
People’s Republic of China, as demand is expected to increase steadily over the
next decade. However, as the business expands, we will evaluate global biodiesel
prices for opportunities abroad, depending upon shipping and export costs,
as
biodiesel can sell for up to 50% to 100% more at the wholesale level overseas
in
comparison to the price in the People’s Republic of China. While we do not plan
to rely on our ability to export biodiesel for our main growth, we do view
the
export opportunity as a potential enhancement to our business plan, especially
given the higher prices that biodiesel can be sold at markets abroad. We are
currently studying our biodiesel export options.
We
believe that manufacturing and feedstock cost differences create opportunities
for import/export markets and cross-border investments. Such activities could
substantially lower the cost and increase supplies to Europe and the U.S. A
number of documents published by the International Energy Agency (IEA) discuss
the development of international markets for biofuels, as there are fairly
wide
ranges of feedstock availability and production costs among countries and
regions.
Intellectual
Property
On
November 9, 2005, our subsidiary, Fujian Zhongde Technology Co., Ltd., filed
an
application (Application No. 200510019790.9) with the State Intellectual
Property Office of the People’s Republic of China (SIPO) for its process to
produce biodiesel from monomer acid. On November 14, 2005, SIPO accepted this
application.
On
January 20, 2006, Fujian Zhongde Technology Co., Ltd. received preliminary
patent approval from SIPO for its proprietary biodiesel production
method.
We
also
own a patent for Multi-purpose Polyamide Hot Melt Adhesive and its Production
Method, China Patent Registration Number ZL00132072.6 and International Patent
Category #C09J177/00. The patent is valid for twenty years, from December 12,
2000 to December 11, 2020.
Customers
Biodiesel
We
currently sell biodiesel to regional service stations in the People’s Republic
of China. We believe that the market for biodiesel will expand and can absorb
an
increase in supply. Since we began selling biodiesel in December 2005 along
with
specialty chemicals, our best selling product has been biodiesel. In fact,
from
January 2006 through December 2007, sales of biodiesel accounted for
approximately 25.89% of our total sales for that time period.
Chemicals
Our
specialty chemical products are sold to companies domestically and exported
globally to companies in Europe, the U.S. and Asia. We believe that high quality
and low production costs have allowed us to gain successful entry into the
global market and to diversify our customer base.
For
the
twelve-month period from January 1, 2006 through December 31, 2006, we achieved
consolidated revenues of $13,489,710. During the same time period, our top
ten
customers - ranked by the sales amount sold to each customer - contributed
$3,154,627 in revenues. The following table depicts the top ten customers for
the twelve-month period from January 1, 2006 through December 31,
2006.
|
|
|
Name
of Customer
|
|
Products
Sold
|
|
Sales
for the Period by Customer
|
|
%
of Sales for the Period
|
|
|
1.
|
|
Fuqing
Zhongdong Filling Station
|
|
Biodiesel
|
|
$
|
1,514,740
|
|
|
11.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
Fuqing
Risheng Filling Station
|
|
Biodiesel
|
|
$
|
1,347,946
|
|
|
9.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
|
Air
Products and Chemicals (PTE) Ltd.
|
|
Specialty
Chemicals
|
|
$
|
1,148,578
|
|
|
8.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
|
HBG
Exports Co., Ltd.
|
|
Specialty
Chemicals
|
|
$
|
902,084
|
|
|
6.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
|
Fuqing
Zhongde Chemical Industrial Co., Ltd. Tianjin Branch
|
|
Specialty
Chemicals
|
|
$
|
511,436
|
|
|
3.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
|
Micro
Ink Co., Ltd
|
|
Specialty
Chemicals
|
|
$
|
437,928
|
|
|
3.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
|
Cangnan
County Shanlian Ink Shop
|
|
Ink
|
|
$
|
373,740
|
|
|
2.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
|
Dachang
Resins (Huizhou) Co., Ltd
|
|
Specialty
Chemicals
|
|
$
|
332,963
|
|
|
2.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
|
Advanced
Chemical Co., Ltd
|
|
Specialty
Chemicals
|
|
$
|
330,494
|
|
|
2.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
|
Fuzhou
Xinqiang Trading Co., Ltd
|
|
Specialty
Chemicals
|
|
$
|
250,778
|
|
|
1.86
|
%
|
|
|
|
Total
(top 10)
|
|
|
|
$
|
7,150,687
|
|
|
52.98
|
%
|
|
|
|
Total
Company (293)
|
|
|
|
$
|
13,489,710
|
|
|
100
|
%
|
During
the twelve-month period from January 1, 2007 through December 31, 2007, we
had
consolidated revenues of $21,756,010. During the same time period, our top
ten
customers - ranked by the sales amount sold to each customer - contributed
$14,710,065 in revenues. The following table depicts the top ten customers
for
the twelve-month period from January 1, 2007 through December 31,
2007.
|
|
|
Name
of Customer
|
|
Products
Sold
|
|
Sales
for the Period by Customer
|
|
%
of Sales for the Period
|
|
|
1.
|
|
Fuqing
Zhongdong Filling Station
|
|
Biodiesel
|
|
$
|
3,168,720
|
|
|
14.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
Fuqing
Risheng Filling Station
|
|
Biodiesel
|
|
$
|
2,604,989
|
|
|
11.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
|
Hangzhou
Yangsheng Chemical Co. Ltd.
|
|
Specialty
Chemicals
|
|
$
|
1,819,939
|
|
|
8.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
|
Dachang
Resins (Huizhou) Co. Ltd.
|
|
Specialty
Chemicals
|
|
$
|
1,647,038
|
|
|
7.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
|
Air
Products and Chemicals (PTE) Ltd.
|
|
Specialty
Chemicals
|
|
$
|
1,349,820
|
|
|
6.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
|
Micro
Ink Co. Ltd.
|
|
Specialty
Chemicals
|
|
$
|
1,196,054
|
|
|
5.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
|
Cray
Valley Resins PVT., Ltd.
|
|
Specialty
Chemicals
|
|
$
|
1,027,040
|
|
|
4.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
|
HBG
Exports Co., Ltd.
|
|
Specialty
Chemicals
|
|
$
|
669,240
|
|
|
3.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
|
Shanming
Youcheng Trading Co., Sha County Branch Office
|
|
Specialty
Chemicals
|
|
$
|
624,739
|
|
|
2.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
|
Fuzhou
Baisheng Precision Chemical Co., Ltd.
|
|
Specialty
Chemicals
|
|
$
|
593,486
|
|
|
2.73
|
%
|
|
|
|
Total
(top 10)
|
|
|
|
$
|
14,701,065
|
|
|
67.57
|
%
|
|
|
|
Total
Company (197)
|
|
|
|
$
|
21,756,010
|
|
|
100
|
%
|
Principal
Suppliers
During
the twelve-month period from January 1, 2007 through December 31, 2007, we
had
four feedstock suppliers who supplied more than 5% of our
feedstocks.
|
|
|
Name
of Supplier
|
|
Percentage
of Feedstock Supplied for Period
|
|
|
1.
|
|
Fuqing
Zhongde Waste Oil Recycling Co. Ltd.
|
|
|
52.91
|
%
|
|
|
|
|
|
|
|
|
|
2.
|
|
Fujian
Quanzhou Zhongyuan Chemical Co., Ltd.
|
|
|
20.45
|
%
|
|
|
|
|
|
|
|
|
|
3.
|
|
Xinjiang
Guansheng Technology Co., Ltd.
|
|
|
12.16
|
%
|
|
|
|
|
|
|
|
|
|
4.
|
|
Cangzhou
Shuanyu Chemical Co., Ltd.
|
|
|
6.98
|
%
|
Regulation
We
are
subject to environmental regulation by both the central government of the
People’s Republic of China and by local government agencies. Since our
inception, we have been in compliance with all applicable
regulations.
Under
the
State Environmental Protection Administration of the People’s Republic of China,
all chemical and biodiesel manufacturing facilities are required to obtain
a
Discharge Permit and a Safe Production Permit. We have both of these permits.
These permits are valid for a period of three years and may be renewed for
additional periods of three years. In order to renew the Safe Production Permit,
the subject facility must not have had any accidents during the previous three
years. In addition, the local environmental protection administration inspects
waste-water, gas and solid waste discharges and issues an examination report
each calendar quarter. In order to renew the Discharge Permit, the subject
facility must have consistently passed the local government inspections for
the
prior three years.
In
addition, we expect the government of the People’s Republic of China to release
an official standard for biodiesel within one year. We will seek to qualify
our
products for the biodiesel standard when it is released. We believe that we
are
well positioned to qualify due to our early production of biodiesel as well
as
our longstanding history of being in operation since 1995, among other
things.
Legal
Proceedings
We
are
not a party to any legal proceedings.
Property
Our
Chinese headquarters are currently located in approximately 573 square meters
of
office space at Fulong Industry Zone, Longtian Town, Fuqing City, Fujian, China
35013.
We
own a
311,000 square-foot manufacturing facility located at the same location. In
the
opinion of our management, this facility is adequately covered by insurance.
In
the People’s Republic of China, the ownership of land belongs to the government
of the People’s Republic of China, and private entities and individuals can only
acquire land use rights for a certain period of time. Our land use rights for
our facility started on June 1, 1998 and expire on May 31, 2047.
On
December 25, 2006, we signed a contract with Fuzhou City Jiangyin Industry
District Management Committee to purchase land usage rights for 50 years at
a
purchase price of 18,549,000 Renminbi, or approximately $2.5 million for the
construction of a new biodiesel plant (Fujian Zhongde Energy Co., Ltd.) with
annual production capacity of 100,000 tons or 30 million gallons. 50% of the
purchase price was paid within 10 days of signing, with an additional 30% being
due on the 3 month anniversary of the agreement and the remaining 20% due on
the
6 month anniversary of the agreement. We plan to use this land usage right
to
construct a new biodiesel factory located in the new Fuqing Jiangyin Industrial
Park in the Fujian Province of the People’s Republic of China. The new factory
site is approximately 50 miles from Fuzhou, the Capital City of Fujian Province,
and 15 miles from our existing facility. We already broke the ground on the
new
biodiesel facility on December 19, 2007.. Work on this facility will last
approximately 10 months and the total investment will cost $15 million,
including $2.5 million for the land usage rights for 50 years, $8.5 million
for
buildings, equipment, and installation, and $4 million for working. We expect
the construction to be completed by the end of 2008.
We
rent
office space at 17 Candlewood Drive, West Windsor, New Jersey, for 16,000
Renminbi per month (approximately $2,070 United States Dollars), pursuant to
an
Office Rental Agreement, dated February 28, 2007, with Sonia Ma. Pursuant to
the
terms of the Office Rental Agreement, Ms. Ma also provides us with office
furniture, computer equipment, telephone service and voice mail at cost. The
term of the Office Rental Agreement is for one year with an option to renew
upon
the mutual agreement of both parties.
Employees
We
have
120 employees, all of which are full time employees. To the best of our
knowledge, we are compliant with local prevailing wage, contractor licensing
and
insurance regulations, and have good relations with our employees.
MANAGEMENT
The
following table sets forth information regarding the members of our board of
directors and our executive officers. All directors hold office for one-year
terms until the election and qualification of their successors. Officers are
elected annually by the board of directors and serve at the discretion of the
board.
|
Name
|
|
Age
|
|
Position
|
|
Tai-ming
Ou
|
|
53
|
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
|
Gary
Zhao
|
|
45
|
|
Chief
Financial Officer and Director
|
|
Ri-wen
Xue
|
|
43
|
|
Chief
Operating Officer and Director
|
|
Yun
He
|
|
40
|
|
Vice
President of Sales
|
|
Qin
Yang
|
|
48
|
|
Director
|
Tai-ming
Ou, Chief Executive Officer and Chairman of the Board.
Mr. Ou
is one of our co-founders and has been our Chief Executive Officer since
inception in 1995. Prior to our founding, Mr. Ou was the Director of General
and
Administrative Office of Fuqing First Secondary School and was responsible
for
building construction, repair and maintenance and purchases of teaching
instruments, property, plant and equipment, and office stationery. Mr. Ou was
also in charge of operating and managing a factory run by the school. Mr. Ou
is
a certified senior economist in the People’s Republic of China. Mr. Ou graduated
from Fujian Normal University in 1981 with a Bachelor’s degree in
mathematics.
Gary
Zhao, Chief Financial Officer and Director.
Mr. Zhao
was appointed as our Chief Financial Officer on November 15, 2006 and became
a
Director on January 9, 2008. From July 2005 through November 14, 2006, Mr.
Zhao
was Vice President of CapGemini China, a global management consulting,
information technology consulting and outsourcing firm. From July 2002 until
July 2005, Mr. Zhao was a director in charge of Finance Performance Management
and Corporate Strategy at Accenture China, where he provided financial
management, Sarbanes-Oxley compliance and corporate strategy consulting
services. From January 2001 until July 2002, Mr. Zhao was Chief Financial
Officer of Chinatech International Software Ltd., a software company located
in
Beijing, the People’s Republic of China. Mr. Zhao received a Bachelor of Science
in Metallurgical Engineering from Tsinghua (Qinghua) University in Beijing,
the
People’s Republic of China, in 1984, a Master of Science in Materials Science
from University of Minnesota in 1989, and an MBA in Finance and Strategic
Management from The Wharton School of the University of Pennsylvania in
1995.
Ri-wen
Xue, Chief Operating Officer and Director.
Mr. Xue
joined us in early 2000 as Executive Secretary to the General Manager. In this
capacity, Mr. Xue was in charge of assisting the General Manager in dealing
with
daily affairs, planning and implementing our business management system,
adjusting our organizational chart, establishing employee job descriptions
and
functional department duties. In October 2002, Mr. Xue was promoted to
Production Manager and became responsible for improving production processes
and
technology. In December 2003, Mr. Xue was promoted to the position of Vice
President - Production and Engineering, and Chairperson of the Board of
Supervisors, where he was in charge of planning and carrying out new project
development, streamlining production and engineering processes, and undertaking
research and development, technology applications and improvements. In October
2006, Mr. Xue became our Chief Operating Officer and a Director. Prior to
joining us, Mr. Xue was a Pipelining Operator, Quality Control, and Local
Assistant Manager at the Chip Copperize Corporation in Japan from April 1995
to
April 1999. Mr. Xue is a certified senior economist and a certified senior
engineer in the People’s Republic of China and graduated from Fujian Finance
College in 1985 with a Bachelor’s degree in finance.
Yun
He, Vice President of Sales.
Mr. He
is one of our co-founders and became Sales Manager in 1995, promoting sales
of
our resins and printing inks in the domestic People’s Republic of China market.
Mr. He has been our Vice President of Sales since 1997. Prior to our formation,
Mr. He established an export business in 1992 and engaged in international
trade
and exporting local garments, food, toys, ornaments and handicrafts to Russia,
the Czech Republic and Germany. Mr. He graduated from Fujian Normal University
in 1989 with a Bachelor’s degree in Chinese literature.
Qin
Yang, Director.
Ms. Yang
is one of our co-founders and has been a director since inception in 1995.
Ms.
Yang had previously founded the Fuqing Welfare Garment Factory in 1984 and
served as its Chief Designer and director. Ms. Yang graduated from Fujian
Industrial Arts School in the Fujian province of the People’s Republic of
China.
Mr.
Ou
and Ms. Yang are husband and wife.
Board
Committees
Audit
Committee.
We
intend to establish an audit committee of the board of directors by the end
of
2008, which will consist of soon-to-be-nominated independent directors. The
audit committee’s duties will be to recommend to our Board of Directors the
engagement of independent auditors to audit our financial statements and to
review our accounting and auditing principles. The audit committee will review
the scope, timing and fees for the annual audit and the results of audit
examinations performed by the internal auditors and independent public
accountants, including their recommendations to improve the system of accounting
and internal controls. The audit committee would at all times be composed
exclusively of directors who are, in the opinion of our Board of Directors,
free
from any relationship that would interfere with the exercise of independent
judgment as a committee member and who possess an understanding of financial
statements and generally accepted accounting principles.
Compensation
Committee.
We
intend to establish a compensation committee of the Board of Directors by the
end of 2008. The compensation committee would review and approve our salary
and
benefits policies, including compensation of executive officers.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table summarizes the annual and long-term compensation paid to
Tai-ming Ou, our chief executive officer, who we refer to in this prospectus
as
the “named executive officer.” During 2007, no executive officer received annual
remuneration in excess of $100,000.
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Option
Awards(1)
($)
|
|
All
Other Compensation
($)
|
|
Total
($)
|
|
|
Tai-ming
Ou
|
|
|
2007
|
|
|
18,462
|
|
|
|
|
|
—
|
|
|
|
|
|
18,462
|
|
|
President
and Chief Executive Officer
(principal
executive officer)
|
|
|
2006
|
|
|
13,153
|
|
|
|
|
|
|
|
|
|
|
|
13,153
|
|
Employment
Agreement
On
January 9, 2008, we entered into a two year employment agreement with Tai-ming
Ou, which agreement shall be automatically renewed for additional one-year
periods until either we or Mr. Ou, as the case may be, gives the other written
notice of its intent not to renew the agreement at least 90 days prior to the
end of the then current term. Pursuant to this agreement, Mr. Ou shall serve
at
our Chief Executive Officer and shall receive a salary of approximately $2,473
per month, which amount shall be increased by at least 10% following the one
year anniversary of the agreement. In addition, under this agreement, we granted
Mr. Ou options to purchase 65,000 shares of common stock with an exercise price
of $2.50 per share and 65,000 shares of common stock with an exercise price
of
$3.00 per share, with all options vesting quarterly over three years. If Mr.
Ou’s employment is terminated without cause or he resigns for good reason, all
unvested options shall vest and Mr. Ou will be entitled to the continuation
of
benefits and the payment of his salary for 12 months.
Outstanding
Equity Awards at Fiscal Year-End
There
were no outstanding equity awards held by our named executive officer as of
December 31, 2007.
2008
Equity Incentive Plan
On
January 9, 2008, our board of directors and stockholders adopted the 2008 Equity
Incentive Plan. The purpose of the 2008 Equity Incentive Plan is to provide
an
incentive to attract and retain directors, officers, consultants, advisors
and
employees whose services are considered valuable, to encourage a sense of
proprietorship and to stimulate an active interest of such persons in our
development and financial success. Under the 2008 Equity Incentive Plan, we
are
authorized to issue up to 2,000,000 stock options, 1,000,000 of which shall
have
an exercise price per share equal to the greater of (i) $2.50 or (ii) 100%
of
the fair market value of a share of common stock on the date of grant and
1,000,000 of which shall have an exercise price per share equal to the greater
of (i) $3.00 or (ii) 100% of the fair market value of a share of common stock
on
the date of grant. Under the 2008 Equity Incentive Plan, we are authorized
to
issue incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended, and non-qualified stock options
and
all options under the plan shall vest quarterly over three years. The 2008
Equity Incentive Plan is administered by our board of directors. On January
9,
2008, we granted options to purchase common stock under the 2008 Equity
Incentive Plan to the following executive officers:
|
Name
|
|
Shares
Subject to Options
|
|
Exercise
Price
|
|
Vesting
Schedule
|
|
Expiration
|
|
Tai-ming
Ou
|
|
65,000
|
|
$2.50
|
|
1/12
every three months following the grant date
|
|
10
years from date of grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,000
|
|
$3.00
|
|
1/12
every three months following the grant date
|
|
10
years from date of grant
|
|
|
|
|
|
|
|
|
|
|
|
Gary
Zhao
|
|
500,000
|
|
$2.50
|
|
1/12
every three months following the grant date
|
|
10
years from date of grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
$3.00
|
|
1/12
every three months following the grant date
|
|
10
years from date of grant
|
|
|
|
|
|
|
|
|
|
|
|
Ri-wen
Xue
|
|
50,000
|
|
$2.50
|
|
1/12
every three months following the grant date
|
|
10
years from date of grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
$3.00
|
|
1/12
every three months following the grant date
|
|
10
years from date of grant
|
|
|
|
|
|
|
|
|
|
|
|
Yun
He
|
|
50,000
|
|
$2.50
|
|
1/12
every three months following the grant date
|
|
10
years from date of grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
$3.00
|
|
1/12
every three months following the grant date
|
|
10
years from date of grant
|
Director
Compensation
The
following table sets forth director compensation for the year ended December
31,
2006.
|
Name
|
|
Fee
Earned
or
Paid in Cash
|
|
All
Other Compensation
|
|
Total
|
|
|
Qin
Yang
|
|
$
|
10,769
|
|
|
|
|
$
|
10,789
|
|
Narrative
to Director Compensation Table
Ms.
Qin
Yang, the wife of Tai-ming Ou, was one of our original founders in 1995 and
has
been one of our directors since that time. In addition, since June 2006, Ms.
Yang has been an independent contractor, and for such services received $897
per
month or $10,769 per annum during the year ended December 31, 2007. In addition,
we paid Ms. Yang a one time cash incentive award of $6,400 in February 2007
for
her performance and contribution to us 2006. In 2008, Ms. Yang’s monthly
compensation as an independent contractor is anticipated to be at $1,379 per
month or $16,552 per annum.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We
review
all relationships and transactions in which the company and our directors and
executive officers or their immediate family members are participants to
determine whether such persons have a direct or indirect material interest.
Transactions that we have determined to be directly or indirectly material
to
the company or a related person are disclosed below. We believe each transaction
is on terms no less favorable to us than the terms generally available to an
unaffiliated third-party under the same or similar circumstances.
Tai-ming
Ou, our Chief Executive Officer and Chairman,
has
provided us with financing through a series of undocumented, unsecured,
non-interest bearing demand loans. The last such advance made to us by Mr.
Ou
was for approximately $490,000 in September 2005. All loans provided to us
by
Mr. Ou were repaid in full during 2005, except for $5,656 which was repaid
to
Mr. Ou in May 2006.
In
connection with our January 9, 2008 private placement, Mr. Ou agreed to place
1,042,012 shares of common stock held by him into an escrow account, with such
shares to be released to the investors in such private placement should we
fail
to either (i) commence the production of biodiesel at our currently proposed
production facility in Jiang Yin, People’s Republic of China on or before
January 1, 2009 or (ii) record at least $14,000,000 of adjusted net income
for
the fiscal year ending December 31, 2009. Should we successfully satisfy each
of
these two milestones, these shares of common stock will be returned to Mr.
Ou.
Yun
He,
our Vice President of Sales, has provided us with financing through a series
of
undocumented, unsecured, non-interest bearing demand loans. The last such
advance made to us by Mr. He was for approximately $242,000 in September 2005.
All loans provided to us by Mr. He were repaid in full during 2005, except
for
$14,516 which was repaid to Mr. He in February 2006.
In
connection with our January 9, 2008 private placement, Mr. He agreed to place
235,293 shares of common stock held by him into an escrow account, with such
shares to be released to the investors in such private placement should we
fail
to either (i) commence the production of biodiesel at our currently proposed
production facility in Jiang Yin, People’s Republic of China on or before
January 1, 2009 or (ii) record at least $14,000,000 of adjusted net income
for
the fiscal year ending December 31, 2009. Should we successfully satisfy each
of
these two milestones, these shares of common stock will be returned to Mr.
He.
Ri-wen
Xue, our Chief Operating Officer and a Director, has provided us with financing
through a series of undocumented, unsecured, non-interest bearing demand loans.
The last such advance made to us by Mr. Xue was for approximately $198,000
in
September 2005. All loans provided to us by Mr. Xue were repaid in full during
2005, except for $86,772 which was repaid to Mr. Xue in January
2006.
In
connection with our January 9, 2008 private placement, Mr. Xue agreed to place
201,680 shares of common stock held by him into an escrow account, with such
shares to be released to the investors in such private placement should we
fail
to either (i) commence the production of biodiesel at our currently proposed
production facility in Jiang Yin, People’s Republic of China on or before
January 1, 2009 or (ii) record at least $14,000,000 of adjusted net income
for
the fiscal year ending December 31, 2009. Should we successfully satisfy each
of
these two milestones, these shares of common stock will be returned to Mr.
Xue.
Ms.
Qin
Yang, one of our Directors, has provided us with financing through a series
of
undocumented, unsecured, non-interest bearing demand loans. The last such
advance made to us by Ms. Yang was for approximately $168,000 in September
2005.
All loans provided to us by Ms. Yang were repaid in full during 2005, except
for
$74,376 which was repaid to Mr. Yang in January 2006.
In
connection with our January 9, 2008 private placement, Gary Zhao, our Chief
Financial Officer, agreed to place 21,015 shares of common stock held by him
into an escrow account, with such shares to be released to the investors in
such
private placement should we fail to either (i) commence the production of
biodiesel at our currently proposed production facility in Jiang Yin, People’s
Republic of China on or before January 1, 2009 or (ii) record at least
$14,000,000 of adjusted net income for the fiscal year ending December 31,
2009.
Should we successfully satisfy each of these two milestones, these shares of
common stock will be returned to Mr. Zhao.
Director
Independence
We
do not
currently have any independent directors.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information with respect to the beneficial ownership
of our common stock as of February 1, 2008 by:
|
|
·
|
each
person known by us to beneficially own more than 5.0% of our common
stock;
|
|
|
·
|
our
named executive officer; and
|
|
|
·
|
all
of our directors and executive officers as a group.
|
The
percentages of common stock beneficially owned are reported on the basis of
regulations of the Securities and Exchange Commission governing the
determination of beneficial ownership of securities. Under the rules of the
Securities and Exchange Commission, a person is deemed to be a beneficial owner
of a security if that person has or shares voting power, which includes the
power to vote or to direct the voting of the security, or investment power,
which includes the power to dispose of or to direct the disposition of the
security. Except as indicated in the footnotes to this table, each beneficial
owner named in the table below has sole voting and sole investment power with
respect to all shares beneficially owned and each person’s address is c/o China
Clean Energy Inc., Fulong Industry Zone, Longtian Town Fuqing City, Fujian,
China 350315. As of January , 2008, we had 31,512,269 shares
outstanding.
|
Name
and Address of Beneficial Owner
|
|
Number
of Shares Beneficially Owned(1)
|
|
Percentage
Beneficially Owned(1)
|
|
|
Tai-ming
Ou
|
|
|
8,477,350
|
|
|
26.90
|
%
|
|
Gary
Zhao
|
|
|
100,000
|
|
|
*
|
|
|
Ri-wen
Xue
|
|
|
959,700
|
|
|
3.05
|
%
|
|
Qin
Yang
|
|
|
8,477,350
|
|
|
*
|
|
|
Nai-ming
Yu
|
|
|
2,399,250
|
|
|
26.90
|
%
|
|
JLF
Partners I, LP(4)
|
|
|
4,600,000
|
|
|
14.88
|
%
|
|
JLF
Partners II, LP(6)
|
|
|
4,660,000
|
|
|
14.88
|
%
|
|
JLF
Offshore Fund, Ltd.(7)
|
|
|
4,600,000
|
|
|
14.88
|
%
|
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (5 persons)
|
|
|
10,656,700
|
|
|
33.82
|
%
|
*
Less
than 1%.
|
(1)
|
Shares
of common stock beneficially owned and the respective percentages
of
beneficial ownership of common stock assumes the exercise of all
options,
warrants and other securities convertible into common stock beneficially
owned by such person or entity currently exercisable or exercisable
within
60 days of February 1, 2008. Shares issuable pursuant to the exercise
of stock options and warrants exercisable within 60 days are deemed
outstanding and held by the holder of such options or warrants for
computing the percentage of outstanding common stock beneficially
owned by
such person, but are not deemed outstanding for computing the percentage
of outstanding common stock beneficially owned by any other
person.
|
|
(2)
|
Includes
3,518,900 shares of common stock held directly by Qin Yang, Mr. Ou’s wife,
with respect to which Mr. Ou disclaims beneficial
ownership.
|
|
(3)
|
Includes
4,958,450 shares of common stock held directly by Tai-Ming Ou, Ms.
Yang’s
husband, with respect to which Ms. Yang disclaims beneficial
ownership.
|
|
(4)
|
The
address of JLF Partners I, LP is 2775 Via De La Valle, Suite 204,
Del Mar,
California 92014.
|
|
(5)
|
Includes
1,860,000 shares of common stock held by JLF Partners I, LP, 160,000
shares of common stock held by JLF Partners II, LP and 2,640,000
shares of
common stock held by JLF Offshore Fund,
Ltd.
|
|
(6)
|
The
address of JLF Partners II, LP is 2775 Via De La Valle, Suite 204,
Del
Mar, California 92014.
|
|
(7)
|
The
address of JLF Offshore Fund, Ltd. is 2775 Via De La Valle, Suite
204, Del
Mar, California 92014.
|
SELLING
STOCKHOLDERS
Up
to
16,200,000 shares of common stock are being offered by this prospectus, all
of
which are being registered for sale for the accounts of the selling security
holders and include the following:
|
|
·
|
10,000,000
shares of common stock issued in a private placement;
|
|
|
·
|
5,000,000
shares of common stock initially issuable upon the exercise of warrants
issued in a private placement; and
|
|
|
·
|
1,200,000
shares of common stock initially issuable upon the exercise of warrants
issued to a placement agent in connection with our private placement
of
common stock and warrants.
|
Each
of
the transactions by which the selling stockholders acquired their securities
from us was exempt under the registration provisions of the Securities Act
of
1933, as amended.
The
shares of common stock referred to above are being registered to permit public
sales of the shares, and the selling stockholders may offer the shares for
resale from time to time pursuant to this prospectus. The selling stockholders
may also sell, transfer or otherwise dispose of all or a portion of their shares
in transactions exempt from the registration requirements of the Securities
Act
of 1933, as amended, or pursuant to another effective registration statement
covering those shares. We may from time to time include additional selling
stockholders in supplements or amendments to this prospectus.
The
table
below sets forth certain information regarding the selling stockholders and
the
shares of our common stock offered by them in this prospectus. The selling
stockholders have not had a material relationship with us within the past three
years other than as described in the footnotes to the table below or as a result
of their acquisition of our shares or other securities. To our knowledge,
subject to community property laws where applicable, each person named in the
table has sole voting and investment power with respect to the shares of common
stock set forth opposite such person’s name.
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Each selling stockholder’s percentage of ownership of our
outstanding shares in the table below is based upon 31,512,269 shares of common
stock outstanding as of February 1, 2008. With respect to the outstanding
warrants, there exist contractual provisions limiting conversion and exercise
to
the extent such conversion or exercise would cause such selling stockholder,
together with its affiliates or members of a “group”, to beneficially own a
number of shares of common stock that would exceed 4.99% of our then outstanding
shares of common stock following such conversion or exercise. The shares and
percentage ownership of our outstanding shares indicated in the table below
do
not give effect to this limitation.
|
|
|
Ownership
Before Offering
|
|
After
Offering(1)
|
|
|
Selling
Stockholder
|
|
Number
of
shares
of
common
stock
beneficially
owned
|
|
Number
of
shares
offered
|
|
Number
of
shares
of
common
stock
beneficially
owned
|
|
Percentage
of
common
stock
beneficially
owned
|
|
|
Fred
L. Astman Wedbush Securities Inc CTDN IRA R/O Holding
10/13/92(2)
|
|
|
30,000
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Samir
Barakat and Claudia Marseille
|
|
|
180,000
|
|
|
180,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chestnut
Ridge Partners, LP(5)
|
|
|
240,000
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hugh
Cohen
|
|
|
9,999
|
|
|
9,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory
Cook Wedbush Securities Inc CTDN IRA Contributory 1/16/02
(8)
|
|
|
30,000
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cranshire
Capital, LP(9)
|
|
|
60,000
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crastvell
Trading Ltd.(11)
|
|
|
710,001
|
|
|
710,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crypto
Corporation(13)
|
|
|
15,000
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Herbert
Arnold Duke
|
|
|
40,000
|
|
|
30,000
|
|
|
10,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
R. Echols, Sr.
|
|
|
15,000
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bai
Ye Feng
|
|
|
240,000
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barry
Goldstein
|
|
|
15,000
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GRQ
Consultants, Inc. 401K Plan(15)
|
|
|
1,749,999
|
|
|
1,749,999
|
|
|
|
|
|
|
|
|
|
|
Ownership
Before Offering
|
|
After
Offering(1)
|
|
|
Selling
Stockholder
|
|
Number
of
shares
of
common
stock
beneficially
owned
|
|
Number
of
shares
offered
|
|
Number
of
shares
of
common
stock
beneficially
owned
|
|
Percentage
of
common
stock
beneficially
owned
|
|
|
Nicholas
Hammond
|
|
|
60,000
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
Harvey & Lyn Harvey JTWROS
|
|
|
15,000
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
R. Holbrooke
|
|
|
30,000
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heller
Capital Investments, LLC (17)
|
|
|
600,000
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRA
FBO John P. O’Shea, Pershing LLC as Custodian(19)
|
|
|
216,666
|
|
|
135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iroquois
Master Fund Ltd.(21)
|
|
|
150,000
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JLF
Offshore Fund, Ltd.(23)
|
|
|
3,960,000
|
|
|
3,960,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JLF
Partners I, LP(23)
|
|
|
2,790,000
|
|
|
2,790,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JLF
Partners II, LP(23)
|
|
|
240,000
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd
Kice(26)
|
|
|
18,500
|
|
|
15,000
|
|
|
3,500
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Kung
|
|
|
75,000
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anna
Lo
|
|
|
15,000
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
Street Union, LLC(28)
|
|
|
15,000
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
B. Marsala
|
|
|
33,000
|
|
|
30,000
|
|
|
3,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mere
Lane Investment Fund LP (29)
|
|
|
20,001
|
|
|
20,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MidSouth
Investor Fund LP(31)
|
|
|
300,000
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern
Valley Partners, LLC(33)
|
|
|
75,000
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Octagon
Capital Partners(34)
|
|
|
60,000
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taixing
Ou(35)
|
|
|
900,000
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
Offshore Opportunity Fund Ltd.(37)
|
|
|
1,500,000
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
S. Colman Trust UDT 3/13/85(39)
|
|
|
240,000
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandor
Capital Master Fund LP (40)
|
|
|
210,000
|
|
|
210,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Peter Selda Wedbush Securities Inc CTDN IRA Contributory
08/27/96(42)
|
|
|
30,000
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Black Diamond Fund, LLLP(43)
|
|
|
210,000
|
|
|
210,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Westminster
Securities Corp.(44)
|
|
|
517,050
|
|
|
517,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jung
Min Choi(46)
|
|
|
439,050
|
(47)
|
|
350,550
|
(47)
|
|
88,500
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Louise(48)
|
|
|
110,475
|
(49)
|
|
110,475
|
(49)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
McLaughlin(50)
|
|
|
115,450
|
(51)
|
|
111,450
|
(51)
|
|
4,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken
Hart(52)
|
|
|
104,850
|
(53)
|
|
104,850
|
(53)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joe
Wolfe(54)
|
|
|
5,625
|
(55)
|
|
5,625
|
(55)
|
|
—
|
|
|
—
|
|
*
Less
than 1%
|
(1)
|
Represents
the amount of shares that will be held by the selling stockholders
after
completion of this offering based on the assumptions that (a) all
shares
registered for sale by the registration statement of which this prospectus
is part will be sold and (b) that no other shares of our common stock
are
acquired or sold by the selling stockholders prior to completion
of this
offering. However, the selling stockholders may sell all, some or
none of
the shares offered pursuant to this prospectus and may sell other
shares
of our common stock that they may own pursuant to another registration
statement under the Securities Act of 1933, as amended, or sell some
or
all of their shares pursuant to an exemption from the registration
provisions of the Securities Act of 1933, as amended, including under
Rule
144. To our knowledge there are currently no agreements, arrangements
or
understanding with respect to the sale of any of the shares that
may be
held by the selling stockholders after completion of this offering
or
otherwise.
|
|
(2)
|
Fred
Astman has voting and dispositive power over these
securities.
|
|
(3)
|
Includes
currently exercisable warrants to purchase 10,000 shares of our common
stock at an exercise price of $2.00 per share.
|
|
(4)
|
Includes
currently exercisable warrants to purchase 60,000 shares of our common
stock at an exercise price of $2.00 per share.
|
|
(5)
|
Kenneth
Pasternak, as principal, has voting and dispositive power over these
securities.
|
|
(6)
|
Includes
currently exercisable warrants to purchase 80,000 shares of our common
stock at an exercise price of $2.00 per share.
|
|
(7)
|
Includes
currently exercisable warrants to purchase 3,333 shares of our common
stock at an exercise price of $2.00 per share.
|
|
(8)
|
Gregory
Cook, as beneficiary, has voting and dispositive power over these
securities.
|
|
(9)
|
Mitchell
P. Kopin, the president of Downsview Capital, Inc., the general partner
of
Cranshire Capital, L.P., has sole voting control and investment discretion
over securities held by Cranshire Capital, L.P. Each of Mitchell
P. Kopin
and Downsview Capital, Inc. disclaims beneficial ownership of the
shares
held by Cranshire Capital, L.P.
|
|
(10)
|
Includes
currently exercisable warrants to purchase 20,000 shares of our common
stock at an exercise price of $2.00 per share.
|
|
(11)
|
Olga
Mirimskaya, as principal, has voting and dispositive power over these
securities.
|
|
(12)
|
Includes
currently exercisable warrants to purchase 236,667 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(13)
|
Evelyn
Cann, as president, has voting and dispositive power over these
securities.
|
|
(14)
|
Includes
currently exercisable warrants to purchase 5,000 shares of our common
stock at an exercise price of $2.00 per
share.
|
|
(15)
|
Barry
Honig, as president, has voting and dispositive power over these
securities.
|
|
(16)
|
Includes
currently exercisable warrants to purchase 583,333 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(17)
|
Ronald
Heller, as Chief Information Officer of Heller Capital Investments,
LLC,
has voting and dispositive power over these
securities.
|
|
(18)
|
Includes
currently exercisable warrants to purchase 200,000 shares of our
common
stock at an exercise price of $2.00 per share.
|
|
(19)
|
John
P. O’Shea has voting and dispositive power over these securities. John
P.
O’Shea is an affiliate of Wetminster Securities Corporation, a
registered broker-dealer. These shares of common stock were bought
in the
ordinary course of business, and at the time of the purchase of the
shares
of common stock to be resold, there were no agreements or understanding,
directly or indirectly with any person to distribute the shares of
common
stock.
|
|
(20)
|
Includes
currently exercisable warrants to purchase 45,000 shares of our common
stock at an exercise price of $2.00 per share.
|
|
(21)
|
Joshua
Silverman has voting and dispositive power over these
securities.
|
|
(22)
|
Includes
currently exercisable warrants to purchase 50,000 shares of our common
stock at an exercise price of $2.00 per
share.
|
|
(23)
|
Jeff
Feinberg has voting and dispositive power over these
securities.
|
|
(24)
|
Includes
currently exercisable warrants to purchase 1,320,000 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(25)
|
Includes
currently exercisable warrants to purchase 930,000 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(26)
|
Todd
Kice is an affiliate of Westminster Securities Corporation, a registered
broker-dealer. Mr. Kice bought the shares of common stock in the
ordinary
course of business, and at the time of the purchase of the shares
of
common stock to be resold, had no agreements or understandings directly
or
indirectly with any person to distribute the shares of common
stock.
|
|
(27)
|
Includes
currently exercisable warrants to purchase 25,000 shares of our common
stock at an exercise price of $2.00 per
share.
|
|
(28)
|
Frank
Brock, as managing member, has voting and dispositive power over
these
securities.
|
|
(29)
|
Hugh
Cohen has voting and dispositive power over these
securities.
|
|
(30)
|
Includes
currently exercisable warrants to purchase 6,667 shares of our common
stock at an exercise price of $2.00 per
share.
|
|
(31)
|
Lyman
O. Heidtke, as general partner, has voting and dispositive power
over
these securities.
|
|
(32)
|
Includes
currently exercisable warrants to purchase 100,000 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(33)
|
Michael
Potter, as president, has voting and dispositive power over these
securities.
|
|
(34)
|
Steven
Hart, as general partner, has voting and dispositive power over these
securities.
|
|
(35)
|
Taixing
Ou is the brother of Tai-ming Ou, our Chief Executive Officer and
Chairman.
|
|
(36)
|
Includes
currently exercisable warrants to purchase 300,000 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(37)
|
Howard
Berger, as manager, has voting and dispositive power over these
securities.
|
|
(38)
|
Includes
currently exercisable warrants to purchase 500,000 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(39)
|
Robert
S. Colman has voting and dispositive power over these
securities.
|
|
(40)
|
John
S. Lemak, as manager, has voting and dispositive power over these
securities. Sandor Capital Mater Fund, L.P. is an affiliate of WFG
Investments, Inc., a registered broker-dealer. Sandor Capital Master
Fund,
L.P. bought the shares of common stock in the ordinary course of
business,
and
at the time of the purchase of the shares of common stock to be resold,
had no agreements or understandings directly or indirectly with any
person
to distribute the shares of common
stock.
|
|
(41)
|
Includes
currently exercisable warrants to purchase 70,000 shares of our common
stock at an exercise price of $2.00 per
share.
|
|
(42)
|
John
Peter Selda has voting and dispositive power over these
securities.
|
|
(43)
|
Brandon
S. Goulding has voting and dispositive power over these
securities.
|
|
(44)
|
John
O’ Shea, as chairman, has voting and dispositive power over these
securities. Westminster Securities Corporation is a registered
broker-dealer and served as our placement agents in connection with
our
private placement of common stock and warrants that occurred on January
9,
2008. Westminster Securities Corporation was issued a warrant to
purchase
these 1,200,000 shares as consideration in connection with our January
9,
2008 private placement, and at the time received, had no agreements
or
understandings directly or indirectly with any person to distribute
the
shares of common stock underlying such
warrant.
|
|
(45)
|
Includes
currently exercisable warrants to purchase 517,050 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(46)
|
Jung
Min Choi is an affiliate of Westminster Securities Corporation,
a
registered broker-dealer. These securities were transferred to
Mr. Choi by
Westminster Securities Corporation in the ordinary course of business,
and
at the time of the time of transfer, Mr. Choi had no agreements
or
understandings directly or indirectly with any person to distribute
the
shares of common stock underlying this
warrant.
|
|
(47)
|
Includes
currently exercisable warrants to purchase 350,550 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(48)
|
Richard
Louise is an affiliate of Westminster Securities Corporation, a
registered
broker-dealer. These securities were transferred to Mr. Louise
by
Westminster Securities Corporation in the ordinary course of business,
and
at the time of the time of transfer, Mr. Louise had no agreements
or
understandings directly or indirectly with any person to distribute
the
shares of common stock underlying this
warrant.
|
|
(49)
|
Includes
currently exercisable warrants to purchase 110,475 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(50)
|
Jeffrey
McLaughlin is an affiliate of Westminster Securities Corporation,
a
registered broker-dealer. These securities were transferred to
Mr.
McLaughlin by Westminster Securities Corporation in the ordinary
course of
business, and at the time of the time of transfer, Mr. McLaughlin
had no
agreements or understandings directly or indirectly with any person
to
distribute the shares of common stock underlying this
warrant.
|
|
(51)
|
Includes
currently exercisable warrants to purchase 111,450 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(52)
|
Ken
Hart is an affiliate of Westminster Securities Corporation, a registered
broker-dealer. These securities were transferred to Mr. Hart by
Westminster Securities Corporation in the ordinary course of business,
and
at the time of the time of transfer, Mr. Hart had no agreements
or
understandings directly or indirectly with any person to distribute
the
shares of common stock underlying this
warrant.
|
|
(53)
|
Includes
currently exercisable warrants to purchase 104,850 shares of our
common
stock at an exercise price of $2.00 per
share.
|
|
(54)
|
Joe
Wolfe is an affiliate of Westminster Securities Corporation, a
registered
broker-dealer. These securities were transferred to Mr. Wolfe by
Westminster Securities Corporation in the ordinary course of business,
and
at the time of the time of transfer, Mr. Wolfe had no agreements
or
understandings directly or indirectly with any person to distribute
the
shares of common stock underlying this
warrant.
|
|
(55)
|
Includes
currently exercisable warrants to purchase 5,625 shares of our
common
stock at an exercise price of $2.00 per
share.
|
DESCRIPTION
OF SECURITIES
We
are
authorized to issue 90,000,000 shares of common stock and 10,000,000 shares
of
preferred stock. On February 1, 2008, there were 31,512,269 shares of common
stock issued and outstanding and no shares of preferred stock issued and
outstanding.
Common
Stock
The
holders of common stock are entitled to one vote per share. Our certificate
of
incorporation does not provide for cumulative voting. The holders of our common
stock are entitled to receive ratably such dividends, if any, as may be declared
by the board of directors out of legally available funds. Upon liquidation,
dissolution or winding-up, the holders of our common stock are entitled to
share
ratably in all assets that are legally available for distribution. The holders
of our common stock have no preemptive, subscription, redemption or conversion
rights. The rights, preferences and privileges of holders of our common stock
are subject to, and may be adversely affected by, the rights of the holders
of
any series of preferred stock, which may be designated solely by action of
the
board of directors and issued in the future.
Preferred
Stock
The
board
of directors is authorized, subject to any limitations prescribed by law,
without further vote or action by the stockholders, to issue from time to time
shares of preferred stock in one or more series. Each such series of preferred
stock shall have such number of shares, designations, preferences, voting
powers, qualifications, and special or relative rights or privileges as shall
be
determined by the board of directors, which may include, among others, dividend
rights, voting rights, liquidation preferences, conversion rights and preemptive
rights.
Warrants
Investor
Warrants
In
connection with the private placement of our common stock and warrants completed
on January 9, 2008, we issued warrants to purchase up to an aggregate of
5,000,000 shares of common stock to the investors. The warrants provide for
the
purchase of shares of common stock for five years at an exercise price of $2.00
per share. Should we, at any time while the warrants are outstanding, sell
or
grant any option to purchase or sell or grant any right to reprice, or otherwise
dispose of or issue any common stock or common stock equivalents entitling
any
party to acquire shares of our common stock at a per share price less than
the
then existing exercise price of the warrants, the exercise price shall be
reduced to equal that lower price. We are prohibited from effecting the exercise
of the warrants to the extent that as a result of such exercise the holder
of
the exercised warrants beneficially owns more than 4.99% (or, if such limitation
is waived by the holder upon no less than 61 days prior notice to us, 9.99%)
in
the aggregate of the issued and outstanding shares of our common stock
calculated immediately after giving effect to the issuance of shares of our
common stock upon the exercise of the warrants. If at any time after January
9,
2009 there is no effective registration statement registering, or no current
prospectus available for, the resale of the shares of common stock underlying
the warrants, then the holders of such warrants have the right to exercise
the
warrants by means of a cashless exercise.
If
within
three trading days from date on which the exercise of the warrants shall be
effected (the “Warrant Share Delivery Date”) we fail to deliver to a holder of
the warrants certificates representing the shares into which such warrants
are
convertible, and if after such Warrant Share Delivery Date the holder of the
warrants is required by its brokerage firm to purchase, or the holder’s
brokerage firm otherwise purchases, shares of our common stock to deliver in
satisfaction of a sale by such holder of the shares of our common stock which
the holder was entitled to receive upon the exercise, then we are obligated
to
(A) pay in cash to the holder the amount by which (x) the holder’s total
purchase price for our common stock so purchased exceeds (y) the product of
(1)
the aggregate number of shares of common stock that such holder was entitled
to
receive from the exercise multiplied by (2) the actual sale price at which
the
sell order giving rise to such purchase obligation was executed and (B) at
the
option of the holder, either reinstate the warrant for which such exercise
was
not honored or to deliver to the holder the number of shares of common stock
that would have been issued if we had timely complied with our delivery
requirements.
Placement
Agent Warrants
In
connection with our offering contemplated on January 9, 2008, we issued a
warrant to purchase up to 1,200,000 shares of common stock to Westminster
Securities Corporation, our placement agent. Such warrant has the same terms
as
the warrants issued to the investors in the private placement completed on
January 9, 2008.
Registration
Rights
On
January 9, 2008, in connection with our private placement of common stock and
warrants, we entered into a registration rights agreement with the purchasers
pursuant to which we agreed to provide certain registration rights with respect
to the common stock issued and the common stock issuable upon exercise of the
warrants. Specifically, we agreed to file a registration statement (of which
this prospectus forms a part) with the Securities and Exchange Commission
covering the resale of the common stock issued and underlying the warrants
on or
before February 23, 2008 and to cause such registration statement to be declared
effective by the Securities and Exchange Commission on or before May 8, 2008.
If
(i)
the registration statement is not filed on or before February 23, 2008 or (ii)
we fail to file with the Securities and Exchange Commission a request for
acceleration of the registration statement in accordance with Rule 461
promulgated by the Securities and Exchange Commission pursuant to the Securities
Act, within five trading days of the date that we are notified by the Securities
and Exchange Commission that such registration statement will not be “reviewed”
or will not be subject to further review (unless the failure to make such
request for acceleration is the result of our determination that events
affecting us will require the filing of an amendment to the registration
statement), or (iii) the registration statement is not declared effective by
the
Securities and Exchange Commission on or before May 8, 2008, or (iv) the
registration statement ceases to remain continuously effective for more than
15
consecutive calendar days or more than an aggregate of 20 calendar days during
any 12-month period after its first effective date, then we are subject to
liquidated damage payments to the holders of the shares sold in the private
placement in an amount equal to either (i) 1% of the aggregate purchase price
paid by such purchasers per month of delinquency or (ii) 1% of the number of
shares of common stock purchased by such purchasers in the offering per month
of
delinquency. Notwithstanding the foregoing, in no event shall liquidated damages
be paid exceed 6% of the aggregate gross proceeds of the offering or 6% of
the
aggregate number of shares of common stock issued in the offering, or a
combination thereof. In addition, we shall not be obligated to pay liquidated
damages with respect to any securities that we may be unable to register
pursuant to the authority of the Securities and Exchange Commission with respect
to Rule 415 of the Securities Act of 1933, as amended.
Pursuant
to the registration rights agreement, we must maintain the effectiveness of
the
registration statement from the effective date until the date on which all
securities registered under the registration statement have been sold, or are
otherwise able to be sold pursuant to Rule 144, subject to our right to suspend
or defer the use of the registration statement in certain events.
Lock-up
Agreements
Existing
Lock-Up Agreements
On
June
29, 2007, we entered into a letter agreement with each of Fred Chang and Liuyi
Zhang whereby they each agreed not to sell or otherwise transfer 100,000 shares
of our common until October 8, 2008.
Private
Placement Lock-Up Agreements
On
January 9, 2008, in connection with our private placement, each of our executive
officers, directors, beneficial holders of more than 5% of our common stock
entered into lock-up agreements pursuant to which they agreed not to sell or
otherwise transfer 85% of their shares of common stock until July 9, 2009,
subject to certain limited exemptions. In addition, on January 9, 2008, our
executive officers, directors, beneficial holders of more than 5% of our common
stock entered into lock-up agreements pursuant to which they agreed not to
sell
or otherwise transfer the remaining 15% of their shares of common stock until
the earlier of (i) 90 days following the date that the “resale” registration
statement covering the shares of common stock and of common stock underlying
the
warrants issued in our January 9, 2008 private placement is declared effective
by the Securities Exchange Commission and (ii) such date that the shares of
common stock and of common stock underlying the warrants issued in our January
9, 2008 private placement may be sold pursuant to Rule 144 without limitation.
Anti-Takeover
Effect of Delaware Law and Certain By-Law Provisions
Certain
provisions of our By-laws are intended to strengthen our board of director’s
position in the event of a hostile takeover attempt. These provisions have
the
following effects:
|
|
·
|
they
provide that only business brought before an annual meeting by our
board
of directors or by a stockholder who complies with the procedures
set
forth in the By-laws may be transacted at an annual meeting of
stockholders; and
|
|
|
·
|
they
provide for advance notice of certain stockholder actions, such as
the
nomination of directors and stockholder
proposals.
|
We
are
also subject to the provisions of Section 203 of the DGCL, an anti-takeover
law.
In general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a “business combination” with an “interested stockholder” for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in
a prescribed manner. For purposes of Section 203, a “business combination”
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an “interested stockholder” is a
person who, together with affiliates and associates, owns, or within three
years
prior, did own, 15% or more of the voting stock of the Delaware
corporation.
Indemnification
of Directors and Officers
Section
145 of the General Corporation Law of the State of Delaware provides, in
general, that a corporation incorporated under the laws of the State of
Delaware, as we are, may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than a derivative action by or in the right of the
corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
enterprise, against expenses (including attorneys’ fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person
in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such person’s conduct was
unlawful. In the case of a derivative action, a Delaware corporation may
indemnify any such person against expenses (including attorneys’ fees) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in
a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification will be made in
respect of any claim, issue or matter as to which such person will have been
adjudged to be liable to the corporation unless and only to the extent that
the
Court of Chancery of the State of Delaware or any other court in which such
action was brought determines such person is fairly and reasonably entitled
to
indemnity for such expenses.
Our
certificate of incorporation and bylaws provide that we will indemnify our
directors, officers, employees and agents to the extent and in the manner
permitted by the provisions of the General Corporation Law of the State of
Delaware, as amended from time to time, subject to any permissible expansion
or
limitation of such indemnification, as may be set forth in any stockholders’ or
directors’ resolution or by contract. Any repeal or modification of these
provisions approved by our stockholders will be prospective only and will not
adversely affect any limitation on the liability of any of our directors or
officers existing as of the time of such repeal or modification.
We
are
also permitted to apply for insurance on behalf of any director, officer,
employee or other agent for liability arising out of his actions, whether or
not
the General Corporation Law of the State of Delaware would permit
indemnification.
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
Insofar
as indemnification for liabilities arising under the Securities Act of 1933,
as
amended, may be permitted to our directors, officers and persons controlling
us,
we have been advised that it is the Securities and Exchange Commission’s opinion
that such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is, therefore, unenforceable.
PLAN
OF DISTRIBUTION
Each
selling stockholder of the common stock and any of their pledgees, assignees
and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the OTC Bulletin Board or any other stock exchange, market
or
trading facility on which the shares are traded or in private transactions.
These sales may be at fixed or negotiated prices. A selling stockholder may
use
any one or more of the following methods when selling shares:
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker dealer
solicits purchasers;
|
|
|
·
|
block
trades in which the broker dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
|
·
|
purchases
by a broker dealer as principal and resale by the broker dealer for
its
account;
|
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
|
·
|
privately
negotiated transactions;
|
|
|
·
|
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a
part;
|
|
|
·
|
broker
dealers may agree with the selling stockholders to sell a specified
number
of such shares at a stipulated price per
share;
|
|
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
|
|
|
·
|
a
combination of any such methods of sale;
or
|
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended, if available, rather than under this
prospectus.
Broker
dealers engaged by the selling stockholders may arrange for other brokers
dealers to participate in sales. Broker dealers may receive commissions or
discounts from the selling stockholders (or, if any broker dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be negotiated,
but, except as set forth in a supplement to this prospectus, in the case of
an
agency transaction not in excess of a customary brokerage commission in
compliance with NASDR Rule 2440; and in the case of a principal transaction
a
markup or markdown in compliance with NASDR IM-2440.
In
connection with the sale of the common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of the common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act of 1933, as amended, in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933, as amended. Each
selling stockholder has informed us that it does not have any written or oral
agreement or understanding, directly or indirectly, with any person to
distribute the common stock. In no event shall any broker-dealer receive fees,
commissions and markups which, in the aggregate, would exceed eight percent
(8%).
We
are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act of 1933, as amended.
Because
selling stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act of 1933, as amended, they will be subject to the prospectus
delivery requirements of the Securities Act of 1933, as amended, including
Rule
172 thereunder. In addition, any securities covered by this prospectus which
qualify for sale pursuant to Rule 144 under the Securities Act of 1933, as
amended, may be sold under Rule 144 rather than under this prospectus. There
is
no underwriter or coordinating broker acting in connection with the proposed
sale of the resale shares by the selling stockholders.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on which
the
shares may be resold by the selling stockholders without registration and
without regard to any volume limitations by reason of Rule 144 under the
Securities Act of 1933, as amended, or any other rule of similar effect or
(ii)
all of the shares have been sold pursuant to this prospectus or Rule 144 under
the Securities Act of 1933, as amended, or any other rule of similar effect.
The
resale shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in
certain states, the resale shares may not be sold unless they have been
registered or qualified for sale in the applicable state or an exemption from
the registration or qualification requirement is available and is complied
with.
Under
applicable rules and regulations under the Securities Exchange Act of 1934,
as
amended, any person engaged in the distribution of the resale shares may not
simultaneously engage in market making activities with respect to the common
stock for the applicable restricted period, as defined in Regulation M, prior
to
the commencement of the distribution. In addition, the selling stockholders
will
be subject to applicable provisions of the Securities Exchange Act of 1934,
as
amended, and the rules and regulations thereunder, including Regulation M,
which
may limit the timing of purchases and sales of shares of the common stock by
the
selling stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time
of
the sale (including by compliance with Rule 172 under the Securities Act of
1933, as amended).
LEGAL
MATTERS
Haynes
and Boone, LLP, New York, New York, will pass upon the validity of the shares
of
our common stock offered by us pursuant to this prospectus.
EXPERTS
The
consolidated financial statements of China Clean Energy Resources, Ltd. and
its
subsidiary at December 31, 2005 and 2004 and for the years then ended appearing
in this prospectus have been audited by Moen and Company LLP, independent
registered public accounting firm (until July 21, 2006), as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report, given on the authority of said firm as experts in accounting and
auditing. Moen and Company LLP resigned as our auditors on July 21, 2006, as
the
principal of that firm retired on July 21, 2006. We have engaged Michael T.
Studer CPA P.C. , independent registered public accounting firm, as our new
auditor. The consolidated financial statements of China Clean Energy Resources,
Ltd. and its subsidiary at December 31, 2006 and the year then ended appearing
in this prospectus have been audited by Michael T. Studer CPA P.C. as set forth
in its report thereon appearing elsewhere herein, and are included in reliance
upon such report, given on the authority of said firm as experts in accounting
and auditing.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have
filed with the Securities and Exchange Commission a registration statement
on
Form SB-2, together with any amendments and related exhibits, under the
Securities Act of 1933, as amended, with respect to our shares of common stock
offered by this prospectus. The registration statement contains additional
information about us and our shares of common stock that we are offering in
this
prospectus.
We
file
annual, quarterly and current reports and other information with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended.
Our Securities and Exchange Commission filings are available to the public
over
the Internet at the Securities and Exchange Commission’s website at
http://www.sec.gov. You may also read and copy any document we file at the
Securities and Exchange Commission’s public reference room located at 100 F
Street, N.E., Washington, D.C. 20549. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the public reference
rooms and their copy charges. In addition, through our website,
http://www.chinacleanenergyinc.com, you can access electronic copies of
documents we file with the Securities and Exchange Commission, including our
Annual Report on Form 10-KSB, our Quarterly Reports on Form 10-QSB, and Current
Reports on Form 8-K and any amendments to those reports. Information on our
website is not incorporated by reference in this prospectus. Access to those
electronic filings is available as soon as practicable after filing with the
Securities and Exchange Commission. You may also request a copy of those
filings, excluding exhibits, from us at no cost. Any such request should be
addressed to us at: Sonya Ma, China Clean Energy Inc., 17 Candlewood Drive,
West
Windsor, New Jersey 08550.
CHINA
CLEAN ENERGY INC.
INDEX
TO
FINANCIAL STATEMENTS
|
China
Clean Energy Inc. Financial Statements for the Years Ended December
31,
2006 and December 31, 2005
|
|
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firms
|
|
|
F-2
|
|
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
|
|
F-4
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2006 and
2005
|
|
|
F-5
|
|
|
Consolidated
Statements of Stockholder’s Equity for the Years Ended December 31, 2006
and 2005
|
|
|
F-6
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2006 and
2005
|
|
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
F-8
|
|
|
|
|
|
|
|
|
China
Clean Energy Inc. Condensed Consolidated Financial Statements as
of
September 30, 2007 and for the Nine Months Ended September 30, 2006
and
2007 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet as of September 30, 2007
|
|
|
F-18
|
|
|
Consolidated
Statement of Operations for the Nine Month Periods Ended September
30,
2007 and 2006
|
|
|
F-19
|
|
|
Consolidated
Statement of Stockholders’ Equity for the Nine Month Periods Ended
September 30, 2007 and 2006
|
|
|
F-20
|
|
|
Consolidated
Statement of Cash Flows for the Nine Month Periods Ended September
30,
2006 and 2007
|
|
|
F-21
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
F-22
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
China
Clean Energy Inc.
I
have
audited the accompanying consolidated balance sheet of China Clean Energy
Inc.
and
subsidiaries (the “Company”) as of December 31, 2006 and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company’s management. My responsibility is to express an opinion on these
financial statements based on my audit.
I
conducted my audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
I plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audit provides a reasonable
basis for my opinion.
In
my
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of China Clean Energy Inc.
and
subsidiaries as of December 31, 2006 and the results of their operations
and
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States.
|
|
|
|
|
|
|
/s/
Michael T. Studer CPA P.C.
|
Freeport,
New York
March
8, 2007 (except as to the third paragraph
of
Note 11, which
is as of July 10, 2007, and
Note
12, which is
as of January 22, 2008)
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
China
Clean Energy Inc, and subsidiaries
We
have
audited the accompanying consolidated balance sheet of China Clean Energy
Inc,
and subsidiaries (formerly Fujian Zhong De Technology Stock Co., Ltd.)
as of
December 31, 2005, and the related consolidated statements of operation,
stockholders’ equity, and cash flows for the year then ended. These financial
statements are the responsibility of the company’s management. Our
responsibility is to express an opinion on these financial statements
based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of China Clean Energy
Inc, and
subsidiaries (formerly Fujian Zhong De Technology Stock Co., Ltd.) as
of
December 31, 2005, and the results of their operations and cash flows
for the
year then ended in conformity with U.S. generally accepted accounting
principles.
|
|
|
|
|
|
“Moen
and Company LLP”
|
|
Vancouver,
British Columbia, Canada
|
|
|
China
Clean Energy Inc. and Subsidiaries
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
(Audited)
|
|
(Audited)
|
|
|
Assets
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
$
|
2,241,712
|
|
$
|
3,175,128
|
|
|
Accounts
receivable, net of allowance for doubtful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounts
of $228,604 and $170,822 respectively
|
|
|
|
|
|
|
|
|
1,962,403
|
|
|
1,537,402
|
|
|
Other
receivable - refundable
value
added
taxes
|
|
|
|
|
|
|
|
|
24,904
|
|
|
-
|
|
|
Due
from related parties
|
|
|
|
|
|
|
|
|
-
|
|
|
14,875
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
941,933
|
|
|
1,300,134
|
|
|
Prepaid
expenses
|
|
|
|
|
|
|
|
|
37,696
|
|
|
-
|
|
|
Total
Current Assets
|
|
|
|
|
5,208,648
|
|
|
6,027,539
|
|
|
Property,
plant and equipment, net
|
|
|
|
|
4,692,200
|
|
|
2,824,026
|
|
|
Intangible
assets, net
|
|
|
|
|
2,430,504
|
|
|
1,981,130
|
|
|
Deposit
paid in connection with
|
|
|
|
|
|
|
|
|
|
|
contract
for purchase of land use rights
|
|
|
|
|
|
|
|
|
95,033
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
|
$
|
12,426,385
|
|
$
|
10,832,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
|
|
|
|
|
$
|
386,719
|
|
$
|
672,853
|
|
|
Short-term
bank loan
|
|
|
|
|
|
|
|
|
1,282,462
|
|
|
1,239,612
|
|
|
Income
taxes payable
|
|
|
|
|
|
|
|
|
117,964
|
|
|
366,353
|
|
|
Due
to related parties
|
|
|
|
|
|
|
|
|
6,419
|
|
|
302,944
|
|
|
Total
Current Liabilities
|
|
|
|
|
1,793,564
|
|
|
2,581,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.0001 per share, authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000,000
shares; issued and outstanding 0 shares
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
Common
stock, par value $.0001 per share; authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,000,000
shares; issued and outstanding 21,512,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
15,995,000 shares, respectively
|
|
|
|
|
|
|
|
|
2,151
|
|
|
1,600
|
|
|
Additional
paid-in capital
|
|
|
|
|
|
|
|
|
7,053,834
|
|
|
5,610,885
|
|
|
|
|
|
|
|
|
|
|
|
3,161,747
|
|
|
2,645,307
|
|
Accumulated other comprehensive income (loss
)
|
|
|
|
|
|
|
|
|
415,089
|
|
|
(6,859
|
)
|
|
Total
stockholders' equity
|
|
|
|
|
10,632,821
|
|
|
8,250,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
|
|
$
|
12,426,385
|
|
$
|
10,832,695
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
China
Clean Energy Inc. and Subsidiaries
|
|
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Audited)
|
|
|
|
(Audited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales of products
|
|
|
|
|
|
|
|
|
|
|
$
|
13,489,710
|
|
|
$
|
10,040,188
|
|
|
Government
Subsidy
|
|
|
|
|
|
|
|
|
|
|
|
9,640
|
|
|
|
43,500
|
|
|
Total
revenues
|
|
|
|
|
|
|
|
|
|
|
|
13,499,350
|
|
|
|
10,083,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
9,699,164
|
|
|
|
7,270,006
|
|
|
Selling
and marketing
|
|
|
|
|
|
|
|
|
|
|
|
411,850
|
|
|
|
390,259
|
|
|
General
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
529,377
|
|
|
|
272,553
|
|
|
Expenses
relating to the "reverse acquisition" of CCER
|
|
|
|
|
|
|
|
|
|
|
|
464,550
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,771
|
|
|
|
34,039
|
|
|
Amortization
of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
204,948
|
|
|
|
66,579
|
|
|
Total
operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
11,344,660
|
|
|
|
8,033,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
|
|
|
|
|
|
|
|
|
2,154,690
|
|
|
|
2,050,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
7,001
|
|
|
|
4,334
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
(89,137
|
)
|
|
|
(64,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
2,072,554
|
|
|
|
1,990,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
(802,694
|
)
|
|
|
(679,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
$
|
1,269,860
|
|
|
$
|
1,310,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
$
|
0.07
|
|
|
$
|
0.08
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
$
|
0.07
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
to compute earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
17,017,580
|
|
|
|
15,995,000
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
17,017,580
|
|
|
|
15,995,000
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
Clean Energy Inc. and Subsidiaries
|
|
Consolidated
Statements of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income
(loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
15,995,000
|
|
|
|
|
$
|
3,627,505
|
|
$
|
1,335,096
|
|
$
|
-
|
|
$
|
4,964,201
|
|
|
Capital
contributions
|
|
|
-
|
|
|
-
|
|
|
1,983,380
|
|
|
-
|
|
|
-
|
|
|
1,983,380
|
|
|
Net
income for year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,310,211
|
|
|
-
|
|
|
1,310,211
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6,859
|
)
|
|
(6,859
|
)
|
|
Balance,
December 31, 2005
|
|
|
15,995,000
|
|
|
1,600
|
|
|
5,610,885
|
|
|
2,645,307
|
|
|
(6,859
|
)
|
|
8,250,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock retained by acquirer's
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders
in connection with "reverse acquisition"
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
China Clean Energy Resources, Ltd. ("CCER")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
October 24, 2006
|
|
|
2,432,269
|
|
|
243
|
|
|
(243
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Common
stock issued to consultants for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rendered
in connection with "reverse acquisition"
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
CCER
|
|
|
1,605,000
|
|
|
160
|
|
|
160,340
|
|
|
-
|
|
|
-
|
|
|
160,500
|
|
|
Common
stock issued for cash on October 24, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
$1 per share, less offering costs of $35,000
|
|
|
1,050,000
|
|
|
105
|
|
|
1,014,895
|
|
|
-
|
|
|
-
|
|
|
1,015,000
|
|
|
Common
stock issued for cash in November 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
$1 per share
|
|
|
250,000
|
|
|
25
|
|
|
249,975
|
|
|
-
|
|
|
-
|
|
|
250,000
|
|
|
Common
stock issued in November 2006 for services
|
|
|
180,000
|
|
|
18
|
|
|
17,982
|
|
|
-
|
|
|
-
|
|
|
18,000
|
|
|
Net
income for year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,269,860
|
|
|
-
|
|
|
1,269,860
|
|
|
Dividends
declared
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(753,420
|
)
|
|
-
|
|
|
(753,420
|
)
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
421,948
|
|
|
421,948
|
|
|
Balance,
December 31, 2006
|
|
|
21,512,269
|
|
$
|
2,151
|
|
$
|
7,053,834
|
|
$
|
3,161,747
|
|
$
|
415,089
|
|
$
|
10,632,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
Clean Energy Inc. and Subsidiaries
|
|
Consolidated
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
(Audited)
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,269,860
|
|
$
|
1,310,211
|
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
178,500
|
|
|
-
|
|
|
Depreciation
of property, plant and equipment
|
|
|
402,138
|
|
|
328,345
|
|
|
Amortization
of intangible assets
|
|
|
204,948
|
|
|
66,579
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(433,820
|
)
|
|
(879,454
|
)
|
|
Other
receivable
|
|
|
(24,904
|
)
|
|
-
|
|
|
Due
from related parties
|
|
|
14,875
|
|
|
(359
|
)
|
|
Inventories
|
|
|
358,201
|
|
|
710,030
|
|
|
Prepaid
expenses
|
|
|
(37,696
|
)
|
|
-
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(286,134
|
)
|
|
(450,784
|
)
|
|
Income
taxes payable
|
|
|
(248,389
|
)
|
|
232,273
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
1,397,579
|
|
|
1,316,841
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Property,
plant and equipment additions
|
|
|
(2,063,652
|
)
|
|
(237,897
|
)
|
|
Intangible
assets acquired
|
|
|
(545,225
|
)
|
|
(743,760
|
)
|
|
Deposit
paid in connection with
|
|
|
|
|
|
|
|
|
contract
for purchase of land use rights
|
|
|
(95,033
|
)
|
|
-
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(2,703,910
|
)
|
|
(981,657
|
)
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Net
proceeds from sale of common stock
|
|
|
|
|
|
|
|
|
and
capital contributions
|
|
|
1,265,000
|
|
|
1,983,380
|
|
|
Short-term
bank loan
|
|
|
42,850
|
|
|
695,246
|
|
|
Due
to related parties
|
|
|
(296,525
|
)
|
|
(384,604
|
)
|
|
Dividends
paid
|
|
|
(753,420
|
)
|
|
(741,628
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
257,905
|
|
|
1,552,394
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash
equivalents
|
|
|
115,010
|
|
|
(6,859
|
)
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(933,416
|
)
|
|
1,880,719
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
3,175,128
|
|
|
1,294,409
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,241,712
|
|
$
|
3,175,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
89,137
|
|
$
|
64,491
|
|
|
Income
taxes paid
|
|
$
|
1,051,083
|
|
$
|
679,884
|
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
Note
1.
Organization
and Business Operations
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
1,050,000
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.
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.”
Note
2.
Summary
of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements at December 31, 2006 include the
accounts of
CCE, CCER, and Fujian Zhongde (collectively, the “Company”). All inter-company
balances and transactions have been eliminated in consolidation.
Basis
of Presentation
The
financial statements of the Company have been prepared in accordance
with
accounting principles generally accepted in the United States and
are expressed
in US dollars.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting
principles
generally accepted in the Unites States 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. Actual results could differ from those estimates.
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, short-term
bank loan, and
due to related parties. The fair value of these financial instruments
approximate their carrying amounts reported in the consolidated balance
sheets
due to the short term maturity of these instruments.
Foreign
Currency Translation
The
functional currency of CCE and CCER is the United States dollar.
The functional
currency of Fujian Zhongde is the Chinese Renminbi (“RMB”). The reporting
currency of the Company is the United States dollar.
Fujian
Zhongde assets and liabilities are translated into United States
dollars at
period-end exchange rates ($0.12825 and $0.12396 at December 31,
2006 and 2005,
respectively). Fujian Zhongde revenues and expenses are translated
into United
States dollars at weighted average exchange rates for the periods
($0.12557 and
$0.12396 for the years ended December 31, 2006 and 2005, respectively).
Resulting translation adjustments are recorded as a component of
accumulated
other comprehensive income (loss) within stockholders’ equity.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with maturities of
three months
or less at the time of issuance to be cash equivalents.
Inventories
Inventories
are stated at the lower of cost or market. The method of determining
cost is
used consistently from year to year as the first-in, first-out (“FIFO”)
method.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the estimated
useful
lives of the respective assets (20 years for buildings, 10 years
for equipment
and machinery, and 5 years for automobile and office equipment).
Intangible
and Other Long-Lived Assets
Intangible
and other long-lived assets are stated at cost, less accumulated
amortization
and impairments. Land use rights are being amortized on a straight-line
basis
over the term of the related agreement, which is 50 years commencing
June 1,
1998. Patents and licenses are being amortized over their expected
useful
economic life of 10 years.
The
Company reviews its long-lived assets for impairment whenever events
or changes
in circumstances indicate that the carrying amount of an asset may
no longer be
recoverable. When these events occur, the Company measures impairment
by
comparing the carrying value of the long-lived assets to the estimated
undiscounted future cash flows expected to result from the use of
the assets and
their eventual disposition. If the sum of the expected undiscounted
cash flows
is less than the carrying amount of the assets, the Company would
recognize an
impairment loss based on the fair value of the assets.
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
Revenue
Recognition
Sales
are
recognized when the revenue is realized or realizable, and has been
earned, in
accordance with the U.S. Securities and Exchange Commission’s Staff Accounting
Bulletin No. 104, “Revenue Recognition in Financial Statements”. The Company’s
sales are related to sales of product. Revenue for product sales
is recognized
as risk and title to the product transfer to the customer, which
usually occurs
at the time shipment is made. Substantially all of the Company’s products are
sold FOB (“free on board”) shipping point. Title to the product passes when the
product is delivered to the freight carrier.
Stock-Based
Compensation
Stock-based
compensation is accounted for at fair value in accordance with SFAS
No. 123 (R)
“Accounting for Stock-Based Compensation”.
SFAS
123R
requires that compensation cost relating to stock-based payment transactions
be
recognized in financial statements. That cost is measured based on
the fair
value of the equity or liability instruments issued on the grant
date of such
instruments, and is recognized over the period during which a party
is required
to provide service in exchange for the award (typically the vesting
period).
No
stock
options have been granted and none are outstanding.
In
2006,
the Company issued a total of 1,785,000 shares of restricted stock
for services
rendered or to be rendered to the Company. 1,605,000 shares were
issued to
consultants for services rendered in connection with the “reverse acquisition”
of CCER on October 24, 2006, 30,000 shares were issued to an investor
relations
firm on November 8, 2006 as an incentive fee, 100,000 shares were
issued to the
Company’s chief financial officer on November 13, 2006 pursuant to the terms
of
a one year Compensation Agreement, and 50,000 shares were issued
to a consultant
on November 13, 2006 pursuant to the terms of a one year Corporate
Services
Agreement. The 100,000 shares issued to the Company’s chief financial officer
and the 50,000 shares issued to the consultant are subject to possible
cancellation or forfeiture in certain circumstances. The fair value
of these
issuances was determined based on the last sale quoted on the OTC
Bulletin Board
on the date of the respective grants, reduced by a restricted stock
discount.
Income
Taxes
Deferred
income taxes are recognized for temporary differences between the
tax bases of
assets and liabilities and their reported amounts in the financial
statements,
net of operating loss carry forwards and credits, by applying enacted
statutory
tax rates applicable to future years. Deferred tax assets are reduced
by a
valuation allowance when, in the opinion of management, it is not
more likely
than not that some portion or all of the deferred tax assets will
be realized.
Current income taxes are provided for in accordance with the laws
of the
relevant taxing authorities.
Earnings
(Loss) Per Common Share
Basic
earnings (loss) per common share are computed on the basis of the
weighted
average number of common shares outstanding during the period.
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
Diluted
earnings (loss) per share are computed on the basis of the weighted
average
number of common shares and dilutive securities (such as stock options
and
convertible securities) outstanding. Dilutive securities having an
anti-dilutive
effect on diluted earnings (loss) per share are excluded from the
calculation.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current
year
presentation.
Note
3.
Inventories
Inventories
consist of:
|
|
|
December
31
|
|
|
|
|
2006
|
|
2005
|
|
|
Raw
materials
|
|
$
|
430,392
|
|
$
|
899,197
|
|
|
Work
in progress and packaging material
|
|
|
24,065
|
|
|
38,143
|
|
|
Finished
goods
|
|
|
487,476
|
|
|
362,794
|
|
|
Total
inventories
|
|
$
|
941,933
|
|
$
|
1,300,134
|
|
Note
4.
Property,
Plant and Equipment
Property,
plant and equipment, net consist of:
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Buildings
|
|
$
|
2,051,056
|
|
$
|
1,838,363
|
|
|
Equipment
and machinery
|
|
|
4,419,551
|
|
|
2,711,679
|
|
|
Automobile
|
|
|
20,529
|
|
|
19,364
|
|
|
Office
equipment
|
|
|
13,848
|
|
|
8,726
|
|
|
Construction
in progress
|
|
|
449,346
|
|
|
-
|
|
|
Total
|
|
|
6,954,330
|
|
|
4,578,132
|
|
|
Less
accumulated depreciation
|
|
|
(2,262,130
|
)
|
|
(1,754,106
|
)
|
|
Net
|
|
$
|
4,692,200
|
|
$
|
2,824,026
|
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
Note
5.
Intangible
Assets
Intangible
assets, net consist of:
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Land
use rights
|
|
$
|
1,949,015
|
|
$
|
1,313,131
|
|
|
Patents
and licenses
|
|
|
1,179,900
|
|
|
1,130,864
|
|
|
Total
|
|
|
3,128,915
|
|
|
2,443,995
|
|
|
Less
accumulated amortization
|
|
|
(698,411
|
)
|
|
(462,865
|
)
|
|
Net
|
|
$
|
2,430,504
|
|
$
|
1,981,130
|
|
The
estimated amortization of intangible assets for each of the Company’s five
succeeding fiscal years ending December 31, 2007, 2008, 2009, 2010,
and 2011 is
$166,715.
Note
6.
Short-term
Bank Loan
The
short-term bank loan is due DBS Bank (Hong Kong) Limited under a
10,000,000 RMB
($1,282,462 translated at the December 31, 2006 exchange rate) revolving
credit
agreement. The loan bears interest at a rate equal to 115% of the
PRC prime rate
and is secured by certain buildings and land use rights owned by
Fujian
Zhongde.
Note
7.
Pension
and Employment Liabilities
At
December 31, 2006 and 2005, the Company has no liability for pension
or post
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 approximately $6,600,000 at December
31,
2006.
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
Note
9.
Income
Taxes
Income
taxes consist of:
|
|
|
Year
ended December 31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
PRC
|
|
$
|
802,694
|
|
$
|
679,884
|
|
|
United
States
|
|
|
-
|
|
|
-
|
|
|
Total
current
|
|
|
802,694
|
|
|
679,884
|
|
|
Deferred
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
802,694
|
|
$
|
679,884
|
|
Fujian
Zhongde has been subject to a PRC 33% standard enterprise income
tax. In 2006,
Fujian Zhongde become 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.
At
December 31, 2006, 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:
|
|
|
Year
Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Expected
tax at 35%
|
|
$
|
725,394
|
|
$
|
696,533
|
|
|
Tax
effect of unutilized
|
|
|
|
|
|
|
|
|
losses
of CCE and CCER
|
|
|
87,607
|
|
|
-
|
|
|
Tax
effect of Fujian Zhongde
|
|
|
|
|
|
|
|
|
income
taxed at lower rate
|
|
|
(46,457
|
)
|
|
(39,802
|
)
|
|
Permanent
differences
|
|
|
36,150
|
|
|
23,153
|
|
|
Actual
provision for income taxes
|
|
$
|
802,694
|
|
$
|
679,884
|
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
Note
10.
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 December
31, 2006 were located in the PRC.
|
|
|
Year
Ended December 31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Specially
chemicals products
|
|
$
|
10,130,772
|
|
$
|
9,799,223
|
|
|
Biodiesel
products
|
|
|
3,358,938
|
|
|
240,965
|
|
|
Total
|
|
$
|
13,489,710
|
|
$
|
10,040,188
|
|
Net
sales
consist of:
In
2006,
one customer (for biodiesel products) accounted for 11% of net
sales.
In
2005,
one customer
(for
specialty chemicals products)
accounted for 18% of net sales.
Note
11.
Commitments
and Contingencies
Contract
for Purchase of Land Use Rights
On
December 25, 2006, Fujian Zhongde 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 ($2,378,909 translated at the December
31, 2006
exchange rate). The contract, which is expected to close in year
2007,
contemplates a new affiliated company of Fujian Zhongde be formed
to build a new
biodiesel facility on the land costing approximately $15,000,000.
The contract
provides 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. On December 25,
2006, Fujian
Zhongde paid 741,000 RMB ($95,033 translated at the December 31,
2006 exchange
rate) as a deposit. On January 8, 2007, Fujian Zhongde paid an additional
8,533,500 RMB to the above seller of the land use rights.
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.
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
The
Registration Statement was declared effectively 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.
Note
12.
Subsequent
Events
Contract
for Purchase of Land Use Rights
On
November 5, 2007, CCER established a new subsidiary Fujian Zhongde
Energy Co.,
Ltd. (“Zhongde Energy”) to build the biodiesel facility. On December 22, 2007,
the acquisition of the land use rights was completed.
Private
Placement Financing for $15,000,000
On
January 9, 2008, CCE completed a private placement, pursuant to which
CCE issued
10,000,000 shares of common stock and five-year warrants to purchase
5,000,000
shares of common stock at an initial exercise price of $2.00 per
share for
aggregate gross proceeds of $15,000,000. In connection with this
private
placement, CCE incurred placement agent fees of approximately $1,200,000,
and
issued the placement agent five-year warrants to purchase an aggregate
of
1,200,000 shares of common stock at an initial exercise price of
$2.00 per
share.
In
connection with the private placement, four related parties placed
a total of
1,500,000 shares of CCE common stock into an escrow account, with
such shares to
be released to the investors of this offering if the Company fails
to (1)
commence the production of biodiesel at its currently proposed production
facility in Jiangyin, PRC on or before January 1, 2009, or (2) record
at least
$14,000,000 of adjusted net income for the fiscal year ending December
31, 2009.
Should the Company successfully satisfy each of these two milestones,
these
shares of CCE common stock will be returned to the four related
parties.
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
In
connection with the private placement, CCE entered into a registration
rights
agreement with the purchasers pursuant to which CCE agreed to provide
certain
registration rights with respect to the common stock issued and the
common stock
issuable upon exercise of the warrants. Specifically, CCE agreed
to file a
registration statement with the Securities and Exchange Commission
covering the
resale of the common stock issued and underlying the warrants on
or before
February 23, 2008 and to cause such registration statement to be
declared
effective by the Securities and Exchange Commission on or before
May 8, 2008. If
(i) the registration statement is not filed on or before February
23, 2008 or
(ii) CCE fails to file with the Securities and Exchange Commission
a request for
acceleration of the registration statement in accordance with Rule
461
promulgated by the Securities and Exchange Commission pursuant to
the Securities
Act, within five trading days of the date that CCE is notified by
the Securities
and Exchange Commission that such registration statement will not
be “reviewed ”
or will not be subject to further review (unless the failure to make
such
request for acceleration is the result of our determination that
events
affecting us will require the filing of an amendment to the registration
statement), or (iii) the registration statement is not declared effective
by the
Securities and Exchange Commission on or before May 8, 2008, or (iv)
the
registration statement ceases to remain continuously effective for
more than 15
consecutive calendar days or more than an aggregate of 20 calendar
days during
any 12-month period after its first effective date, then CCE is subject
to
liquidated damage payments to the holders of the shares sold in the
private
placement in an amount equal to either (i) 1% of the aggregate purchase
price
paid by such purchasers per month of delinquency or (ii) 1% of the
number of
shares of common stock purchased by such purchasers in the offering
per month of
delinquency. Notwithstanding the foregoing, in no event shall liquidated
damages
be paid exceed 6% of the aggregate gross proceeds of the offering
or 6% of the
aggregate number of shares of common stock issued in the offering,
or a
combination thereof. In addition, CCE shall not be obligated to pay
liquidated
damages with respect to any securities that CCE is unable to register
pursuant
to the authority of the Securities and Exchange Commission with respect
to Rule
415 of the Securities Act of 1933, as amended. Pursuant to the registration
rights agreement, CCE must maintain the effectiveness of the registration
statement from the effective date until the date on which all securities
registered under the registration statement have been sold, or are
otherwise
able to be sold pursuant to Rule 144, subject to CCE’s right to suspend or defer
the use of the registration statement in certain events.
Adoption
of 2008 Equity Incentive Plan
On
January 9, 2008, the Company adopted the 2008 Equity Incentive Plan.
The purpose
of the 2008 Equity Incentive Plan is to provide an incentive to attract
and
retain directors, officers, consultants, advisors and employees whose
services
are considered valuable, to encourage a sense of proprietorship and
to stimulate
an active interest of such persons in our development and financial
success.
Under the 2008 Equity Incentive Plan, CCE is authorized to issue
up to 2,000,000
stock options, 1,000,000 of which shall have an exercise price per
share equal
to the greater of (i) $2.50 or (ii) 100% of the Fair Market Value
of a share of
common stock on the date of grant and 1,000,000 of which shall have
an exercise
price per share equal to the greater of (i) $3.00 or (ii) 100% of
the Fair
Market Value of a share of common stock on the date of grant. Under
the 2008
Equity Incentive Plan, CCE is authorized to issue incentive stock
options
intended to qualify under Section 422 of the Internal Revenue Code
of 1986, as
amended, and non-qualified stock options and all options under the
Plan shall
vest quarterly over three years. The 2008 Equity Incentive Plan is
administered
by CCE’S board of directors. On January 9, 2008, CCE granted options to
purchase
a total of 1,330,000 shares of common stock under the 2008 Equity
Incentive Plan
to four executive officers. 665,000 options are exercisable at a
price of $2.50
per share and 665,000 options are exercisable at a price of $3.00
per share; all
1,330,000 options expire 10 years from the date of grant.
Employment
Agreement
On
January 9, 2008, the Company entered into a two year employment agreement
with
its Chief Executive Officer and chairman of the Board of Directors,
which
agreement shall be automatically renewed for additional one-year
periods until
either party gives the other written notice of its intent not to
renew the
agreement at least 90 days prior to the end of the then current term.
Pursuant
to this agreement, the Chief Executive Officer (the “CEO”) shall receive a
salary of approximately $2,473 per month, which amount shall be increased
by at
least 10% following the one year anniversary of the agreement. If
the CEO’s
employment is terminated without cause or he resigns for good reason,
all
unvested options shall vest and the CEO will be entitled to the continuation
of
benefits and the payment of his salary for 12 months.
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
Capital
Contribution to Fujian Zhongde Energy Co., Ltd.
On
January 11, 2008, CCER made a capital contribution of $10,000,000
to Zhongde
Energy to fulfill the registered capital investment requirements
stipulated by
the Fuqing City Foreign Trading and Economy Cooperation Bureau.
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
(Expressed
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
ASSETS
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
1,330,791
|
|
$
|
2,241,712
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $394,390
and
$228,604, respectively
|
|
|
|
|
|
2,645,196
|
|
|
1,768,262
|
|
|
Other
receivable - refundable value added taxes
|
|
|
|
|
|
-
|
|
|
24,904
|
|
|
Other
receivable - recoverable corporate income taxes
|
|
|
|
|
|
143,101
|
|
|
-
|
|
|
Inventories
|
|
|
|
|
|
712,626
|
|
|
941,933
|
|
|
Advance
payments to suppliers
|
|
|
|
|
|
904,318
|
|
|
194,141
|
|
|
Prepaid
expenses
|
|
|
|
|
|
41,317
|
|
|
37,696
|
|
|
Total
Current Assets
|
|
|
|
|
|
5,777,349
|
|
|
5,208,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
, plant and equipment, net
|
|
|
|
|
|
5,056,649
|
|
|
4,692,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
|
|
|
2,383,772
|
|
|
2,430,504
|
|
|
Deposits
paid in connection with
|
|
|
|
|
|
|
|
|
|
|
|
contract
for purchase of land use rights and related
costs
|
|
|
|
|
|
1,951,355
|
|
|
95,033
|
|
|
Total
Assets
|
|
|
|
|
$
|
15,169,125
|
|
$
|
12,426,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
|
|
$
|
648,060
|
|
$
|
386,719
|
|
|
Current
portion of bank indebtedness
|
|
|
|
|
|
1,190,273
|
|
|
1,282,462
|
|
|
Income
taxes payable
|
|
|
|
|
|
-
|
|
|
117,964
|
|
|
Due
to related parties
|
|
|
|
|
|
-
|
|
|
6,419
|
|
|
Total
current liabilities
|
|
|
|
|
|
1,838,333
|
|
|
1,793,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
portion of bank indebtedness
|
|
|
|
|
|
284,770
|
|
|
-
|
|
|
Due
to related parties
|
|
|
|
|
|
-
|
|
|
-
|
|
|
Total
Liabilities
|
|
|
|
|
|
2,123,103
|
|
|
1,793,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
-
|
|
|
-
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.0001 per share, authorized
|
|
|
|
|
|
|
|
|
|
|
|
10,000,000
shares; issued and outstanding 0 shares
|
|
|
|
|
|
-
|
|
|
-
|
|
|
Common
stock, par value $0.0001 per share, authorized
|
|
|
|
|
|
|
|
|
|
|
|
90,000,000
shares; issued and outstanding 21,512,269
|
|
|
|
|
|
|
|
|
|
|
|
and
21,512,269 shares, respectively
|
|
|
|
|
|
2,151
|
|
|
2,151
|
|
|
Additional
paid-in capital
|
|
|
|
|
|
7,053,834
|
|
|
7,053,834
|
|
|
Retained
earnings
|
|
|
|
|
|
5,190,149
|
|
|
3,161,747
|
|
|
Accumulated
other comprehensive income (loss)
|
|
|
|
|
|
799,888
|
|
|
415,089
|
|
|
Total
stockholders' equity
|
|
|
|
|
|
13,046,022
|
|
|
10,632,821
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
|
|
|
$
|
15,169,125
|
|
$
|
12,426,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales of products
|
|
$
|
5,459,688
|
|
$
|
3,687,425
|
|
$
|
14,853,094
|
|
$
|
9,800,162
|
|
|
Government
subsidy
|
|
|
-
|
|
|
645
|
|
|
-
|
|
|
7,812
|
|
|
Total
revenue
|
|
|
5,459,688
|
|
|
3,688,070
|
|
|
14,853,094
|
|
|
9,807,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
4,033,402
|
|
|
2,644,263
|
|
|
10,848,073
|
|
|
7,082,112
|
|
|
Selling
and marketing
|
|
|
164,642
|
|
|
100,356
|
|
|
601,933
|
|
|
268,012
|
|
|
General
and administrative
|
|
|
345,436
|
|
|
103,172
|
|
|
1,110,813
|
|
|
251,045
|
|
|
Depreciation
of property, plant and equipment
|
|
|
18,928
|
|
|
8,934
|
|
|
53,943
|
|
|
25,356
|
|
|
Amortization
of intangible assets
|
|
|
36,023
|
|
|
40,816
|
|
|
134,410
|
|
|
163,524
|
|
|
Total
operating costs and expenses
|
|
|
4,598,431
|
|
|
2,897,541
|
|
|
12,749,172
|
|
|
7,790,049
|
|
|
Income
from Operations
|
|
|
861,257
|
|
|
790,529
|
|
|
2,103,922
|
|
|
2,017,925
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
incomes
|
|
|
1,983
|
|
|
2,473
|
|
|
5,914
|
|
|
6,791
|
|
|
Interest
expenses
|
|
|
(28,654
|
|
|
(26,287
|
)
|
|
(81,434
|
)
|
|
(67,287
|
)
|
|
Total
Other Income (Expenses)
|
|
|
(26,671
|
|
|
(23,814
|
)
|
|
(75,520
|
)
|
|
(60,496
|
)
|
|
Income
before Income Taxes
|
|
|
834,586
|
|
|
766,715
|
|
|
2,028,402
|
|
|
1,957,429
|
|
|
Income
Taxes
|
|
|
-
|
|
|
(266,017
|
)
|
|
-
|
|
|
(683,963
|
)
|
|
Net
Income
|
|
$
|
834,586
|
|
$
|
500,698
|
|
$
|
2,028,402
|
|
$
|
1,273,466
|
|
|
Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
127,602
|
|
|
100,658
|
|
|
384,799
|
|
|
292,351
|
|
|
Comprehensive
Income
|
|
$
|
962,188
|
|
$
|
601,356
|
|
$
|
2,413,201
|
|
$
|
1,565,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
$
|
0.03
|
|
$
|
0.09
|
|
$
|
0.08
|
|
|
Diluted
|
|
$
|
0.04
|
|
$
|
0.03
|
|
$
|
0.09
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,512,269
|
|
|
15,995,000
|
|
|
21,512,269
|
|
|
15,995,000
|
|
|
Diluted
|
|
|
21,512,269
|
|
|
15,995,000
|
|
|
21,512,269
|
|
|
15,995,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
Statements
of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
(Expressed
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
21,512,269
|
|
$
|
2,151
|
|
$
|
7,053,834
|
|
$
|
3,161,747
|
|
$
|
415,089
|
|
$
|
10,632,821
|
|
|
Net
income for the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
ended
March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
400,706
|
|
|
|
|
|
400,706
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,964
|
|
|
106,964
|
|
|
Balance
at March 31, 2007
|
|
|
21,512,269
|
|
|
2,151
|
|
|
7,053,834
|
|
|
3,562,453
|
|
|
522,053
|
|
|
11,140,491
|
|
|
Net
income for the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
ended
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
793,110
|
|
|
|
|
|
793,110
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,233
|
|
|
150,233
|
|
|
Balance
at June 30, 2007
|
|
|
21,512,269
|
|
|
2,151
|
|
|
7,053,834
|
|
|
4,355,563
|
|
|
672,286
|
|
|
12,083,834
|
|
|
Net
income for the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
ended
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
834,586
|
|
|
|
|
|
834,586
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,602
|
|
|
127,602
|
|
|
Balance
at September 30, 2007
|
|
|
21,512,269
|
|
$
|
2,151
|
|
$
|
7,053,834
|
|
$
|
5,190,149
|
|
$
|
799,888
|
|
$
|
13,046,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
(Expressed
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,028,402
|
|
$
|
1,273,466
|
|
|
Adjustmens
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
by (used for) operating activities
|
|
|
|
|
|
|
|
|
Depreciation
of proeprty, plant and equipment
|
|
|
398,604
|
|
|
282,226
|
|
|
Amortization
of intangible assets
|
|
|
134,410
|
|
|
163,524
|
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(876,934
|
)
|
|
(224,110
|
)
|
|
Other
receivables
|
|
|
(118,197
|
)
|
|
-
|
|
|
Due
from related parties
|
|
|
(6,419
|
)
|
|
(269,141
|
)
|
|
Inventory
|
|
|
229,307
|
|
|
689,214
|
|
|
Advance
payments to suppliers
|
|
|
(710,177
|
)
|
|
-
|
|
|
Prepaid
expenses
|
|
|
(3,621
|
)
|
|
-
|
|
|
Accounts
payable and accrued liabilities
|
|
|
261,341
|
|
|
(259,426
|
)
|
|
Income
taxes payable
|
|
|
(117,964
|
)
|
|
(245,329
|
)
|
|
Net
cash provided by (used for) operating activities
|
|
|
1,218,752
|
|
|
1,410,424
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Property,
plant and equipment additions
|
|
|
(763,053
|
)
|
|
(1,701,617
|
)
|
|
Intangible
assets additions
|
|
|
-
|
|
|
(541,100
|
)
|
|
Deposits
paid in connection with contract for purchase of land
use
rights
|
|
|
(1,856,322
|
)
|
|
-
|
|
|
Net
cash provided by (used for) investing activities
|
|
|
(2,619,375
|
)
|
|
(2,242,717
|
)
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Capital
stock issued for cash
|
|
|
-
|
|
|
50,000
|
|
|
Increase
(decrease) in current portion of bank indebtedness
|
|
|
(284,798
|
)
|
|
26,725
|
|
|
Increase
(decrease) in noncurrent portion of bank indebtedness
|
|
|
477,379
|
|
|
-
|
|
|
Dividends
paid
|
|
|
-
|
|
|
(753,420
|
)
|
|
Net
cash provided by (used for) financing activities
|
|
|
192,581
|
|
|
(676,695
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash
equivalents
|
|
|
297,121
|
|
|
160,117
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(910,921
|
)
|
|
(1,348,871
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
2,241,712
|
|
|
3,175,128
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,330,791
|
|
$
|
1,826,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
81,434
|
|
$
|
67,287
|
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
683,963
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
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 approximately $7,100,000 at September 30,
2007.
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
chief executive officer and chairman of the board of directors. 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% and 12%, respectively,
of net sales.
In
2006,
two customers (for biodiesel products) accounted for 12% and 10%, 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.
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
Note
13.
Subsequent
Events
Contract
for Purchase of Land Use Rights
On
November 5, 2007, CCER established a new subsidiary Fujian Zhongde Energy
Co.,
Ltd. (“Zhongde Energy”) to build the biodiesel facility. On December 22, 2007,
the acquisition of the land use rights was completed.
Private
Placement Financing for $15,000,000
On
January 9, 2008, CCE completed a private placement, pursuant to which CCE
issued
10,000,000 shares of common stock and five-year warrants to purchase 5,000,000
shares of common stock at an initial exercise price of $2.00 per share for
aggregate gross proceeds of $15,000,000. In connection with this private
placement, CCE incurred placement agent fees of approximately $1,200,000,
and
issued the placement agent five-year warrants to purchase an aggregate of
1,200,000 shares of common stock at an initial exercise price of $2.00 per
share.
In
connection with the private placement, four related parties placed a total
of
1,500,000 shares of CCE common stock into an escrow account, with such shares
to
be released to the investors of this offering if the Company fails to (1)
commence the production of biodiesel at its currently proposed production
facility in Jiangyin, PRC on or before January 1, 2009, or (2) record at
least
$14,000,000 of adjusted net income for the fiscal year ending December 31,
2009.
Should the Company successfully satisfy each of these two milestones, these
shares of CCE common stock will be returned to the four related
parties.
In
connection with the private placement, CCE entered into a registration rights
agreement with the purchasers pursuant to which CCE agreed to provide certain
registration rights with respect to the common stock issued and the common
stock
issuable upon exercise of the warrants. Specifically, CCE agreed to file
a
registration statement with the Securities and Exchange Commission covering
the
resale of the common stock issued and underlying the warrants on or before
February 23, 2008 and to cause such registration statement to be declared
effective by the Securities and Exchange Commission on or before May 8, 2008.
If
(i) the registration statement is not filed on or before February 23, 2008
or
(ii) CCE fails to file with the Securities and Exchange Commission a request
for
acceleration of the registration statement in accordance with Rule 461
promulgated by the Securities and Exchange Commission pursuant to the Securities
Act, within five trading days of the date that CCE is notified by the Securities
and Exchange Commission that such registration statement will not be “reviewed ”
or will not be subject to further review (unless the failure to make such
request for acceleration is the result of our determination that events
affecting us will require the filing of an amendment to the registration
statement), or (iii) the registration statement is not declared effective
by the
Securities and Exchange Commission on or before May 8, 2008, or (iv) the
registration statement ceases to remain continuously effective for more than
15
consecutive calendar days or more than an aggregate of 20 calendar days during
any 12-month period after its first effective date, then CCE is subject to
liquidated damage payments to the holders of the shares sold in the private
placement in an amount equal to either (i) 1% of the aggregate purchase price
paid by such purchasers per month of delinquency or (ii) 1% of the number
of
shares of common stock purchased by such purchasers in the offering per month
of
delinquency. Notwithstanding the foregoing, in no event shall liquidated
damages
be paid exceed 6% of the aggregate gross proceeds of the offering or 6% of
the
aggregate number of shares of common stock issued in the offering, or a
combination thereof. In addition, CCE shall not be obligated to pay liquidated
damages with respect to any securities that CCE is unable to register pursuant
to the authority of the Securities and Exchange Commission with respect to
Rule
415 of the Securities Act of 1933, as amended. Pursuant to the registration
rights agreement, CCE must maintain the effectiveness of the registration
statement from the effective date until the date on which all securities
registered under the registration statement have been sold, or are otherwise
able to be sold pursuant to Rule 144, subject to CCE’s right to suspend or defer
the use of the registration statement in certain events.
CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
NOTES
TO
FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
Adoption
of 2008 Equity Incentive Plan
On
January 9, 2008, the Company adopted the 2008 Equity Incentive Plan. The
purpose
of the 2008 Equity Incentive Plan is to provide an incentive to attract and
retain directors, officers, consultants, advisors and employees whose services
are considered valuable, to encourage a sense of proprietorship and to stimulate
an active interest of such persons in our development and financial success.
Under the 2008 Equity Incentive Plan, CCE is authorized to issue up to 2,000,000
stock options, 1,000,000 of which shall have an exercise price per share
equal
to the greater of (i) $2.50 or (ii) 100% of the Fair Market Value of a share
of
common stock on the date of grant and 1,000,000 of which shall have an exercise
price per share equal to the greater of (i) $3.00 or (ii) 100% of the Fair
Market Value of a share of common stock on the date of grant. Under the 2008
Equity Incentive Plan, CCE is authorized to issue incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code of 1986,
as
amended, and non-qualified stock options and all options under the Plan shall
vest quarterly over three years. The 2008 Equity Incentive Plan is administered
by CCE’S board of directors. On January 9, 2008, CCE granted options to purchase
a total of 1,330,000 shares of common stock under the 2008 Equity Incentive
Plan
to four executive officers. 665,000 options are exercisable at a price of
$2.50
per share and 665,000 options are exercisable at a price of $3.00 per share;
all
1,330,000 options expire 10 years from the date of grant.
Employment
Agreement
On
January 9, 2008, the Company entered into a two year employment agreement
with
its Chief Executive Officer and chairman of the Board of Directors, which
agreement shall be automatically renewed for additional one-year periods
until
either party gives the other written notice of its intent not to renew the
agreement at least 90 days prior to the end of the then current term. Pursuant
to this agreement, the Chief Executive Officer (the “CEO”) shall receive a
salary of approximately $2,473 per month, which amount shall be increased
by at
least 10% following the one year anniversary of the agreement. If the CEO’s
employment is terminated without cause or he resigns for good reason, all
unvested options shall vest and the CEO will be entitled to the continuation
of
benefits and the payment of his salary for 12 months.
Capital
Contribution to Fujian Zhongde Energy Co., Ltd.
On
January 11, 2008, CCER made a capital contribution of $10,000,000 to Zhongde
Energy to fulfill the registered capital investment requirements stipulated
by
the Fuqing City Foreign Trading and Economy Cooperation Bureau.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
24.
Indemnification
of Directors and Officers.
Section
145 of the Delaware General Corporation Law (the “DGCL”) provides, in general,
that a corporation incorporated under the laws of the State of Delaware, as
we
are, may indemnify any person who was or is a party or is threatened to be
made
a party to any threatened, pending or completed action, suit or proceeding
(other than a derivative action by or in the right of the corporation) by reason
of the fact that such person is or was a director, officer, employee or agent
of
the corporation, or is or was serving at the request of the corporation as
a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of
the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person’s conduct was unlawful. In the case of a
derivative action, a Delaware corporation may indemnify any such person against
expenses (including attorneys’ fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit
if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that
no
indemnification will be made in respect of any claim, issue or matter as to
which such person will have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery of the State of Delaware
or
any other court in which such action was brought determines such person is
fairly and reasonably entitled to indemnity for such expenses.
Our
Certificate of Incorporation and By-laws provide that we will indemnify our
directors, officers, employees and agents to the extent and in the manner
permitted by the provisions of the DGCL, as amended from time to time, subject
to any permissible expansion or limitation of such indemnification, as may
be
set forth in any stockholders’ or directors’ resolution or by contract. In
addition, our director and officer indemnification agreements with each of
our
directors and officers provide, among other things, for the indemnification
to
the fullest extent permitted or required by Delaware law, provided that no
indemnitee will be entitled to indemnification in connection with any claim
initiated by the indemnitee against us or our directors or officers unless
we
join or consent to the initiation of the claim, or the purchase and sale of
securities by the indemnitee in violation of Section 16(b) of the Exchange
Act.
Any
repeal or modification of these provisions approved by our stockholders will
be
prospective only and will not adversely affect any limitation on the liability
of any of our directors or officers existing as of the time of such repeal
or
modification.
We
are
also permitted to apply for insurance on behalf of any director, officer,
employee or other agent for liability arising out of his actions, whether or
not
the DGCL would permit indemnification.
Item
25.
Other
Expenses of Issuance and Distribution.
The
fees
and expenses payable by us in connection with this Registration Statement are
estimated as follows:
|
SEC
Registration Fee
|
|
$
|
1,190.55
|
|
|
Accounting
Fees and Expenses
|
|
|
10,000.00
|
|
|
Legal
Fees and Expenses
|
|
|
10,000.00
|
|
|
Printing
Expenses
|
|
|
5,000.00
|
|
|
Miscellaneous
Fees and Expenses
|
|
|
3,809.45
|
|
|
Total
|
|
$
|
30,000.00
|
|
Item
26.
Recent
Sales of Unregistered Securities.
On
October 24, 2006, we accepted subscriptions for a total of 1,050,000 shares
of
common stock, at a purchase price of $1.00 per share, in exchange for gross
proceeds of $1,050,000. The securities were offered and sold to investors in
reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. Each
of
the persons and/or entities receiving our securities qualified as an accredited
investor (as defined by Rule 501 under the Securities Act of 1933, as
amended).
On
October 24, 2004, pursuant to a Share Exchange Agreement with the shareholders
of China Clean Energy Resources, Ltd., we issued 15,995,000 shares of common
stock to the shareholders of China Clean Energy Resources, Ltd. in exchange
for
100% of the common shares of China Clean Energy Resources, Ltd. The securities
were offered and sold to investors in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended, and
Rule
506 promulgated thereunder. Each of the persons and/or entities receiving our
securities qualified as an accredited investor (as defined by Rule 501 under
the
Securities Act of 1933, as amended).
On
October 24, 2006, we issued Yongfu Zhu 408,333 shares of common stock, valued
at
$0.10 per share, as compensation for consulting services. The securities were
issued to Yongfu Zhu in reliance upon exemptions from registration pursuant
to
Section 4(2) under the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder. Yongfu Zhu qualified as an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended).
On
October 24, 2006, we issued Olivia Hsin-Yu Chao 408,333 shares of common stock,
valued at $0.10 per share, as compensation for consulting services. The
securities were issued to Olivia Hsin-Yu Chao in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder. Olivia Hsin-Yu Chao qualified
as
an accredited investor (as defined by Rule 501 under the Securities Act of
1933,
as amended).
On
October 24, 2006, we issued Fred Chang 204,167 shares of common stock, valued
at
$0.10 per share, as compensation for consulting services. The securities were
issued to Fred Chang in reliance upon exemptions from registration pursuant
to
Section 4(2) under the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder. Fred Chang qualified as an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended).
On
October 24, 2006, we issued Liuyi Zhang 204,167 shares of common stock, valued
at $0.10 per share, as compensation for consulting services. The securities
were
issued to Liuyi Zhang in reliance upon exemptions from registration pursuant
to
Section 4(2) under the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder. Liuyi Zhang qualified as an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended).
On
October 24, 2006, we issued Zuyuan Zheng 175,000 shares of common stock, valued
at $0.10 per share, as compensation for consulting services. The securities
were
issued to Zuyuan Zheng in reliance upon exemptions from registration pursuant
to
Section 4(2) under the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder. Zuyuan Zheng qualified as an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended).
On
October 24, 2006, we issued Avenndi, LLC 5,000 shares of common stock, valued
at
$0.10 per share, as compensation for consulting services. The securities were
issued to Avenndi, LLC in reliance upon exemptions from registration pursuant
to
Section 4(2) under the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder. Avenndi, LLC qualified as an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended).
On
October 24, 2006, we issued Westminster Securities Corporation 200,000 shares
of
common stock, valued at $0.10 per share, as compensation for financial advisory
services. The securities were issued to Westminster Securities Corporation
in
reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.
Westminster Securities Corporation qualified as an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended).
On
November 9, 2006, we accepted a subscription for a total of 250,000 shares
of
common stock, at a purchase price of $1.00 per share, in exchange for gross
proceeds of $250,000.
The
securities were offered and sold to investors in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder. Each of the persons and/or
entities receiving our securities qualified as an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended)
.
On
November 15, 2006, we granted Gary Zhao, our Chief Financial Officer, a total
of
100,000 shares of unvested restricted common stock. 8.333 of the restricted
shares will vest on every one-month anniversary of Mr. Zhao employment. The
securities were issued to Mr. Zhao in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended, and
Rule
506 promulgated thereunder. Mr. Zhao qualified as an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended).
On
January 25, 2007, we issued 30,000 shares of common stock, valued at $0.10
per
share, to CCG Elite Investor Relations, as compensation for investor relations
services. These shares were issued pursuant to an agreement between us and
CCG
Elite Investor Relations dated November 8, 2006. The securities were issued
to
CCG Elite Investor Relations in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended, and
Rule
506 promulgated thereunder. CCG Elite Investor Relations qualified as an
accredited investor (as defined by Rule 501 under the Securities Act of 1933,
as
amended).
On
January 25, 2007, we issued 50,000 shares of common stock, valued at $0.10
per
share, to Craig Bird, an employees of Segue Ventures LLC, as compensation for
investor relations services. These shares were issued pursuant to an agreement
between us and Segue Ventures LLC dated November 13, 2006. The securities were
issued to Craig Bird in reliance upon exemptions from registration pursuant
to
Section 4(2) under the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder. Craig Bird qualified as an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended).
On
January 9, 2008, we sold (i) 10,000,000 shares of our common stock, (ii)
five-year warrants to purchase 5,000,000 shares of common stock at an exercise
price of $2.00 per share, pursuant to a Securities Purchase Agreement among
us
and the purchasers signatory thereto. We received aggregate gross proceeds
of
approximately $15.0 million from the sale of the common stock and warrants.
The
securities were offered and sold to investors in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder. Each of the persons and/or
entities receiving our securities qualified as an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended).
Westminster
Securities Corporation acted as placement agent with respect to the January
9,
2008 offering and received a cash fee equal to $1,200,000 and warrants to
purchase 1,200,000 shares of our common stock at an exercise price of $2.00
per
share. The securities were issued to Westminster Securities Corporation in
reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.
Westminster Securities Corporation qualified as an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended).
Item
27.
Exhibits.
|
Exhibit
No.
|
|
Description
|
|
2.1
|
|
Share
Exchange Agreement, dated as of October 20, 2006, by and among the
shareholders of China Clean Energy Resources, Ltd., China Clean Energy
Inc., Chet Kurzawski and Doug Reid (Incorporated by reference to
Exhibit
2.1 of Amendment Number 2 to the Registration Statement on form SB-2/A
of
China Clean Energy Inc. filed on May 25, 2007).
|
|
|
|
|
|
3.1*
|
|
Composite
Certificate of Incorporation of China Clean Holdings
Inc.
|
|
|
|
|
|
3.2
|
|
Amended
and Restated By-laws of Hurley Exploration Inc. (Incorporated by
reference
to Exhibit 3.5 to the Current Report on Form 8-K of China Clean Energy
Inc. filed with the Securities and Exchange Commission on October
30,
2006).
|
|
Exhibit
No.
|
|
Description
|
|
5.1**
|
|
Opinion
of Haynes and Boone, LLP.
|
|
|
|
|
|
10.1
|
|
Form
of Subscription Agreement for October 24, 2006 Private Placement
and
November 9, 2006 Private Placement (Incorporated by reference to
Exhibit
10.1 to the Current Report on Form 8-K of China Clean Energy Inc.
filed
with the Securities and Exchange Commission on October 30,
2006).
|
|
|
|
|
|
10.2
|
|
Contract
of Supply and Purchase of Acid Oil, dated August 2, 2006, between
Fujian
Zhongde Technology Corporation, Ltd. and Fuqing Zhongde Waste Oil
Collecting Corporation, Ltd. (Incorporated by reference to Exhibit
10.2 to
the Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on October 30,
2006).
|
|
|
|
|
|
10.3
|
|
Contract
for the Transfer of the Patent, dated August 29, 2005, between Ta-ming
Ou
and Liang Zicai (Incorporated by reference to Exhibit 10.6 to the
Current
Report on Form 8-K of China Clean Energy Inc. filed with the Securities
and Exchange Commission on October 30, 2006).
|
|
|
|
|
|
10.4
|
|
Agreement
on Transfer of the Patent, dated September 26, 2005, between Fujian
Zhong
De Technology Stock Co., Ltd. and Ta-ming Ou (Incorporated by reference
to
Exhibit 10.7 to the Current Report on Form 8-K of China Clean Energy
Inc.
filed with the Securities and Exchange Commission on October 30,
2006).
|
|
|
|
|
|
10.5
|
|
Amended
and Restated Consulting Agreement, dated January 18, 2007, between
Fujian
Zhongde Technology Co., Ltd. and Allstar Capital Inc. (Incorporated
by
reference to Exhibit 10.6 of to the
Registration
Statement on form SB-2 of China Clean Energy Inc. filed on January
22,
2007).
|
|
|
|
|
|
10.6
|
|
Engagement
Letter, dated September 19, 2006, between China Clean Energy Resources,
Ltd. and Westminster Securities Corporation. (Incorporated by reference
to
Exhibit 10.7 of to the
Registration
Statement on form SB-2 of China Clean Energy Inc. filed on January
22,
2007).
|
|
|
|
|
|
10.7
|
|
Credit
Facility, dated February 1, 2005, between DBS Bank Ltd. and Fujian
Zhongde
Technology Co., Ltd. (Incorporated by reference to Exhibit 10.8 of
to
the
Registration
Statement on form SB-2 of China Clean Energy Inc. filed on January
22,
2007).
|
|
|
|
|
|
10.8
|
|
Contract
of Land and Estate Mortgage, dated March 28, 2005, between DBS Bank
Ltd.
and Fujian Zhongde Technology Co., Ltd. (Incorporated by reference
to
Exhibit 10.9 of to the
Registration
Statement on form SB-2 of China Clean Energy Inc. filed on January
22,
2007).
|
|
|
|
|
|
10.9
|
|
Contract
of Supply and Purchase of Acid Oil, dated August 2, 2006, between
Fujian
Zhongde Technology Corporation, Ltd. and Fuqing Zhongde Waste Oil
Collecting Corporation (Incorporated by reference to Exhibit 10.10
of to
the Registration Statement on form SB-2 of China Clean Energy Inc.
filed
on January 22, 2007).
|
|
|
|
|
|
10.10
|
|
Land
Investment Agreement, dated December 25, 2006, between Fujiang Zhongde
Technology Co., Ltd and Fuzhou City Jiangyin Industry District Management
Committee (Incorporated by reference to Exhibit 10.11 of to the
Registration Statement on form SB-2 of China Clean Energy Inc. filed
on
January 22, 2007).
|
|
|
|
|
|
10.11
|
|
Sales
Contract, dated November 15, 2006, between Fujian Zhongde Technology
Co.,
Ltd. and Cray Valley Resins India Pvt. Ltd. (Incorporated by reference
to
Exhibit 10.12 of to the
Registration
Statement on form SB-2 of China Clean Energy Inc. filed on January
22,
2007).
|
|
Exhibit
No.
|
|
Description
|
|
10.12
|
|
Supplier
Agreement, dated March 5, 2007 between China Clean Energy Inc. and
Fujian
Quanzhou Zhong Yuan Long Chemistry Industry Co., Ltd. (Incorporated
by
reference to Exhibit 10.13 of Amendment Number 2 to the Registration
Statement on form SB-2/A of China Clean Energy Inc. filed on May
25,
2007).
|
|
|
|
|
|
10.13
|
|
Supplier
Agreement, dated March. 06, 2007 between China Clean Energy, Inc.
and
Meiweike (Shaxian) Linchan Chemistry Co., Ltd. (Incorporated by reference
to Exhibit 10.14 of to Amendment Number 2 to the Registration Statement
on
form SB-2/A of China Clean Energy Inc. filed on May 25,
2007).
|
|
|
|
|
|
10.14
|
|
Supplier
Agreement, dated March. 05, 2007 between China Clean Energy, Inc.
and
Xinjiang Guansheng Technology Chemistry Co., Ltd. (Incorporated by
reference to Exhibit 10.15 of to
Amendment
Number 2 to the Registration Statement on form SB-2 of China Clean
Energy
Inc. filed on May 25, 2007).
|
|
|
|
|
|
10.15
|
|
Form
of Securities Purchase Agreement, dated January 9, 2008 (Incorporated
by
reference to Exhibit 10.1 to the Current Report on Form 8-K of China
Clean
Energy Inc. filed with the Securities and Exchange Commission on
January
10, 2008).
|
|
|
|
|
|
10.16
|
|
Form
of Registration Rights Agreement, dated January 9, 2008 (Incorporated
by
reference to Exhibit 10.2 to the Current Report on Form 8-K of China
Clean
Energy Inc. filed with the Securities and Exchange Commission on
January
10, 2008).
|
|
|
|
|
|
10.17
|
|
Form
of Class A Warrant to Purchase Common Stock (Incorporated by reference
to
Exhibit 10.3 to the Current Report on Form 8-K of China Clean Energy
Inc.
filed with the Securities and Exchange Commission on January 10,
2008).
|
|
|
|
|
|
10.18
|
|
Form
of Lock-up Agreement (Incorporated by reference to Exhibit 10.4 to
the
Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on January 10,
2008).
|
|
|
|
|
|
10.19
|
|
2008
Equity Incentive Plan (Incorporated by reference to Exhibit 10.5
to the
Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on January 10,
2008).
|
|
|
|
|
|
10.20
|
|
Form
of 2008 Incentive Stock Option Agreement (Incorporated by reference
to
Exhibit 10.6 to the Current Report on Form 8-K of China Clean Energy
Inc.
filed with the Securities and Exchange Commission on January 10,
2008).
|
|
|
|
|
|
10.21
|
|
Form
of 2008 Non-Qualified Stock Option Agreement (Incorporated by reference
to
Exhibit 10.7 to the Current Report on Form 8-K of China Clean Energy
Inc.
filed with the Securities and Exchange Commission on January 10,
2008).
|
|
|
|
|
|
10.22
|
|
Employment
Agreement, dated as of January 9, 2008, by and between China Clean
Energy
Inc. and Tai-ming Ou (Incorporated by reference to Exhibit 10.8 to
the
Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on January 10,
2008).
|
|
|
|
|
|
10.23
|
|
Employment
Agreement, dated as of January 9, 2008, by and between China Clean
Energy
Inc. and Gary Zhao (Incorporated by reference to Exhibit 10.9 to
the
Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on January 10,
2008).
|
|
|
|
|
|
10.24
|
|
Employment
Agreement, dated as of January 9, 2008, by and between China Clean
Energy
Inc. and Ri-wen Xue (Incorporated by reference to Exhibit 10.10 to
the
Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on January 10,
2008).
|
|
Exhibit
No.
|
|
Description
|
|
10.25
|
|
Employment
Agreement, dated as of January 9, 2008, by and between China Clean
Energy
Inc. and Yun He (Incorporated by reference to Exhibit 10.11 to the
Current
Report on Form 8-K of China Clean Energy Inc. filed with the Securities
and Exchange Commission on January 10, 2008).
|
|
|
|
|
|
21.1*
|
|
List
of Subsidiaries.
|
|
|
|
|
|
23.1*
|
|
Consent
of Moen and Company LLP.
|
|
|
|
|
|
23.2*
|
|
Consent
of Michael T. Studer CPA PC.
|
|
|
|
|
|
23.3**
|
|
Consent
of Haynes and Boone, LLP (included in Exhibit 5.1).
|
|
|
|
|
|
24.1
|
|
Power
of Attorney (included on signature
page).
|
|
**
|
To
be filed by amendment.
|
Item
28.
Undertakings.
The
undersigned registrant hereby undertakes that it will:
1.
File,
during any period in which it offers or sells securities, a post-effective
amendment to this registration statement to:
i.
Include any prospectus required by Section 10(a)(3) of the Securities Act;
ii.
Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the forgoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective registration statement.
iii.
Include any additional or changed material information on the plan of
distribution.
2.
For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering.
3.
File a
post-effective amendment to remove from registration any of the securities
that
remain unsold at the end of the offering.
4.
For
determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned small business issuer undertakes that in a primary offering
of
securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell
the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned
small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
i.
Any
preliminary prospectus or prospectus of the undersigned small business issuer
relating to the offering required to be filed pursuant to Rule 424;
ii.
Any
free writing prospectus relating to the offering prepared by or on behalf of
the
undersigned small business issuer or used or referred to by the undersigned
small business issuer;
iii.
The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned small business issuer or its
securities provided by or on behalf of the undersigned small business issuer;
and
iv.
Any
other communication that is an offer in the offering made by the undersigned
small business issuer to the purchaser.
5.
Insofar as indemnification for liabilities arising under the Securities Act
of
1933 (the “Act”) may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter
has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
6.
Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule
430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed
to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first
use,
supersede or modify any statement that was made in the registration statement
or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in the City of West Windsor,
State of New Jersey on February 1, 2008.
|
|
|
|
|
|
CHINA
CLEAN ENERGY INC.
|
|
|
|
|
|
By:
|
/s/
Tai-ming Ou
|
|
|
Name:
Tai-ming Ou
|
|
|
Title:
Chief Executive Officer
|
POWER
OF ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that the undersigned officers and directors of China
Clean Energy Inc., a Delaware corporation that is filing a registration
statement on Form SB-2 with the Securities and Exchange Commission under the
provisions of the Securities Act of 1933, as amended, hereby constitute and
appoint Tai-ming Ou and Gary Zhao, and each of them, their true and lawful
attorneys-in-fact and agents, with full power of substitution and
re-substitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to the registration statement,
including a prospectus or an amended prospectus therein, and all other documents
in connection therewith to be filed with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all interests and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or either of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In
accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Tai-ming Ou
|
|
|
|
|
|
Tai-ming
Ou
|
|
Chief
Executive Officer and Chairman of the Board of Directors (Principal
Executive Officer)
|
|
February
1, 2008
|
|
|
|
|
|
|
|
/s/
Gary Zhao
|
|
|
|
|
|
Gary
Zhao
|
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
|
February
1, 2008
|
|
|
|
|
|
|
|
/s/
Ri-wen Xue
|
|
|
|
|
|
Ri-wen
Xue
|
|
Chief
Operating Officer and Director
|
|
February
1, 2008
|
|
|
|
|
|
|
|
/s/
Qin Yang
|
|
|
|
|
|
Qin
Yang
|
|
Director
|
|
February
1, 2008
|
EXHIBIT
INDEX
|
Exhibit
No.
|
|
Description
|
|
2.1
|
|
Share
Exchange Agreement, dated as of October 20, 2006, by and among the
shareholders of China Clean Energy Resources, Ltd., China Clean Energy
Inc., Chet Kurzawski and Doug Reid (Incorporated by reference to
Exhibit
2.1 of Amendment Number 2 to the Registration Statement on form SB-2/A
of
China Clean Energy Inc. filed on May 25, 2007).
|
|
|
|
|
|
3.1*
|
|
Composite
Certificate of Incorporation of China Clean Holdings
Inc.
|
|
|
|
|
|
3.2
|
|
Amended
and Restated By-laws of Hurley Exploration Inc. (Incorporated by
reference
to Exhibit 3.5 to the Current Report on Form 8-K of China Clean Energy
Inc. filed with the Securities and Exchange Commission on October
30,
2006).
|
|
|
|
|
|
5.1**
|
|
Opinion
of Haynes and Boone, LLP.
|
|
|
|
|
|
10.1
|
|
Form
of Subscription Agreement for October 24, 2006 Private Placement
and
November 9, 2006 Private Placement (Incorporated by reference to
Exhibit
10.1 to the Current Report on Form 8-K of China Clean Energy Inc.
filed
with the Securities and Exchange Commission on October 30,
2006).
|
|
|
|
|
|
10.2
|
|
Contract
of Supply and Purchase of Acid Oil, dated August 2, 2006, between
Fujian
Zhongde Technology Corporation, Ltd. and Fuqing Zhongde Waste Oil
Collecting Corporation, Ltd. (Incorporated by reference to Exhibit
10.2 to
the Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on October 30,
2006).
|
|
|
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10.3
|
|
Contract
for the Transfer of the Patent, dated August 29, 2005, between Ta-ming
Ou
and Liang Zicai (Incorporated by reference to Exhibit 10.6 to the
Current
Report on Form 8-K of China Clean Energy Inc. filed with the Securities
and Exchange Commission on October 30, 2006).
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10.4
|
|
Agreement
on Transfer of the Patent, dated September 26, 2005, between Fujian
Zhong
De Technology Stock Co., Ltd. and Ta-ming Ou (Incorporated by reference
to
Exhibit 10.7 to the Current Report on Form 8-K of China Clean Energy
Inc.
filed with the Securities and Exchange Commission on October 30,
2006).
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|
|
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10.5
|
|
Amended
and Restated Consulting Agreement, dated January 18, 2007, between
Fujian
Zhongde Technology Co., Ltd. and Allstar Capital Inc. (Incorporated
by
reference to Exhibit 10.6 of to the
Registration
Statement on form SB-2 of China Clean Energy Inc. filed on January
22,
2007).
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|
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10.6
|
|
Engagement
Letter, dated September 19, 2006, between China Clean Energy Resources,
Ltd. and Westminster Securities Corporation. (Incorporated by reference
to
Exhibit 10.7 of to the
Registration
Statement on form SB-2 of China Clean Energy Inc. filed on January
22,
2007).
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10.7
|
|
Credit
Facility, dated February 1, 2005, between DBS Bank Ltd. and Fujian
Zhongde
Technology Co., Ltd. (Incorporated by reference to Exhibit 10.8 of
to
the
Registration
Statement on form SB-2 of China Clean Energy Inc. filed on January
22,
2007).
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10.8
|
|
Contract
of Land and Estate Mortgage, dated March 28, 2005, between DBS Bank
Ltd.
and Fujian Zhongde Technology Co., Ltd. (Incorporated by reference
to
Exhibit 10.9 of to the
Registration
Statement on form SB-2 of China Clean Energy Inc. filed on January
22,
2007).
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10.9
|
|
Contract
of Supply and Purchase of Acid Oil, dated August 2, 2006, between
Fujian
Zhongde Technology Corporation, Ltd. and Fuqing Zhongde Waste Oil
Collecting Corporation (Incorporated by reference to Exhibit 10.10
of to
the Registration Statement on form SB-2 of China Clean Energy Inc.
filed
on January 22, 2007).
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|
Exhibit
No.
|
|
Description
|
|
10.10
|
|
Land
Investment Agreement, dated December 25, 2006, between Fujiang Zhongde
Technology Co., Ltd and Fuzhou City Jiangyin Industry District Management
Committee (Incorporated by reference to Exhibit 10.11 of to the
Registration Statement on form SB-2 of China Clean Energy Inc. filed
on
January 22, 2007).
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10.11
|
|
Sales
Contract, dated November 15, 2006, between Fujian Zhongde Technology
Co.,
Ltd. and Cray Valley Resins India Pvt. Ltd. (Incorporated by reference
to
Exhibit 10.12 of to the
Registration
Statement on form SB-2 of China Clean Energy Inc. filed on January
22,
2007).
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10.12
|
|
Supplier
Agreement, dated March 5, 2007 between China Clean Energy Inc. and
Fujian
Quanzhou Zhong Yuan Long Chemistry Industry Co., Ltd. (Incorporated
by
reference to Exhibit 10.13 of Amendment Number 2 to the Registration
Statement on form SB-2/A of China Clean Energy Inc. filed on May
25,
2007).
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10.13
|
|
Supplier
Agreement, dated March. 06, 2007 between China Clean Energy, Inc.
and
Meiweike (Shaxian) Linchan Chemistry Co., Ltd. (Incorporated by reference
to Exhibit 10.14 of to Amendment Number 2 to the Registration Statement
on
form SB-2/A of China Clean Energy Inc. filed on May 25,
2007).
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|
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|
10.14
|
|
Supplier
Agreement, dated March. 05, 2007 between China Clean Energy, Inc.
and
Xinjiang Guansheng Technology Chemistry Co., Ltd. (Incorporated by
reference to Exhibit 10.15 of to
Amendment
Number 2 to the Registration Statement on form SB-2 of China Clean
Energy
Inc. filed on May 25, 2007).
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|
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10.15
|
|
Form
of Securities Purchase Agreement, dated January 9, 2008 (Incorporated
by
reference to Exhibit 10.1 to the Current Report on Form 8-K of China
Clean
Energy Inc. filed with the Securities and Exchange Commission on
January
10, 2008).
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|
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10.16
|
|
Form
of Registration Rights Agreement, dated January 9, 2008 (Incorporated
by
reference to Exhibit 10.2 to the Current Report on Form 8-K of China Clean
Energy Inc. filed with the Securities and Exchange Commission on
January
10, 2008).
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|
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10.17
|
|
Form
of Class A Warrant to Purchase Common Stock (Incorporated by reference
to
Exhibit 10.3 to the Current Report on Form 8-K of China Clean Energy
Inc.
filed with the Securities and Exchange Commission on January 10,
2008).
|
|
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10.18
|
|
Form
of Lock-up Agreement (Incorporated by reference to Exhibit 10.4 to
the
Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on January 10,
2008).
|
|
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|
|
10.19
|
|
2008
Equity Incentive Plan (Incorporated by reference to Exhibit 10.5
to the
Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on January 10,
2008).
|
|
|
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|
|
10.20
|
|
Form
of 2008 Incentive Stock Option Agreement (Incorporated by reference
to
Exhibit 10.6 to the Current Report on Form 8-K of China Clean Energy
Inc.
filed with the Securities and Exchange Commission on January 10,
2008).
|
|
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|
|
10.21
|
|
Form
of 2008 Non-Qualified Stock Option Agreement (Incorporated by reference
to
Exhibit 10.7 to the Current Report on Form 8-K of China Clean Energy
Inc.
filed with the Securities and Exchange Commission on January 10,
2008).
|
|
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|
10.22
|
|
Employment
Agreement, dated as of January 9, 2008, by and between China Clean
Energy
Inc. and Tai-ming Ou (Incorporated by reference to Exhibit 10.8 to
the
Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on January 10,
2008).
|
|
Exhibit
No.
|
|
Description
|
|
10.23
|
|
Employment
Agreement, dated as of January 9, 2008, by and between China Clean
Energy
Inc. and Gary Zhao (Incorporated by reference to Exhibit 10.9 to
the
Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on January 10,
2008).
|
|
|
|
|
|
10.24
|
|
Employment
Agreement, dated as of January 9, 2008, by and between China Clean
Energy
Inc. and Ri-wen Xue (Incorporated by reference to Exhibit 10.10 to
the
Current Report on Form 8-K of China Clean Energy Inc. filed with
the
Securities and Exchange Commission on January 10,
2008).
|
|
|
|
|
|
10.25
|
|
Employment
Agreement, dated as of January 9, 2008, by and between China Clean
Energy
Inc. and Yun He (Incorporated by reference to Exhibit 10.11 to the
Current
Report on Form 8-K of China Clean Energy Inc. filed with the Securities
and Exchange Commission on January 10, 2008).
|
|
|
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|
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21.1*
|
|
List
of Subsidiaries.
|
|
|
|
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|
23.1*
|
|
Consent
of Moen and Company LLP.
|
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23.2*
|
|
Consent
of Michael T. Studer CPA PC.
|
|
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|
23.3**
|
|
Consent
of Haynes and Boone, LLP (included in Exhibit 5.1).
|
|
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|
|
24.1
|
|
Power
of Attorney (included on signature
page).
|
|
**
|
To
be filed by amendment.
|
Grafico Azioni China Clean Energy (CE) (USOTC:CCGY)
Storico
Da Mag 2024 a Giu 2024
Grafico Azioni China Clean Energy (CE) (USOTC:CCGY)
Storico
Da Giu 2023 a Giu 2024
