NOTE 1 – ORGANIZATION AND BUSINESS
China Clean Energy, Inc. (“CCE” or the “Company”) was incorporated in the State of Delaware on November 12, 2004. The Company originally through its direct and indirect wholly-owned subsidiaries, China Clean Energy Resources Limited (“CCER”), Fujian Zhongde Technology Co., Ltd. (“Fujian Zhongde”), synthesizes and distributes renewable fuel products and specialty chemicals to customers in both the People’s Republic of China (“PRC” or “China”) and abroad.
On November 5, 2007, CCER established a new wholly-owned subsidiary, Fujian Zhongde Energy Co., Ltd. (“Zhongde Energy”), in Jiangyin Industrial Zone, Fuqing City, Fujian Province, PRC. Zhongde Energy builds a biodiesel and specialty chemicals refinery in the Jiangyin Industrial Park to produce and sell biodiesel and specialty chemicals products. The construction of its production plant was completed in October 2009 and trial production was completed at the end of 2009 and commenced to regular production in January 2010.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements of China Clean Energy Inc. reflect the activities of CCE and its 100% owned subsidiaries CCER, Fujian Zhongde and Zhongde Energy (collectively the “Company”).
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and are expressed in US dollars. All significant intercompany balances and transactions have been eliminated in consolidation. The Company has reclassified certain prior year amounts to conform to the current year presentation.
Use of Estimates and Assumptions
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. For example, the Company estimates the fair value of share-based compensation granted to its employees and estimates its potential losses on uncollectible receivables. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The accounting standards regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires fair value disclosures of those financial instruments. This accounting standard defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. Current assets and current liabilities qualified as financial instruments and management believes their carrying amounts are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and if applicable, their current interest rate is equivalent to interest rates currently available. The three levels are defined as follow:
|
·
|
Level 1 -- inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
·
|
Level 2 -- inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
|
·
|
Level 3 -- inputs to the valuation methodology are unobservable and significant to the fair value.
|
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates the hierarchy disclosures each quarter. Liabilities measured at fair value on a recurring basis are summarized as follows:
|
|
Carrying Value as of
December 31, 2009
|
|
Fair Value Measurements at
December 31, 2009
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
|
Warrant liabilities
|
$1,259,774
|
|
|
|
$1,259,774
|
The following is a reconciliation of the beginning and ending balances of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period ended December 31, 2009:
|
|
|
Warrant liabilities
|
|
|
Beginning balance*
|
|
$
|
295,381
|
|
|
Total gains or losses:
|
|
|
|
|
|
Included in earnings
|
|
|
964,393
|
|
|
Included in other comprehensive income
|
|
|
-
|
|
|
Purchases, issuances, and settlements
|
|
|
-
|
|
|
Transfer in and/or out of Level 3
|
|
|
-
|
|
|
Ending balance
|
|
$
|
1,259,774
|
|
* Effective January 1, 2009, the Company adopted the provisions of an accounting standard regarding whether an instrument (or embedded feature) is indexed to an entity’s own stock. As the result of the adoption, the Company reclassified from additional paid-in capital, as a cumulative effect adjustment, $9.2 million to beginning retained earnings and $295,381 to a long-term warrant liability to recognize the fair value of such warrants. Refer to Note 9 for additional information.
A discussion of the valuation techniques used to measure fair value for the liability listed above and activity for this liability for the year ended December 31, 2009 is provided elsewhere in the notes.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record assets and liabilities at fair value on a non-recurring basis. Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges. For the year ended December 31, 2009, there were no impairment charges.
Foreign Currency Translation
The functional currency of CCE and CCER is the United States dollar. The functional currency of Fujian Zhongde and Zhongde Energy is the Chinese Renminbi (“RMB”). The reporting currency of the Company is the United States dollar.
Fujian Zhongde and Zhongde Energy assets and liabilities are translated into United States dollars at period-end exchange rates ($0.14670 and $0.14670 at December 31, 2009 and 2008, respectively). Fujian Zhongde and Zhongde Energy revenues and expenses are translated into United States dollars at weighted average exchange rates for the periods ($0.14661 and $0.14415 for the years ended December 31, 2009 and 2008, respectively). Resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Items in the consolidated cash flow statement are translated at the average exchange rate for the period. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
As of December 31, 2009 and 2008, translation adjustments resulting from this process included in accumulated other comprehensive income in the consolidated statement of stockholders’ equity amounted to $3,166, 247 and $3,169,989, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with original maturities of three months or less at the time of purchase to be cash equivalents.
Accounts Receivable
The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful account is established and recorded based on managements’ assessment of potential losses based on the credit history and relationship with the customers. Management reviews its receivable on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
Inventories
Inventories are stated at the lower of cost or market using weighted average method. Management reviews inventories for obsolescence or cost in excess of net realizable value periodically and records an inventory write-down and additional cost of goods sold when the carrying value exceeds net realizable value.
Plant and Equipment
Plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of plant and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:
|
|
Estimated Useful Life
|
|
Buildings
|
10-20 years
|
|
Vehicle
|
5 years
|
|
Office equipment
|
5 years
|
|
Production equipment
|
10 years
|
Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and placed into service. Maintenance, repairs and minor renewals are charged directly to expense as incurred. Major additions and betterment to buildings and equipment are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred.
Intangible Assets
Under the accounting standard regarding goodwill and other intangible assets, all goodwill and certain intangible assets determined to have indefinite lives will not be amortized but will be tested for impairment at least annually. Intangible assets other than goodwill will be amortized over their useful lives and reviewed for impairment in accordance with the accounting standard for accounting for impairment or disposal of long-lived assets.
Intangible assets consist of land use right and patents. All land in China is owned by government: however, the government grants “land use rights”. The Company through its 100% owned subsidiaries, owns three land use rights with usable life ranging from 42 to 50 years which will expire ranging from 2048 to 2058. The Company amortizes the cost of land use right over contract period.
Patents, which have legal life of 10 years in PRC, are being amortized over 10 years as management believes that ten years is the estimated useful life of the patents currently owned by the Company.
Impairment of Long-Lived Assets
The Company reviews its long-lived tangible and intangible 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 discounted 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. As of December 31, 2009 and 2008, the Company recorded an impairment loss totaling $0 and $74,817, respectively.
Revenue Recognition
The Company follows the accounting standard regarding revenue recognition which specifies that revenue should be realized or realizable and earned when four criteria are met:
|
|
•
|
Persuasive evidence of an arrangement exists. (The Company considers its sales contracts to be persuasive evidence of an arrangement.)
|
|
|
•
|
Product is shipped or services have been rendered.
|
|
|
•
|
The seller’s price to the buyer is fixed or determinable.
|
|
|
•
|
Collectability of payment is reasonably assured.
|
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 when shipment is made, provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is deemed probable. 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.
Sales revenue represents the invoiced value of goods, net of a value-added tax (“VAT”). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT may be offset by the VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.
Transportation and unloading charges and product inspection charges are included in selling expenses and totaled $211,538 and $189,703 for the year ended December 31, 2009 and 2008, respectively.
Research and Development Costs
Research and development (or “R&D”) expenses include salaries, material, contract and other outside service fees, facilities and overhead costs. In accordance to the FASB’s accounting standards for research and development costs, the Company expenses the costs associated with the research and development activities when incurred.
The research and development expenses are included in general and administrative expenses and totaled $143,944 and $154,499 for the years ended December 31, 2009 and 2008, respectively.
Stock-based Compensation
The Company accounts for equity instruments issued to employees and in exchange for the receipt of goods or services from other than employees in accordance with the FASB’s accounting standards regarding accounting for stock based compensation and accounting for equity instruments that are issued to other than employees for acquiring or in conjunction with selling goods or services. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
Income Taxes
The Company records income taxes pursuant to the FASB’s accounting standard for income taxes. The accounting standard 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.
The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantially 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 principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably 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 is related 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 the Company intends to settle its current tax assets and liabilities on a net basis. The Company had $69,466 deferred tax assets as of December 31, 2009 due to the temporary operation loss of Zhongde Energy, one operating subsidiary in China.
The Company adopted the FASB’s accounting standard for accounting for uncertainty income taxes as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s consolidated financial statements.
China Income Taxes
The Company’s subsidiaries are governed by the Income Tax Law of the People’s Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the Income Tax Laws).
Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
The key changes are:
|
a.
|
The new standard EIT rate of 25% replaces the 33% rate applicable to both DES and FIEs, except for High Tech companies that pay a reduced rate of 15%;
|
|
b.
|
Companies established before March 16, 2007 continue to enjoy tax holiday treatment approved by local government for a grace period of either for the next 5 years or until the tax holiday term is completed, whichever is sooner.
|
Earnings per Share
Basic earnings per common share are computed on the basis of the weighted average number of common shares outstanding during the years.
Diluted earnings 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 per share are excluded from the calculation.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board issued an accounting standard amending the accounting and disclosure requirements for transfers of financial assets. This accounting standard requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity (“QSPE”). This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company adopted this standard as of December 31, 2009; however, the standard does not have material effect on the Company’s consolidated financial statements.
In June 2009, the Financial Accounting Standards Board also issued an accounting standard amending the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a company’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the company’s financial statements. Finally, a company will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company adopted this standard as of December 31, 2009; however, the standard does not have material effect on the Company’s consolidated financial statements.
In June 2009, the Financial Accounting Standards Board issued an accounting standard which establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. All current and subsequent public filings will reference the Codification as the sole source of authoritative literature.
In August 2009, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The Company adopted this standard and has determined the standard does not have material effect on the Company’s consolidated financial statements.
In October 2009, the Financial Accounting Standards Board issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company adopted this standard and has determined the standard does not have material effect on the Company’s consolidated financial statements.
In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166,
Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.
The amendments in this Accounting Standards Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167,
Amendments to FASB Interpretation No. 46(R)
. The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company adopted this standard and has determined the standard does not have material effect on the Company’s consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements In January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements
In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable, net consisted of the following as of December 31:
|
|
|
2009
|
|
|
2008
|
|
|
Accounts receivable
|
|
$
|
1,860,713
|
|
|
$
|
1,229,157
|
|
|
Less: allowance for doubtful accounts
|
|
|
(93,761
|
)
|
|
|
(136,389
|
)
|
|
Accounts receivable, net
|
|
$
|
1,766,952
|
|
|
$
|
1,092,768
|
|
The following table consists of allowance for doubtful accounts at:
|
|
|
2009
|
|
|
2008
|
|
|
Beginning allowance for doubtful accounts
|
|
$
|
136,389
|
|
|
$
|
407,593
|
|
|
Additions to bad debt expense
|
|
|
24,028
|
|
|
|
-
|
|
|
Recovery of amount previously reserved
|
|
|
(66,656
|
)
|
|
|
(294,543
|
)
|
|
Effect of foreign currency translation gain
|
|
|
-
|
|
|
|
23,339
|
|
|
Ending allowance for doubtful accounts
|
|
$
|
93,761
|
|
|
$
|
136,389
|
|
NOTE 4 – INVENTORIES
Inventories consist of the following as of December 31:
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
349,800
|
|
|
$
|
353,438
|
|
|
Work in process and packaging materials
|
|
|
4,471
|
|
|
|
70,360
|
|
|
Finished goods on shipment
|
|
|
-
|
|
|
|
38,856
|
|
|
Finished goods
|
|
|
110,571
|
|
|
|
444,669
|
|
|
Subtotal
|
|
|
464,842
|
|
|
|
907,323
|
|
|
Minus: inventory written-off
|
|
|
-
|
|
|
|
(92,113
|
)
|
|
Total
|
|
$
|
464,842
|
|
|
$
|
815,210
|
|
As of December 31, 2009 and 2008, the Company recorded reserve $0 and $92,113 for obsolete and slow-moving inventories, respectively. The amount had been included in the cost of goods sold for the years ended December 31 2009 and 2008, respectively.
NOTE 5 – PLANT AND EQUIPMENT
Plant and equipment, net consist of the following as of December 31:
|
|
|
2009
|
|
|
2008
|
|
|
Buildings
|
|
$
|
12,032,983
|
|
|
$
|
2,456,981
|
|
|
Equipment and machinery
|
|
|
16,744,242
|
|
|
|
6,620,068
|
|
|
Office equipment and vehicles
|
|
|
92,708
|
|
|
|
51,380
|
|
|
Construction in progress
|
|
|
-
|
|
|
|
13,079,606
|
|
|
Total
|
|
|
28,869,933
|
|
|
|
22,208,035
|
|
|
Less accumulated depreciation
|
|
|
(3,750,899
|
)
|
|
|
(3,040,411
|
)
|
|
Plant and equipment, net
|
|
$
|
25,119,034
|
|
|
$
|
19,167,624
|
|
|
Advances on equipment purchases
|
|
$
|
-
|
|
|
$
|
3,649,192
|
|
Construction in progress represents materials, labor costs, and capitalized interest incurred to construct the production plant of Zhongde Energy Co., Ltd in Jiangyin, Fujian. Construction of the production plant was completed in October 2009.
Depreciation expense was $710,051 and $707,177 for the years ended December 31, 2009 and 2008, respectively. For the years ended December 31, 2009 and 2008, interest expense of $114,718 and $50,672 was capitalized into construction in progress, respectively.
NOTE 6 – INTANGIBLE ASSETS
Intangible assets, net consist of the following as of December 31:
|
|
|
2009
|
|
|
2008
|
|
|
Land use rights
|
|
$
|
4,950,538
|
|
|
$
|
4,950,538
|
|
|
Patents and licenses
|
|
|
1,349,640
|
|
|
|
1,349,640
|
|
|
Total
|
|
|
6,300,178
|
|
|
|
6,300,178
|
|
|
Less accumulated amortization
|
|
|
(1,439,533
|
)
|
|
|
(1,227,552
|
)
|
|
Total intangible assets, net
|
|
$
|
4,860,645
|
|
|
$
|
5,072,626
|
|
Amortization expenses were $211,851 and $225,731 for the years ended December 31, 2009 and 2008, respectively. The estimated aggregate amortization expenses for the five succeeding fiscal years are as the following:
|
Years
|
|
Estimated Amortization Expense
|
|
2010
|
|
192,303
|
|
2011
|
|
189,371
|
|
2012
|
|
189,371
|
|
2013
|
|
189,371
|
|
2014
|
|
189,371
|
NOTE 7 – BANK LOANS
Bank loans consist of the following as of December 31:
|
|
|
2009
|
|
|
2008
|
|
|
Long-term bank loan
|
|
|
|
|
|
|
|
Interest at 115% of PRC prime rate, secured by certain buildings and land use rights, repaid in 2009
|
|
$
|
-
|
|
|
$
|
257,861
|
|
|
Less current portion
|
|
|
-
|
|
|
|
(236,308
|
)
|
|
Short-term bank loans
|
|
|
|
|
|
|
|
|
|
5.841% annum interest rate, due on April 2010, secured by the buildings and the land use rights of both Zhongde Energy and Fujian Zhongde. (1)
|
|
|
1,467,000
|
|
|
|
-
|
|
|
5.841% annum interest rate, due on April 2010, secured by the buildings and land use rights of both Zhongde Energy and Fujian Zhongde. (1)
|
|
|
1,613,700
|
|
|
|
-
|
|
|
Total
|
|
$
|
3,080,700
|
|
|
$
|
21,553
|
|
|
(1)
|
The Company’s CEO also provided personally
irrevocable guarantee to the short-term bank loans.
Zhongde Technology paid $1,907,100 (RMB13 million) bank loans back to the bank on Feb 20, 2010.
|
Total interest expense of the bank loans for the years ended December 31, 2009 and 2008 amounted to $114,718 and $50,672, respectively. Interest expenses incurred for both years were fully capitalized into construction in progress.
NOTE 8 – RETIREMENT AND EMPLOYMENT LIABILITIES
The full time employees of the Company are entitled to employee benefits including medical care, welfare subsidies, unemployment insurance and retirement benefits through a Chinese government mandated multi-employer defined contribution plan. The Company is required to accrue for those benefits based on certain percentages of the employees’ salaries and make contributions to the plans out of the amounts accrued for medical and pension benefits. The total provisions and contributions made for such employee benefits were amounted to $13,669 and $16,681 for the years ended December 31, 2009 and 2008, respectively. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees.
As of December 31, 2009 and 2008, the Company had no liability for pension or post-employment benefits. The Company does not have a pension or other retirement plan.
NOTE 9 – $15,000,000 PRIVATE PLACEMENT AND WARRANTS
On January 9, 2008, CCE completed a private placement, pursuant to which CCE issued 10,000,000 shares of common stock and 5,000,000 five-year warrants 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 cash fees of approximately $1,200,000, and issued the placement agent 1,200,000 five-year warrants at an initial exercise price of $2.00 per share. The net proceeds of $13.6 million was recorded as equity. The fair value of the warrants issued to the placement agent, was determined to be part of the cost of raising capital and therefore netted against the additional paid-in capital.
In connection with the private placement, four shareholders and officers placed a total of 1,500,000 shares of their personally owned CCE common stock into an escrow account, to be released to the investors of this offering if the Company failed 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 shareholders and officers.
As of January 1, 2009, the Company did not successfully commence production of biodiesel at the Jiangyin location, and the 1,500,000 shares of Company’s common stock held in escrow account that was previously owned by those four shareholders and officers had been transferred to investors.
In connection with the private placement, CCE entered into a registration rights agreement with the purchasers and 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. On February 1, 2008, the Company filed the registration statement. On February 8, 2008, the registration statement was declared effective by the Securities and Exchange Commission.
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.
Effective January 1, 2009, the Company adopted the provisions of an accounting standard regarding whether an instrument (or embedded feature) is indexed to an entity’s own stock. This accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. It provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception within the standards. As a result of adopting this accounting standard, 6,200,000 of issued and outstanding warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment, because these warrants are denominated in US dollars and the Company’s functional currency is Renminbi and the warrants are effectively “dual-indexed”. As such, effective January 1, 2009, the Company reclassified the fair value of these warrants, which have the “dual-indexed” feature, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue in January 2008. All future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expired.
On January 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative effect adjustment, $9.2 million to beginning retained earnings and $295,381 to a long-term warrant liability to recognize the fair value of such warrants on such date. The fair value increased to $1, 259,774 as of December 31, 2009. As such, the Company recognized a $964,391 loss from the change in fair value for the year ended December 31, 2009.
These warrants do not trade in an active securities market, and as such, the Company estimates the fair value using the Black-Scholes Option Pricing Model using the following assumptions:
|
|
|
December 31,
|
|
January 1,
|
|
|
|
2009
|
|
2009
|
|
Annual dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
Expected life (years)
|
|
|
3.00
|
|
|
|
4.00
|
|
|
Risk-free interest rate
|
|
|
1.70
|
%
|
|
|
1.55
|
%
|
|
Expected volatility
|
|
|
117
|
%
|
|
|
99
|
%
|
Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for the recent three years. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities according to the remaining term of the warrants.
Following is a summary of warrant activity and status:
|
|
|
Warrants
Outstanding
|
Warrants
Exercisable
|
Weighted average
Exercise price
|
Average remaining
Contractual life
|
|
Balance, at December 31, 2007
|
|
-
|
-
|
-
|
-
|
|
Granted
|
|
6,200,000
|
6,200,000
|
$2.00
|
5.0
|
|
Forfeited
|
|
-
|
-
|
-
|
-
|
|
Exercised
|
|
-
|
-
|
-
|
-
|
|
Balance, at December 31, 2008
|
|
6,200,000
|
6,200,000
|
$2.00
|
4.0
|
|
Granted
|
|
-
|
-
|
-
|
-
|
|
Forfeited
|
|
-
|
-
|
-
|
-
|
|
Exercised
|
|
-
|
-
|
-
|
-
|
|
Balance, at December 31, 2009
|
|
6,200,000
|
6,200,000
|
$2.00
|
3.0
|
NOTE 10 – OPTIONS
On January 9, 2008, the Company adopted the 2008 Equity Incentive Plan. Under the 2008 Equity Incentive Plan, CCE is authorized to issue up to 2,000,000 options, 1,000,000 will have an exercise price equal to the greater of (i) $2.50 or (ii) the fair market value of the common stock on the date of grant (“Tranche 1 Options”) and 1,000,000 will have an exercise price equal to the greater of (i) $3.00 or (ii) 100% of the fair market value of the common stock on the date of grant (“Tranche 2 Options”). 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 1,680,000 shares of common stock under the 2008 Equity Incentive Plan, including 1,350,000 granted to Company officers and directors. 840,000 options are exercisable at a price of $2.50 per share and 840,000 options are exercisable at a price of $3.00 per share; all 1,680,000 options expire 10 years from the date of grant. The $3,043,429 fair value of the 1,680,000 stock options will be expensed ratably over the three year requisite service period of the respective personnel. The fair value of the stock options was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: exercise prices of $2.50 (for 840,000 stock options) and $3.00 (for 840,000 stock options), expected life of options of 10 years, expected volatility of 98%, expected dividend yield of 0%, and risk-free interest rate of 3.82%. For the years ended December 31, 2009 and 2008, $404,582 and $903,769 was amortized and recorded as compensation expense, respectively.
Following is a summary of stock option activity:
|
|
|
Options Outstanding
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Outstanding as of December 31, 2007
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
1,680,000
|
|
|
|
2.75
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,070,000
|
)
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Outstanding as of December 31, 2008
|
|
|
610,000
|
|
|
|
2.75
|
|
|
$
|
-
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Forfeited
|
|
|
(20,000
|
)
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Outstanding as of December 31, 2009
|
|
|
590,000
|
|
|
$
|
2.75
|
|
|
$
|
-
|
|
Following is a summary of the status of options outstanding at December 31, 2009:
|
Exercise Price
|
|
|
Outstanding Options Number
|
|
|
Average Remaining Contractual Life
|
|
|
Average Exercise Price
|
|
|
Exercisable Options Number
|
|
|
Average Remaining Contractual Life
|
|
|
$
|
2.50
|
|
|
|
295,000
|
|
|
|
8.0
|
|
|
$
|
2.50
|
|
|
|
196,667
|
|
|
|
8.0
|
|
|
$
|
3.00
|
|
|
|
295,000
|
|
|
|
8.0
|
|
|
$
|
3.00
|
|
|
|
196,667
|
|
|
|
8.0
|
|
|
|
|
|
|
|
590,000
|
|
|
|
8.0
|
|
|
$
|
2.75
|
|
|
|
393,334
|
|
|
|
8.0
|
|
NOTE 11 - EARNINGS PER SHARE
For the years ended December 31, 2009 and 2008, all warrants and options were excluded from the calculation of diluted earnings per share because the exercise prices of $2.00, $2.50, and $3.00 which were higher than the average trading price of the Company’s stock. Thus, these warrants were anti-dilutive. The basic and diluted (loss) earnings per share for the years ended December 31, 2009 and 2008 were ($0.01) and $0.02, respectively.
NOTE 12 – STATUTORY RESERVES
The Company’s PRC subsidiaries are required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the statutory public welfare fund are at 10% of the after tax net income determined in accordance with PRC GAAP. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10% of net income after tax per annum. This contribution will be made to meet 50% of the respective companies’ registered capital.
The Company has total registered capital $15,612,485. As of December 31, 2009 and 2008, the Company allocated $1,630,882 and $1,457,432, respectively, to the statutory reserves. The additional amount that still needs to be allocated to statutory reserves to meet the 50% of registered capital as of December 31, 2009 is approximately $6,175,361.
NOTE 13 – TAXES
Income Taxes
Provision for income taxes for the years ended December 31 is as follows:
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
|
$
|
306,037
|
|
|
$
|
369,640
|
|
|
United States
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Total current
|
|
|
|
|
306,037
|
|
|
|
369,640
|
|
|
Deferred
|
|
|
|
|
(69,424
|
)
|
|
|
-
|
|
|
Total
|
|
|
|
$
|
236,613
|
|
|
$
|
369,640
|
|
Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% replaces the 33% rate applicable to both DES and FIEs, except for High Tech companies that pay a reduced rate of 15%. For companies established before March 16, 2007 continue to enjoy tax holiday treatment approved by local government for a grace period of either for the next 5 years or until the tax holiday term is completed, whichever is sooner. Pursuant to the PRC tax law, net operating loss can be carried forward 5 years to offset future taxable income.
In 2006, Fujian Zhongde became a wholly-owned foreign enterprise (“WOFE”). The 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 March 31, 2007, the PRC tax authorities approved a full income tax exemption to Fujian Zhongde for the year of 2007 and a 12.5% income tax rate for years of 2008, 2009 and 2010. Zhongde Energy is levied on a 25.0% income tax rate.
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31, 2009 and 2008:
|
|
|
2009
|
|
2008
|
|
|
U.S. Statutory rates
|
|
35
|
%
|
35
|
%
|
|
Foreign income not recognized in USA
|
|
(35
|
)
|
(35
|
)
|
|
China income taxes
|
|
25
|
|
25
|
|
|
Tax exemption
|
|
(13
|
)
|
(13
|
)
|
|
Other items (1)
|
|
(281
|
)
|
26
|
|
|
Total effective income tax rate
|
|
269
|
%
|
38
|
%
|
(1) These rates differ from the stated effective tax rate in China mainly due to losses incurred by US Company that was not deductible in the PRC.
The estimated tax savings for the years ended December 31, 2009 and 2008 amounted to $306,037 and $376,984. The net effect on earnings per share had the income tax been applied would decrease earnings per share from ($0.01) to ($0.02) in 2009 and $0.02 to $0.01 in 2008, respectively.
Deferred income taxes
Since Zhongde Energy had an operating loss for the year ended December 31, 2009, the loss can be carried forward to offset income for the next five years. The Company recorded deferred tax assets of 69,424 as of December 31, 2009. Based on the foregoing information, the Company believes that a valuation allowance is not deemed necessary for the deferred assets for the following reasons: (i) there will be sufficient operating income generated in future years based on the fact that the Company’s wholly owned subsidiary, Zhongde Energy, is expected to generate profits after the new plant put into production, and (ii) the current operating loss of Zhongde Energy can be carried forward for five years to offset future operating income under PRC tax regulations.
The Company has cumulative undistributed earnings of foreign subsidiaries of $ 9,409,861 as of December 31, 2009, which is included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.
CCE was incorporated in the United States and has incurred net operating losses for income tax purposes for the year ended December 31, 2009. The estimated net operating loss carry forwards for United States income taxes amounted to approximately $1,948,570 and $1,563,786 as of December 31, 2009 and 2008, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2024 and 2029. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance as of December 31, 2009 was $682,000 and the valuation allowance was increased by $136,546 for the year ended December 31, 2009. Management will review this valuation allowance periodically and make adjustments as warranted.
Value Added Tax
Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax, VAT, in accordance with Chinese laws. The VAT standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product. A preferential rate is also applied for exporting products.
VAT on sales and VAT on purchases amounted to $1,562,277 and $1,900,888 for the year ended December 31, 2009 and $2,063,352 and $1,837,530 for the year ended December 31, 2008, respectively. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent because the VAT taxes are not impacted by the income tax holiday. As of December 31, 2009 and 2008, VAT payable amounted to $22,191 and $72,729, respectively.
NOTE 14 – RELATED PARTY TRANSACTIONS
Fujian Zhongde purchases raw materials from companies affiliated with the Company’s majority stockholder. Yang Fan, one of the shareholders of this “affiliated” company, Fujian Zhongde Waste Oil Co. Ltd., is the niece of Ms. Yang Qin, director of China Clean Energy Inc. and a major shareholder of the company. In the years ended December 31, 2009 and 2008, the aforesaid purchases totaled $0 and $869,553, respectively. As of December 31, 2009 and 2008, there were no outstanding payable due to these companies.
NOTE 15 – 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, 2009 were located in the PRC.
In accordance with the enterprise-wide disclosure requirements of the accounting standard, the Company's net revenue from external customers by main product categories and by geographic areas for the years ended December 31, 2009 and 2008 are as follows:
|
|
2009
|
|
|
2008
|
|
|
|
Revenues
|
GP%
|
|
Revenues
|
GP%
|
|
Domestic revenues
|
$9,075,128
|
7%
|
|
$ 12,137,363
|
21%
|
|
International revenues
|
6,858,223
|
34%
|
|
6,032,472
|
22%
|
|
Total Revenues
|
$ 15,933,351
|
18%
|
|
$ 18,169,835
|
21%
|
|
|
2009
|
|
|
2008
|
|
|
|
Revenues
|
GP%
|
|
Revenues
|
GP%
|
|
Biodiesel
|
2,364,971
|
3%
|
|
1,394,818
|
16%
|
|
Specialty chemicals
|
13,568,380
|
21%
|
|
16,775,017
|
22%
|
|
Total Revenues
|
$ 15,933,351
|
18%
|
|
$ 18,169,835
|
21%
|
NOTE 16 – CONCENTRATIONS AND RISKS
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the economy in the regions where the Company’s customers are located. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
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.
The Company’s demand deposits are in accounts maintained with state
owned banks within the People’s Republic of China and an offshore account in United States of America. Total cash deposited with banks within the People’s Republic of China, as of December 31, 2009 and 2008 amounted to $4,146,250 and $2,902,707, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
For the year ended December 31, 2009, one customer for specialty chemical products (no customer for biodiesel product) accounted for 10.3% of net sales. The customer had $132,436 accounts receivable as of December 31, 2009. In 2008, no customer (for both biodiesel and specialty chemical products) accounted for over 10% of net sales.
For the year ended December 31, 2009, three major suppliers for feedstock and raw materials accounted for 16.8%, 11.5% and 9.8%, respectively, of the total purchase. In 2008, no suppliers for feedstock and raw materials accounted over 10%, of the total raw material purchase. There were no accounts payables due to these suppliers as of December 31, 2009.
NOTE 17 – COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in legal matters arising in the ordinary course of business. Management currently is not aware of any legal matters or pending litigation, which would have a significant effect on the Company’s consolidated financial statements as of December 31, 2009.
NOTE 18 – SUBSEQUENT EVENTS
On February 1, 2010, the Company granted options to the Company’s CFO to purchase a total of 300,000 shares of common stock under the 2008 Equity Incentive Plan, including 150,000 shares at an exercise price of $2.50 per share and 150,000 options at an exercise price of $3.00 per share; all 300,000 options expire 10 years from the date of grant. The option shares will be vested quarterly in three years started on May 1, 2010.
On February 20, 2010, Zhongde Energy entered into a line of credit agreement with Fujian Haixia bank Co., Ltd for the total amount of $5,809,320 (RMB39.6 million). Zhongde Energy borrowed the loan amount of $4,841,100 (RMB 33 million) with 5.94% annum interest rate on February 24, 2010. Pursuant to the loan agreement, Zhongde Energy will pay a principal payment of $733,500 (RMB 5 million) to the bank by February 24, 2011 and the remaining balance of $4,107,600 (RMB 28 million) no later than January 5, 2012. The loan is secured by the buildings and the land use rights owned by Zhongde Energy with co-guaranty provided by Zhongde Technology. CEO of the Company also personally guaranteed the loan.
The Company has performed an evaluation of subsequent events till the date the financial statements were issued.