form10ksba.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB/A
(Amendment
No. 1)
|
x
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
For
the fiscal year ended December 31, 2006
|
|
|
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
For
the transition period from ____________ to
______________
|
|
|
|
Commission
File Number 000-51753
SINO
CLEAN ENERGY INC.
(Exact
name of Registrant as specified in its charter)
|
NEVADA
(State
or other jurisdiction of
incorporation
or organization)
|
75-2882833
(I.R.S.
Employer Identification No.)
|
|
|
|
|
Room
2205, Suite A, Zhengxin Building,
No.
5, Gaoxin 1st Road, Gao Xin District,
Xi’an, Shaanxi Province,
People’s Republic of China
(Address
of principal executive offices)
|
N/A
(Zip
Code)
|
|
|
|
|
(8629)
8209-1099
(Issuer's
telephone number, including area code)
|
|
|
|
Securities
registered pursuant to Section 12(b) of the Act:
|
|
|
|
|
Title
of each class
None
|
Name
of each exchange on which registered
None
|
|
|
|
|
Securities
registered pursuant to Section 12(g) of the Act:
|
|
Title
of Class
Common
Stock, $.001 par value
|
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x No o
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Issuer's
revenues for its most recent fiscal year: $7,253,887
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant on April 30, 2007 was approximately
$10,246,510. The per share stock price for computational purposes was $0.55,
based on the closing sale price per share for the Registrant's common stock on
the OTC Bulletin Board on April 30, 2007. This value is not intended to be a
representation as to the value or worth of the Registrant's common stock. The
number of non-affiliates of the Registrant has been calculated by subtracting
the number of shares held by persons affiliated with the Registrant from the
number of outstanding shares.
The
number of shares of the Registrant's common stock outstanding on April 30 2007
was 28,227,250.
Transitional
Business Disclosure Format (Check One). Yes o No x
|
|
TO
ANNUAL REPORT ON FORM 10-KSB
|
|
|
FOR
YEAR ENDED DECEMBER 31, 2006
|
|
|
|
Page
|
|
|
|
|
Introductory
Notes - Forward Looking Statements and Certain Terminology
|
A-2
|
|
Explanatory
Note
|
A-3
|
|
PART
I
|
|
|
|
Item
1.
|
Description
of Business
|
1
|
|
Item
2.
|
Description
of Property
|
7
|
|
Item
3.
|
Legal
Proceedings
|
8
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
8
|
|
PART
II
|
|
|
|
Item
5.
|
Market
for Registrant's Common Equity and Related Stockholder
Matters
|
9
|
|
Item
6.
|
Management's
Discussion and Analysis or Plan of Operation
|
12
|
|
Item
7.
|
Financial
Statements
|
30
|
|
Item
8.
|
Changes
in and Disagreements on Accounting and Financial
Disclosure
|
31
|
|
Item
8A.
|
Controls
and Procedures
|
31
|
|
Item
8B.
|
Other
Information
|
31
|
|
PART
III
|
|
|
|
Item
9.
|
Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act
|
31
|
|
Item
10.
|
Executive
Compensation
|
33
|
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management
|
35
|
|
Item
12.
|
Certain
Relationships and Related Transactions
|
35
|
|
Item
13.
|
Exhibits
|
37
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
39
|
INTRODUCTORY
NOTES - FORWARD LOOKING STATEMENTS AND CERTAIN TERMINOLOGY
Some of
the statements made by us in this Annual Report on Form 10-KSB are
forward-looking in nature, including but not limited to, statements relating to
our future revenue, product development, demand, acceptance and market share,
gross margins, levels of research and development, our management's plans and
objectives for our current and future operations, and other statements that are
not historical facts. Forward-looking statements include, but are not limited
to, statements that are not historical facts, and statements including forms of
the words "intend", "believe", "will", "may", "could", "expect", "anticipate",
"plan", "possible", and similar terms. Actual results could differ materially
from the results implied by the forward looking statements due to a variety of
factors, many of which are discussed throughout this Annual Report and
particularly in the sections titled “Factors That May Affect Future Results” and
“Factors Affecting Business, Operating Results and Financial Condition”, both of
which are included in the section titled “Management’s Discussion and Analysis
of Plan of Operation.” Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to publicly release any revisions to these
forward-looking statements that may reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events. Factors that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by us include, but are not limited
to:
|
|
●
|
our
ability to finance our activities and maintain our financial
liquidity;
|
|
|
●
|
our
ability to attract and retain qualified, knowledgeable
employees;
|
|
|
●
|
the
impact of general economic conditions on our
business;
|
|
|
●
|
postponements,
reductions, or cancellations in orders from new or existing
customers;
|
|
|
●
|
the
limited number of potential customers for our
products;
|
|
|
●
|
the
variability in gross margins on our
products;
|
|
|
●
|
our
ability to design and market new products
successfully;
|
|
|
●
|
our
failure to acquire new customers in the
future;
|
|
|
●
|
deterioration
of business and economic conditions in our
markets;
|
|
|
●
|
intensely
competitive industry conditions with increasing price competition;
and
|
|
|
●
|
the
rate of growth in the alternative fuel
markets.
|
In this
document, the words "we," "our," "ours," "us," and “Company” refer to Sino
Clean Energy Inc. (formerly China West Coal Energy Inc.) and our
subsidiaries.
EXPLANATORY
NOTE
This
Amendment No. 1 to Sino Clean Energy Inc.’s (formerly China West Coal Energy
Inc.) Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006
("Form 10-KSB/A") is being filed in connection with the Company’s restatement of
its consolidated financial statements for fiscal 2006 (“2006 Financial
Statements”) that were previously attached to its original Annual Report on Form
10-KSB filed on May 3, 2007. This amendment is filed to: (1) add
disclosure in Item 7 and Note 1 to the financial statements regarding the
corporation reorganization and business activities, including that the Company
changing its company name to “Sino Clean Energy Inc.”; (2) delete disclosure in
Item 7 and Note 3 to the financial statements regarding going concern and
management plans; (3) add disclosure in Item 7 and Note 3 to the financial
statements regarding restatement of the Company’s 2006 Financial Statements,
including the nature and impact of the restatement on the financial statements
including adjustments to the Company’s consolidated balance sheet and
consolidated income statement ; (4) delete disclosure in Item 7, Note 4(a)
and original Note 8 to the financial statements regarding the
description of reclassification of assets held for resales and discontinued
operation and the establishment and disposal of Shaanxi Suoke New Energy
Industry Company Limited in 2005; (5) delete the wording “from the discontinued
operations” of Note 4(d) to the financial statements in Item 7; (6) revise the
description of “Leasehold properties” to “Building” of Note 4(f) to the
financial statements in Item 7; (7) revise the description of “intangible
assets” to “prepaid land use right” of Note 4(g) to the financial statements in
Item 7; (8) delete disclosure in Item 7 and original Note 4(n) to the financial
statements regarding the accounting policy of stock based compensation; (9)
revise the description of the accounting policy of foreign currency translation
of Note 4(q) to the financial statements in Item 7; (10) add disclosure to in
items 7 and Note 4(s) to the financial statements regarding the recently issued
accounting pronouncement “FASB Statement No. 161; (11) delete disclosure in Item
7 and original Note 8 to the financial statements regarding the note of
Investment; (12) restate the property, plant and equipment of Note 9
to the financial statements in Item 7 regarding reclassification of buildings
from assets held for sales of discontinued operations; (13) insert disclosure in
Item 7 and Note 10 to the financial statements regarding prepaid land use
right; (14) revise disclosure in Item 7 and Note 11 to the financial
statements regarding the exclusion of land use right from intangible assets and
deleting the description of land use right and patent; (15) revise disclosure in
Item 7 and Note 14 to the financial statements regarding: (i) deleting the
assets and liabilities of discontinued operation of Note 14(a); (ii) excluding
rental income from the result of discontinued operation of Note 14(b); and (iii)
deleting cash flows of discontinued operations in Note 14(c); (16) deleting
disclosure in Item 7 and original Note 15 to the financial statements regarding
the assets held for sale; (17) add disclosure in Item 7 and Note 15 to the
financial statements regarding the component of income tax expenses and
reconciliation of effective tax rate; (18) revise disclosure in Item 7 and Note
16 to the financial statements by adjusting retroactively adjusted the weighted
average number of common share outstanding by deeming the three for one forward
stock split in 2007 occurred as of the beginning of the earliest period
presented; (19) delete the company name of related party in Note 17 to the
financial statements in Item 7; (20) revise disclosure in Item 7 and Note 17 to
the financial statements and Item 12 under the paragraph “Related Party
Transaction” to reflect that Mr. Peng Zhou is a minority shareholder of the
Company’s subsidiary; (21) revise disclosure in Item 7 and Note 18(c) regarding
the current status of building; (21) delete disclosure in Item 7 and original
Notes 19 and 20 regarding subsequent event and reclassification, respectively;
(23) add disclosure to Item 1 regarding the Company’s August 2007 name change to
Sino Clean Energy Inc.; (24) add disclosure under Item 6 titled “Restatement of
2006 Financial Statements” describing and explaining the restatement of the 2006
Financial Statements and delete the discussion under Item 7 regarding “Going
Concern”; (25) revise the disclosure in Item 6 to adjust the total general and
administrative expenses and the total revenues (from discontinued operations)
for fiscal year 2005 under the section “Results of Operation”; (26) revise the
disclosures in Item 6 under the paragraph titled “Liquidity and Capital
Resources” to reflect the restated reduced amounts for cash from operating
activities, cash expenditure in investing activities, cash generated from
financing activities, total current assets and net working capital as of
December 31, 2006; (27) add disclosure in Item 14 regarding the fees billed by
the Company’s current auditor in connection with its audit of the Company’s
restated financial statements for the fiscal year ended December 31, 2006; and
(28) revise disclosure in Item 2 to clarify that the Company owns the land use
right for the property located at Yau Zhou Ou in Tongchuan City until December
8, 2057.
Except as
required to reflect the changes noted above, this Form 10-KSB/A does not attempt
to modify or update any other disclosures
set forth in the original filing. Additionally, this Form 10-KSB/A does not
purport to provide a general update or discussion of any other developments of
the Registrant subsequent to the original filing. The filing of this
Form 10-KSB/A shall not be deemed an admission that the original filing, when
made, included any untrue statement of material fact or omitted to state a
material fact necessary to make a statement not misleading.
PART
I
ITEM
1. DESCRIPTION OF BUSINESS
History Of Endo Networks,
Inc.
China
West Coal Energy Inc. (“CWCE” or the “Company”), which as of August 2007 has
subsequently changed its name to Sino Clean Energy Inc., is engaged in the
research, development, production and sale of its “coal water mixture” product,
a fuel substitute for oil, gas or coal. The Company was originally incorporated
in Texas as “Discount Mortgage Services, Inc.” on July 11, 2000 and in September
2001, the Company purchased Endo Networks, Inc., a corporation incorporated in
Ontario, Canada on January 11, 2001 (“Endo Canada”). In November 2001, the
Company changed its name to Endo Networks, Inc. and was redomiciled to the State
of Nevada in December 2002.
Prior to
the Share Exchange transaction described below, CWCE conducted through, and all
of CWCE’s assets were contained within, Endo Canada, in which conceptual and
software development was ongoing for approximately two years by the Company
founders, through ongoing contract relationships with software development
companies. The Company helped businesses acquire new customers and build sales
and loyalty with existing customers. The Company used interactive technology
such as touch screen kiosks, handheld computers, and websites, combined with
promotional marketing tactics to filter large numbers of consumers, to find
qualified prospects, and even precondition them for a sale. Our services can be
deployed within a business' own retail environment, to increase sales with their
own customer base by increasing frequency of visit and/or average spend with
individual customers, or they can be deployed within a partner location
such as an office tower or a consumer show, to find and acquire qualified new
customers. The Company’s prior areas of expertise included: web, kiosk,
handheld, wireless, loyalty, promotional marketing, direct marketing,
integration with point of sale, surveys, incentive, sampling, and field and
event marketing. The client base included specialty retail, general retail, food
service, automotive, alcohol, energy, consumer packaged goods, entertainment,
amateur sports, and telecommunications companies.
However,
since its inception, the Company had incurred losses and had substantial trouble
maintaining consistent cash flow necessary to operate our business. As recently
as its last fiscal year and quarter, the Company reported losses and working
with a capital deficit for those same periods. The additional investment and
infrastructure needed to sustain our business and develop our operations could
not be supported by its current cash flow. In view of the foregoing, the
Company’s lack of our growth and the limited platform for our future growth
in its current state, the Company’s Board determined that it would be in our
stockholders’ best interests to sell all of Endo’s assets to Peter B. Day, the
Company’s previous President, CEO and sole director prior to the Closing of the
Share Exchange. In making the determination to sell all of our assets to Mr.
Day, the Board gave primary consideration to Mr. Day’s familiarity with our
operations and business relations. The Company’s Board believed that Mr. Day’s
knowledge of our operations would lead to an efficient and expeditious sale
process. The Board was also able to negotiate Mr. Day’s agreement to assume any
liability with respect to the Company’s assets prior to the Closing. The Asset
and Share Purchase Agreement (the “Purchase Agreement”) by and between the
Company and Mr. Day was approved by our Board and executed on June 26, 2006, and
a majority of our shareholders approved the Purchase Agreement at our Annual
Shareholder meeting on September 5, 2006. The Purchase Agreement was filed as
Exhibit A to our Schedule 14A Information Statement, which was filed with the
Securities and Exchange Commission on August 8, 2006, and is incorporated herein
by reference. The description of the Purchase Agreement contained herein and the
transactions contemplated thereby do not purport to be complete and are
qualified in their entirety by reference to such documents. On September 30,
2006, the Company completed its sale of all of its assets and shares of Endo
Canada to Mr. Day, pursuant to the terms of that certain Purchase Agreement.
Following the Closing of the Purchase Agreement, the Company sought to identify,
evaluate and investigate various companies with the intent that, if such
investigation warrants, a transaction could be negotiated and completed
pursuant to which the Company would acquire a target company with an operating
business with the intent of continuing the acquired company’s business as a
publicly held entity.
On
October 18, 2006, the Company executed a Share Exchange Agreement (“Exchange
Agreement”) by and among Hangson Limited, a business company incorporated under
the laws of the British Virgin Islands (“Hangson”), and the stockholders of 100%
of Hangson’s common stock (the “Hangson Stockholders”), on the one hand,
and Endo and a majority of the Company’s stockholders (“Endo Stockholders”), on
the other hand. The closing of this share exchange transaction (the “Share
Exchange”) occurred on October 20, 2006 (the “Closing Date” or the “Closing”).
Separately, Hangson entered into consulting service agreements and
equity-related agreements (the “Contractual Arrangements”) with Shaanxi Suoang
Biological Science & Technology Co., Ltd. (“Shaanxi Suoang”), which is a
limited liability company headquartered in the People’s Republic of China
(“PRC”) and organized under the laws of the PRC. Hangson’s business operations
are conducted through Shaanxi Suoang under these Contractual
Arrangements.
Under the
Exchange Agreement, on the Closing Date, the Company issued a total of
26,000,000 shares of Common Stock (the “ENDO Shares”) to the Hangson
Stockholders and to Viking Partners, Inc., a consultant in this transaction, in
exchange for 100% of the common stock of Hangson. Additionally, immediately
prior to the Closing Date, Peter B. Day, the Company’s then President, CEO and
sole director voluntarily cancelled 715,500 (post-reverse split) shares of the
915,500 (post 1 for 5 reverse split) shares of the Company’s common stock that
he owns; and three of Company’s other shareholders also voluntarily cancelled a
total of 438,850 (post 1 for 5 reverse split) shares of the Company’s common
stock that they own, and the Company issued an additional 669,600 shares
pursuant to certain anti-dilution provisions contained in agreements the Company
had with two consultants. Also pursuant to the Share Exchange, and as approved
by a majority of the Company’s shareholders, the Company split its common stock
on a 1-for-5 reverse basis (the “Reverse Split”) prior to the Closing Date.
After the cancellations, the consultant anti-dilution share issuances, the
Reverse Split and minor corrective stock issuances for rounding of fractional
shares resulting from the Reverse Split, the Company had approximately 2,227,250
shares of common stock outstanding and after the Share Exchange, the Company had
approximately 28,227,250 shares of common stock outstanding, with the Hangson’s
Shareholders owning approximately 85% of the Company’s common stock. In
addition, at Closing, Hangson paid the Company’s creditors a total of US
$500,000 for services rendered, in order to satisfy certain obligations as set
forth in the Exchange Agreement. We accounted for this Share Exchange as a
reverse acquisition and recapitalization and, as a result, the Company’s
consolidated financial statements are in substance those of Hangson, with the
assets and liabilities, and revenues and expenses, of the Company being included
effective from the date of the Share Exchange.
From and
after the Closing Date of the Share Exchange, the Company’s primary operations
consisted of the operations of Hangson and its variable interest entity (“VIE”),
Shaanxi Suo’ang Biological Science & Technology Co., Ltd. (“Shaanxi
Suoang”)
Having no
substantive operation of its own, Hangson, through its VIE, Shaanxi Suoang is
currently engaged in the research, development, production and sale of
“coal-water mixture,” which is a fuel substitute for coal, oil or gas. Shaanxi
Suoang operates the “coal-water mixture” business through its subsidiary,
Shaanxi Suo’ang New Energy Enterprise Company Limited.
Recent Developments
On May 8,
2006, Shaanxi Suoang entered into an agreement to establish a subsidiary named
Shaanxi Suo’ang New Energy Enterprise Company Limited (“Suoang New Energy”) in
which Shaanxi Suoang has injected a capital of $496,000 representing an 80%
equity interest in Suoang New Energy. Suoang New Energy was formed for the
purpose of engaging in the research, development, production and sale of “coal
water mixture”, a fuel to substitute for coal, oil or gas.
During
the majority of the 2006 fiscal year, we were engaged in two lines of business:
production and sale of coal-polymer (“COPO”) resin products, including but not
limited to, degradable mulch used for the conservation of moisture and warmth of
soil and protection of the roots of plants, and materials used for plastic
injection molding, electric wire covering, and garbage bags, and also its
“coal-water mixture” fuel substitute business described above. However, the
Company has subsequently decided to focus solely on its coal-water mixture fuel
product business. In December 2006, we began phasing out of the COPO resin
product business by selling our patented technology related to COPO resin
production. Further, we ceased operations of our COPO resin product
manufacturing plant in January 2007, and we also sold the COPO resin plant
machinery. Going forward, we will concentrate on the development, production and
sale of our “coal-water mixture” fuel substitute. In January 2007, we entered
into our first contracts for the sale of our coal water mixture product. We
expect production of our coal water mixture will commence in July
2007.
Effective
January 4, 2007, we changed our name from “Endo Networks, Inc.” to “China West
Coal Energy Inc.” (the “Name Change”) and we increased the number of our
authorized shares of capital stock to 250,000,000 shares, which includes
200,000,000 shares of common stock and 50,000,000 shares of preferred stock
(“Authorized Shares Amendment”), by filing a Certificate of Amendment to amend
our Articles of Incorporation. On November 27, 2006, holders of a majority of
our outstanding common stock approved the Name Change and the Authorized Shares
Amendment to our Articles of Incorporation. On December 8, 2006, we filed a
definitive information statement on Schedule 14C with the SEC, which was
delivered to our stockholders of record to notify them that the stockholders had
approved the Name Change and the Authorized Shares Amendment to our Articles of
Incorporation.
As
discussed more fully in the Form 8-K Current Report filed with the SEC on
January 16, 2007, the Company’s Board of Directors, by unanimous written
consent, approved a change of the Company ’s fiscal year. The Company’s new
fiscal year will begin on January 1 and end on December 31 of each year, and
this change is applicable with the year ending December 31,
2006.
Throughout
the remainder of this report, when we use phrases such as "we," "our,"
"Company," "us," we are referring to CWCE, Hangson, and Shaanxi Suoang as a
combined entity.
Overview of Hangson
Limited
Hangson
is a company that was incorporated on June 2, 2006 under the laws of the British
Virgin Islands and is the Company’s wholly owned subsidiary. The Company was
previously engaged in both the production and sale of COPO resin products and
also the research, development, production and sale of its “coal-water mixture,”
product, an available fuel substitute for coal, oil or gas. However, the Company
subsequently decided that it would be in the best interest of the Company to
cease operations of the COPO resin products business and focus on the
“coal-water mixture” product business. Because of the control that the Company
exercises over Shaanxi Suoang pursuant to the “Contractual Arrangements”
described below by and between Shaanxi Suoang and Hangson, Shaanxi Suoang has
phased out of the COPO resin products business and will instead focus on
research, development, production and sale of “coal-water mixture” fuel
substitute. In December 2006, the patented technology owned through Shaanxi
Suoang in connection with the COPO resin products was sold to HanZhongWeiDa
Commercial Company Limited, a company controlled by Leping Yao, a shareholder of
Shaanxi Suoang, for consideration of $256,200. Further, in January 2007, we
ceased operations at our COPO resin product manufacturing plant and we sold our
COPO resin products’ manufacturing plant machinery to HanZhongWeiDa Commercial
Company Limited for cash consideration of $89,670 and the related COPO
products inventory to an unrelated third party for $12,767.
Hangson
does not conduct any substantive operations of its own and conducts its primary
business operations through its VIE, Shaanxi Suoang. Shaanxi Suoang, in turn,
conducts its coal-water mixture operations through its subsidiary, Suoang New
Energy.
PRC law
currently has limits on foreign ownership of certain companies. To comply with
these foreign ownership restrictions, we operate our business in China through
Shaanxi Suoang, which is a limited liability company headquartered in Xi’an,
China and organized under the laws of China. Shaanxi Suoang has the licenses and
approvals necessary to operate our business in China. We have contractual
arrangements with Shaanxi Suoang and its shareholders pursuant to which we
provide technology consulting and other general business operation services to
Shaanxi Suoang. Through these contractual arrangements, we also have the ability
to substantially influence Shaanxi Suoang’s daily operations and financial
affairs, appoint its senior executives and approve all matters requiring
shareholder approval. As a result of these contractual arrangements, which
enable us to control Shaanxi Suoang, we are considered the primary beneficiary
of Shaanxi Suoang. Accordingly, we consolidate Shaanxi Suoang’s results, assets
and liabilities in our financial statements. For a description of these
contractual arrangements, see the section below titled “Contractual Arrangements
with Shaanxi Suoang and its Shareholders.” The Company’s consolidated assets do
not include any collateral for Shaanxi Suoang’s obligations. The creditors of
Shaanxi Suoang do not have recourse to the general credit of the
Company.
Contractual
Arrangements With Shaanxi Suoang And Its Shareholders
Our
relationships with Shaanxi Suoang and its shareholders are governed by a series
of contractual arrangements. Under PRC laws, each of Hangson, and Shaanxi Suoang
is an independent legal person and none of them is exposed to liabilities
incurred by the other party. Other than pursuant to the contractual arrangements
between Hangson and Shaanxi Suoang, Shaanxi Suoang does not transfer any other
funds generated from its operations to Hangson. As of August 18, 2006, we
entered into the following contractual arrangements with Shaanxi Suoang as
described below:
Consulting
Services Agreement. Pursuant to the exclusive
consulting services agreements between Hangson and Shaanxi Suoang, Hangson has
the exclusive right to provide to Shaanxi Suoang general business operations
services as well as consulting services related to the technological research
and development of coal-based products as well as general business operation
advice and strategic planning (the “Services”). Under this agreement, Hangson
owns the intellectual property rights developed or discovered through research
and development, in the course of providing the Services, or derived from the
provision of the Services. Shaanxi Suoang pays a quarterly consulting service
fees in Renminbi (“RMB”) to Hangson that is equal to all of Shaanxi Suoang’s
revenue for such quarter.
Operating
Agreement.
Pursuant to the operating agreement among Hangson, Shaanxi Suoang and all
shareholders of Shaanxi Suoang (collectively “Shaanxi Suoang’s Shareholders”),
Hangson provides guidance and instructions on Shaanxi Suoang’s daily operations,
financial management and employment issues. The shareholders of Shaanxi Suoang
must designate the candidates recommended by Hangson as their representatives on
Shaanxi Suoang’s board of directors. Hangson has the right to appoint senior
executives of Shaanxi Suoang. In addition, Hangson agrees to guarantee Shaanxi
Suoang’s performance under any agreements or arrangements relating to Shaanxi
Suoang’s business arrangements with any third party. Shaanxi Suoang, in return,
agrees to pledge its accounts receivable and all of its assets to Hangson.
Moreover, Shaanxi Suoang agrees that without the prior consent of Hangson,
Shaanxi Suoang will not engage in any transactions that could materially affect
the assets, liabilities, rights or operations of Shaanxi Suoang, including,
without limitation, incurrence or assumption of any indebtedness, sale or
purchase of any assets or rights,
incurrence
of any encumbrance on any of its assets or intellectual property rights in favor
of a third party or transfer of any agreements relating to its business
operation to any third party. The term of this agreement is ten (10) years from
August 18, 2006 and may be extended only upon Hangson’s written confirmation
prior to the expiration of this agreement, with the extended term to be mutually
agreed upon by the parties.
Equity
Pledge Agreement. Under the equity pledge
agreement between the shareholders of Shaanxi Suoang and Hangson, the
shareholders of Shaanxi Suoang pledged all of their equity interests in Shaanxi
Suoang to Hangson to guarantee Shaanxi Suoang’s performance of its obligations
under the technology consulting agreement. If Shaanxi Suoang or Shaanxi Suoang’s
Shareholders breaches its respective contractual obligations, Hangson, as
pledgee, will be entitled to certain rights, including the right to sell the
pledged equity interests. Shaanxi Suoang’s Shareholders also agreed that upon
occurrence of any event of default, Hangson shall be granted an exclusive,
irrevocable power of attorney to take actions in the place and stead of the
Shaanxi Suoang’s Shareholders to carry out the security provisions of the equity
pledge agreement and take any action and execute any instrument that Hangson may
deem necessary or advisable to accomplish the purposes of the equity pledge
agreement. The shareholders of Shaanxi Suoang agreed not to dispose of the
pledged equity interests or take any actions that would prejudice Hangson’
interest. The equity pledge agreement will expire two (2) years after
Shaanxi Suoang’s obligations under the exclusive consulting services agreements
have been fulfilled.
Option
Agreement. Under the option
agreement between the shareholders of Shaanxi Suoang and Hangson, the
shareholders of Shaanxi Suoang irrevocably granted Hangson or its designated
person an exclusive option to purchase, to the extent permitted under PRC law,
all or part of the equity interests in Shaanxi Suoang for the cost of the
initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable PRC law. Hangson or its designated person
has sole discretion to decide when to exercise the option, whether in part or in
full. The term of this agreement is ten (10) years from August 18, 2006 and may
be extended prior to its expiration by written agreement of the
parties.
Proxy
Agreement. Pursuant to the proxy agreement among Hangson and Shaanxi
Suoang’s Shareholders, Shaanxi Suoang’s Shareholders agreed to irrevocably grant
a person to be designated by Hangson with the right to exercise Shaanxi Suoang’s
Shareholders’ voting rights and their other rights, including the attendance at
and the voting of Shaanxi Suoang’s Shareholders’ shares at the shareholders’
meetings (or by written consent in lieu of such meetings) in accordance
with applicable laws and its Article of Association, including but not limited
to the rights to sell or transfer all or any of his equity interests of the
Shaanxi Suoang, and appoint and vote for the directors and Chairman as the
authorized representative of the shareholders of Shaanxi Suoang. The term of
this Proxy Agreement is ten (10) years from August 18, 2006 and may be extended
prior to its expiration by written agreement of the parties.
Shaanxi Suo’ang Biological Science &
Technology Co.,
Ltd.
As
discussed above, our operations are conducted through Shaanxi Suoang, which is a
limited liability company headquartered in Xian, China and organized under the
laws of PRC. Shaanxi Suoang was organized in May 2002. As described above,
Shaanxi Suoang is now solely engaged in research, development, marketing and the
sales of “coal water mixture”, which is an available fuel substitute for oil,
gas or coal through its subsidiary, Suoang New Energy.
Principal
Products Or Services
Shaanxi
Suoang is currently engaged in research, development, marketing and sales of its
coal water mixture fuel (hereinafter “CWM Fuel”). CWM Fuel is a fuel substitute
that can be used instead of oil, coal and gas, in industrial boilers, power
plant boilers and industrial kilns. The Company believes it is ready to
commercialize this fuel substitute for use in boilers used for central heating
for government buildings, schools, armed forces’ barracks, and residential
communities, and also for use in industrial production facilities. The Company
is currently constructing a coal water mixture production plant in western
China. The whole construction project is estimated to cost approximately RMB60
million (US$7,500,000) in total. We believe that construction will be completed
by the June 2007 and we expect production of our CWM Fuel product will commence
in July 2007.
Coal
Water Mixture Fuel
CWM Fuel
is a viscous, heavy liquid fuel that is produced by mixing grinded coal, water
and chemical additives. This liquid fuel can be stored, pumped and burned as a
substitute for oil or gas in properly modified furnaces or boilers. In general,
CWM Fuel is cheaper than oil or gas but its combustion thermal efficiency may be
similar to oil or gas. Further, CWM Fuel may burn cleaner than coal and
thus, may be a more environmentally friendly fuel.
The
Company is currently constructing a CWM Fuel production facility in the city of
Tongchuan with an expected annual production capacity of 300,000 tons that will
enable the Company to supply several industrial users and two central heating
stations in Tongchuan.
China is
a large producer and consumer of coal and will remain so for the foreseeable
future. Pollution resulting from coal combustion causes concern both within and
outside China. Approximately 90% of environmental pollution in China is
attributable to direct coal combustion. The Chinese Government is currently
developing policies and implementing control-measures to reduce this pollution.
Clean coal technology (CCT) can play an important part in this process,
contributing to both improved energy utilization efficiency and reduced
environmental pollution.
In August
1995, the Chinese government formulated “the 9th
Five-Year Plan for Clean Coal Technology in China and a Development Program to
2010.” In the “10th
Five-Year Plan” the State emphasized the need to strengthen clean coal
technology R&D and also to promote commercialization of proven clean coal
technologies. The potential clean coal technology market in China is
substantial. The Company’s CWM Fuel, being a mixture of coal, water, and
additives, presents itself as a fuel to substitute direct coal combustion. Use
of the CWM Fuel not only allows the mixture to be transported as a fluid, which
avoids coal dust dispersion and spontaneous combustion during transportation and
storage, but it also allows the equipment used to burn this fuel to be
simplified. CWM Fuel may enhance the combustion efficiency rate of coal while
reducing the dust emission rate.
Because
direct coal combustion has caused serious pollution in China, the Chinese
government has enacted relevant laws and regulations to require enterprises to
replace old direct coal combustion industrial burners or furnaces with furnaces
that use cleaner fuels. In the city of Xian, for example, thousands of plants
continue to use old direct coal combustion burners or furnaces. In addition, we
believe on average, approximately 200 furnaces are purchased by local
enterprises in Xian each year. But based on prevailing regulations, no new
direct coal combustion furnace is allowed to be installed within Xian’s city
limits. Therefore, considering the high and fluctuating prices of petroleum, the
potential demand for the Company’s CWM Fuel product as a cleaner substitute for
direct coal combustion is expected to be substantial.
In 2003,
Shaanxi Suoang’s board of directors realized this opportunity and initiated the
development of our CWM Fuel product. After studying the market demand for CWM
Fuel in the cities of Qingdao, Shenyang, Maoming, Foshan for two years and
conducting a feasibility study, the Company decided to develop its CWM Fuel
product which complies with the environmental protection policies of
“prohibiting the burning of raw coal” in large-sized or medium-sized cities such
as Xian. Shaanxi Suoang developed a series of technologies in 2004, including
“techniques for the production of coal water mixture by utilizing the waste
fluid from paper making and silt in urban area” and the “garbage combustion
techniques based on coal water mixture.” Given the expected demand for coal
water mixture products and CWM Fuel product that we have developed, we believe
that the conditions for the application, promotion and industrialized production
and sale of CWM Fuel is now mature. The Company has invested approximately
RMB60 million to initiate the construction of the production facility base for
its CWM Fuel in the city of Tongchuan, and the Company is currently planning for
an annual production capacity of 300,000 tons, which would be one of the largest
in Western China.
The
Company’s future plans relating to its CWM products include either the purchase
of or becoming a major shareholder in boiler manufacturers in
Shaanxi Province to facilitate the production of boilers that are
compatible with our CWM Fuel. Future plans also include the potential purchase
of coal mines to supply the coal needed to manufacture the CWM
Fuel.
DISTRIBUTION
METHODS OF THE PRODUCTS OR SERVICES AND OUR CUSTOMERS
Our CWM
Fuel product will be sold and distributed by the Company directly to its
customers. We plan to conduct promotional marketing activities to publicize our
product and enhance the Company’s image as well as to reinforce the recognition
of the Company’s brand name through assistance from the local
government.
In January
2007, we entered into our first contracts for the sale of our CWM Fuel product.
Because the Company has just commenced sales of our CWM Fuel product, we will be
dependent on a limited number of customers for a substantial portion of our
revenues from the sale of this product. Nonrenewal or termination of our
contracts with major customer or the failure by these customers to issue
additional orders under the existing contracts would have a materially adverse
effect on our revenues. There can be no assurance that the Company will be able
to obtain additional contracts for CWM Fuel product sales similar in scope to
those we have recently obtained, that it will be able to retain
existing customers and attract new customers, or that it will not remain largely
dependent on a limited customer base accounting for a substantial portion of
revenues.
COMPETITION
In
regards to our CWM Fuel product, we have no major competitors in Shaanxi
province but we have four competitors in other provinces: Tai’an Liangda CWM
Co., Ltd., Datong Huihai CWM Company, Daqing Shengtai Clean Coal Fuel Co., Ltd.,
and Ningbo Hongyuan CWM Co., Ltd. The Company will be able to compete with these
competitors because of its strong R&D capability, extensive sales network,
abundant coal resources, the local government’s assistance and the lack of
competitors in the Shaanxi market.
SOURCES
AND AVAILABILITY OF RAW MATERIALS AND THE PRINCIPAL SUPPLIERS
Our
principal raw material is coal that is supplied directly from the local coal
mines and used to manufacture our products. The prices for this raw material are
subject to market forces largely beyond our control, including energy costs,
market demand, and freight costs. The prices for this raw material have varied
significantly in the past and may vary significantly in the future.
PATENTS,
TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
CONTRACTS
We rely
on a combination of patent, trademark, copyright and trade secret protection
laws in China and other jurisdictions, as well as confidentiality procedures and
contractual provisions to protect our intellectual property and our brand. We
previously owned an issued patented special technology in regards to our COPO
products in China that was valid for 10 years. However, we have ceased
operations of our COPO products business and have decided to concentrate on our
CWM Fuel business. Thus, in December 2006, we entered into an agreement for the
sale of the above-described patented technology to a related company
HanZhongWeiDa Commercial Company Limited which was controlled by Leping Yao, a
shareholder of Shaanxi Suo'ang for consideration of $256,200.
We also
enter into confidentiality, non-compete and invention assignment agreements with
our employees and consultants and nondisclosure agreements with third parties.
Coal and bio-technology companies are at times involved in litigation based on
allegations of infringement or other violations of intellectual property rights.
Furthermore, the application of laws governing intellectual property rights in
the PRC and abroad is uncertain and evolving and could involve substantial risks
to us.
GOVERNMENT
APPROVAL AND REGULATION OF THE COMPANY’S PRINCIPAL PRODUCTS OR
SERVICES
The State
Environmental Protection Laws of the PRC governs us and our products. The
Company is subject to various PRC federal, state and local environmental laws
and regulations, including the State Environmental Protection Laws concerning
emissions to the air, discharges to waterways, the release of materials into the
environment, the generation, handling, storage, transportation, treatment and
disposal of waste materials or otherwise relating to the protection of the
environment. The Company endeavors to ensure the safe and lawful operation of
its facilities in manufacturing and distribution of products and believes it is
in compliance in all material respects with applicable PRC laws and
regulations.
No
enterprise may start production at its facilities until it receives approval
from the Ministry of Commerce to begin operations. The Company currently has
obtained the requisite approval and licenses from the Ministry of Commerce in
order to operate our production facilities.
COSTS
AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
No
environmental compliance expenses were required in 2006 for the Company’s
current COPO products production facility. Further, the Company does not expect
to incur any material environmental compliance costs in connection with its CWM
Fuel business.
RESEARCH
AND DEVELOPMENT
We will
continue to conduct research and development (“R&D”) to further develop
and improve the quality of our CWM Fuel products. In 2006, we had approximately
$37,718 in R&D expenses.
EMPLOYEES
In 2005,
the Company had 80 employees, 80 of which were full time employees. In 2006, the
Company had 76 employees, 76 of which were full time employees. We believe the
success of our business depends, in part, on our ability to attract and retain
qualified personnel, particularly qualified scientific, technical and key
management personnel and we strive to have good relationships with our
employees.
PRINCIPAL
EXECUTIVE OFFICES
Our
principal executive office is located at Room 2205, Suite A,
Zhengxin Building, No. 5, Gaoxin 1st Road, Gao Xin District, Xi’an,
Shaanxi Province, People’s Republic of China and our telephone number is
(029) 8209-1099.
REPORTS
TO SECURITY HOLDERS
We file
reports including our annual report, information statements as well as other
reports required of publicly held companies with the Securities and Exchange
Commission ("SEC"). You can read and copy any materials we file with the
Commission at its' Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. You can obtain additional information about the operation of the
Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition,
the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the Commission, including us.
ITEM
2. DESCRIPTION OF
PROPERTY
The
Company’s headquarters are currently located in approximately 298 square meters
of office space and production facilities at Room 2205, Suite A, Zhengxin Bldg.,
No.5, Gaoxin 1st Road, Gao Xin District, Xi’an, Shaanxi Province, People’s
Republic of China. The Company leases this office space. We terminated the
tenancy agreement for our COPO resin product manufacturing plant in December
2006. However, the Company is also currently constructing a production facility
for the CWM Fuel product in Tongchuan City, China. In July, 2006, the Company
purchased a land use right for the property located at Yao Zhou Ou in
Tongchuan City for the CWM Fuel production facility and is currently in the
process of obtaining the land use right certificate for this
property.
The table
below provides summary descriptions of the properties used for the Company’s
business operations in 2006:
|
Property
Location
|
Area
(sq. meters)
|
Lease
Expiration Period
|
Purpose
|
|
Room
2205, Suite A, Zhengxin Bldg., No.5, Gaoxin 1st Road, Gao Xin District,
Xi’an, Shaanxi Province, People’s Republic of China
|
248
|
March
17, 2008
|
Offices
|
|
No.
36 Da Xing Lu,
Xian
Shi, People’s Republic of China
|
2,310
|
December
30, 2013
(Company
terminated the tenancy agreement in 12/2006.)
|
COPO
Resin Products Production and Manufacturing Facility
|
|
Yao
Zhou Ou,
Tongchuan City,
People’s
Republic of China
|
40,626
|
Company
owns land use rights until December 8, 2057
|
Production
facility for coal water mixture - under
construction
|
During
the year 2004, the Company exchanged leasehold properties consisting of three
floors in a commercial building located in the Hanzhong City, China and having a
net book value of $1,691,555 for another leasehold properties also consisting of
three floors in the same building and having a fair value of $1,773,697. The
terms of the exchange also required the Company to pay cash of $501,205. The
Company accounted for the cash component as an acquisition of real estate, and
the nonmonetary component based on the recorded amount of $1,691,555 of the
leasehold properties given up.
In order
to raise funds to support the Company’s new CWM Fuel business, on June 13,
2006, the Company signed a property transfer agreement with Hanzhong Si Xiong Ke
Chuang Business Company Limited (“Buyer”), a company controlled by Yanjun Zhao,
a Company shareholder, to dispose of the above-described leasehold properties
together with the leasehold improvement at the cash consideration of
approximately $2,450,000. According to the property transfer
agreement, the cash consideration would be settled by installment with the last
installment on or before March 31, 2007 and the title of the property will be
passed to buyer upon receipt of the 95% of the total consideration due to the
Company under the property transfer agreement. As of December 31,
2006, the Company has received $1,409,100 in connection with this property
transfer transaction.
On March
25, 2007, the Company and the Buyer entered into a supplementary agreement
whereby the Company agreed to transfer the title of the properties to the Buyer
upon the Buyer’s payment of the remaining balance of approximately $1,041,900 to
the Company on or before May 31, 2007.
|
ITEM 3.
LEGAL
PROCEEDINGS
|
We may be
subject to, from time to time, various legal proceedings relating to claims
arising out of our operations in the ordinary course of our business. We are not
currently a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, would have a material adverse effect on the
business, financial condition, or results of operations of the
Company.
|
ITEM
4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY
HOLDERS
|
The
Company held its Annual Meeting of Stockholders at its offices located at 2624
Dunwin Drive, Unit #3, Mississauga, Ontario, Canada L5l 3T5 on September 5, 2006
at 9:30 A.M. As described more fully in the Company’s Definitive Proxy Statement
on Schedule 14A filed on August, 8, 2006, we held the meeting: (a) to elect
Peter B. Day as the sole member of the Company’s Board of Directors, whose terms
are described in the proxy statement; (b) to consider and vote on approval of
the sale of all of our assets and shares of Endo Networks, Inc. (Canada) to Mr.
Peter Day pursuant to that certain Asset and Share Purchase Agreement, dated as
of June 26, 2006; (c) to grant our Board of Directors the authority to effect a
reverse stock split of up to 20 to 1; and (d) to grant our Board of Directors
the authority to effect a forward stock split of up to 20 to 1. The following is
the results of the voting:
1. Election
of Director:
|
Nominees
|
|
Number
of Shares
|
|
|
|
|
|
|
|
|
|
Peter
B. Day
|
|
For:
|
|
11,957,113
|
|
|
|
|
Against:
|
|
0
|
|
|
|
|
Abstain:
|
|
1,600,253
|
|
|
2.
|
To approve Asset and Share Purchase
Agreement, dated
as of June 26, 2006
|
|
Approve
|
|
Number
of Shares
|
|
|
|
|
|
|
|
|
|
Asset
and Share Purchase Agreement
|
|
For:
|
|
11,957,113
|
|
|
|
|
Against:
|
|
0
|
|
|
|
|
Abstain:
|
|
1,600,253
|
|
|
3.
|
To approve grant of authority to the Board
to effect a reverse stock split of up to 20 to
1.
|
|
Approve
|
|
Number
of Shares
|
|
|
|
|
|
|
|
|
|
Authority
for Reverse Stock Split
|
|
For:
|
|
11,957,113
|
|
|
|
|
Against:
|
|
0
|
|
|
|
|
Abstain:
|
|
1,600,253
|
|
|
4.
|
To approve grant of authority to Board to
effect a forward stock split of up to 20 to
1.
|
|
Approve
|
|
Number
of Shares
|
|
|
|
|
|
|
|
|
|
Authority
for Reverse Stock Split
|
|
For:
|
|
11,957,113
|
|
|
|
|
Against:
|
|
0
|
|
|
|
|
Abstain:
|
|
1,600,253
|
|
PART
II
|
ITEM
5. MARKET FOR
COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our
common stock is not listed on any stock exchange. The common stock is traded
over-the-counter on the Over-the-Counter Electronic Bulletin Board under the
symbol "CWCE". The following table sets forth the high and low bid information
for the common stock for each quarter within the last two fiscal years (for
fiscal year ended December 31), as reported by the Over-the-Counter Electronic
Bulletin Board. The bid prices reflect inter-dealer quotations, do not include
retail markups, markdowns or commissions and do not necessarily reflect actual
transactions.
|
|
|
LOW
|
|
HIGH
|
|
|
2006
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
0.00
|
|
$
|
0.80
|
|
|
Third
Quarter
|
|
$
|
0.13
|
|
$
|
0.16
|
|
|
Second
Quarter
|
|
$
|
0.14
|
|
$
|
0.15
|
|
|
First
Quarter
|
|
$
|
0.10
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
Third
Quarter
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
Second
Quarter
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
First
Quarter
|
|
$
|
0.09
|
|
$
|
0.10
|
|
As of
April 30, 2007, there were approximately 112 stockholders of record of our
common stock.
DIVIDENDS
We have
never paid any dividends on the Common Stock or the Preferred Stock whereas our
VIE Shaanxi Suoang paid $4,440,960 in 2006. We currently
anticipate that any future earnings will be retained for the development of our
business and do not anticipate paying any dividends on the Common Stock or the
Preferred Stock in the foreseeable future.
TRANSFER
AGENT
Our
transfer agent is Signature Stock Transfer, Inc., 2301 Ohio Drive - Suite 100,
Plano, Texas 75093. Their telephone number is (972)
612-4120.
EQUITY
COMPENSATION PLAN INFORMATION
We
currently do not have any effective equity compensation plans.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
As
described in full detail in our Current Report on Form 8-K filed on November 17,
2006, which is incorporated herein by reference, on November 9, 2006, the
Company's Board of Directors elected to dismiss Lopez, Blevins, Bork &
Associates, L.L.P. (“LBB”) as its independent registered public accounting firm
(“Independent Accountant”) and also elected to retain Schwartz Levitsky Feldman
LLP, Chartered Accountants as its new Independent Accountant. During
the Company’s fiscal year ended September 30, 2005 and the subsequent interim
period through November 9, 2006, the date of the dismissal of LBB, the Company
did not have any disagreement with LBB on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure. The decision to change Independent Accountants was
approved by the Board of Directors.
RECENT
SALES OF UNREGISTERED SECURITIES
Pursuant
to the Share Exchange Agreement entered by and among Hangson Limited, a British
Virgin Islands company (“Hangson”), and the stockholders of 100% of Hangson’
common stock (the “Hangson Stockholders”), on the one hand, and the Registrant
and a majority of the Registrant’s stockholders (“ENDO Stockholders”), on the
other hand, the Company issued 26,000,000 shares of the Company’s common stock
(the “ENDO Shares”) to the Hangson Shareholders and to Viking Partners, Inc.
(“Viking”), a consultant in the Share Exchange transaction, in exchange for 100%
of the common stock of Hangson. The issuance of the Endo Shares to
the Hangson Shareholders and Viking pursuant to the Share Exchange Agreement was
exempt from registration under the Securities Act pursuant to Section 4(2)
and/or Regulation S thereof. We made this determination based on the
representations of the Hangson Shareholders and Viking which included, in
pertinent part, that such shareholders were either (a) "accredited investors"
within the meaning of Rule 501 of Regulation D promulgated under the Securities
Act, and/or (b) not a "U.S. person" as that term is defined in Rule 902(k) of
Regulation S under the Act, and that such shareholders were acquiring our common
stock, for investment purposes for their own respective accounts and not as
nominees or agents, and not with a view to the resale or distribution thereof,
and that each
member understood that the shares of our common stock may not be sold or
otherwise disposed of without registration under the Securities Act or an
applicable exemption therefrom.
On May 2,
2006, we entered into a consulting agreement (the “TriPoint Agreement”) with
TriPoint Capital Advisors, LLC (“TriPoint”), a business consultant, in order to
assist us in our business development, with the structuring of capital
transactions, to provide mergers and acquisition support services, and corporate
compliance support. As consideration for their services under the agreement, we
agreed to issue Tripoint 472,000 shares (94,400 shares after giving effect for
the 5:1 reverse stock split on October 17, 2006) of our common stock. Based on
the last trading price prior to the issuance of the stock a non-cash consulting
expense of $70,800 was recorded for the issuance of these shares. The
TriPoint Agreement provided that if a reduction in shares occurs after the date
of the agreement by reason of a reverse stock split, then the Company is
obligated to issue TriPoint a warrant for the purchase of additional shares
of common stock, at the then par value, sufficient to preserve the original
share issuance in the agreement of 472,000 (the “TriPoint Agreement
Anti-Dilution Provision”). The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering.
On May 2,
2006, we entered into a consulting agreement (the “Progressive Agreement”) with
Progressive Capital Markets, LLC (“Progressive”), a business consultant, in
order to assist us in our business development, with the structuring of capital
transactions, to provide mergers and acquisition support services, and corporate
compliance support. As consideration for their services under the agreement, we
agreed to issue Progressive 365,000 (73,000 shares after giving effect for the
5:1 reverse stock split on October 17, 2006) shares of our common stock. Based
on the last trading price prior to the issuance of the stock a non-cash
consulting expense of $54,750 was recorded for the issuance of these
shares. The Progressive Agreement provided that if a reduction in shares occurs
after the date of the agreement by reason of a reverse stock split, then the
Company is obligated to issue Progressive a warrant for the purchase of
additional shares of common stock, at the then par value, sufficient to preserve
the original share issuance in the agreement of 365,000 (the “Progressive
Agreement Anti-Dilution Provision”). The shares were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act for
issuances not involving a public offering.
On
October 11, 2006, pursuant to the TriPoint Agreement Anti-Dilution Provision and
because the Company engaged in a 1 for 5 Reverse Stock Split (as discussed more
fully above), the Company issued TriPoint a warrant (the “TriPoint Warrant”) for
the purchase of an additional 377,600 shares of the Company’s common stock with
an exercise price of $.001 per share, so as to preserve the number of shares
held by TriPoint prior to the Reverse Split at 472,000 shares as required
under the TriPoint Agreement. The warrant was issued pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act for issuances
not involving a public offering.
On
October 11, 2006, pursuant to the Progressive Agreement Anti-Dilution Provision
and because the Company engaged in a 1 for 5 Reverse Stock Split (as discussed
more fully above), the Company issued Progressive a warrant (the “Progressive
Warrant”) for the purchase of an additional 292,000 shares of the Company’s
common stock with an exercise price of $.001 per share, so as to preserve the
number of shares held by Progressive prior to the Reverse Split at 365,000
shares as required under the Progressive Agreement. The warrant was issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving a public offering.
On
October 17, 2006, TriPoint exercised their TriPoint warrant, as described above,
and the Company issued to TriPoint 377,600 shares of the Company’s common stock
at an exercise price of $.001 per share to TriPoint. These shares were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving a public offering.
On
October 17, 2006, Progressive exercised their Progressive warrant, as described
above, and the Company issued to Progressive 292,000 shares of the Company’s
common stock at an exercise price of $.001 per share to Progressive. These
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act for issuances not involving a public
offering.
During
July 2005, the Company issued 55,000 shares (11,000 shares after giving effect
for the 5:1 reverse stock split on October 17, 2006) of its common stock to
consultants for consulting services valued $0.10 per share or $5,500, which was
the fair value of common stock on the date issued. These transactions were
exempt from registration requirements in reliance on Section 4(2) of the
Securities Act of 1933. There was no form of general solicitation or general
advertising undertaken and the investor is accredited.
During
July 2004, the Company issued 96,500 (19,300 shares after giving effect for the
5:1 reverse stock split on October 17, 2006) shares of common stock to
consultants for consulting services valued $0.07 per share or $6,755, which was
the fair value of common stock on the date issued. These transactions were
exempt from registration requirements in reliance on Section 4(2) of the
Securities Act of 1933. There was no form of general solicitation or general
advertising undertaken and the investor is accredited.
|
ITEM
6. MANAGEMENT'S
DISCUSSION AND ANALYSIS
|
Overview
China
West Coal Energy Inc. (formerly Endo Networks, Inc.) (the “Company”) was
originally incorporated in Texas as “Discount Mortgage Services, Inc.” on July
11, 2000 and in September 2001, the Company purchased Endo Networks, Inc., a
corporation incorporated in Ontario, Canada on January 11, 2001 (“Endo
Canada”). In November 2001, the Company changed its name to Endo Networks, Inc.
and was redomiciled to the State of Nevada in December 2002. Prior to the Share
Exchange transaction described below, the Company conducted through, and all of
the Company ’s assets were contained within, Endo Canada, in which conceptual
and software development was ongoing for approximately two years by the Company
founders, through ongoing contract relationships with software development
companies.
On
October 18, 2006, we entered into a definitive Share Exchange Agreement with
Hangson Limited (“Hangson”), whereby we would acquire all of the outstanding
common stock of Hangson in exchange for newly-issued shares of our common stock
to the Hangson shareholders (the “Share Exchange”). On October 20, 2006 (the
“Closing Date”), Hangson became our wholly-owned subsidiary and Hangson’s
shareholders became owners of the majority of our voting stock. The acquisition
of Hangson by us was accounted for as a reverse merger because on a post-merger
basis, the former shareholders of Hangson held a majority of our outstanding
common stock on a voting and fully-diluted basis. As a result, Hangson is deemed
to be the acquirer for accounting purposes. From and after the Closing Date of
the Share Exchange, the Registrant’s primary operations will now consist of the
operations of Hangson.
Additionally,
on August 18, 2006, Hangson entered various agreements Shaanxi Suo’ang
Biological Science & Technology Co., Ltd. (“Shaanxi Suoang”). Through these
contractual arrangements, we have the ability to substantially influence Shaanxi
Suoang’s daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval. As a result of these
contractual arrangements, which obligates Hangson to absorb a majority of the
risk of loss from Shaanxi Suoang activities, it enables Hangson to control
Shaanxi Suoang, and enables Hangson to receive a majority of Shaanxi Suoang’s
expected residual returns, Hangson is considered to be the primary
beneficiary of Shaanxi Suoang. Accordingly, we consolidate Shaanxi Suoang’s
results, assets and liabilities in our financial statements. For a description
of these contractual arrangements, see the section above titled
“Contractual Arrangements with Shaanxi Suoang and its Shareholders.” The
Company’s consolidated assets do not include any collateral for Shaanxi Suoang’s
obligations. The creditors of Shaanxi Suoang do not have recourse to
the general credit of the Company.
Our
primary business operations are conducted through our wholly-owned subsidiary
Hangson Limited (“Hangson”). Hangson was incorporated under the laws of the
British Virgin Islands on June 2, 2006. Hangson does not have any substantive
operations of its own and conducts its primary business operations through
Shaanxi Suoang, which through the contractual arrangements described above is
deemed Hangson’s variable interest entity (“VIE”). For the majority of fiscal
2006, Shaanxi Suoang was engaged in two lines of businesses: the research,
development, production, marketing and sales of coal-polymer (“COPO”) resin
products, and also in the research, development, production and sale of
“coal-water mixture,” fuel substitute product (“CWM Fuel”). However, the Company
subsequently decided to focus on its CWM Fuel product business. Thus, as
described more fully in Item 1 above titled “Description of Business,” as
of January 2007, the Company ceased operations of its COPO resin products
business and is now focused on its CWM Fuel product business. Shaanxi Suoang
conducts its CWM Fuel operations through its subsidiary, Suoang New
Energy.
Significant
Accounting Policies
Intangible
assets
The land
use right is amortized over the expected period of 50 years.
Property,
plant and equipment
Property,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Gains or losses on disposals are reflected as gain or loss in the
year of disposal. The cost of improvements that extend the life of plant,
property and equipment are capitalized. These capitalized costs may include
structural improvements, equipment and fixtures. All ordinary repair and
maintenance costs are expensed as incurred.
Depreciation
or amortization for financial reporting purposes is provided using the
straight-line method over the estimated useful lives.
Impairment
The
Company accounts for impairment of long-lived assets including property, plant
and equipment, and amortizable intangible assets in accordance with SFAS No.144,
Accounting for Impairment of
Long-Lived Assets to be Disposed Of, which requires an impairment loss to
be recognized when the carrying amount of a long-lived asset or asset group
exceeds its fair value and is not recoverable (when carrying amount exceeds the
gross, undiscounted cash flows from use and disposition). The impairment loss is
measured as the excess of the carrying amount over the asset’s (or asset
group’s) fair value.
Income
taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
SFAS No. 109 requires an asset and liability approach for financial accounting
and reporting for income taxes and allows recognition and measurement of
deferred tax assets based upon the likelihood of realization of tax benefits in
future years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future
deductibility is uncertain.
Revenue
recognition
Revenues
of the Company include COPO resin product sales which have been classified as
discontinued operations. Sales are recognized when the following four revenue
criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the selling price is fixed or determinable, and collectibility is
reasonably assured. Revenues are presented net of value added tax (VAT). No
return allowance is made as products are normally not returnable upon acceptance
by the customers
Foreign
currency transactions
The
Company determines its functional currency based on the criteria of SFAS 52,
Foreign Currency
Translation and has determined RMB to be their functional currency.
Transactions denominated in foreign currencies are translated into the
functional currency at the exchange rates prevailing on the transaction dates.
Monetary assets and liabilities denominated in foreign currencies are translated
into the functional currency at the exchange rates prevailing on the balance
sheet date. Exchange gains or losses are included in the statement of
operations.
Foreign
currency translation
The
reporting currency of the Company is the United States Dollars. All assets and
liabilities accounts have been translated into United States Dollars using the
current exchange rate at the balance sheet date. Capital stock is recorded at
historical rates. Revenue and expenses are translated using the average exchange
rate in the year. The resulting gain and loss has been reported as other
comprehensive income (loss) within the shareholder’s equity.
Use
of estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Because of the use
of estimates inherent in the financial reporting process, actual results could
differ from those estimates. Significant estimates include estimates of accruals
and determination of fair values for assets disposal.
FISCAL
YEAR END
On
January 16, 2007, the Company adopted the fiscal year end of Hangson, the
accounting acquirer in the reverse acquisition described above and the Company’s
operating business after the share exchange transaction. Thus the Company new
fiscal year end is December 31, commencing with the Company’s annual report for
the year ending December 31, 2006.
RESTATEMENT
OF 2006 FINANCIAL STATEMENTS
As more
fully discussed in Note 3 to our Financial Statements, the Company has
decided to restate its previously issued financial statements for the year ended
December 31, 2006. The Company’s determination to restate these
previously issued financial statements arose from the following
adjustments:
The
Company incorrectly classified certain properties that do not meet all of the
criteria for classification as held-for-sale, and do not constitute part of the
discontinued component, as assets of discontinued operations. Rental
income, net of depreciation and other expenses, related to these properties and
a related provision for income taxes were incorrectly included in the results of
discontinued operations. The above incorrect classifications resulted
in the incorrect calculation of the earnings (loss) per share from continuing
operations and from discontinued operations, respectively.
In
addition, the Company has also reclassified various amounts to conform to the
proper presentation of the Financial Statements. The Company reclassified
pre-paid land use right from intangible assets. In addition, the
Company reallocated accounts receivable, other receivable, inventories of
discontinued operations and discontinued operations assets held for sale from
discontinued operations. Accounts payable and taxes payable of discontinued
operation were also reclassified from discontinued operation.
The
Company has also retroactively adjusted the share capital by deeming that the
three for one forward stock split on August 20, 2007 as of the beginning of the
earliest period presented, and has also reclassified bank charges that were
incorrectly classified as finance cost.
The
schedules under Note 3 to our financial statements under Item 7 herein show
the impact of the above adjustments on the relevant captions from the Company’s
consolidated financial statements as of December 31, 2006 and for the year then
ended. The restatement will not affect net income as previously reported
in the Company's 2006 Financial Statements. Further, the Company
expects that the adjustments referred to herein will not materially affect the
Company's current cash position or financial condition.
RESULT
OF OPERATIONS
Fiscal
year ended December 31, 2006 as compared to fiscal year ended December 31,
2005
REVENUES.
All revenues are related to the discontinued operation. During the
year ended December 31, 2006, we had revenues of $7,253,887 as compared to
revenues of $5,426,591 during the year
ended December 31, 2005, an increase of approximately 34%. In
general, this increase is mainly attributable to an increase in the number of
distributors in the Company’s COPO resin product business,
which ceased operation during the year.
GROSS
PROFIT. Cost of goods sold, which consist of raw materials, direct labor and
manufacturing overhead, were $5,434,301 for the year ended December 31, 2006 as
compared to $4,417,584 for the year ended December 31, 2005. Gross
profit was $1,819,586 for the year ended December 31, 2006 as compared to
$1,009,007 for the year ended December 31, 2005, representing gross margins of
approximately 25% and 19%, respectively. All gross profit of
the Company is attributable to our implementation of better cost
controls in the Company's ceased COPO resin product
business.
SELLING
EXPENSES. Selling expenses, which consist of commission, advertising and
promotion expenses, freight charges and salaries in relation to the
Company's ceased COPO resin product business totaled $285,235 for the year
ended December 31, 2006 as compared to $143,231 for the year ended December 31,
2005, an increase of approximately 99%. This increase is mainly due
to increases in freight charges and salaries.
GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses for both
discontinued and continued operations totaled $617,417 for the year ended
December 31, 2006 as compared to $475,940 for the year ended December 31, 2005,
an increase of approximately 30%. This increase is primarily
attributable to the expansion of our operations and an increase in legal and
professional fees incurred in connection with compliance with the Company’s SEC
reporting obligations.
NET
INCOME. We had a net loss of $92,020 for the year ended December 31, 2006
as compared to a net income $842,692 for the year ended December 31,
2005. The decrease in net income is primarily attributable to the
payment of $575,000 for merger costs, impairment of plant and machineries of
$170,166 and loss on disposal of patent of $291,266.
LIQUIDITY AND CAPITAL
RESOURCES
For the
year ended December 31, 2006, we used cash from operating activities of
$330,685, as compared to $1,015,973 generated for the year ended December
31, 2005. The decrease
is primarily attributable to the cessation of our old COPO business. The
expenditure in investing activities for 2006 consisted of, among others, payment
of $503,772 for
the purchases of property, plant and equipment and payment of construction costs
for of our new CWM Fuel manufacturing plant. On the other hand, we generated
$3,987,278 from financing activities for 2006 (as compared to $454,798 used in
financing activities for 2005), which, among
others, consisted of proceeds from additional paid in capital from
subsidiaries of $4,549,007.
As of
December 31, 2006, the Company had cash of $4,450,557. Our total current assets
were $8,080,954 and our total current liabilities were $2,759,458, which
resulted in a net working capital of $5,321,496.
CONTRACTUAL
OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual
Obligations
We have
certain commitments that include future payments. We have presented below a
summary in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
|
|
|
Payments
Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less
than 1 year
|
|
1-3
Years
|
|
3-5
Years
|
|
5
Years +
|
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Lease Obligations
|
|
$
|
831,649
|
|
|
831,649
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Operating
Leases
|
|
$
|
13,745
|
|
|
--
|
|
|
13,745
|
|
|
--
|
|
|
--
|
|
|
Total
Contractual Obligations:
|
|
$
|
845,394
|
|
|
831,649
|
|
|
13,745
|
|
|
--
|
|
|
--
|
|
Operating
lease amounts include minimum lease payments under our non-cancelable operating
leases for office premises and production plants of Hangson. The amounts
presented are consistent with contractual terms and are not expected to differ
significantly, unless a substantial change in our headcount needs requires us to
exit an office facility early or expand our occupied space.
Capital
commitments include capital contribution to a subsidiary and purchase of
machines for our production of “coal-water mixture” of Hangson.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to our
investors.
Related
Party Transactions
For a
description of our related party transactions see Item 12 of this Annual
Report entitled “Certain Relationships and Related Transactions, and Director
Independence.”
Quantitative and Qualitative
Disclosures about Market Risk
Exchange
Rates
Shaanxi
Suoang maintains its books and records in Renminbi (“RMB”), the lawful currency
of the PRC. In general, for consolidation purposes, the Company translates
Shaanxi Suoang’s assets and liabilities into US Dollars using the applicable
exchange rates prevailing at the balance sheet date, and the statement of income
is translated at average exchange rates during the reporting period. Adjustments
resulting from the translation of Shaanxi Suoang’s financial statements are
recorded as accumulated other comprehensive income.
The
exchange rates used to translate amounts in RMB into US Dollars for the purposes
of preparing the consolidated financial statements or otherwise stated in this
MD&A were as follows:
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Balance
sheet items, except for the registered and paid-up capital, as of December
31
|
|
|
USD0.1281:RMB1
|
|
|
USD0.124:RMB1
|
|
|
Amounts
included in the statement of operations, statement of changes in
stockholders’ equity and statement of cash flows for the years ended
December 31
|
|
|
USD0.126:RMB1
|
|
|
USD0.122:RMB1
|
|
RISK
FACTORS
Factors
Affecting Business, Operating Results and Financial Condition
An
investment in our securities is very speculative and involves a high degree of
risk. You should carefully consider the following risk factors, along with the
other matters referred to in this Annual Report, before you decide to buy our
securities. If you decide to buy our securities, you should be able to afford a
complete loss of your investment.
Risks
Associated With Our Business
FACTORS
THAT MAY AFFECT FUTURE PERFORMANCE
Before
investing in our common stock you should carefully consider the following risk
factors, the other information included herein and the information included in
our other reports and filings. Our business, financial condition, and the
trading price of our common stock could be adversely affected by these and other
risks.
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We have a
limited operating history. Shaanxi Suoang commenced operations in 2002 and first
achieved profitability in the year ended 2004. Accordingly, you should consider
our future prospects in light of the risks and uncertainties experienced by
early stage companies in evolving industries such as the coal products and
alternative energy industry in China. An investor in our securities must
consider the risks, uncertainties and difficulties frequently encountered by
companies in new and rapidly evolving markets. The risks and difficulties we
face include challenges in accurate financial planning as a result of limited
historical data and the uncertainties resulting from having had a relatively
limited time period in which to implement and evaluate our business strategies
as compared to older companies with longer operating histories.
We
recently ceased operations of our COPO resin product business and the production
of our CWM Fuel product has yet to commence.
In
December 2006, we decided to solely focus on the research, development,
production, marketing and sale of our CWM Fuel product and thus, in January
2007, we ceased operations and have phased out our COPO resin product business.
In early 2007, we entered into contracts for the sale of our CWM Fuel product.
We believe the first phase of the construction of our CWM Fuel manufacturing
plant will be completed in June 2007, and that production and delivery of our
CWM Fuel product will commence in July 2007. However, there can be no assurance
that we will be able to successfully complete the construction of our CWM
manufacturing plant in a timely manner. Assuming we complete the construction of
our CWM Fuel plant and commence production of our CWM Fuel product, we cannot
assure you that our operations will be able to generate sufficient revenue to
continue our operations or that our new CWM Fuel business operations will be
profitable.
Our
independent auditor has expressed doubt about our ability to continue as a going
concern because we ceased our COPO resin operation, which was our main resource
of working capital, we disposed of leasehold property which generated rental
income and production of our new Coal Water Mixture (“CWM”) fuel product has not
commenced.
Our
independent auditor has noted in its report concerning our financial statements
as of December 31, 2006 that the Company ceased its COPO resin operation, which
was the main resource of the Company’s working capital, disposed of leasehold
property, which generated rental income, and started a new Coal Water Mixture
(“CWM”) fuel business subsequent to the balance sheet date. The independent
auditor further noted that production facilities of the Company’s CWM Fuel are
under construction and operations have not yet commenced. The independent
auditor stated that these conditions raise substantial doubt about our ability
to continue as a going concern. We cannot assure you that we will achieve
operating profits in the future.
We
Must Obtain Additional Financing to Execute Our Business Plan
The
projected revenues from the sale of our CWM Fuel product may not be adequate to
support our expansion and product development programs. We will need substantial
additional funds to build and maintain our new production facilities, pursue
further research and development, obtain regulatory approvals; file, prosecute,
defend and enforce our intellectual property rights and market our products. We
will seek additional funds through public or private equity or debt financing,
strategic transactions and/or from other sources. We could enter into
collaborative arrangements for the development of particular products that would
lead to our relinquishing some or all rights to the related technology or
products.
There are
no assurances that future funding will be available on favorable terms or at
all. If additional funding is not obtained, we will need to reduce, defer or
cancel development programs, planned initiatives or overhead expenditures, to
the extent necessary. The failure to fund our capital requirements would have a
material adverse effect on our business, financial condition and results of
operations.
Our
business and results of operations are dependent on coal markets, which may be
cyclical.
As the
majority of our revenue will be derived from sales of coal-based
products, our business and operating results are substantially dependent on the
domestic supply for coal. The domestic and international coal markets are
cyclical and exhibit fluctuation in supply and demand from year to year and are
subject to numerous factors beyond our control, including, but not limited to,
the economic conditions in the PRC, the global economic conditions and
fluctuations in industries with high demand for coal, such as the power and
steel industries. Fluctuations in supply and demand for coal have effects on
coal prices which in turn affect our operating and financial performance. We
have experienced substantial price fluctuations in the past and believe that
such fluctuations will continue. The demand for coal is primarily affected by
the overall economic development and the demand for coal from the electricity
generation, steel and construction industries. The supply of coal on the other
hand, is primarily affected by the geographical location of the coal supplies,
the volume of coal produced by the domestic and international coal suppliers,
and the quality and price of competing sources of coal. Alternative fuels such
as natural gas, oil and nuclear power, alternative energy sources such as
hydroelectric power, and international shipping costs also have effects on the
market demand for coal. Excess demand for coal may have an adverse effect on
coal
prices which would in turn cause a decline in our profitability. A significant
increase in domestic coal prices could also materially and adversely affect our
business and result of operations.
Our
business relies on our major customers.
Our
revenues from the sale of the CWM Fuel will be initially derived from sales to 3
major customers, Shaanxi Hau Yuen Paper Industry Company Limited, Shaanxi
Tongchuan Yi Tong Gao Ya Dian Chi Factory, and Shaanxi Yao Zhou Jian Qin Cement
Company Limited. Given the large percentage of our revenues to be derived from
our sales to these 3 major customers, any adverse developments to Shaanxi Yao
Zhou Jian Qin Cement Company Limited, Shaanxi Tongchuan Yi Tong Gao Ya Dian Chi
Factory and Shaanxi Hau Yuen Paper Industry Company Limited business
operations could have an adverse impact on our results of
operations.
Competition
in the PRC and the international coal industry is increasing and our business
and prospects will be adversely affected if we are not able to compete
effectively.
We face
competition in all areas of our business. Competition in the coal energy
industry is based on many factors, including price, production capacity, quality
and characteristics, transportation capability and costs, blending capability
and brand name. Our coal-based products business competes in the domestic market
in China and in international markets with other large domestic coal-based
products companies and we will also have to compete with other competitors in
the coal water mixture product industry. Some of our competitors may have
greater financial, marketing, distribution and other resources than we do, and
more well-known brand names in the markets. We currently compete favorably on
the quality of our coal-based products. However, there can be no assurance that
we will continue to compete favorably due to quality improvements by our
competitors and this may have a material adverse impact on our results of
operations.
We
may suffer losses resulting from industry-related accidents and lack of
insurance.
We
operate manufacturing facilities that may be affected by water, gas, fire or
structural problems. As a result, we, like other coal-based products companies,
may experience accidents that will cause property damage and personal injuries.
Although we have implemented safety measures for our production facilities and
provided on-the-job training for our employees, there can be no assurance that
industry-related accidents will not occur in the future.
We do not
currently maintain fire, casualty or other property insurance covering our
properties, equipment or inventories, other than with respect to vehicles. In
addition, we do not maintain any business interruption insurance or any third
party liability insurance to cover claims in respect of personal injury,
property or environmental damage arising from accidents on our properties, other
than third party liability insurance with respect to vehicles. Any uninsured
losses and liabilities incurred by us could have a material adverse effect on
our financial condition and results of operations.
Our
business operations may be adversely affected by present or future environmental
regulations.
As a
producer of coal products, we are subject to significant, extensive, and
increasingly stringent environmental protection laws and regulations in China.
These laws and regulations:
|
|
●
|
impose
fees for the discharge of waste
substances;
|
|
|
●
|
require
the establishment of reserves for reclamation and
rehabilitation;
|
|
|
●
|
require
the payment of fines for serious environmental offenses;
and
|
|
|
●
|
allow
the PRC Government, at its discretion, to close any facility that fails to
comply with orders requiring it to correct or stop operations causing
environmental damage.
|
Our
operations may produce significant amounts of waste water, gas and solid waste
materials. Currently, the PRC Government is moving toward more rigorous
enforcement of applicable laws and regulations as well as the adoption and
enforcement of more stringent environmental standards. Our budgeted amounts
of capital expenditure for environmental regulatory compliance may not be
sufficient and we may need to allocate additional funds for such purpose. If we
fail to comply with current or future environmental laws and regulations, we may
be required to pay penalties or fines or take corrective actions, any of which
may have a material adverse effect on our business operations and financial
condition.
In
addition, China is a signatory to the 1992 United Nations Framework Convention
on Climate Change and the 1997 Kyoto Protocol, which are intended to limit
emissions of greenhouse gases. Efforts to control greenhouse gas emission in
China could result in reduced use of coal if power generators switch to sources
of fuel with lower carbon dioxide emissions, which in turn could reduce the
revenues of our business and have a material adverse effect on our results of
operations.
Our
operations are subject to a number of risks relating to the PRC.
We are
also subject to a number of risks relating to the PRC, including the
following:
The
central and local PRC governments continue to support the development and
operation of coal industry in China. If the PRC Government changes its current
policies that are currently beneficial to us, we may face significant
constraints on our flexibility and ability to expand our business operations or
to maximize our profitability.
|
|
●
|
Under
current PRC regulatory requirements, our projects for the development of
our coal water mixture fuel substitute require PRC Government approval. If
any of our important projects required for our growth or cost reduction
are not approved, or are not approved on a timely basis, our financial
condition and operating performances could be adversely
affected.
|
|
|
●
|
The
PRC Government has been reforming, and is expected to continue to reform
its economic system. Many of the reforms are unprecedented or
experimental, and are expected to be refined and improved. Other
political, economic and social factors can also lead to further
readjustment of the reform measures. This refining and readjustment
process may not always have a positive effect on our operations. Our
operating results may be adversely affected by changes in the PRC’s
economic and social conditions and by changes in policies of the PRC
Government such as changes in laws and regulations (or the interpretation
thereof), imposition of additional restrictions on currency conversion and
reduction in tariff protection and other import
restrictions.
|
|
|
●
|
Since
1994, the conversion of Renminbi into foreign currencies, including Hong
Kong and U.S. dollars, has been based on rates set by the People’s Bank of
China, or PBOC, which are set daily based on the previous day’s PRC
interbank foreign exchange market rate and current exchange rates on the
world financial markets. Since 1994, the official exchange rate for the
conversion of Renminbi to U.S. dollars has generally been stable. On July
21, 2005, however, PBOC announced a reform of its exchange rate system.
Under the reform, Renminbi is no longer effectively linked to US dollars
but instead is allowed to trade in a tight 0.3% band against a basket of
foreign currencies. Any further appreciation of Renminbi in the future
will increase the cost of our export sales, reduce our account receivables
denominated in foreign currencies and adversely affect our financial
condition and results of operations. On the other hand, any devaluation of
the Renminbi may adversely affect the value of, and dividends payable
on our shares we receive our revenues and denominate our profits in
Renminbi. Our financial condition and operating performance may also be
affected by changes in the value of certain currencies other than Renminbi
in which our earnings and obligations are denominated. In particular, a
devaluation of the Renminbi is likely to increase the portion of our cash
flow required to satisfy our foreign currency-denominated
obligations.
|
|
|
●
|
Since
1997, many new laws and regulations covering general economic matters have
been promulgated in the PRC. Despite this activity to develop the legal
system, PRC’s system of laws is not yet complete. Even where adequate law
exists, enforcement of existing laws or contracts based on existing law
may be uncertain and sporadic, and it may be difficult to obtain swift and
equitable enforcement or to obtain enforcement of a judgment by a court of
another jurisdiction. The relative inexperience of PRC’s judiciary in many
cases creates additional uncertainty as to the outcome of any litigation.
In addition, interpretation of statutes and regulations may be subject to
government policies reflecting domestic political
changes.
|
Our
coal water mixture production facilities will be subject to extensive regulation
by the PRC Government and government regulations may limit our activities and
adversely affect our business operations.
Our coal
water mixture operations, like those of other PRC energy companies, is subject
to extensive regulation established by the PRC Government. Central governmental
authorities, such as the National Development and Reform Commission, the State
Environmental Protection Administration, the Ministry of Land and Resources, the
State Administration of Coal Mine Safety, the and the State Bureau of Taxation,
and provincial and local authorities and agencies exercise extensive control
over various aspects of China’s coal industry and transportation (including rail
and sea transport). These controls affect the following material aspects of our
operations:
|
|
●
|
pricing
of our transport services;
|
|
|
●
|
industry-specific
taxes and fees;
|
|
|
●
|
target
of our capital investments;
|
|
|
●
|
pension
funds appropriation; and
|
|
|
●
|
environmental
and safety standards.
|
We may
face significant constraints on our ability to implement our business strategies
or to carry out or expand our business operations. Our business may also be
materially and adversely affected by future changes in certain regulations and
policies of the PRC Government in respect of the coal industry.
New legislation or regulations may be adopted that may materially and
adversely affect our coal water mixture operations, our cost structure or the
demand for our products. In addition, new legislation or regulations or
different or more stringent interpretation of existing laws and regulations may
also require us to substantially change our existing operations or incur
significant costs.
The
Profitability of Our Products Depend on Our Ability to Operate Without
Infringing the Proprietary Rights of Others and to Protect Proprietary
Rights
We must
operate without infringing the proprietary rights of third parties and without
third parties circumventing our rights. The patent positions of coal and
biotechnology enterprises, including ours, are uncertain and involve complex
legal and factual questions for which important legal principles are largely
unresolved. For example, no consistent policy has emerged regarding the breadth
of bio-technology patent claims that are granted by the U.S. Patent and
Trademark Office or enforced by the U.S. federal courts. In addition, the scope
of the originally claimed subject matter in a patent application can be
significantly reduced before a patent is issued. The biotechnology patent
situation outside the U.S. is even more uncertain and is currently undergoing
review and revision in many countries. For our products, which have or in the
future may have, obtained patent protection, their profitability may depend in
part on our ability to obtain and maintain patents and licenses and preserve
trade secrets, and the period our intellectual property remains exclusive.
Because patent applications are maintained in secrecy in some cases, we cannot
be certain that we or our licensors are the first creators of inventions
described in our pending patent applications or patents or the first to
file patent applications for such inventions.
Other
companies may independently develop similar products and design around any
patented products we develop.
We cannot
assure you that:
|
|
●
|
any
of our patent applications will result in the issuance of
patents;
|
|
|
●
|
we
will develop additional patentable
products;
|
|
|
●
|
the
patents we have been issued will provide us with any competitive
advantages;
|
|
|
●
|
the
patents of others will not impede our ability to do business;
or
|
|
|
●
|
third
parties will not be able to circumvent our
patents.
|
A number
of coal-based products companies, bio-technology companies, research and
academic companies and institutions have developed technologies, filed patent
applications or received patents on technologies that may relate to our
business. If these technologies, applications or patents conflict with ours, our
ability to sell our products may be curtailed. If patents that cover our
activities are issued to other companies, we may not be able to obtain licenses
at a reasonable cost, or at all. We may also be unable to develop our
technology, or introduce, manufacture or sell current or future products we have
planned.
Patent
litigation is becoming widespread in the bio-technology industry. Such
litigation may affect our efforts to form collaborations, to conduct research or
development, to conduct clinical testing or to manufacture or market any
products under development. There are no assurances that our patents would be
held valid or enforceable by a court or that a competitor’s technology or
product would be found to
infringe our patents in the event of patent litigation. Our business could be
materially affected by an adverse outcome to such litigation. We could incur
substantial costs and devote significant management resources to defend our
patent position or to seek a declaration that another company’s patents are
invalid.
Much of
our know-how and technology may not be patentable, though it may constitute
trade secrets. There are no assurances that we will be able to meaningfully
protect our trade secrets. We cannot assure you that any of our existing
confidentiality agreements with employees, consultants, advisors or
collaborators will provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. Collaborators, advisors or consultants may dispute the ownership of
proprietary rights to our technology, for example by asserting that they
developed the technology independently.
We
May Encounter Difficulties in Manufacturing our Products
Before
our products can be profitable, they must be produced in commercial quantities
in a cost-effective manufacturing process that complies with regulatory
requirements, including production and quality control regulations. If we cannot
arrange for or maintain commercial-scale manufacturing on acceptable terms, or
if there are delays or difficulties in the manufacturing process, we may not be
able to conduct clinical testing, obtain regulatory approval or meet demand for
our products. Production of our products could require raw materials which are
scarce or which can be obtained only from a limited number of sources. If we are
unable to obtain adequate supplies of such raw materials, the development,
regulatory approval and marketing of our products could be delayed.
We
May Not Be Able to Obtain the Regulatory Approvals or Clearances That Are
Necessary to Commercialize Our Products
The PRC
imposes significant statutory and regulatory obligations upon the manufacture
and sale of our products. Each regulatory authority typically has a lengthy
approval process in which it examines product testing data and the facilities in
which the product is manufactured. Regulatory submissions must meet complex
criteria to demonstrate the safety and efficacy of the ultimate products.
Addressing these criteria requires considerable data collection, verification
and analysis. We may spend time and money preparing regulatory submissions or
applications without assurances as to whether they will be approved on a timely
basis or at all.
Our
product candidates, some of which are currently in the early stages of
development, will require additional development prior to their
commercialization. These steps and the process of obtaining required approvals
and clearances can be costly and time-consuming. If our potential products are
not successfully developed, cannot be proven to be safe and effective through
product testing, or do not receive applicable regulatory approvals and
clearances, or if there are delays in the process:
|
|
●
|
the
commercialization of our products could be adversely
affected;
|
|
|
●
|
any
competitive advantages of the products could be diminished;
and
|
|
|
●
|
revenues
or collaborative milestones from the products could be reduced or
delayed.
|
Governmental
and regulatory authorities may approve a product candidate for fewer indications
or narrower circumstances than requested or may condition approval on the
performance of post-marketing studies for a product candidate. Even if a product
receives regulatory approval and clearance, it may later exhibit adverse side
effects that limit or prevent its widespread use or that force us to withdraw
the product from the market.
Any
marketed product and its manufacturer will continue to be subject to strict
regulation after approval. Results of post-marketing programs may limit or
expand the further marketing of products. Unforeseen problems with an approved
product or any violation of regulations could result in restrictions on the
product, including its withdrawal from the market and possible civil
actions.
In
manufacturing our products we will be required to comply with applicable good
manufacturing practices regulations, which include requirements relating to
quality control and quality assurance, as well as the maintenance of records and
documentation. if we cannot comply with regulatory requirements, including
applicable good manufacturing practice requirements, we may not be allowed to
develop or market the product candidates. If we or our manufacturers fail to
comply with applicable regulatory requirements at any stage during the
regulatory process, we may be subject to sanctions, including fines, product
recalls or seizures, injunctions, refusal of regulatory agencies to review
pending market approval applications or supplements to approve
applications, total or partial suspension of production, civil penalties,
withdrawals of previously approved marketing applications and criminal
prosecution.
Competitors
May Develop and Market Products That Are Less Expensive, More Effective or
Safer, Making Our Products Obsolete or Uncompetitive
Some of
our competitors and potential competitors have greater product development
capabilities and financial, scientific, marketing and human resources than we
do. Technological competition from other alternative energy, coal-based product
and bio-technology companies is intense and is expected to increase. Other
companies have developed technologies that could be the basis for competitive
products. Some of these products may be produced with an entirely different
approach or may be manufactured differently than the products we are developing.
Alternative products may be developed that are more effective and are less
costly than our products. Competitors may succeed in developing products earlier
than us, obtaining approvals and clearances for such products more rapidly than
us, or developing products that are more effective than ours. Over time, our
technology or products may become obsolete or uncompetitive.
Our
Products May Not Gain Market Acceptance
Our
products may not gain market acceptance in the coal-based products and
bio-technology community. The degree of market acceptance of any product depends
on a number of factors, including establishment and demonstration of our
products’ efficacy and safety, cost-effectiveness, advantages over alternative
products, and marketing and distribution support for the products. Limited
information regarding these factors is available in connection with our products
or products that may compete with ours.
To
directly market and distribute our products, we or our collaborators require a
marketing and sales force with appropriate technical expertise and supporting
distribution capabilities. We may not be able to further establish sales,
marketing and distribution capabilities or enter into arrangements with third
parties on acceptable terms. If we or our partners cannot successfully market
and sell our products, our ability to generate revenue will be
limited.
Our
Operations and the Use of Our Products Could Subject Us to Damages Relating to
Injuries or Accidental Contamination.
Our
research and development processes involve the controlled use of hazardous
materials. We are subject to federal, provincial and local PRC laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and waste products. The risk of accidental contamination or
injury from handling and disposing of such materials cannot be completely
eliminated. In the event of an accident involving hazardous materials, we could
be held liable for resulting damages. We are not insured with respect to this
liability. Such liability could exceed our resources. In the future we could
incur significant costs to comply with PRC environmental laws
and regulations.
If
We Were Successfully Sued for Product Liability, We Could Face Substantial
liabilities That May Exceed Our Resources.
We may be
held liable if any product we develop, or any product which is made using our
technologies, causes injury or is found unsuitable during product testing,
manufacturing, marketing, sale or use. We currently do not have product
liability insurance. We are not insured with respect to this liability. If we
choose to obtain product liability insurance but cannot obtain sufficient
insurance coverage at an acceptable cost or otherwise protect against potential
product liability claims, the commercialization of products that we develop may
be prevented or inhibited. If we are sued for any injury caused by our products,
our liability could exceed our total assets.
We
Have Limited Business Insurance Coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.
Our
Success Depends on Attracting and Retaining Qualified Personnel
We depend
on a core management and scientific team. The loss of any of these individuals
could prevent us from achieving our business objective of commercializing our
product candidates. Our future success will depend in large part on our
continued ability to attract and retain other highly qualified scientific,
technical and management personnel, as well as personnel with expertise in
clinical testing and government regulation. We face competition for personnel
from other companies, universities, public and private research institutions,
government entities and other organizations. If our recruitment and retention
efforts are unsuccessful, our business operations could
suffer.
Risk Related to the
Alternative Energy
Industry
A
drop in the retail price of conventional energy or other alternative energy may
have a negative effect on our business.
A
customer's decision to purchase our CWM Fuel product will be primarily driven by
the return on investment resulting from the energy savings from our CWM Fuel
product. Any fluctuations in economic and market conditions that impact the
viability of conventional and other alternative energy sources, such as
decreases in the prices of oil and other fossil fuels could cause the demand for
our CWM Fuel product to decline. Although we believe that current levels of
retail energy prices support a reasonable return on investment for our CWM Fuel
product, there can be no assurance that future retail pricing of conventional
energy and other alternative energy will remain at such levels.
Existing
regulations and changes to such regulations may present technical, regulatory
and economic barriers to the purchase and use of coal water mixture product,
which may significantly affect the demand for our products.
Our CWM
Fuel product will be subject to oversight and regulation in accordance with
national and local ordinances or regulations relating to safety, environmental
protection, and related matters. We are responsible for knowing such ordinances
and requirements must design our CWM Fuel product to comply with varying
standards. Any new government regulations or utility policies pertaining to our
products may result in significant additional expenses to us, our resellers and
their customers and, as a result, could cause a significant reduction in demand
for our product.
If our
CWM Fuel product is not suitable for widespread adoption or sufficient demand
for our CWM Fuel product does not develop or takes longer to develop than we
anticipate, our sales would not significantly increase and we would be unable to
achieve or sustain profitability.
The
market for CWM Fuel products is emerging and rapidly evolving, and its future
success is uncertain. If CWM Fuel and clean coal technology prove unsuitable for
widespread commercial deployment or if demand for our CWM Fuel product fails to
develop sufficiently, we may be unable to generate enough revenues to achieve
and sustain profitability. In addition, demand for CWM Fuel product in the
markets and geographic regions we target may not develop or may develop more
slowly than we anticipate. Many factors will influence the widespread adoption
of coal water mixture technology and demand for our products,
including:
|
|
●
|
cost-effectiveness
of coal water mixture technologies as compared with conventional and other
alternative energy technologies;
|
|
|
●
|
performance
and reliability of our coal water mixture product as compared with
conventional and other alternative energy
products;
|
|
|
●
|
capital
expenditures by customers that tend to decrease if the PRC or global
economy slows down; and
|
|
|
●
|
availability
of government subsidies and
incentives.
|
Risks Related to Our
Corporate Structure
PRC
laws and regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation, we
could be subject to sanctions. In addition, changes in such PRC laws and
regulations may materially and adversely affect our business.
There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual
arrangements with our affiliated Chinese entity, Shaanxi Suoang, and its
shareholders. We are considered a foreign person or foreign invested enterprise
under PRC law. As a result, we are subject to PRC law limitations on foreign
ownership of Chinese companies. These laws and regulations are relatively new
and may be subject to change, and their official interpretation and enforcement
may involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively.
The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you that our current ownership and operating structure would not
be found in violation of any current or future PRC laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
We
may be adversely affected by complexity, uncertainties and changes in PRC
regulation of our business and companies, including limitations on our ability
to own key assets.
The PRC
government regulates the coal and bio-technology industries including foreign
ownership of, and the licensing and permit requirements pertaining to, companies
in these industry. These laws and regulations are relatively new and evolving,
and their interpretation and enforcement involve significant uncertainty. As a
result, in certain circumstances it may be difficult to determine what actions
or omissions may be deemed to be a violation of applicable laws and regulations.
Issues, risks and uncertainties relating to PRC government regulation of our
industry include the following:
|
|
●
|
we
only have contractual control over Shaanxi Suoang. We do not own it due to
the restriction of foreign investment in Chinese businesses;
and
|
|
|
●
|
uncertainties
relating to the regulation of the coal product and alternative energy
business in China, including evolving licensing practices, means that
permits, licenses or operations at our company may be subject to
challenge. This may disrupt our business, or subject us to sanctions,
requirements to increase capital or other conditions or enforcement,
or compromise enforceability of related contractual arrangements, or
have other harmful effects on us.
|
The
interpretation and application of existing PRC laws, regulations and policies
and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, alternative energy and bio-technology
businesses in China, including our business.
In
order to comply with PRC laws limiting foreign ownership of Chinese companies,
we conduct our business through Shaanxi Suoang by means of contractual
arrangements. If the PRC government determines that these contractual
arrangements do not comply with applicable regulations, our business could be
adversely affected.
The PRC
government restricts foreign investment in businesses in China. Accordingly, we
operate our business in China through Shaanxi Suoang. Shaanxi Suoang holds the
licenses and approvals necessary to operate our coal-based products business in
China. We have contractual arrangements with Shaanxi Suoang and its shareholders
that allow us to substantially control Shaanxi Suoang. We cannot assure you,
however, that we will be able to enforce these contracts.
Although
we believe we comply with current PRC regulations, we cannot assure you that the
PRC government would agree that these operating arrangements comply with PRC
licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. If the PRC
government determines that we do not comply with applicable law, it could revoke
our business and operating licenses, require us to discontinue or restrict our
operations, restrict our right to collect revenues, require us to restructure
our operations, impose additional conditions or requirements with which we may
not be able to comply, impose restrictions on our business operations or on our
customers, or take other regulatory or enforcement actions against us that
could be harmful to our business.
Our
contractual arrangements with Shaanxi Suoang and its shareholders may not be as
effective in providing control over these entities as direct
ownership.
Since PRC
law limits foreign equity ownership in companies in China, we operate our
business through an affiliated Chinese company, referred to herein as Shaanxi
Suoang. We have no equity ownership interest in Shaanxi Suoang and rely on
contractual arrangements to control and operate such business. These contractual
arrangements may not be as effective in providing control over Shaanxi Suoang as
direct ownership. For example, Shaanxi Suoang could fail to take actions
required for our business despite its contractual obligation to do so. If
Shaanxi Suoang fails to perform under their agreements with us, we may have
to rely on legal remedies under PRC law, which may not be effective. In
addition, we cannot assure you that Shaanxi Suoang’s shareholders would always
act in our best interests.
The
Chairman of the Board of Directors of Shaanxi Suoang has potential conflicts of
interest with us, which may adversely affect our business.
Mr.
Baowen Ren, our Chief Executive Officer, is also the Chairman of the Board of
Directors of Shaanxi Suoang. Conflicts of interests between his duties to our
company and Shaanxi Suoang may arise. As Mr. Ren is a director and executive
officer of our Company, he has a duty of loyalty and care to us under Nevada law
when there are any potential conflicts of interests between our company and
Shaanxi Suoang. We cannot assure you, however, that when conflicts of interest
arise, Mr. Ren will act completely in our interests or that conflicts of
interests will be resolved in our favor. In addition, Mr. Ren could violate his
legal duties by diverting business opportunities from us to others. If we cannot
resolve any conflicts of interest between us and Mr. Ren, we would have to rely
on legal proceedings, which could result in the disruption of our
business.
Risks Related to Doing
Business in
China
Adverse
changes in economic and political policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
Substantially
all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in China. China’s economy
differs from the economies of most developed countries in many respects,
including with respect to the amount of government involvement, level of
development, growth rate, control of foreign exchange and allocation of
resources. While the PRC economy has experienced significant growth in the past
20 years, growth has been uneven across different regions and among various
economic sectors of China. The PRC government has implemented various measures
to encourage economic development and guide the allocation of resources. Some of
these measures benefit the overall PRC economy, but may also have a negative
effect on us. For example, our financial condition and results of operations may
be adversely affected by government control over capital investments or changes
in tax regulations that are applicable to us. Since early 2004, the PRC
government has implemented certain measures to control the pace of economic
growth. Such measures may cause a decrease in the level of economic activity in
China, which in turn could adversely affect our results of operations and
financial condition.
If
PRC law were to phase out the preferential tax benefits currently being extended
to foreign invested enterprises and “new or high-technology enterprises” located
in a high-tech zone, we would have to pay more taxes, which could have a
material and adverse effect on our financial condition and results of
operations.
Under PRC
laws and regulations, an enterprise may enjoy preferential tax benefits if it is
registered in a high-tech zone and also qualifies as “new or high-technology
enterprise”. As an enterprise as well as a certified “new or high-technology
enterprise” located in a high-tech zone in Xian, Shaanxi Suoang is entitled to a
two-year exemption from enterprise income tax beginning from its first year of
operation, followed by a 15% tax rate so long as it continues to qualify as a
“new or high-technology enterprise.” Shaanxi Suoang is currently subject to a
15% enterprise income tax rate for so long as its status as a “new or
high-technology enterprise” remains unchanged. If the PRC law were to phase out
preferential tax benefits currently granted to “new or high-technology
enterprises” and technology consulting services, we would be subject to the
standard statutory tax rate, which currently is 33%, and we would be unable to
obtain business tax refunds for our provision of technology consulting services.
Loss of these preferential tax treatments could have a material and adverse
effect on our financial condition and results of operations.
Shaanxi
Suoang is subject to restrictions on making payments to us.
Hangson,
our wholly owned subsidiary, is a holding company incorporated in the British
Virgin Islands and it does not have any assets or conduct any business
operations other than our investments in our variable interest entity
(“VIE”) in China, Shaanxi Suoang. As a result of our holding company
structure, we rely entirely on payments from Shaanxi Suoang under our
contractual arrangements. The PRC government also imposes controls on the
conversion of RMB into foreign currencies and the remittance of currencies out
of China. We may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency. (See the section
below titled “Government control of currency conversion may affect the
value of your investment.”) Furthermore, if our VIE in China incurs debt on
its own in the future, the instruments governing the debt may restrict its
ability to make payments. If we are unable to receive all of the revenues from
our operations through these contractual or dividend arrangements, we may
be unable to pay dividends on our ordinary shares.
Uncertainties
with respect to the PRC legal system could adversely affect us.
We
conduct our business primarily through Hangson and our VIE, Shaanxi Suoang. Our
operations in China are governed by PRC laws and regulations. We are generally
subject to laws and regulations in China. The PRC legal system is based on
written statutes. Prior court decisions may be cited for reference but have
limited precedential value.
However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result, we
may not be aware of our violation of these policies and rules until some time
after the violation. In addition, any litigation in China may be protracted and
result in substantial costs and diversion of resources and management
attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in the
prospectus.
We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, most of our senior executive
officers reside within China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon our
senior executive officers, including with respect to matters arising under U.S.
federal securities laws or applicable state securities laws. Moreover, our PRC
counsel has advised us that the PRC does not have treaties with the United
States or many other countries providing for the reciprocal recognition and
enforcement of judgment of courts.
Governmental
control of currency conversion may affect the value of your
investment.
The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB. Under our current structure, our
income is primarily derived from payments from Shaanxi Suoang. Shortages in the
availability of foreign currency may restrict the ability of our PRC
subsidiaries and our affiliated entity to remit sufficient foreign currency
to pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, 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 government authorities is required where RMB 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.
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 dividends in foreign
currencies to our shareholders.
Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while a significant
portion of our financial assets are denominated in U.S. dollars. We rely
entirely on fees paid to us by our VIE in China. Any significant fluctuation in
value of RMB may materially and adversely affect our cash flows, revenues,
earnings and financial position, and the value of, and any dividends payable on,
our stock in U.S. dollars. For example, an appreciation of RMB against the U.S.
dollar would make any new RMB denominated investments or expenditures more
costly to us, to the extent that we need to convert U.S. dollars into RMB for
such purposes. An appreciation of RMB against the U.S. dollar would also result
in foreign currency translation losses for financial reporting purposes when we
translate our U.S. dollar denominated financial assets into RMB, as RMB is our
reporting currency.
We
face risks related to health epidemics and other outbreaks.
Our
business could be adversely affected by the effects of SARS or another epidemic
or outbreak. China reported a number of cases of SARS in April 2004. Any
prolonged recurrence of SARS or other adverse public health developments in
China may have a material adverse effect on our business operations. For
instance, health or other government regulations adopted in response may require
temporary closure of our production facilities or of our offices. Such closures
would severely disrupt our business operations and adversely affect our results
of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of SARS or any other
epidemic.
Risks Related to an
Investment in Our Securities
To
Date, We Have Not Paid Any Cash Dividends and No Cash Dividends Will be Paid in
the Foreseeable Future.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even if
the funds are legally available for distribution, we may nevertheless decide not
to pay any dividends. We intend to retain all earnings for the company's
operations.
The
Application of the "Penny Stock" Rules Could Adversely Affect the Market Price
of Our Common Stock and Increase Your Transaction Costs to Sell Those
Shares.
As long
as the trading price of our common shares is below $5 per share, the open-market
trading of our common shares will be subject to the "penny stock" rules. The
"penny stock" rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the Securities and Exchange Commission relating to the
penny stock market. The broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements must be sent
disclosing recent price information on the limited market in penny stocks. These
additional burdens imposed on broker-dealers may restrict the ability or
decrease the willingness of broker-dealers to sell our common shares, and may
result in decreased liquidity for our common shares and increased transaction
costs for sales and purchases of our common shares as compared to other
securities.
Our
Common Shares are Thinly Traded and, You May be Unable to Sell at or Near Ask
Prices or at All if You Need to Sell Your Shares to Raise Money or Otherwise
Desire to Liquidate Your Shares.
The
Company cannot predict the extent to which an active public market for its
common stock will develop or be sustained. However, the Company does not rule
out the possibility of applying for listing on the Nasdaq National Market or
other exchanges.
Our
common shares have historically been sporadically or "thinly-traded" on the
“Over-the-Counter Bulletin Board”, meaning that the number of persons interested
in purchasing our common shares at or near bid prices at any given time may be
relatively small or non-existent. This situation is attributable to a number of
factors, including the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others in
the investment community that generate or influence sales volume, and that even
if we came to the attention of such persons, they tend to be risk-averse and
would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned
and viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained.
The
market price for our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you purchase our common stock may not be indicative of the price
that will prevail in the trading market. You may be unable to sell your common
stock at or above your purchase price if at all, which may result in substantial
losses to you.
The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact on
its share price. Secondly, we are a speculative or "risky" investment due to our
lack of revenues or profits to date and uncertainty of future market acceptance
for our current and potential products. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined
to sell their shares on the market more quickly and at greater discounts than
would be the case with the stock of a seasoned issuer. The following factors may
add to the volatility in the price of our common shares: actual or anticipated
variations in our quarterly or annual operating results; adverse outcomes; the
termination of our contractual agreements with Shaanxi Suoang; and additions or
departures of our key personnel, as well as other items discussed under this
"Risk Factors" section, as well as elsewhere in this Current Report. Many of
these factors are beyond our control and may decrease the market price of our
common shares, regardless of our operating performance. We cannot make any
predictions or projections as to what the prevailing market price for our common
shares will be at any time, including as to whether our common shares will
sustain their current market prices, or as to what effect that the sale of
shares or the availability of common shares for sale at any time will have on
the prevailing market price. However, the Company does not rule out the
possibility of applying for listing on the Nasdaq National Market or other
exchanges.
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales
and false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
Volatility
in Our Common Share Price May Subject Us to Securities Litigation.
The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
In the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
Our
corporate actions are substantially controlled by our principal shareholders and
affiliated entities.
Our
principal shareholders and their affiliated entities will own approximately 85%
of our outstanding ordinary shares, representing approximately 85% of our voting
power. These shareholders, acting individually or as a group, could exert
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. In addition, because of the
percentage of ownership and voting concentration in these principal shareholders
and their affiliated entities, elections of our board of directors will
generally be within the control of these shareholders and their affiliated
entities. While all of our shareholders are entitled to vote on matters
submitted to our shareholders for approval, the concentration of shares and
voting control presently lies with these principal shareholders and their
affiliated entities. As such, it would be difficult for shareholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as shareholders will be viewed favorably by all shareholders of the
company.
The
Elimination of Monetary Liability Against our Directors, Officers and Employees
under Nevada law and the Existence of Indemnification Rights to our Directors,
Officers and Employees may Result in Substantial Expenditures by our Company and
may Discourage Lawsuits Against our Directors, Officers and
Employees.
Our
articles of incorporation contains a provision that eliminates the liability of
our directors for monetary damages to our company and shareholders to the extent
allowed under Nevada law and we are prepared to give such indemnification to our
directors and officers to the extent provided by Nevada law. We may also have
contractual indemnification obligations under our employment agreements that we
enter into with our officers. The foregoing indemnification obligations could
result in our company incurring substantial expenditures to cover the cost of
settlement or damage awards against directors and officers, which we may be
unable to recoup. These provisions and resultant costs may also discourage our
company from bringing a lawsuit against directors and officers for breaches of
their fiduciary duties, and may similarly discourage the filing of derivative
litigation by our shareholders against our directors and officers even though
such actions, if successful, might otherwise benefit our company and
shareholders.
Legislative
Actions, Higher Insurance Costs and Potential New Accounting Pronouncements may
Impact our Future Financial Position and Results of Operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as
proposed legislative initiatives following the Enron bankruptcy are likely to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules.
These and other potential changes could materially increase the expenses we
report under generally accepted accounting principles, and adversely affect our
operating results.
Past
Activities Of The Company And Its Affiliates May Lead To Future Liability For
The Company.
Prior to
our entry into the Exchange Agreement with Hangson on October 20, 2006, the
Company engaged in businesses unrelated to its current operations. Although the
Endo Shareholders are providing certain indemnifications against any loss,
liability, claim, damage or expense arising out of or based on any breach of or
inaccuracy in any of their representations and warranties made regarding such
acquisition, any liabilities relating to such prior business against which
Hangson is not completely indemnified may have a material adverse effect on the
Company.
The
market price for our stock may be volatile.
The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:
|
|
●
|
actual
or anticipated fluctuations in our quarterly operating
results;
|
|
|
●
|
changes
in financial estimates by securities research
analysts;
|
|
|
●
|
conditions
in bio-technology and coal-based product
markets;
|
|
|
●
|
changes
in the economic performance or market valuations of other alternative
energy and coal-based products
companies;
|
|
|
●
|
announcements
by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
|
●
|
addition
or departure of key personnel;
|
|
|
●
|
fluctuations
of exchange rates between RMB and the U.S.
dollar;
|
|
|
●
|
intellectual
property litigation; and
|
|
|
●
|
general
economic or political conditions in
China.
|
In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.
We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.
We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from this offering will be sufficient to meet
our anticipated cash needs for the near future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may seek
to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity securities could result in additional dilution to our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
We will
be subject to reporting obligations under the U.S. securities laws. The
Securities and Exchange Commission, or the SEC, as required by Section 404 of
the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to
include a management report on such company’s internal controls over financial
reporting in its annual report, which contains management’s assessment of the
effectiveness of the company’s internal controls over financial reporting. In
addition, an independent registered public accounting firm must attest to and
report on management’s assessment of the effectiveness of the company’s internal
controls over financial reporting. Our management may conclude that our internal
controls over our financial reporting are not effective. Moreover, even if our
management concludes that our internal controls over financial reporting are
effective, our independent registered public accounting firm may still decline
to attest to our management’s assessment or may issue a report that is qualified
if it is not satisfied with our controls or the level at which our controls are
documented, designed, operated or reviewed, or if it interprets the relevant
requirements differently from us. Our reporting obligations as a public company
will place a significant strain on our management, operational and financial
resources and systems for the foreseeable future. Effective internal controls,
particularly those related to revenue recognition, are necessary for us to
produce reliable financial reports and are important to help prevent fraud. As a
result, our failure to achieve and maintain effective internal controls over
financial reporting could result in the loss of investor confidence in the
reliability of our financial statements, which in turn could harm our business
and negatively impact the trading price of our stock. Furthermore, we anticipate
that we will incur considerable costs and use significant management time and
other resources in an effort to comply with Section 404 and other requirements
of the Sarbanes-Oxley Act.
We
will incur increased costs as a result of being a public company.
As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the Sarbanes-Oxley Act,
as well as new rules subsequently implemented by SEC have required changes in
corporate governance practices of public companies. We expect these new rules
and regulations to increase our legal, accounting and financial compliance costs
and to make certain corporate activities more time-consuming and costly. In
addition, we will incur additional costs associated with our public company
reporting requirements. We are currently evaluating and monitoring developments
with respect to these new rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.
|
ITEM
7. FINANCIAL
STATEMENTS
|
The
Company’s Financial Statements commence on the following
page.
SINO
CLEAN ENERGY INC.
(FORMERLY
CHINA WEST COAL ENERGY, INC.)
AND ITS
SUBSIDIARIES
Consolidated
Financial Statements
For The
Years Ended December 31, 2006 And 2005
SINO
CLEAN ENERGY INC.
(FORMERLY
CHINA WEST COAL ENERGY INC.)
AND ITS
SUBSIDIARIES
INDEX TO
FINANCIAL STATEMENTS
|
|
Pages
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
|
|
Consolidated
Balance Sheets
|
F-4
|
|
|
|
|
Consolidated
Statements of Operations
|
F-6
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
F-8
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
F-9
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-10
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Sino
Clean Energy Inc. (formerly known as China West Coal Energy, Inc.)
We have
audited the accompanying balance sheet of Sino Clean Energy Inc. (formerly known
as China West Coal Energy, Inc.) and subsidiaries as of December 31, 2006, and
the related statements of income and comprehensive income, stockholders’ equity,
and cash flows for the year then ended. Sino Clean Energy Inc.
(formerly known as China West Coal Energy, Inc.)’s management is responsible for
these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits. The
financial statements of Hangson Limited, the accounting acquirer of Sino Clean
Energy Inc. (formerly known as China West Coal Energy, Inc.), for the year ended
December 31, 2005, as explained in Note 1 to the accompanying consolidated
financial statements were audited by other auditors whose report dated June 5,
2006 expressed an unqualified opinion on those statements.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an 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 purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
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 Sino Clean Energy Inc. (formerly
known as China West Coal Energy, Inc.) and subsidiaries as of December 31, 2006,
and the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
As
described in Note 3 to the accompanying consolidated financial statements, the
Company has restated the consolidated balance sheet as of December 31, 2006 and
the related statements of income and comprehensive income, stockholders’ equity,
and cash flows for the year then ended which were previously audited by other
independent accountants, to correct certain accounting errors that were detected
after the original issuance of those consolidated financial
statements.
(Signed)
Yu and Associates CPA Corporation
Arcadia,
California
March 26,
2008
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Hangson
Limited, the accounting acquirer of Sino Clean Energy Inc.
We have
audited the accompanying consolidated balance sheet of Hangson Limited
(hereinafter referred to as the “Company”) as of December 31, 2005 and the
related consolidated statements of income and comprehensive income,
stockholders’ equity, and cash flows for the year then ended. The
Company’s management is responsible for these consolidated financial
statements. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of the Company’s 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 purpose 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 consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Hangson Limited as of
December 31, 2005 and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
(Signed)
GC Alliance Limited
GC
ALLIANCE LIMITED
Certified
Public Accountants
Hong
Kong
June 5,
2006
|
Sino
Clean Energy Inc.
|
|
|
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
|
|
|
Consolidated
Balance Sheets
|
|
|
(Amounts
expressed in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(As
restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalent
|
|
$ |
4,450,557 |
|
|
$ |
691,268 |
|
|
Amounts
due from directors (Note 17(a))
|
|
|
206,186 |
|
|
|
119,397 |
|
|
Deposits
and prepayments (Note 7)
|
|
|
1,830,769 |
|
|
|
124,863 |
|
|
Other
receivables
|
|
|
39,071 |
|
|
|
39,432 |
|
|
Loan
to related party (Notes 8 and 17(a))
|
|
|
411,970 |
|
|
|
- |
|
|
Prepaid
land use right - current portion (Note 10)
|
|
|
30,944 |
|
|
|
- |
|
|
Assets
on discontinued operation
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net (Note 4(d))
|
|
|
750,635 |
|
|
|
639,701 |
|
|
Other
receivable - related (Note 17(d))
|
|
|
256,200 |
|
|
|
- |
|
|
Inventories
|
|
|
14,952 |
|
|
|
38,449 |
|
|
Others
|
|
|
89,670 |
|
|
|
- |
|
|
Investment
|
|
|
- |
|
|
|
335,500 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
8,080,954 |
|
|
|
1,988,610 |
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
rental
|
|
|
- |
|
|
|
59,520 |
|
|
Loan
to a related party (Notes 8 and 17(a))
|
|
|
- |
|
|
|
372,000 |
|
|
Property,
plant and equipment, net (Note 9)
|
|
|
2,958,868 |
|
|
|
2,725,867 |
|
|
Prepaid
land use right - non current portion (Note 10)
|
|
|
1,500,773 |
|
|
|
- |
|
|
Intangible
assets , net (Note 11)
|
|
|
1,632 |
|
|
|
628,640 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
12,542,227 |
|
|
$ |
5,774,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sino
Clean Energy Inc.
|
|
|
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
|
|
|
Consolidated
Balance Sheets
|
|
|
(Amounts
expressed in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(As
restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable - discontinued operation
|
|
$ |
864,787 |
|
|
$ |
64,702 |
|
|
Accrued
expenses and other payables (Note 12)
|
|
|
372,125 |
|
|
|
178,412 |
|
|
Amount
due to a director (Note 17(a))
|
|
|
20,702 |
|
|
|
- |
|
|
Taxes
payable
|
|
|
92,744 |
|
|
|
1,680 |
|
|
Deposit
on sales of property (Note 17(e))
|
|
|
1,409,100 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,759,458 |
|
|
|
244,794 |
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
94,748 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value,
|
|
|
|
|
|
|
|
|
|
50,000,000
shares authorized,
|
|
|
|
|
|
|
|
|
|
nil
issued and outstanding
|
|
|
- |
|
|
|
- |
|
|
Common
stock, $0.001 par value,
|
|
|
|
|
|
|
|
|
|
200,000,000
shares authorized,
|
|
|
|
|
|
|
|
|
|
84,681,750
issued and outstanding (Notes 1 and 16)
|
|
|
84,682 |
|
|
|
4,712,137 |
|
|
Additional
paid-in capital
|
|
|
9,153,174 |
|
|
|
84,759 |
|
|
(Accumulated
deficit) Retained earnings
|
|
|
(330,456 |
) |
|
|
447,982 |
|
|
Statutory
reserves (Note 13)
|
|
|
348,309 |
|
|
|
159,371 |
|
|
Accumulated
other comprehensive income
|
|
|
432,312 |
|
|
|
125,594 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
9,688,021 |
|
|
|
5,529,843 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
12,542,227 |
|
|
$ |
5,774,637 |
|
|
Sino
Clean Energy Inc.
|
|
|
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
|
|
Consolidated
Statements of Income (Operations) and Comprehensive Income
|
|
|
(Amounts
expressed in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(As
restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
37,718 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
263,256 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(300,974 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
Merger
cost
|
|
|
(575,000 |
) |
|
|
- |
|
|
Rental
income, net of outgoings
|
|
|
329,741 |
|
|
|
419,875 |
|
|
Interest
income
|
|
|
60,678 |
|
|
|
28,957 |
|
|
Sundry
income
|
|
|
- |
|
|
|
4,024 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
(184,581 |
) |
|
|
452,856 |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations before
|
|
|
|
|
|
|
|
|
|
provision
for income taxes and minority interest
|
|
|
(485,555 |
) |
|
|
452,856 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes on
|
|
|
|
|
|
|
|
|
|
continuing
operations (Note 15)
|
|
|
49,462 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income from continuing operations
|
|
|
|
|
|
|
|
|
|
before
minority interest
|
|
|
(535,017 |
) |
|
|
452,856 |
|
|
|
|
|
|
|
|
|
|
|
|
Sino
Clean Energy Inc.
|
|
|
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
|
|
|
Consolidated
Statements of Income (Operations) and Comprehensive Income
|
|
|
(Amounts
expressed in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(As
restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations (Note 14)
|
|
|
|
|
|
|
|
Income
from operations of discontinued
|
|
|
|
|
|
|
|
component
|
|
|
866,490 |
|
|
|
389,836 |
|
|
Loss
on disposal of discontinued
|
|
|
|
|
|
|
|
|
|
operations
assets
|
|
|
(291,266 |
) |
|
|
- |
|
|
Income
tax expenses (Note 15)
|
|
|
(165,021 |
) |
|
|
- |
|
|
Net
income from discontinued operations
|
|
|
410,203 |
|
|
|
389,836 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income before minority interest
|
|
|
(124,814 |
) |
|
|
842,692 |
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
32,794 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(92,020 |
) |
|
|
842,692 |
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
306,718 |
|
|
|
125,594 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
214,698 |
|
|
$ |
968,286 |
|
|
|
|
|
|
|
|
|
|
|
|
Weight
average number of shares
|
|
|
|
|
|
|
|
|
|
-
Basic and diluted
|
|
|
84,681,750 |
|
|
|
84,681,750 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share (Note 16)
|
|
|
|
|
|
|
|
|
|
-
Basic and diluted
|
|
|
|
|
|
|
|
|
|
-
From continuing operation
|
|
$ |
(0.005 |
) |
|
$ |
0.005 |
|
|
-
From discontinuing operation
|
|
|
0.004 |
|
|
|
0.005 |
|
|
-
Net income (loss)
|
|
$ |
(0.001 |
) |
|
$ |
0.010 |
|
|
Sino
Clean Energy Inc.
|
|
|
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
|
|
|
Consolidated
Statements of Shareholders' Equity
|
|
|
(Amount
expressed in U.S. Dollars except number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Common
stock (par value $0.1208)
|
|
|
Additional
|
|
|
Statutory
|
|
|
Statutory
|
|
|
earnings/
|
|
|
other
|
|
|
|
|
|
|
|
paid-in
|
|
|
capital
|
|
|
welfare
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
reserves
|
|
|
reserves
|
|
|
deficit
|
|
|
income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2005
|
|
|
39,000,000 |
|
|
$ |
4,712,137 |
|
|
$ |
84,759 |
|
|
$ |
15,839 |
|
|
$ |
7,920 |
|
|
$ |
209,558 |
|
|
|
- |
|
|
|
5,030,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
842,692 |
|
|
|
- |
|
|
|
842,692 |
|
|
Transfer
to reserve
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
90,408 |
|
|
|
45,204 |
|
|
|
(135,612 |
) |
|
|
- |
|
|
|
- |
|
|
Dividend
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(468,656 |
) |
|
|
- |
|
|
|
(468,656 |
) |
|
Foreign
currency translation gain
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
125,594 |
|
|
|
125,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
39,000,000 |
|
|
|
4,712,137 |
|
|
|
84,759 |
|
|
|
106,247 |
|
|
|
53,124 |
|
|
|
447,982 |
|
|
|
125,594 |
|
|
|
5,529,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
injection of subsidiaries
|
|
|
- |
|
|
|
- |
|
|
|
4,440,960 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,440,960 |
|
|
Exchange
to share prior recapitalization
|
|
|
(39,000,000 |
) |
|
|
(4,712,137 |
) |
|
|
4,712,137 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Acquired
on capitalization (at par $0.001)
|
|
|
2,712,000 |
|
|
|
2,712 |
|
|
|
(2,712 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Cancellation
of shares (at par $0.001)
|
|
|
(1,154,350 |
) |
|
|
(1,154 |
) |
|
|
1,154 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Recapitalization
(at par $0.001)
|
|
|
26,669,600 |
|
|
|
26,669 |
|
|
|
(26,669 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Three
for one forward stock split
|
|
|
56,454,500 |
|
|
|
56,455 |
|
|
|
(56,455 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(92,020 |
) |
|
|
- |
|
|
|
(92,020 |
) |
|
Transfer
to reserve
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
123,849 |
|
|
|
62,979 |
|
|
|
(186,828 |
) |
|
|
- |
|
|
|
- |
|
|
Dividend
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(499,590 |
) |
|
|
- |
|
|
|
(499,590 |
) |
|
Foreign
currency translation gain
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,110 |
|
|
|
- |
|
|
|
- |
|
|
|
306,718 |
|
|
|
308,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
84,681,750 |
|
|
$ |
84,682 |
|
|
$ |
9,153,174 |
|
|
$ |
232,206 |
|
|
$ |
116,103 |
|
|
$ |
(330,456 |
) |
|
$ |
432,312 |
|
|
$ |
9,688,021 |
|
|
Sino
Clean Energy Inc.
|
|
|
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
(Amount
expressed in U.S. Dollars except number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(As
restated)
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(92,020 |
) |
|
$ |
842,692 |
|
|
Adjustments
to reconcile net (loss) income to cash
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
(32,794 |
) |
|
|
- |
|
|
Depreciation
and amortization
|
|
|
289,281 |
|
|
|
222,470 |
|
|
Impairment
of plant and machinery
|
|
|
170,166 |
|
|
|
- |
|
|
Loss
on disposal of patent
|
|
|
291,265 |
|
|
|
- |
|
|
Provision
for doubtful debts
|
|
|
444 |
|
|
|
- |
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
|
|
Deposits
and prepayments
|
|
|
(1,672,328 |
) |
|
|
- |
|
|
Accounts
receivable, net
|
|
|
(88,721 |
) |
|
|
(188,422 |
) |
|
Other
receivables
|
|
|
(251,187 |
) |
|
|
42,525 |
|
|
Inventories
|
|
|
24,351 |
|
|
|
323,489 |
|
|
Others
|
|
|
(89,670 |
) |
|
|
- |
|
|
Prepaid
rental
|
|
|
59,520 |
|
|
|
|
|
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
784,569 |
|
|
|
(200,459 |
) |
|
Accrued
expenses and other payables
|
|
|
186,956 |
|
|
|
(14,395 |
) |
|
Taxes
payables
|
|
|
89,483 |
|
|
|
(11,927 |
) |
|
Net
cash (used in) provided by operating activities
|
|
|
(330,685 |
) |
|
|
1,015,973 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Advance
to) repayment from loan to a related party
|
|
|
(27,206 |
) |
|
|
55,984 |
|
|
Payment
for prepaid land use right
|
|
|
(1,506,924 |
) |
|
|
- |
|
|
Purchase
of property, plant and equipment
|
|
|
(503,772 |
) |
|
|
(1,029 |
) |
|
Purchase
of intangibles
|
|
|
- |
|
|
|
(905 |
) |
|
Establishment
of a subsidiary
|
|
|
- |
|
|
|
(335,500 |
) |
|
Proceeds
from disposal of intangible assets
|
|
|
251,905 |
|
|
|
- |
|
|
Proceeds
from sale of investments
|
|
|
346,369 |
|
|
|
- |
|
|
Deposit
on sales of property
|
|
|
1,385,478 |
|
|
|
- |
|
|
Net
cash used in investing activities
|
|
|
(54,150 |
) |
|
|
(281,450 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
(Advance
to) repayment from a director
|
|
|
(82,841 |
) |
|
|
13,858 |
|
|
Advance
from a director
|
|
|
20,702 |
|
|
|
- |
|
|
Dividend
paid
|
|
|
(499,590 |
) |
|
|
(468,656 |
) |
|
Capital
contribution by subsidiaries
|
|
|
4,549,007 |
|
|
|
- |
|
|
Net
cash provided by (used in) financing activities
|
|
|
3,987,278 |
|
|
|
(454,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation
|
|
|
156,846 |
|
|
|
7,947 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
3,759,289 |
|
|
|
287,672 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
691,268 |
|
|
|
403,596 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$ |
4,450,557 |
|
|
$ |
691,268 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$ |
126,119 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
1. CORPORATION REORGANIZATION AND BUSINESS
ACTIVITIES
Sino
Clean Energy Inc. (the “Company”) was originally incorporated in Texas as
“Discount Mortgage Services, Inc.” on July 11, 2000. In November
2001, the Company changed its name to Endo Networks, Inc. and was redomiciled to
the State of Nevada in December 2002. On January 4, 2007, the Company
changed its name to “China West Coal Energy Inc.” Further on August 15,
2007, the Company changed its name to “Sino Clean Energy Inc.”
The
Company effected a 1 for 5 reverse split of its common stock, effective as of
October 17, 2006. The Company’s Board of Directors approved the
Reverse Split in June 2006 and a majority of its stockholders approved it at the
annual shareholder meeting on September 5, 2006. The Company had a
total of 2,712,000 shares of common stock outstanding after the reverse
split.
On
October 18, 2006, the Company executed a Share Exchange Agreement (the “Exchange
Agreement”) by and between Hangson Limited (“Hangson”), a company incorporated
in the British Virgin Islands, and the stockholders of 100% of Hangson’s common
stock (the “Hangson Stockholders”), on the one hand, and the Company and a
majority of the Company’s stockholders, on the other hand. The closing of this
transaction (the “Share Exchange”) occurred on October 20, 2006 (the “Closing
Date”).
Under the
Exchange Agreement, on the Closing Date, the Company issued a total of
26,000,000 shares of the Company’s Common Stock (the “Shares”) to Hangson
Stockholders and to Viking Partners, Inc. (“Viking”), a consultant to this
transaction, in exchange for 100% of the common stock of
Hangson. Additionally, immediately prior to the Closing, Peter B.
Day, the Company’s former President, CEO and sole director voluntarily cancelled
715,500 (post 1-for-5 reverse split) shares of the 915,500 (post 1-for-5 reverse
split) shares of the Company’s common stock that he owns; and three of the
Company’s other shareholders also voluntarily cancelled a total of 438,850 (post
1-for-5 reverse split) shares of the Company’s common stock that they
own. Also pursuant to the Exchange Agreement, and as approved by a
majority of the Company’s shareholders, the Company split its common stock on a
1-for-5 reverse basis (the “Reverse Split”) prior to the Closing
Date. Further, prior to the Closing, the Company issued an additional
669,600 shares after the Reverse Split pursuant to certain anti-dilution
provisions contained in agreements the Company had with two of the Company’s
consultants. After the share cancellations, the Reverse Split and the
consultant anti-dilution share issuances, the Company had a total of
approximately 2,227,250 shares of common stock outstanding. After the
Closing, the Company had 28,227,250 shares of common stock outstanding, with the
Hangson’s Stockholders owning approximately 85% of the Company’s common stock,
and with the balance of the Company’s common stock held by those who held the
Company’s shares prior to the Share Exchange. In addition, at the
Closing, Hangson paid the Company’s creditors a total of US$500,000 for
consulting services rendered, in order to satisfy certain obligations as set
forth in the Exchange Agreement.
Additionally,
on August 18, 2006, Hangson entered into various agreements with Shaanxi Suo’ang
Biological Science & Technology Co., Ltd. (“Shaanxi Suoang”), a company
registered in the People’s Republic of China (“PRC”). Through these contractual
arrangements, Hangson has the ability to substantially influence Shaanxi
Suoang’s daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval. As a result of these
contractual arrangements, which obligates Hangson to absorb a majority of the
risk of loss from Shaanxi Suoang’s activities, enables Hangson to control
Shaanxi Suoang, and enables Hangson to receive a majority of Shaanxi Suoang’s
expected residual returns, Hangson is considered the primary beneficiary of
Shaanxi Suoang and Shaanxi Suoang became a variable interest entity (“VIE”)
under FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51”. Accordingly, the
Company consolidates Shaanxi Suoang’s results, assets and liabilities in its
financial statements. The Company’s consolidated assets do not
include any collateral for Shaanxi Suoang’s obligations. The
creditors of Shaanxi Suoang do not have recourse to the general credit of the
Company.
Because
Hangson and Shaanxi Suoang are under common control, the merger of Hangson and
Shaanxi Suoang achieved through the aforementioned contractual arrangements has
been accounted for as if pooling at historical cost and prepared on the basis as
if the aforementioned contractual arrangements between Hangson and Shaanxi
Suoang had become effective as of the beginning of the first period presented in
the accompanying consolidated financial statements.
Before
December 2006, the Company had principally been engaged in the research,
development, production, marketing and sales of coal-polymer (“COPO”) resin
products including but not limited to, degradable mulch used for the
conservation of moisture and warmth of soil and protection of the roots of
plants, and materials used for plastic injection molding,
electric wire covering, and garbage bags. In December 2006, the
Company made the decision to cease its operations in COPO products manufacturing
and divert all its resources to the research, development, production and sale
of coal-water mixture (“CWM”), which is a potential fuel substitute for coal,
oil or gas. The Company conducts it CWM business through an 80%-owned
subsidiary registered in the PRC.
2. FISCAL YEAR
END
Prior to
the Share Exchange described in Note 1 above, Hangson’s reporting fiscal year
end was December 31. However, the Company’s reporting year-end was September
30. The Company has decided to adopt the fiscal year end of Hangson,
its operating business after the Share Exchange described above, and thus on
January 15, 2007, the Company Company’s Board of Directors approved a
change of its fiscal year by an unanimous written consent. The Company’s new
fiscal year will begin on January 1 and end on December 31 of each year, and
this change has become applicable from the year ended December 31,
2006.
3. RESTATEMENT OF 2006
FINANCIAL STATEMENTS
The
Company has restated its previously issued financial statements for the year
ended December 31, 2006. The Company’s determination to restate these previously
issued financial statements arose from the following adjustments:
|
|
(1)
|
The
Company incorrectly classified certain properties that do not meet all the
criteria for classifying as held-for-sale, and do not constitute part of
the discontinued component, as assets of discontinued operations. Rental
income, net of depreciation and other expenses, related to these
properties and related provision for income taxes were incorrectly
included in the results of discontinued
operations.
|
|
|
(2)
|
The
above incorrect classifications resulted in the incorrect calculation of
the earnings (loss) per share from continuing operations and from
discontinued operations,
respectively.
|
|
|
(3)
|
The
Company has also reclassified various amounts to conform to the proper
presentation.
|
|
|
(4)
|
The
Company has retroactively adjusted the common stock by deeming that the
three for one forward stock split on August 20, 2007 as of the beginning
of the earliest period presented.
|
|
|
(5)
|
The
Company incorrectly classified bank charges as finance
cost.
|
The
following schedules show the impact of the above adjustments on the relevant
captions from the Company’s consolidated financial statements as of December 31,
2006 and for the year then ended.
CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 2006
|
|
|
As
previously reported
|
|
|
Adjustments
|
|
|
|
|
|
As
restated
|
|
|
|
|
|
|
|
Amount
|
|
|
No.
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalent
|
|
$ |
4,450,557 |
|
|
|
|
|
|
|
|
$ |
4,450,557 |
|
|
Amounts
due from directors
|
|
|
206,186 |
|
|
|
|
|
|
|
|
|
206,186 |
|
|
Deposits
and prepayments
|
|
|
1,830,769 |
|
|
|
|
|
|
|
|
|
1,830,769 |
|
|
Other
receivables
|
|
|
- |
|
|
|
39,071 |
|
|
|
(3 |
) |
|
|
39,071 |
|
|
Loan
to related party
|
|
|
411,970 |
|
|
|
|
|
|
|
|
|
|
|
411,970 |
|
|
Prepaid
land use right – current portion
|
|
|
- |
|
|
|
30,944 |
|
|
|
(3 |
) |
|
|
30,944 |
|
|
Assets
on discontinued operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
- |
|
|
|
750,635 |
|
|
|
(3 |
) |
|
|
750,635 |
|
|
Other
receivables – related
|
|
|
- |
|
|
|
256,200 |
|
|
|
(3 |
) |
|
|
256,200 |
|
|
Inventories
|
|
|
- |
|
|
|
14,952 |
|
|
|
(3 |
) |
|
|
14,952 |
|
|
Others
|
|
|
- |
|
|
|
89,670 |
|
|
|
(3 |
) |
|
|
89,670 |
|
|
Discontinued
operations
|
|
|
3,485,462 |
|
|
|
(3,485,462 |
) |
|
|
(1 |
)(3) |
|
|
- |
|
|
Total
current assets
|
|
|
10,384,944 |
|
|
|
(2,303,990 |
) |
|
|
|
|
|
|
8,080,954 |
|
|
Non-current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
623,934 |
|
|
|
2,334,934 |
|
|
|
(1 |
) |
|
|
2,958,868 |
|
|
Prepaid
land use right – non-current portion
|
|
|
- |
|
|
|
1,500,773 |
|
|
|
(3 |
) |
|
|
1,500,773 |
|
|
Intangible
assets, net
|
|
|
1,533,349 |
|
|
|
(1,531,717 |
) |
|
|
(3 |
) |
|
|
1,632 |
|
|
Total
Assets
|
|
$ |
12,542,227 |
|
|
|
- |
|
|
|
|
|
|
$ |
12,542,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable -discontinued operation
|
|
$ |
- |
|
|
|
864,787 |
|
|
|
(3 |
) |
|
$ |
864,787 |
|
|
Accrued
expenses and other payables
|
|
|
372,125 |
|
|
|
|
|
|
|
|
|
|
|
372,125 |
|
|
Amount
due to a director
|
|
|
20,702 |
|
|
|
|
|
|
|
|
|
|
|
20,702 |
|
|
Taxes
payable
|
|
|
- |
|
|
|
92,744 |
|
|
|
(3 |
) |
|
|
92,744 |
|
|
Deposit
on sales of property
|
|
|
- |
|
|
|
1,409,100 |
|
|
|
(1 |
) |
|
|
1,409,100 |
|
|
Discontinued
operations
|
|
|
2,366,631 |
|
|
|
(2,366,631 |
) |
|
|
(3 |
) |
|
|
- |
|
|
Total
current liabilities
|
|
|
2,759,458 |
|
|
|
- |
|
|
|
|
|
|
|
2,759,458 |
|
|
Minority
interest
|
|
|
94,748 |
|
|
|
|
|
|
|
|
|
|
|
94,748 |
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
Common
stock
|
|
|
28,227 |
|
|
|
56,455 |
|
|
|
(4 |
) |
|
|
84,682 |
|
|
Additional
paid-in capital
|
|
|
9,209,629 |
|
|
|
(56,455 |
) |
|
|
(4 |
) |
|
|
9,153,174 |
|
|
Statutory
reserves
|
|
|
348,309 |
|
|
|
|
|
|
|
|
|
|
|
348,309 |
|
|
Accumulated
other comprehensive income
|
|
|
432,312 |
|
|
|
|
|
|
|
|
|
|
|
432,312 |
|
|
Accumulated
deficit
|
|
|
(330,456 |
) |
|
|
|
|
|
|
|
|
|
|
(330,456 |
) |
|
Total
shareholders’ equity
|
|
|
9,688,021 |
|
|
|
|
|
|
|
|
|
|
|
9,688,021 |
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
12,542,227 |
|
|
|
- |
|
|
|
|
|
|
$ |
12,542,227 |
|
CONSOLIDATED
INCOME STATEMENT
FOR
THE YEAR ENDED DECEMBER 31, 2006
|
|
|
As
previously reported
|
|
|
Adjustments
|
|
|
As
restated
|
|
|
|
|
|
|
|
Amount
|
|
|
No.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
- |
|
|
|
|
|
|
|
|
$ |
- |
|
|
Cost
of goods sold
|
|
|
- |
|
|
|
|
|
|
|
|
|
- |
|
|
Gross
profit
|
|
|
- |
|
|
|
|
|
|
|
|
|
- |
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
37,718 |
|
|
|
|
|
|
|
|
|
37,718 |
|
|
General
and administrative
|
|
|
263,174 |
|
|
|
82 |
|
|
|
(5 |
) |
|
|
263,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(300,892 |
) |
|
|
|
|
|
|
|
|
|
|
(300,974 |
) |
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger
cost
|
|
|
(575,000 |
) |
|
|
|
|
|
|
|
|
|
|
(575,000 |
) |
|
Rental
income, net
|
|
|
- |
|
|
|
329,741 |
|
|
|
(1 |
) |
|
|
329,741 |
|
|
Interest
income
|
|
|
60,678 |
|
|
|
|
|
|
|
|
|
|
|
60,678 |
|
|
Finance
costs
|
|
|
(82 |
) |
|
|
(82 |
) |
|
|
(5 |
) |
|
|
- |
|
|
Total
other income (expenses)
|
|
|
(514,404 |
) |
|
|
329,741 |
|
|
|
|
|
|
|
(184,581 |
) |
|
Loss
from continuing operations before income taxes
|
|
|
(815,296 |
) |
|
|
329,741 |
|
|
|
|
|
|
|
(485,555 |
) |
|
Provision
for income taxes
|
|
|
- |
|
|
|
(49,462 |
) |
|
|
(1 |
) |
|
|
(49,462 |
) |
|
Net
loss from continuing operations
|
|
|
(815,296 |
) |
|
|
280,279 |
|
|
|
|
|
|
|
(535,017 |
) |
|
Income
from discontinued operations, net of taxes
|
|
|
690,482 |
|
|
|
(280,279 |
) |
|
|
(1 |
) |
|
|
410,203 |
|
|
Net
loss before minority interest
|
|
|
(124,814 |
) |
|
|
- |
|
|
|
|
|
|
|
(124,814 |
) |
|
Minority
interest
|
|
|
32,794 |
|
|
|
- |
|
|
|
|
|
|
|
32,794 |
|
|
Net
loss
|
|
$ |
(92,020 |
) |
|
|
- |
|
|
|
|
|
|
$ |
(92,020 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.029 |
) |
|
|
0.024 |
|
|
|
(2 |
) |
|
$ |
(0.005 |
) |
|
From
discontinued operations
|
|
|
0.024 |
|
|
|
(0.020 |
) |
|
|
(2 |
) |
|
|
0.004 |
|
|
Net
loss
|
|
$ |
(0.005 |
) |
|
|
0.004 |
|
|
|
|
|
|
$ |
(0.001 |
) |
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
4. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
|
a.
|
Basis of presentation
and consolidation
|
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America.
The
consolidated financial statements include the financial statements of the
Company, Hangson and its variable interest entities and its controlled
subsidiary. All significant inter-company transactions and balances
among the Company, Hangson and its variable interest entities are eliminated
upon consolidation.
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those
estimates. Significant estimates include estimates of accruals and
determination of fair values for assets disposed.
|
|
c.
|
Cash and cash
equivalents
|
Cash and
cash equivalents consist of cash on hand and bank deposits.
Accounts
receivables are recognized and carried at original invoiced amount less an
allowance for any uncollectible accounts.
The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging
method, bad debts determined by management are based on historical experience as
well as the current economic climate and are applied to customers' balances
categorized by the number of months the underlying invoices have remained
outstanding. The valuation allowance balance is adjusted to the
amount computed as a result of the aging method. When facts
subsequently become available to indicate that an adjustment to the allowance
should be made, this is recorded as a change in estimate in the current
year. As of December 31, 2006 and 2005, accounts receivable were net
of allowances of $3,772 and $3,215, respectively.
Inventories
are stated at the lower of cost, as determined on a weighted average basis, or
net realizable value. Costs of inventories include purchase and
related costs incurred in bringing the products to their present location and
condition.
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
|
|
f.
|
Property, plant and
equipment
|
Property,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Gains or losses on disposals are reflected as gain or loss in the
year of disposal. The cost of improvements that extend the life of plant,
property and equipment are capitalized. These capitalized costs may include
structural improvements, equipment and fixtures. All ordinary repair and
maintenance costs are expensed as incurred.
Depreciation
or amortization for financial reporting purposes is provided using the
straight-line method over the estimated useful lives of the assets as
follows:
|
Buildings
|
the
shorter of the useful life or the lease term
|
|
Leasehold
improvements
|
the
shorter of the useful life or the lease term
|
|
Plant
and machinery
|
10
years
|
|
Office
equipment
|
5
years
|
|
Motor
vehicles
|
3
years
|
|
|
g.
|
Construction in
progress
|
Construction
in progress includes direct costs of factory buildings. Construction
in progress is not depreciated until such time as the assets are completed and
put into operational use.
|
|
h.
|
Prepaid land use
rights
|
Prepaid
land use right is expensed over the term of 50 years.
The
Company accounts for impairment of long-lived assets including property, plant
and equipment, and amortizable intangible assets in accordance with SFAS No.144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which requires
an impairment loss to be recognized when the carrying amount of a long-lived
asset or asset group exceeds its fair value and is not recoverable (when
carrying amount exceeds the gross, undiscounted cash flows from use and
disposition). The impairment loss is measured as the excess of the
carrying amount over the asset's (or asset group's) fair value.
SFAS No.
130, Reporting Comprehensive Income, requires disclosure of all components of
comprehensive income and loss on an annual and interim
basis. Comprehensive income and loss is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. The Company had
other comprehensive income of $306,718 and $125,594 for the years ended December
31, 2006 and 2005, respectively. The other comprehensive income arose
from the changes in foreign currency exchange rate.
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
|
|
k.
|
Fair value of
financial instruments
|
The
Company believes that the carrying values of its cash and cash equivalents,
other receivables and other payables as of December 31, 2006 and 2005
approximate to their respective fair values due to the short-term nature of
those instruments.
Revenue
of the Company includes only sales of its discontinued business, COPO resin
product sales which have been classified as discontinued
operations. Sales are recognized when the following four revenue
criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the selling price is fixed or determinable, and collectibility is
reasonably assured. Revenues are presented net of value added tax
(VAT). No return allowance is made as products are normally not
returnable upon acceptance by the customers.
Advertising
expenses are expensed to operations in the years incurred. The
Company incurred advertising expenses of $986 and $1,258 for the years ended
December 31, 2006 and 2005, respectively.
|
|
n.
|
Research and
development costs
|
Research
and development costs are expensed to operations as incurred.
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
Basic
earnings per share (“EPS”) is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
year.
The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. SFAS No. 109 requires an asset and liability approach for
financial accounting and reporting for income taxes and allows recognition and
measurement of deferred tax assets based upon the likelihood of realization of
tax benefits in future years. Under the asset and liability approach,
deferred taxes are provided for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation
allowance is provided for deferred tax assets if it is more likely than not
these items will either expire before the Company is able to realize their
benefits, or that future deductibility is uncertain.
|
|
q.
|
Foreign currency
translation
|
The
reporting currency of the Company is the United States Dollars. All
assets and liabilities accounts have been translated into United States Dollars
using the current exchange rate at the balance sheet date. Capital
stock is recorded at historical rates. Revenue and expenses are
translated using the average exchange rate in the period. The
resulting gain and loss has been reported as other comprehensive income (loss)
within the shareholder's equity.
Parties
are considered to be related to the Company if the parties, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also
include principal owners of the Company, its management, members of the
immediate families of principal owners of the Company and its management and
other parties with which the Company may deal if one party controls or can
significantly influence the management or operating policies of the other to an
extent that one of the transacting parties might be prevented from fully
pursuing its own separate interests. A party which can
significantly influence the management or operating policies of the transacting
parties or if it has an ownership interest in one of the transacting parties and
can significantly influence the other to an extent that one or more of the
transacting parties might be prevented from fully pursuing its own separate
interests is also a related party.
|
|
s.
|
Recently issued
accounting pronouncements
|
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments” (“SFAS 155”). This Statement amends FASB Statements
No. 133, “Accounting for Derivative Instruments and Hedging Activities”,
and No. 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities”. This Statement resolves issues
addressed in Statement 133 Implementation Issue No. D1, “Application of
Statement 133 to Beneficial Interests in Securitized Financial
Assets.” SFAS No. 155 permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of Statement 133, and establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation. It also clarifies that concentrations of credit risk in
the form of subordination are not embedded derivatives and amends Statement 140
to eliminate the prohibition on a qualifying special-purpose entity from holding
a derivative financial instrument that pertains to a beneficial interest other
than another derivative financial instrument. This Statement
is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15,
2006. The Company has determined that the adoption of SFAS No. 155
did not have a material impact on its Consolidated Financial
Statements.
In March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets” (“SFAS 156”). This Statement amends FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, with respect to the accounting for separately recognized
servicing assets and servicing liabilities. This Statement requires
an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in indicated situations; requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair
value, if practicable; permits an entity to choose relevant subsequent
measurement methods for each class of separately recognized
servicing
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
assets
and servicing liabilities; at its initial adoption, permits a one-time
reclassification of available-for-sale securities to trading securities by
entities with recognized servicing rights, without calling into question the
treatment of other available-for-sale securities under Statement 115, provided
that the available-for-sale securities are identified in some manner as
offsetting the entity's exposure to changes in fair value of servicing assets or
servicing liabilities that a servicer elects to subsequently measure at fair
value; and requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of financial
position and additional disclosures for all separately recognized servicing
assets and servicing liabilities. The Company has determined that the
adoption of SFAS No. 156 did not have a material impact on its Consolidated
Financial Statements.
The FASB
issued FASB Interpretation No.(“FIN”) 48, “Accounting for Uncertainty in Income
Taxes,” in June 2006. This interpretation establishes new standards
for the financial statement recognition, measurement and disclosure of uncertain
tax positions taken or expected to be taken in income tax
returns. The new rules will be effective for the Company in the first
quarter of 2008. The Company anticipates that the adoption
of this standard will not have a material effect on its financial
statements.
In
September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108,
“Considering the Effects of Prior Year Misstatements when quantifying
misstatements in Current Year Financial Statements,” which eliminated the
diversity in practice surrounding the quantification and evaluation of financial
statement errors. The guidance outlined in SAB 108 is effective for
the Company and is consistent with its historical practices for assessing
such matters when circumstances have required such an
evaluation. Accordingly, the Company believes that the adoption of
SAB 108 will have no impact on its financial statements.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
157”), to define fair value, establish a framework for measuring fair value in
accordance with generally accepted accounting principles and expand disclosures
about fair value measurements. SFAS 157 requires quantitative disclosures using
a tabular format in all periods (interim and annual) and qualitative disclosures
about the valuation techniques used to measure fair value in all annual periods.
The provisions of this Statement shall be effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. The Company will be required to adopt the
provisions of this statement as of January 1, 2008. The Company is
currently evaluating the impact of adopting SFAS 157.
In
September 2006, the FASB issued Statement No. 158, “Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - An amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). This Statement enhances
disclosure regarding the funded status of an employer's defined benefit
postretirement plan by (a) requiring companies to include the funding
status in comprehensive income, (b) recognize transactions and events that
affect the funded status in the financial statements in the year in which they
occur, and (c) at a measurement date of the employer's fiscal year-end.
Statement No. 158 effective for fiscal years ending after December 15, 2008, and
is not expected to apply to the Company.
In
February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No.
115" (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair values. SFAS 159 is effective for
fiscal years after November 15, 2007. The Company is currently evaluating the
impact of adopting SFAS 159 on its financial statements.
On March
19, 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 161, Disclosures about Derivative Instruments and Hedging Activities. The
new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. "Use and complexity of derivative instruments
and hedging activities have increased significantly over the past several years.
This has led to concerns among investors that the existing disclosure
requirements in FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, do not provide enough information about how these
instruments and activities affect the entity’s financial position and
performance," explained Kevin Stoklosa, project manager. "By requiring
additional information about how and why derivative instruments are being used,
the new standard gives investors better information upon which to base their
decisions." The new standard also improves transparency about the
location and amounts of derivative instruments in an entity’s financial
statements; how derivative instruments and related hedged items are accounted
for under Statement 133; and how derivative instruments and
related
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
hedged
items affect its financial position, financial performance, and cash flows. FASB
Statement No. 161 achieves these improvements by requiring disclosure of the
fair values of derivative instruments and their gains and losses in a tabular
format. It also provides more information about an entity’s liquidity
by requiring disclosure of derivative features that are credit
risk-related. Finally, it requires cross-referencing within footnotes
to enable financial statement users to locate important information about
derivative instruments. Management is currently evaluating the effect of this
pronouncement on financial statements.
5. CONCENTRATION OF CREDIT
RISK
|
a.
|
Financial
instruments that potentially expose the Company to concentrations of
credit risk consist of cash and cash equivalents and accounts
receivable. The Company performs ongoing evaluations of their
cash position and credit evaluations to ensure collections and minimize
losses.
|
|
b.
|
As
of December 31, 2006 and 2005, the Company's bank deposits were all placed
with banks in the PRC where there is currently no rule or regulation in
place for obligatory insurance of bank
accounts.
|
|
c.
|
For
the years ended December 31, 2006 and 2005, all of the Company's sales
arose in the PRC. All accounts receivable as of December 31, 2006 and 2005
also arose in the PRC.
|
|
d.
|
Details
of the customers accounting for 10% or more of the Company’s total sales
are as follows:
|
|
|
|
Year
ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Company
A
|
|
$ |
- |
|
|
$ |
610,000 |
|
|
Company
B
|
|
|
- |
|
|
|
586,204 |
|
|
Company
C
|
|
|
1,252,276 |
|
|
|
- |
|
|
Company
D
|
|
|
1,174,336 |
|
|
|
- |
|
|
Company
E
|
|
|
1,151,996 |
|
|
|
- |
|
|
Company
F
|
|
|
748,503 |
|
|
|
- |
|
The
accounts receivable from the three customers with the largest receivable balance
represents 50% and 48% of the balance of the account at December 31, 2006 and
2005, respectively. Since these accounts receivable originated
from the COPO resin business, which was discontinued subsequent to the
year-end, part of these amounts have been reclassified to discontinued
operations.
6. CURRENT VULNERABILITY DUE TO
CERTAIN CONCENTRATIONS
The
Company's operations are all carried out in the PRC. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC's economy.
The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among
others, the political, economic and legal environments and foreign currency
exchange. The Company's results may be adversely affected by changes
in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
7. DEPOSITS AND
PREPAYMENTS
Deposits
and prepayments consist of the following,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Prepayment
for construction in progress and machinery purchases
|
|
$ |
1,827,932 |
|
|
$ |
48,206 |
|
|
Rental
deposit and prepaid
|
|
|
1,902 |
|
|
|
29,760 |
|
|
Other
|
|
|
935 |
|
|
|
46,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,830,769 |
|
|
$ |
124,863 |
|
8. LOAN TO A RELATED
PARTY
An
interest-bearing loan has been lent to a related company, Shaanxi Hanzhong New
Century Real Estate Company Limited which was controlled by a shareholder, Mr.
Yang Feng. The loan was lent with a term of five years from November
5, 2002 to November 5, 2007 and bears interest at 7.2% per annum. A
majority shareholder of the Shaanxi Suo'ang, Shaanxi Hanzhong Blue Tide Costumes
Group Corporation Limited, guaranteed the repayment of this loan with all of its
assets and issued a commitment letter to Shaanxi Suo'ang. The loan
was repaid in 2007.
9. PROPERTY, PLANT AND
EQUIPMENT
Property,
plant and equipment consists of the following,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(As
restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
$ |
580,614 |
|
|
$ |
- |
|
|
Buildings
|
|
|
2,326,315 |
|
|
|
2,251,859 |
|
|
Leasehold
improvements
|
|
|
217,770 |
|
|
|
210,800 |
|
|
Plant
and machinery
|
|
|
- |
|
|
|
316,521 |
|
|
Office
equipment
|
|
|
57,771 |
|
|
|
52,964 |
|
|
Motor
vehicles
|
|
|
119,624 |
|
|
|
95,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,302,094 |
|
|
|
2,927,715 |
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(343,226 |
) |
|
|
(201,848 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,958,868 |
|
|
$ |
2,725,867 |
|
Construction
in progress included above was the construction of buildings, production lines
and machinery for the “Coal-water mixture” business. The construction
work commenced in June 2006 and the first phase was completed in June
2007. The plant became operational in August 2007.
The
depreciation expenses on property, plant and equipment for the years ended
December 31, 2006 and 2005 were $194,633 and $130,956,
respectively.
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
10. PREPAID LAND USE
RIGHT
The
Company has recorded as prepaid land use rights the costs paid to acquire a
long-term interest to utilize the land underlying the building and production
facility for its “coal-water mixture” business. This type of
arrangement is common for the use of land in the PRC. The prepaid
land use rights are expensed on the straight-line method over the term of the
land use rights of 50 years.
The lease
expenses on land use right for the years ended December 31, 2006 and 2005 was
$15,213 and nil, respectively. The lease expenses for land use rights over each
of the next five years and thereafter is $30,944.
11. INTANGIBLE
ASSETS
Intangible
assets consist of the following,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(As
restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
|
|
$ |
- |
|
|
$ |
930,000 |
|
|
Accounting
software
|
|
|
1,835 |
|
|
|
905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,835 |
|
|
|
930,905 |
|
|
Less:
Accumulated amortization
|
|
|
(203 |
) |
|
|
(302,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,632 |
|
|
$ |
628,640 |
|
The
amortization expenses on intangible assets for the year ended December 31, 2006
and 2005 were $94,648 and $91,514, respectively.
12. ACCRUED EXPENSES AND OTHER
PAYABLES
Accrued
expenses and other payables consist of the following as of,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Accrued
operating expenses
|
|
$ |
255,082 |
|
|
$ |
87,327 |
|
|
Accrued
staff welfare
|
|
|
52,993 |
|
|
|
33,249 |
|
|
Other
payables
|
|
|
64,050 |
|
|
|
57,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
372,125 |
|
|
$ |
178,412 |
|
13. STATUTORY
RESERVES
As
stipulated by the PRC's Company Law, net income after taxation can only be
distributed as dividends after appropriation has been made for the
following:
|
a.
|
Making
up cumulative prior years' losses, if
any;
|
|
b.
|
Allocations
to the “Statutory capital reserve” of at least 10% of income after tax, as
determined under PRC accounting rules and regulations, until the fund
amounts to 50% of the Company's registered capital. This is restricted to
set off against losses, expansion of production and operation or
increase in registered capital; and
|
|
c.
|
Allocations
of 5-10% of income after tax, as determined under PRC accounting rules and
regulations, to the Company's “Statutory common welfare fund”. This is
restricted to capital expenditure for the collective benefits of the
Company's employees; and
|
|
d.
|
Allocations
to the discretionary surplus reserve, if approved in the shareholders'
general meeting.
|
Statutory
reserves consist of the following as of,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Statutory
capital reserve
|
|
$ |
232,206 |
|
|
$ |
106,247 |
|
|
Statutory
common welfare fund
|
|
|
116,103 |
|
|
|
53,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
348,309 |
|
|
$ |
159,371 |
|
14. DISCONTINUED
OPERATIONS
Before
December 2006, the Company had principally been engaged in the research,
development, production, marketing and sales of coal-polymer (“COPO”) resin
products including but not limited to, degradable mulch used for the
conservation of moisture and warmth of soil and protection of the roots of
plants, and materials used for plastic injection molding, electric wire
covering, and garbage bags. In December 2006, the Company made the
decision to cease its operations
in COPO products manufacturing and divert all its resources to the production
and sale of “coal-water mixture” products.
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
Accordingly,
the table below presents the revenue and expenses of the COPO resin products
segment as income from discontinued operations. The operating results
of the COPO resin products segment for the year ended December 31, 2005 was
restated to also reflect it as discontinued operations.
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
7,253,887 |
|
|
$ |
5,426,591 |
|
|
Cost
of goods sold
|
|
|
5,434,301 |
|
|
|
4,417,584 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,819,586 |
|
|
|
1,009,007 |
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
285,235 |
|
|
|
143,231 |
|
|
General
and administrative expenses
|
|
|
354,161 |
|
|
|
475,940 |
|
|
Income
from operations
|
|
|
1,180,190 |
|
|
|
389,836 |
|
|
Other
expenses
|
|
|
|
|
|
|
|
|
|
Plant
and machinery impairment
|
|
|
170,166 |
|
|
|
- |
|
|
Loss
on disposal of patent (Note 17(d))
|
|
|
291,266 |
|
|
|
- |
|
|
Other
|
|
|
143,534 |
|
|
|
- |
|
|
Total
other expenses
|
|
|
604,966 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
575,224 |
|
|
|
389,836 |
|
|
Provision
for income taxes (Note 15)
|
|
|
(165,021 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from discontinued operations
|
|
$ |
410,203 |
|
|
$ |
389,836 |
|
15. INCOME
TAXES
Companies
in the PRC are generally subject to PRC Enterprise Income Taxes at a statutory
rate of 33% (30% of national income tax plus 3% local income tax) on the net
income. However, the Company’s VIE, Shaanxi Suoang has been approved as a “high
and new technology enterprise” and under PRC Income Tax Laws, it is entitled to
a preferential tax rate of 15% upon expiry of a two years' tax holiday for 2004
and 2005, within which no income taxes were charged. Shaanxi Suoang is subject
to income tax from 2006.
The
Company and Hangson are not subject to any income taxes as the companies had no
income for the fiscal 2006 and 2005.
The
income tax expense for the years ended December 31, consisted of the
following:
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Current
– PRC Enterprise Income Tax
|
|
$ |
214,483 |
|
|
$ |
- |
|
|
Deferred
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax expenses
|
|
|
214,483 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
49,462 |
|
|
|
- |
|
|
Discontinued
operations (Note 14)
|
|
|
165,021 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax expenses
|
|
|
214,483 |
|
|
|
- |
|
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate:
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
U.S.
statutory rate
|
|
|
34 |
% |
|
|
34 |
% |
|
Foreign
income not recognized in U.S.
|
|
|
(34 |
%) |
|
|
(34 |
%) |
|
Non-deductible
expenses and other
|
|
|
224 |
% |
|
|
- |
|
|
PRC
preferential income tax rate
|
|
|
15 |
% |
|
|
15 |
% |
|
Tax
holiday
|
|
|
- |
|
|
|
(15 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
239 |
% |
|
|
- |
|
No
significant deferred tax liabilities or assets existed as of either December 31,
2006 or 2005.
16. EARNINGS PER
SHARE
Basic
earnings per share (EPS) for the years ended December 31, 2006 and 2005 were
determined by dividing net income for the years by the weighted average number
of common shares outstanding. The weighted average number of common shares
outstanding was adjusted to account for the effects of the share exchange
transaction as a reverse acquisition as more fully described in Note
1.
The
Company has retroactively adjusted the weighted average number of common shares
outstanding by deeming that the three for one (3:1) forward stock split during
the year had occurred as of the beginning of the earliest period
presented.
The
Company did not have dilutive securities outstanding as of and during the year
ended December 31, 2006 and 2005.
17. RELATED PARTY
TRANSACTIONS
(a) Related party receivables
and payables
Amounts
receivable from a related party and directors as of December 31, are summarized
as follows:
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Loan
to a related party:
|
|
|
|
|
|
|
|
Shaanxi
Hanzhong New Century Real Estate Company Limited (Note 8)
|
|
|
|
|
|
|
|
Principal
|
|
$ |
384,300 |
|
|
$ |
372,000 |
|
|
Interest
receivable
|
|
|
27,670 |
|
|
|
- |
|
|
|
|
$ |
411,970 |
|
|
$ |
372,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
due from directors:
|
|
|
|
|
|
|
|
|
|
Mr.
Baowen Ren, also a shareholder of the Company
|
|
$ |
144,698 |
|
|
$ |
119,397 |
|
|
Mr.
Peng Zhou, a minority shareholder of the Company’s
subsidiary
|
|
|
61,488 |
|
|
|
- |
|
|
|
|
$ |
206,186 |
|
|
$ |
119,397 |
|
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Amount
due to a director:
|
|
|
|
|
|
|
|
Mr.
Peng Zhou, a minority shareholder of the Company’s
subsidiary
|
|
$ |
20,702 |
|
|
$ |
- |
|
Balance
with Shaanxi Hanzhong New Century Real Estate Company Limited represented an
interest bearing loan which was fully described in Note 8.
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
Balances
with Mr. Baowen Ren and Mr. Peng Zhou represent cash advances by the Company.
These balances are interest free and unsecured and have no fixed repayment
dates. The balances were repaid in 2007.
(b) Guarantee given by a
shareholder
A
majority shareholder of the Company, Shaanxi Hanzhong Blue Tide Costumes Group
Corporation Limited, has guaranteed the repayment of the long-term interest
bearing loan advanced to a related company, Shaanxi Hanzhong New Century Real
Estate Company Limited, controlled by Mr. Yang Feng as more fully described in
Note 8 and above.
(c) Sale of
investment
During
the year, the Company disposed of its 55% equity interest in a non-consolidated
subsidiary to Mr. Peng Zhou, who is a director of the Company and minority
shareholder of the Company’s subsidiary, at its carrying cost of
$335,500. Accordingly, no gain or loss on disposal was
recorded.
(d) Disposal of
Patent
During
the year, the Company disposed of the patent related to the discontinued COPO
resin product operations to a related company for a consideration of
$256,200. A loss on disposal of $291,266 was recorded (see Note
14).
(e) Transfer of
property
On June
13, 2006, the Company signed a property transfer agreement with a related
company, HanZhong SiXiong KeChuang Commercial Company Ltd. (“Buyer”), which is
controlled by the shareholder of the Company, Mr. Yanjun Zhao to dispose of the
Company’s leasehold properties together with the leasehold improvements for an
aggregate cash consideration of approximately $2,450,000. The agreed
price is $120,000 lower then the evaluated value according to an appraisal
report issued by an independent professional valuer, Xi'An Zheng Heng Assets
Valuation Company Ltd. because the property title did not transfer from the
property developer to the Company as more fully described in note
18(c). Up to December 31, 2006, a total of $1,409,100 was received
and recorded as deposit on sale of property in the balance sheet.
On March
25, 2007 and June 21, 2007, the Company and the Buyer entered into the extension
agreements whereby the Company extended the date for payment of the remaining
balance and transfer of the title of properties to the Buyer to on or before May
31, 2007 and October 31, 2007 respectively. On March 6, 2008, the
Company entered a supplementary agreement with the Buyer, whereby the Company
agreed to transfer the title of the properties before May 31, 2008 and the Buyer
agreed to pay the Company within one month after the transfer of property
title.
Sino
Clean Energy Inc.
(Formerly
China West Coal Energy, Inc.) and Subsidiaries
Notes to
Consolidated Financial Statements
18. COMMITMENTS AND
CONTINGENCIES
|
a.
|
Capital expenditure
commitments
|
During
the fiscal year 2006, the Company entered into various contracts for the
construction of a new plant for its coal water mixture
business. Furthermore, the Company also entered into several
contracts to purchase machinery.
The
Company's commitments for capital expenditure as of December 31, 2006 are as
follows:
|
Contracted but not
accrued for:
|
|
|
|
|
Construction
of factory buildings
|
|
$ |
210,787 |
|
|
Purchase
of machinery
|
|
|
620,862 |
|
|
|
|
|
|
|
|
|
|
$ |
831,649 |
|
|
b.
|
Operating lease
commitments
|
As of
December 31, 2006, the Company’s total future minimum lease payments under
non-cancelable operating leases to be paid in each of the five succeeding years
are as follows:
|
Periods
ending December 31,
|
|
|
|
|
2007
|
|
$ |
4,851 |
|
|
2008
|
|
|
4,851 |
|
|
2009
|
|
|
4,043 |
|
|
2010
and thereafter
|
|
|
- |
|
|
Total
Operating Lease Commitments
|
|
|
13,745 |
|
|
c.
|
Real estate title
certificate of the leasehold
property
|
The
Company has not obtained the real estate title certificate for its leasehold
property with a carrying value of $2,204,271 as of December 31, 2006 and located
in the PRC. As discussed in Note 17(e), the Company has entered into
a signed a property transfer agreement to dispose of this property.
In the
event that the Company fails to transfer the real estate title to the buyer,
there is a risk that the Company might be subject to
penalties. However, management believes that this possibility is
remote.
|
d.
|
Social insurance of
Employees
|
According
to the prevailing laws and regulations of the PRC, the Company is required to
cover its employees with medical, retirement and unemployment insurance
programs. Management believes that due to the transient nature of its
employees, the Company does not need to provide all employees with such social
insurance.
In the
event that any current or former employee files a complaint with the PRC
government, the Company may be subject to making up the social insurance as well
as administrative fines. As the Company believes that these fines
would not be material, no provision has been made in this regard.
On March
26, 2008, the Company entered into a purchase agreement with a supplier to
purchase 200,000 tons of coal at a fixed price of approximately RMB510 per ton.
The total purchase consideration of RMB20,000,000 (approximately $2,740,000) has
to be prepaid by two installments with the last payment on or before April 30,
2008.
|
ITEM
8.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
As
described in full detail in our Current Report on Form 8-K filed on November 17,
2006, which is incorporated herein by reference, on November 9, 2006, the
Company's Board of Directors elected to dismiss LBB & Associates Ltd., LLP
as the Company’s independent registered public accounting firm (“Independent
Accountant”) and also elected to retain Schwartz Levitsky Feldman LLP, Chartered
Accountants, as its new Independent Accountant.
|
ITEM
8A.
|
CONTROLS
AND PROCEDURES
|
|
(a)
|
Evaluation of disclosure
controls and procedures. As of the end of the period covered by
this report, we carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer
and Director of Finance, of the effectiveness of the design and operation
of our disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of the end of the applicable period to
ensure that the information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act (i) is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms and (ii) is accumulated
and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosures.
|
|
(b)
|
Changes in internal controls
over financial reporting. There was no change in our internal
control over financial reporting during our most recent fiscal quarter
that has materially affected, or is reasonably likely to materially
affect, our internal control over financial
reporting.
|
|
ITEM
8B.
|
OTHER
INFORMATION
|
As
discussed more fully above under Item 1. (“Description of Business”), the
Company decided to cease operations of its COPO resin products business and
focus on the Company’s CWM Fuel product business. Thus, in December
2006, the Company’s patented technology owned through Shaanxi Suoang in
connection with the COPO resin products was sold to HanZhongWeiDa Commercial
Company Limited (“HanZhongWeiDa”), a related company controlled by Leping Yao, a
shareholder of Shaanxi Suoang, for consideration of $256,200. Further, and in
January 2007, we ceased operations at our COPO resin product manufacturing plant
and we sold our COPO resin products’ manufacturing plant machinery to
HanZhongWeiDa Commercial Company Limited for consideration of
$89,670. The Company obtained an independent appraisal report prior
to the sale of the patent and the COPO plant machinery and the appraised value
for the patent was approximately RMB2,000,000 (approximately $259,538) and the
appraised value of the COPO plant machinery was approximately RMB700,000
(approximately $90,838). The Company then sought out buyers who would
be interested in purchasing these assets for the highest purchase price and also
considered the recoverability of proceeds from the sale of these
assets. Of the companies that made an offer for these assets,
HanZhongWeiDa offered the highest price and thus the Company sold these assets
to HanZhongWeiDa. The Company incurred a loss on the disposal of the
patented technology of $291,266 and incurred an impairment loss of $170,166 in
connection with the disposal of the COPO resin product plant
machinery.
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS
AND EXECUTIVE OFFICERS
Current
Executive Officers and Directors
The
following tables set forth information regarding the Company’s current executive
officers and directors of the Company. The Board of Directors is comprised of
only one class. Except as otherwise described below, all of the directors will
serve until the next annual meeting of stockholders or until their successors
are elected and qualified, or until their earlier death, retirement, resignation
or removal. Also provided herein are brief descriptions of the business
experience of each director and executive officer during the past five years and
an indication of directorships held by each director in other companies subject
to the reporting requirements under the federal securities laws.
|
Name
|
|
Age
|
|
Positions
|
|
|
Baowen
Ren
|
|
|
37
|
|
CEO,
President and Chairman of the Board
|
|
|
Wenjie
Zhang
|
|
|
34
|
|
Director
|
|
|
Peng
Zhou
|
|
|
38
|
|
Director
|
|
|
Caixia
Peng
|
|
|
28
|
|
Chief
Financial Officer and Treasurer
|
|
Baowen Ren, 37, is the
Director of Hangson Limited and has been Chairman of the Board of Shaanxi
Suo’ang Biological Science & Technology, Co., Ltd. (“Shaanxi Suo’ang”),
Hangson’s Chinese operational variable interest business entity, since January
2003. Mr. Ren is a
senior economic engineer who graduated from the Business Management Department
of Hanzhong Normal University in 1992. He had been the president of
Shaanxi Lanchao Group Clothe Group Co. Ltd. from January 2001 to December 2002
and had been conferred honorable titles of “Pacemaker in the New Long March”,
“Shaanxi Outstanding Young Entrepreneur”, “Shaanxi Top 100 Entrepreneur”, and
“National Model Township Entrepreneur of Ministry of Agriculture”. Under his
leadership, Shaanxi Suo’ang has convened a batch of excellent management
personnel for products technology development, market strategy and sales, and
capital operations for the expansion and development of Shaanxi Suoang’s
business.
Peng Zhou, 38, is the General
Manager of Shaanxi Suo’ang, Hangson’s Chinese operational variable interest
business entity. Mr. Zhou is an accountant who graduated from the Statistics
Department of Shaanxi Institute of Finance in 1992. Mr. Zhou started at Shaanxi
Suo’ang as a Project Manager in May 2002 and was promoted to his current
position as General Manager in May 2005. Mr. Zhou has also been engaged in
industries such as finance, media, foreign trade, real estate and had held the
posts of manager of credit department, editor, financial supervisor, and deputy
manager. From June 1997 until March 2002, Mr. Zhou was the Vice President of
Hanzhong Ruisen Real Estate Company. Mr. Zhou was also in charge of compiling
and reporting work for a number of projects such as Industrial Park Project of
3,000-thousand Sets of Clothes, New Construction Material Project-Shale Brick
Manufacturing Demonstration Base with Annual Output of 6000-Thousand Pieces, and
Erlang Dam Downstream Hydropower Station Cascade Development
Project.
Wenjie Zhang, 34, has been the
General Manager of Hanzhong Minsheng Guomao Department Store since January 2004.
Mr. Zhang graduated with a degree in administration from the Xi’an Science
Institution in 1995. From January 2001 until December 2003, Mr. Zhang was the
Sales Manager at Shaanxi Jingyi Wood Group Company.
Caixia Peng, 28, is the
Finance Director of Shaanxi Suo’ang, Hangson’s Chinese operational variable
interest business entity. Ms. Peng started as Shaanxi Suo’ang’s Finance Manager
in April 2005 and has been Shaanxi Suo’ang’s Finance Director since February
2006. Ms. Peng is an accountant who graduated from the Xi’an Finance &
Economy Institution in 1992. From July 2003 until March 2005, Ms. Peng was the
Finance Manager at Yangling Bodisen Co., Ltd. Prior to that, from July 2001
until June 2003, Ms. Peng was the Finance Director at Yangling Tianwei
Pharmaceutical Co., Ltd.
Audit,
Nominating and Compensation Committees
Due to
our lack of operations and size, we have not designated an Audit Committee.
Furthermore, we are currently quoted on the OTC Bulletin Board, which is
sponsored by the NASD, under the symbol “CWCE ” and the OTCBB does not have any
listing requirements mandating the establishment of any particular committees.
Our board of directors acts as our Audit Committee and performs equivalent
functions, such as: recommending a firm of independent certified public
accountants to audit the annual financial statements; reviewing the independent
auditors independence, the financial statements and their audit report; and
reviewing management's administration of the system of internal accounting
controls. For these same reasons, we did not have any other committees during
fiscal 2005.
Our Board
believes that, considering our size and the members of our Board, decisions
relating to director nominations can be made on a case-by-case basis by all
members of the board without the formality of a nominating committee or a
nominating committee charter. To date, we have not engaged third parties to
identify or evaluate or assist in identifying potential nominees, although we
reserve the right in the future to retain a third party search firm, if
necessary.
The Board
does not have an express policy with regard to the consideration of any director
candidates recommended by shareholders since the Board believes that it can
adequately evaluate any such nominees on a case-by-case basis. The Board will
evaluate shareholder-recommended candidates under the same criteria as
internally generated candidates. Although the Board does not currently have any
formal minimum criteria for nominees, substantial relevant business and industry
experience would generally be considered important, as would the ability to
attend and prepare for board, committee and shareholder meetings. Any candidate
must state in advance his or her willingness and interest in serving on the
board of directors.
We have
not received any recommendations for a director nominee from any
shareholder.
Code
of Ethics
For the
year ended December 31, 2006, we did not have formal written code of ethics
applicable to our principal executive officer and principal financial officer,
because the board of directors has not determined it to be immediately necessary
from a management perspective to adopt a formal code at this time. However, we
plan to adopt and approve a formal written code of ethics in the near
future.
Family
Relationships
There are
no family relationships between or among any of the current directors, executive
officers or persons nominated or charged by the Company to become directors or
executive officers.
Involvement
in Certain Legal Proceedings
There are
no orders, judgments, or decrees of any governmental agency or administrator, or
of any court of competent jurisdiction, revoking or suspending for cause any
license, permit or other authority to engage in the securities business or in
the sale of a particular security or temporarily or permanently restraining any
of our officers or directors from engaging in or continuing any conduct,
practice or employment in connection with the purchase or sale of securities, or
convicting such person of any felony or misdemeanor involving a security, or any
aspect of the securities business or of theft or of any felony. Nor are any of
the officers or directors of any corporation or entity affiliated with us so
enjoined.
Compliance
with Section 16(a) of the Exchange Act
Section 16(a)
of the Securities Exchange Act of 1934 requires our executive officers and
directors, and persons who own more than ten percent (10%) of our common stock
to file reports of ownership and change in ownership with the Securities and
Exchange Commission and the exchange on which the common stock is listed for
trading. Executive officers, directors and more than ten percent (10%)
stockholders are required by regulations promulgated under the Exchange Act to
furnish us with copies of all Section 16(a) reports filed. To the Company’s
knowledge, based solely on review of the copies of such reports furnished to the
Company and written representation that no other reports were required, all of
the Company’s other officers, directors and greater than ten percent (10%)
shareholders complied with all applicable Section 16(a) filing
requirements.
ITEM
10. EXECUTIVE COMPENSATION
SUMMARY
OF EXECUTIVE COMPENSATION
None of
current executive officers received compensation in excess of $100,000 for the
fiscal years ended December 31, 2006 or 2005, respectively. The following table
summarizes all compensation received by our previous Chief Executive Officer,
President and Chief Financial Officer in fiscal years 2006 and
2005.
|
SUMMARY
COMPENSATION TABLE
|
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation
($)
|
Nonqualified
Deferred Compensation Earnings
($)
|
All
Other Compensation
($)
|
Total
($)
|
|
Baowen
Ren, Chief Executive Officers (1)
|
2006
|
4,560
|
0
|
0
|
0
|
0
|
0
|
0
|
4,560
|
|
2005
|
4,556
|
0
|
0
|
0
|
0
|
0
|
0
|
4,556
|
|
Caixia
Peng, Chief Financial Officer(2)
|
2006
|
2,430
|
0
|
0
|
0
|
0
|
0
|
0
|
2,430
|
|
2005
|
2,130
|
0
|
0
|
0
|
0
|
0
|
0
|
2,130
|
|
Peter
B. Day, Former CEO and CFO (3)
|
2006
|
$105,500
|
0
|
0
|
0
|
0
|
0
|
0
|
105,500
|
|
2005
|
$103,200
|
0
|
0
|
0
|
0
|
0
|
0
|
103,200
|
__________________________
|
|
(1)
|
Salary
paid to Mr. Ren is expressed in U.S. Dollars based on the interbank
exchange rate of RMB 7.90 for each 1.00 U.S. Dollar, on October 20,
2006.
|
|
|
(2)
|
Salary
paid to Ms. Peng is expressed in U.S. Dollars based on the interbank
exchange rate of RMB 7.90 for each 1.00 U.S. Dollar, on October 20,
2006.
|
|
|
(3)
|
As
of September 30, 2006, Mr. Day was the Chief Executive Officer, President,
and Chief Financial Officer of the Company. Mr. Day had not received any
payment for his position and as a result his salary was accrued as an
expense. This liability was purchased from the Company by Mr. Day together
with the assets of Endo Canada pursuant to the June 26, 2006 Asset and
Share Purchase Agreement. Mr. Day resigned as the Company’s Chief
Executive Officer, President, and Chief Financial Officer on October 20,
2006 in connection with the Share Exchange transaction described above
under the section titled “Item 1. Description of
Business”.
|
Narrative
Disclosure To Summary Compensation Table And Grants Of Plan-Based
Awards
We
currently do not have any employment agreements with our executive
officers.
STOCK
EXERCISES
For the
fiscal years ended December 31, 2006 and 2005, the Company had no unexercised
stock options or stock awards that had not vested because the Company had not
issued any options or Stock Appreciation Rights (“SARs”) to any officers,
employees or directors during the last two fiscal years. During the fiscal year
ended 2004, the Company issued options for the purchase a total of 634,000
shares of the Company’s common stock to consultants of the Company. All of these
options expired as of September 30, 2006.
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL
SEC
regulations state that we must disclose information regarding agreements, plans
or arrangements that provide for payments or benefits to our executive officers
in connection with any termination of employment or change in control of the
Company. We currently have no employment agreements with any of our executive
officers, nor any compensatory plans or arrangements resulting from the
resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer's
responsibilities following a change-in-control. As a result, we have omitted
this table.
DIRECTOR
COMPENSATION
We
currently we do not have any compensation agreements with the members of our
Board of Directors for their service on the Board, and we did not provide any
director compensation to members of our Board during the last fiscal
year.
|
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding the beneficial ownership of our
common stock as of April 16, 2007, for each of the following
persons:
|
|
• each of our directors and named
executive officers;
|
|
|
• all directors and named executive
officers as a group; and
|
|
|
• each person who is known by us to
own beneficially five percent or more of our common
stock.
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the persons and
entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the stockholder’s name. Unless
otherwise indicated, the address of each beneficial owner listed below is Room
2205, Suite A, Zhengxin Bldg., No.5, Gaoxin 1st Road, Gao Xin District, Xi’an,
Shaanxi Province, People’s Republic of China. The percentage of class
beneficially owned set forth below is based on 28,227,250 shares of common stock
outstanding on April 16, 2007.
|
Named
executive officers and directors:
|
|
Number
of
Shares
beneficially
owned
|
|
Percentage
of
class
beneficially
owned
(1)
|
|
|
Baowen
Ren, CEO, President, and Chairman
|
|
|
9,597,232
|
|
34.00
|
%
|
|
Wenjie
Zhang, Director
|
|
|
1,269,234
|
|
4.50
|
%
|
|
Peng
Zhou, Director
|
|
|
0
|
|
0.0
|
%
|
|
Caixia
Peng, CFO and Treasurer
|
|
|
0
|
|
0.0
|
%
|
|
All
directors and executive officers as a group (4 persons)
|
|
|
10,866,466
|
|
38.5
|
%
|
____________________
* less
than 1%
|
|
(1)
|
Based
on 28,227,250 shares outstanding.
|
Securities
Authorized for Issuance under Equity Compensation Plan
We
currently do not have any effective equity compensation plans.
|
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
HANGSON’S
CONTRACTUAL ARRANGEMENTS WITH SHAANXI SUOANG AND ITS SHAREHOLDERS
PRC law
currently limits foreign equity ownership of Chinese companies. To comply with
these foreign ownership restrictions, we operate our business in China through a
series of contractual arrangements with Shaanxi Suoang and its majority
shareholders that were executed on August 18, 2006. For a description of these
contractual arrangements, please see the section under Item 1 above titled
“Contractual Arrangements with Shaanxi Suoang and Its
Shareholders.”
RELATED
PARTY TRANSACTIONS
Set forth
below are the Company’s related party transactions and the related party
transactions between Shaanxi Suoang’s shareholders, officers and/or
directors, and Shaanxi Suoang, with whom Hangson has contractual arrangements
which give Hangson the ability to substantially influence Shaanxi Suoang’s daily
operations and financial affairs, appoint its senior executives and approve all
matters requiring shareholder approval.
(a) Related
party receivables and payables
Amounts
receivable from a related party, and due from or due to directors as of December
31 of each year are summarized as follows:
|
|
|
2006
|
|
|
2005
|
|
|
Loan
to a related party
|
|
|
|
|
|
|
|
Shaanxi
Hanzhong New Century Real Estate Company Limited (1)
|
|
$ |
411,970 |
|
|
$ |
372,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
due from directors
|
|
|
|
|
|
|
|
|
|
Mr.
Baowen Ren, also a shareholder of the Company (2)
|
|
$ |
144,698 |
|
|
$ |
119,397 |
|
|
Mr,
Peng Zhou, also a minority shareholder of the Company’s subsidiary
(2)
|
|
$ |
61,488 |
|
|
$ |
- |
|
|
Amount
due to a director
|
|
|
|
|
|
|
|
|
|
Mr,
Peng Zhou, also a minority shareholder of the Company’s subsidiary
|
|
$ |
20,702 |
|
|
$ |
- |
|
|
|
(1)
|
Balance
with Shaanxi Hanzhong New Century Real Estate Company Limited represents a
long-term interest bearing loan of $384,300 paid and interest
receivable of $57,670 to a company, Shaanxi Hanzhong New Century Real
Estate Company Limited is controlled by the shareholder, Mr. Yang Feng.
The loan is for a term of five years from November 5, 2002 to November 5,
2007 and bears interest at 7.2% per annum. A majority shareholder of the
Shaanxi Suoang, Shaanxi Hanzhong Blue Tide Costumes Group Corporation
Limited, guarantees the repayment of this loan. According to a
supplement agreement signed between both parties and witnessed by a
PRC lawyer, the loan is repayable in one lump sum in May
2007.
|
|
|
(2)
|
The
balances with Mr. Baowen Ren and Mr. Peng Zhou represent cash advances by
the Company. This balance is interest free and unsecured and has no fixed
repayment date. It is expected that the balance will be received or repaid
within one year.
|
(b) Guarantee
given by a shareholder
A
majority shareholder of the Shaanxi Suoang, Shaanxi Hanzhong Blue Tide Costumes
Group Corporation Limited, guarantees the repayment of a long-term interest
bearing loan advanced to a company, Shaanxi Hanzhong New Century Real Estate
Company Limited, controlled by Mr. Yang Feng.
(c) Sale
of Shaanxi
Suoke
During
the year, Shaanxi Suoang disposed its 55% equity interest in Shaanxi Suoke to
Mr. Peng Zhou, director and minority shareholder of the Company’s subsidiary at
its carrying cost of $335,500.
(d) Disposal
of Patent
In
December 2006, Shaanxi Suoang sold its patent to HanZhongWeiDa Commercial
Company Limited, a company controlled by Leping Yao, a shareholder of Shaanxi
Suoang, at the consideration of $256,200.
(e) Transfer
of property
On June
13, 2006, Shaanxi Suoang entered into a property transfer agreement with
Hanzhong Sixiong Kechuang Commercial Company Limited, a company controlled by
Mr. Yanjun Zhao, a Company shareholder to dispose of the Company’s leasehold
property in Hangzhong City, China together with the leasehold improvement
therein in exchange for cash consideration of approximately $2,450,000. The
title of the property will not be transferred until the Company receives payment
of 95% of the cash consideration.
OTHER
RELATED PARTY TRANSACTIONS
Per the
terms of a verbal agreement the Company paid its former President Mr. Day
approximately $8,600 per month in consulting fees. The Company accrued
consulting fees due to Mr. Day in the amount of $251,120 at September 30, 2005.
These amounts were recorded under “Accrued expenses - related parties” in the
financial statements and was purchased by Mr. Day together with assets according
to the Purchase Agreement he signed with the company on June 26,
2006.
The
Company also paid for Mr. Day’s home office rent. For the year ended December
31, 2005, the total rent paid by the Company for the President’s home office was
$17,900.
On
September 30, 2006, Peter Day, the Company’s former CEO, President, CFO and sole
director, purchased all of our assets and shares in Endo Networks, Inc., a
corporation incorporated under the laws of Canada from us pursuant to that
certain Asset and Share Purchase Agreement dated as of June 26, 2006. As
consideration for all of the assets, which currently total $553,015, and all of
the shares of Endo Canada, Mr. Day assumed all of our liabilities prior to the
Share Exchange, which currently total $919,389 (such number includes our assets
of $553,015 and our excess liabilities of $366,374), except for certain excluded
liabilities.
DIRECTOR
INDEPENDENCE
The
Company does not have a separately designated audit, compensation or nominating
committee of our Board, as it is not required to, and the functions customarily
delegated to these committees are performed by the full Board. We have
determined, however, that none of our directors is “independent” as that term is
defined in Section 4200 of the NASD Marketplace Rule.
|
ITEM
13. EXHIBITS AND
REPORTS ON FORM 8-K
|
(a) Exhibits to the Form
10-KSB:
|
Exhibit
Number
|
|
Description
|
|
2.1
|
|
Share
Exchange Agreement between Endo Networks, Inc., Endo Majority
Shareholders, Hangson Ltd. and the Hangson Shareholders dated October 18,
2006 (1)
|
|
3.1
|
|
Articles
of Incorporation of Endo Networks, Inc., a Nevada corporation, as
amended.
|
|
3.2
|
|
Bylaws
of Endo Networks, Inc.
|
|
10.1
|
|
Asset
and Share Purchase Agreement between Registrant and Peter B. Day (for Endo
Canada) (2)
|
|
10.2
|
|
Contract
for Technology Transfer between Shaanxi Suo’ang Biological Science &
Technology Co., Ltd. and HanZhongWeiDa Commercial Company Limited dated
December 25, 2006 *
|
|
10.3
|
|
Machineries Transfer
Agreement between Shaanxi Suo’ang Biological Science & Technology
Co., Ltd. and HanZhongWeiDa Commercial Company Limited dated January 10,
2007 *
|
|
17.1
|
|
Letter
of Resignation by Mr. Peter B. Day to the Board of Directors of Endo
Networks, Inc.(3)
|
|
21
|
|
List
of Subsidiaries *
|
|
31.1
|
|
Section
302 Certification by the Corporation’s Chief Executive Officer
*
|
|
31.2
|
|
Section
302 Certification by the Corporation’s Chief Financial Officer
*
|
|
32.1
|
|
Section
906 Certification by the Corporation’s Chief Executive Officer
*
|
|
32.2
|
|
Section
906 Certification by the Corporation’s Chief Financial Officer
*
|
|
99.1
|
|
Consulting
Services Agreement by and between Hangson Limited and Shaanxi Suo’ang
Biological Science & Technology Co., Ltd. dated August 18, 2006
(3)
|
|
99.2
|
|
Equity
Pledge Agreement by and between Hangson Limited and Shaanxi Suo’ang
Biological Science & Technology Co., Ltd. (“Shaanxi Suoang”) and
Shaanxi Suoang’s Majority Shareholders dated August 18, 2006
(3)
|
|
99.3
|
|
Operating
Agreement by and between Hangson Limited and Shaanxi Suo’ang Biological
Science & Technology Co., Ltd. (“Shaanxi Suoang”) and Shaanxi Suoang’s
Majority Shareholders dated August 18, 2006 (3)
|
|
99.4
|
|
Proxy
Agreement by and between Hangson Limited and Shaanxi Suo’ang Biological
Science & Technology Co., Ltd. (“Shaanxi Suoang”) and Shaanxi Suoang’s
Majority Shareholders dated August 18, 2006 (3)
|
|
99.5
|
|
Option
Agreement between Hangson Limited and Shaanxi Suo’ang Biological Science
& Technology Co., Ltd. (“Shaanxi Suoang”) and Shaanxi Suoang’s
Majority Shareholders dated August 18, 2006 (3)
|
|
99.6
|
|
Agreement
by and between Shaanxi Suo’ang Biological
Science and Technology Co. Ltd. and Hanzhong Si Xiong Ke Chuang Business
Co. Ltd. (3)
|
|
99.7
|
|
Supplementary
Agreement by and between Shaanxi Suo’ang Biological
Science and Technology Co. Ltd. and Hanzhong Si Xiong Ke Chuang Business
Co. Ltd. dated March 25, 2007 *
|
|
|
|
|
* Filed
herewith.
_______________
|
(1)
|
Filed
as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with
the SEC on October 18, 2006 and incorporated herein by
reference.
|
|
|
|
|
(2)
|
Filed
as Exhibit A of Registrant’s Schedule 14A filed with the SEC on August 8,
2006 and incorporated herein by reference.
|
|
|
|
|
(3)
|
Filed
as Exhibits to the Registrant’s Current Report on Form 8-K filed with the
SEC on October 26, 2006 and incorporated herein by
reference.
|
|
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
AUDIT
FEES
The
aggregate fees billed by Lopez, Blevins, Bork & Associates, LLP for
professional services rendered for the review of the Company’s unaudited
financial statements through the quarter ended June 30, 2006 and the audit of
the Company’s annual financial statements for the year ended September 30, 2005
or services that are normally provided by the accountant in connection with
statutory and regulatory filing or engagements for those periods/years was
$17,100.
The
aggregate fees billed by GC Alliance Limited for professional services rendered
for the audit of the Company in connection with the Share Exchange Transaction
was $105,000.
The
aggregate fees billed by former auditor, Schwartz Levitsky Feldman LLP, was
$110,000 for professional services rendered for the audit of the Company’s
annual consolidated financial statements for the fiscal year ended December 31,
2006.
The
aggregate fees billed by current auditor, Yu and Associates CPA Corporation, was
$40,000 for professional services rendered for the audit of the Company’s
restated annual consolidated financials statements for the fiscal year ended
December 31, 2006.
AUDIT
RELATED FEES
There
were no fees billed for services reasonably related to the performance of the
audit or review of the financial statements outside of those fees disclosed
above under “Audit Fees” for the year ended December 31, 2006.
TAX
FEES
For the
years ended December 31, 2006 and December 31, 2006, there were no fees billed
for services for tax compliance, tax advice and tax planning work to the
Company.
ALL OTHER
FEES
There
were no fee billed by LBB or SLF during the last two fiscal years for products
and services provided by LBB or SLF.
PRE-APPROVAL
POLICIES AND PROCEDURES
Prior to
engaging its accountants to perform particular services, our board of directors
obtains an estimate for the service to be performed. All of the services
described above were approved by the board of directors in accordance with its
procedure.
[SIGNATURES
PAGE FOLLOWS]
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| |
SINO
CLEAN ENERGY INC.
(Registrant)
|
|
| |
|
|
|
|
Dated
April 15, 2008
|
By:
|
/s/ Baowen
Ren |
|
| |
|
Baowen
Ren
|
|
| |
|
Chief
Executive Officer
|
|
| |
|
|
|
KNOW ALL
THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Baowen Ren and Caixia Peng, and each of them, jointly
and severally, his attorneys in fact, each with full power of substitution, for
him in any and all capacities, to sign any and all amendments to this Report on
Form 10-KSB/A, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue
hereof.
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
| /s/
Baowen Ren |
|
Chief
Executive Officer, President and Chairman of the Board
|
|
April
15, 2008
|
|
Baowen
Ren
|
|
|
|
|
|
|
|
|
|
|
| /s/
Caixia Peng |
|
Chief
Financial Officer and
Treasurer
|
|
April
15, 2008
|
|
Caixia
Peng
|
|
|
|
|
|
|
|
|
|
|
| /s/
Wenjie Zhang |
|
Director
|
|
April
15, 2008
|
|
Wenjie
Zhang
|
|
|
|
|
|
|
|
|
|
|
| /s/
Peng Zhou |
|
Director
|
|
April
15, 2008
|
|
Peng
Zhou
|
|
|
|
|