As
filed with the Securities and Exchange Commission on June 30,
2008
Registration
No. 333-147953
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 5
TO
FORM S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA
BIO ENERGY HOLDING GROUP CO., LTD.
|
Delaware
|
5172
|
65-0854589
|
||
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer Identification
Number)
|
Dongxin
Century Square, 7 th Floor
Hi-Tech
Development District
Xi’an,
Shaanxi Province, PRC 710043
+86
29 8320 4383
(Address,
including zip code, and telephone number including area code, of Registrant’s
principal executive offices)
Gao
Xincheng
Chief
Executive Officer
China
Bio Energy Holding Group Co., Ltd.
c/o
Xi’an Baorun Industrial Development Co., Ltd.
Dongxin
Century Square, 7 th Floor
Hi-Tech
Development District
Xi’an,
Shaanxi Province, PRC 710043
+86
29 8320 4383
(Name,
address, including zip code, and telephone number,including area code, of agent
for service)
Copies
to:
Mitchell
S. Nussbaum, Esq.
Loeb
& Loeb LLP
345
Park Avenue
New
York, New York 10154
Tel.
No.: 212-407-4159 Fax No.: 212-407-4990
Approximate
date of commencement of proposed sale to the public: From time to time after
this Registration Statement becomes effective.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer ¨
Accelerated
Filer ¨
Non-Accelerated
Filer ¨
Smaller
Reporting Company x
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. ¨
CALCULATION
OF REGISTRATION FEE
|
Title
of each class of securities to be
registered
|
Amount to be
registered(1)
|
Proposed
maximum
offering
price
per
share
|
Proposed
maximum
aggregate
offering
price
|
Amount
of
registration
fee
|
|||||||||
|
Common
Stock, $.0001 par value per share
|
2,631,269
|
(2)
|
$
|
4.125
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(3)
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$
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10,853,984.63
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$
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333.22
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(4)
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|||
|
Common
Stock, $.0001 par value per share
|
212,905
|
(2)
|
$
|
4.60
|
(5)
|
979,363.00
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$
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38.49
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(4)
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||||
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TOTAL
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2,844,174
|
—
|
$
|
11,751,172.13
|
$
|
371.71
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(4)
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||||||
(1)
Pursuant to Rule 416 of the Securities Act of 1933, as amended, the shares
of
common stock offered hereby also include such presently indeterminate number
of
shares of our common stock as shall be issued by us to the selling shareholders
as a result of stock splits, stock dividends or similar
transactions.
(2)
On
December 7, 2007, we filed the registration statement on Form S-1 to register
2,631,269 shares of our common stock being sold by certain of our stockholders.
This Amendment No. 2 to Form S-1 registers an additional 212,905 shares of
our common stock being sold by certain of our stockholders.
(3)
Estimated solely for purposes of calculating the registration fee in accordance
with Rule 457(c) under the Securities Act of 1933, as amended based on the
average of the bid and asked prices, as reported on the Over the Counter
Bulletin Board on November 30, 2007.
(4)
Previously paid.
(5)
Estimated solely for purposes of calculating the registration fee in accordance
with Rule 457(c) under the Securities Act of 1933, as amended based on the
average of the bid and asked prices, as reported on the Over the Counter
Bulletin Board on April 8, 2008.
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said section
8(a), may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in
any
state where the offer or sale is not permitted.
Preliminary
Prospectus
Subject
To Completion, Dated June 30, 2008
CHINA
BIO ENERGY HOLDING GROUP CO., LTD.
2,844,174
Shares of Common Stock
This
prospectus relates to the sale of up to 2,844,174 shares of common stock of
China Bio Energy Holding Group Co., Ltd., a Delaware corporation, that may
be
sold from time to time by the selling stockholders named in this prospectus
on
page 16 (“Selling Stockholders”). We will not receive any proceeds from the sale
of the shares of common stock by the Selling Stockholders.
The
prices at which the Selling Stockholders may sell their shares will be
determined by the prevailing market price for the shares or in privately
negotiated transactions. Information regarding the Selling Stockholders and
the
times and manner in which they may offer and sell the shares under this
prospectus is provided under “Selling Stockholders” and “Plan of Distribution”
in this prospectus.
Our
common stock is traded in the over-the-counter market and prices are reported
on
the Over-The-Counter (“OTC”) Bulletin Board under the symbol: “CBEH” The last
closing price of our common stock on June 26, 2008 was $9.00. You are urged
to obtain current market quotations of our common stock before purchasing
any of
the shares being offered for sale pursuant to this
prospectus.
THIS
INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF
YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE “RISK FACTORS” BEGINNING
ON PAGE 6 FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN INVESTMENT IN
OUR COMMON STOCK.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date of this prospectus is __________, 2008
Table
of Contents
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2
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THE
OFFERING
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4
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SUMMARY
CONSOLIDATED FINANCIAL DATA
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5
|
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RISK
FACTORS
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6
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NOTE
REGARDING FORWARD-LOOKING STATEMENTS
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15
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USE
OF PROCEEDS
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15
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SELLING
STOCKHOLDERS
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15
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PLAN
OF DISTRIBUTION
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19
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BUSINESS
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30
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DIRECTORS
AND EXECUTIVE OFFICERS
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44
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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47
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TRANSACTIONS
WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL
PERSONS
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49
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DESCRIPTION
OF CAPITAL STOCK
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53
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TRANSFER
AGENT AND REGISTRAR
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55
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LEGAL
MATTERS
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56
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EXPERTS
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56
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56
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INDEX
TO AUDITED FINANCIAL STATEMENTS
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F-1
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i
PROSPECTUS
SUMMARY
This
summary highlights selected information appearing elsewhere in this prospectus.
While this summary highlights what we consider to be the most important
information about us, you should carefully read this prospectus and the
registration statement of which this prospectus is a part in their entirety
before investing in our common stock, especially the risks of investing in
our
common stock, which we discuss later in “Risk Factors,” and our consolidated
financial statements and related notes beginning on page F-1. Unless the context
requires otherwise, the words “we,” the “Company,” us” and “our” refer
to China Bio Energy Holding Group Co., Ltd. and our
subsidiaries.
The
Company
Overview
We
are
primarily engaged in two businesses in the People’s Republic of China (“PRC”):
the manufacture and distribution of biodiesel products; and the processing
and
distribution of finished oil products.
Biodiesel
is a clean burning alternative fuel formulated exclusively for diesel engines
and produced from a variety of feedstocks, such as vegetable oils, animal fats
and waste oil. We commenced operations of our new biodiesel facility with an
annual production capacity of 100,000 tons in October 2007 .
From
our
inception in 1999 to 2007, we were primarily engaged in the finished oil
products industry. We determined that our established relationships and
distribution channel in such industry could serve as a springboard to
strategically expand our business to include biodiesel products and provide
us
with an integrated opportunity for future sales growth. We achieved sales of
$6.76 million in the first quarter of 2008 from our new biodiesel facility,
representing 19% of our quarterly sales. We achieved sales of $4.58 million
in
the last quarter of 2007 from this facility, representing 6% of our annual
sales
in 2007. We currently anticipate, assuming our biodiesel facility is fully
utilized by the end of this year, that biodiesel sales will represent
approximately 30% of our sales for 2008 and approximately 40% of our sales
in
2009.
The
consumption volume of biodiesel in China is estimated to reach 20 million
tons by 2020. Since China’s biodiesel industry is still underdeveloped, we
believe the expansion of our business into the biodiesel industry at this time
will enable us to achieve an increasing share of this vital market.
Growth
Strategy
We
currently have a number of initiatives in place to continue to drive our future
growth, including the following:
·
Expansion
of biodiesel production
. We
anticipate that our new biodiesel facility will be at full utilization by the
end of 2008. Therefore, we plan to increase our biodiesel production capacity
within the next two to three years either through construction of a new facility
or through acquisitions of other biodiesel facilities.
·
Establishment
of additional feedstock planting bases .
Through
agreements with the Bureau of Forestry in Shaanxi Province, we are entitled
to
the feedstock from five planting bases which, on an annual basis, can provide
us
with 68,000 tons of raw materials for biodiesel production. In the next 12
months, we plan to add three additional planting bases under similar agreements
with such Bureau of Forestry to provide us with an additional 20,000 tons of
raw
materials for biodiesel production on an annual basis.
·
Increased
capacity of waste oil recycling.
Besides
oil plants, we can also use waste oil as raw materials for our biodiesel
production. We are the 60% owner of a waste oil recycling center with
capacity to collect enough waste oil to produce 43,000 tons of biodiesel on
an
annual basis. We are in the process of constructing a second waste oil recycling
center located in Tongchuan, with the capacity to collect enough waste oil
to
produce 21,000 tons of biodiesel on an annual basis. We expect this second
facility to become operational in May 2008.
2
·
Acquisition
of oil extracting plants
.
We recently acquired three oil extracting plants for initial
processing to extract vegetable oil from plant seeds. Accordingly, we now
have the use of five oil extracting plants which has increased our biodiesel
production capacity from plant oil extraction by 40,000 tons to 68,000 tons
on
an annual basis.
·
Enhancing
proprietary technology
. We
possess the technology and know-how for oil mixing and processing technologies.
We also have two utility model patents and three invention patents related
to
biodiesel. We are committed to continuously improve our technology and
manufacturing processes to achieve higher quality and efficiency.
·
Importation
of oil products
. We are
in the process of applying for a government license to import oil products
from
overseas. As China becomes more dependent on imported oil, we believe that
an
import license will bring us more trading opportunities, expand our customer
base and increase our market share.
·
Acquisition
of additional gas stations
. In
February 2007 we acquired a gas station located in Xi’an, Shaanxi Province. We
plan to acquire several gas stations in the Shaanxi Province over the next
three
years. Such acquisitions will enable us to increase the retail
distribution for both our finished oil and biodiesel products.
Corporate
Structure
In
order
to implement an offshore holding company structure to comply with Chinese laws
imposing restrictions on foreign ownership in the finished oil products industry
in China, we established our current Hong Kong holding company, Baorun China
Group Limited (“Baorun Group”), on September 12, 2007. Baorun Group established
Redsky Industrial (Xi’an) Co., Ltd. (“Redsky Industrial”), its wholly owned
subsidiary in the PRC, on October 15, 2007. As a result, we own 100% of the
equity of Redsky Industrial through Baorun Group. We have entered into
contractual arrangements with Xi’an Baorun Industrial Co., Ltd. (“Baorun
Industrial”) pursuant to which our wholly owned subsidiary, Redsky Industrial,
provides technical support and consulting services to Baorun Industrial. In
addition, we have entered into agreements with Baorun Industrial and its
shareholders, providing us with the ability to effectively control this entity.
Accordingly, we have consolidated the historical results of Baorun Industrial
in
our financial statements as a variable interest entity pursuant to U.S. GAAP.
See “Business — Our Corporate Structure.”
The
following diagram illustrates our corporate structure:
3
Executive
Offices
Our
executive offices are located at Dongxin Century Square, 7 th
Floor,
Hi-Tech Development District, Xi’an, Shaanxi Province, PRC 710043. Our
telephone number is 86-29-8320-4383. Our corporate website is
www.chinabaorun.com. Information contained on or accessed through our website
is
not intended to constitute and shall not be deemed to constitute part of this
prospectus.
The
Offering
|
Common
stock being offered by Selling Stockholders
|
Up
to 2,844,174 shares
|
|
|
OTCBB
Symbol
|
CBEH
|
|
|
Risk
Factors
|
The
securities offered by this prospectus are speculative and involve
a high
degree of risk and investors purchasing securities should not purchase
the
securities unless they can afford the loss of their entire investment.
See
“Risk Factors” beginning on page
6.
|
4
SUMMARY
CONSOLIDATED FINANCIAL DATA
The
following table presents summary consolidated financial data as of the dates
and
for the periods indicated. We have derived the summary of our consolidated
statements of operations data for the years ended December 31, 2007, 2006 and,
2005 and our consolidated balance sheet data as of December 31, 2007 and 2006
from the audited consolidated financial statements of our operating
subsidiary, Xi’an Baorun Industrial Development Co., Ltd. included
elsewhere in this prospectus. The summary consolidated historical financial
data
as of and for the three months ended March 31, 2008 and 2007 have been derived
from the unaudited condensed consolidated financial statements included
elsewhere in this prospectus. The unaudited condensed consolidated financial
statements include all adjustments which we consider necessary for a fair
presentation of our financial position, results of operations and cash flows
for
the interim period presented. Our historical results are not necessarily
indicative of the results that may be expected in the future. The summary of
our
consolidated financial data set forth below should be read together with our
consolidated financial statements and the notes thereto, as well as “Selected
Consolidated Financial Data” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” included elsewhere in this
prospectus.
|
For
the Three
Months
Ended
March 31,
|
Year
Ended December 31,
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|||||||||||||||
|
2008
|
2007
|
2007
|
2006
|
2005
|
||||||||||||
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(in
thousands, except per share data)
|
||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||
|
Net
sales
|
35,561
|
11,559
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87,104
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54,428
|
29,217
|
|||||||||||
|
Cost
of goods sold
|
30,548
|
10,444
|
77,007
|
48,666
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24,843
|
|||||||||||
|
Gross
profit
|
5,013
|
1,114
|
10,097
|
5,762
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4,374
|
|||||||||||
|
General
and administrative expenses
|
(320
|
)
|
(127
|
)
|
(1,687
|
)
|
(356
|
)
|
(216
|
)
|
||||||
|
Income
from operations
|
4,693
|
987
|
8,411
|
5,405
|
4,158
|
|||||||||||
|
Non-operating
income (expenses)
|
||||||||||||||||
|
Interest
Income (expenses)
|
(28
|
)
|
(20
|
)
|
(142
|
)
|
(86
|
)
|
(16
|
)
|
||||||
|
Earnings
before Income Tax
|
4,665
|
963
|
5,181
|
5,345
|
4,142
|
|||||||||||
|
Provision
for Income Tax
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Net
earnings available to common stockholders
|
4,665
|
|
963
|
|
5,181
|
5,345
|
4,142
|
|||||||||
|
As of March 31,
|
As
of December 31,
|
|||||||||
|
2008
|
2007
|
2006
|
||||||||
|
(in
thousands)
|
||||||||||
|
Balance
Sheet Data:
|
||||||||||
|
Cash
and cash equivalents
|
1,552
|
1,382
|
631
|
|||||||
|
Accounts
receivable
|
5,893
|
289
|
5,745
|
|||||||
|
Property
and equipment, net
|
8,341
|
8,166
|
705
|
|||||||
|
Total
assets
|
49,039
|
43,706
|
20,316
|
|||||||
|
Total
Current Liabilities
|
4,911
|
5,476
|
6,014
|
|||||||
|
Total
Liabilities
|
4,937
|
5,510
|
6,076
|
|||||||
|
Total
Stockholders’ Equity
|
44,101
|
38,196
|
14,240
|
|||||||
5
RISK
FACTORS
Investing
in our securities involves a great deal of risk. Careful consideration should
be
made of the following factors as well as other information included in this
prospectus before deciding to purchase our common stock. You should pay
particular attention to the fact that we conduct all of our operations in China
and are governed by a legal and regulatory environment that in some respects
differs significantly from the environment that may prevail in other countries.
Our business, financial condition or results of operations could be affected
materially and adversely by any or all of these risks.
THE
FOLLOWING MATTERS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR
OTHERWISE. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A
FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT
ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR
STATEMENTS.
Risks
Related to Our Business
We
rely on a limited number of third party suppliers for our supply of finished
oil
products and the loss of any such supplier, particularly our largest supplier,
could have a material adverse effect on our operations.
We
are
dependent upon our relationships with third parties for our supply of finished
oil products. We have agreements with five major suppliers. These
suppliers provided approximately 75% of finished oil products for the three
months ended March 31, 2008, with one of the suppliers providing approximately
30%. Should any of these suppliers, and in particular our largest supplier,
terminate their supply relationships with us, fail to perform their obligations
as agreed, or enter into the finished oil products business in competition
with
us, we may be unable to procure sufficient amounts of finished oil products
to
fulfill our customer demand. If we are unable to obtain adequate quantities
of
finished oil products at economically viable prices, our customers could seek
to
purchase products from other suppliers, which could have a material adverse
effect on our revenues.
Our
ability to operate at a profit is partially dependent on market prices for
the
petroleum and biodiesel fuels. If the petroleum and biodiesel prices drop
significantly, we will be unable to maintain
profitability.
Our
results of operations and financial condition are affected by the selling price
of petroleum and biodiesel fuel products. Prices are subject to and determined
by market forces over which we have no control. The amount of our revenues
depends on the market prices for petroleum and biodiesel fuels and the
corresponding net income could be adversely impacted by such market
prices.
Our
future success substantially depends on our ability to significantly increase
both our manufacturing/storage capacity and output.
Our
future success depends on our ability to significantly increase both our
manufacturing/storage capacity and our output. In particular, we intend to
expand our biodiesel production capabilities within the next several years.
Our
ability to establish additional manufacturing/storage capacity and increase
output is subject to significant risks and uncertainties,
including:
·
the
ability to raise significant additional funds to purchase and prepay for raw
materials or to build additional manufacturing facilities, which we may be
unable to obtain on reasonable terms or at all;
·
delays
and cost overruns as a result of a number of factors, many of which may be
beyond our control, such as increases in raw materials prices and problems
with
equipment vendors;
·
delays
or
denial of required approvals by relevant government
authorities;
6
·
diversion
of significant management attention and other resources; and
·
failure
to execute our expansion plan effectively.
If
we are
unable to establish or successfully operate additional manufacturing/storage
capacity or to increase manufacturing output, or if we encounter any of the
risks described above, we may be unable to expand our business and decrease
costs to improve our profitability as planned. Even if we do expand our
manufacturing/storage capacity and output, we may be unable to generate
sufficient customer demand for our finished oil and biodiesel to support our
increased production levels.
In
the past several years w e have derived a significant portion of our revenues
from a small group of customers. If we were to become dependent again upon
a few
customers, such dependency could negatively impact our business, operating
results and financial condition.
Previously,
our customer base has been highly concentrated. Our top five customers accounted
for approximately 40%, 74% and 63% of our revenues for the years ended December
31, 2006, 2005 and 2004, respectively. As our customer base may change from
year-to-year, during such years that the customer base is highly concentrated,
the loss of, or reduction of our sales to, any of such major customers could
have a material adverse effect on our business, operating results and financial
condition. See “Business — Customers” for a description of our largest
customers.
Key
employees are essential to growing our business.
Gao
Xincheng, our Chief Executive Officer and President and other senior management
personnel are essential to our ability to continue to grow our business. Mr.
Gao
has established relationships within the industries in which we operate. If
he
were no longer employed by us, our growth strategy might be hindered, which
could limit our ability to increase revenue.
In
addition, we face competition for attracting skilled personnel. If we fail
to
attract and retain qualified personnel to meet current and future needs, this
could slow our ability to grow our business, which could result in a decrease
in
market share.
If
we need additional financing, we may not be able to find such financing on
satisfactory terms or at all.
Our
capital requirements may be accelerated as a result of many factors, including
timing of development activities, underestimates of budget items, unanticipated
expenses or capital expenditures, future product opportunities with
collaborators and future business combinations. Our future growth strategy
includes the construction or acquisition of biodiesel facilities which will
enable us to produce more biodiesel fuel. Consequently, we may need to seek
additional debt or equity financing, which may not be available on favorable
terms, if at all, and which may be dilutive to our stockholders.
We
may
seek to raise additional capital through public or private equity offerings,
debt financings or additional corporate collaboration and licensing
arrangements. To the extent we raise additional capital by issuing equity
securities, our stockholders may experience dilution. To the extent that we
raise additional capital by issuing debt securities, we may incur substantial
interest obligations, may be required to pledge assets as security for the
debt
and may be constrained by restrictive financial and/or operational covenants.
Debt financing would also be superior to our stockholders’ interest in
bankruptcy or liquidation. To the extent we raise additional funds through
collaboration and licensing arrangements, it may be necessary to relinquish
some
rights to our technologies or product candidates, or grant licenses on
unfavorable terms.
If
we fail to adequately protect or enforce our intellectual property rights,
or to
secure rights to patents of others, the value of our intellectual property
rights could diminish.
Our
success, competitive position and future revenues will depend in part on our
ability to obtain and maintain patent protection for our products, methods,
processes and other technologies, to preserve our trade secrets, to prevent
third parties from infringing on our proprietary rights and to operate without
infringing the proprietary rights of third parties.
7
To
date,
we have filed five patent applications with the State Intellectual Property
Office of the PRC. However, we cannot predict the degree and range of protection
patents will afford us against competitors. Third parties may find ways to
invalidate or otherwise circumvent our proprietary technology. Third parties
may
attempt to obtain patents claiming aspects similar to our patent applications.
If we need to initiate litigation or administrative proceedings, such actions
may be costly whether we win or lose. To help protect our proprietary know-how
and inventions for which patents may be unobtainable or difficult to obtain,
such as our core technology for oil processing, we rely on trade secret
protection and confidentiality agreements. If any of our intellectual property
is disclosed, our value would be significantly impaired, and our business and
competitive position would suffer.
Officers
with lack of experience as officers of publicly-traded companies on our
management team may hinder our ability to comply with the Sarbanes-Oxley
Act.
It
may be
time consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the Sarbanes-Oxley Act.
We may need to hire additional financial reporting, internal controls and other
finance staff in order to develop and implement appropriate internal controls
and reporting procedures. If we are unable to comply with the Sarbanes-Oxley
Act’s internal controls requirements, we may not be able to obtain the
independent auditor certifications that Sarbanes-Oxley Act requires
publicly-traded companies to obtain.
A
price increase in raw materials, such as fat or vegetable oil, could increase
the cost of our products and reduce our profit margin for our biodiesel
products.
Fat,
vegetable oil and various agricultural and botanical products are the primary
materials used in the production of our biodiesel. In the last two years, the
price of these raw materials have fluctuated substantially as have other raw
materials due to increased demand in China resulting from its rapid economic
development. If the price for these raw materials continues to increase
significantly, our profit margin for our biodiesel products could decrease
considerably and we may not be able to maintain our profitability.
If
we infringe the rights of third parties, we could be prevented from selling
products, forced to pay damages and compelled to defend against
litigation.
If
our
products, methods, processes and other technologies infringe proprietary rights
of other parties, we could incur substantial costs, and may have to obtain
licenses (which may not be available on commercially reasonable terms, if at
all), redesign our products or processes, stop using the subject matter claimed
in the asserted patents, pay damages, or defend litigation or administrative
proceedings, which may be costly whether we win or lose. All of the above could
result in a substantial diversion of valuable management resources.
We
believe we have taken reasonable steps, including comprehensive internal and
external prior patent searches, to ensure we have freedom to operate and that
our development and commercialization efforts can be carried out as planned
without infringing others’ proprietary rights. However, a third party patent may
have been filed or will be filed that may contain subject matter of relevance
to
our development, causing a third party patent holder to claim infringement.
Resolving such issues has traditionally resulted, and could in our case result,
in lengthy and costly legal proceedings, the outcome of which cannot be
predicted accurately.
Our
legal right to lease certain properties could be challenged by property owners
or other third parties, which could prevent us from continuing to utilize
storage vessels and our biodiesel manufacturing factory, which are located
on
such properties, or could increase the costs associated with utilizing those
storage vessels and manufacturing factory.
We
do not
hold any land-use rights with respect to the manufacturing factory or oil
storage facilities on which our biodiesel manufacturing factory and finished
oil
storage vessels are located. Instead, our business model relies on leases with
third parties who either own the properties or lease the properties from the
ultimate property owner. There may be challenges to the title of the properties
which, if successful, could impair the development or operations of our storage
or manufacturing on such properties. In addition, we are subject to the risk
of
potential disputes with property owners. Such disputes, whether resolved in
our
favor or not, may divert management attention, harm our reputation or otherwise
disrupt our business.
8
In
several instances, where our immediate lessors are not the ultimate owners
of
land or storage space, no consent was obtained from the owners to sublease
the
land or storage space to us. A lessor’s failure to duly obtain the title to the
property or to receive any necessary approvals from the ultimate owner or the
primary lease holder, as applicable, could potentially invalidate our lease
or
result in the renegotiation of such lease leading to less favorable terms.
The
building ownership or leasehold in connection with our storage or manufacturing
operations could be subject to similar third-party challenges.
Our
lessors’ failure to comply with lease registration and other compliance
requirements under PRC law may subject these lessors or us to fines or other
penalties that may negatively affect our ability to utilize storage vessels
or
our biodiesel manufacturing factory.
We
are
subject to a number of land- and property-related legal requirements. For
instance, under PRC law, all lease agreements are required to be registered
with
the local housing bureau and any lease of available military real estate should
adopt a standard military lease agreement and such lease agreement would not
become effective unless approved by military real estate administrative
authorities. Currently, none of the lessors of the storage vessels we operate
and manage had obtained registrations or approval of their leases from the
relevant authorities as required and we continue to request these lessors to
obtain registrations under our lease agreements with them. The failure of our
lessors to register lease agreements as required by law or to get the lease
approved may subject these lessors or us to fines or other penalties which
may
negatively affect our ability to operate the storage vessels covered under
those
leases.
Accidents
or injuries in our finished oil storage vessels or biodiesel manufacturing
factory may adversely affect our reputation and subject us to
liability.
There
are
inherent risks of accidents or injuries when working in finished oil storage
vessels or biodiesel manufacturing factories. Death and accidents could prevent
us from renewing our Safety Production Permit. One or more accidents or injuries
at any of our finished oil storage vessels or at our biodiesel
manufacturing factory could adversely affect our safety reputation among
customers and potential customers and increase our costs if we are required
to
take additional measures to make our safety precautions even more visible and
effective. If accidents or injuries occur we may be held liable for costs
related to the injuries. Our current insurance policy, which covers claims
as a result of accidental injuries, may not provide adequate coverage and we
may
be unable to renew our insurance policies or obtain new insurance policies
without increases in cost of our insurance premiums or decreases in
coverage levels.
Our
insurance may not cover all claims made against us.
Currently
we have property and accidental injury insurance policies. If we were held
liable for amounts and claims exceeding the limits of our insurance coverage
or
outside the scope of our insurance coverage, the costs to cover any such
shortfalls could significantly reduce and put a strain on our available cash.
In
addition, we do not have any business disruption insurance coverage for our
operations to cover losses that may be caused by natural disasters or
catastrophic events, such as SARS or avian flu. Any business disruption or
natural disaster may result in our incurring substantial costs and diversion
of
our resources.
9
Risks
Associated With Doing Business In China
PRC
laws and regulations restrict foreign investment in China’s finished oil
products industry and we have entered into contractual agreements with Baorun
Industrial to control and realize the benefits of the business. We are relying
upon PRC laws and there is substantial uncertainty regarding the interpretation
and application of current or future PRC laws and
regulations.
Since
we
are deemed to be foreign persons or foreign-funded enterprises under PRC laws
and cannot directly invest in companies operating in the finished oil production
industry, we operate our businesses in China through Baorun Industrial, an
operating company that is owned by PRC citizens and not by us. Accordingly,
our
Chinese subsidiary, Redsky Industrial, entered into a series of exclusive
contractual agreements with Baorun Industrial. Although we believe we are in
compliance with current PRC regulations, we cannot be sure that the PRC
government would view these contractual arrangements to be in compliance with
PRC licensing, registration or other regulatory requirements, with existing
policies or with requirements or policies that may be adopted in the future.
Because this structure has not been challenged or examined by PRC authorities,
uncertainties exist as to whether the PRC government may interpret or apply
the
laws governing these arrangements in a way that is contrary to the opinion
of
our PRC counsel. If we, our wholly owned subsidiaries or Baorun Industrial,
were
found to be in violation of any existing PRC laws or regulations, the relevant
regulatory authorities would have broad discretion to deal with such violation,
including, but not limited to the following:
·
levying
fines;
·
confiscating
income;
·
revoking
licenses;
·
shutting
down servers or blocking websites;
·
requiring
a restructure of ownership or operations; and/or
·
requiring
the discontinuance of our businesses.
Any
of
these or similar actions could cause significant disruption to our business
operations or render us unable to conduct our business operations and may
materially adversely affect our business, financial condition and results of
operations.
The
contractual agreements between Redsky Industrial and Baorun Industrial may
not
be as effective in providing operational control as direct ownership of Baorun
Industrial and may be ineffective to permit consolidation of the financial
results of the business.
We
depend
on Baorun Industrial, an operating company in which we have no equity ownership
interest, for substantially all of our operations, revenues and net income,
and
must rely on contractual agreements to control and operate these businesses.
Our
contractual agreements with our wholly owned subsidiaries may not be as
effective in providing and maintaining control over the operating company and
its business operations as direct ownership of these businesses. For example,
we
may not be able to take control of Baorun Industrial upon the occurrence of
certain events, such as the imposition of statutory liens, judgments, court
orders, death or incapacity. Furthermore, if the operating company and its
stockholders fail to perform as required under those contractual agreements,
we
will have to rely on the PRC legal system and the uncertainties that exist
under
PRC law to enforce those agreements. If we were unsuccessful in an enforcement
action, it could result in the disruption of our business, damage to our
reputation, diversion of our resources and significant costs. In addition,
the
PRC government may propose new laws or amend current laws that may be
detrimental to our current contractual agreements with the operating company,
which may in turn have a material adverse effect on our business
operations.
Our
operations and assets in China are subject to significant political and economic
uncertainties.
Under
its
current leadership, the Chinese government has been pursuing economic reform
policies that encourage private economic activity and greater economic
decentralization. However, changes in PRC laws and regulations, or their
interpretation, or the imposition of confiscatory taxation, restrictions on
currency conversion, imports and sources of supply, devaluations of currency
or
the nationalization or other expropriation of private enterprises could have
a
material adverse effect on our business, results of operations and financial
condition. Nationalization or expropriation could even result in the total
loss
of our investment in China and in the total loss of your investment in
us.
10
We
derive all of our sales from China.
All
of
our sales are generated from China. We anticipate that sales of our products
in
China will continue to represent all of our total sales in the near future.
Any
significant decline in the condition of the PRC economy could adversely affect
consumer demand of our products, among other things, which in turn would have
a
material adverse effect on our business and financial condition.
Currency
fluctuations and restrictions on currency exchange may adversely affect our
business, including limiting our ability to convert Chinese renminbi into
foreign currencies and, if Chinese renminbi were to decline in value, reducing
our revenue in U.S. dollar terms.
On
July
21, 2005, the Chinese government changed its policy concerning the value of
the
renminbi by moving from a fixed rate of exchange based upon the U.S. dollar
to a
managed floating exchange rate regime based upon market supply and demand of
a
basket of currencies. Since all our net revenues are recorded in renminbi,
fluctuations in the exchange rate between the renminbi and the U.S. dollar
could
adversely affect our operating results. The income statements of our operations
are translated into U.S. dollars at the average exchange rates in each
applicable period. As a result, fluctuations in exchange rates may adversely
affect our expenses and results of operations as well as the value of our assets
and liabilities. Fluctuations may adversely affect the comparability of
period-to-period results. We do not use hedging techniques to eliminate the
effects of currency fluctuations. Thus, exchange rate fluctuations could have
a
material adverse impact on our operating results and stock prices.
Our
ability to implement our business plan is dependent on many factors, including
our ability to receive various governmental permits.
In
accordance with PRC laws and regulations, we are required to maintain various
licenses and permits in order to operate our business including, without
limitation, Safety Production Permits, a Finished Oil Products Distribution
License and a Dangerous Chemical Distribution License. We are required to comply
with applicable production safety standards in relation to our production
processes and our premises and equipment are subject to periodical inspections
by regulatory authorities to ensure compliance with the dangerous chemical
safety production laws and regulations and finished oil distribution laws and
regulations. Failure to pass these inspections, or the loss or suspension of
some or all of our production activities, which could disrupt our operations
and
adversely affect our business.
Our
business benefits from preferential tax treatment and changes to this treatment
could adversely affect our operating results.
The
rate
of income tax on companies in China may vary depending on the availability
of
preferential tax treatment or subsidies based on their industry or location.
The
current maximum corporate income tax rate is 33%. The PRC government promulgated
on March 16, 2007 the new Enterprise Income Tax Law that became effective as
of
January 1, 2008. Pursuant to the new law, the enterprise income tax of 25%
is
applied to all enterprises. Although we were approved by the local tax authority
to be exempted from the enterprise income tax for a period commencing in 2005
and ending in 2010, we do not know whether such new law may change the
preferential treatment that was granted to us. Any loss or substantial reduction
of the tax benefits enjoyed by us would reduce our net profit.
Changes
in foreign exchange regulations in the PRC may affect our ability to pay
dividends in foreign currency or conduct other foreign exchange
business.
The
PRC
government imposes controls on the convertibility of renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
We
receive substantially all of our revenues 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 denominated obligations. Under existing
PRC 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 PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where renminbi is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies.
11
The
PRC
government 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.
Recent
PRC regulations relating to mergers and acquisitions of domestic enterprises
by
foreign investors may increase the administrative burden we face and create
regulatory uncertainties.
On
August
8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce,
or
MOFCOM, the State Assets Supervision and Administration Commission, or SASAC,
the State Administration for Taxation, the State Administration for Industry
and
Commerce, the China Securities Regulatory Commission, or CSRC, and the State
Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations
on
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or New
M&A Rule, which became effective on September 8, 2006. The New M&A Rule
purports, among other things, to require offshore special purpose vehicles,
or
SPVs, formed for overseas listing purposes through acquisitions of PRC domestic
companies and controlled by PRC companies or individuals, to obtain the approval
of the CSRC prior to publicly listing their securities on an overseas stock
exchange. Based on our understanding of current PRC Laws, we are not sure
whether the New M&A Rule would require us or our entities in China to obtain
the CSRC approval in connection with the transaction contemplated by the
Exchange Agreement in connection with the share exchange.
Further,
if the PRC government finds that we or our Chinese stockholders did not obtain
the CSRC approval, which CSRC may think we should have obtained before our
executing the Exchange Agreement, we could be subject to severe penalties.
The
New M&A Rule does not stipulate the specific penalty terms, so we are not
able to predict what penalties we may face, and how such penalties will affect
our business operations or future strategy.
The
Chinese government exerts substantial influence over the manner in which we
must
conduct our business activities.
China
only recently has permitted provincial and local economic autonomy and private
economic activities, and, as a result, we are dependent on our relationship
with
the local government in the province in which we operate our business. The
Chinese government has exercised and continues to exercise substantial control
over virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its
laws
and regulations, including those relating to taxation, environmental
regulations, land use rights, property and other matters. We believe that our
operations in China are in material compliance with all applicable legal and
regulatory requirements. However, the central or local governments of these
jurisdictions may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts
on
our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to
continue to support recent economic reforms and to return to a more centrally
planned economy or regional or local variations in the implementation of
economic policies, could have a significant effect on economic conditions in
China or particular regions thereof, and could require us to divest ourselves
of
any interest we then hold in Chinese properties.
Future
inflation in China may inhibit our activity to conduct business in
China.
In
recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. During the past ten years, the rate of inflation in China
has been as high as 20.7% and as low as -2.2%. These factors have led to the
adoption by the Chinese government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth
and
contain inflation. High inflation may in the future cause the Chinese government
to impose controls on credit and/or prices, or to take other action, which
could
inhibit economic activity in China, and thereby harm the market for our
products.
12
Government
regulations on environmental matters in China may adversely impact on our
business.
Our
manufacturing operations are subject to numerous laws, regulations, rules and
specifications relating to human health and safety and the environment. These
laws and regulations address and regulate, among other matters, wastewater
discharge, air quality and the generation, handling, storage, treatment,
disposal and transportation of solid and hazardous wastes and releases of
hazardous substances into the environment. In addition, third parties and
governmental agencies in some cases have the power under such laws and
regulations to require remediation of environmental conditions and, in the
case
of governmental agencies, to impose fines and penalties. We make capital
expenditures from time to time to stay in compliance with applicable laws and
regulations.
All
potential environmental liabilities may not have been identified or properly
quantified and a prior owner, operator, or tenant may have created an
environmental condition unknown to us. We may be potentially liable for damages
or cleanup, investigation or remediation costs in connection with the ownership
and operation of our properties (including locations to which we may have sent
waste in the past) and the conduct of our business.
State
and
local environmental regulatory requirements change often. Future laws,
ordinances or regulations might impose material environmental liability or
the
current environmental condition of the properties could in future be affected
by
the condition of land or operations in the vicinity of the properties (such
as
the presence of underground storage tanks), or by third parties unrelated to
us.
Moreover, it is possible that compliance with a new regulatory requirement
could
impose significant compliance costs on us. Such costs could have a material
adverse effect on our business, financial condition and results of
operations.
We
may have limited legal recourse under PRC law if disputes arise under our
contracts with third parties.
The
Chinese government has enacted some laws and regulations dealing with matters
such as corporate organization and governance, foreign investment, commerce,
taxation and trade. However, their experience in implementing, interpreting
and
enforcing these laws and regulations is limited, and our ability to enforce
commercial claims or to resolve commercial disputes is unpredictable. The
resolution of these matters may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the
legal merits of a particular matter or dispute may influence their
determination. Any rights we may have to specific performance, or to seek an
injunction under PRC law, in either of these cases, are severely limited, and
without a means of recourse by virtue of the Chinese legal system, we may be
unable to prevent these situations from occurring. The occurrence of any such
events could have a material adverse effect on our business, financial condition
and results of operations.
We
must comply with the Foreign Corrupt Practices Act.
We
are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business. Foreign
companies, including some of our competitors, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in mainland China. If our
competitors engage in these practices, they may receive preferential treatment
from personnel of some companies, giving our competitors an advantage in
securing business or from government officials who might give them priority
in
obtaining new licenses, which would put us at a disadvantage. We could suffer
severe penalties if our employees or other agents were found to have engaged
in
such practices.
Risks
Related to the Common Stock
If
we do not timely file and have declared effective the registration statement
to
register the shares being offered by the selling stockholders named herein,
we
will be subject to liquidated damages.
On
October 23, 2007, we entered into a registration rights agreement to register
the shares of common stock to which this prospectus relates. We are obligated
to
file the registration statement of which this prospectus is a part, by
December 7, 2007 and have the registration statement declared effective by
the
SEC no later than April 21, 2008. If we are unable to obtain an extension
of the
effective date or a waiver of liquidated damages, then we must pay liquidated
damages in the amount of 0.75% of the purchase price of the securities being
registered, per month, subject to a maximum limit of 7.5%. As of June 26,
2008,
we have accrued approximately $96,686 in liquidated
damages.
13
When
the registration statement covering the resale of the shares being offered
in
this prospectus becomes effective, there will be a significant number of shares
of common stock eligible for sale, which could depress the market price of
our
stock.
Following
the effective date of the registration statement, 2,844,174 shares of our common
stock will become available for sale in the public market, which could harm
the
market price of the stock. Further, shares may be offered from time to time
in
the open market pursuant to Rule 144, and these sales may have a depressive
effect as well.
The
outstanding warrants may adversely affect us in the future and cause dilution
to
existing stockholders.
We
currently have warrants outstanding to purchase up to 5,681,819 shares of our
common stock. The term of these warrants expire in 2012 and the exercise price
ranges from $3.00 to $4.40 per share, subject to adjustment in certain
circumstances. Exercise of the warrants may cause dilution in the interests
of
other stockholders as a result of the additional common stock that would be
issued upon exercise. In addition, sales of the shares of our common stock
issuable upon exercise of the warrants could have a depressive effect on the
price of our stock, particularly if there is not a coinciding increase in demand
by purchasers of our common stock. Further, the terms on which we may obtain
additional financing during the period any of the warrants remain outstanding
may be adversely affected by the existence of these warrants as
well.
If
we are unable to list our common stock on the NASDAQ or higher exchange by
June
30, 2009, we must issue 1,000,000 shares of our common stock to the purchaser
of
our Series A Convertible Preferred Stock, thereby causing further dilution
to
our existing stockholders.
On
October 23, 2007, we entered into purchase agreement with Vision Opportunity
Master Fund, Ltd., or Vision, pursuant to which Vision purchased 1,000,000
shares of the our Series A Convertible Preferred Stock at a purchase price
of
$10.00 per share. Pursuant to the terms of the purchase agreement, we agreed
to
take all necessary steps to list our common stock on the NASDAQ or higher stock
exchange as soon as possible. In addition, we agreed to issue 1,000,000 shares
of common stock to Vision in the event our common stock is not so listed by
June
30, 2009. If our common stock is not listed on the NASDAQ or higher exchange
by
June 30, 2009 and we are required to issue 1,000,000 shares of our common stock
to Vision, it would cause dilution to our existing stockholders.
There
may not be sufficient liquidity in the market for our securities in order for
investors to sell their securities.
There
is
currently only a limited public market for our common stock, which is listed
on
the OTC Bulletin Board. The share volume of our common stock during the
month of May 2008 was 21,225 shares. As of June 26, 2008, the closing price
of our common stock was $9.00.
The
market price of our common stock may be volatile.
The
market price of our common stock has been and will likely continue to be highly
volatile, as is the stock market in general, and the market for OTC Bulletin
Board quoted stocks in particular. Some of the factors that may materially
affect the market price of our common stock are beyond our control, such as
changes in financial estimates by industry and securities analysts, conditions
or trends in the industry in which we operate or sales of our common stock.
These factors may materially adversely affect the market price of our common
stock, regardless of our performance. In addition, the public stock markets
have
experienced extreme price and trading volume volatility. This volatility has
significantly affected the market prices of securities of many companies for
reasons frequently unrelated to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market
price
of our common stock.
14
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements that involve substantial risks
and uncertainties. These include statements about our expectations, beliefs,
intentions or strategies for the future, which are indicated by words or phrases
such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,”
“management believes” and similar words or phrases. The forward-looking
statements are based on our current expectations and are subject to certain
risks, uncertainties and assumptions. Our actual results could differ
materially from results anticipated in these forward-looking statements. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholders. There will be no proceeds to
us
from the sale of shares of common stock in this offering.
SELLING
STOCKHOLDERS
We
are
registering for resale shares of our common stock held by the selling
stockholders identified below. We are registering the shares to permit the
selling stockholders and their pledgees, donees, transferees and other
successors-in-interest that receive their shares from a selling stockholder
as a
gift, partnership distribution or other non-sale related transfer after the
date
of this prospectus to resell the shares when and as they deem
appropriate.
The
following tables set forth:
|
·
|
the
name of the selling stockholders,
|
|
·
|
the
number and percentage of shares of our common stock that the selling
stockholders beneficially owned prior to the offering for resale
of the
shares under this prospectus,
|
|
·
|
the
number of shares of our common stock that may be offered for resale
for
the account of the selling stockholders under this prospectus,
and
|
|
·
|
the
number and percentage of shares of our common stock to be beneficially
owned by the selling stockholders after the offering of the resale
shares
(assuming all of the offered resale shares are sold by the selling
stockholders).
|
The
number of shares in the column “Maximum Number of Shares Being Offered”
represents all of the shares that each selling stockholder may offer under
this
prospectus. We do not know how long the selling stockholders will hold the
shares before selling them or how many shares they will sell, and we currently
have no agreements, arrangements or understandings with any of the selling
stockholders regarding the sale of any of the resale shares. The shares offered
by this prospectus may be offered from time to time by the selling stockholders
listed below.
With
the
exception of (1) Princeton Capital Group, who acquired the shares listed below
in connection with the Share Exchange, (2) Sichenzia Ross Friedman Ference
LLP,
who was issued shares by the Company as consideration for services rendered
prior to the Share Exchange, and (3) Alfred Schiffrin, who acquired shares
from
the Company in a private placement in 2005 and was issued shares under the
Company’s equity compensation plan in 2005, the shares being offered for resale
by the other selling stockholders were issued in a private stock purchase and
sale transaction in September 2006.
This
table is prepared solely based on information supplied to us by the listed
selling stockholders, any Schedules 13D or 13G and Forms 3 and 4, and other
public documents filed with the SEC, and assumes the sale of all of the shares
offered hereby.
15
|
Name
of Selling Stockholder
|
Shares
Beneficially
Owned Prior to
Offering(1)
|
Maximum
Number
of
Shares
to be
Sold
|
Number
of
Shares
Beneficially
Owned
After
Offering
|
Percentage
Ownership
After
Offering
|
|||||||||
|
Vision
Opportunity Master Fund Ltd.
|
1,321,136
|
(2)
|
300,001
|
(3)
|
1,336,893
|
4.99
|
%
|
||||||
|
Princeton
Capital Group
|
1,500,000
|
(4)
|
1,500,000
|
-0-
|
*
|
||||||||
|
Castle
Bison, Inc.
|
156,057
|
(5)
|
156,057
|
-0-
|
*
|
||||||||
|
Vincent
Finnegan
|
4,000
|
(6)
|
4,000
|
-0-
|
*
|
||||||||
|
Stallion
Ventures, LLC
|
468,618
|
(7)
|
468,618
|
-0-
|
*
|
||||||||
|
Menlo
Venture Partners, LLC
|
78,647
|
(8)
|
78,647
|
-0-
|
*
|
||||||||
|
Robert
Scherne
|
16,667
|
(9)
|
16,667
|
-0-
|
*
|
||||||||
|
John
Vogel
|
4,000
|
(10)
|
4,000
|
-0-
|
*
|
||||||||
|
Windermere
Insurance Company Ltd.
|
86,779
|
(11)
|
86,779
|
-0-
|
*
|
||||||||
|
Sichenzia
Ross Friedman Ference LLP
|
9,000
|
(12)
|
9,000
|
-0-
|
*
|
||||||||
|
Alfred
Schiffrin
|
7,500
|
(13)
|
7,500
|
-0-
|
*
|
||||||||
|
Ronit
Sucoff
|
33,556
|
33,556
|
-0-
|
*
|
|||||||||
|
Helen
Kohn
|
33,556
|
33,556
|
-0-
|
*
|
|||||||||
|
Shadow
Capital, LLC
|
20,001
|
(14)
|
20,001
|
-0-
|
*
|
||||||||
|
Stanley
Goldberg Rev Trust
|
16,667
|
(15)
|
16,667
|
-0-
|
*
|
||||||||
|
Irv
Edwards
|
8,250
|
8,250
|
-0-
|
*
|
|||||||||
|
Fink
Family Trust
|
33,556
|
(16)
|
33,556
|
-0-
|
*
|
||||||||
|
Mark
Bell MD Retirement Trust
|
8,250
|
(17)
|
8,250
|
-0-
|
*
|
||||||||
|
Larry
Chimerine
|
53,390
|
53,390
|
-0-
|
*
|
|||||||||
|
Cliff
Sullivan
|
5,679
|
5,679
|
-0-
|
*
|
|||||||||
*
Represents beneficial ownership of less than one percent of our outstanding
shares.
|
(1)
|
Beneficial
ownership is determined in accordance with the rules and regulations
of
the SEC. In computing the number of shares beneficially owned by
a person
and the percentage ownership of that person, securities that are
currently
convertible or exercisable into shares of our common stock, or
convertible
or exercisable into shares of our common stock within 60 days of
the date
hereof are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership
of any
other person. Except as indicated in the footnotes to the following
table,
each stockholder named in the table has sole voting and investment
power
with respect to the shares set forth opposite such stockholder’s name. The
percentage of beneficial ownership is based on 25,454,545 shares
of common
stock outstanding as of June 26,
2008.
|
16
|
(2)
|
Vision
Capital Advisors, LLC (formerly known as Vision Opportunity Capital
Management, LLC), a Delaware limited liability company, which serves
as
the investment manager to Vision Opportunity Master Fund Ltd. and
Adam
Benowitz, who is the managing member of Vision Capital Advisors and
the
Director of Vision Opportunity Master Fund share voting and investment
power with Vision Opportunity Master Fund with respect to the shares
beneficially owned by Vision Opportunity Master Fund. Vision Capital
Advisors and Mr. Benowitz may each be deemed to beneficially own
the
shares of common stock held by Vision Opportunity Master Fund. Each
disclaims beneficial ownership of such shares. This amount includes
300,001 shares of our common stock that Vision owned prior to the
share
exchange. This amount does not include 1,000,000 shares of our Series
A
Convertible Preferred Stock, which are initially convertible into
approximately 4,545,455 shares of common stock, subject to adjustment
and
warrants to purchase up to 5,681,819 shares of our common stock,
all of
which we must register in another registration statement pursuant
to the
registration rights agreement we entered into with Vision; however,
based
upon the terms of the both the Series A Convertible Preferred Stock
and
the warrants issued to Vision, holders may not convert the Series
A
Convertible Preferred Stock and/or exercise the warrants, if on any
date,
such holder would be deemed the beneficial owner of more than 4.99%
of the
then outstanding shares of our common stock (in connection with the
calculations explained in footnote 1 above, the calculation of Vision’s
ownership and percentage of ownership in the table above considers
these
additional securities and the corresponding cap); however, a holder
can
elect to waive the cap upon 61 days notice to us, except that during
the
61 day period prior to the expiration date of their warrants, they
can
waive the cap at any time, but a waiver during such period will not
be
effective until the day immediately preceding the expiration date
of the
warrant. Additionally, the shares of Series A Convertible Preferred
Stock
are subject to certain anti-dilution provisions, which would be triggered
if we were to sell securities at a price below the price at which
we sold
the Series A Preferred Stock.
|
|
(3)
|
This
represents the number of shares of our common stock that Vision owned
prior to the Share Exchange.
|
|
(4)
|
The
shares were issued to Princeton Capital Group in connection with
the share
exchange, in exchange for 500 shares of Baorun Group owned by Princeton
Capital Group. Ms. Meiyi Xia and Ms. Lin Li share voting and dispositive
power over the shares.
|
|
(5)
|
Castle
Bison, Inc. owned approximately 10.4% of our common stock immediately
prior to the share exchange. All shares of Castle Bison, Inc. are
beneficially owned by Mr. Raul Silvestre, who, as president of Castle
Bison, has sole voting and investment power over the shares. Mr.
Silvestre
was our legal counsel from September 16, 2006 through October 23,
2007.
|
|
(6)
|
Mr.
Finnegan was a member of our board of directors from September 16,
2006
until his resignation on October 23,
2007.
|
|
(7)
|
Stallion
Ventures, LLC owned approximately 31.24% of our common stock immediately
prior to the share exchange. Martin Sumichrast and Ralph Olson, the
Managing Directors of Stallion Ventures, share voting and dispositive
power over the shares held by Stallion
Ventures
|
|
(8)
|
Ariel
Coro, the Manager of Menlo Venture Partners, LLC, has sole voting
and
dispositive power over the shares held by Menlo Venture
Partners.
|
|
(9)
|
Mr.
Scherne was our Chief Financial Officer from September 16, 2006 until
his
resignation on October 23, 2007.
|
|
(10)
|
Mr.
Vogel was our Chief Executive Officer from September 16, 2006 until
his
resignation on October 23, 2007, and served as a member of our board
of
directors until his resignation on December 9,
2007.
|
17
|
(11)
|
John
Scardino, the director of Windermere Insurance Company Limited, has
sole
voting and dispositive power over the shares held by
Windermere.
|
|
(12)
|
Sichenzia
Ross Friedman Ference LLP served as our outside legal until October
23,
2007. Gregory Sichenzia, Marc J. Ross, Richard A. Friedman and Michael
H.
Ference, all of whose business address is 61 Broadway, 32 nd
Floor, New York, New York 10006, may be deemed the control persons
of
Sichenzia Ross Friedman Ference
LLP.
|
|
(13)
|
Alfred
Schiffrin was our president and sole director from January 2002 to
July
2003 and from December 2004 to October 2006 was the president and
sole
director of our then wholly-owned subsidiary, Renewable Assets,
Inc.
|
|
(14)
|
B.
Kent Garlinghouse, the Manager of Shadow Capital, LLC, has sole voting
and
dispositive power over the shares held by Shadow
Capital.
|
|
(15)
|
Lynn
Intrater and Geraldine Goldberg, as co-trustees, share voting and
dispositive power over the shares held by the Stanley Goldberg Rev
Trust.
Lynn Intrater and Geraldine Goldberg disclaim beneficial ownership
of the
shares held by the Stanley Goldberg Rev
Trust.
|
|
(16)
|
Marvin
H. Fink, as trustee of the Fink Family Trust, has sole voting and
dispositive power over the shares held by the Fink Family
Trust.
|
|
(17)
|
Mark
R. Bell has sole voting and dispositive power over the shares held
by the
Mark Bell M.D. Retirement
Trust.
|
18
PLAN
OF DISTRIBUTION
The
selling stockholders and any of their pledgees, donees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock being offered under this prospectus on any stock exchange,
market or trading facility on which shares of our common stock are traded or
in
private transactions. These sales may be at fixed or negotiated prices. The
selling stockholders may use any one or more of the following methods when
disposing of shares:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resales by the broker-dealer
for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
to
cover short sales made after the date that the registration statement
of
which this prospectus is a part is declared effective by the
SEC;
|
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
|
·
|
a
combination of any of these methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
shares may also be sold under Rule 144 under the Securities Act of 1933, as
amended, if available for a selling stockholder, rather than under this
prospectus. Princeton Capital Group is the only selling stockholder that may
avail itself of Rule 144 in connection with a resale of the shares. The selling
stockholders have the sole and absolute discretion not to accept any purchase
offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The
selling stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged
shares.
Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, which
commissions as to a particular broker or dealer may be in excess of customary
commissions to the extent permitted by applicable law.
If
sales
of shares offered under this prospectus are made to broker-dealers as
principals, we would be required to file a post-effective amendment to the
registration statement of which this prospectus is a part. In the post-effective
amendment, we would be required to disclose the names of any participating
broker-dealers and the compensation arrangements relating to such
sales.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares offered under this prospectus may be deemed to be
“underwriters” within the meaning of the Securities Act in connection with these
sales. Commissions received by these broker-dealers or agents and any profit
on
the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Any broker-dealers or agents
that are deemed to be underwriters may not sell shares offered under this
prospectus unless and until we set forth the names of the underwriters and
the
material details of their underwriting arrangements in a supplement to this
prospectus or, if required, in a replacement prospectus included in a
post-effective amendment to the registration statement of which this prospectus
is a part.
19
The
selling stockholders and any other persons participating in the sale or
distribution of the shares offered under this prospectus will be subject to
applicable provisions of the Exchange Act, and the rules and regulations under
that act, including Regulation M. These provisions may restrict activities
of,
and limit the timing of purchases and sales of any of the shares by, the selling
stockholders or any other person. Furthermore, under Regulation M, persons
engaged in a distribution of securities are prohibited from simultaneously
engaging in market making and other activities with respect to those securities
for a specified period of time prior to the commencement of such distributions,
subject to specified exceptions or exemptions. All of these limitations may
affect the marketability of the shares.
If
any of
the shares of common stock offered for sale pursuant to this prospectus are
transferred other than pursuant to a sale under this prospectus, then subsequent
holders could not use this prospectus until a post-effective amendment or
prospectus supplement is filed, naming such holders. We offer no assurance
as to
whether any of the selling stockholders will sell all or any portion of the
shares offered under this prospectus.
We
have
agreed to pay all fees and expenses we incur incident to the registration of
the
shares being offered under this prospectus. However, each selling stockholder
and purchaser is responsible for paying any discounts, commissions and similar
selling expenses they incur.
We
and
the selling stockholders have agreed to indemnify one another against certain
losses, damages and liabilities arising in connection with this prospectus,
including liabilities under the Securities Act.
20
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
The
following information should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this
report.
Company
Overview
We
are
primarily engaged in the wholesale distribution and processing of heavy oil
and
finished oil products and the development, exploration, production and
distribution of biodiesel through certain contractual agreements between our
wholly owned indirect subsidiary Redsky Industrial and Baorun Industrial. Redsky
Industrial, a registered wholly foreign owned entity (“WFOE”) in the People’s
Republic of China, is a subsidiary of Baorun Group, our direct wholly owned
subsidiary.
Basis
of Presentations
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) and the requirements of
Regulation S-X promulgated by the Securities and Exchange Commission. These
accounting principles require us to make certain estimates, judgments and
assumptions. We believe that the estimates, judgments and assumptions upon
which
we rely are reasonable based upon information available to us at the time that
these estimates, judgments and assumptions are made. These estimates, judgments
and assumptions can affect the reported amounts of assets and liabilities as
of
the date of the financial statements as well as the reported amounts of revenues
and expenses during the periods presented. Our financial statements would be
affected to the extent there are material differences between these estimates
and actual results. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not require management’s
judgment in its application. There are also areas in which management’s judgment
in selecting any available alternative would not produce a materially different
result.
Critical
Accounting Policies
Accounts
Receivable
Our
policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns
to
evaluate the adequacy of these reserves. Based on historical collection
activity, no allowance was deemed necessary at March 31, 2008 or December 31,
2007. The bad debt allowance of December 31, 2006 was $28,930.
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods comprises
direct material, direct production cost and an allocated portion of production
overheads.
Property
and Equipment
Plants
and equipment are stated at the actual cost on acquisition less accumulated
depreciation and amortization. Depreciation and amortization are provided for
in
amounts sufficient to relate the cost of depreciation assets to operations
over
their estimated service lives, principally on a straight-line basis. Most
property, plant and equipment have a residual value of 5% of actual cost. The
estimated lives used in determining depreciation are:
21
|
Building
|
20
years
|
|
Vehicle
|
5
years
|
|
Office
Equipment
|
5
years
|
|
Production
Equipment
|
5
years
|
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, we examine the
possibility of decreases in the value of fixed assets when events or changes
in
circumstances reflect the fact that their recorded value may not be
recoverable.
Revenue
Recognition
Our
revenue recognition policies are in compliance with SEC Staff Accounting
Bulletin 104. Sales revenue is recognized at the date of shipment to customers
when a formal arrangement exists, the price is fixed or determinable, the
delivery is completed, no other significant obligations of the Company exist
and
collectability is reasonably assured. Payments received prior to meeting all
relevant criteria for revenue recognition are recorded as unearned
revenue.
Foreign
Currency Translation
Our
functional currency is the Renminbi (“RMB”). For financial reporting purposes,
RMB has been translated into United States dollars (“USD”) as the reporting
currency. Assets and liabilities are translated at the exchange rate in effect
at the balance sheet date. Revenues and expenses are translated at the average
rate of exchange prevailing during the reporting period. Translation adjustments
arising from the use of different exchange rates from period to period are
included as a component of stockholders’ equity as “Accumulated other
comprehensive income.” Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
Income
Tax Recognition
We
account for income taxes under Statement of Financial Accounting Standards
No.
109, “Accounting for Income Taxes” “SFAS 109.” SFAS 109 requires the recognition
of deferred tax assets and liabilities for both the expected impact of
differences between the financial statements and the tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from tax
losses and tax credit carry forwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.
Baorun
Industrial has obtained income tax abatements for the years ended December
31,
2004 through 2010, due to the fact that it uses waste gas, water and residue
in
the production of its products. We believe that this abatement is in effect
for
all periods presented. Currently, the PRC is in a period of growth and is openly
promoting business development in order to bring more business into the PRC.
Tax
abatements are one of the many methods used to promote such business
development. If the abatement should be rescinded for future periods, Baorun
Industrial would be subjected to tax liabilities. Had the abatement for income
taxes not been in effect for Baorun Industrial, we estimate that the pro forma
financial impact would be as follows:
|
Three Months Ended March 31,
|
Year Ended December 31,
|
|||||||||||||||
|
2008
|
2007
|
2007
|
2006
|
2005
|
||||||||||||
|
(pro forma)
|
(pro forma)
|
(pro forma)
|
(pro forma)
|
(pro forma)
|
||||||||||||
|
Net
Income before income taxes
|
$
|
4,664,905
|
$
|
962,923
|
$
|
8,579,565
|
$
|
5,343,579
|
$
|
4,141,087
|
||||||
|
Tax
provision
|
(1,166,226
|
)
|
$
|
(317,765
|
)
|
(2,831,256
|
)
|
(1,763,381
|
)
|
(1,366,559
|
)
|
|||||
|
Net
income
|
$
|
3,498,679
|
$
|
645,158
|
$
|
5,748,309
|
$
|
3,580,198
|
$
|
2,774,528
|
||||||
22
Results
of Operations
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
Three Months Ended March 31,
|
Year Ended December 31,
|
||||||||||||||||||||||||||||||
|
2008
|
2007
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||
|
$
|
% of
Sales
|
$
|
% of
Sales
|
$
|
% of
Sales
|
$
|
% of
Sales
|
$
|
% of Sales
|
||||||||||||||||||||||
|
Sales
|
35,560,840
|
100
|
%
|
11,558,725
|
100
|
%
|
87,104,187
|
54,427,820
|
29,217,184
|
||||||||||||||||||||||
|
Cost
of Sales
|
(30,547,663
|
)
|
86
|
%
|
(10,444,290
|
)
|
90
|
%
|
(77,006,690
|
)
|
88
|
%
|
(48,666,440
|
)
|
89
|
%
|
(24,843,313
|
)
|
85
|
%
|
|||||||||||
|
Gross
Profit
|
5,013,177
|
14
|
%
|
1,114,435
|
10
|
%
|
10,097,497
|
12
|
%
|
5,761,380
|
11
|
%
|
4,373,871
|
15
|
%
|
||||||||||||||||
|
General
& Administrative Expenses
|
(319,806
|
)
|
1
|
%
|
(127,101
|
)
|
1
|
%
|
(1,686,760
|
)
|
2
|
%
|
(356,392
|
)
|
1
|
%
|
(216,362
|
)
|
1
|
%
|
|||||||||||
|
Income
from Operation
|
4,693,371
|
13
|
%
|
987,334
|
9
|
%
|
8,410,737
|
10
|
%
|
5,404,988
|
10
|
%
|
4,157,509
|
14
|
%
|
||||||||||||||||
|
Other
Income (expenses), net
|
(28,466
|
)
|
—
|
%
|
(24,411
|
)
|
—
|
%
|
168,828
|
0
|
%
|
(61,409
|
)
|
0
|
%
|
(16,422
|
)
|
0
|
%
|
||||||||||||
|
Net
Income
|
4,664,905
|
13
|
%
|
962,923
|
8
|
%
|
8,579,565
|
10
|
%
|
5,343,579
|
10
|
%
|
4,141,087
|
14
|
%
|
||||||||||||||||
Three
months ended March 31, 2008 as compared to three months ended March 31,
2007
Net
sales.
Net
sales for first quarter 2008 were approximately $35.56 million compared to
net
sales in first quarter 2007 of approximately $11.56 million, an increase in
revenues of $24 million, or 208%. The increase was mainly due to two reasons.
First, during the first quarter of 2008, we used military-use railroad routes
to
sell and deliver our oil products to the customers in the provinces of China
that commercial railroads cannot directly connect to. The advantage to
delivering oil through military railroad stations and routes, is that we were
able to strengthen and extend our sales network to provinces that we were unable
to directly connect to before, which increased our sales. Second, there was
an
increase in our production of bio-diesel which increased its sales.
Cost
of sales.
Cost of
sales for first quarter 2008 was approximately $30.55 million compared to cost
of sales in first quarter 2007 of approximately $10.44 million, an increase
of
$20.11 million, or 193%. The increase in cost of sales was attributable to
the
increase of production and sales activities in first quarter of 2008. Cost
of
sales as a percentage of sales was approximately 86% for first quarter 2008
and
90% for first quarter 2007, respectively. The decrease as a percentage of sales
was due to relatively low production cost for bio-diesel oil than the purchase
price of diesel oil products from the market as we increased our production
of
bio-diesel during the first quarter 2008 comparing with same period in
2007.
Gross
profit.
Gross
profit was approximately $5.01 million for first quarter of 2008 as compared
to
approximately $1.11 million for first quarter of 2007, representing gross
margins of approximately 14% and 10% respectively. During the first quarter
of
2008, the gross profit margin for making and selling Bio-diesel oil was
approximately 16% and the gross profit margin for buying and reselling gasoline
was approximately 11%. The improved gross margin is a result of increased market
demand and also the lower cost of self-supplied bio-diesel
products.
General
and administrative expenses.
General
and administrative expenses for the first quarter of 2008 were $319,806. The
general and administrative expenses for the first quarter of 2007 were $127,101,
an increase of $192,705 or 152%. This increase was due to increased sales and
productions for the first quarter of 2008and increase in audit, legal,
consulting and filing expenses in connection with the Company of being public
in
US since October of 2007. The percentage of sales for both periods is about
1%,
which was in same proportion to the total sales.
Net
income.
The net
income for the first quarter 2008 was $4,664,905 as compared to $962,923 for
the
first quarter in 2007. It was an increase of $3,701,982 in net profit or 384%.
The management believed that the net income increase is a result of the fast
and
continuing revenue growth.
23
Fiscal
year ended December 31, 2007 as compared to fiscal year ended December 31,
2006
Net
sales.
Net
sales for 2007 were approximately $87.10 million compared to net sales in 2006
of approximately $54.43 million, an increase in revenues of $32.67 million,
or
60%. The increase was due to expansion of our business in 2007 through the
opening of two new representative offices which added five additional provinces
in China to our territorial sales coverage and increased our direct sales
between our vendors and customers. In addition, we started production of our
new
biodiesel product line in October 2007, as a result of which, direct sales
of
biodiesel increased by $4,401,061. We believe that our sales will continue
to
grow because we are strengthening our sales efforts by hiring more sales people,
increasing our sales channels and improving the quality of our
products.
Cost
of sales.
Cost of
sales for 2007 were approximately $77.00 million compared to cost of sales
in
2006 of approximately $48.67 million, an increase of $28.33 million, or 58%.
The
increase in cost of sales was attributable to the increase of production and
sales activities in 2007. Cost of sales as a percentage of sales was
approximately 88% for 2007 and 89% for 2006, respectively. We believe that
our
cost of sales as a percentage of net sales will decrease slightly as we will
improve the efficiency of our manufacturing facility.
Gross
profit.
Gross
profit was approximately $10.10 million for 2007 as compared to approximately
$5.76 million for 2006, representing gross margins of approximately 12% and
11%
for 2007 and 2006, respectively. During 2007, both the gross profit for diesel
and heavy oil increased slightly while the gross profit for gasoline decreased
slightly due to the increased price of crude oil. The slight increase in our
gross profits for diesel and heavy oil was mainly due to the increase of
production and sales activities in 2007, increased selling price for heavy
oil
and decreased cost for producing biodiesel.
General
and administrative expenses
.
General and administrative expenses increased $1.33 million from 2006, of which
$1.11 million was associated with our reverse merger and financing in 2007.
The
major expenses related to the reverse merger and financing included U.S. and
Chinese legal counsel expenses, auditing expenses, consulting expenses, and
due
diligence expenses.
Net
income
. Our
net income for the year ended December 31, 2007 was $8,579,565 as compared
to
$5,343,579 for the year ended December 31, 2006, an increase of $3,235,986
or
61%. This increase was due to the benefit of the economies of scale resulting
from the growth in revenue and corresponding efficiencies in manufacturing
operations. Our management believes that net income will continue to increase
as
we will continue to offer better quality products, improve our manufacturing
efficiency and control our expenses.
Fiscal
year ended December 31, 2006 as compared to fiscal year ended December 31,
2005
Net
sales.
Net
sales for 2006 were approximately $54.43 million compared to net sales of 2005
of approximately $29.22 million, an increase in revenues of $25,210,636, or
86%.
Of the net sales for each of 2005 and 2006, gasoline sales contributed
approximately $6.29 million in 2005 and approximately $28.09 million in 2006.
The 347% increase in our gasoline sales in 2006 was primarily due to the
increase in customers as a result of the opening of our new branch office
serving both our wholesale and retail operations. In addition, this increase
was
also due to the commencement of diesel sales in that year.
Cost
of sales.
Cost of
sales for 2006 were approximately $48.67 million compared to cost of sales
in
2005 of approximately $24.84 million, an increase of $23,823,127, or 96%. The
increase in cost of sales is attributable to the increase of sales activities
and the purchase price of heavy oil. Cost of sales as a percentage of sales
was
approximately 89% for 2006 and was 85% for 2005.
Gross
profit.
Gross
profit was approximately $5.76 million for 2006 as compared to approximately
$4.37 million for 2005, representing gross margins of approximately 11% and
15%
for 2006 and 2005, respectively. The decrease in our gross profit margin in
2006
was mainly due to the rising cost of heavy oil.
Operating
expenses.
Operating expenses consisting of general and administrative expenses totaled
$356,392 for 2006 as compared to $216,362 for 2005, an increase of $140,030
or
65%. General administration expenses include salary, office rent, traveling,
vehicle maintenance, utility, stamp duties and fixed assets depreciations.
Operating expenses as a percentage of sales was approximately 1% for both
years.
24
Net
income.
Our net
income for the year ended December 31, 2006 was $5,343,579 as compared to
$4,141,087 for the year ended December 31, 2005, an increase of $1,202,492
or
29%. Net income increased due to the diversification of our product lines and
effective cost reduction.
Liquidity
and Capital Resources
As
of
March 31, 2008, we had cash and cash equivalents of approximately $1.5 million
and $1.3 million. As of December 31, 2007 and 2006, we had cash and cash
equivalents of approximately $1.3 million and $.6 million, respectively. At
March 31, 2008, other current assets were approximately $37 million and current
liabilities were approximately $4.9 million, as compared to other current assets
of approximately $34 million and current liabilities of approximately $5.5
million at December 31, 2007 and other current assets of approximately $19.06
million and current liabilities of approximately $6.01 million at December
31,
2006. Working capital equaled approximately $34 million at March 31, 2008,
compared to $30 million at December 31, 2007, an increase of 13%. Working
capital equaled approximately $30 million at December 31, 2007, compared to
$13.1 million at December 31, 2006, an increase of $16.9 million, or 129%.
The
ratio of current assets to current liabilities was 8-to-1 at March 31, 2008,
compared to 6-to-1 at the year ended December 31, 2007 and 3-to-1 at the year
ended December 31, 2006. The increase in working capital in first quarter 2008
was primarily due to the increased sales during 2008. The increase in working
capital in 2007 compared to 2006 was primarily due to the consummation of a
$10
million equity financing in 2007 and increased sales during 2007. The increase
in the current ratio in 2008 was primarily related to increases in accounts
receivable and increases in inventory levels with concurrent decreases in
accounts payable and other payables. The increase in the current ratio in 2007
compared to 2006 was primarily related to increases in advances to suppliers
and
increases in inventory levels with concurrent decreases in accounts payable
and
notes payable.
We
believe we have sufficient cash to continue our current business through March
31, 2009 due to expected increased sales revenue and net income from operations.
We intend to expand our current operations through (i) our completed acquisition
of three oil extraction plants; (ii) expansion of our 100,000 ton biodiesel
manufacturing facility; and (iii) the acquisition of several additional gas
stations over the next three years. We expect to finance such expansion through
bank loans, the issuance of debt or equity securities, or a combination thereof.
Failure to obtain such financing could have a material adverse effect on our
business expansion.
Our
future capital requirements will depend on a number of factors,
including:
| · |
the
cost of filing, prosecuting, defending, and enforcing patent claims
and
other intellectual property rights;
|
| · |
competing
technological and market
developments;
|
| · |
our
ability to maintain our existing and establish new collaborative
relationships; and
|
| · |
the
development of commercialization activities and
arrangements.
|
We
do not
anticipate any additional material research and development expenses during
the
next 12 months.
We
do not
believe that inflation had a significant negative impact on our results of
operations during the quarter ended March 31, 2008 or the year ended December
31, 2007.
25
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the three months ended March 31, 2008 and
2007:
|
Three Months Ended
March 31,
|
|||||||
|
|
2008
|
|
|
2007
|
|||
|
Cash
provided by (used in):
|
|||||||
|
Operating
Activities
|
$
|
1,074,063
|
$
|
(436,737
|
|||
|
Investing
Activities
|
(947,842
|
)
|
(153,988
|
||||
|
Financing
Activities
|
(12,783
|
)
|
(10,562
|
||||
Net
cash
provided by operating activities was $1,074,063 in first quarter of 2008, as
compared to $436,737 net cash used by operating activities in first quarter
2007. The increase in net cash during the first quarter of 2008 comparing with
same period of 2007 was mainly due to increase in net income and advances from
customers, and decrease in prepaid expenses and advance to
suppliers.
Net
cash
used in investing activities was $947,842 during the first quarter 2008, as
compared to net cash used in investing activities of $153,988 in first quarter
of 2007. The increase of net cash used in investing activities in 2008 was
mainly due to the amounts paid for purchasing three oil extraction plants and
further construction and improvements on these three oil extraction
plants.
Net
cash
used in financing activities was $12,783 in the first quarter of 2008 as
compared to net cash used in financing activities of $10,562 for first quarter
2007. The increase of net cash flow used by financing activities in 2008 was
due
to the repayment of long-term loans.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the years ended December 31, 2007, 2006 and
2005:
|
Year
Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Cash
provided by (used in):
|
||||||||||
|
Operating
Activities
|
$
|
(5,108,303
|
)
|
$
|
20,548
|
$
|
(221,444
|
)
|
||
|
Investing
Activities
|
(7,009,173
|
)
|
(891,284
|
)
|
(19,659
|
)
|
||||
|
Financing
Activities
|
13,048,697
|
881,399
|
(19,799
|
)
|
||||||
Fiscal
year ended December 31, 2007 as compared to fiscal year ended December 31,
2006
Net
cash
flow used in operating activities was $5,108,303 in 2007, as compared to
net
cash flow provided by operating activities of $20,548 in 2006. The increase
in
net cash flow used in operating activities in 2007 was mainly due to the
increase of the amount of prepayment for the purchasing of oil products and
increased inventory level. The oil industry is a seller’s market. If we control
the oil supplies, we will be a market maker in the region. According to the
current trade practices of the oil industry, no credit terms are allowed
and
cash on delivery or advance payment is customary. As a result, we put more
of
our funding to our suppliers as advance payments. We have to secure the oil
resources for our 2008 operations. In addition, the recent construction of
our
new biodiesel manufacturing facility has been in operation since October
2007.
We purchased supply items and inventory for this facility for an aggregate
amount of $1,110,000.
Net
cash
flow used in investing activities was $7,009,173 for 2007, as compared to
net
cash flow used in investing activities of $891,284 in 2006. The increase
of net
cash flow used in investing activities in 2007 was mainly due to the
construction of the new bio diesel manufacturing facility for an aggregate
cost
of approximately $8,773,000.
Net
cash
flow provided by financing activities was $13,048,697 in 2007 as compared
to net
cash provided by financing activities of $881,399 for 2006. The increase
of net
cash flow provided by financing activities in 2007 was mainly due to issuance
of
our preferred stock for $10 million in cash.
Fiscal
year ended December 31, 2006 as compared to fiscal year ended December 31,
2005
Net
cash
flow provided by operating activities was $20,548 in 2006, compared to net
cash
flow used in operating activities of $221,444 in 2005. This increase in net
cash
flow provided by operating activities in 2006 was mainly due to decreases
in
advances to suppliers, increased accounts payable and advances from customers
in
2006 compared with 2005.
Net
cash
flow used in investing activities was $891,284 for 2006, as compared to net
cash
used in investing activities of $19,659 in 2005. The increase of net cash
flow
used in investing activities in 2006 was mainly due to the start of the
construction of the new biodiesel manufacturing facility.
Net
cash
flow provided by financing activities was $881,399 in 2006 as compared to
net
cash used in financing activities of $19,799 in 2005. The increase of net
cash
flow provided by financing activities in fiscal 2006 was mainly from a bank
loan.
26
Off-Balance
Sheet Arrangements
We
have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered
into
any derivative contracts that are indexed to our shares and classified as
stockholders’ equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest
in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest
in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
Contractual
Obligations
Short-term
loan
At
March
31, 2008, we are obligated under a short-term loan from a commercial bank in
the
PRC for the amount of $1,424,704 (RMB10,000,000). This loan was entered into
on
August 31, 2007 and matures on August 30, 2008. The principal will be repaid
at
maturity and the interest is payable per quarter with an interest rate of 8.073%
per annum. The loan is guaranteed by Xi’an City Economic & Technology
Investment Guarantee Co., Ltd. We paid them the guarantee fee of 2% of the
loan
principal, and pledged our diesel equipment as collateral for their
guarantee.
Long-term
liabilities
Our
long-term liabilities reflect loans payable for the acquisition of three
automobiles. One automobile was purchased for the approximate amount of $180,000
in September 2006 with a three-year loan of $100,000 at an interest rate of
6.3%
per annum. At March 31, 2008 and December 31, 2007, the outstanding loan balance
for this car is $63,894 and $70,325, respectively.
The
other
two automobiles were purchased in February 2007 for $43,000 and $29,000,
respectively. The loan amounts for these two automobiles were approximately
$25,500 and $19,800, respectively. Each of these loans has a two-year term
with
an interest rate of 7.56% per annum. At March 31, 2008 and December 31, 2007,
the outstanding loan balances for these two automobiles were $27,967 and
$30,617, respectively. At March 31, 2008 and December 31, 2007, $65,743 and
$67,287 of the total outstanding loan balance has been reclassified to current
portion of the liabilities that are payable within one year,
respectively.
Operating
leases
As
of
March 31, 2008, we have three lease agreements for oil storage facilities.
The
first lease agreement, expiring on June 30, 2008, is a renewable long-term
operating lease agreement. The other two lease agreements expiring on December
31, 2008, are short-term renewable agreements. The aggregate payments remaining
under these three lease agreements equal approximately $125,000.
During
2007, we leased one gas station for operation under a long-term operating lease
agreement expiring on December 31, 2027. Total rent payments paid during the
year ended December 31, 2007 were $20,000. Total rent payments due during 2008
will equal an aggregate of $20,000.
All
of
our lease agreements are non-cancelable.
27
Recently
Issued Accounting Pronouncements
Business
Combinations
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS 141R will change
the accounting treatment for certain specific items, including:
| · |
Acquisition
costs will be generally expensed as
incurred;
|
| · |
Non-controlling
interests (formerly known as “minority interests” - see SFAS 160
discussion below) will be valued at fair value at the acquisition
date;
|
| · |
Acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount
or the
amount determined under existing guidance for non-acquired
contingencies;
|
| · |
In-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition
date;
|
| · |
Restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date;
and
|
| · |
Changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
SFAS
141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date
is
on or after the beginning of the first annual reporting period beginning on
or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we
are a calendar year-end company we will continue to record and disclose business
combinations following existing GAAP until January 1, 2009. We expect SFAS
141R
will have an impact on accounting for business combinations once adopted but
the
effect is dependent upon acquisitions at that time.
Non-controlling
Interests in Consolidated Financial Statements - An Amendment of ARB No.
51
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS 160”).
SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain
or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Like
SFAS 141R discussed above, earlier adoption is prohibited. We have not completed
our evaluation of the potential impact, if any, of the adoption of SFAS 160
on
our consolidated financial position, results of operations and cash
flows.
28
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements required under the accounting pronouncements, but does
not change existing guidance as to whether or not an instrument is carried
at
fair value. Additionally, it establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. SFAS No. 157 is effective
for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial
statements for fiscal year, including financial statements for an interim period
within the fiscal year. The Company is currently evaluating the impact, if
any,
that SFAS No. 157 will have on its financial statements.
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
Amendment of FASB Statements No. 87, 88, 106, and 132R
In
September 2006, the FASB, issued SFAS, No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the
underfunded or overfunded status of a defined benefit postretirement plan as
an
asset or liability in its statement of financial position and to recognize
changes in the funded status in the year in which the changes occur through
accumulated other comprehensive income. Additionally, SFAS No. 158 requires
employers to measure the funded status of a plan as of the date of its year-end
statement of financial position. The new reporting requirements and related
new
footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending
after December 15, 2006. We adopted the provisions of SFAS No. 158 for the
year
end 2006, and the effect of recognizing the funded status in accumulated other
comprehensive income was not significant. The new measurement date requirement
applies for fiscal years ending after December 15, 2008.
Fair
Value Option for Financial Assets and Financial Liabilities
In
February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115.” The statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. The Company is analyzing the
potential accounting treatment.
Considering
the Effects of Prior Year Misstatements in Current Year Financial
Statements
In
September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”), which provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. The Company
adopted SAB 108 in the fourth quarter of 2006 with no impact on its financial
statements.
FASB
161 - Disclosures about Derivative Instruments and Hedging
Activities
In
March
2008, the FASB issued FASB Statement No. 161, which amends and expands the
disclosure requirements of FASB Statement No. 133 with the intent to provide
users of financial statements with an enhanced understanding of; how and why
an
entity uses derivative instruments, how the derivative instruments and the
related hedged items are accounted for and how the related hedged items affect
an entity’s financial position, performance and cash flows. This Statement is
effective for financial statements for fiscal years and interim periods
beginning after November 15, 2008. Management believes this Statement will
have
no impact on the financial statements of the Company once adopted.
29
BUSINESS
Business
Overview
We
are
primarily engaged in two businesses in the People’s Republic of China (“PRC”):
the manufacture and distribution of biodiesel products; and the processing
and
distribution of finished oil products. For the three months ended March 31,
2008, sales of our oil products and biodiesel accounted for approximately 81%
and 19%, respectively, of our total revenues. For the year ended December 31,
2007, sales of our oil products and biodiesel accounted for approximately 94%
and 6%, respectively, of our total revenues.
From
our
inception in 1999 to 2007, we were primarily engaged in the finished oil
products industry. We determined that our established relationships and
distribution channel in such industry could serve as a springboard to
strategically expand our business to include biodiesel products and provide
us
with an integrated opportunity for future sales growth. We achieved sales of
approximately $6,760,000 in the first quarter of 2008 from our new biodiesel
facility, representing 19% of our quarterly sales. We achieved sales of $4.58
million in the last quarter of 2007 from this facility, representing 6% of
our
annual sales in 2007. We currently anticipate, assuming our biodiesel facility
is fully utilized by the end of this year, that biodiesel sales will represent
approximately 30% of our sales for 2008 and approximately 40% of our sales
in
2009.
Corporate
Structure
The
following diagram illustrates our current corporate structure and the place
of
formation and affiliation of each of our subsidiaries and our affiliated entity
as of the date of this prospectus 1
:
1
For risks relating to our current corporate structure, see “Risk
Factors—Risks Associated with Doing Business in China.”
2.
Agreements that provide us with effective control over Baorun Industrial include
irrevocable powers of attorney, equity pledge agreements, purchase options
and
cooperation agreement. See “Our Corporate Structure—Contractual Agreements with
Baorun Industrial.”
3.
The economic benefits and losses of Baorun Industrial accrue to Redsky Group
pursuant to a business cooperation agreement. See “Our Corporate
Structure—Contractual Agreements with Baorun Industrial.”
30
Contractual
Agreements with Baorun Industrial
Baorun
Industrial was founded in 1999 in China and is wholly owned by three Chinese
citizens, including our Chairman, Chief Executive Officer and President, Mr.
Gao
Xincheng, who owns 70% of Baorun Industrial. We do not have an equity interest
in Baorun Industrial. In order to meet domestic ownership requirements under
Chinese law, which restricts foreign companies from operating in the finished
oil industry, Redsky Industrial executed a series of exclusive contractual
agreements with Baorun Industrial, which allow us to, among other things, secure
significant rights to influence Baorun Industrial’s business operations,
policies and management, approve all matters requiring shareholder approval,
and
give us the right to include 100% of the income earned by Baorun Industrial
as
part of our consolidated financial statements. We are able to influence Baorun
Industrial’s business operations, policies and management as a result of the
grant of irrevocable powers of attorney by each of the Baorun Industrial
shareholders to Redsky Industrial. The power of attorney authorizes Redsky
Industrial to act on behalf of each shareholder of Baorun Industrial, as their
exclusive agent and attorney with respect to all matters concerning their
shareholding, including without limitation: (1) attending shareholders’
meetings; (2) exercising all the shareholder’s rights and shareholder’s voting
rights that the shareholders’ are entitled to under the laws of China and Baorun
Industrial’s Articles of Association, including but not limited to the sale or
transfer or pledge or disposition of the shares in part or in whole; and (3)
designating and appointing the legal representative (chairperson), the director,
supervisor, the chief executive officer and other senior management members
of
Baorun Industrial. The Baorun Industrial shareholders are the original founding
shareholders of Baorun Industrial. They have not and do not receive any
compensation for entering into the contractual agreements.
The
Business Cooperation Agreement between Redsky Industrial and Baorun Industrial
entitles Redsky Industrial to receive 100% of the annual net income of Baorun
Industrial as compensation for providing exclusive technical support, business
support and related consulting services relating to Baorun Industrial’s
operations. Baorun Industrial has agreed to pay a monthly service fee to Redsky
Industrial equal to 100% of the net income generated on a monthly basis. The
payment and terms of payment are fixed to ensure that Redsky Industrial obtains
100% of the net income for that month, although adjustments may be made upon
approval by Redsky Industrial to provide for Baorun Industrial’s operational
needs. If at year end, after an audit of the financial statements of Baorun
Industrial, there is determined to be any shortfall in the payment of 100%
of
the annual net income, such shortfall must be paid. In addition, to ensure
that
Baorun Industrial and its shareholders perform their obligations under these
contractual arrangements, the shareholders have pledged to Redsky Industrial
all
of their equity interests in Baorun Industrial. At such time that current
restrictions under PRC law on foreign ownership of Chinese companies engaging
in
the finished oil industry in China are lifted, Redsky Industrial may exercise
its option to purchase the equity interests in Baorun Industrial
directly.
The
contractual agreements entered into by us and the shareholders of Baorun
Industrial incude:
Exclusive
Business Cooperation Agreement
Pursuant
to an Exclusive Business Cooperation Agreement entered into between Redsky
Industrial and Baorun Industrial on October 19, 2007, as amended on March 24,
2008, Redsky Industrial has the exclusive right to provide to Baorun Industrial
complete technical support, business support and related consulting services,
which include, among others, technical services, business consultations,
equipment or property leasing, marketing consultancy and product research.
Baorun Industrial has agreed to pay an annual service fee to Redsky Industrial
equal to 100% of the annual net income of Baorun Industrial. This agreement
has
a ten-year term, subject to renewal at the option of Redsky Industrial and
early
termination in accordance with the terms set forth therein.
Exclusive
Option Agreements
Under
Exclusive Option Agreements dated October 19, 2007 entered into among Redsky
Industrial, each of the three shareholders of Baorun Industrial and Baorun
Industrial, the shareholders of Baorun Industrial, irrevocably granted to Redsky
Industrial or its designated person an exclusive option to purchase, to the
extent permitted by PRC law, a portion or all of their respective equity
interests in Baorun Industrial for a purchase price to be designated by Redsky
Industrial. Redsky Industrial or its designated person has the sole discretion
to decide when to exercise the option, whether in part or in full. Each of
these
agreements has a ten-year term, subject to renewal at Redsky Industrial’s
election.
31
Equity
Pledge Agreements
Under
the
Equity Pledge Agreements dated October 19, 2007, entered into among Redsky
Industrial, Baorun Industrial and each of the three shareholders of Baorun
Industrial, the shareholders of Baorun Industrial pledged their equity interests
in Baorun Industrial to guarantee Baorun Industrial’s performance of its
obligations under the Exclusive Business Cooperation Agreement. If Baorun
Industrial or any of its shareholders breaches his/her respective contractual
obligations under the agreement, or upon the occurrence of an event of default,
Redsky Industrial is entitled to certain rights, including the right to dispose
of the pledged equity interests. The shareholders of Baorun Industrial agreed
not to dispose of the pledged equity interests or take any actions that would
prejudice Redsky Industrial’s interest. Each of the Equity Pledge Agreements
will be valid until all the payments due under the Exclusive Business
Cooperation Agreement have been fulfilled. Since the Exclusive Business
Cooperation Agreement may be renewed at Redsky Industrial’s option, the equity
pledge will remain in effect with each such renewal of the Exclusive Business
Cooperation Agreement, and until all payments due under the Exclusive Business
Cooperation are paid in full by Baorun Industrial.
Incentive
Option Agreements
On
October 19, 2007, Redsky Group, the 88.21% owner of our shares of common stock,
entered into an Incentive Option Agreement with Mr. Gao Xincheng, our Chairman,
Chief Executive Officer and President, whereby Redsky Group granted an incentive
option to Mr. Gao to purchase 3,000 ordinary shares of Redsky Group at an
exercise price of $1.00 per share for a total aggregate consideration of $3,000.
Mr. Gao has been granted the incentive options for the contributions that Mr.
Gao has made and will continue to make to Redsky Group. Upon exercise of all
of
the options by Mr. Gao, Redsky Group has agreed to repurchase the shares of
Redsky Group owned by the current sole stockholder, and Mr. Gao shall become
the
sole stockholder of Redsky Group.
Irrevocable
Powers of Attorney
Under
irrevocable powers of attorney, each of the shareholders of Baorun Industrial
has granted to Redsky Industrial the power to exercise all voting rights of
such
shareholder in shareholders’ meetings, including, but not limited to, the power
to determine the sale or transfer of all or part of such shareholder’s equity
interest in, and appoint and elect the directors, the legal representative
(chairperson), chief executive officer and other senior management of Baorun
Industrial. No payments are required to be made under these irrevocable powers
of attorney.
Company
Background
We
acquired Baorun Group pursuant to a Share Exchange Agreement, dated October
23,
2007, with Baorun Group, Redsky Group Limited (“Redsky Group”), a British Virgin
Islands company, Princeton Capital Group LLP, Castle Bison, Inc. and Stallion
Ventures, LLC. Together, Redsky Group and Princeton Capital Group owned shares
constituting 100% of the issued and outstanding ordinary shares of Baorun Group.
Pursuant to the terms of the Share Exchange Agreement, Redsky Group and
Princeton Capital Group transferred to us all of their shares in Baorun Group
in
exchange for the issuance of 22,454,545 shares of our common stock to Redsky
Group and 1,500,000 shares of our common stock to Princeton Capital Group.
As a
result of this share exchange, Baorun Group became our wholly owned subsidiary
and Redsky Group and Princeton Capital Group acquired an aggregate of
approximately 94.11% of our outstanding common stock (“Share
Exchange”).
As
part
of the Share Exchange, we entered into a purchase agreement with Vision
Opportunity Master Fund, Ltd., or Vision, for the purchase of 1,000,000 shares
of the our Series A Convertible Preferred Stock at a purchase price of $10.00
per share. Vision received 1,000,000 shares of our Series A Convertible
Preferred Stock, which are initially convertible into approximately 4,545,455
shares of common stock, subject to adjustment, and warrants to purchase up
to
5,681,819 shares of our common stock, all of which we must register in another
registration statement pursuant to a registration rights agreement between
us
and Vision. Holders may not convert the Series A Convertible Preferred Stock
and/or exercise the warrants, if on any date, such holder would be deemed the
beneficial owner of more than 4.99% of the then outstanding shares of our common
stock. Pursuant to the terms of the Vision purchase agreement, we agreed to
take
all necessary steps to list our common stock on the NASDAQ or higher stock
exchange as soon as possible. In addition, we agreed to issue 1,000,000 shares
of common stock to Vision in the event our common stock is not so listed by
June
30, 2009.
32
In
connection with the Share Exchange, we entered into a registration rights
agreement to register for resale the shares of our common stock being offered
for resale by the selling stockholders under this prospectus, which comprise
(i)
1,344,174 shares beneficially owned by certain of those persons who were our
officers, directors, promoters, owners of more than 5% of our shares of common
stock, or otherwise our affiliates, prior to the closing of the Share Exchange,
or their transferees and (ii) 1,500,000 shares issued to Princeton Capital
Group
in connection with the Share Exchange.
We
were
incorporated in the State of Delaware in July 1998 under the corporate name
“AMS
Marketing Inc.” and in October 2003, we changed our name to “International
Imaging Systems, Inc.” Until January 2007 we were engaged in the business of
marketing pre-owned, brand name photocopy machines and employee leasing. In
September 2006, three of our major stockholders, in a privately negotiated
transaction, sold 4,500,000 shares of common stock owned by them, representing
56.4% of our issued and outstanding shares, to several accredited investors.
In
connection with this sale, all of our officers and directors resigned and the
purchasers nominated new officers and directors. In January 2007, we pursued
an
acquisition strategy to acquire an undervalued business with a history of
operating revenues in markets that provide room for growth. Pursuant to such
strategy in October 2007, we acquired the business of Baorun Industrial. On
November 15, 2007, through a merger of our newly-formed wholly owned subsidiary,
China Bio Energy Holding Group Co., Ltd., our corporate name was changed to
“China Bio Energy Holding Group Co., Ltd.” We believe that our new name more
appropriately reflects our new business operations.
Industry
and Market Overview
China
Oil Markets
Rapid
economic development in China has resulted in increased energy demand. The
demand for oil in China has exceeded the supply, which has caused China to
become increasingly dependent on imported oil. We believe that the increased
demand for oil and related products has provided a great opportunity for our
oil
products business. The following table depicts the demand for oil and oil supply
in China in 2007, and the projections for 2008 through 2020.
|
2007
|
2008
|
2010
|
2015
|
2020
|
||||||||||||
|
Oil
Demand (1,000 tons)
|
345,977
|
401,420
|
408,300
|
453,850
|
492,220
|
|||||||||||
|
Oil
Supply (1,000 tons)
|
186,657
|
192,000
|
198,000
|
200,000
|
200,000
|
|||||||||||
|
Shortage
(1,000 tons)
|
159,280
|
209,420
|
210,300
|
253,850
|
292,220
|
|||||||||||
|
Importation
(%)
|
46.04
|
52.17
|
51.52
|
55.93
|
59.37
|
|||||||||||
Source:
2007 Report on China Oil Market Analysis and Forecast.
China Biodiesel Markets
The
rise
in global oil prices, global warming and other environmental awareness issues
are increasing the demand in China for fuels derived from renewable resources.
Technological innovations and the desire to reduce reliance on oil have
motivated the production, research and development of the biodiesel industry
in
China. However, China’s biodiesel industry is still underdeveloped, which we
believe provides opportunities for us in this market. The following table
depicts the production and sales of biodiesel in China from 2005 through 2007
and forecasts for 2008 through 2020.
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
2020
|
||||||||||||||||
|
Output
(1,000 tons)
|
80
|
100
|
300
|
600
|
900
|
2,000
|
20,000
|
|||||||||||||||
|
Sales
(1,000 USD)
|
87,053
|
108,813
|
326,440
|
652,880
|
979,307
|
2,176,240
|
21,762,453
|
|||||||||||||||
|
Output
Growth Rate
|
25
|
%
|
200
|
%
|
100
|
%
|
50
|
%
|
122
|
%
|
900
|
%
|
||||||||||
Source
2005-2010 Report on China Biodiesel Industry Prospects and Market
Forecast.
33
The
demand for biodiesel in China is directly related to the consumption rate of
oil. China is now the second largest oil consumer in the world behind the United
States, consuming approximately seven million barrels of oil per day, and
China’s need for petroleum continues to grow rapidly. Today, the Chinese
government is encouraging the introduction of biodiesel fuel into its transport
fuel mix to reduce harmful carbon dioxide emissions, improve air quality, and
lessen dependence on imported fuels.
In
February 2005, China enacted the Renewable Energy Law, which 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 sustainable development of the economy and society. This legislation
states that fuel retail businesses must begin to include “biological liquid
fuel” in their sales or they will suffer imposed fines as China is seeking to
reduce its dependence on fossil fuels in its diesel transportation
vehicles.
Products
Oil
Products
We
sell a
variety of oil products including,
| · |
gasoline
and diesel (representing the majority of oil products output and
consumption in the PRC with automobiles being the leading driver
of
gasoline and diesel consumption in China and diesel being mainly
used in
vehicles and agricultural machines with diesel
engines);
|
| · |
heavy
oil (broadly used as the fuel of ship boilers, heating furnaces,
metallurgical furnaces and other industrial
furnaces);
|
| · |
residual
oil (represents the residue left after crude oil goes through vacuum
distillation); It is usually utilized to manufacture petroleum coke,
residual lubricating oil and asphalt or as a feedstock for cracking,
i.e.,
the process of breaking down residual oil into light oil products
such as
gasoline, or can also be turned into compound gas or hydrogen through
partial oxygenation, or can be used to make ethene through cracking
reaction in a regenerative furnace or can be used as
fuel.);
|
| · |
slurry
(a type of heavy oil, which is the residue left after gasoline and
diesel
are extracted from crude oil); and
|
| · |
naphtha
(a type of light oil, which is a necessary catalyst for manufacturing
ethane and propane through cracking in tube furnaces, and producing
benzene, toluene and xylene by catalytic
reforming).
|
Sales
of
our oil products accounted for approximately 81% of our total revenues for
the
three months ended March 31, 2008 and approximately 94% of our total revenues
for the year ended December 31, 2007.
Biodiesel
Biodiesel
refers to a clean burning alternative fuel produced from domestic, renewable
resources. Biodiesel is a methyl ester (sometimes called “fatty acid methyl
ester”) that is made through a chemical process called transesterification
whereby glycerin is separated from fat or vegetable oil. The vegetable oil
or
fat can be castor oil, rapeseed oil, soybean oil, peanut oil, corn oil or
cottonseed oil, animal oils, waste scraps from the refinery of the above oils
and used cooking oil. Sales of biodiesel accounted for approximately 19% of
our
total revenues for the three months ended March 31, 2008 and
approximately 6% of our total revenues for the year ended December 31,
2007.
Biodiesel
contains no petroleum, but it can be blended at any level with petroleum diesel
to create a biodiesel blend. It can be used in compression-ignition (diesel)
engines with little or no modifications. Biodiesel has many benefits,
including:
|
·
|
Excellent
environmental performance;
|
|
·
|
Superior
ignition;
|
34
|
·
|
Extensive
use;
|
|
·
|
Compatibility
with existing diesel engines;
|
|
·
|
Better
lubrication to extend the life time of
engines;
|
|
·
|
Safety;
|
|
·
|
From
renewable energy sources; and
|
|
·
|
Climate
flexibility.
|
Gas
Station.
We
own
and operate a gas station located in Xi’an, Shaanxi Province where we sell our
oil products to end users.
Manufacturing
of Biodiesel
In
2006,
we built a 10,000 square-meter biodiesel production facility with annual output
capability of 100,000 tons. We commenced production at this facility in October
2007. The table set forth below shows the current and anticipated utilization
rate and output of this facility for the periods shown. There are constraints
on
our ability to reach full capacity of 100,000 tons by the year ended 2008.
As a
result of biodiesel production enterprises being regulated as chemical
production businesses, products must be processed strictly in accordance with
established work procedures. The production of biodiesel is achieved through
the
effective performance of all equipment necessary for production. Initial
production has required adjustments to equipment and a full debugging process.
However, we believe that the estimated utilization rate of 50% by June 2008
and
100% by December 2008, is in line with utilization rates of other chemical
production businesses over the same period.
|
Period
|
Utilization Ratio
|
Output
(in thousand ton)
|
|||||
|
October
2007 to December 2007
|
30
|
%
|
7.5
|
||||
|
January
2008 to June 2008
|
50
|
%
|
25
|
||||
|
July
2008 to December 2008
|
100
|
%
|
50
|
||||
|
2009
|
100
|
%
|
100
|
||||
We
plan
to expand our biodiesel production level by reaching an estimated utilization
rate of 100% at our existing facility by the end of 2008 and construction of
a
new facility during the next two or three years.
Our
Suppliers
Gasoline
and Diesel Oil Products
We
purchase more than 75% of our gasoline and diesel oil products from the
following five suppliers:
| · |
Shaan
Xi Yanchang Oil (Group) Company
|
| · |
Shaan
Xi Oil and Chemical Industrial
Company
|
| · |
China
Oil and Chemical Company North-West
Branch
|
| · |
Shan
Xi Yan an Oil Refinery and Chemical Industrial Co.,
Ltd.
|
| · |
Lanzhou
Pingda Oil and Chemical Industrial
Company
|
35
During
the fiscal quarter ended March 31, 2008 and the fiscal year ended December
31,
2007, based on cost, we purchased approximately 30.37% and 57.99%, respectively,
of our gasoline and diesel oil products from Shaan Xi Yanchang Oil (Group)
Company. We have a long-standing relationship with Shaan Xi Yanchang Oil (Group)
Company, which includes establishing supplying and purchasing stations with
three oil refining factories that are owned by Shaan Xi Yanchang Oil (Group)
Company. In Shaanxi Province, we are the only entity that has established
supplying and purchasing stations with the Shaan Xi Yanchang Oil (Group)
Company. While we depend on Shaan Xi Yanchang Oil Group for the majority of
our
supply needs, we believe that we can find alternative suppliers on comparable
terms within a reasonable amount of time without any significant disruption
in
our operations.
Raw
Materials for Biodiesel Production
We
have
access to diversified biodiesel raw materials. Besides oil plants, we can also
use waste oil and acidized oil as raw material for our biodiesel
production.
We
have
signed raw material purchasing contracts with local associations such as the
Forestry Bureau of Yongshou County, the Forest and Fruits Production Managing
Station of Danfeng County, the Forestry Bureau of Ningqiang County and the
Forestry Bureau of Liuba County, some of which are governmental entities. These
associations organize local farmers to plant oil plants. The associations are
then responsible for collecting the oil plant seeds and delivering them to
our
pre-processing factories. The purchasing contracts obligate the associations
to
first offer to sell the feedstock to us at the lowest rates. If the supply
of
feedstock is greater than our demands, they can then sell any remaining
feedstock to other companies.
Shaanxi
Province is the second largest cultivator of prickly ash, an oil plant, in
China. Together, the local farmers in Shaanxi Province have planted
approximately 2,460,000 acres of prickly ash, 850,000 acres of cornel and
150,000 acres of pistacia chinensis. Even though we could satisfy all of our
current feedstock demands solely with prickly ash, we diversify our feedstock
supply with other oil plants, waste oil and acidified oil because the costs
of
these raw materials are lower than prickly ash. There is also significant
acreage of wild oil plants that grow throughout Shaanxi Province. However,
because the feedstock available from the local associations currently satisfies
our supply demands, we do not rely on any supplies of wild oil plants for our
production needs. Further, at our waste oil disposition center, we have the
ability to recycle approximately 48,000 tons of waste oil annually. In addition
to manufacturing biodiesel from oil plant seeds, the recycling of waste oil
after rough processing permits us to manufacture an additional 43,200 tons
of
biodiesel annually from the waste oil, based on a 90% oil extracting
rate.
According
to the Chamber of Forestry of Shaanxi Province, the government of Shaanxi
Province plans to allow more than 20 million acres of forestlands to be used
as
farmland solely for the planting of oil plants. Approximately half of this
acreage is already currently being used to plant oil crops. It takes
approximately three to five years for such crops to grow to be harvested. We
believe that the abundant supply of feedstock currently available in Shaanxi
Province, along with government plans to convert forestlands to farmlands for
the cultivation of oil plants, is sufficient for our current needs and will
be
sufficient for our expanded demands for raw material once we complete the
expansion of our biodiesel manufacturing facility.
We
have
established cooperation relationships with pre-processing factories, such as
Hancheng City Golden Sun Prickly Ash Oil and Spicery Co.,Ltd. and Tongchuan
City
Hongguang Oil Processing Plant, for rough processing, which is the extraction
of
plant oil from oil plant seeds. We have acquired three oil extracting plants
for
pre-processing of feedstock.
We
have established Xi’an Waste Oil Disposition Center in cooperation
with Xi’an Weiyang District Limin Environmental Chemical Plant and Xi’an
Environment Protection Bureau. We are the 60% owner of this plant, which
can recycle approximately 48,000 tons of waste oil annually. The recycling
of
waste oil after rough processing permits us to manufacture an additional 43,200
tons of biodiesel annually from the waste oil, based on a 90% oil extracting
rate. We own Huangbao Waste Oil Disposition Center near our biodiesel
facility which will become operational in May 2008. The production of recycled
waste oil for use in our biodiesel manufacturing will increase annually due
to
the establishment of these waste oil disposition centers.
36
Research
and Development
As
a
result of long-term technology cooperation agreements with scientific
institutions and universities, we own oil mixing and processing technologies,
two utility model patents and three invention patents. In practice, we propose
the subject matter to be researched and pursuant to these agreements we entrust
our R&D partners to perform the research and analysis and provide advanced
technology services. We have been researching technology that would enable
us to
extract linolenic acid from prickly ash seeds. The next step in this research
is
referred to as deep R&D where the focus is now on extracting a purer form of
linolenic acid from prickly ash seeds. If successful, we believe that this
technology could reduce the costs associated with producing biodiesel by
approximately 50%.
Competition;
Competitive Advantages and Strategies
Oil
Products
We
estimate that we have approximately ten major competitors in Shaanxi Province
in
China that also produce and distribute oil products similar to ours, including
Shaanxi Dongda Petro-Chemical Co., Ltd., Shaanxi Dayun Petrochemical Material
Co., Ltd. and Baoji Huahai Industry Corp. Based on the amount of oil products
we
purchase from Shaanxi Yan Chang Oil (Group) Co., Ltd., one of the largest oil
suppliers in China, we rank third among our competitors and we maintain 30%
of
the market share in Shaanxi Province. We are one of the few licensed oil product
distributors in Shaanxi Province. In April 2004, we were granted a license
to
distribute finished oil products by the Ministry of Commerce of the PRC. We
are
also one of 13 enterprises that were recognized as qualified enterprises
operating in the fuel business in Shaanxi Province by the Shaanxi Province
Government.
We
believe we have the following advantages over our competitors in this
market:
| · |
Oil
distribution license.
Under Chinese Oil Products Market Managing Regulations, the distribution
of biodiesel is listed in the market management of finished oil.
Only
companies who obtain an Oil Distribution License are permitted to
distribute biodiesel. Because Baorun Industrial has an Oil Distribution
License, we could distribute as well as manufacture the biodiesel
we
produce while other biodiesel manufacturers must distribute their
product
through other companies that have obtained Oil Distribution
Licenses.
|
| · |
Decentralized
industry risk.
Our industry orientation is finished oil wholesaling and biodiesel
production and we have expanded into gas station operation. While
we
increase the production of biodiesel, we are also working to expand
the
wholesale and retail distribution of finished oil. Our profit comes
from
oil distribution and biodiesel production. We believe we are less
sensitive than other biodiesel producers to market demands, price
fluctuation and introduction of new biodiesel products due to the
several-pronged nature of our
operations.
|
| · |
Qualification.
We
have obtained a distribution license from the Ministry of Commerce
for the
distribution of heavy oil and finished oil products. The Ministry
of
Commerce has stringent requirements for entities that intend to distribute
oil products and the governing authority conducts strict annual
inspections of oil distributors. Currently, only ten enterprises
in
Shaanxi Province are licensed by the Ministry of Commerce to distribute
finished oil, three of which also have finished oil and heavy oil
distribution licenses.
|
| · |
Supply
advantage.
Shaanxi Yan Chang Oil (Group) Co., Ltd., one of the four largest
qualified
raw oil and gas exploration enterprises in China, is our largest
oil
supplier. We have established a stable long-term relationship with
Shaanxi
Yan Chang Oil (Group) Co., Ltd. and also have established supplying
and
purchasing stations with Yan’an Oil Refining Factory, Yongping Oil
Refining Factory and Yulin Oil Refining Factory, all of which are
oil
refining factories that are owned by Shaanxi Yan Chang Oil (Group)
Co.,
Ltd. In Shaanxi Province, we are the only entity that has established
supplying and purchasing stations with the Shaanxi Yan Chang Oil
(Group)
Co., Ltd.
|
37
| · |
Advanced
oil mixing technology.
By
applying our advanced proprietary oil mixing technology, the quality
of
our oil products has been greatly
enhanced.
|
| · |
Special
railway.
We
have the exclusive right to use three railway lines in Shaanxi Province
to
distribute our oil products. We are the only enterprise in Shaanxi
Province that has the capability to distribute oil products to Yunnan
Province, Guizhou Province and Sichuan Province directly and to other
geographic areas in China.
|
| · |
Strong
storage capability.
Our oil depot storage capability reaches 37,000 cubic meters. Aside
from
the need for strong funding support for newcomers to this industry,
new
entrants must also have significant storage capacity to be able to
compete, which is a great barrier to entry for new
competitors.
|
| · |
Gas
Station.
We
own and operate our own gas station where we are able to sell our
oil
products.
|
Biodiesel
Fuels
In
the
area of biodiesel fuel production, we are not aware of the existence of any
significant competitors in Shaanxi Province. However, we face competition from
competitors in other geographic areas in China and foreign competitors, if
such
foreign competitors choose to export their biodiesel to China.
We
believe that we have the following advantages over our competitors in this
market:
| · |
Lower
cost of supply.
We
have a rich and stable source of feedstock for biodiesel production,
such
as castor bean, Chinese pistache, Chinese prickly ash and Chinese
pine. We
are in partnership with local governments and farmers who have entered
into contracts with us to first offer their feedstock to us at the
lowest
rates.
|
| · |
Advanced
technologies and equipment.
By
employing our own proprietary processing technology and equipment,
our
processing efficiency is greatly enhanced resulting in reduced processing
costs.
|
| · |
Higher
quality.
While China has not yet set forth standards for biodiesel products,
we
employ German and United States standards which are recognized as
high
quality and acceptable in our industry worldwide to develop and produce
our biodiesel products. In addition, we believe that we maintain
high
quality biodiesel as a result of employing our proprietary technologies
and research and development efforts in connection with several
universities and institutions and high quality
feedstock.
|
| · |
Manufacturing
capability.
We
estimate that the demand for biodiesel in China will be 2,000,000
tons by
the end of 2010. Our new biodiesel facility has a full utilization
capability of 100,000 tons. We plan to increase our biodiesel production
capacity through construction of a new facility over the next two
or three
years.
|
| · |
Lower
price.
The cost of feedstock accounts for 75% of the total cost of the biodiesel
production. Due to our contractual relationships for feedstock supply
with
the local government and farmers and because we are one of the leading
biodiesel producers in Shaanxi Province, our supply costs are much
lower
than other competitors. Our reduced supply costs enable us to offer
our
products at a lower price compared to our competitors, which we believe
will put us in a position ahead of our competitors for a larger share
of
the market.
|
| · |
High
profitability.
The biodiesel we produce can be sold to our clients directly and
can also
be mixed with petro diesel upon 5% to 10% ratio to be distributed
to our
clients. The current market price of diesel is 6,500 Yuan and the
biodiesel we produce can be sold at the price of 6,500 Yuan, but
other
biodiesel producers without an Oil Distribution License have to sell
their
biodiesel at the price of 4,500 Yuan to companies with an Oil Distribution
License (such as Petro China, Sinopec and Baorun Industrial ) who
can then
sell the biodiesel to distributors or end users. Therefore, we have
higher
profitability than the other biodiesel manufacturers without Oil
Distribution Licenses.
|
38
| · |
Stable
distribution channels.
With many years operating experience, we have established stable
sales
networks. Biodiesel and petro diesel share the same market. Our
sales
network reaches many provinces, such as Shaanxi, Henan, Hebei,
Shandong,
Shanxi, Hunan, Hubei, Jiangxi, Guizhou, Yunnan, Beijing, Shanghai,
Fujian
and Xinjiang. We can distribute our biodiesel through our existing
distribution channels to reduce the cost.
|
| · |
Strong
industrial relationships.
Since we have been engaged in the oil trade business for many years,
we
have established strong industrial relationships with our customers,
which
we believe provide significant opportunities for our biodiesel
business.
|
| · |
Excellent
research and development capabilities.
We
have kept long-term cooperative relationships with many top Chinese
universities and institutions to engage in the research and development
of
new biodiesel products including Tsinghua University, Xi’an Communication
University, Xi’an Oil University, Northwest University of Forestry and
Agriculture, Northwestern Chemical Research Institution and Luoyang
Chemical Engineering Design
Institute.
|
Growth
Strategy
We
currently have a number of initiatives in place to drive our future
growth.
| · |
Expansion
of biodiesel production.
In
2006, we built our 10,000 square-meter biodiesel production facility
with
annual output capability of 100,000 tons, located in Tongchuan City,
Shaanxi Province, which was put into production in October 2007.
We
anticipate that our new biodiesel facility will be at full utilization
by
the end of 2008. Therefore, we plan to increase our biodiesel production
capacity within the next two to three years either through construction
of
a new facility or through acquisitions of other biodiesel
facilities.
|
| · |
Establishment
of additional feedstock planting bases.
Through agreements with the Bureau of Forestry in Shaanxi Province,
we are
entitled to the feedstock from five planting bases which, on an annual
basis, can provide us with 68,000 tons of raw materials for biodiesel
production. These planting bases are located in Danfeng, Ningqiang,
Liuba,
Tongchuan and Caotan Town, which includes Xi’an Weiyang District Limin
Environmental Chemical Plant which became operational in October
2007.
Over the next 12 months, we plan to add three additional planting
bases
under similar agreements with such Bureau of Forestry to provide
us with
an additional 20,000 tons of raw materials for biodiesel production
on an
annual basis.
|
| · |
Increased
capacity of waste oil recycling.
Besides oil plants, we can also use waste oil as raw materials for
our
biodiesel production. We have established Xi’an Waste Oil Disposition
Center in cooperation with Xi’an Weiyang District Limin Environmental
Chemical Plant and Xi’an Environment Protection Bureau. We are the 60%
owner of this plant, which can recycle approximately 48,000 tons of
waste oil annually. The recycling of waste oil after rough processing
permits us to manufacture an additional 43,000 tons of biodiesel
annually
from the waste oil, based on a 90% oil extracting rate. We are in
the
process of constructing a second waste oil recycling center, Huangbao
Waste Oil Disposition Center which is near our biodiesel facility
and
located in Tongchuan. This second facility will have the capacity
to
collect enough waste oil to produce 21,000 tons of biodiesel on an
annual
basis. We expect the new facility to become operational in May 2008
irm
status.].
The production of recycled waste oil for use in our biodiesel
manufacturing will increase annually due to the establishment of
these
waste oil disposition centers.
|
39
| · |
Acquisition
of oil extracting plants
.
We recently acquired three oil processing plants for “rough
processing,” the process in which plant oil is extracted from oil plant
seeds. These plants are Shaanxi Xunyang Miaoping Oil Extraction Plants,
Shaanxi Jingyang Sanqu Oil Processing Plant and Shaanxi Yulin Fuda
Oil
Processing Plant. In addition, through agreements with each of Hancheng
City Golden Sun Prickly Ash Oil and Spicery Co., Ltd. and Tongchuan
City
Hongguang Oil Processing Plant, we can also use those plants for
our rough
processing. These five oil processing plants enable us to produce
an
aggregate of 68,000 tons of biodiesel on an annual basis from the
extraction of plant oils.
|
| · |
Enhancing
proprietary technology
.
We possess the technology and know-how for oil mixing and processing
technologies. We also have two utility model patents and three invention
patents related to biodiesel. We are committed to continuously improve
our
technology and manufacturing processes to achieve higher quality
and
efficiency.
|
| · |
Importation
of oil products
.
We are in the process of applying for a government license to import
oil
products from overseas. China’s growing economy has fueled the increased
demand for oil products in China. In China, the government has been
implementing guiding prices for oil products. As oil import tariffs
fall
lower and the globalization of oil trade increases, we believe that
China’s oil trading companies will have more opportunities. When
international oil prices are lower than China’s guiding price, those
companies with importing licenses are able to purchase oil from overseas
at relatively lower prices than in China, and are then able to increase
their profits from sales. As China becomes more dependent on imported
oil,
we believe that an import license will bring us more trading
opportunities, expand our customer base and increase our market
share.
|
| · |
Acquisition
of additional gas stations.
In
February 2007 we acquired a gas station located in Xi’an, Shaanxi
Province. We plan to acquire several gas stations in the Shaanxi
Province
over the next three years. Such acquisitions will enable us to increase
the retail distribution for both our finished oil and biodiesel
products.
|
Sales
and Marketing
We
have
developed a stable sales network for our products in a number of provinces
and
municipalities including Shaanxi, Henan, Hebei, Shandong, Shanxi, Hunan, Hubei,
Jiangxi, Guizhou, Yunnan, Beijing, Shanghai, Fujian and Xinjiang. We now employ
16 full-time salespersons. As our business expands, we intend to further expand
our sales network and develop more sales channels.
Intellectual
Property
Our
core
technologies consist of: (i) know-how technologies to improve the quality of
heavy oil and finished oil products and (ii) two utility model technologies
and
three inventions related to the biodiesel production. We do not have patent
protection for our know-how technology.
In
September 2006, we filed the following five patent applications with the State
Intellectual Property Office of the PRC (“SIPO”), all of which are related to
our biodiesel production and all of which were accepted by SIPO:
| · |
Application
No. 200610152506.X for a new composite catalyst for preparing biodiesel.
On November 17, 2006, Baorun Industrial received preliminary invention
patent approval from SIPO for its proprietary biodiesel compound
activator.
|
| · |
Application
No. 200610152507.4 for a new technology for processing biodiesel
with
catalyst or splitting decomposition in liquid or gas
face.
|
| · |
Application
No. 200610152508.9 for a biodiesel processing
technique.
|
| · |
Application
No. 200620137855.X for a new reaction vessel for preparing biodiesel
and
composite diesel.
|
40
| · |
Application
No. 200620137854.5 for new reaction equipment for preparing
biodiesel.
|
We
have
patent protection on each of our patents for a period of five years. The renewal
process only requires us to re-apply for such protection. There is little to
no
risk of revocation of such protection by the SIPO.
In
addition, we own the rights to technologies developed jointly with various
scientific institutions and research centers. We developed technologies for
the
production of biodiesel jointly with the Xi’an Petroleum University and
Northwest University of Forestry and Agriculture. We developed our proprietary
technology for the production of biodiesel jointly with the Beijing Qing Da
Ke
Ma Technology Co., Ltd. and ownership of the resultant technology was
transferred to us by a contract dated September 4, 2006. We own the right to
the
oil mixing technology developed by Xi’an Petroleum University by a contract
dated December 18, 2005.
Customers
Our
primary target customers are oil product trading companies in China (i.e.,
sales
subsidiaries of Sinopec and PetroChina) and terminal users (i.e., gas stations,
electric power companies and shipping companies).
We
currently sell our oil products to regional distributors in China that supply
retail service stations and directly to end users through our retail service
gas
station. Twenty percent of the biodiesel we produced was mixed with petro-diesel
and was sold to oil distributors. Eighty percent of the biodiesel we produced
was sold to the Tongchuan Huaneng Power Plant and Weihe Power Plant. We do
not
believe that our sales are affected by seasonality.
We
have
adopted different means for payment based upon the financial principles and
customs of our respective clients. For example, we have entered into agreements
with PetroChina, Sinopec, Tongchuan Huaneng Power Plant and other state-owned
enterprises whereby we deliver products to agreed upon locations and these
customers agree to pay us after delivery of a certain quantity of product.
However, our customers that own and operate private gas stations, for example,
typically pay 10% to 15% of the total purchase price of the products to be
delivered in advance, and when delivery takes place, they pay the remaining
amounts owed.
As
of the
fiscal quarter ended March 31, 2008,
the
following chart reflects our top five customers ranked by the dollar amount
sold
to each customer :
|
Name
of Customer
|
Sales for the
Period by
Customer
|
% of Sales for
the Period
|
|||||
|
Huaneng
International Power Development Corporation
|
$
|
3,349,600
|
9.42
|
%
|
|||
| Yunnan Ludi Petroleum Co., Ltd. | $ | 2,687,092 | 7.55 |
%
|
|||
|
Guizhou
Nengfa Power Fuel Corporation
|
$ | 2,487,430 | 6.99 |
%
|
|||
| Shaan Xi Wei He Power Plant | $ | 1,413,690 | 3.97 |
%
|
|||
|
Chuan
Yu Branch of China Petroleum & Chemical Sales
Corporation
|
$ | 1,319,789 | 3.71 | % | |||
|
Total
Top Five Customers
|
$
|
11,257,601
|
31.64
|
%
|
|||
|
Total
Company Results (Approximate)
|
$
|
35,560,840
|
100
|
%
|
|||
41
Governmental
Regulation
We
carry
on our business in an industry that is subject to PRC environmental protection
laws and regulations. These laws and regulations require enterprises engaged
in
manufacturing and construction that may cause environmental waste to adopt
effective measures to control and properly dispose of waste gases, waste water,
industrial waste dust and other environmental waste materials. Fines may be
levied against producers who cause pollution. Currently we do not anticipate
any
material capital expenditures for environmental compliance for the rest of
2008,
unless required by the government during the course of its annual
inspections.
In
accordance with the requirement of the environmental protection laws of the
PRC,
we have installed the necessary environmental protection equipment, adopted
advance environmental protection technologies, established responsibility
systems for environmental protection and reported to and registered with the
relevant local environmental protection department. We believe that we have
complied with such relevant environmental laws and have never paid a fee for
excessive discharge pollutants.
Under
PRC
dangerous chemical laws and regulations, all dangerous chemical manufacturing
facilities are required to obtain a Safe Production Permit. We obtained such
permit in April 2007. The permit is valid for a period of three years and is
renewable for additional periods of three years. In order to renew the Safe
Production Permit, the subject facility must not have had any fatal accidents
and must pass periodic inspections by local work safety administration
authorities during the three year period.
In
addition, our business is in an industry that is subject to PRC finished oil
products laws and regulations. These laws and regulations require enterprises
engaged in the wholesaling of finished oil products, including gasoline, diesel
and biodiesel, to obtain a Wholesaling Business License. We have obtained such
license. Pursuant to the Administrative Measures on the Finished Oil Market
promulgated by the Ministry of Commerce of the PRC in 2006, the provincial
level
government authority conducts annual inspections of the enterprises which have
acquired a Finished Oil Wholesale Business License and submits the inspection
results to the Ministry of Commerce. If we pass the annual inspection, the
Wholesaling Business License will continue to be valid and we can continue
to
conduct our current business. The enterprises which fail the annual inspection
have the opportunity to cure such violations in a limited period of time;
otherwise, the approval authority will revoke the Finished Oil Wholesale
Business License. For the annual inspection, the governmental authority reviews
the following items: (i) the execution and performance of the finished oil
supply agreements; (ii) the operation results for the previous year; (iii)
whether the finished oil distributor and the basic facilities comply with the
technical requirements of the Administrative Measures on the Finished Oil
Market; and (iv) finished oil quality, quantity, fire protection, safe
production and environmental protection. However, there are no provisions
regarding renewal set forth in the Administrative Measures.
With
respect to environmental issues that may impact the construction of our
biodiesel factory, we have complied with the necessary procedures to commence
construction. The governmental authorities reviewed the environmental impact
report prepared by a professional institution that we engaged prior to the
commencement of construction. After the construction was finished, we obtained
environmental approvals from the government authorities in January
2008.
We
anticipate that the PRC government will release an official standard for
biodiesel fuels in the near future. We will seek to qualify our products for
the
biodiesel standard when it is released. We believe that our products are well
positioned to qualify due to our early production of biodiesel as well as our
longstanding history of being in operation since 1999, among other
things.
Legal
Proceedings
In
the
normal course of business, we may be subject to claims and litigation. We are
not a party to any material legal proceedings nor are we aware of any
circumstance that may reasonably lead a third party to initiate legal
proceedings against us.
42
Property
The
following table summaries the location of real property we own or
lease.
|
Address
|
Leased/Owned
|
|
|
2-20702,
Dongxin City Garden, Xi’an, Shaanxi, China
|
Owned
|
|
|
Suite
1105, Floor 11, Building One, Dongxin Century Square, Xi’an, Shaanxi
Province, China
|
Owned
|
|
|
Suite
1305, Floor 11, Building One, Da Hua Garden, Xi’an, Shaanxi Province,
China
|
Owned
|
|
|
Suite
1105, Floor 11, Building One, Da Hua Garden, Xi’an, Shaanxi Province,
China
|
Owned
|
|
|
Suite
B-901, Zhong Fu New Village Plaza, Xi’an, Shaanxi Province,
China
|
Owned
|
|
|
Space
within the Northwest Fire-resistant Materials Factory, Tongchuan,
Shaanxi
Province, China
|
Leased
|
|
|
Suite
10719 and 10720, Dongxin Century Square, Xi’an, Shaanxi Province,
China
|
Owned
|
We
entered into a lease agreement with Northwest Fire-resistant Materials Factory
in April 2006 whereby we were granted a use right to a piece of land located
in
Tongchuan City, Shaanxi Province for building our biodiesel production base.
We
pay rent of 150,000 RMB annually which is paid in three installments for each
year during the term of the lease agreement. This agreement has a term of ten
years commencing in July 2007 and ending in June 2016. We believe our facilities
are suitable and adequate for our current needs. We have completed construction
of a biodiesel production facility with an annual output capability of 100,000
tons. We plan to increase our biodiesel production capacity through the
construction of a new facility over the next two or three years.
Employees
We
have
73 employees. We are compliant with local prevailing wage, contractor licensing
and insurance regulations, and have good relations with our
employees.
43
DIRECTORS
AND EXECUTIVE OFFICERS
Set
forth
below is information regarding our current directors and executive
officers.
|
Name
|
Age
|
Position
|
||
|
Gao
Xincheng
|
44
|
Chairman,
Chief Executive Officer and President
|
||
|
Li
Gaihong
|
30
|
Chief
Financial Officer, Treasurer and Director
|
||
|
Chen
Jun
|
35
|
Chief
Operating Officer
|
Gao
Xincheng, Chairman, Chief Executive Officer and President
Mr.
Gao
has served as our Chairman, Chief Executive Officer and President since the
consummation of the share exchange on October 23, 2007
. Mr.
Gao has extensive experience in the research and marketing of oil products.
In
November 1999 Mr. Gao founded Baorun Industrial to manufacture and sell finished
oil products and biodiesel. Mr. Gao has served as Chief Executive Officer of
Baorun Industrial since its inception in 1999 and continues to serve in such
position. Mr. Gao received a B.S. in Mechanical Engineering from Xi’an
University of Technology in 1985 and an E.M.B.A. from Xi’an Jiaotong University
in 2004.
Li
Gaihong, Chief Financial Officer, Treasurer and Director
Ms.
Li
has served as our Chief Financial Officer, Secretary and Treasurer since the
consummation of the share exchange on October 23, 2007, and has served as a
member of our Board of Directors since December 9, 2007. Prior to that time,
Ms.
Li served as Chief Financial Officer of Baorun Industrial since September 2005,
and continues to serve in such position. From August 2000, until Ms. Li joined
Baorun Industrial in September 2005, Ms. Li served as Chief Financial Officer
of
Xi’an Dongfang Oil Group Co., Ltd., which is located in China and is engaged in
the business of oil production. Ms. Li obtained a B.S. in Accounting from Xi’an
Northwest University in 1997, and is currently studying to obtain an E.M.B.A.
degree in Business Administration from Xi’an Jiaotong University.
Chen
Jun, Chief Operating Officer
Mr.
Chen
has served as our Chief Operating Officer since the consummation of the share
exchange on October 23, 2007. Prior to that time, Mr. Chen served as Chief
Operating Officer of Baorun Industrial since February 2005, and continues to
serve in such position. As Chief Operating Officer of Baorun Industrial, Mr.
Chen established the current sales system of the finished oil products and
helped Baorun Industrial transform from the sale of fuel oil to finished oil
products. From February 2000 to February 2005, Mr. Chen served as Manager of
Sinopec Hubei Petroleum Company, which is located in China and is engaged in
the
business of oil distribution. Mr. Chen obtained a B.S. in Petroleum Refining
from Hanjiang Petroleum Administration Institute in 1992.
Corporate
Governance
Director
Independence
We
do not
currently have any independent directors serving on our board of
directors.
Board
Committees
We
are
currently listed on the OTC Bulletin Board and are not required to have an
audit
committee, nominating committee or a compensation committee. Our board of
directors currently performs the functions that would be delegated to the audit
committee.
44
Code
of Ethics
We
adopted a Code of Business Conduct and Ethics on March 28, 2008. The Code of
Ethics is intended to promote honest and ethical conduct, full and accurate
reporting, and compliance with laws as well as other matters. A copy of the
Code
of Ethics is included as Exhibit 14 to our 2007 annual report on Form 10-K
filed
with the SEC. A printed copy of the Code of Ethics may also be obtained free
of
charge by writing to China Bio Energy Holding Group Co., Ltd., Dongxin Century
Square, 7th Floor, Hi-Tech Development District, Xi’an, Shaanxi Province, PRC
710043.
Executive
Compensation
Compensation
Discussion and Analysis
We
strive
to provide our named executive officers with a competitive base salary that
is
in line with their roles and responsibilities when compared to peer companies
of
comparable size in the same or similar locality.
It
is not
uncommon for companies with operations primarily in China operations to have
base salaries and bonuses as the sole and only form of compensation. The base
salary level is established and reviewed based on the level of responsibilities,
the experience and tenure of the individual and the current and potential
contributions of the individual. The base salary is compared to similar
positions within comparable peer companies and with consideration of the
executive’s relative experience in his or her position. Based on an evaluation
of available information with respect to the base salaries of executives of
our
competitors, the base salary and bonus paid to our named executive officers
is
in line with our competitors. Base salaries are reviewed periodically and at
the
time of promotion or other changes in responsibilities.
We
plan
to implement a more comprehensive compensation program appropriate for
executives of a public company, which takes into account other elements of
compensation, including without limitation, short and long term compensation,
cash and non-cash, and other equity-based compensation such as stock options.
We
expect that such compensation programs shall be comparative to our peers in
the
industry and aimed to retain and attract talented individuals.
Summary
Compensation Table
|
Name and Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
All Other
Compensation
($)
|
Total ($)
|
|||||||||||
|
Gao
Xincheng (1)
|
2007
|
8,500
|
1,500
|
-
|
10,000
|
|||||||||||
|
President,
Chief Executive Officer and Director
|
2006
|
7,700
|
1,000
|
-
|
8,700
|
|||||||||||
|
2005
|
7,500
|
800
|
-
|
8,300
|
||||||||||||
|
Li
Gaihong (1)
|
2007
|
4,000
|
1,200
|
-
|
5,200
|
|||||||||||
|
Chief
Financial Officer, Treasurer and Director
|
2006
|
3,000
|
900
|
-
|
3,900
|
|||||||||||
|
2005
|
2,800
|
700
|
-
|
3,500
|
||||||||||||
|
John
Vogel (2)
|
2007
|
-0-
|
-0-
|
-0-
|
||||||||||||
|
Chief
Executive Officer and President
|
2006
|
-0-
|
-0-
|
-
|
-0-
|
|||||||||||
|
2005
|
N/A
|
N/A
|
N/A
|
N/A
|
||||||||||||
|
(1)
|
Reflects
compensation received by our named executive officers in their capacities
as executive officers of Baorun
Industrial.
|
45
|
(2)
|
No
amounts are reported for Mr. Vogel for the fiscal year ended December
31,
2005, as Mr. Vogel was not an executive officer of our company during
that
time. Mr. Vogel resigned as our Chief Executive Officer and President
on
October 23, 2007, in connection with the share
exchange.
|
Since
we
are the only publicly traded oil company in Shaanxi Province, we relied on
information from the HR Department of Shaanxi, HR Service Center for the average
executive compensation levels of private peer companies, including Xi’an Dongda
Petroleum Co., Ltd., Xi’an Dongfang Oil Group Co., Ltd., Shaanxi Baojiang
Petroleum and Chemical Co., Ltd., Xi’an Zhongli Petroleum LLC, Xi’an Northern
Petroleum Co., Ltd. and Shaanxi Dayun Petroleum and Chemical Co.,
Ltd.
During
each of the last three fiscal years, none of our other officers had salary
and
bonus greater than $100,000. Our executive officers will be reimbursed by us
for
any out-of-pocket expenses incurred in connection with activities conducted
on
our behalf. There is no limit on the amount of these out-of-pocket expenses
and
there will be no review of the reasonableness of such expenses by anyone other
than our Board of Directors, which includes persons who may seek reimbursement,
or a court of competent jurisdiction if such reimbursement is
challenged.
Employment
Contracts and Termination of Employment, and
Change-In-Control
Baorun
Industrial entered into an employment agreement with Mr. Gao Xincheng to employ
him as its Chairman effective as of October 23, 2007. The current term of the
agreement expires on October 22, 2010, and may be renewed for an additional
term
expiring on October 22, 2013. Mr. Gao is entitled to a base monthly salary
in an
amount of $800. Baorun Industrial also pays premiums for Mr. Gao for pension,
unemployment, medical insurance and other social insurance coverages in
accordance with relevant PRC laws and regulations. Baorun Industrial has a
right
to adjust the salary and welfare benefits of Mr. Gao appropriately based on
his
capability, experience, attitude, performance, achievement, working-age and
position as well as its salary and position adjustment policies and business
conditions experienced. Either party to the agreement has a right to terminate
the agreement, subject to the terms and conditions therein. In connection with
the agreement, Mr. Gao also executed a confidentiality and non-competition
agreement.
Baorun
Industrial entered into an employment agreement with Ms. Li Gaihong to employ
her as its Chief Financial Officer, effective as of October 23, 2007. The
current term of the agreement expires on October 22, 2010, and may be renewed
for an additional term expiring on October 22, 2013. Ms. Li receives a base
monthly salary in an amount of $500. Baorun Industrial also pays premiums for
Ms. Li for pension, unemployment, medical insurance and other social insurance
coverages in accordance with relevant PRC laws and regulations. Baorun
Industrial has a right to adjust the salary and welfare benefits of Ms. Li
appropriately based on her capability, experience, attitude, performance,
achievement, working-age and position as well as its salary and position
adjustment policies and business conditions experienced. Either party to the
agreement has a right to terminate the agreement, subject to the terms and
conditions therein. In connection with the agreement, Ms. Li also executed
a
confidentiality and non-competition agreement.
Grants
of Plan-Based Awards
None
Outstanding
Equity Awards at Fiscal Year-End
None
Option
Exercise and Stock Vested
None
46
Pension
Benefits
We
do not
sponsor any qualified or non-qualified defined benefit plans.
Nonqualified
Deferred Compensation
We
do not
maintain any non-qualified defined contribution or deferred compensation
plans.
Compensation
of Directors
Our
directors are reimbursed for expenses incurred by them in connection with
attending Board of Directors’ meetings, but they do not receive any other
compensation for serving on the Board of Directors. Our directors may
participate in the Company’s incentive compensation program, but currently to
such incentive compensation arrangements are in place.
Compensation
Committee Interlocks and Insider Participation
We
did
not have a compensation committee during the fiscal year ended December 31,
2007. None of our executive officers prior to the share exchange received
compensation for their services during 2007. Mr. Gao participated in the
deliberations concerning compensation of the executive officers of Baorun
Industrial for the fiscal year ended December 31, 2007.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth as of June 26, 2008 the number of shares of
our
common stock beneficially owned by (i) each person who is known by us to
be the
beneficial owner of more than five percent of the Company’s common stock; (ii)
each director; (iii) each of the named executive officers in the Summary
Compensation Table; and (iv) all directors and executive officers as a
group. As
of June 26, 2008, we had 25,454,545 shares of common stock issued and
outstanding.
Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. Unless otherwise
indicated, the stockholders listed in the table have sole voting and investment
power with respect to the shares indicated. Unless otherwise noted, the
principal address of each of the stockholders, directors and officers listed
below is Dongxin Century Square 7F, Xi’an Hi-tech Development District, Xi’an,
China.
All
share
ownership figures include shares of our common stock issuable upon securities
convertible or exchangeable into shares of our common stock within sixty
(60)
days of June 26, 2008, which are deemed outstanding and beneficially owned
by
such person for purposes of computing his or her percentage ownership,
but not
for purposes of computing the percentage ownership of any other
person.
|
Name and Address of Beneficial Owner
|
Number of Shares of
Common Stock
Beneficially
Owned
|
Percentage of
Outstanding
Shares of
Common Stock
|
|||||
|
Redsky
Group Limited (1)
|
22,454,545
|
88.21
|
%
|
||||
|
Princeton
Capital Group (2)
|
1,500,000
|
5.89
|
%
|
||||
|
Gao
Xincheng
|
—
|
*
|
|||||
|
Li
Gaihong
|
—
|
*
|
|||||
|
Chen
Jun
|
—
|
*
|
|||||
|
All
Directors, Executive Officers and Director Nominees, as a
group
|
—
|
__
|
|||||
47
*
Less
than one percent
|
(1)
|
The
business address of Redsky Group Limited is P.O. Box 957, Offshore
Incorporation Centre, Road Town, Tortola, British Virgin
Islands.
|
|
(2)
|
The
business address of Princeton Capital Group is 6 Market Street,
Suite 920,
Plainsboro, NJ 08536.
|
48
TRANSACTIONS
WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL
PERSONS
Currently
we do not have any independent directors.
In
2005,
Baorun Industrial entered into an agreement with Shaanxi Baohui Industrial
Development Co., Ltd. (“Baohui”), for the purchase of oil and sale of supplies.
Baohui is owned 40% by Ms. Gao Huiling, who owns 20.86% of Baorun
Industrial.
On
occasion, we satisfy the payment of our accounts payable, through the issuance
of notes payable with certain vendors. These notes are issued by our bank.
These
notes are usually of a short-term nature, approximately three to six months
in
length. They do not bear interest and are paid by our bank to the vendors
upon
presentation to the our bank on the date of maturity. Total notes payable
to
related parties as of March 31, 2008, December 31, 2007 and December 31,
2006
were approximately $0, $0 and $1,282,000, respectively.
In
order
to facilitate the issuance of these trade notes, the bank typically requires
us
to maintain 50% of the value of the trade note in a restricted cash account.
In
the event of insufficient funds to repay these notes, our bank can proceed
with
bankruptcy proceedings in the PRC against us. On December 21, 2006 we drew
10,000,000 RMB, or approximately $1,282,000, to Baohui under a six month
trade
note arrangement. We had 5,000,000 RMB, or approximately $641,000, deposited
with the commercial bank classified as restricted cash. This bank trade note
facility was secured by ShanXi Ming Xi Tang Da Information Technological
Limited
Liability Company, an unrelated party, for amounts not covered by the restricted
cash account.
As
of
December 31, 2006, we had receivables due from Baohui amounting to $315,497.
This amount was generated from the business between us and Baohui for the
purchase of oil from our suppliers, which was then resold to us. Total sales
to
Baohui for the year ended December 31, 2006 was $644,005.
As
of
December 31, 2005 we were obligated for various trade notes to Baohui, totaling
8,000,000 RMB, or approximately $991,000. Under these six month trade note
arrangements, we deposited 7,000,000 RMB, or approximately $867,000, with
a
commercial bank classified as restricted cash. These trade notes to Baohui
were
repaid in January 2006.
Review,
Approval or Ratification of Transactions with Related
Parties
The
transactions with related parties described above by Baorun Industrial were
entered into prior to the consummation of the Share Exchange. Baorun Industrial
did not have any policies or procedures in place with respect to the review
and
approval or ratification of the related party transactions that have been
described. As a public company we have implemented policies and procedures
to
review and approve future related party transactions.
We
believe that all transactions with related parties were on terms no less
favorable than could have been obtained from third parties.
Promoters
and Certain Control Persons
On
October 23, 2007, we entered into a Share Exchange Agreement, with Baorun
Group,
Redsky Group Limited, a British Virgin Islands company, Princeton Capital
Group
LLP, a New Jersey limited liability partnership, Castle Bison, Inc. and Stallion
Ventures, LLC. Together, Redsky Group and Princeton Capital Group owned shares
constituting 100% of the issued and outstanding ordinary shares of Baorun
Group.
Pursuant to the terms of the Share Exchange Agreement, Redsky Group and
Princeton Capital Group transferred to us all of their shares in Baorun Group
in
exchange for the issuance of 22,454,545 shares of our common stock to Redsky
Group and 1,500,000 shares of our common stock to Princeton Capital Group.
As a
result of this share exchange, Baorun Group became our wholly owned subsidiary
and Redsky and Princeton Capital Group acquired an aggregate of approximately
94.11% of our outstanding common stock.
49
Our
only
“promoter” (within the meaning of Rule 405 under the Securities Act of 1933, as
amended), or person who took the initiative in the formation of our business
or
in connection with the formation of our business received 10% of our debt
or
equity securities or 10% of the proceeds from the sale of such securities
in
exchange for the contribution of property or services, during the last five
years has been Redsky Group. As disclosed elsewhere, in connection with the
share exchange, Redsky Group, the majority shareholder of Baorun Group, received
22,454,545 shares of our common stock representing approximately 88.12% of
our
issued and outstanding shares. Mr. Gao and Ms. Meiyi Xia serve on the board
of
directors of Redsky Group and Ms. Xia is the sole shareholder of Redsky
Group.
50
MARKET
FOR OUR COMMON STOCK, DIVIDENDS AND
RELATED
STOCKHOLDER INFORMATION
Since
December 2007, our common stock has been quoted on the Over the Counter Bulletin
Board, or OTCBB, under the symbol “CBEH” as a result of the share exchange and
the change in our name. From July 2005 until December 2007, our common stock
was
quoted under the symbol “IIMG”..
The
following table shows by each fiscal quarter the range of high and low bid
quotations reported by the OTCBB in each fiscal quarter from January 1, 2006
through December 31, 2007, and for the first quarter of 2008 and the second
quarter of 2008 through June 26. The OTCBB quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
|
2008
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
5.50
|
$
|
4.00
|
|||
|
Second
Quarter (through June 26)
|
9.00
|
4.10
|
|||||
|
2007
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
9.00
|
$
|
3.90
|
|||
|
Second
Quarter
|
6.00
|
3.00
|
|||||
|
Third
Quarter
|
5.00
|
1.01
|
|||||
|
Fourth
Quarter
|
5.50
|
1.65
|
|||||
|
2006
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
0.30
|
$
|
0.20
|
|||
|
Second
Quarter
|
0.25
|
0.25
|
|||||
|
Third
Quarter
|
0.25
|
0.07
|
|||||
|
Fourth
Quarter
|
0.15
|
0.07
|
|||||
Holders
of Record
As
of June 26, 2008, there were 155 holders of record of our common
stock.
Dividends
We
have
never paid any dividends and we plan to retain earnings, if any, for use
in the
development of our business. Payment of future dividends, if any, will be
at the
discretion of the Board of Directors after taking into account various factors,
including current financial condition, operating results and current and
anticipated cash needs.
51
Equity
Compensation Plan Information
The
following table sets forth aggregate information regarding our equity
compensation plans in effect as of December 31, 2007:
Equity
Compensation Plan Information
|
Plan category
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
|
Weighted-
average
exercise price
of outstanding
options
warrants and
rights (b)
|
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column
(a))
(c)
|
|||||||
|
Equity compensation
plans approved by security holders
|
-0-
|
$
|
0
|
5,840,000
|
||||||
|
Equity
compensation plans not approved by security holders
|
N/A
|
N/A
|
N/A
|
|||||||
|
Total
|
__
|
__
|
5,840,000
|
|||||||
Our
2003
Equity Incentive Program (the “Plan”) provides for the grant of incentive stock
options, nonqualified stock options and restricted stock awards (the “Awards”).
Certain Awards are intended to qualify as “incentive stock options” within the
meaning of the Internal Revenue Code (the “Code”). Other Awards granted under
the Plan are not intended to qualify as incentive stock options under the
Code.
The Plan was approved by our stockholders on August 11, 2003. The shares
of
common stock underlying Awards that can be granted under our Plan were
registered on a Form S-8 with the Securities and Exchange Commission on November
24, 2003.
The
total
number of shares of our common stock that may be issued under the Plan may
not
exceed 6,000,000, of which 1,000,000 will be available for issuance as incentive
stock option grants and 5,000,000 will be available for issuance as nonqualified
stock option grants. The total number of shares may be increased annually
based
upon the total number of common stock outstanding in subsequent years. We
currently have no Awards issued under the Plan.
52
DESCRIPTION
OF CAPITAL STOCK
Common
Stock
We
have
80,000,000 authorized shares of common stock, $0.0001 par value per share,
of
which 25,454,545 shares are issued and outstanding. Each holder of shares
of
common stock is entitled to one vote per share at stockholders’ meetings. Our
Articles of Incorporation do not provide for cumulative voting for the election
of directors. Holders of shares of common stock are entitled to receive,
pro
rata, such dividends as may be declared by the Board of Directors out of
funds
legally available therefor, and are also entitled to share, pro rata, in
any
other distributions to the stockholders. Upon any liquidation, dissolution
or
winding-up, holders of shares of common stock are entitled to share ratably
in
all assets remaining after payment of liabilities. Holders of shares of common
stock do not have any preemptive rights or other rights to subscribe for
additional shares. The outstanding shares of common stock are validly issued,
fully paid and non-assessable.
Preferred
Stock
We
have
1,000,000 authorized shares of preferred stock par value $0.0001 per share,
of
which 1,000,000 shares are designated as Series A Convertible Preferred Stock
(the “Preferred Shares”), and of which 1,000,000 shares are issued and
outstanding.
The
principal terms of the Preferred Shares that may materially limit or qualify
the
rights of our Common Stock are as follows:
Voting
. Except
with respect to specified transactions that may affect the rights, preferences,
privileges or voting power of the Preferred Shares and except as otherwise
required by Delaware law, the Preferred Shares have no voting rights. We
will
not effect such specified transactions, which include authorizing, creating,
issuing or increasing the authorized or issued amount of any class or series
of
stock, ranking pari passu or senior to the Preferred Shares, with respect
to the
distribution of assets on liquidation, dissolution or winding up, without
the
affirmative vote or consent of the original holder of the Preferred Shares
and
the holders of 25% of the Preferred Shares outstanding at the time, the
calculation of which will include the original holder’s percentage of ownership
of the Preferred Shares outstanding at the time, given in person or by proxy,
either in writing or at a meeting, in which the holders of the Preferred
Shares
vote separately as a class. The common stock into which the Preferred Shares
are
convertible will, upon issuance, have all of the same voting rights as other
issued and outstanding common stock and none of the rights of the Preferred
Shares.
Dividends
. The
holders of the Preferred Shares are not entitled to any dividends.
Conversion
. At any
time on or after the issuance date, the holder of any such shares of Preferred
Shares may, at the holder’s option, elect to convert all or any portion of the
shares of the Preferred Shares held by such person into a number of fully
paid
and nonassessable shares of common stock equal to the quotient of (i) the
liquidation preference amount ($10.00) of the shares of Preferred Shares
being
converted divided by (ii) the conversion price, which initially is $2.20
per
share, subject to certain adjustments.
If
within
three business days of our receipt of an executed copy of a conversion notice
the transfer agent fails to issue and deliver to a holder the number of shares
of common stock to which such holder is entitled upon such holder’s conversion
of the Preferred Shares or to issue a new preferred stock certificate
representing the number of Preferred Shares to which such holder is entitled,
we
will pay additional damages to such holder on each business day after such
third
business day that such conversion is not timely effected in an amount equal
0.5%
of the product of (A) the sum of the number of shares of common stock not
issued
to the holder on a timely basis and to which such holder is entitled and,
in the
event we failed to deliver a preferred stock certificate to the holder on
a
timely basis, the number of shares of common stock issuable upon conversion
of
the shares of Preferred Shares represented by such certificate, as of the
last
possible date which we could have issued such certificate to such holder
timely
and (B) the closing bid price of our common stock on the last possible date
which we could have issued such common stock and such certificate, as the
case
may be, to such holder timely. If we fail to pay those additional damages
within
five business days of the date incurred, then such payment will bear interest
at
the rate of 2.0% per month (pro rated for partial months) until such payments
are made.
53
The
conversion price of the Preferred Shares may be adjusted in the event of
(i)
combination, stock split, or reclassification of the common stock; (ii) capital
reorganization; (iii) distribution of dividends; or (iv) the issuance or
sale of
additional shares of common stock or common stock equivalents.
Liquidation
. In the
event of the liquidation, dissolution or winding up of our affairs, whether
voluntary or involuntary, the holders of shares of Preferred Shares then
outstanding are entitled to receive, out of our assets available for
distribution to its stockholders, an amount equal to $10.00 per share or
the
liquidation preference amount, of the Preferred Shares before any payment
are
made or any assets distributed to the holders of the common stock or any
other
junior stock. If our assets are not sufficient to pay in full the liquidation
preference amount payable to the holders of outstanding shares of the Preferred
Shares tock and any series of preferred stock or any other class of stock
ranking pari passu, as to rights on liquidation, dissolution or winding up,
with
the Preferred Shares, then all of said assets will be distributed among the
holders of the Preferred Shares and the other classes of stock ranking pari
passu with the Preferred Shares, if any, ratably in accordance with the
respective amounts that would be payable on such shares if all amounts payable
thereon were paid in full. The liquidation payment with respect to each
outstanding fractional share of Preferred Shares will be equal to a ratably
proportionate amount of the liquidation payment with respect to each outstanding
share of Preferred Shares. All payments pursuant thereto, are to be in cash,
property (valued at its fair market value as determined by an independent
appraiser chosen by the Company and reasonably acceptable to the holders
of a
majority of the Preferred Shares) or a combination thereof; provided
,
however
, that
no cash is to be paid to holders of junior stock unless each holder of the
outstanding shares of Preferred Shares has been paid in cash the full
Liquidation Preference Amount to which such holder is entitled as provided
herein.
Warrants
Pursuant
to the financing we completed on October 23, 2007, we issued a Series A-1
Warrant to purchase 3,409,091 shares of our common stock at an exercise price
of
$3.00 and a Series A-2 Warrant to purchase 2,272,728 shares of our common
stock
at an exercise price of $4.40. Each warrant has a five year term from the
issuance date.
The
Warrants, at the option of the holder, may be exercised by cash payment of
the
exercise price or if the registration statement is not then declared effective
by the SEC by “cashless exercise”. We will not receive any additional proceeds
to the extent that warrants are exercised by cashless exercise.
Commencing
24 months following the closing of the financing, if the per share market
value
of one share of common stock is greater than the warrant price and the
registration statement is not in effect, in lieu of exercising this warrant
by
payment of cash, the warrant holder may exercise the warrant by a cashless
exercise by surrender of the warrant, in which event we will issue to the
holder
a number of shares of our common stock computed using the following
formula:
|
X
=
Y - (A)(Y)
|
||
|
B
|
||
|
Where
|
X
=
|
the
number of shares of common stock to be issued to the warrant
holder.
|
|
Y
=
|
the
number of shares of common stock purchasable upon exercise of all
of the
warrant or, if only a portion of the warrant is being exercised,
the
portion of the warrant being exercised.
|
|
|
A
=
|
the
warrant price.
|
|
|
B
=
|
the
per share market value of one share of common
stock.
|
54
The
exercise price and number of shares of our common stock issuable upon exercise
of the warrants may be adjusted in certain circumstance, including in the
event
of a stock dividend, or our recapitalization, reorganization, merger or
consolidation and the issuance of rights to purchase additional shares of
our
common stock or to receive other securities convertible into additional shares
of common stock.
For
a
period of one year following the original issue date (the “Full Ratchet
Period”), in the event we issue any additional shares of common stock at a price
per share less than the exercise price then in effect or without consideration,
then the exercise price upon each such issuance will be adjusted to a price
equal to the consideration per share paid for such additional shares of common
stock.
No
fractional shares will be issued upon exercise of the warrants. If, upon
exercise of a warrant, a holder would be entitled to receive a fractional
interest in a share, we will pay to the holder cash equal to such fraction
multiplied by the then fair market value of one full share.
Pursuant
to the terms of the warrants, we will not effect the exercise of any warrants,
and no person who is a holder of any warrant has the right to exercise his/her
warrants, to the extent that after giving effect to such exercise, such person
would beneficially own in excess of 4.99% of the then outstanding shares
of our
common stock. However, the holder is entitled to waive this cap upon 61 days
notice to us.
Registration
Rights
Pursuant
to the registration rights agreement we entered into with certain of the
Selling
Stockholders in connection with the Share Exchange, we agreed to file the
registration statement of which this prospectus is a part and use our best
efforts to have the registration statement declared effective by no later
than
April 21, 2008. We are required to keep the registration statement continuously
effective under the Securities Act for an effectiveness period to end on
the
earlier of the date when all of the securities covered by the registration
statement have been sold or the date on which such securities may be sold
without any restriction pursuant to Rule 144. We will pay liquidated damages
of
.75% of the dollar amount of the shares registered in the registration
statement per month, payable in cash, up to a maximum of 7.5%, if the
registration statement is not declared effective by April 21, 2008 or ceases
to
be effective prior to the expiration of the effectiveness period. However,
no
liquidated damages are to be paid with respect to any shares that we are
not
permitted to include in the registration statement due to the SEC’s application
of Rule 415.
In
connection with the issuance of the Preferred Shares and Warrants in the
October
2007 financing, we entered into a registration rights agreement with Vision
Opportunity Master Fund Ltd. in which we agreed to file a registration
statement with the SEC to register the shares of common stock underlying
the
shares of Preferred Stock on the day that is the 45th day following the later
of
(i) 60 days following the sale of all of the shares included in this prospectus
and (ii) six months following the date of this prospectus [effective date
of this Registration Statement], or any subsequent registration statement
with
respect to the selling stockholder shares, or such earlier date as permitted
by
the SEC. We have agreed to use our best efforts to have the Vision registration
statement declared effective within 105 calendar days of filing, or 135
calendar days of filing in the case of a full review by the SEC. We are required
to keep the Vision registration statement continuously effective under the
Securities Act for an effectiveness period to end on the earlier of the date
when all of the securities covered by the Vision registration
statement have been sold or the date on which such securities may be sold
without any restriction pursuant to Rule 144. We will pay liquidated damages
of
1% of the dollar amount of the Preferred Shares sold in the October 2007
financing per month, payable in cash, up to a maximum of 10%, if the Vision
registration statement is not filed or declared effective within the foregoing
time periods or ceases to be effective prior to the expiration of the
effectiveness period. However, no liquidated damages are to be paid with
respect
to any shares of Preferred Stock that we are not permitted to include in
the
Vision registration statement due to the SEC’s application of Rule
415.
TRANSFER
AGENT AND REGISTRAR
The
Transfer Agent and Registrar for shares of our common stock is Corporate
Stock
Transfer, Inc., 3200 Cherry Creek Drive So., #430, Denver, Colorado 80209.
Our
Transfer Agent and Registrar’s telephone number is
303-282-4800.
55
LEGAL
MATTERS
The
validity of the securities offered hereby have been passed upon for us by
Loeb
& Loeb LLP, New York, New York.
EXPERTS
Our
financial statements as of and for the years ended December 31, 2007, 2006
and
2005 included in this prospectus and in the registration statement have been
audited by Sherb & Co., LLP, an independent registered public accounting
firm, as stated in their report appearing herein.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC a registration statement on Form S-1 under the Securities
Act
of 1933 with respect to the common stock offered hereby. This prospectus,
which
constitutes a part of the registration statement, does not contain all of
the
information in the registration statement and the exhibits of the registration
statement. For further information with respect to us and the shares being
offered under this prospectus, we refer you to the registration statement,
including the exhibits and schedules thereto.
You
may
read and copy the registration statement of which this prospectus is a part
at
the SEC’s Public Reference Room, which is located at 100 F Street, N.E.,
Washington, D.C. 20549. You can request copies of the registration statement
by
writing to the SEC and paying a fee for the copying cost. Please call the
SEC at
1-800-SEC-0330 for more information about the operation of the SEC’s Public
Reference Room. In addition, the SEC maintains an Internet web site, which
is
located at www.sec.gov, which contains reports, proxy and information statements
and other information regarding issuers that file electronically with the
SEC.
You may access the registration statement of which this prospectus is a part
at
the SEC’s Internet web site. We are subject to the information reporting
requirements of the Securities Exchange Act of 1934, and we will file reports,
proxy statements and other information with the SEC.
56
CHINA
BIO ENERGY HOLDING GROUP CO., LTD.
AND
ITS SUBSIDIARIES
INDEX
TO AUDITED FINANCIAL STATEMENTS
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Audited
Financial Statements:
|
||
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
F-3
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2007,
2006 and
2005
|
F-4
|
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2007,
2006 and 2005
|
F-5
|
|
|
Consolidated
Statements of Cash Flow for the years ended December 31, 2007,
2006 and
2005
|
F-6
|
|
|
Notes
to Audited Financial Statements
|
F-7
|
|
| Interim Financial Statements (unaudited) | ||
| Consolidated Balance Sheet as of March 31, 2008 and December 31, 2007 | Q-1 | |
| Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 | Q-2 | |
| Consolidated Statements of Cash Flow for the three months ended March 31, 2008 and 2007 | Q-3 | |
| Notes to Interim Financial Statements | Q-4 |
F-1
 |
1900
NW Corporate Blvd., Suite East 210
Boca
Raton, FL 33431
Tel:
561.886.4200
Fax:
561.886.3330
e-mail.
info@sherbcpa.com
Offices
in New York and Florida
|
Certified
Public Accountants
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders
and Directors
China
Bio
Energy Holding Group Co., Ltd.
We
have
audited the accompanying consolidated balance sheets of China Bio Energy
Holding
Group Co., Ltd. and its Subsidiaries as of December 31, 2007 and 2006, and
the
related consolidated statements of operations, stockholders’ equity and cash
flows for the years ended December 31, 2007, 2006 and 2005. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with generally accepted auditing standards
as
established by the Auditing Standards Board (United States) and in accordance
with the auditing standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether the financial statements are free
of
material misstatement. The Company is not required to have, nor were we engaged
to perform, and audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial reporting
as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purposes of expressing an opinion on the effectiveness of
the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Bio Energy Holding Group
Co.,
Ltd. as of December 31, 2007, and 2006, and the results of its operations
and
its cash flows for the years ended December 31, 2007, 2006 and 2005 in
conformity with accounting principles generally accepted in the United
States.
|
/
s / Sherb &Co., LLP
|
|
Certified
Public Accountants
|
Boca
Raton, Florida
March
21,
2008
(except
for note 17 paragraph (g), as to which the date
is June 16, 2008)
F-2
CHINA
BIO ENERGY HOLDING GROUP CO., LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
|
As of December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS
|
|
|
|||||
|
Cash
& cash equivalents
|
1,382,371
|
$
|
631,443
|
||||
|
Restricted
cash
|
200,000
|
641,433
|
|||||
|
Accounts
receivable
|
288,589
|
5,745,362
|
|||||
|
Other
receivables
|
1,548,681
|
159,857
|
|||||
|
Prepaid
expenses
|
2,896,493
|
—
|
|||||
|
Advance
to suppliers
|
16,546,506
|
4,276,233
|
|||||
|
Inventory
|
12,082,962
|
7,303,981
|
|||||
|
Advance
to shareholders
|
—
|
22,054
|
|||||
|
Due
from related party
|
593,696
|
315,497
|
|||||
|
Total
current assets
|
35,539,298
|
19,095,860
|
|||||
|
CONSTRUCTION
IN PROGRESS
|
—
|
515,742
|
|||||
|
PROPERTY
AND EQUIPMENT, net
|
8,166,250
|
704,871
|
|||||
|
TOTAL
ASSETS
|
43,705,548
|
$
|
20,316,473
|
||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable
|
179,617
|
$
|
2,267,116
|
||||
|
Advance
from customers
|
499,908
|
381,809
|
|||||
|
Taxes
payable
|
125,015
|
744,666
|
|||||
|
Other
payables
|
3,165,677
|
282,638
|
|||||
|
Accrued
expenses
|
67,875
|
—
|
|||||
|
Notes
payable - trade / related party
|
—
|
1,282,052
|
|||||
|
Loan
payable
|
1,370,877
|
1,019,231
|
|||||
|
Long
term notes payable - current portion
|
67,287
|
36,670
|
|||||
|
Total
current liabilities
|
5,476,256
|
6,014,182
|
|||||
|
LONG
TERM LIABILITIES
|
33,655
|
61,862
|
|||||
|
Total
liabilities
|
5,509,911
|
6,076,044
|
|||||
|
COMMITMENT
AND CONTINGENCIES
|
|||||||
|
STOCKHOLDERS’
EQUITY
|
|||||||
|
Preferred
stock, $0.001 par value; authorized shares 1,000,000; issued
and
outstanding 1,000,000 shares
|
1,000
|
—
|
|||||
|
Common
stock, $0.0001 par value; authorized shares 80,000,000; issued
and
outstanding 25,454,545 shares and 23,954,545 as of December 31,
2007 and
2006, respectively
|
2,545
|
2,395
|
|||||
|
Paid-in
capital
|
19,611,938
|
2,533,837
|
|||||
|
Statutory
reserve
|
2,051,030
|
1,110,374
|
|||||
|
Accumulated
other comprehensive income
|
2,319,732
|
624,806
|
|||||
|
Retained
earnings
|
14,209,392
|
9,969,017
|
|||||
|
Total
stockholders’ equity
|
38,195,637
|
14,240,429
|
|||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
43,705,548
|
$
|
20,316,473
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
CHINA
BIO ENERGY HOLDING GROUP CO., LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
|
For the Years Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Net
sales
|
$
|
87,104,187
|
$
|
54,427,820
|
$
|
29,217,184
|
||||
|
Cost
of goods sold
|
77,006,690
|
48,666,440
|
24,843,313
|
|||||||
|
Gross
profit
|
10,097,497
|
5,761,380
|
4,373,871
|
|||||||
|
General
and administrative expenses
|
1,686,760
|
356,392
|
216,362
|
|||||||
|
Income
from operations
|
8,410,737
|
5,404,988
|
4,157,509
|
|||||||
|
Non-operating
income(expenses)
|
||||||||||
|
Interest
income(expenses)
|
(142,442
|
)
|
(86,254
|
)
|
(16,422
|
)
|
||||
|
Other
income
|
328,264
|
24,845
|
—
|
|||||||
|
Financial
expenses
|
(16,994
|
)
|
—
|
—
|
||||||
|
Total
non-operating income(expenses)
|
168,828
|
(61,409
|
)
|
(16,422
|
)
|
|||||
|
Net
income
|
8,579,565
|
5,343,579
|
4,141,087
|
|||||||
|
Other
comprehensive item
|
||||||||||
|
Foreign
currency translation
|
1,694,926
|
464,099
|
128,667
|
|||||||
|
Comprehensive
Income
|
$
|
10,274,491
|
$
|
5,807,678
|
$
|
4,269,754
|
||||
|
Net
income
|
8,579,565
|
5,343,579
|
4,141,087
|
|||||||
|
Deemed
dividend to preferred stockholders
|
3,398,534
|
—
|
—
|
|||||||
|
Net
income available to common stockholders
|
$
|
5,181,031
|
$
|
5,343,579
|
$
|
4,141,087
|
||||
|
Basic
and diluted weighted average shares outstanding
|
||||||||||
|
Basic
|
24,238,107
|
23,954,545
|
23,954,545
|
|||||||
|
Diluted
|
25,145,122
|
23,954,545
|
23,954,545
|
|||||||
|
Basic
and diluted net earnings per share
|
||||||||||
|
Basic
|
$
|
0.21
|
$
|
0.22
|
$
|
0.17
|
||||
|
Diluted
|
$
|
0.21
|
$
|
0.22
|
$
|
0.17
|
||||
F-4
CHINA
BIO ENERGY HOLDING GROUP CO., LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
Preferred stock
|
Common stock
|
Additional
paid in
|
Statutory |
Other
comprehensive
|
Retained | |||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
reserves
|
income
|
earning
|
Total
|
||||||||||||||||||||
|
Balance
at December 31, 2004
|
-
|
$
|
-
|
23,954,545
|
$
|
2,395
|
$
|
2,533,837
|
$
|
130,317
|
$
|
32,040
|
$
|
1,464,408
|
$
|
4,162,997
|
||||||||||||
|
Net
income for the year
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
4,141,087
|
4,141,087
|
|||||||||||||||||||
|
Transfer
to statutory reserves
|
-
|
-
|
-
|
-
|
-
|
445,699
|
-
|
(445,699
|
)
|
|||||||||||||||||||
|
Foreign
currency translation gain
|
-
|
-
|
-
|
-
|
-
|
-
|
128,667
|
-
|
128,667
|
|||||||||||||||||||
|
Balance
at December 31, 2005
|
-
|
-
|
23,954,545
|
2,395
|
2,533,837
|
576,016
|
160,707
|
5,159,796
|
8,432,751
|
|||||||||||||||||||
|
Net
income for the year
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5,343,579
|
5,343,579
|
|||||||||||||||||||
|
Transfer
to statutory reserves
|
-
|
-
|
-
|
-
|
-
|
534,358
|
-
|
(534,358
|
)
|
|||||||||||||||||||
|
Foreign
currency translation gain
|
-
|
-
|
-
|
-
|
-
|
-
|
464,099
|
-
|
464,099
|
|||||||||||||||||||
|
Balance
at December 31, 2006
|
-
|
-
|
23,954,545
|
2,395
|
2,533,837
|
1,110,374
|
624,806
|
9,969,017
|
14,240,429
|
|||||||||||||||||||
|
Capital
contribution
|
-
|
-
|
-
|
-
|
3,905,724
|
-
|
-
|
-
|
3,905,724
|
|||||||||||||||||||
|
Recapitalization
on reverse acquisition
|
-
|
-
|
1,500,000
|
150
|
(150
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Shares
issued for cash
|
1,000,000
|
1,000
|
-
|
-
|
13,172,527
|
-
|
-
|
(3,398,534
|
)
|
9,774,993
|
||||||||||||||||||
|
Net
income for the year
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
8,579,565
|
8,579,565
|
|||||||||||||||||||
|
Transfer
to statutory reserves
|
-
|
-
|
-
|
-
|
-
|
940,656
|
-
|
(940,656
|
)
|
|||||||||||||||||||
|
Foreign
currency translation gain
|
-
|
-
|
-
|
-
|
-
|
-
|
1,694,9266
|
-
|
1,694,926
|
|||||||||||||||||||
|
Balance
at December 31, 2007
|
1,000,000
|
$
|
1,000
|
25,454,545
|
$
|
2,545
|
$
|
19,611,938
|
$
|
2,051,030
|
$
|
2,319,732
|
$
|
14,209,392
|
$
|
38,195,637
|
||||||||||||
F-5
CHINA
BIO ENERGY HOLDING GROUP CO., LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
For The Years Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||
|
Net
income
|
$
|
8,579,565
|
$
|
5,343,579
|
$
|
4,141,087
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
|
228,833
|
104,443
|
65,861
|
|||||||
|
Bad
debt expenses
|
—
|
28,930
|
—
|
|||||||
|
(Increase)
decrease in current assets:
|
||||||||||
|
Accounts
receivable
|
5,644,946
|
(3,607,785
|
)
|
734,378
|
||||||
|
Other
receivable and prepaid expenses
|
(4,099,356
|
)
|
(143,252
|
)
|
299,071
|
|||||
|
Advance
to suppliers
|
(11,484,067
|
)
|
(1,826,306
|
)
|
(4,129,702
|
)
|
||||
|
Inventory
|
(4,098,099
|
)
|
(1,791,200
|
)
|
(460,985
|
)
|
||||
|
Due
from related party
|
(245,852
|
)
|
(37,756
|
)
|
(528,426
|
)
|
||||
|
Increase
(decrease) in current liabilities:
|
||||||||||
|
Accounts
payable
|
(1,889,778
|
)
|
1,226,872
|
1,040,244
|
||||||
|
Advance
from customers
|
87,896
|
(83,033
|
)
|
(1,456,698
|
)
|
|||||
|
Taxes
payable
|
(643,780
|
)
|
752,253
|
(56,980
|
)
|
|||||
|
Other
payables and accrued expenses
|
2,811,389
|
53,803
|
130,706
|
|||||||
|
Net
cash provided by (used in) operating activities
|
(5,108,303
|
)
|
20,548
|
(221,444
|
)
|
|||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||
|
Restricted
cash for investing activity
|
(200,000
|
)
|
—
|
—
|
||||||
|
Sale
of investment
|
—
|
37,175
|
—
|
|||||||
|
Acquisition
of property & equipment
|
(6,809,173
|
)
|
(412,717
|
)
|
(19,659
|
)
|
||||
|
Construction
in progress
|
—
|
(515,742
|
)
|
—
|
||||||
|
Net
cash used in investing activities
|
(7,009,173
|
)
|
(891,284
|
)
|
(19,659
|
)
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||
|
Repayment
from / (Advance to) shareholder
|
22,617
|
(738
|
)
|
(12,790
|
)
|
|||||
|
Repayment
of short term loan
|
(1,577,744
|
)
|
—
|
—
|
||||||
|
Proceeds
from short term loan
|
269,531
|
1,019,231
|
—
|
|||||||
|
Repayment
from long term notes payable
|
(4,235
|
)
|
—
|
(21,800
|
)
|
|||||
|
Proceeds
from long term notes payable
|
—
|
89,697
|
—
|
|||||||
|
Issuance
of preferred stock
|
9,774,993
|
—
|
—
|
|||||||
|
Capital
contribution
|
3,905,724
|
—
|
—
|
|||||||
|
Notes
payable – trade
|
—
|
(743,494
|
)
|
743,494
|
||||||
|
Notes
payable – related party
|
—
|
290,726
|
(713,912
|
)
|
||||||
|
Restricted
cash
|
657,811
|
225,977
|
(14,791
|
)
|
||||||
|
Net
cash provided by (used in) financing activities
|
13,048,697
|
881,399
|
(19,799
|
)
|
||||||
|
NET
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
|
931,221
|
10,663
|
(260,902
|
)
|
||||||
|
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
|
(180,293
|
)
|
464,099
|
128,033
|
||||||
|
CASH
& CASH EQUIVALENTS, BEGINNING OF YEAR
|
631,443
|
156,681
|
289,550
|
|||||||
|
CASH
& CASH EQUIVALENTS, END OF YEAR
|
$
|
1,382,371
|
$
|
631,443
|
$
|
156,681
|
||||
|
Supplemental
Cash flow data:
|
||||||||||
|
Income
tax paid
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Interest
paid
|
$
|
137,463
|
$
|
108,423
|
$
|
40,016
|
||||
F-6
CHINA
BIO ENERGY HOLDING GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
China
Bio
Energy Holding Group Co., Ltd. (the “Company” or “CBEH”) was originally
incorporated in the State of Delaware in July 1998 under the corporate name
“AMS
Marketing Inc.” and in October 2003, the Company changed its name to
“International Imaging Systems, Inc.” On November 15, 2007, through a merger of
its newly-formed wholly owned subsidiary, China Bio Energy Holding Group
Co.,
Ltd. (Merger Sub), the Company’s name was changed to “China Bio Energy Holding
Group Co., Ltd.” The separate existence of Merger Sub then ceased after the
merger. The Company is currently engaged in the development, exploration,
production and distribution of bio-diesel and wholesale and processing of
heavy
oil and finished oil products through its indirect wholly owned operating
subsidiary in China.
On
October 23, 2007, the Company entered into a Share Exchange Agreement, with
Baorun China Group Limited (“Baorun Group”), a company organized in September
2007 under the laws of Hong Kong, and its shareholders Redsky Group Limited
(“Redsky Group”), a British Virgin Islands company, and Princeton Capital Group
LLP, a New Jersey limited liability partnership, Castle Bison, Inc. and Stallion
Ventures, LLC. Redsky Group and Princeton Capital Group owned shares
constituting 100% of the issued and outstanding ordinary shares of Baorun
Group.
Pursuant to the terms of the Share Exchange Agreement, Redsky Group and
Princeton Capital Group transferred all of their shares in Baorun Group in
exchange for the issuance of 22,454,545 shares of the Company’s common stock to
Redsky Group and 1,500,000 shares of the Company’s common stock to Princeton
Capital Group. As a result of this share exchange, Baorun Group became
wholly-owned subsidiary of the Company, and Redsky Group and Princeton Capital
Group acquired an aggregate of approximately 94.11% of the Company’s outstanding
common stock.
Redsky
Industrial (Xi’an) Co., Ltd. (“Redsky Industrial”), a wholly foreign owned
entity (“WFOE”) and a subsidiary of Baorun Group in the People’s Republic of
China (the “PRC”), executed a series of exclusive contractual agreements
(“Redsky Contracts”) with Xi’an Baorun Industrial Development Co., Ltd. (“Baorun
Industrial”). These contractual agreements allow Redsky Industrial to, among
other things, exercise significant rights to influence Baorun Industrial’s
business operations, policies and management, approve all matters requiring
shareholder approval, and the right to include 100% of the net income earned
by
Baorun Industrial as part of our Consolidated Financial Statements. In addition,
to ensure that Baorun Industrial and its shareholders perform their obligations
under these contractual arrangements, Baorun Industrial’s shareholders have
pledged to Redsky Industrial all of their equity interests in Baorun Industrial.
At such time that current restrictions under PRC law on foreign ownership
of
Chinese companies engaging in the finished oil industry in China are lifted,
Redsky Industrial may exercise its option to purchase the equity interests
in
Baorun Industrial directly.
Baorun
Industrial was registered as a privately owned company on November 11, 1999
in
the PRC. Its business operations consist of processing and distributing heavy
oil and finished oil. It also engages in the research and development,
manufacturing and distribution of bio-diesel. Baorun Industrial distributes
its
oil products to clients primarily located in the Shaanxi, Henan, Hunan, Sichuan,
Hubei, Guizhou, and Xinjiang provinces of the PRC.
As
Baorun
Group owns Redsky Industrial, which will effectively control Baorun Industrial,
Baorun Industrial is deemed a subsidiary of Baorun Group, a legal subsidiary
of
the Company. Based on Baorun Industrial’s contractual relationship with Redsky
Industrial, the Company has determined that a variable interest entity has
been
created in accordance with FASB Interpretations - FIN 46(R): Consolidation
of
Variable Interest Entities (as amended) (“FIN 46(R)”). Under FIN 46(R),
subsequent to the Redsky Contract and the Exchange Agreement, Baorun Industrial
is to be presented as a consolidated subsidiary of the Company.
Prior
to
the acquisition of Baorun Group, the Company was a non-operating public shell
corporation. Pursuant to Securities and Exchange Commission rules, the merger
or
acquisition of a private operating company into a non-operating public shell
corporation with nominal net assets is considered a capital transaction in
substance, rather than a business combination. Accordingly, for accounting
purposes, the transaction has been treated as a reverse acquisition and a
recapitalization, and pro-forma information is not presented. Transaction
costs
incurred in the reverse acquisition have been charged to
expense.
F-7
The
Company believes that current PRC corporate rules and regulations do not
preclude Redsky Industrial, and thereby the Company, from exercising effective
control of Baorun Industrial, the operating entity of the Company. Pursuant
to
the terms of the Business Cooperation Agreement, as amended (“Cooperation
Agreement”) entered into between Redsky Industrial and Baorun Industrial, Baorun
Industrial shall granted to Redsky Industrial the right to claim 100% of
the net
income, or loss, of Baorun Industrial in consideration for the services provided
by Redsky Industrial,. In addition, Baorun Industrial granted to Redsky
Industrial the right to any residual returns and dividends from Baorun
Industrial.
The
assets and liabilities of Baorun Industrial are accounted for at their
historical rate, similar to the manner in which Baorun Group was treated
by the
Company in the Share Exchange. Baorun Industrial is not a self-supporting
entity
and requires the support of Redsky Industrial and their related entities.
Redsky
Industrial and its related entities were required to finance Baorun Industrial
through the issuance of shares of preferred stock by the Company, Redsky
Industrial’s ultimate parent. The financing of the Company (Note 16), concurrent
with the Share Exchange Agreement, was entered into to enable Baorun Industrial
to pursue bio-energy production projects, and to expand existing conventional
oil/energy projects. Bio-energy production and the marketing of their products
is an industry with limited operating history, and might require additional
financing above what Redsky Industrial, the Company and its related entities
have currently advanced to Baorun Industrial.
Under
the
Cooperation Agreement, Baorun Industrial cannot assign its rights under such
agreement to another third party without Redsky Industrial’s consent. Under the
agreement, Redsky Industrial must notify Baorun Industrial of its intent
to
assign the agreement to a third party but does not need the consent of Boarun
Industrial for such assignment. Under the Cooperation Agreement Redsky
Industrial is to absorb 100% of the net income, or loss, of Baorun Industrial.
In addition, Baorun Industrial granted to Redsky Industrial the right to
any
residual returns and dividends from Baorun Industrial. Accordingly, as Redsky
Industrial is a wholly owned subsidiary of Baorun Group, which is ultimately
a
subsidiary of the Company, 100% of Baorun Industrial will be consolidated
into
Redsky Industrial and ultimately the Company. The right to absorb these
benefits, and expenses, are in place for the entire life of the Cooperation
Agreement, or until such time that the Cooperation Agreement is voided or
cancelled.
Under
the
series of agreements between Redsky Industrial and the shareholders of Baorun
Industrial, prior to the sale of an equity interest of Baorun Industrial
to
Redsky Industrial, the shareholder of Baorun Industrial selling his or her
proportional equity interest must inform the other remaining shareholders
of
Baorun Industrial of such a transaction.
Pursuant
to the terms of the Exclusive Option Agreements among Redsky Industrial,
Baorun
Industrial and all three shareholders of Baorun Industrial, the purchase
price
for the equity interest of Baorun Industrial was not established. The purchase
price is to be designated by Redsky Industrial to the extent allowed by relevant
laws and regulations of the PRC.
F-8
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principle
of consolidation
The
accompanying consolidated financial statements include our accounts and the
accounts of our wholly owned subsidiary, Baorun Group and Redsky Industrial,
and
its consolidated subsidiary, Baorun Industrial (collectively, the “Company”).
All significant inter-company accounts and transactions have been eliminated
in
consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during
the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories. Actual
results could differ from those estimates.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, we consider all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
As
of December 31, 2007 and 2006, we maintained restricted cash of $200,000
in an escrow account for the use of the Company’s investor relations only, and
$641,433 in a bank account that is collateral for certain bank loans,
respectively. These amounts are presented as restricted cash on the accompanying
consolidated balance sheets.
Accounts
Receivable
Our
policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns
to
evaluate the adequacy of these reserves. Based on historical collection
activity, no allowance was deemed necessary at December 31, 2007. The bad debt
allowance at December 31, 2006 was $28,930.
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods comprises
direct material, direct production cost and an allocated portion of production
overheads.
Advances
from Customers
Advances
from customers consist of prepayments to the Company for products that have not
yet been shipped to the customers. Any amounts received prior to satisfying
the
Company’s revenue recognition criteria are recorded as deferred revenue or
advances from customers. The Company will recognize prepayments from customers
as revenue at the time the delivery of goods is made.
F-9
Property
and Equipment
Plants
and equipment are stated at the actual cost on acquisition less accumulated
depreciation and amortization. Depreciation and amortization are provided for
in
amounts sufficient to relate the cost of depreciation assets to operations
over
their estimated service lives, principally on a straight-line basis. Most
property, plant and equipment have a residual value of 5% of actual cost. The
estimated lives used in determining depreciation are:
|
Building
|
20
years
|
|
Vehicle
|
5
years
|
|
Office
Equipment
|
5
years
|
|
Production
Equipment
|
5
years
|
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company
examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may
not
be recoverable.
Construction
in Progress
Construction
in progress is recorded at its purchase price.Construction in progress refers
to
the biodiesel production facility that the Company was constructing as of
December 31, 2006. The construction in progress has been completed during the
year ended December 31, 2007 and has been transferred into the plant and
equipment.
Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets,
are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge
is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily determinable.
Based on its review, the Company believes that, as of December 31, 2007 and
2006, there were no significant impairments of its long-lived
assets.
Income
Taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been included in the financial statements
or
tax returns. Under this method, deferred income taxes are recognized for the
tax
consequences in future years of differences between the tax bases of assets
and
liabilities and their financial reporting amounts at each period end based
on
enacted tax laws and statutory tax rates applicable to the periods in which
the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
According
to the related regulation of Chinese tax authority, since Baorun Industrial
uses
the waste gas, water and residue to produce products, the Company is eligible
for the exemption of income taxes for six years from year 2004 to year 2010.
Net
income for the years ended December 31, 2007, 2006 and 2005 would have been
reduced by $3,100,000, $1,760,000 and $1,370,000, respectively, if Baorun
Industrial was not exempt from income taxes.
Baorun
Group and Redsky Industrial had net operating losses of approximately $769,000
and $44,000, respectively, at December 31, 2007. A 100% valuation allowance
has
been established due to the uncertainty of its realization.
F-10
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. As a result of the
implementation of FIN 48, the Company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards established
by FIN 48. As a result of the implementation of Interpretation 48, the Company
recognized no material adjustments to liabilities or stockholders’ equity. When
tax returns are filed, it is likely that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to
uncertainty about the merits of the position taken or the amount of the position
that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position
will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than
50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken
that
exceeds the amount measured as described above is reflected as a liability
for
unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination.
Interest
associated with unrecognized tax benefits are classified as interest expense
and
penalties are classified in selling, general and administrative expenses in
the
statements of income. The adoption of FIN 48 did not have a material impact
on
the Company’s financial statements.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Securities and
Exchange Commission (SEC) Staff Accounting Bulletin 104. Sales revenue is
recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are met are recorded as unearned revenue.
Sales
revenue represents the invoiced value of goods, net of value-added tax (“VAT”).
All of the Company’s products that are sold in the PRC are subject to Chinese
VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by
the
Company on raw materials and other materials included in the cost of producing
their finished product. The Company recorded VAT payable and VAT receivable
net
of payments in the financial statements. The VAT tax return is filed offsetting
the payables against the receivables.
Sales
returns and allowances was $0 for each of 2007, 2006 and 2005. The Company
does
not provide unconditional right of return, price protection or any other
concessions to its customers.
Cost
of Goods Sold
Cost
of
goods sold consists primarily of material costs, direct labor, manufacturing
overhead and related expenses, which are directly attributable to the production
of products. Write-down of inventory to lower of cost or market is also
recorded in cost of goods sold.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable and other receivables. The Company does not
require collateral or other security to support these receivables. The Company
conducts periodic reviews of its clients’ financial condition and customer
payment practices to minimize collection risk on accounts
receivable.
F-11
The
operations of the Company are located 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, as well as by the general
state of the PRC economy.
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement
of
cash flows may not necessarily agree with changes in the corresponding balances
on the balance sheet.
Cash
flows from investing activity exclude transfer from construction in progress
of
$528,910 to property and equipment for 2007.
Fair
Value of Financial Instruments
SFAS
No.
107, “Disclosures about Fair Value of Financial Instruments,” requires that the
Company disclose estimated fair values of financial instruments. The carrying
amounts reported in the statements of financial position for current assets
and
current liabilities qualifying as financial instruments are a reasonable
estimate of fair value.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States dollars (“USD”) as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at
the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders’ equity as “Accumulated other
comprehensive income”. Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
This
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People’s Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People’s Bank of
China.
On
July
21, 2005, the central government of China allowed the RMB to fluctuate, ending
its decade old valuation peg to the U.S. dollar. Historically, the Chinese
government has benchmarked the RMB exchange ratio against the U.S. dollar,
thereby mitigating the associated foreign currency exchange rate fluctuation
risk. The Company does not believe that its foreign currency exchange rate
fluctuation risk is significant, especially if the Chinese government continues
to benchmark the RMB against the U.S. dollar.
The
Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
“Reporting Comprehensive Income.” Comprehensive income is comprised of net
income and all changes to the statements of stockholders’ equity, except those
due to investments by stockholders, changes in paid-in capital and distributions
to stockholders. Comprehensive income for the year ended December 31, 2007,
2006
and 2005 included net income and foreign currency translation
adjustments.
Basic
and diluted earning per share (EPS)
Basic
EPS
is computed by dividing income available to common stockholders by the weighted
average number of shares of common stock outstanding for the period. Diluted
EPS
is computed similar to basic net income per share except that the denominator
is
increased to include the number of additional shares of common stock that would
have been outstanding if the potential shares of common stock had been issued
and if the additional shares of common stock were dilutive. Diluted net earning
per share is based on the assumption that all dilutive convertible shares and
stock options were converted or exercised. Dilution is computed by applying
the
treasury stock method. Under this method, options and warrants are assumed
to be
exercised at the beginning of the period (or at the time of issuance, if later),
and as if funds obtained thereby were used to purchase shares of common stock
at
the average market price during the period. The following table presents
a reconciliation of basic and diluted earning per share:
F-12
|
December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Net
income available to common stockholders
|
$
|
5,181,031
|
$
|
5,343,579
|
$
|
4,141,087
|
||||
|
Weighted
average shares outstanding – basic
|
24,238,107
|
23,954,545
|
23,954,545
|
|||||||
|
Effect
of dilutive securities:
|
||||||||||
|
Convertible
preferred stock
|
859,278
|
—
|
—
|
|||||||
|
Unexercised
warrants
|
47,737
|
—
|
—
|
|||||||
|
Weighted
average shares outstanding- diluted
|
25,145,122
|
23,954,545
|
23,954,545
|
|||||||
|
Earnings
per share – basic
|
$
|
0.21
|
$
|
0.22
|
$
|
0.17
|
||||
|
Earnings
per share – diluted
|
$
|
0.21
|
$
|
0.22
|
$
|
0.17
|
||||
Segment
Reporting
SFAS
No.
131, “Disclosures about Segments of an Enterprise and Related Information”
requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company.
SFAS
131
has no effect on the Company’s financial statements as substantially all of the
Company’s operations are conducted in one industry segment, that of processing
and distributing finished oil. All of the Company’s assets are located in the
PRC. All of the Company’s sales are in the PRC and are involved in the
processing and distribution of finished oil. In the last quarter of the year
ended December 31, 2007, the Company had sales of approximately $4,580,000
from
its biodiesel facility.
New
Accounting Pronouncements
Business
Combinations
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS 141R will change
the accounting treatment for certain specific items, including:
|
·
|
Acquisition
costs will be generally expensed as
incurred;
|
|
·
|
Noncontrolling
interests (formerly known as “minority interests” - see SFAS 160
discussion below) will be valued at fair value at the acquisition
date;
|
|
·
|
Acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount
or the
amount determined under existing guidance for non-acquired
contingencies;
|
|
·
|
In-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition
date;
|
|
·
|
Restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date;
and
|
|
·
|
Changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
F-13
SFAS
141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date
is
on or after the beginning of the first annual reporting period beginning on
or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. We
expect SFAS 141R will have an impact on accounting for business combinations
once adopted but the effect is dependent upon acquisitions at that
time.
Noncontrolling
Interests in Consolidated Financial Statements - An Amendment of ARB No.
51
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain
or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Like SFAS 141R discussed above, earlier adoption is prohibited. We have not
completed our evaluation of the potential impact, if any, of the adoption of
SFAS 160 on our consolidated financial position, results of operations and
cash
flows.
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, “
Fair
Value Measurements,” which establishes a framework for measuring fair value, and
expands disclosures about fair value measurements required under the accounting
pronouncements, but does not change existing guidance as to whether or not
an
instrument is carried at fair value. Additionally, it establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity
has
not yet issued financial statements for fiscal year, including financial
statements for an interim period within the fiscal year. The Company is
currently evaluating the impact, if any, that SFAS No. 157 will have on its
financial statements.
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
Amendment of FASB Statements No. 87, 88, 106, and 132R
In
September 2006, the FASB, issued SFAS, No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the
underfunded or overfunded status of a defined benefit postretirement plan as
an
asset or liability in its statement of financial position and to recognize
changes in the funded status in the year in which the changes occur through
accumulated other comprehensive income. Additionally, SFAS No. 158 requires
employers to measure the funded status of a plan as of the date of its year-end
statement of financial position. The new reporting requirements and related
new
footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending
after December 15, 2006. We adopted the provisions of SFAS No. 158 for the
year
end 2006, and the effect of recognizing the funded status in accumulated other
comprehensive income was not significant. The new measurement date requirement
applies for fiscal years ending after December 15, 2008.
Fair
Value Option for Financial Assets and Financial Liabilities
In
February of 2007 the FASB issued SFAS 159, “ The Fair Value Option for Financial
Assets and Financial Liabilities —Including an amendment of FASB Statement No.
115.” The statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. The Company is analyzing the
potential accounting treatment.
F-14
Considering
the Effects of Prior Year Misstatements in Current Year Financial
Statements
In
September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”), which provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. The Company
adopted SAB 108 in the fourth quarter of 2006 with no impact on its financial
statements.
3.
CASH BANK ACCOUNT
Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the PRC. Total cash in state-owned banks at December
31, 2007 and 2006 amounted to $1,377,141 and $1,272,876, respectively, of which
no deposits are covered by insurance. 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.
4.
INVENTORY
Inventories
consisted of the following:
|
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Petroleum
|
$
|
2,909,158
|
$
|
716,477
|
|||
|
Diesel
|
6,079,751
|
1,298,776
|
|||||
|
Heavy
Oil
|
1,620,487
|
5,288,728
|
|||||
|
Other
Oil
|
1,473,566
|
—
|
|||||
|
Total
|
$
|
12,082,962
|
$
|
7,303,981
|
|||
5.
OTHER RECEIVABLES
Other
receivables represent deposits for diesel oil equipment and acquisition
of three oil mill factories. As of December 31, 2007 and 2006, other
receivables were $1,548,680 and $159,857, respectively.
F-15
6.
PLANT AND EQUIPMENT
Plant
and
Equipment are summarized as follows:
|
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Building
|
$
|
314,459
|
$
|
294,084
|
|||
|
Diesel
Equipment
|
7,500,890
|
—
|
|||||
|
Office
Equipment
|
98,788
|
72,818
|
|||||
|
Other
Equipment
|
25,086
|
21,926
|
|||||
|
Motor
Vehicles
|
746,759
|
578,963
|
|||||
|
8,685,982
|
967,791
|
||||||
|
Less:
Accumulated Depreciation
|
519,732
|
262,920
|
|||||
|
Total
|
$
|
8,166,250
|
$
|
704,871
|
|||
Depreciation
expense for the periods ended December 31, 2007, 2006 and 2005 amounted to
$228,833, $104,443 and $65,861, respectively.
7.
DUE FROM RELATED PARTY
“Due
from
related party” represents the advance to and prepayment for the purchase from a
related company that is 40% owned by one of the shareholders of Baorun
Industrial. As of December 31, 2007 and 2006, $593,696 and $315,497,
respectively, was due from this related party. Purchases from this related
party
during 2007, 2006 and 2005 were approximately $0, $644,000 and $969,000,
respectively. During 2007, “due from related party” was mainly the advance to
this related company.
8.
MAJOR CUSTOMERS AND VENDORS
Major
Customers
During
year 2007 and 2006, the Company has increased its finished oil customers
and requested payment in advance from the customers. For the year ended December
31, 2007, there were no major customers who made sales over 5% of the Company’s
total sales as the Company is diversifying its customer base. For the years
ended December 31, 2006 and 2005, five customers accounted for approximately
40%
and 72% of the Company’s sales, respectively, and these customers accounted for
approximately 60% of the Company’s outstanding accounts receivable at December
31, 2006.
Major
Suppliers
For
the
years ended December 31, 2007, 2006 and 2005, five suppliers accounted for
approximately 86%, 66%, and 73% of the Company’s purchases, respectively. At
December 31, 2007 and 2006, the accounts payable to these five suppliers were
approximately $0 and $2,010,706, respectively. Management believes that other
suppliers could provide raw materials on comparable terms.
F-16
9.
VALUE ADDED TAX PAYABLE
Tax
payable mainly consisted of value added tax payable of $125,015 for the
year ended December 31, 2007. For the year ended December 31, 2006, it consisted
of the value added tax in the amount of $744,666.
10.
OTHER PAYABLE
Other
payable mainly consisted of payable for the loan from Ningxia Yuanshun
Petrochemical Company . Ningxia Yuanshun Petrochemical Company got this loan
with the same amount from Redsky Industrial which was included in prepaid
expenses. For the years ended December 31, 2007 and 2006, the other payable
were
$3,165,677 and $282,638, respectively.
11.
INCOME TAXES
During
the years ended December 31, 2007, 2006 and 2005, Baorun Industrial obtained
approval from the PRC tax authority for the exemption of income
taxes.
Despite
the income tax exemption of Baorun Industrial, the Company is governed by the
income tax law of the PRC concerning private-run enterprises, which are
generally subject to tax at a statutory rate of 33% on income reported in the
statutory financial statements after appropriated tax adjustments.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31,
|
2007
|
2006
|
2005
|
||||||||
|
US
statutory rates
|
34
|
%
|
34
|
%
|
34
|
%
|
||||
|
Tax
rate difference
|
(1
|
)%
|
(1
|
)%
|
(1
|
)%
|
||||
|
Effect
of tax holiday
|
(33
|
)%
|
(33
|
)%
|
(33
|
)%
|
||||
|
Valuation
allowance
|
-
|
-
|
-
|
|||||||
|
Tax
per financial statements
|
-
|
-
|
-
|
|||||||
The
following table gives the unaudited proforma financial impact had the PRC
taxes not been abated.
|
Years ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||
|
Net
income before income taxes
|
$
|
8,579,565
|
$
|
5,343,579
|
$
|
4,141,087
|
||||
|
Tax
provision
|
3,099,930
|
1,763,381
|
1,366,559
|
|||||||
|
Net
income
|
$
|
5,479,635
|
$
|
3,580,198
|
$
|
2,774,528
|
||||
12.
LOAN PAYABLE
The
Company is obligated under a short term loan from a commercial bank in the
PRC
for the amount of $1,370,877 (RMB10,000,000). This loan was entered into on
August 31, 2007 and matures on August 30, 2008. The principal will be repaid
at
maturity and the interest is payable quarterly at the rate of 8.073% per annum.
This loan is guaranteed by Xi’an City Economic & Technology Investment
Guarantee Co., Ltd. The Company paid them the guarantee fee of 2% of the loan
principal and pledged the Company’s diesel equipment as collateral for the
guarantee.
F-17
Notes
Payable – Trade / Related Party
The
Company, on occasion, satisfies the payment of their accounts payable, through
the issuance of notes payable with certain vendors. These notes are issued
by
the Company’s bank. These notes are usually of a short term nature,
approximately three to six months in length. They do not bear interest and
are
paid by the company’s bank to the vendors upon presentation to the Company’s
bank on the date of maturity. Total notes payable as of December 31, 2007 and
2006 were approximately $0 and $1,282,000, respectively.
13.
LONG-TERM LIABILITIES
Long-term
liabilities are the loans payable for the acquisition of automobiles. On
September 27, 2006 the Company entered into a three years note payable for
approximately $100,000. This note is collateralized by the car with an
annualized interest rate of 6.3%. At December 31, 2007 and 2006, the outstanding
loan balance for this car was $70,325 and $98,532, respectively.
In
February, 2007, the Company entered into another two notes payable for the
acquisition of two automobiles. One is a two years note for the loan amount
of
approximately $25,500 with 7.56% interest rate per annum. The other one is
a two
years note for the loan amount of $19,800 with 7.56% annual interest rate.
At
December 31, 2007, the outstanding loan balances for these two automobiles
were
$17,229 and $13,388, respectively. At December 31, 2007, $67,287 of the total
outstanding loan balance has been reclassified to current portion of the
liabilities that are payable within one year.
14.
COMMITMENTS
Employee
Agreements
The
Company entered into an employment agreement with Mr. Gao Xincheng to employ
him
as the Chairman, effective as of October 23, 2007. The current term of the
agreement expires on October 22, 2010, but is renewable upon agreement by the
parties to the agreement, unless earlier terminated by either party. Mr. Gao’s
base monthly salary is $800. The Company pays premiums for Mr. Gao for social
insurance schemes such as Pension, Unemployment, Medical Insurance, etc., in
accordance with relevant PRC laws and regulations. The Company has the right
to
adjust the salary and welfare of Mr. Gao. In connection with this agreement,
Mr.
Gao also executed a Confidentiality and Non-competition Agreement with the
Company.
The
Company entered into an employment agreement with Ms. Li Gaihong to employ
her
as the Chief Financial Officer, effective as of October 23, 2007. The current
term of the agreement expires on October 22, 2010, but is renewable upon
agreement by the parties to the agreement, unless earlier terminated by either
party. Ms. Li’s base monthly salary is $500. The Company pays premiums for Ms.
Li for social insurance schemes such as Pension, Unemployment, Medical
Insurance, etc. in accordance with relevant PRC laws and regulations. The
Company has the right to adjust the salary and welfare of Ms. Li. In connection
with this agreement, Ms. Li also executed a Confidentiality and Non-competition
Agreement with the Company.
Lease
Agreements
The
Company leases one oil storage facility under a long term, non-cancelable,
and
renewable operating lease agreement expiring on June 30, 2008.
The
Company leases another two oil storage facilities under one year,
non-cancelable, and renewable operating lease agreements expiring on December
31, 2007. One lease agreement has been renewed for one year with expiration
date
on December 31, 2008. The other lease agreement has been terminated pursuant
to
its terms. The Company entered into a new one year, non-cancelable and renewable
lease agreement for a new oil storage facility with an expiration date on
December 31, 2008.
During
2007, the Company leased one gas station for operation under a long-term,
non-cancelable operating lease agreement with an expiration date of December
31,
2027. This lease is classified as an operating lease.
F-18
These
non-cancelable operating lease agreements require that the Company pay certain
operating expenses applicable to the leased premises. Future minimum rental
payments required under these operating leases are as follows:
|
Year
Ending December 31,
|
Amount
|
|||
|
2008
|
$
|
175,000
|
||
|
2009
|
20,000
|
|||
|
2010
|
20,000
|
|||
|
2011
|
20,000
|
|||
|
2012
|
20,000
|
|||
|
Total
|
$
|
255,000
|
||
Total
rent expense for the years ended December 31, 2007, 2006, and 2005 amounted
to
$173,386, $92,997 and $170,289, respectively.
15.
STATUTORY RESERVES
Pursuant
to the new corporate law of the PRC effective January 1, 2006, the Company
is
now only required to maintain one statutory reserve by appropriating from its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
Surplus
reserve fund
The
Company is now only required to transfer 10% of its net income, as determined
under PRC accounting rules and regulations, to a statutory surplus reserve
fund
until such reserve balance reaches 50% of the Company’s registered capital. The
Company transferred $940,656, $534,358 and $445,699 to this reserve for years
2007, 2006 and 2005, respectively.
The
surplus reserve fund is non-distributable other than during liquidation and
can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
stockholders in proportion to their stockholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Common
welfare fund
Common
welfare fund is a voluntary fund that the Company can elect to transfer 5%
to
10% of its net income to this fund. The Company did not make any contribution
to
this fund for any of the years ended December 31, 2007, 2006 and
2005.
This
fund
can only be utilized on capital items for the collective benefit of the
Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. This fund is non-distributable except upon
liquidation.
Pursuant
to the “Circular of the Ministry of Finance (MOF) on the Issue of Corporate
Financial Management after the Corporate Law Enforced” (No.67 [2006]), effective
on April 1, 2006, issued by the MOF, companies transferred the balance of SCWF
(Statutory Common Welfare Fund) as of December 31, 2005 to Statutory Surplus
Reserve. Any deficit in the SCWF was charged in turn to Statutory Surplus
Reserve, additional paid-in capital and undistributed profit of previous years.
If a deficit still remains, it should be transferred to retained earnings and
be
reduced to zero by a transfer from after tax profit of following years. At
December 31, 2005, the Company did not have a deficit in the SCWF.
F-19
16.
STOCKHOLDERS’ EQUITY
Reverse
Merger
On
October 23, 2007, the Company entered into a Share Exchange Agreement with
Baorun Group, its shareholders Redsky Group Limited, Princeton Capital Group
LLP
and Castle Bison, Inc. and Stallion Ventures, LLC, the Company’s then principal
stockholders. Pursuant to the terms of the Share Exchange Agreement, Redsky
Group and Princeton Capital Group transferred all of their shares constituting
100% of the issued and outstanding ordinary shares of Baorun Group in exchange
for the issuance of 22,454,545 shares of the Company’s common stock to Redsky
Group and 1,500,000 shares of the Company’s common stock to Princeton Capital
Group. As a result of this share exchange, Baorun Group became a wholly-owned
subsidiary of the Company, and Redsky Group and Princeton Capital Group acquired
an aggregate of approximately 94.11% of the Company’s outstanding common stock.
The total shares of the Company’s common stock issued in the share exchange were
23,954,545. They are accounted for as if they have been outstanding for all
periods presented in the financial statements. This transaction is referred
to
as a reverse acquisition, or merger, under the purchase method for business
combinations, and accordingly the transaction has been treated as a
recapitalization of Baorun Group. Under the Share Exchange Agreement, Baorun
Group is considered the accounting acquirer and the Company is the accounting
acquiree. Prior to the reverse merger, the Company had 1,500,000 shares of
common stock outstanding. These shares are referred to in the Company’s
statement of stockholders’ equity as a recapitalization on reverse acquisition.
Prior to the reverse merger, both Baorun Group and Redsky Group had limited
activities and assets and no liabilities.
At
the
same time, Redsky Industrial, a WFOE subsidiary of Baorun Group in the PRC,
executed a series of exclusive contractual agreements with Baorun Industrial.
These contractual agreements allow Redsky Industrial to, among other things,
secure significant rights to influence Baorun Industrial’s business operations,
policies and management, approve all matters requiring shareholder approval,
and
the right to include 100% of net income earned by Baorun Industrial as part
of
our Consolidated Financial Statements.
We
have
determined a variable interest entity has been created in accordance with FASB
Interpretations - FIN 46(R): Consolidation of Variable Interest Entities (as
amended) (“FIN 46 (R)”). Under FIN 46 (R), as a result of the contractual
arrangements between Redsky Industrial and Baorun Industrial and the Exchange
Agreement, Baorun Industrial is presented as our consolidated
subsidiary.
Series
A Convertible Preferred Stock with Series A-1 and Series A-2 warrants Issued
for
Cash
Concurrently
with the share exchange, the Company entered into a securities purchase
agreement (the “Purchase Agreement”) with one accredited investor for the sale
of securities consisting of (i) 1,000,000 shares of the Company’s Series A
convertible preferred stock, (ii) a series A-1 warrant to purchase 3,409,091
shares of the Company’s common stock at an exercise price of US$3.00 per share,
and (iii) a Series A-2 warrant to purchase 2,272,728 shares of the Company’s
common at an exercise price of US$4.40 per share (the Series A-1 and Series
A-2
warrants, collectively the “Warrants”), for aggregate gross proceeds equal to
$10,000,000. Net proceeds of $9,774,993 have been received by the
Company.
Each
share of preferred stock is convertible into a number of fully paid and
non-assessable shares of common stock equal to the quotient of the liquidation
preference amount per share of preferred stock, or $10.00, divided by the
conversion price, which initially is $2.20 per share, subject to certain
adjustments, or approximately 4,545,455 shares of common stock if all 1,000,000
shares of preferred stock converted. No dividend is declared during the
year.
Deemed
dividend allocated to warrants is $1,585,631. The value of warrants mentioned
was determined by allocation of principal using the Black-Scholes pricing model
with the following assumptions: discount rate - 1.37%; dividend yield - 0%;
expected volatility - 30% and term of 5 years. Additionally, the Company
recorded $1,812,903 as dividend from beneficial conversion, which reflects
the
difference between the fair market price and effective conversion rate. Pursuant
to EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios” and EITF 00-27,
“Application of Issue No. 98-5 in Certain Convertible Instruments,” the total
value of $3,398 534 was recorded as a deemed dividend.
F-20
17.
OPERATING RISK
(a)
Country risk
Currently,
the Company’s revenues are mainly derived from sale of oil products in the PRC.
The Company hopes to expand its operations in the PRC, but, such expansion
has
not been commenced and there are no assurances that the Company will be able
to
achieve such an expansion successfully. Therefore, a downturn or stagnation
in
the economic environment of the PRC could have a material adverse effect on
the
Company’s financial condition.
(b)
Products risk
The
Company competes with larger companies that have greater funds available for
expansion, marketing, research and development and the ability to attract more
qualified personnel. There can be no assurance that the Company will remain
competitive with larger competitors.
(c)
Exchange risk
The
Company cannot guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount
of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on the exchange rate of Chinese
Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate could
fluctuate depending on changes in the political and economic environments
without notice.
(d)
Political risk
Currently,
the PRC is in a period of growth and is openly promoting business development
in
order to bring more business into the PRC. Additionally, the PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws
or
regulations are changed by the PRC government, the Company’s ability to operate
in the PRC could be affected.
(e)
Key
personnel risk
The
Company’s future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental
to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-person insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
(f)
Late
filing risk
If
the
Company does not timely file and have declared effective the registration
statement to register the shares being offered by the selling stockholders,
the
Company will be subject to liquidated damages in the amount of 0.75% of the
purchase price of the securities being registered, per month, subject to a
maximum limit of 7.5%.
(g)
All
the Company’s operations are in the PRC. There is no assurance that CBEH, the
U.S. parent, will be able to receive funds from its PRC subsidiary for the
payment of ongoing expenses and the distribution of dividends.
The
following schedule is the balance sheet of CBEH, the U.S. parent, as of December
31, 2007:
|
Total
Assets:
|
||||
|
Restricted
cash
|
$
|
200,000
|
||
|
Investment
in Baorun Group
|
9,574,993
|
|||
|
$
|
9,774,993
|
|||
|
Stockholders'
Equity:
|
||||
|
Preferred
stock, $.001 par value; authorized shares
|
||||
|
1,000,000;
issued and outstanding 1,000,000 shares
|
$
|
1,000
|
||
|
Common
stock, $.0001 par value; authorized shares
|
2,538
|
|||
|
80,000,000;
issued and outstanding 25,387,041 shares
|
||||
|
Additional
paid in capital
|
9,771,455
|
|||
|
$
|
9,774,993
|
|||
F-21
|
CHINA
BIO ENERGY HOLDING GROUP CO., LTD. AND
SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
BALANCE SHEET
|
|||||||
|
As
of March 31,
2008
|
As
of December 31,
2007
|
||||||
|
ASSETS
|
(Unaudited)
|
||||||
|
CURRENT
ASSETS
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,552,219
|
$
|
1,382,371
|
|||
|
Restricted
cash
|
200,000
|
200,000
|
|||||
|
Accounts
receivable, net
|
5,893,346
|
288,589
|
|||||
|
Other
receivables
|
274,947
|
1,548,681
|
|||||
|
Prepaid
expenses
|
2,936,408
|
2,896,493
|
|||||
|
Advance
to suppliers
|
14,869,631
|
16,546,506
|
|||||
|
Inventories
|
12,391,064
|
12,082,962
|
|||||
|
Due
from related party
|
655,855
|
593,696
|
|||||
|
Total
current assets
|
38,773,470
|
35,539,298
|
|||||
|
CONSTRUCTION
IN PROGRESS
|
1,923,351
|
-
|
|||||
|
PROPERTY
AND EQUIPMENT, net
|
8,341,165
|
8,166,250
|
|||||
|
TOTAL
ASSETS
|
$
|
49,037,986
|
$
|
43,705,548
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable
|
$
|
-
|
$
|
179,617
|
|||
|
Advance
from customers
|
1,969,776
|
499,908
|
|||||
|
Tax
payable
|
289,120
|
125,015
|
|||||
|
Other
payables
|
1,091,031
|
3,165,677
|
|||||
|
Accrued
expenses
|
70,540
|
67,875
|
|||||
|
Loan
payable
|
1,424,704
|
1,370,877
|
|||||
|
Long
term notes payable - current portion
|
65,743
|
67,287
|
|||||
|
Total
current liabilities
|
4,910,914
|
5,476,256
|
|||||
|
LONG
TERM LIABILITIES
|
26,118
|
33,655
|
|||||
|
Total
liabilities
|
4,937,032
|
5,509,911
|
|||||
|
COMMITMENT
AND CONTINGENCIES
|
|||||||
|
STOCKHOLDERS'
EQUITY
|
|||||||
|
Preferred
stock, $.001 par value; authorized shares
1,000,000;
issued and outstanding 1,000,000 shares
|
1,000
|
1,000
|
|||||
|
Common
stock, $.0001 par value; authorized shares
80,000,000;
issued and outstanding 25,454,545 shares
|
2,545
|
2,545
|
|||||
|
Paid
in capital
|
16,213,404
|
19,611,938
|
|||||
|
Statutory
reserve
|
2,051,030
|
2,051,030
|
|||||
|
Accumulated
other comprehensive income
|
3,562,891
|
2,319,732
|
|||||
|
Retained
earnings
|
22,270,084
|
14,209,392
|
|||||
|
Total
stockholders' equity
|
44,100,954
|
38,195,637
|
|||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
49,037,986
|
$
|
43,705,548
|
|||
Q-1
|
CHINA
BIO ENERGY HOLDING GROUP CO., LTD. AND
SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE
INCOME
|
|||||||
|
(Unaudited)
|
For
The Three Months Ended March 31,
|
||||||
|
2008
|
2007
|
||||||
|
Sales
|
$
|
35,560,840
|
$
|
11,558,725
|
|||
|
Cost
of goods sold
|
30,547,663
|
10,444,290
|
|||||
|
Gross
profit
|
5,013,177
|
1,114,435
|
|||||
|
General
and administrative expenses
|
319,806
|
127,101
|
|||||
|
Income
from operations
|
4,693,371
|
987,334
|
|||||
|
Non-operating
income (expenses)
|
|||||||
|
Interest
income (expenses)
|
(28,271
|
)
|
(19,967
|
)
|
|||
|
Other
income (expenses)
|
(70
|
)
|
-
|
||||
|
Financial
expenses
|
(125
|
)
|
(4,444
|
)
|
|||
|
Total
non-operating expenses
|
(28,466
|
)
|
(24,411
|
)
|
|||
|
Net
income
|
4,664,905
|
962,923
|
|||||
|
Other
comprehensive item
|
|||||||
|
Foreign
currency translation gain
|
1,243,160
|
175,187
|
|||||
|
Comprehensive
Income
|
$
|
5,908,065
|
$
|
1,138,110
|
|||
|
Basic
and diluted weighted average shares outstanding
|
|||||||
|
Basic
|
25,454,545
|
23,954,545
|
|||||
|
Diluted
|
31,459,006
|
23,954,545
|
|||||
|
Basic
and diluted net earnings per share available to common
stockholders
|
|||||||
|
Basic
|
$
|
0.18
|
$
|
0.04
|
|||
|
Diluted
|
$
|
0.15
|
$
|
0.04
|
|||
See
accompanying notes to the consolidated financial
statements
Q-2
|
CHINA
BIO ENERGY HOLDING GROUP CO., LTD. AND
SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
|||||||
|
(Unaudited)
|
For
The Three Months Ended March 31,
|
||||||
|
2008
|
2007
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
income
|
$
|
4,664,905
|
$
|
962,923
|
|||
|
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
225,045
|
35,788
|
|||||
|
Depreciation
|
|||||||
|
(Increase)
decrease in current assets:
|
|||||||
|
Accounts
receivable
|
(5,481,284
|
)
|
(3,450,923
|
)
|
|||
|
Other
receivable and prepaid expenses
|
251,082
|
(135,820
|
)
|
||||
|
Advance
to suppliers
|
2,279,926
|
931,823
|
|||||
|
Inventory
|
162,999
|
414,397
|
|||||
|
Due
from related party
|
(38,069
|
)
|
282,507
|
||||
|
Increase
(decrease) in current liabilities:
|
|||||||
|
Accounts
payable
|
(182,927
|
)
|
106,307
|
||||
|
Advance
from customers
|
1,421,163
|
145,692
|
|||||
|
Taxes
payable
|
156,005
|
191,709
|
|||||
|
Other
payables and accrued expenses
|
(2,384,782
|
)
|
78,860
|
||||
|
Net
cash provided by (used in) operating activities
|
1,074,063
|
(436,737
|
)
|
||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Acquisition
of property and equipment
|
(82,235
|
)
|
(6,293
|
)
|
|||
|
Construction
in progress
|
(865,607
|
)
|
(147,695
|
)
|
|||
|
Net
cash used in investing activities
|
(947,842
|
)
|
(153,988
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Repayment
of long term notes payable
|
(12,783
|
)
|
(10,562
|
)
|
|||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
113,438
|
(601,287
|
)
|
||||
|
EFFECT
OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
|
56,410
|
3,554
|
|||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
1,382,371
|
631,443
|
|||||
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
1,552,219
|
$
|
33,710
|
|||
|
Supplemental
Cash flow data:
|
|||||||
|
Income
tax paid
|
-
|
-
|
|||||
|
Interest
paid
|
$
|
27,658
|
$
|
19,967
|
|||
See
accompanying notes to the consolidated financial
statements
Q-3
CHINA
BIO ENERGY HOLDING GROUP CO., LTD.. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
ORGANIZATION
AND DESCRIPTION OF BUSINESS
China
Bio
Energy Holding Group Co., Ltd. (the “Company” or “CBEH”) was originally
incorporated in the State of Delaware in July 1998 under the corporate name
“AMS
Marketing Inc.” and in October 2003, the Company changed its name to
“International Imaging Systems, Inc.” On November 15, 2007, through a merger of
its newly-formed wholly owned subsidiary, China Bio Energy Holding Group Co.,
Ltd. (Merger Sub), the Company’s name was changed to “China Bio Energy Holding
Group Co., Ltd.” The separate existence of Merger Sub then ceased after the
merger. The Company is currently engaged in the development, exploration,
production and distribution of bio-diesel and wholesale and processing of heavy
oil and finished oil products through its indirect wholly owned operating
subsidiary in China.
On
October 23, 2007, the Company entered into a Share Exchange Agreement, with
Baorun China Group Limited (“Baorun Group”), a company organized under the laws
of Hong Kong, and its shareholders Redsky Group Limited (“Redsky Group”), a
British Virgin Islands company, and Princeton Capital Group LLP, a New Jersey
limited liability partnership, Castle Bison, Inc. and Stallion Ventures, LLC.
Redsky Group and Princeton Capital Group owned shares constituting 100% of
the
issued and outstanding ordinary shares of Baorun Group. Pursuant to the terms
of
the Share Exchange Agreement, Redsky Group and Princeton Capital Group
transferred all of their shares in Baorun Group in exchange for the issuance
of
22,454,545 shares of the Company’s common stock to Redsky Group and 1,500,000
shares of the Company’s common stock to Princeton Capital Group. As a result of
this share exchange, Baorun Group became wholly-owned subsidiary of the Company,
and Redsky Group and Princeton Capital Group acquired an aggregate of
approximately 94.11% of the Company’s outstanding common stock.
Redsky
Industrial (Xi’an) Co., Ltd. (“Redsky Industrial”), a wholly foreign owned
entity (“WFOE”) and a subsidiary of Baorun Group in the People’s Republic of
China (the “PRC”), executed a series of exclusive contractual agreements
(“Redsky Contracts”) with Xi’an Baorun Industrial Development Co., Ltd. (“Baorun
Industrial”). These contractual agreements allow Redsky Industrial to, among
other things, exercise significant rights to influence Baorun Industrial’s
business operations, policies and management, approve all matters requiring
shareholder approval, and the right to include 100% of the net income earned
by
Baorun Industrial as part of our Consolidated Financial Statements. In addition,
to ensure that Baorun Industrial and its shareholders perform their obligations
under these contractual arrangements, Baorun Industrial’s shareholders have
pledged to Redsky Industrial all of their equity interests in Baorun Industrial.
At such time that current restrictions under PRC law on foreign ownership of
Chinese companies engaging in the finished oil industry in China are lifted,
Redsky Industrial may exercise its option to purchase the equity interests
in
Baorun Industrial directly.
Baorun
Industrial was registered as a privately owned company on November 11, 1999
in
the PRC. Its business operations consist of processing and distributing heavy
oil and finished oil. It also engages in the research and development,
manufacturing and distribution of bio-diesel. Baorun Industrial distributes
its
oil products to clients primarily located in the Shaanxi, Henan, Hunan, Sichuan,
Hubei, Guizhou, and Xinjiang provinces of the PRC.
As
Baorun
Group owns Redsky Industrial, which will effectively control Baorun Industrial,
Baorun Industrial is deemed a subsidiary of Baorun Group, a legal subsidiary
of
the Company. Based on Baorun Industrial’s contractual relationship with Redsky
Industrial, the Company has determined that a variable interest entity has
been
created in accordance with FASB Interpretations - FIN 46(R): Consolidation
of
Variable Interest Entities (as amended) (“FIN 46(R)”). Under FIN 46(R),
subsequent to the Redsky Contract and the Exchange Agreement, Baorun Industrial
is to be presented as a consolidated subsidiary of the Company.
Q-4
Prior
to
the acquisition of Baorun Group, the Company was a non-operating public shell
corporation. Pursuant to Securities and Exchange Commission rules, the merger
or
acquisition of a private operating company into a non-operating public shell
corporation with nominal net assets is considered a capital transaction in
substance, rather than a business combination. Accordingly, for accounting
purposes, the transaction has been treated as a reverse acquisition and a
recapitalization, and pro-forma information is not presented. Transaction costs
incurred in the reverse acquisition have been charged to expense.
The
Company believes that current PRC corporate rules and regulations do not
preclude Redsky Industrial, and thereby the Company, from exercising effective
control of Baorun Industrial, the operating entity of the Company. Pursuant
to
the terms of the Business Cooperation Agreement, as amended (“Cooperation
Agreement”) entered into between Redsky Industrial and Baorun Industrial, Baorun
Industrial shall granted to Redsky Industrial the right to claim 100% of the
net
income, or loss, of Baorun Industrial in consideration for the services provided
by Redsky Industrial,. In addition, Baorun Industrial granted to Redsky
Industrial the right to any residual returns and dividends from Baorun
Industrial.
The
assets and liabilities of Baorun Industrial are accounted for at their
historical rate, similar to the manner in which Baorun Group was treated by
the
Company in the Share Exchange. Baorun Industrial is not a self-supporting entity
and requires the support of Redsky Industrial and their related entities. Redsky
Industrial and its related entities were required to finance Baorun Industrial
through the issuance of shares of preferred stock by the Company, Redsky
Industrial’s ultimate parent. The financing of the Company, concurrent with the
Share Exchange Agreement, was entered into to enable Baorun Industrial to pursue
bio-energy production projects, and to expand existing conventional oil/energy
projects. Bio-energy production and the marketing of their products is an
industry with limited operating history, and might require additional financing
above what Redsky Industrial, the Company and its related entities have
currently advanced to Baorun Industrial.
Under
the
Cooperation Agreement, Baorun Industrial cannot assign its rights under such
agreement to another third party without Redsky Industrial’s consent. Under the
agreement, Redsky Industrial must notify Baorun Industrial of its intent to
assign the agreement to a third party but does not need the consent of Baorun
Industrial for such assignment. Under the Cooperation Agreement Redsky
Industrial is to absorb 100% of the net income, or loss, of Baorun Industrial.
In addition, Baorun Industrial granted to Redsky Industrial the right to any
residual returns and dividends from Baorun Industrial. Accordingly, as Redsky
Industrial is a wholly owned subsidiary of Baorun Group, which is ultimately
a
subsidiary of the Company, 100% of Baorun Industrial will be consolidated into
Redsky Industrial and ultimately the Company. The right to absorb these
benefits, and expenses, are in place for the entire life of the Cooperation
Agreement, or until such time that the Cooperation Agreement is voided or
cancelled.
Under
the
series of agreements between Redsky Industrial and the shareholders of Baorun
Industrial, prior to the sale of an equity interest of Baorun Industrial to
Redsky Industrial, the shareholder of Baorun Industrial selling his or her
proportional equity interest must inform the other remaining shareholders of
Baorun Industrial of such a transaction.
Pursuant
to the terms of the Exclusive Option Agreements among Redsky Industrial, Baorun
Industrial and all three shareholders of Baorun Industrial, the purchase price
for the equity interest of Baorun Industrial was not established. The purchase
price is to be designated by Redsky Industrial to the extent allowed by relevant
laws and regulations of the PRC.
The
unaudited financial statements have been prepared by the Company,
pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the
opinion of management, necessary to fairly present the operating results for
the
respective periods. Certain information and footnote disclosures normally
present in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations. These financial statements should
be read in conjunction with the audited financial statements and footnotes
included in the Company’s audited financial statements. The results
for the three months ended March 31, 2008 are not necessarily indicative of
the
results to be expected for the full year ending December 31, 2008.
Q-5
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principle
of consolidation
The
accompanying consolidated financial statements include our accounts and the
accounts of our wholly owned subsidiary, Baorun Group and Redsky Industrial,
and
its consolidated subsidiary, Baorun Industrial (collectively, the “Company”).
All significant inter-company accounts and transactions have been eliminated
in
consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during
the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories. Actual
results could differ from those estimates.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
As
of
March 31, 2008 and December 31, 2007, the Company maintained restricted cash
of
$200,000 in an escrow account for the use of the Company’s investment relations
only. It is presented as restricted cash on the accompanying consolidated
balance sheets.
Accounts
Receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns
to
evaluate the adequacy of these reserves. Based on historical collection
activity, no allowance was deemed necessary at March 31, 2008 and December
31,
2007.
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods comprises
direct material, direct production cost and an allocated portion of production
overheads.
Advances
from Customers
Advances
from customers consist of prepayments to the Company for products that have
not
yet been shipped to the customers. Any amounts received prior to satisfying
the
Company’s revenue recognition criteria are recorded as deferred revenue or
advances from customers. The Company will recognize the prepayments from the
customers as revenue at the time the delivery of goods is made. Advances from
customers as of March 31, 2008 and December 31, 2007 were $1,969,776 and
$499,908, respectively.
Q-6
Property
and Equipment
Plants
and equipments are stated at the actual cost on acquisition less accumulated
depreciation and amortization. Depreciation and amortization are provided for
in
amounts sufficient to relate the cost of depreciation assets to operations
over
their estimated service lives, principally on a straight-line basis. Most
property, plant and equipment have a residual value of 5% of actual cost. The
estimated lives used in determining depreciation are:
|
Building
|
20
years
|
|
Vehicle
|
5
years
|
|
Office
Equipment
|
5
years
|
|
Production
Equipment
|
5
years
|
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company
examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may
not
be recoverable.
Construction
in Progress
Construction
in progress is recorded at its purchase price. At March 31, 2008, the
construction in progress refers to the amount of $1,923,351 the Company paid
for
acquiring three oil extraction plants. The Company is currently refitting these
oil extraction plants before using it for operation. The ownership transfer
process and refitment are expected to be completed before June,
2008.
Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets,
are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge
is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily determinable.
Based on its review, the Company believes that, as of March 31, 2008 and
December 31, 2007, there were no significant impairments of its long-lived
assets.
Income
Taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been included in the financial statements
or
tax returns. Under this method, deferred income taxes are recognized for the
tax
consequences in future years of differences between the tax bases of assets
and
liabilities and their financial reporting amounts at each period end based
on
enacted tax laws and statutory tax rates applicable to the periods in which
the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
Q-7
According
to the related regulation of Chinese tax authority, since Baorun Industrial
uses
the waste gas, water and residue to produce the products, the Company is
eligible for the exemption of income taxes for six years from year 2004 to
year
2010.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. As a result of the
implementation of FIN 48, the Company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards established
by FIN 48. As a result of the implementation of Interpretation 48, the Company
recognized no material adjustments to liabilities or stockholders equity. When
tax returns are filed, it is highly certain that some positions taken would
be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position
is
recognized in the financial statements in the period during which, based on
all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount
of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in
the
accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination.
Interest
associated with unrecognized tax benefits are classified as interest expense
and
penalties are classified in selling, general and administrative expenses in
the
statements of income. The adoption of FIN 48 did not have a material impact
on
the Company’s financial statements.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (“SAB”) 104. Sales revenue
is recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are recorded as unearned revenue.
Sales
revenue represents the invoiced value of goods, net of value-added tax (“VAT”).
All of the Company’s products that are sold in the PRC are subject to Chinese
value-added tax of 17% of the gross sales price. This VAT may be offset by
VAT
paid by the Company on raw materials and other materials included in the cost
of
producing their finished product. The Company recorded VAT payable and VAT
receivable net of payments in the financial statements. The VAT tax return
is
filed offsetting the payables against the receivables.
There
were no sales returns and allowances for the three months ended March 31, 2008
and 2007. The Company does not provide unconditional right of return, price
protection or any other concessions to its customers.
Cost
of Goods Sold
Cost
of
goods sold consists primarily of material costs, direct labor, manufacturing
overhead and related expenses, which are directly attributable to the production
of products. Write-down of inventory to lower of cost or market is also
recorded in cost of goods sold.
Q-8
Shipping
costs
Shipping
costs are included in cost of goods sold and totaled $144,333 and $85,911 for
the three months ended March 31, 2008 and 2007, respectively.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable and other receivables. The Company does not
require collateral or other security to support these receivables. The Company
conducts periodic reviews of its clients’ financial condition and customer
payment practices to minimize collection risk on accounts
receivable.
The
operations of the Company are located 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, as well as by the
general state of the PRC economy.
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations is calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statement of cash
flows may not necessarily agree with changes in the corresponding balances
on
the balance sheet.
Fair
Value of Financial Instruments
SFAS
No.
107, “Disclosures about Fair Value of Financial Instruments,” requires that the
Company disclose estimated fair values of financial instruments. The carrying
amounts reported in the statements of financial position for current assets
and
current liabilities qualifying as financial instruments are a reasonable
estimate of fair value.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States dollars (“USD”) as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at
the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders’ equity as “Accumulated other
comprehensive income”.
Gains
and
losses resulting from foreign currency transactions are included in income.
There has been no significant fluctuation in exchange rate for the conversion
of
RMB to USD after the balance sheet date.
On
July
21, 2005, the central government of China allowed the RMB to fluctuate, ending
its decade old valuation peg to the U.S. dollar. Historically, the Chinese
government has benchmarked the RMB exchange ratio against the U.S. dollar,
thereby mitigating the associated foreign currency exchange rate fluctuation
risk. The Company does not believe that its foreign currency exchange rate
fluctuation risk is significant, especially if the Chinese government continues
to benchmark the RMB against the U.S. dollar.
This
fluctuation of the exchange rates does not imply free convertibility of RMB
to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People’s Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People’s Bank of
China.
The
Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
“Reporting Comprehensive Income”. Comprehensive income is comprised of net
income and all changes to the statements of stockholders’ equity, except those
due to investments by stockholders, changes in paid-in capital and distributions
to stockholders. Comprehensive income for the three months ended March 31,
2008
and 2007 were included net income and foreign currency translation
adjustments.
Q-9
Basic
and diluted earning per share
(EPS)
Basic
EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similar to basic net income per share except that the denominator
is
increased to include the number of additional common shares that would have
been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Diluted net earning per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. The following table presents a reconciliation of basic and diluted
earnings per share:
|
March
31,
|
|||||||
|
2008
|
2007
|
||||||
|
Net
income available to common stockholders
|
$
|
4,664,905
|
$
|
962,923
|
|||
|
Weighted
average shares outstanding - basic
|
25,454,545
|
23,954,545
|
|||||
|
Effect
of dilutive securities:
|
|||||||
|
Convertible
preferred stock
|
4,545,455
|
-
|
|||||
|
Unexercised
warrants
|
1,459,006
|
-
|
|||||
|
Weighted
average shares outstanding - diluted
|
31,459,006
|
23,954,545
|
|||||
|
Earnings
per share - basic
|
$
|
0.18
|
$
|
0.04
|
|||
|
Earnings
per share - diluted
|
$
|
0.15
|
$
|
0.04
|
|||
Segment
Reporting
SFAS
No.
131, "Disclosures about Segments of an Enterprise and Related Information"
requires use of the “management approach” model for segment reporting. The
management approach model
is
based on the way a company's management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company.
SFAS
131
has no effect on the Company’s financial statements as substantially all of the
Company’s operations are conducted in one industry segment, that of processing
and distributing finished oil. All of the Company’s assets are located in the
PRC. All of the Company's sales are in the PRC and are involved in the
processing and distribution of finished oil.
New
Accounting Pronouncements
Business
Combinations
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS 141R will change
the accounting treatment for certain specific items, including:
|
·
|
Acquisition
costs will be generally expensed as
incurred;
|
|
·
|
Noncontrolling
interests (formerly known as “minority interests” - see SFAS 160
discussion below) will be valued at fair value at the acquisition
date;
|
|
·
|
Acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount
or the
amount determined under existing guidance for non-acquired
contingencies;
|
|
·
|
In-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition
date;
|
|
·
|
Restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date;
and
|
|
·
|
Changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
Q-10
SFAS
141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date
is
on or after the beginning of the first annual reporting period beginning on
or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. We
expect SFAS 141R will have an impact on accounting for business combinations
once adopted but the effect is dependent upon acquisitions at that
time.
Noncontrolling
Interests in Consolidated Financial Statements - An Amendment of ARB No.
51
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain
or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Like SFAS 141R discussed above, earlier adoption is prohibited. We have not
completed our evaluation of the potential impact, if any, of the adoption of
SFAS 160 on our consolidated financial position, results of operations and
cash
flows.
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
Amendment of FASB Statements No. 87, 88, 106, and 132R
In
September 2006, the FASB, issued SFAS, No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the
underfunded or overfunded status of a defined benefit postretirement plan as
an
asset or liability in its statement of financial position and to recognize
changes in the funded status in the year in which the changes occur through
accumulated other comprehensive income. Additionally, SFAS No. 158 requires
employers to measure the funded status of a plan as of the date of its year-end
statement of financial position. The new reporting requirements and related
new
footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending
after December 15, 2006. We adopted the provisions of SFAS No. 158 for the
year
end 2006, and the effect of recognizing the funded status in accumulated other
comprehensive income was not significant. The new measurement date requirement
applies for fiscal years ending after December 15, 2008.
FASB
161 - Disclosures about Derivative Instruments and Hedging
Activities
In
March
2008, the FASB issued FASB Statement No. 161, which amends and expands the
disclosure requirements of FASB Statement No. 133 with the intent to provide
users of financial statements with an enhanced understanding of; how and why
an
entity uses derivative instruments, how the derivative instruments and the
related hedged items are accounted for and how the related hedged items affect
an entity’s financial position, performance and cash flows. This Statement is
effective for financial statements for fiscal years and interim periods
beginning after November 15, 2008. Management believes this Statement will
have
no impact on the financial statements of the Company once adopted.
Q-11
3.
CASH IN BANK ACCOUNTS
Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the PRC. Total cash in state-owned banks at March
31,
2008 and December 31, 2007 amounted to $1,547,811 and $1,357,256, respectively,
of which no deposits are covered by insurance. 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.
4.
INVENTORIES
Inventories
consisted of the following:
|
March
31, 2008
|
Dec
31, 2007
|
||||||
|
Petroleum
|
$
|
3,826,000
|
$
|
2,909,158
|
|||
|
Diesel
|
5,143,165
|
6,079,751
|
|||||
|
Heavy
Oil
|
1,738,057
|
1,620,487
|
|||||
|
Others
|
1,683,842
|
1,473,566
|
|||||
|
Total
|
$
|
12,391,064
|
$
|
12,082,962
|
|||
5.
OTHER
RECEIVABLES
At
March
31, 2008, other receivables represented deposits made for purchase of equipments
and short term cash advances to third parties in the amount of $274,947. At
December 31, 2007, other receivables represented deposits for diesel oil
equipments and three oil mill factories acquisitions in the amount of
$1,548,681.
6.
PLANT AND EQUIPMENT
Plant
and
Equipment are summarized as follows:
|
|
March
31, 2008
|
Dec
31, 2007
|
|||||
|
Building
|
$
|
326,806
|
$
|
314,459
|
|||
|
Diesel
Processing Equipment
|
7,878,160
|
7,500,890
|
|||||
|
Office
Equipment
|
103,835
|
98,788
|
|||||
|
Other
Equipment
|
26,071
|
25,086
|
|||||
|
Motor
Vehicles
|
776,081
|
746,759
|
|||||
|
|
9,110,953
|
8,685,982
|
|||||
|
Less:
Accumulated
Depreciation
|
769,788
|
519,732
|
|||||
|
Total
|
$
|
8,341,165
|
$
|
8,166,250
|
|||
Depreciation
expense for the three months ended March 31, 2008 and 2007 were $225,045 and
$35,788, respectively.
Q-12
7.
DUE FROM RELATED PARTY
Due
from
related party represents the advance to and prepayment for the purchase of
oil
products from a related company that is 40% owned by one of the shareholder
of
Baorun Industrial. As of March 31, 2008 and December 31, 2007, due from this
related party was $655,855 and $593,696, respectively. Purchase from this
related party during three months ended March 31, 2008 and 2007 were
$0.
8.
MAJOR CUSTOMERS AND VENDORS
Major
Customers
For
the
three months ended March 31, 2008, three major customers accounted for
approximately 9%, 8% and 7% of the Company’s total sales, respectively, and
these customers accounted for approximately $3,707,784 of the Company’s
outstanding accounts receivable at March 31, 2008. For the three months ended
March 31, 2007, three major customers accounted for approximately 8%, 6% and
5%
of the Company’s sales, respectively.
Major
Vendors
For
the
three months ended March 31, 2008, two major vendors accounted for approximately
30% and 29% of the Company’s total purchases, respectively. The accounts payable
to these two vendors were $0 at March 31, 2008. For the three months ended
March
31, 2007, one vendor accounted for approximately 89% of the Company’s total
purchases.
9.
TAX PAYABLE
Tax
payable consisted of the following at March 31, 2008 and December 31,
2007:
|
|
March
31, 2008
|
December
31, 2007
|
|||||
|
Value
added tax payable
|
$
|
270,186
|
$
|
125,015
|
|||
|
Urban
maintenance and construction tax payable
|
18,913
|
-
|
|||||
|
Other
tax payable
|
21
|
-
|
|||||
|
|
$
|
289,120
|
$
|
125,015
|
|||
10.
OTHER PAYABLES
Other
payable mainly consisted of payable for the purchase of equipment and short
term
advances from third parties. At March 31, 2008 and December 31, 2007, the other
payables were $1,091,031 and $3,165,677, respectively.
11.
LOAN PAYABLE
The
Company is obligated under a short term loan from a commercial bank in the
PRC
for the amount of $1,424,704 (RMB10, 000,000). This loan was entered into on
August 31, 2007 with maturity on August 30, 2008. The principal will be repaid
at maturity and the interest is payable per quarter with an interest rate of
8.073% per annum. This loan is guaranteed by Xi’an City Economic &
Technology Investment Guarantee Co., Ltd. The Company paid them the guarantee
fee of 2% of the loan principal, and collateralized the Company’s diesel
processing equipments for the guarantee.
12.
LONG-TERM LIABILITIES
Long-term
liabilities are the loans payable for the acquisition of automobiles. On
September 27, 2006 the Company entered into a three year note payable for
approximately $100,000. This note is collateralized by the car with an
annualized interest rate of 6.3%. At March 31, 2008 and December 31, 2007,
the
outstanding loan balance for this car is $63,894 and $70,325,
respectively.
Q-13
In
February, 2007, the Company entered into another two notes payable for
additional two automobiles. One is a two years note for the loan amount of
approximately $25,500 with 7.56% interest rate per annum. The other one is
a two
years note for the loan amount of $19,800 with 7.56% annual interest rate.
At
March 31, 2008 and December 31, 2007, the outstanding loan balances for these
two automobiles were $27,967 and $30,617, respectively. At March 31, 2008 and
December 31, 2007, $65,743 and $67,287 of the total outstanding loan balance
has
been reclassified to current portion of the liabilities that are payable within
one year, respectively.
13.
COMMITMENTS
Employee
Agreements
The
Company entered into an employment agreement with Mr. Gao Xincheng to employ
him
as the Chairman, effective as of October 23, 2007. The current term of the
agreement expires in October 22, 2010, but is renewable upon agreement by the
parties to the agreement, unless earlier terminated by either party. Mr. Gao’s
base monthly salary is $800. The Company pays premiums for Mr. Gao for social
insurance schemes such as Pension, Unemployment, Medical Insurance, etc. in
accordance with relevant PRC laws and regulations. The Company has the right
to
adjust the salary and welfare of Mr. Gao. In connection with this agreement,
Mr.
Gao also executed a Confidentiality and Non-competition Agreement with the
Company.
The
Company entered into an employment agreement with Ms. Li Gaihong to employ
her
as the Chief Financial Officer, effective as of October 23, 2007. The current
term of the agreement expires in October 22, 2010, but is renewable upon
agreement by the parties to the agreement, unless earlier terminated by either
party. Ms. Li’s base monthly salary is $500. The Company pays premiums for Ms.
Li for social insurance schemes such as Pension, Unemployment, Medical
Insurance, etc. in accordance with relevant PRC laws and regulations. The
Company has the right to adjust the salary and welfare of Ms. Li. In connection
with this agreement, Ms. Li also executed a Confidentiality and Non-competition
Agreement with the Company.
Lease
Agreements
The
Company leased one oil storage facility under long term, non-cancelable, and
renewable operating lease agreements since 2006 with expiration date on June
30,
2008.
The
Company leases another two oil storage facilities under one year,
non-cancelable, and renewable operating lease agreements expiring on December
31, 2007. One lease agreement has been renewed for one year with expiration
date
on December 31, 2008. The other lease agreement has been terminated as lease
term expired. The Company entered into a new one year, non-cancelable and
renewable lease agreement for a new oil storage facility with expiration date
on
December 31, 2008.
During
2007, the Company leases one gas station for operation under long term,
non-cancelable operating lease agreements with expiration date on December
31,
2027. This lease is classified as operating lease.
These
non-cancelable operating lease agreements require that the Company pays certain
operating expenses applicable for the leased premises. Future minimum rental
payments required under these operating leases are as follows:
|
Year
Ending March 31,
|
Amount
|
|||
|
2009
|
$
|
175,000
|
||
|
2010
|
20,000
|
|||
|
2011
|
20,000
|
|||
|
2012
|
20,000
|
|||
|
2013
|
20,000
|
|||
|
Years
thereafter
|
300,000
|
|||
|
Total
|
$
|
555,000
|
||
Total
rent expense for the three months ended March 31, 2008 and 2007 amounted to
$29,700, and $0, respectively.
Q-14
14.
STATUTORY RESERVES
Pursuant
to the new corporate law of the PRC effective January 1, 2006, the Company
is
required to maintain one statutory reserve by appropriating from its after-tax
profit before declaration or payment of dividends. The statutory reserve
represents restricted retained earnings.
Surplus
reserve fund
The
Company is required to transfer 10% of its net income, as determined under
PRC
accounting rules and regulations, to a statutory surplus reserve fund until
such
reserve balance reaches 50% of the Company’s registered capital. The Company
transferred $0 and $0 to this reserve for three months ended March 31, 2008
and
2007, respectively.
The
surplus reserve fund is non-distributable, other than during liquidation, and
can be used to fund previous years’ losses, if any, and may be utilized for
business expansion or converted into share capital by issuing new shares to
existing shareholders in proportion to their shareholding or by increasing
the
par value of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the registered
capital.
Common
welfare fund
Common
welfare fund is a voluntary fund that the Company can elect to transfer 5%
to
10% of its net income to this fund. The Company did not make any contribution
to
this fund for the three months ended March 31, 2008 and 2007.
This
fund
can only be utilized on capital items for the collective benefit of the
Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. This fund is non-distributable other than
upon liquidation.
15.
STOCKHOLDERS’ EQUITY
Reverse
Merger
On
October 23, 2007, the Company entered into a Share Exchange Agreement with
Baorun China, its shareholders Redsky Group Limited, Princeton Capital Group
LLP
and Castle Bison, Inc. and Stallion Ventures, LLC, the Company’s then principal
stockholders. Pursuant to the terms of the Share Exchange Agreement, Redsky
Group and Princeton Capital Group transferred all of their shares constituting
100% of the issued and outstanding ordinary shares of Baorun China in exchange
for the issuance of 22,454,545 shares of the Company’s common stock to Redsky
Group and 1,500,000 shares of the Company’s common stock to Princeton Capital
Group. As a result of this share exchange, Baorun China became a wholly-owned
subsidiary of the Company, and Redsky Group and Princeton Capital Group acquired
an aggregate of approximately 94.11% of the Company’s outstanding common
stock.
At
the
same time, Redsky Industrial, a WFOE subsidiary of Baorun China in the PRC,
executed a series of exclusive contractual agreements with Baorun Industrial.
These contractual agreements allow Redsky Industrial to, among other things,
secure significant rights to influence Baorun Industrial’s business operations,
policies and management, approve all matters requiring shareholder approval,
and
the right to include 100% of net income earned by Baorun Industrial as part
of
our Consolidated Financial Statements.
Q-15
We
have
determined a variable interest entity has been created in accordance with FASB
Interpretations - FIN 46(R): Consolidation of Variable Interest Entities (as
amended) (“FIN 46 (R)”). Under FIN 46 (R), as a result of the contractual
arrangements between Redsky Industrial and Baorun Industrial and the Exchange
Agreement, Baorun Industrial is presented as our consolidated
subsidiary.
Series
A Convertible Preferred
Stock with Series A-1 and Series A-2 Warrants issued for
cash
Concurrently
with the Share Exchange, the Company entered into a securities purchase
agreement (the “Purchase Agreement”) with one accredited investor for the sale
of securities, consisting of (i) 1,000,000 shares of the Company’s Series A
convertible preferred stock, (ii) a series A-1 warrant to purchase 3,409,091
shares of the Company’s common stock at an exercise price of $3.00, and (iii) a
Series A-2 warrant to purchase 2,272,728 shares of the Company’s common at an
exercise price of $4.40 (the Series A-1 and Series A-2 warrants, collectively
the “Warrants”), for aggregate gross proceeds equal to $10,000,000. Net proceeds
of $9,774,993 have been received by the Company.
Each
Preferred Share is convertible into a number of fully paid and non-assessable
shares of common stock equal to the quotient of the liquidation preference
amount per Preferred share, or $10.00, divided by the conversion price, which
initially is $2.20 per share, subject to certain adjustments, or approximately
4,545,455 shares of common stock if all 1,000,000 shares of Preferred Shares
converted. No dividend is declared during the year.
The
value
of warrants mentioned was determined by allocation of principal using the
Black-Scholes pricing model with the following assumptions: discount rate
- 1.37%; dividend yield - 0%; expected volatility - 30% and term of 5 years.
Following is a summary of the warrant activity:
|
Outstanding
as of December 31, 2007
|
5,681,819
|
|||
|
Granted
|
-
|
|||
|
Forfeited
|
-
|
|||
|
Exercised
|
-
|
|||
|
Outstanding
as of March 31, 2008
|
5,681,819
|
16.
OPERATING RISK
(a)
Country risk
Currently,
the Company’s revenues are mainly derived from sale of oil products in the PRC.
The Company hopes to expand its operations in the PRC, however, such expansion
has not been commenced and there are no assurances that the Company will be
able
to achieve such an expansion successfully. Therefore, a downturn or stagnation
in the economic environment of the PRC could have a material adverse effect
on
the Company’s financial condition.
(b)
Products risk
The
Company competes with larger companies, who have greater funds available for
expansion, marketing, research and development and the ability to attract more
qualified personnel. There can be no assurance that the Company will remain
competitive with larger competitors.
(c)
Exchange risk
The
Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount
of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate could
fluctuate depending on changes in the political and economic environments
without notice.
Q-16
(d)
Political risk
Currently,
the PRC is in a period of growth and is openly promoting business development
in
order to bring more business into the PRC. Additionally, the PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws
or
regulations are changed by the PRC government, the Company’s ability to operate
in the PRC could be affected.
(e)
Key
personnel risk
The
Company’s future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental
to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
(f)
Late
filing risk
If
the
Company does not timely file and have declared effective the registration
statement to register the shares being offered by the selling stockholders,
the
Company will be subject to liquidated damages in the amount of 0.75% of the
purchase price of the securities being registered, per month, subject to a
maximum limit of 7.5%.
Q-17
You
should rely only on the information contained in this prospectus. We have
not
authorized anyone to provide you with information different from that contained
in this prospectus or any prospectus supplement. This prospectus is not an
offer
of these securities in any jurisdiction where an offer and sale is not
permitted. The information contained in this prospectus is accurate only
as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.
2,844,174
Shares
Common
Stock
CHINA
BIO ENERGY
HOLDING
GROUP CO., LTD.
Preliminary
Prospectus
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, to be paid by the Registrant in connection with
the
issuance and distribution of the common stock being registered. All amounts
other than the SEC registration fee are estimates.
|
SEC
Registration Fee
|
$
|
371.71
|
||
|
Printing
and Engraving Expenses
|
-0-
|
|||
|
Legal
Fees and Expenses
|
100,000
|
|||
|
Accounting
Fees and Expenses
|
6,000
|
|||
|
Miscellaneous
|
-0-
|
|||
|
Total
|
$
|
106,371,71
|
Item
14. Indemnification of Directors and Officers
Section
145 of the Delaware General Corporation Law authorizes a court to award, or
a
corporation’s board of directors to grant, indemnity to directors and officers
in terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended (the “Securities
Act”).
The
Certificate of Incorporation and By-Laws of the Registrant provide that the
registrant shall indemnify any person to the full extent permitted by the
Delaware General Corporation Law (the “DGCL”). Section 145 of the DGCL,
relating to indemnification, is hereby incorporated herein by
reference.
In
accordance with Section 102(a)(7) of the DGCL, the Certificate of
Incorporation of the registrant eliminates the personal liability of directors
to the registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director with certain limited exceptions set forth in
Section 102(a)(7).
In
addition, the registrant currently maintains an officers’ and directors’
liability insurance policy which insures, Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers or persons controlling the registrant, pursuant to the
foregoing provisions, the Registrant has been informed that in the opinion
of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
Item
15. Recent Sales of Unregistered Securities
The
following private placements of the Company’s securities were made in reliance
upon the exemption from registration under Section 4(2) of the Securities Act
of
1933, as amended, and/or, Rule 506 of Regulation D promulgated under the
Securities Act. The Company did not use underwriters in any of the following
private placements.
On
October 23, 2007, we consummated a private sale of our securities to one
accredited investor, consisting of 1,000,000 shares of our Series A Convertible
Stock, a Series A-1 warrant to purchase 3,409,091 shares of our common stock
at
an exercise price of US$3.00 per share and a Series A-2 warrant to purchase
2,272,728 shares of our common stock at an exercise price of US$4.40 per share,
for aggregate gross proceeds equal to $10,000,000.
II-1
On
August
10, 2007, we completed the private placement of 450,000 units to accredited
investors, which resulted in gross proceeds to the Company of $75,000 Each
unit
consisted of one share of common stock and a warrant to purchase one
additional share of common stock. The warrants were subsequently
cancelled.
On
March
23, 2007, we issued 20,000 shares of our common stock to our chief financial
officer as payment of accrued compensation in the amount of $2,600.
On
March
20, 2007, we issued 6,300,000 shares of our common stock to eight shareholders
upon conversion of 63,000 shares of preferred stock.
On
November 3, 2006, we completed the sale of 225,000 shares of authorized,
previously unissued Series A Convertible Preferred Stock for gross cash proceeds
of $123,750 or $0.55 per share to accredited investors.
On
March
9, 2006, we issued an aggregate of 460,000 restricted shares of our common
stock, par value $.001 per share, to five accredited investors in exchange
for
promissory notes in the aggregate principal amount of $230,000 issued to such
investors during 2003 by our formerly wholly-owned subsidiary, Advanced Imaging
Systems, LLC, in accordance with the terms of such notes.
On
September 21, 2005 and February 24, 2006, we issued 210,000 and 400,000
restricted shares, respectively, of our common stock, par value $.001 per share,
to five accredited investors in exchange for promissory notes in the aggregate
principal amount of $305,000 issued to such investors during 2003 by our
formerly wholly-owned subsidiary, Advanced Imaging Systems, LLC, in accordance
with the terms of such notes.
On
July
29, 2005, we sold an aggregate of 225,000 restricted shares of our common stock,
par value $.001 per share, to three accredited investors, and on August 9,
2005,
we sold 80,000 restricted shares of our common stock to an accredited investor
in private transactions pursuant to subscription agreements between each such
investor and us. The investors paid $.10 per share, for aggregate gross proceeds
of $30,500. These sales were the first and second closing of a private placement
of up to 1,500,000 restricted shares of our common stock authorized by our
board
of directors.
Item
16. Exhibits and Financial Statement Schedules
EXHIBITS
The
following exhibits are filed as part of this registration
statement:
|
EXHIBIT
NUMBER |
DESCRIPTION
|
|
|
2.1
|
Share
Exchange Agreement dated as of October 23, 2007. (1)
|
|
|
2.2
|
Agreement
and Plan of Merger, dated November 15, 2007. (2)
|
|
|
3.1
|
Certificate
of Correction filed on July 24, 2007. (3)
|
|
|
3.1
|
Certificate
of Amendment filed on June 11, 2007. (4)
|
|
|
3.1
|
Articles
of Incorporation. (5)
|
|
|
3.1
|
Certificate
of Amendment to Articles of Incorporation. (6)
|
|
|
3.1
|
Certificate
of Ownership and Merger, dated November 15, 2007. (2)
|
|
|
3.1*
|
Certificate
of Incorporation of China Bio Energy Holding Group Co.,
Ltd.
|
|
|
3.2
|
By-laws.
(5)
|
|
|
4.1
|
Form
of Warrant. (1)
|
|
|
4.2
|
Amended
and Restated Certificate of Designation of the Relative Rights
and
Preferences of the Series A Convertible Preferred Stock.
(1)
|
|
|
5.1+
|
Opinion
of Loeb & Loeb regarding legality of the
securities.
|
|
|
10.1
|
Securities
Purchase Agreement, dated as of October 23, 2007. (1)
|
|
|
10.2
|
Insider
Registration Rights Agreement, dated as of October 23, 2007.
(1)
|
|
|
10.3
|
Financing
Registration Rights Agreement, dated as of October 23, 2007.
(1)
|
|
|
10.4
|
Share
Escrow Agreement, dated as of October 23, 2007.
(1)
|
II-2
|
10.5
|
Pubic
Relations Escrow Agreement, Dated as of October 23, 2007.
(1)
|
|
|
10.6*
|
Exclusive
Business Cooperation Agreement by and between Redsky China and Xi’an
Baorun , dated as of October 19, 2007.
|
|
|
10.7*
|
Exclusive
Option Agreement by and between Gao Xincheng and Xi’an Baorun, dated as of
October 19, 2007.
|
|
|
10.8*
|
Exclusive
Option Agreement by and between Gao Huiling and Xi’an Baorun, dated as of
October 19, 2007.
|
|
|
10.9*
|
Exclusive
Option Agreement by and between Liu Yunlong and Xi’an Baorun, dated as of
October 19, 2007.
|
|
|
10.10*
|
Equity
Pledge Agreement by and among Redsky China, Xi’an Baorun and Gao Xincheng,
dated as of October 19, 2007.
|
|
|
10.11*
|
Equity
Pledge Agreement by and among Redsky China, Xi’an Baorun and Gao Huiling,
dated as of October 19, 2007.
|
|
|
10.12*
|
Equity
Pledge Agreement by and among Redsky China, Xi’an Baorun and Liu Yunlong,
dated as of October 19, 2007.
|
|
|
10.13*
|
Incentive
Option Agreement by and between Redsky and Gao Xincheng, dated as
of
October 19, 2007.
|
|
|
10.14
|
Power
of Attorney of Gao Xincheng. (7)
|
|
|
10.15
|
Power
of Attorney of Gao Huiling. (7)
|
|
|
10.16
|
Power
of Attorney of Liu Yunlong. (7)
|
|
|
10.17
|
Nominee
Letter between Redsky China and Gao Xincheng. (7)
|
|
|
10.18
|
Nominee
Letter between Redsky China and Gao Huiling. (7)
|
|
|
10.19
|
Nominee
Letter between Redsky China and Liu Yunlong. (7)
|
|
|
10.20
|
Employment
Agreement between Baorun Industrial and Gao Xincheng, dated as of
October
23, 2007. (7)
|
|
|
10.21
|
Employment
Agreement between Baorun Industrial and Li Gaihong, dated as of October
23, 2007. (7)
|
|
|
10.22
|
Employment
Agreement between Baorun Industrial and Chen Jun, dated as of October
23,
2007. (7)
|
|
|
10.23
|
Amendment
to Exclusive Business Cooperation Agreement, dated March 24, 2008.
(7)
|
|
|
10.24
|
Sales
Contract of Finished Oil by and between Chuan Yu Branch of China
Petroleum
& Chemical Sales Corporation and Baorun Industrial, dated as of
January 10, 2007. (7)
|
|
|
10.25
|
Finished
Oil Sales Contract by and between Sales Company of Shaanxi Yanchang
Petroleum Oil (Group) Co., Ltd. and Baorun Industrial, dated as of
January
10, 2007. (7)
|
|
|
10.26
|
Sales
Contract of Finished Oil by and between Shangdong Jin Cheng Petrochemical
Group Co. Ltd. and Baorun Industrial, dated January 10, 2007.
(7)
|
|
|
10.27
|
Sales
Contract of Finished Oil Zibo City Lin Zi Lu Hua Refined Chemicals
Co.,
Ltd. and Baorun Industrial, dated November 28, 2006.
(7)
|
|
|
10.28
|
Sales
Contract of Finished Oil by and between Hubei Hong Xin Petrochemical
Industrial Co., Ltd. and Baorun Industrial, dated September 16, 2006.
(7)
|
|
|
10.29
|
Sales
Contract of Finished Oil by and between Shouguang City Lian Meng
Petroleum
& Chemical Co., Ltd. and Baorun Industrial, dated as of May 10, 2005.
(7)
|
|
|
14
|
Code
of Business Conduct and Ethics. (7)
|
|
|
21*
|
List
of Subsidiaries.
|
|
|
23.1+
|
Consent
of Sherb & Co., LLP.
|
|
|
23.2*
|
Consent
of Loeb & Loeb LLP (included in the opinion filed as Exhibit
5.1).
|
+
Filed
herewith.
*
Previously filed.
|
(1)
|
Incorporated
by reference to the Company’s Form 8-K filed on October 29,
2007.
|
|
(2)
|
Incorporated
by reference to the Company’s Form 8-K filed on November 23,
2007.
|
|
(3)
|
Incorporated
by reference to the Company’s Form 10-QSB filed on November 13,
2007.
|
|
(4)
|
Incorporated
by reference to the Company’s Form 10-QSB filed on August 3,
2007.
|
|
(5)
|
Incorporated
by reference to the Company’s Registration Statement on Form
10-SB.
|
|
(6)
|
Incorporated
by reference to the Company’s Definitive Information Statement filed on
September 19, 2003.
|
|
(7)
|
Incorporated
by reference to the Company’s Form 10-K filed on March 31,
2008.
|
II-3
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made
pursuant to this Registration Statement, a post-effective amendment to this
registration statement:
(i)
to include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933.
(ii)
to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement.
(iii)
to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(2)
That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona
fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4)
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the
Registrant’s annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall
be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be
the initial bona fide offering thereof.
(5)
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of
the Registrant pursuant to the foregoing provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the
payment by the Registrant of expenses incurred or paid by a director, officer
or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
II-4
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of
the
requirements for filing this Amendment No. 5 to Form S-1 and has authorized
this Amendment No. 5 to Form S-1 to be signed on its behalf by the
undersigned in the City of Xi’an, People’s Republic of China, on June 30,
2008.
|
CHINA
BIO ENERGY HOLDING GROUP CO., LTD.
|
|||
|
By:
|
/s/
Gao Xincheng
|
||
|
Name:
Gao Xincheng
|
|||
|
Title:
Chief Executive Officer and
President
|
|||
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on
the
dates indicated:
|
Signature
|
Title
|
Date
|
||
|
/s/
Gao Xincheng
|
Chairman,
Chief Executive Officer and President
|
June
30, 2008
|
||
|
Gao
Xincheng
|
(Principal
Executive Officer)
|
|||
|
/s/
Li Gaihong
|
Chief
Financial Officer (Principal Account Officer and
|
June
30, 2008
|
||
|
Li
Gaihong
|
Principal
Financial Officer) and Director
|
II-5
EXHIBIT
INDEX
|
EXHIBIT
NUMBER |
DESCRIPTION
|
|
|
2.1
|
Share
Exchange Agreement dated as of October 23, 2007. (1)
|
|
|
2.2
|
Agreement
and Plan of Merger, dated November 15, 2007. (2)
|
|
|
3.1
|
Certificate
of Correction filed on July 24, 2007. (3)
|
|
|
3.1
|
Certificate
of Amendment filed on June 11, 2007. (4)
|
|
|
3.1
|
Articles
of Incorporation. (5)
|
|
|
3.1
|
Certificate
of Amendment to Articles of Incorporation. (6)
|
|
|
3.1
|
Certificate
of Ownership and Merger, dated November 15, 2007. (2)
|
|
|
3.1*
|
Certificate
of Incorporation of China Bio Energy Holding Group Co.,
Ltd.
|
|
|
3.2
|
By-laws.
(5)
|
|
|
4.1
|
Form
of Warrant. (1)
|
|
|
4.2
|
Amended
and Restated Certificate of Designation of the Relative Rights
and
Preferences of the Series A Convertible Preferred Stock.
(1)
|
|
|
5.1+
|
Opinion
of Loeb & Loeb regarding legality of the
securities.
|
|
|
10.1
|
Securities
Purchase Agreement, dated as of October 23, 2007. (1)
|
|
|
10.2
|
Insider
Registration Rights Agreement, dated as of October 23, 2007.
(1)
|
|
|
10.3
|
Financing
Registration Rights Agreement, dated as of October 23, 2007.
(1)
|
|
|
10.4
|
Share
Escrow Agreement, dated as of October 23, 2007. (1)
|
|
|
10.5
|
Pubic
Relations Escrow Agreement, Dated as of October 23, 2007.
(1)
|
|
|
10.6*
|
Exclusive
Business Cooperation Agreement by and between Redsky China and
Xi’an
Baorun , dated as of October 19, 2007.
|
|
|
10.7*
|
Exclusive
Option Agreement by and between Gao Xincheng and Xi’an Baorun, dated as of
October 19, 2007.
|
|
|
10.8*
|
Exclusive
Option Agreement by and between Gao Huiling and Xi’an Baorun, dated as of
October 19, 2007.
|
|
|
10.9*
|
Exclusive
Option Agreement by and between Liu Yunlong and Xi’an Baorun, dated as of
October 19, 2007.
|
|
|
10.10*
|
Equity
Pledge Agreement by and among Redsky China, Xi’an Baorun and Gao Xincheng,
dated as of October 19, 2007.
|
|
|
10.11*
|
|
Equity
Pledge Agreement by and among Redsky China, Xi’an Baorun and Gao Huiling,
dated as of October 19, 2007.
|
|
10.12*
|
Equity
Pledge Agreement by and among Redsky China, Xi’an Baorun and Liu Yunlong,
dated as of October 19, 2007.
|
|
|
10.13*
|
Incentive
Option Agreement by and between Redsky and Gao Xincheng, dated
as of
October 19, 2007.
|
|
|
10.14
|
Power
of Attorney of Gao Xincheng. (7)
|
|
|
10.15
|
Power
of Attorney of Gao Huiling. (7)
|
|
|
10.16
|
Power
of Attorney of Liu Yunlong. (7)
|
|
|
10.17
|
Nominee
Letter between Redsky China and Gao Xincheng. (7)
|
|
|
10.18
|
Nominee
Letter between Redsky China and Gao Huiling. (7)
|
|
|
10.19
|
Nominee
Letter between Redsky China and Liu Yunlong. (7)
|
|
|
10.20
|
Employment
Agreement between Baorun Industrial and Gao Xincheng, dated as
of October
23, 2007. (7)
|
|
|
10.21
|
Employment
Agreement between Baorun Industrial and Li Gaihong, dated as of
October
23, 2007. (7)
|
|
|
10.22
|
Employment
Agreement between Baorun Industrial and Chen Jun, dated as of October
23,
2007. (7)
|
|
|
10.23
|
Amendment
to Exclusive Business Cooperation Agreement, dated March 24, 2008.
(7)
|
|
|
10.24
|
Sales
Contract of Finished Oil by and between Chuan Yu Branch of China
Petroleum
& Chemical Sales Corporation and Baorun Industrial, dated as of
January 10, 2007. (7)
|
|
|
10.25
|
Finished
Oil Sales Contract by and between Sales Company of Shaanxi Yanchang
Petroleum Oil (Group) Co., Ltd. and Baorun Industrial, dated as
of January
10, 2007. (7)
|
|
|
10.26
|
Sales
Contract of Finished Oil by and between Shangdong Jin Cheng Petrochemical
Group Co. Ltd. and Baorun Industrial, dated January 10, 2007.
(7)
|
II-6
|
10.27
|
Sales
Contract of Finished Oil Zibo City Lin Zi Lu Hua Refined Chemicals
Co.,
Ltd. and Baorun Industrial, dated November 28, 2006.
(7)
|
|
|
10.28
|
Sales
Contract of Finished Oil by and between Hubei Hong Xin Petrochemical
Industrial Co., Ltd. and Baorun Industrial, dated September 16, 2006.
(7)
|
|
|
10.29
|
Sales
Contract of Finished Oil by and between Shouguang City Lian Meng
Petroleum
& Chemical Co., Ltd. and Baorun Industrial, dated as of May 10, 2005.
(7)
|
|
|
14
|
Code
of Business Conduct and Ethics. (7)
|
|
|
21*
|
List
of Subsidiaries.
|
|
|
23.1+
|
Consent
of Sherb & Co., LLP.
|
|
|
23.2*
|
Consent
of Loeb & Loeb LLP (included in the opinion filed as Exhibit
5.1).
|
+
Filed
herewith.
*
Previously filed.
|
(1)
|
Incorporated
by reference to the Company’s Form 8-K filed on October 29,
2007.
|
|
(2)
|
Incorporated
by reference to the Company’s Form 8-K filed on November 23,
2007.
|
|
(3)
|
Incorporated
by reference to the Company’s Form 10-QSB filed on November 13,
2007.
|
|
(4)
|
Incorporated
by reference to the Company’s Form 10-QSB filed on August 3,
2007.
|
|
(5)
|
Incorporated
by reference to the Company’s Registration Statement on Form
10-SB.
|
|
(6)
|
Incorporated
by reference to the Company’s Definitive Information Statement filed on
September 19, 2003.
|
|
(7)
|
Incorporated
by reference to the Company’s Form 10-K filed on March 31,
2008.
|
II-7