UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K




(Mark
      One)x
                
                ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF
      THE SECURITIES EXCHANGE ACT OF
1934




For
the Fiscal Year Ended December 31, 2009


OR




 ̈
                
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF
      THE SECURITIES EXCHANGE ACT OF
1934




For
the Transition Period from ___ to  ____


Commission
File Number 001-34608





Andatee
China Marine Fuel Services Corporation


(Exact
Name of Registrant as Specified in Its Charter)




Delaware
                
                80-0445030(State
      or Other Jurisdiction of
                  Incorporation
      or Organization)
                
                (IRS
      Employer
                  Identification
      No.)




(Address
of Principal Executive Offices) (Zip Code)


(Registrant’s
Telephone Number, Including Area Code)





Dalian
Ganjingzi District, Dalian Wan Lijiacun


Unit
C, No. 68 West Binhai Road, Xigang District Dalian


People’s
Republic of China


011
(86411) 8360 4683





Securities
registered under Section 12(b) of the Exchange Act:


Common
Stock, par value $0.001


Name of
each exchange on which registered:


The
Nasdaq Global Market LLC





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ̈NOx





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes  ̈ NO
x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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
 ̈





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes ̈NO ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, 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-K
or any amendment to this Form 10-K.  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):





Large Accelerated Filer ̈
            Accelerated Filer ̈
            Non-accelerated Filer  ̈
            Smaller Reporting Companyx





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ̈NOx





As of the
close of business on February 26, 2010, the aggregate market value of the voting
stock (common stock) held by non-affiliates of the registrant was approximately
$22.08 million based on the closing sale price of the Common stock on the Nasdaq
Global Market on that date. The registrant does not have any non-voting common
equity.





The
Company had 9,134,921 shares of common stock issued and outstanding as of
February 26, 2010.





Documents
Incorporated by Reference





None.














Table
of Contents




PagePart
      I
                      
                      1Item
      1.
                      
                      Business
                      
                      2Item
      1A.
                      
                      Risk
      Factors
                      
                      12Item
      1B.
                      
                      Unresolved
      Staff Comments
                      
                      25Item
      2
                      
                      Properties
                      
                      25Item
      3.
                      
                      Legal
      Proceedings
                      
                      26Item
      4.
                      
                      Submission
      of Matters to a Vote of Security Holders
                      
                      27Part
      II
                      
                      28Item
      5.
                      
                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      
                      28Item
      6.
                      
                      Selected
      Financial Data
                      
                      29Item
      7.
                      
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      30Item
      7A.
                      
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      
                      50Item
      8.
                      
                      Financial
      Statements and Supplementary Data
                      
                      50Item
      9.
                      
                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                      
                      51Item
      9A.
                      
                      Controls
      and Procedures
                      
                      51Item
      9B.
                      
                      Other
      Information
                      
                      52Part
      III
                      
                      53Item
      10.
                      
                      Directors,
      Executive Officers and Corporate Governance
                      
                      53Item
      11.
                      
                      Executive
      Compensation
                      
                      57Item
      12.
                      
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      
                      60Item
      13.
                      
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      
                      61Item
      14.
                      
                      Principal
      Accounting Fees and Services
                      
                      62Part
      IV
                      
                      63Item
      15.
                      
                      Exhibits
      and Financial Statement Schedules
                      
                      63Signatures
                      
                      64Exhibit
      Index


i





Part
I





Cautionary
Note Regarding Forward Looking Statements





This
Annual Report on Form 10-K (including the section regarding Management’s
Discussion and Analysis of Financial Condition and Results of Operations)
contains certain “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, as well as information relating to Andatee
China Marine Fuel Services Corporation that is based on management’s exercise of
business judgment and assumptions made by and information currently available to
management. Although forward-looking statements in this Annual Report on Form
10-K reflect the good faith judgment of our management, such statements can only
be based on facts and factors currently known by us. Consequently,
forward-looking statements are inherently subject to risks and uncertainties and
actual results and outcomes may differ materially from the results and outcomes
discussed in or anticipated by the forward-looking statements. When used in this
document and other documents, releases and reports released by us, the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “the facts suggest” and
words of similar import, are intended to identify any forward-looking
statements. You should not place undue reliance on these forward-looking
statements. These statements reflect our current view of future events and are
subject to certain risks and uncertainties as noted below. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, our actual results could differ materially from those anticipated in
these forward-looking statements. Actual events, transactions and results may
materially differ from the anticipated events, transactions or results described
in such statements. Although we believe that our expectations are based on
reasonable assumptions, we can give no assurance that our expectations will
materialize. Many factors could cause actual results to differ materially from
our forward looking statements including those set forth in Item 1A of this
report. Other unknown, unidentified or unpredictable factors could materially
and adversely impact our future results. We undertake no obligation and do not
intend to update, revise or otherwise publicly release any revisions to our
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of any unanticipated events.





We file
reports with the Securities and Exchange Commission (“SEC” or “Commission”). We
make available on our website (http://www.andatee.com) free of charge our public
reports filed pursuant to the Exchange Act and amendments to those reports as
soon as reasonably practicable after we electronically file such materials with
or furnish them to the SEC. Information appearing at our website is not a part
of this Annual Report on Form 10-K. You can also read and copy any materials we
file with the Commission at its Public Reference Room at 100 F Street, NE,
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 Commission 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 our
reports.





Our
fiscal year begins on January 1, and ends on December 31, and any references
herein to “Fiscal 2009” mean the year ended December 31, 2009, and references to
other “Fiscal” years mean the year ending December 31, of the year
indicated.





We
obtained statistical data, market data and other industry data and forecasts
used in this Form 10-K from publicly available information. While we believe
that the statistical data, industry data, forecasts and market research are
reliable, we have not independently verified the data, and we do not make any
representation as to the accuracy of that information.





Except
where the context otherwise requires and for purposes of this Annual
Report:





·
            the
      terms “we,” “us,” “our company,” “our” refer to Andatee China Marine Fuel
      Services Corporation, a Delaware corporation, its subsidiaries Goodwill
      Rich International Limited and Dalian Fusheng Consulting Co. Ltd., its
      variable interest entity (VIE), Dalian Xingyuan Marine Bunker Co. Ltd.,
      through which entity we conduct all of our business operations, and the
      subsidiaries of our VIE entity, which are Donggang Xingyuan Marine Bunker
      Company Ltd., Xiangshan Yongshinanlian Petrol Company Ltd., and Rongcheng
      Xinfa Petrol Company Ltd.;


·
            the
      term “Andatee” refers to Andatee China Marine Fuel Services Corporation,
      the parent company;


·
            the
      term Goodwill’’ refers to Goodwill Rich International Limited, a
      subsidiary of Andatee, which for financial reporting purposes is the
      predecessor to Andatee; and


·
            “China”
      and “PRC” refer to the People’s Republic of China, and for the purpose of
      this Annual Report only, excluding Taiwan, Hong Kong and
      Macau.


1





The
standard barrel of 42 US gallons is used in the United States as a measure of
crude oil, and the producers of other petroleum products as reported on the US
commodities or stock exchanges tend to convert their production volumes into
barrels for global reporting purposes. Elsewhere in the world, oil is commonly
measured in liters or cubic meters (1,000 liters equals one cubic meter, and 159
liters equals one US 42 gallon barrel) or in tons (the latter customarily used
by European oil companies). The fuel oils produced by the company, however, are
qualitatively different products from crude oil. In its essence, they are types
of heavy oil, with densities ranging from 0.82 to 0.95, thus, making it
impracticable to use US barrels for measuring and reporting purposes. In
addition, all of the company supply, vendor and client contracts are executed in
tons, not in barrels.





The
conversion chart below illustrates the conversions between barrels or liters and
tons, as applied to our product line:





Product#
                        
                        Temperature
                        
                        Density
                        
                        Liters/Ton
                        
                        Barrels/Ton2#
                        
                        20°C
                        
                        0.850
                        
                        1,176
                        
                        7.403#
                        
                        20°C
                        
                        0.895
                        
                        1,117
                        
                        7.034#
                        
                        20°C
                        
                        0.947
                        
                        1,056
                        
                        6.64120CST
                        
                        20°C
                        
                        0.988
                        
                        1,012
                        
                        6.36180CST
                        
                        20°C
                        
                        0.988
                        
                        1,012
                        
                        6.36





This
Annual Report contains translations of certain Renminbi, or RMB, the legal
currency of China, amounts into U.S. dollars at the rate of RMB6.8225 to $1.00,
the noon buying rate in effect on December 31, 2009, in New York City for cable
transfers of Renminbi as certified for customs purposes by the Federal Reserve
Bank of New York. We make no representation that the Renminbi or U.S. dollar
amounts referred to in this report could have been or can be converted into
U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.
On February 22, 2010, the noon buying rate was approximately RMB6.83 to
$1.00.





Unless
the context indicates otherwise, all share and per share data in
this report give effect to a 1-for-1.333334 reverse share split that became
effective on October 19, 2009.





Item
      1.
            Business





Overview
of our Company





We carry
out all of our business through our Hong Kong subsidiary, Goodwill, its
wholly-owned Chinese subsidiary, Fusheng, and Fusheng’s variable interest entity
(VIE), Dalian Xingyuan, and Dalian Xingyuan’s subsidiaries (Dalian Xingyuan and
its subsidiaries being collectively referred to as the VIE
entities).  Through these VIE entities, we are engaged in the
production, storage, distribution and wholesale purchases and sales of blended
marine fuel oil for cargo and fishing vessels with operations mainly in
Liaoning, Shandong and Zhejiang Provinces in People’s Republic of China (PRC).
We compete by providing our customers value added benefits, including
single-supplier convenience, competitive pricing, logistical support and fuel
quality control. Our sales of marine oil for fishing boats represented
approximately 79% of our total revenue for the period 2006 − 2009 as compared
with the sale of marine oil for cargo vessels which represented the remaining
21% of our total revenue for the same periods. Currently, we sell approximately
57% of our products through distributors and approximately 43% to retail
customers. Our products are substitutes for diesel used throughout east China
fishing industry by small to medium sized cargo vessels. Our core facilities
include as storage tanks, berths (the space allotted to a vessel at the wharf),
marine fuel pumps, blending facilities and tankers. Our sales network covers
major depots along the towns of Dandong, Shidao and Shipu along the east coast
of China.





Our
operations in China are conducted through our VIE, Dalian Xingyuan Marine Bunker
Company, Ltd and its three subsidiaries: Donggang Xingyuan Marine Bunker
Company, Ltd. (located in Dandong City, Liaoning Province, and established in
April 2008 under the laws of the PRC), Xiangshan Yongshi Nanlian Petrol Company,
Ltd. (located in Xiangshan City, Zhejiang Province, and established in May 1997
under the laws of the PRC) and Rongcheng Xinfa Petrol Company, Ltd. (located in
Rongcheng City, Shandong Province, and established in September 2007 under the
laws of the PRC).





Our
marine fuel for cargo vessels is classified as CST180 and CST120; our marine
fuel for fishing boats/vessels, - #2 fuel (for engines with 1,800 rpm capacity),
#3
fuel (for engines with 1,600 rpm capacity) and #4 fuel (for engines with 1,400
rpm capacity). We also produce blended marine fuel according to customer
specifications using our proprietary blending technology. Our own blend of
Marine Diesel Oil, #3 fuel and #4 fuel are substitutes for the traditional
diesel oil, commonly known as #0 diesel oil, used by most small to medium
vessels. We generate virtually all of our revenues from our own brands of
blended oil products.


2





Andatee
China Marine Fuel Services Corporation is a Delaware corporation.  Our
executive offices are located in the City of Dalian, a key international
shipping hub and international logistics center in North China. Our main offices
are located in the city of Dalian, Dalian Ganjingzi District, Dalian Wan
Lijiacun, at Unit C, No. 68 West Binhai Road, Xigang District Dalian, China. Our
telephone and fax numbers are (86411) 8360 4683 and (86411) 8360 4683,
respectively. Our website address is http://www.andatee.com. The information on
our website is not part of this Annual Report.





The
following map shows locations of our VIE’s in various parts across the coast of
east China:











Organizational
Structure and Corporate History





Our VIE
operating entity, Dalian Xingyuan, has three subsidiaries: Donggang Xingyuan
Marine Bunker Company Ltd. (located in Dandong City, Liaoning Province, and
established in April 2008 under the laws of the PRC), Xiangshan Yongshinanlian
Petrol Company Ltd. (located in Xiangshan City, Zhejiang Province, and
established in May 1997 under the laws of the PRC) and Rongcheng Xinfa Petrol
Company Ltd. (located in Rongcheng City, Shandong Province, and established in
September 2007 under the laws of the PRC). Dalian Xingyuan and its three
subsidiaries are collectively referred to as the ‘‘VIE’’. Dalian Xingyuan was
established in September 2001 with a registered capital of RMB7 million and
began providing refueling services to the marine vessels in Dalian Port in
Dalian City. The Board of Directors of Dalian Xingyuan consists of 3 members,
including An Fengbin, Wang Yu and Liu Shaoyuan. Mr. An is Chairman of the Board
and General Manager of Dalian Xingyuan. Upon the October 28, 2008 incorporation
of Goodwill, Goodwill and the shareholders of Dalian Xingyuan had entered into a
series of separate agreements under which Goodwill and Dalian Xingyuan were
deemed, until March 2009, to be under the common control of the shareholders of
Dalian Xingyuan.





We
conduct all of our business operations through Dalian Xingyuan, our operating
entity, wihch was established in September 2001 with a registered capital of
RMB7 million and began providing refueling services to the marine vessels in
Dalian Port in Dalian City. We do not own any equity interests in Dalian
Xingyuan. Our relationships with Dalian Xingyuan and its shareholders are
governed by a series of contractual arrangements Dalian Xingyuan has with our
wholly-owned onshore subsidiary, Dalian Fusheng Consulting Co., Ltd.
(“Fusheng”). Under Chinese laws, each of Fusheng and Dalian Xingyuan is an
independent legal entity and neither of them is exposed to liabilities incurred
by the other party. Other than pursuant to the contractual arrangements between
Fusheng and Dalian Xingyuan, Dalian Xingyuan does not transfer any other funds
generated from its operations to Fusheng. Fusheng entered into these contractual
arrangements with Dalian Xingyuan in March 2009, as discussed in detail below.
Subsequently, Fusheng assigned its rights under these contractual arrangements
to us.  Thus, we control and receive the economic benefits of their
business operations through contractual arrangements. Dalian Xingyuan holds the
licenses and approvals necessary to operate its business in China. We have
contractual arrangements with Dalian Xingyuan and its shareholders pursuant to
which we provide technology consulting and other general business operation
services to Dalian Xingyuan. Through these contractual arrangements, we also
have the ability to substantially influence Dalian Xingyuan’s daily operations
and financial affairs, since we are able to appoint its senior executives and
approve all matters requiring shareholder approval. As a result of these
contractual arrangements which enable us to control Dalian Xingyuan and to
receive, through our offshore subsidiary and VIE’s, all of Dalian Xingyuan’s
profits, we are considered the primary beneficiary of Dalian Xingyuan.
Accordingly, we consolidate Dalian Xingyuan’s results, assets and liabilities in
our financial statements, which is a typical arrangement for companies that are
traded and registered in the United States that maintain operations in the
PRC.





In 2003,
Xingyuan became the sole supplier of fuel oil to China Shipping Group Co.,
Ltd.’s vessels in Dalian. In 2005, through our partnership with the Dalian
University of Technology, Xingyuan successfully developed its own blend of
marine fuel as an alternative fuel substitute which, while reducing cost by
approximately 20%, maintains the same energy efficiency as major marine fuel
brands. Following the success of our fuel substitutes, we established
distribution centers in Shandong Shidao, Liaoning Donggang and Zhejiang Nanlian.
Before October 2007, we were a joint venture company through a subsidiary of
China Petroleum in Northern China, which is the largest petroleum company in the
PRC. We purchased 100% of the joint venture and commenced our operations as a
private company. Xingyuan also developed the blending ability for CST120 and
CST180 brands of its fuel which are used for cargo vessels.


3





In
December 2008, Xingyuan entered into an agreement with the shareholder of
Xiangshan Nanlian, which is located in the town of Shipu, Xiangshan county,
Zhejiang Province. We purchased a 63% ownership stake in Xiangshan Nanlian for a
purchase price of approximately $2.2 million (RMB15.12 million). Also in late
December 2008, we entered into an agreement with shareholders of Rongcheng Xinfa
to acquire its 90% ownership stake in the entity for a purchase price of
approximately US$1.45 million (RMB9.9 million). The purpose of these agreements
was to establish and extend our distribution network in an orderly and sustained
way. Subsequently, on March 26, 2009, Fusheng, Xingyuan and the shareholders of
Xingyuan entered into a series of agreements, including the Consulting Services
Agreement, the Operating Agreement, the Equity Pledge Agreement, the Option
Agreement and the Proxy and Voting Agreement. Xingyuan entered into these
agreements with Fusheng because of the PRC laws and regulations restricting the
ability of offshore entities to acquire or dispose of ownership of domestic
companies. These agreements ensure that the original minority shareholders of
Xingyuan will regain their respective pro rata ownership upon triggering of the
conditions set forth in the agreements. Under these agreements, the Company
obtained the ability to direct the operations of Xingyuan and its subsidiaries
and to obtain the economic benefit of their operations. Therefore, management
determined that Xingyuan became a variable interest entity and the Company was
determined to be the primary beneficiary of Xingyuan and its subsidiaries.
Accordingly, beginning March 26, 2009, the Company has consolidated the assets,
liabilities, results of operations and cash flows of Xingyuan and its
subsidiaries its financial statements.





In August
2009, Andatee entered into a share exchange agreement (the “Exchange Agreement”)
with all of the shareholders of Goodwill Rich International Limited, a Hong Kong
company (“Goodwill”). Pursuant to the Exchange Agreement, Andatee agreed to
issue 6,000,000 shares of its common stock in exchange for all of the issued and
outstanding securities of Goodwill (”Share Exchange”). The Goodwill shareholders
included Star Blessing Enterprise Limited (“SBE”), a company organized under the
laws of the British Virgin Islands, (i) Growing Sincere Limited (“GSL”) a
company organized under the laws of the British Virgin Islands, (ii) White
Bright Limited (“WBL”), a company organized under the laws of the British Virgin
Islands, and (iii) Shining Joy Group Limited (“SJG”) a company organized under
the laws of the British Virgin Islands. Prior to the Share Exchange, SBE, GSL,
WBL and SJG beneficially owned 89.04%, 4%, 3% and 3.96% of equity securities in
Goodwill, respectively. The Share Exchange closed on October 16, 2009. Andatee
did not issue any fractional shares in connection with the Share Exchange. Upon
the closing of the Share Exchange, Andatee (i) became the 100% parent of
Goodwill, and its wholly-owned subsidiary, Dalian Fusheng Consulting Co., Ltd.,
and (ii) assumed the operations of Goodwill and its subsidiaries. The
transactions contemplated by the Exchange Agreement, as amended, were intended
to be a ‘‘tax-free’’ incorporation pursuant to the provisions of Section 351 of
the Internal Revenue Code of 1986, as amended. The organization of Andatee and
its acquisition of Goodwill Rich did nothing more than to change the name of
Goodwill Rich to Andatee, change its place of incorporation/organization, and
change its capital structure from 10,000 shares outstanding to 8,000,000 shares
outstanding (prior to the October 2009 reverse stock split). For financial
reporting purposes, the Share Exchange will be accounted for as a
recapitalization of Goodwill affected through a combination of companies
(Andatee and Goodwill) under common control, which will be recorded at
historical cost. As a result, Goodwill is deemed to be the predecessor of
Andatee for financial reporting purposes, and the historical financial
statements of Goodwill presented in this report will become the historical
financial statements of Andatee (after being adjusted to retroactively reflect
the effects of the recapitalization to 6,000,000 issued and outstanding common
shares) at such time as Andatee issues financial statements for the period that
includes October 16, 2009.





On
October 16, 2009, our Board approved a reverse split in the 1-for-1.333334
ratio. Following shareholder approval of the split, we effected the split on
October 19, 2009. Immediately following the reverse stock split, all outstanding
shares of our common stock was exchanged for the newly issued shares of common
stock on the basis of the reverse split ratio. The par value of common stock was
not affected by the split. As a result of the split, the number of shares
available for future issuances has increased and the number of currently
outstanding shares of our common stock decreased. The purpose of the split was
to recapitalize all of our outstanding shares of capital stock into shares of
the same class of common stock to be sold in the January 2010 initial public
offering.





The
following diagram illustrates our corporate structure following the consummation
of the Exchange Agreement:











Industry
Overview





According
to Oil & Gas Journal (OGJ), China had 18.3 billion barrels of proven oil
reserves as of January 2006, flat from the previous year. EIA estimates that
China will produce 3.8 million barrels per day (Mmbbl/d) of oil in 2006,
slightly higher than the previous year. Of this, 96% is expected to be crude
oil. EIA estimates that China will consume 7.4 Mmbbl/d of oil in 2006,
representing nearly a half million barrels per day increase from 2005. For 2006,
EIA data forecasts that China’s increase in oil demand will represent 38% of the
world total increase in demand. China’s petroleum industry has undergone major
changes over the last decade. In 1998, the Chinese government reorganized most
state owned oil and gas assets into two vertically integrated firms: the China
National Petroleum Corporation (CNPC) and the China Petroleum and Chemical
Corporation (Sinopec). Each of these companies operates a range of local
subsidiaries. The other major state sector firm is the China National Offshore
Oil Corporation (CNOOC), which handles offshore exploration and production and
accounts for roughly 15% of China’s domestic crude oil
production.


4





According
to OGJ, China had 6.2 Mmbbl/d of crude oil refining capacity as of January 2006.
Sinopec and CNPC are the two dominant players in China’s oil refining sector.
The expansive sector is undergoing modernization and consolidation, with dozens
of small refineries shut down in recent years and larger refineries expanding
and upgrading their existing facilities. In July 2006, PetroChina completed the
expansion of its Dalian refining center, raising the plant’s capacity from
210,000 bbl/d to 410,000 bbl/d, making it the largest refinery in China. China
has been ranked the highest in the world for the volume of the cargo and
container output for the last 5 consecutive years. According to the National
Development and Reform Commission and the National Bureau of Statistics of
China, in 2007, total logistics industry output increased to RMB 75,228.3
billion, or by 26.2%. The same report estimated that by 2010, the total industry
output will reach RMB 1.2 trillion, with 20% growth annually. By the end of
2007, China had 14 harbors with 100 million ton capacity, up from 12 in 2006. In
total, there are over 1,400 harbors in China with more than 35,000 dock berth
with cargo capacity of 3.4 billion tons and 61.5 million shipping containers.
Also, in 2007, China sea infrastructure and logistics industries added RMB 341.4
billion in value, an increase of more than 21%. In 2007, the total fuel
consumption in the PRC exceeded 40.7 billion tons; for the same period, the
total consumption by region, including Liaoning, Shandong and Zhejiang
Provinces, where we primarily operate, was in excess of 818 million
tons.





The
market for oil for small and medium size vessels, i.e. less than 3,000 tons, is
very fragmented with no discernible market leader. It is characterized by
intense price competition, uneven product and service quality and is dominated
by many small fuel trading companies. Most of these trading companies do not
have stable supply sources or a strong working capital to withstand market risk.
Unstable supplies often lead to chronic shortages of oil in the market resulting
in black market operations and counterfeit products. Boats and vessels operators
when docking at berths for refueling are often at the mercy of oil merchants
selling them assortments of fuel oil from various suppliers in the market. Boat
and vessel operators are at high risk when oil merchants market them poor
quality oil or counterfeit products that have insufficient energy efficiency or
cause damages to engines. Therefore, our experience has consistently shown that
vessel operators are willing to pay a premium for consistent quality products
and services.





Our
Products and Services





We blend
and supply marine fuel as an alternative fuel for Chinese cargo and fishing
vessels. Our sales of fuel for fishing boats represented approximately 79% of
our total revenue for the period 2006 − 2009 as compared with the sale of fuel
for cargo vessels which represented the remaining 21% of our total revenue for
the same periods. Our cargo vessel fuel is designated as CST180 and CST120;
fishing boat/vessel fuel - #2 fuel (for engines with 1,800 rpm capacity), #3
fuel (for engines with 1600 rpm capacity) and #4 fuel (for engines with 1400 rpm
capacity). We also blend fuel to specific customer specifications using our
proprietary blending technology. Our own blend of Marine Diesel Oil, #3 fuel oil
and #4 fuel oil are able to replace the traditional diesel oil, commonly known
as #0 diesel oil, used by most small to medium vessels and boats. Currently, we
sell approximately 57% of our products through distributors and approximately
43% of our products to retail customers. Fuel is classified into 6 classes,
numbered 1 through 6, each according to its boiling point, composition and
purpose. The boiling point, in the range of 175 − 600°C, and carbon chain
length, in the range of 20 − 70 atoms, of the fuel increases with fuel number,
i.e. the higher the class number, the higher the boiling point and the carbon
chain length as well as oil’s viscosity. Price of oil, on the other hand,
usually decreases as the fuel number increases since higher number fuel must be
heated to overcome its viscosity.





The
following table represents the description of our sales organized by product and
geographical markets for the periods 2006 − 2009:




Year
      ended December 312009
                                    
                                    
                                    
                                    
                                    
                                    2008
                                    
                                    
                                    
                                    
                                    
                                    2007Tons
                                    
                                    
                                    %
                                    
                                    
                                    Tons
                                    
                                    
                                    %
                                    
                                    
                                    Tons
                                    
                                    
                                    %(in thousands)
                                    
                                    
                                    
                                    
                                    
                                    (in thousands)
                                    
                                    
                                    
                                    
                                    
                                    (in thousands)Products2#
                                    
                                    
                                    17.18
                                    
                                    
                                    
                                    7.14
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    0
                                    %3#
                                    
                                    
                                    22.81
                                    
                                    
                                    
                                    9.48
                                    %
                                    
                                    
                                    18.58
                                    
                                    
                                    
                                    14.58
                                    %
                                    
                                    
                                    7.13
                                    
                                    
                                    
                                    3
                                    %4#
                                    
                                    
                                    151.93
                                    
                                    
                                    
                                    63.17
                                    %
                                    
                                    
                                    90.49
                                    
                                    
                                    
                                    71
                                    %
                                    
                                    
                                    169.08
                                    
                                    
                                    
                                    72
                                    %180CST
                                    
                                    
                                    31.47
                                    
                                    
                                    
                                    13.08
                                    %
                                    
                                    
                                    15.99
                                    
                                    
                                    
                                    12.58
                                    %
                                    
                                    
                                    49.14
                                    
                                    
                                    
                                    20.9
                                    %120CST
                                    
                                    
                                    17.12
                                    
                                    
                                    
                                    7.12
                                    %
                                    
                                    
                                    2.37
                                    
                                    
                                    
                                    1.86
                                    %
                                    
                                    
                                    9.38
                                    
                                    
                                    
                                    4.1
                                    %AreasDalian
                                    
                                    
                                    91.03
                                    
                                    
                                    
                                    37.85
                                    %
                                    
                                    
                                    40.89
                                    
                                    
                                    
                                    32.09
                                    %
                                    
                                    
                                    84.95
                                    
                                    
                                    
                                    36.2
                                    %Shandong
                                    
                                    
                                    109.48
                                    
                                    
                                    
                                    45.52
                                    %
                                    
                                    
                                    79.08
                                    
                                    
                                    
                                    62.06
                                    %
                                    
                                    
                                    149.79
                                    
                                    
                                    
                                    63.8
                                    %Donggang
                                    
                                    
                                    20.16
                                    
                                    
                                    
                                    8.38
                                    %
                                    
                                    
                                    7.45
                                    
                                    
                                    
                                    5.85
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    0
                                    %Zhejiang
                                    
                                    
                                    19.85
                                    
                                    
                                    
                                    8.25
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    0
                                    %


5





Our
Competitive Strengths





Our
business objective is to become the premium ‘‘one-stop’’ marine service provider
for cargo, fishing and other vessels in China through our integrated
distribution networks. We believe that our business model offers competitive
advantages over our current market competition through:





·
            Product Superiority and Price
      Competitiveness - our blended marine fuel is price competitive as
      compared with various brands of diesel oil available in the local PRC
      market. In fact, based on quarterly 2009 price data, our blended fuel
      (#4), while maintaining the same fuel efficiency, is, on average, US$144
      per ton cheaper than the leading diesel fuel
  brand.





·
            Brand Recognition - our
      consistent, what we believe to be superior product quality over the years
      has resulted in our dominance in the fishing boat and vessel market in the
      provinces where we maintain our operations. Through our VIE entities, we
      are the largest privately owned company engaged in marine fuel industry in
      northern China. We intend to take advantage of our brand to increase our
      customer base and to leverage our brand and build an integrated
      distribution system for our range of related oil products and services. We
      believe our strong branding has allowed us to develop a broad base of
      end-user customers, expand our sales channels and facilitate more rapid
      acceptance of our new products.





·
            Reliability of Our Supplies of
      Raw Materials- We have stable and reliable raw material suppliers
      for our production. Our relationships with upstream suppliers enables us
      to be a low cost producer. We have a long-standing relationship with China
      Petroleum (particularly, Dalian, Panjin and Liaoyang Branched) which,
      combined, provided over 60% of all raw materials we require per year, in
      2008 − 2009 with other suppliers, including Beijing XSSB, Fushun XC,
      Qingdao Anbang, providing the remaining of our need for raw materials. We
      will continue to explore new suppliers to reduce supply risk as
      needed.





·
            Extensive Sales and
      Distribution Network - Our distribution consists of approximately
      25 distributors throughout China in three provinces, we believe our
      distribution network is one of the largest among marine fuel suppliers in
      China. We are acquiring and building new facilities, which consist of
      blending plants, storage tanks, and fueling ports, close to some of our
      end customers or to a particular market in order to improve our product
      distribution capacity. We focus on timely delivery and good customer
      service. In addition our storage facilities are located close to our
      customers, enabling us to sell directly to them resulting in lower
      logistics costs. It also allows us to provide better after sales service
      and to maintain a close relationship with our key distributors through
      regular meetings, discussions and customer visits. Among our distributors,
      in 2008, Zhonghai Dalian and Shidao Hekou represent 16% and 13% of our
      sales, respectively.





·
            Innovation and R&D
      capabilities - We strive to identify market trends and developments
      in the marine fuel industry and use our blending technology to produce
      quality oils to satisfy the market demand. Since 2003, we have developed
      more than 5 new products as a result of our research and development
      capabilities. We operate several dedicated research and development
      facilities with 3 professionals and collaborate with universities and
      institutes, including Dalian University of Technology. We believe our
      investment in research and development has enabled us to continuously
      expand our product offerings and proactively anticipate market changes in
      our industry.





·
            Stringent Quality
      Control - We have stringent quality control systems at all stages
      of the blending process. Our periodic quality tests of our blended
      products are conducted by the team of trained scientific personnel which
      represent the area’s leading technical institutes and universities. We
      test the consistency and quality of our blended products and adjust the
      various components on an ‘‘as needed’’ basis. In addition, the quality of
      our testing process is periodically and independently verified by the
      governmental agencies in charge of overseeing quality and safety standards
      of the oil products supplied in the
marketplace.





·
            Strong Management Team
      - We have key management staff that has extensive experience and technical
      skills in oil processing, refining and blending
  technology.





Our
Strategies





Our
strategy is to capitalize on our competitive strengths to expand our current
market penetration. We plan to grow our business by pursuing the following
strategies:


6





·
            Expand our Product
      Offerings - We are focused on becoming a ‘‘one-stop’’ product
      supplier for our end-user customers. We plan to continue expanding our
      product offerings to increase the customization of marine fuels and
      address the key elements of our end-user customers’ needs for lower
      prices, easier access to fuel and a wide variety of complementary
      services. We believe offering these integrated systems will promote higher
      end-user customer satisfaction, higher margins, the establishment of
      long-term service contracts to maintain the systems and increased barriers
      to entry for potential competitors.





·
            Focus on Advanced
      Technologies - We are currently utilizing our research and
      development capabilities to develop new blending processes and
      applications. We believe there will be a growing demand for products
      possessing such features as governments, businesses and consumers become
      increasingly focused on sustainable economic growth and environmental
      issues. We follow advanced project selection procedures prior to the
      development of new products, including the use of detailed market and
      technological analyses. All new products are subject to rigorous testing
      at our facilities prior to production and sample products are often
      delivered to end-user customers for their trial use. We begin
      manufacturing new products only after the sample product from a trial
      production passes internal inspection and achieves customer satisfaction.
      This integrated approach allows us to identify potential difficulties in
      commercializing our product and make adjustments as necessary to develop
      cost-efficient manufacturing processes prior to mass production. We
      recognize the importance of customer satisfaction for our newly-developed
      products and continue to seek feedback from our end-user customers even
      after the formal launch of a
product.





·
            Pursue Selective Strategic
      Acquisitions - While we have experienced substantial organic
      growth, we plan to pursue a disciplined and targeted acquisition strategy
      to accelerate our growth. Our strategy will focus on obtaining
      complementary product offerings and locations, product line extensions,
      research and development capabilities and access to new markets and
      customers. We seek vertical growth through the acquisition of retail
      facilities which increase revenue line by having these newly acquired
      facilities to purchase more goods from parent and enjoying the profit
      margin on wholesale and retail distribution. Our acquisitions have
      historically enabled us to increase our product and service offerings and
      expand into other geographies. We may continue to acquire companies that
      provide us with storage capacities, customer and distribution network
      access. We expect that our acquisition targets will have the same core
      expertise as we do, maintain suitable storage facilities/berth locations,
      an established customer base to market our existing line of products and
      services. We anticipate that this strategy will enhance our time to market
      and our customer base, and will reduce local market entry risk. We intend
      to target profitable companies with annual revenues of at least US$6
      million. Our proposed strategy is to acquire an entity at a discount to
      public company trading multiples at a purchase price consisting of cash
      and common stock at closing, contingent earn-out cash payments payable
      upon the attainment of post-closing performance
  milestones.





·
            Increase Our Market Share in
      China - We plan to continue to expand our market share of the
      industry in China. To do so, we are developing additional advanced
      products across our comprehensive product lines, which will further create
      cross-selling opportunities and production and marketing synergies. We
      also intend to increase our marketing activities and are actively seeking
      to increase the number of distributors carrying our products, specifically
      new distributors that will provide us with greater access to a wider range
      of end-user customers.





·
            Expand Our Blending Capacity
      and Increase In-house Production - We currently plan to build new
      manufacturing and blending facilities and production lines to produce new
      brands of marine fuel products. We also plan to improve and upgrade our
      existing manufacturing facilities and production lines to enhance our
      quality control and to meet increasing demand for our current products.
      With the increased manufacturing capacity, we also expect to bring
      additional production steps in-house and increase the in-house
      manufacturing of certain core components to further improve our cost
      structure, the protection of our intellectual property, the quality and
      performance of our products and our operational
    efficiencies.





Sales
& Marketing





Our main
customers are located in Liaoning, Shandong and Zhejiang Provinces. Currently,
we have eight full-time sales and marketing personnel responsible for promoting
our products and services to our customers and distributors. We maintain close
relationships with our key customers through regular meetings and discussions to
keep them updated on the variety of products and services we offer. In addition,
we maintain strong relationships in our local communities and government for
favorable business expansion in each individual geographical area. Our sales and
marketing approach varies depending on the peculiarities of a particular market.
In Shandong Province, for instance, our focus has been on partnering with
certain owners of the local oil storage tanks and reservoirs whose facilities
are generally underutilized, which allows us certain additional storage
capacity, up to an additional 8,000 tons a month in that Province. In Zhoushan
City, Zhejiang province, on the other hand, we sell raw materials to our
customers who then blend such raw materials into final products and sell them in
the market.


7





Supply
of Raw Materials





Although
we intend to diversify our raw material supplies by engaging international
sources, presently, we purchase all of our raw materials only from Chinese
suppliers. Our operating company, Xingyuan, maintains a contractual relationship
with Panjin Liaohe Oil Field Dali Group Petrochemical Co., Ltd. (“Panjin”) for
purchases of wax fuel oil, which we commenced in October 2005, which provides
over 20% of all raw materials as we need every year. These contracts are renewed
on a monthly basis whereby the quantities of oil purchased vary from period to
period at then prevailing market prices. We purchase our heavy oil from
PetroChina Company Limited, the largest oil and gas producer and distributor in
China, from its Huhehaote refinery, in the amount of approximately 1,000 tons
per month at prevailing market prices. Xingyuan also purchases, at market
prices, rubber filling oil and extract oil from PetroChina Dalian Petrochemical
Company in amounts of 3,000 − 5,000 and 3,000 tons per month, respectively,
which provides over 30% of all raw materials as we need every year. These
contracts are also renewed on a monthly basis whereby the quantities of oil
purchased vary from period to period at then prevailing market prices.
Similarly, Xingyuan maintains a contractual relationship with Qingdao Anbang
Refining and Chemical Co., Ltd. (“Qingdao”) for our needs of catalytic diesel
oil. These contracts are also renewed on a rolling monthly basis whereby the
quantities of oil purchased vary from period to period at then prevailing market
prices. We commenced our relationship with Qingdao in February 2007. The use of
domestic, local suppliers in close proximity to our facilities enables us to
closely monitor the quality of the raw supplies obtained from such suppliers,
provide technical training relating to our raw material requirements and suggest
technical improvements. We obtain raw materials and components from suppliers
through non-exclusive purchase orders and supply contracts. The purchase order
or contract specifies the price for the raw material. Although we allow for
adjustments in the price for certain raw materials under extraordinary
circumstances, the prices for our materials are generally fixed for the
effective term of the purchase agreement. Our contracts with our suppliers are
generally renewable on an annual basis, but the price is not fixed and remains
flexible and reflective of the prevailing market conditions. We typically
negotiate with our suppliers to renew supply contracts at the beginning of each
year, taking into account the quality and consistency of the materials and
services provided. We maintain multiple supply sources for each of our key raw
materials so as to minimize any potential disruption of our operations and
maintain sourcing stability.





In  2007,
2008 and 2009, purchases from PetroChina Dalian Petrochemical Company (as
described above), our largest supplier, accounted for 39.9%, 46.3% and 33.4%,
respectively, of our total purchases of raw materials. For the same periods, our
ten largest suppliers combined accounted for 78%, 86% and 92%, respectively, of
our total purchases of raw materials. The raw materials required for our
products are low value crude oil refinement byproducts which conventionally are
disposed of by the major oil producing and refining companies. We negotiate
prices for our raw material supplies on a monthly basis to accommodate for our
short-term production requirements.





We
maintain a procurement team that has established relationships with various raw
material suppliers to ensure constant and reliable supply. In addition, we have
successfully employed and continue to employ a number of methods to hedge
against the risks of fluctuations in the raw material prices. Namely,
we:





·
            Shorten
      our production cycle from 30 to 14 days to reduce the price
      risk;


·
            Review
      raw material price agreements on a weekly
basis;


·
            Reduce
      purchase amounts, or buy on an ‘‘as needed’’
  basis;


·
            Place
      our blending facilities in close proximity to our customers to reduce
      delivery time;


·
            Increase
      the proportion of direct sales to end users by building more
      infrastructure to reduce reliance on
  distributors;


·
            Leverage
      our brand, i.e. seek customers who are willing to pay quality and brand
      premium.





Quality
Control





We have
implemented a rigid quality control system and devote significant attention to
quality control procedures at every stage of our process. We monitor our
manufacturing process closely and conduct performance and reliability testing to
ensure our products meet our end-user customer expectations. Our quality control
group as of December 31, 2009 included 7 employees that implement various
management systems to improve product quality programs. We inspect our raw
materials to ensure compliance with quality standards. We also evaluate the
quality and delivery performance of each supplier periodically and adjust
quantity allocations accordingly. We also monitor in-process and outgoing stages
of our processes.


8





Seasonality





The
Chinese government prohibits fishing boats and vessels from fishing from June
15th to September 15th of each year, the breeding season for many varieties of
fish, in order to protect marine resources and prevent overfishing. As a result,
the demand for our blended fuel drops by approximately 15% during this period.
In addition, we are also subject to the reduced commercial activity during the
Chinese New Year, the most important of the traditional Chinese holidays. During
this time, both cargo and fishing traffic decrease and we expect the demand for
our products to decrease accordingly.





Research
& Development





As of
December 31, 2009, we had 7 members in our research and development group. Our
research and development activities are based in our research and development
center located in the City of Dalian, where we maintain 3 laboratories,
including one at the Dalian University of Technology. Each of our laboratories
is staffed with several support personnel and is headed by an experienced member
of the faculty with whom we enter into contractual arrangements to provide
research and development services to the Company. We own all rights, title and
interest in any proprietary information resulting from the research work at our
R & D facilities. In addition to improving our existing product offerings,
our research and development efforts focus on the development of new products,
as well as the development of new production methodologies to improve our
manufacturing processes.





Competition





The
market for oil for small and medium size vessels, i.e. less than 3,000 tons, is
very fragmented with no discernible market leader. We estimate the total value
of this market to be approximately US$1.6 billion as of December 31, 2009. It is
characterized by intense price competition, uneven product and service quality
and is dominated by many small fuel trading companies. Most of these trading
companies do not have stable supply sources or a strong working capital to
withstand market risk, which may lead to chronic shortages of oil in the market.
Boat and vessel operators are at high risk when oil merchants market them poor
quality oil or counterfeit products that have insufficient energy efficiency or
cause damage to engines. Therefore, our experience and market research have
consistently shown that boat and vessel operators are willing to pay a premium
for consistent quality products and services. High barriers of entry for new
entrants into this industry include heavy regulatory hurdles, scarcity of
suitable operation and storage sites, capital intensity and skilled management.
Most of the operational, business and other activities in the storage, refining
and producing industries are heavily regulated and require layers of
governmental consents and approvals. In addition, storage hubs must be located
on sufficiently large sites in strategic locations with close proximity to
industrial ports and harbors with deep water access. Most of the infrastructure
requires significant upfront capital expenditures. Thus, we believe all of the
foregoing fortify our competitive positions in the industry.





Our
industry is characterized by the major national oil companies controlling the
upstream refineries and supplying the end products to the downstream. In
particular for marine fuel oil, China Marine Bunker (China Petrol) Co., Ltd. is
a major participant in the market. In the downstream, there are many traders
selling marine fuel oil in all the provinces feeding from the 1st tier
manufacturers. There are only a limited number of credible manufacturers that
have blending capability of and direct access to raw materials from national
refineries. Our competitors are numerous, ranging from large multinational
corporations, which have significantly greater capital resources, to relatively
small and specialized firms. In addition to competing with fuel resellers, we
also compete with the major oil producers that market fuel directly to the large
shipping companies. Such major oil producers do not include the PRC oil
companies since under the PRC laws, petroleum producers are precluded from
blending oil and oil products. Our business could be adversely affected because
of increased competition from the larger oil companies who may choose to
directly market to shipping companies, or to provide less advantageous price and
credit terms to us than our fuel reseller competitors.





We
believe we have no significant competition in the fuel market for small and
medium vessels. Potential competitors could include major domestic oil producing
and refining companies, including as Sinopec, China Petrol and CNOOC, none of
which are currently active in this marketplace or legally permitted to blend
oil. However, we believe it is unlikely they would enter into this segment of
the market in the near future since the entry opportunities diminish as we
develop our integrated distribution system through acquiring resources and sites
and strengthening our market position, thus creating high barriers to entry,
including regulatory and compliance hurdles capital and storage scarcity,
shortage of skilled management.


9





Insurance





The
insurance industry in China is still at an early state of its development.
Insurance companies in China offer limited business insurance products or offer
them at a high price. Business interruption or similar types of insurance are
not customary in China. We currently maintain insurance coverage with Tianan
Insurance Company Limited of China, which, as of December 31, 2009, was
approximately RMB8,630,000 (US$1,260,000) on our property and facilities and
approximately RMB3,600,000 (US$9,300,000) on our inventory. We do not carry any
third party liability insurance to cover claims in respect of personal injury,
property or environmental damage arising from accidents on our property or
relating to our operations other than on our transportation vehicles. We have
not had a third party liability claim filed against us during the last five
years.





Business,
Ownership, Environmental and Other Regulations





Petroleum
and Refining Industry Regulations





Although
the Chinese government is liberalizing its control over the petroleum and
petrochemical industries, significant government regulations remain. Central
government agencies and their local or provincial level counterparts do not own
or directly control our production facilities. However, they exercise
significant control over the petrochemical industry in areas such as production
quotas, quality standards, allocation of raw materials and finished products,
allocation of foreign exchange and Renminbi loans for capital construction
projects. Since 2003, at the national level, our operations are subject to the
supervision and industrial oversight, to various extent, by the State Assets
Regulatory and Management Commission, by the Ministry of Commerce and the
National Development and Reform Committee. At the local level, we are subject to
the supervision and oversight by the provincial branches of these national
agencies as well as local governments and agencies.





Foreign
Exchange and Dividend Distribution Regulations





The
principal regulations governing foreign currency exchange in China are the
Foreign Exchange Control Regulations (1996), as amended. Under these
regulations, the Renminbi is convertible for current account items, including
the distribution of dividends, interest payments, trade and service-related
foreign exchange transactions. Conversion of the Renminbi for capital account
items, such as direct investment, loans, repatriation of investment and
investment in securities outside China, however, is still subject to the
approval of the SAFE or its competent local branch. The dividends paid by a
subsidiary to its shareholder are deemed income of the shareholder and are
taxable in China. Pursuant to the Administration Rules of the Settlement, Sale
and Payment of Foreign Exchange (1996), foreign-invested enterprises in China
may purchase or remit foreign exchange, subject to a cap approved by the SAFE,
for settlement of current account transactions without the approval of the
SAFE.





The
principal regulations governing distribution of dividends of foreign holding
companies include the Foreign Investment Enterprise Law (1986), as amended, and
the Administrative Rules under the Foreign Investment Enterprise Law (2001).
Under these regulations, foreign-invested enterprises in China may pay dividends
only out of their accumulated profits, if any, determined in accordance with
Chinese accounting standards and regulations. In addition, foreign-invested
enterprises in China are required to allocate at least 10% of their respective
accumulated profits each year, if any, to fund certain reserve funds unless
these reserves have reached 50% of the registered capital of the enterprises.
These reserves are not distributable as cash dividends. Our Chinese VIE’s and
one PRC subsidiary, Fusheng, which are all foreign-invested enterprises, are
restricted from distributing any dividends to us until they have met these
requirements set out in the regulations.





According
to the new EIT law and the implementation rules on the new EIT law, if a foreign
legal person is not deemed to be a resident enterprise for Chinese tax purposes,
dividends generated after January 1, 2008 and paid to this foreign legal person
from business operations in China will be subject to a 10% withholding tax,
unless such foreign legal person’s jurisdiction of incorporation has a tax
treaty with the PRC that provides for a different withholding arrangement. Under
the new EIT law and its implementation rules, if an enterprise incorporated
outside China has its ‘‘de facto management organization’’ located within China,
such enterprise would be classified as a resident enterprise and thus would be
subject to an enterprise income tax rate of 25% on all of its income on a
worldwide basis, with the possible exclusion of dividends received directly from
another Chinese tax resident.


10





On
December 25, 2006, the People’s Bank of China, or PBOC, issued the
Administration Measures on Individual Foreign Exchange Control, and the
corresponding Implementation Rules were issued by SAFE on January 5, 2007. Both
of these regulations became effective on February 1, 2007. According to these
regulations, all foreign exchange matters relating to employee stock holding
plans, share option plans or similar plans in which PRC citizens’ participation
require approval from the SAFE or its authorized branch. On March 28, 2007, SAFE
promulgated the Application
Procedure of Foreign Exchange Administration for Domestic Individuals
Participating in Employee Stock Option Holding Plan or Stock Option Plan of
Overseas Listed Company, or the Stock Option Rule. The purpose of the
Stock Option Rule is to regulate foreign exchange administration of Chinese
citizens who participate in employee stock holding plans and share option plans
of offshore listed companies. According to the Stock Option Rule, if a Chinese
citizen participates in any employee stock holding plans or share option plans
of an offshore listed company, a Chinese domestic agent or the Chinese
subsidiary of the offshore listed company is required to file, on behalf of the
individual, an application with the SAFE to obtain approval for an annual
allowance with respect to the purchase of foreign exchange in connection with
stock holding or share option exercises. This restriction exists because a
Chinese citizen may not directly use offshore funds to purchase stock or
exercise share options. Concurrent with the filing of the required application
with the SAFE, the Chinese domestic agent or the Chinese subsidiary must obtain
approval from the SAFE to open a special foreign exchange account at a Chinese
domestic bank to hold the funds required in connection with the stock purchase
or option exercise, any returned principal profits upon sales of stock, any
dividends issued on the stock and any other income or expenditures approved by
the SAFE. The Chinese domestic agent or the Chinese subsidiary also is required
to obtain approval from the SAFE to open an offshore special foreign exchange
account at an offshore trust bank to hold offshore funds used in connection with
any employee stock holding plans. All proceeds obtained by a Chinese citizen
from dividends acquired from the offshore listed company through employee stock
holding plans or share option plans, or sales of the offshore listed company’s
stock acquired through other methods, must be remitted back to China after
relevant offshore expenses are deducted. The foreign exchange proceeds from
these sales can be converted into Renminbi or transferred to the individuals’
foreign exchange savings account after the proceeds have been remitted back to
the special foreign exchange account opened at a Chinese bank. If share options
are exercised in a cashless exercise, the Chinese individuals exercising them
are required to remit the proceeds to the special foreign exchange account.
Although the Stock Option Rule has been promulgated recently and many issues
require further interpretation, we and our Chinese employees who have been or
will be granted share options or shares will be subject to the Stock Option
Rule, as an offshore listed company.





Employee
Stock Option Regulations





Under
SAFE Notice No. 106, employee stock holding plans of offshore special purpose
companies must be filed with the SAFE, and employee share option plans of
offshore special purpose companies must be filed with the SAFE while applying
for the registration for the establishment of the offshore special purpose
company. After the employees exercise their options, they must apply for the
amendment to the registration for the offshore special purpose company with the
SAFE. If we or our Chinese employees fail to comply with the Stock Option Rule,
we and/or our Chinese employees may face sanctions imposed by foreign exchange
authority or any other Chinese government authorities.





On August
8, 2006, six Chinese regulatory agencies, including the Ministry of Commerce,
the State Assets Supervision and Administration Commission, the State
Administration for Taxation, the State Administration for Industry and Commerce,
the CSRC and the SAFE, jointly issued the Regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A
Rule, which became effective on September 8, 2006. Under the New M&A Rule,
equity or assets merger and acquisition of Chinese enterprises by foreign
investors will be subject to the approval from the Ministry of Commerce or its
competent local branches. This regulation also includes provisions that purport
to require special purpose companies formed for purposes of offshore listing of
equity interests in Chinese companies to obtain the approval of the CSRC prior
to the listing and trading of their securities on any offshore stock exchange.
As defined in the New M&A Rule, a special purpose vehicle is an offshore
company that is directly or indirectly established or controlled by Chinese
entities or individuals for the purposes of an overseas listing.





The CSRC
approval procedures require the filing of a number of documents with the CSRC
and it would take several months to complete the approval process. The
application of the New M&A Rule with respect to offshore listings of special
purpose companies remains unclear with no consensus currently existing among
leading Chinese law firms regarding the scope of the applicability of the CSRC
approval requirement. A loan made by foreign investors as shareholders in a
foreign-invested enterprise is considered to be foreign debt in China and
subject to several Chinese laws and regulations, including the Foreign Exchange
Control Regulations of 1997, the Interim Measures on Foreign Debts of 2003, or
the Interim Measures, the Statistical Monitoring of Foreign Debts Tentative
Provisions of 1987 and its Implementing Rules of 1998, the Administration
of the Settlement, Sale and Payment of Foreign Exchange Provisions of 1996, and
the Notice of the SAFE in Respect of Perfection of Issues Relating Foreign
Debts, dated October 21, 2005. Under these regulations, a shareholder loan in
the form of foreign debt made to a Chinese entity does not require the prior
approval of the SAFE. However, such foreign debt must be registered with and
recorded by the SAFE or its local branch in accordance with relevant Chinese
laws and regulations. Our Chinese VIE’s and our PRC subsidiary can legally
borrow foreign exchange loans up to their borrowing limits, which is defined as
the difference between the amount of their respective ‘‘total investment’’ and
‘‘registered capital’’ as approved by the Ministry of Commerce, or its local
counterparts. Interest payments, if any, on the loans are subject to 10%
withholding tax unless any such foreign shareholders’ jurisdiction of
incorporation has a tax treaty with China that provides for a different
withholding agreement. Pursuant to Article 18 of the Interim Measures, if the
amount of foreign exchange debt of our Chinese VIE’s and our PRC subsidiary
exceed their respective borrowing limits, we are required to apply to the
relevant Chinese authorities to increase the total investment amount and
registered capital to allow the excess foreign exchange debt to be registered
with the SAFE.


11





Environmental
Regulations





China’s
rapid economic growth over the last two decades has also brought with it several
energy related environmental problems. Environmental pollution from fossil fuel
combustion is damaging human health, air and water quality, agriculture, and
ultimately the economy. Many of China’s cities are among the most polluted in
the world. China is the world’s second-largest source of carbon dioxide
emissions behind the United States. EIA forecasts predict that China will
experience the largest growth in carbon dioxide emissions between now and the
year 2030. The Chinese government has taken several steps to improve
environmental conditions in the country. Chief among these is the new Law on
Renewable Energy, which took effect on January 1, 2006. The new law seeks to
promote cleaner energy technologies, with a stated goal of increasing the use of
renewable energy to 10% of the country’s electricity consumption by 2010 (up
from roughly 3% in 2003).





We are
subject to national and local environmental protection regulations, which
currently impose a graduated schedule of fees for the discharge of waste
substances, require the payment of fines for pollution and provide for the
forced closure of any facility that fails to comply with orders requiring it to
cease or cure certain environmentally damaging practices. We have established
environmental protection systems which consist of pollution control facilities
to treat certain of our waste materials and to safeguard against accidents. We
believe our environmental protection facilities and systems are adequate for the
existing national and local environmental protection regulations.





Employees





As of
December 31, 2009, we had 131 employees, 24 of which are engaged in management,
administration and related areas, and the remaining 107 - in operations at
various local sites throughout the east of China. None of our employees are
represented by a labor union or collective bargaining agreements. We consider
our employee relations to be good.





Intellectual
Property





We rely
on trademark and copyright laws, trade secret protection, non-competition and
confidentiality and/or licensing agreements with our executive officers,
clients, contractors, research and development personnel and others to protect
our intellectual property rights. We do not possess any licenses to use
third-party intellectual property rights nor do we license to third-parties any
intellectual property rights we own. The protection afforded by our intellectual
property may be inadequate. It may be possible for third parties to obtain and
use, without our consent, intellectual property that we own or are licensed to
use. Unauthorized use of our intellectual property by third parties, and the
expenses incurred in protecting our intellectual property rights, may adversely
affect our business. We may also be subject to litigation involving claims of
violation of intellectual property rights of third parties.





Item
      1a.
            Risk
      Factors





The
Company faces many risks. The risks described below may not be the only risks
the Company faces. Additional risks not yet known or currently believed to be
immaterial may also impair the Company’s business. If any of the events or
circumstances described in the following risks actually occurs, the Company’s
business, financial condition or results of operations could suffer, and the
trading price of its common stock could decline. You should consider the
following risks, together with all of the other information in this Annual
Report on Form 10-K, before making an investment decision with respect to the
Company’s securities.





Risks
Relating to Our Operations





Our
limited operating history makes evaluation of our business
difficult





We have a
limited operating history and have encountered and expect to continue to
encounter many of the difficulties and uncertainties often faced by early stage
companies. Our limited operating history makes it difficult to evaluate our
future prospects, including our ability to develop a wide customer and
distribution network for our services, expand our operations to include
additional services and control raw material costs, all of which are critical to
our success. We may encounter unanticipated problems, expenses and delays in
developing and marketing our services and securing additional blending and
storage facilities. We may not be able to successfully address these risks. If
we are unable to address these risks, our business may not grow, our stock price
may suffer, and we may be unable to stay in business.


12





If
the fuel we blend fails to meet the specifications we have agreed to supply to
our customers, our relationship with our customers could be adversely
affected





We blend
marine fuel to meet customer specifications. If the fuel fails to meet the
specifications we have agreed to supply to our customers, our relationship with
our customers could be adversely affected, and we could be subject to claims and
other liabilities which could have a material adverse effect on our business,
financial condition and results of operations.





The
current global financial crisis may have further material adverse effects on our
financial condition and operating results





The
current global financial crisis has resulted in reduced demand and decreased
prices for the petrochemical industry. Although China continued to experience
steady and relatively fast growth in 2008 and 2009, the momentum of its economic
growth has weakened, with a substantial adverse impact on China’s petrochemical
industry. Beginning in the second half of 2008 in particular, production growth
in China’s petrochemical industry slowed significantly, market demand weakened,
product prices fell sharply and corporate profitability decreased substantially.
A sustained economic downturn may have further material adverse effects on our
financial condition and operating results. Moreover, measures taken by the
Chinese government, such as restrictions on workforce reduction, may limit our
ability to adjust to a changing market environment and have an adverse impact on
our financial performance.





Our
historical sales to significant customers have been concentrated





For the
fiscal year ended December 31, 2009, one customer accounted for approximately
12.8% and 11.9% of our total revenues. No other customer contributed greater
than 10% of the revenues. For the year ended December 31, 2008, two customers
accounted for approximately 17% and 14% of total revenues, respectively. No
other customer contributed greater than 10% of the revenues. For the year ended
December 31, 2007, two customers accounted for approximately 21% and 11% of
total revenues, respectively. No other customer contributed greater than 10% of
the revenues. In the event a substantial portion of such sales is disrupted, our
results of operations may be adversely affected.





Our
operations may be adversely affected by the cyclical nature of the petroleum and
petrochemical market and by the volatility of prices of crude oil and
petrochemical products





Almost
all of our revenues are attributable to petrochemical products, which have
historically been cyclical and sensitive to the availability and price of raw
materials and general economic conditions. Markets for many of our products are
sensitive to changes in industry capacity and output levels, cyclical changes in
regional and global economic conditions, the price and availability of
substitute products and changes in consumer demand, which from time to time have
had a significant impact on product prices in the regional and global markets.
Historically, the markets for these products have experienced alternating
periods of tight supply, causing prices and margins to increase, followed by
periods of capacity additions, finally resulting in oversupply and declining
prices and margins. As tariffs and other import restrictions are reduced and the
control of product pricing is relaxed in China, the markets for many of our
products have become increasingly subject to the cyclicality of regional and
global markets. For example, in 2008, abrupt changes occurred in the domestic
demand for petrochemical products. In the first half of the year, the prices of
petrochemical products continued to rise in conjunction with substantial rises
in international oil prices. However, in the second half, there was a fall in
both sales volume and prices of petrochemical products triggered by the global
economic downturn. The sales volume and prices of our petrochemical products
also declined, and may remain at the current levels for a sustained period of
time, or even decline further from such levels.  Historically,
international prices of crude oil have fluctuated widely due to many factors
beyond our control. For example, international crude oil prices increased
significantly in the first half of 2008 but decreased significantly in the
second half. After hitting successive record highs, crude oil prices began to
fall rapidly, and hit a new, 3-year record low in December 2008. We expect that
the volatility and uncertainty of the prices of crude oil and petrochemical
products will continue. Increasing crude oil prices and declines in prices of
petrochemical products may adversely affect our business and results of
operations and financial condition.


13





Some
of our major products are subject to government price controls, and we are not
able to pass on all cost increases from rising crude oil prices through higher
product prices





We
require large amounts of crude oil to manufacture our products. Our ability to
pass on increased crude oil costs to our customers is dependent on market
conditions and government regulations, particularly government regulation with
respect to the price of certain of our fuel products. In particular, gasoline,
diesel and jet fuel, and liquefied petroleum gas are subject to government price
controls. In 2009, 2008 and 2007 no sales were from such products subject to
price control. Although the Chinese government has adopted a new pricing
mechanism for domestic refined oil products that indirectly links the prices of
these products to international crude oil prices, such pricing mechanism is
still nontransparent. Moreover, the Chinese government controls the distribution
of many petroleum products in China. For instance, some of our petroleum
products are required to be sold to designated distributors (such as the
subsidiaries of China Petroleum & Chemical Corporation). Because we cannot
freely sell our fuel products to take advantage of opportunities for higher
prices and because the formula for the new pricing mechanism set by the Chinese
government is not transparent, in periods of high crude oil prices, we may not
be able to fully cover increases in crude oil prices by increases in the sale
prices of our products, which has had and will continue to have a material
adverse effect on our financial condition, results of operations and cash
flows.





Our
development plans have significant capital expenditure and financing
requirements, which are subject to a number of risks and
uncertainties





The
petrochemical business is a capital intensive business. Our ability to maintain
and increase our revenues, net income and cash flows depends upon continued
capital spending. Our current business strategy contemplates capital
expenditures for 2010 of approximately RMB 8.1million (US$1.18 million), which
will be provided through financing activities, and use of our own capital. Our
actual capital expenditures may vary significantly from these planned amounts
due to our ability to generate sufficient cash flows from operations,
investments and other factors that may be beyond our control. In addition, there
can be no assurance as to whether, or at what cost, our capital projects will be
completed or the success of these projects if completed.  Our ability
to obtain external financing in the future is subject to a variety of
uncertainties, including:





•
            our
      future results of operations, financial condition and cash
      flows;


•
            the
      condition of the economy in China and the markets for our
      products;


•
            the
      cost of financing and the condition of financial markets;
    and


•
            the
      issuance of relevant government approvals and other project risks
      associated with the development of infrastructure in
  China.





If we
fail to obtain sufficient funding for our operations or development plans, our
business, results of operations and financial condition could be adversely
affected.





Material
disruptions in the availability or supply of fuel would adversely affect our
business





The
success of our business depends on our ability to purchase, sell and coordinate
delivery of fuel and related services to our customers. In the past, we
experienced difficulties in securing supplies of certain components for blending
process. We have addressed that concern by diversifying our raw material
supplies and strengthening our relationships with our existing suppliers. Our
business would be adversely affected to the extent that political instability,
natural disasters, terrorist activity, military action or other conditions
disrupt the availability or supply of fuel.





Our
earnings will be adversely affected by seasonality of the fishing
business





The
Chinese government prohibits fishing vessels from fishing from June 15th to
September 15th of each year, the breeding season for many varieties of fish, in
order to protect marine resources and prevent overfishing. As a result, the
demand for our blended fuel drops by approximately 15% during this period,
which, in turn, has an adverse effect on our operations in the 3rd fiscal
quarter of each calendar year. In addition, we are also subject to the reduced
commercial activity during the Chinese New Year which takes place during the
1st
quarter and lasts about 2 weeks. During this time, both cargo and fishing
traffic decreases and we expect the demand for our products to decrease
accordingly by approximately the same amount as the decrease in the 3rd
quarter.





Adverse
conditions in the shipping and fishing industries may have an adverse effect on
our business





Our
business is focused on the marketing of fuel and fuel-related services to the
shipping and fishing industries. Therefore, any adverse economic conditions in
these industries may have an adverse effect on our business. In addition, any
political instability, natural disasters, terrorist activity or military action
that disrupts shipping or flight operations will adversely affect our customers
and may reduce the demand for our products and services. Our business also could
be adversely affected by increased merger activity in such industries, which may
reduce the number of customers that purchase our products and services, as well
as the prices we are able to charge for such products and
services.


14


Insurance
coverage for some of our operations may be insufficient to cover
losses





The
insurance industry in China is still at an early state of its development.
Insurance companies in China offer limited business insurance products or offer
them at a high price. We do not maintain insurance coverage for various risks,
including environmental claims. A significant uninsured claim against us would
have a material adverse effect on our financial position and results of
operations.





Failure
to attract and retain highly qualified personnel could have a material negative
impact on our business





Implementation
of our business strategy is predominantly dependent on the efforts of Mr. An
Fengbin, our President and Chief Executive Officer. If we were to lose his
services, our business and operations would be severely affected. Competition
for highly qualified personnel is intense, and we have very limited resources.
The loss of any executive officer or key employee or the failure to attract and
retain other skilled employees could have a material adverse impact upon our
business, operations or financial condition.





We
may be unable to protect our trademark or other proprietary intellectual
property rights





We rely
on trademark and copyright laws, trade secret protection, non-competition and
confidentiality and/or licensing agreements with our executive officers,
clients, contractors, research and development personnel and others to protect
our intellectual property rights. We do not possess any licenses to use
third-party intellectual property rights nor do we license to third-parties any
intellectual property rights we own. The protection afforded by our intellectual
property may be inadequate. It may be possible for third parties to obtain and
use, without our consent, intellectual property that we own or are licensed to
use. Unauthorized use of our intellectual property by third parties, and the
expenses incurred in protecting our intellectual property rights, may adversely
affect our business. We may also be subject to litigation involving claims of
violation of intellectual property rights of third parties. In order to protect
or enforce our intellectual property rights, we may initiate litigation against
third parties. In addition, we may become subject to inference, cancellation, or
opposition proceedings conducted in trademark offices or the courts to determine
the priority of rights in our marks. The defense of intellectual property
rights, interference, cancellation, or opposition proceedings, and other legal
and administrative proceedings, would be costly and divert our technical and
management personnel from their normal responsibilities. Furthermore, because of
the substantial amount of discovery required in connection with intellectual
property litigation, there is a risk that some of our confidential information
could be compromised by disclosure during this type of litigation which
disclosure could substantially diminish our competitive advantages, thus,
resulting in decrease revenues and possible losses.





We
face competition and, if we are not able to effectively compete in our markets,
our revenues and profits may decrease





Competitive
pressures in our markets could adversely affect our competitive position,
leading to a possible loss of market share or a decrease in prices, either of
which could result in decreased revenues and profits. Our competitors are
numerous, ranging from large multinational corporations, which have
significantly greater capital resources, to relatively small and specialized
firms. In addition to competing with fuel resellers, we also compete with the
major oil producers that market fuel directly to the large commercial airlines
and shipping companies. Such major oil producers do not include the PRC oil
companies since under the PRC laws, petroleum producers are precluded from
blending oil and oil products. Our business could be adversely affected because
of increased competition from the larger oil companies who may choose to
directly market to smaller airlines and shipping companies, or to provide less
advantageous price and credit terms to us than our fuel reseller
competitors.





We
rely on few significant providers for our raw material supplies





Presently,
we purchase all of our raw materials only from Chinese suppliers. Our operating
company, Xingyuan, maintains a contractual relationship with Panjin Liaohe Oil
Field Dali Group Petrochemical Co., Ltd. (“Panjin”) for purchases of wax fuel
oil, which we commenced in October 2005, which provides over 20% of raw
materials as we need every year. We also purchase our heavy oil from PetroChina
Company Limited, the largest oil and gas producer and distributor in China, from
its Huhehaote refinery. Xingyuan also purchases, at market prices, rubber
filling oil and extract oil from PetroChina Dalian Petrochemical Company, which
provides over 35% of raw materials as we need every year. One major supplier,
Dalian Branch, provided 33.4%, 46.3% and 39.9% of our purchase of raw materials
for years ended December 31, 2009, 2008 and 2007, respectively. The amount of
advance to this supplier was $1,774,425, $665,789 and $1,355,310 as of December
31, 2009, 2008 and 2007, respectively. Another major supplier, Panjin, provided
36.2%, 23.3% and 10.0% of our purchase of raw materials for years ended December
31, 2009, 2008 and 2007, respectively. The amount of advance to this supplier
was $3,791,459, $1,439, and $335,514 as of December 31, 2009, 2008 and 2007,
respectively. For the same periods, our ten largest suppliers combined accounted
for 92%, 78% and 86%, respectively, of our total purchases of raw materials. If
our supply arrangements are disrupted or terminated, our business operations
would suffer. Economic conditions and growth trends in our industry could
materially and adversely affect our ability to maintain an adequate supply of
raw materials necessary to maintain our operations.


15


We
may not be able to integrate profits from future acquisitions





Acquisitions
of local providers of marine oil and other similar products and services in
various cities along the eastern shore of China are a part of our growth
strategy. Such growth path would present a number of challenges to us,
including, without limitation, needs to integrate management teams, local
infrastructure, profits, etc. of such companies. We provide no assurance that we
will be able to successfully acquire any such business or that we would be able
to integrate profits from such acquired companies.





We
are subject to a variety of environmental laws and regulations related to our
refining, blending and storage operations. Our failure to comply with
environmental laws and regulations may have a material adverse effect on our
business and results of operations





We are
subject to various environmental laws and regulations that require us to obtain
environmental permits for our operations. If we fail to comply with the
provisions of our permit, we could be subject to fines, criminal charges or
other sanctions by regulators, including the suspension or termination of our
operations. We are required to comply with extensive and complex environmental
laws and regulations at various levels in the PRC relating to, among other
things:





•           the
handling of fuel and fuel products;


•           the
operation of bulk fuel storage facilities;


•           workplace
safety;


•           fuel
spillage or seepage;


•           environmental
damage; and


•           hazardous
waste disposal.





If we are
involved in a spill or other accident involving hazardous substances, if there
are releases of fuel and fuel products we own, or if we are found to be in
violation of environmental laws or regulations, we could be subject to
liabilities that could have a material adverse effect on our business, financial
condition and results of operations. If we should fail to comply with applicable
environmental regulations, we could be subject to substantial fines or penalties
and to civil and criminal liability. We cannot assure you that at all times we
will be in compliance with environmental laws and regulations or our
environmental permits or that we will not be required to expend significant
funds to comply with, or discharge liabilities arising under, environmental
laws, regulations and permits.





We
will incur increased costs as a result of being a public company





In
January 2010, we completed our initial public offering and became an Exchange
Act reporting company and, thus, expect to incur significant legal, accounting
and other expenses that we did not incur as a private company. Moreover, the
Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the
Securities and Exchange Commission and the Nasdaq Stock Market, have imposed
additional requirements on corporate governance practices of public companies.
We expect these new rules and regulations to increase our legal and financial
compliance costs and to make some corporate activities more time-consuming and
costly. We will also incur additional costs associated with our public company
reporting requirements. It may also be difficult for us to attract and retain
qualified persons to serve on our board of directors due to increased risks of
liability to our directors under the new rules and regulations. We are currently
evaluating and monitoring developments with respect to these new rules and
regulations, and we cannot predict or estimate with any degree of certainty the
amount or timing of additional costs we may incur. Our results of operations,
cash flows and financial condition reflected in our combined and consolidated
financial statements may not be indicative of the results of operations that we
would have achieved had we operated as a public entity for all periods presented
or of future results that we may achieve as a publicly traded company with our
current holding company structure. Such variations may be material to our
business.


16


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. As a result,
current and potential shareholders could lose confidence in our financial
reporting, which would harm our business and the trading price of our
stock





Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. As directed by Section 404 of the Sarbanes-Oxley Act
of 2002, or SOX 404, the Securities and Exchange Commission adopted rules
requiring public companies to include a report of management on the Company’s
internal controls over financial reporting in their annual reports. If we cannot
provide financial reports or prevent fraud, our business reputation and
operating results could be harmed. Inferior internal controls also could cause
investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our stock.





Risks
Related to our Corporate Structure and Doing Business in China





Chinese
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 Chinese laws and
regulations may materially and adversely affect our business





There are
substantial uncertainties regarding the interpretation and application of
Chinese 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 VIE entity, Xingyuan, and its stockholders. We
are considered a foreign person or foreign invested enterprise under Chinese
law. 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
Chinese 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 on our
business of the interpretation of existing or new Chinese laws or regulations.
We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future Chinese 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.





If the
relevant authorities find us in violation of PRC laws or regulations, they would
have broad discretion in dealing with such a violation, including, without
limitation:





•           levying
fines;


•           revoking
our business license, other licenses or authorities;


•           requiring
that we restructure our ownership or operations; and


•           requiring
that we discontinue any portion or all of our business.





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.





The
contractual arrangements with Xingyuan and its shareholders may not be as
effective in providing control over Xingyuan as direct ownership of Xingyuan and
the shareholders of Xingyuan may have potential conflicts of interest with
us





We have
no ownership interest in Xingyuan and we conduct substantially all of our
operations and generate substantially all of our revenues through contractual
arrangements that our subsidiary, Fusheng, had entered into with Xingyuan and
its shareholders, and such contractual arrangements are designed to provide us
with effective control over Xingyuan.





We
believe that these contractual arrangements are valid, binding and enforceable,
and will not result in any violation of PRC laws or regulations currently in
effect. If we had direct ownership of Xingyuan, we would be able to exercise our
rights as a shareholder to effect changes in the board of directors of Xingyuan,
which in turn could effect changes, subject to any applicable fiduciary
obligations, at the management level. Due to our VIE structure, we have to rely
on contractual rights to effect control and management of Xingyuan, which
exposes us to the risk of potential breach of contract by the shareholders of
Xingyuan. In addition, as Xingyuan is jointly owned by its shareholders, it may
be difficult for us to change our corporate structure if such shareholders
refuse to cooperate with us.


17


Xingyuan
shareholders may have potential conflict of interest with us





An
Fengbin, our President and CEO, controls and is a director of Dalian
Dongfangzheng Industrial Co., Ltd. (DFZ) which entity is the majority
shareholder of Xingyuan. He is also a Board member of Donggang Xingyuan, a
subsidiary of our VIE entity. In addition, An Fengbin has the power to vote and
dispose of all of the securities of Oriental Excel Enterprises Limited, a
British Virgin Islands company, which, in turn, holds 100% of equity interest in
Star Blessing Enterprises Limited, which entity, in turn, holds 89.04% interest
in Andatee. As detailed below, the foregoing relationships and ownership
interests may result in certain conflict of interests.





The
shareholders of Xingyuan may breach, or cause Xingyuan to breach, the contracts
for a number of reasons. For example, their interests as shareholders of
Xingyuan and the interests of our company may conflict and we may fail to
resolve such conflicts; the shareholders may believe that breaching the
contracts will lead to greater economic benefit for them; or the shareholders
may otherwise act in bad faith. If any of the foregoing were to occur, we may
have to rely on legal or arbitral proceedings to enforce our contractual rights,
including specific performance or injunctive relief, and claiming damages. Such
arbitration and legal proceedings may cost us substantial financial and other
resources, and result in disruption of our business, and we cannot assure you of
a favorable outcome.





In
addition, as all of these contractual arrangements are governed by PRC law and
provide for the resolution of disputes through either arbitration or litigation
in the PRC, they would be interpreted in accordance with PRC law and any
disputes would be resolved in accordance with PRC legal procedures. The legal
environment in the PRC is not as developed as in other jurisdictions, such as
the United States. As a result, uncertainties in the PRC legal system could
further limit our ability to enforce these contractual arrangements.
Furthermore, these contracts may not be enforceable in China if PRC government
authorities or courts take a view that such contracts contravene PRC laws and
regulations or are otherwise not enforceable for public policy reasons. In the
event we are unable to enforce these contractual arrangements, we may not be
able to exert effective control over Xingyuan, and our ability to conduct our
business may be materially and adversely affected.





Xingyuan’s
termination of its consulting services agreement with Fusheng may adversely
affect our business and operations





Under the
terms of the exclusive consulting services agreement by and between Fusheng and
Xingyuan, Fusheng has the exclusive right to provide to Xingyuan business
consulting and related services in connection with the production and sale of
marine bunker. Under this agreement, Fusheng owns the intellectual property
rights arising from the performance of these services, including, but not
limited to, any trade secrets, copyrights, patents, know-how, unpatented methods
and processes and otherwise, whether developed by Fusheng or Xingyuan based on
Fusheng’s provision of such services under the agreement. Xingyuan pays
quarterly consulting service fees to Fusheng that are equal 50% of Xingyuan’s
total net profit for such quarter. The consulting services agreement is in
effect for a term of 10 years starting from March 26, 2009 unless terminated
earlier by (a) Xingyuan upon 6 months’ prior written notice and payment to
Fusheng of RMB 2,000,000 and all of Fusheng’s losses resulting from such early
termination; (b) Fusheng upon Xingyuan’s breach of the agreement; or (c) Fusheng
at any time upon 30 days’ prior written notice to Xingyuan. Due to the
substantial expenses and time involved in finding a suitable replacement for
this relationship, in the event such termination, our business and operations
would be adversely affected.





All
of our assets are located in the PRC and all of our revenues are derived from
our operations in China, and changes in the political and economic policies of
the PRC government or uncertainties with respect to the PRC legal system could
have a significant impact upon the business we may be able to conduct in the PRC
and accordingly, on the results of our operations and financial
condition





Our
business operations may be adversely affected by the current and future
political environment in the PRC. The Chinese government exerts substantial
influence and control over the manner in which we must conduct our business
activities. Our ability to operate in China may be adversely affected by changes
in Chinese laws and regulations, including those relating to taxation, import
and export tariffs, raw material environmental regulations, land use rights,
property and other matters. Under the current government leadership, the
government of the PRC has been pursuing economic reform policies that encourage
private economic activity and greater economic decentralization. There is no
assurance, however, that the government of the PRC will continue to pursue these
policies, or that it will not significantly alter these policies from time to
time without notice.


18


Since
1979, the Chinese government has promulgated many new laws and regulations
covering general economic matters. Despite this activity to develop a legal
system, China’s system of laws is not yet complete. Even where adequate law
exists in China, enforcement of existing laws or contracts based on existing law
may be uncertain or 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 China’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 activities in
China will also be subject to administrative review and approval by various
national and local agencies of China’s government. Because of the changes
occurring in China’s legal and regulatory structure, we may not be able to
secure the requisite governmental approval for our activities. Although we have
obtained all required governmental approval to operate our business as currently
conducted, to the extent we are unable to maintain required governmental
approvals, the Chinese government may, in its sole
discretion  prohibit us from conducting our business.





The
Chinese legal system is based on written statutes, and prior court decisions may
be cited for reference, but have limited precedential value. Since 1979, a
series of new Chinese laws and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. Since the
Chinese legal system continues to rapidly evolve, the interpretations of many
laws, regulations and rules are not always uniform and enforcement of these
laws, regulations and rules involve uncertainties, which may limit legal
protections available to you and us.





Investors
may not be able to serve process or enforce judgments on us or our related
parties





Some of
our directors, including our agent for service of process, are residents of
China and not of the United States, and substantially all the assets of these
Chinese persons are located outside the United States. As a result, it could be
difficult for investors to effect service of process in the United States or to
enforce a judgment obtained in the United States against our Chinese officers,
directors and other related parties. There is also uncertainty as to whether the
courts in China would enforce judgments of United States courts against us or
our directors and officers based on the civil liabilities provisions of the
securities laws of the United States or any other state, or adjudicate an
original action brought in China based upon the securities laws of the United
States or any other state.





The
contractual arrangements entered into between our Chinese VIE’s or between us
and one of our Chinese VIE’s entities may be subject to audit or challenge by
the Chinese tax authorities. A finding that we owe additional taxes could
substantially reduce our net earnings and the value of your
investment





Under
Chinese laws and regulations, arrangements and transactions among affiliated
parties may be subject to audit or challenge by the Chinese tax authorities. We
could face material and adverse tax and financial consequences if the Chinese
tax authorities determine that the contractual arrangements between our Chinese
VIE’s or between us and one of our Chinese VIE’s or those arrangements entered
into between us or one of our Chinese VIE’s and an entity affiliated with us do
not represent arm’s-length prices. As a result of such a determination, the
Chinese tax authorities could adjust any of the income in the form of a transfer
pricing adjustment. A transfer pricing adjustment could, among other things,
result in a reduction of expense deductions for Chinese tax purposes recorded by
us or our Chinese VIE’s or an increase in taxable income, all of which could
increase our tax liabilities. In addition, the Chinese tax authorities may
impose late payment fees and other penalties on us or our Chinese VIE’s for
under-paid taxes.





All
of our revenues are generated through Xingyuan, and we rely on payments made by
Xingyuan to Fusheng, our subsidiary, pursuant to contractual arrangements to
transfer any such revenues to Fusheng. Any restriction on such payments and any
increase in the amount of PRC taxes applicable to such payments may materially
and adversely affect our business and our ability to pay dividends to our
shareholders





We
conduct substantially all of our operations through Xingyuan, which generates
all of our revenues. Fusheng, our subsidiary in China, entered into a number of
contracts with Xingyuan, pursuant to which Xingyuan pays Fusheng for certain
services that Fusheng provides to Xingyuan. However, depending on the nature of
services provided, certain of these payments are subject to PRC taxes at
different rates, including business taxes and VATs, which effectively reduce the
amount that Fusheng receives from Xingyuan. We cannot assure you that the PRC
government will not impose restrictions on such payments or change the tax rates
applicable to such payments. Any such restrictions on such payment or increases
in the applicable tax rates may materially and adversely affect our ability to
receive payments from Xingyuan or the amount of such payments, and may in turn
materially and adversely affect our business, our net income and our ability to
pay dividends to our shareholders.


19


The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities





The
Chinese government has exercised and continues to exercise substantial control
over virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land-use-rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. The central or local governments
of the jurisdictions in which we operate may impose new, stricter regulations or
interpretations of existing regulations that would require additional
expenditures and efforts on our part to ensure our compliance with such
regulations or interpretations. Accordingly, government actions in the future,
including any decision not to continue to support China’s economic reforms and
to return to a more centrally planned economy or regional or local variations in
the implementation of economic policies, could have a significant effect on
economic conditions in China or particular regions thereof and could require us
to divest ourselves of any interest we then hold in Chinese properties or joint
ventures.





Under
the terms of the Circular No. 698, recently promulgated by the PRC State
Administration of Taxation, a future sale or transfer of Goodwill Rich’s
securities may subject us to tax liability and filing requirements in the
PRC.





On
December 11, 2009, the PRC State Administration of Taxation (‘‘SAT’’) issued
Circular No. 698 (the “Circular”), entitled Notice on Strengthening the
Management of Enterprise Income Tax Collection of Proceeds from Equity Transfers
by Non-resident Enterprises, indicating SAT’s intention to target off-shore
transactions involving the indirect transfer of Chinese enterprises. Under the
Circular, a sale of securities of an offshore entity may give rise to a tax
liability in the PRC for the Chinese resident proposing the sale if SAT were to
treat the transaction as a transfer of a PRC resident enterprise by a
non-resident enterprise and that such offshore entity had no reasonable business
purpose. Although the Circular does not contain any guidance on the precise
meaning of the term ‘‘reasonable business purpose,’’ Article 120 of the
Implementing Regulations of the Enterprise Income Tax Law defines the expression
‘‘not having a reasonable business purpose’’ as an activity for the purpose of
reducing, avoiding or deferring the payment of taxes. If we were to transfer all
or some of our securities holdings in Goodwill Rich and the SAT were to
determine that Goodwill Rich had no reasonable business purpose, the PRC tax
authorities, on approval of the SAT, may re-characterize the transaction,
causing the existence of Goodwill Rich to be ignored, thus, treating the
proposed transfer as a transfer by us of our wholly-owned onshore subsidiary,
Dalian Fusheng. In such a circumstance, we would be required to make certain
disclosures and tax filings with the appropriate Chinese tax authorities within
seven days commencing from the agreed date of the share transfer, or from the
date when we actually received the purchase price paid prior to the agreed
transfer date. In addition to the tax liability, we may be required to provide
SAT with various information, including documentation with respect to the
relationship between us and Goodwill Rich, the business purpose of Goodwill
Rich, and financial information of Goodwill Rich and our Company.





The
Circular is a notice issued by SAT, and, as such, does not have the legal effect
of a rule or regulation. Although, under the PRC laws, SAT already had the legal
authority to enforce the tax, it is not being enforced by SAT and tax forms to
be filed by the PRC target enterprise in connection with a proposed transfer are
not specified. SAT will need to provide additional rules and regulations to
outline and clarify the application of the Circular. Therefore, based on the
limited and imprecise nature of the regulatory interpretations, it is difficult
for us to assess the likelihood, effect upon our operations, if any, and the
extent of any tax liability in the event we determined to sell or otherwise
dispose of any of the securities of our Goodwill Rich.





The
scope of our business license in China is limited, and we may not expand or
continue our business without government approval and renewal,
respectively





Xingyuan
is our principal operating Variable Interest Entity, and Fusheng is a wholly
foreign-owned enterprise, commonly known as a WFOE. A WFOE can only conduct
business within its approved business scope, which ultimately appears on its
business license. The scope of its business license includes consulting services
in corporate, investment and corporate marketing areas as well as in commercial
marketing. Any amendment or expansion to the scope of its business requires
further application and government approval. Any changes to the scope of
business license require application and review with the regulatory authorities.
In the event such approval is not granted, our business may be adversely
affected. Currently, Xingyuan and its subsidiaries maintain all necessary
permits and approvals to carry out its business plan and, therefore, the scope
of Fusheng’s business license has no practical limitation on the scope of
business engaged in by Xingyuan or its respective subsidiaries. We cannot assure
investors that Xingyuan will be able to obtain the necessary government approval
for any change or expansion of its business.


20


We
may be subject to fines and legal sanctions imposed by SAFE or other Chinese
government authorities if we or our Chinese employees fail to comply with recent
Chinese regulations relating to employee share options or shares granted by
offshore special purpose companies or offshore listed companies to Chinese
citizens





On
December 25, 2006, the People’s Bank of China, or PBOC, issued the
Administration Measures on Individual Foreign Exchange Control, and the
corresponding Implementation Rules were issued by the PRC State Administration
of Foreign Exchange, or ‘‘SAFE,’’ on January 5, 2007. Both of these regulations
became effective on February 1, 2007. According to these regulations, all
foreign exchange matters relating to employee stock holding plans, share option
plans or similar plans with PRC citizens’ participation require approval from
the SAFE or its authorized branch. On March 28, 2007, the SAFE issued the
Application Procedure of Foreign Exchange Administration for Domestic
Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of
Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule,
Chinese citizens who are granted share options or shares by an offshore listed
company are required, through a Chinese agent or Chinese subsidiary of the
offshore listed company, to register with the SAFE and complete certain other
procedures. We and our Chinese employees who may be granted share options or
shares will be subject to the Stock Option Rule when we become an offshore
listed company. If we or our Chinese employees fail to comply with these
regulations, we or our Chinese employees may be subject to fines or other legal
sanctions imposed by the SAFE or other Chinese government
authorities.





Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could restrict or limit our ability to
operate, including our ability to pay dividends. Our failure to obtain the prior
approval of the China Securities Regulatory Commission, or the CSRC, for any
offering and the listing and trading of our common stock could have a material
adverse effect on our business, operating results, reputation and trading price
of our common stock





The SAFE
issued a public notice in November 2005, known as Circular 75, concerning the
use of offshore holding companies in mergers and acquisitions in China. The
public notice provides that if an offshore company controlled by PRC residents
intends to acquire a PRC company, such acquisition will be subject to
registration with the relevant foreign exchange authorities. The public notice
also suggests that registration with the relevant foreign exchange authorities
is required for any sale or transfer by the PRC residents of shares in an
offshore holding company that owns an onshore company. The PRC residents must
each submit a registration form to the local SAFE branch with respect to their
ownership interests in the offshore company, and must also file an amendment to
such registration if the offshore company experiences material events, such as
changes in the share capital, share transfer, mergers and acquisitions, spin-off
transactions or use of assets in China to guarantee offshore obligations. If any
PRC resident stockholder of an offshore holding company fails to make the
required SAFE registration and amended registration, the onshore PRC
subsidiaries of that offshore company may be prohibited from distributing their
profits and the proceeds from any reduction in capital, share transfer or
liquidation to the offshore entity. Failure to comply with the SAFE registration
and amendment requirements described above could result in liability under PRC
laws for evasion of applicable foreign exchange restrictions. Because of
uncertainty in how the SAFE notice will be interpreted and enforced, we cannot
be sure how it will affect our business operations or future plans. For example,
Fusheng’s ability to conduct foreign exchange activities, such as the remittance
of dividends and foreign currency denominated borrowings, may be subject to
compliance with the SAFE notice by our PRC resident beneficial holders. Failure
by our PRC resident beneficial holders could subject these PRC resident
beneficial holders to fines or legal sanctions, restrict our overseas or
cross-border investment activities, limit Xingyuan’s ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.





On August
8, 2006, the PRC Ministry of Commerce (“MOFCOM”), joined by the State-owned
Assets Supervision and Administration Commission of the State Council, the State
Administration of Taxation, the State Administration for Industry and Commerce,
the China Securities Regulatory Commission and the SAFE, released a
substantially amended version of the Provisions for Foreign Investors to Merge
with or Acquire Domestic Enterprises (the “Revised M&A Regulations”), which
took effect September 8, 2006. These new rules significantly revised China’s
regulatory framework governing onshore-to-offshore restructurings and foreign
acquisitions of domestic enterprises. These new rules signify greater PRC
government attention to cross-border merger, acquisition and other investment
activities, by confirming MOFCOM as a key regulator for issues related to
mergers and acquisitions in China and requiring MOFCOM approval of a broad range
of merger, acquisition and investment transactions. Further, the new rules
establish reporting requirements for acquisition of control by foreigners of
companies in key industries, and reinforce the ability of the Chinese government
to monitor and prohibit foreign control transactions in key industries. Among
other things, the revised M&A Regulations include new provisions that
purport to require that an offshore special purpose vehicle, or SPV, formed for
listing purposes and controlled directly or indirectly by PRC companies or
individuals must obtain the approval of the CSRC prior to the listing and
trading of such SPV’s securities on an overseas stock exchange. On September 21,
2006, the CSRC published on its official website procedures specifying documents
and materials required to be submitted to it by SPVs seeking CSRC approval of
their overseas listings. However, the application of this PRC regulation remains
unclear with no consensus currently existing among the leading PRC law firms
regarding the scope and applicability of the CSRC approval requirement. If the
CSRC or another PRC regulatory agency subsequently determines that CSRC approval
was required, we may face regulatory actions or other sanctions from the CSRC or
other PRC regulatory agencies. These regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, delay or restrict the repatriation of the proceeds from an offering of
securities into the PRC, or take other actions that could have a material
adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our common stock. The
CSRC or other PRC regulatory agencies also may take actions requiring us, or
making it advisable for us, to halt any offering before settlement and delivery
of the securities offered. Consequently, if investors engage in market trading
or other activities in anticipation of and prior to settlement and delivery,
they do so at the risk that settlement and delivery may not occur. Also, if
later the CSRC requires that we obtain its approval, we may be unable to obtain
a waiver of the CSRC approval requirements, if and when procedures are
established to obtain such a waiver. Any uncertainties and/or negative publicity
regarding this CSRC approval requirement could have a material adverse effect on
the trading price of our common stock. Furthermore, published news reports in
China recently indicated that the CSRC may have curtailed or suspended overseas
listings for Chinese private companies. These news reports have created further
uncertainty regarding the approach that the CSRC and other PRC regulators may
take with respect to us. It is uncertain how our business operations or future
strategy will be affected by the interpretations and implementation of Circular
75 and the Revised M&A Regulations. It is anticipated that application of
the new rules will be subject to significant administrative interpretation, and
we will need to closely monitor how MOFCOM and other ministries apply the rules
to ensure that our domestic and offshore activities continue to comply with PRC
law. Given the uncertainties regarding interpretation and application of the new
rules, we may need to expend significant time and resources to maintain
compliance.


21


SAFE
rules and regulations may limit our ability to transfer the proceeds from future
capital raising and other similar activities to Xingyuan, our VIE in the PRC,
which may adversely affect the business expansion of Xingyuan





On August
29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a
foreign invested company of foreign currency into Renminbi by restricting how
the converted Renminbi may be used. The notice requires that the registered
capital of a foreign-invested company settled in Renminbi converted from foreign
currencies may only be used for purposes within the business scope approved by
the applicable governmental authority and may not be used for equity investments
within the PRC. In addition, SAFE strengthened its oversight of the flow and use
of the registered capital of a foreign-invested company settled in Renminbi
converted from foreign currencies. The use of such Renminbi capital may not be
changed without SAFE’s approval, and may not in any case be used to repay
Renminbi loans if the proceeds of such loans have not been used. Violations of
Circular 142 will result in severe penalties, such as heavy fines. As a result,
Circular 142 may adversely affect the business expansion of
Xingyuan.





The
foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
affect our financial condition





To the
extent that we need to convert U.S. Dollars into Renminbi for our operational
needs, our financial position and the price of our common stock may be adversely
affected should the Renminbi appreciate against the U.S. Dollar at that time.
Conversely, if we decide to convert our Renminbi into U.S. Dollars for the
operational needs or paying dividends on our common stock, the dollar equivalent
of our earnings from our VIE’s in China would be reduced should the dollar
appreciate against the Renminbi. Until 1994, the Renminbi experienced a gradual
but significant devaluation against most major currencies, including dollars,
and there was a significant devaluation of the Renminbi on January 1, 1994 in
connection with the replacement of the dual exchange rate system with a unified
managed floating rate foreign exchange system. Since 1994, the value of the
Renminbi relative to the U.S. Dollar has remained stable and has appreciated
slightly against the U.S. Dollar. Countries, including the United States, have
argued that the Renminbi is artificially undervalued due to China’s current
monetary policies and have pressured China to allow the Renminbi to float freely
in world markets. In July 2005, the PRC government changed its policy of pegging
the value of the Renminbi to the dollar. Under the new policy the Renminbi is
permitted to fluctuate within a narrow and managed band against a basket of
designated foreign currencies. While the international reaction to the Renminbi
revaluation has generally been positive, there remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in further and more significant appreciation of the Renminbi
against the dollar.





Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by Chinese exchange control
regulations that restrict our ability to convert Renminbi into foreign
currencies.


22


Governmental
control of currency conversion may affect the value of your
investment





The PRC
government imposes controls on the convertibility of the Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive the majority of our revenues in Renminbi. Shortages in the availability
of foreign currency may restrict the ability of our affiliated entities to remit
sufficient foreign currency to pay dividends or other payments to us, or
otherwise satisfy its 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 Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies. 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, if any, in foreign currencies to our
shareholders.





Inflation
in the PRC could negatively affect our profitability and growth





While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. During the past decade, the rate of inflation in China has been as
high as approximately 20% and China has experienced deflation as low as
approximately minus 2%. If prices for our products and services rise at a rate
that is insufficient to compensate for the rise in the costs of supplies such as
raw materials, it may have an adverse effect on our profitability. In order to
control inflation in the past, the PRC government has imposed controls on bank
credits, limits on loans for fixed assets and restrictions on state bank
lending. The implementation of such policies may impede economic growth. In
October 2004, the People’s Bank of China, the PRC’s central bank, raised
interest rates for the first time in nearly a decade and indicated in a
statement that the measure was prompted by inflationary concerns in the Chinese
economy. In April 2006, the People’s Bank of China raised the interest rate
again. Repeated rises in interest rates by the central bank would likely slow
economic activity in China which could, in turn, materially increase our costs
and also reduce demand for our products and services. On March 18, 2008, China’s
central bank, the People’s Bank of China, announced that the bank reserve ratio
would rise half of a percentage point to 15.5% effective March 25, 2008 in an
effort to reduce inflation pressures hours after Premier Wen Jiabao highlighted
inflation as a major concern for the government. China’s consumer price index
growth rate reached 8.7% year over year in 2008.





Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences





As our
ultimate holding company is a Delaware corporation, we are subject to the United
States Foreign Corrupt Practices Act, which generally prohibits United States
companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Foreign companies,
including some that may compete with us, are not subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices
may occur from time-to-time in the PRC. We can make no assurance, however, that
our employees or other agents will not engage in such conduct for which we might
be held responsible. If our employees or other agents are found to have engaged
in such practices, we could suffer severe penalties and other consequences that
may have a material adverse effect on our business, financial condition and
results of operations.





If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with the State Administration of Foreign Exchange of the
PRC, or SAFE. We may also face regulatory uncertainties that could restrict our
ability to adopt an equity compensation plan for our directors and employees and
other parties under PRC law





On April
6, 2007, SAFE issued the ‘‘Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also know as ‘‘Circular 78.’’ It is not
clear whether Circular 78 covers all forms of equity compensation plans or only
those which provide for the granting of stock options. For any plans which are
so covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the plan. In
addition, Circular 78 also requires PRC citizens to register with SAFE and make
the necessary applications and filings if they participated in an overseas
listed company’s covered equity compensation plan prior to April 6, 2007. We
intend to adopt an equity compensation plan in the future and make option grants
to our officers and directors, most of who are PRC citizens. Circular 78 may
require our officers and directors who receive option grants and are PRC
citizens to register with SAFE. We believe that the registration and approval
requirements contemplated in Circular 78 will be burdensome and time consuming.
If it is determined that any of our equity compensation plans are subject to
Circular 78, failure to comply with such provisions may subject us and
participants of our equity incentive plan who are PRC citizens to fines and
legal sanctions and prevent us from being able to grant equity compensation to
our PRC employees. In that case, our ability to compensate our employees and
directors through equity compensation would be hindered and our business
operations may be adversely affected.


23


Any
recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another
widespread public health problem, in the PRC could adversely affect our
operations





A renewed
outbreak of SARS, Avian Flu or another widespread public health problem in
China, where all of our manufacturing facilities are located and where all of
our sales occur, could have a negative effect on our operations. Our business is
dependent upon our ability to continue to manufacture products. Such an outbreak
could have an impact on our operations as a result of:





•
            quarantines
      or closures of some of our manufacturing facilities, which would severely
      disrupt our operations,


•
            the
      sickness or death of our key officers and employees,
  and


•
            a
      general slowdown in the Chinese
economy.





Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.





Adverse
changes in political and economic policies of the PRC government could have a
material and adverse effect on the overall economic growth of China, which could
reduce the demand for our products





Most of
our business operations are conducted in China and most of our revenues are
generated in China. Accordingly, our business, financial condition, results of
operations and prospects are affected significantly by economic, political and
legal developments in China. The Chinese economy differs from the economies of
most developed countries in many respects, including the amount of government
involvement, the level of development, the growth rate, the control of foreign
exchange, and the allocation of resources.





While the
Chinese economy has grown significantly in the past 30 years, the growth has
been uneven geographically among various sectors of the economy, and during
different periods. We cannot assure you that the Chinese economy will continue
to grow, or that if there is growth, such growth will be steady and uniform, or
that if there is a slowdown, such slowdown will not have a negative effect on
our business. For example, the Chinese economy experienced high inflation in the
second half of 2007 and the first half of 2008. China’s consumer price index
soared 7.9% during the six months ended June 30, 2008 as compared to the same
period in 2007. To combat inflation and prevent the economy from overheating,
the PRC government adopted a number of tightening macroeconomic measures and
monetary policies, including increasing interest rates, raising statutory
reserve rates for banks and controlling bank lending to certain industries or
economic sectors. However, due in part to the impact of the global crisis in
financial services and credit markets and other factors, the growth rate of
China’s gross domestic product has decreased to 6.8% in the fourth quarter of
2008, down from 11.9% reached in the second quarter of 2007. As a result,
beginning in September 2008, among other measures, the PRC government began to
loosen macroeconomic measures and monetary policies by reducing interest rates
and decreasing the statutory reserve rates for banks. In addition, in November
2008 the PRC government announced an economic stimulus package in the amount of
$586 billion. We cannot assure you that the various macroeconomic measures,
monetary policies and economic stimulus package adopted by the PRC government to
guide economic growth and the allocation of resources will be effective in
sustaining the fast growth rate of the Chinese economy. In addition, such
measures, even if they benefit the overall Chinese economy in the long-term, may
adversely affect us.





A
downturn in the economy of the PRC may slow our growth and
profitability





The
Chinese economy has grown at an approximately 9% annual rate for more than 25
years, making it the fastest growing major economy in recorded history. In 2007,
China’s economy grew by 11.4%, the fastest pace in 11 years, according to the
National Bureau of Statistics. We cannot assure you that growth of the Chinese
economy will be steady, that inflation will be controllable or that any slowdown
in the economy or uncontrolled inflation will not have a negative effect on our
business. Several years ago, the Chinese economy experienced deflation, which
may recur in the future. More recently, the Chinese government announced its
intention to continuously use macroeconomic tools and regulations to slow the
rate of growth of the Chinese economy, the results of which are difficult to
predict. Adverse changes in the Chinese economy will likely impact the financial
performance of a variety of industries in China that use or would be candidates
to use our products. If such adverse changes were to occur, our customers and
potential customers could reduce spending on our products and
services.


24


Contract
drafting, interpretation and enforcement in China involves significant
uncertainty





We have
entered into numerous contracts governed by PRC law, many of which are material
to our business. As compared with contracts in the United States, contracts
governed by PRC law tend to contain less detail and are not as comprehensive in
defining contracting parties’ rights and obligations. As a result, contracts in
China are more vulnerable to disputes and legal challenges. In addition,
contract interpretation and enforcement in China is not as developed as in the
United States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be subject to
disputes under our material contracts, and if such disputes arise, we cannot
assure you that we will prevail.





Because
our business is located in the PRC, we may have difficulty establishing adequate
management, legal and financial controls, which it is required to do in order to
comply with U.S. securities laws





PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. Most of our middle and top management staff are not educated and
trained in the Western system, and we may have difficulty hiring new employees
in the PRC with such training. In addition, we may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the PRC. As a
result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards. Therefore, we may,
in turn, experience difficulties in implementing and maintaining adequate
internal controls as required under Section 404 of the Sarbanes-Oxley Act of
2002. This may result in significant deficiencies or material weaknesses in our
internal controls which could impact the reliability of our financial statements
and prevent us from complying with SEC rules and regulations and the
requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies,
weaknesses or lack of compliance could have a materially adverse effect on our
business.





Item 1b.
            Unresolved
      Staff Comments





None.





Item 2.
            Properties





Under
Chinese law, all of the land in China is either state-owned or
collectively-owned, depending on its location and the specific laws governing
such land. Collectively-owned land is owned by rural collectives and generally
cannot be used for non-agricultural purposes unless approved by the Chinese
government. Collectively-owned land cannot be transferred, leased or mortgaged
to non-collectives without first being converted into state-owned land.
Individuals and entities may acquire rights to use state-owned land, or land use
rights, for commercial, industrial or residential purposes by means of mutual
agreement, tender, auction or listing for sale from local land authorities or an
existing holder of a land-use-right. Land-use-rights granted for commercial,
industrial and residential purposes may be granted for a period of up to 40, 50
or 70 years, respectively. This period may be renewed at the expiration of the
initial and any subsequent terms, subject to compliance with relevant laws and
regulations. Land-use rights are transferable and may be used as security for
borrowings and other obligations.





Our
executive offices are located at Unit C, No. 68 West Binhai Road, Xigang
District Dalian, People’s Republic of China. We lease the premise at the rate of
approximately $89,000 per annum; the lease term expires January 5, 2011. Our
production, blending and storage facilities are located at China National
Petroleum Corporation’s Dalian Branch in Liaoning Province, Dalian Ganjinzi
District Shanzhong Street and Panjin Liaohe Petroleum Corporation’s Panjin
branch also in Liaoning Province Panjin Xinglongtai District Gong Street. Our
leased facilities, in the aggregate, represent approximately 22,100 cubic meters
of storage facilities, and approximately 460,000 tons of berth facilities as set
forth in the following list of our leased facilities in various geographical
locations as of December 31, 2009:





Type
      of Leased Facility
                  
                  Capacity
                  
                  
                  Monthly
      Rent
                  
                  
                  #
      of Units
                  
                  LocationOil
      Blending & Storage Tanks
                  
                  
                  10,000
      c/m
                  
                  
                  $
                  17,518
                  
                  
                  
                  1
                  
                  Liaoning-DalianOil
      Blending & Storage Tanks
                  
                  
                  2,000
      c/m
                  
                  
                  $
                  17,518
                  
                  
                  
                  2
                  
                  Liaoning-DalianOil
      Blending & Storage Tanks
                  
                  
                  1,000
      c/m
                  
                  
                  $
                  17,518
                  
                  
                  
                  3
                  
                  Liaoning-DalianBerth
      Facilities
                  
                  
                  50,000-80,000 tons
                  
                  
                  $
                  12,165
                  
                  
                  
                  9
                  
                  Liaoning-DalianOil
      Blending & Storage Tanks
                  
                  
                  2,400
      c/m
                  
                  
                  $
                  18,300
                  
                  
                  
                  1
                  
                  Liaoning-PanjinOil
      Blending & Storage Tanks
                  
                  
                  2,700
      c/m
                  
                  
                  $
                  18,300
                  
                  
                  
                  1
                  
                  Liaoning-PanjinBerth
      Facilities
                  
                  
                  2,500
      tons
                  
                  
                  $
                  18,300
                  
                  
                  
                  4
                  
                  Liaoning-Panjin


25


Our owned
facilities, in the aggregate, represent approximately 23,800 cubic meters of
storage facilities, and approximately 1,500 tons of berth facilities as set
forth in the following list of our leased facilities in various geographical
locations as of December 31, 2009:





Type
      of Owned Facility
                  
                  Capacity
                  
                  
                  #
      of Units
                  
                  LocationStorage
      Tank
                  
                  
                  1,500
      c/m
                  
                  
                  
                  4
                  
                  Shandong-RongchengOil
      Blending & Storage Tank
                  
                  
                  2,000
      c/m
                  
                  
                  
                  4
                  
                  Liaoning-DonggangBerth
      Facilities
                  
                  
                  500 tons
                  
                  
                  
                  1
                  
                  Liaoning-DonggangOil
      Blending & Storage Tanks
                  
                  
                  2,000
      c/m
                  
                  
                  
                  1
                  
                  Zhejiang-ShifpuOil
      Blending & Storage Tanks
                  
                  
                  1,000
      c/m
                  
                  
                  
                  2
                  
                  Zhejiang-ShifpuOil
      Blending & Storage Tanks
                  
                  
                  600 tons
                  
                  
                  
                  3
                  
                  Zhejiang-ShifpuBerth
      Facilities
                  
                  
                  1,000
      tons
                  
                  
                  
                  1
                  
                  Zhejiang-Shifpu





Our oil
tanks are mainly located in three regions as follows:





•           
Donggang - The reserve
capacity of every one of the four oil tanks located in Donggang Liaoning
Province is 2000 cubic meters (cm). The oil tanks are used for storage, delivery
and blending of nonstandard diesel, standard diesel and #3 marine fuel. The
capacity of fuel turnover per year can be as high as 200,000 tons. The location
of oil tanks in Donggang is near Xingyuan’s berth, which is also owned by the
Company, and the oil can be transported to the vessels at the berth through
underground pipelines.





•           Xinfa - The reserve capacity
of every one of the four oil tanks located in Shidao, Shandong Province is 1,500
cm. The oil tanks are applied for storage and delivery of #3 and #4 marine fuel.
The capacity of fuel turnover per year is up to 150,000 tons. The location of
oil tanks in Xinfa is near Xingyuan’s berth, which is also owned by the Company,
and the fuel can be transported to the vessels at the berth through underground
pipelines.





•           Nanlian - there are six oil
tanks located in Nanlian, including one with the reserve capacity of 2000 cm,
two with the reserve capacity of 1000 cm and three with the reserve capacity of
600 cm. The oil tanks are applied for storage, delivery and blending of
nonstandard diesel. The capacity of fuel turnover per year is approximately
150,000 tons. The location of oil tanks in Nanlian is near Xingyuan’s berth,
owned by the Company and the marine fuel can be transported to the vessels at
the berth through underground pipelines.





As of
December 31, 2009, we had one oil tanker at our disposal, named Xingyuan No.1,
which is used for the transportation and re-fueling at sea purposes. The tanker
has the maximum carrying capacity of 500 tons.





Item
3.                   Legal
Proceedings





Except as
set forth below, there are no material legal proceedings, regulatory inquiries
or investigations pending or threatened against us.





In
January 2008, our operating company, Dalian Xingyuan, also obtained a judgment
in its favor in the sales contract dispute at the trial court level against
Yantai Development Zone Fuchang Bunker Co., Ltd. (“Fuchang”). Under this
judgment for specific performance, Fuchang is required to deliver approximately
163 tons of marine fuel to Dalian Xingyuan within 20 days following the court
decision or to pay to Dalian Xingyuan a restitution amount of RMB791,473 plus
the legal expenses of the lawsuit of approximately RMB16,510. In May 2008, our
operating entity, Dalian Xingyuan, obtained a judgment in a contractual dispute
in its favor against Dalian Dafangshen Ocean Fishery Co., Ltd. (“Dafangshen”) in
the amount of RMB1,431,487 and the penalty of approximately RMB1,000,000.
Dafangshen did not appeal the judgment and, therefore, we intend to collect on
this judgment to the full extent permissible under the PRC law.


26


In June
2008, in a separate joint-cooperation contract dispute by and between Dalian
Xingyuan and Fuchang, Fuchang obtained a judgment against Dalian Xingyuan
following a trial in the amount of RMB1,000,000. On August 15, 2009, the
people’s court of first instance formed a new collegial panel and rendered its
judgment in favor of Dalian Xingyuan, as a result of which judgment Dalian
Xingyuan will not be required to pay the RMB1,000,000 penalty to
Fuchang.  Fuchang has appealed the verdict and lost on the appeal with
the people’s court, thereby exhausting all of its appeals in this matter. Dalian
Xingyuan is in the process of enforcing and collecting upon the judgment in this
matter.


Item
4.                     Submission
of Matters to a Vote of Security Holders





No
matters were submitted to a vote of security holders during the fourth quarter
of 2009.


27


Part
II





Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities





Market
Information





Following
the completion of the initial public offering of the Company’s securities in
January 2010, shares of the Company’s common stock commenced public trading on
the Nasdaq Global Market on January 26, 2010 under the trading symbol “AMCF”.
The market for our common stock is limited and volatile. Continental Stock
Transfer and Trust Company is the transfer agent and registrar for our common
stock.  On February 19, 2010, the closing bid price of the Company’s
securities was $6.00 per share.





Holders





We had
approximately 610 stockholders of record as of February 22, 2010.





Dividends





We have
not declared or paid any cash dividends on our common stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future. We
currently expect to retain future earnings, if any, for the development of our
business. Dividends may be paid on our common stock only if and when declared by
our Board and will depend on a number of factors, including but not limited to,
future operating results, capital requirements, financial condition and the
terms of any credit facility or other financing arrangements we may obtain or
enter into, future prospects and any other factors our Board may deem relevant
at the time such payment is considered.




Recent
Sales of Unregistered Securities





Except as
set forth below, we have not issued any unregistered securities in the last
three years.





In August
2009, we entered into a Share Exchange Agreement (“Exchange Agreement”) with all
of the shareholders of Goodwill Rich International Limited, a Hong Kong company
(“Goodwill”). Pursuant to the Exchange Agreement, we agreed to issue 8,000,000
shares of our common stock in exchange for all of the issued and outstanding
securities of Goodwill (“Share Exchange”). The Goodwill shareholders included
Star Blessing Enterprise (“SBE”), a company organized under the laws of the
British Virgin Islands, (i) Growing Sincere Limited (“GSL”) a company organized
under the laws of the British Virgin Islands, (ii) White Bright Limited (“WBL”),
a company organized under the laws of the British Virgin Islands, and (iii)
Shining Joy Group Limited (“SJG”) a company organized under the laws of the
British Virgin Islands. Prior to the Share Exchange, SBE, GSL, WBL and SJG
beneficially owned 89.04%, 4%, 3% and 3.96% of equity securities in Goodwill,
respectively. The Exchange Agreement closed on October 16, 2009. Upon the
closing of the Share Exchange, we (i) became the 100% parent of Goodwill, and
its wholly-owned subsidiary, Dalian Fusheng Consulting Co., Ltd., and (ii)
assumed the operations of Goodwill and its subsidiaries.





The
securities were offered and issued to the Goodwill shareholders and their
designees in reliance upon exemptions from registration pursuant to (i)
Regulation S of the Securities Act, and (ii) Section 4(2) under the Securities
Act, and Rule 506 promulgated thereunder. We complied with the conditions of
Rule 903 as promulgated under the Securities Act including, but not limited to,
the following: (i) subscriber is a non-U.S. resident and has not offered or sold
their shares in accordance with the provisions of Regulation S; (ii) an
appropriate legend was affixed to the securities issued in accordance with
Regulation S; (iii) subscriber has represented that it was not acquiring the
securities for the account or benefit of a U.S. person; and (iv) subscriber
agreed to resell the securities only in accordance with the provisions of
Regulation S, pursuant to a registration statement under the Securities Act, or
pursuant to an available exemption from registration. We will refuse to register
any transfer of the shares not made in accordance with Regulation S, after
registration, or under an exemption.


28


Use
of Proceeds from Registered Securities





Our
initial public offering of up to 2,500,000 shares of our common stock was
effected through a Registration Statement on Form S-1 (SEC File No. 333-161577)
that was declared effective by the Securities and Exchange Commission on January
25, 2010. On January 26, 2010, we filed another Registration Statement on Form
S-1 pursuant to the SEC Rule 462(b) (SEC File No. 333-164526) to register the
increase in the size of the offering to up to 3,134,921 shares of common stock.
Our public offering commenced on January 26, 2010 and terminated on January 27,
2010 after the sale of all securities registered. Rodman & Renshaw, LLC and
Newbridge Securities Corporation acted as managing underwriters in the offering.
All 3,134,921 shares of common stock were sold at the initial public offering
price of $6.30 per share, which resulted in an aggregate offering amount of
$19,750,002. In connection with the IPO, we paid $1,185,000 in underwriting
discount and $395,000 in non-accountable expense allowance to the underwriters.
Net proceeds of the IPO to the Company following the offering expenses were
approximately $17,739,002.





As of the
date of this report, we do not anticipate any significant variance in the use of
net proceeds as disclosed in the final prospectus dated January 26, 2010, which
included expenditures for sales marketing, research & development, capital
improvement, potential acquisitions and working capital purposes.To
date, we have expended approximately $3.8 million.  We did not pay any
of the net proceeds of the IPO directly or indirectly to any director, officer,
or persons owning 10 percent or more of our stock or affiliate of our
Company.





Purchases
of Equity Securities by the Issuer and Affiliated Purchasers





None.





Item
6.                    Selected
Financial Data





As a
smaller reporting issuer (as defined in Item 10(f)(1) of Regulation S-K), the
Company is not required to report selected financial data specified in Item 301
of Regulation S-K.


29


Item
7.                   Management’s
Discussion and Analysis of Financial Condition and Results of
Operations


You should read the following
discussion and analysis of our financial condition and results of operations in
conjunction with our combined and consolidated financial statements and the
related notes included elsewhere in this Annual Report on Form 10-Ks. The
discussion in this section contains forward-looking statements that involve
risks and uncertainties. As a result of various factors, including those set
forth under “Risk Factors” and elsewhere in this report, our actual future
results may be materially different from what we expect.
  Overview
  We carry
out all of our business through our Hong Kong subsidiary, Goodwill, its
wholly-owned Chinese subsidiary, Fusheng, and Fusheng’s variable interest entity
(VIE), Xingyuan, and Xingyuan’s subsidiaries (Xingyuan and its subsidiaries
being collectively referred to as the VIE entities). A VIE is an entity under
FASB Interpretation No. 46R (“Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51”) where equity investors do not have the
characteristics of a controlling financial interest (see Note 1 of Notes to
Combined and Consolidated Financial Statements). Through Xingyuan, we are a
leading marine fuel supplier along the coast of east China. Our products include
cargo vessel fuel classified as CST180 and CST120, fishing boat fuel classified
as #3 and #4, which are close substitutes for diesel used throughout the
region’s fishing industry. As the largest privately owned company engaged in
marine fuel industry in northern China, we hold a market share of approximately
25% in the area of Bohai Bay. We produce, store, distribute and trade the
blended marine fuel oil for cargo and fishing vessels. Backed by core
facilities, including storage tanks, tankers and berths, our sales network
covers major depots along the towns of Dandong, Shidao and Shipu, which are
famous for their fishing tradition and industry.
  Andatee
China Marine Fuel Services Corporation was incorporated in July 2009 under the
laws of the State of Delaware. We were organized as a holding company to acquire
Goodwill Rich, a company incorporated in Hong Kong, and its subsidiary in
connection with a contemplated initial public offering of the Company on the
NASDAQ Capital Market. Goodwill Rich was incorporated on October 28,
2008.
  Andatee
became the owner of 100% of the outstanding common stock of Goodwill Rich as the
result of a share exchange arrangement entered in August 2009 and completed on
October 16, 2009, in which 6,000,000 common share of Andatee were exchanged for
all of the outstanding shares of Goodwill Rich. The stockholders of Andatee and
the stockholders of Goodwill Rich were the same, and therefore the August 2009
share exchange was accounting for as a recapitalization of Goodwill Rich. As a
result, Goodwill is deemed to be the predecessor of Andatee for financial
reporting purposes, and the financial statements of Andatee for the periods
prior to the share exchange as presented here are the historical financial
statements of Goodwill Rich for those periods, after being adjusted to
retroactively reflect the effects of the recapitalization to 6,000,000 issued
and outstanding shares.
  In March
2009, Goodwill Rich established a subsidiary company in Dalian, PRC named Dalian
Fusheng Consulting Company (“Fusheng”).
  Xingyuan
was established in September 2001 with a registered capital of RMB7 million and
began providing refueling services to the marine vessels in Dalian Port in
Dalian City. Xingyuan holds 100% ownership of Donggang Xingyuan, a company
incorporated in Dalian, PRC, in April, 2008. In addition, in December 2008,
Xingyuan acquired 90% ownership of Xinfa and 63% ownership of Nanlian,
respectively (see more details in Note 3 of the Notes to the Combined and
Consolidated Financial Statements).
  30
  On March
26, 2009, Fusheng, Xingyuan and the stockholders of Xingyuan entered into a
series of agreements (the Consulting Services Agreement, the Operating
Agreement, the Equity Pledge Agreement, the Option Agreement and the Proxy and
Voting Agreement). Under these agreements Goodwill Rich obtained the ability to
direct the operations of Xingyuan and its subsidiaries and to obtain the
economic benefit of their operations. Therefore, management determined that
Xingyuan became a variable interest entity (“VIE”) under the provisions of
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 810 (originally issued as FASB Interpretation (“FIN”) No. 46(R)
“Consolidated Variable Interest Entities — an interpretation of ARB No. 51”),
and the Goodwill Rich (and the Company after the October 16, 2009 share exchange
described above) was determined to be the primary beneficiary of Xingyuan and
its subsidiaries. Accordingly, beginning March 26, 2009, Goodwill Rich (and the
Company after the October 16, 2009 share exchange described above) has
consolidated the assets, liabilities, results of operations and cash flows of
Xingyuan and its subsidiaries its financial statements. The agreements between
the Goodwill Rich and Xingyuan were entered into to facilitate raising capital
for the operations of Xingyuan through an offering of the Company’s common stock
on the Nasdaq Capital Market, and Goodwill Rich paid no consideration to
Xingyuan or its stockholders for entering into the agreements under which
Xingyuan became a VIE, provided, however, that Mr. An Fengbin, the principle
stockholder of Xingyuan became the chairman and CEO of the Company, and Mr. An
Fengbin and the other stockholders of Xingyuan  have certain rights or
options to acquire the 6,000,000 shares of the Company’s common stock issued in
the share exchange between the Company and Goodwill Rich at later dates when
permitted by PRC laws and regulations. Mr. An Fengbin remains the principle
stockholder of Xingyuan after the completion of the share exchange between
Goodwill Rich and Andatee described above.
  Upon the October 28, 2008 incorporation
of Goodwill Rich, Goodwill Rich and the stockholders of Xingyuan has entered
into a series of separate agreements under which Goodwill Rich and Xingyuan were
deemed, until March 2009, to be under the common control of the stockholders of
Xingyuan. Those separate agreements provided that the majority stockholder of
Goodwill Rich appointed Mr. An Fengbin to (i) act as a director of Xingyuan,
Xingyuan’s majority stockholder, and Fusheng, (ii) act for the majority
stockholder of Goodwill Rich at any meetings of the directors, managers,
financial controllers or other senior management of Xingyuan, Xingyuan’s
majority stockholder, and Fusheng, (iii) exercise all voting and dispositive
rights over the common stock of Xingyuan, Xingyuan’s majority stockholder, and
Fusheng. The agreements further provided that the majority stockholder of
Xingyuan would not appoint any additional directors to the boards of any of
these entities without Mr. An Fengbin’s approval. As a result, Mr. An Fengbin
was deemed to control Goodwill Rich and Fusheng, and those companies and
Xingyuan were deemed to be under common control.
  All of the transactions between
Andatee, Goodwill Rich, Fusheng and Xingyuan were deemed to be transactions
between companies under common control, and therefore the bases of the assets
and liabilities in each of the companies was not adjusted in any of the
transactions.
  As a
result of the above, our combined and consolidated financial statements
contain:
  •
                through
      October 28, 2008, the assets, liabilities, results of operations and cash
      flows of Xingyuan and its
subsidiaries;
 
 31
  •
                for
      the period from October 28, 2008 to March 26, 2009, the assets,
      liabilities, results of operations and cash flows of Goodwill Rich and its
      subsidiary (adjusted for the effects of the August, 2009 recapitalization
      with Andatee) combined with those of Xingyuan and its subsidiaries;
      and
  •
                for
      the period from March 26, 2009 to June 30, 2009, the assets, liabilities,
      results of operations and cash flows of Goodwill Rich and its subsidiary
      (adjusted for the effects of the August, 2009 recapitalization with
      Andatee) consolidated with those of its VIE, Xingyuan, and its
      subsidiaries.
 Business
Development and Outlook
  Since our
inception in 2001, we have taken several steps to increase investment in
facilities and product line expansion in order to provide our customers with
easier access to our products and services and to build a delivery network
closer to target market. These steps include acquiring additional local
companies and facilities, and development of new products, all aimed at meeting
customer demands in various markets. Historically, we have funded these
activities from our working capital.
  In
December 2008, we entered into an agreement with the shareholder of Xiangshan
Nanlian, which is located in Shipu town, Xiangshan county, Zhejiang Province. We
purchased a 63% ownership stake in Xiangshan Nanlian for a purchase price of
approximately $2.2 million (RMB15.12 million). This acquisition allowed us to
build a stronghold in an important fishing port in southern China. We estimate
the market for marine fuel in Shipu to exceed 300,000 tons per year, which, at
current prices equates to approximately $240 million. We believe that Xiangshan
Nanlian’s presence in the market combined with our blended marine fuel
production capabilities will enable us to increase our market share to
15 – 20% and to continue our expansion through acquisitions of local
market participants and intensified marketing efforts.
  Also in
late December 2008, we entered into an agreement with shareholders of Rongcheng
Xinfa to acquire its 90% ownership stake in the entity for a purchase price of
approximately US$1.45 million (RMB9.9 million). Rongcheng Xinfa engaged in
distribution of marine fuel oil in the surrounding areas of Shidao town,
Rongcheng city, Shandong Province, with heavily concentrated and developed
fishing industry. We currently sell approximately 350,000 tons per year which
represents approximately one third of the market. We intend to expand our
business by enhancing our relationships with our existing customers,
diversifying our products to meet customers’ needs and pursuing the strategy of
acquisitions of local players in the marketplace.
  The
following are material terms of various related agreements with Xinfa and
Nanlian:
  Share Transfer
Agreement — Chen Weiwen, Ke Guoan and Dalian Xingyuan entered
into a Share Transfer Agreement dated December 31, 2008 pursuant to which Dalian
Xingyuan acquired 63% of Xiangshan Yongshinanlian Petroleum Co., Ltd.
(“Xiangshan Nanlian”) in exchange for Dalian Xingyuan’s payment of RMB2,120,000
on January 8, 2009 and its agreement to, before January 25, 2010, either (i) pay
RMB13,000,000 to the account of Xiangshan Nanlian or (ii) send oil product of
equivalent value to Xiangshan Nanlian’s storage facilities. Upon payment by
Dalian Xingyuan of the full consideration for the transfer of ownership
interests, a RMB13 million loan from Baotou Commercial Bank, Ningbo Branch, will
become the debt of Xiangshan Nanlian. Under the terms of the agreement, Chen
Weiwen is in charge of Xiangshan Nanlian’s sales and Dalian Xingyuan is in
charge of purchases. Chen Weiwen has the right to require Dalian Xingyuan to
purchase his 37% ownership interest in Xiangshan Nanlian after the year 2010 for
a purchase price of RMB 8,880,000. In the event the amount of sales under the
agreement are less than 40,000 tons, the payments are distributed to the
shareholders on a pro rata basis in accordance with their respective holdings of
the company. Should the sales be equal or exceed 40,000 tons but less than
50,000 tons, Chen Weiwen’s pro rata portion of the payment is to increase to
40%. Finally, if the sales are equal or exceed 50,000 tons, his pro rata portion
is to increase to 50%. If Dalian Xingyuan fails to comply with such demand
within 30 days, a daily 1% penalty will accrue until the purchase is
consummated.
  32
  Equity Replacement
Agreement — Shandong Xinfa Fishery Group Co., Ltd., Wang
Hongli, Wang Mingli and Dalian Xingyuan entered into an Equity Replacement
Agreement pursuant to which Dalian Xingyuan acquired 90% ownership of Rongcheng
Xinfa Petroleum Company in exchange for Dalian Xingyuan’s issuance of 2,475,000
shares of its common equity, equal to 3.96% ownership of Dalian Xingyuan and a
value of approximately RMB9.9 million. Under the terms of the Equity Replacement
Agreement, Xinfa, Wang Hongli and Wang Mingli, all shareholders of Xinfa, agreed
to transfer certain portions of their respective holdings of Xinfa to Dalian
Xingyuan in exchange for approximately RMB 11 million. Following such transfer,
Wang Hongli and Wang Mingli each retained 5% of Xinfa’s equity. The Equity
Replacement Agreement also contains certain ownership representations and
warranties and other provisions, including, without limitation, indemnification,
force majeure, which are customary for agreements of this nature.
  We have
established strong ties with our upstream suppliers. Our top raw material
suppliers are either state-owned enterprises or supported by state-owned
enterprises, from which we received in excess of 60% of our total raw supplies
purchases in 2008 and in excess of 77% of our total raw materials purchased in
2009. We also benefit from these relationships by being able to lease advanced
facilities from our suppliers, which reduces our transportation costs and time
and expedites deliveries of raw materials and, thus, improves customer service.
China Petroleum, the PRC’s largest petroleum company, is our leading supplier
with branches or subsidiaries located in northern China.
  In late
2008, we undertook the following steps designed to reduce the overall production
and transportation costs:
  •
              built
      own and acquired other distributing facilities to increase our profit
      margin and sales, enhance our brand and decrease the adverse impact of oil
      price volatility
  •
              established
      regional purchase center, controlling all information collection and
      analysis, order making and logistics, which allows us to negotiate
      favorable pricing and volume discounts and maintain an appropriate sale
      levels
  •
              worked
      closely with the managements of the acquired companies to obtain an
      in-depth knowledge of local markets and developed a list of suppliers to
      reduce the purchase cost of certain raw materials.•
              relocated
      our production and storage centers closer to our end users which allows us
      more opportunity to develop an efficient and flexible manufacturing and
      operational infrastructure and enjoy savings on transportation
      costs.
  Since
2006, our overall strategy has been to (i) increase our share of retail sales
since such sales had shown to be less price-sensitive than our sales to the
distributors, (ii) acquire our own retail facilities to reduce the risk of
opportunistic negotiations from our retail customers during periods of volatile
oil prices and (iii) build retail points in strategic locations (often close to
other, recently acquired locations) to capture a majority of active local
markets. During 2009, oil prices recovered from about $40 a barrel in January of
2009 to about $80 a barrel in December of 2009.  This recovery in oil
prices reflected the beginning of the recovery of the global economy from the
extreme recessionary conditions present during 2008. As the result of the
beginning of this recovery, and the effects of our own expansion steps, we
stabilized our operations and increased our share of certain markets in 2009.
This is reflected in the increase in our revenues, which in 2009 increased by
56.9% to $ 124.28 million in revenue as the result of an 88.7% increase in our
volume of sales, and was also reflected in the improvement in our gross margin,
which in 2009 increased to 11.33% from 5.32% in 2008. Our gross margin was also
positively impacted by the increase in the portion of our total sales which was
to retail customers.  In 2009, 43% of our sales were to retail
customers as compared with 38% in 2008.
  33
  We
believe that maintaining our retail sales and distribution channels translate
into stable gross margins which can help offset the pressure imposed on our
profit margin by crude oil price downturn. We believe that higher retail sales
and closer ties with our end users as well as wider distribution network are at
the core of our strength and business viability going forward. We intend to (i)
control more facilities closer to end markets, through business acquisitions,
partner cooperation, building local platform for our products and added-value
services, which would enhance the brand awareness of the “Xingyuan” brand and
(ii) expand our product line and upgrade production facilities to explore the
increasing markets opportunities and increase our share in retail
market.
  We
maintained gross profit margins of 5.32% and 11.33% in 2008 and 2009,
respectively. We had revenues of US$79.2million and US$124.3 million and net
income attributable to our shareholders of US$1.48 million and US$6.42 million
in 2008, and 2009, respectively.
  Principal
Factors Affecting our Financial Performance
  We
believe that the following factors will continue to affect our financial
performance:
  •
              Increasing
      demand for blended marine fuel — The increasing demand
      for blended marine fuel has a positive impact on our financial position.
      The strong growth in the blended marine fuel industry since 2002 has been
      driven by several factors, including, among others, steady population
      growth in the PRC, improvements in the living standards, national energy
      conservation efforts.
  •
              Expansion
      of our sources of supply, production capacity and sales
      network — To meet the increasing demand for our products,
      we need to expand our sources of supply and production capacity. We plan
      to make capital improvements in our existing production facilities, which
      would improve both their efficiency and capacity. In the short-run, we
      intend to increase our investment in our reliable supply network,
      personnel training, information technology applications and logistic
      system upgrades.
  •
              Fluctuations
      in Crude Oil Price — We use oil refinery by-products as
      raw materials for our production. The recent increase in oil prices had a
      direct impact on the price we pay for these products. However, we
      mitigated this in the short-term by increasing the price of our products
      and passing the entirety of the increase to our
  customers.
  Components
of Revenue and Expenses
  Revenue
  We
generate revenues from the sale of our blended marine fuel products. The
revenues we report are net of value-added taxes, or VAT, levied on our products.
Currently, our products, all of which were sold in China, are subject to a VAT
at a rate of 17% of the gross sales price or at a rate approved by the Chinese
government. Pursuant to the Provisional Regulation of China on Value Added Tax
and its implementing rules, all entities and individuals that are engaged in the
sale of goods, the provision of processing, repairs and replacement services and
the importation of goods in China are generally required to pay the
VAT.
  34
  In 2007
and 2008, our revenues were US$106.45 million and US$79.19 million respectively.
The reason for this decline was mainly due to the diminished level of global
economic activity and following recession triggering worldwide inventory
liquidation and commodity price free fall in fourth quarter of 2008. We exerted
significant effort to shift from wholesaler/distributor to end-user bases and
increase the ratio of retail in the total sales. Before October 2007, we were a
joint-venture company through a subsidiary of China Petroleum in Northern China
(largest petroleum company in China). We eventually were able to purchase 100%
of the joint venture. We still enjoy a strong relationship with China Petroleum
which is evidenced by having the only privately owned blending, berthing and
pipelines inside of the largest oil refinery (China Petroleum owned) in the
Northern Region of the PRC. As a result of us acquiring the joint venture, our
sales dropped 5.5% mainly due to our focus on the transaction. Our drop in sales
during 2008 was mainly due to the historic fluctuation in oil prices, the global
recession and a lack of having our own distribution channels. During the global
recession in 2008, the market experienced worldwide inventory liquidation and a
steep decline in commodity prices during the second half of the year. We decided
to reduce production and inventory as a method to control the risk associated
with these unprecedented fluctuations. Additionally, we believed the market was
ripe to begin building up our own distribution. We began in northern Bohai bay
in Liaoning province where we began building significant facilities and
targeting other existing locations in active markets such as Shandong and
Zhejiang province. From 2006 to 2008, retail sale account increased from 14%,
32% and to 38%, respectively. We believe that this is a strong indication that
executing our strategy of migrating to more retail sales. In 2007, the total
volume of marine fuel sold was approximately 235,000 tons, decreasing by 21,000
or 8.2% as compared with 256,000 tons sold in 2006; the retail sale increased
from 34,500 tons sold in 2006 to 74,900 tons sold in 2007, an increase of almost
120%, which was largely due to one product, equivalent to 180CST, being
introduced in the market, which permitted refueling-at-sea transactions in 2007.
In 2008, the total market demand for marine fuel was 127,000 tons, down by
108,000 tons or 46% compared with the figure in 2007; the retail sales also
suffered a decline from 74,900 tons to 49,000 tons during the same period. The
global economic downturn had adverse effects on our operations as we saw oil
prices collapse and market demand substantially decrease, but the shift of our
business model toward more end-user oriented based helped the company to
mitigate the negative macroeconomic effects. Even though most oil related
businesses in the PRC suffered significant losses in 2008, we managed to realize
$1.48 million in net profits and improved our profit margin. In 2008, we
invested in Donggang to build facilities near the port where fish boats and
vessels have heavy traffic, while in Shidao Shandong province we enhanced the
cooperation with our distributors to allow us to utilize their facilities to
serve our customers directly.
  In 2008
and 2009, our revenues were US$79.19 million and US$124.28 million respectively.
As discussed above, in 2009 the conditions in the marine fuel business began to
regain normal conditions as compared with the extreme conditions that existed in
the last part of 2008.  The total market demand for our marine
products was in excess of 240,000 tons in 2009, an increase of 113,000 tons or
88% when compared with total market demand in 2008. In 2008, 82% of our total
revenues were generated in the first three quarters of the year (January 2008
through September 2008).  In 2009, the percentage of our total
revenues generated in the first three quarter of the year was 69%, indicated
that the performance throughout the whole year of 2009, and especially in the
fourth quarter, was more in line with normal expectations for the marine fuel
industry, focusing on fishing vessels.
  35
  In
addition, the expansion of our sales and distribution network we have been
pursuing since early 2008 contributed to the increase of revenues in 2009, in
particular in the areas around Donggang, Shidao and Shipu through building or
acquiring Donggang, Xinfa and Nalian.  In these locations the sales of
our products increased in 2009 by over 59,500 tons to total sales of over 67,000
tons in term of sales volume right after our sales network expanded itself into
foresaid regions.
  Cost
of Revenue
  Our cost
of revenue consists primarily of direct costs to produce our products, including
raw material costs, salaries and related manufacturing personnel expenses,
transportation costs, and repair and maintenance costs. Our costs of revenue
were US$74.97 million, and US$110.2 million in 2008, and 2009,
respectively.
  Raw
material costs account for over 95% of the cost of revenue, and the raw
materials we use are generally the by-products produced by refineries. We
believe that our long standing relationship with major suppliers in the region
can provide the supply and price stability that we require in our operations. In
our case, we have a long standing contractual relationship with China Petroleum
Dalian Branch, Panjin Branch, etc. which, historically, provide over 70% of all
raw materials. With other supplies, including Beijing Xinshengshibo, Fushun
Shengli, Qingfao Anbang providing the remaining of our need for raw
materials.
  Gross
Margins
  Our gross
profit margins in 2008 and 2009 were 5.32% and 11.33%, respectively. Our gross
profit margins are impacted by changes in the average prices of our products,
product sales mix, the ratio of retail to wholesale and our raw material
purchasing price. The average prices of our products are subject to the
fluctuations in world crude oil prices and, most recently, have also been
affected by the challenging global economic conditions.
  Since the
average prices and gross margins of our products vary by product line, changes
in our product sales mix will also impact our overall gross margins. Our marine
fuel 3# generally has higher gross profit margins than marine fuel 4# and 180
CST. In addition, our new products, such as marine fuel 2#, which we introduced
in June 2007, generally have higher gross profit margins than those in previous
periods. As a result, our gross profit margin is affected by the proportion of
sales of our higher gross profit margin products as compared to sales of our
lower gross profit margins products.
  Selling
Expenses
  Our
selling expenses consist primarily of employee compensation and benefits for our
sales and marketing staff, expenses for promotional and advertising activities.
Our selling expenses were US$1.50 million and US$3.55 million in 2008 and 2009,
respectively.
  Our
selling expenses as a percentage of revenue have increased from almost 1.89% in
2008 to 2.86% in 2009. In the near term, we expect that certain components of
our selling expenses will increase as we step up efforts to expand our presence
in new markets in China. Specifically, we expect that product promoting expenses
will increase as we improve the awareness among customers in Donggang and
Xiangshan. In addition, we also expect salary expenses to increase as we
continue to hire additional sales representatives to help broaden our end-user
customer base. This anticipated increase in selling expenses is a part of our
plan to grow and support our extensive distribution network.
  36
  General
and Administrative Expenses
  Our
general and administrative expenses consist primarily of employee compensation
and benefits for our general management, finance and administrative staff,
depreciation and amortization with respect to equipment used for general
corporate purposes, professional, legal and consultancy fees, and other expenses
incurred for general corporate purposes. Our general and administrative expenses
were US$0.85 million and US$1.02 million in 2008 and 2009,
respectively.
  From 2008
to 2009, our general and administrative expenses increased by US$0.17 million or
20%. We expect that our overall general and administrative expenses will
increase after the closing of our initial public offering due to the continued
expansion of our business and the various additional legal, accounting and other
requirements that will be applicable to us as a public company in the United
States. Our general and administrative expenses as a percentage of revenue were
1.07% and 0.83% for 2008 and 2009, respectively. In general, as a percentage of
revenue, we expect that general and administrative expenses will continue to be
approximately 1.0% of our revenues.
  Interest
Expense
  Interest
expense is paid on our outstanding bank debt obligations on a quarterly or
monthly basis. Our interest expense as a percentage of revenue was 0.0008% and
0.27% in 2008 and 2009, respectively.
  Other
Income
  Other
income is primarily comprised of gains on disposal of property and tax refunds
from local government.
  Critical
Accounting Policies
  We
prepare financial statements in conformity with U.S. GAAP, which requires us to
make estimates and assumptions that affect the amounts reported in our combined
and consolidated financial statements and related notes. We periodically
evaluate these estimates and assumptions based on the most recently available
information, our own historical experience and various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Since the use of estimates is
an integral component of the financial reporting process, actual results could
differ from those estimates. We believe the following accounting policies
involve the most significant judgments and estimates used in the preparation of
our financial statements.
  Revenue
Recognition
  We
primarily generate revenue from blended products sales to distributors and end
users. We also generate revenue from raw materials sales. We consider revenue
from the sale of our blended products and raw materials realized or realizable
and earned upon meeting all of the following criteria: persuasive evidence of a
sale arrangement exists, delivery has occurred, the price to the distributor is
fixed or determinable, and collectability of payment is reasonably assured.
These criteria are met at the time of shipment when the risk of loss passes to
the distributor or end user. Revenue represents the invoiced value of sold
goods, net of VAT. Our products, all of which are sold in China, are subject to
a Chinese VAT at a rate of 17% of the gross sales price or at a rate approved by
the Chinese local government. This VAT may be offset by VAT we paid on raw
materials and other materials included in the cost of producing the finished
product. The VAT amounts paid and available for offset are maintained in our
current liabilities.
  37
  Accounts
Receivables
  During
the normal course of business, we extend to some of our customers interest-free
unsecured credit for an initial term of 30 – 60 days, depending on a
customer’s credit history, as well as local market practices. Our accounts
receivable turnover in days for 2008 and 2009 were 10 and 5.9 days,
respectively. Since 2007, we reviewed our accounts receivables quarterly and
determined the amount of allowances, if any, necessary for doubtful accounts.
Historically, we have not had any bad debt write-offs and, as such, we do not
provide an arbitrary reserve amount for possible bad debts based upon a
percentage of sales or accounts receivable balances. Rather, we review our
accounts receivable balances to determine whether specific reserves are required
due to such issues as disputed balances with customers, declines in customers’
credit worthiness, or unpaid balances exceeding agreed-upon terms. Based upon
the results of these reviews, we determine whether a specific provision should
be made to provide a reserve for possible bad debt write-offs.
  Since
2007, we also communicated with our customers each month to identify any
potential issues and reassess our credit limits and terms with them based on
their prior payment history and practice. We also plan to continue building upon
our existing relationships and history with each of our customers to assist us
in the full and timely collection of outstanding payments.
  As of
December 31, 2008 and 2009, we had outstanding accounts receivable totaling
US$1.69 million and US$2.52 million, respectively, among which we identified and
provided for doubtful debts of US$175,887 and US$36,239, respectively. We
believe that the remaining outstanding amounts will be collected pursuant to the
terms, conditions, and within the time frames agreed upon between our customers
and us primarily due to the enhanced collection measures.
  During
the reported periods, we did not experience any material problems relating to
distributor payments and our only bad debt write off, recorded in 2009 and
included in other expense, related to certain 2007 advances to suppliers which
we determined to be unrecoverable.
  Assessment
of Impairment for Long-lived Assets
  Our
long-lived assets include fixed assets, intangible assets and goodwill. Fixed
assets comprise property and buildings, marine bunker, boiler equipment,
laboratory equipment, transportation vehicles and other office equipment, and
are depreciated over the estimated useful lives of the assets on a straight-line
basis. Intangible assets mainly comprise land use right and other finite-lived
intangible assets. We amortize the cost of intangible assets over their expected
future economic lives. Goodwill represents the excess of the purchase price over
the net of the fair value of the identifiable tangible and intangible assets
acquired and the fair value of liabilities assumed upon the business
acquisitions. Goodwill is stated at cost less provision for impairment loss.
Management’s judgment is required in the assessment of the economic lives of
intangible assets and useful lives of the fixed assets. Based on the existence
of one or more indicators of impairment, we measure any impairment of fixed
assets, intangible assets and goodwill based on a projected discounted cash flow
method using a discount rate determined by our management which is commensurate
with the risk inherent in our business model. An impairment charge would be
recorded if we determined that the carrying value of fixed assets, intangible
assets and goodwill may not be recoverable. Our estimates of future cash flows
require significant judgment based on our historical results and anticipated
results and are subject to many factors.
  38
  Determination
of Functional Currencies
  Our
reporting currency is the U.S. dollar. The functional currency of Andatee and
Goodwill are the U.S. dollar. The functional currency of our PRC subsidiary, our
VIE and its subsidiaries in China is the RMB. An entity’s functional currency is
the currency of the primary economic environment in which it operates. Normally,
that is the currency of the environment in which it primarily generates and
expends cash. Management’s judgment is essential in the determination of the
functional currency which is made by assessing various indicators, such as cash
flows, sales price and market, expenses, financing and inter-company
transactions and arrangements. Assets and liabilities of our subsidiary and VIE
entities in China are translated into U.S. dollars, our reporting currency, at
the exchange rate in effect at the balance sheet date and revenues and expenses
are translated at the current exchange rate in effect during the reporting
period. Foreign currency translation adjustments are not included in determining
net income for the period but are accumulated in a separate component of
consolidated equity on the balance sheet. The accumulated foreign currency
translation adjustment as of December 31,2009 and 2008 was a gain of $33,812 and
$329,758, respectively.
  Results
of Operations
  Comparison
of 2008 and 2009
  Revenue
  Our
revenue increased by US$45.1 million, or 56.9%, from US$79.2 million for the
year of 2008 to US$124.3 million for the year of 2009.  The increase
in our revenues was  the result of increased volumes sold due to the
expansion of our sales network and recovery of demand from downstream industry.
Following our 2008 acquisition of the facilities located in Shandong Shidao and
Zhejiang Nalian, we experienced steady sales increase from those two markets.
The volume sales of 4# marine fuel, mainly used by fishing boats, generated by
the selling efforts of Xinfa, increased by 21,500 tons, from 6,100 tons sold for
the year of 2008 to over 27,600 tons in 2009, and in Nanlian, the volume sales
of 2# marine fuel, mainly used by fishing boats, was over 19,000 tons. We
expanded and completed construction of our facilities in Donggang, following
which we sold over 20,000 tons of 3# marine fuel to fishing boats of local
customers, which contributed to the total increase in sales volume for the year
2009. Overall our sales volume increased by 88.7% or 113,000 tons, from 127,000
tons to 240,000 tons.  In 2008  3# marine fuel represented
14.6% of our sales, 4# marine fuel represented 71.0% of our sales,
180CST represented 12.5% of our sales and 120CST represented 1.9%
of our sales. In 2009 2# marine fuel represented 7.1% of our sales, 3#
marine fuel represented 9.5% of our sales, 4# marine fuel represented 63.2%
of our sales, 180CST represented13.1% of our sales and
120CST represented7.1% of our sales.
  The
effect of the increase in the volume of our sales in 2009 was partially offset
by lower average selling prices, which reflected the overall lower crude oil
prices that prevailed in 2009. In 2008 crude oil prices reached their peak of
over $140 per barrel in the middle of the year before beginning to decline to
lower levels of around $40 per barrel by the end of the year.  In 2009
crude oil prices increased over the course of the year. In 2008,  we
sold 82% of our marine fuel products in the first three quarters during which
the average crude oil price was above $100. In 2009, our sales were more evenly
distributed throughout the year.
  39
  Cost
of Revenue
  Our cost
of revenues increased US$35.2 million, or 47.0%, from US$75.0 million for 2008
to US$110.2 million for 2009. This increase reflects our 56.9% increase in sales
during 2009. As a percentage of revenues, the cost of revenues decreased from
94.7% for 2008 to 88.7% for 2009. This decrease was primarily due to the
measures taken by us to control the cost of raw materials in 2009, which
measures included closer relationships with our raw material suppliers and
improved knowledge of oil substitutes and market for such substitutes which
allowed us to react promptly to changes in material supplies. In addition our
cost of revenues declined as a percentage of sales in 2009 as the result of an
increase in retail sales as a percentage of our overall sales mix, from 38% of
total sales in 2008 to 43% of total sales in 2009. Generally, retail sales bear
a higher gross profit margin, by from 3% to 4%, as compared to wholesale
sales.
  Gross
Profit
  As a
result of the factors above, our gross profit increased by US$9.9 million, or
234.2%, from US$4.2 million for 2008 to US$14.1 million in 2009. As a percentage
of revenues, our gross profit margin increased from 5.3% for 2008 to 11.3% for
2009. The increase in our gross profit percentage results primarily from an
increase in the sale of products with higher gross profit. Sales to retail
customers, which generally carry a higher gross margin, increased from 38% of
total sales in 2008 to 43% of sales in 2009 as the result of our expansion or
acquisition of retail distribution facilities.
  Selling
Expenses
  Selling
expenses increased US$2.05 million, or 137.1%, from US$1.50 million for 2008 to
US$3.55 million in 2009. This increase was primarily due to the increase in
sales employee compensation and other expenses for promotion of our products. As
a percentage of revenues, selling expenses increased from 1.9% for 2008 to 2.9%
for 2009.
  General
and Administrative Expenses
  General
and administrative expenses increased US$0.18 million, or 21.4%, from US$0.85
million for 2008 to US$1.03 million in 2009. This increase was primarily due to
increased expenses incurred as were prepared to become a public reporting
company in the United States. As a percentage of revenues, general and
administrative expenses decreased from 1.1% for 2008 to 0.8% for
2009.
  Operating
Income
  As a
result of the factors discussed above, our operating income increased US$7.6
million, or 408.8%, from US$1.9 million for 2008 to US$9.5 million in 2009. As a
percentage of revenues, our operating income increased from 2.4% for 2008 to
7.6% for 2009.
  Interest
Expense
  Interest
expense (net) increased US$331,134, from US$605 for 2008 to US$331,739 in 2009
as the result of the increase in the level of our debt financing.  We
increased our use of bankers’ acceptance notes during the second half of 2008,
and increased our short term borrowings in 2009.  However, by the end
of 2009, we had reduced our overall borrowings (bankers’ acceptance notes and
short term borrowings) from US$16.4 million at December 31, 2008 to US$10.2
million as of December 31, 2009.
  Provision
for Income Taxes
  Provision
for income taxes increased US$1.76 million, or 334.7%, from US$0.53 million for
2008 to US$2.29 million in 2009. This increase in the provision for income taxes
was primarily attributable to the increase in our pre-tax income by 345.6% over
2008. Our effective tax rates were 25.6% in 2009 and 26.3% in 2008.
  40




Net
Income




As a
result of the foregoing, net income increased US$4.9 million, or 333.8%, from
US$1.5 million for 2008 to US$6.4 million for 2009.




Liquidity
and Capital Resources




Historically,
we have relied primarily on cash flow from operating activities and our
revolving loan arrangement with Shenzhen Development Bank Co., Ltd. for our
capital requirements in 2008 and 2009. We expect that our future capital
expenditures primarily will be to build new fueling facilities, improve and
upgrade our existing production facilities, expand product lines, our research
and development capabilities, and make acquisitions as we deem
appropriate.




We expect
that a total amount of $16 million is needed to fund the construction of the
projects in 2009 and 2010, of which $8.1 million will be needed in 2010. The
majority will be incurred for the building of new manufacturing facilities and
the improvement and upgrading of our existing manufacturing facilities. In
addition, we intend to use approximately $5.3 million to be set aside for
possible acquisitions. We believe that the net proceeds from our January, 2010
initial public offering, together with our cash flow from operating activities
and funds we may obtain through bank borrowings, will be sufficient to meet our
presently anticipated cash needs for at least the next 12 months.




Our
long-term liquidity needs will relate primarily to working capital to pay our
suppliers, as well as any increases in additional production capacity or
acquisitions of third party businesses that we may seek in the future. We expect
to meet these requirements primarily through the proceeds of this offering and
revolving short-term bank borrowings, as well as our cash flow from operations.
We believe our working capital is sufficient for these current requirements,
though we may require additional cash due to changing business conditions or
other future developments, including any investments or acquisitions we may
decide to pursue. If our existing cash is insufficient to meet our requirements,
we may seek to raise more capital by selling additional equity securities or
increase our borrowing level under current or future arrangements with our
lender. The actual amount and timing of our future capital requirements may
differ materially from our estimate depending on our actual results of
operations.




We
maintain a revolving line of credit with Shenzhen Development Bank Co., Ltd. in
the amount of up to RMB60 million (US$8.6 million). The term of the loan is six
months at the interest rate of 5.84% per annum. The loan agreement contemplates
a 50% penalty interest in the event of our failure to repay the note in a timely
manner. As of December 31, 2009, our balance on this line of credit is
approximately RMB50 million (approximately US$7.3 million).




As of
December 31, 2008 and 2009, we had cash of US$4.92 million, and US$1.54 million,
respectively. The decrease in our cash balance at December 31, 2009 reflects
2009 capital expenditures of $8.1 million and an increase in inventories of $8.6
million as discussed below.  In January, 2010 we received gross
proceeds (before offering costs) of $19.7 million from our initial public
offering.  Regarding our current level of borrowing, see the
discussion below on our existing short-term notes. There is no seasonal
fluctuation to our borrowing requirements.


41




The
following table sets forth a summary of our cash flows for the periods
indicated:




2009
                  
                  
                  2008Cash
      flow data:Net
      cash provided by  operating activities
                  
                  
                  368,036
                  
                  
                  
                  3,229,622Net
      cash used in investing activities
                  
                  
                  (4,348,034
                  )
                  
                  
                  (6,920,102
                  )Net
      cash  provided by financing activities
                  
                  
                  584,720
                  
                  
                  
                  8,229,106Effect
      of exchange rate on cash
                  
                  
                  10,374
                  
                  
                  
                  91,273Net
      changes in cash
                  
                  
                  (3,384,904
                  )
                  
                  
                  4,629,899Cash
      at beginning of period
                  
                  
                  4,923,913
                  
                  
                  
                  294,014Cash
      at end of period
                  
                  
                  1,539,009
                  
                  
                  
                  4,923,913




Operating
Activities




Net cash
provided by operating activities for the year ended December 31, 2009 was
US$0.37 million, which was primarily attributable to the following factors: (1)
net income of US$6.42 million, (2) an increase in accounts receivables of
US$0.99 million as a result of increased revenue and the retail ratio, (3) an
increase in inventories of US$8.58 million and advances to suppliers of $5.51
million resulting from inventory rebuilding in order to meet increasing demand,
as discussed below, and (4) A decrease in other receivables of US$0.71 million,
(5) an increase in tax payable of US$7.42 million due to increased revenue and
earnings, and (6) an increase in accounts payable of US$0.27 million in line
with increased purchasing, and (7) an increase in other payable of US$0.88
million.




The
increase in our inventories at December 31, 2009 reflects both our increased
sales and inventories established to meet the requirements of a longer peak
selling season in early 2010. Normally, our peak selling season in a calendar
year is from the end of August until approximately 10 days before the Spring
Festival (the Chinese lunar new year), which is the largest festival in the PRC.
In 2010, the Spring Festival began on February 13, 2010, about three weeks later
than the January 25, 2009 beginning of the Spring Festival a year
ago.  As a result, in the first quarter of 2010 we will have a peak
selling season that is approximately three weeks longer than in the first
quarter of 2009. Our inventories at December 31, 2009 increased as the result of
our overall increases in sales, and to prepare for this longer peak selling
season.




Net cash
provided by operating activities for the year ended December 31, 2008 was
US$3.23 million, which was primarily attributable to the following factors: (1)
net income of US$1.48 million; (2) a decrease in accounts receivables of US$1.38
million; (3) a decrease in inventories of US$3.08 million, (4) an increase in
other receivables of US$0.95 million, (5) decrease in advances to suppliers of
US$1.28 million and decrease in accounts payable of US$2.97 million, (6) an
increase in tax payable of US$0.93 million, and (7) a decrease in other payables
of US$1.58 million. In the fourth quarter of 2008, the global economic downturn
had adverse effects on the Company’s operations as oil prices collapse and
market demand substantially decrease. The decrease in accounts receivables,
advances to suppliers and accounts payables were in line with decreased customer
demands. In the mean time, the Company had taken action to manage increasing
liquidity risks by lowering its inventory level and shortening its inventory
turnover period.


42




Investing
Activities




Cash used
in investing activities was US$4.35 million for the year ended December 31,
2009, which was attributable to (1) consideration paid for acquisition of
Xiangshan Nanlian of US$2.21 million, (2) US$1.52 million certificate of
deposits collected back from Shanghai Pudong Development Bank, (3) expenditures
in construction projects of US$0.50 million to expand the production capacity in
Donggang, Liaoning province and Nanlian, Zhejiang province; (4) expenditures in
purchase of property and equipment of US$8.07 million to add more production
capacity in Donggang, Liaoning province, and (5) collection of related party
receivables of $4.92 million.




Net cash
used in investing activities was US$6.92 million in 2008, which was primary
attributable to (1) an increased amount loaned to DFZ of US$5.35 million (for
more details of the loan, see Note 11 “Related Party Transactions” in the
financial statements), (2) an increase in certificates of deposit amounting to
US$1.49 million, and (3) capital expenditures of US$0.74 for the purchase of
land use rights, equipment and construction materials for our facilities in
Doggang, Liaoning province.




Financing
Activities




Cash
provided by and used in our financing activities consist of capital
contributions from shareholders, borrowings from and repayments to our
short-term notes. In the year ended December 31, 2009, the Company had proceeds
from bank loans at amount of US$7.31 million, and repaid US$13.45 million bank
notes and collected back US$6.72 million from the escrow accounts for such bank
notes.




Net cash
provided by financing activities was US$8.23 million in 2008 which is primary
attributable to contributions from shareholders of US$4.31 million, repayment of
bank loans of US$2.59 million proceeds from bank notes of $13.21 million and
cash paid into escrow account at amount US$6.61 million.




Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements.




Impact
of Recently Issued Accounting Pronouncements




Recent
accounting pronouncements that we have adopted or that will be required to adopt
in the future are summarized below.




Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles




In June
2009, the FASB issued Statement No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles”
(“SFAS No. 168”). SFAS No. 168 will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (“GAAP”),
superseding existing FASB, American Institute of Certified Public Accountants
(“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting
literature. SFAS No. 168 reorganizes the thousands of GAAP pronouncements into
the FASB ASC, which contains roughly 90 accounting topics and displays them
using a consistent structure. Also included is relevant Securities and Exchange
Commission guidance organized using the same topical structure in separate
sections. SFAS No. 168 is effective for financial statements issued for
reporting periods that end after September 15, 2009. As the result of SFAS No.
168 we references to the authoritative accounting literature in these financial
statements have been revised to include references to the FASB ASC.




Technical
Corrections to Various Topics




In
February, 2010 the FASB issued ASC Update 2010-08, which contains technical
corrections to various Topics within the ASC.  Those corrections are
effective for interim and annual periods beginning after February 2,
2010.  We are currently evaluating the potential effects of ASC Update
2010-08.


43




Fair
Value Measurements and Disclosures – Improving Disclosures About Fair Value
Measurements




In
February, 2010, the FASB issued FASB ASC Update 2010-06, “Fair Value
Measurements and Disclosures – Improving Disclosures About Fair Value
Measurements,” ASU Update 2010-06 adds new requirements for disclosures of
significant transfers into and out of Levels 1, 2 and 3 of the fair value
hierarchy, the reasons for the transfers and the policy for determining when
transfers are recognized. ASU 2010-06 also adds new requirements for disclosures
about purchases, sales, issuances and settlements on a gross rather than net
basis relating to the reconciliation of the beginning and ending balances
of Level 3 recurring fair value measurements. It also clarifies the level
of disaggregation to require disclosures by “class” rather than by “major
category of assets and liabilities” and clarifies that a description of inputs
and valuation techniques used to measure fair value is required for both
recurring and nonrecurring fair value measurements classified as Level 2
or 3. ASU Update 2010-06 is effective January 1, 2010 except for the
requirements to provide the Level 3 activity of purchases, sales, issuances
and settlements on a gross basis which are effective January 1, 2011. The
adoption of ASU 2010-06 is not expected to have a material impact on our results
of operations or financial position.


Consolidation
of Variable Interest Entities – Amendments to FASB Interpretation No.
46(R)


In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)”, which has been codified as an update to FASB ASC Topic 810 which
requires ongoing analyses to determine whether an entity’s variable
interest gives it a controlling financial interest in a variable interest entity
(“VIE”), making it the primary beneficiary, based on whether the entity
(i) has the power to direct activities of the VIE that most significantly
impact its economic performance, including whether it has an implicit financial
responsibility to ensure the VIE operates as designed, and (ii) has the
obligation to absorb losses or the right to receive benefits of the VIE that
could potentially be significant to the VIE. Enhanced disclosures regarding an
entity’s involvement with variable interest entities are also required under the
provisions of FASB ASC 810. These requirements are effective January 1,
2010. The adoption of these requirements is not expected to have a material
impact on ours financial statements.




Accounting
for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance
or Other Financing




In June
2009, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No. 09-1,
“Accounting for Own-Share Lending Arrangements in Contemplation of Convertible
Debt Issuance or Other Financing”. This Issue is effective for fiscal years
beginning on or after December 15, 2009, and interim periods within those fiscal
years for arrangements outstanding as of the beginning of those fiscal years.
Share lending arrangements that have been terminated as a result of counterparty
default prior to the effective date of this Issue but for which the entity has
not reached a final settlement as of the effective date are within the scope of
this Issue. This Issue requires retrospective application for all arrangements
outstanding as of the beginning of fiscal years beginning on or after December
15, 2008. This Issue is effective for arrangements entered into on or after the
beginning of the first reporting period that begins on or after June 15, 2009.
Early adoption is not permitted. The implementation of this issue did not have a
material impact on ours financial position and results of
operations.


44




Subsequent
Events




In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”) which
is codified at FASB ASC Topic 855. This Statement establishes general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
It requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date and was effective for interim and
annual periods ending after June 15, 2009. The adoption of SFAS No. 165 did not
to have a material impact on ours financial statements.




Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly




In April
2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly”. This FSP, which is codified
at FASB ASC Topic 820, provides additional guidance for estimating fair value in
accordance with FASB Statement No. 157, Fair Value Measurements, when the volume
and level of activity for the asset or liability have significantly decreased.
This FSP also includes guidance on identifying circumstances that indicate a
transaction is not orderly. FSP FAS No. 157-4 is effective for interim and
annual reporting periods ending after June 15, 2009, and shall be applied
prospectively. The implementation of FSP FAS No. 157-4 did not have a material
on ours financial position and results of operations.




Recognition
and Presentation of Other-Than-Temporary Impairments




In April
2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments “, which is codified in FASB
ASC Topic 320. The objective of an other-than-temporary impairment analysis
under existing U.S. generally accepted accounting principles (GAAP) is to
determine whether the holder of an investment in a debt or equity security for
which changes in fair value are not regularly recognized in earnings (such as
securities classified as held-to-maturity or available-for-sale) should
recognize a loss in earnings when the investment is impaired. An investment is
impaired if the fair value of the investment is less than its amortized cost
basis. FSP FAS No. 115-2 and FAS No. 124-2 is effective for interim and annual
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. Earlier adoption for periods ending before
March 15, 2009, is not permitted. The implementation of FSP FAS No. 115-2 and
FAS No. 124-2 did not have a material impact on ours financial position and
results of operations.




Interim
Disclosures about Fair Value of Financial Instruments




In April
2009, the FASB issued FSP FAS No. 107-1 and APB No. 28-1, “Interim Disclosures
about Fair Value of Financial Instruments” which is codified in FASB ASC Topic
825. This FSP amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP FAS No. 107-1 is effective for
interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The implementation of FSP FAS
No. 107-1 did not have a material impact on ours financial position and results
of operations


45




Employers’
Disclosures About Postretirement Benefit Plan Assets




In
December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position on Financial Accounting Standard (“FSP FAS”) No. 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit Plan Assets.” This FSP
amends FASB Statement No. 132(R) (“SFAS No. 132(R)”), “Employers’ Disclosures
about Pensions and Other Postretirement Benefits,” (FASB ASC Topic 715) to
provide guidance on an employer’s disclosures about plan assets of a defined
benefit pension or other postretirement plan. FSP FAS No. 132(R)-1 also includes
a technical amendment to SFAS No. 132(R) that requires a nonpublic entity to
disclose net periodic benefit cost for each annual period for which a statement
of income is presented. The required disclosures about plan assets are effective
for fiscal years ending after December 15, 2009. The technical amendment was
effective upon issuance of FSP FAS No. 132(R)-1 and did not have a material
effect on ours consolidated financial statements.




Accounting
for an Instrument (or an Embedded Feature) With a Settlement Amount that is
Based on the Stock of an Entity’s Consolidated Subsidiary




In
November 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No.
08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement
Amount that is based on the Stock of an Entity’s Consolidated Subsidiary.” EITF
No. 08-8, codified at FASB ASC Topic 815, clarifies whether a financial
instrument for which the payoff to the counterparty is based, in whole or in
part, on the stock of an entity’s consolidated subsidiary is indexed to the
reporting entity’s own stock. EITF No. 08-8 also clarifies whether or not stock
should be precluded from qualifying for the scope exception of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” or from being
within the scope of EITF No. 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” EITF
No. 08-8 was effective for fiscal years beginning on or after December 15, 2008,
and interim periods within those fiscal years. The impact of adoption was not
material to ours consolidated financial condition or results of
operations.




Accounting
for Defensive Intangible Assets




In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for Defensive
Intangible Assets.” EITF No. 08-7, codified at FASB ASC Topic 350, clarifies how
to account for defensive intangible assets subsequent to initial measurement.
EITF No. 08-7 applies to all defensive intangible assets except for intangible
assets that are used in research and development activities. EITF No. 08-7 was
effective for intangible assets acquired on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. The impact of
adoption was not material to ours consolidated financial condition or results of
operations.




Equity
Method Investment Accounting Considerations




In
November 2008, the FASB issued EITF Issue No. 08-6 (“EITF No. 08-6”), “Equity
Method Investment Accounting Considerations.” EITF No. 08-6 amends FASB ASC
Topic 323 to clarify the accounting for certain transactions and impairment
considerations involving the equity method. Transactions and impairment dealt
with are initial measurement, decrease in investment value, and change in level
of ownership or degree of influence. EITF No. 08-6 was effective on a
prospective basis for fiscal years beginning on or after December 15, 2008. The
impact of adoption was not material to ours consolidated financial condition or
results of operations.


46




Issuer’s
Accounting for Liabilities Measured at Fair Value with a Third-Party Credit
Enhancement




In
September 2008, the FASB issued EITF Issue No. 08-5 (“EITF No. 08-5”), “Issuer’s
Accounting for Liabilities Measured at Fair Value with a Third-Party Credit
Enhancement.” This EITF, codified at FASB ASC Topic 820, determines an issuer’s
unit of accounting for a liability issued with an inseparable third-party credit
enhancement when it is measured or disclosed at fair value on a recurring basis.
FSP EITF No. 08-5 was effective on a prospective basis in the first reporting
period beginning on or after December 15, 2008. The impact of adoption was not
material to our consolidated financial condition or results of
operations.




Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities




In June
2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No. 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” The FSP, codified at FASB ASC Topic 260, addresses
whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing earnings per share under the two-class
method. The FSP affects entities that accrue dividends on share-based payment
awards during the awards’ service period when the dividends do not need to be
returned if the employees forfeit the award. This FSP was effective for fiscal
years beginning after December 15, 2008. The impact of adoption was not material
to ours consolidated financial condition or results of operations.




Determining
Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own
Stock




In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF
07-5, codified at FASB ASC Topic 815, provides that an entity should use a two
step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement provisions. It also clarifies on
the impact of foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation. EITF 07-5 was
effective for fiscal years beginning after December 15, 2008. The impact of
adoption was not material to ours consolidated financial condition or results of
operations.




Accounting
for Convertible Debt Instruments that May be Settled in Cash Upon Conversion
(Including Partial Cash Settlement)




In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) Opinion No. 14-1,
“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)”. The FSP, codified at FASB ASC
Topic 470, clarifies the accounting for convertible debt instruments that may be
settled in cash (including partial cash settlement) upon conversion. The FSP
requires issuers to account separately for the liability and equity components
of certain convertible debt instruments in a manner that reflects the issuer’s
nonconvertible debt (unsecured debt) borrowing rate when interest cost is
recognized. The FSP requires bifurcation of a component of the debt,
classification of that component in equity and the accretion of the resulting
discount on the debt to be recognized as part of interest expense in our
consolidated statement of operations. The FSP requires retrospective application
to the terms of instruments as they existed for all periods presented. The FSP
was effective for us as of January 1, 2009 and early adoption is not permitted.
The impact of adoption was not material to ours consolidated financial condition
or results of operations.


47




Disclosure
about Derivative Instruments and Hedging Activities




In March
2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and
Hedging Activities, an amendment of SFAS No. 133”, (SFAS No.161), which was
codified at FASB ASC Topic 815. This statement requires that objectives for
using derivative instruments be disclosed in terms of underlying risk and
accounting designation. The Company was required to adopt SFAS No. 161 on
January 1, 2009. The adoption of SFAS No. 161 did not have material impact on
ours consolidated financial statements.




Quantitative
and Qualitative Disclosures about Market Risk




Interest
Rate Risk




We are
exposed to interest rate risk due primarily to our short-term notes. Although
the interest rates on our short-term notes are fixed during their respective
terms, the terms are typically 12 months or less and interest rates are subject
to change upon renewal. The interest rates on our short-term notes are
determined by reference to the benchmark interest rates set by the People’s Bank
of China, or the PBOC. Since April 28, 2006, the PBOC has increased the
benchmark interest rate of RMB bank notes with a term of 6 to 12 months 12
times, seven consecutive increases followed by five consecutive decreases, by
0.27% on most occasions. As a result, from 2006 to the three months ended March
31, 2009, the benchmark interest rate for these RMB bank notes increased from
5.85% to 7.47% then decreased to 5.31% and the interest rate applicable to us
increased from 6.696% to 8.217% then decreased to 5.841% over the same period.
Any future increase in the PBOC’s benchmark interest rate will result in an
increase in our interest expenses. A 1.0% increase in the annual interest rates
for all of our credit facilities as of December 31, 2009 would decrease income
from continuing operations before income taxes by approximately RMB700,000
($102,326) for the year ended December 31, 2009. We monitor interest rates in
conjunction with our cash requirements to determine the appropriate level of
debt balances relative to other sources of funds. We have not entered into any
hedging transactions in an effort to reduce our exposure to interest rate
risk.




Foreign
Exchange Risk




Although
the conversion of the RMB is highly regulated in China, the value of the RMB
against the value of the U.S. dollar (or any other currency) may fluctuate and
be affected by, among other things, changes in China’s political and economic
conditions. Under the currency policy in effect in China today, the RMB is
permitted to fluctuate in value within a narrow band against a basket of certain
foreign currencies. China is currently under significant international pressures
to liberalize this currency policy, and if such liberalization occur, the value
of the RMB could appreciate or depreciate against the U.S. dollar.




While our
reporting currency is the U.S. dollar, to date all of our revenue and expenses
are denominated in RMB and the majority of our assets and liabilities are
denominated in RMB. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between U.S. dollar and RMB. If the RMB depreciates against the
U.S. dollar, the value of our RMB revenues and assets as expressed in our U.S.
dollar financial statements will decline. For example, as reported in our U.S.
dollar financial statements included in this report, our revenues for the year
ended December 31, 2009 were $124.4 million, representing revenues of RMB851.21
million at the average rate of RMB6.84088 to $1.00 for the year ended December
31, 2009. If the value of the RMB were to depreciate by approximately 10% to
RMB7.5249 to $1.00, the value of the same amount of RMB-denominated revenue in
U.S. dollars would be $113.12 million. The fluctuations in the exchange rate
would affect our financial results translated in U.S. dollar terms without
giving effect to any underlying change in our business or results of
operations.


48




In
addition, fluctuations in the exchange rate between the U.S. dollar and the RMB
will affect the relative purchasing power of the proceeds from this offering,
our balance sheet and our financial results in U.S. dollars following this
offering. For example, to the extent that we need to convert U.S. dollars
received in this offering into RMB for our operations, appreciation of the RMB
against the U.S. dollar would have an adverse effect on the RMB amount that we
receive from the conversion. Assuming we were to convert the net proceeds
received in this offering into RMB, a 1.0% increase in the value of the RMB
against the U.S. dollar would decrease the amount of RMB we receive by RMB
million. Conversely, if we decide to convert our RMB into U.S. dollars for the
purpose of business purposes, appreciation of the U.S. dollar against the RMB
would have a negative effect on the U.S. dollar amount available to us. Since
our exposure to foreign exchange risks is limited, we have not used any forward
contracts or currency borrowings to hedge our exposure and do not currently
intend to do so.




The
following table sets forth the noon buying rates for U.S. dollars in effect in
New York City for cable transfers of Renminbi as certified for customs purposes
by the Federal Reserve Bank of New York, for the periods indicated.




Renminbi per U.S. Dollar Noon Buying
      RateAverage
                    
                    
                    High
                    
                    
                    Low
                    
                    
                    Period-EndYear ended December 31,2004(1)
                    
                    
                    8.2768
                    
                    
                    
                    8.2774
                    
                    
                    
                    8.2764
                    
                    
                    
                    8.27652005(1)
                    
                    
                    8.1826
                    
                    
                    
                    8.2765
                    
                    
                    
                    8.0702
                    
                    
                    
                    8.07022006(1)
                    
                    
                    7.9579
                    
                    
                    
                    8.0702
                    
                    
                    
                    7.8041
                    
                    
                    
                    7.80412007(1)
                    
                    
                    7.5806
                    
                    
                    
                    7.8127
                    
                    
                    
                    7.2946
                    
                    
                    
                    7.29462008(1)
                    
                    
                    6.9193
                    
                    
                    
                    7.2946
                    
                    
                    
                    6.7800
                    
                    
                    
                    6.82252009(1)(2)
                    
                    
                    6.8408
                    
                    
                    
                    6.8430
                    
                    
                    
                    6.7880
                    
                    
                    
                    6.8372For the months ofJanuary
      2009
                    
                    
                    6.8360
                    
                    
                    
                    6.8430
                    
                    
                    
                    6.8225
                    
                    
                    
                    6.8392February
      2009
                    
                    
                    6.8363
                    
                    
                    
                    6.8470
                    
                    
                    
                    6.8241
                    
                    
                    
                    6.8395March
      2009
                    
                    
                    6.8360
                    
                    
                    
                    6.8438
                    
                    
                    
                    6.8240
                    
                    
                    
                    6.8329April
      2009
                    
                    
                    6.8304
                    
                    
                    
                    6.8361
                    
                    
                    
                    6.8180
                    
                    
                    
                    6.8180May
      2009
                    
                    
                    6.8242
                    
                    
                    
                    6.8306
                    
                    
                    
                    6.8230
                    
                    
                    
                    6.8281June
      2009
                    
                    
                    6.8338
                    
                    
                    
                    6.8374
                    
                    
                    
                    6.8307
                    
                    
                    
                    6.8307July
      2009
                    
                    
                    6.8319
                    
                    
                    
                    6.8345
                    
                    
                    
                    6.8306
                    
                    
                    
                    6.8321August
      2009
                    
                    
                    6.8421
                    
                    
                    
                    6.8351
                    
                    
                    
                    6.8015
                    
                    
                    
                    6.8412September
      2009
                    
                    
                    6.8394
                    
                    
                    
                    6.8290
                    
                    
                    
                    6.7880
                    
                    
                    
                    6.8376October
      2009
                    
                    
                    6.8364
                    
                    
                    
                    6.8290
                    
                    
                    
                    6.7950
                    
                    
                    
                    6.8381November
      2009
                    
                    
                    6.8367
                    
                    
                    
                    6.8279
                    
                    
                    
                    6.7975
                    
                    
                    
                    6.8367December
      2009
                    
                    
                    6.8275
                    
                    
                    
                    6.8299
                    
                    
                    
                    6.8244
                    
                    
                    
                    6.8259January
      2010
                    
                    
                    6.8346
                    
                    
                    
                    6.8295
                    
                    
                    
                    6.7836
                    
                    
                    
                    6.8369February
      2010 (2)
                    
                    
                    6.8370
                    
                    
                    
                    6.8336
                    
                    
                    
                    6.7941
                    
                    
                    
                    6.8434


49




(1)
            The
      average rate of exchange is calculated using the average of the exchange
      rates on the last day of each month during the
  period.


(2)
              Through
      February 16, 2010.


Our
business is primarily conducted in China and all of our revenues are denominated
in Renminbi. This report contains translations of Renminbi amounts into U.S.
dollars at specified rates solely for the convenience of the reader. Unless
otherwise noted, all translations from Renminbi to U.S. dollars were made at the
noon buying rate in New York City for cable transfers in Renminbi per U.S.
dollar as certified for customs purposes by the Federal Reserve Bank of New
York. On February 16, 2010, the noon buying rate was approximately RMB6.84 to
$1.00. No representation is made that the Renminbi amounts referred to in this
report could have been or could be converted into U.S. dollars at any particular
rate or at all.




Since
July 2005, the Renminbi has not been pegged solely to the U.S. dollar. Instead,
it is pegged against a basket of currencies, determined by the People’s Bank of
China, against which it can rise or fall by as much as 0.5% each day. The
Renminbi may appreciate or depreciate significantly in value against the U.S.
dollar in the future. See “Risk Factors — Risks Related to Doing
Business in China — The foreign currency exchange rate between U.S.
Dollars and Renminbi could adversely affect our financial
condition.”




Inflation




Inflationary
factors, such as increases in the cost of our products and overhead costs, could
impair our operating results. Although we do not believe that inflation has had
a material impact on our financial position or results of operations to date, a
high rate of inflation in the future may have an adverse effect on our ability
to maintain current levels of gross profit and selling, general and
administrative expenses as a percentage of revenue if the selling prices of our
products do not increase with these increased costs.




Item
7A.                Quantitative
and Qualitative Disclosures About Market Risk




As a
smaller reporting issuer (as defined in Item 10(f)(1) of Regulation S-K), the
Company is not required to report quantitative and qualitative disclosures about
market risk specified in Item 305 of Regulation S-K.




Item
8.                   Financial
Statements and Supplementary Data




50


ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
 INDEX TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 
 PageReport
      of Independent Registered Public Accounting Firm
                    F-2Combined
      and Consolidated Balance Sheets as of December 31, 2009 and
      2008
                    F-3Combined
      and Consolidated Statements of Income for the Years Ended December 31,
      2009 and 2008
                    F-4Combined
      and Consolidated Statements of Cash Flows forthe Years Ended
      December 31, 2009 and 2008
                    F-5Combined
      and Consolidated Statements of Shareholders’ Equity for the Years Ended
      December 31, 2009 and 2008
                    F-6Notes
      to Combined and Consolidated Financial Statements December 31, 2009 and
      2008
                    F-7
  F-1
 
 
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 Andatee
China Marine Fuel Services Corporation
  We have
audited the accompanying combined and consolidated balance sheets of Andatee China Marine Fuel Services
Corporation and subsidiaries as of December 31, 2009 and 2008 and the
related  combined and consolidated statements of income and other
comprehensive income, shareholders’ equity, and cash flows for the year ended
December 31, 2009 and 2008. These combined and consolidated financial statements
are the responsibility of the company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 Andatee China Marine Fuel Services
Corporation and subsidiaries as of December 31, 2009 and 2008, and the results
of its operations and its cash flows for the year ended December 31, 2009 and
2008, in conformity with accounting principles generally accepted in the United
States of America.
 
 /s/
Jewett, Schwartz, Wolfe & Associates
 
 Hollywood,
Florida
 February
27, 2010
 
 200 South
Park Road, SUITE 150 ● HOLLYWOOD, FLORIDA 33021 ● TELEPHONE (954) 922-5885 ● FAX
(954) 922-5957
 MEMBER –
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS ● FLORIDA INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
 PRIVATE
COMPANIES PRACTICE SECTION OF THE AICPA ●REGISTERED WITH THE PUBLIC COMPANY
ACCOUNTING OVERSIGHT BOARD OF THESEC
  F-2


ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
 COMBINED
AND CONSOLIDATED BALANCE SHEETS
 
 December 31,2009
                  
                  
                  2008ASSETSCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  1,539,009
                  
                  
                  $
                  4,923,913Accounts
      receivable, net
                  
                  
                  2,515,403
                  
                  
                  
                  1,518,429Other
      receivables
                  
                  
                  1,307,474
                  
                  
                  
                  1,015,849Inventories
                  
                  
                  13,302,530
                  
                  
                  
                  4,701,681Advances
      to suppliers
                  
                  
                  7,691,266
                  
                  
                  
                  2,168,620Related
      party receivable
                  
                  
                  122,667
                  
                  
                  
                  4,909,643Deferred
      expense
                  
                  
                  150,943
                  
                  
                  
                  -Deferred
      tax assets
                  
                  
                  112,743
                  
                  
                  
                  59,448Total
      current assets
                  
                  
                  26,742,035
                  
                  
                  
                  19,297,583Property,
      plant and equipment, net
                  
                  
                  10,441,246
                  
                  
                  
                  2,766,905Construction
      in progress
                  
                  
                  632,202
                  
                  
                  
                  127,952Intangible
      assets
                  
                  
                  2,691,974
                  
                  
                  
                  2,754,656Goodwill
                  
                  
                  1,117,923
                  
                  
                  
                  1,115,150Restricted
      cash
                  
                  
                  -
                  
                  
                  
                  8,228,532Total
      assets
                  
                  $
                  41,625,380
                  
                  
                  $
                  34,290,778LIABILITIES
      AND EQUITYCurrent
      liabilitiesAccounts
      payable
                  
                  $
                  565,802
                  
                  
                  $
                  296,349Short-term
      loan
                  
                  
                  10,238,109
                  
                  
                  
                  2,917,919Taxes
      payable
                  
                  
                  11,001,715
                  
                  
                  
                  3,518,518Advances
      from customers
                  
                  
                  456,715
                  
                  
                  
                  1,339,773Dividends
      payable
                  
                  
                  231,861
                  
                  
                  
                  231,286Bank
      notes payable
                  
                  
                  -
                  
                  
                  
                  13,422,427Other
      payable
                  
                  
                  287,914
                  
                  
                  
                  405,235Total
      current liabilities
                  
                  
                  22,782,116
                  
                  
                  
                  22,131,507Total
      liabilities
                  
                  
                  22,782,116
                  
                  
                  
                  22,131,507Commitments
      and contingenciesEquityStockholder’s
      equity of the CompanyCommon
      stock: par value $.001; 50,000,000 shares authorized; 6,000,000 shares
      issued and outstanding
                  
                  
                  6,000
                  
                  
                  
                  6,000Additional
      paid-in capital.
                  
                  
                  9,533,619
                  
                  
                  
                  9,533,619Other
      comprehensive income
                  
                  
                  488,640
                  
                  
                  
                  454,828Retained
      earnings
                  
                  
                  7,543,994
                  
                  
                  
                  1,126,957Total
      stockholders' equity of the Company
                  
                  
                  17,572,253
                  
                  
                  
                  11,121,404Noncontrolling
      interest
                  
                  
                  1,271,011
                  
                  
                  
                  1,037,867Total
      equity
                  
                  
                  18,843,264
                  
                  
                  
                  12,159,271Total
      liabilities and equity
                  
                  $
                  41,625,380
                  
                  
                  $
                  34,290,778
 
 The
accompanying notes are an integral past of these combined and consolidated
financial statements
  F-3
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
 COMBINED
AND CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
 For the years ended December 31,2009
                    
                    
                    2008Revenues
                    
                    $
                    124,277,622
                    
                    
                    $
                    79,186,659Cost
      of revenues
                    
                    
                    110,201,272
                    
                    
                    
                    74,974,371Gross
      profit
                    
                    
                    14,076,350
                    
                    
                    
                    4,212,288Operating
      expensesSelling
      expenses
                    
                    
                    3,551,292
                    
                    
                    
                    1,497,723General
      and administrative expenses
                    
                    
                    1,029,840
                    
                    
                    
                    848,366Total
      operating expenses
                    
                    
                    4,581,132
                    
                    
                    
                    2,346,089Income
      from operations
                    
                    
                    9,495,218
                    
                    
                    
                    1,866,199Other
      income (expense)Other
      income
                    
                    
                    -
                    
                    
                    
                    154,899Interest
      expense
                    
                    
                    (331,739
                    )
                    
                    
                    (605
                    )Other
      expense
                    
                    
                    (221,032
                    )
                    
                    
                    (13,981
                    )Total
      other income (expense)
                    
                    
                    (552,771
                    )
                    
                    
                    140,313Income
      before income tax provision
                    
                    
                    8,942,447
                    
                    
                    
                    2,006,512Tax
      provision
                    
                    
                    2,292,266
                    
                    
                    
                    527,284Net
      income
                    
                    
                    6,650,181
                    
                    
                    
                    1,479,228Net
      income attributable to the noncontrolling interest
                    
                    
                    233,144
                    
                    
                    
                    -Net
      income attributable to the Company
                    
                    $
                    6,417,037
                    
                    
                    $
                    1,479,228Foreign
      currency translation adjustment
                    
                    
                    33,812
                    
                    
                    
                    329,758Comprehensive
      income attributable to the Company
                    
                    
                    6,450,849
                    
                    
                    
                    1,808,986Comprehensive
      income attributable to the noncontrolling interest
                    
                    
                    233,144
                    
                    
                    
                    -Comprehensive
      income
                    
                    $
                    6,683,993
                    
                    
                    $
                    1,808,986Basic
      and diluted weighted average shares outstanding
                    
                    
                    6,000,000
                    
                    
                    
                    6,000,000Basic
      and diluted net earnings per share
                    
                    $
                    1.11
                    
                    
                    $
                    0.25
 
 The
accompanying notes are an integral past of these combined and consolidated
financial statements
 
 F-4
 
 ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
 COMBINED
AND CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 For the years ended December 31,2009
                      
                      
                      2008Cash
      flows from operating activities:Net
      income attributable to the Company
                      
                      $
                      6,417,037
                      
                      
                      $
                      1,479,228Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Noncontrolling
      interest
                      
                      
                      233,144
                      
                      
                      
                      -Depreciation
                      
                      
                      410,269
                      
                      
                      
                      91,642Amortization
                      
                      
                      69,494
                      
                      
                      
                      6,414Bad
      debt allowance
                      
                      
                      212,473
                      
                      
                      
                      135,425Provision
      for impairment loss on construction
                      
                      
                      
                      
                      
                      
                      -(Gain)
      loss on disposal of property, plant and equipment
                      
                      
                      -
                      
                      
                      
                      (24,632
                      )Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (992,664
                      )
                      
                      
                      1,380,659Inventories
                      
                      
                      (8,584,537
                      )
                      
                      
                      3,075,442Other
      receivables
                      
                      
                      713,655
                      
                      
                      
                      (951,103
                      )Advances
      to suppliers
                      
                      
                      (5,514,286
                      )
                      
                      
                      1,275,859Related
      party receivable
                      
                      
                      (122,601
                      )Prepaid
      expense
                      
                      
                      (150,862
                      )
                      
                      
                      -Accounts
      payable
                      
                      
                      269,125
                      
                      
                      
                      (2,974,304
                      )Salary
      and accrued benefit payable
                      
                      
                      -
                      
                      
                      
                      (23,163
                      )Advances
      from customers
                      
                      
                      (885,912
                      )
                      
                      
                      413,187Taxes
      payable
                      
                      
                      7,417,310
                      
                      
                      
                      926,926Other
      payable
                      
                      
                      876,391
                      
                      
                      
                      (1,581,958
                      )Net
      cash provided by operating activities
                      
                      
                      368,036
                      
                      
                      
                      3,229,622Cash
      flows from investing activitiesConsideration
      for acquisition
                      
                      
                      (2,210,242
                      )
                      
                      
                      -Cash
      acquired by acquisition
                      
                      
                      -
                      
                      
                      
                      252Certificate
      of deposit
                      
                      
                      1,520,272
                      
                      
                      
                      (1,493,770
                      )Purchase
      of property and equipment
                      
                      
                      (8,073,606
                      )
                      
                      
                      (55,577
                      )Construction
      contracts
                      
                      
                      (503,661
                      )
                      
                      
                      (125,966
                      )Repayment
      of related party receivable
                      
                      
                      4,919,203Due
      from related party
                      
                      
                      -
                      
                      
                      
                      (4,833,448
                      )Purchase
      of intangible assets
                      
                      
                      -
                      
                      
                      
                      (555,225
                      )Proceeds
      on sale of fixed assets
                      
                      
                      -
                      
                      
                      
                      143,632Net
      cash used in investing activities
                      
                      
                      (4,348,034
                      )
                      
                      
                      (6,920,102
                      )Cash
      flows from financing activitiesProceeds
      from shareholders
                      
                      
                      -
                      
                      
                      
                      4,314,697Proceeds
      from short term loans
                      
                      
                      7,309,001
                      
                      
                      
                      -Repayment
      of short term  loans
                      
                      
                      -
                      
                      
                      
                      (2,585,371
                      )Collection
      from (payment to) escrow account for bank notes
                      
                      
                      6,724,281
                      
                      
                      
                      (6,607,059
                      )Proceeds
      from bank notes
                      
                      
                      -
                      
                      
                      
                      13,214,119Repayment
      of bank notes
                      
                      
                      (13,448,562
                      )
                      
                      
                      -Dividends
      distribution
                      
                      
                      -
                      
                      
                      
                      (107,280
                      )Net
      cash provided by financing activities
                      
                      
                      584,720
                      
                      
                      
                      8,229,106Effect
      of exchange rate on cash
                      
                      
                      10,374
                      
                      
                      
                      91,273Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      (3,384,904
                      )
                      
                      
                      4,629,899Cash
      and cash equivalents, beginning of period
                      
                      $
                      4,923,913
                      
                      
                      $
                      294,014Cash
      and cash equivalents, end of period
                      
                      $
                      1,539,009
                      
                      
                      $
                      4,923,913Supplemental
      cash flow information:Cash
      paid during the year for:Interest
                      
                      $
                      478,610
                      
                      
                      $
                      210,080Income
      taxes
                      
                      $
                      1,121,660
                      
                      
                      $
                      176,523
  The
accompanying notes are an integral past of these combined and consolidated
financial statements
 
 F-5
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
 COMBINED
AND CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
 
 Andatee China Marine Fuel Services Corporation ShareholdersCommon Stock
                                    
                                    
                                    Additional
                                      Paid- In
                                    
                                    
                                    Accumulated
                                      Other
                                      Comprehensive
                                    
                                    
                                    Retained
                                    
                                    
                                    Total
                                      Shareholders’
                                    
                                    
                                    Non-ControllingShare
                                    
                                    
                                    Amount
                                    
                                    
                                    Capital
                                    
                                    
                                    (loss) Income
                                    
                                    
                                    Earnings
                                    
                                    
                                    Equity
                                    
                                    
                                    Interest
                                    
                                    
                                    TotalBalance
      as of December 31, 2007
                                    
                                    
                                    6,000,000
                                    
                                    
                                    $
                                    6,000
                                    
                                    
                                    $
                                    3,774,553
                                    
                                    
                                    $
                                    125,070
                                    
                                    
                                    $
                                    (352,271
                                    )
                                    
                                    $
                                    3,553,352
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    3,553,352Contribution
      from shareholders
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,314,697
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,314,697
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,314,697Noncontrolling
      interests in subsidiaries acquired
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,037,867
                                    
                                    
                                    
                                    1,037,867Issuance
      of equity for business acquisition
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,444,369
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,444,369
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,444,369Net
      income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,479,228
                                    
                                    
                                    
                                    1,479,228
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,479,228Foreign
      currency translation adjustment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    329,758
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    329,758
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    329,758Balance
      as of December 31, 2008
                                    
                                    
                                    6,000,000
                                    
                                    
                                    $
                                    6,000
                                    
                                    
                                    $
                                    9,533,619
                                    
                                    
                                    $
                                    454,828
                                    
                                    
                                    $
                                    1,126,957
                                    
                                    
                                    $
                                    11,121,404
                                    
                                    
                                    $
                                    1,037,867
                                    
                                    
                                    $
                                    12,159,271Net
      income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    6,417,037
                                    
                                    
                                    
                                    6,417,037
                                    
                                    
                                    
                                    233,144
                                    
                                    
                                    
                                    6,650,181Foreign
      currency translation adjustment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    33,812
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    33,812
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    33,812Balance
      as of December 31, 2009
                                    
                                    $
                                    6,000,000
                                    
                                    
                                    $
                                    6,000
                                    
                                    
                                    $
                                    9,533,619
                                    
                                    
                                    $
                                    488,640
                                    
                                    
                                    $
                                    7,543,994
                                    
                                    
                                    $
                                    17,572,253
                                    
                                    
                                    $
                                    1,271,011
                                    
                                    
                                    $
                                    18,843,264
  The
accompanying notes are an integral past of these combined and consolidated
financial statements
  F-6
 ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  1.
Description of Business, Organization, VIE and Basis of Consolidation and
Combination
  Andatee China Marine Fuel Services
Corporation (“Andatee” or “the Company”) was incorporated in the State of
Delaware on July 10, 2009. Upon incorporation, the Company had authorized
50,000,000 common stock shares, par value $0.001per share. On October 16, 2009
the Company issued 8,000,000 shares in the share exchange with Goodwill Rich, as
described below. On October 19, 2009, the Company affected a reverse share split
on the basis of the 1-for-1.333334 ratio. As a result of the split, the number
of common stock issued and outstanding has decreased from 8,000,000 to 6,000,000
shares. The effect of reverse share split has been retroactively reflected for
all periods presented herein.
  The
Company was organized as a holding company to acquire Goodwill Rich
International Limited (“Goodwill Rich”), a company incorporated in Hong Kong,
and its subsidiary in connection with a contemplated initial public offering of
the Company’s common stock on the NASDAQ Capital Market. Goodwill Rich was
incorporated on October 28, 2008.
  Andatee
became the owner of 100% of the outstanding common stock of Goodwill Rich as the
result of a share exchange arrangement entered in August 2009 and completed on
October 16, 2009, in which 8,000,000 common share of Andatee (on a pre-reverse
stock split basis or 6,000,000 common shares after the effect of the reverse
stock split) were exchanged for all of the outstanding shares of Goodwill Rich.
The stockholders of Andatee and the stockholders of Goodwill Rich were the same,
and therefore the August 2009 share exchange was accounting for as a
recapitalization of Goodwill Rich. As a result, Goodwill is deemed to be the
predecessor of Andatee for financial reporting purposes, and the financial
statements of Andatee for the periods prior to the share exchange as presented
here are the historical financial statements of Goodwill Rich for those periods,
after being adjusted to retroactively reflect the effects of the
recapitalization to 6,000,000 issued and outstanding shares.
  In March
2009, Goodwill Rich established a subsidiary company in Dalian, People’s
Republic of China (the “PRC”), named Dalian Fusheng Consulting Company
(“Fusheng”).
  Dalian
Xingyuan Marine Bunker Co., Ltd. (“Xingyuan”) was established in September 2001
with a registered capital of RMB7 million and began providing refueling services
to the marine vessels in Dalian Port in Dalian City. Xingyuan holds 100%
ownership of Donggang Xingyuan Marine Fuel Company (“Donggang Xingyuan”), a
company incorporated in Dalian, PRC, in April, 2008. In addition, in December
2008, Xingyuan acquired 90% ownership of Rongcheng Xinfa Petroleum Company
(“Xinfa”) and 63% ownership of Xiangshan Yongshi Nanlian Petroleum Company
(“Nanlian”), respectively (see more details in Note 3 “Business
Acquisitions”).
  On March
26, 2009, Fusheng, Xingyuan and the stockholders of Xingyuan entered into a
series of agreements, as described below (the Consulting Services Agreement, the
Operating Agreement, the Equity Pledge Agreement, the Option Agreement and the
Proxy and Voting Agreement). Under these agreements Goodwill Rich obtained the
ability to direct the operations of Xingyuan and its subsidiaries and to obtain
the economic benefit of their operations. Therefore, management determined that
Xingyuan became a variable interest entity (“VIE”) under the provisions of
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 810 (originally issued as FASB Interpretation (“FIN”) No. 46(R)
“Consolidated Variable Interest Entities — an interpretation of ARB No. 51””),
and the Goodwill Rich (and the Company after the October 16, 2009 share exchange
described above) was determined to be the primary beneficiary of Xingyuan and
its subsidiaries. Accordingly, beginning March 26, 2009, Goodwill Rich (and the
Company after the October 16, 2009 share exchange described above) has
consolidated the assets, liabilities, results of operations and cash flows of
Xingyuan and its subsidiaries its financial statements. The agreements between
the Goodwill Rich and Xingyuan were entered into to facilitate raising capital
for the operations of Xingyuan through an offering of the Company’s common stock
on the Nasdaq Capital Market, and Goodwill Rich paid no consideration to
Xingyuan or its stockholders for entering into the agreements under which
Xingyuan became a VIE, provided, however, that Mr. An Fengbin, the principle
stockholder of Xingyuan became the chairman and CEO of the Company, and Mr. An
Fengbin and the other stockholders of Xingyuan  have certain rights or
options to acquire the 6,000,000 shares of the Company’s common stock issued in
the share exchange between the Company and Goodwill Rich at later dates when
permitted by PRC laws and regulations. Mr. An Fengbin remains the principle
stockholder of Xingyuan after the completion of the share exchange between
Goodwill Rich and Andatee described above.
 
 Upon the
October 28, 2008 incorporation of Goodwill Rich, Goodwill Rich and the
stockholders of Xingyuan has entered into a series of separate agreements under
which Goodwill Rich and Xingyuan were deemed, until March 2009, to be under the
common control of the stockholders of Xingyuan. Those separate agreements
provided that the majority stockholder of Goodwill Rich appointed Mr. An Fengbin
to (i) act as a director of Xingyuan, Xingyuan’s majority stockholder, and
Fusheng, (ii) act for the majority stockholder of Goodwill Rich at any meetings
of the directors, managers, financial controllers or other senior management of
Xingyuan, Xingyuan’s majority stockholder, and Fusheng, (iii) exercise all
voting and dispositive rights over the common stock of Xingyuan, Xingyuan’s
majority stockholder, and Fusheng. The agreements further provided that the
majority stockholder of Xingyuan would not appoint any additional directors to
the boards of any of these entities without Mr. An Fengbin’s approval. As a
result, Mr. An Fengbin was deemed to control Goodwill Rich and Fusheng, and
those companies and Xingyuan were deemed to be under common
control.
  F-7
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  1.
Description of Business, Organization, VIE and Basis of Consolidation and
Combination – (continued)
  All of
the transactions between Andatee, Goodwill Rich, Fusheng and Xingyuan were
deemed to be transactions between companies under common control, and therefore
the bases of the assets and liabilities in each of the companies was not
adjusted in any of the transactions.
  As a
result of the above, the accompanying combined and consolidated financial
statements contain:
 
 •
                through October 28, 2008, the
      assets, liabilities, results of operations and cash flows of Xingyuan and
      its subsidiaries;
 
 •
                for
      the period from October 28, 2008 to March 26, 2009, the assets,
      liabilities, results of operations and cash flows of Goodwill Rich and its
      subsidiary (adjusted for the effects of the August, 2009 recapitalization
      with Andatee) combined with those of Xingyuan and its subsidiaries;
      and
 
 •
                for
      the period from March 26, 2009 to June 30, 2009, the assets, liabilities,
      results of operations and cash flows of Goodwill Rich and its subsidiary
      (adjusted for the effects of the August, 2009 recapitalization with
      Andatee) consolidated with those of its VIE, Xingyuan, and its
      subsidiaries.
  The
Company, its subsidiaries, its VIE and its VIE’s subsidiaries (collectively the
“Group”) are principally engaged in the production, storage, distribution and
trading of blended marine fuel oil for cargo and fishing vessels in the
PRC.
  Consulting Services
Agreement.   Pursuant to the exclusive consulting services
agreement between Fusheng and Xingyuan, Fusheng has the exclusive right to
provide to Xingyuan business consulting and related services in connection with
the production and sale of marine bunker (the “Services”). Under this agreement,
Fusheng owns the intellectual property rights arising from the performance of
the Services, including, but not limited to, any trade secrets, copyrights,
patents, know-how, un-patented methods and processes and otherwise, whether
developed by Fusheng or Xingyuan based on Fusheng’s provision of Services under
the agreement. Xingyuan pays 50% of its total net profit to Fusheng on a
quarterly basis as consulting service fee. The consulting services agreement is
in effect for a term of 10 years starting from March 26, 2009 unless terminated
by (a) Xingyuan upon six-months prior written notice and payment to Fusheng of
(i) RMB2,000,000 as liquidated damages and (ii) all of Fusheng’s losses
resulting from such early termination; (b) Fusheng upon Xingyuan’s breach of the
agreement; or (c) Fusheng at any time upon thirty-days written notice to
Xingyuan. This agreement may be renewed at Fusheng’s sole
discretion.
  Operating
Agreement.  Pursuant to the operating agreement among Fusheng,
Xingyuan and the stockholders of Xingyuan who collectively hold all of the
outstanding shares of Xingyuan (collectively “Xingyuan Stockholders”), Fusheng
provides guidance and instructions on Xingyuan’s daily operations, financial
management and employment issues. The stockholders of Xingyuan must appoint the
candidates recommended by Fusheng to Xingyuan’s board of directors. Fusheng has
the right to appoint personnel to high level managerial positions of Xingyuan,
including General Manager and Chief Financial Officer. In addition, Fusheng
agrees to guarantee Xingyuan’s performance under any agreements, contracts or
transactions executed by Xingyuan relating to Xingyuan’s business. Xingyuan, in
return, agrees to pay Fusheng a quarterly fee equal to 50% of Xingyuan’s total
net profits for such quarter. Moreover, Xingyuan agrees that without the prior
consent of Fusheng, Xingyuan will not engage in any transactions that could
materially affect the assets, obligations, rights or the business of Xingyuan,
including, without limitation, (a) borrowing money from a third party or
assuming any debt, (b) selling to a third party or acquiring from a third party
any assets or rights, including without limitation, any plant, equipment, real
or personal property, or any intellectual property rights, (c) providing any
guaranty for any third party obligations, (d) assigning to a third party any
agreements related to Xingyuan’s business, (e) engaging in any other business
consulting agreements with a third party or engaging in any other business
activities other than the business of producing and selling marine bunker, and
(f) pledging any of Xingyuan’s assets or intellectual property rights to a third
party as a security interest. The term of this agreement is 10 years from March
26, 2009 and will be automatically renewed for additional 10 year period
upon the expiration of the initial term or any renewal term, unless previously
terminated. Fusheng may terminate the agreement at any time upon thirty (30)
days written notice to Xingyuan and the Xingyuan
Stockholders.
  F-8
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  1.
Description of Business, Organization, VIE and Basis of Consolidation and
Combination – (continued)
  Equity Pledge
Agreement.  Under the equity pledge agreement between Xingyuan,
the Xingyuan Stockholders and Fusheng, the Xingyuan Stockholders pledged all of
their equity interests in Xingyuan to Fusheng to guarantee Xingyuan’s
performance of its obligations under the following agreements entered into by
Fusheng and Xingyuan: (a) the Exclusive Consulting Agreement dated March 26,
2009, (b) the Operating Agreement dated March 26, 2009 and (c) any other
agreements to be entered into by and between Fusheng and Xingyuan from time to
time with respect to Fusheng’s provision of services to Xingyuan and Fusheng’s
collection of appropriate charges from Xingyuan (collectively, (a), (b) and (c)
are the “Service Agreements”). If Xingyuan or Xingyuan’s Stockholders breach its
respective contractual obligations, Fusheng, as pledgee, will be entitled to
certain rights, including but not limited to the right to sell the pledged
equity interests. The stockholders of Xingyuan agreed that without Fusheng’s
prior written consent, they will not transfer any equity interest, create or
permit to exist any pledge that may damage Fusheng’s rights or interests in the
pledged equity interests, or cause Xingyuan’s meeting of stockholders or board
of directors to pass any resolutions about the sale, transfer, pledge or other
disposal of the lawful right to derive income from any equity interest in
Xingyuan or about the permission of the creation of any other security interests
thereon. The term of this agreement is the same as the longest of the Service
Agreements. If the term of any Service Agreement is renewed, the term of this
agreement will extend accordingly.
  Option
Agreement.   Under the option agreement between Xingyuan,
the Xingyuan Stockholders and Fusheng, the Xingyuan Stockholders irrevocably,
unconditionally and exclusively granted Fusheng a purchase option (the “Purchase
Option”) whereby, to the extent permitted under Chinese law, Fusheng has the
right to request the Xingyuan Stockholders transfer, to it or its designated
entity or person, the total equity interests held by them in the registered
capital of Xingyuan, which as a group equals 100% of the outstanding equity of
Xingyuan. Fusheng has sole discretion to decide the specific time, method and
number of the exercise of the Purchase Option. At the time of each exercise of
the Purchase Option by Fusheng, the total consideration to be paid to Xingyuan
Stockholders by Xingyuan or its designated entity or person shall be determined
from one of following two prices i) RMB 10.00; or ii) the lowest price permitted
under PRC laws. This agreement will terminate after 100% of the outstanding
equity of Xingyuan has been duly transferred to Fusheng and/or Fusheng’s
designee(s).
  Proxy and Voting
Agreements.  Pursuant to the proxy and voting agreements
between Fusheng, Xingyuan, and each of Xingyuan’s Stockholders, Xingyuan’s
Stockholders agreed to irrevocably entrust the person designated by Fusheng with
his stockholder voting rights and other stockholder rights for representing him
to exercise such rights at the stockholders’ meeting of Xingyuan in accordance
with applicable laws and its Article of Association, including, but not limited
to, the right to sell or transfer all or any of his equity interest in Xingyuan,
and appoint and vote for the directors and Chairman as the authorized
representative of the Xingyuan Stockholders. The term of each Proxy and Voting
Agreement is twenty (20) years from March 26, 2009 and may be extended prior to
its expiration by written agreement of the parties.
  F-9
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  2.
Summary of Significant Accounting Policies
  Basis
of Presentation
  The
accompanying combined and consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America (“US GAAP”).
  Basis
of Consolidation
  The
combined and consolidated financial statements include the combined revenues,
expenses and cash flows of Xingyuan and its subsidiaries as of and for the year
ended December 31, 2008 and on a consolidated basis from the date that Xingyuan
became a consolidated VIE of the Company (see Note 1). All intercompany
transactions and balances have been eliminated in consolidation.
  Use
of Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
  Foreign
Currency Translation
  The
Company’s functional and reporting currency is the United States dollar (“U.S.
dollar”). The functional currency of the Company’s subsidiary in Hong Kong is
the U.S. dollar while the local currency of the Company’s subsidiary, VIE and
its subsidiaries in China is the Renminbi (“RMB”). Accordingly, assets and
liabilities of the China entities are translated at the current exchange rate in
effect at the balance sheet date, and revenues and expenses are translated at
the average exchange rates in effect during the reporting period to U.S. dollar.
Gains and losses resulting from foreign currency translation to reporting
currency are recorded in accumulated other comprehensive income in the
statements of changes in shareholders’ equity for the years
presented.
  Foreign
currency transactions are translated at the applicable rates prevailing at the
dates of the transactions. Monetary assets and liabilities denominated in
foreign currencies at the balance sheet date are remeasured at the applicable
rates of exchange in effect at that date. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations.
  Cash
and Cash Equivalents
  Cash and
cash equivalents include cash on hand and cash on deposit, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
  Restricted
Cash
  In
accordance with FASB ASC Topic 210 (originally Accounting Review Board (“ARB”)
No. 43, Chapter 3A “Current Assets and Current Liabilities”), cash which is
restricted as to withdrawal is considered a non-current asset.
  Accounts
Receivable
  Accounts
receivable are recognized and carried at original invoiced amount less an
allowance for uncollectible accounts, as needed.
  When
evaluating the adequacy of its allowance for doubtful accounts, the Company
reviews the collectability of accounts receivable, historical write-offs, and
changes in sales policies, customer credibility and general economic
tendency.
  Inventories
  Inventories
are stated at the lower of cost and current market value. Costs include the cost
of raw materials, freight, direct labor and related manufacturing overhead.
Inventories are stated at cost upon acquisition.
  F-10
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  2.
Summary of Significant Accounting Policies  – (continued)
  The cost
of inventories is calculated using the weighted average method. Any excess of
the cost over the net realizable value of each item of inventories is recognized
as a provision for diminution in the value of inventories.
  Net
realizable value is the estimated selling price in the normal course of business
less the estimated costs to completion and the estimated expenses and related
taxes to make the sale.
  Reusable
materials include low-value consumables and other materials, which can be in use
for more than one year but do not meet the definition of fixed assets. Reusable
materials are amortized in half when received for use and in another half when
cease to work for any purpose. The amounts of the amortization are included in
the cost of the related assets or profit or loss.
  Concentration
of Risks
  All of
the Group’s sales and a majority of its expense transactions are denominated in
RMB and a significant portion of the Group’s assets and liabilities are
denominated in RMB. RMB is not freely convertible into foreign currencies. In
the PRC, certain foreign exchange transactions are required by law to be
transacted only by authorized financial institutions at exchange rates set by
the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by
the Group in China must be processed through the PBOC or other China foreign
exchange regulatory bodies which require certain supporting documentation in
order to affect the remittance.
  As of
December 31, 2009, all of the Company’s cash was on deposit at financial
instructions in the PRC where there is currently no rule or regulation requiring
such financial institutions to maintain  insurance to cover bank
deposits in the event of bank failure.
  For
fiscal year ended December 31, 2009, there were two customers accounted for
12.8% and 11.9% of the Company’s total revenues. There were two customers
accounted for 16.9% and 13.9% of the total revenues for the fiscal year ended
December 31, 2008.
  For the
year ended December 31, 2009, the company purchased 36.2% and 33.4% of its raw
materials from two suppliers. The balances of advances to these two suppliers
were $791,459 and $1,774,425 at December 31, 2009. The total balance of advances
to suppliers at December 31, 2009 was $7,691,266, which was non-interest bearing
and unsecured.
  For the
year ended December 31, 2008, the company purchased 46% of its raw materials
from one supplier. The balance of advances to this supplier was $665,789 at
December 31, 2008. The total balance of advances to suppliers at December 31,
2008 was $2,168,620, which was non-interest bearing and unsecured.
  Property,
Plant and Equipment
  Property,
plant and equipment are stated at cost, less accumulated depreciation.
Expenditures for maintenance and repairs, which are not considered improvements
and do not extend the useful life of the asset, are expensed as incurred;
additions, renewals and betterments are capitalized. When assets are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in the statement
of operations in cost of blended products.
  F-11
   ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  2.
Summary of Significant Accounting Policies – (continued)
  Depreciation
is provided to recognize the cost of the asset in the results of operations. The
Company calculates depreciation using the straight-line method with estimated
useful life as follows:
 
 Items
                
                Useful LifeProperty
      and buildings
                
                40 yearsMarine
      bunker
                
                15 yearsBoiler
      equipment
                
                12 yearsLaboratory
      equipment
                
                8 yearsTransportation
      vehicles
                
                8 yearsOffice
      equipment
                
                4 yearsElectronic
      equipment
                
                3 years
  Construction
in Progress
  Construction
in progress represents property and buildings under construction and consists of
construction expenditure, equipment procurement, and other direct costs
attributable to the construction. Construction in progress is not depreciated.
Upon completion and ready for intended use, construction in progress is
reclassified to the appropriate category of property, plant and
equipment.
  Impairment
of Long-Lived Assets
  In
accordance with FASB ASC Topic 360 (originally Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”), certain assets such as property, plant, and equipment, and
purchased intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Intangible assets are tested for impairment annually.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
There were no events or changes in circumstances that necessitated a review of
impairment of long lived assets as of December 31, 2009 and 2008,
respectively.
  Goodwill
  Goodwill
represents the excess of the purchase price over the net of the fair value of
the identifiable tangible and intangible assets acquired and the fair value of
liabilities assumed in business acquisitions. The Company performs its
impairment test on an annual basis. The Company determined that there was no
impairment of goodwill as of December 31, 2009.
  Intangible
Assets
  Intangible
assets consist mainly of land use rights and software. The intangible assets are
amortized using straight-line method over the life of the rights and
assets.
  F-12
 
 ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  2.
Summary of Significant Accounting Policies  – (continued)
  The
details of land use rights are as follows:
 
 Location
                                
                                Land Size
                                
                                
                                Amount
                                
                                Terms(square
      meter)Nanhui
      Village, Shipu Town, Zhejiang Province
                                
                                
                                8,906.90
                                
                                
                                $
                                2,192,816
                                
                                April
      1, 2004 – May 12, 2047Development
      Zone, Donggang, Liaoning Province
                                
                                
                                21,994.80
                                
                                
                                $
                                563,978
                                
                                July
      16, 2008 – May 15,
2058
  Noncontrolling
Interests in Consolidated Financial Statements
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS No. 160”), which amends Accounting
Research Bulletin 51, Consolidated Financial Statements, to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS
No. 160 (now codified at FASB ASC Topic 810) also changes the way the
consolidated income statement is presented by requiring consolidated net income
to be reported at amounts that include the amounts attributable to both the
parent and the noncontrolling interest. It also requires disclosure, on the face
of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. SFAS No.
160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish between
the interests of the parent owners and the interests of the noncontrolling
owners of a subsidiary. SFAS No. 160 is effective for fiscal periods, and
interim periods within those fiscal years, beginning on or after December 15,
2008. The Company adopted SFAS No. 160 for the accompanying consolidated
financial statements.
  Noncontrolling
interest represents a 37% equity interest in Nanlian and a 10% equity interest
in Xinfa for the minority owners.
  Revenue
Recognition
  The
Company recognizes revenues in accordance with the guidance in the Securities
and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104.
Revenue is recognized when persuasive evidence of an arrangement exists, when
the selling price is fixed or determinable, when delivery occurs and when
collection is probable.
  Delivery
is typically conveyed via pipeline or tanker and sales revenues are recognized
when customers take possession of goods in accordance with the terms of purchase
order agreements that evidence agreed upon pricing and when collectability is
reasonably assured.
  Advances
from customers represent monies that customers have paid in advance for the
Company’s marine fuel products as down payments and where the delivery of these
marine fuel products is not yet complete. Supply and demand for our products
determines the circumstances requiring advances from customers. As an industry
wide practice, we require advances from customers for substantially all
sales.
  Stock-Based
Compensation
  In
December 2004, the FASB issued SFAS No.123(R), “Share-Based Payment”, (now
codified at FASB ASC Topic 718) which prescribes accounting and reporting
standards for all stock based compensation plans, including employee stock
options, restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS No. 123(R) requires compensation expense to be recorded using the
fair value method.
  F-13
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  2.
Summary of Significant Accounting Policies  – (continued)
  Environmental
Expenditures
  Environmental
expenditures that relate to current ongoing operations or to conditions caused
by past operations are expensed as incurred.
  Research
and Development Costs
  Research
and development costs are recognized in the income statement when
incurred.
  Income
Taxes
  The
Company provides for income taxes in accordance with FASB ASC Topic 718
(originally SFAS No. 109, “Accounting for Income Taxes”) which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates, applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
  Defined
Contribution Plan
  Pursuant
to the relevant laws and regulations in the PRC, the Company participates in
various defined contribution retirement plans organized by the respective
divisions in municipal and provincial governments for its employees. The Company
is required to make contributions to the retirement plans in accordance with the
contribution rates and basis as defined by the municipal and provincial
governments. The contributions are charged to the respective assets or the
income statement on an accrual basis. When employees retire, the respective
divisions are responsible for paying their basic retirement benefits. The
Company does not have any other obligations in this respect.
  The
Company contributed $33,511 and $28,388 for the years ended December 31, 2009
and 2008, respectively.
  Housing
Fund and Other Social Insurance
  In
addition to retirement benefits, the Company makes contributions to the housing
fund and other social insurances such as basic medical insurance, unemployment
insurance, worker injury insurance and maternity insurance for its employees in
accordance with relevant laws and regulations. The Company makes monthly
contributions to the housing fund and the above insurances based on the
applicable rates of the employee salaries. The contributions are charged to the
respective liability account and the income statement on an accrual
basis.
  Earnings
per Share
  Basic net
income per common share is computed using the weighted average number of common
shares outstanding during the periods after giving retroactive effect to (i) the
recapitalization of Goodwill Rich affected through the October 16, 2008 share
exchange between he Company and Goodwill Rich and (ii) the October 19, 2009
reverse stock split. Diluted net income per share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the year.
  Comprehensive
Income (Loss)
  Comprehensive
income (loss) is defined as the change in equity of a company during a period
from transactions and other events and circumstances excluding transactions
resulting from investments from owners and distributions to owners. Accumulated
other comprehensive income (loss), as presented on the accompanying consolidated
balance sheets, consists of the cumulative foreign currency translation
adjustment.
  Segment
Reporting
  The
Company operates and manages its business as a single segment. As the Company
primarily generates its revenues from customers in the PRC, no geographical
segments are presented.
  F-14
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  2.
Summary of Significant Accounting Policies  – (continued)
  Recent
Accounting Pronouncements
  Recent
accounting pronouncements that the Company has adopted or that will be required
to adopt in the future are summarized below.
  Technical
Corrections to Various Topics
  In February, 2010 the FASB issued ASC
Update 2010-08, which contains technical corrections to various Topics within
the ASC. Those corrections are effective for interim and annual periods
beginning after February 2, 2010. The Company is currently evaluating the
potential effects of ASC Update 2010-08.
  Fair
Value Measurements and Disclosures – Improving Disclosures About Fair Value
Measurements
  In
February, 2010, the FASB issued FASB ASC Update 2010-06, “Fair Value
Measurements and Disclosures – Improving Disclosures About Fair Value
Measurements,” ASU Update 2010-06 adds new requirements for disclosures of
significant transfers into and out of Levels 1, 2 and 3 of the fair value
hierarchy, the reasons for the transfers and the policy for determining when
transfers are recognized. ASU 2010-06 also adds new requirements for disclosures
about purchases, sales, issuances and settlements on a gross rather than net
basis relating to the reconciliation of the beginning and ending balances of
Level 3 recurring fair value measurements. It also clarifies the level of
disaggregation to require disclosures by “class” rather than by “major category
of assets and liabilities” and clarifies that a description of inputs and
valuation techniques used to measure fair value is required for both recurring
and nonrecurring fair value measurements classified as Level 2 or 3. ASU
Update 2010-06 is effective January 1, 2010 except for the requirements to
provide the Level 3 activity of purchases, sales, issuances and settlements
on a gross basis which are effective January 1, 2011. The adoption of ASU
2010-06 is not expected to have a material impact on the Company’s results of
operations or financial position.
  Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles
  In June
2009, the FASB issued Statement No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles”
(“SFAS No. 168”). SFAS No. 168 will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (“GAAP”),
superseding existing FASB, American Institute of Certified Public Accountants
(“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting
literature. SFAS No. 168 reorganizes the thousands of GAAP pronouncements into
the FASB ASC, which contains roughly 90 accounting topics and displays them
using a consistent structure. Also included is relevant Securities and Exchange
Commission guidance organized using the same topical structure in separate
sections. SFAS No. 168 is effective for financial statements issued for
reporting periods that end after September 15, 2009. As the result of SFAS No.
168 the Company’s references to the authoritative accounting literature in these
financial statements have been revised to include references to the FASB
ASC.
 
 Consolidation
of Variable Interest Entities – Amendments to FASB Interpretation No.
46(R)
 In June 2009, the FASB issued SFAS
No. 167, “Amendments to FASB Interpretation No. 46(R)”, which has been codified
as an update to FASB ASC Topic 810 which requires ongoing analyses to determine
whether an entity’s variable interest gives it a controlling financial interest
in a variable interest entity (“VIE”), making it the primary beneficiary, based
on whether the entity (i) has the power to direct activities of the VIE
that most significantly impact its economic performance, including whether it
has an implicit financial responsibility to ensure the VIE operates as designed,
and (ii) has the obligation to absorb losses or the right to receive
benefits of the VIE that could potentially be significant to the VIE. Enhanced
disclosures regarding an entity’s involvement with variable interest entities
are also required under the provisions of FASB ASC 810. These requirements are
effective January 1, 2010. The adoption of these requirements is not
expected to have a material impact on the Company’s financial
statements.
  Accounting
for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance
or Other Financing
  In June
2009, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No. 09-1,
“Accounting for Own-Share Lending Arrangements in Contemplation of Convertible
Debt Issuance or Other Financing”. This Issue is effective for fiscal years
beginning on or after December 15, 2009, and interim periods within those fiscal
years for arrangements outstanding as of the beginning of those fiscal years.
Share lending arrangements that have been terminated as a result of counterparty
default prior to the effective date of this Issue but for which the entity has
not reached a final settlement as of the effective date are within the scope of
this Issue. This Issue requires retrospective application for all arrangements
outstanding as of the beginning of fiscal years beginning on or after December
15, 2008. This Issue is effective for arrangements entered into on or after the
beginning of the first reporting period that begins on or after June 15, 2009.
Early adoption is not permitted. The implementation of this issue did not have a
material impact on the Company’s financial position and results of
operations.
  Subsequent
Events
  In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”) which
is codified at FASB ASC Topic 855. This Statement establishes general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
It requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date and was effective for interim and
annual periods ending after June 15, 2009. The adoption of SFAS No. 165 did not
to have a material impact on the Company’s financial statements.
  Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly
  In April
2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly”. This FSP, which is codified
at FASB ASC Topic 820, provides additional guidance for estimating fair value in
accordance with FASB Statement No. 157, Fair Value Measurements, when the volume
and level of activity for the asset or liability have significantly decreased.
This FSP also includes guidance on identifying circumstances that indicate a
transaction is not orderly. FSP FAS No. 157-4 is effective for interim and
annual reporting periods ending after June 15, 2009, and shall be applied
prospectively. The implementation of FSP FAS No. 157-4 did not have a material
on the Company’s financial position and results of operations.
  F-15
 
 ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  2.
Summary of Significant Accounting Policies  – (continued)
  Recognition
and Presentation of Other-Than-Temporary Impairments
  In April
2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments “, which is codified in FASB
ASC Topic 320. The objective of an other-than-temporary impairment analysis
under existing U.S. generally accepted accounting principles (GAAP) is to
determine whether the holder of an investment in a debt or equity security for
which changes in fair value are not regularly recognized in earnings (such as
securities classified as held-to-maturity or available-for-sale) should
recognize a loss in earnings when the investment is impaired. An investment is
impaired if the fair value of the investment is less than its amortized cost
basis. FSP FAS No. 115-2 and FAS No. 124-2 is effective for interim and annual
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. Earlier adoption for periods ending before
March 15, 2009, is not permitted. The implementation of FSP FAS No. 115-2 and
FAS No. 124-2 did not have a material impact on the Company’s financial position
and results of operations.
  Interim
Disclosures about Fair Value of Financial Instruments
  In April
2009, the FASB issued FSP FAS No. 107-1 and APB No. 28-1, “Interim Disclosures
about Fair Value of Financial Instruments” which is codified in FASB ASC Topic
825. This FSP amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP FAS No. 107-1 is effective for
interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The implementation of FSP FAS
No. 107-1 did not have a material impact on the Company’s financial position and
results of operations
  Employers’
Disclosures About Postretirement Benefit Plan Assets
  In
December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position on Financial Accounting Standard (“FSP FAS”) No. 132(R)-1,
“Employers’ Disclosures about Postretirement
  F-16
 
 ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  2.
Summary of Significant Accounting Policies  – (continued)
  Benefit
Plan Assets.” This FSP amends FASB Statement No. 132(R) (“SFAS No. 132(R)”),
“Employers’ Disclosures about Pensions and Other Postretirement Benefits,” (FASB
ASC Topic 715) to provide guidance on an employer’s disclosures about plan
assets of a defined benefit pension or other postretirement plan. FSP FAS No.
132(R)-1 also includes a technical amendment to SFAS No. 132(R) that requires a
nonpublic entity to disclose net periodic benefit cost for each annual period
for which a statement of income is presented. The required disclosures about
plan assets are effective for fiscal years ending after December 15, 2009. The
technical amendment was effective upon issuance of FSP FAS No. 132(R)-1 and did
not have a material effect on the Company’s consolidated financial
statements.
  Accounting
for an Instrument (or an Embedded Feature) With a Settlement Amount that is
Based on the Stock of an Entity’s Consolidated Subsidiary
  In
November 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No.
08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement
Amount that is based on the Stock of an Entity’s Consolidated Subsidiary.” EITF
No. 08-8, codified at FASB ASC Topic 815, clarifies whether a financial
instrument for which the payoff to the counterparty is based, in whole or in
part, on the stock of an entity’s consolidated subsidiary is indexed to the
reporting entity’s own stock. EITF No. 08-8 also clarifies whether or not stock
should be precluded from qualifying for the scope exception of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” or from being
within the scope of EITF No. 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” EITF
No. 08-8 was effective for fiscal years beginning on or after December 15, 2008,
and interim periods within those fiscal years. The impact of adoption was not
material to the Company’s consolidated financial condition or results of
operations.
  Accounting
for Defensive Intangible Assets
  In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for Defensive
Intangible Assets.” EITF No. 08-7, codified at FASB ASC Topic 350, clarifies how
to account for defensive intangible assets subsequent to initial measurement.
EITF No. 08-7 applies to all defensive intangible assets except for intangible
assets that are used in research
and development activities. EITF No. 08-7 was effective for intangible assets
acquired on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The impact of adoption was not material
to the Company’s consolidated financial condition or results of
operations.
  F-17
 
 ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  2.
Summary of Significant Accounting Policies  – (continued)
  Equity
Method Investment Accounting Considerations
  In
November 2008, the FASB issued EITF Issue No. 08-6 (“EITF No. 08-6”), “Equity
Method Investment Accounting Considerations.” EITF No. 08-6 amends FASB ASC
Topic 323 to clarify the accounting for certain transactions and impairment
considerations involving the equity method. Transactions and impairment dealt
with are initial measurement, decrease in investment value, and change in level
of ownership or degree of influence. EITF No. 08-6 was effective on a
prospective basis for fiscal years beginning on or after December 15, 2008. The
impact of adoption was not material to the Company’s consolidated financial
condition or results of operations.
  Issuer’s
Accounting for Liabilities Measured at Fair Value with a Third-Party Credit
Enhancement
  In
September 2008, the FASB issued EITF Issue No. 08-5 (“EITF No. 08-5”), “Issuer’s
Accounting for Liabilities Measured at Fair Value with a Third-Party Credit
Enhancement.” This EITF, codified at FASB ASC Topic 820, determines an issuer’s
unit of accounting for a liability issued with an inseparable third-party credit
enhancement when it is measured or disclosed at fair value on a recurring basis.
FSP EITF No. 08-5 was effective on a prospective basis in the first reporting
period beginning on or after December 15, 2008. The impact of adoption was not
material to the Company’s consolidated financial condition or results of
operations.
  F-18
 
 ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  2.
Summary of Significant Accounting Policies  – (continued)
  Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities
  In June
2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No. 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” The FSP, codified at FASB ASC Topic 260, addresses
whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing earnings per share under the two-class
method. The FSP affects entities that accrue dividends on share-based payment
awards during the awards’ service period when the dividends do not need to be
returned if the employees forfeit the award. This FSP was effective for fiscal
years beginning after December 15, 2008. The impact of adoption was not material
to the Company’s consolidated financial condition or results of
operations.
  Determining
Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own
Stock
  In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF
07-5, codified at FASB ASC Topic 815, provides that an entity should use a two
step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement provisions. It also clarifies on
the impact of foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation. EITF 07-5 was
effective for fiscal years beginning after December 15, 2008. The impact of
adoption was not material to the Company’s consolidated financial condition or
results of operations.
  Accounting
for Convertible Debt Instruments that May be Settled in Cash Upon Conversion
(Including Partial Cash Settlement)
  In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) Opinion No. 14-1,
“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)”. The FSP, codified at FASB ASC
Topic 470, clarifies the accounting for convertible debt instruments that may be
settled in cash (including partial cash settlement) upon conversion. The FSP
requires issuers to account separately for the liability and equity components
of certain convertible debt instruments in a manner that reflects the issuer’s
nonconvertible debt (unsecured debt) borrowing rate when interest cost is
recognized. The FSP requires bifurcation of a component of the debt,
classification of that component in equity and the accretion of the resulting
discount on the debt to be recognized as part of interest expense in our
consolidated statement of operations. The FSP requires retrospective application
to the terms of instruments as they existed for all periods presented. The FSP
was effective for us as of January 1, 2009 and early adoption is not permitted.
The impact of adoption was not material to the Company’s consolidated financial
condition or results of operations.
  F-19
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  2.
Summary of Significant Accounting Policies  – (continued)
  Disclosure
about Derivative Instruments and Hedging Activities
  In March
2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and
Hedging Activities, an amendment of SFAS No. 133”, (SFAS No.161), which was
codified at FASB ASC Topic 815. This statement requires that objectives for
using derivative instruments be disclosed in terms of underlying risk and
accounting designation. The Company was required to adopt SFAS No. 161 on
January 1, 2009. The adoption of SFAS No. 161 did not have material impact on
the Company’s consolidated financial statements.
  3.
Business Acquisition
  On
December 25, 2008, Xingyuan acquired 90% ownership of Rongcheng Xinfa Petroleum
Company (“Xinfa”), for which Xingyuan issued 2,475,000 shares of its common
stock, equal to 3.96% ownership of Xingyuan. Xinfa engaged in distribution of
marine fuel oil in the surrounding areas of Shidao town, Rongcheng city,
Shandong Province, with heavily concentrated and developed fishing
industry.
  The
acquisition-date fair value of the total consideration transferred was RMB 9.9
million (approximately $1.44 million), based on independent appraisal reports as
well as the management experience in valuation of similar assets and
liabilities.
  On
December 31, 2008, Xingyuan entered into a share acquisition agreement with
Xiangshan Yongshi Nanlian Petroleum Company (“Nanlian”) and its shareholders.
Xingyuan acquired 63% ownership of Nanlian, for a total consideration of
RMB15.12 million (approximately $2.21 million), which was fully paid in February
2009. The principal activities of Nanlian are storage, distribution and trading
of blended marine fuel oil for cargo and fishing vessels. This acquisition
allowed the Company to build a stronghold in a very important fishing port in
southern China.
  The
acquisition of Xinfa and Nanlian was accounted for using the purchase method.
The results of Xinfa and Nanlian’s operations have been included in the
consolidated financial statements since their acquisition
dates.
  F-20
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  3.
Business Acquisition  – (continued)
  Management
made estimates and judgments in determining the fair values of the assets
acquired and liabilities assumed based on independent appraisal reports as well
as its experience in valuation of similar assets and liabilities. The following
represents the purchase price allocation and factors that contributed to a
purchase price that resulted in the recognition of goodwill at the date of the
acquisition:
 
 Xinfa
                              
                              
                              Nanlian
                              
                              
                              TotalCash
      and cash equivalents
                              
                              $
                              252
                              
                              
                              $
                              —
                              
                              
                              $
                              252Inventory
                              
                              
                              27,839
                              
                              
                              
                              28,831
                              
                              
                              
                              56,670Other
      receivables
                              
                              
                              —
                              
                              
                              
                              1,880,565
                              
                              
                              
                              1,880,565Property
      and equipment
                              
                              
                              1,024,337
                              
                              
                              
                              327,959
                              
                              
                              
                              1,352,296Goodwill
                              
                              
                              497,185
                              
                              
                              
                              617,965
                              
                              
                              
                              1,115,150Intangible
      assets
                              
                              
                              —
                              
                              
                              
                              2,192,816
                              
                              
                              
                              2,192,816Current
      liabilities
                              
                              
                              —
                              
                              
                              
                              (1,909,565
                              )
                              
                              
                              (1,909,565
                              )Noncontrolling
      interests
                              
                              
                              (105,243
                              )
                              
                              
                              (932,624
                              )
                              
                              
                              (1,037,867
                              )Total
      purchase price
                              
                              $
                              1,444,370
                              
                              
                              $
                              2,205,947
                              
                              
                              $
                              3,650,317
  The
intangible assets acquired in the Nalian acquisition in the amount of $2,192,816
was for a land use rights of 43 years, (April 1, 2004 to May 12, 2047), which
are amortized using straight-line method over the remaining life of the rights.
The goodwill is not expected to be deductible for income tax
purposes.
  The
following unaudited pro forma financial information presents the consolidated
results of operations of the Group as if the acquisition of the 90% equity
interest in Xinfa and the 63% equity interest in Nanlian had occurred as of
January 1, 2008. In addition, the unaudited pro forma financial information does
not attempt to project the future results of operations after the acquisition of
Xinfa and Nanlian.
  For
the Year Ended December 31, 2008
 
 HistoricalThe Group
                              
                              
                              Xinfa
                              
                              
                              Nanlian
                              
                              
                              Adjustment
                              
                              
                              Pro-formaRevenues
                              
                              $
                              79,186,659
                              
                              
                              $
                              9,910,463
                              
                              
                              $
                              10,339,382
                              
                              
                              $
                              (4,094,522
                              )
                              
                              $
                              95,341,982Income
      from operations
                              
                              $
                              1,866,199
                              
                              
                              $
                              510,033
                              
                              
                              $
                              503,321
                              
                              
                              $
                              (17,061
                              )
                              
                              $
                              2,862,493Net
      income attributable to the Company
                              
                              $
                              1,479,228
                              
                              
                              $
                              387,799
                              
                              
                              $
                              342,371
                              
                              
                              $
                              (17,061
                              )
                              
                              $
                              2,192,337Basic
      earnings per share attributable to the Company
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              0.37
                              *Diluted
      earnings per share attributable to the Company
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              0.37
                              *
 
 F-21
 
 ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  3.
Business Acquisition  – (continued)
  *
              The number of shares outstanding
      used in the calculation of earnings per share is 6,000,000 shares,
      following the reverse stock split of 1-for-1.333334 that became effective
      on October 19, 2009.
  The pro
forma adjustments represent the elimination of inter-company sales from Xingyuan
to Xinfa and the unrealized profit therewith.
  4.
Accounts Receivables
 
 As of December 31,2009
                                                                
                                                                
                                                                2008Trade
      accounts receivables
                                                                
                                                                $
                                                                2,551,642
                                                                
                                                                
                                                                $
                                                                1,694,316Allowances
      for doubtful accounts
                                                                
                                                                
                                                                (36,239
                                                                )
                                                                
                                                                
                                                                (175,887
                                                                )Accounts
      receivables, net
                                                                
                                                                $
                                                                2,515,403
                                                                
                                                                
                                                                $
                                                                1,518,429
  5.
Other Receivables
 
 As of December 31,2009
                                        
                                        
                                        2008Other
      receivables
                                        
                                        $
                                        1,722,206
                                        
                                        
                                        $
                                        1,077,755Allowances
      for doubtful accounts
                                        
                                        
                                        (414,732
                                        )
                                        
                                        
                                        (61,906
                                        )Other
      receivables
                                        
                                        $
                                        1,307,474
                                        
                                        
                                        $
                                        1,015,849
  6.
Inventories
  Inventory
consists of the following:
 
 As of December 31,2009
                                
                                
                                2008Marin
      Fuel
                                
                                $
                                13,298,794
                                
                                
                                $
                                4,697,954Other
      consumables
                                
                                
                                3,736
                                
                                
                                
                                3,727Total
                                
                                $
                                13,302,530
                                
                                
                                $
                                4,701,681
 
 F-22
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  6.
Inventories  – (continued)
  As of
December 31, 2009, $5,022,679 of Dalian Xingyuan’s inventory has been pledged as
the collateral for a loan from Shenzhen Development Bank (“SD
Bank”).
  7.
Property Plant and Equipment
 
 As of December 31,2009
                        
                        
                        2008Property
      and buildings
                        
                        $
                        10,226,544
                        
                        
                        $
                        2,717,405Laboratory
      equipment
                        
                        
                        336,412
                        
                        
                        
                        41,849Boiler
      equipment
                        
                        
                        227,756
                        
                        
                        
                        190,249Marine
      bunker
                        
                        
                        206,559
                        
                        
                        
                        206,046Transportation
      vehicles
                        
                        
                        529,386
                        
                        
                        
                        307,907Office
      equipment
                        
                        
                        34,891
                        
                        
                        
                        16,631Electronic
      equipment
                        
                        
                        49,895
                        
                        
                        
                        44,641Total
                        
                        
                        11,611,443
                        
                        
                        
                        3,524,728Less:
      Accumulated depreciation
                        
                        
                        (1,170,197
                        )
                        
                        
                        (757,823
                        )Net
      Value
                        
                        $
                        10,441,246
                        
                        
                        $
                        2,766,905
  The
depreciation expenses were $410,269 and $91,642 for the years ended December 31,
2009 and 2008, respectively.
  As of
December 31, 2009, $1,140,738 of Xingyuan’s property has been pledged as the
collateral for a loan from Shanghai Pudong Development Bank (“SPD
Bank”).
  8.
Construction in Progress
 
 As of December 31,2009
                                            
                                            
                                            2008Construction
      in progress, cost
                                            
                                            $
                                            675,454
                                            
                                            
                                            $
                                            171,097Less:
      provision for impairment losses
                                            
                                            
                                            (43,252
                                            )
                                            
                                            
                                            (43,145
                                            )Total
                                            
                                            $
                                            632,202
                                            
                                            
                                            $
                                            127,952
  Construction
impairment losses related to constructions projects in Lvshun and Zhuanghe,
resulted in provisions of $43,252 and $43,145 for the years ended on December
31, 2009 and 2008 respectively, due to the shift of the company’s expansion
strategy. Originally, the Company intended on building a market network locally
around Dalian City, where the Company’s headquarter is located; hence it started
the construction of property and buildings in Lvshun and Zhuanghe. In late 2007,
the Company perceived an opportunity of establishing a national market network
focusing on the nation’s biggest fishing market neighborhoods, such as Donggang
in Liaoning province, Shidao in Shandong province and Zhoushan in Zhejiang
province. Therefore, the on-going constructions in Lvshun and Zhuanghe were
ceased thereafter. Given the situation, the Board of Xingyuan ratified a
resolution to set aside provisions for impairment losses of constructions in
Lvshun and Zhuanghe.
  The
construction projects as of December 31, 2009 and 2008 were constructions to
build facilities to expand production capacity in Donggang and Nalian. Balances
represent mainly construction expenditures and equipment cost.
  F-23
  
 ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  8.
Construction in Progress – (continued)
  The
following table states in details about costs incurred as each of the balance
sheet date presented:
 
 As of December 31,2009
                                
                                
                                2008Berth
      and berth improvement
                                
                                $
                                437,109
                                
                                
                                $
                                72,048Office
      building
                                
                                
                                -
                                
                                
                                
                                15,758Oil
      blending and storage tank
                                
                                
                                195,093
                                
                                
                                
                                40,146Pumping
      station and boiler
                                
                                
                                -
                                
                                
                                
                                —Total
                                
                                $
                                632,202
                                
                                
                                $
                                127,952
  9.
Intangible Assets
 
 As of December 31,2009
                                
                                
                                2008Land
      use rights
                                
                                $
                                2,763,649
                                
                                
                                $
                                2,756,794Software
                                
                                
                                4,388
                                
                                
                                
                                4,377Total
                                
                                
                                2,768,037
                                
                                
                                
                                2,761,171Less:
      accumulated amortizations
                                
                                
                                (76,063
                                )
                                
                                
                                (6,515
                                )Intangible
      assets, net
                                
                                $
                                2,691,974
                                
                                
                                $
                                2,754,656
  Nanlian’s
land use rights of $2,140,922 have been pledged as collateral for a loan from
Baotou Commerce Bank as of December 31, 2009.
  ’
  Amortization
expenses ended December 31, 2009 and 2008 were $69,464 and $6,414
respectively.
  10.
Restricted Cash
  As of December 31,2009
                                
                                
                                2008Escrow
      account
                                
                                $
                                -
                                
                                
                                $
                                6,711,214Certificate
      of deposit
                                
                                
                                -
                                
                                
                                
                                1,517,318Total
                                
                                $
                                -
                                
                                
                                $
                                8,228,532
  To reduce
the Company’s financial interest, the Company chooses Bank Acceptance Bill
(“BAC”) as a financial vehicle to obtain additional working capital. According
to the bank’s credit policy, the Company is required to deposit 50% of total BAC
credit applied into the Escrow Account as guarantee. Upon the maturity of the
BAC, the Company is required to deposit another 50% into the Escrow Account to
clear the account.
  The
certificate of deposits as of December 31, 2008 was with the SPD Bank. $758,659
matured on May 27, 2009 and another $758,659 matured on June 2,
2009.
  11.
Related Party Transactions
  The
amounts due from related parties were as follows:
  As of December 31,2009
                                
                                
                                2008Amount
      due from Dalian Dongfangzheng
                                
                                $
                                -
                                
                                
                                $
                                4,909,643Amount
      due from An Fengbin
                                
                                
                                122,667
                                
                                
                                
                                -Total
                                
                                $
                                122,667
                                
                                
                                $
                                4,909,643
  In September 2008, Dalian Dongfangzheng
Industrial Co., Ltd. (“DFZ”) borrowed $5,436,942 from Donggang Xingyuan for the
purpose of temporary funding its business operations. The balance was repaid by
August 8, 2009. Mr. An Fengbin, the CEO of the Company and the Chairman and CEO
of Xinyuan and his wife, Wang Jing, established DFZ, which holds 85% equity
interest of Xingyuan, in September 2006. DFZ is under the control of these
individuals.
  In
November, 2009 Xingyuan advanced $122,667 to Donggang Aquatic Product Trading
Center and Donggang Xingyuan Ship Repair Yard, two companies that are under the
control of Mr. An Fengbin. These companies are using these funds, together with
approximately $700,000 invested by Mr. An Fengbin through December 31, 2009, to
construct facilities in the Donggang port area that would provide marine
services that compliment the services offered there by the Company. Mr. An
Fengbin is liable to the Company for these advances and is at risk for any
losses incurred by these entities, and the Company has no obligations to or on
behalf of Donggang Aquatic Product Trading Center and Donggang Xingyuan Ship
Repair Yard.
  F-24
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  12.
Short Term Loans
 
 Interest Rate(Per Annum)
                                                              
                                                              
                                                              
                                                              12-31-09
                                                              
                                                              
                                                              
                                                              12-31-08
                                                              
                                                              TermsSD
      Bank
                                                              
                                                              
                                                              5.84
                                                              %
                                                              
                                                              $
                                                              1,462,587
                                                              
                                                              
                                                              $
                                                              —
                                                              
                                                              December
      9, 2009 – June 9, 2010SD
      Bank
                                                              
                                                              
                                                              4.86
                                                              %
                                                              
                                                              
                                                              1,901,363
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              December
      11, 2009 – June 11, 2010SD
      Bank
                                                              
                                                              
                                                              4.86
                                                              %
                                                              
                                                              
                                                              1,755,104
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              December
      15, 2009 – June 15, 2010SPD
      Bank
                                                              
                                                              
                                                              5.31
                                                              %
                                                              
                                                              
                                                              2,193,881
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              November
      30, 2009 –  July 27, 2010SPD
      Bank
                                                              
                                                              
                                                              5.84
                                                              %
                                                              
                                                              
                                                              1,023,811
                                                              
                                                              
                                                              
                                                              1,021,272
                                                              
                                                              August
      27, 2009 –  July 27, 2010Baotou
      Commerce Bank
                                                              
                                                              
                                                              5.84
                                                              %
                                                              
                                                              
                                                              1,901,363
                                                              
                                                              
                                                              
                                                              1,896,647
                                                              
                                                              July
      22, 2009 – July 22, 2010Total
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              10,238,109
                                                              
                                                              
                                                              $
                                                              2,917,919
  Dalian
Xingyuan’s inventory of $5,022,679 has been pledged as the collateral for a loan
from SD Bank.
  13. Bankers Acceptance
Notes
  From
August to December in 2008, the Company executed a credit facility with Shenzhen
Development Bank (“SD Bank”) that provided for working capital. Borrowings under
the credit facility were made at bankers’ acceptance.
 
 
 Beneficiary
                            
                            Endorser
                            
                            Origination Date
                            
                            Maturity Date
                            
                            AmountDalian
      Dongfangzheng Industrial Co., Ltd.
                            
                            
                            SD
      Bank
                            
                            
                            
                            08-12-2008
                            
                            
                            
                            02-12-2009
                            
                            
                            $
                            4,376,879Dalian
      Dongfangzheng Industrial Co., Ltd.
                            
                            
                            SD
      Bank
                            
                            
                            
                            08-13-2008
                            
                            
                            
                            02-13-2009
                            
                            
                            
                            3,209,712Dalian
      Xinghang Petrolium Co.
                            
                            
                            SD
      Bank
                            
                            
                            
                            12-09-2008
                            
                            
                            
                            06-09-2009
                            
                            
                            
                            1,458,959Dalian
      Xinghang Petrolium Co.
                            
                            
                            SD
      Bank
                            
                            
                            
                            12-10-2008
                            
                            
                            
                            06-10-2009
                            
                            
                            
                            1,458,959Dalian
      Xinghang Petrolium Co.
                            
                            
                            SD
      Bank
                            
                            
                            
                            12-11-2008
                            
                            
                            
                            06-11-2009
                            
                            
                            
                            1,458,959Dalian
      Xinghang Petrolium Co.
                            
                            
                            SD
      Bank
                            
                            
                            
                            12-11-2008
                            
                            
                            
                            06-11-2009
                            
                            
                            
                            1,458,959Total
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            13,422,427
  Borrowings
under this credit facility are made on a when-and-as-needed basis at the
Company’s discretion. 8,500 tons of marine fuel was pledged to be served as
collateral against credit default.
  14.
Restricted Net Assets
  The
Company’s ability to pay dividends is primarily dependent on the Company
receiving distributions of funds from its subsidiaries. Relevant PRC statutory
laws and regulations permit payments of dividends by the Group’s PRC subsidiary
only out of their retained earnings, if any, as determined in accordance with
PRC accounting standards and regulations. The results of operations reflected in
the financial statements prepared in accordance with U.S. GAAP differ from those
reflected in the statutory financial statements of the Company’s subsidiary and
VIE.
    F-25
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  14.
Restricted Net Assets – (continued)
  namely
general reserve fund, the enterprise expansion fund and staff welfare and bonus
fund which are appropriated from net profit as reported in the enterprise’s PRC
statutory accounts. A wholly-owned foreign invested enterprise is required to
allocate at least 10% of its annual after-tax profit to the general reserve
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. Appropriations to the enterprise
expansion fund and staff welfare and bonus fund are at the discretion of the
board of directors for all foreign invested enterprises. The aforementioned
reserves can only be used for specific purposes and are not distributable as
cash dividends. Fusheng were established as a wholly-owned foreign invested
enterprise and therefore are subject to the above mandated restrictions on
distributable profits.
  Additionally,
in accordance with the Company Law of the PRC, a domestic enterprise is required
to provide statutory common reserve at least 10% of its annual after-tax profit
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. A domestic enterprise is also required
to provide for discretionary surplus reserve, at the discretion of the board of
directors, from the profits determined in accordance with the enterprise’s PRC
statutory accounts. The aforementioned reserves can only be used for specific
purposes and are not distributable as cash dividends. Xingyuan and its
subsidiaries were established as domestic invested enterprises and therefore are
subject to the above mandated restrictions on distributable
profits.
  As a
result of these PRC laws and regulations that require annual appropriations of
10% of after-tax income to be set aside prior to payment of dividends as general
reserve fund, the Company’s PRC subsidiary and VIE are restricted in their
ability to transfer a portion of their net assets to the Company.
  Amounts
restricted include paid-in capital and statutory reserve funds of the Company’s
PRC subsidiary and VIE as determined pursuant to PRC generally accepted
accounting principles, totaling approximately US$2,065,000 and US$1,386,000 as
of  December 31, 2009 and 2008; therefore in accordance with Rules 504
and 4.08 (e) (3) of Regulation S-X, the condensed parent company only financial
statements as of December 31, 2009 and 2008, for each of the years in the period
ended December 31, 2009 and 2008 are disclosed in Note 18.
  15.
Taxation
  Value
Added Tax (“VAT”)
  The
Group’s PRC entities are subjected to VAT at an effective rate of 17% for the
revenues.
  Donggang
City provided special tax exemptions to the enterprises incorporated in
Donggang. Donggang Xingyuan is entitled to enjoy a special 15% tax exemption of
its monthly paid VAT as a refund to the Company.
  Income
Taxes
  Goodwill
Rich is subject to taxes in Hong Kong at 16.5%.
  Under
Chinese income tax laws, prior to January 1, 2008, companies were subject to an
income tax at an effective rate of 33% (30% state income taxes plus 3% local
income taxes) on income as reported in their statutory financial statements
after appropriate tax adjustments. Beginning January 1, 2008, the new Enterprise
Income Tax (“EIT”) law replaced the income tax laws. The new standard EIT rate
of 25% replaced the 33% rate (or other reduced rates previously granted by tax
authorities). The new standard rate of 25% was applied to calculate certain
deferred tax benefits that are expected to be realized in future
periods.
  Donggang
Xingyuan is entitled to enjoy a special tax exemption granted by Donggang City
whereby 20% of its paid EIT will be refunded to the Company.
  F-26
   ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  15.
Taxation  – (continued)
  The
following table reconciles the Group’s effective tax rates for the periods
ended:
 
 As of December 31,2009
                            
                            
                            2008HK
      income taxes
                            
                            
                            —
                            
                            
                            
                            —China
      income taxes
                            
                            
                            25
                            %
                            
                            
                            25
                            %Local
      income tax adjustment
                            
                            
                            0.6
                            %
                            
                            
                            1.3
                            %Effective
      income tax rates
                            
                            
                            25.6
                            %
                            
                            
                            26.3
                            %
  Deferred Tax
  The
provision for income taxes consists of taxes on income from operations plus
unrecognized tax benefits from the application of FIN 48 plus changes in
deferred taxes for the periods ended:
 
 As of December 31,2009
                      
                      
                      2008Current
                      
                      $
                      2,345,561
                      
                      
                      $
                      560,696Deferred
                      
                      
                      (53,295
                      )
                      
                      
                      (33,412
                      )Total
                      
                      $
                      2,292,266
                      
                      
                      $
                      527,284
  The
charges for taxation are based on the results for the year as adjusted for items
which are non-assessable or disallowed. They are calculated using tax rates that
have been enacted or granted at the balance sheet dates.
  The
significant components of deferred tax expenses (benefits) are:
 
 As of December 31,2009
                        
                        
                        2008Change
      in valuation allowance
                        
                        $
                        (53,295
                        )
                        
                        $
                        (33,412
                        )Total
                        
                        $
                        (53,295
                        )
                        
                        $
                        (33,412
                        )
   Deferred
tax assets and deferred tax liabilities reflect the tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purpose. The following
represents the significant components of deferred tax assets and
liabilities:
 
 As of December
      31,2009
                          
                          
                          2008Deferred
      tax assets:Change
      in valuationallowance
                          
                          $
                          112,743
                          
                          
                          $
                          59,448Deferred
      tax assets
                          
                          $
                          112,743
                          
                          
                          $
                          59,448
  F-27
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  16.
Fixed Asset Disposition
  In
October 2008, based on the Company’s experience and analysis of the oil market,
management estimated that the demand for oil transportation would keep shrinking
for at least 3 to 4 months as oil prices collapsed and financial crisis spread
into other areas of the economy. As a result, management concluded that
transportation overcapacity in terms of oil bunkers would lead to an unnecessary
increase of various expenses related to maintaining the fleet in good shape.
Therefore, the Company decided to sell one bunker. The sale of the bunker, in
2008, is set forth as follows:
 
 Asset Item
                      
                      Historical
                        Cost
                      
                      Net Value
                      
                      Proceeds on
                        Disposal
                      
                      Gain on
                        DisposalBunker
      No. 3
                      
                      $
                      181,443
                      
                      
                      $
                      119,000
                      
                      
                      $
                      143,632
                      
                      
                      $
                      24,632
  17.
Commitment and Contingency
  Lease
Obligation
  The
Company has entered into several tenancy agreements for the lease of storage
facilities, offices premises and berth use rights. The Company’s commitment for
minimum lease payments under these operating leases for the next five years and
thereafter is as follows:
 
 For
      the year 2010
                      
                      
                      299,270For
      the year 2011
                      
                      
                      210,219For
      the year 2012
                      
                      
                      —For
      the year 2013
                      
                      
                      —Thereafter
                      
                      
                      —Total
                      
                      $
                      509,489
  Rental
expenses, including storage tank leasing charges and office rental charges, were
approximately $471,114 and $425,790, for the years ended December 31, 2009 and
2008, respectively, and were charged to the statement of operations as
incurred.
  Share
Purchase Agreement
  In
December 2008, the Company entered into a share purchase agreement with Chen
Weiwen to purchase its 63% ownership of Xiangshan Yongshinanlian Petroleum
Company, according to the foresaid agreement, the Company is bound to pay RMB
8,880,000 (approximately $1.3 million) for the remaining 37% ownership of Nalian
to Mr. Chen upon his request after the year of 2010.
  Legal
Proceeding
  On
January 16, 2008, Xingyuan obtained a judgment in its favor in the sales
contract dispute at the trial court level against Yantai Development Zone
Fuchang Bunker Co., Ltd. (“Fuchang”). Under this judgment for specific
performance, Fuchang is required to deliver approximately 163 tons of marine
fuel to Xingyuan within 20 days following the court decision or to pay to
Xingyuan a restitution amount of RMB 791,473 (approximately $116,000) plus legal
expenses of the lawsuit of RMB 16,510 (approximately $2,400).
 
 F-28
  ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  17.
Commitment and Contingency  – (continued)
  On May 6,
2008, Xingyuan, obtained a judgment in a contractual dispute in its favor
against Dalian Dafangshen Ocean Fishery Co., Ltd. (“Dafangshen”) in the amount
of RMB 1,431,487 (approximately $209,000) and the penalty of approximately RMB
1,000,000 (approximately $146,000). Dafangshen did not appeal the judgment and,
therefore, the Company intends to collect on this judgment to the full extent
permissible under the PRC law.
  In June
2008, in a separate joint-cooperation contract dispute by and between Dalian
Xingyuan and Fuchang, Fuchang obtained a judgment against Dalian Xingyuan
following a trial in the amount of RMB1,000,000. On August 15, 2009, the
people’s court of first instance formed a new collegial panel and rendered its
judgment in favor of Dalian Xingyuan, as a result of which judgment Dalian
Xingyuan will not be required to pay the RMB1,000,000 penalty to Fuchang. 
Fuchang has appealed the verdict and lost on the appeal with the people’s court,
thereby exhausting all of its appeals in this matter. Dalian Xingyuan is in the
process of enforcing and collecting upon the judgment in this matter.
  18.
Parent Company Only Condensed Financial Information
  Condensed
Balance Sheets
 
 As of December 31,2009
                      
                      2008ASSETSNoncurrent
      assetsInvestment
      in subsidiaries
                      
                      
                      17,572,253
                      
                      
                      
                      11,121,404Total
      noncurrent assets
                      
                      
                      17,572,253
                      
                      
                      
                      11,121,404Total
      assets
                      
                      $
                      17,572,253
                      
                      
                      $
                      11,121,404LIABILITIES
      AND STOCKHOLDERS' EQUITYCommitments
      and contingencies
                      
                      
                      —
                      
                      
                      
                      —Stockholders'
      equityCommon
      stock; par value $0.001; 50,000,000 shares authorized; 6,000,000 shares
      issued and outstanding
                      
                      
                      6,000
                      
                      
                      
                      6,000Additional
      paid in capital
                      
                      
                      9,533,619
                      
                      
                      
                      9,533,619Retained
      earnings (Deficit)
                      
                      
                      7,543,994
                      
                      
                      
                      1,126,957Other
      comprehensive income
                      
                      
                      488,640
                      
                      
                      
                      454,828Total
      stockholders’ equity
                      
                      
                      17,572,253
                      
                      
                      
                      11,121,404Total
      liabilities and stockholders' equity
                      
                      $
                      17,572,253
                      
                      
                      $
                      11,121,404
  F-29
 
 ANDATEE
CHINA MARINE FUEL SERVICES CORPORATION
  NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
  18.
Parent Company Only Condensed Financial Information
 – (continued)
  Condensed
Statements of Income:
 As of December 31,2009
                        
                        
                        2008Operating
      incomeEquity
      in profit of subsidiaries & VIE
                        
                        
                        6,417,037
                        
                        
                        
                        1,479,228Net
      income attributable to the Company
                        
                        
                        6,417,037
                        
                        
                        
                        1,479,228
  Condensed Cash Flow Statements
  As of December 31,2009
                        
                        
                        2008Cash
      flows from operating activities:Net
      income
                        
                        $
                        6,417,037
                        
                        
                        $
                        1,479,228Adjustments
      to reconcile net income to net cash provided by operating
      activities:Equity
      in profit of subsidiaries & VIE
                        
                        
                        (6,417,037
                        )
                        
                        
                        (1,479,228
                        )Net
      cash provided by operating activities
                        
                        
                        —
                        
                        
                        
                        —Net
      change in cash and cash equivalents
                        
                        
                        —
                        
                        
                        
                        —Cash
      and cash equivalents, beginning of period
                        
                        
                        —
                        
                        
                        
                        —Cash
      and cash equivalents, end of period
                        
                        $
                        —
                        
                        
                        $
                        —
  Basis
of Presentation
  For the
presentation of the parent company only condensed financial information, the
Company records its investment in subsidiaries under the equity method of
accounting as prescribed in APB opinion No. 18, “ The Equity Method of Accounting for
Investments in Common Stock ”. Such investment is presented on the
balance sheet as “Investment in Subsidiaries” and 100% of the subsidiaries
profit or loss as “Equity in profit or loss of subsidiaries” on the statement of
income.
  19.
Subsequent Events
  On
January 26, 2010 the Company completed a firm commitment initial public offering
of 3,134,921 shares of common stock at an initial public offering price of $6.30
per share.  The Company received net proceeds, before offering
expenses, of approximately $18.6 million. The 3,134,921 shares were offered and
sold under the Company's registration statement on Form S-1 which was declared
effective by the Securities and Exchange Commission on January 25,
2010. The Company intends to use the net proceeds to expand its research
and marketing, to fund the completion of the expansion and upgrade of certain
production and storage facilities, to fund possible future acquisitions and to
increase its working capital
  On
January 25, 2009, the Company granted a total of 13,125 non-qualified stock
option to members of the Company’s Board of Directors, as follows; Yu Bing
(3,750 options), Wen Jiang (3,750 options) and Francis Leong (5,625
options).  The options are exercisable at a price of $6.30 per share.
The options vested upon their issuance.
  F-30
  Item
9.                   Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure





None.





Item
9A(T).           Controls
and Procedures





Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures





As of the
end of the period covered by this Annual Report, under the supervision and with
the participation of management, including the Chief Executive Officer and Chief
Financial Officer (the “Certifying Officers”), the Company conducted an
evaluation of its disclosure controls and procedures. As defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act, the term “disclosure controls and
procedures” means controls and other procedures of an issuer that are designed
to ensure that information required to be disclosed by the issuer in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission’s
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer’s management,
including the Certifying Officers, to allow timely decisions regarding required
disclosure. Based on this evaluation, the Certifying Officers have concluded
that the Company’s disclosure controls and procedures were effective as of
December 31, 2009.





Management’s
Report on Internal Control over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of its
management, including the Certifying Officers, the Company conducted an
evaluation of the effectiveness of its internal control over financial reporting
based on the framework in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of its
management, including the Certifying Officers, the Company conducted an
evaluation of the effectiveness of its internal control over financial reporting
based on the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.





The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles in the United States of America.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Based on
this evaluation under the framework in Internal Control - Integrated Framework,
management concluded that the Company’s internal control over financial
reporting was effective as of December 31, 2009.


51





This
Annual Report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the company to
provide only management's report in this Annual Report.





Changes
in Internal Control over Financial Reporting





There was
no change in the Company’s internal control over financial reporting during the
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





Item
9b.                 Other
Information





None.


52


Part
III





Item
10.            Directors,
Executive Officers and Corporate Governance





The
following table sets forth the names and ages of our directors and executive
officers as of February 22, 2010. Our Board oversees the business affairs of our
company and monitors the performance of management. Under our Bylaws, the Board
size may not exceed 6 members. Presently, there are five Board members. At each
annual meeting, shareholders elect directors for a full term or the remainder
thereof, as the case may be, to succeed those whose terms have expired. Each
director holds office for the term for which he or she is elected or until his
or her successor is duly elected. Officers are appointed by, and serve at the
pleasure of, our Board.





Name
                
                Age
                
                PositionAn
      Fengbin
                
                42
                
                Chairman,
      President and Chief Executive OfficerWen
      Tong
                
                33
                
                Chief
      Financial Officer, DirectorChen
      Yuqiang
                
                46
                
                Chief
      Operating OfficerWen
      Jiang
                
                46
                
                Independent
      Director (1)(2)(3)Yu
      Bing
                
                32
                
                Independent
      Director  (1)(2)(3)(4)Francis
      N.S. Leong
                
                65
                
                Independent
      Director  (1)(2)(3)Bai
      Jinhai
                
                70
                
                Chief
      Technology Officer


(1)           Member
of the Audit Committee.


(2)           Member
of the Compensation Committee.


(3)           Member
of the Nominating and Governance Committee.


(4)           Audit
Committee financial expert





Biographical
and background information with respect to the Company’s current executive
officers and directors is provided below.





An Fengbin has served as our
Chairman, President and Chief Executive Officer since May 2004. From 1985 to
1996, Mr. An worked in the Credit and Loan Department of China Agricultural Bank
where he held the title of Deputy Director of Corporate Department, following
which engagement, he joined Dalian Zhenyuan Oil Blending Co., Ltd. as a General
Manager in 1996 and remained until May 2000. In September 2001, he established a
joint venture with Sinopec Corp. (China Petroleum & Chemical Corporation)
and founded Xingyuan. Mr. An graduated from Dongbei Finance and Economics
University in September 2003 with a degree in Economic Management degree. Mr.
An’s substantial experience in the petrochemical industry and his day to day
leadership as President and Chief Executive Officer of our Company provides him
with intimate knowledge of our business and operations.





Wen Tong has been our Chief
Financial Officer and Director since May 2007. From November 2005 to April 2007,
Mr. Wen has worked at China Industrial Waste Management Co. Ltd., an OTC-BB
company with approximately $10 million in revenue in 2007, as a director and a
Deputy Manager. Prior to that, Mr. Wen has worked as an auditor at the
accounting firm of Liaoning Tianjin Accounting. Mr. Wen holds a degree in
Accounting from Dongbei Finance and Economics University (September
1998).  Wen Tong’s significant expertise and experience in the public
accounting and finance enables him to effectively address and analyze the
challenges and opportunities facing a US public company with multiple operations
in the PRC.





Chen Yuqiang has served as the
Chief Operating Officer of our company since April 2009. Mr. Chen worked as a
Deputy General Manager at Guangdong Longtian Chemical Co. since October 2007
before joining our company. Prior to that, from April 2006 to October 2007, Mr.
Chen was the Deputy General Manager for Guangzhou Nansha Taishan Petrochemical
Co. Ltd. Mr. Chen graduated from Chongqing Jiaotong University in 1995 with a
degree in Logistic Management. He also holds a Master’s degree in Business
Administration from Zhongshan University (December 2007).





Wen Jiang has served as our
director since July 2009. From 1993 to present, Mr. Jiang has served as Managing
Director of the accounting firm of Wen Jiang & Company, PC in Portland,
Oregon, where provides services to more than 300 clients in the public and
private sectors. Mr. Jiang has 18 years of experience in accounting, auditing,
tax and international business consulting matters. He is a licensed CPA in State
of Oregon (1993) and a registered member with PCAOB. Mr. Jiang holds a Bachelor
of Science degree in Accounting from Eastern Oregon University (1989). Wen
Jiang’s substantial experience and expertise in accounting, auditing, tax and
international business consulting matters provide valuable insights to the Board
and the Board committees on which he serves.




53





Francis N.S. Leong has served
as our director since July 2009. From 2003 to present, Mr. Leong has served as a
Principal at Sungai River, Inc., an international financial consulting firm. Mr.
Leong also holds directorships on the Boards of several public companies,
including Boyuan Construction Group, Inc., a Chinese construction company (BOY —
Toronto Stock Exchange Venture Board); and China Industrial Waste Management,
Inc., an industrial waste collection company based in Dalian, China (CIWT —
OTC-BB). Mr. Leong holds a Bachelor of Commerce degree from National Chengchi
University in Taipei, Taiwan (1968) and a Master’s degree in Public
Administration from Marriott School of Management, Brigham Young University,
(1975).  Francis N.S. Leong brings years of public company and
accounting experience and expertise to his work on the Board and its standing
committee.





Yu Bing has served as our
director since July 2009. From June 2007 to present, Ms. Yu has served as
Executive Director of Brainzoom Investment Holdings Limited, an international
business and financial consulting firm. From October 2009 to present, Ms. Yu
served as Chief Financial Officer of China New Borun Corporation, a private
multinational company principally engaged in manufacture and distribution of
edible alcohol and its by-products. From March 2006 to May 2007, she has served
as Corporate Financial Director of Cellon International Holdings Corporation, an
electronics component design company. From June 1999 to March 2006, Ms. Yu has
served as Audit Manager at Arthur Andersen, then, at PricewaterhouseCoopers LLP
(PWC). Ms. Yu holds a Bachelor of Accounting from Central University of Finance
and Economics (1998).  Yu Bing’s training and experience at PWC and
subsequent public company experience provide unique perspective and insight in
the areas of public company and SEC accounting.





Bai Jinhai has been our Chief
Technological Officer since March 2005. Mr. Bai holds a Chemical Engineering
degree from Dalian Technological University (DTU) (September 1963). Following
his graduation, he remained on the DTU faculty and has taught in undergraduate
and graduate programs at the DTU. He has also conducted independent research in
the oil and chemical technology areas.





All of
our executive officers and key employees devote their full-time attention to our
business. No director or executive officer is related to any other of our
directors or executive officers, and there are no arrangements or understandings
between a director and any other person that such person will be elected as a
director. There are no material proceedings to which any director, director
nominee, executive officer or affiliate of our company, any owner of record or
beneficially of more than 5% of any class of voting securities of our company,
or any associate of any such director, officer, affiliate or security holder is
a party adverse to us.





No
director or officer of the Company has, during the last ten years has been
subject to or involved in any of legal proceedings described under Item 401(f)
of Regulation S-K, including, without limitation, any criminal proceeding
(excluding traffic violations or similar misdemeanors), any civil proceeding of
a judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to, United
States federal or state securities laws or finding any violations with respect
to such laws. There are no family relationships between or among any of the
current directors, executive officers or persons nominated or charged to become
directors or executive officers. There are no family relationships among our
officers and directors and those of our subsidiary and VIE’s.





The Board
believes that the Company’s Chief Executive Officer is best situated to serve as
Chairman because he is the director most familiar with the Company’s business
and industry, and most capable of effectively identifying strategic priorities
and leading the discussion and execution of strategy. Independent directors and
management have different perspectives and roles in strategy development. The
Company’s independent directors bring experience, oversight and expertise from
outside the company and industry, while the Chief Executive Officer brings
company-specific experience and expertise. The Board believes that the combined
role of Chairman and Chief Executive Officer promotes strategy development and
execution, and facilitates information flow between management and the Board,
which are essential to effective governance.  The Company does not
have a lead independent director.





One of
the key responsibilities of the Board is to develop strategic direction and hold
management accountable for the execution of strategy once it is developed. The
Board believes the combined role of Chairman and Chief Executive Officer and the
Board, at large, is in the best interest of shareholders because it provides the
appropriate balance between strategy development and independent oversight of
management.




54





Board
Committees





Our Board
has designated three standing committees: the Audit Committee, the Compensation
Committee and the Nominating and Governance Committee.





Audit Committee. The Audit
Committee assists the Board in the oversight of the audit of our consolidated
financial statements and the quality and integrity of its accounting, auditing
and financial reporting processes. The Audit Committee is responsible for making
recommendations to the Board concerning the selection and engagement of
independent registered public accountants and for reviewing the scope of the
annual audit, audit fees, results of the audit and auditor independence. The
Audit Committee also reviews and discusses with management and the Board such
matters as accounting policies, internal accounting controls and procedures for
preparation of financial statements. Our Board has determined that each of the
members of the Audit Committee meets the criteria for independence under the
standards provided by the Nasdaq Stock Market. Francis N.S. Leong is the
Chairman of the Audit Committee; Yu Bing and Wen Jiang are the other two members
on the Committee.





Audit Committee Financial
Expert. Our Board has also determined that Ms. Yu qualifies as an ‘‘audit
committee financial expert’’ as defined under the federal securities laws. Yu
Bing is ‘‘independent’’ under Rule 10A-3 under the Securities Act.





Compensation Committee. The
Compensation Committee evaluates the performance of our senior executives,
considers the design and competitiveness of our compensation plans, reviews and
approves senior executive compensation and administers our equity compensation
plans.  Wen Jiang is the Chairman of the Compensation Committee;
Francis N.S. Leong and  Yu Bing are the other two members on the
Committee.





None of
our executive officers served:





•
            as
      a member of the compensation committee of another entity which has had an
      executive officer who has served on our compensation
      committee;


•
            as
      a director of another entity which has had an executive officer who has
      served on our compensation committee;
or


•
            as
      a member of the compensation committee of another entity which has had an
      executive officer who has served as one of our
  directors.





Nominating and Governance
Committee. The Nominating and Governance Committee identifies candidates
for future Board membership and proposes criteria for Board candidates and
candidates to fill Board vacancies, as well as a slate of directors for election
by the shareholders at each annual meeting. The Nominating and Governance
Committee also annually assesses and reports to the Board on Board and Board
Committee performance and effectiveness and reviews and makes recommendations to
the Board concerning the composition, size and structure of the Board and its
committees. Yu Bing is the Chairwoman of this Committee; Francis N.S. Leong and
Wen Jiang are the other two members on the Committee.





Shareholders
meeting the following requirements who want to recommend a director candidate
may do so in accordance with our Bylaws and the following procedures established
by the Nomination and Governance Committee. The Board will consider all director
candidates recommended to the Nomination and Governance Committee by
shareholders owning at least 5% of our outstanding shares at all times during
the year preceding the date on which the recommendation is made that meet the
qualifications established by the Board. To make a nomination for director at an
annual meeting, a written nomination solicitation notice must be received by the
Nomination and Governance Committee at our principal executive office not less
than 120 days before the anniversary date our proxy statement was mailed to
shareholders in connection with our previous annual meeting. The written
nomination solicitation notice must contain the following material elements, as
well as any other information reasonably requested by us or the Nomination and
Governance Committee:





•
              the
      name and address, as they appear on our books, of the shareholder giving
      the notice or of the beneficial owner, if any, on whose behalf the
      nomination is made;


•
            a
      representation that the shareholder giving the notice is a holder of
      record of our common stock entitled to vote at the annual meeting and
      intends to appear in person or by proxy at the annual meeting to nominate
      the person or persons specified in the
  notice;


•
            complete
      biography of the nominee, as well as consents to permit us to complete any
      due diligence investigations to confirm the nominee’s background, as we
      believe to be appropriate;


•
            the
      disclosure of all special interests and all political and organizational
      affiliations of the nominee;


•
            a
      signed, written statement from the director nominee as to why the director
      nominee wants to serve on our Board, and why the director nominee believes
      that he or she is qualified to
  serve;




55




•
            a
      description of all arrangements or understandings between or among any of
      the shareholder giving the notice, the beneficial owner, if any, on whose
      behalf the notice is given, each nominee and any other person or persons
      (naming such person or persons) pursuant to which the nomination or
      nominations are to be made by the shareholder giving the
      notice;


•
            such
      other information regarding each nominee proposed by the shareholder
      giving the notice as would be required to be included in a proxy statement
      filed pursuant to the proxy rules of the SEC had the nominee been
      nominated, or intended to be nominated, by our Board;
      and


•
            the
      signed consent of each nominee to serve as a director if so
      elected.





In
considering director candidates, the Nomination and Governance Committee will
consider such factors as it deems appropriate to assist in developing a Board
and committees that are diverse in nature and comprised of experienced and
seasoned advisors. Each director nominee is evaluated in the context of the full
Board’s qualifications as a whole, with the objective of establishing a Board
that can best perpetuate our success and represent shareholder interests through
the exercise of sound judgment. Each director nominee will be evaluated
considering the relevance to us of the director nominee’s skills and experience,
which must be complimentary to the skills and experience of the other members of
the Board.





The
Nomination and Governance Committee also focuses on issues of diversity, such as
diversity of gender, race and national origin, education, professional
experience and differences in viewpoints and skills. The Nomination and
Governance Committee does not have a formal policy with respect to diversity;
however, the Board and the Committee believe that it is essential that the Board
members represent diverse viewpoints. In considering candidates for the Board,
the Committee considers the entirety of each candidate’s credentials in the
context of these standards. With respect to the nomination of continuing
directors for re-election, the individual’s contributions to the Board are also
considered.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires officers, directors and persons who own more than ten percent of a
registered class of equity securities to, within specified time periods, file
certain reports of ownership and changes in ownership with the SEC.





Following
the completion of the initial public offering of its securities in January 2010,
the Company and, among others, its directors and executive officers, became
subject to the reporting requirements under the Exchange Act.  Based
solely upon a review of Forms 3 and Forms 4 furnished to the Company pursuant to
Rule 16a-3 under this Act during the Company’s most recent fiscal year, and
Forms 5 with respect to the most recent fiscal year, the Company believes that
all such forms required to be filed pursuant to Section 16(a) were timely filed
as necessary by the executive officers, directors and security
holders.





Code
of Ethics





Our Board
has adopted a Code of Ethics within the meaning of Item 406 of Regulation S-K
that applies to all of our officers and employees, including our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. Our Code of Ethics codifies
the business and ethical principles that govern our business. The Code of Ethics
is designed to deter wrongdoing and to promote:





•
            Honest
      and ethical conduct, including the ethical handling of actual or apparent
      conflicts of interest between personal and professional
      relationships;


•
              Full,
      fair, accurate, timely, and understandable disclosure in reports and
      documents that we file with, or submit to, the SEC and in other public
      communications made by us;


•
            Compliance
      with applicable governmental laws, rules and
  regulations;


•
            The
      prompt internal reporting of violations of the ethics code to an
      appropriate person or persons identified in the code;
      and


•
            Accountability
      for adherence to the Code of
Ethics.





Copies of
the charters of all three standing committees and of the Code are available on
the Company’s corporate website, http://www.andatee.com, and will be provided to
any stockholder without charge upon the written request to our corporate
secretary.




56





Item
11.            Executive
Compensation





The
following table sets forth information concerning the compensation for the
fiscal year ended December 31, 2009, 2008 and 2007, respectively, of our (i)
Chief Executive Officer, (ii) Chief Financial Officer, and (iii) all other
executive officers (collectively, the ‘‘named executive
officers’’):





Summary
Compensation Table





Name
      and principal position
                            
                            Year
                            
                            Salary
      ($)
                            
                            
                            Bonus
      ($)
                            
                            
                            All
      other
                            
                            
                            Total
      ($)Compensation
      ($)An
      Fengbin, President and
                            
                            2009
                            
                            $
                            71,883
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            71,883Chief
      Executive Officer (1)
                            
                            2008
                            
                            $
                            64,000
                            
                            
                            $
                            20,000
                            
                            
                            $
                            0
                            
                            
                            $
                            84,0002007
                            
                            $
                            60,000
                            
                            
                            $
                            15,000
                            
                            
                            $
                            0
                            
                            
                            $
                            75,000Wen
      Tong
                            
                            2009
                            
                            $
                            13,000
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            13,000Chief
      Financial Officer
                            
                            2008
                            
                            $
                            13,000
                            
                            
                            $
                            5,000
                            
                            
                            $
                            0
                            
                            
                            $
                            18,0002007
                            
                            $
                            10,000
                            
                            
                            $
                            5,000
                            
                            
                            $
                            0
                            
                            
                            $
                            15,000





(1)           The
material terms and provisions of Mr. An’s Employment Agreement are disclosed
below. There were no option grants, option exercises, options outstanding or
stock vested in 2008 or 2009. We do not offer any pension benefit plans to our
employees.





Except as
described below, 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.





An
Fengbin Employment Agreement.





In
November 2009, we entered into an Employment Agreement with Mr. An Fengbin, our
President and Chief Executive Officer. Under the terms of the Employment
Agreement, he will serve as our President and Chief Executive Officer for a term
of 5 years. Mr. An is to receive an initial annual salary in the amount of
$120,000, with an annual increase of the prior year’s salary thereafter during
the term. Additionally, at the discretion of our Compensation Committee, Mr. An
is eligible to receive an annual bonus which amount, if any, and payment will be
determined by the Committee. Mr. An is entitled to medical, disability, vacation
and life insurance benefits, and reimbursement of all reasonable or authorized
business expenses. In the event the Employment Agreement terminates, during its
term, upon Mr. An’s death, the Company is obligated to pay Mr. An’s estate his
base salary amount through the first anniversary of his death (or the expiration
of the Employment Agreement if earlier than the anniversary date), as well as
pro rata allocation of any bonus based on the days of service during the year of
death, and all amounts owing to Mr. An at the time of termination, including for
previously accrued but unpaid bonuses, expense reimbursements and accrued but
unused vacation pay. If Mr. An is unable to perform his obligations under the
Employment Agreement for over 180 consecutive days during any consecutive 12
months period, we may terminate the Employment Agreement by written notice to
Mr. An delivered prior to the date that he resumes his duties. Upon receipt of
such written notice, Mr. An is permitted to request a medical examination under
which if he was certified to be incapable of performing his obligations for over
2 additional months, the Employment Agreement would be terminated.





We may
terminate the Employment Agreement for Cause, upon notice if at any time Mr. An,
among other things: (a) refuses in bad faith to carry out specific written
directions of our Board; (b) intentionally takes fraudulent or dishonest action
in his relations with us; (c) is convicted of a crime involving an act of
significant moral turpitude; or (d) knowingly commits an act or omitted to act
in violation of our written policies, the Employment Agreement or any agreements
that we may have with third parties and that is materially damaging to our
business or reputation. On the other hand, Mr. An may terminate the Employment
Agreement upon written notice if, among other things: (a) there is a material
adverse change in the nature of his title, duties or obligations; (b) we
materially breach the Employment Agreement; (c) we fail to make any payment to
Mr. An (excepting any payment which was not material and which we were
contesting in good faith). If Mr. An were to terminate the Employment Agreement
for any one of these reasons, or if we terminated the Employment Agreement
without Cause, we would be obligated to pay to Mr. An (or in the case of his/her
death, his estate), his base salary and any bonus, without any offset, as well
as all amounts owing to Mr. An at the time of termination, including for
previously accrued but unpaid bonuses, expense reimbursements and accrued but
unused vacation pay. In the event of a consolidation, merger, transfer of assets
or similar transaction, the employment agreement will inure to the benefit of
and be assumed by resulting or surviving transferee corporation or entity and
will continue in full force and effect and will entitle Mr. An to exactly the
same compensation, benefits, perquisites, payments and other rights as would
have been their entitlement had such extraordinary corporate transaction not
occurred.




57





The
Employment Agreement contains restrictive covenants: (i) preventing the use
and/or disclosure of confidential information during or at any time after
termination; and (ii) preventing competition with the Company during his
employment and for a period of 3 years after termination (including contact with
or solicitation of our customers, employees or suppliers). The Employment
Agreement also contains other terms and provisions customary for agreements of
this nature. Lastly, we indemnify Mr. An for any claims made against him in his
capacity as our executive officer.




Outstanding
Equity Awards at December 31, 2009





There
were no outstanding equity awards to the named executive officers at December
31, 2009.





Director
Compensation





All of
our directors were appointed to the Board and various committees in July 2009.
The following table represents Board compensation in 2009:





Name
                            
                            Fees Earned or
                            
                            
                            Option Awards
                            
                            
                            All Other Compensation (3)
                            
                            
                            Totalor Paid in CashFrancis
      Leong
                            
                            $
                            6,000
                            (1)
                            
                            $
                            0
                            (2)
                            
                            
                            —
                            
                            
                            $
                            6,000Wen
      Jiang
                            
                            $
                            5,000
                            (1)
                            
                            $
                            0
                            (2)
                            
                            
                            —
                            
                            
                            $
                            5,000Yu
      Bing
                            
                            $
                            5,000
                            (1)
                            
                            $
                            0
                            (2)
                            
                            
                            —
                            
                            
                            $
                            5,000An
      Fengbin (4)
                            
                            $
                            0
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            $
                            0Wen
      Tong (4)
                            
                            $
                            0
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            $
                            0





(1)           For
the services on the Board and standing committees thereof, our non-management
directors receive the following cash compensation: Mr. Leong - $12,000 per
annum, payable in equal quarterly installments of $3,000; Mr. Jiang and Ms. Yu -
each $10,000 per annum, payable in equal quarterly installments of $2,500. This
compensation covers the member services in connection with, among other things,
attending director meetings, whether in person or by telephone conference
call.


(2)           No
stock options were awarded to the members of the Board of Directors during 2009.
Upon the effectiveness of the  registration statement filed in
connection with the initial public offering of the Company’s securities in
January 2010, the Company issued 3,750 stock options to each Mr. Jiang and Ms.
Yu, and 5,625 stock options to Mr. Leong. All such options have an exercise
price of $6.30 per share which was the price of the Company’s initial public
offering, will vest immediately and will be exercisable for three years. In
accordance with the requirements of FASB Accounting Standards Codification
Section 718 (previously SFAS No. 123(R)), the Company will charge the fair value
of these options to expense in the first quarter of 2010. Under the Board’s
equity compensation policies, non-management directors will subsequently each
receive annual grants of options to purchase shares of our common stock at an
exercise price equal to the fair market value of the shares on the date of grant
in the amounts to be determined by the Board and the Compensation
Committee.


(3)           All
directors will be reimbursed for their reasonable out of pocket expenses
associated with attending meetings. There were no such expenses in
2009.


(4)           Management
member of the Board who is not compensated for his Board service.





2009
Equity Incentive Plan





In July
2009, our Board adopted, subject to the shareholder approval, the 2009 Equity
Incentive Plan (the “Plan”) for our officers, directors, employees and outside
consultants and advisors. We have developed this Plan to align the interests of
(i) employees, (ii) non-employee Board members, and (iii) consultants and key
advisors with the interests of our shareholders and to provide incentives for
these persons to exert maximum efforts for our success and to encourage them to
contribute materially to our growth. On September 27, 2009, our stockholders
approved the Plan. As of the date hereof, we have issued 13,125 options pursuant
to the Plan.





The Plan
is not subject to the provisions of the Employment Retirement Income Security
Act and is not a ‘‘qualified plan’’ within the meaning of Section 401 of the
Internal Revenue Code, as amended (the ‘‘Code’’). The Plan is administered by
our Compensation Committee which has exclusive discretion to select the
participants who will receive awards under the Plan and to determine the type,
size and terms of each award.




58





Shares Subject to the Plan.
We may issue up to 5,000,000 shares under the Plan, subject to adjustment to
prevent dilution from stock dividends, stock splits, recapitalization or similar
transactions. Certain grants may be made in cash, in our stock, or in a
combination of the two, as determined by the Compensation
Committee.





Awards under the Plan. Under
the Plan, the Compensation Committee may grant awards in the form of incentive
stock options, as defined in Section 422 of the Code, as well as options which
do not so qualify, stock units, stock awards, stock appreciation rights and
other stock-based awards.





Options. The duration of any
option shall be within the sole discretion of the Compensation Committee;
provided, however, that any incentive stock option granted to a 10% or less
stockholder or any nonqualified stock option shall, by its terms, be exercised
within 10 years after the date the option is granted and any incentive stock
option granted to a greater than 10% stockholder shall, by its terms, be
exercised within five years after the date the option is granted. The exercise
price of all options will be determined by the Compensation Committee; provided,
however, that the exercise price of an option (including incentive stock options
or nonqualified stock options) will be equal to, or greater than, the fair
market value of a share of our stock on the date the option is granted and
further provided that incentive stock options may not be granted to an employee
who, at the time of grant, owns stock possessing more than 10% of the total
combined voting power of all classes of our stock or any parent or subsidiary,
as defined in section 424 of the Code, unless the price per share is not less
than 110% of the fair market value of our stock on the date of
grant.





Stock Units. The Compensation
Committee may grant stock to an employee, consultant or non-employee director,
on such terms and conditions as the Compensation Committee deems appropriate
under the Plan. Each stock shall represent the right of the participant to
receive a share of our stock or an amount based on the value of a share of our
stock.





Stock Awards. The
Compensation Committee may issue shares of our stock to an employee, consultant
or non-employee director under a stock award, upon such terms and conditions as
the Committee deems appropriate under the Plan. Shares of our stock issued
pursuant to stock awards may be issued for cash consideration or for no cash
consideration, and subject to restrictions or no restrictions, as determined by
the





Compensation Committee. The
Compensation Committee may establish conditions under which restrictions on
stock awards shall lapse over a period of time or according to such other
criteria as the Compensation Committee deems appropriate, including restrictions
based upon the achievement of specific performance goals. SARs and Other
Stock-Based Awards. SARs may be granted to an employee, non-employee director or
consultant separately or in tandem with an option. SARs may be granted in tandem
either at the time the option is granted or at any time thereafter while the
option remains outstanding. Upon the exercise of SARs, the related option will
terminate to the extent of an equal number of shares of our stock. The stock
appreciation for a SAR is the amount by which the fair market value of the
underlying stock on the date of exercise of the SAR exceeds the base amount of
the SAR. The Compensation Committee will determine whether the stock
appreciation for an SAR is to be paid in the form of shares of stock, cash or a
combination of the two.





Other Awards. Other awards
may be granted that are based on or measured by our stock to employees,
consultants and non-employee directors, on such terms and conditions as the
Compensation Committee deems appropriate. Other stock-based awards may be
granted subject to achievement of performance goals or other conditions and may
be payable in our stock or cash, or in a combination of the two.





Qualified Performance-Based
Compensation. The Compensation Committee may determine that stock units,
stock awards, SARs or other stock-based awards granted to an employee will be
considered ‘‘qualified performance-based compensation’’ under section 162(m) of
the Code.





Termination of Employment. If
the employment or service of a participant is terminated for cause, the options
of such participant, both accrued and future, will terminate immediately. If the
employment or service is terminated by either the participant or us for any
reason other than for cause, death, or for disability, as defined in Section
22(e)(3) of the Code, the options of the participant then outstanding shall be
exercisable by the participant at any time prior to the expiration of the
options or within three months after the date of such termination, whichever is
shorter, but only to the extent of the vested right to exercise the options at
the date of the termination. In the case of a participant who becomes disabled,
the rights of the participant under any then outstanding options are exercisable
by the participant at any time prior to the expiration of the options or within
one year after the date of termination of employment or service due to
disability, whichever is shorter, but only to the extent of the vested right to
exercise the options at the date of such termination. In the event of the death
of a participant, the rights of the participant under any then outstanding
options are exercisable by the person or persons to whom these rights pass by
will or by the laws of descent and distribution, at any time prior to the
expiration of the options or within one year after the date of death, whichever
is shorter, but only to the extent of the vested right to exercise the options,
if any, at the date of death. The terms and conditions regarding any other
awards under the Plan will be determined by the Compensation
Committee.




59





Termination or Amendment of the
Plan. Our Board of Directors may at any time terminate the Plan or make
such amendments thereto as it deems advisable, without action on the part of our
shareholders unless their approval is required under the law. However, no
termination or amendment will, without the consent of the individual to whom any
option has been granted, affect or impair the rights of such individual. Under
Section 422(b)(2) of the Code, no incentive stock option may be granted under
the Plan more than ten years from the date the Plan is adopted or the date the
Plan is approved by our shareholders, whichever is earlier.





Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters





The
following table sets forth information with respect to beneficial ownership of
our common stock as of March 1, 2010 by:





•
            Each
      person who is known by us to beneficially own more than 5% of our
      outstanding common shares;


•
            Each
      of our directors and named executive officers;
  and


•
            All
      directors and named executive officers as a
  group.





The
number and percentage of common shares beneficially owned before the offering
are based on 9,134,921 common shares outstanding as of March 1, 2010.
Information with respect to beneficial ownership has been furnished by each
director, officer or beneficial owner of more than 5% of our common shares.
Unless otherwise indicated in the footnotes, the address for each principal
shareholder is in the care of Unit C, No. 68 West Binhai Road, Xigang District
Dalian, People’s Republic of China.





Name
                      
                      Number
      of
                      
                      
                      %of
    SharesShares
      Owned (1)(5)
                      
                      
                      Outstanding
      (2)An
      Fengbin (3)
                      
                      
                      5,342,397
                      
                      
                      
                      58.5
                      %Wen
      Tong
                      
                      
                      0
                      
                      
                      
                      0Wen
      Jiang (4)
                      
                      
                      3,750
                      
                      
                      
                      *Yu
      Bing (4)
                      
                      
                      3,750
                      
                      
                      
                      *Francis
      N.S. Leong (4)
                      
                      
                      5,625
                      
                      
                      
                      *Star
      Blessing Enterprises Ltd. (3)
                      
                      
                      5,342,397
                      
                      
                      
                      58.5
                      %All
      directors and executive officers as a group (5 people)
                      
                      
                      5,359,897
                      
                      
                      
                      58
                      %








* Less
than 1% percent.





(1)           Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the common shares. In computing the
number of common shares beneficially owned by a person listed below and the
percentage ownership of such person, common shares underlying options, warrants
or convertible securities held by each such person that are exercisable or
convertible within 60 days are deemed outstanding, but are not deemed
outstanding for computing the percentage ownership of any other person. Except
as otherwise indicated in the footnotes to this table, or as required by
applicable community property laws, all persons listed have sole voting and
investment power for all common shares shown as beneficially owned by
them.


(2)           The
number of our common shares outstanding used in calculating the percentage for
each listed person includes the common shares underlying options held by such
person.


(3)           Mr.
An Fengbin has the power to vote and dispose of all of the securities of
Oriental Excel Enterprises Limited, a British Virgin Islands company (‘‘OEEL’’)
pursuant to the August 2009 amendment to the March 26, 2009 agreement (the
‘‘Original Agreement’’) by and between Ms. Lai WaiChi, a citizen of Hong Kong,
who holds 100% equity interest in OEEL (which entity, in turn, holds 100% equity
interest in Star Blessing Enterprises Limited) and Mr. An Fengbin. Under the
terms of the amendment to the Original Agreement, the parties agreed to (i)
terminate Article 2 of the Original Agreement which set forth certain conditions
of disbursement of Ms. Lai’s holdings of all of her holdings of the OEED
securities (the ‘‘Transfer Shares’’), and (ii) replace Article 2 with an
agreement that An Fengbin will be entitled to the Transfer Shares, in exchange
for no consideration, in the event net income reported in the consolidated
interim financial statements of Goodwill for the six month period ended June 30,
2009 is not less than $1.5 million. OEEL is the sole owner of the securities of
Star Blessing Enterprises Limited, also a British Virgin Islands company, which,
in turn, holds 89.4% ownership in the Company. The requirement for net income of
not less that $1.5 million for the six month period ended June 30, 2009 was met,
and therefore An Fengbin is now entitled to receive the Transfer Shares at such
time as permitted under PRC laws and regulations, as such laws and regulations
permit. Specifically, Mr. An will be permitted to receive such shares when he
completes his registration application with the State Administration of Foreign
Exchange (SAFE). For additional discussion of these requirements please refer to
Risk Factors entitled “ We may
be subject to fines ...”, “ Recent PRC regulations
relating ...”, “ SAFE
rules and regulations may limit ...” and “ If we make equity compensation
....” under Item 1A of this Annual Report.  An Fengbin’s right
to receive the Transfer Shares for no consideration reflects the fact that
Goodwill paid no consideration to Xingyuan or its stockholders for entering into
the agreements under which Xingyuan became a VIE of the Company.




60




(4)           Represents
director options to purchase shares of common stock of the Company.


(5)           Reflects
the 1-for-1.333334 reverse stock split effected in October 2009.





Securities
Authorized for Issuance under Equity Compensation Plans





The
Company maintains the 2009 Equity Incentive Plan approved by its shareholders
that authorizes awards representing up to 5,000,000 shares of common
stock.  As of the date hereof, we have issued 13,125 options pursuant
to the Plan.


Equity
Compensation Plan Information as of December 31, 2009





Plan Category
                            
                            Number of
                              Securities to Be
                              Issued Upon
                              Exercise of
                              Outstanding
                              Options,
                              Warrants,
        and
                              Rights
                              Weighted
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price of
                              Outstanding
                              Options,
                              Warrants,
                              and Rights
                            
                            
                            Securities Remaining
                              Available for Future
                              IssuanceEquity
      compensation plans approved by
                              security
      holders
                            
                            
                            13,125
                            
                            
                            $
                            6.30
                            
                            
                            
                            4,986,875Equity
      compensation plans not approved by security holders
                            
                            
                            n/a
                            
                            
                            
                            n/a
                            
                            
                            
                            n/aTotal
                            
                            
                            13,125
                            
                            
                            $
                            6.30
                            
                            
                            
                            4,986,875





Item
13.            Certain
Relationships and Related Transactions, and Director Independence





Review
and Approval Policies and Procedures for Related Party Transactions





Pursuant
to Board policy, our executive officers and directors, and principal
stockholders, including their immediate family members and affiliates, are not
permitted to enter into a related party transaction with us without the prior
consent of our Audit Committee, or other independent committee of our board of
directors in the case it is inappropriate for our Audit Committee to review such
transaction due to a conflict of interest. Any request for us to enter into a
transaction with an executive officer, director, principal stockholder, or any
of such persons’ immediate family members or affiliates, in which the amount
involved exceeds $120,000 must first be presented to our Audit Committee for
review, consideration and approval. All of our directors, executive officers and
employees are required to report to our Audit Committee any such related party
transaction. In approving or rejecting the proposed agreement, our Audit
Committee shall consider the relevant facts and circumstances available and
deemed relevant to the Audit Committee. Our Audit Committee shall approve only
those agreements that, in light of known circumstances, are in, or are not
inconsistent with, our best interests, as our Audit Committee determines in the
good faith exercise of its discretion.





Except as
disclosed below, from its inception to December 31, 2009, the Company has not
been a participant in any transaction that is reportable under Item 404(d) of
Regulation S-K.  The Company knows of no proposed transaction in which
it will be a participant that would be reportable under Item 404(d) of
Regulation S-K.





Dalian
Dongfangzheng Industrial Co., Ltd., (DFZ) which holds 85% equity interest in
Dalian Xingyuan, was established by An Fengbin and his wife, Wang Jing, in
September 2006. In September 2008, DFZ borrowed $5,436,942 from Donggang
Xingyuan for the purpose of short-term funding for its business operations. The
borrowing was non-interest bearing. As of September 30, 2009 the balance was
paid in full in three separate payments; $4.38 million during February 2009,
$120,000 during April 2009, and the remaining balance was paid on August 8,
2009. All material related party transactions will be made or entered into on
terms that are no less favorable to use than can be obtained from unaffiliated
third parties. Related party transactions that we have previously entered into
were not approved by independent directors, as we had no independent directors
at that time.




61




In
November 2009, Xingyuan advanced $122,667 to Donggang Aquatic Product Trading
Center and Donggang Xingyuan Ship Repair Yard, two companies that are under the
control of Mr. An Fengbin. These companies are using these funds, together with
approximately $700,000 invested by Mr. An Fengbin through December 31, 2009, to
construct facilities in the Donggang port area that would provide marine
services that compliment the services offered there by the Company. Mr. An
Fengbin is liable to the Company for these advances and is at risk for any
losses incurred by these entities, and the Company has no obligations to or on
behalf of Donggang Aquatic Product Trading Center and Donggang Xingyuan Ship
Repair Yard. The Audit Committee consisting solely of independent and
disinterested directors of the Board has reviewed, approved and ratified the
terms of the foregoing transaction.


Director
Independence





Our Board
is subject to the independence requirements of the Nasdaq Stock Market (Nasdaq).
Our Board has determined that a majority of our directors and all current
members of the Audit Committee, the Compensation Committee and the Nominating
and Governance Committee are ‘‘independent’’ under the standards provided by the
Nasdaq and that the members of the Audit Committee are also “independent” for
purposes of Section 10A-3 of the Exchange Act. The Board based these
determinations primarily on a review of the responses of the directors and
executive officers to questions regarding employment and transaction history,
affiliations and family and other relationships and on discussions with the
directors. Based upon information submitted to the Board and consistent with the
foregoing Nasdaq and SEC requirements, the Board has determined that Wen Jiang,
Yu Bing and Francis N.S. Leong are independent directors on the
Board.  None of such directors engage in any transaction, relationship
or arrangement contemplated under Section 404(a) of Regulation S-K.





Item
14.            Principal
Accounting Fees and Services





Our Audit
Committee and our Board has retained Jewett, Schwartz, Wolfe & Associates
(“JSW”) as our independent registered public accounting firm to audit our
consolidated financial statements for the fiscal year ending December 31, 2009.
Aggregate fees for professional services rendered by JSW for the respective
services for the fiscal years ended December 31, 2008 and 2009 were as
follows:





2008
                      
                      
                      2009Audit
      Fee
                      
                      $
                      137,344
                      
                      
                      $
                      122,774Audit-Related
      Fees
                      
                      $
                      0
                      
                      
                      $
                      0Tax
      Fees
                      
                      $
                      0
                      
                      
                      $
                      0All
      Other Fees
                      
                      $
                      0
                      
                      
                      $
                      0





Audit
Fees





Audit
fees represent the aggregate fees billed for professional services rendered by
JSW for the audit of our annual financial statements, review of financial
statements included in our quarterly reports, review of registration statements
or services that are normally provided in connection with statutory and
regulatory filings or engagements for those fiscal years.





Audit-Related
Fees





Audit-related
fees represent the aggregate fees billed for assurance and related services that
are reasonably related to the performance of the audit or review of our
financial statements and are not reported under Audit Fees. There were no such
fees in fiscal 2008 and 2009.





Tax
Fees





Tax fees
represent the aggregate fees billed for professional services rendered by our
principal accountants for tax compliance, tax advice, and tax planning for such
years.





All
Other Fees





All other
fees represent the aggregate fees billed for products and services other than
the services reported in the other categories. There were no such fees in fiscal
2008 and 2009.





Audit
Committee Pre-Approval Policies and Procedures





The Audit
Committee on an annual basis reviews audit and non-audit services performed by
the independent auditors. All audit and non-audit services are pre-approved by
the Audit Committee, which considers, among other things, the possible effect of
the performance of such services on the auditors’ independence.


62


Part
IV





Item
15.            Exhibits
and Financial Statement Schedules





Exhibit No.
                  Exhibit
      Title2.1
                  Share
      Exchange Agreement by and among the Company, Goodwill Rich International
      Limited and shareholders of Goodwill, dated as of August 21,
      2009(1)2.2
                  Shandong
      Xinfa Fishery Group Co., Ltd. Equity Replacement
    Agreement(1)2.3
                  Rongcheng
      Xinfa Share Transfer Agreement(1)3.1(i)
                  Certificate
      of Incorporation(1)3.1.1(i)
                  Amendment
      to the Certificate of Incorporation(1)3.1(ii)
                  By-Laws(1)4.1
                  Form
      of Common Stock Certificate(1)10.1
                  Exclusive
      Consulting Services Agreement by and between Dalian Fusheng Consulting
      Co., Ltd. and Dalian Xingyuan Marine Bunker Co. Ltd., dated March 26,
      2009(1)10.2
                  Operating
      Agreement by and among Dalian Fusheng Consulting Co., Ltd., Dalian
      Xingyuan Marine Bunker Co. Ltd and the stockholders of Xingyuan, dated
      March 26, 2009(1)10.3
                  Equity
      Pledge Agreement by and among Dalian Fusheng Consulting Co., Ltd., the
      Dalian Xingyuan Marine Bunker Co. Ltd and stockholders, dated March 26,
      2009(1)10.4
                  Purchase
      Option Agreement by and among Dalian Xingyuan Marine Bunker Co. Ltd, the
      Xingyuan Stockholders and Dalian Fusheng Consulting Co., Ltd., dated March
      26, 2009(1)10.5
                  Proxy
      and Voting Agreement by and between Dalian Fusheng Consulting Co., Ltd.,
      Dalian Xingyuan Marine Bunker Co. Ltd, and Dalian Dongfangzheng Industrial
      Co., Ltd, dated March 26, 2009(1)10.6
                  Proxy
      and Voting Agreement by and among Dalian Fusheng, Dalian Xingyuan and Wang
      Jing, dated March 26, 2009(1)10.7
                  Proxy
      and Voting Agreement by and among Dalian Fusheng, Dalian Xingyuan and Wang
      Yu dated March 26, 2009(1)10.8
                  Proxy
      and Voting Agreement by and among Dalian Fusheng, Dalian Xingyuan and Wang
      Xin, dated March 26, 2009(1)10.9
                  Agreement
      by and among Oriental Excel Enterprises Limited, Mrs. Lai WaiChi, a
      citizen of Hong Kong, Mr. An Fengbin, a PRC citizen, dated March 26,
      2009(1)10.10
                  Employment
      Agreement with An Fengbin(1)*10.11
                  2009
      Equity Incentive Plan(1)*10.12
                  Loan
      Agreement with Shenzhen Development Bank Co, Ltd.(1)10.13
                  Contract
      for Purchase and Sale with Panjin Liaohe Oil Field Dali Group
      Petrochemical Co., Ltd.(1)10.14
                  Contract
      for Purchase and Sale with Qingdao Anbang Refining and Chemical Co.,
      Ltd.(1)10.15
                  Contract
      for Purchase and Sale with PetroChina Dalian Petrochemical
      Company.(1)10.16
                  Sales
      Contract for Furfural Extract Oil with PetroChina Dalian Petrochemical
      Company.(1)10.17
                  Sales
      Contract for Rubber Filling Oil and Extract Oil with PetroChina Dalian
      Petrochemical Company.(1)10.18
                  Supplemental
      Agreement dated as of August 30, 2009.(1)10.19
                  Authorization
      Agreement.(1)10.20
                  Authorization
      letter amendment.(1)10.21
                  Amendment
      No. 1 to the Authorization Agreement.(1)14.1
                  Code
      of Ethics and Conduct.(1)21.1
                  List
      of Subsidiaries**31.1
                  Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.**31.2
                  Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.**32.1
                  Certificate
      of Chief Executive Officer pursuant to 18
  U.S.C.ss.1350.**32.2
                  Certificate
      of Chief Financial Officer pursuant to 18
  U.S.C.ss.1350.**





*
            Indicates
      a management contract or a compensatory plan or
    arrangement.


**
            Filed
      herewith


(1)
            Incorporated
      by reference to the exhibit with the same number to the Company’s
      Registration Statement on Form S-1 (SEC File No. 333-161577) effective as
      of January 25, 2010.




63




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




Andatee
      China Marine Fuel Services CorporationBy:
                /s/
      An FengbinName:
                An
      FengbinTitle:
                President,
      Chief Executive Officer




Date: 
March 2, 2010




Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated:





Signature
                    
                    Title
                    Date/s/
      An Fengbin
                    
                    President,
      Chief Executive Officer, Director
                    March
      2, 2010An
      Fengbin
                    
                    (Principal
      Executive Officer)/s/
      Wen Tong
                    
                    Chief
      Financial Officer, Director
                    March
      2, 2010Wen
      Tong
                    
                    (Principal
      Financial Officer)/s/
      Wen Jiang
                    
                    Director
                    March
      2, 2010Wen
      Jiang/s/
      Yu Bing
                    
                    Director
                    March
      2, 2010Yu
      Bing/s/
      Francis N.S. Leong
                    
                    Director
                    March
      2, 2010Francis
      N.S. Leong




Signed
originals of this written statement have been provided to Andatee China Marine
Fuel Services Corporation and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon
request.


64