UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
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x
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended September 30, 2006
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o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ____________ to ______________
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Commission
File Number 000-51753
CHINA
WEST COAL ENERGY INC.
(Exact
name of Registrant as specified in its charter)
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NEVADA
(State
or other jurisdiction of
incorporation
or organization)
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75-2882833
(I.R.S.
Employer Identification No.)
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Room
2205, Suite A, Zhengxin Building,
No.
5, Gaoxin 1st Road, Gao Xin District,
Xi’an,
Shaanxi Province, People’s Republic of China
(Address
of principal executive offices)
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N/A
(Zip
Code)
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(029)
8209-1099
(Issuer's
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
None
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Name
of each exchange on which registered
None
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Securities
registered pursuant to Section 12(g) of the Act:
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Title
of Class
Common
Stock, $.001 par value
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Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days. Yes x
No o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No x
Issuer's
revenues for its most recent fiscal year: $923,129*
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant on January 15, 2007 was approximately
$18,228,800. The per share stock price for computational purposes was $1.05,
based on the closing sale price per share for the Registrant's common stock
on
the OTC Bulletin Board on January 15, 2007. This value is not intended to be
a
representation as to the value or worth of the Registrant's common stock. The
number of non-affiliates of the Registrant has been calculated by subtracting
the number of shares held by persons affiliated with the Registrant from the
number of outstanding shares.
The
number of shares of the Registrant's common stock outstanding on January 15,
2007 was 28,227,250.
Transitional
Business Disclosure Format (Check One). Yes o
No x
*
Please see Explanatory Note on page A-2 regarding
the financial information in this Form 10-KSB Annual Report.
TABLE
OF CONTENTS
TO
ANNUAL REPORT ON FORM 10-KSB
FOR
YEAR ENDED SEPTEMBER 30, 2006
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Page
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Explanatory
Note
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A-2
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Introductory
Notes - Forward Looking Statements and Certain Terminology
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A-2
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PART
I
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Item
1.
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Description
of Business
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1
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Item
2.
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Description
of Property
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7
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Item
3.
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Legal
Proceedings
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7
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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8
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PART
II
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Item
5.
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Market
for Registrant's Common Equity and Related Stockholder
Matters
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9
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Item
6.
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Management's
Discussion and Analysis
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11
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Item
7.
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Financial
Statements
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30
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Item
8.
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Changes
in and Disagreements on Accounting and Financial
Disclosure
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32
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Item
8A.
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Controls
and Procedures
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32
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Item
8B.
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Other
Information
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32
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PART
III
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Item
9.
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Directors,
Executive Officers, Promoters and Control Persons; Compliance with
Section
16(a) of the Exchange Act
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33
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Item
10.
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Executive
Compensation
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34
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management
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36
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Item
12.
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Certain
Relationships and Related Transactions
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36
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Item
13.
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Exhibits
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38
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Item
14.
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Principal
Accountant Fees and Services
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38
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Signatures
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40
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(REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK)
EXPLANATORY
NOTE
As
previously reported in our Current Report on Form 8-K, on October 20, 2006,
the
Company, under its predecessor name Endo Networks, Inc. (“Endo”) and Endo’s
prior majority shareholders, completed a share exchange transaction with Hangson
Limited, a British Virgin Islands company (“Hangson”) and Hangson’s shareholders
(the “Exchange”) that resulted in Hangson becoming a wholly-owned subsidiary of
Endo and also resulted in a change of control of the Company. The Exchange
was
accounted for as a reverse acquisition and recapitalization and, as a result,
Endo’s (the legal acquirer) consolidated financial statements will, in
substance, be those of Hangson (the accounting acquirer), with the assets and
liabilities, and revenues and expenses, of Endo being included effective from
the date of the Exchange. However,
the Exchange was not completed until after the end of Company’s current fiscal
year, September 30, 2006 and thus the Company was required to file this Annual
Report on Form 10-KSB for Endo’s business activities prior to the Share Exchange
and as of September 30, 2006. Although this Annual Report on Form 10-KSB
includes descriptions of the Share Exchange and the business of the combined
entity after the Closing of the Share Exchange, the financial statements and
information included are only those of Endo, the legal acquirer. The financial
statements for Hangson for the years ended December 31, 2004 and December 31,
2005 were included with the Form 8-K filed on October 26, 2006 in connection
with the Exchange. Further, the
Company has also decided to adopt the fiscal year end of Hangson, its operating
business after the share exchange transaction, and thus the Company will be
filing an annual report on Form 10-KSB for its new fiscal year ending December
31st, commencing with the Company’s annual report for the year ending December
31, 2006.
INTRODUCTORY
NOTES - FORWARD LOOKING STATEMENTS AND CERTAIN TERMINOLOGY
Some
of
the statements made by us in this Annual Report on Form 10-KSB are
forward-looking in nature, including but not limited to, statements relating
to
our future revenue, product development, demand, acceptance and market share,
gross margins, levels of research and development, our management's plans and
objectives for our current and future operations, and other statements that
are
not historical facts. Forward-looking statements include, but are not limited
to, statements that are not historical facts, and statements including forms
of
the words "intend", "believe", "will", "may", "could", "expect", "anticipate",
"plan", "possible", and similar terms. Actual results could differ materially
from the results implied by the forward looking statements due to a variety
of
factors, many of which are discussed throughout this Annual Report and
particularly in the sections titled “Factors That May Affect Future Results” and
“Factors Affecting Business, Operating Results and Financial Condition”, both of
which are included in the section titled “Management’s Discussion and Analysis
of Plan of Operation”. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to publicly release any revisions to these
forward-looking statements that may reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events. Factors that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by us include, but are not limited to:
● our
ability to finance our activities and maintain our financial liquidity;
● our
ability to attract and retain qualified, knowledgeable employees;
● the
impact of general economic conditions on our business;
● postponements,
reductions, or cancellations in orders from new or existing
customers;
● the
limited number of potential customers for our products;
● the
variability in gross margins on our products;
● our
ability to design and market new products successfully;
● our
failure to acquire new customers in the future;
● deterioration
of business and economic conditions in our markets;
● intensely
competitive industry conditions with increasing price competition;
and
● the
rate
of growth in the alternative fuel markets.
In
this
document, the words "we," "our," "ours," "us," and “Company” refer to China West
Coal Energy Inc. and our subsidiaries.
PART
I
ITEM
1. DESCRIPTION
OF BUSINESS
History
Of Endo Networks, Inc.
China
West Coal Energy Inc. (“CWCE” or the “Company”) was originally incorporated in
Texas as “Discount Mortgage Services, Inc.” on July 11, 2000 and in September
2001, the Company purchased Endo Networks, Inc., a corporation incorporated
in
Ontario, Canada on January 11, 2001 (“Endo Canada”). In November 2001, the
Company changed its name to Endo Networks, Inc. and was redomiciled to the
State
of Nevada in December 2002.
Prior
to
the Share Exchange transaction described below, CWCE conducted through, and
all
of CWCE’s assets were contained within, Endo Canada, in which conceptual and
software development was ongoing for approximately two years by the Company
founders, through ongoing contract relationships with software development
companies. The Company helped businesses acquire new customers and build sales
and loyalty with existing customers. The Company used interactive technology
such as touch screen kiosks, handheld computers, and websites, combined with
promotional marketing tactics to filter large numbers of consumers, to find
qualified prospects, and even precondition them for a sale. Our services can
be
deployed within a business' own retail environment, to increase sales with
their
own customer base by increasing frequency of visit and/or average spend with
individual customers, or they can be deployed within a partner location such
as
an office tower or a consumer show, to find and acquire qualified new customers.
The Company’s prior areas of expertise included: web, kiosk, handheld, wireless,
loyalty, promotional marketing, direct marketing, integration with point of
sale, surveys, incentive, sampling, and field and event marketing. The client
base included specialty retail, general retail, food service, automotive,
alcohol, energy, consumer packaged goods, entertainment, amateur sports, and
telecommunications companies.
However,
since its inception, the Company had incurred losses and had substantial trouble
maintaining consistent cash flow necessary to operate our business. As recently
as its last fiscal year and quarter, the Company reported losses and working
with a capital deficit for those same periods. The additional investment
and infrastructure needed to sustain our business and develop our operations
could not be supported by its current cash flow. In view of the foregoing,
the
Company’s lack of our growth and the limited platform for our future growth in
its current state, the Company’s Board determined that it would be in our
stockholders’ best interests to sell all of Endo’s assets to Peter B. Day, the
Company’s previous President, CEO and sole director prior to the Closing of the
Share Exchange. In making the determination to sell all of our assets to
Mr. Day, the Board gave primary consideration to Mr. Day’s familiarity with our
operations and business relations. The Company’s Board believed that Mr.
Day’s knowledge of our operations would lead to an efficient and expeditious
sale process. The Board was also able to negotiate Mr. Day’s agreement to
assume any liability with respect to the Company’s assets prior to the Closing.
The Asset and Share Purchase Agreement (the “Purchase Agreement”) by and between
the Company and Mr. Day was approved by our Board and executed on June 26,
2006,
and a majority of our shareholders approved the Purchase Agreement at our Annual
Shareholder meeting on September 5, 2006. The Purchase Agreement
was filed as Exhibit A to our Schedule 14A Information Statement, which was
filed with the Securities and Exchange Commission on August 8, 2006, and is
incorporated herein by reference. The description of the Purchase
Agreement contained herein and the transactions contemplated thereby do not
purport to be complete and are qualified in their entireties by reference to
such document. On September 30, 2006, the Company completed its sale of all
of
its assets and shares of Endo Canada to Mr. Day, pursuant to the terms of that
certain Purchase Agreement. Following the Closing of the Purchase Agreement,
the
Company had nominal assets and no business operations, and it sought to
identify, evaluate and investigate various companies with the intent that,
if
such investigation warrants, a reverse merger transaction could be negotiated
and completed pursuant to which the Company would acquire a target company
with
an operating business with the intent of continuing the acquired company’s
business as a publicly held entity.
On
October 18, 2006, the Company executed a Share Exchange Agreement (“Exchange
Agreement”) by and among Hangson Limited, a business company incorporated under
the laws of the British Virgin Islands (“Hangson”), and the stockholders of 100%
of Hangson’s common stock (the “Hangson Stockholders”), on the one hand, and
Endo and a majority of the Company’s stockholders (“Endo Stockholders”), on the
other hand. The closing of this share exchange transaction (the “Share
Exchange”) occurred on October 20, 2006 (the “Closing Date” or the “Closing”).
Separately, Hangson has entered into consulting service agreements and
equity-related agreements (the “Contractual Arrangements”) with Shaanxi Suoang
Biological Science & Technology Co., Ltd. (“Shaanxi Suoang”), which is
a limited liability company headquartered in the People’s Republic of China
(“PRC”) and organized under the laws of the PRC. Hangson’s business operations
are conducted through Shaanxi Suoang under these Contractual
Arrangements.
Under
the
Exchange Agreement, on the Closing Date, the Company issued a total of
26,000,000 shares of Common Stock (the “ENDO Shares”) to the Hangson
Stockholders and to Viking Partners, Inc., a consultant in this transaction,
in
exchange for 100% of the common stock of Hangson. Additionally, immediately
prior to the Closing Date, Peter B. Day, the Company’s then President, CEO and
sole director voluntarily cancelled 715,500 (post-reverse split) shares of
the
915,500 (post 1 for 5 reverse split) shares of the Company’s common
stock that he owns; and three of Company’s other shareholders also voluntarily
cancelled a total of 438,850 (post 1 for 5 reverse split) shares of the
Company’s common stock that they own, and the Company issued an additional
669,600 shares pursuant to certain anti-dilution provisions contained in
agreements the Company had with two consultants. Also pursuant to the
Share Exchange, and as approved by a majority of the
Company’s shareholders, the Company split its common stock on a 1-for-5
reverse basis (the “Reverse Split”) prior to the Closing Date. After the
cancellations, the consultant anti-dilution share issuances, the Reverse Split
and
minor
corrective stock issuances for rounding of fractional shares resulting from
the
Reverse Split, the Company had approximately 2,227,250 shares of
common stock outstanding and after the Share Exchange, the Company
had approximately 28,227,250 shares of common stock outstanding, with the
Hangson’s Shareholders owning approximately 85% of the
Company’s common stock. In addition, at Closing, Hangson paid the
Company’s creditors a total of US $500,000 for services rendered, in order to
satisfy certain obligations as set forth in the Exchange Agreement. We accounted
for this Share Exchange as a reverse acquisition and recapitalization and,
as a
result, the Company’s consolidated financial statements are in substance those
of Hangson, with the assets and liabilities, and revenues and expenses, of
the
Company being included effective from the date of the Share
Exchange.
From
and
after the Closing Date of the Share Exchange, the Company’s primary operations
consisted of the operations of Hangson and its variable interest entity (“VIE”),
Shaanxi Suo’ang Biological Science & Technology Co., Ltd. (“Shaanxi
Suoang”)
Having
no
substantive operation of its own, Hangson, through its VIE, Shaanxi Suoang,
is
engaged in the production and sale of coal-polymer (“COPO”) resin products,
including but not limited to, degradable mulch used for the conservation of
moisture and warmth of soil and protection of the roots of plants, and materials
used for plastic injection molding, electric wire covering, and garbage bags.
Shaanxi Suoang is also engaged in the research, development, production and
sale
of “coal-water mixture,” which is a potential fuel substitute for coal, oil or
gas.
Recent
Events
Effective
January 4, 2007, we changed our name from “Endo Networks, Inc.” to “China West
Coal Energy Inc.” (the “Name Change”) and we increased the number of our
authorized shares of capital stock to 250,000,000 shares, which include
200,000,000 shares of common stock and 50,000,000 shares of preferred stock
(“Authorized Shares Amendment”), by filing a Certificate of Amendment to amend
our Articles of Incorporation. On November 27, 2006, holders of a majority
of our outstanding common stock approved the Name Change and the Authorized
Shares Amendment to our Articles of Incorporation. On December 8, 2006, we
filed a definitive information statement on Schedule 14C with the SEC, which
was
delivered to our stockholders of record to notify them that the stockholders
had
approved the Name Change and the Authorized Shares Amendment to our Articles
of
Incorporation.
As
discussed more fully in the Form 8-K Current Report filed with the SEC on
January 16, 2007, the Company’s Board of Directors, by unanimous written
consent, approved a change of the Company ’s fiscal year. The Company’s new
fiscal year will begin on January 1 and end on December 31 of each year,
and
this change shall be applicable with the year ending December 31,
2006.
Throughout
the remainder of this report, when we use phrases such as "we," "our,"
"company," "us," we are referring to CWCE, Hangson, and Shaanxi Suoang as a
combined entity.
Overview
of Hangson Limited
Hangson
is a company incorporated under the laws of the British Virgin Islands on June
2, 2006. The Company is engaged in the production and sale of coal-polymer
(“COPO”) resin products, including but not limited to, degradable mulch used for
the conservation of moisture and warmth of soil and protection of the roots
of
plants, and materials used for plastic injection molding, electric wire
covering, and garbage bags. The Company is also engaged in the research,
development, production and sale of “coal-water mixture,” which is a potential
fuel substitute for coal, oil or gas. Hangson does not conduct any substantive
operations of its own and conducts its primary business operations through
its
variable interest entity (“VIE”), Shaanxi Suo’ang Biological Science &
Technology Co., Ltd. (“Shaanxi Suoang”)
PRC
law
currently has limits on foreign ownership of certain companies. To comply with
these foreign ownership restrictions, we operate our business in China through
Shaanxi Suo’ang Biological Science & Technology Co., Ltd., which is a
limited liability company headquartered in Xi’an, China and organized under the
laws of China (hereinafter, referred to together as “Shaanxi Suoang”). Shaanxi
Suoang has the licenses and approvals necessary to operate our business in
China. We have contractual arrangements with Shaanxi Suoang and its shareholders
pursuant to which we provide technology consulting and other general business
operation services to Shaanxi Suoang. Through these contractual arrangements,
we
also have the ability to substantially influence Shaanxi Suoang’s daily
operations and financial affairs, appoint its senior executives and approve
all
matters requiring shareholder approval. As a result of these contractual
arrangements, which enable us to control Shaanxi Suoang, we are considered
the
primary beneficiary of Shaanxi Suoang. Accordingly, we consolidate Shaanxi
Suoang’s results, assets and liabilities in our financial statements. For a
description of these contractual arrangements, see the section below titled
“Contractual Arrangements with Shaanxi Suoang and its Shareholders.” The
Company’s consolidated assets do not include any collateral for Shaanxi Suoang’s
obligations. The creditors of Shaanxi Suoang do not have recourse to the general
credit of the Company.
Contractual
Arrangements With Shaanxi Suoang And Its Shareholders
Our
relationships with Shaanxi Suoang and its shareholders are governed by a series
of contractual arrangements. Under PRC laws, each of Hangson, and Shaanxi Suoang
is an independent legal person and none of them is exposed to liabilities
incurred by the other party. Other than pursuant to the contractual arrangements
between Hangson and Shaanxi Suoang, Shaanxi Suoang does not transfer any other
funds generated from its operations to Hangson. As of August 18, 2006, we
entered into the following contractual arrangements with Shaanxi Suoang as
described below:
Consulting
Services Agreement.
Pursuant
to the exclusive consulting services agreements between Hangson and Shaanxi
Suoang, Hangson has the exclusive right to provide to Shaanxi Suoang general
business operations services as well as consulting services related to the
technological research and development of coal-based products as well as general
business operation advice and strategic planning (the “Services”). Under this
agreement, Hangson owns the intellectual property rights developed or discovered
through research and development, in the course of providing the Services,
or
derived from the provision of the Services. Shaanxi Suoang pays a quarterly
consulting service fees in Renminbi (“RMB”) to Hangson that is equal to all of
Shaanxi Suoang’s revenue for such quarter.
Operating
Agreement.
Pursuant
to the operating agreement among Hangson, Shaanxi Suoang and all shareholders
of
Shaanxi Suoang (collectively “Shaanxi Suoang’s Shareholders”), Hangson provides
guidance and instructions on Shaanxi Suoang’s daily operations, financial
management and employment issues. The shareholders of Shaanxi Suoang must
designate the candidates recommended by Hangson as their representatives on
Shaanxi Suoang’s board of directors. Hangson has the right to appoint senior
executives of Shaanxi Suoang. In addition, Hangson agrees to guarantee Shaanxi
Suoang’s performance under any agreements or arrangements relating to Shaanxi
Suoang’s business arrangements with any third party. Shaanxi Suoang, in return,
agrees to pledge its accounts receivable and all of its assets to Hangson.
Moreover, Shaanxi Suoang agrees that without the prior consent of Hangson,
Shaanxi Suoang will not engage in any transactions that could materially affect
the assets, liabilities, rights or operations of Shaanxi Suoang, including,
without limitation, incurrence or assumption of any indebtedness, sale or
purchase of any assets or rights, incurrence of any encumbrance on any of its
assets or intellectual property rights in favor of a third party or transfer
of
any agreements relating to its business operation to any third party. The term
of this agreement is ten (10) years from August 18, 2006 and may be extended
only upon Hangson’s written confirmation prior to the expiration of this
agreement, with the extended term to be mutually agreed upon by the
parties.
Equity
Pledge Agreement. Under
the
equity pledge agreement between the shareholders of Shaanxi Suoang and Hangson,
the shareholders of Shaanxi Suoang pledged all of their equity interests in
Shaanxi Suoang to Hangson to guarantee Shaanxi Suoang’s performance of its
obligations under the technology consulting agreement. If Shaanxi Suoang or
Shaanxi Suoang’s Shareholders breaches its respective contractual obligations,
Hangson, as pledgee, will be entitled to certain rights, including the right
to
sell the pledged equity interests. Shaanxi Suoang’s Shareholders also agreed
that upon occurrence of any event of default, Hangson shall be granted an
exclusive, irrevocable power of attorney to take actions in the place and stead
of the Shaanxi Suoang’s Shareholders to carry out the security provisions of the
equity pledge agreement and take any action and execute any instrument that
Hangson may deem necessary or advisable to accomplish the purposes of the equity
pledge agreement. The shareholders of Shaanxi Suoang agreed not to dispose
of
the pledged equity interests or take any actions that would prejudice Hangson’
interest. The equity pledge agreement will expire two (2) years after Shaanxi
Suoang’s obligations under the exclusive consulting services agreements have
been fulfilled.
Option
Agreement. Under
the
option agreement between the shareholders of Shaanxi Suoang and Hangson, the
shareholders of Shaanxi Suoang irrevocably granted Hangson or its designated
person an exclusive option to purchase, to the extent permitted under PRC law,
all or part of the equity interests in Shaanxi Suoang for the cost of the
initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable PRC law. Hangson or its designated person
has sole discretion to decide when to exercise the option, whether in part
or in
full. The term of this agreement is ten (10) years from August 18, 2006 and
may
be extended prior to its expiration by written agreement of the
parties.
Proxy
Agreement.
Pursuant
to the proxy agreement among Hangson and Shaanxi Suoang’s Shareholders, Shaanxi
Suoang’s Shareholders agreed to irrevocably grant a person to be designated by
Hangson with the right to exercise Shaanxi Suoang’s Shareholders’ voting rights
and their other rights, including the attendance at and the voting of Shaanxi
Suoang’s Shareholders’ shares at the shareholders’ meetings (or by written
consent in lieu of such meetings) in accordance with applicable laws and its
Article of Association, including but not limited to the rights to sell or
transfer all or any of his equity interests of the Shaanxi Suoang, and appoint
and vote for the directors and Chairman as the authorized representative of
the
shareholders of Shaanxi Suoang. The term of this Proxy Agreement is ten (10)
years from August 18, 2006 and may be extended prior to its expiration by
written agreement of the parties.
Shaanxi
Suo’ang Biological Science & Technology Co., Ltd.
As
discussed above, our operations are conducted through Shaanxi Suoang, which
is a
limited liability company headquartered in Xian, China and organized under
the
laws of PRC. Shaanxi Suoang was organized in May 2002. Shaanxi Suoang is engaged
in research, development, marketing and sales of coal polymer resin products,
and is also engaged in research, development, marketing and the sales
of “coal water mixture”, which can potentially be used as a fuel substitute
for oil, gas or coal.
Principal
Products Or Services
Shaanxi
Suoang currently has two major lines of products:
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1.
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Coal-polymer
(“COPO”) resin products, including degradable mulch used for the
conservation of moisture and warmth of soil and protection of the
roots of
plants, materials used for plastic injection molding, electric wire
covering, garbage bags, etc. The Company has a patent (number 94104380.0)
regarding the production of COPO resin products. Currently, the Company
is
selling over 5 different COPO products to over 10 provinces and districts
around China.
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2.
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Coal
Water Mixture Fuel. Coal water mixture fuel is a fuel substitute
that can
be used instead of oil, coal and gas, in industrial boilers, power
plant
boilers and industrial kilns. After two years of research and feasibility
study, the Company is ready to commercialize this fuel
substitute for use in boilers used for central heating for government
buildings, schools, armed forces’ barracks, and residential communities,
and also for use in industrial production facilities. The Company
is
currently constructing a coal water mixture production plant in western
China. The whole construction project is estimated to cost approximately
RMB60 million (US$7,500,000) in total. First phase of the
construction is projected to be complete by the end of 2006 and
the Company expects production of Coal Water Mixture Fuel to commence
by
early 2007.
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Coal
Polymer Resin Products
The
development, production, marketing and sales of coal-polymer (“COPO”) resin
based products is currently Hangson’s largest business. The Company has placed
great emphasis on the research and development of diversified products by taking
the multi-functional COPO resin parent material as the base for such products.
It has launched more than five kinds of product in the COPO series by relying
on
the technologies of its research and development (“R&D”) center. The Company
developed a series of products with high performance and relatively lower cost,
such as COPO resin degradable film, COPO charcoal and COPO resin anti-static
parent material in 2004 and continue to produce products such as degradable
mulch used for the conservation of moisture and warmth of soil and protection
of
the roots of plants, and material components used in the manufacture of products
such as plastic injection molding, electric wire covering, and garbage bags.
Currently, these products are marketed, distributed and sold in over ten
provinces of China, including Xian, Shaanxi, Gansu and Xinjiang, and the
Company’s market share for these types of products in these areas continues to
grow. The
Company plans to continue developing, manufacturing and selling COPO resin
based
products in the future while developing and commercializing its Coal Water
Mixture product described below.
Coal
Water Mixture Fuel
Coal
Water Mixture Fuel (“CWM Fuel”) is a viscous, heavy liquid fuel that is produced
by mixing grinded coal, water and chemical additives. This liquid fuel can
be
stored, pumped and burned as a substitute for oil or gas in properly modified
furnances or boilers. In general, CWM Fuel is cheaper than oil or gas but
its combustion thermal efficiency may be similar to oil or gas.
Further, CWM Fuel may burn cleaner than coal and thus, may be a more
environmentally friendly fuel.
The
Company is also currently constructing a CWM Fuel production facility in the
city of Tongchuan with an expected annual production capacity of 300,000 tons
that will enable the Company to supply several industrial users and two central
heating stations in Tongchuan.
China
is
a large producer and consumer of coal and will remain so for the foreseeable
future. Pollution resulting from coal combustion causes concern both within
and outside China. Approximately 90% of environmental pollution in China is
attributable to direct coal combustion. The Chinese Government is currently
developing policies and implementing control-measures to reduce this pollution.
Clean coal technology (CCT) can play an important part in this process,
contributing to both improved energy utilization efficiency and reduced
environmental pollution.
In
August
1995, the Chinese government formulated “the 9th
Five-Year Plan for Clean Coal Technology in China and a Development Program
to
2010.” In the “10th
Five-Year Plan” the State emphasized the need to strengthen clean coal
technology R&D and also to promote commercialization of proven clean coal
technologies. The potential clean coal technology market in China is
substantial. The Company’s CWM Fuel, being a mixture of coal, water, and
additives, presents itself as a fuel to substitute direct coal combustion.
Use
of the CWM Fuel not only allows the mixture to be transported as a
fluid, which avoids coal dust dispersion and spontaneous combustion during
transportation and storage, but it also allows the equipment used to burn this
fuel to be simplified. CWM Fuel may enhance the combustion efficiency
rate of coal while reducing the dust emission rate.
Because
direct coal combustion has caused serious pollution in China, the Chinese
government has enacted relevant laws and regulations to require enterprises
to replace old direct coal combustion industrial burners or furnaces with
furnaces that use cleaner fuels. In the city of Xian, for example,
thousands of plants continue to use old direct coal combustion burners or
furnaces. In addition, we believe on average, approximately 200
furnaces are purchased by local enterprises in Xian each year. But based on
prevailing regulations, no new direct coal combustion furnace is allowed to
be
installed within Xian’s city limits. Therefore, considering the high and
fluctuating prices of petroleum, the potential demand for the
Company’s CWM Fuel product as a cleaner substitute for direct coal
combustion may be substantial.
In
2003,
Shaanxi Suoang’s board of directors realized this opportunity
and initiated the development of CWM Fuel products.
After studying the market demand for CWM Fuel in the cities
of Qingdao, Shenyang, Maoming, Foshan for two years and conducting a
feasibility study, the Company decided to develop its CWM Fuel product
which complies with the environmental protection policies of “prohibiting the
burning of raw coal” in large-sized or medium-sized cities such as Xi’an. The
Company developed a series of patented technologies in 2004, including the
“biological anticoagulation agent,” “combustion supporting agent,” “techniques
for the production of coal water mixture by utilizing the waste fluid from
paper
making and silt in urban area” and the “garbage combustion techniques based on
coal water mixture.” Thus, we believe that the conditions for the
application, promotion and industrialized production and sale of CWM
Fuel is now mature. The Company has invested approximately RMB60
million to initiate the construction of the production facility base for its
CWM
Fuel in the city of Tongchuan, and the Company is currently planning for an
annual production capacity of 300,000 tons, which would be one of the largest
in
Western China.
The
Company’s future plans relating to its CWM products include either the purchase
of or becoming a major shareholder in boiler manufacturers in Shaanxi Province
that will produce boilers that are compatible with our CWM Fuel, and also the
potential purchase of coal mines to supply the coal needed to manufacture the
CWM Fuel.
DISTRIBUTION
METHODS OF THE PRODUCTS OR SERVICES AND OUR CUSTOMERS
Most
of
the Company’s COPO products are sold through directly to dealers. Currently, we
have approximately 24 distribution agents throughout the PRC such as Xinjiang,
Shandong, Shanxi, Qinghai, Ningxia, Gansu and Xi’an. The Company will continue
to establish more representative offices and engage additional distribution
agents in order to strengthen its distribution network. The Company recognizes
the importance of branding as well as packaging. All of our Company’s COPO
products bear a uniform brand but we also brand and package our products with
specialized designs to differentiate the different categories of the Company’s
products.
We
conduct promotional marketing activities to publicize and enhance the Company’s
image as well as reinforce the recognition of the Company’s brand name by:
| |
1.
|
publishing
advertisements and articles in national as well as specialized and
provincial newspapers, magazines, and in other media, including the
Internet;
|
| |
2.
|
participation
in national meetings, seminars, symposiums, exhibitions for bio-technology
and other related industries; and
|
| |
3.
|
sending
direct mail to potential customers, including companies and government
departments.
|
We currently
have over 24 customers, including major direct customers located in Xi’an,
Shandong, Guansu and Xinjiang.
Our CWM
Fuel product will be sold and distributed by the Company directly to its
customers. We plan to conduct promotional marketing activities to publicize
our
product and enhance the Company’s image as well as to reinforce the recognition
of the Company’s brand name through assistance from the local
government.
COMPETITION
With
respect to our COPO products, we have four
major competitors in the PRC: Liaoyang North Degradable Plastic Co., Ltd.,
Gansu
Tianshui Plastic Co., Ltd., Shandong Shenxian Mulching Film Factory; and
Xinjiang Tianye Joint-Stock Co., Ltd. These companies have more assets and
have
a larger market share. The Company is able to compete with these competitors
because of the strong R&D capability, extensive sales network and lower
prices.
In
regards to our CWM Fuel product, we have no major competitors in Shaanxi
province but we have four competitors in other provinces: Tai’an Liangda CWM
Co., Ltd., Datong Huihai CWM Company, Daqing Shengtai Clean Coal Fuel Co.,
Ltd.,
and Ningbo Hongyuan CWM Co., Ltd. The Company will be able to compete with
these
competitors because of the strong R&D capability, extensive sales network,
abundant coal resources, the local government’s assistance and lack of
competitors in the Shaanxi market.
SOURCES
AND AVAILABILITY OF RAW MATERIALS AND THE PRINCIPAL SUPPLIERS
Our
principal raw material is coal that is supplied directly from the local coal
mines and used to manufacture our products. The Company designs, develops and
manufactures its products at its manufacturing facilities located at Xi’an, PRC.
The prices for this raw material is subject to market forces largely beyond
our
control, including energy costs, market demand, and freight costs. The prices
for this raw material have varied significantly in the past and may vary
significantly in the future.
PATENTS,
TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
CONTRACTS
We
rely
on a combination of trademark, copyright and trade secret protection laws in
China and other jurisdictions, as well as confidentiality procedures and
contractual provisions to protect our intellectual property and our brand.
We
have an issued patented special technology in regards to our COPO products
in
China, valid for 10 years and we intend to apply for more patents to protect
our
core technologies. We also enter into confidentiality, non-compete and invention
assignment agreements with our employees and consultants and nondisclosure
agreements with third parties. We also have a registered trademark in the PRC
that we use for the branding of our COPO products.
Coal
and
bio-technology companies are at times involved in litigation based on
allegations of infringement or other violations of intellectual property rights.
Furthermore, the application of laws governing intellectual property rights
in
the PRC and abroad is uncertain and evolving and could involve substantial
risks
to us.
GOVERNMENT
APPROVAL AND REGULATION OF THE COMPANY’S PRINCIPAL PRODUCTS OR
SERVICES
The
State
Environmental Protection Laws of the PRC governs us and our products. The
Company is subject to various PRC federal, state and local environmental laws
and regulations, including the State Environmental Protection Laws concerning
emissions to the air, discharges to waterways, the release of materials into
the
environment, the generation, handling, storage, transportation, treatment and
disposal of waste materials or otherwise relating to the protection of the
environment. The Company endeavors to ensure the safe and lawful operation
of
its facilities in manufacturing and distribution of products and believes it
is
in compliance in all material respects with applicable PRC laws and
regulations.
No
enterprise may start production at its facilities until it receives approval
from the Ministry of Commerce to begin operations. The Company currently has
obtained the requisite approval and licenses from the Ministry of Commerce
in
order to operate our production facilities.
COSTS
AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
In
compliance with PRC environmental regulations, the Company will be required
to
pay for costs of environmental compliance and safety once it commences
operations of its CWM Fuel production facility. No environmental
compliance expenses were required in 2005 for the Company’s current COPO
products production facility.
RESEARCH
AND DEVELOPMENT
We
place
great emphasis on product research and development (“R&D”). Shaanxi Suoang
has a research and development center located in Xian, PRC and it will continue
to conduct research and development to develop and improve the quality of the
products that it produces.
EMPLOYEES
As
September 30, 2005, Endo Networks, Inc. had 18 employees. As of September 30,
2006, the Company had 5 employees.
In
2004,
Shaanxi Suoang had 60 employees. In 2005, Shaanxi Suoang had 80 employees.
Currently, Shaanxi Suoang has 76 employees. We
believe the success of our business depends, in part, on our ability to attract
and retain qualified personnel, particularly qualified scientific, technical
and
key management personnel. Our employees are not governed by collective
bargaining agreements. We believe our relationships with our employees are
good.
PRINCIPAL
EXECUTIVE OFFICES
Our
principal executive office is located at Room 2205, Suite A, Zhengxin Building,
No. 5, Gaoxin 1st Road, Gao Xin District, Xi’an, Shaanxi Province, People’s
Republic of China and our telephone number is (029) 8209-1099.
FILING
STATUS
We
file
reports with the Securities and Exchange Commission ("SEC"). You can read and
copy any materials we file with the Commission at its' Public Reference Room
at
450 Fifth Street, NW, Washington, DC 20549. You can obtain additional
information about the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. In addition, the 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 us.
ITEM
2. DESCRIPTION
OF PROPERTY
The
Company’s headquarters is currently located in approximately 298 square meters
of office space and production facilities at Room 2205, Suite A, Zhengxin Bldg.,
No.5, Gaoxin 1st Road, Gao Xin District, Xi’an, Shaanxi Province, People’s
Republic of China. The Company leases this office space. We believe that our
existing production facilities for our COPO products are well maintained, in
good operating condition, and will be sufficient for our production goals for
the next year. The Company is also currently constructing a production facility
for the Coal Water Mixture product in Tong Chuan City, PRC.
In
China,
the Company owns or leases the following properties:
|
Property
Location
|
Area
(sq. meters)
|
Lease
Expiration Period
|
Purpose
|
|
Room
2205, Suite A, Zhengxin Bldg., No.5, Gaoxin 1st Road, Gao Xin District,
Xi’an, Shaanxi Province, People’s Republic of China
|
248
|
March
17, 2008
|
Offices
|
|
No.
36 Da Xing Lu,
Xian
Shi, People’s Republic of China
|
2,310
|
December
30, 2013
|
Production
and Manufacturing Facility
|
|
Yao
Zhou Ou,
Tong
Chuan City,
People’s
Republic of China
|
40,626
|
None
- Company owned
|
Production
facility for coal water mixture - under
construction
|
ITEM
3. LEGAL PROCEEDINGS
We
may be
subject to, from time to time, various legal proceedings relating to claims
arising out of our operations in the ordinary course of our business. We are
not
currently a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, would have a material adverse effect on the
business, financial condition, or results of operations of the
Company.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
Company
held its
Annual Meeting of Stockholders at its offices located at 2624 Dunwin Drive,
Unit
#3, Mississauga, Ontario, Canada L5l 3T5 on September 5, 2006 at 9:30 A.M.
As
described more fully in the Company’s Definitive Proxy Statement on Schedule 14A
filed on August, 8, 2006, we held the meeting: (a) to elect Peter B. Day as
the
sole member of the Company’s Board of Directors, whose terms are described in
the proxy statement; (b) to consider and vote on approval of the sale of all
of
our assets and shares of Endo Networks, Inc. (Canada) to Mr. Peter Day pursuant
to that certain Asset and Share Purchase Agreement, dated as of June 26, 2006;
(c) to grant our Board of Directors the authority to effect a reverse stock
split of up to 20 to 1; and (d) to grant our Board of Directors the authority
to
effect a forward stock split of up to 20 to 1. The
following is the results of the voting:
1.
Election
of Director:
|
Nominees
|
|
Number
of Shares
|
|
|
|
|
|
|
|
|
|
Peter
B. Day
|
|
For:
|
|
11,957,113
|
|
| |
|
Against:
|
|
0
|
|
| |
|
Abstain:
|
|
1,600,253
|
|
| 2. |
To
approve Asset
and Share Purchase Agreement, dated as of June 26,
2006
|
|
Approve
|
|
Number
of Shares
|
|
|
|
|
|
|
|
|
|
Asset
and Share Purchase Agreement
|
|
For:
|
|
11,957,113
|
|
|
|
|
Against:
|
|
0
|
|
|
|
|
Abstain:
|
|
1,600,253
|
|
| 3. |
To
approve grant
of authority to the Board to effect a reverse stock split
of up to 20 to
1.
|
|
Approve
|
|
Number
of Shares
|
|
|
|
|
|
|
|
|
|
Authority
for Reverse Stock Split
|
|
For:
|
|
11,957,113
|
|
|
|
|
Against:
|
|
0
|
|
|
|
|
Abstain:
|
|
1,600,253
|
|
| 4. |
To
approve grant
of authority to Board to effect a forward stock
split of up to 20 to
1.
|
|
Approve
|
|
Number
of Shares
|
|
|
|
|
|
|
|
|
|
Authority
for Reverse Stock Split
|
|
For:
|
|
11,957,113
|
|
|
|
|
Against:
|
|
0
|
|
|
|
|
Abstain:
|
|
1,600,253
|
|
PART
II
ITEM
5. MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock is not listed on any stock exchange. The common stock is traded
over-the-counter on the Over-the-Counter Electronic Bulletin Board under the
symbol "CWCE". The following table sets forth the high and low bid information
for the common stock for each quarter within the last two fiscal years (for
fiscal year ended September 30), as reported by the Over-the-Counter Electronic
Bulletin Board. The bid prices reflect inter-dealer quotations, do not include
retail markups, markdowns or commissions and do not necessarily reflect actual
transactions.
|
|
|
LOW
|
|
HIGH
|
|
|
2006
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
0.13 |
|
|
0.16 |
|
|
Third
Quarter
|
|
$
|
0.14 |
|
|
0.15 |
|
|
Second
Quarter
|
|
$
|
0.10 |
|
|
0.14 |
|
|
First
Quarter
|
|
$
|
0.10 |
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
0.10 |
|
|
0.10 |
|
|
Third
Quarter
|
|
$
|
0.10 |
|
|
0.10 |
|
|
Second
Quarter
|
|
$
|
0.09 |
|
|
0.10 |
|
|
First
Quarter
|
|
$
|
0.08 |
|
|
0.12 |
|
As
of
January 15, 2007, there were approximately 110 stockholders of record of our
common stock.
DIVIDENDS
We
have
never paid any dividends on the Common Stock or the Preferred Stock. We
currently anticipate that any future earnings will be retained for the
development of our business and do not anticipate paying any dividends on the
Common Stock or the Preferred Stock in the foreseeable future.
TRANSFER
AGENT
Our
transfer agent is Signature Stock Transfer, Inc., 14675 Midway Road, Suite
221,
Dallas, Texas 75244. Their telephone number is (972) 612-4120.
EQUITY
COMPENSATION PLAN INFORMATION
We
currently do not have any equity compensation plans.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
As
described in full detail in our Current Report on Form 8-K filed on November
17,
2006, which is incorporated herein by reference, on November 9, 2006, the
Company's Board of Directors elected to dismiss Lopez,
Blevins, Bork & Associates, L.L.P. (“LBB”)
as its
independent registered public accounting firm (“Independent Accountant”) and
also elected to retain Schwartz Levitsky Feldman LLP, Chartered Accountants
as
its new Independent Accountant. During
the Company’s fiscal year ended September 30, 2005 and the subsequent interim
period through November 9, 2006, the date of the dismissal of LBB, the Company
did not have any disagreement with LBB on any matter of accounting principles
or
practices, financial statement disclosure, or auditing scope or
procedure. The
decision to change Independent Accountants was approved by the Board of
Directors.
RECENT
SALES OF UNREGISTERED SECURITIES
Pursuant
to the Share Exchange Agreement entered by and among Hangson Limited, a British
Virgin Islands company (“Hangson”), and the stockholders of 100% of Hangson’
common stock (the “Hangson Stockholders”), on the one hand, and the Registrant
and a majority of the Registrant’s stockholders (“ENDO Stockholders”), on the
other hand, the Company issued 26,000,000 shares of the Company’s common stock
(the “ENDO Shares”) to the Hangson Shareholders and to Viking Partners, Inc.
(“Viking”), a consultant in the Share Exchange transaction, in exchange for 100%
of the common stock of Hangson. The issuance of the Endo Shares to the Hangson
Shareholders and Viking pursuant to the Share Exchange Agreement was exempt
from
registration under the Securities Act pursuant to Section 4(2) and/or Regulation
S thereof. We made this determination based on the representations of the
Hangson Shareholders and Viking which included, in pertinent part, that such
shareholders were either (a) "accredited investors" within the meaning of Rule
501 of Regulation D promulgated under the Securities Act, and/or (b) not a
"U.S.
person" as that term is defined in Rule 902(k) of Regulation S under the Act,
and that such shareholders were acquiring our common stock, for investment
purposes for their own respective accounts and not as nominees or agents, and
not with a view to the resale or distribution thereof, and that each member
understood that the shares of our common stock may not be sold or otherwise
disposed of without registration under the Securities Act or an applicable
exemption therefrom.
On
May 2,
2006, we entered into a consulting agreement (the “TriPoint Agreement”) with
TriPoint Capital Advisors, LLC (“TriPoint”), a business consultant, in order to
assist us in our business development, with the structuring of capital
transactions, to provide mergers and acquisition support services, and corporate
compliance support. As consideration for their services under the
agreement, we agreed to issue Tripoint 472,000 shares (94,400
shares after giving effect
for the 5:1 reverse stock split on October 17, 2006) of our common stock.
Based on the last trading price prior to the issuance of the stock a non-cash
consulting expense of $70,800 was recorded for the issuance of these shares.
The
TriPoint Agreement provided that if a reduction in shares occurs after the
date
of the agreement by reason of a reverse stock split, then the Company is
obligated to issue TriPoint a warrant for the purchase of additional shares
of
common stock, at the then par value, sufficient to preserve the original share
issuance in the agreement of 472,000 (the “TriPoint Agreement Anti-Dilution
Provision”). The shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act for issuances not involving
a
public offering.
On
May 2,
2006, we entered into a consulting agreement (the “Progressive Agreement”) with
Progressive Capital Markets, LLC (“Progressive”), a business consultant, in
order to assist us in our business development, with the structuring of capital
transactions, to provide mergers and acquisition support services, and corporate
compliance support. As consideration for their services under the
agreement, we agreed to issue Progressive 365,000 (73,000
shares after giving effect
for the 5:1 reverse stock split on October 17, 2006) shares of our common
stock. Based on the last trading price prior to the issuance of the stock a
non-cash consulting expense of $54,750 was recorded for the issuance of these
shares. The Progressive Agreement provided that if a reduction in shares occurs
after the date of the agreement by reason of a reverse stock split, then the
Company is obligated to issue Progressive a warrant for the purchase of
additional shares of common stock, at the then par value, sufficient to preserve
the original share issuance in the agreement of 365,000 (the “Progressive
Agreement Anti-Dilution Provision”). The shares were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act
for
issuances not involving a public offering.
On
October 11, 2006, pursuant to the TriPoint Agreement Anti-Dilution Provision
and
because the Company engaged in a 1 for 5 Reverse Stock Split (as discussed
more
fully above), the Company issued TriPoint a warrant (the “TriPoint Warrant”) for
the purchase of an additional 377,600 shares of the Company’s common stock with
an exercise price of $.001 per share, so as to preserve the number of shares
held by TriPoint prior to the Reverse Split at 472,000 shares as required under
the TriPoint Agreement. The warrant was issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering.
On
October 11, 2006, pursuant to the Progressive Agreement Anti-Dilution Provision
and because the Company engaged in a 1 for 5 Reverse Stock Split (as discussed
more fully above), the Company issued Progressive a warrant (the “Progressive
Warrant”) for the purchase of an additional 292,000 shares of the Company’s
common stock with an exercise price of $.001 per share, so as to preserve the
number of shares held by Progressive prior to the Reverse Split at 365,000
shares as required under the Progressive Agreement. The warrant was issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving a public offering.
On
October 17, 2006, TriPoint exercised their TriPoint warrant, as described above,
and the Company issued to TriPoint 377,600 shares of the Company’s common stock
at an exercise price of $.001 per share to TriPoint. These shares were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving a public offering.
On
October 17, 2006, Progressive exercised their Progressive warrant, as described
above, and the Company issued to Progressive 292,000 shares of the Company’s
common stock at an exercise price of $.001 per share to Progressive. These
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act for issuances not involving a public
offering.
During
July 2005, the Company issued 55,000 shares (11,000
shares after giving effect
for the 5:1 reverse stock split on October 17, 2006) of its common
stock to consultants for consulting services valued $0.10 per share or $5,500,
which was the fair value of common stock on the date issued. These transactions
were exempt from registration requirements in reliance on Section 4(2) of the
Securities Act of 1933. There was no form of general solicitation or general
advertising undertaken and the investor is accredited.
During
July 2004, the Company issued 96,500 (19,300
shares after giving effect
for the 5:1 reverse stock split on October 17, 2006) shares of common
stock to consultants for consulting services valued $0.07 per share or $6,755,
which was the fair value of common stock on the date issued. These
transactions were exempt from registration requirements in reliance on Section
4(2) of the Securities Act of 1933. There was no form of general solicitation
or
general advertising undertaken and the investor is accredited.
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Introduction
As
explained more fully above under the section “Explanatory Note” at the beginning
of this Form 10-KSB, although
this annual report includes descriptions of the Share Exchange and the business
of the combined entity after the Closing of the Share Exchange, the financial
statements included are only those of Endo, the legal acquirer. The financial
statements for Hangson for the years ended December 31, 2004 and December 31,
2005 were included with the Form 8-K filed on October 26, 2006 (along with
unaudited combined Pro Forma financial statements of the combined entities)
in
connection with the Exchange. The Company has decided to adopt the December
31
fiscal year end of Hangson and thus the Company will also file an annual report
on Form 10-KSB for the combined entities commencing with the annual report
for
the year ending December 31, 2006.
Overview
China
West Coal Energy Inc. (formerly Endo Networks, Inc.) (the “Company”) was
originally incorporated in Texas as “Discount Mortgage Services, Inc.” on July
11, 2000 and in September 2001, the Company purchased Endo Networks, Inc.,
a
corporation incorporated in Ontario, Canada on January 11, 2001 (“Endo Canada”).
In November 2001, the Company changed its name to Endo Networks, Inc. and was
redomiciled to the State of Nevada in December 2002. Prior to the Share Exchange
transaction described below, the Company conducted through, and all of the
Company ’s assets were contained within, Endo Canada, in which conceptual and
software development was ongoing for approximately two years by the Company
founders, through ongoing contract relationships with software development
companies.
On
October 18, 2006, we entered into a definitive Share Exchange Agreement with
Hangson Limited (“Hangson”), whereby we would acquire all of the outstanding
common stock of Hangson in exchange for newly-issued shares of our common stock
to the Hangson shareholders (the “Share Exchange”). On October 20, 2006 (the
“Closing Date”), Hangson became our wholly-owned subsidiary and Hangson’s
shareholders became owners of the majority of our voting stock. The acquisition
of Hangson by us was accounted for as a reverse merger because on a post-merger
basis, the former shareholders of Hangson held a majority of our outstanding
common stock on a voting and fully-diluted basis. As a result, Hangson is deemed
to be the acquirer for accounting purposes. From and after the Closing Date
of
the Share Exchange, the Registrant’s primary operations will now consist of the
operations of Hangson.
Additionally,
on August 18, 2006, Hangson entered various agreements with Shaanxi Suo’ang
Biological Science & Technology Co., Ltd. (“Shaanxi Suoang”). Through these
contractual arrangements, we have the ability to substantially influence Shaanxi
Suoang’s daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval. As a result of these
contractual arrangements, which obligates Hangson to absorb a majority of the
risk of loss from Shaanxi Suoang activities, enables Hangson to control Shaanxi
Suoang, and enables Hangson to receive a majority of Shaanxi Suoang’s expected
residual returns, Hangson is considered the primary beneficiary of Shaanxi
Suoang. Accordingly, we consolidate Shaanxi Suoang’s results, assets and
liabilities in our financial statements. For a description of these contractual
arrangements, see the section above titled “Contractual Arrangements with
Shaanxi Suoang and its Shareholders.” The Company’s consolidated assets do not
include any collateral for Shannxi Suoang’s obligations. The creditors of
Shannxi Suoang do not have recourse to the general credit of the Company.
Hangson
was incorporated under the laws of the British Virgin Islands on June 2, 2006.
Hangson does not conduct any substantive operations of its own and conducts
its
primary business operations through Shaanxi Suoang. Shaanxi Suoang is engaged
in
the research, development, production, marketing and sales of coal-polymer
(“COPO”) resin products including but not limited to, degradable mulch used for
the conservation of moisture and warmth of soil and protection of the roots
of
plants, and materials used for plastic injection molding, electric wire
covering, and garbage bags. Shaanxi Suoang is also engaged in the research,
development, production and sale of “coal-water mixture,” which is a potential
fuel substitute for coal, oil or gas. Our primary business operations are
conducted through our wholly-owned subsidiary Hangson Limited (“Hangson”).
Hangson does not conduct any substantive operations of its own but conducts
its
primary business operations through its variable interest entity (“VIE”),
Shaanxi Suo’ang Biological Science & Technology Co., Ltd. (“Shaanxi
Suoang”).
Significant
Accounting Policies
Cash
and equivalents
We
consider all highly liquid investment instruments purchased with original
maturities of three months or less when acquired to be cash
equivalents.
Intangible
assets
Intangible
assets are recorded at cost. Cost is amortized over the estimated useful
life of the asset unless that life is determined to be indefinite.
Intangible
assets not subject to amortization are tested for impairment on at least an
annual basis. If the fair value of the intangible asset is determined to
be less than the carrying amount, an impairment loss is recognized in the amount
of that difference.
Intangible
assets subject to amortization are reviewed for impairment in accordance with
the provisions applying to long-live assets.
Property
and equipment
Property
and equipment are stated at cost. Depreciation of property and equipment
is calculated on straight-line method over the estimated useful lives of the
assets. Impairment losses are recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. No impairment losses have been recorded since
inception.
Impairment
of long-lived assets
The
Company monitors the recoverability of long-lived assets, including property
and
equipment and intangible assets, based upon estimates using factors such as
expected future asset utilization, business climate, and undiscounted cash
flows
resulting from the use of the related assets or to be realized on sale. The
Company’s
policy
is to write down assets to the estimated net recoverable amount, in the period
in which it is determined likely that the carrying amount of the asset wilt
not
he recoverable.
Income
taxes
Income
taxes are computed using the asset and liability method. Under the asset
and liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax basis of assets
and liabilities and are measured using the currently enacted tax rates and
laws.
A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized.
Revenue
recognition
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. The Company recognizes revenue from the sale
of advertising related products and services like interactive advertising,
studio promotion, and event management as the services are performed.
Revenue
derived from professional services provided on a time and materials basis is
recognized as services are performed.
For
time
and material contracts, revenue is recognized and billed by multiplying the
number of hours expended by our professionals in the performance of the contract
by the established billing rates. For fixed fee projects, revenue is
generally recognized using the proportionate performance method.
Provisions for estimated losses on uncompleted contracts are made on a
contract-by-contract basis and are recognized in the period in which such losses
are determined.
Foreign
exchange
As
nearly
all operations are conducted in Canada, the Canadian dollar is the functional
currency. All balance sheet accounts have been translated at the current
exchange rate as of September 30, 2006. Statement of operations items have
been
translated at average currency exchange rates during the years ended September
30, 2006 and 2005. The resulting translation adjustment is recorded as a
separate component of comprehensive loss within stockholders plain
deficit.
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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
FISCAL
YEAR END
Prior
to
our acquisition, Hangson’s reporting fiscal year end was December 31. However,
our reporting year end was September 30. The Company has decided to adopt the
fiscal year end of Hangson, its operating business after the share exchange
transaction described above, and thus the Company will be filing an annual
report on Form 10-KSB for its new fiscal year ending December 31, commencing
with the Company’s annual report for the year ending December 31, 2006.
GOING
CONCERN
The
Company has incurred losses and has had substantial difficulties in maintaining
necessary cash flows for proper operations for years. For
the
year ended September 30, 2006, the Company had an accumulated deficit totaling
$1,271,176. Because of these recurring losses, the Company encountered
difficulties in acquiring additional working capital to develop and/or renew
its
business operations. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. In addition to discontinuing the
unprofitable operations, Management has entered into a Share Exchange Agreement
as disclosed below which they believe will ultimately reverse these negative
trends. No assurances can be given that Management’s Plans will be successful.
The consolidated financial statements do not include any adjustments that
might
result from the outcome of this uncertainity.
The
Company had entered into a definitive Share Exchange Agreement to acquire
Hangson Limited, a British Virgin Islands corporation after it sold all of
its
assets and liabilities to Mr. Peter B. Day, the Company’s President, CEO and
director under an Asset and Share Purchase Agreement signed between the Company
and Mr. Day on June 26, 2006. On October 20, 2006, the Company completed
a share
exchange transaction with Hangson Limited, a British Virgin Islands company
(“Hangson”) and Hangson’s shareholders (the “Exchange”) that resulted in Hangson
becoming a wholly owned subsidiary of Endo and also resulted in a change
of
control of the Company. The Exchange was accounted for as a reverse acquisition
and recapitalization and, as a result, Endo’s (the legal acquirer) consolidated
financial statements will, in substance, be those of Hangson (the accounting
acquirer). This event may eventually mitigate the Company’s going concern
problem.
These
conditions raise substantial doubt about our ability to continue as a going
concern. The financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might be necessary should we be unable
to
continue as a going concern.
SUMMARY
OF FISCAL YEAR ENDED SEPTEMBER 30, 2006
RESULTS
OF OPERATIONS
Revenues
for the year ended September 30, 2006 were $923,129 compared with $1,289,498
for
the previous year and cost of sales for the same periods were $468,926 and
$599,483 respectively. Sales decreased by 28%, and our gross profit increased
by
2%, which reflects an increase in our gross profit to 49 % of sales
from 54 % of sales in the prior year. In the year ended September 30, 2006,
we ceased to work some projects with low profit margin and our revenues
consisted of service and product deployments and the increase in gross profit
being due to doing similar deployments with less custom programming and less
new
hardware requirements.
Our
general and administrative expenses increased to $950,869 from $808,552 the
prior fiscal year which resulted in the company posting a loss, after
depreciation and amortization expenses, of $602,399 compared to a loss of
$214,221 the prior fiscal year.
LIQUIDITY
For
the
year ended September 30, 2006, we generated cash from operating activities
of
$223,218, as compared to $152,752 for the year ended September 30, 2005. This
substantial change was because on September 30, 2006, we completed the sale
of
all the Company's stock of Endo Canada to Mr. Peter Day as fully described
in
notes 1 and 9 of Notes to Financial Statements. Thus, our operations were
discontinued as of September 30, 2006 and gain on assets and liabilities
transaction with related parties of $703,260 was included in additional paid-in
capital.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We
have
certain commitments that include future payments. We have presented below a
summary in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash flows.
|
|
|
Payments
Due by Period
|
|
|
|
|
Total
|
|
Less
than 1 year
|
|
1-3
Years
|
|
3-5
Years
|
|
5
Years +
|
|
|
|
|
In
Thousands
|
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Lease Obligations
|
|
$
|
4,814,929
|
|
|
4,814,929
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Operating
Leases
|
|
$
|
305,309
|
|
|
53,106
|
|
|
73,444
|
|
|
75,358
|
|
|
103,401
|
|
|
Total
Contractual Obligations:
|
|
$
|
5,120,238
|
|
|
4,868,035
|
|
|
73,444
|
|
|
75,358
|
|
|
103,401
|
|
Operating
lease amounts include minimum lease payments under our non-cancelable operating
leases for office premises and production plants of Hangson. The amounts
presented are consistent with contractual terms and are not expected to differ
significantly, unless a substantial change in our headcount needs requires
us to
exit an office facility early or expand our occupied space.
Capital
commitments include capital contribution to a subsidiary and purchase of
machines for our production of “coal-water mixture” of Hangson.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that have or are reasonably likely
to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to our
investors.
Related
Party Transactions
For
a
description of our related party transactions see the section of this Current
Report entitled “Certain Relationships and Related Transactions.”
Quantitative
and Qualitative Disclosures about Market Risk
Exchange
Rates
Shaanxi
Suoang maintains its books and records in Renminbi (“RMB”), the lawful currency
of the PRC. In general, for consolidation purposes, the Company translates
Shaanxi Suoang’s assets and liabilities into US Dollars using the applicable
exchange rates prevailing at the balance sheet date, and the statement of income
is translated at average exchange rates during the reporting period. Adjustments
resulting from the translation of Shaanxi Suoang’s financial statements are
recorded as accumulated other comprehensive income.
Until
July 21, 2005, RMB had been pegged to US$ at the rate of RMB8.30: US$1.00.
On
July 21, 2005, the PRC government reformed the exchange rate system into a
managed floating exchange rate system based on market supply and demand with
reference to a basket of currencies. In addition, the exchange rate of RMB
to
US$ was adjusted to RMB8.11: US$1.00 as of July 21, 2005. The People’s Bank of
China announces the closing price of a foreign currency such as US$ traded
against RMB in the inter-bank foreign exchange market after the closing of
the
market on each working day, which will become the unified exchange rate for
the
trading against RMB on the following working day. The daily trading price of
US$
against RMB in the inter-bank foreign exchange market is allowed to float within
a band of ±0.3%
around the unified exchange rate published by the People’s Bank of China. This
quotation of exchange rates does not imply free convertibility of RMB to other
foreign currencies. All foreign exchange transactions continue to take place
either through the Bank of China or other banks authorized to buy and sell
foreign currencies at the exchange rates quoted by the People’s Bank of China.
Approval of foreign currency payments by the Bank of China or other institutions
required submitting a payment application form together with invoices, shipping
documents and signed contracts.
The
exchange rates used to translate amounts in RMB into US Dollars for the purposes
of preparing the consolidated financial statements or otherwise stated in this
MD&A were as follows:
|
|
|
September
30, 2006
|
|
December
31, 2005
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet items, except for the registered and paid-up capital, as of
end of
period/year
|
|
|
USD0.127:RMB1
|
|
|
USD0.124:RMB1
|
|
|
USD0.123:RMB1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
included in the statement of operations, statement of changes in
stockholders’ equity and statement of cash flows for the period/ year
ended
|
|
|
USD0.123:RMB1
|
|
|
USD0.122:RMB1
|
|
|
USD0.122:RMB1
|
|
RISK
FACTORS
Factors
Affecting Business, Operating Results and Financial
Condition
An
investment in our securities is very speculative and involves a high degree
of
risk. You should carefully consider the following risk factors, along with
the
other matters referred to in this Annual Report, before you decide to buy our
securities. If you decide to buy our securities, you should be able to afford
a
complete loss of your investment.
Risks
Associated With Our Business
FACTORS
THAT MAY AFFECT FUTURE PERFORMANCE
Before
investing in our common stock you should carefully consider the following risk
factors, the other information included herein and the information included
in
our other reports and filings. Our business, financial condition, and the
trading price of our common stock could be adversely affected by these and
other
risks.
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We
have a
limited operating history. Shaanxi Suoang commenced operations in 2002 and
first
achieved profitability in the year ended 2004. Accordingly, you should consider
our future prospects in light of the risks and uncertainties experienced by
early stage companies in evolving industries such as the coal products and
alternative energy industry in China. Some of these risks and uncertainties
relate to our ability to:
● maintain
our position as one of the market leaders in China;
● offer
new
and innovative products to attract and retain a larger customer
base;
● attract
additional customers and increase spending per customer;
● increase
awareness of our brand and continue to develop user and customer
loyalty;
● respond
to competitive market conditions;
● respond
to changes in our regulatory environment;
● manage
risks associated with intellectual property rights;
● maintain
effective control of our costs and expenses;
● raise
sufficient capital to sustain and expand our business;
● attract,
retain and motivate qualified personnel; and
● upgrade
our technology to support additional research and development of new
products.
If
we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We
Must Obtain Additional Financing to Execute Our Business
Plan
The
revenues from the production and sale of our coal polymer (“COPO”) resin
products and the projected revenues from our coal water mixture product are
not
adequate to support our expansion and product development programs. We
will need substantial additional funds to build and maintain our new production
facilities, pursue further research and development, obtain regulatory
approvals; file, prosecute, defend and enforce our intellectual property rights
and market our products. We will seek additional funds through public or
private equity or debt financing, strategic transactions and/or from other
sources. We could enter into collaborative arrangements for the
development of particular products that would lead to our relinquishing some
or
all rights to the related technology or products.
There
are
no assurances that future funding will be available on favorable terms or at
all. If additional funding is not obtained, we will need to reduce, defer
or cancel development programs, planned initiatives or overhead expenditures,
to
the extent necessary. The failure to fund our capital requirements would
have a material adverse effect on our business, financial condition and results
of operations.
Our
business and results of operations are dependent on coal markets, which may
be
cyclical.
As
the
majority of our revenue is currently derived from sales of coal-based products,
our business and operating results are substantially dependent on the domestic
supply for coal. The domestic and international coal markets are cyclical and
exhibit fluctuation in supply and demand from year to year and are subject
to
numerous factors beyond our control, including, but not limited to, the economic
conditions in the PRC, the global economic conditions and fluctuations in
industries with high demand for coal, such as the power and steel industries.
Fluctuations in supply and demand for coal have effects on coal prices which
in
turn affect our operating and financial performance. We have experienced
substantial price fluctuations in the past and believe that such fluctuations
will continue. The demand for coal is primarily affected by the overall economic
development and the demand for coal from the electricity generation, steel
and
construction industries. The supply of coal on the other hand, is primarily
affected by the geographical location of the coal supplies, the volume of coal
produced by the domestic and international coal suppliers, and the quality
and
price of competing sources of coal. Alternative fuels such as natural gas,
oil
and nuclear power, alternative energy sources such as hydroelectric power,
and
international shipping costs also have effects on the market demand for coal.
Excess demand for coal may have an adverse effect on coal prices which
would in turn cause a decline in our profitability. A
significant increase in domestic coal prices could also materially and
adversely affect our business and result of operations.
Our
business relies on our major customers.
For
the
years ended December 31, 2004 and 2005, Xinjiang Changji Autonomous
Prefecture Runze Agricultural Materials Co., Ltd. (“Xingjiang Changji”) and
Xijiang Akesu Hengfeng Agricultural Development Co., Ltd. (“Xijiang Akesu”) were
our largest customers, respectively. For the year ended December 31, 2004,
sales to Xinjiang Changji was $770,889, which represented 16.7% of our total
net
sales in 2004. For the year ended December 31, 2005, sales to Xijiang Akesu
was $610,000, which represented 11% of our total net sales in 2005. Given the
large percentage of our revenues derived from our sales to these two major
customers, any adverse developments to Xinjiang Changji’s and Xijiang Akesu’s
business operations could have an adverse impact on our results of operations.
Competition
in the PRC and the international coal industry is increasing and our business
and prospects will be adversely affected if we are not able to compete
effectively.
We
face
competition in all areas of our business. Competition in the coal energy
industry is based on many factors, including price, production capacity, quality
and characteristics, transportation capability and costs, blending capability
and brand name. Our coal-based products business competes in the domestic and
international markets with other large domestic coal-based products companies
and we will also have to compete with other competitors in the coal water
mixture product industry. Some of our competitors may have greater financial,
marketing, distribution and other resources than we do, and more well-known
brand names in the markets. We currently compete favorably on the quality of
our
coal-based products. However, there can be no assurance that we will continue
to
compete favorably due to quality improvements by our competitors and this may
have a material adverse impact on our results of operations.
We
may suffer losses resulting from industry-related accidents and lack of
insurance.
We
operate manufacturing facilities that may be affected by water, gas, fire or
structural problems. As a result, we, like other coal-based products companies,
may experience accidents that will cause property damage and personal injuries.
Although we have implemented safety measures for our production facilities
and
provided on-the-job training for our employees, there can be no assurance that
industry-related accidents will not occur in the future.
We
do not
currently maintain fire, casualty or other property insurance covering our
properties, equipment or inventories, other than with respect to vehicles.
In
addition, we do not maintain any business interruption insurance or any third
party liability insurance to cover claims in respect of personal injury,
property or environmental damage arising from accidents on our properties,
other
than third party liability insurance with respect to vehicles. Any uninsured
losses and liabilities incurred by us could have a material adverse effect
on
our financial condition and results of operations.
Our
business operations may be adversely affected by present or future environmental
regulations.
As
a
producer of coal products, we are subject to significant, extensive, and
increasingly stringent environmental protection laws and regulations in China.
These laws and regulations:
● impose
fees for the discharge of waste substances;
● require
the establishment of reserves for reclamation and rehabilitation;
● require
the payment of fines for serious environmental offenses; and
●
allow
the
PRC Government, at its discretion, to close any facility that fails to
comply
with orders requiring it to correct or stop operations causing environmental
damage.
Our
operations may produce significant amounts of waste water, gas and solid waste
materials. Currently, the PRC Government is moving toward more rigorous
enforcement of applicable laws and regulations as well as the adoption and
enforcement of more stringent environmental standards. Our budgeted amounts
of
capital expenditure for environmental regulatory compliance may not be
sufficient and we may need to allocate additional funds for such purpose. If
we
fail to comply with current or future environmental laws and regulations, we
may
be required to pay penalties or fines or take corrective actions, any of which
may have a material adverse effect on our business operations and financial
condition.
In
addition, China is a signatory to the 1992 United Nations Framework Convention
on Climate Change and the 1997 Kyoto Protocol, which are intended to limit
emissions of greenhouse gases. Efforts to control greenhouse gas emission in
China could result in reduced use of coal if power generators switch to sources
of fuel with lower carbon dioxide emissions, which in turn could reduce the
revenues of our coal business and have a material adverse effect on our results
of operations.
Our
operations are subject to a number of risks relating to the
PRC.
We
are
also subject to a number of risks relating to the PRC, including the following:
| |
●
|
The
central and local PRC governments continue to support the development
and
operation of coal industry in China. If the PRC Government changes
its
current policies that are currently beneficial to us, we may face
significant constraints on our flexibility and ability to expand
our
business operations or to maximize our
profitability.
|
| |
●
|
Under
current PRC regulatory requirements, our projects for the development
of
our coal water mixture fuel substitute require PRC Government approval.
If
any of our important projects required for our growth or cost reduction
are not approved, or are not approved on a timely basis, our financial
condition and operating performances could be adversely
affected.
|
| |
●
|
The
PRC Government has been reforming, and is expected to continue to
reform
its economic system. Many of the reforms are unprecedented or
experimental, and are expected to be refined and improved. Other
political, economic and social factors can also lead to further
readjustment of the reform measures. This refining and readjustment
process may not always have a positive effect on our operations.
Our
operating results may be adversely affected by changes in the PRC’s
economic and social conditions and by changes in policies of the
PRC
Government such as changes in laws and regulations (or the interpretation
thereof), imposition of additional restrictions on currency conversion
and
reduction in tariff protection and other import
restrictions.
|
| |
●
|
Since
1994, the conversion of Renminbi into foreign currencies, including
Hong
Kong and U.S. dollars, has been based on rates set by the People’s Bank of
China, or PBOC, which are set daily based on the previous day’s PRC
interbank foreign exchange market rate and current exchange rates
on the
world financial markets. Since 1994, the official exchange rate for
the
conversion of Renminbi to U.S. dollars has generally been stable.
On
July 21, 2005, however, PBOC announced a reform of its exchange rate
system. Under the reform, Renminbi is no longer effectively linked
to US
dollars but instead is allowed to trade in a tight 0.3% band against
a
basket of foreign currencies. Any further appreciation of Renminbi
in the
future will increase the cost of our export sales, reduce our account
receivables denominated in foreign currencies and adversely affect
our
financial condition and results of operations. On the other hand,
any
devaluation of the Renminbi may adversely affect the value of, and
dividends payable on our shares we receive our revenues and denominate
our
profits in Renminbi. Our financial condition and operating performance
may
also be affected by changes in the value of certain currencies other
than
Renminbi in which our earnings and obligations are denominated. In
particular, a devaluation of the Renminbi is likely to increase the
portion of our cash flow required to satisfy our foreign
currency-denominated obligations.
|
| |
●
|
Since
1997, many new laws and regulations covering general economic matters
have
been promulgated in the PRC. Despite this activity to develop the
legal
system, PRC’s system of laws is not yet complete. Even where adequate law
exists, enforcement of existing laws or contracts based on existing
law
may be uncertain and sporadic, and it may be difficult to obtain
swift and
equitable enforcement or to obtain enforcement of a judgment by a
court of
another jurisdiction. The relative inexperience of PRC’s judiciary in many
cases creates additional uncertainty as to the outcome of any litigation.
In addition, interpretation of statutes and regulations may be subject
to
government policies reflecting domestic political
changes.
|
Our
coal water mixture production facilities will be subject to extensive regulation
by the PRC Government and government regulations may limit our activities and
adversely affect our business operations.
Our
coal
water mixture operations, like those of other PRC energy companies, will be
subject to extensive regulation established by the PRC Government. Central
governmental authorities, such as the National Development and Reform
Commission, the State Environmental Protection Administration, the Ministry
of
Land and Resources, the State Administration of Coal Mine Safety, the and the
State Bureau of Taxation, and provincial and local authorities and agencies
exercise extensive control over various aspects of China’s coal industry and
transportation (including rail and sea transport). These controls affect the
following material aspects of our operations:
● pricing
of our transport services;
● industry-specific
taxes and fees;
● target
of
our capital investments;
● pension
funds appropriation; and
● environmental
and safety standards.
We
may
face significant constraints on our ability to implement our business strategies
or to carry out or expand our business operations. Our business may also be
materially and adversely affected by future changes in certain regulations
and
policies of the PRC Government in respect of the coal industry. New legislation
or regulations may be adopted that may materially and adversely affect our
coal
water mixture operations, our cost structure or the demand for our products.
In
addition, new legislation or regulations or different or more stringent
interpretation of existing laws and regulations may also require us to
substantially change our existing operations or incur significant
costs.
The
Profitability of Our Products Depend on Our Ability to Operate Without
Infringing the Proprietary Rights of Others and to Protect Proprietary
Rights
We
must
operate without infringing the proprietary rights of third parties and without
third parties circumventing our rights. The patent positions of coal and
biotechnology enterprises, including ours, are uncertain and involve complex
legal and factual questions for which important legal principles are largely
unresolved. For example, no consistent policy has emerged regarding the
breadth of bio-technology patent claims that are granted by the U.S. Patent
and
Trademark Office or enforced by the U.S. federal courts. In addition, the
scope of the originally claimed subject matter in a patent application can
be
significantly reduced before a patent is issued. The biotechnology patent
situation outside the U.S. is even more uncertain and is currently undergoing
review and revision in many countries. For our products, which have or in
the future may have, obtained patent protection, their profitability may depend
in part on our ability to obtain and maintain patents and licenses and preserve
trade secrets, and the period our intellectual property remains exclusive.
Because patent applications are maintained in secrecy in some cases, we cannot
be certain that we or our licensors are the first creators of inventions
described in our pending patent applications or patents or the first to file
patent applications for such inventions.
Other
companies may independently develop similar products and design around any
patented products we develop.
We
cannot
assure you that:
● any
of
our patent applications will result in the issuance of patents
● we
will
develop additional patentable products
● the
patents we have been issued will provide us with any competitive
advantages
● the
patents of others will not impede our ability to do business; or
● third
parties will not be able to circumvent our patents.
A
number
of coal-based products companies, bio-technology companies, research and
academic companies and institutions have developed technologies, filed patent
applications or received patents on technologies that may relate to our
business. If these technologies, applications or patents conflict with
ours, our ability to sell our products may be curtailed. If patents
that cover our activities are issued to other companies, we may not be able
to
obtain licenses at a reasonable cost, or at all. We may also be unable to
develop our technology; or introduce, manufacture or sell current or future
products we have planned.
Patent
litigation is becoming widespread in the bio-technology industry. Such
litigation may affect our efforts to form collaborations, to conduct research
or
development, to conduct clinical testing or to manufacture or market any
products under development. There are no assurances that our patents would
be held valid or enforceable by a court or that a competitor’s technology or
product would be found to infringe our patents in the event of patent
litigation. Our business could be materially affected by an adverse
outcome to such litigation. We could incur substantial costs and
devote significant management resources to defend our patent position or to
seek
a declaration that another company’s patents are invalid.
Much
of
our know-how and technology may not be patentable, though it may constitute
trade secrets. There are no assurances that we will be able to meaningfully
protect our trade secrets. We cannot assure you that any of our existing
confidentiality agreements with employees, consultants, advisors or
collaborators will provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. Collaborators, advisors or consultants may dispute the
ownership of proprietary rights to our technology, for example by asserting
that
they developed the technology independently.
We
May Encounter Difficulties in Manufacturing our
Products
Before
our products can be profitable, they must be produced in commercial quantities
in a cost-effective manufacturing process that complies with regulatory
requirements, including GMP, production and quality control regulations.
If we cannot arrange for or maintain commercial-scale manufacturing on
acceptable terms, or if there are delays or difficulties in the manufacturing
process, we may not be able to conduct clinical testing, obtain regulatory
approval or meet demand for our products. Production of our products could
require raw materials which are scarce or which can be obtained only from a
limited number of sources. If we are unable to obtain adequate supplies of
such raw materials, the development, regulatory approval and marketing of our
products could be delayed.
We
May Not Be Able to Obtain the Regulatory Approvals or Clearances That Are
Necessary to Commercialize Our Products
The
PRC
imposes significant statutory and regulatory obligations upon the manufacture
and sale of our products. Each regulatory authority typically has a
lengthy approval process in which it examines product testing data and the
facilities in which the product is manufactured. Regulatory submissions
must meet complex criteria to demonstrate the safety and efficacy of the
ultimate products. Addressing these criteria requires considerable data
collection, verification and analysis. We may spend time and money
preparing regulatory submissions or applications without assurances as to
whether they will be approved on a timely basis or at all.
Our
product candidates, some of which are currently in the early stages of
development, will require additional development prior to their
commercialization. These steps and the process of obtaining required approvals
and clearances can be costly and time-consuming. If our potential products
are not successfully developed, cannot be proven to be safe and effective
through product testing, or do not receive applicable regulatory approvals
and
clearances, or if there are delays in the process:
● the
commercialization of our products could be adversely affected;
● any
competitive advantages of the products could be diminished; and
● revenues
or collaborative milestones from the products could be reduced or
delayed.
Governmental
and regulatory authorities may approve a product candidate for fewer indications
or narrower circumstances than requested or may condition approval on the
performance of post-marketing studies for a product candidate. Even if a
product receives regulatory approval and clearance, it may later exhibit adverse
side effects that limit or prevent its widespread use or that force us to
withdraw the product from the market.
Any
marketed product and its manufacturer will continue to be subject to strict
regulation after approval. Results of post-marketing programs may limit or
expand the further marketing of products. Unforeseen problems with an
approved product or any violation of regulations could result in restrictions
on
the product, including its withdrawal from the market and possible civil
actions.
In
manufacturing our products we will be required to comply with applicable good
manufacturing practices regulations, which include requirements relating to
quality control and quality assurance, as well as the maintenance of records
and
documentation. if we cannot comply with regulatory requirements, including
applicable good manufacturing practice requirements, we may not be allowed
to
develop or market the product candidates. If we or our manufacturers fail
to comply with applicable regulatory requirements at any stage during the
regulatory process, we may be subject to sanctions, including fines, product
recalls or seizures, injunctions, refusal of regulatory agencies to review
pending market approval applications or supplements to approve applications,
total or partial suspension of production, civil penalties, withdrawals of
previously approved marketing applications and criminal
prosecution.
Competitors
May Develop and Market Products That Are Less Expensive, More Effective or
Safer, Making Our Products Obsolete or Uncompetitive
Some
of
our competitors and potential competitors have greater product development
capabilities and financial, scientific, marketing and human resources than
we
do. Technological competition from other alternative energy, coal-based
product and bio-technology companies is intense and is expected to
increase. Other companies have developed technologies that could be the
basis for competitive products. Some of these products have an entirely
different approach or means of accomplishing the desired curative effect than
products we are developing. Alternative products may be developed that are
more effective, work faster and are less costly than our products.
Competitors may succeed in developing products earlier than us, obtaining
approvals and clearances for such products more rapidly than us, or developing
products that are more effective than ours. In addition, other forms of
treatment may be competitive with our products. Over time, our technology or
products may become obsolete or uncompetitive.
Our
Products May Not Gain Market Acceptance
Our
products may not gain market acceptance in the coal-based products and
bio-technology community. The degree of market acceptance of any product
depends on a number of factors, including establishment and demonstration of
clinical efficacy and safety, cost-effectiveness, clinical advantages over
alternative products, and marketing and distribution support for the
products. Limited information regarding these factors is available in
connection with our products or products that may compete with
ours.
To
directly market and distribute our products, we or our collaborators require
a
marketing and sales force with appropriate technical expertise and supporting
distribution capabilities. We may not be able to further establish sales,
marketing and distribution capabilities or enter into arrangements with third
parties on acceptable terms. If we or our partners cannot successfully
market and sell our products, our ability to generate revenue will be
limited.
Our
Operations and the Use of Our Products Could Subject Us to Damages Relating
to
Injuries or Accidental Contamination.
Our
research and development processes involve the controlled use of hazardous
materials. We are subject to federal, provincial and local PRC laws and
regulations governing the use, manufacture, storage, handling and disposal
of
such materials and waste products. The risk of accidental contamination or
injury from handling and disposing of such materials cannot be completely
eliminated. In the event of an accident involving hazardous materials, we could
be held liable for resulting damages. We are not insured with respect to
this liability. Such liability could exceed our resources. In the future
we could incur significant costs to comply with PRC environmental laws and
regulations.
If
We Were Successfully Sued for Product Liability, We Could Face Substantial
liabilities That May Exceed Our Resources.
We
may be
held liable if any product we develop, or any product which is made using our
technologies, causes injury or is found unsuitable during product testing,
manufacturing, marketing, sale or use. We currently do not have product
liability insurance. We are not insured with respect to this liability. If
we
choose to obtain product liability insurance but cannot obtain sufficient
insurance coverage at an acceptable cost or otherwise protect against potential
product liability claims, the commercialization of products that we develop
may
be prevented or inhibited. If we are sued for any injury caused by our products,
our liability could exceed our total assets.
We
Have Limited Business Insurance Coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have
any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.
Our
Success Depends on Attracting and Retaining Qualified
Personnel
We
depend
on a core management and scientific team. The loss of any of these
individuals could prevent us from achieving our business objective of
commercializing our product candidates. Our future success will depend in
large part on our continued ability to attract and retain other highly qualified
scientific, technical and management personnel, as well as personnel with
expertise in clinical testing and government regulation. We face
competition for personnel from other companies, universities, public and private
research institutions, government entities and other organizations. If our
recruitment and retention efforts are unsuccessful, our business operations
could suffer.
Risk
Related to the Alternative Energy Industry
A
drop in the retail price of conventional energy or other alternative energy
may
have a negative effect on our business.
A
customer's decision to purchase our Coal Water Mixture product will be primarily
driven by the return on investment resulting from the energy savings from our
Coal Water Mixture product. Any fluctuations in economic and market conditions
that impact the viability of conventional and other alternative energy sources,
such as decreases in the prices of oil and other fossil fuels could cause the
demand for our Coal Water Mixture product to decline. Although we believe that
current levels of retail energy prices support a reasonable return on investment
for our Coal Water Mixture product, there can be no assurance that future retail
pricing of conventional energy and other alternative energy will remain at
such levels.
Existing
regulations and changes to such regulations may present technical, regulatory
and economic barriers to the purchase and use of coal water mixture product,
which may significantly affect the demand for our
products.
Our
Coal
Water Mixture product will be subject to oversight and regulation in accordance
with national and local ordinances or regulations relating to safety,
environmental protection, and related matters. We are responsible for knowing
such ordinances and requirements must design our Coal Water Mixture product
to
comply with varying standards. Any new government regulations or utility
policies pertaining to our products may result in significant additional
expenses to us, our resellers and their customers and, as a result, could cause
a significant reduction in demand for our product.
If
our
Coal Water Mixture product is not suitable for widespread adoption or sufficient
demand for our Coal Water Mixture product does not develop or takes longer
to
develop than we anticipate, our sales would not significantly increase and
we
would be unable to achieve or sustain profitability.
The
market for Coal Water Mixture products is emerging and rapidly evolving, and
its
future success is uncertain. If Coal Water Mixture and clean coal technology
prove unsuitable for widespread commercial deployment or if demand for our
Coal
Water Mixture product fails to develop sufficiently, we may be unable to
generate enough revenues to achieve and sustain profitability. In addition,
demand for Coal Water Mixture product in the markets and geographic regions
we
target may not develop or may develop more slowly than we anticipate. Many
factors will influence the widespread adoption of coal water
mixture technology and demand for our products,
including:
●
cost-effectiveness
of coal water mixture technologies as compared with conventional and other
alternative energy technologies;
●
performance
and reliability of our coal water mixture product as compared with conventional
and other alternative energy products;
● capital
expenditures by customers that tend to decrease if the PRC or global economy
slows down; and
● availability
of government subsidies and incentives.
Risks
Related to Our Corporate Structure
PRC
laws and regulations governing our businesses and the validity of certain of
our
contractual arrangements are uncertain. If we are found to be in violation,
we
could be subject to sanctions. In addition, changes in such PRC laws and
regulations may materially and adversely affect our business.
There
are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual
arrangements with our affiliated Chinese entity, Shaanxi Suoang, and its
shareholders. We are considered a foreign person or foreign invested enterprise
under PRC law. As a result, we are subject to PRC law limitations on foreign
ownership of Chinese companies. These laws and regulations are relatively new
and may be subject to change, and their official interpretation and enforcement
may involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance
by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively.
The
PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses
and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses.
We
cannot assure you that our current ownership and operating structure would
not
be found in violation of any current or future PRC laws or regulations. As
a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of
these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
We
may be adversely affected by complexity, uncertainties and changes in PRC
regulation of our business and companies, including limitations on our ability
to own key assets.
The
PRC
government regulates the coal and bio-technology industries including foreign
ownership of, and the licensing and permit requirements pertaining to, companies
in these industry. These laws and regulations are relatively new and evolving,
and their interpretation and enforcement involve significant uncertainty. As
a
result, in certain circumstances it may be difficult to determine what actions
or omissions may be deemed to be a violation of applicable laws and regulations.
Issues, risks and uncertainties relating to PRC government regulation of our
industry include the following:
| |
●
|
we
only have contractual control over Shaanxi Suoang. We do not own
it due to
the restriction of foreign investment in Chinese businesses;
and
|
| |
●
|
uncertainties
relating to the regulation of the coal product and alternative energy
business in China, including evolving licensing practices, means
that
permits, licenses or operations at our company may be subject to
challenge. This may disrupt our business, or subject us to sanctions,
requirements to increase capital or other conditions or enforcement,
or
compromise enforceability of related contractual arrangements, or
have
other harmful effects on us.
|
The
interpretation and application of existing PRC laws, regulations and policies
and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, alternative energy and bio-technology
businesses in China, including our business.
In
order to comply with PRC laws limiting foreign ownership of Chinese companies,
we conduct our business through Shaanxi Suoang by means of contractual
arrangements. If the PRC government determines that these contractual
arrangements do not comply with applicable regulations, our business could
be
adversely affected.
The
PRC
government restricts foreign investment in businesses in China. Accordingly,
we
operate our business in China through Shaanxi Suoang. Shaanxi Suoang holds
the
licenses and approvals necessary to operate our coal-based products business
in
China. We have contractual arrangements with Shaanxi Suoang and its shareholders
that allow us to substantially control Shaanxi Suoang. We cannot assure you,
however, that we will be able to enforce these contracts.
Although
we believe we comply with current PRC regulations, we cannot assure you that
the
PRC government would agree that these operating arrangements comply with PRC
licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. If the
PRC
government determines that we do not comply with applicable law, it could revoke
our business and operating licenses, require us to discontinue or restrict
our
operations, restrict our right to collect revenues, require us to restructure
our operations, impose additional conditions or requirements with which we
may
not be able to comply, impose restrictions on our business operations or on
our
customers, or take other regulatory or enforcement actions against us that
could
be harmful to our business.
Our
contractual arrangements with Shaanxi Suoang and its shareholders may not be
as
effective in providing control over these entities as direct ownership.
Since
PRC
law limits foreign equity ownership in companies in China, we operate our
business through an affiliated Chinese company, referred to herein as Shaanxi
Suoang. We have no equity ownership interest in Shaanxi Suoang and rely on
contractual arrangements to control and operate such business. These contractual
arrangements may not be as effective in providing control over Shaanxi Suoang
as
direct ownership. For example, Shaanxi Suoang could fail to take actions
required for our business despite its contractual obligation to do so. If
Shaanxi Suoang fails to perform under their agreements with us, we may have
to
rely on legal remedies under PRC law, which may not be effective. In addition,
we cannot assure you that Shaanxi Suoang’s shareholders would always act in our
best interests.
The
Chairman of the Board of Directors of Shaanxi Suoang has potential conflicts
of
interest with us, which may adversely affect our business.
Baowen
Ren, our Chief Executive Officer, is also the Chairman of the Board of Directors
of Shaanxi Suoang. Conflicts of interests between his duties to our company
and
Shaanxi Suoang may arise. As Mr. Ren is a director and executive officer of
our
company, he has a duty of loyalty and care to us under Nevada law when there
are
any potential conflicts of interests between our company and Shaanxi Suoang.
We
cannot assure you, however, that when conflicts of interest arise, Mr. Ren
will
act completely in our interests or that conflicts of interests will be resolved
in our favor. In addition, Mr. Ren could violate his legal duties by diverting
business opportunities from us to others. If we cannot resolve any conflicts
of
interest between us and Mr. Ren, we would have to rely on legal proceedings,
which could result in the disruption of our business.
Risks
Related to Doing Business in China
Adverse
changes in economic and political policies of the PRC government could have
a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
Substantially
all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in China. China’s economy
differs from the economies of most developed countries in many respects,
including with respect to the amount of government involvement, level of
development, growth rate, control of foreign exchange and allocation of
resources. While the PRC economy has experienced significant growth in the
past
20 years, growth has been uneven across different regions and among various
economic sectors of China. The PRC government has implemented various measures
to encourage economic development and guide the allocation of resources. Some
of
these measures benefit the overall PRC economy, but may also have a negative
effect on us. For example, our financial condition and results of operations
may
be adversely affected by government control over capital investments or changes
in tax regulations that are applicable to us. Since early 2004, the PRC
government has implemented certain measures to control the pace of economic
growth. Such measures may cause a decrease in the level of economic activity
in
China, which in turn could adversely affect our results of operations and
financial condition.
If
PRC law were to phase out the preferential tax benefits currently being extended
to foreign invested enterprises and “new or high-technology enterprises” located
in a high-tech zone, we would have to pay more taxes, which could have a
material and adverse effect on our financial condition and results of
operations.
Under
PRC
laws and regulations, a foreign invested enterprise may enjoy preferential
tax
benefits if it is registered in a high-tech zone and also qualifies as “new or
high-technology enterprise”. As a foreign invested enterprise as well as a
certified “new or high-technology enterprise” located in a high-tech zone in
Beijing, Shaanxi Suoang is entitled to a two-year exemption from enterprise
income tax beginning from its first year of operation, followed by a 15% tax
rate so long as it continues to qualify as a “new or high-technology
enterprise.” Shaanxi Suoang is currently subject to a 15% enterprise income tax
rate for so long as its status as a “new or high-technology enterprise” remains
unchanged. If the PRC law were to phase out preferential tax benefits currently
granted to “new or high-technology enterprises” and technology consulting
services, we would be subject to the standard statutory tax rate, which
currently is 33%, and we would be unable to obtain business tax refunds for
our
provision of technology consulting services. Loss of these preferential tax
treatments could have a material and adverse effect on our financial condition
and results of operations.
Shaanxi
Suoang is subject to restrictions on making payments to us.
We
are a
holding company incorporated in the British Virgin Islands and do not have
any
assets or conduct any business operations other than our investments in our
affiliated entity in China, Shaanxi Suoang. As a result of our holding company
structure, we rely entirely on payments from Shaanxi Suoang under our
contractual arrangements. The PRC government also imposes controls on the
conversion of RMB into foreign currencies and the remittance of currencies
out
of China. We may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency. See “Government
control of currency conversion may affect the value of your investment.”
Furthermore, if our affiliated entity in China incurs debt on its own in the
future, the instruments governing the debt may restrict its ability to make
payments. If we are unable to receive all of the revenues from our operations
through these contractual or dividend arrangements, we may be unable to pay
dividends on our ordinary shares.
Uncertainties
with respect to the PRC legal system could adversely affect us.
We
conduct our business primarily through our affiliated Chinese entity, Shaanxi
Suoang. Our operations in China are governed by PRC laws and regulations. We
are
generally subject to laws and regulations applicable to foreign investments
in
China and, in particular, laws applicable to wholly foreign-owned enterprises.
The PRC legal system is based on written statutes. Prior court decisions may
be
cited for reference but have limited precedential value.
Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based
in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result,
we
may not be aware of our violation of these policies and rules until some time
after the violation. In addition, any litigation in China may be protracted
and
result in substantial costs and diversion of resources and management attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in the
prospectus.
We
conduct substantially all of our operations in China and substantially all
of
our assets are located in China. In addition, most of our senior executive
officers reside within China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon
our
senior executive officers, including with respect to matters arising under
U.S.
federal securities laws or applicable state securities laws. Moreover, our
PRC
counsel has advised us that the PRC does not have treaties with the United
States or many other countries providing for the reciprocal recognition and
enforcement of judgment of courts.
Governmental
control of currency conversion may affect the value of your investment.
The
PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB. Under our current structure, our
income is primarily derived from payments from Shaanxi Suoang. Shortages in
the
availability of foreign currency may restrict the ability of our PRC
subsidiaries and our affiliated entity to remit sufficient foreign currency
to
pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be
made
in foreign currencies without prior approval from the PRC State Administration
of Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required where RMB is to
be
converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of bank loans denominated in foreign currencies.
The PRC government may also at its discretion restrict access in the future
to
foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders.
Fluctuation
in the value of RMB may have a material adverse effect on your investment.
The
value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while a significant
portion of our financial assets are denominated in U.S. dollars. We rely
entirely on fees paid to us by our affiliated entity in China. Any significant
fluctuation in value of RMB may materially and adversely affect our cash flows,
revenues, earnings and financial position, and the value of, and any dividends
payable on, our stock in U.S. dollars. For example, an appreciation of RMB
against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into RMB for such purposes. An appreciation of RMB against the U.S.
dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency.
We
face risks related to health epidemics and other outbreaks.
Our
business could be adversely affected by the effects of SARS or another epidemic
or outbreak. China reported a number of cases of SARS in April 2004. Any
prolonged recurrence of SARS or other adverse public health developments in
China may have a material adverse effect on our business operations. For
instance, health or other government regulations adopted in response may require
temporary closure of our production facilities or of our offices. Such closures
would severely disrupt our business operations and adversely affect our results
of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of SARS or any other epidemic.
Risks
Related to an Investment in Our Securities
To
Date, We Have Not Paid Any Cash Dividends and No Cash Dividends Will be Paid
in
the Foreseeable Future.
We
do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even
if
the funds are legally available for distribution, we may nevertheless decide
not
to pay any dividends. We intend to retain all earnings for the company's
operations.
The
Application of the "Penny Stock" Rules Could Adversely Affect the Market Price
of Our Common Stock and Increase Your Transaction Costs to Sell Those Shares.
As
long
as the trading price of our common shares is below $5 per share, the open-market
trading of our common shares will be subject to the "penny stock" rules. The
"penny stock" rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000
or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received
the
purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny
stock
market. The broker-dealer also must disclose the commissions payable to both
the
broker-dealer and the registered representative and current quotations for
the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.
Our
Common Shares are Thinly Traded and, You May be Unable to Sell at or Near Ask
Prices or at All if You Need to Sell Your Shares to Raise Money or Otherwise
Desire to Liquidate Your Shares.
The
Company cannot predict the extent to which an active public market for its
common stock will develop or be sustained. However, the Company does not rule
out the possibility of applying for listing on the Nasdaq National Market or
other exchanges.
Our
common shares have historically been sporadically or "thinly-traded" on the
“Over-the-Counter Bulletin Board”, meaning that the number of persons interested
in purchasing our common shares at or near bid prices at any given time may
be
relatively small or non-existent. This situation is attributable to a number
of
factors, including the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others
in
the investment community that generate or influence sales volume, and that
even
if we came to the attention of such persons, they tend to be risk-averse and
would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned
and viable. As a consequence, there may be periods of several days or more
when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained.
The
market price for our common stock is particularly volatile given our status
as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you purchase our common stock may not be indicative of the price
that will prevail in the trading market. You may be unable to sell your common
stock at or above your purchase price if at all, which may result in substantial
losses to you.
The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As
a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could,
for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact
on
its share price. Secondly, we are a speculative or "risky" investment due to
our
lack of revenues or profits to date and uncertainty of future market acceptance
for our current and potential products. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined
to sell their shares on the market more quickly and at greater discounts than
would be the case with the stock of a seasoned issuer. The following factors
may
add to the volatility in the price of our common shares: actual or anticipated
variations in our quarterly or annual operating results; adverse outcomes;
the
termination of our contractual agreements with Shaanxi Suoang; and additions
or
departures of our key personnel, as well as other items discussed under this
"Risk Factors" section, as well as elsewhere in this Current Report. Many of
these factors are beyond our control and may decrease the market price of our
common shares, regardless of our operating performance. We cannot make any
predictions or projections as to what the prevailing market price for our common
shares will be at any time, including as to whether our common shares will
sustain their current market prices, or as to what effect that the sale of
shares or the availability of common shares for sale at any time will have
on
the prevailing market price. However, the Company does not rule out the
possibility of applying for listing on the Nasdaq National Market or other
exchanges.
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse.
Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales
and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups
by
selling broker-dealers; and (5) the wholesale dumping of the same securities
by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect
to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
Volatility
in Our Common Share Price May Subject Us to Securities Litigation.
The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
In the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
Our
corporate actions are substantially controlled by our principal shareholders
and
affiliated entities.
Our
principal shareholders and their affiliated entities will own approximately
85%
of our outstanding ordinary shares, representing approximately 85% of our voting
power. These shareholders, acting individually or as a group, could exert
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. In addition, because of
the
percentage of ownership and voting concentration in these principal shareholders
and their affiliated entities, elections of our board of directors will
generally be within the control of these shareholders and their affiliated
entities. While all of our shareholders are entitled to vote on matters
submitted to our shareholders for approval, the concentration of shares and
voting control presently lies with these principal shareholders and their
affiliated entities. As such, it would be difficult for shareholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as shareholders will be viewed favorably by all shareholders of the
company.
The
Elimination of Monetary Liability Against our Directors, Officers and Employees
under Nevada law and the Existence of Indemnification Rights to our Directors,
Officers and Employees may Result in Substantial Expenditures by our Company
and
may Discourage Lawsuits Against our Directors, Officers and Employees.
Our
articles of incorporation contains a provision that eliminates the liability
of
our directors for monetary damages to our company and shareholders to the extent
allowed under Nevada law and we are prepared to give such indemnification to
our
directors and officers to the extent provided by Nevada law. We may also have
contractual indemnification obligations under our employment agreements with
our
officers. The foregoing indemnification obligations could result in our company
incurring substantial expenditures to cover the cost of settlement or damage
awards against directors and officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage our company from bringing
a
lawsuit against directors and officers for breaches of their fiduciary duties,
and may similarly discourage the filing of derivative litigation by our
shareholders against our directors and officers even though such actions, if
successful, might otherwise benefit our company and shareholders.
Legislative
Actions, Higher Insurance Costs and Potential New Accounting Pronouncements
may
Impact our Future Financial Position and Results of
Operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results
of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as
proposed legislative initiatives following the Enron bankruptcy are likely
to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These
and
other potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results.
Past
Activities Of The Company And Its Affiliates May Lead To Future Liability For
The Company.
Prior
to
our entry into the Exchange Agreement with Hangson on October 20, 2006, the
Company engaged in businesses unrelated to its current operations. Although
the
Endo Shareholders are providing certain indemnifications against any loss,
liability, claim, damage or expense arising out of or based on any breach of
or
inaccuracy in any of their representations and warranties made regarding such
acquisition, any liabilities relating to such prior business against which
Hangson is not completely indemnified may have a material adverse effect on
the
Company.
The
market price for our stock may be volatile.
The
market price for our stock may be volatile and subject to wide fluctuations
in
response to factors including the following:
● actual
or
anticipated fluctuations in our quarterly operating results;
● changes
in financial estimates by securities research analysts;
● conditions
in bio-technology and coal-based product markets;
● changes
in the economic performance or market valuations of other alternative energy
and
coal-based products companies;
●
announcements
by us or our competitors of new products, acquisitions, strategic partnerships,
joint ventures or capital commitments;
● addition
or departure of key personnel;
● fluctuations
of exchange rates between RMB and the U.S. dollar;
● intellectual
property litigation; and
● general
economic or political conditions in China.
In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.
We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.
We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from this offering will be sufficient to meet
our anticipated cash needs for the near future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may
seek
to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity securities could result in additional dilution to
our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
If
we fail to maintain an effective system of internal controls, we may not be
able
to accurately report our financial results or prevent fraud.
We
will
be subject to reporting obligations under the U.S. securities laws. The
Securities and Exchange Commission, or the SEC, as required by Section 404
of
the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company
to
include a management report on such company’s internal controls over financial
reporting in its annual report, which contains management’s assessment of the
effectiveness of the company’s internal controls over financial reporting. In
addition, an independent registered public accounting firm must attest to and
report on management’s assessment of the effectiveness of the company’s internal
controls over financial reporting. Our management may conclude that our internal
controls over our financial reporting are not effective. Moreover, even if
our
management concludes that our internal controls over financial reporting are
effective, our independent registered public accounting firm may still decline
to attest to our management’s assessment or may issue a report that is qualified
if it is not satisfied with our controls or the level at which our controls
are
documented, designed, operated or reviewed, or if it interprets the relevant
requirements differently from us. Our reporting obligations as a public company
will place a significant strain on our management, operational and financial
resources and systems for the foreseeable future. Effective internal controls,
particularly those related to revenue recognition, are necessary for us to
produce reliable financial reports and are important to help prevent fraud.
As a
result, our failure to achieve and maintain effective internal controls over
financial reporting could result in the loss of investor confidence in the
reliability of our financial statements, which in turn could harm our business
and negatively impact the trading price of our stock. Furthermore, we anticipate
that we will incur considerable costs and use significant management time and
other resources in an effort to comply with Section 404 and other requirements
of the Sarbanes-Oxley Act.
We
will incur increased costs as a result of being a public company.
As
a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the Sarbanes-Oxley
Act,
as well as new rules subsequently implemented by SEC have required changes
in
corporate governance practices of public companies. We expect these new rules
and regulations to increase our legal, accounting and financial compliance
costs
and to make certain corporate activities more time-consuming and costly. In
addition, we will incur additional costs associated with our public company
reporting requirements. We are currently evaluating and monitoring developments
with respect to these new rules, and we cannot predict or estimate the amount
of
additional costs we may incur or the timing of such costs.
ITEM
7. FINANCIAL STATEMENTS
CHINA
WEST COAL ENERGY INC.
(FORMERLY
ENDO NETWORKS, INC.)
CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER
30, 2006 and 2005
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
| |
Page
|
| |
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
|
|
|
ACCOUNTING
FIRM
|
F-1A
|
| |
|
|
REPORT
OF PREVIOUS INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
|
F-1B
|
| |
|
|
CONSOLIDATED
BALANCE SHEET
|
F-2
|
| |
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
F-3
|
| |
|
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIT
|
F-4
|
| |
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F-5
|
| |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-6
to F-18
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of China West Coal Energy Inc.
(formerly
Endo Networks, Inc.)
We
have
audited the accompanying consolidated balance sheet of China West Coal
Energy
Inc. (formerly Endo Networks, Inc.) as at September 30, 2006 and the
related
consolidated statements of operations, cash flows and changes in stockholders’
deficit for the year ended September 30, 2006. These consolidated
financial statements are the responsibility of the management of China
West Coal
Energy Inc. (formerly Endo Networks, Inc.) Our responsibility is to
express an
opinion on these consolidated financial statements based on our
audit.
The
consolidated balance sheet, statements of operations, cash flows and
changes in
stockholder deficit as of and for the year ended September 30, 2005
were audited
by other auditors, whose report dated December 29, 2005 expressed an
opinion
without reservation.
We
conducted our audit in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audit to obtain reasonable assurance about whether
the
consolidated financial statements are free of material misstatement.
An audit
includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the consolidated financial statements. An audit also
includes
assessing the accounting principles used and significant estimates
made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of China West Coal
Energy Inc.
(formerly Endo Networks, Inc.) as of September 30, 2006 and the results
of its
operations and its cash flows for the year ended September 30, 2006
in
conformity with United States generally accepted accounting.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in note
3 to the
consolidated financial statements, the Company has sustained recurring
losses,
has no source of revenue and has limited working capital. These conditions
raise
substantial doubt about the company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in note 10. The
consolidated financial statements do not include any adjustments that
might
result from the outcome of this uncertainty.
Toronto,
Ontario, Canada
January
8, 2007
|
|
|
/s/
Schwartz Levitsky Feldman LLP
|
|
|
|
_____________________________
|
|
|
|
Schwartz
Levitsky Feldman LLP
|
| |
|
Chartered
Accountants
|
|
|
|
Licensed
Public Accountants
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
China
West Coal Energy, Inc
(formerly
known as Endo Networks, Inc.)
Xi’an
Shaanxi Province, People’s Republic of China
We
have
audited the accompanying balance sheet of China West Coal Energy, Inc.
(formerly
known as Endo Networks, Inc.) (the “Company”) as of September 30, 2005, and the
related statements of operations, stockholders’ deficit, and cash flows for the
year then ended. These financial statements are the responsibility
of the
Company’s management. Our responsibility is to express an opinion of these
financial statements based on our audit.
We
conducted our audit 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. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the
overall
financial statement presentation. We believe that our audit provides
a
reasonable basis for our opinion.
In
our
opinion, the financial statement referred to above present fairly,
in all
material respects, the financial position of Endo Networks, Inc. as
of September
30, 2005, and the results of its operations and its cash flows for
the year then
ended, in conformity with the accounting principles generally accepted
in the
United States of America.
The
accompanying financial statements have been prepared assuming that
the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company has incurred losses from operations for the
year ended
September 30, 2005 totaling approximately $214,000 and has negative
net worth
approximating $215,000 and current liabilities exceed current assets
by
approximately $512,000. The Company will require additional working
capital to
develop its business until it either (1) achieves a level of revenues
adequate
to generate sufficient cash flows from operations; or (2) obtains additional
financing necessary to support its working capital requirements. These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans regard to this matter are described in Note 3.
The accompanying financial statements do not include any adjustments
that might
results from the outcome of these uncertainties.
/s/
LBB
& Associates, Ltd., LLP
LBB
&
Associates, Ltd., LLP (formerly Lopez, Blevins, Bork & Associates,
LLP)
Houston,
Texas
December
29, 2005 (except for Note 10a. which is dated January 17, 2007)
CHINA
WEST COAL ENERGY INC.
(FORMERLY
ENDO
NETWORKS, INC.)
CONSOLIDATED
BALANCE SHEETS
As
at September 30, 2006 and 2005
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
| |
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Accounts
receivable, net of allowance for doubtful
|
|
|
|
|
|
|
|
|
accounts
of $Nil (2005: $Nil)
|
|
$
|
—
|
|
$
|
83,209
|
|
|
Prepaid
expenses
|
|
|
|
|
|
59,728
|
|
|
Total
current assets
|
|
|
|
|
|
142,937
|
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation (note 4)
|
|
|
|
|
|
441,170
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
|
|
$ |
584,107
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFINCIENCY
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities of capital leases payable
|
|
$
|
|
|
$
|
54,028
|
|
|
Accounts
payable
|
|
|
|
|
|
196,092
|
|
|
Accrued
expenses related party
|
|
|
|
|
|
251,120
|
|
|
Accrued
expenses - other
|
|
|
10,000
|
|
|
153,244
|
|
|
Total
current liabilities
|
|
|
10,000
|
|
|
654,484
|
|
|
|
|
|
|
|
|
|
|
|
Capital
leases payable
|
|
|
|
|
|
144,132
|
|
| |
|
|
10,000
|
|
|
798,616
|
|
|
COMMITMENTS
(note 5)
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
STOCKHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 50,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
2,712,000
shares (2005: 2,544,073) issued and outstanding (note 7)
|
|
|
2,712
|
|
|
2,544
|
|
|
Additional
paid-in capital
|
|
|
1,143,368 |
|
|
314,726
|
|
|
Accumulated
deficit
|
|
|
(1,271,176
|
)
|
|
(668,777
|
)
|
|
Accumulated
other comprehensive income
|
|
|
115,096
|
|
|
136,998
|
|
|
Total
Stockholders’ Deficit
|
|
|
(10,000
|
)
|
|
(214,509
|
)
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
|
|
$
|
584,107
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHINA
WEST COAL ENERGY INC.
(FORMERLY
ENDO
NETWORKS, INC.)
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended September 30, 2006 and 2005
| |
|
|
2006
|
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
923,129
|
|
$
|
1,289,498
|
|
|
Cost
of goods sold
|
|
|
468,926
|
|
|
599,483
|
|
| |
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
454,203
|
|
|
690,015
|
|
| |
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
105,733
|
|
|
95,684
|
|
| |
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
950,869
|
|
|
808,552
|
|
| |
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,056,602
|
|
|
904,236
|
|
| |
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(602,399
|
)
|
|
(214,221
|
)
|
| |
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(21,902
|
)
|
|
92,883
|
|
|
Comprehensive
loss
|
|
$
|
(624,301
|
)
|
$
|
(121,338
|
)
|
| |
|
|
|
|
|
|
|
|
Net
loss per share (basic and diluted)
|
|
$
|
(0.23
|
)
|
$
|
(0.08
|
)
|
|
Weighted
average shares of common stock outstanding
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
2,588,101
|
|
|
2,538,618
|
|
The
accompanying notes are an integral
part of these consolidated financial statements.
CHINA
WEST COAL ENERGY INC.
(FORMERLY
ENDO
NETWORKS, INC.)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
Years
Ended September 30, 2006 and 2005
| |
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Share
|
|
|
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2004
|
|
|
2,533,073
|
|
$
|
2,533
|
|
$
|
309,237
|
|
$
|
(454,556
|
)
|
$
|
44,115
|
|
$
|
(98,671
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
11,000
|
|
|
11
|
|
|
5,489
|
|
|
— |
|
|
— |
|
|
5,500
|
|
|
Net
loss for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2005
|
|
|
— |
|
|
— |
|
|
— |
|
|
(214,221
|
)
|
|
— |
|
|
(214,221
|
)
|
|
Foreign
currency translation adjustment
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
92,883
|
|
|
92,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2005
|
|
|
2,544,073
|
|
|
2,544
|
|
|
314,726
|
|
|
(668,777
|
)
|
|
136,998
|
|
|
(214,509
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
167,400
|
|
|
168
|
|
|
125,382
|
|
|
|
|
|
|
|
|
125,550
|
|
|
Corrective
issuance of common stock
|
|
|
527
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Net
loss for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006
|
|
|
— |
|
|
— |
|
|
— |
|
|
(602,399
|
)
|
|
|
|
|
(602,399
|
)
|
| Gain
on assets and liabilities transaction with related parties |
|
|
|
|
|
|
|
|
703,260 |
|
|
|
|
|
|
|
|
703,260 |
|
|
Foreign
currency translation adjustment
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(21,902
|
)
|
|
(21,902
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2006
|
|
|
2,712,000
|
|
$
|
2,712
|
|
$
|
1,143,368
|
|
$
|
(1,271,176
|
)
|
$
|
115,096
|
|
$
|
(10,000
|
)
|
The
accompanying notes are an integral part of
these consolidated financial statements.
CHINA
WEST COAL ENERGY INC.
(FORMERLY
ENDO
NETWORKS, INC.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended September 30, 2006 and 2005
| |
|
|
2006
|
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS USED IN FROM DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(602,399
|
)
|
$
|
(214,221
|
)
|
|
Adjustments
to reconcile net income (loss) to net
|
|
|
|
|
|
|
|
|
cash
used in operating activities:
|
|
|
|
|
|
|
|
|
Bad
debts
|
|
|
|
|
|
20,717
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
254,029
|
|
|
Common
stock issued for services
|
|
|
125,550
|
|
|
5,500
|
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(120,453
|
) |
|
—
|
|
|
Prepaid
expenses
|
|
|
(23,582
|
) |
|
—
|
|
|
Accounts
payable
|
|
|
|
|
|
(88,336
|
)
|
|
Accrued
expenses to related party
|
|
|
273,093 |
|
|
—
|
|
|
Accrued
expenses
|
|
|
10,000
|
|
|
121,175
|
|
|
Other
current liabilities
|
|
|
325,522
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
Net
cash from operating activities
|
|
|
223,218
|
|
|
152,752
|
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTITIES:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
|
) |
|
(202,242
|
)
|
| |
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
|
) |
|
(202,242
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Lease
financing payments
|
|
|
|
) |
|
(14,616
|
)
|
| |
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
|
) |
|
(14,616
|
)
|
| |
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash
|
|
|
(3,438
|
|
|
52,494
|
|
| |
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
|
|
|
(11,612
|
)
|
| |
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
|
|
|
11,612
|
|
| |
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
|
|
$
|
|
|
The
accompanying notes are an integral part of
these consolidated financial statements.
CHINA
WEST COAL ENERGY INC.
(FORMERLY
ENDO
NETWORKS, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2006 AND 2005
| 1. |
DESCRIPTION
OF BUSINESS AND COMPANY STRUCTURE
|
China
West Coal Energy Inc., formerly known as Endo Networks, Inc. (the “Company”),
was originally incorporated in Texas as “Discount Mortgage Services, Inc.” on
July 11, 2000. The Company purchased Endo Networks, Inc., a corporation
incorporated in Ontario, Canada on January 11, 2001 (“Endo Canada”). In November
2001, the Company changed its name to Endo Networks, Inc. and was redomiciled
to
the State of Nevada in December 2002. The Company conducted business through
Endo Canada and all of its assets were contained within Endo Canada, which
engaged in conceptual and software development business for approximately
two
years through ongoing contract relationships with software development
companies.
The
Company has incurred losses and has had substantial difficulty in maintaining
necessary cash flows for proper operation for years. The Company also required
additional investment in infrastructure to sustain and develop its business.
The
need could not be met by its current cash flows. In view of the foregoing
lack
of growth and the limited platform for its future growth, the Company’s Board
determined that it would be in the stockholders’ best interests to sell its
investment in Endo Canada to Mr. Peter B. Day, the Company’s President, CEO and
director. The Company’s Board believed that Mr. Day’s knowledge of their
operations would lead to an efficient and expeditious sale process. An
Asset and Share Purchase Agreement (the “Purchase Agreement”) by and between the
Company and Mr. Day was approved by the Board and executed on June 26,
2006. The
Company thus discontinued its operations as a result of this sale with
effect
from September 30, 2006. The Company then entered into a definitive Share
Exchange Agreement to acquire Hangson Limited, a British Virgin Islands
corporation on October 18, 2006. The transaction was closed on October
20, 2006
and Hangson became the Company’s wholly owned subsidiary after this event. For
details of the event, please refer to note 10.
| 2. |
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES
|
Cash
Equivalents
The
Company considers all highly liquid investment instruments purchased with
original maturities of three months or less when acquired to be cash
equivalents.
Revenue
Recognition
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable and collect
ability is probable. The Company recognizes revenue from the sale of
advertising related products and services like interactive advertising,
studio
promotion, and event management as the services are performed.
| 2. |
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES
(CONTINUED)
|
Revenue
Recognition
(Cont’d)
Revenue
derived from professional services provided on a time and materials basis
is
recognized as services are performed.
For
time
and material contracts, revenue is recognized and billed by multiplying
the
number of hours expended by our professionals in the performance of the
contract
by the established billing rates. For fixed fee projects, revenue is
generally recognized using the proportionate performance method.
Provisions for estimated losses on uncompleted contracts are made on a
contract-by-contract basis and are recognized in the period in which such
losses
are determined.
Accounts
Receivable
The
Company maintains allowances for doubtful accounts on all its accounts
receivable for estimated losses resulting from the inability of its customers
and others to make required payments. If the financial condition of the
Company's customers and others were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be
required.
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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Property
and equipment
Property
and equipment are stated at cost. Depreciation of property and equipment
is calculated on straight-line method over the estimated useful lives of
the
assets. Impairment losses are recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. No impairment losses have been recorded since
inception.
Comprehensive
income
SFAS
No.
130, “Reporting Comprehensive Income”, requires disclosure of all components of
comprehensive income and loss on an annual and interim basis. Comprehensive
income and loss is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Accumulated other comprehensive income arose from the
changes
in foreign currency exchange rates.
Stock
Based Compensation
The
Company has adopted the fair value accounting for employee stock options
as per
SFAS 123(R) using the modified retrospective application method, effective
April
1, 2005. The fair value of the stock options are amortized into income
over the
vesting period of the options.
| 2. |
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES
(CONTINUED)
|
Impairment
of long-lived assets
The
Company monitors the recoverability of long-lived assets, including property
and
equipment and intangible assets, based upon estimates using factors such
as
expected future asset utilization, business climate, and undiscounted cash
flows
resulting from the use of the related assets or to be realized on sale.
The
Company policy is to write down assets to the estimated net recoverable
amount,
in the period in which it is determined likely that the carrying amount
of the
asset will not be recoverable.
Income
Taxes
Income
taxes are computed using the asset and liability method. Under the asset
and liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax basis
of assets
and liabilities and are measured using the currently enacted tax rates
and laws.
A valuation allowance is provided for the amount of deferred tax assets
that,
based on available evidence, are not expected to be realized.
Net
income (loss) per share
The
basic
net income (loss) per common share is computed by dividing the net income
(loss)
applicable to common stockholders by the weighted average number of common
shares outstanding.
Diluted
net income (loss) per common share is computed by dividing the net income
(loss)
applicable to common stockholders, adjusted on an "as if converted" basis,
by
the weighted average number of common shares outstanding plus potential
dilutive
securities.
For
the
year ended September 30, 2005 potential dilutive securities had an anti-dilutive
effect and were not included in the calculation of diluted net profit loss
per
common share. These securities consisted of Nil and 126,800 of stock
options at September 30, 2006 and 2005 respectively.
Software
Capitalization
The
Company adopted Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". In accordance
with
this standard, certain direct development costs associated with internal-use
software are capitalized, including external direct costs of material and
services, and payroll costs for employees devoting time to the software
projects. These costs are amortized over a period not to exceed five years
beginning when the asset is substantially ready for use. Costs incurred
during
the preliminary project stage, as well as maintenance and training, are
expensed
as incurred.
| 2. |
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES
(CONTINUED)
|
Advertising
Advertising
and promotional costs are expensed when incurred. These expenses were $18,062
and $2,822 for the years ended September 30, 2006 and 2005
respectively.
Financial
instruments
The
carrying amount of the Company financial instruments, which include accounts
receivable, accounts payable and accrued liabilities, capital leases payable
approximate fair value. It is management opinion that the Company
is not
exposed to significant interest, currency or credit risk arising from these
financial instruments unless otherwise noted.
Foreign
Currency Translation
As
nearly
all operations of the Company are conducted in Canada, the Canadian dollar
is
the functional currency. All balance sheet accounts have been translated
at the
current exchange rate as of September 30, 2006. Statement of operations
items
have been translated at average currency exchange rates during the years
ended
September 30, 2006 and 2005. The resulting translation adjustment is
recorded as
a separate component of comprehensive loss within stockholders’
deficit.
Recently
Issued Accounting Pronouncements
In
February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise
would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes
a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation,
clarifies
that concentrations of credit risk in the form of subordination are not
embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006. The Company’s management has not evaluated the impact
of this pronouncement on the Company’s consolidated financial statements.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”) which
prescribes a recognition threshold and measurement attribute, as well as
criteria for subsequently recognizing, derecognizing and measuring uncertain
tax
positions for financial statement purposes. FIN 48 also requires expanded
disclosure with respect to the uncertainty in income tax assets and liabilities.
FIN 48 is effective for fiscal years beginning after December 15, 2006,
which
will be the Company’s fiscal 2008, and is required to be recognized as a change
in accounting principle through a cumulative-effect adjustment to retained
earnings as of the beginning of the year of adoption. The adoption of FIN
48 is
not expected to have a material impact on the Company’s consolidated results of
operations or financial position.
| 2. |
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES
(CONTINUED)
|
Recently
Issued Accounting Pronouncements
(Cont’d)
In
June
2006, the Financial Accounting Standards Board (“FASB”) ratified the provisions
of Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented
in the
Income Statement (That Is, Gross versus Net Presentation).” EITF Issue No. 06-3
requires that the presentation of taxes within revenue-producing transactions
between a seller and a customer, including but not limited to sales, use,
value
added, and some excise taxes, should be on either a gross (included in
revenue
and cost) or a net (excluded from revenue) basis. In addition, for any
such
taxes that are reported on a gross basis, a company should disclose the
amounts
of those taxes in interim and annual financial statements for each period
for
which an income statement is presented if those amounts are significant.
The
disclosure of those taxes can be done on an aggregate basis. EITF Issue
No. 06-3
is effective for fiscal years beginning after December 15, 2006, which
will be
the Company’s fiscal year 2008. The adoption of EITF Issue No. 06-3 is not
expected to have a material impact on the Company’s consolidated results of
operations or financial position.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No.108 (“SAB No. 108”), “Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatements”. SAB No. 108 requires
analysis of misstatements using both an income statement (rollover) approach
and
a balance sheet (iron curtain) approach in assessing materiality and provides
for a one-time cumulative effect transition adjustment. SAB No. 108 is
effective
for the fiscal year beginning November 15, 2006. The Company is reviewing
SAB
No. 108 to determine what effect, if any, its adoption will have on the
Company’s consolidated financial statement presentation and
disclosures.
In
March
2006, the FASB issued SFAS No. 156. This Statement amends FASB Statement
No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, with respect to the accounting for separately
recognized servicing assets and servicing liabilities. This Statement is
effective as of the beginning of its first fiscal year that begins after
September 15, 2006.
An
entity
should apply the requirements for recognition and initial measurement of
servicing assets and servicing liabilities prospectively to all transactions
after the effective date of this Statement.
In
September 2006, the FASB issued SFAS No. 157 and No. 158. Statement No.
157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures
about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board
having
previously concluded in those accounting pronouncements that fair value
is the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application
of this
Statement will change current practice.
| 2. |
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES
(CONTINUED)
|
Recently
Issued Accounting Pronouncements
(Cont’d)
Statement
No. 158 is an amendment of FASB Statements No. 87, 88, 106, and 132(R).
It
improves financial reporting by requiring an employer to recognize the
over
funded or under funded status of a defined benefit postretirement plan
(other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the
year in
which the changes occur through comprehensive income of a business entity
or
changes in unrestricted net assets of a not-for-profit organization. This
Statement also improves financial reporting by requiring an employer to
measure
the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions.
The
Company does not expect application of SFAS No. 156, 157 and 158 to have
a
material affect on its consolidated financial statements.
The
Company has incurred losses and has had substantial difficulties in maintaining
necessary cash flows for proper operations for years. For the year ended
September 30, 2006 and 2005, the Company incurred losses totaling $602,399
and
$214,221, and at September 30, 2005 had a working capital deficit of
$511,547.
The Company’s accumulated deficit as of September 30, 2006 and 2005 are totaling
$1,271,176 and $668,777 respectively. Because of these recurring losses,
the
Company encountered difficulties in acquiring additional working capital
to
develop and/or renew its business operations. These factors raise
substantial doubt about the Company’s ability to continue as a going concern. In
addition to discontinuing the unprofitable operations, Management has
entered
into Share Exchange Agreement as disclosed below which they believe will
ultimately reverse these negative trends. No assurances can be given
that
Management’s plans will be successful. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
The
Company had entered into a definitive Share Exchange Agreement to acquire
Hangson Limited, a British Virgin Islands corporation after it sold all
of its
assets and liabilities to Mr. Peter B. Day, the Company’s President, CEO and
director under an Asset and Share Purchase Agreement signed between the
Company
and Mr. Day on June 26, 2006. On October 20, 2006, the Company completed
a share
exchange transaction with Hangson Limited, a British Virgin Islands company
(“Hangson”) and Hangson’s shareholders (the “Exchange”) that resulted in Hangson
becoming a wholly owned subsidiary of Endo and also resulted in a change
of
control of the Company. The Exchange was accounted for as a reverse acquisition
and recapitalization and, as a result, Endo’s (the legal acquirer) consolidated
financial statements will, in substance, be those of Hangson (the accounting
acquirer). This event may eventually mitigate the Company’s going concern
problem.
| 4. |
FURNITURE
AND EQUIPMENT
|
Furniture
and equipment consisted of the following as of September 30, 2006 and
2005:
|
|
|
Estimated
Useful
Life
(in
years)
|
|
2006
|
|
2005
|
|
|
Automobiles
|
|
|
3
|
|
|
|
|
$
|
3,337
|
|
|
Kiosk
equipment
|
|
|
3
|
|
|
|
|
|
229,671
|
|
|
Furniture
and
equipment
|
|
|
5-7
|
|
|
|
|
|
664,095
|
|
|
Computer
equipment and software
|
|
|
3-5
|
|
|
|
|
|
33,664
|
|
|
Intellectual
property
|
|
|
2
|
|
|
|
|
|
344,160
|
|
|
Application
development (software)
|
|
|
3
|
|
|
|
|
|
36,043
|
|
|
|
|
|
|
|
|
|
|
|
1,310,970
|
|
|
Less:
accumulated depreciation and Amortization
|
|
|
|
|
|
|
|
|
(869,800
|
)
|
|
|
|
|
|
|
|
|
|
$
|
441,170
|
|
Depreciation
and amortization expense was $170,463 and $254,029 for the year ended September
30, 2006 and 2005, respectively.
As
of
September 30, 2006, all the assets were sold in accordance with the Asset
and
Share Purchase Agreement.
Capital
Leases
The
Company leased equipment under long-term lease agreements. Property and
equipment includes equipment under capital leases as of September 30, 2006
and
2005 were $Nil and $659,514 respectively. The monthly payments for this
note are
$5,890 with the final payment due in August 2008. The balance outstanding
on the capital lease payable at September 30, 2006 and 2005 was $ Nil and
$198,160 respectively.
Future
maturities of these capital leases payable are as follows:
|
Year
Ending September 30,
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
$
|
54,028
|
|
|
2007
|
|
|
|
|
|
60,280
|
|
|
2008
|
|
|
|
|
|
83,852
|
|
|
|
|
|
|
|
|
198,160
|
|
|
Less:
current portion
|
|
|
|
|
|
(54,028
|
)
|
|
Total
non-current portion
|
|
|
|
|
$
|
144,132
|
|
Operating
Lease
The
Company leases its office space on a month-to-month basis. The Company
had no
other operating leases for the years ended September 30, 2006 and 2005.
Rent
expense was $23,849 and $23,675 for the years ended September 30, 2006
and 2005
respectively.
For
the
years ended September 30, 2006 and 2005, the Company has incurred net losses
and, therefore, has no tax liability. The net deferred tax asset generated
by the loss carry-forward has been fully reserved. The cumulative net
operating loss carry-forward is approximately $1,271,000 and $669,000 at
September 30, 2006 and 2005 respectively, and will expire in the years
2021
through 2025.The provision for refundable Federal income tax for the years
ended
September 30 consists of the following:
|
|
|
September
30,
2006
|
|
September
30,
2005
|
|
|
Refundable
Federal income tax attributable to:
|
|
|
|
|
|
|
|
|
Current
operations
|
|
|
|
|
$
|
(72,800
|
)
|
|
Less,
Change in valuation allowance
|
|
|
|
|
|
72,800
|
|
|
Net
refundable amount
|
|
|
|
|
|
|
|
| 6. |
INCOME
TAXES (CONTINUED)
|
The
cumulative tax effect at the expected rate of 34% of significant items
comprising the Company net deferred tax amounts are as follows:
|
|
|
September
30,
2006
|
|
September
30,
2005
|
|
|
Deferred
tax asset attributable to:
|
|
|
|
|
|
|
|
|
Net
operating loss carryover
|
|
$
|
(197,900
|
)
|
$
|
(227,400
|
)
|
|
Less,
Valuation allowance
|
|
|
197,900
|
|
|
227,400
|
|
|
Net
deferred tax asset
|
|
|
|
|
|
|
|
Common
Stock:
The
Company is authorized to issue 50,000,000 common shares of stock at a par
value
of $0.001 per share. These shares have full voting rights. At September
30, 2006 and 2005, there were 2,712,000 and 2,544,073 shares outstanding
after
giving effect
for the 5:1 reverse stock split on October 17, 2006. The Company
has not paid a dividend to its shareholders.
During
June 2006, the Company issued 167,400 shares of common stock in return
for
consulting services provided by two consultants. Based on the last trading
price
prior to the issuance of the stock a non-cash consulting expense of $125,550
was
recorded for the issuance of these shares.
During
July 2005, the Company issued 11,000 shares of common stock for services
valued
at $0.50 per share or $5,500 which was the fair value of common stock on
the
date issued.
Stock
Options:
No stock
options were issued in 2006 and 2005.
| 7. |
STOCKHOLDERS'
DEFICIT
(CONTINUED)
|
Stock
Options: (Cont’d)
The
following table summarizes stock option activity:
|
|
|
2006
|
|
2005
|
|
|
Outstanding,
beginning of the year
|
|
|
126,800
|
|
|
126,800
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(126,800
|
)
|
|
|
|
|
Outstanding,
end of year
|
|
|
|
|
|
|
|
|
Exercisable
at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
grant-date fair
Value
of options, granted during the year
|
|
$
|
0.00
|
|
$
|
0.00
|
|
| |
|
|
|
|
|
|
|
|
Weighted-average
remaining, years
Of
contractual life
|
|
$
|
0.00
|
|
$
|
0.25
|
|
The
fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in fiscal 2004: zero dividend yield, expected
volatility of 195%, risk-free interest rate of 2.75% and expected lives
of 2
years.
The
options granted have an exercise price of $2.50 per share and vest at the
date
of issuance. The maximum exercise term of the options is two
years.
| 8. |
CONCENTRATIONS
OF CREDIT RISK
|
As
of
September 30, 2005, amounts due from two customers individually amounted
to 48%
and 14% of total trade accounts receivable.
For
the
year ended September 30, 2006 two customers individually accounted for 50%
and 10% of total revenues. For the year ended September 30, 2005, the Company
had four customers that individually accounted for 31%, 20%, 13%, and 12%
of
total revenues.
| 9. |
RELATED
PARTY TRANSACTIONS
|
According
to a verbal agreement the Company pays its President approximately $8,600
per
month in consulting fees for the years ended September 30, 2005 and 2006.
the
Company has accrued consulting fees due to its President in the amount
of
$238,787 at September 30, 2005. At September 30, 2005, an additional
$12,333 was
owed to the President for an advance he made to the Company. These amounts
were
recorded under accrued expenses - related parties in the financial statements.
On
June
26, 2006, the Company signed an Asset Purchase Agreement with its President,
Peter B. Day, to sell all of the Company’s assets and 100% of the stock of Endo
Canada, a wholly owned subsidiary of the Company. All of the Company’s assets
and virtually all of its liabilities are held in Endo Canada. As consideration
for the sale, Mr. Day agreed to assume substantially all of the Company’s
liabilities including above-mentioned accrued expenses.
The
Company also pays for the President’s home office rent. For the year ended
September 30, 2005 and 2006, the total rent paid by the Company for the
President’s home office was $17,900 and $15,064.
|
|
a) |
Reverse
split on outstanding shares and name change:
|
The
Company affected a 1 for 5 reverse split of its common stock, which
is effective
as of October 17, 2006. The Company’s Board of Directors approved the
Reverse Split in June 2006 and a majority of its stockholders approved
it at the
annual shareholder meeting on September 5, 2006. The Company had a total of
2,712,000 shares of common stock outstanding after the reverse split.
Effective
on January 4, 2007, the Company changed its name from “Endo Networks, Inc.” to
“China West Coal Energy Inc.” and increased the number of its authorized shares
of capital stock to 250,000,000 shares, which includes 200,000,000
shares of
common stock and 50,000,000 shares of preferred stock, by filing a
Certificate
of Amendment to amend its Articles of Incorporation.
On
November 27, 2006, holders of a majority of the Company’s outstanding common
stock approved the name change and the Authorized Shares Amendment
to the
Company’s Articles of Incorporation.
On
December 8, 2006, the Company filed a definitive information statement
on
Schedule 14C with the SEC, which was delivered to its stockholders
of record to
notify them that the stockholders had approved the above name change
and the
authorized shares amendment to the Company’s Articles of Incorporation.
|
|
b) |
Share
exchange and reverse merger transaction:
|
On
October 18, 2006, the Company executed a Share Exchange Agreement (“Exchange
Agreement”) by and among Hangson Limited, a business company incorporated under
the laws of the British Virgin Islands (“Hangson”), and the stockholders of 100%
of Hangson’s common stock (the “Hangson Stockholders”), on the one hand, and the
Company and a majority of the Registrant’s stockholders (“the Company
Stockholders”), on the other hand. This transaction was closed on October 20,
2006.
Under
the
Exchange Agreement, on the Closing Date, the Company issued a total
of
26,000,000 shares of Common Stock (the “ENDO Shares”) to the Hangson
Stockholders and to Viking Partners, Inc., a consultant in this transaction,
in
exchange for 100% of the common stock of Hangson. Additionally, immediately
prior to the Closing Date, Peter B. Day, the Company’s then President, CEO and
sole director voluntarily cancelled 715,500 (post-reverse split) shares
of the
915,500 (post 1 for 5 reverse split) shares of the Company’s common
stock that he owns; and three of the Company’s other shareholders also
voluntarily cancelled a total of 438,850 (post 1 for 5 reverse split
as
mentioned above) shares of the Company’s common stock that they own, and the
Company issued an additional 669,600 shares pursuant to certain anti-dilution
provisions contained in agreements the Company had with two
consultants. After the reverse split mentioned above, the cancellations
and the
consultant anti-dilution share issuances, the Company had a total of
28,227,250 shares of common stock outstanding. In addition, at Closing,
Hangson paid the Company’s creditors a total of US $500,000 for services
rendered, in order to satisfy certain obligations as set forth in the
Exchange
Agreement. The Company accounted for this Share Exchange as a reverse
acquisition and recapitalization and, as a result, the Company’s consolidated
financial statements are in substance those of Hangson, with the assets
and
liabilities, and revenues and expenses, of the Company being included
effective
from the date of the Share Exchange.
| 10. |
SUBSEQUENT
EVENTS
(CONTINUED)
|
Hangson
is a company incorporated under the laws of the British Virgin Islands
on June
2, 2006. The Company is engaged in the production and sale of coal-polymer
(“COPO”) resin products, including but not limited to, degradable mulch used for
the conservation of moisture and warmth of soil and protection of the roots
of
plants, and materials used for plastic injection molding, electric wire
covering, and garbage bags. Hangson is also engaged in the research,
development, and production and sale of “coal-water mixture,” which is a
potential fuel substitute for coal, oil or gas. Hangson does not conduct
any
substantive operations of its own and conducts its primary business operations
through its variable interest entity (“VIE”), Shaanxi Suo’ang Biological Science
& Technology Co., Ltd. (“Shaanxi Suoang”).
Shaanxi
Suoang is a limited liability company headquartered in Xian, China and
organized
under the laws of PRC. Shaanxi Suoang was organized in May 2002. Shaanxi
Suoang
is engaged in research, development, marketing and sales of coal polymer
resin
products, and is also engaged in research, development, marketing and the
sales
of “coal water mixture”, which can potentially be used as a fuel substitute
for oil, gas or coal.
Under
PRC
laws, each of Hangson, and Shaanxi Suoang is an independent legal person
and
none of them is exposed to liabilities incurred by the other party. Other
than
pursuant to the contractual arrangements between Hangson and Shaanxi Suoang,
Shaanxi Suoang does not transfer any other funds generated from its operations
to Hangson. Presently Hangson maintains its relationship with Shaanix Suoang
and
its shareholders by a series of contractual arrangements through which
Hangson
actually has control on Shaanxi Suoang’s operation and Shaanxi Suoang becomes
one of Hangson's VIE.
From
and
after the Closing Date of the Share Exchange, the Company’s primary operations
consisted of the operations of Hangson and its VIE Shaanxi
Suoang.
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
As
described in full detail in our Current Report on Form 8-K filed on November
17,
2006, which is incorporated herein by reference, on November 9, 2006, the
Company's Board of Directors elected to dismiss LBB & Associates Ltd., LLP
as the Company’s independent registered public accounting firm (“Independent
Accountant”) and also elected to retain Schwartz
Levitsky Feldman LLP, Chartered Accountants,
as its
new Independent Accountant.
ITEM
8A. CONTROLS
AND PROCEDURE
|
(a)
|
Evaluation
of disclosure controls and procedures.
As of the end of the period covered by this report, we carried
out an
evaluation, under the supervision and with the participation
of our
management, including our Chief Executive Officer and Director
of Finance,
of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under
the Securities Exchange Act of 1934, as amended. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective
as of
the end of the applicable period to ensure that the information
required
to be disclosed by the Company in reports that it files or submits
under
the Exchange Act (i) is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission
rules and forms and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosures.
|
|
(b)
|
Changes
in internal controls over financial reporting.
There was no change in our internal control over financial reporting
during our most recent fiscal quarter that has materially affected,
or is
reasonably likely to materially affect, our internal control
over
financial reporting.
|
ITEM
8B. OTHER
INFORMATION
Not
Applicable.
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS
AND EXECUTIVE OFFICERS
Previous
Executive Officers and Directors
As
of
September 30, 2006, Peter B. Day was the CEO, President, CFO and sole Director
of the Company.
|
Name
|
|
Age
|
|
Positions
|
|
|
Peter
B. Day
|
|
|
35
|
|
CEO,
President, and Director |
|
|
|
|
|
|
|
|
|
|
Peter
B. Day Mr.
Day attended the University of Toronto from 1989 to 1992 studying English,
History and Psychology and attended Humber College in 2000 studying
Telecommunications. Mr. Day's relevant work experience follows: General
Manager
and Partner in Down Home Satellite Programming, Inc. from 1996 to 1998;
Marketing Director and General Manager for Galaxy Satellite Programming,
Inc.
from 1998 to 2000; Vice President Streamline Media, Inc., a computer software
and web design company from 2000 to 2002; Vice President and General Manager
for
Endo Networks, Inc. from 2000 to 2002, President for Endo Networks, Inc.
2002 to
present.
Current
Executive Officers and Directors
The
following tables set forth information regarding the Company’s current executive
officers and directors of the Company. The Board of Directors is comprised
of
only one class. Except as otherwise described below, all of the directors
will
serve until the next annual meeting of stockholders or until their successors
are elected and qualified, or until their earlier death, retirement, resignation
or removal. Also provided herein are brief descriptions of the business
experience of each director and executive officer during the past five
years and
an indication of directorships held by each director in other companies
subject
to the reporting requirements under the federal securities laws.
|
Name
|
|
Age
|
|
Positions
|
|
|
Baowen
Ren
|
|
|
36
|
|
CEO,
President and Chairman of the Board |
|
|
Wenjie
Zhang
|
|
|
33
|
|
Director |
|
|
Peng
Zhou
|
|
|
37
|
|
Director |
|
|
Caixia
Peng
|
|
|
27
|
|
Chief
Financial Officer and Treasurer |
|
Baowen
Ren,
36, is
the Director of Hangson Limited and has been Chairman of the Board of
Shaanxi Suo’ang Biological Science & Technology, Co., Ltd. (“Shaanxi
Suo’ang”), Hangson’s Chinese operational variable interest business entity,
since January 2003.
Mr. Ren
is a senior economic engineer who graduated from the Business Management
Department of Hanzhong Normal University in 1992.
He had
been the president of Shaanxi Lanchao Group Clothe Group Co.
Ltd. from January 2001 to December 2002 and had been conferred
honorable titles of “Pacemaker in the New Long March”, “Shaanxi Outstanding
Young Entrepreneur”, “Shaanxi Top 100 Entrepreneur”, and “National Model
Township Entrepreneur of Ministry of Agriculture”. Under his leadership, Shaanxi
Suo’ang has convened a batch of excellent management personnel for products
technology development, market strategy and sales, and capital operations
for
the expansion and development of Shaanxi Suo’ang’s business.
Peng
Zhou,
37, is the General Manager of Shaanxi Suo’ang, Hangson’s Chinese
operational variable interest business entity. Mr. Zhou is an accountant
who
graduated from the Statistics Department of Shaanxi Institute of Finance
in
1992. Mr. Zhou started at Shaanxi Suo’ang as a Project Manager in May 2002
and was promoted to his current position as General Manager in May 2005.
Mr. Zhou has also been engaged in industries such as finance, media,
foreign trade, real estate and had held the posts of manager of credit
department, editor, financial supervisor, and deputy manager. From June
1997 until March 2002, Mr. Zhou was the Vice President of Hanzhong
Ruisen Real Estate Company. Mr. Zhou was also in charge of compiling and
reporting work for a number of projects such as Industrial Park Project
of
3,000-thousand Sets of Clothes, New Construction Material Project-Shale
Brick
Manufacturing Demonstration Base with Annual Output of 6000-Thousand Pieces,
and
Erlang Dam Downstream Hydropower Station Cascade Development
Project.
Wenjie
Zhang,
33, has
been the General Manager of Hanzhong Minsheng Guomao Department Store since
January 2004. Mr. Zhang graduated with a degree in administration from
the Xi’an
Science Institution in 1995. From January 2001 until December 2003, Mr.
Zhang
was the Sales Manager at Shaanxi Jingyi Wood Group Company.
Caixia
Peng,
27, is
the Finance Director of Shaanxi Suo’ang, Hangson’s Chinese operational variable
interest business entity. Ms. Peng started as Shaanxi Suo’ang’s Finance Manager
in April 2005 and has been Shaanxi Suo’ang’s Finance Director since February
2006. Ms. Peng is an accountant who graduated from the Xi’an Finance &
Economy Institution in 1992. From July 2003 until March 2005, Ms. Peng
was the
Finance Manager at Yangling Bodisen Co., Ltd. Prior to that, from July
2001
until June 2003, Ms. Peng was the Finance Director at Yangling Tianwei
Pharmaceutical Co., Ltd.
Audit,
Nominating and Compensation Committees
Due
to
our lack of operations and size, we have not designated an Audit Committee.
Furthermore, we are currently quoted on the OTC Bulletin Board, which is
sponsored by the NASD, under the symbol “CWCE ” and the OTCBB does not have any
listing requirements mandating the establishment of any particular committees.
Our board of directors acts as our Audit Committee and performs equivalent
functions, such as: recommending a firm of independent certified public
accountants to audit the annual financial statements; reviewing the independent
auditors independence, the financial statements and their audit report;
and
reviewing management's administration of the system of internal accounting
controls. For these same reasons, we did not have any other committees
during fiscal 2005.
Our
Board
believes that, considering our size and the members of our Board, decisions
relating to director nominations can be made on a case-by-case basis by
all
members of the board without the formality of a nominating committee or
a
nominating committee charter. To date, we have not engaged third parties
to identify or evaluate or assist in identifying potential nominees, although
we
reserve the right in the future to retain a third party search firm, if
necessary.
The
Board
does not have an express policy with regard to the consideration of any
director
candidates recommended by shareholders since the Board believes that it
can
adequately evaluate any such nominees on a case-by-case basis. The Board
will
evaluate shareholder-recommended candidates under the same criteria as
internally generated candidates. Although the Board does not currently
have any formal minimum criteria for nominees, substantial relevant business
and
industry experience would generally be considered important, as would the
ability to attend and prepare for board, committee and shareholder meetings.
Any
candidate must state in advance his or her willingness and interest in
serving
on the board of directors.
We
have
not received any recommendations for a director nominee from any
shareholder.
Family
Relationships
There
are
no family relationships between or among any of the current directors,
executive
officers or persons nominated or charged by the Company to become directors
or
executive officers.
Involvement
in Certain Legal Proceedings
There
are
no orders, judgments, or decrees of any governmental agency or administrator,
or
of any court of competent jurisdiction, revoking or suspending for cause
any
license, permit or other authority to engage in the securities business
or in
the sale of a particular security or temporarily or permanently restraining
any
of our officers or directors from engaging in or continuing any conduct,
practice or employment in connection with the purchase or sale of securities,
or
convicting such person of any felony or misdemeanor involving a security,
or any
aspect of the securities business or of theft or of any felony. Nor are
any of
the officers or directors of any corporation or entity affiliated with
us so
enjoined.
ITEM
10. EXECUTIVE
COMPENSATION
None
of
current executive officers received compensation in excess of $100,000
for the
fiscal years ended September 30, 2006 or 2005, respectively. The following
table
summarizes all compensation received by our previous Chief Executive Officer,
President and Chief Financial Officer in fiscal years 2006 and
2005.
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM COMPENSATION
|
|
|
|
|
|
|
ANNUAL
COMPENSATION
|
|
AWARDS
|
|
PAYOUTS
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
|
Bonus
($)
|
|
Other
Annual
Compensation
($)
|
|
Restricted
Stock
Awards
($)
|
|
Securities
Underlying Options/SARs
|
|
LTIP
Payout
($)
|
|
All
Other Compen-
sation
($)
|
|
|
Peter
B. Day
|
|
|
2006
|
|
$
|
105,500
|
|
|
(1)
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Former
CEO
|
|
|
2005
|
|
$
|
103,200
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
and
CFO
|
|
|
2004
|
|
$
|
100,000
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
(1)
|
As
of September 30, 2006, Mr. Day was the Chief Executive Officer,
President,
and Chief Financial Officer of the Company. Mr. Day had not received
any
payment for his position and as a result his salary was accrued
as an
expense. This liability was purchased from the Company by Mr.
Day together
with the assets of Endo Canada pursuant to the June 26, 2006
Asset and
Share Purchase Agreement.
|
The
following summary compensation table indicates the cash and non-cash
compensation earned during Hangson’s fiscal year ended December 31, 2006 by
the Chief Executive Officer and each of our other four highest paid executives
of our predecessor, Hangson, whose total compensation exceeded $100,000
during
the fiscal year ended December 31, 2006.
Summary
compensation table
|
|
|
Long
Term Compensation
|
|
|
|
|
Annual
Compensation
|
|
Awards
|
|
Payouts
|
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
(1)
|
|
Bonus
($)
|
|
Other
Annual
Compensation ($)
|
|
Restricted
Stock
Award(s)
($)
|
|
Securities
Underlying
Options/
SARs
(#) (#)
|
|
LTIP
Payouts
($)
|
|
All
Other
Compensation
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baowen
Ren, CEO and Chairman
|
|
|
2006
2005
2004
|
|
$
$
$
|
36,000
36,000
46,000
|
|
|
N/A
N/A
N/A
|
|
|
N/A
N/A
N/A
|
|
|
N/A
N/A
N/A
|
|
|
N/A
N/A
N/A
|
|
|
N/A
N/A
N/A
|
|
|
N/A
N/A
N/A
|
|
|
(1)
|
Salary
paid to Mr. Ren is expressed in U.S. Dollars based on the interbank
exchange rate of RMB 7.90 for each 1.00 U.S. Dollar, on
October 20, 2006.
|
STOCK
OPTION GRANTS AND EXERCISES
For
the
fiscal years ended September 30, 2006 and 2005, the Company did not issue
any
options or Stock Appreciation Rights to any officers, employees or directors.
For the fiscal year ended 2004, the Company issued options for the purchase
a
total of 634,000 shares of the Company’s common stock to consultants of the
Company’s. All of these options expired as of September 30, 2006.
EMPLOYMENT
AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
FOR
HANGSON
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.
COMPENSATION
OF DIRECTORS AND OFFICERS
During
the most recent fiscal year, no compensation was paid or accrued for Endo’s
directors. The Company has no retirement or stock option or bonus plan for
the executive officers.
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding the beneficial ownership
of our
common stock as of November 30, 2006, for each of the following persons:
• each
of
our directors and named executive officers;
• all
directors and named executive officers as a group; and
• each
person who is known by us to own beneficially five percent or more of our
common
stock.
Beneficial
ownership is determined in accordance with the rules of the Securities
and
Exchange Commission. Unless otherwise indicated in the table, the persons
and
entities named in the table have sole voting and sole investment power
with
respect to the shares set forth opposite the stockholder’s name. Unless
otherwise indicated, the address of each beneficial owner listed below
is Room
2205, Suite A, Zhengxin Bldg., No.5, Gaoxin 1st Road, Gao Xin District,
Xi’an,
Shaanxi Province, People’s Republic of China. The percentage of class
beneficially owned set forth below is based on 28,227,250 shares of common
stock
outstanding on January 15, 2007.
|
Named
executive officers and directors:
|
|
Number
of
Shares
beneficially
owned
|
|
Percentage of
class beneficially
owned
(1)
|
|
| |
|
|
|
|
|
|
Baowen
Ren, CEO, President, and Chairman
|
|
|
9,597,232
|
|
|
34.00
|
%
|
|
Wenjie
Zhang, Director
|
|
|
1,269,234
|
|
|
4.50
|
%
|
|
Peng
Zhou, Director
|
|
|
0
|
|
|
0.0
|
%
|
|
Caixia
Peng, CFO and Treasurer
|
|
|
0
|
|
|
0.0
|
%
|
|
Peter
B. Day, former CEO, CFO and Sole Director
|
|
|
200,000
|
|
|
*
|
|
|
All
directors and executive officers as a group as of September 30,
2006 (Mr.
Day only)
|
|
|
200,000
|
|
|
*
|
|
|
All
directors and executive officers as a group (4 persons)
|
|
|
10,866,466
|
|
|
38.5
|
%
|
*
less
than 1%
(1) Based
on
28,227,250 shares outstanding.
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
HANGSON’S
CONTRACTUAL ARRANGEMENTS WITH SHAANXI SUOANG AND ITS SHAREHOLDERS
PRC
law
currently limits foreign equity ownership of Chinese companies. To comply
with
these foreign ownership restrictions, we operate our business in China
through a
series of contractual arrangements with Shaanxi Suoang and its majority
shareholders that were executed on August 18, 2006. For a description of
these
contractual arrangements, see “Contractual Arrangements with Shaanxi Suoang and
Its Shareholders.”
RELATED
PARTY TRANSACTIONS OF HANGSON LIMITED
Set
forth
below are the related party transactions between Shaanxi Suoang’s shareholders,
officers and/or directors, and Shaanxi Suoang, with whom Hangson has contractual
arrangements which give Hangson the ability to substantially influence
Shaanxi
Suoang’s daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval.
|
(a)
|
Related
party receivables and
payables
|
Amounts
receivable from and payable to directors as of December 31, are summarized
as
follows:
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Long-term
loan to a related party
|
|
|
|
|
|
|
Shaanxi
Hanzhong New Century Real Estate Company Limited
|
|
$
|
372,000
|
|
$
|
362,472
|
|
|
|
|
|
|
|
|
|
|
|
Amount
due from a director
|
|
|
|
|
|
|
|
|
Mr.
Baowen Ren, also a shareholder of the Company
|
|
$
|
119,397
|
|
$
|
130,063
|
|
Balance
with Shaanxi Hanzhong New Century Real Estate Company Limited represents
a
long-term interest bearing loan paid to a company, Shaanxi Hanzhong New
Century
Real Estate Company Limited controlled by the shareholder, Mr. Yang Feng.
The
loan is for a term of five years from November 5, 2002 to November 5, 2007
and
bears interest at 7.2% per annum. A majority shareholder of the Company,
Shaanxi
Hanzhong Blue Tide Costumes Group Corporation Limited guarantees the repayment
of this loan. The loan is repayable in one lump sum at the maturity
date.
The
balance
with Mr. Baowen Ren represents cash advances by the Company. This balance
is
interest free and unsecured and has no fixed repayment date. It is expected
that
the balance will be received or repaid within one year.
(b) Guarantee
given by a shareholder
A
majority shareholder of the Company, Shaanxi Hanzhong Blue Tide Costumes
Group
Corporation Limited, guarantees the repayment of a long-term interest bearing
loan advanced to a company, Shaanxi Hanzhong New Century Real Estate Company
Limited, controlled by Mr. Yang Feng.
OTHER
RELATED PARTY TRANSACTIONS
Per
the
terms of a verbal agreement the Company paid its former President Mr. Day
approximately $8,600 per month in consulting fees. The Company accrued
consulting fees due to Mr. Day in the amount of $251,120 at September 30,
2005. These amounts were recorded under “Accrued expenses - related
parties” in the financial statements and was purchased by Mr. Day together with
assets according to the Purchase Agreement he signed with the company on
June
26, 2006.
The
Company also paid for the President’s home office rent. For the year ended
September 30, 2005, the total rent paid by the Company for the President’s home
office was $17,900.
On
September 30, 2006, Peter Day, the Company’s former CEO, President, CFO and sole
director, purchased all of our assets and shares in Endo Networks, Inc.,
a
corporation incorporated under the laws of Canada from us pursuant to that
certain Asset and Share Purchase Agreement dated as of June 26, 2006. As
consideration for all of the assets, which currently total $553,015, and
all of
the shares of Endo Canada, Mr. Day assumed all of our liabilities prior
to the
Share Exchange, which currently total $919,389 (such number includes our
assets
of $553,015 and our excess liabilities of $366,374), except for certain
excluded
liabilities.
ITEM
13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
to the Form 10-KSB:
|
Exhibit
Number
|
|
Description
|
|
2.1
|
|
Share
Exchange Agreement between Endo Networks, Inc., Endo Majority
Shareholders, Hangson Ltd. and the Hangson Shareholders dated
October 18,
2006 (1)
|
|
3.1
|
|
Articles
of Incorporation of Endo Networks, Inc., a Nevada corporation,
as
amended.
|
|
3.2
|
|
Bylaws
of Endo Networks, Inc.
|
|
10.1
|
|
Asset
and Share Purchase Agreement between Registrant and Peter B.
Day (for Endo
Canada) (2)
|
|
17.1
|
|
Letter
of Resignation by Mr. Peter B. Day to the Board of Directors
of Endo
Networks, Inc.
|
|
99.1
|
|
Consulting
Services Agreement by and between Hangson Limited and Shaanxi
Suo’ang
Biological Science & Technology Co., Ltd. dated August 18, 2006
(3)
|
|
99.2
|
|
Equity
Pledge Agreement by and between Hangson Limited and Shaanxi Suo’ang
Biological Science & Technology Co., Ltd. (“Shaanxi Suoang”) and
Shaanxi Suoang’s Majority Shareholders dated August 18, 2006
(3)
|
|
99.3
|
|
Operating
Agreement by and between Hangson Limited and Shaanxi Suo’ang Biological
Science & Technology Co., Ltd. (“Shaanxi Suoang”) and Shaanxi Suoang’s
Majority Shareholders dated August 18, 2006 (3)
|
|
99.4
|
|
Proxy
Agreement by and between Hangson Limited and Shaanxi Suo’ang Biological
Science & Technology Co., Ltd. (“Shaanxi Suoang”) and Shaanxi Suoang’s
Majority Shareholders dated August 18, 2006 (3)
|
|
99.5
|
|
Option
Agreement between Hangson Limited and Shaanxi Suo’ang Biological Science
& Technology Co., Ltd. (“Shaanxi Suoang”) and Shaanxi Suoang’s
Majority Shareholders dated August 18, 2006 (3)
|
|
99.6
|
|
Agreement
by and between Shaanxi Suo’ang
Biological Science and Technology Co. Ltd. and Hanzhong Si Xiong
Ke Chuang
Business Co. Ltd. (3)
|
|
99.7
|
|
Consolidated
Financial statements of Hangson Limited for the years ended December
31,
2005 and December 31, 2004 (3)
|
|
99.8
|
|
Consolidated
Financial statements of Hangson Limited for the six months ended
June 30,
2006 and 2005 (unaudited) (3)
|
|
99.9
|
|
Unaudited
pro forma condensed financial statements of the Registrant, as
of and for
the six months ended June 30, 2006 and unaudited pro forma Statement
of
Operations for the six months ended June 30, 2006 (3)
|
|
31.1
|
|
Section 302
Certification by the Corporation’s Chief Executive Officer
*
|
|
31.2
|
|
Section 302
Certification by the Corporation’s Chief Financial
Officer*
|
|
32.1
|
|
Section 906
Certification by the Corporation’s Chief Executive
Officer*
|
|
32.2
|
|
Section 906
Certification by the Corporation’s Chief Financial
Officer*
|
| |
|
|
*
Filed
herewith.
_______________
|
(1)
|
Filed
as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with
the SEC on October 18, 2006 and incorporated herein by
reference.
|
|
(2)
|
Filed
as Exhibit A of Registrant’s Schedule 14A filed with the SEC on August 8,
2006 and incorporated herein by
reference.
|
|
(3)
|
Filed
as Exhibits to the Registrant’s Current Report on Form 8-K filed with the
SEC on October 26, 2006 and incorporated herein by
reference.
|
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
AUDIT
FEES
The
aggregate fees billed by Lopez,
Blevins, Bork & Associates, LLP
for
professional services rendered for the review of the Company’s unaudited
financial statements through the quarter ended June 30, 2006 and the audit
of
the Company’s annual financial statements for the year ended September 30, 2005
or services that are normally provided by the accountant in connection
with
statutory and regulatory filing or engagements for those periods/years
was
$17,100.
The
aggregate fees billed by GC Alliance Limited for professional services
rendered
for the audit of the Company in connection with the Share Exchange Transaction
was $105,000.
The
aggregate fees billed by the newly appointed auditor, Schwartz Levitsky
Feldman
LLP, was $10,000 for professional services rendered for the audit of the
Company’s annual consolidated financial statements for the fiscal year ended
September 30, 2006.
AUDIT
RELATED FEES
There
were no fees billed for services reasonably related to the performance
of the
audit or review of the financial statements outside of those fees disclosed
above under “Audit Fees” for the year ended September 30, 2006.
TAX
FEES
For
the
years ended September 30, 2006 and September 30, 2006, there were no fees
billed
for services for tax compliance, tax advice and tax planning work to the
Company.
ALL
OTHER
FEES
There
were no other fees billed by LBB or SLF during the last two fiscal years
for
products and services provided by LBB or SLF.
PRE-APPROVAL
POLICIES AND PROCEDURES
Prior
to
engaging its accountants to perform particular services, our board of directors
obtains an estimate for the service to be performed. All of the services
described above were approved by the board of directors in accordance with
its
procedure.
[SIGNATURES
PAGE FOLLOWS]
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
|
Dated:
January 19, 2007
|
|
|
CHINA
WEST COAL ENERGY INC.
|
| |
|
|
(Registrant)
|
| |
|
|
|
| |
|
|
|
| |
|
By:
|
/s/
Baowen Ren |
|
|
|
|
|
Baowen
Ren
Chief
Executive Officer
|
KNOW
ALL
THESE PERSONS BY THESE PRESENTS, that each person whose signature appears
below
constitutes and appoints Baowen Ren and Caixia Peng, and each of them,
jointly
and severally, his attorneys in fact, each with full power of substitution,
for
him in any and all capacities, to sign any and all amendments to this Report
on
Form 10-KSB, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each said attorneys-in-fact or
his
substitute or substitutes, may do or cause to be done by virtue hereof.
In
accordance with the Exchange Act, this report has been signed below by
the
following persons on behalf of the registrant and in the capacities and
on the
dates indicated.
| |
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
| |
|
|
|
|
|
/s/
Baowen
Ren
|
|
|
|
|
|
Baowen
Ren
|
|
Chief
Executive Officer, President and Chairman of the Board
|
|
January
19, 2007
|
| |
|
|
|
|
|
/s/
Caixia
Peng
|
|
|
|
|
|
Caixia
Peng
|
|
Chief
Financial Officer and Treasurer
|
|
January
19, 2007
|
| |
|
|
|
|
|
/s/
Wenjie
Zhang
|
|
|
|
|
|
Wenjie
Zhang
|
|
Director
|
|
January
19, 2007
|
| |
|
|
|
|
|
/s/
Peng
Zhou
|
|
|
|
|
|
Peng
Zhou
|
|
Director
|
|
January
19, 2007
|