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Item
1.
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Description
of Business.
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Company
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 a 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.
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Products
Sold
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%
of Total Sales for the Period
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1.
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Dimer
Acid
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36.97%
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2.
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Biodiesel
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26.54%
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3.
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Polyamide
Resin
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21.84%
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4.
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Vegetable
Asphaltun
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5.30%
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5.
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Polyamide
Hot Melt Adhesive
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3.36%
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6.
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Printing
Ink
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3.20%
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7.
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Fatty
Acid
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1.31%
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8.
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Stearic
Acid
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0.66%
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9.
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Liquid
Resin 651#
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0.36%
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10.
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Gluewater
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0.29%
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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 26.15% of total sales.
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Products
Sold
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%
of Total Sales for the Period
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|
1.
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Dimer
Acid
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26.15%
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2.
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Biodiesel
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24.89%
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3.
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Polyamide
Resin
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22.58%
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4.
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Printing
Ink
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10.11%
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5.
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Fatty
Acid
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4.77%
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6.
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Polyamide
Hot Melt Adhesive
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4.62%
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7.
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Stearic
Acid
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3.15%
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8.
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Vegetable
Asphaltun
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2.69%
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9.
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Oleic
Acid
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0.68%
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10.
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Gluewater
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0.35%
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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:
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carbon
monoxide (CO), a poisonous gas that causes smog;
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particulates
that contribute to respiratory infections, including asthma;
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sulfur,
which contributes to the formation of acid rain; and
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unburned
aromatic hydrocarbons that create smog and may be a contributing
cause of
cancer.
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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.
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 300,000 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 place 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:
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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);
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in
the Hebei Province; and/or
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in
the Xinjiang Province.
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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 broke ground on this new biodiesel facility on December 19, 2007,
and
operations at this new facility are being conducted through Fujian Zhongde
Energy Co., Ltd., a wholly owned subsidiary that was formed on November 5,
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:
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grow
capacity and capabilities in line with market demand increases;
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enhance
our technology through innovation, research and study, and obtain
global
patent protection;
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continue
to improve operational efficiencies and use of nearly all resource
by-products;
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further
expand into global markets and diverse industry sectors;
and
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build
a strong market reputation to foster and capture future growth in
the
People’s Republic of China and
abroad.
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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:
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Annual
Capacity - biodiesel: 10,000 tons or approximately 3 million
gallons
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Annual
Capacity - specialty chemicals: 18,000
tons
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After
Expansion:
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Approximately
$1,500,000 will be invested by us to install a high performance hot
melt
adhesive production line using our proprietary technology.
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Engineering
effort is primarily focused on increasing biodiesel and hot-melt
adhesive
production yields while maintaining the current quality standards.
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Production
will maintain current yields while new equipment is installed, minimizing
production downtime and lost sales.
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The
improvement project has already begun and is expected to be completed
within three months.
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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 net sales of $13,489,710. During the same time period, our top
ten
customers - ranked by the sales amount sold to each customer - contributed
$7,150,687 in revenues. The following table depicts the top ten customers for
the twelve-month period from January 1, 2006 through December 31, 2006.
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Name
of Customer
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|
Products
Sold
|
|
Sales
for the Period by Customer
|
|
%
of Sales for the Period
|
|
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1.
|
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Fuqing
Zhongdong Filling Station
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Biodiesel
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$
|
1,514,740
|
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11.23
%
|
|
|
2.
|
|
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Fuqing
Risheng Filling Station
|
|
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Biodiesel
|
|
$
|
1,347,946
|
|
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9.96
%
|
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|
3.
|
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Air
Products and Chemicals (PTE) Ltd.
|
|
|
Specialty
Chemicals
|
|
$
|
1,148,578
|
|
|
8.51
%
|
|
|
4.
|
|
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HBG
Explore Corporation
|
|
|
Specialty
Chemicals
|
|
$
|
902,084
|
|
|
6.69
%
|
|
|
5.
|
|
|
Fuqing
Zhongde Chemical Industrial Co., Ltd.
Tianjin
Branch
|
|
|
Specialty
Chemicals
|
|
$
|
511,436
|
|
|
3.79
%
|
|
|
6.
|
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|
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
%
|
|
|
|
|
|
|
|
|
|
|
$
|
7,150,687
|
|
|
52.98
%
|
|
|
|
|
|
Total
(Company)
|
|
|
|
|
$
|
13,489,710
|
|
|
100.00
%
|
|
During
the twelve-month period from January 1, 2007 through December 31, 2007, we
had
consolidated net sales of $21,756,010. During the same time period, our top
ten
customers - ranked by the sales amount sold to each customer - contributed
$14,701,065 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)
|
|
|
|
|
$
|
21,756,010
|
|
|
100.00%
|
|
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
|
%
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.
RISK
FACTORS
There
are
numerous and varied risks, known and unknown, that may prevent us from achieving
our goals. You should carefully consider the risks described below and the
other
information included in this Annual Report, including our financial statements
and related notes. Our business, financial condition and results of operations
could be harmed by any of the following risks. If any of the events or
circumstances described below were to occur, our business, financial condition
and results of operations could be materially adversely affected. As a result,
the trading price of our common stock could decline, and investors could lose
part or all of their investment.
Risks
Related 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 Renminbi, 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
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, and, to date, we 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:
|
|
·
|
adequate
highway or rail capacity, including sufficient numbers of dedicated
tanker
trucks or cars;
|
|
|
·
|
sufficient
storage facilities for feedstock and biodiesel;
|
|
|
·
|
increases
in truck fleets capable of transporting biodiesel within localized
markets; and
|
|
|
·
|
expansion
of independent filling stations
|
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 place significant demands on our management,
administrative, operational, internal audit and accounting resources. We
anticipate that as our business grows 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;
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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.
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. 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.