UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
[x] Annual Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended:
December 31, 2012
[ ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ______to_______
Commission file number:
001-34649
CHINA GENGSHENG MINERALS,
INC.
(Exact name of small business issuer as specified in its
charter)
NEVADA
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91-0541437
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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No. 88 Gengsheng Road
Dayugou Town, Gongyi, Henan
Peoples Republic of China,
451271
(Address of Principal Executive Offices and Zip Code)
(86) 371-64059863
(Registrants Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
Title of each class
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Name of each exchange on which
registered
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Common Stock, par value $0.001 per share
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NYSE MKT LLC
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [
] No [x]
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [
] No [x]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files). Yes[x] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definition for large accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated Filer [ ]
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Accelerated Filer [ ]
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Non-Accelerated Filer [ ]
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Smaller Reporting Company
[x]
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Indicate by check mark whether registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant as of June 29, 2012, was approximately
$5,669,935 based on $0.49, the price at which the registrants common stock was
last sold on that date.
There were a total of 26,803,044 shares of the registrants
common stock outstanding as of April 15, 2013.
Documents Incorporated by Reference:
None
TABLE OF CONTENTS
Special Note Regarding Forward Looking Statements
The following discussion of the financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related notes thereto. The following discussion
contains forward-looking statements. Unless the context requires otherwise,
references to we, us, our, the Registrant, or the Company refer to
China GengSheng Minerals, Inc. and its subsidiaries. The words or phrases would
be, will allow, expect to, intends to, will likely result, are
expected to, will continue, is anticipated, estimate, or similar
expressions are intended to identify forward-looking statements. Such statements
include those concerning our expected financial performance, our corporate
strategy and operational plans. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including: (a) those risks and uncertainties related to
general economic conditions in China, including regulatory factors that may
affect such economic conditions; (b) whether we are able to manage our planned
growth efficiently and operate profitable operations, including whether our
management will be able to identify, hire, train, retain, motivate and manage
required personnel or that management will be able to successfully manage and
exploit existing and potential market opportunities; (c) whether we are able to
generate sufficient revenues or obtain financing to sustain and grow our
operations; and (d) whether we are able to successfully fulfill our primary
requirements for cash which are explained below under Liquidity and Capital
Resources. Such risks and uncertainties also include the risks noted under
Item 1A Risk Factors. Unless otherwise required by applicable law, we do not
undertake, and we specifically disclaim any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
Use of Certain Defined Terms
In this Form 10-K, unless indicated otherwise, references
to:
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China GengSheng Minerals, we, us, our, the
Registrant or the Company refer to the combined business of China
GengSheng Minerals, Inc., a Nevada corporation (formerly, China Minerals
Technologies, Inc.) and its wholly-owned BVI subsidiary, GengSheng
International Corporation, or GengSheng International, GengSheng
Internationals wholly-owned BVI subsidiary, Smarthigh Holdings Limited,
or Smarthigh and GengSheng Internationals wholly-owned Chinese
subsidiary, Zhengzhou Duesail Fracture Proppant Co. Ltd., or Duesail, and
Duesails wholly-owned subsidiary, Henan Yuxing Proppant Co., Ltd., or
Yuxing and GengSheng Internationals wholly-owned Chinese subsidiary,
Henan GengSheng Refractories Co., Ltd., or Refractories, and
Refractoriess majority-owned subsidiary, Henan GengSheng High-Temperature
Materials Co., Ltd., or High Temperature, and Refractoriess wholly-owned
subsidiary, Henan GengSheng Micronized Powder Materials Co., Ltd., or
Micronized, and Henan GengSheng's wholly-owned subsidiary, Guizhou
Southeast Prefecture GengSheng New Materials Co., Ltd, or Prefecture;
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Powersmart or GengSheng International refer to
GengSheng International Corporation, a BVI company (formerly, Powersmart
Holdings Limited) that is wholly-owned by China GengSheng Minerals;
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Securities Act refers to the Securities Act of 1933, as
amended, and Exchange Act refer to Securities Exchange Act of 1934, as
amended;
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China and PRC refer to the People's Republic of
China, and BVI refers to the British Virgin Islands;
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RMB refers to Renminbi, the legal currency of China;
and
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U.S. dollar, $ and US$ refers to the legal currency
of the United States. For all U.S. dollar amounts reported, the dollar
amount has been calculated on the basis that RMB1 = $0.1585 for its
December 31, 2012 audited balance sheet, and RMB1 = $0.1574 for its
December 31, 2011 audited balance sheet, which were determined based on
the currency conversion rate at the end of each respective period. The
conversion rates of RMB1 = $0.1584 is used for the consolidated statement
of income and comprehensive income and consolidated statement of cash
flows for the year ended December 31, 2012, and RMB1 = $0.1549 is used for
the consolidated statement of income and comprehensive income and
consolidated statement of cash flows for the year ended December 31, 2011;
both of which were based on the average currency conversion rate for each
respective period.
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PART I
ITEM 1. BUSINESS
Overview
We are a Nevada holding company operating in the materials
technology industry through our subsidiaries in China. We develop, manufacture
and sell a broad range of mineral-based, heat-resistant products capable of
withstanding high temperatures, saving energy and boosting productivity in
industries such as steel and oil. Our products include refractory products,
industrial ceramics, fracture proppants and fine precision abrasives.
2
Currently, we conduct our operations in China through our
wholly owned subsidiaries, Henan GengSheng Refractories Co., Ltd.
(Refractories), Zhengzhou Duesail Fracture Proppant Co., Ltd. (Duesail),
Henan GengSheng Micronized Powder Materials Co., Ltd. (Micronized), Guizhou
Southeast Prefecture GengSheng New Materials Co., Ltd. (Prefecture) and Henan
Yuxing Proppant Co., Ltd., (Yuxing) , and through our majority owned
subsidiary, Henan GengSheng High-Temperature Materials Co., Ltd.
(High-Temperature). Through our wholly owned BVI subsidiary, GengSheng
International, and its wholly owned Chinese subsidiary, Refractories, which has
an annual production capacity of approximately 127,000 tons, we manufacture
refractory products. We manufacture fracture proppant products through
Duesail, which has an annual production capacity of approximately 66,000 tons,
and Yuxing, which has designed annual production capacity of approximately
60,000 tons. We manufacture fine precision abrasives products through
Micronized, which has designed annual production capacity of approximately
22,000 tons. Through our majority owned subsidiary, High-Temperature, which has
an annual production capacity of approximately 150,000 units, we manufacture
industrial and functional ceramic products.
We sell our products to over 300 customers in the iron, steel,
oil, glass, cement, aluminum, chemical and solar industries located in China and
other countries in Asia, Europe and North America. Our refractory customers are
companies in the steel, iron, petroleum, chemical, coal, glass and mining
industries. Our fracture proppant products are sold to oil and gas companies.
Our industrial ceramics are used in the utilities and petrochemical industries.
Our fine precision abrasives are marketed to solar companies and optical
equipment manufacturers. Our largest customers, measured by percentage of our
revenue, mainly operate in the steel industry and oil industry. Currently, most
of our revenues are derived from the sale of our monolithic refractory products
and fracture proppants products to customers in China.
Our principal executive offices are located at No. 88 Gengsheng
Road, Dayugou Town, Gongyi, Henan, Peoples Republic of China 451271 and our
telephone number is (86) 371-6405-9863.
Available Information
We are required to file annual, quarterly and current reports,
proxy statements and other information required by the Securities Exchange Act
of 1934, as amended (the Exchange Act), with the Securities and Exchange
Commission (the SEC). You may read and copy any document we file with the SEC
at the SECs Public Reference Room located at 100 F Street, N.E., Washington, DC
20549. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet
website at http://www.sec.gov, from which interested persons can electronically
access our SEC filings.
We make available free of charge through our internet site
http://www.gengsheng.com
our annual reports on
Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; proxy
statements, if any, Forms 3, 4 and 5 filed by or on behalf of directors,
executive officers and certain large stockholders; and any amendments to those
documents filed or furnished pursuant to the Exchange Act. These filings will
become available as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC.
In addition, the following information is available on the
Investor Relations page of our website: (i) Corporate Governance and (ii)
Quarterly Results. These documents will also be available in print without
charge to any person who requests them by writing or telephoning our principal
executive offices: China GengSheng Minerals, Inc. No.88 Gengsheng Road, Dayugou
Town, Gongyi, Henan, 451271, P.R. China, Tel:(86) 371-6405-9863, Fax:(86)
371-6405-9846. The information posted on our website is not incorporated into
this annual report on Form 10-K.
3
Corporate Structure
We conduct our operations in China through our wholly owned
subsidiaries Refractories, Duesail, Yuxing, Micronized and Prefecture and
through our majority owned subsidiary, High-Temperature.
The following chart reflects our organizational structure as of
the date of this report.
Corporate History
We were originally incorporated under the laws of the State of
Washington, on November 13, 1947, under the name Silver Mountain Mining Company.
From our inception until 2001, we operated various unpatented mining claims and
deeded mineral rights in the State of Washington, but we abandoned these
operations entirely by 2001. On August 15, 2006, we changed our domicile from
Washington to Nevada when we merged with and into Point Acquisition Corporation,
a Nevada corporation. From about 2001 until our reverse acquisition of
Powersmart on April 25, 2007, which is discussed in the next section entitled
"Acquisition of Powersmart and Related Financing", we were a blank check company
and had no active business operations. On June 11, 2007, we changed our
corporate name from "Point Acquisition Corporation" to "China Minerals
Technologies, Inc." and subsequently changed our name again to "China GengSheng
Minerals, Inc." on July 26, 2007.
Acquisition of Powersmart and Related Financing
On April 25, 2007, we completed a reverse acquisition
transaction through a share exchange with GengSheng International Corporation
(formerly, Powersmart Holdings Limited) whereby we issued to the sole
shareholder of Powersmart Holdings Limited, Shunqing Zhang, 16,887,815 shares of
China GengSheng Minerals, Inc. common stock, in exchange for all of the issued
and outstanding capital stock of Powersmart. By this transaction, Powersmart
became our wholly owned subsidiary and Mr. Zhang became our controlling
stockholder.
4
On April 25, 2007, we also completed a private placement
financing transaction pursuant to which we issued and sold 5,347,594 shares of
our common stock to certain accredited investors for $10 million in gross
proceeds.
On January 4, 2011, the Company and certain institutional
investors entered into a securities purchase agreement pursuant to which the
Company sold to such investors an aggregate of 2,500,000 shares of common stock
at a price of $4.00 per share for aggregate gross proceeds to the Company of
$10,000,000. The shares of common stock were issued pursuant to a prospectus
supplement dated as of January 10, 2011, which was filed with the Securities and
Exchange Commission in connection with a takedown from the Companys shelf
registration statement on Form S-3 (File No. 333-165486), which became effective
on April 28, 2010, and the base prospectus dated as of April 28, 2010 contained
in such registration statement.
Segmental Information
Our operating segments are functioned by our manufacturing
facilities and include four reportable segments: refractories, industrial
ceramics, fracture proppants and fine precision abrasives.
For financial information relating to our business segments,
see Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations and Note 24 to the consolidated financial statements
appearing elsewhere in this annual report. For a discussion of the risks
attendant to our foreign operations and of any dependence on one or more of the
Companys segments upon such foreign operations, please see Item 1A, Risk
Factors.
Our Products and Markets
The following table set forth sales information about our
product mix in each of the last three years.
(All amounts, other than percentages, in
thousands of U.S. dollars)
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Year Ended December 31,
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2012
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2011
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2010
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Percentage
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Percentage
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Percentage
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Sales
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of sales
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Sales
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of sales
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Sales
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of sales
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revenue
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revenue
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revenue
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revenue
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revenue
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revenue
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Refractories
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$
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38,878
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52.9%
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$
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46,572
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60.5%
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$
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45,758
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73.6%
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Industrial Ceramics
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1,802
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2.5%
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430
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0.6%
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1,246
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2.0%
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Fracture Proppants
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24,517
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33.3%
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22,526
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29.3%
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14,320
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23.0%
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Fine Precision Abrasive
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8,338
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11.3%
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7,408
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9.6%
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865
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1.4%
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$
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73,535
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100.0%
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$
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76,936
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100.0%
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$
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62,189
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100.0%
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Refractories
Our largest product segment is the refractories segment, which
accounted for approximately 52.9% of total revenue in 2012. Our refractory
products have high-temperature resistance and can function under thermal stress
that is common in many heavy industrial production environments. Because of
their unique high-temperature resistant qualities, the refractory products are
used as linings and key components in many industrial furnaces, such as steel
production furnaces, ladles, vessels, and other high-temperature processing
machines that must operate at high temperatures for a long period of time
without interruption. The majority of our customers are in the iron, steel,
cement, chemical, coal, glass, petro-chemical and nonferrous industries.
We provide a customized solution for each order of our
monolithic refractory materials based on customer-specific formulas. Upon
delivery to customers, the monolithic materials are applied to the inner
surfaces of our customers furnaces, ladles or other vessels to improve the
productivity of that equipment. The product benefits our customers as it lowers
the overall cost of production and improves financial performance. The reasons
that the monolithic materials can help our customers improve productivity, lower
production costs and achieve stronger financial performance include the
following: (i) monolithic refractory castables can be cast into complex shapes
which are unavailable or difficult to achieve by alternative products such as
shaped bricks; (ii) monolithic refractory linings can be repaired, and in some
cases, even reinstalled, without furnace cool-down periods or steel-production
interruptions, and therefore improve the steel makers productivity; (iii)
monolithic refractories can form an integral surface without joints, enhancing
resistance to penetration, impact and erosion, and thereby improving the
equipments operational safety and extending their useful service lives; (iv)
monolithic refractories can be installed by specialty equipment either
automatically or manually, thus saving construction and maintenance time as well
as costs; and (v) monolithic refractories can be customized to specific
requirements by adjusting individual formulas without the need to change batches
of shaped bricks, which is a costly procedure. Our refractory products and their
features are described as follows:
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Castable, coating, and dry mix materials
. Offerings within this
product line are used as linings in containers such as a tundish used for
pouring molten metal into a mold. The primary advantages of these products are
speed and ease of installation for heat treatment.
5
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Low-cement and non-cement castables
. Our low-cement and non-cement
castable products are typically used in reheating furnaces for producing
steel. These castable products are highly durable and can last up to five
years.
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Pre-cast roofs
. These products are usually used as a component of
electric arc furnaces. They are highly durable, and in the case of our
corundum-based, pre-cast roof, products can endure approximately 160 to 220
complete operations of furnace heating.
We also have a production line for pressed bricks, which is a
type of shaped refractory, for steel production. The annual designed
production capacity of our shaped refractory products is approximately 15,000
metric tons.
Finally, we provide a full-service option to our steel
customers, which include refractory product installation, testing, maintenance,
repair and replacement. Refractory products sales are often enhanced by our
on-site installation and technical support personnel. Our installation services
include applying refractory materials to the walls of steel-making furnaces and
other high temperature vessels to maintain and extend their lives. Our technical
service staff assure that our customers can achieve their desired productivity
objectives. They also measure the refractory wear at our customer sites to
improve the quality of maintenance and overall performance of our customers
equipment. Full-service customers contributed approximately 28.9% of the
Companys total sales in 2012, compared with 32.0% in 2011. We believe that
these services, together with our refractory products, provide us a strategic
advantage for profits.
Industrial Ceramics
Industrial Ceramics accounted for approximately 2.5% of the
total revenue in 2012. Our industrial ceramic products, including abrasive balls
and tiles, valves, electronic ceramics and structural ceramics, are components
for a variety of end products such as fuses, vacuum interrupters, electrical
components, mud slurry pumps, and high-pressure pumps. Such end use products are
used in the electric power, electronic component, industrial pump, and
metallurgy industries.
Fracture Proppants
Fracture Proppants accounted for approximately 33.3% of the
total revenue in 2012. Our fracture proppant products are very fine ball-like
pellets, used to reach pockets of oil and natural gas deposits that are trapped
in the fractures under the ground. Oil drillers inject the pellets into those
fractures, squeezing out the trapped oil or natural gas, which leads to higher
yield. Our fracture proppant products are available in several different
particle sizes (measured in millimeters). They are typically used to extract
crude oil and natural gas, which increases the productivity of crude oil and
natural gas wells. These products are highly resistant to pressure. In October
2007, our fracture proppant products were recognized by China National Petroleum
Corporation (the CNPC), China Petroleum & Chemical Corporation (the
Sinopec) and the China National Offshore Oil Corporation (the CNOOC) as
their supplier of fracture proppant products for their oil and gas-drilling
operation.
Fine Precision Abrasives
Fine Precision Abrasives accounted for 11.3% of our total
revenue in 2012. Fine precision abrasives are used for producing a super-fine,
super-consistent finish on certain products. A high-strength polyester backing
provides a uniform base for a coating of micron-graded mineral particles that
are uniformly dispersed for greater finishing efficiency. Our fine precision
abrasives are made from silicon carbide (SiC). They are ultra-fine,
high-strength pellets with uniform shape, and are used for surface-polishing and
slicing of precision instruments such as solar panels. Currently, the type of
abrasives that we produce is in high demand among solar-energy companies. Solar
energy companies use fine precision abrasives to cut silicon bars and to polish
equipment surfaces so that they can be smooth and reflective. Our products can
be utilized in a broad range of areas including machinery manufacturing,
electronics, optical glass, architecture, industry development, semiconductor,
silicon chip, plastic and lens.
Our Competition Strength and Challenges
With over 1,500 manufacturers in China, the refractory market
in which we compete is highly fragmented and highly competitive. In each of our
product segments, there is at least one major competitor. Many of our products
are made to industry specifications and may be interchangeable with our
competitors products. Some of our competitors are large and well-established
companies, such as Puyang Refractories Co., Ltd., Wuhan Ruisheng Specialty
Refractory Materials Co., Ltd., and Beijing Lirr Refractories Co., Ltd., and
their financial resources and ability to gain market share may be greater than
ours, which limits our pricing power in the market. Due to the diversity of our
product offering, we believe that we still enjoy a competitive advantage as many
of our competitors do not offer the entire spectrum of our product line.
Refractories and Industrial Ceramics
Through our wholly-owned Chinese subsidiaries Refractories and
High-Temperature, we manufacture refractory products and industrial ceramic
products in China. We believe that we are well positioned to compete in the refractories
segment and the industrial ceramics segment, because of our long-standing
business relationships with major steel companies, the quality and diversity of
our products and our competitive prices.
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We have distinguished ourselves through our customer service
team that provides a full range of refractory services, including refractory
construction, on-site maintenance and technical support. Our national registered
laboratory with high-quality research team meets our customers diverse product
requirements in a timely manner based on the differences of construction sites.
Our products compete on efficient operations, price differential and our quality
of service.
Most of our large customers, measured by percentage of our
revenue, operate in the steel industry. The steel industry is characterized by
intense price competition, which results in continuing emphasis on our need to
increase product productivity and performance. Our strategy has been to fulfill
the steel industrys need by developing technologically advanced refractory
products to help our customers increase their productivity. We believe that the
trend towards greater productivity in the highly competitive steel industry will
continue to provide a growing opportunity for our products, especially
monolithic refractories.
Fracture Proppants
We first started production of fracture proppant products in
December 2006, through our wholly-owned BVI subsidiary, GengSheng International,
and its wholly-owned Chinese subsidiary, Duesail. Our products have passed the
testing conducted by China Petroleum and Chemical Industry Association (the
CPCIA), which strengthens our competitiveness in the market compared to our
competitors. We were recognized as their fracture proppant supplier by China
National Petroleum Corporation (CNPC), China Petroleum & Chemical
Corporation (Sinopec) and China National Offshore Oil Corp. (CNOOC), who
monopolize the oil and gas drilling business in China, and we are the signed
provider for China National Offshore Oil Corp. (CNOOC). Our main competitors for
the production of fracture proppants are Carbo Ceramics Inc. and Saint-Gobain
Proppants (Guanghan) Co., Ltd, while these two companies are both subsidiaries
of international magnates, which focus on international sales. In April 2009, we
doubled our production capacity of Duesail to 66,000 tons and the new production
line at Duesail can provide a wide range of products, sizing from 52M Pa, 69M Pa
to 86M Pa and 102M Pa.
Fine Precision Abrasives
Our fine precision abrasives facility is designed to have a
production capacity of 22,000 tons per year. Our products can be used in wire
slicing of solar ingots for solar cell makers to make wafers and polishing
surface of solar panels or high-precision instruments. Our main competitors are
two Japanese companies, namely Nanxing and FUJIMI, which currently have the
largest share of the fine precision abrasives market in China.
Overall, we believe that our competitive strengths include the
following:
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Market Position
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We believe that we hold a competitive
position in the monolithic refractory marketplace. According to the most
recent Chinese steel industry publication available, during 2012, total
national sales were approximately 28.2 million tons, 70% of which were from
refractories applied in steel making, of which 40% is monolithic refractories.
The industry is highly competitive and consists of more than 1,500
manufacturers. However, we believe our well recognized GengSheng brand,
leading position in research and development and full-service business model
place us in a strong competitive position in the monolithic refractory market.
We have broad customer base, good recognition of the GengSheng brand,
flexible manufacturing capabilities and easily accessed distribution channels.
These capabilities enable us to introduce new refractory product categories to
our customers efficiently and cost-effectively.
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Broad Product Offering.
Our refractory product segment offers
over 25 product categories that cover a wide range of customer specifications
for use in the iron and steel manufacturing industries, in industrial furnaces
and other heavy machinery. Our broad product offerings allow us to offer our
customers a single-source solution for many of their refractory product
requirements.
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Diversified End Market/Customer Base
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We sell our
refractory products in over 25 provinces in China and 11 countries overseas.
In 2012, we had over 250 customers for the refractories segment, and none of
them accounted for more than 15% of our 2012 net sales. Our largest customer
in refractories segment, Shandong Steel Co., Ltd, Rizhao Subsidiary accounted
for 11.7% of 2012 net sales. Our broad product line and diversified target
markets and customer base have contributed to greater stability in our sales
and operating profit margin. We have long term relationships with steel and
iron industry leaders in China, such as Shangdong Steel and Anshan Steel.
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Experienced Management Team.
Our senior management team has
an average of over 20 years of experience in the refractory industry and with
the Company.
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Access to Raw Materials
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We are located in Gongyi,
Henan Province, an area of China which has abundant reserves of bauxite and
other key raw materials used in refractory manufacturing. We have diversified
our access to raw materials by acquiring Prefecture, a subsidiary of our
wholly own subsidiary Refractories, to secure and stabilize the supply and the
price of raw materials. Prefecture has access to bauxite reserve and provided
processed raw material for Refractories. It is currently not in operation, but
we can resume operation anytime if we need to further secure and stabilize the
supply and the price of raw materials.
7
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Research and Development Capabilities
.
We utilize our
research and development capabilities to supply our customers with cutting
edge refractory products designed to meet their specific demands. To achieve
the highest quality product developments, we established a modern,
state-of-the- art laboratory in China dedicated to quality control and
testing.
-
Maintenance Service Capabilities
.
We dedicate over 300
employees to the installation and service of our products at the client sites.
This service contributes greatly to positive business relationship with our
customers and makes our products more attractive and competitive.
Our Customers
We have over 300 customers in 25 provinces in China, as well as in greater Asia, North America and Europe. Our customers include some of the largest steel and iron producers and petroleum & chemical producers in China. During 2012, sales to two of our customers, Jilin Petroleum Group Company Ltd. (“Jilin”) and Shandong Steel Co., Ltd, Rizhao Subsidiary (“Rizhao”) represented 10% or more of our consolidated sales. Our sales to Jilin amounted to $9.0 million or 12.3% of our revenue and sales to Rizhao amounted to $8.6 million or 11.7% of our revenue. Sales to Shanghai Jolly Trading Co., Ltd. (“Jolly”) and Rizhao represented 10% or more of our consolidated sales in 2011. Our sales to Jolly amounted to $10.9 million or 14.1% of our revenue and sales to Rizhao amounted to $8.5 million or 11.1% of our revenues for 2011. During the fiscal year 2010, sales to Rizhao and AMSAT International Co., (“AMSAT”) represented 10% or more of our consolidated sales. Our sales to Rizhao amounted to $9.0 million or 14.5% of our revenue and our sales to AMSAT amounted to $6.5 million or 10.4% of our revenue for 2010.
Our top ten customers among our segmental lines for the years ended December 31, 2010, 2011 and 2012, which are listed below, accounted for approximately 57.0%, 63.9% and 55.6% of our consolidated revenues, respectively.
Our Top 10 Customers
|
|
(As of December 31, 2012)
|
|
|
Sales (in
|
|
|
|
|
|
|
|
|
|
thousands of
|
|
|
Percentage of
|
|
|
Locations of
|
|
Customers
|
|
US dollars)
|
|
|
net sales
|
|
|
Customers
|
|
Jilin Petroleum Group Company Ltd.
|
$
|
9,016
|
|
|
12.3%
|
|
|
Jilin, China
|
|
Shandong Steel Co., Ltd., Rizhao Subsidiary
|
|
8,586
|
|
|
11.7%
|
|
|
Rizhao, China
|
|
Trina Solar
|
|
5,206
|
|
|
7.1%
|
|
|
Changzhou, China
|
|
Fushun New Steel Co., Ltd.
|
|
5,194
|
|
|
7.1%
|
|
|
Fushun, China
|
|
Heilongjiang Jianlong Iron & Steel LLC.
|
|
2,777
|
|
|
3.8%
|
|
|
Shuangyashan China
|
|
Zibo Hongda Steel LLC
|
|
2,540
|
|
|
3.5%
|
|
|
Zibo, China
|
|
Sinopec Shengli Oilfield
|
|
2,440
|
|
|
3.3%
|
|
|
Dongying, China
|
|
CNPC Chuanqing Drilling & Exploration Corporation
|
|
2,254
|
|
|
3.1%
|
|
|
Xian, China
|
|
Gansu Jiu Steel Group Hongxing Iron &
Steel Co., Ltd.
|
|
1,937
|
|
|
2.6%
|
|
|
Jiayu, China
|
|
Anshan Baode Iron & Steel Ltd.
|
|
1,829
|
|
|
2.5%
|
|
|
Anshan, China
|
|
Total
|
$
|
41,779
|
|
|
57.0%
|
|
|
|
|
(As of December 31, 2011)
|
|
|
Sales (in
|
|
|
|
|
|
|
|
|
|
thousands of
|
|
|
Percentage of
|
|
|
Locations of
|
|
Customers
|
|
US dollars)
|
|
|
net sales
|
|
|
Customers
|
|
Shanghai Jolly Trading Co., Ltd
|
$
|
10,873
|
|
|
14.1%
|
|
|
Shanghai, China
|
|
Shandong Steel Co., Ltd., Rizhao Subsidiary
|
|
8,539
|
|
|
11.1%
|
|
|
Rizhao, China
|
|
AMSAT International
|
|
6,504
|
|
|
8.5%
|
|
|
USA
|
|
Trina Solar
|
|
5,864
|
|
|
7.6%
|
|
|
Changzhou, China
|
|
Fushun New Steel Co., Ltd.
|
|
3,946
|
|
|
5.1%
|
|
|
Fushun, China
|
|
Zibo Hongda Steel LLC
|
|
3,222
|
|
|
4.2%
|
|
|
Zibo, China
|
|
Xianyang Chuanqing Qingxinyuan Engineering
Co., Ltd.
|
|
3,197
|
|
|
4.2%
|
|
|
Xianyang, China
|
|
Gansu Jiu Steel Group Hongxing Iron & Steel Co., Ltd.
|
|
2,732
|
|
|
3.6%
|
|
|
Jiayu, China
|
|
Heilongjiang Jianlong Iron & Steel LLC.
|
|
2,258
|
|
|
2.9%
|
|
|
Shuangyashan China
|
|
Anshan Baode Iron & Steel Ltd.
|
|
1,988
|
|
|
2.6%
|
|
|
Anshan, China
|
|
Total
|
$
|
49,123
|
|
|
63.9%
|
|
|
|
|
8
(As of December 31,
2010)
|
|
|
|
Sales (in
|
|
|
|
|
|
|
|
|
|
thousands of
|
|
|
Percentage of
|
|
|
Locations of
|
|
Customers
|
|
US dollars)
|
|
|
net sales
|
|
|
Customers
|
|
Shandong Steel Co., Ltd., Rizhao Subsidiary
|
$
|
8,992
|
|
|
14.5%
|
|
|
Rizhao, China
|
|
AMSAT International
|
|
6,451
|
|
|
10.4%
|
|
|
USA
|
|
Zibo Hongda Steel LLC.
|
|
3,579
|
|
|
5.8%
|
|
|
Zibo, China
|
|
Nanchang Changli Iron & Steel
Co., Ltd.
|
|
2,993
|
|
|
4.8%
|
|
|
Nanchang, China
|
|
Heilongjiang Jianlong Iron & Steel LLC.
|
|
2,680
|
|
|
4.3%
|
|
|
Shuangyashan China
|
|
Anhui Yangtze Steel LLC.
|
|
2,190
|
|
|
3.5%
|
|
|
Maanshan, China
|
|
Anshan Baode Iron & Steel Ltd.
|
|
2,071
|
|
|
3.3%
|
|
|
Anshan, China
|
|
Gansu Jiu Steel Group Hongxing Iron
& Steel Co., Ltd.
|
|
1,858
|
|
|
3.0%
|
|
|
Jiayu, China
|
|
CNPC Bohai Drilling Engineering Company Limited
|
|
1,875
|
|
|
3.0%
|
|
|
Handan, China
|
|
Beijing Shenwu Thermal Energy
Technology Co., Ltd.
|
|
1,836
|
|
|
3.0%
|
|
|
Beijing, China
|
|
Total
|
$
|
34,525
|
|
|
55.6%
|
|
|
|
|
Our Suppliers of Raw Materials
The principal raw materials used in our refractory products and
fracture proppants products are various forms of aluminum oxide, including
bauxite, corundum, processed AI203, magnesia, calcium aluminates cement, resin,
and silica. Bauxite is used in the production of refractory materials, fracture
proppants products and some industrial ceramic products. Bauxite is abundantly
available from mines close to our manufacturing facilities. We purchase a
significant portion of our magnesia requirements from sources in Liaoning
Province. If we experience supply interruptions of our raw materials, we believe
that we could still obtain adequate supplies from alternate sources in local
areas or elsewhere in China. However, we may incur higher costs related to
transportation and storage.
The average costs of some of our raw materials from 2011 to
2012 are as follows:
(Per ton and stated in US dollar)
|
2012
|
2011
|
% Change
|
Ordinary bauxite
|
112.4
|
86.0
|
30.7%
|
Refined bauxite
|
280.9
|
261.3
|
7.5%
|
Middle class magnesia
|
220.3
|
218.8
|
0.7%
|
High class magnesia
|
307.9
|
270.5
|
13.8%
|
Silica
|
339.9
|
334.6
|
1.6%
|
Calcium aluminates cement
|
847.8
|
817.6
|
3.7%
|
Processed aluminum oxide
|
755.2
|
733.3
|
3.0%
|
Brown fused corundum
|
616.2
|
581.7
|
5.9%
|
White fused corundum
|
784.8
|
825.6
|
-4.9%
|
The average costs of some of our raw materials from 2010 to
2011 are as follows:
(Per ton and stated in US dollar)
|
2011
|
2010
|
% Change
|
Ordinary bauxite
|
86.0
|
73.6
|
16.8%
|
Refined bauxite
|
261.3
|
250.2
|
4.4%
|
Middle class magnesia
|
218.8
|
191.4
|
14.3%
|
High class magnesia
|
270.5
|
219.4
|
23.3%
|
Silica
|
334.6
|
317.1
|
5.5%
|
Calcium aluminates cement
|
817.6
|
756.1
|
8.1%
|
9
(Per ton and stated in US dollar)
|
2011
|
2010
|
% Change
|
Processed aluminum oxide
|
733.3
|
676.0
|
8.5%
|
Brown fused corundum
|
581.7
|
496.6
|
17.1%
|
White fused corundum
|
825.6
|
545.6
|
51.3%
|
We typically have supply agreements with terms of one to two
years that do not impose minimum purchase requirements. The cost of raw
materials purchased during the term of a supply agreement usually is the market
price for the raw materials at the time of purchase. Our centralized procurement
system helps to reduce raw material costs. We generally are not engaged in
speculative raw material commodity contracts and attempt to reflect raw material
price changes in the sale price of our products. Our ability to achieve
anticipated operating results depends in part on having an adequate supply of
raw materials for our manufacturing operations. Because of our strategy to
maintain multiple suppliers for each material we source, we do not particularly
rely on one single supplier.
Our Sales and Marketing
Our sales and marketing group is comprised of over 100
employees who focus on managing specific product lines across several
distribution channels. Our marketing process involves an integrated process of
sales leads screening, bidding and negotiating and executing definitive sales
agreements.
To maximize the accessibility of our products to a diverse
group of end users, we market our products through a variety of distribution
channels. We have separate sales and marketing groups that work directly with
our customers in each of our target market. Marketing and sales are accomplished
through the mailing of brochures, industry trade advertising, trade show
exhibitions, online sales and sales presentations.
Our Growth Strategy
The key elements of our growth strategy are summarized as
follow:
-
Adjust Cost Structure Through Operating Efficiency and Productivity
Improvements.
We regularly evaluate our operating productivity and
efficiency and focus on reducing our manufacturing and distribution costs. We
have planned to further utilize internal capacity for new refractory product
developments while continuing to meet customers needs throughout our supply
chain. We believe that these initiatives will provide significant costs
savings and improve operating profits.
-
Expand Product Lines and Specialty Product Lines.
We seek to
identify, develop and commercialize new products that use our core technology.
In particular, we intend to develop a variety of specialty, high margin
mineral-based products, including fracture proppant products and fine
precision abrasives.
-
Pursue Sales Opportunities in Existing and New Markets.
We
believe that we have significant growth opportunities by increasing our
penetration within our existing customer base, adding new customers, further
expanding product offering, and pursuing additional marketing channels. In
addition to continuing to target leading steel and iron manufacturers for
refractory products, we have been receiving contracts from major oil &
chemical manufacturers, large wholesalers and solar producer in China who
started business with us for our proppant products and fine precision
abrasives.
-
Selectively Pursue Strategic Acquisitions.
As a strong
competitor in our core refractory manufacturing market, we believe that we are
well-positioned to benefit from the consolidation of manufacturers in these
markets. We also believe that our management has the ability to identify and
integrate strategic acquisitions. We will continue to selectively pursue
acquisitions that will improve our market position within our existing target
markets, expand our product offerings, and increase our manufacturing
efficiency.
-
Expand International Operations.
We are expanding operations
to overseas market to increase our presence and our sales efforts in countries
outside China. When opportunity arises, we will consider setting up sales
office in our main overseas market to better serve our customer.
Regulation
Because our operations are based in China, we are regulated by
the national and local laws of the Peoples Republic of China. The refractory
materials industry is generally subject to national, local laws and regulations
related to the environment, health, and safety. The manufacturing of refractory
materials involves the release of powder and dust which are classified as
environmental pollutants under applicable government laws and regulations. We
regularly monitor and review our operations, procedures, and policies for
compliance with these laws and regulations. We have made substantial capital
investments in our facilities to ensure compliance with environmental and
regulatory laws. We believe that our operations are in substantial compliance
with the laws and regulations and that there are no violations that would have a
material effect on us. The cost of compliance with these laws and regulations is
not expected to have a large financial impact on us.
10
In addition, we are also subject to PRCs foreign currency
regulations. The PRC government has control over Renminbi reserves through,
among other things, direct regulation of the conversion of Renminbi into other
foreign currencies. Although foreign currencies which are required for current
account transactions can be bought freely at authorized Chinese banks, the
proper procedural requirements prescribed by Chinese law must be met. At the
same time, Chinese companies are also required to sell their foreign exchange
earnings to authorized Chinese banks and the purchase of foreign currencies for
capital account transactions still requires prior approval of the Chinese
government.
We do not face any significant government regulation in
connection with the production of our products. We do not need any special
government permits to produce our products other than those permits that are
required of all corporations in China.
Our Intellectual Property
While we consider our patents and trademarks valuable assets,
we do not consider any single patent or trademark to be of such material
importance that its absence would harm or cause a material disruption of our
business. We also consider the production of our refractories to involve
proprietary know-how, and we adjust and test the specific composition formulas
to ensure optimal product performance.
Patents
We currently own ninety Chinese patents which are approved by
and registered with the China State Intellectual Property Office. The following
table lists part of our important patents:
Patent Name
|
Patent Number
|
Application Date
|
Patent Term
|
Country
|
Integral casting technology in mixer
furnaces
|
ZL00137106.1
|
December 29, 2000
|
20 years
|
PRC
|
Light-slag heat-retaining refractory castables in
high-furnaces clinders
|
ZL200510107341.X
|
December 27, 2005
|
20 years
|
PRC
|
Ceramic sealing double-gate valve
|
ZL200520029858.7
|
January 24, 2005
|
10 years
|
PRC
|
Ceramic plunger in pumps
|
ZL200520029859.1
|
January 24, 2005
|
10 years
|
PRC
|
Ceramic cylinder in slurry pumps
|
ZL200820148214.3
|
July 25, 2008
|
10 years
|
PRC
|
Ceramic plunger pump
|
ZL200820148089.6
|
July 21, 2008
|
10 years
|
PRC
|
Ceramic lining in abrasion-resistance tubes
|
ZL20082014090.9
|
July 21, 2008
|
10 years
|
PRC
|
In addition, we have twenty-one pending patent applications
with the China State Intellectual Property Office.
Trademarks
We also own the following registered trademark associated with
the brand GengSheng that were issued by the State Industrial and Commercial
Administration Bureau of the PRC.
Trademark
|
Registered Number
|
Termination Date
|
Use
|
|
6269829
|
March 6, 2020
|
Used for refractories catalogued
as class number 19
|
Our Research and Development Activities
We believe that the development of new products and new
technology is critical to our success. We are continuously working to improve
the quality, efficiency and cost-effectiveness of our existing products and
develop technology to expand the range of specifications of our products.
We have spent $923,403, $699,367 and $817,179 on
Company-sponsored research and development activities in fiscal years of 2012, 2011
and 2010, respectively. The expenses on research and development include salary,
cost of raw material consumed, testing expenses and other costs incurred for research and development of potential
new products. We do not have any customer-sponsored research and development
activities.
11
Our Employees
As of December 31, 2012, we had approximately 1,200 full time
employees, all of whom are salaried employees and members of a labor union.
Approximately 4% of our employees hold a bachelors degree, and approximately 1%
of our employees hold a masters degree. We actively recruit our employees from
the local market and expect to focus our recruiting efforts on candidates
holding bachelor degree in material science, refractory materials and marketing
as we implement our expansion plans. We have implemented a comprehensive
training program for our employees that focus not only on skills and knowledge
for their specific duties, but also on our corporate culture and core
values.
Our employees participate in a mandated state pension scheme
and social insurance programs managed by Chinese municipal and provincial
governments which cover pensions, unemployment and injury insurance. We are
required to contribute to the scheme at a rate of 28% of the average monthly
salary for employee pensions, 3% of the average monthly salary for the state
unemployment fund and 1% of the average monthly salary for injury insurance. Our
compensation expenses related to this scheme were $522,336, $466,371 and
$324,810 for the years ended December 31, 2012, 2011 and 2010, respectively.
Our Chinese subsidiaries have labor unions which protect
employees rights, assist in the fulfillment of our economic objectives,
encourage employee participation in management decisions and assist in mediating
disputes between us and union members. We believe that we maintain a
satisfactory working relationship with our employees and we have not experienced
any significant labor disputes or any difficulty in recruiting staff for our
operations.
China enacted a new Labor Contract Law, which became effective
on January 1, 2008. We have updated our employment contracts and employee
handbook and been in compliance with the new law. We will work with the
employees and the labor union to ensure that the employees obtain the full
benefit of the law. We do not anticipate that changes in the law will materially
impact our financial results.
ITEM 1A. RISK FACTORS
The market price of our common stock could fluctuate
substantially due to a variety of factors, including market perception of our
ability to achieve our planned growth, quarterly operating results of other
companies in the same industry, trading volume in our common stock, changes in
general conditions in the economy and the financial markets or other
developments affecting our competitors or us. In addition, the stock market is
subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies
for reasons unrelated to their operating performance and could have the same
effect on our common stock.
RISKS RELATED TO OUR BUSINESS
The slow recovery from the global economic crisis could
affect the overall availability and cost of external financing for our
operation.
The slow recovery of the global financial markets from the
global economic crisis and turmoil may adversely impact our business, the
business and financial condition of our customers and the business of potential
investors from whom we expect to generate our potential sources of capital
financing. Presently it is unclear to what extent the economic stimulus measures
and other actions taken or contemplated by the Chinese governments and other
governments throughout the world will mitigate the effects of the negative
impact caused by the economic turmoil on our industry and other industries that
affect our business. Although these conditions have not presently impaired our
ability to access credit markets and finance our operations, the impact of the
current crisis on our ability to obtain capital financing in the future, and the
cost and terms of same, is unclear.
A downturn or negative changes in the highly volatile
steel and iron industry will harm our business and profitability.
The iron and steel industries accounted for approximately 60%
to 70% of the consumption in the Chinese refractory industry according to the
industry association statistics. Because our largest customers are in the steel
industry, our business performance is closely tied to the performance of the
steel industry. The sector as a whole is cyclical and its profitability can be
volatile as a result of general economic conditions, labor costs, competition,
import duties, tariffs and currency exchange rates. These macroeconomic factors
have historically resulted in wide fluctuations in Chinese and global economies
in which steel companies sell their products. In our case, future economic
downturns, stagnant economies or currency fluctuations in China or globally
could decrease the demand for steel products both in China and overseas and, in
turn, could negatively impact our sales, margins and profits.
Industry growth rate for refractory products may
decelerate and may affect our future revenue growth.
In China, the production of refractory materials has
experienced fast growth in recent years driven largely by growth in Chinas
steel production. China has become the largest country for producing and
consuming refractories, a majority of which were demanded by companies in the
steel industry. Our industrys growth has been primarily driven by the growth in
the Chinese steel industry. According to figures provided by World Steel
Association, Chinese steel output grew from an annual output of 157 million tons
in 2001 to approximately 717 million tons in 2012, representing a
compounded annual growth rate of 13.5% . Going forward, however, the forecast
provided by the China International Capital Corporation suggests that the annual
output of steel in China will not maintain this growth rate.
12
If the steel industry experiences such a slowdown, our growth
prospects will likewise be curtailed. Additionally, the market for monolithic
refractories in China is still in the developmental stage, and successful market
penetration of the monolithic refractories depends heavily on two factors.
First, successful market penetration depends on technological progress that
results in products that provide better performance for our customers, new
varieties of products that meet our customers future requirements, and more
efficient and effective installation and maintenance methods. Second, successful
market penetration also depends on our marketing strategy and our ability to
execute that strategy while maintaining a high quality of service to our
customers. Our future revenue growth without acquisitions may maintain, but
nevertheless, we may not match our past growth rate.
Our inability to overcome fierce competition in the
highly fragmented and highly competitive Chinese refractory market could reduce
our revenue and net income.
The refractory market in China is highly fragmented with over
1,500 producers of refractory products, according to the Chairman of the
Association of China Refractory Industry. Our competitors manufacture products
that are similar to and directly compete with the products that we manufacture
and market. We compete with many other refractory manufacturers in China, on a
region-by-region basis, and with international competitors on a world-wide
basis. Our main competitors are located in China and include Puyang Punai
High-temperature Materials Co., Ltd., Wuhan Ruisheng Specialty Refractory
Materials Co., Ltd., Beijing Lirr Refractories Co., Ltd. and others. Currently,
our primary international competitor is Mineral Technologies, Inc. in the United
States.
As a regional market leader in the monolithic refractory
marketplace in China, we can buy raw materials in large quantities allowing us
to negotiate volume discount that results in lower price than what is offered to
our smaller competitors. As our smaller competitors consolidate and grow larger,
they may be able to negotiate similar volume discount from raw material
suppliers. Under such scenario, any cost advantage that we currently enjoy may
be reduced or eliminated altogether. Although our smaller competitors may pay
higher materials costs relative to our material costs, their operating and
administrative costs may be lower than ours, which may allow our competitors to
offer very competitive prices for their products and services. Their competitive
prices may force us to lower our prices, and to sell products and services at a
loss in order to maintain our market share. Currently, we have a policy for
setting a pricing floor so that we do not sell products at a loss; however, we
cannot assure that we can maintain this policy indefinitely. Thus, increased
competition in our industry could reduce our revenue and net income.
Any decrease in the availability, or increase in the
cost, of raw materials and energy could materially increase our costs and
jeopardize our current profit margins and profitability.
The principal raw materials used in our refractory products are several forms of the minerals SiO
2
, Al
2
0
3
, and MgO, including bauxite, mullite, corundum, processed Al203, Spinel, magnesia, calcium
aluminates cement, and silica. We use bauxite primarily in the
production of refractory materials, fracture proppants and some
industrial ceramic products. The availability of these raw materials and energy
resources may decrease and their prices can become volatile as a result of,
among other things, changes in overall supply and demand levels and new laws or
regulations. Our ability to achieve our sales target depends on our ability to
maintain what we believe to be adequate inventories of raw materials to meet
reasonably anticipated orders from our customers. In 2012, raw material costs
accounted for 84.0% of the production cost for refractory products, 43.0% for
fracture proppant products and 43.0% for industrial ceramics products and 86.3%
for micropowder products.
Our production facilities are located in Gongyi, Henan
Province, where there is currently abundant reserve of bauxite and corundum for
refractory manufacturing. Although our proximity to bauxite allows us to benefit
from a relatively short delivery time and lower shipping costs, we may
experience supply shortages or price increases or both due to sharp increases in
overall industry demand for bauxite. Besides purchasing bauxite from local
suppliers, we also purchase bauxite, mullite, magnesia, calcium aluminates
cement and other raw materials from suppliers in Shanxi Province, Shandong
Province, Liaoning Province and Gansu Province. All of these locations are
outside of Henan Province and any increase in shipping costs will increase our
cost of raw materials from these sources and will decrease our revenues and
profitability.
Further, if our existing suppliers are unable or unwilling to
deliver raw materials needed on time to meet our production schedules, we may be
unable to produce certain products, which could result in a decrease in revenues
and profitability, a loss of goodwill with our customers, and could damage our
reputation as a reliable supplier in our industry. In the event that our raw
material and energy costs increase, we may not be able to pass these higher
costs on to our customers in full or at all due to contractual agreements or
pricing pressures in the refractory market. Any increase in the prices for raw
materials or energy resources could materially increase our costs and therefore
lower our earnings and profitability.
Actions by the Chinese government could drive up our
material costs and could have a negative impact on our
profitability.
In past years, the Chinese government has shut down some
outdated mineral mines in China. These shutdowns have decreased the overall
supply of raw materials needed to produce refractory products. As a result, the
materials costs for our products have increased. If the Chinese government shuts down more mineral mines, we could
experience further supply shortages and price increases that could have a
negative impact on our profitability.
13
We may experience fluctuation of profit performance and
our future profitability is not assured.
As we are facing fierce competition and the cost of our raw
materials and energy keep rising, we have experienced significant pressure in
the refractories segment of our business, our largest product segment which accounted for
approximately 52.9% of total revenue in 2012. We may experience fluctuation of
profit performance and our profitability is not assured.
Specific factors that may undermine our financial objectives
include, among others:
-
Volatile iron and steel producer spending levels, which particularly
affects our refractories segment which constitutes the largest portion of mix;
-
Adverse changes to our product mix, both fundamentally (resulting from new
product transitions, the declining profitability of certain legacy products
and the termination of certain products with declining margins, among other
things) and due to demand fluctuations;
-
Intense pricing pressure across our product lines due to competitive
forces, which continues to offset many of the cost improvements we are
realizing quarter over quarter;
-
Rising cost of materials and energy that significantly impact our
profitability, particularly in our refractories segment;
-
Execution challenges, which limit revenue opportunities and harm
profitability, market opportunities and customer relations;
-
Continuing high levels of selling, general and administrative expenses.
Taken together, these factors limit our ability to predict
future profitability levels and to achieve our long-term profitability
objectives. While some of these factors may diminish over time as we improve our
cost structure and focus on enhancing our product mix, several factors, such as
continuous pricing pressure, increasing competition, rising costs of raw
materials and energy, are likely to remain endemic to our businesses. If we fail
to achieve profitability expectations, our business and financial condition may
be materially adversely impacted.
We may not be able to implement our business plan because
we may be unable to fund the substantial ongoing capital and maintenance
expenditures needed for our operations and to invest in new projects at the same
time.
Our operations are capital intensive and the nature of our
business and our business strategy need substantial additional working capital
investment. We need capital to build new production lines, acquire new
equipment, maintain the condition of our existing equipment, maintain compliance
with environmental laws and regulations, and to pursue new market opportunities.
We may not be able to fund our capital expenditures from operating cash flow and
from the proceeds of borrowings available for capital expenditures under our
credit facilities, and we may need additional debt or equity financing. We
cannot assure that this type of financing will be available or, if available, it
may result in increased interest expenses, increased leverage and decreased
income available to fund further expansion. In addition, future debt financings
may limit our ability to withstand competitive pressures and render us more
vulnerable to economic downtowns. If we are unable to fund our capital
requirements, we may be unable to implement our business plan and our financial
performance may be adversely impacted.
Approximately 57.0% of our sales revenues were derived
from our ten largest customers, and any reduction in revenues from any of these
customers would reduce our revenues and net income.
While we have over 300 active customers, approximately 57.0% of
our sales revenue came from our top ten customers in 2012, with Jilin and Rizhao
accounted for approximately 12.3% and 11.7% of our sales revenue in the same
period. If we cease to do business at or above current levels with Jilin, Rizhao
or any one of our other largest customers which contribute significantly to our
sales revenues, and we are unable to generate additional sales revenues with new
and existing customers that purchase a similar amount of our products, then our
revenues and net income would decline considerably.
A significant interruption or casualty loss at any of our
facilities could increase our production costs and reduce our sales and
earnings.
Our manufacturing process requires large industrial facilities
for crushing, smashing, batching, molding and baking raw materials. After the
refractory products come off the production line, we need additional facilities
to inspect, package, and store the finished goods. Our facilities may experience
interruptions or major accidents and may be subject to unplanned events such as
explosions, fires, inclement weather, acts of God, terrorism, accidents and
transportation interruptions. Any shutdown or interruption of any facility would
reduce the output from that facility, which could substantially impair our
ability to meet sales targets. Interruptions in production capabilities will inevitably increase production costs and reduce our sales
and earnings. In addition to the revenue losses, longer-term business disruption
could result in the loss of goodwill with our customers. To the extent these
events are not covered by insurance, our revenues, margins and cash flows may be
adversely impacted by events of this type.
14
Environmental regulations impose substantial costs and
limitations on our operations.
Our products are not considered environmentally hazardous
materials, however, the powder and dust produced during our production process is
considered hazardous to the environment. We have environmental liability risks
and limitations on operations brought about by the requirements of environmental
laws and regulations. We are subject to various national and local environmental
laws and regulations concerning issues such as air emissions, waste water
discharges, and solid and hazardous waste management and disposal. These laws
and regulations are becoming increasingly stringent. While we believe that our
facilities are in material compliance with all applicable environmental laws and
regulations, the risks of substantial unanticipated costs and liabilities
related to compliance with these laws and regulations are an inherent part of
our business. It is possible that future conditions may develop, arise or be
discovered that create new environmental compliance or remediation liabilities
and costs. While we believe that we can comply with environmental legislation
and regulatory requirements and that the costs of compliance have been included
within budgeted cost estimates, compliance may prove to be more costly than
anticipated.
Climate change and related regulatory responses may
impact our business.
Climate change as a result of emissions of greenhouse gases is
a significant topic of discussion. It is impracticable to predict with any
certainty the impact of climate change on our business or the regulatory
responses to it, although we recognize that they could be significant. The most
direct impact is likely to be an increase in energy costs, which would increase
our operating costs, primarily through increased utility and transportations
costs. In addition, many of our customers operate in the manufacturing industry.
Any restrictions or penalties imposed under a cap and trade system might
significantly impact their operations, which in turn, would adversely affect
their demand for our products. However, it is too soon for us to predict with
any certainty the ultimate impact, either directionally or quantitatively, of
climate change and related regulatory responses.
If our customers and/or the ultimate consumers of
products which use our products successfully assert product liability claims
against us due to defects in our products, our operating results may suffer and
our reputation may be harmed.
Our products are widely used as protective linings in
industrial furnaces operating in highly hazardous environments because those
furnaces must operate under extremely high temperatures in order to produce
iron, steel and other industrial products. Significant property damage, personal
injuries and even death can result from the malfunctioning of high temperature
furnaces as a result of defects in our refractory products. The costs and
resources needed to defend product liability claims could be substantial. We
could be responsible for paying some or all of the damages if found liable. We
do not have product liability insurance. The publicity surrounding these sorts
of claims is also likely damage our reputation, regardless of whether such
claims are successful. Any of these consequences resulting from defects in our
products would hurt our operating results and stockholder value.
If we are not able to adequately secure and protect our
patent, trademark and other proprietary rights our business may be materially
affected.
We hold ninety patents related to our production and some of
these patents are key technology widely used in our process to improve the
efficiency of production. We also rely on non-disclosure agreements and other
confidentiality procedures to protect our intellectual property rights in
various jurisdictions. These technologies are very important to our business and
it may be possible for unauthorized third parties to copy or reverse engineer
our products, or otherwise obtain and use information that we regard as
proprietary. Furthermore, third parties could challenge the scope or
enforceability of our patents. In certain foreign countries, including China
where we operate, the laws do not protect our proprietary rights to the same
extent as the laws of the United States. Decided court cases in Chinas civil
law system do not have binding legal effect on future decisions and even where
adequate law exists in China, enforcement based on existing law may be uncertain
and sporadic and it may be difficult to obtain enforcement of a judgment by a
court of another jurisdiction. In addition, the relative inexperience of Chinas
judiciary in many cases creates additional uncertainty as to the outcome of any
litigation, and interpretation of statutes and regulations may be subject to
government policies reflecting domestic political changes. Any misappropriation
of our intellectual property could have a material adverse effect on our
business and results of operations, and we cannot assure that the measures we
take to protect our proprietary rights are adequate.
Expansion of our business may place a significant strain
on our management and operational infrastructure and impede our ability to meet
any increased demand for our products.
Our business plan is to significantly grow our operations by
meeting the anticipated growth in demand for existing products and by
introducing new product offerings. Growth in our business may place a
significant strain on our personnel, management, financial systems and other
resources. Our business growth also presents numerous risks and challenges,
including:
-
Our ability to successfully and rapidly expand sales to potential
customers in response to increasing demand;
15
-
The costs associated with such growth, which are difficult to quantify, but
could be significant; and
-
The costs associated with developing new products to keep pace with rapid
technological changes.
To accommodate the growth and compete effectively, we may need
to obtain additional funding to improve information systems, procedures and
controls and expand, train, motivate and manage existing and additional
employees. Funding may not be available in a sufficient amount or on favorable
terms, if at all. If we are not able to manage these activities and implement
these strategies successfully to expand to meet any increased demand, our
operating results could suffer.
Improvements in the quality and lifespan of refractory
products may decrease product turnover and our sales revenues.
Technological and manufacturing improvements have made
refractory products more durable and more efficient. While making products more
durable and more efficient is generally a positive development, the increased
quality and durability of refractory products could lead to declining
consumption and turnover of refractory products. With the growth rate in the
steel industry decelerating and with the consumption rate of refractory products
per metric ton of steel produced decreasing, the refractory industrys future
growth rate may decelerate. We can increase our prices to offset the decrease in
product consumption, but we cannot assure that price increases will be
acceptable to our customers.
Our new products are complex and may contain defects that
are detected only after their release to our customers, which may cause us to
incur significant unexpected expenses and lost sales.
Our products are highly complex and must operate at high
temperatures for a long period of time. Although our new products are tested
prior to release, they can only be fully tested when they are used by our
customers. Consequently, our customers may discover defects after new products
have been released. Although we have test procedures and quality control
standards in place designed to minimize the number of defects in our products,
we cannot guarantee that our new products will be completely free of defects
when released. If we are unable to quickly and successfully correct the defects
identified after their release, we could experience significant costs associated
with compensating our customers for damages caused by our products, costs
associated with correcting the defects, costs associated with design
modifications, and costs associated with service or warranty claims or both.
Additionally, we could lose customers, lose market share and suffer damage to
our reputation.
Our holding company structure may limit the payment of
dividends.
We have no direct business operations, other than our ownership
of our subsidiaries. While we have no current intention of paying dividends,
should we decide in the future to do so, as a holding company, our ability to
pay dividends and meet other obligations depends upon the receipt of dividends
or other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries, from time to time, may be
subject to restrictions on their ability to make distributions to us, including
as a result of restrictive covenants in loan agreements, restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions as discussed below. If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of RMB into U.S. dollars
may reduce the amount received by U.S. stockholders upon conversion of the
dividend payment into U.S. dollars.
Chinese regulations currently permit the payment of dividends
only out of accumulated profits as determined in accordance with Chinese
accounting standards and regulations. Our subsidiaries in China are also
required to set aside a portion of their after-tax profits according to Chinese
accounting standards and regulations to fund certain reserve funds. Currently,
our subsidiaries in China are the only sources of revenues or investment
holdings for the payment of dividends. If they do not accumulate sufficient
profits under Chinese accounting standards and regulations to first fund certain
reserve funds as required by Chinese accounting standards, we will be unable to
pay any dividends.
We completed our new fine precisions abrasives production
facility in 2009 and we have earned revenue in 2011 and 2012 but we cannot
guarantee that we will earn the estimated revenues in the future or that it
ultimately will be profitable.
We initiated the construction of our fine precisions abrasives
production facility in 2008 and completed it in 2009. We entered into trial
production in July 2009 and initiated sales in August 2010. In 2012, the company
sold approximately 3,054 tons of abrasives. However, we cannot guarantee that we
will continue to earn revenue or that the business will be profitable.
We may incur significant costs to ensure compliance with
United States corporate governance and accounting requirements.
We may incur significant costs associated with our public
company reporting requirements, costs associated with newly applicable corporate
governance requirements, including requirements under the Sarbanes-Oxley Act of
2002 (Sarbanes-Oxley Act) and other rules implemented by the Securities and
Exchange Commission. We expect all of these applicable rules and regulations to
significantly increase our legal and financial compliance costs and to make some
activities more time consuming and costly. We also expect that these applicable
rules and regulations may make it more difficult and more expensive for us to
obtain director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. As a result, it may be more difficult for us
to attract and retain qualified individuals to serve on our board of directors
or as executive officers. We are currently evaluating and monitoring
developments with respect to these newly applicable rules, and we cannot predict
or estimate the amount of additional costs we may incur or the timing of such
costs.
16
If we fail to maintain an effective system of internal
control over financial reporting, our ability to accurately and timely report
our financial results or prevent fraud may be adversely affected and investor
confidence and the market price of our ordinary shares may be adversely
impacted.
Section 404 of the Sarbanes-Oxley Act requires annual
management assessments of the effectiveness of our internal controls over
financial reporting and a report by our independent auditors addressing these
assessments. Pursuant to Rule 13a-15(b) under the Exchange Act, the Company
carried out an evaluation with the participation of the Companys management,
including our Chairman, Chief Executive Officer and President, Shunqing Zhang,
our Interim Chief Financial Officer, Shuxian Li, of the effectiveness of the
Companys disclosure controls and procedures (as defined under Rule 13a-15(e)
under the Exchange Act) as of December 31, 2012. Based on this evaluation, our
chief executive officer and interim chief financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report.
However, a control system, no matter how well designed and
implemented, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Furthermore, the design of a control
system must reflect the fact that there are internal resource constraints, and
the benefit of controls must be weighed relative to their corresponding costs.
Because of the limitations in all control systems, no evaluation of controls can
provide complete assurance that all control issues and instances of error, if
any, within our company are detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur due to human error or mistake. Additionally, controls, no matter how
well designed, could be circumvented by the individual acts of specific persons
within the organization. The design of any system of controls is also based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated
objectives under all potential future conditions. If we fail to achieve and
maintain the adequacy of our internal controls, we may not be able to ensure
that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those
related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to helping prevent financial fraud. If we
cannot provide reliable financial reports or prevent fraud, our business and
operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our common stock could
drop significantly. In addition, we cannot be certain that material weaknesses
or significant deficiencies in our internal controls will not be discovered in
the future.
RISKS RELATED TO DOING BUSINESS IN CHINA
Chinese corporate income tax law could adversely affect
our business and our net income.
China passed a new Enterprise Income Tax Law, or the New EIT
Law, and its implementation regulations, both of which became effective on
January 1, 2008. Under the New EIT Law, an enterprise established outside of
China with de facto management bodies within China is considered a resident
enterprise, meaning that it can be treated in a manner similar to a Chinese
domestic enterprise for enterprise income tax purposes. The implementing rules
of the New EIT Law define de facto management as substantial and overall
management and control over the production and operations, personnel,
accounting, and properties of the enterprise. On April 22, 2009, the State
Administration of Taxation issued the Notice Concerning Relevant Issues
Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated
Offshore as Resident Enterprises pursuant to Criteria of de facto Management
Bodies, or the Notice, further interpreting the application of the New EIT Law
and its implementation with respect to non-Chinese enterprises or group
controlled offshore entities. Pursuant to the Notice, an enterprise incorporated
in an offshore jurisdiction and controlled by a Chinese enterprise or group will
be classified as a non-domestically incorporated resident enterprise if (i)
its senior management in charge of daily operations reside or perform their
duties mainly in China; (ii) its financial or personnel decisions are made or
approved by bodies or persons in China; (iii) substantial assets and properties,
accounting books, corporate chops, board and shareholder minutes are kept in
China; and (iv) at least half of its directors with voting rights or senior
management often resident in China. A resident enterprise would be generally
subject to the uniform 25% enterprise income tax rate as to its worldwide
income. Although the Notice is directly applicable to enterprises registered in
an offshore jurisdiction and controlled by Chinese domestic enterprises or
groups, it is uncertain whether the PRC tax authorities will make reference to
the Notice when determining the resident status of other offshore companies,
such as China GengSheng Minerals, Inc., Gengsheng International Corporation and
Smarthigh Holding Limited. Since substantially all of our management is
currently based in China, it is likely we may be treated as a Chinese resident
enterprise for enterprise income tax purposes. The tax consequences of such
treatment are currently unclear, as they will depend on how local tax
authorities apply or enforce the New EIT Law or the implementation
regulations.
In addition, under the New EIT Law and implementation
regulations, PRC income tax at the rate of 10% is applicable to dividends
payable to investors that are non-resident enterprises (and that do not have
an establishment or place of business in the PRC, or that have such
establishment or place of business but the relevant income is not effectively
connected with the establishment or place of business) to the extent that such
dividends have their source within the PRC unless there is an applicable tax
treaty between the PRC and the jurisdiction in which an overseas holder resides
which reduces or exempts the relevant tax. Similarly, any gain realized on the
transfer of shares by such investors is also subject to the 10% PRC income tax
if such gain is regarded as income derived from sources within the PRC.
17
If we are considered a PRC resident enterprise, it is unclear
whether the dividends we pay with respect to our shares, or the gain you may
realize from the transfer of our shares, would be treated as income derived from
sources within the PRC and be subject to PRC tax. If we are required under the
New EIT Law to withhold PRC income tax on our dividends payable to our foreign
shareholders, or if you are required to pay PRC income tax on the transfer of
your shares, the value of your investment in our shares may be materially and
adversely affected.
Future inflation in China may inhibit our ability to
conduct business in China.
In recent years, the Chinese economy has experienced periods of
rapid expansion and highly fluctuating rates of inflation. During the past ten
years, the rate of inflation in China has been as high as 5.9% and as low as
-0.8% . These factors have led to the adoption by the Chinese government, from
time to time, of various corrective measures designed to restrict the
availability of credit or regulate growth and contain inflation. High inflation
may in the future cause the Chinese government to impose controls on credit or
prices, or to take other action, which could inhibit economic activity in China,
and thereby harm the market for our products and our company.
Our business is largely subject to the uncertain legal
environment in China and our legal protection could be limited.
The Chinese legal system is a civil law system based on written
statutes. Unlike common law systems, it is a system in which precedents set in
earlier legal cases are not generally used. The overall effect of legislation
enacted over the past 20 years has been to enhance the legal protections
afforded to foreign-invested enterprises in China. However, these laws,
regulations and legal requirements are relatively recent and are evolving
rapidly, and their interpretation and enforcement involve uncertainties. These
uncertainties could limit the legal protections available to foreign investors,
such as the right of foreign-invested enterprises to hold licenses and permits
such as requisite business licenses. In addition, all of our executive officers
and our directors are residents of China and not of the U.S., and substantially
all the assets of these persons are located outside the U.S. As a result, it
could be difficult for investors to effect service of process in the U.S., or to
enforce a judgment obtained in the U.S. against our Chinese operations and
subsidiaries.
The Chinese government exerts substantial influence over
the manner in which we must conduct our business activities.
China only recently has permitted provincial and local economic
autonomy and private economic activities. The Chinese government has exercised
and continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership. Our ability to operate
in China may be harmed by changes in its laws and regulations, including those
relating to taxation, import and export tariffs, environmental regulations, land
use rights, property and other matters. We believe that our operations in China
are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of the jurisdictions in
which we operate may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any
decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the
implementation of economic policies, could have a significant effect on economic
conditions in China or particular regions thereof, and could require us to
divest ourselves of any interest we then hold in Chinese properties or joint
ventures.
Restrictions on currency exchange may limit our ability
to receive and use our revenues effectively.
The majority of our revenues are settled in Renminbi, or RMB.
Any future restrictions on currency exchanges may limit our ability to use
revenue generated in RMB to fund any future business activities outside of China
or to make dividend or other payments in U.S. dollars. Although the Chinese
government introduced regulations in 1996 to allow greater convertibility of the
RMB for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises may only
buy, sell or remit foreign currencies after providing valid commercial documents
at those banks in China authorized to conduct foreign exchange business. In
addition, conversion of RMB for capital account items, including direct
investment and loans, is subject to governmental approval in China, and
companies are required to open and maintain separate foreign exchange accounts
for capital account items. We cannot be certain that the Chinese regulatory
authorities will not impose more stringent restrictions on the convertibility of
the RMB.
Failure to comply with PRC regulations relating to the
establishment of offshore special purpose companies by PRC residents may subject
our PRC resident stockholders to personal liability, limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiaries, limit our
PRC subsidiaries ability to distribute profits to us or otherwise materially
adversely affect us.
In October 2005, the PRC State Administration of Foreign
Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire control over domestic companies or assets, even in the absence of legal ownership; adding requirements relating to
the source of the PRC residents funds used to establish or acquire the offshore
entity; covering the use of existing offshore entities for offshore financings;
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and making the domestic affiliate of the SPV responsible for the accuracy
of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. Amendments to registrations made under Circular 75 are
required in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations, and
Notice 106 makes the offshore SPV jointly responsible for these filings. In the
case of an SPV which was established, and which acquired a related domestic
company or assets, before the implementation date of Circular 75, a retroactive
SAFE registration was required to have been completed before March 31, 2006;
this date was subsequently extended indefinitely by Notice 106, which also
required that the registrant establish that all foreign exchange transactions
undertaken by the SPV and its affiliates were in compliance with applicable laws
and regulations. Failure to comply with the requirements of Circular 75, as
applied by SAFE in accordance with Notice 106, may result in fines and other
penalties under PRC laws for evasion of applicable foreign exchange
restrictions. Any such failure could also result in the SPVs affiliates being
impeded or prevented from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the SPV, or from engaging
in other transfers of funds into or out of China.
18
We believe our stockholders who are PRC residents as defined in
Circular 75 have registered with the relevant branch of SAFE, as currently
required, in connection with their equity interests in us and our acquisitions
of equity interests in our PRC subsidiaries. However, we cannot provide any
assurances that their existing registrations have fully complied with, and they
have made all necessary amendments to their registration to fully comply with,
all applicable registrations or approvals required by Circular 75. Moreover,
because of uncertainty over how Circular 75 will be interpreted and implemented,
and how or whether SAFE will apply it to us, we cannot predict how it will
affect our business operations or future strategies. For example, our present
and prospective PRC subsidiaries ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with Circular 75 by our PRC resident
beneficial holders. In addition, such PRC residents may not always be able to
complete the necessary registration procedures required by Circular 75. We also
have little control over either our present or prospective direct or indirect
stockholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident stockholders to comply
with Circular 75, if SAFE requires it, could subject these PRC resident
beneficial holders to fines or legal sanctions, restrict our overseas or
cross-border investment activities, limit our subsidiaries ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.
Changes in China's political or economic situation could
harm us and our operating results.
Economic reforms adopted by the Chinese government have had a
positive effect on the economic development of the country, but the government
could change these economic reforms or any of the legal systems at any time.
This could either benefit or damage our operations and profitability. Some of
the things that could have this effect are:
-
Level of government involvement in the economy;
-
Control of foreign exchange;
-
Methods of allocating resources;
-
Balance of payments position;
-
International trade restrictions; and
-
International conflict.
The Chinese economy differs from the economies of most
countries belonging to the Organization for Economic Cooperation and
Development, or OECD, in many ways. For example, state-owned enterprises still
constitute a large portion of the Chinese economy and weak corporate governance
and a lack of flexible currency exchange policy still prevail in China. As a
result of these differences, we may not develop in the same way or at the same
rate as might be expected if the Chinese economy was similar to those of the
OECD member countries.
The value of our securities will be affected by the
currency exchange rate between U.S. dollars and RMB.
The value of our common stock will be affected by the foreign
exchange rate between U.S. dollars and RMB, and between those currencies and
other currencies in which our sales may be denominated. For example, if we need
to convert U.S. dollars into RMB for our operational needs and the RMB
appreciate against the U.S. dollar at that time, our financial position, our
business, and the price of our common stock may be harmed. Conversely, if we
decide to convert our RMB into U.S. dollars for the purpose of declaring
dividends on our common stock or for other business purposes and the U.S. dollar
appreciates against the RMB, the U.S. dollar equivalent of our earnings from our
subsidiaries in China would be reduced.
19
Our procurement strategy is to diversify our suppliers both in
the PRC and overseas. And some of our raw materials and major equipments are
currently imported. These transactions are often settled in U.S. dollars or
other foreign currency. In the event that the U.S. dollars or other foreign
currency appreciate against RMB, our costs will increase. Our profitability and
operating results will suffer if we cannot pass the resulted cost increase to
our customers. In addition, because our sales to international customers are
growing, we are subject to the risk of foreign currency depreciation.
Until 1994, the RMB experienced a gradual but significant
devaluation against most major currencies, including the U.S. dollar, and there
was a significant devaluation of the RMB on January 1, 1994 in connection with
the replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the RMB relative to the
U.S. dollar has remained stable and has appreciated slightly. Countries,
including the United States, have argued that the RMB is artificially
undervalued due to Chinas current monetary policies and have pressured China to
allow the RMB to float freely in world markets. In July 2005, the PRC government
changed its policy of pegging the value of the RMB to the U.S. dollar. Under
this policy, which was halted in 2008 due to the worldwide financial crisis, the
Renminbi was permitted to fluctuate within a narrow and managed band against a
basket of certain foreign currencies. In June 2010, the Chinese government
announced its intention to again allow the Renminbi to fluctuate within the 2005
parameters. It is possible that the Chinese government could adopt an even more
flexible currency policy, which could result in more significant fluctuation of
Renminbi against the U.S. dollar, or it could adopt a more restrictive policy.
While the international reaction to the RMB revaluation has generally been
positive, there remains significant international pressure on the PRC government
to adopt an even more flexible currency policy, which could result in further
and more significant appreciation of the RMB against the U.S. dollar.
A slowdown or other adverse developments in the Chinese
economy may materially and adversely affect our customers demand for our
products and services.
All of our operations are conducted in China and a major
portion of our revenues are generated from sales to businesses operating in
China. Although the Chinese economy has grown significantly in recent years,
such growth may not continue. We do not know how sensitive we are to a slowdown
in economic growth or other adverse changes in Chinese economy which may affect
demand for our products. A slowdown in overall economic growth, an economic
downturn or recession or other adverse economic developments in China may
materially reduce the demand for our services and in turn reduce our results of
operations.
Failure to comply with the U.S. Foreign Corrupt Practices
Act and Chinese anti-corruption laws could subject us to penalties and other
adverse consequences.
Our executive officers, employees and other agents may violate
applicable law in connection with the marketing or sale of our products,
including Chinas anti-corruption laws and the U.S. Foreign Corrupt Practices
Act, or the FCPA, which generally prohibits United States companies from
engaging in bribery or other prohibited payments to foreign officials for the
purpose of obtaining or retaining business. In addition, we are required to
maintain records that accurately and fairly represent our transactions and have
an adequate system of internal accounting controls. Foreign companies, including
some that may compete with us, are not subject to these prohibitions, and
therefore may have a competitive advantage over us. The PRC also strictly
prohibits bribery of government officials. However, corruption, extortion,
bribery, pay-offs, theft and other fraudulent practices occur from time-to-time
in the PRC.
While we intend to implement measures to ensure compliance with
the FCPA and Chinese anti-corruption laws by all individuals involved with our
company, our employees or other agents may engage in such conduct for which we
might be held responsible. If our employees or other agents are found to have
engaged in such practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial
condition and results of operations. In addition, our brand and reputation, our
sales activities or the price of our ordinary shares could be adversely affected
if we become the target of any negative publicity as a result of actions taken
by our employees or other agents.
The implementation of the new PRC labor law and increases
in the labor costs in China may hurt our business and profitability.
On June 29, 2007, the PRC government promulgated a new labor
law, the Labor Agreement Law of the PRC, or the New Labor Agreement Law, which
became effective on January 1, 2008. The New Labor Agreement Law imposes greater
liability on employers and significantly affects the cost of an employers
decision to reduce its workforce. Further, it requires certain terminations be
based upon seniority and not merit. In the event we decide to significantly
change or decrease our workforce, the New Labor Agreement Law could adversely
affect our ability to enact such changes in a manner that is most advantageous
to our business or in a timely and cost-effective manner, thus materially and
adversely affecting our financial condition and future operating prospects.
RISKS RELATED TO THE MARKET FOR OUR STOCK
As our common stock is thinly traded, the stock price may
be volatile and investors may have difficulty disposing of their investments at
prevailing market prices.
On March 4, 2010, our common stock began trading on the NYSE
MKT LLC (NYSE MKT, formerly NYSE Amex LLC, American Stock Exchange) under the
symbol CHGS. Prior to March 4, 2010, our common stock was traded
over-the-counter under the symbol CHGS.OB. Despite the relisting on the larger
stock exchange, our common stock remains thinly and sporadically traded and no
assurances can be given that a larger market will ever develop, or if developed,
that it will be maintained.
20
Our common stock is subject to price volatility unrelated
to our operations.
The market price of our common stock could fluctuate
substantially due to a variety of factors, including market perception of our
ability to achieve our planned growth, quarterly operating results of other
companies in the same industry, trading volume in our common stock, changes in
general conditions in the economy and the financial markets or other
developments affecting our competitors or us. In addition, the stock market is
subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies
for reasons unrelated to their operating performance and could have the same
effect on our common stock.
We cannot assure you that our common stock will be liquid
or that it will remain listed on the NYSE MKT.
We cannot assure you that we will be able to maintain the
continued listing standards of the NYSE MKT. The NYSE MKT requires companies to
meet certain continued listing criteria including certain minimum stockholders'
equity and equity prices per share as outlined in the NYSE MKT LLC Company
Guide. We may not be able to maintain such minimum stockholders' equity or
prices per share or may be required to effect a reverse stock split to maintain
such minimum prices and/or issue additional equity securities in exchange for
cash or other assets, if available, to maintain certain minimum stockholders'
equity required by the NYSE MKT. If we are delisted from the NYSE MKT then our
common stock will trade, if at all, only on the over-the-counter market, such as
the OTC Bulletin Board securities market, and then only if one or more
registered broker-dealer market makers comply with quotation requirements. In
addition, delisting of our common stock could depress our stock price,
substantially limit liquidity of our common stock and materially adversely
affect our ability to raise capital on terms acceptable to us, or at all.
Delisting from the NYSE MKT could also have other negative results, including
the potential loss of confidence by suppliers and employees, the loss of
institutional investor interest and fewer business development opportunities. In
order to remain listed on NYSE MKT, we are required to maintain a minimum
stockholders equity of $6 million.
Techniques employed by manipulative short sellers in
Chinese small cap stocks may drive down the market price of our common
stock.
Short selling is the practice of selling securities that the
seller does not own but rather has, supposedly, borrowed from a third party with
the intention of buying identical securities back at a later date to return to
the lender. The short seller hopes to profit from a decline in the value of the
securities between the sale of the borrowed securities and the purchase of the
replacement shares, as the short seller expects to pay less in that purchase
than it received in the sale. As it is therefore in the short sellers best
interests for the price of the stock to decline, many short sellers (sometime
known as disclosed shorts) publish, or arrange for the publication of,
negative opinions regarding the relevant issuer and its business prospects in
order to create negative market momentum and generate profits for themselves
after selling a stock short. While traditionally these disclosed shorts were
limited in their ability to access mainstream business media or to otherwise
create negative market rumors, the rise of the Internet and technological
advancements regarding document creation, videotaping and publication by weblog
(blogging) have allowed many disclosed shorts to publicly attack a companys
credibility, strategy and veracity by means of so-called research reports that
mimic the type of investment analysis performed by large Wall Street firm and
independent research analysts. These short attacks have, in the past, led to
selling of shares in the market, on occasion in large scale and broad base.
Issuers with business operations based in China and who have limited trading
volumes and are susceptible to higher volatility levels than U.S. domestic
large-cap stocks can be particularly vulnerable to such short attacks.
These short seller publications are not regulated by any
governmental, self-regulatory organization or other official authority in the
U.S., are not subject to the certification requirements imposed by the
Securities and Exchange Commission in Regulation AC (Regulation Analyst
Certification) and, accordingly, the opinions they express may be based on
distortions of actual facts or, in some cases, fabrications of facts. In light
of the limited risks involved in publishing such information, and the enormous
profit that can be made from running just one successful short attack, unless
the short sellers become subject to significant penalties, it is more likely
than not that disclosed shorts will continue to issue such reports.
Recently, some short sellers actively attack on Chinese small
cap stocks. We are a Chinese small cap public company and may be attacked by
some short sellers. While we intend to strongly defend our public filings
against any such short teller attacks, oftentimes we are constrained, either by
principles of freedom of speech, applicable state law (often called Anti-SLAPP
statutes), or issues of commercial confidentiality, in the manner in which we
can proceed against the relevant short seller. You should be aware that in light
of the relative freedom to operate that such persons enjoy - oftentimes blogging
from outside the U.S. with little or no assets or identity requirements - should
we be targeted for such an attack, our stock will likely suffer from a
temporary, or possibly long term, decline in market price.
In addition, as many Chinese small cap public companies have
been recently subject to intense scrutiny, criticism and negative publicity by
investors, short sellers, financial commentators and regulatory agencies, such
as the United States Securities and Exchange Commission, and much of the
scrutiny, criticism and negative publicity has centered around financial and
accounting irregularities and mistakes, a lack of effective internal controls
over financial accounting, inadequate corporate governance policies or a lack of
adherence thereto and, in many cases, allegations of fraud, it is not clear what
affect this sector-wide scrutiny, criticism and negative publicity will have on
our company, our business and our stock price. If we become the subject of any
unfavorable allegations, whether such allegations are proven to be true or
untrue, we will have to expend significant resources to investigate such
allegations and/or defend our company. This situation could be costly and time
consuming and distract our management from growing our company. If such
allegations are not proven to be groundless, our company and business operations
will be severely impacted. It could seriously affect our ability to raise money and your investment in our stock could
be rendered worthless.
21
Our President and CEO hold a significant percentage of
our outstanding voting securities.
As of December 31, 2012, Mr. Shunqing Zhang, our President and
CEO, was the beneficial owner of approximately 56.8% of our outstanding voting
securities. As a result, he possessed significant influence, giving him the
ability to elect a majority of our board of directors and to authorize or
prevent significant corporate transactions. His ownership and control may impede
or delay any future change in control through merger, consolidation, takeover or
other business combinations and may discourage a potential acquirer from making
a tender offer.
Certain provisions of our articles of incorporation may
make it more difficult for a third party to effect a
change-in-control.
Our articles of incorporation authorize the Board of Directors
to issue up to 50,000,000 shares of preferred stock. The preferred stock may be
issued in one or more series, the terms of which may be determined at the time
of issuance by the board of directors without further action by the
stockholders. These terms may include voting rights including the right to vote
as a series on particular matters, preferences as to dividends and liquidation,
conversion rights and redemption rights provisions. The issuance of any
preferred stock could diminish the rights of holders of our common stock, and
therefore could reduce the value of such common stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
our ability to merge with, or sell assets to, a third party. The ability of the
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent the stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
All land in China is owned by the government authority.
Individuals and companies are permitted to acquire rights to use land or land
use rights for specific purposes. In the case of land used for industrial
purposes, the land use rights are granted for a period of up to 50 years. This
period may be renewed at the expiration of the initial and any subsequent terms.
Granted land use rights are transferable and may be used as security for
borrowings and other obligations.
We currently have about 23 manufacturing facilities located on
five manufacturing sites in China. We have obtained the land use rights for four
of our five manufacturing sites and are in the process of obtaining the right
from the relevant governmental authority for periods ranging from 39 to 50 years
to use the land on which our Yuxing subsidiary is located. In our Refractories
subsidiary in Gongyi City, Henan Province, we have offices and workshops that
total approximately 366,166 square feet. In our High-Temperature subsidiary in
Zhengzhou City, Henan Province, we have offices and workshops that total
approximately 115,777 square feet. In our Duesail subsidiary in Gongyi City,
Henan Province, we have offices and workshops that total approximately 193,750
square feet. In our Micronized subsidiary in Gongyi City, Henan Province, we
have offices and workshops that total approximately 739,114 square feet, and we
have offices and workshops that total approximately 753,000 square feet in the
Yuxing subsidiary in Gongyi City, Henan Province.
We believe that our facilities, which are of varying ages and
are of different construction types, have been satisfactorily maintained. They
are in good conditions and are suitable for our operations and generally provide
sufficient capacity to meet our production and operational requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits
and legal proceedings which arise in the ordinary course of business. We are
currently not aware of any such legal proceedings or claims that we believe will
have a material adverse affect on our business, financial condition or operating
results. However, litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to time that may
harm our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
22
PART II
ITEM 5. MARKET FOR OUR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
On March 4, 2010, our common stock commenced trading on the
NYSE MKT LLC under the symbol CHGS. Before that, our common stock was traded
over-the-counter under the symbol CHGS.OB.
The following table sets forth, for the periods indicated, the
high and low bid prices of our common stock as reported on the NYSE MKT LLC.
These prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
Year Ended December 31, 2012
|
Closing Bid Prices
(1)
|
|
|
High
|
Low
|
4
th
Quarter
|
$ 0.48
|
$ 0.28
|
3
rd
Quarter
|
0.51
|
0.34
|
2
nd
Quarter
|
1.08
|
0.45
|
1
st
Quarter
|
1.19
|
0.69
|
|
|
|
Year Ended December 31, 2011
|
|
|
|
High
|
Low
|
4
th
Quarter
|
$ 1.19
|
$ 0.69
|
3
rd
Quarter
|
1.93
|
0.90
|
2
nd
Quarter
|
3.16
|
1.53
|
1
st
Quarter
|
4.37
|
1.96
|
_______________________________________
(1)
The
above tables set forth the range of high and low bid prices per share of our
common stock as reported in our SEC filings and by www.quotemedia.com for the
periods indicated.
Holder
s
On April 12, 2013, there were approximately 216 stockholders of
record of our common stock. The number of record holders does not include
persons who held our common stock in nominee or street name accounts through
brokers.
Dividend Policy
We have never declared dividends or paid cash dividends. Our
board of directors, which currently consists of five directors, has complete
discretion on whether to pay dividends, subject to the approval of our
shareholders. We currently intend to retain and use any future earnings for the
development and expansion of our business and do not anticipate paying any cash
dividends in the near future. Even if our board of directors decides to pay
dividends, the form, frequency and amount will depend upon our future operations
and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that the board of directors may deem
relevant.
Securities Authorized for Issuance under Equity Compensation
Plans
At the Companys annual shareholder meeting, which was held on
September 28, 2011, the Companys shareholders approved the 2011 Long-Term
Incentive Plan (the Plan), which authorized a total of 3,000,000 shares of the
Company common stock. The maximum number of shares of common stock that may be
issued to any one grantee during any calendar year shall not exceed 100,000.
The Plan is designed to enhance the Companys and its
affiliates ability to attract and retain highly qualified officers, directors,
key employees and other persons, and to motivate such officers, directors, key
employees and other persons to serve the Company and its affiliates and to
expend maximum effort to improve the business results and earnings of the
Company, by providing to such persons an opportunity to acquire or increase a
direct proprietary interest in the operations and future success of the
Company.
As of April 15, 2013, no securities have been issued under the
Plan.
23
For a detailed description of the Plan, see Schedule 14A
Information Proxy Statement filed with the SEC on August 15, 2011. The following
table sets forth information regarding the Plan.
Equity Compensation Plan Information
Plan category
|
Number of securities to
be
issued upon exercise of
outstanding options,
warrants
and rights
|
Weighted-average exercise
price
of outstanding options, warrants
and
rights
|
Number of securities
remaining
available for future issuance
under equity
compensation plans
|
Equity compensation plans
approved by security
holders
|
3,000,000
|
n/a
|
3,000,000
|
Equity compensation plans
not approved by security
holders
|
0
|
n/a
|
0
|
Total
|
3,000,000
|
n/a
|
3,000,000
|
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, as defined by Item 10 of
Regulation S-K, the Company is not required to provide this information.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial Condition and
Results of Operations, which we refer to as the MD&A, is intended to help
the reader understand our Company, our operations and our present business
environment. The MD&A is provided as a supplement to, and should be read in
conjunction with, our consolidated financial statements and the accompanying
notes.
The following discussion and analysis of our financial
condition and results of operations should be read in conjunction with our
audited consolidated financial statements and related notes included elsewhere
in this annual report on Form 10-K. Some of the information contained in this
discussion and analysis constitutes forward-looking statements that involve
risks and uncertainties. Actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed
below and elsewhere in this annual report on Form 10-K particularly under
Special Note Regarding Forward-Looking Statements and Risk Factors. Unless
otherwise specified, references to Notes to our consolidated financial
statements are to the Notes to our audited consolidated financial statements as
of December 31, 2012 and 2011.
Overview
We are a Nevada holding company that operates through our
direct and indirect subsidiaries. Through our wholly-owned BVI subsidiary,
GengSheng International, and its wholly-owned Chinese subsidiary, Refractories,
we manufacture monolithic refractory products in China. Through our wholly-owned
BVI subsidiary, GengSheng International, and its wholly-owned Chinese
subsidiary, Duesail and Duesails wholly-owned subsidiary Yuxing, we manufacture
fracture proppant products. Through Micronized, wholly-owned subsidiary of
Refractories, we manufacture fine precision abrasives. Through High-Temperature,
89% owned subsidiary of Refractories, we manufacture industrial ceramic
products. We have four primary business segments: refractories, industrial
ceramics, fracture proppant and fine precision abrasives. Refractories product
is a nonmetallic material that is used in heavy industrial processes present
with extremely high temperatures, and the main customers for the segment are
steel makers. Our industrial ceramic products, including abrasive balls and
tiles, valves, electronic ceramics and structural ceramics, are components for a
variety of end-use products such as fuses, vacuum interrupters, electrical
components, mud slurry pumps, and high-pressure pumps. Such end use products are
used in the electric power, electronic component, industrial pump, and
metallurgy industries. Our fracture proppants are very fine ball-like pellets,
highly resistant to pressure, and used to reach pockets of oil and natural gas
deposits that are trapped in the fractures under the ground. Oil drillers inject
the pellets into those fractures, squeezing out the trapped oil or natural gas,
which leads to higher yield. The fine precision abrasives are essentially very
fine, uniformly round, silicon carbide (SiC) based particles. These ultra-fine
high-strength particles are applicable in a broad range of applications,
including machine manufacturing, electronics, optical glass, architecture,
semiconductors, silicon chips, plastics and lenses. In 2012, the refractories
segment contributed approximately $38.9 million or 52.9% of our total revenue of
approximately $73.5 million, industrial ceramics contributed approximately $1.8
million or 2.5% of the total revenue, fracture proppants contributed approximately $24.5
million or 33.3% of our total revenue and fine precision abrasives contributed
approximately $8.3 million or 11.3% of the total revenue.
24
We sell our products to over 300 customers in the iron, steel,
oil, glass, cement, aluminum, chemical and solar industries located in China and
11 countries in other parts of Asia, North America and Europe. Our refractory
customers are companies in the steel, iron, petroleum, chemical, coal, glass and
mining industries. Our fracture proppant products are sold to oil and gas
companies. Our industrial ceramics are products used by the utilities and
petrochemical industries. The Companys fine precision abrasives target solar
companies and optical equipment manufacturers. Most of our large customers,
measured by percentage of our revenue, mainly operate in the steel industry.
Currently, most of our revenues are derived from the sale of our monolithic
refractory products and fracture proppants products to customers in China.
Summary of Business Operations in 2012
During 2012, we experienced a decrease in sales revenue due to
the continued challenges from both the refractory and fracture proppant markets.
From the beginning of 2009, the PRC central government has labeled the steel
sector in China an overcapacity-burdened industry and the government is resolved
to cut back the industry's excessive capacity. Since then some small and
mid-sized steel producers have been shut down, which resulted in the decrease in the
demand for refractories. To face the changing market environment, we have adjusted product offerings in
the refractories segment, entered into more full-service
contracts to sell both our product and service and focused on maintaining current customers. However, due to the weak
demand for our products and the inability to find new customers, the sales in
our refractories segment declined in 2012. In the fracture proppant segment, our sales
in the U.S. market were discontinued in 2012 as a result of the changes in
market conditions. Although our sales were compensated by the increased demand
in domestic market, the profit margin and payment terms were worse than prior
years.
In fine precision abrasives segment, we failed to expand market share and
improve the profitability in 2012 as the uncertainty surrounding the solar industry
still exists.
Our financial performance in 2012 is summarized as follows:
-
Sales revenue decreased by approximately $3.4 million, or 4.4% to
approximately $73.5 million in 2012 from approximately $76.9 million in 2011.
-
Gross profit decreased by approximately $3.6 million, or 22.0%, to
approximately $12.6 million in 2012, from approximately $16.2 million in 2011.
Gross profit margin was 17.2% for 2012, compared with 21.1% for 2011. The
decrease in gross profit margin was largely attributed to the lower gross
profit margin in our fine precision abrasives segment as weak demand from
solar industry continued to impact us negatively, the lower gross profit
margin in fracture proppants segment as well as the rising costs of raw
material, labor and energy in refractories segment as compared to 2011.
-
Net loss increased by approximately $6.0 million, to approximately $13.5
million in 2012, from a net loss of approximately $7.5 million in 2011.
-
Our consolidated balance sheet as of December 31, 2012 included current
assets of approximately $120.9 million and total assets of approximately
$162.4 million, with working capital deficit of approximately $1.0 million.
Major Factors that Affected our Financial Condition in
2012
Continued Industry Consolidation of Steel Makers Further
Squeezed Our Profit in Refractories Segment
Although the crude steel output in China reached a new record
of approximately 717 million metric tons in 2012, the steel industry still faces
overcapacity and weak demand from both domestic and international market. In
addition, the PRC governments continued policy to close small to mid-sized
steel makers reduced the overall demand for refractories. As revenue from our
Refractories segment accounted for a large portion of our total sales revenue
and many of our customers are in the steel industry, the continued industry
consolidation of steel makers have a deep impact on us and further reduced our
profit in the refractories segment.
Considerable Increase in Raw Material Prices and Decrease in
Gross Profit Margin
While the overall inflation in China started to ease in 2012,
the increase in raw materials prices, labor costs and fuel and utilities costs
continue to impact us. Also, in a fragmented market, the selling price of our
products could not keep pace with the increase in raw materials prices.
Increase in Financing Costs Further Limited Our Ability to
Expand Business
The unfavorable payment terms offered by our customers in the refractories segment and fine precision abrasives segment strained our working
capital needs, and as a result, significantly increased our financing costs, as
banks charged higher interest rates when we discounted more bills receivables to
meet our working capital needs.
25
Uncertainties Facing Our Fracture Proppants Segment
Starting from 2012, more and more Chinese manufacturers of
fracture proppants products started to sell their products directly in the U.S.
market. Since our sales of fracture proppants products in the U.S. market were
mainly through wholesalers and distributors, the change in the market condition
made it nearly impossible for us to continue sales in the U.S. market while
still maintaining a reasonable profit margin. As a result, our sales in the U.S.
market were discontinued in 2012. We are currently selling all our fracture
proppants products to oil drillers in the domestic market. Although the sales
volume is higher, the profit margin is lower and the payment terms are less
favorable.
Deteriorating Market for Our Fine Precision Abrasives
Segment
Chinas solar industry is experiencing severe challenge with
many large solar panel manufacturers struggling to survive. As a supplier of
solar-energy companies, we are facing remarkable uncertainties in maintaining
our current customers. If we cannot continue our sales of fine precision
abrasives products to solar industry we may have to reduce selling price
significantly to stay competitive, and this will affect our revenue negatively and we may
ultimately need to discontinue our
production.
Results of Operations
The following table summarizes the results of our operations
during the fiscal years ended December 31, 2012 and 2011, respectively, and
provides information regarding the dollar and percentage increase or (decrease)
during such years.
(All amounts, other than percentages, in U.S.
dollars)
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
As a percentage
|
|
|
|
|
|
As a percentage
|
|
|
|
Dollars
|
|
|
of
|
|
|
Dollars
|
|
|
of
|
|
Statement of operations data:
|
|
in thousands
|
|
|
sales revenue
|
|
|
in thousands
|
|
|
sales revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Revenue
|
|
73,535
|
|
|
100.0%
|
|
|
76,936
|
|
|
100.0%
|
|
Cost of goods sold
|
|
60,886
|
|
|
82.8%
|
|
|
60,727
|
|
|
78.9%
|
|
Gross profit
|
|
12,649
|
|
|
17.2%
|
|
|
16,209
|
|
|
21.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
1,731
|
|
|
2.4%
|
|
|
1,335
|
|
|
1.8%
|
|
General &
administrative expenses
|
|
7,319
|
|
|
10.0%
|
|
|
7,011
|
|
|
9.1%
|
|
Impairment on fixed assets
|
|
287
|
|
|
0.4%
|
|
|
-
|
|
|
0.0%
|
|
Impairment on goodwill
|
|
-
|
|
|
0.0%
|
|
|
441
|
|
|
0.6%
|
|
Impairment on intangible assets
|
|
-
|
|
|
0.0%
|
|
|
310
|
|
|
0.4%
|
|
Research and
development expenses
|
|
923
|
|
|
1.3%
|
|
|
699
|
|
|
0.9%
|
|
Selling expenses
|
|
9,630
|
|
|
13.1%
|
|
|
9,491
|
|
|
12.3%
|
|
Total operating expenses
|
|
19,890
|
|
|
27.0%
|
|
|
19,287
|
|
|
25.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(7,241
|
)
|
|
-9.8%
|
|
|
(3,078
|
)
|
|
-4.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant income
|
|
559
|
|
|
0.8%
|
|
|
380
|
|
|
0.5%
|
|
Guarantee income
|
|
563
|
|
|
0.8%
|
|
|
614
|
|
|
0.8%
|
|
Guarantee expenses
|
|
(462
|
)
|
|
-0.6%
|
|
|
(518
|
)
|
|
-0.7%
|
|
Equity in net loss of a non-consolidated affiliate
|
|
(59
|
)
|
|
-0.1%
|
|
|
-
|
|
|
0.0%
|
|
Interest income
|
|
813
|
|
|
1.1%
|
|
|
916
|
|
|
1.2%
|
|
Impairment on deposit for acquisition of
a
non-consolidated affiliate
|
|
-
|
|
|
0.0%
|
|
|
(1,248
|
)
|
|
-1.6%
|
|
Change in fair value of warranty
liabilities
|
|
-
|
|
|
0.0%
|
|
|
970
|
|
|
1.3%
|
|
Other income
|
|
25
|
|
|
0.0%
|
|
|
15
|
|
|
0.0%
|
|
Finance costs
|
|
(7,301
|
)
|
|
-9.9%
|
|
|
(5,279
|
)
|
|
-6.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and noncontrolling interest
|
|
(13,103
|
)
|
|
-17.8%
|
|
|
(7,228
|
)
|
|
-9.4%
|
|
Income taxes
|
|
(492
|
)
|
|
-0.7%
|
|
|
(325
|
)
|
|
-0.5%
|
|
Noncontrolling interest
|
|
56
|
|
|
0.1%
|
|
|
48
|
|
|
0.1%
|
|
26
Net loss attributable to
Companys common
stockholders
|
|
(13,539
|
)
|
|
-18.4%
|
|
|
(7,505
|
)
|
|
-9.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar ($)
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Increase
|
|
Dollars in thousands
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Sales Revenue
|
|
73,535
|
|
|
76,936
|
|
|
(3,401
|
)
|
|
-4.4 %
|
|
Cost of goods sold
|
|
60,886
|
|
|
60,727
|
|
|
159
|
|
|
0.3%
|
|
Gross profit
|
|
12,649
|
|
|
16,209
|
|
|
(3,560
|
)
|
|
-22.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
1,731
|
|
|
1,335
|
|
|
396
|
|
|
29.7%
|
|
General &
administrative expenses
|
|
7,319
|
|
|
7,011
|
|
|
308
|
|
|
4.4%
|
|
Impairment on fixed assets
|
|
287
|
|
|
-
|
|
|
287
|
|
|
100.0%
|
|
Impairment on goodwill
|
|
-
|
|
|
441
|
|
|
(441
|
)
|
|
-100.0%
|
|
Impairment on intangible assets
|
|
-
|
|
|
310
|
|
|
(310
|
)
|
|
-100.0%
|
|
Research and development
expenses
|
|
923
|
|
|
699
|
|
|
224
|
|
|
32.0%
|
|
Selling
expenses
|
|
9,630
|
|
|
9,491
|
|
|
139
|
|
|
1.5%
|
|
Total operating expenses
|
|
19,890
|
|
|
19,287
|
|
|
603
|
|
|
3.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(7,241
|
)
|
|
(3,078
|
)
|
|
(4,163
|
)
|
|
135.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant income
|
|
559
|
|
|
380
|
|
|
179
|
|
|
47.1%
|
|
Guarantee income
|
|
563
|
|
|
614
|
|
|
(51
|
)
|
|
-8.3%
|
|
Guarantee expenses
|
|
(462
|
)
|
|
(518
|
)
|
|
56
|
|
|
-10.8%
|
|
Equity in net loss of a
non-consolidated affiliate
|
|
(59
|
)
|
|
-
|
|
|
(59
|
)
|
|
-100.0%
|
|
Interest income
|
|
813
|
|
|
916
|
|
|
(103
|
)
|
|
-11.2%
|
|
Impairment on deposit for
acquisition of
a non-consolidated affiliate
|
|
-
|
|
|
(1,248
|
)
|
|
1,248
|
|
|
-100%
|
|
Change in fair value of warranty liabilities
|
|
-
|
|
|
970
|
|
|
(970
|
)
|
|
-100%
|
|
Other income
|
|
25
|
|
|
15
|
|
|
10
|
|
|
66.7%
|
|
Finance costs
|
|
(7,301
|
)
|
|
(5,279
|
)
|
|
(2,022
|
)
|
|
38.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and noncontrolling
interest
|
|
(13,103
|
)
|
|
(7,228
|
)
|
|
(5,875
|
)
|
|
81.3%
|
|
Income taxes
|
|
(492
|
)
|
|
(325
|
)
|
|
(167
|
)
|
|
51.4%
|
|
Noncontrolling interest
|
|
56
|
|
|
48
|
|
|
8
|
|
|
16.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Companys common
stockholders
|
|
(13,539
|
)
|
|
(7,505
|
)
|
|
(6,034
|
)
|
|
80.4%
|
|
The average conversion rates between RMB and U.S. dollar used
for the consolidated statements of operations and comprehensive loss increased
approximately 2.3% during the reporting period of 2012 compared with the
reporting period of 2011. As substantially all of our revenues and most expenses
are denominated in RMB, the appreciation in the value of RMB relative to the
U.S. dollar affected our financial results reported in the U.S. dollar terms
without giving effect to any underlying change in our business or results of
operations.
Sales revenue.
Sales revenue decreased approximately
$3.4 million, or 4.4%, to approximately $73.5 million in 2012 from approximately
$76.9 million in 2011. Excluding foreign currency translation, the revenue
decreased approximately $5.0 million, or 6.5% compared with 2011. The decrease
was mainly attributable to the decreased sales from our refractory segment.
In our refractory segment, we sold 78,186 metric tons of
refractory products in 2012, a 21.0% decrease compared with 98,920 metric tons
sold in 2011. The revenue from our refractory products decreased to
approximately $38.9 million in 2012 from approximately $46.6 million in 2011.
Excluding foreign currency translation, the revenue decreased approximately $8.6
million, or 18.4% compared with 2011. The average selling prices reached $497
per metric ton in 2012, representing a 5.1% increase compared with $473 per
metric ton in the same period of 2011. Excluding foreign currency translation,
the average selling prices increased to $486 per metric ton, or an increase of
2.8% compared with 2011.
In our fracture proppant segment, we sold 73,958 metric tons of fracture proppant products in 2012, compared with 60,388 metric tons in 2011. The increase in sales volume was primarily driven by the increased sales in domestic market as we started to sell our products to oil producers in China from the second quarter of 2012. Revenue from fracture proppant products was approximately $24.5 million for 2012, an increase of approximately 2.0 million, or 8.8% compared with approximately $22.5 million in 2011. Excluding foreign currency translation, the revenue increased approximately $1.4 million, or 6.4% compared with 2011. Average selling price decreased to $331 per metric ton in 2012, compared with $381 per metric ton in 2011. Excluding foreign currency translation, the average selling prices decreased $57 per metric ton, or 14.9% compared with 2011. The decrease in average selling price was primarily due to the increased sales in domestic market where the fracture proppant products are typically priced much lower than in the U.S. market.
27
In our industrial ceramics segment, revenue was approximately
$1.8 million for 2012 compared with approximately $430,000 in 2011. The increase
was primarily attributable to the high demand for our products in 2012.
In our fine precision abrasives segment, we realized sales of
approximately $8.3 million, an increase of approximately $930,000 as compared
with 2011. The increase in sales revenue was primarily due to the increased
sales to a major customer in 2012. Excluding foreign currency translation, the
revenue was approximately $8.2 million compared with approximately $7.4 million
in 2011.
Cost of goods sold.
Our cost of goods sold increased by
approximately $159,000 or 0.3% to approximately $60.9 million for 2012 from
approximately $60.7 million in 2011. Excluding foreign currency translation, our
cost of goods sold decreased approximately $1.2 million or 2.0% compared with
2011. As a percentage of sales revenue, the cost of goods sold increased by
approximately 3.9% to 82.8% in 2012 from 78.9% in 2011. The increase was
primarily due to higher raw materials costs, energy costs and labor costs
compared with 2011.
Gross profit.
Our gross profit decreased by
approximately $3.6 million, or 22.0% to approximately $12.6 million for 2012
from approximately $16.2 million in 2011. Excluding foreign currency
translation, our gross profit decreased approximately $3.8 million, or 23.7%
compared with 2011. Gross profit margin was 17.2% for 2012, as compared with
21.1% for 2011. The decrease was primarily attributable to the decreased gross
profit margin in our refractory segment and fracture proppants segment.
Allowance for doubtful accounts.
Allowance for doubtful
accounts increased approximately $396,000, or 29.7% to approximately $1.7 million for 2012
from approximately $1.3 million in 2011. Excluding foreign currency translation,
the allowance for doubtful accounts increased approximately $358,000, or 26.8%
compared with 2011. The increase was primarily due to the managements decision
to increase the allowance for other receivables which have uncertainties in
collectability in 2012.
General and administrative expenses.
Our general and
administrative expenses increased by approximately $308,000 or 4.4%, to
approximately $7.3 million for 2012 from approximately $7.0 million in 2011.
Excluding foreign currency translation, the general and administrative expenses
increased approximately $146,000, or 2.1% compared with 2011. As a percentage of
net revenues, general and administrative expenses increased 0.9% to 10.0% in
2012, compared with 9.1% in 2011.
Impairments on fixed assets.
Impairment expense on fixed
assets was approximately $287,000 for 2012. There was no impairment expense on
fixed assets in 2011. The increase was attributable to the write-off of fixed
assets at Prefecture.
Research and development expenses.
Our research and
development expenses increased to approximately $923,000 for 2012. Excluding
foreign currency translation, the research and development expenses were
approximately $903,000, compared with approximately $699,000 for 2011 due to
more research and development activities in 2012.
Selling expenses.
Selling expenses increased by
approximately $139,000 to approximately $9.6 million for 2012 compared with
approximately $9.5 million in 2011. Excluding foreign currency translation, the
selling expenses decreased approximately $74,000, or 0.8% compared with 2011. As
a percentage of sales revenue, our selling expenses increased to 13.1% for 2012,
as compared with 12.3% for 2011. The increase in selling expenses as a
percentage of sales revenue was primarily attributable to the higher
transportation expenses and sales related expenses as we increased sales of
fracture proppants products in domestic market.
Government grant income.
Our government grant income was
approximately $559,000 for 2012. Excluding foreign currency translation, the
government grant income was approximately $547,000 compared with approximately
$380,000 for 2011.
Equity in net loss of a non-consolidated affiliate.
Equity in net loss of a non-consolidated affiliate was approximately $59,000
for 2012, which was related to our investment in Yili YiQiang Silicon Limited
(Yili).
Finance costs.
Our finance costs increased by
approximately $2.0 million, or 38.3% to approximately $7.3 million for 2012,
from approximately $5.3 million for 2011. Excluding foreign currency
translation, our finance costs increased approximately $1.9 million, or 35.2%
compared with 2011. The increase was primarily attributable to an increase of
approximately $1.0 million in bills discounting charges as we discounted more
bills receivable instead of holding them to maturity; and an increase of
approximately $1.0 million in interest expenses as we increased borrowing
activities for 2012.
Loss before income taxes and non-controlling interests.
Our loss before income taxes and non-controlling interest was approximately
$13.1 million for 2012. Excluding foreign currency translation, our loss before
income taxes and non-controlling interest was approximately $12.8 million,
compared with approximately $7.2 million for 2011. The increase was primarily
attributable to the loss from operations and higher finance costs for 2012.
28
Income taxes.
Our income taxes were approximately
$492,000 for 2012, an increase of approximately $167,000 or 51.4% from
approximately $325,000 for 2011. Excluding foreign currency translation, our
income taxes were approximately $481,000. Despite a net loss,
as certain of our PRC subsidiaries recognized taxable income, we still incurred
income taxes for the year ended December 31, 2012.
Net loss.
Our net loss for 2012 was approximately $13.5
million, an increase of approximately $6.0 million from approximately $7.5
million in 2011. Excluding foreign currency translation, our net loss was
approximately $13.2 million. The decrease was attributable to the factors
described above.
Liquidity and Capital Resources
As of December 31, 2012, we had cash and cash equivalents of
approximately $5.4 million and restricted cash of approximately $27.1 million. Our current
assets were approximately $120.9 million and our current liabilities were
approximately $121.9 million as of December 31, 2012 which resulted in a current
ratio of approximately 0.99. Total stockholders equity as of December 31, 2012
was approximately $40.3 million. The following table sets forth summary of our
cash flows for the periods indicated:
Dollars in thousands
|
|
2012
|
|
|
2011
|
|
Net cash used in operating activities
|
|
(6,540
|
)
|
|
(3,533
|
)
|
Net cash used in investing activities
|
|
(1,267
|
)
|
|
(13,886
|
)
|
Net cash provided by financing activities
|
|
9,606
|
|
|
20,048
|
|
Effect of foreign currency translation on cash and cash
equivalents
|
|
15
|
|
|
40
|
|
Net increase in cash and cash equivalents
|
|
1,814
|
|
|
2,669
|
|
Cash and cash equivalents, beginning of year
|
|
3,594
|
|
|
925
|
|
Cash and cash equivalents, end of year
|
|
5,408
|
|
|
3,594
|
|
Operating Activities
Net cash used in operating activities was approximately $6.5
million in 2012, compared with net cash used in operating activities of
approximately $3.5 million in 2011. The increase in net cash used in operating
activities was primarily due to the increase in trade receivables and bills
receivables and the decrease in bills payable during 2012, which was partly
offset by the increase in trade payables compared to 2011.
Investing Activities
Net cash used in investing activities in 2012 was approximately
$1.3 million, a decrease of approximately $12.6 million from net cash used in
investing activities of approximately $13.9 million in 2011. The decrease in net
cash used in investing activities in 2012 was primarily due to fewer activities
related to our construction of manufacturing and administrative facilities as
compared to 2011.
Financing Activities
Net cash provided by financing activities was approximately
$9.6 million in 2012, compared with net cash provided by financing activities of
approximately $20.0 million in 2011 when we received $9.3 million from
equity financing activities.
Loan Facilities
We secured new loans totaling approximately $75.0 million from
banks for our working capital needs and we repaid approximately $56.2 million in
bank loans during the year ended December 31, 2012. As a result, the balance of
all our bank loans and bank borrowings as of December 31, 2012 was approximately
$65.2 million, which includes short-term bank loans of approximately $34.8
million and bank borrowings secured by bank deposits of approximately $30.4
million.
As of December 31, 2012, the details of all our short-term bank
loans and bank borrowings are as follows:
29
All amounts, other than
percentages, are in U.S. dollar.
|
|
|
|
|
|
|
No
|
Type
|
Contracting Party
|
Valid Date
|
Duration
|
Amount
|
1
|
Facility Bank Loan
|
Zhengzhou Bank
|
2012-01-5 to 2013-01-04
|
1 year
|
$4,755,000
|
2
|
Facility Bank Loan
|
China Construction Bank
|
2012-01-10 to 2013-01-09
|
1 year
|
$3,170,000
|
3
|
Facility Bank Loan
|
Industrial and Commercial Bank of China
|
2012-02-03 to 2013-01-08
|
1 year
|
$2,536,000
|
|
|
|
|
|
|
4
|
Facility Bank Loan
|
Agricultural Bank of China
|
2012-02-20 to 2013-02-19
|
1 year
|
$1,854,450
|
5
|
Facility Bank Loan
|
China CITIC Bank
|
2012-03-01 to 2013-02-28
|
1 year
|
$1,474,050
|
6
|
Facility Bank Loan
|
Luoyang Bank
|
2012-04-25 to 2013-04-24
|
1 year
|
$3,170,000
|
7
|
Facility Bank Loan
|
Agricultural Bank of China
|
2012-04-28 to 2013-04-27
|
1 year
|
$5,072,000
|
8
|
Facility Bank Loan
|
Industrial and Commercial Bank of China
|
2012-05-09 to 2013-05-08
|
1 year
|
$713,250
|
|
|
|
|
|
|
9
|
Facility Bank Loan
|
China CITIC Bank
|
2012-06-26 to 2013-06-25
|
1 year
|
$2,377,500
|
10
|
Facility Bank Loan
|
City Credit Cooperatives in Gongyi
|
2012-07-31 to 2013-07-25
|
1 year
|
$713,250
|
|
|
|
|
|
|
11
|
Facility Bank Loan
|
China EverBright Bank
|
2012-08-16 to 2013-02-01
|
6 months
|
$518,295
|
|
|
|
|
|
|
12
|
Facility Bank Loan
|
China EverBright Bank
|
2012-08-21 to 2013-02-06
|
6 months
|
$900,914
|
|
|
|
|
|
|
13
|
Facility Bank Loan
|
Shanghai Pudong Development
|
2012-08-27 to 2013-08-26
|
1 year
|
$792,500
|
|
|
Bank Village Bank
|
|
|
|
14
|
Facility Bank Loan
|
Shanghai Pudong Development
|
2012-08-29 to 2013-08-28
|
1 year
|
$396,250
|
|
|
Bank Village Bank
|
|
|
|
15
|
Facility Bank Loan
|
Shanghai Pudong Development
|
2012-09-05 to 2013-09-04
|
1 year
|
$2,853,000
|
|
|
Bank
|
|
|
|
16
|
Facility Bank Loan
|
China EverBright Bank
|
2012-09-25 to 2013-03-12
|
6 months
|
$182,085
|
|
|
|
|
|
|
17
|
Facility Bank Loan
|
Shanghai Pudong Development
|
2012-10-15 to 2013-10-14
|
1 year
|
$427,950
|
|
|
Bank Village Bank
|
|
|
|
18
|
Facility Bank Loan
|
City Credit Cooperatives in Gongyi
|
2012-12-26 to 2013-12-25
|
1 year
|
$2,853,000
|
|
|
|
|
|
|
19
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-07-17 to 2013-01-02
|
6 months
|
$237,750
|
|
|
Bank Village Bank
|
|
|
|
20
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-07-30 to 2013-01-18
|
6 months
|
$15,850
|
|
|
Bank Village Bank
|
|
|
|
21
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-07-31 to 2013-01-11
|
6 months
|
$79,250
|
|
|
Bank Village Bank
|
|
|
|
22
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-08-04 to 2013-01-11
|
6 months
|
$158,500
|
|
|
Bank Village Bank
|
|
|
|
23
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-08-07 to 2013-01-01
|
5 months
|
$63,400
|
|
|
Bank Village Bank
|
|
|
|
24
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-08-07 to 2013-01-24
|
6 months
|
$25,360
|
|
|
Bank Village Bank
|
|
|
|
25
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-08-13 to 2013-02-03
|
6 months
|
$475,500
|
|
|
Bank Village Bank
|
|
|
|
26
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-08-30 to 2013-02-15
|
6 months
|
$1,585,000
|
27
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-08-31 to 2013-02-23
|
6 months
|
$317,000
|
|
|
Bank Village Bank
|
|
|
|
28
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-09-04 to 2013-03-03
|
6 months
|
$871,750
|
29
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-09-06 to 2013-03-05
|
6 months
|
$3,170,000
|
30
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-09-10 to 2013-03-07
|
6 months
|
$871,750
|
31
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-09-10 to 2013-03-10
|
6 months
|
$713,250
|
32
|
Bank Borrowing
|
Pingdingshan Bank
|
2012-09-12 to 2013-03-04
|
6 months
|
$1,585,000
|
33
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-09-16 to 2013-02-28
|
6 months
|
$158,500
|
|
|
Bank Village Bank
|
|
|
|
34
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-09-28 to 2013-01-27
|
4 months
|
$79,250
|
|
|
Bank Village Bank
|
|
|
|
35
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-09-28 to 2013-03-21
|
6 months
|
$317,000
|
|
|
Bank Village Bank
|
|
|
|
36
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-09-30 to 2013-03-21
|
6 months
|
$317,000
|
|
|
Bank Village Bank
|
|
|
|
37
|
Bank Borrowing
|
China EverBright Bank
|
2012-10-09 to 2013-03-25
|
6 months
|
$808,984
|
|
|
|
|
|
|
38
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-10-16 to 2013-04-16
|
6 months
|
$792,500
|
|
|
|
|
|
|
39
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-10-17 to 2013-04-17
|
6 months
|
$792,500
|
30
40
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-10-30 to 2013-04-30
|
6 months
|
$792,500
|
41
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-10-31 to 2013-04-30
|
6 months
|
$792,500
|
42
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-11-01 to 2013-03-21
|
5 months
|
$79,250
|
|
|
Bank Village Bank
|
|
|
|
43
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-11-01 to 2013-05-01
|
6 months
|
$475,500
|
44
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-11-02 to 2013-04-30
|
6 months
|
$840,050
|
|
|
Bank Village Bank
|
|
|
|
45
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-11-07 to 2013-03-21
|
5 months
|
$79,250
|
|
|
Bank Village Bank
|
|
|
|
46
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-11-12 to 2013-05-12
|
6 months
|
$1,585,000
|
47
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-11-13 to 2013-05-02
|
6 months
|
$475,500
|
|
|
Bank Village Bank
|
|
|
|
48
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-11-13 to 2013-05-31
|
6 months
|
$3,170,000
|
49
|
Bank Borrowing
|
China Minsheng Bank
|
2012-11-15 to 2013-05-15
|
6 months
|
$2,642,195
|
50
|
Bank Borrowing
|
Other
|
2012-11-16 to 2013-04-26
|
6 months
|
$79,250
|
51
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-11-19 to 2013-05-16
|
6 months
|
$221,900
|
|
|
Bank Village Bank
|
|
|
|
52
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-11-29 to 2013-05-20
|
6 months
|
$79,250
|
|
|
Bank Village Bank
|
|
|
|
53
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-11-29 to 2013-05-28
|
6 months
|
$317,000
|
54
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-12-06 to 2013-06-05
|
6 months
|
$2,377,500
|
55
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-12-12 to 2013-06-11
|
6 months
|
$871,750
|
56
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-12-13 to 2013-06-13
|
6 months
|
$396,250
|
57
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-12-14 to 2013-06-13
|
6 months
|
$459,650
|
58
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-12-18 to 2013-06-17
|
6 months
|
$475,500
|
59
|
Bank Borrowing
|
Shanghai Pudong Development
|
2012-12-20 to 2013-06-13
|
6 months
|
$792,500
|
|
|
Bank Village Bank
|
|
|
|
We have facility bank loans of approximately $34.8 million,
maturing from January 4, 2013 to December 25, 2013 and bank borrowings secured
by bank deposits of approximately $30.4 million. We will also consider
refinancing debts. However, we cannot provide assurance that we will be able to
refinance any of our debts on terms favorable to us in a timely manner.
Below is a brief summary of the payment obligations under
material contracts to which we are a party:
On January 5, 2012, our subsidiary, Refractories, entered into
a short-term working capital loan agreement with Zhengzhou Bank (ZB), whereby
ZB has agreed to loan approximately $4.8 million (RMB 30 million) to
Refractories for a term of one year, at an interest rate of 8.53% per year on
all outstanding principal.
On January 10, 2012, our subsidiary, Duesail, entered into a
short term working capital loan agreement with China Construction Bank (CCB),
whereby CCB has agreed to loan approximately $3.2 million (RMB 20 million) to
Duesail for a term of one year, at an interest rate of 8.00% per year on all
outstanding principal.
On February 3, 2012, our subsidiary, Refractories, entered into
a short-term working capital loan agreement with Industrial and Commercial Bank
of China (ICBC), whereby ICBC has agreed to loan approximately $2.9 million
(RMB 18 million) to Refractories for a term of one year, at an interest rate of
6.89% per year on all outstanding principal. The balance as of December 31, 2012
was approximately $2.5 million (RMB 16 million).
On February 20, 2012, our subsidiary, Micronized, entered into
a short-term working capital loan agreement with Agricultural Bank of China
(ABC), whereby ABC has agreed to loan approximately $1.9 million (RMB 11.7
million) to Micronized for a term of one year, at an interest rate of 6.56% per
year on all outstanding principal.
On March 1, 2012, our subsidiary, Micronized, entered into a
short-term working capital loan agreement with China CITIC Bank (CITIC),
whereby CITIC has agreed to loan approximately $1.5 million (RMB 9.3 million) to
Micronized for a term of one year, at an interest rate of 6.56% per year on all
outstanding principal.
31
On April 25, 2012, our subsidiary, Refractories, entered into a
short-term working capital loan agreement with Luoyang Bank (LYB), whereby LYB
has agreed to loan approximately $3.2 million (RMB 20 million) to Refractories
for a term of one year, at an interest rate of 7.22% per year on all outstanding
principal.
On April 28, 2012, our subsidiary, Refractories, entered into a
short-term working capital loan agreement with ABC, whereby ABC has agreed to
loan approximately $5.1 million (RMB 32 million) to Refractories for a term of
one year, at an interest rate of 8.53% per year on all outstanding principal.
On May 9, 2012, our subsidiary, Micronized, entered into a
short-term working capital loan agreement with ICBC, whereby ICBC has agreed to
loan approximately $713,000 (RMB 4.5 million) to Micronized for a term of one
year, at an interest rate of 6.56% per year on all outstanding principal.
On June 26, 2012, our subsidiary, Refractories, entered into a
short-term working capital loan agreement with CITIC, whereby CITIC has agreed
to loan approximately $2.4 million (RMB 15 million) to Refractories for a term
of one year, at an interest rate of 6.94% per year on all outstanding principal.
On July 31, 2012, our subsidiary, Duesail, entered into a short
term working capital loan agreement with City Credit Cooperatives in Gongyi
(CCCG), whereby CCCG has agreed to loan approximately $713,000 (RMB4.5
million) to Duesail for a term of one year, at an interest rate of 11.52% per
year on all outstanding principal.
On August 16, 2012, our subsidiary, Micronized, entered into a
short-term working capital loan agreement with China EverBright Bank (CEB),
whereby CEB has agreed to loan approximately $518,000 (RMB 3.3 million) to
Micronized for a term of 6 months, at an interest rate of 3.15% per year on all
outstanding principal.
On August 21, 2012, our subsidiary, Micronized, entered into a
short-term working capital loan agreement with CEB, whereby CEB has agreed to
loan approximately $901,000 (RMB 5.7 million) to Micronized for a term of 6
months, at an interest rate of 3.15% per year on all outstanding principal.
On August 27, 2012, our subsidiary, Refractories, entered into
a short-term working capital loan agreement with Shanghai Pudong Development
Bank Village Bank of Gongyi (SPDVB), whereby SPDVB has agreed to loan
approximately $793,000 (RMB 5.0 million) to Refractories for a term of one year,
at an interest rate of 8.40% per year on all outstanding principal.
On August 29, 2012, our subsidiary, Duesail, entered into a
short-term working capital loan agreement with SPDVB, whereby SPDVB has agreed
to loan approximately $396,000 (RMB 2.5 million) to Duesail for a term of one
year, at an interest rate of 8.40% per year on all outstanding principal.
On September 5, 2012, our subsidiary, Refractories, entered
into a short-term working capital loan agreement with Shanghai Pudong
Development Bank (SPD), whereby SPD has agreed to loan approximately $2.9
million (RMB 18 million) to Refractories for a term of one year, at an interest
rate of 6.60% per year on all outstanding principal.
On September 25, 2012, our subsidiary, Micronized, entered into
a short-term working capital loan agreement with CEB, whereby CEB has agreed to
loan approximately $182,000 (RMB 1.1 million) to Micronized for a term of 6
months, at an interest rate of 3.15% per year on all outstanding principal.
On October 15, 2012, our subsidiary, Refractories, entered into
a short-term working capital loan agreement with SPDVB, whereby SPDVB has agreed
to loan approximately $428,000 (RMB 2.7 million) to Refractories for a term of
one year, at an interest rate of 6.56% per year on all outstanding principal.
On December 26, 2012, our subsidiary, Duesail, entered into a
short term working capital loan agreement with CCCG, whereby CCCG has agreed to
loan approximately $2.9 million (RMB18 million) to Duesail for a term of one
year, at an interest rate of 11.81% per year on all outstanding principal.
Statutory Reserves
Under PRC regulations, all our subsidiaries in the PRC may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC GAAP. In addition, these companies are required to set aside
at least 10% of their after-tax net profits each year, if any, to fund the
statutory reserves until the balance of the reserves reaches 50% of their
registered capital. The statutory reserves are not distributable in the form of
cash dividends to the Company and can be used to make up cumulative prior year
losses.
Special Reserve
Before the reorganization, a former subsidiary of Refractories,
Gongyi GengSheng Refractories Co., Ltd., was entitled to a special tax
concession (Tax Concession) because it employed the required number of
disabled staff according to the relevant PRC tax rules. In particular, this Tax
Concession exempted the subsidiary from paying enterprise income tax. However,
these tax savings can only be used for future development of its production facilities or welfare
matters, and cannot be distributed as cash dividends. Accordingly, the same
amount of tax savings was set aside and taken to special reserve which is not
available for distribution. This reserve as maintained by the subsidiary has
been combined into Refractories upon the reorganization and is subject to the
same restrictions in its usage.
32
Restrictions on net assets also include the conversion of local
currency into foreign currencies, tax withholding obligations on dividend
distributions, the need to obtain State Administration of Foreign Exchange
approval for loans to a non-PRC consolidated entity and the covenants or
financial restrictions related to outstanding debt obligations. We did not have
these restrictions on our net assets as of December 31, 2012 and December 31,
2011.
The following table provides the amount of our statutory
reserves, special reserve, the amount of restricted net assets, consolidated net
assets, and the amount of restricted net assets as a percentage of consolidated
net assets, as of December 31, 2012 and December 31, 2011.
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Statutory reserves
|
$
|
4,554,936
|
|
$
|
4,554,936
|
|
Special reserve
|
|
3,556,036
|
|
|
3,556,036
|
|
Total restricted net assets
|
$
|
8,110,972
|
|
$
|
8,110,972
|
|
Consolidated net assets
|
$
|
40,331,549
|
|
$
|
53,589,986
|
|
Restricted net assets as percentage of
consolidated net assets
|
|
20.1%
|
|
|
15.1%
|
|
Total restricted net assets accounted for approximately 20.1%
of our consolidated net assets as of December 31, 2012. As our subsidiaries
usually set aside only 10% of after-tax net profits each year to fund the
statutory reserves and are not required to fund the statutory reserves when they
incur losses, we believe the potential impact of such restricted net assets on
our liquidity is limited.
Accounts Receivable and Bills Receivable
Accounts receivable represents amounts due to us by our
customers on the sale of products or services on credit.
Bills receivable represents bank undertakings that essentially
guarantee the payment of amounts owed by our customers to us. The undertakings
are provided by banks upon receipt of collateral deposits from the customers.
Bills receivable can be sold by us at a discount before maturity.
The following is the aging analysis for accounts receivable as
of December 31, 2012 and December 31, 2011:
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Due within 1 year
|
$
|
49,553,183
|
|
$
|
43,781,105
|
|
Due from 1 to 2 years
|
|
4,821,849
|
|
|
4,863,486
|
|
Due from 2 to 3 years
|
|
2,521,481
|
|
|
1,037,185
|
|
Due over 3 years
|
|
1,646,402
|
|
|
1,532,792
|
|
|
|
|
|
|
|
|
Total
|
$
|
58,542,915
|
|
$
|
51,214,568
|
|
The following is the aging analysis for bills receivable as of
December 31, 2012 and December 31, 2011:
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Due within 6 months
|
$
|
9,913,668
|
|
$
|
6,331,997
|
|
|
|
|
|
|
|
|
Total
|
$
|
9,913,668
|
|
$
|
6,331,997
|
|
We generally provide our customers in the refractories segment
with a payment period of 90 days and our customers in the fine precision
abrasives segment with a payment period of 180 days. As there are many producers
in the refractories and fine precision abrasives market competing with us, we
find it difficult to change these payment terms. The payment term for our other
segments varies by customers.
33
We noted that turnover days of accounts receivable in our
refractories segment increased in 2012 due to the macro economic situation.
However, we are usually willing to continue the relationship with our customers
in the refractory segment and allow for additional time for them to make
payments. In the meantime, since most of our large customers are state-owned
steel producers and our products are essential for their daily operations, we
have not seen a significant increase of risk related to the collection of
accounts receivables.
Critical Accounting Policies
Basis of consolidation
The accompanying consolidated financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States of America.
The consolidated financial statements include the accounts of
the Company and its subsidiaries. All inter-company accounts and transactions
have been eliminated in consolidation.
Use of estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting periods. These accounts and estimates include, but
are not limited to, the valuation of trade receivables, other receivables,
inventories, deferred income taxes, provision of warranty, the estimation on
useful lives of property, plant and equipment and the impairment of long-lived
assets. Actual results could differ from those estimates.
Allowance for doubtful accounts
The Company establishes an allowance for doubtful accounts
based on managements assessment of the collectability of trade receivables. A
considerable amount of judgment is required in assessing the amount of the
allowance. The Company considers the historical level of credit losses and
applies percentages to aged receivable categories. The Company makes judgments
about the creditworthiness of each customer based on ongoing credit evaluations,
and monitors current economic trends that might impact the level of credit
losses in the future. If the financial condition of the customers were to
deteriorate, resulting in their inability to make payments, a larger allowance
may be required.
Based on the above assessment, the management changed the
general provisioning policy during the year ended December 31, 2011 to make
allowance equivalent to 5% of trade receivables due from 1 to 2 years, 40% of
trade receivables due from 2 to 3 years and 90% of trade receivables due over 3
years. Additional specific provision is made against trade receivables to the
extent which they are considered to be doubtful.
Bad debts are written off when identified. The Company does not
accrue interest on trade receivables.
Investment in a non-consolidated affiliate
Investment in an entity over which the Company does not have
control, but has significant influence, is accounted for using the equity method
of accounting. The Companys investment in Yili YiQiang Silicon Limited ("Yili")
is reported in the consolidated balance sheets as investment in a
non-consolidated affiliate.
Impairment of long-lived assets
Long-lived assets are tested for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. The Company recognizes impairment of long-lived assets in the
event that the net book values of such assets exceed the future undiscounted
cash flows attributable to such assets.
The management opined that there was an indication of
impairment related to the buildings, machinery and equipments, and construction
in progress at Prefecture. Based on the impairment review performed by the
management as of December 31, 2012, an impairment loss of $287,247 was
recognized in the consolidated statements of operations and comprehensive loss
for the year ended December 31, 2012.
Financial guarantee issued
The Company has acted as guarantor for bank loans granted to
certain local authorities and certain business associates. The Company assessed
its obligation under this guarantee pursuant to the provision of ASC 460
Guarantee. The Company recognized in its consolidated financial statements a
liability for that guarantee at fair value at the date of inception and
recognized as an expense in profit or loss immediately. The amount of guarantee
liability is amortized in profit or loss over the term of the guarantee as
income from financial guarantees issued.
34
Revenue recognition
Pure products sales - Sales revenue is recognized when the
significant risks and rewards of ownership have been transferred to the buyer at
the time when the products are delivered to and accepted by customers, the sales
price is fixed or determinable and collection is reasonably assured.
Products sales with installation, testing, maintenance, repair
and replacement - This kind of contract is signed as a whole such that all of
these services are provided for one fixed fee, and it does not separate the
components of products, installation, testing, maintenance, repair and
replacement. After delivery of products/materials to customers, the Company will
do the installation and testing works, which takes one to two days, before
acceptance and usage by customers. The product life cycle is very short and can
normally be used for 80 cycles of production by customers (about two to three
days). Thereafter the customers will need maintenance, repair and replacement of
the Companys materials. For each maintenance, repair and replacement, the
Company will supply materials and do the installation and testing works again,
which are regarded as separate sales by the Company. In other words, the Company
will have sales to this kind of customer every couple of days. This kind of
sales revenue is recognized when the significant risks and rewards of ownership
have been transferred to the buyer at the time when the installation and testing
works are completed and after acceptance by customers, the sales price is fixed
or determinable and collection is reasonably assured.
Revenue from sales of the Companys product represents the
invoiced value of goods, net of the value-added tax (VAT). The Companys
products that are sold in the PRC are subject to VAT at a rate of 17 percent of
the gross sales price. The VAT may be offset by VAT paid by the Company on raw
materials, other materials or costs included in the cost of producing the
Companys products.
Warranty
The Company maintains a policy of providing after sales support
for certain products by way of a warranty program. As such these products are
guaranteed for usage over a pre-agreed period of time of service life or a
pre-determined number of heating times. Further, the relevant customers are
allowed to defer the settlement of a certain percentage (normally 10%) of the
billed amount for a certain period of time (normally one year) after acceptance
of the Companys products under the warranty program. As of December 31, 2012
and 2011, such receivables amounted to $502,850 and $976,145 respectively and
were included in trade receivables.
Since such products were well developed and highly mature, the
Company did not encounter any significant claims from such customers based on
past experience. Only a fraction of the Companys sales are under warranty
programs. Sales with warranty programs of $5.0 million and $9.1 million
accounted for 6.8% and 11.8% of total revenues for the fiscal years of 2012 and
2011, respectively. The warranty programs guarantee the products for usage over
a pre-agreed period of time of service life or a pre-determined number of
heating times. If a claim qualifies under the program, the Company will be
responsible to repair the system.
Based on the materiality criteria of SAB Topic 1.M, the Company
begins accruing for warranty expenses at the time of sale when the warranty
programs reach 10% of total sales or when warranty expenses reach 5% of net
income.
Stock-based compensation
The Company adopted the provisions of ASC 718, which requires
the use of the fair value method of accounting for share-based compensation.
Under the fair value based method, compensation cost related to employee stock
options or similar equity instruments which are equity-classified awards, is
measured at the grant date based on the value of the award and is recognized
over the requisite service period, which is usually the vesting period. ASC 718
also requires measurement of cost of a liability-classified award based on its
current fair value.
Recently issued accounting pronouncements
In October 2012, the Financial Accounting Standards Board (the
"FASB") issued Accounting Standards Update ("ASU") No. 2012-04, Technical
Corrections and Improvements. The amendments in this update cover a wide range
of Topics in the Accounting Standards Codification. These amendments include
technical corrections and improvements to the Accounting Standards Codification
and conforming amendments related to fair value measurements. The amendments in
this update will be effective for fiscal periods beginning after December 15,
2012. The Company is evaluating the impact of this ASU and does not expect its
adoption to have a significant impact on the Company's consolidated financial
statements.
In February 2013, the FASB issued ASU No. 2013-02, Topic 350 -
Comprehensive Income, (ASU 2013-02), which amends Topic 220 to improve the
reporting of reclassifications out of accumulated other comprehensive income to
the respective line items in net income. ASU 2013-02 is effective for reporting
periods beginning after December 15, 2012. The Company is evaluating the impact
of this ASU and does not expect its adoption to have a significant impact on the
Companys consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
As a smaller reporting company, as defined by Item 10 of
Regulation S-K, the Company is not required to provide this information.
35
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
Consolidated Financial Statements
The financial statements required by this item begin on page
F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) that are designed to ensure that
information that would be required to be disclosed in Exchange Act reports is
recorded, processed, summarized and reported within the time period specified in
the SECs rules and forms, and that such information is accumulated and
communicated to our management, including to our Chief Executive Officer and
Interim Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our
management, including our Chief Executive Officer, Mr. Shunqing Zhang, and our
Interim Chief Financial Officer, Ms. Shuxian Li, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as of
December 31, 2012. Based on our assessment, Mr. Zhang and Ms. Li determined
that, as of December 31, 2012, our disclosure controls and procedures were
effective.
Internal Controls over Financial Reporting
Managements Annual Report on Internal Control over
Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Interim Chief Financial Officer,
and effected by our Board of Directors, management and other personnel, to
provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. GAAP, and includes those policies and procedures that:
|
1)
|
pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of
our assets;
|
|
|
|
|
2)
|
provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. GAAP, and that our receipts and expenditures are
being made only in accordance with the authorization of our management and
directors; and
|
|
|
|
|
3)
|
provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
|
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2012. In making this assessment,
management used the framework set forth in the report entitled Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on that evaluation, our management concluded that
our internal control over financial reporting was effective as of December 31,
2012.
The Companys management, including its Chief Executive Officer
and Interim Chief Financial Officer, does not expect that the Companys
disclosure controls and procedures and its internal control processes will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of error or
fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
the breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
may not be detected. However, these inherent limitations are known features of
the financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
36
The annual report does not include an attestation report of the
Companys registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by the
Companys registered accounting firm pursuant to temporary rules of the SEC that
permit the Company to provide only managements report in this annual
report.
Changes in Internal Control
There has been no change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that
occurred during our fiscal quarter ended December 31, 2012 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Directors, Executive Officers, Promoter and Control
Persons
Identification of Directors and Executive
Officers
The following sets forth the name and position of each of our
current executive officers and our directors. All directors of our Company hold
office until our next annual board meeting or until their successors have been
elected and qualified. The executive officers of our Company and operating
subsidiary are appointed by our board of directors and hold office until their
death, resignation or removal from office.
Name
|
Age
|
Date of Appt
.
|
Position
|
Shunqing Zhang
|
59
|
Apr. 25, 2007
|
CEO, President and Chairman,
Board Director
|
Shuxian Li
|
54
|
Jan. 11, 2013
|
Interim Chief Financial Officer
|
Ming He
|
42
|
Nov. 18, 2009
|
Board Director
|
Jingzhong Yu
|
48
|
Nov. 18, 2009
|
Board Director
|
Ningsheng Zhou
|
54
|
Jul. 15, 2011
|
Board Director
|
Hsin-I Lin
|
60
|
Oct. 5, 2011
|
Board Director
|
There are no arrangements or understandings between our
directors and executive officers and any other person pursuant to which any
director or officer was or is to be selected as a director or officer, and there
are no arrangements, plans or understandings as to whether non-management
shareholders will exercise their voting rights to continue to elect the current
board of directors. There are also no arrangements, agreements or understandings
to our knowledge between non-management shareholders that may directly or
indirectly participate in or influence the management of our affairs.
Identification of Certain Significant
Employees
Other than the executive officers named above, the Company does
not have any significant employees.
Family Relationships
There are no family relationships among our directors or
officers.
Business Experience
The following is a brief account of the education and business
experience during at least the past five years of each director, executive
officer and key employee of our Company and operating subsidiary, indicating the
persons principal occupation during that period, and the name and principal
business of the organization in which such occupation and employment were
carried out.
37
Shunqing Zhang,
age 59. Mr. Zhang became CEO and
President of China GengSheng Minerals, Inc. on April 25, 2007 and has served as
Chairman of the Board since May 3, 2007. Mr. Zhang was elected Chairman of the
Board and CEO of Henan Gengsheng in December, 2005. Prior to that, he served as
President of Henan Gengsheng for June 2002 to December 2005, and served as
Chairman of the Board and President of the Gengsheng Industry Group of Henan
Province, from 1997 to 2002. Prior to that, Mr. Zhang served as Director of the
Academy of the Ministry of Metallurgy Lofa Resistance Associated Experimental
Plant in Gongyi City, a refractories manufacturer, from 1986 to 1997. Mr. Zhang
holds an associate degree from China Central Radio and TV University. In
December of 2008, Mr. Zhang was awarded the title of "Gongyi City's Most
Influential Person in the 30 Years of Opening & Reform" by the City of
Gongyi in Henan Province. In naming Mr. Zhang, the city cited his achievements
in creating jobs in the local community, stimulating the rapid growth of
Gongyi's economy and setting excellent examples of taking social
responsibilities. As Chief Executive Officer of the Company, Mr. Zhang provides
the Board with an intimate understanding of the Companys operations and
industry.
Shuxian Li,
age 54, has over twenty years of finance and
accounting experience. She has been working with China GengSheng Minereals, Inc.
since July 2005, serving as financial officer, audit committee chair and
director of internal control office and womens committee chair. Prior to
joining the Company, Ms. Li worked at Henan Xinzheng Tobacco Co. from April 1983
through June 2005, holding various finance and accounting positions in its
financial, management, audit and cost management departments. Ms. Li holds the
designation of CPA, ICPA and Certified Tax Planner. She received her Bachelors
degree from Zhengzhou University.
Ming He,
age 42
.
Mr. He has been overseeing his
personal investment since March 2012. He served as the Chief Financial Officer
of Shengkai Innovations, Inc. (NASDAQ: VALV) from March 2010 through March 2012.
Between January 2007 and February 2010, Mr. He served as CFO of Usunco
Automotive Limited / Equicap, Inc. From October 2004 until January 2007, Mr. He
served as the Senior Manager of SORL Auto Parts, Inc. (NASDAQ: SORL). Mr. He
holds designations of Chartered Financial Analyst and Illinois Certified Public
Accountant. He received his Master of Science degree in Accountancy in 2004 and
Master of Business Administration degree in Finance in 2003 from University of
Illinois at Urbana-Champaign. He also received his Bachelor of Arts degree from
Shanghai Institute of Foreign Trade in 1992. Mr. He serves as the chair of the
Audit Committee and is a member of the Compensation Committee and Nominating
Committee of the Board.
Jingzhong Yu
, Age 48. Prof. Yu currently is an
accounting professor at Zhongnan University of Economics and Law and has served
in such position since 1985. Prof. Yu also served as an investment advisor from
December 2003 to December 2007 to China Wanke Co., Ltd., which is a residential
property developer, 999 Group, which is a pharmaceutical manufacturing company,
Sanyi Group., Ltd., which is in the equipment and machinery manufacturing
business, and China National Salt Industry Corporation, which is in the business
of producing salt and salt chemicals. From December 2003 to June 2008, Prof. Yu
served as an investment advisor to China Tobacco Group, which manufactures
tobacco products. Prof. Yu serves as the chair of the Compensation Committee and
is a member of the Audit Committee and Nominating Committee of the Board.
Ningsheng Zhou
, Age 54. Prof. Zhou has been a professor
and director of High Temperature Materials Institute of Henan University of
Science and Technology since 2004. From 2000 to 2004, he was a Vice President of
Luoyang Institute of Refractories Research (LIRR) in China. Mr. Zhou is an
expert in refractories R&D and applications with 30 years of experiences in
the refractory industry. Mr. Zhou received his Ph. D. degree from University of
Montreal in Canada in 2000 and a Master of Science degree in Inorganic
Non-Metallic Materials from LIRR in 1987. He received his Bachelor of Science
degree in Refractories Technology from Wuhan University of Science and
Technology in 1982 and also worked as a visiting scholar in Germany during 1991
and 1993.
Hsin-I Lin,
Age 60. Mr. Lin has been with Rim Asia
Capital Partners since 2004, where he served as Partner. Prior to joining Rim
Asia Capital Partners, he worked as a Partner at SVO, from 2002-2004. Mr. Lin
has approximately twenty years of experience in business administration, direct
investment, corporate finance, and investment banking in the United States and
China. Mr. Lin received his B.A. from Tamkang University in Taiwan, his M.A.
from Waseda University in Japan, his M.B.A from Oklahoma City University in the
United States and his PhD in economics from Northwest University in China.
Except as noted above, there are no other agreements or
understandings for any of our executive officers or directors to resign at the
request of another person and no officer or director is acting on behalf of nor
will any of them act at the direction of any other person. Directors are elected
until their successors are duly elected and qualified.
Board Meetings and Committees
Board Composition
. All actions of board of directors
require the approval of a majority of the directors in attendance at a meeting
at which a quorum is present. Our board of directors is composed of Mr. Shunqing
Zhang, who is also our President and Chief Executive Officer, Mr. Ming He, Mr.
Jingzhong Yu, Mr. Ningsheng Zhou, and Mr. Hsin-I Lin. The Board has determined
that the following directors, who constitute a majority of the Board (three),
are independent in accordance with the NYSE MKT and SEC rules governing director
independence: Ming He, Jingzhong Yu and Hsin-I Lin.
Meetings of the Board of Directors.
During 2012, the
Board of Directors met six times. During that period, each of the incumbent
directors attended 100% of the aggregate number of meetings held by the Board
and by each of the committees on which such director served.
38
Board Committees.
Our Board of Directors currently has
three standing committees: the Audit Committee, the Compensation Committee and
the Nominating Committee. The principal functions and the names of the directors
currently serving as members of each of those committees are set forth below. In
accordance with applicable NYSE MKT and SEC requirements, the Board of Directors
has determined that each director serving on the Audit, Compensation and
Nominating committees is an independent director.
Audit Committee
. The Audit Committee assists the Board
in fulfilling its oversight responsibilities with respect to our financial
matters. The Audit Committee operates under a written charter, a copy of which
is available on our website at
www.gengsheng.com
under the heading
Investor Relations. Under the charter, the committees principal
responsibilities include reviewing our financial statements, reports and
releases; reviewing with the independent auditor all critical accounting
policies and alternative treatments of financial information under generally
accepted accounting principles; and appointing, compensating, retaining and
overseeing the work of the independent auditor.
The Audit Committee met five times during 2012. The current
members of the Audit Committee are Ming He (Chairman), Jingzhong Yu and Hsin-I
Lin. The Board of Directors has determined that Mr. He is an audit committee
financial expert, as that term is defined in SEC rules.
Compensation Committee
. The Compensation Committee has
the primary authority to determine our compensation philosophy and to establish
compensation for our executive officers. The Compensation Committee operates
under a written charter, a copy of which is available on our website at
www.gengsheng.com
under the heading Investor Relations. Under the
charter, the committees principal responsibilities include making
recommendations to the Board on the Companys compensation policies, determining
the compensation of senior management, making recommendations to the Board on
the compensation of independent directors and approving performance-based
compensation.
The Compensation Committee did not meet during 2012. The
current members of the Compensation Committee are Jingzhong Yu (Chairman), Ming
He and Hsin-I Lin.
Nominating Committee
. The Nominating Committee provides
for the nomination of persons to serve on our Board. The qualifications of
recommended candidates also will be reviewed and approved by the full Board. The
Committee considered the following factors when qualifying candidates: current
composition of the Board and the characteristics of each candidate under
consideration, including that candidates competencies, experience, reputation,
integrity, independence, potential for conflicts of interest and other
appropriate qualities. When considering a director standing for re-election, in
addition to the factors described above, the Committee considers that
individuals past contribution and future commitment to the Company. The
independent directors evaluate all candidates, regardless of the source from
which the candidate was first identified, based upon the totality of the merits
of each candidate and not based upon minimum qualifications or attributes. The
Nominating Committee operates under a written charter, a copy of which is
available on our website at
www.gengsheng.com
under the heading Investor
Relations.
The Nominating Committee did not meet during 2012. The current
members of the Nominating Committee are Hsin-I Lin (Chairman), Ming He and
Jingzhong Yu.
Material Changes to the Procedures by which Security Holders
May Recommend Nominees to the Board of Directors
There have been no material changes to the procedures by which
security holders may recommend nominees to the Board of Directors.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none
of our officers or directors were involved in any of the following: (1) any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time; (2) any conviction in a criminal proceeding
or being subject to a pending criminal proceeding (excluding traffic violations
and other minor offenses); (3) being subject to any order, judgment, or decree,
not subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business, securities or
banking activities; and (4) being found by a court of competent jurisdiction (in
a civil action), the Commission or the Commodities Futures Trading Commission to
have violated a federal or state securities or commodities law, and the judgment
has not been reversed, suspended or vacated.
Section 16(a) Beneficial Ownership Reporting
Compliance
Under U.S. securities laws, directors, certain executive
officers and persons holding more than 10% of our common stock must report their
initial ownership of the common stock, and any changes in that ownership, to the
SEC. The SEC has designated specific due dates for these reports. Based solely
on our review of the copies of such reports received by us and on written
representations by our officers and directors regarding their compliance with
the applicable reporting requirements under Section 16(a) of the Exchange Act,
we believe that, with respect to the fiscal year ended December 31, 2012, our
officers and directors, and all of the persons known to us to own more than 10%
of our common stock, filed all required reports on a timely basis.
39
Code of Ethics
On April 25, 2007, our then sole director adopted a code of
ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 that applies to
all of our directors, officers and employees, including our principal executive
officer, principal financial officer, and principal accounting officer. The code
of ethics is designed to deter wrongdoing and to promote:
-
Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships;
-
Full, fair, accurate, timely and understandable disclosure in reports and
documents that we file with, or submit to, the SEC, and in other public
communications that we made;
-
Compliance with applicable government laws, rules and regulations;
-
The prompt internal reporting of violations of the code to the appropriate
person or persons; and
-
Accountability for adherence to the code.
The code requires the highest standard of ethical conduct and
fair dealing of its senior financial officers, or SFO, defined as the Chief
Executive Officer and Interim Chief Financial Officer. While this policy is
intended to only cover the actions of the SFO, in accordance with
Sarbanes-Oxley, we expect our other officers, directors and employees will also
review our code and abide by its provisions. We believe that our reputation is a
valuable asset and must continually be guarded by all associated with us so as
to continue the trust, confidence and respect of our suppliers, customers and
stockholders.
Our SFO are committed to conducting business in accordance with
the highest ethical standards. The SFO must comply with all applicable laws,
rules and regulations. Furthermore, SFO must not commit an illegal or unethical
act, or instruct or authorize others to do so.
Board Leadership Structure and Role in Risk
Oversight
Mr. Shunqing Zhang is our chairman and chief executive officer.
We have three independent directors. Our lead independent director is David Ming
He. Our Board has three standing committees, each of which is comprised solely
of independent directors with a committee chair. The Board believes that the
Companys chief executive officer is best situated to serve as Chairman of the
Board because he is the director most familiar with our business and industry
and the director most capable of identifying strategic priorities and executing
our business strategy. In addition, having a single leader eliminates the
potential for confusion and provides clear leadership for the Company. We
believe that this leadership structure has served the Company well.
Our Board of Directors has overall responsibility for risk
oversight. The Board has delegated responsibility for the oversight of specific
risks to Board committees as follows:
-
The Audit Committee oversees the Companys risk policies and processes
relating to the financial statements and financial reporting processes, as
well as key credit risks, liquidity risks, market risks and compliance, and
the guidelines, policies and processes for monitoring and mitigating those
risks.
-
The Nominating Committee oversees risks related to the Companys governance
structure and processes.
Our Board of Directors is responsible to approve all related
party transactions. We have not adopted written policies and procedures
specifically for related person transactions.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning all cash
and non-cash compensation awarded to, earned by or paid to the following persons
for services rendered in all capacities during the noted periods: Shunqing
Zhang, our President and Chief Executive Office, Ningfang Liang, our former
Chief Financial Officer. Our interim Chief Financial Officer Shuxian Li was
appointed on January 11, 2013 and thus we did not pay any compensation to her
for her services as executive officer of the Company in the past two years.
No executive officers salary and bonus exceeded $100,000 in
any of the applicable years. The following information includes the dollar value
of base salaries, bonus awards, the number of stock options granted and certain
other compensation, if any, whether paid or deferred.
40
SUMMARY COMPENSATION TABLE
Name and
principal
position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock awards
($)
|
Option awards
($)
|
Nonequity incentive plan
compensation
($)
|
Nonqualified
deferred
compensation
earnings
($)
|
All other
compensation
($)
|
Total
($)
|
Shunqing Zhang,
Chairman, CEO, President
|
2012
|
47,520
|
-
|
-
|
-
|
-
|
-
|
-
|
47,520
(1)
|
2011
|
77,450
|
-
|
-
|
-
|
-
|
-
|
-
|
77,450
|
Ningfang Liang
,
former
CFO
(2)
|
2012
|
63,000
|
-
|
-
|
-
|
-
|
-
|
27,000
|
90,000
|
2011
|
45,000
|
-
|
-
|
-
|
-
|
-
|
-
|
45,000
|
(1)
|
Mr. Zhang took a voluntary pay cut in 2012.
|
(2)
|
Mr. Liang resigned as our CFO on January 8,
2013.
|
Outstanding Equity Awards at Fiscal Year End
None.
Employment Agreement
As required by applicable PRC law, we have entered into
employment agreements with most of our officers, managers and employees. Our
subsidiary Henan Gengsheng has employment agreements with the following named
executive officers:
Shunqing Zhang
. Mr. Zhang’s preliminary employment agreement became effective as of January 1, 2007 and expired on December 31, 2009. We have renewed his employment agreement in January 2010 and 2012, which will expire on December 31, 2013 and continue on a year-to-year basis thereafter unless terminated by either party on not less than 30 days’ notice. Mr. Zhang is entitled to an annual salary of RMB 500,000 (approximately $77,450) under the agreement but voluntarily received a reduced salary of approximately $47,520 during the fiscal year of 2012.
Ningfang Liang.
Pursuant to employment agreement that
the Company and Mr. Liang entered into on June 30, 2011, Mr. Liang will be
entitled to an annual salary of $90,000. The employment agreement has an initial
term (the Initial Term) commencing as of June 27th, 2011 and expiring on June
26th, 2012, and continuing on a year-to-year basis thereafter unless terminated
by either party on not less than thirty (30) days notice prior to the expiration
of the Initial Term or any one-year extension. On January 8, 2013, Mr. Liang
resigned as our Chief Financial Officer.
Shuxian Li.
Ms. Li was appointed the interim Chief
Financial Officer of the Company on January 11, 2013. Pursuant to the employment
agreement dated January 11, 2013 between the Company and Ms. Li, Ms. Li will be
entitled to an annual salary of Renminbi 180,000 (approximately $28,931) and
will serve as the Companys interim Chief Financial Officer until a suitable
candidate for Chief Financial Officer has been qualified and selected by the
Company.
Director Compensation
On November 18, 2009, we appointed Mr. Ming He and Mr.
Jingzhong Yu as our independent directors, with engagement term to be one year,
renewable for additional one year terms unless terminated by 30 days notice. On
July 15, 2011, we appointed Mr. Ningsheng Zhou as our director for one year,
renewable for additional one year terms unless terminated by 30 days notice. On
October 5, 2011, we appointed Mr. Hsin-I Lin as our independent director, with
engagement term to be one year, renewable for additional one year terms unless
terminated by 30 days notice. Our board consists of five members, including the
CEO, Mr. Shunqing Zhang, sits as the Chairman, Mr. Ningsheng Zhou, and along
with the three independent directors. During the 2012 fiscal year, we did not
pay Mr. Shunqing Zhang any compensation for his services as our director. For
their function as directors, we paid Mr. Zhou, Mr. He, Mr. Yu and Mr. Lin in the
amount of $19,008 (RMB 120,000), $25,000, $7,920 (RMB 50,000) and $25,000
respectively. We do reimburse our directors for reasonable travel expenses
related to duties as a director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and
Management
41
The following table sets forth information regarding beneficial
ownership of our common stock as of April 15, 2013 (i) by each person who is
known by us to beneficially own more than 5% of our common stock; (ii) by each
of our officers and directors; and (iii) by all of our officers and directors as
a group.
Unless otherwise specified, the address of each of the persons
set forth below is in care of GengSheng International, No. 88 Gengsheng Road,
Dayugou Town, Gongyi, Henan, China 451271.
Name & Address of Beneficial
Owner
|
Office, if Any
|
Title of Class
|
Amount & Nature of
Beneficial
Ownership
(1)
|
Percent of
Class
(2)
|
|
|
|
|
|
Officers and Directors
|
Shunqing Zhang
|
CEO and President
|
Common Stock,
$0.001 par
value
|
15,231,748
|
56.83%
|
|
|
|
|
|
Shuxian Li
|
Interim Chief Financial
Officer
|
Common Stock,
$0.001 par
value
|
0
|
*
|
|
|
|
|
|
Ming He
|
Independent Director
|
Common Stock,
$0.001 par
value
|
10,000
|
*
|
|
|
|
|
|
Jingzhong Yu
|
Independent Director
|
Common Stock,
$0.001 par
value
|
0
|
*
|
|
|
|
|
|
Ningsheng Zhou
|
Director
|
Common Stock,
$0.001 par
value
|
0
|
*
|
|
|
|
|
|
Hsin-I Lin
|
Independent Director
|
Common Stock,
$0.001 par
value
|
0
|
*
|
|
|
|
|
|
All officers and directors as a
group
(6 persons named above)
|
|
Common Stock,
$0.001 par
value
|
15,241,748
|
56.87%
|
* Less than 1%
1
Beneficial ownership is determined in accordance
with the rules of the SEC and generally includes voting or investment power with
respect to securities. Each of the beneficial owners listed above has direct
ownership of and sole voting power and investment power with respect to the
shares of our common stock.
2
As of April 15, 2013, a total of 26,803,044 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each beneficial owner above, any options, warrants and other convertible securities exercisable within 60 days have been included in the denominator.
Changes in Control
There are no arrangements known to us, including any pledge by
any person of our securities, the operation of which may at a subsequent date
result in a change in control of our Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
Transactions with Related Persons
During the fiscal year of 2012, Mr. Shunqing Zhang, our Chairman and Chief Executive Officer, loaned the Company an aggregate of $158,500. The loans are interest free and unsecured. The loans are still outstanding as of the date of this report. Additionally, Mr. Zhang also guaranteed a short term loan for the Company from a third party company of $3,170,000, with an interest of $24% per annum. The loan was fully settled on March 11, 2013.
During the fiscal year of 2011, Mr. Zhang provided guarantee for certain loans of the Company which have been fully settled.
Except described above, there were no other material transactions, or series of similar
transactions, during our last two fiscal year, or any currently
proposed transactions, or series of similar transactions, to which our Company
or any of our subsidiaries was or is to be a party, in which the amount involved
exceeded the lesser of $120,000 and in which any director, executive officer or
any security holder who is known to us to own of record or beneficially more
than five percent of any class of our common stock, or any member of the
immediate family of any of the foregoing persons, had an interest.
Our Board of Directors is responsible to approve all related party transactions. We have not adopted written policies and procedures specifically for related person transactions.
Director Independence
Our board of directors is currently composed of five members,
Mr. Shunqing Zhang, who is also our President and Chief Executive Officer, Mr.
Ningsheng Zhou, Mr. Ming He, who is an independent director and Chairman of
Audit Committee, Mr. Jingzhong Yu, who is an independent director and Chairman
of Compensation Committee and Mr. Hsin-I Lin, who is an independent director and
Chairman of Nominating Committee. Mr. Zhang and Mr. Zhou are not an
independent director as defined by Section 303A.02 of the NYSE Listed Company
Manual.
42
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PKF Hong Kong, was our independent registered public accounting
firm engaged to examine our consolidated financial statements from the date of
recapitalization on April 25, 2007 to December 7, 2012.
EFP Rotenberg, LLP was appointed our independent registered
public accounting firm on January 2, 2013.
Fees for the fiscal years ended December 31, 2012 and
2011
Audit Fees
.
PKF Hong Kong, was paid
aggregate fees of approximately $45,144 for the reviews of the financial
statements for the quarters ended March 31, 2012, June 30, 2012 and September
30, 2012 and approximately $143,485 for professional services rendered for the
audit of our annual financial statements and for the reviews of the financial
statements for the year ended December 31, 2011.
EFP Rotenberg, LLP was paid aggregate fee of approximately
$140,000 for professional services rendered for the audit of our annual
financial statements for the year ended December 31, 2012.
Audit Related Fees
.
PKF Hong Kong, was not
paid additional fees for the fiscal years December 31, 2012 and December 31,
2011 for assurance and related services reasonably related to the performance of
the audit or review of our financial statements.
Tax Fees
.
PKF Hong Kong, was not paid any
fees for the fiscal years ended December 31, 2012 and December 31, 2011 for
professional services rendered for tax compliance, tax advice and tax planning.
This service was not provided.
All Other Fees.
PKF Hong Kong, was paid no other
fees for professional services during the fiscal years ended December 31, 2012
and December 31, 2011.
Policy on Audit Committee Pre-Approval of Audit and
Permissible Non-Audit Services of Independent Auditors
Our audit committee and board of directors reviewed and
approved all audit services provided by PKF Hong Kong, and has determined that
the firm's provision of such services to us during 2012 is compatible with and
did not impair the independence of PKF Hong Kong. It is the practice of our
audit committee and board of directors to consider and approve in advance all
auditing services provided to us by our independent auditors.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
Exhibit No.
|
Description
|
|
|
2.1
|
Share Exchange Agreement, dated April 25, 2007, among the
Registrant, Gengsheng International and Shunqing Zhang [Incorporated by
reference to Exhibit 2.1 to the Registrants current report on Form 8-K
filed on April 27, 2007, in commission file number 0-51527].
|
|
|
3.1
|
Articles of Incorporation of the Registrant as filed with
the Secretary of State of the State of Nevada on May 22, 2006
[Incorporated by reference to Exhibit 3i.1 to the Registrants current
report on Form 8-K filed on October 10, 2006, in commission file number
0-51527].
|
|
|
3.2
|
Articles of Merger of the Registrant as filed with the
Secretary of State of the State of Nevada on August 15, 2006 [Incorporated
by reference to Exhibit 3i.2 to the Registrants current report on Form
8-K filed on October 10, 2006, in commission file number 0-51527].
|
|
|
3.3
|
Certificate of Amendment to Articles of Incorporation as
filed with the Secretary of State of the State of Nevada [Incorporated by
reference to Exhibit 3.1 to the Registrants current report on Form 8-K
filed on December 13, 2006, in commission file number 0-51527].
|
|
|
3.4
|
Certificate of Correction as filed with the Secretary of
State of the State of Nevada on April 17, 2007 [Incorporated by reference
to Exhibit 3.4 to the Registrants current report on Form 8-K filed on
April 27, 2007, in commission file number 0-51527].
|
43
Exhibit No.
|
Description
|
3.5
|
Amended and Restated Bylaws of
the Registrant, adopted on May 23, 2006 [Incorporated by reference to
Exhibit 3.5 to the Registrants current report on Form 8-K filed on April
27, 2007, in commission file number 0-51527].
|
|
|
4.1
|
Form of Registration Rights
Agreement, dated April 25, 2007 [Incorporated by reference to Exhibit 4.1
to the Registrants current report on Form 8-K filed on April 27, 2007, in
commission file number 0-51527].
|
|
|
10.1
|
Employment Agreement, dated January 1, 2012, by and between China GengSheng Minerals, Inc. and Shunqing Zhang*
|
|
|
10.2
|
Agreement, dated June 19, 2011,
by and between Zhengzhou Duesail Fracture Proppant Co., Ltd. and another
party. (confidential treatment has been requested with respect to certain
portions of this agreement) [Incorporated by reference to Exhibit 10.1 to
the Registrants current report on Form 8-K filed on June 23, 2011 in
commission file number 0-51527]
|
|
|
10.3
|
Subscription Agreement dated
March 31, 2011, by and between China GengSheng Minerals, Inc. and Yili
Yiqiang Silicon Company (the Silicon) and Silicons two shareholders
[Incorporated by reference to Exhibit 10.1 to the Registrants current
report on Form 8-K filed on April 6, 2011 in commission file number
0-51527]
|
|
|
10.4
|
Employment Agreement, dated
January 11, 2013, by and between Ms. Shuxian Li and the Company
[Incorporated by reference to Exhibit 10.1 to the Registrations current
report on Form 8-K filed on January 14, 2013 in commission file number
001-34649].
|
|
|
14
|
Business Ethics Policy and Code
of Conduct, adopted on April 25, 2007 [Incorporated by reference to
Exhibit 14 to the Registrants current report on Form 8-K filed on April
27, 2007, in commission file number 0-51527].
|
|
|
21.1
|
Subsidiaries of the Registrant.
Incorporated by reference to Exhibit 21 to the Registrants current report
on Form 8-K field on April 16, 2012 in commission file number 001-34649.
|
|
|
23.1
|
Consent of Independent Registered Public Accounting Firm
|
|
|
31.1
|
Certification of Principal
Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.*
|
|
|
31.2
|
Certification of Principal Financial Officer
filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
32.1
|
Certification of Principal Executive Officer
furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
32.2
|
Certification of Principal Executive Officer
furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
101.INS
|
XBRL Instance Document*
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema*
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation
Linkbase*
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition
Linkbase*
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase*
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation
Linkbase*
|
Notes to exhibits * Filed herewith
44
China GengSheng Minerals, Inc.
|
|
Consolidated Financial Statements
|
For the years ended December 31,
|
2012 and 2011
|
|
Index to Consolidated Financial Statements
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of:
China
GengSheng Minerals, Inc.
We have audited the accompanying consolidated balance sheet of
China GengSheng Minerals, Inc. and its subsidiaries (the "Company") as of
December 31, 2012, and the related consolidated statements of operations and
comprehensive loss, stockholders equity and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
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 consolidated financial
position of the Company as of December 31, 2012, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ EFP Rotenberg, LLP
EFP Rotenberg, LLP
Certified
Public Accountants
Rochester, New York
April 15, 2013
F-1
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and Stockholders of
China
GengSheng Minerals, Inc.
We have audited the accompanying consolidated balance sheets of
China GengSheng Minerals, Inc. (the "Company") and its subsidiaries as of
December 31, 2011, and the related consolidated statements of operations and
comprehensive loss, equity and cash flows for the year ended December 31, 2011.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2011, and the consolidated
results of their operations and their cash flows for the year ended December 31,
2011 in conformity with accounting principles generally accepted in the United
States of America.
PKF
Certified Public Accountants
Hong Kong, China
April 16, 2012
F-2
China GengSheng Minerals, Inc.
|
Consolidated Balance Sheets
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
5,408,309
|
|
$
|
3,594,361
|
|
Restricted cash
|
|
27,079,527
|
|
|
21,094,008
|
|
Trade receivables, net
|
|
55,811,468
|
|
|
49,167,748
|
|
Bills receivable
|
|
9,913,668
|
|
|
6,331,997
|
|
Other receivables and
prepayments, including related parties, net
|
|
9,500,177
|
|
|
8,451,185
|
|
Advances to senior management
|
|
9,005
|
|
|
360,162
|
|
Inventories, net
|
|
12,971,168
|
|
|
16,956,582
|
|
Deferred tax assets, net of valuation
allowance
|
|
210,544
|
|
|
-
|
|
|
|
|
|
|
|
|
Total current assets
|
|
120,903,866
|
|
|
105,956,043
|
|
|
|
|
|
|
|
|
Deposits for acquisition of a non-consolidated
affiliate
|
|
-
|
|
|
1,092,041
|
|
Investment in a non-consolidated
affiliate
|
|
1,040,492
|
|
|
-
|
|
Deposits for acquisition of land use right, property,
plant and equipment
|
|
-
|
|
|
618,892
|
|
Goodwill, net
|
|
-
|
|
|
-
|
|
Intangible assets, net
|
|
-
|
|
|
-
|
|
Property, plant and equipment, net
|
|
36,425,004
|
|
|
37,164,849
|
|
Land use rights
|
|
4,035,948
|
|
|
3,137,961
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
162,405,310
|
|
$
|
147,969,786
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Trade payables
|
$
|
23,808,926
|
|
$
|
18,671,086
|
|
Bills payable
|
|
13,995,550
|
|
|
16,385,340
|
|
Other payables and accrued
expenses
|
|
7,561,146
|
|
|
8,877,407
|
|
Deferred revenue - Government grants
|
|
649,612
|
|
|
443,632
|
|
Provision of warranty
|
|
100,570
|
|
|
184,778
|
|
Income taxes payable
|
|
166,719
|
|
|
218,038
|
|
Non-interest-bearing loans,
including related party
|
|
6,760,465
|
|
|
3,318,472
|
|
Collateralized short-term bank loans
|
|
65,196,883
|
|
|
45,974,022
|
|
Loan from third party
|
|
3,170,000
|
|
|
-
|
|
Deferred tax liabilities
|
|
513,524
|
|
|
112,625
|
|
Warrant liabilities
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
121,923,395
|
|
|
94,185,400
|
|
COMMITMENTS AND CONTINGENCIES
F-3
China GengSheng Minerals, Inc.
|
Consolidated Balance Sheets
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Preferred stock - $0.001
par value 50,000,000 shares authorized, no
shares
issued and outstanding
|
|
-
|
|
|
-
|
|
Common stock - $0.001 par value
100,000,000 shares authorized in 2012 and
2011;
issued and outstanding
26,803,044 shares in 2012 and 2011
|
|
26,803
|
|
|
26,803
|
|
Additional paid-in capital
|
|
28,197,310
|
|
|
28,197,310
|
|
Statutory and other reserves
|
|
8,110,972
|
|
|
8,110,972
|
|
Accumulated other
comprehensive income
|
|
7,994,358
|
|
|
7,713,341
|
|
Retained earnings
|
|
(3,997,894
|
)
|
|
9,541,560
|
|
Total China GengSheng Minerals, Inc.
stockholders' equity
|
|
40,331,549
|
|
|
53,589,986
|
|
NONCONTROLLING INTEREST
|
|
150,366
|
|
|
194,400
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
40,481,915
|
|
|
53,784,386
|
|
|
|
|
|
|
|
|
TOTAL LIABILITES AND STOCKHOLDERS EQUITY
|
$
|
162,405,310
|
|
$
|
147,969,786
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
China GengSheng Minerals, Inc.
Consolidated Statements of
Operations and Comprehensive Loss
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Sales revenue
|
$
|
73,534,827
|
|
$
|
76,935,665
|
|
Cost of goods sold
|
|
60,885,990
|
|
|
60,726,627
|
|
|
|
|
|
|
|
|
Gross profit
|
|
12,648,837
|
|
|
16,209,038
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
1,730,835
|
|
|
1,334,736
|
|
General and
administrative expenses
|
|
7,318,775
|
|
|
7,010,822
|
|
Impairment on fixed assets
|
|
287,247
|
|
|
-
|
|
Impairment on
goodwill
|
|
-
|
|
|
441,089
|
|
Impairment on intangible assets
|
|
-
|
|
|
309,800
|
|
Research and
development expenses
|
|
923,403
|
|
|
699,367
|
|
Selling expenses
|
|
9,629,997
|
|
|
9,491,077
|
|
Total operating expenses
|
|
19,890,257
|
|
|
19,286,891
|
|
Loss from operations
|
|
(7,241,420
|
)
|
|
(3,077,853
|
)
|
|
|
|
|
|
|
|
Other (expenses) income
|
|
|
|
|
|
|
Government grant
income
|
|
558,665
|
|
|
379,505
|
|
Guarantee income
|
|
562,847
|
|
|
614,472
|
|
Guarantee expenses
|
|
(461,578
|
)
|
|
(518,141
|
)
|
Equity in net loss of a non-consolidated affiliate
|
|
(59,143
|
)
|
|
-
|
|
Interest income
|
|
813,049
|
|
|
916,387
|
|
Impairment on deposit for acquisition of a non-consolidated
|
|
|
|
|
|
|
affiliate
|
|
-
|
|
|
(1,248,804
|
)
|
Change in fair value of warrant liabilities
|
|
-
|
|
|
970,000
|
|
Other income
|
|
25,845
|
|
|
14,788
|
|
Finance costs
|
|
(7,300,886
|
)
|
|
(5,278,802
|
)
|
|
|
|
|
|
|
|
Total other expenses
|
|
(5,861,201
|
)
|
|
(4,150,595
|
)
|
|
|
|
|
|
|
|
Loss before income taxes and
noncontrolling interest
|
|
(13,102,621
|
)
|
|
(7,228,448
|
)
|
Income taxes
|
|
(492,289
|
)
|
|
(325,146
|
)
|
|
|
|
|
|
|
|
Net loss before noncontrolling interest
|
|
(13,594,910
|
)
|
|
(7,553,594
|
)
|
Net loss attributable to
noncontrolling interest
|
|
55,456
|
|
|
48,282
|
|
|
|
|
|
|
|
|
Net loss attributable to
Companys common stockholders
|
$
|
(13,539,454
|
)
|
$
|
(7,505,312
|
)
|
|
|
|
|
|
|
|
Net loss before
noncontrolling interest
|
$
|
(13,594,910
|
)
|
$
|
(7,553,594
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
292,439
|
|
|
1,716,651
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
(13,302,471
|
)
|
|
(5,836,943
|
)
|
Comprehensive loss attributable to
noncontrolling interest
|
|
44,034
|
|
|
95,517
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Companys
common
stockholders
|
|
$(13,258,437
|
)
|
|
$(5,741,426
|
)
|
|
|
|
|
|
|
|
Loss per share - Basic and diluted
attributable to Companys
common stockholders
|
|
$(0.49
|
)
|
|
$(0.28
|
)
|
|
|
|
|
|
|
|
Weighted average number of shares - Basic and
diluted
|
|
26,803,044
|
|
|
26,754,737
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
China GengSheng Minerals, Inc.
|
Consolidated Statements of Cash Flows
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss before
noncontrolling interest
|
$
|
(13,594,910
|
)
|
$
|
(7,553,594
|
)
|
Adjustments to reconcile net loss before
noncontrolling interest to net cash
used in operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
3,041,657
|
|
|
2,271,268
|
|
Impairment
of fixed assets
|
|
287,247
|
|
|
-
|
|
Impairment of goodwill
|
|
-
|
|
|
441,089
|
|
Impairment
of intangible assets
|
|
-
|
|
|
309,800
|
|
Impairment on deposit for acquisition of a non-consolidated
affiliate
|
|
-
|
|
|
1,248,804
|
|
Amortization of land use rights
|
|
229,498
|
|
|
28,428
|
|
Amortization of intangible assets
|
|
-
|
|
|
77,450
|
|
Equity in
net loss of a non-consolidated affiliate
|
|
59,143
|
|
|
-
|
|
Deferred taxes
|
|
189,696
|
|
|
208,518
|
|
Loss on
disposal of property, plant and equipment
|
|
318,826
|
|
|
4,319
|
|
Share-based compensation
|
|
-
|
|
|
7,965
|
|
Guarantee
expenses
|
|
461,578
|
|
|
518,141
|
|
Guarantee income
|
|
(562,847
|
)
|
|
(614,472
|
)
|
Provision
for obsolete inventories
|
|
123,422
|
|
|
-
|
|
Allowance for doubtful accounts
|
|
1,730,835
|
|
|
1,334,736
|
|
Deferred
revenue amortized
|
|
(316,800
|
)
|
|
(356,270
|
)
|
Change in fair value of warrant liabilities
|
|
-
|
|
|
(970,000
|
)
|
Exchange
gain
|
|
(60,073
|
)
|
|
(163,440
|
)
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
Restricted
cash
|
|
10,358,814
|
|
|
(3,678,875
|
)
|
Trade receivables
|
|
(7,452,975
|
)
|
|
(5,205,716
|
)
|
Bills
receivable
|
|
(3,451,040
|
)
|
|
(3,134,922
|
)
|
Other receivables and prepayments
|
|
(2,185,817
|
)
|
|
(1,944,805
|
)
|
Advances to
senior management
|
|
315,157
|
|
|
(301,907
|
)
|
Inventories
|
|
3,978,007
|
|
|
(676,480
|
)
|
Trade
payables
|
|
4,721,613
|
|
|
3,892,832
|
|
Provision of warranty
|
|
(85,446
|
)
|
|
110,634
|
|
Bills
payable
|
|
(2,586,867
|
)
|
|
7,493,190
|
|
Other payables and accrued expenses
|
|
(1,901,343
|
)
|
|
3,524,992
|
|
Income
taxes payable
|
|
(157,566
|
)
|
|
(405,102
|
)
|
|
|
|
|
|
|
|
Net cash flows used in operating activities
|
|
(6,540,191
|
)
|
|
(3,533,417
|
)
|
Cash flows from investing
activities
|
|
|
|
|
|
|
Payments to acquire and
deposit for acquisition of land use
right,
property, plant and
equipment
|
|
(1,276,883
|
)
|
|
(13,899,189
|
)
|
Proceeds from
disposal of property, plant and equipment
|
|
9,477
|
|
|
12,983
|
|
Net cash flows used in investing activities
|
|
(1,267,406
|
)
|
|
(13,886,206
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Net proceeds
from issuance of shares
|
|
-
|
|
|
9,258,473
|
|
Government grant received
|
|
357,984
|
|
|
436,586
|
|
Restricted cash
|
|
(16,193,232
|
)
|
|
5,070,605
|
|
Proceeds from bank loans
|
|
75,040,860
|
|
|
107,636,911
|
|
Repayment of
bank loans
|
|
(56,151,216
|
)
|
|
(104,913,150
|
)
|
Proceeds from non-interest
bearing loans
|
|
4,380,528
|
|
|
4,266,233
|
|
Repayment of
non-interest bearing loans
|
|
(996,432
|
)
|
|
(1,706,840
|
)
|
Proceeds from third party loans
|
|
11,088,000
|
|
|
-
|
|
Repayment of
third party loans
|
|
(7,920,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
Net cash flows provided by
financing activities
|
|
9,606,492
|
|
|
20,048,818
|
|
F-6
China GengSheng Minerals, Inc.
|
Consolidated Statements of Cash Flows (Contd)
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on
cash and cash equivalents
|
|
15,053
|
|
|
40,114
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
1,813,948
|
|
|
2,669,309
|
|
Cash and cash equivalents - beginning of year
|
|
3,594,361
|
|
|
925,052
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of year
|
$
|
5,408,309
|
|
$
|
3,594,361
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
Interest
|
$
|
7,055,208
|
|
$
|
5,550,951
|
|
Income
taxes
|
$
|
346,723
|
|
$
|
520,676
|
|
|
|
|
|
|
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
Proceeds from disposal of property, plant and equipment
settled by
offsetting trade payables
|
|
$82,338
|
|
|
$99,084
|
|
Proceeds from government grant receivables
settled by offsetting
non-interest-bearing loan from government
|
|
-
|
|
|
$384,648
|
|
Warrants issued to investors in connection with public
placement
|
|
-
|
|
$
|
970,000
|
|
Acquisition of Yili YiQiang Silicon Limited
by offsetting deposit for
acquisition of a non-consolidated affiliate
|
|
$1,098,979
|
|
|
$-
|
|
Acquisition of property, plant and equipment through the
offset of accounts payable, other payables, and accounts receivable
|
|
$1,496,356
|
|
|
$-
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
China GengSheng Minerals, Inc.
|
Consolidated Statements of Stockholders Equity
|
For the Years Ended December 31, 2012 and 2011
|
|
|
|
|
|
China GengSheng Minerals, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
Statutory and
|
|
|
comprehensive
|
|
|
Retained
|
|
|
Noncontrolling
|
|
|
|
|
|
|
shares
|
|
|
Amount
|
|
|
paid-in capital
|
|
|
other
reserves
|
|
|
income
|
|
|
earnings
|
|
|
interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
24,294,386
|
|
$
|
24,294
|
|
$
|
19,903,388
|
|
$
|
7,521,114
|
|
$
|
5,949,455
|
|
$
|
17,636,730
|
|
$
|
289,917
|
|
$
|
51,324,898
|
|
Common stock issued for proceeds
of $10 million
|
|
2,500,000
|
|
|
2,500
|
|
|
9,027,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,030,000
|
|
Cost of raising capital
|
|
-
|
|
|
-
|
|
|
(741,534
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(741,534
|
)
|
Common stock issued and allotted for
share-
based payment
at fair value
|
|
8,658
|
|
|
9
|
|
|
7,956
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,965
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,505,312
|
)
|
|
(48,282
|
)
|
|
(7,553,594
|
)
|
Foreign currency translation
adjustments
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,763,886
|
|
|
-
|
|
|
(47,235
|
)
|
|
1,716,651
|
|
Appropriation to
reserves
|
|
-
|
|
|
-
|
|
|
-
|
|
|
589,858
|
|
|
-
|
|
|
(589,858
|
)
|
|
-
|
|
|
-
|
|
Balance, December 31, 2011
|
|
26,803,044
|
|
|
26,803
|
|
|
28,197,310
|
|
|
8,110,972
|
|
|
7,713,341
|
|
|
9,541,560
|
|
|
194,400
|
|
|
53,784,386
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13,539,454
|
)
|
|
(55,456
|
)
|
|
(13,594,910
|
)
|
Foreign currency translation
adjustments
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
281,017
|
|
|
-
|
|
|
11,422
|
|
|
292,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
26,803,044
|
|
$
|
26,803
|
|
$
|
28,197,310
|
|
$
|
8,110,972
|
|
$
|
7,994,358
|
|
$
|
(3,997,894
|
)
|
$
|
150,366
|
|
$
|
40,481,915
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
China GengSheng Minerals,
Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31,
2012 and 2011
|
The Company was originally incorporated
on November 13, 1947, in accordance with the laws of the State of Washington as
Silver Mountain Mining Company. On August 20, 1979, the Articles of
Incorporation were amended to change the corporate name of the Company to
Leadpoint Consolidated Mines Company. On August 15, 2006, the Company changed
its state of incorporation from Washington to Nevada by means of a merger with
and into a Nevada corporation formed on May 23, 2006, solely for the purpose of
effecting the reincorporation and changed its name to Point Acquisition
Corporation. On June 11, 2007, the Company changed its name to China Minerals
Technologies, Inc. and on July 26, 2007, the Company changed its name to China
GengSheng Minerals, Inc. On March 4, 2010, the Companys common stock began
trading on the NYSE MKT LLC (formerly the American Stock Exchange) under the
symbol CHGS. Prior to March 4, 2010, the Companys common stock traded on the
Over-the-Counter Bulletin Board under the symbol CHGS.OB.
Currently the Company has the following
eight subsidiaries:
|
Company name
|
Place/date of
|
The Company's
|
Common stock/
|
Principal activities
|
|
|
incorporation or
|
effective ownership
|
registered capital
|
|
|
|
establishment
|
interest
|
|
|
|
|
|
|
|
|
|
GengSheng
International
Corporation
( GengSheng
International )
|
The British Virgin
Islands
(the BVI)/
November 3, 2004
|
100%
|
Ordinary shares :-
Authorized: 50,000
shares of $1 each
Paid up: 100 shares
of $1 each
|
Investment
holding
|
|
|
|
|
|
|
|
Henan GengSheng
Refractories Co., Ltd.
( Refractories )
|
The People's
Republic of
China (the PRC)/
December 20, 1996
|
100%
|
Registered capital
of
$12,089,879 fully
paid up
|
Manufacturing
and selling
of refractory
products
|
|
|
|
|
|
|
|
Henan GengSheng
High-Temperature
Materials Co., Ltd.
( High-Temperature )
|
PRC/
September 4, 2002
|
89.33%
|
Registered capital
of
$1,246,300 fully
paid up
|
Manufacturing
and selling
of functional
ceramic products
|
|
|
|
|
|
|
|
Smarthigh Holdings
Limited
(
Smarthigh )
|
BVI/
November 5, 2004
|
100%
|
Ordinary shares :-
Authorized: 50,000
shares of $1 each
Paid up: 100 shares
of $1 each
|
Investment
holding
|
|
|
|
|
|
|
|
Zhengzhou Duesail
Fracture Proppant
Co., Ltd.
( Duesail )
|
PRC/
August 14, 2006
|
100%
|
Registered capital of
$2,800,000 fully
paid up
|
Manufacturing
and selling
of
fracture proppant
products
|
|
|
|
|
|
|
|
Henan GengSheng
Micronized Powder
Materials Co., Ltd.
( Micronized )
|
PRC/
March 31, 2008
|
100%
|
Registered capital of
$5,823,000 fully
paid up
|
Manufacturing
and selling
of
fine precision
abrasives
|
|
|
|
|
|
|
|
Guizhou Southeast
Prefecture GengSheng
New Materials Co.,
Ltd.
( Prefecture )
|
PRC/
April 13, 2004
|
100%
|
Registered capital of
$141,840 fully
paid up
|
Manufacturing
and selling
of
corundum
materials
|
F-9
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
|
Henan Yuxing
Proppant Co., Ltd.
(Yuxing)
|
PRC/
June 3, 2011
|
100%
|
Registered capital of
$3,086,000 fully paid up
|
Manufacturing
and selling
of
fracture proppant
products
|
2.
|
Description of business
|
The Company is a holding company whose
primary business operations are conducted through its subsidiaries located in
the PRCs Henan Province. Prefecture is located in Guizhou Province and is
manufacturing corundum materials, a major raw material for monolithic
refractory. Through its operating subsidiaries, the Company produces and markets
a broad range of monolithic refractory, functional ceramics, fracture proppant,
fine precision abrasives, and corundum materials.
The principal raw materials used in the products are several forms of aluminum oxide, including bauxite, processed AI
2
O
3
and calcium aluminates cement, and other
materials, such as corundum, magnesia, resin and silica, which are primarily
sourced from suppliers located in the PRC. The production facilities of the
Company, other than the Prefectures sub-processing factory located in Guizhou,
are also located in Henan Province.
Refractories products allow steel
makers and other customers to improve the productivity and longevity of their
equipment and machinery. Functional ceramic products mainly include abrasive
balls and tiles, valves, electronic ceramics and structural ceramics. Fracture
proppant products are used to reach trapped pockets of oil and natural gas
deposits, which lead to higher productivities of oil and natural gas wells. Due
to their heat-resistant qualities and ability to function under thermal stress,
refractories serve as components in industrial furnaces and other heavy
industrial machinery. Corundum materials are a major raw material for producing
monolithic refractory. Fine precision abrasive is the Companys new product that
was commercially launched in the fourth quarter of 2009, and is used for slicing
the solar-silicon bar and polishing the equipment surface. The Companys
customers include some of the largest steel and iron producers located in 25
provinces in the PRC, as well as in the United States and other countries in
Asia, and Europe.
3.
|
Summary of significant accounting
policies
|
Basis of consolidation
The accompanying consolidated financial
statements of the Company have been prepared in accordance with the accounting
principles generally accepted in the United States of America.
The consolidated financial statements
include the accounts of the Company and its subsidiaries. All inter-company
accounts and transactions have been eliminated in consolidation.
Noncontrolling interest
Noncontrolling interest resulted from
the consolidation of an 89.33% owned subsidiary, High-Temperature.
Use of estimates
In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the dates of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting periods. These accounts
and estimates include, but are not limited to, the valuation of trade
receivables, other receivables, inventories, deferred income taxes, provision of
warranty, the estimation on useful lives of property, plant and equipment and
the impairment of long-lived assets. Actual results could differ from those
estimates.
F-10
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
3.
|
Summary of significant accounting policies
(Contd)
|
Concentrations of credit
risk
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash and cash equivalents, trade, bills and other receivables. As
of December 31, 2012 and 2011, substantially all of the Companys cash and cash
equivalents and restricted cash were held by major financial institutions
located in the PRC and Hong Kong, which management believes are of high credit
quality. With respect to trade and other receivables, the Company extends credit
based on an evaluation of the customers financial condition. The Company
generally does not require collateral for trade and other receivables and
maintains an allowance for doubtful accounts of trade and other receivables.
Regarding bills receivable, they are
undertaken by the banks to honor the payments at maturity and the customers are
required to place deposits with the banks equivalent to a certain percentage of
the bills amount as collateral. These bills receivable can be sold to any third
party at a discount before maturity. The Company does not maintain allowance for
bills receivable in the absence of bad debt experience and the payments are
undertaken by the banks.
During the reporting periods, sales to
the following customers represented 10% or more of the Companys consolidated
sales:
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Jilin Petroleum Group Company Ltd.
|
$
|
9,016,032
|
|
$
|
-
|
|
|
Shangdong Steel Co., Ltd. Rizhao Subsidiary
|
|
8,585,732
|
|
|
8,539,268
|
|
|
Shanghai Jolly Trading Co., Ltd.
|
|
-
|
|
|
10,873,027
|
|
|
AMSAT International Limited
|
|
-
|
|
|
6,504,751
|
|
|
|
$
|
17,601,764
|
|
$
|
25,917,046
|
|
During the reporting periods, no
customers represented 10% or more of the Companys trade receivables.
Cash and cash equivalents
Cash and cash equivalents include all
cash, deposits in banks and other highly liquid investments with initial
maturities of three months or less to be cash equivalents. As of December 31,
2012, cash and cash equivalents of approximately $1.5 million were denominated
in USD and were placed with a bank in Hong Kong. Approximately $3.9 million were
denominated in Renminbi (RMB) and were placed with banks in the PRC. As of
December 31, 2011, cash and cash equivalents of approximately $2.4 million were
denominated in USD and were placed with a bank in Hong Kong. Approximately $1.2
million were denominated in Renminbi (RMB) and were placed with banks in the
PRC. Cash and cash equivalents denominated in RMB are not freely convertible
into foreign currencies and the remittance of these funds out of the PRC is
subject to exchange control restrictions imposed by the PRC government.
Restricted Cash
Deposits in banks pledged as collateral
for bills payable and bank loans (Note 4) that are restricted in use are
classified as restricted cash under current assets.
Allowance for doubtful
accounts
The Company establishes an allowance
for doubtful accounts based on managements assessment of the collectability of
trade receivables. A considerable amount of judgment is required in assessing
the amount of the allowance. The Company considers the historical level of
credit losses and applies percentages to aged receivable categories. The Company
makes judgments about the creditworthiness of each customer based on ongoing
credit evaluations, and monitors current economic trends that might impact the
level of credit losses in the future. If the financial condition of the
customers were to deteriorate, resulting in their inability to make payments, a
larger allowance may be required.
F-11
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
3.
|
Summary of significant accounting policies
(Contd)
|
Based on the above assessment, the
management changed the general provisioning policy during the year ended
December 31, 2011 to make allowance equivalent to 5% of trade receivables due
from 1 to 2 years, 40% of trade receivables due from 2 to 3 years and 90% of
trade receivables due over 3 years. Additional specific provision is made
against trade receivables to the extent which they are considered to be
doubtful.
Bad debts are written off when
identified. The Company does not accrue interest on trade receivables.
Inventories
Inventories are stated at the lower of
cost or market. Cost is determined on a weighted average basis and includes all
expenditures incurred in bringing the goods to the point of sale and putting
them in a saleable condition. In case of manufacturing inventories and work in
progress, cost includes an appropriate share of production overheads based on
normal operating capacity. In assessing the ultimate realization of inventories,
the management makes judgments as to future demand requirements compared to
current or committed inventory levels. Our reserve requirements generally
increase as our projected demand requirements increases; decrease due to market
conditions and product life cycle changes. The Company estimates the demand
requirements based on market conditions, forecasts prepared by its customers,
sales contracts and orders in hand.
In addition, the Company estimates net
realizable value based on intended use, current market value and inventory
ageing analyses. The Company writes down the inventories for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventories and the estimated market value based upon assumptions about
future demand and market conditions.
Based on the above assessment, the
Company establishes a general policy to make a 50% provision for inventories
aged over 1 year. Historically, the actual net realizable value is close to the
managements estimation.
Investment in a non-consolidated
affiliate
Investment in an entity over which the
Company does not have control, but has significant influence, is accounted for
using the equity method of accounting. The Companys investment in Yili YiQiang
Silicon Limited ("Yili") is reported in the consolidated balance sheets as
investment in a non-consolidated affiliate (Note 9).
Property, plant and
equipment
Property, plant and equipment are
stated at cost less accumulated depreciation. Cost represents the purchase price
of the asset and other costs incurred to bring the asset into its existing
use.
Depreciation is provided on
straight-line basis over their estimated useful lives. The estimated useful
lives for significant property and equipment are as follows:
|
Buildings
|
20 years
|
|
Plant and machinery
|
5-10 years
|
|
Furniture, fixtures and equipment
|
4 - 5 years
|
|
Motor vehicles
|
3 years
|
Maintenance or repairs are charged to
expense as incurred. Upon sale or disposition, the applicable amounts of asset
cost and accumulated depreciation are removed from the accounts and the net
amount less proceeds from disposal is charged or credited to income.
Construction in progress mainly
represents expenditures in respect of the Companys new offices and factories
under construction. All direct costs relating to the acquisition or construction
of the Companys new office and factories are capitalized as construction in
progress. No depreciation is provided in respect of construction in
progress.
F-12
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
3.
|
Summary of significant accounting policies
(Contd)
|
Intangible assets
The Company accounts for goodwill and
intangible assets in accordance with the provisions of ASC 350 (previously SFAS
No. 142). The provisions of ASC 350 (i) prohibit the amortization of goodwill
and indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value may
be impaired), and (iii) require that reporting units be identified for the
purpose of assessing potential future impairments of goodwill. All intangible
assets had been fully impaired as of December 31, 2011 (Note 10).
Goodwill
Goodwill is recognized upon acquisition
of the equity interest in Prefecture, which represent the excess of the purchase
price over the fair value of acquired identified net assets of Prefecture at the
time of acquisition. It is stated at cost less impairment losses.
The goodwill was identified upon the
acquisition of 100% equity interest in Prefecture, which represented the excess
of the purchase price of $875,400 over the fair value of acquired identified net
assets of Prefecture of $434,311 at the time of acquisition on June 12, 2008.
Since its acquisition, annual impairment reviews have been performed by
management and the goodwill was considered fully impaired as of December 31,
2011.
Land use rights
Land use rights are stated at cost less
accumulated amortization. Amortization is provided using the straight-line
method over the terms of the leases of 39 to 50 years obtained from the relevant
PRC land authority.
Impairment of long-lived
assets
Long-lived assets are tested for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. The Company recognizes
impairment of long-lived assets in the event that the net book values of such
assets exceed the future undiscounted cash flows attributable to such assets.
The management opined that there was an
indication of impairment related to the buildings, machinery and equipments, and
construction in progress at Prefecture. Based on the impairment review performed
by the management as of December 31, 2012, an impairment loss of $287,247 was
recognized in the consolidated statements of operations and comprehensive loss
for the year ended December 31, 2012.
Government grant
The government grant income is
recognized in the consolidated statements of income and comprehensive income
when the relevant performance criteria are met. Grants applicable to purchase
property, plant and equipment are amortized over the life of the depreciable
assets.
The government grants income of
$558,665 for the year ended December 31, 2012 included environment protection
subsidy of $316,800 and other subsidies of $241,865 provided by local
government.
The government grants income of
$379,505 for the year ended December 31, 2011 included subsidized interest
payments of $356,270 and incentive payment of $23,235 for the advanced
technology subsidy provided by the local government.
Government grants of $649,612 were
recorded as deferred revenue as of December 31, 2012. These grants included
subsidies provided by local government and will be recognized as income by the
Company when certain milestones are achieved.
F-13
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
3.
|
Summary of significant accounting policies
(Contd)
|
Financial guarantee issued
The Company has acted as guarantor for
bank loans granted to certain local authorities and certain business associates.
The Company assessed its obligation under this guarantee pursuant to the
provision of ASC 460 Guarantee. The Company recognized in its consolidated
financial statements a liability for that guarantee at fair value at the date of
inception and recognized as an expense in profit or loss immediately. The amount
of guarantee liability is amortized in profit or loss over the term of the
guarantee as income from financial guarantees issued.
Capitalized interest
The interest cost associated with the
major development and construction projects is capitalized and included in the
cost of the project. When no debt is incurred specifically for a project,
interest is capitalized on amounts expended on the project using
weighted-average cost of the Companys outstanding borrowings. Capitalization of
interest ceases when the project is substantially completed or development
activity is suspended for more than a brief period.
The amount of interest capitalized for
2012 and 2011 was insignificant.
Revenue recognition
Pure products sales - Sales revenue is
recognized when the significant risks and rewards of ownership have been
transferred to the buyer at the time when the products are delivered to and
accepted by customers, the sales price is fixed or determinable and collection
is reasonably assured.
Products sales with installation,
testing, maintenance, repair and replacement - This kind of contract is signed
as whole such that all of these service are provided for one fixed fee, and it
does not separate the components of products, installation, testing,
maintenance, repair and replacement. After delivery of products/materials to
customers, the Company will do the installation and testing works, which takes
one to two days, before acceptance and usage by customers. The product life
cycle is very short and can normally be used for 80 cycles of production by
customers (about two to three days). Thereafter the customers will need
maintenance, repair and replacement of the Companys materials. For each
maintenance, repair and replacement, the Company will supply materials and do
the installation and testing works again, which are regarded as separate sales
by the Company. In other words, the Company will have sales to this kind of
customer every couple of days. This kind of sales revenue is recognized when the
significant risks and rewards of ownership have been transferred to the buyer at
the time when the installation work and testing are completed and after
acceptance by customers, the sales price is fixed or determinable and collection
is reasonably assured.
Revenue from sales of the Companys
product represents the invoiced value of goods, net of the value-added tax
(VAT). The Companys products that are sold in the PRC are subject to VAT at a
rate of 17 percent of the gross sales price. The VAT may be offset by VAT paid
by the Company on raw materials, other materials or costs included in the cost
of producing the Companys products.
Selling expenses
Selling expenses mainly consist of
advertising, commission, entertainment, salaries, shipping and handling cost and
traveling expenses which are incurred during selling activities.
Advertising, shipping and handling
costs, research and development expenses
Advertising, shipping and handling
costs and other product-related costs are charged to expense as incurred.
Advertising expense amounting to
$75,533 and $19,459 for the years ended December 31, 2012 and 2011,
respectively, were included in selling expenses.
Shipping and handling costs amounting
to $4,293,064 and $3,482,695 for the years ended December 31, 2012 and 2011,
respectively, were included in selling expenses.
Research and development include cost
of raw material consumed, testing expenses and other costs incurred for research
and development of potential new products. They are expensed when incurred.
Research and development costs amounted to $923,403 and $699,367 for the years
ended December 31, 2012 and 2011, respectively.
F-14
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
3.
|
Summary of significant accounting policies
(Contd)
|
Warranty
The Company maintains a policy of
providing after sales support for certain products by way of a warranty program.
As such these products are guaranteed for usage over a pre-agreed period of time
of service life or a pre-determined number of heating times. Further, the
relevant customers are allowed to defer the settlement of a certain percentage
(normally 10%) of the billed amount for a certain period of time (normally one
year) after acceptance of the Companys products under the warranty program. As
of December 31, 2012 and 2011, such receivables amounted to $502,850 and
$976,145 respectively and were included in trade receivables.
Since such products were well developed
and highly mature, the Company did not encounter any significant claims from
such customers based on past experience. Only a fraction of the Companys sales
are under warranty programs. Sales with warranty programs of $5.0 million and
$9.1 million accounted for 6.8% and 11.8% of total revenues for the fiscal years
of 2012 and 2011, respectively. The warranty programs guarantee the products for
usage over a pre-agreed period of time of service life or a pre-determined
number of heating times. If a claim qualifies under the program, the Company
will be responsible to repair the system.
Based on the materiality criteria of
SAB Topic 1.M, the Company begins accruing for warranty expenses at the time of
sale when the warranty programs reach 10% of total sales or when warranty
expenses reach 5% of net income.
Cost of sales
Cost of sales consists primarily of
material costs, freight charges, purchasing and receiving costs, inspection
costs, warehousing costs, internal transfer costs, wages, employee compensation,
depreciation and related costs, which are directly attributable to the
production of products. Write-down of inventory to lower of cost or market is
also recorded in cost of sales.
General and administrative
expenses
General and administrative expenses
consist of rent paid, office expenses, staff welfare, consumables, research and
development costs, labor protection and salaries and wages which are incurred at
the administrative level and exchange difference.
Stock-based compensation
The Company adopted the provisions of
ASC 718, which requires the use of the fair value method of accounting for
share-based compensation. Under the fair value based method, compensation cost
related to employee stock options or similar equity instruments which are
equity-classified awards, is measured at the grant date based on the value of
the award and is recognized over the requisite service period, which is usually
the vesting period. ASC 718 also requires measurement of cost of a
liability-classified award based on its current fair value.
Income taxes
The Company uses the asset and
liability method of accounting for income taxes pursuant to ASC 740 Income
Taxes. Under the asset and liability method of ASC 740, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statements carrying amounts of
existing assets and liabilities and loss carry forwards and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Comprehensive income (loss)
The Company has adopted ASC 220,
Comprehensive Income, which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Components of
comprehensive income (loss) include net income (loss) and foreign currency
translation adjustments.
F-15
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
3.
|
Summary of significant accounting policies
(Contd)
|
Foreign currency translation
The functional currency of the Company
is RMB and RMB is not freely convertible into foreign currencies. The Company
maintains its financial statements in the functional currency. Monetary assets
and liabilities denominated in currencies other than the functional currency are
translated into the functional currency at rates of exchange prevailing at the
balance sheet date. Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchanges
rates prevailing at the dates of the transaction. Exchange gains or losses
arising from foreign currency transactions are included in the determination of
net income for the respective periods.
For financial reporting purposes, the
financial statements of the Company which are prepared using the functional
currency have been translated into United States dollars. Assets and liabilities
are translated at the exchange rates at the balance sheet dates and revenue and
expenses are translated at the average exchange rates and stockholders equity
is translated at historical exchange rates. Any translation adjustments
resulting are not included in determining net income but are included in foreign
exchange adjustment to other comprehensive income, a component of stockholders
equity. The exchange rates in effect as of December 31, 2012 and 2011 were RMB1
for $0.1585 and $0.1574 respectively. The average exchange rates for the years
end December 31, 2012 and 2011 were RMB1 for $0.1584 and $0.1549 respectively.
There is no significant fluctuation in exchange rate for the conversion of RMB
to US dollars after the balance sheet date.
Recorded in other comprehensive income
are translation exchange gains which amounted to $292,439 and $1,716,651 for the
years ended December 31, 2012 and 2011, respectively.
Basic and diluted earnings (loss)
per share
The Company reports basic earnings
(loss) per share in accordance with ASC 260 Earnings Per Share. Basic earnings
(loss) per share are computed using the weighted average number of shares
outstanding during the periods presented. The weighted average number of shares
of the Company represents the common stock outstanding during the reporting
periods.
Commitments and
Contingencies
Liabilities for loss contingencies
arising from claims, assessments, litigation, fines and penalties and other
sources are recorded when it is probable that a liability has been incurred and
the amount of the assessment can be reasonably estimated.
Off-balance sheet
arrangements
Apart from the guarantee given as
stated in Note 22(b) by the Company to third parties, the Company does not have
any off-balance sheet arrangements.
Fair value of financial
instruments
ASC 820 requires the disclosure of the
estimated fair value of financial instruments including those financial
instruments for which fair value option was not elected. The Companys financial
instruments carried at fair value include warrant liabilities only. The required
disclosure is set out in Note 27.
Except for the warrant liabilities, the
carrying amount of financial assets and liabilities approximate their fair value
due to short maturities.
F-16
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
3.
|
Summary of significant accounting policies
(Contd)
|
Recently issued accounting
pronouncements
In October 2012, the Financial
Accounting Standards Board (the "FASB") issued Accounting Standards Update
("ASU") No. 2012-04, Technical Corrections and Improvements. The amendments in
this update cover a wide range of Topics in the Accounting Standards
Codification. These amendments include technical corrections and improvements to
the Accounting Standards Codification and conforming amendments related to fair
value measurements. The amendments in this update will be effective for fiscal
periods beginning after December 15, 2012. The Company is evaluating the impact
of this ASU and does not expect its adoption to have a significant impact on the
Company's consolidated financial statements.
In February 2013, the FASB issued ASU
No. 2013-02, Topic 350 - Comprehensive Income, (ASU 2013-02), which amends
Topic 220 to improve the reporting of reclassifications out of accumulated other
comprehensive income to the respective line items in net income. ASU 2013-02 is
effective for reporting periods beginning after December 15, 2012. The Company
is evaluating the impact of this ASU and does not expect its adoption to have a
significant impact on the Companys consolidated financial statements.
4.
|
Restricted cash and bills payable
|
|
|
|
December 31
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Bank deposits held as collateral for bills
payable (Note 4a)
|
$
|
9,585,882
|
|
$
|
12,552,650
|
|
|
Bank deposits held as collateral for bank loans (Note 16)
|
|
17,493,645
|
|
|
8,499,600
|
|
|
Other (4b)
|
|
-
|
|
|
41,758
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,079,527
|
|
$
|
21,094,008
|
|
Note :
|
a)
|
The Company is requested by certain suppliers to settle
amounts owed to such suppliers by the issuance of bills through banks for
which the banks undertake to guarantee the Companys settlement of these
amounts at maturity. These bills are interest free and would be usually
matured within six months from the date of issuance. As collateral
security for the banks undertakings, the Company is required to pay the
bank charges as well as maintain deposits with such banks in amounts equal
to 50% or 100% of the bills amounts issued.
|
|
|
|
|
|
Bills payable amounted to $13,995,550 and $16,385,340 as
of December 31, 2012 and 2011, respectively.
|
|
|
|
|
b)
|
The amount was held by a third party due to the dispute
with one supplier at Prefecture and was settled in the third quarter of
2012.
|
F-17
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
5.
|
Trade receivables, net
|
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
$
|
58,542,915
|
|
$
|
51,214,568
|
|
|
Allowance for doubtful accounts
|
|
(2,731,447
|
)
|
|
(2,046,820
|
)
|
|
|
$
|
55,811,468
|
|
$
|
49,167,748
|
|
An analysis of the allowance for
doubtful debts accounts for the years ended December 31, 2012 and 2011 is as
follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
2,046,820
|
|
$
|
1,020,741
|
|
|
Addition of doubtful debt expenses, net
|
|
669,900
|
|
|
972,037
|
|
|
Translation adjustments
|
|
14,727
|
|
|
54,042
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
$
|
2,731,447
|
|
$
|
2,046,820
|
|
Bills receivable represents bank
undertakings that essentially guarantee the payment of amounts owed by our
customers to us. The undertakings are provided by banks upon receipt of
collateral deposits from the customers. Bills receivable can be sold by us at a
discount before maturity.
As of December 31, 2012, the balance of
bills receivable was $9,913,668, with maturities ranging from 1 day to 6
months.
F-18
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
7.
|
Other receivables and prepayments, net and
related party advances
|
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Government grant receivables (Note 7a)
|
$
|
398,913
|
|
$
|
550,396
|
|
|
Loans to third parties (Note 7b)
|
|
1,532,455
|
|
|
1,314,359
|
|
|
Value added tax and other tax recoverable
|
|
569,886
|
|
|
662,151
|
|
|
Deposits for purchase of raw materials
|
|
2,145,583
|
|
|
1,430,517
|
|
|
Other deposit
|
|
1,140,410
|
|
|
198,988
|
|
|
Prepayment
|
|
874,873
|
|
|
1,817,126
|
|
|
Other receivables
|
|
489,653
|
|
|
248,731
|
|
|
Related party advances (Note 7c)
|
|
4,172,518
|
|
|
2,986,134
|
|
|
|
|
|
|
|
|
|
|
|
|
11,324,291
|
|
|
9,208,402
|
|
|
Allowance for doubtful accounts
|
|
(1,824,114
|
)
|
|
(757,217
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
9,500,177
|
|
$
|
8,451,185
|
|
|
|
|
|
|
|
|
|
|
Advances to senior management (Note 7b)
|
$
|
9,005
|
|
$
|
360,162
|
|
An analysis of the allowance for
doubtful accounts for the years ended December 31, 2012 and 2011 is as
follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
757,217
|
|
$
|
374,590
|
|
|
Addition of doubtful debt expenses, net
|
|
1,060,935
|
|
|
362,699
|
|
|
Translation adjustments
|
|
5,962
|
|
|
19,928
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
$
|
1,824,114
|
|
$
|
757,217
|
|
Notes :
|
a)
|
As of December 31, 2012, government grant receivables
represented incentive bonus of $398,913 from the local government for
successful back-door listing and good performance by Refractories. The
Company is currently evaluating the collectability and timing of the
receipt of the grants.
|
|
|
|
|
b)
|
The loans to third parties mainly represent the loans to
companies and government entity which have business connections with the
Company. The amounts are interest-free, unsecured and repayable on
demand.
|
|
|
|
|
|
The advances to senior management were mainly for
handling sourcing activities and for travel and other expenses in the
ordinary course of business.
|
|
|
|
|
c)
|
The amounts mainly represent staff drawings for handling
sourcing and logistic activities for the Company in the ordinary course of
business.
|
F-19
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
4,327,856
|
|
$
|
5,542,691
|
|
|
Work-in-process
|
|
2,249,471
|
|
|
619,773
|
|
|
Finished goods
|
|
6,543,959
|
|
|
10,820,551
|
|
|
|
|
|
|
|
|
|
|
|
|
13,121,286
|
|
|
16,983,015
|
|
|
Allowance for obsolete inventories
|
|
(150,118
|
)
|
|
(26,433
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
12,971,168
|
|
$
|
16,956,582
|
|
During the year ended December 31,
2012, allowance for obsolete inventories of $123,422 was recognized in the cost
of goods sold; no allowance for obsolete inventories was recognized in the year
ended December 31, 2011.
9.
|
Deposit for acquisition of a
non-consolidated affiliate, net and investment in a non-consolidated
affiliate
|
The Company paid RMB 15 million
(equivalent to $2.37 million) in August 2010 to acquire 24.5% equity interest in
Yili YiQiang Silicon Limited ("Yili"), a company established in the PRC and
engaged in manufacturing and trading of silicon carbide. Due to some unexpected
administrative difficulties in the completion of the acquisition, the aforesaid
investment amount paid was only recognized as deposit as the ownership, risks
and rewards of 24.5% equity interest in Yili had not been transferred to the
Company as of December 31, 2011. The acquisition was completed on May 28, 2012
and the deposit was recognized as investment in a non-consolidated affiliate at
that date.
The management opined that there was an
indication of impairment as the financial position of Yili deteriorated
subsequent to the payment of deposit. Based on the impairment review performed
by the management with reference to the financial position of Yili as of
December 31, 2011, an impairment loss of $1,248,804 was recognized in the
consolidated statements of operations and comprehensive loss for the year ended
December 31, 2011 as the management assessed the probability of recovering the
whole carrying value of the deposit was unlikely.
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Initial cost
|
$
|
2,361,000
|
|
$
|
2,361,000
|
|
|
Less: Impairment charge
|
|
(1,248,804
|
)
|
|
(1,248,804
|
)
|
|
Translation adjustments
|
|
(20,155
|
)
|
|
(20,155
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,092,041
|
|
$
|
1,092,041
|
|
|
Less: Recognized as investment in a non-consolidated
affiliate
|
|
(1,092,041
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
|
$
|
-
|
|
$
|
1,092,041
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Investment in a non-consolidated affiliate
|
$
|
1,092,041
|
|
$
|
-
|
|
|
Less: Equity in net loss of a non-consolidated affiliate
|
|
(59,143
|
)
|
|
-
|
|
|
Translation adjustments
|
|
7,594
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
$
|
1,040,492
|
|
$
|
-
|
|
F-20
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
10.
|
Intangible assets, net and goodwill, net
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Unpatented technology (Note 10a)
|
$
|
-
|
|
$
|
393,500
|
|
|
Accumulated amortization
|
|
-
|
|
|
(77,450
|
)
|
|
Translation adjustments
|
|
-
|
|
|
(6,250
|
)
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
-
|
|
|
309,800
|
|
|
Less: impairment charge
|
|
-
|
|
|
(309,800
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
$
|
-
|
|
$
|
-
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Goodwill (Note 10b)
|
$
|
-
|
|
$
|
441,089
|
|
|
Less: impairment charge
|
|
-
|
|
|
(441,089
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
$
|
-
|
|
$
|
-
|
|
Notes :
|
a)
|
During 2007, Refractories entered into a contract with an
independent third party to purchase unpatented technology in relation to
the production of mortar, at a cash consideration of $342,750. This
consideration was mutually agreed between Refractories and such third
party and this unpatented technology can be used for an unlimited period
of time. Since its acquisition, an annual impairment review was performed
by management and it was stated at cost less any impairment losses. In
2011, the expected useful life of the unpatented technology was reviewed
and can be used up to 2015. Unpatented technology is stated at cost less
any accumulated amortization and any identified impairment losses. Based
on the result of the review performed at the end of 2011, the intangible
asset was considered fully impaired.
|
|
|
|
|
|
During the year ended December 31, 2012 and 2011, the
amortization charge was nil and $77,450 respectively.
|
|
|
|
|
b)
|
The goodwill was identified upon the acquisition of 100%
equity interest in Prefecture, which represented the excess of the
purchase price of $875,400 over the fair value of acquired identified net
assets of Prefecture of $434,311 at the time of acquisition on June 12,
2008. Since its acquisition, annual impairment reviews have been performed
by management. Based on the result of the review performed at the end of
2011, the goodwill was considered fully impaired.
|
F-21
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
11.
|
Property, plant and equipment, net
|
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Costs:
|
|
|
|
|
|
|
|
Buildings
|
$
|
25,669,609
|
|
$
|
24,950,339
|
|
|
Plant and machinery
|
|
15,289,765
|
|
|
13,712,330
|
|
|
Furniture,
fixtures and equipment
|
|
1,670,067
|
|
|
1,411,826
|
|
|
Motor vehicles
|
|
2,369,478
|
|
|
2,157,474
|
|
|
|
|
|
|
|
|
|
|
|
|
44,998,919
|
|
|
42,231,969
|
|
|
Accumulated depreciation
|
|
(10,848,175
|
)
|
|
(7,862,270
|
)
|
|
Impairment charge
|
|
(223,539
|
)
|
|
-
|
|
|
Construction in progress
|
|
2,497,799
|
|
|
2,795,150
|
|
|
|
|
|
|
|
|
|
|
Net
|
$
|
36,425,004
|
|
$
|
37,164,849
|
|
(i) During the reporting periods,
depreciation is included in:
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold and overhead of
inventories
|
$
|
2,302,382
|
|
$
|
1,603,855
|
|
|
General and administrative expenses
|
|
739,275
|
|
|
667,413
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,041,657
|
|
$
|
2,271,268
|
|
During the years ended December 31,
2012 and 2011, property, plant and equipment with carrying amounts of $410,640
and $116,386 were disposed of at considerations of $91,814 and $112,067
resulting in losses of $318,826 and $4,319, respectively.
(ii) Construction in Progress
Construction in progress mainly
comprises capital expenditure for construction of the Companys new offices and
factories.
F-22
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
|
|
|
December 31
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Right to use land
|
$
|
4,427,495
|
|
$
|
3,298,741
|
|
|
Accumulated amortization
|
|
(391,547
|
)
|
|
(160,780
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
4,035,948
|
|
$
|
3,137,961
|
|
The Company obtained the right from the
relevant PRC land authority for periods ranging from 39 to 50 years to use the
lands on which the office premises, production facilities and warehouses of the
Company are situated.
During the years ended December 31,
2012 and 2011, amortization amounted to $229,498 and $28,428 respectively.
The estimated aggregate amortization
expenses for land use right for the five succeeding years are as follows:
|
Year
|
|
|
|
|
2013
|
$
|
88,550
|
|
|
2014
|
|
88,550
|
|
|
2015
|
|
88,550
|
|
|
2016
|
|
88,550
|
|
|
2017
|
|
88,550
|
|
|
|
$
|
442,750
|
|
As of December 31, 2012, land use
rights with net book value of $3,062,931 of the Company were pledged as
collateral under certain loan arrangements (Note 16).
13.
|
Other payables and accrued expenses
|
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Accrued audit fee
|
$
|
90,135
|
|
$
|
120,411
|
|
|
Other accrued expenses
|
|
216,273
|
|
|
151,884
|
|
|
Value added tax and other tax payables
|
|
2,979,263
|
|
|
2,950,004
|
|
|
Sales receipts in advance
|
|
392,898
|
|
|
2,723,249
|
|
|
Salaries payable
|
|
1,360,136
|
|
|
1,007,506
|
|
|
Staff welfare payable (Note 13a)
|
|
196,048
|
|
|
130,423
|
|
|
Advances from staff
|
|
1,066,429
|
|
|
595,539
|
|
|
Freight charges payable
|
|
3,833
|
|
|
128,524
|
|
|
Guarantee liability (Note 22b)
|
|
210,690
|
|
|
309,858
|
|
|
Other payables
|
|
1,045,441
|
|
|
760,009
|
|
|
|
$
|
7,561,146
|
|
$
|
8,877,407
|
|
Note :
|
a)
|
Staff welfare payable represents accrued staff medical,
industry injury claims, labor and unemployment insurances. All of which
are third parties insurance and the insurance premiums are based on
certain percentages of salaries. The obligations of the Company are
limited to those premiums contributed by the
Company.
|
F-23
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
14.
|
Provision of warranty
|
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Balance at beginning of year
|
$
|
184,778
|
|
$
|
69,739
|
|
|
Claims paid for the year
|
|
(81,346
|
)
|
|
(49,266
|
)
|
|
Provision for the year
|
|
(2,862
|
)
|
|
164,305
|
|
|
Balance at end of year
|
$
|
100,570
|
|
$
|
184,778
|
|
15.
|
Non-interest-bearing loans
|
The loans represent interest-free and
unsecured loans from Companys associates and a government entity and are
repayable on demand.
The balance of non-interest-bearing
loans as of December 31, 2012 included $158,500 (equivalent of RMB1,000,000)
from Mr. Shunqing Zhang, the Chairman and CEO of the Company.
16.
|
Collateralized short-term bank loans
|
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Bank loans wholly repayable within 1 year
|
$
|
65,196,883
|
|
$
|
45,974,022
|
|
The above bank loans are denominated in
RMB and carry average interest rates at 5.91% per annum with maturity dates
ranging from four months to twelve months.
The bank loans as of December 31, 2012
were secured by the followings: -
|
(a)
|
Guarantee executed by business associates (Note 22b) up
to the amount of $25,835,500;
|
|
(b)
|
Land use rights with carrying amount of $3,062,931 (Note
12);
|
|
(c)
|
Bank deposits of $17,493,645 (Note 4); and
|
|
(d)
|
Bills issued by banks.
|
17.
|
Loan from a third party
|
The loan is interest-bearing at 24% per
annum from an unrelated company. It was guaranteed by Mr. Shunqing Zhang, the
Chairman and CEO of the Company and another employee of the Company. The loan
had a maturity of three months and was fully settled on March 11, 2013.
F-24
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
18.
|
Statutory and other reserves
|
The Companys statutory and other
reserves were comprised as follows:
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Statutory reserves
|
$
|
4,554,936
|
|
$
|
4,554,936
|
|
|
Special reserve
|
|
3,556,036
|
|
|
3,556,036
|
|
|
|
$
|
8,110,972
|
|
$
|
8,110,972
|
|
Statutory reserves
Under PRC regulations, all subsidiaries
in the PRC may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC GAAP. In addition, these companies are
required to set aside at least 10% of their after-tax net profits each year, if
any, to fund the statutory reserves until the balance of the reserves reaches
50% of their registered capital. The statutory reserves are not distributable in
the form of cash dividends to the Company and can be used to make up cumulative
prior year losses.
Special reserve
Before the reorganization, a former
subsidiary of Refractories, Gongyi GengSheng Refractories Co., Ltd., was
entitled to a special tax concession (Tax Concession) because it employed the
required number of disabled staff according to the relevant PRC tax rules. In
particular, this Tax Concession exempted the subsidiary from paying enterprise
income tax. However, these tax savings can only be used for future development
of its production facilities or welfare matters, and cannot be distributed as
cash dividends. Accordingly, the same amount of tax savings was set aside and
taken to special reserve which is not available for distribution. This reserve
as maintained by the subsidiary has been combined into Refractories upon the
reorganization and is subject to the same restrictions in its usage.
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
$
|
3,688,791
|
|
$
|
2,672,262
|
|
|
Bills discounting charges
|
|
3,612,095
|
|
|
2,606,540
|
|
|
|
$
|
7,300,886
|
|
$
|
5,278,802
|
|
UNITED STATES
The Company is incorporated in the
United States of America (U.S.) and is subject to U.S. tax law. No provisions
for income taxes have been made as the Company has no U.S. taxable income for
reporting periods. The applicable income tax rate for the reporting periods is
34%. The Company has not provided deferred tax on undistributed earnings of its
non-U.S. subsidiaries as of December 31, 2012, as it is the Company's current
policy to reinvest these earnings in non-U.S. operations.
F-25
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
BVI
GengSheng International and Smarthigh
were incorporated in the BVI and are not subject to income taxes under the
current laws of the BVI.
20.
|
Income taxes (Contd)
|
PRC
The PRCs legislative body, the
National Peoples Congress, adopted the unified Corporate Income Tax Law (CIT
Law) on March 16, 2007. This new tax law replaces the existing separate income
tax laws for domestic enterprises and foreign-invested enterprises and became
effective on January 1, 2008. Under the new tax law, a unified income tax rates
is set at 25% for both domestic enterprises and foreign-invested enterprises.
However, there will be a transition period for enterprises, whether
foreign-invested or domestic, that are currently receiving preferential tax
treatments granted by relevant tax authorities. Enterprises that are subject to
an enterprise income tax rate lower than 25% may continue to enjoy the lower
rate and will transit into the new tax rate over a five year period beginning on
the effective date of the CIT Law. Enterprises that are currently entitled to
exemptions for a fixed term will continue to enjoy such treatment until the
exemption term expires. Preferential tax treatment will continue to be granted
to industries and projects that qualify for such preferential treatments under
the new tax law.
Pursuant to the income tax rules and
regulations of the PRC, provision for PRC income tax of the PRC subsidiaries is
calculated based on the following rates :
|
|
Year ended December 31,
|
|
|
Note:-
|
2012
|
2011
|
|
Refractories
|
(a)
|
15%
|
15%
|
|
High-Temperature
|
(a)
|
15%
|
15%
|
|
Duesail
|
(a)
|
15%
|
12.5%
|
|
Prefecture
|
|
25%
|
25%
|
|
Micronized
|
|
25%
|
25%
|
|
Yuxing
|
|
25%
|
25%
|
Note :
|
(a)
|
Entities entitled to a tax holiday in which they are
fully exempted from the PRC enterprise income tax for 2 years starting
from their first profit-making year after netting off accumulated tax
losses, followed by a 50% reduction in the PRC enterprise income tax for
the next 3 years (tax holidays). Any unutilised tax holidays will
continue until expiry while tax holidays were deemed to start from January
1, 2008, even if the entity was not yet making profit after netting off
its accumulated tax losses. Duesail is in the fourth year of tax holidays
in 2012. Refractories is in the third year of tax holidays in 2009 and
starting from the fiscal year 2011, Refractories is subject to enterprise
income tax at unified rate of 15% for three years due to its engagement in
an advanced technology industry and has passed the inspection of the
provincial high-tech item. The relevant authority granted it a certificate
during 2011. Starting from the fiscal year 2011, High-Temperature is
subject to enterprise income tax at unified rate of 15% for three years
due to its engagement in an advanced technology industry. The relevant
authority granted it a certificate during 2011.
|
In July 2006, the FASB issued ASC
740-10-25. This interpretation requires recognition and measurement of uncertain
income tax positions using a more-likely-than-not approach. The Company
adopted this ASC 740-10-25 on January 1, 2007. Under the new CIT Law which
became effective on January 1, 2008, the Company may be deemed to be a resident
enterprise by the PRC tax authorities. If the Company was deemed to be resident
enterprise, the Company may be subject to the CIT at 25% on the worldwide
taxable income and dividends paid from the PRC subsidiaries to their overseas
holding companies may be exempted from 10% PRC withholding tax. Except for
certain immaterial interest income from bank deposits placed with financial
institutions outside the PRC, all of the Companys income is generated from the
PRC operation. Given the immaterial amount of income generated from outside the
PRC and the PRC subsidiaries do not intend to pay dividends for the foreseeable
future, the management considers that the impact arising from resident
enterprise on the Companys financial position is not significant. The
management evaluated the Company's tax positions and considered that no
additional provision for uncertainty in income taxes is necessary as of December
31, 2012 and 2011.
F-26
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
The components of the provision for
income taxes from continuing operations are:
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Current taxes - PRC
|
$
|
291,588
|
|
$
|
116,628
|
|
|
Deferred taxes - PRC
|
|
200,701
|
|
|
208,518
|
|
|
|
|
|
|
|
|
|
|
|
$
|
492,289
|
|
$
|
325,146
|
|
The effective income tax expenses
differ from the PRC statutory income tax rate from continuing operations in the
PRC as follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Provision for income taxes at statutory
income tax rate 25% in 2012 and 2011
|
$
|
(3,275,657
|
)
|
$
|
(1,807,112
|
)
|
|
Non-deductible items for tax
|
|
889,081
|
|
|
1,266,696
|
|
|
Income not subject to tax
|
|
(84,110
|
)
|
|
(323,627
|
)
|
|
(Over) under provision in prior year
|
|
177,827
|
|
|
(88,272
|
)
|
|
Valuation allowance
|
|
2,349,343
|
|
|
1,245,097
|
|
|
Difference arising from preferential tax rate
|
|
599,404
|
|
|
237,263
|
|
|
NOL utilized
|
|
(64,381
|
)
|
|
-
|
|
|
Tax holiday and tax concession
|
|
(99,218
|
)
|
|
(204,899
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
492,289
|
|
$
|
325,146
|
|
During the years ended December 31,
2012 and 2011, the amounts of benefit from the tax holiday and tax concession
were $99,218 and $204,899 and the effect on basic loss per share were $0.004 and
$0.01, respectively.
Deferred tax assets (liabilities) as of
December 31, 2012 and 2011 are composed of the following:
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
PRC
|
|
|
|
|
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
Allowance for doubtful debts
|
$
|
694,516
|
|
$
|
414,680
|
|
|
Other payables
|
|
108,522
|
|
|
6,783
|
|
|
Others
|
|
132,415
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
935,453
|
|
|
421,463
|
|
|
Valuation allowance
|
|
(903,994
|
)
|
|
(421,463
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
31,459
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
Property, plant and equipment
|
$
|
327,215
|
|
$
|
159,601
|
|
|
Intangible assets
|
|
16,586
|
|
|
47,220
|
|
F-27
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
|
Tax losses carry forward
|
|
-
|
|
|
616,813
|
|
|
Valuation allowance
|
|
(164,716
|
)
|
|
(823,634
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
210,544
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax liabilities:
|
|
|
|
|
|
|
|
Other receivables and prepayments
|
$
|
(31,758
|
)
|
$
|
(78,328
|
)
|
|
Inventory
|
|
(9,276
|
)
|
|
(9,211
|
)
|
|
Intangible assets
|
|
(25,261
|
)
|
|
(25,086
|
)
|
|
Other
|
|
(447,229
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(513,524
|
)
|
$
|
(112,625
|
)
|
During the reporting periods, all the
potential dilutive shares were not included in the computation of diluted loss
per share because they were anti-dilutive. Accordingly, the basic and diluted
loss per share are the same.
22.
|
Commitments and contingencies
|
|
(a)
|
The Company's operations are subject to the laws and
regulations in the PRC relating to the generation, storage, handling,
emission, transportation and discharge of certain materials, substances
and waste into the environment, and various other health and safety
matters. Governmental authorities have the power to enforce compliance
with their regulations, and violators may be subject to fines, injunctions
or both. The Company must devote substantial financial resources to ensure
compliance and believes that it is in substantial compliance with all the
applicable laws and regulations.
|
|
|
|
|
|
The Company is currently not involved in any
environmental remediation and has not accrued any amounts for
environmental remediation relating to its operations. Under existing
legislation, management believes that there are no probable liabilities
that will have a material adverse effect on the financial position,
operating results or cash flows of the Company.
|
|
|
|
|
|
During the years ended December 31, 2012 and 2011, the
Company has incurred expenditures for routine pollutant discharge fees
amounting to $18,691 and $19,987, respectively. These costs were included
in general and administrative expenses.
|
|
|
|
|
(b)
|
The Company guaranteed the following debts of third
parties, which is summarized as follows:
|
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Guaranteed amount
|
$
|
30,939,200
|
|
$
|
41,317,500
|
|
In 2010, the Company, in accordance
with ASC 460, commenced to recognize the liability arising from guarantees given
for the debts granted to third parties by financial institutions.
An analysis of the guarantee liability
as of December 31, 2012 and 2011 is as follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
309,858
|
|
$
|
392,978
|
|
|
Recognized expenses for the year
|
|
461,578
|
|
|
518,141
|
|
|
Recognized as income for the year
|
|
(562,847
|
)
|
|
(614,472
|
)
|
|
Translation adjustments
|
|
2,101
|
|
|
13,211
|
|
F-28
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
|
Balance at end of year
|
$
|
210,690
|
|
$
|
309,858
|
|
The fair value of such guarantees is
determined by reference to fees charged in an arms length transaction for
similar services.
F-29
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
22.
|
Commitments and contingencies (Contd)
|
Guarantees as of December 31, 2012 are
further analyzed as below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repaid
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
|
|
|
|
Term loan
|
|
|
|
|
|
Interest
|
|
|
|
|
|
up to
|
|
|
as of
|
|
|
interest as of
|
|
|
Estimated
|
|
|
|
|
draw down
|
|
|
|
|
|
rate (per
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
maximum
|
|
|
Guarantee
|
|
date
|
|
|
Expiry date
|
|
|
annum)
|
|
|
Loan principal
|
|
|
2012
|
|
|
2012
|
|
|
2012
|
|
|
exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business associates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note i)
|
|
1/12/2012
|
|
|
1/11/2013
|
|
|
6.588%
|
|
|
7,925,000
|
|
|
-
|
|
|
7,925,000
|
|
|
30,039
|
|
|
7,955,039
|
|
|
|
|
3/6/2012
|
|
|
3/5/2013
|
|
|
7.216%
|
|
|
2,060,500
|
|
|
-
|
|
|
2,060,500
|
|
|
30,144
|
|
|
2,090,644
|
|
|
|
|
6/5/2012
|
|
|
6/4/2013
|
|
|
7.930%
|
|
|
4,755,000
|
|
|
-
|
|
|
4,755,000
|
|
|
170,457
|
|
|
4,925,457
|
|
|
|
|
6/29/2012
|
|
|
6/26/2013
|
|
|
12.096%
|
|
|
792,500
|
|
|
-
|
|
|
792,500
|
|
|
49,112
|
|
|
841,612
|
|
|
|
|
7/16/2012
|
|
|
7/15/2013
|
|
|
7.200%
|
|
|
3,170,000
|
|
|
-
|
|
|
3,170,000
|
|
|
129,440
|
|
|
3,299,440
|
|
|
|
|
8/27/2012
|
|
|
8/26/2015
|
|
|
11.664%
|
|
|
1,585,000
|
|
|
-
|
|
|
1,585,000
|
|
|
495,869
|
|
|
2,080,869
|
|
|
|
|
8/31/2012
|
|
|
8/30/2013
|
|
|
6.600%
|
|
|
713,250
|
|
|
-
|
|
|
713,250
|
|
|
32,630
|
|
|
745,880
|
|
|
|
|
9/10/2012
|
|
|
9/9/2013
|
|
|
6.000%
|
|
|
427,950
|
|
|
-
|
|
|
427,950
|
|
|
18,502
|
|
|
446,452
|
|
|
|
|
9/20/2012
|
|
|
9/19/2013
|
|
|
6.000%
|
|
|
3,170,000
|
|
|
-
|
|
|
3,170,000
|
|
|
142,259
|
|
|
3,312,259
|
|
|
|
|
10/26/2012
|
|
|
10/25/2013
|
|
|
6.160%
|
|
|
3,170,000
|
|
|
-
|
|
|
3,170,000
|
|
|
165,312
|
|
|
3,335,312
|
|
|
|
|
11/23/2012
|
|
|
11/22//2013
|
|
|
6.160%
|
|
|
3,170,000
|
|
|
-
|
|
|
3,170,000
|
|
|
179,757
|
|
|
3,349,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,939,200
|
|
$
|
-
|
|
$
|
30,939,200
|
|
$
|
1,443,521
|
|
$
|
32,382,721
|
|
Notes:
|
i)
|
During the year, the Company has acted as guarantor for
bank loans granted to certain business associates. Certain of these
associates also provided guarantees for bank loans to the Company. (Note
16). None of our directors, director nominees or executive officers is
involved in normal operation or investing in the business of the
guaranteed business associates. All the business associates have a healthy
record to pay back loans on a timely manner, in the Peoples Bank of
Chinas (Central Bank of China) credit rating
system.
|
All the above guarantees have no
recourse provision that would enable the Company to recover from third parties
of any amounts paid under the guarantees and any assets held either as
collateral or by third parties that the Company can obtain or liquidate to
recover all or a portion of the amounts paid under the guarantees.
If the third parties fail to perform
under their contractual obligation, the Company will make future payments
including the contractual principal amounts, related interest and penalties.
|
(c)
|
As of December 31, 2012, the Company had capital
commitments of $876,526 in respect of the construction and renovation of
office buildings and workshops; and $452,942 in respect of the purchase of
machinery, which were not contracted for and provided in these financial
statements.
|
F-30
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
22.
|
Commitments and contingencies (Contd)
|
|
(d)
|
In accordance with the PRC tax regulations, the Companys
sales are subject to value added tax (VAT) at 17% upon the issuance of
VAT invoices to its customers. When preparing these consolidated financial
statements, the Company recognized revenue when the significant risks and
rewards of ownership have been transferred to the buyer at the time when
the products are delivered to and accepted by customers, and made full tax
provision in accordance with relevant national and local laws and
regulations of the PRC.
|
|
|
|
|
|
The Company follows the practice of reporting its revenue
for PRC tax purposes when invoices are issued. In the local statutory
financial statements prepared under PRC GAAP, the Company recognized
revenue on an invoice basis instead of when the significant risks and
rewards of ownership have been transferred to the buyer at the time when
the products are delivered to and accepted by customers. Accordingly,
despite the fact the Company has made full tax provision in the
consolidated financial statements, the Company may be subject to a penalty
for the deferred reporting of tax obligations. The exact amount of penalty
cannot be estimated with any reasonable degree of certainty. The
management considers it is very unlikely that the tax penalty will be
imposed.
|
23.
|
Defined contribution plan
|
The Company has a defined contribution
plan for all qualified employees in the PRC. The employer and its employees are
each required to make contributions to the plan at the rates specified in the
plan. The only obligation of the Company with respect to the retirement plan is
to make the required contributions under the plan. No forfeited contribution is
available to reduce the contribution payable in the future years. The defined
contribution plan contributions were charged to the consolidated statements of
operations and comprehensive loss. The Company contributed $522,336 and $466,371
for years ended December 31, 2012 and 2011, respectively.
The Company uses the management
approach in determining reportable operating segments. The management approach
considers the internal organization and reporting used by the Company's chief
operating decision maker for making operating decisions and assessing
performance as the source for determining the Company's reportable segments.
Management, including the chief operating decision maker, reviews operating
results solely by the revenue of monolithic refractory products, industrial
ceramic products, fracture proppant products, fine precision abrasives and
operating results of the Company. As such, the Company has determined that it
has four operating segments as defined by ASC 280, Segment Reporting:
refractories, industrial ceramic, fracture proppant and fine precision
abrasives.
Adjustments and eliminations of
inter-company transactions were not included in determining segment (loss)
profit, as they are not used by the chief operating decision maker.
|
|
|
Refractories
|
|
|
Industrial ceramic
|
|
|
Fracture proppant
|
|
|
Fine precision abrasives
|
|
|
Total
|
|
|
|
|
Year ended December 31,
|
|
|
Year ended December 31,
|
|
|
Year ended December 31,
|
|
|
Year ended December 31,
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from
external
customers
|
$
|
38,877,865
|
|
$
|
46,571,586
|
|
$
|
1,802,386
|
|
$
|
429,417
|
|
$
|
24,516,603
|
|
$
|
22,526,371
|
|
$
|
8,337,973
|
|
$
|
7,408,291
|
|
$
|
73,534,827
|
|
$
|
76,935,665
|
|
|
Interest
income
|
|
550,913
|
|
|
814,725
|
|
|
74
|
|
|
157
|
|
|
261,725
|
|
|
101,152
|
|
|
-
|
|
|
353
|
|
|
812,711
|
|
|
916,387
|
|
|
Interest
expenses
|
|
4,244,148
|
|
|
3,027,223
|
|
|
1,966
|
|
|
113,044
|
|
|
1,456,920
|
|
|
2,123,777
|
|
|
1,597,118
|
|
|
14,245
|
|
|
7,300,152
|
|
|
5,278,289
|
|
|
Depreciation
|
|
735,391
|
|
|
695,404
|
|
|
115,394
|
|
|
114,978
|
|
|
1,217,880
|
|
|
631,501
|
|
|
972,992
|
|
|
829,385
|
|
|
3,041,657
|
|
|
2,271,268
|
|
|
Amortization
|
|
42,762
|
|
|
94,791
|
|
|
5,223
|
|
|
5,108
|
|
|
132,600
|
|
|
-
|
|
|
48,913
|
|
|
5,979
|
|
|
229,498
|
|
|
105,878
|
|
|
Segment (loss)
profit
|
|
(8,376,074
|
)
|
|
(6,484,382
|
)
|
|
(512,232
|
)
|
|
(441,166
|
)
|
|
1,309,176
|
|
|
1,093,414
|
|
|
(5,234,674
|
)
|
|
(2,295,119
|
)
|
|
(12,813,804
|
)
|
|
(8,127,253
|
)
|
|
Segment assets
|
|
80,170,355
|
|
|
82,480,900
|
|
|
3,778,461
|
|
|
3,677,127
|
|
|
44,524,087
|
|
|
32,048,852
|
|
|
31,709,484
|
|
|
26,954,762
|
|
|
160,182,387
|
|
|
145,161,641
|
|
|
Capital
expenditure
|
$
|
1,897,177
|
|
$
|
3,139,275
|
|
$
|
27,540
|
|
$
|
12,716
|
|
$
|
715,830
|
|
$
|
8,787,955
|
|
$
|
132,692
|
|
$
|
1,959,243
|
|
$
|
2,773,239
|
|
$
|
13,899,189
|
|
F-31
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
24.
|
Segment information (Cont'd)
|
Segment information by products for
the years ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine
|
|
|
|
|
|
|
|
Monolithic
|
|
|
|
|
|
Pre-cast
|
|
|
Ceramic
|
|
|
Ceramic
|
|
|
Wearable
|
|
|
Fracture
|
|
|
precision
|
|
|
|
|
|
|
|
materials
1
|
|
|
Mortar
|
|
|
roofs
|
|
|
tubes
2
|
|
|
cylinders
3
|
|
|
ceramic valves
|
|
|
proppant
|
|
|
abrasives
|
|
|
Total
|
|
|
Year ended December 31, 2012
|
|
|
Revenue
|
$
|
23,154,143
|
|
|
715,221
|
|
$
|
15,008,501
|
|
$
|
1,408,738
|
|
$
|
338,480
|
|
$
|
55,168
|
|
$
|
24,516,603
|
|
$
|
8,337,973
|
|
$
|
73,534,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
|
Revenue
|
$
|
27,289,068
|
|
$
|
457,573
|
|
$
|
18,824,945
|
|
$
|
287,460
|
|
$
|
128,205
|
|
$
|
13,752
|
|
$
|
22,526,371
|
|
$
|
7,408,291
|
|
$
|
76,935,665
|
|
1 Castable, coating, and dry mix
materials & low-cement and non-cement castables generally refer as
Monolithic materials.
2 Ceramic plates, tubes, elbows, and rollers generally
refer as Ceramic tubes.
3 Ceramic cylinders and plugs comprehensively refer
to Ceramic cylinders.
Reconciliation is provided for
unallocated amounts relating to corporate operations which is not included in
the segment information.
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenue
|
$
|
73,534,827
|
|
$
|
76,935,665
|
|
|
|
|
|
|
|
|
|
|
Total loss for reportable segments
|
$
|
(12,813,804
|
)
|
$
|
(8,127,253
|
)
|
|
Unallocated amounts relating to operations:
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
(285,869
|
)
|
|
(144,311
|
)
|
|
Finance cost
|
|
(396
|
)
|
|
(513
|
)
|
|
Other income
|
|
(2,552
|
)
|
|
1,043,629
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and noncontrolling
interest
|
$
|
(13,102,621
|
)
|
$
|
(7,228,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
$
|
160,182,387
|
|
$
|
145,161,641
|
|
|
Other receivables
|
|
737,866
|
|
|
430,558
|
|
|
Cash and cash equivalents
|
|
1,485,057
|
|
|
2,377,587
|
|
|
|
|
|
|
|
|
|
|
|
$
|
162,405,310
|
|
$
|
147,969,786
|
|
F-32
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
24.
|
Segment information (Cont'd)
|
All of the Companys long-lived assets
are located in the PRC. Geographic information about the revenues, which are
classified based on the customers, is set out as follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
PRC
|
$
|
72,272,154
|
|
$
|
68,606,749
|
|
|
United States
|
|
82,671
|
|
|
7,035,746
|
|
|
Others
|
|
1,180,002
|
|
|
1,293,170
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
73,534,827
|
|
$
|
76,935,665
|
|
25.
|
Share-based compensation
|
In 2011, the Company granted to one
former audit committee member 8,658 shares of common stock as awards for his
services provided for the year of 2011. Share-based compensation expenses were
calculated based on the market price on the date of issuance. The market price
of 8,658 shares of common stock issued to the former audit committee member was
$0.92.
There was no share-based compensation
in 2012.
26.
|
2011 Stock Incentive Plan (the 2011
Plan)
|
At the annual meeting of stockholders
of the Company held on September 28, 2011, the Companys stockholders approved
the 2011 Plan. The 2011 Plan authorized the Company to grant equity awards to
directors, employees (including executive officers), consultants and other
service providers, as more fully described and summarized in the Companys Proxy
Statement, which was included in the Schedule 14A filed with the Securities and
Exchange Commission on August 15, 2011.
F-33
China GengSheng Minerals, Inc.
|
Notes to Consolidated Financial Statements
|
as of December 31, 2012 and 2011
|
In accordance with ASC 815, the one
year warrants, which were issued in a public placement completed as of January
7, 2011 to purchase up to 1,000,000 common shares are not
considered indexed to the Companys own equity and should be classified as
derivative financial liability at fair value for each reporting period.
Accordingly, a part of the net proceed from the public placement amounting to
$970,000 representing the fair value at initial recognition, was allocated to
warrant liabilities.
The fair value of these warrants was
calculated using black-scholes option valuation model. The assumptions that were
used to calculate fair value of the warrants as of December 31, 2011 are as
follows:
- Expected volatility of 80.45%
-
Expected dividend yield of 0%
- Risk-free interest rate of 0.07%
-
Expected lives of 11 days
- Exercise price of $4 per share
As of December 31, 2011, the fair value
of warrant liabilities was $Nil, and corresponding gain on change in fair value
of warrant liabilities of $970,000 was recognized in the consolidated statement
of operations and comprehensive loss for the year ended December 31, 2011.
Fair value accounting : ASC 820
establishes a valuation hierarchy for disclosure of the inputs to fair value
measurement. This hierarchy prioritizes the inputs into three broad levels as
follows :
Level 1 - Quoted prices in active
markets for identical assets or liabilities.
Level 2 - Observable inputs other than
quoted prices in active markets for identical assets or liabilities.
Level 3 - Unobservable inputs to the
valuation methodology that are significant to the measurement of fair value of
assets or liabilities.
The warrant liabilities are determined
by using Level 2 inputs. The following tables summarize the changes in Level 2
items measured at fair value on a recurring basis on our consolidated balance
sheet during the year ended December 31, 2011 :-
|
|
|
Warrant
|
|
|
|
|
liabilities
|
|
|
|
|
|
|
|
Balance, January 1, 2011
|
$
|
-
|
|
|
Issuance of warrants
|
|
970,000
|
|
|
Change in fair value
|
|
(970,000
|
)
|
|
|
|
|
|
|
Balance, December 31, 2011
|
$
|
-
|
|
F-34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 15, 2013
|
CHINA GENGSHENG MINERALS, INC.
|
|
|
|
|
|
/s/ Shunqing Zhang
|
|
Shunqing Zhang
|
|
Chief Executive Officer and President
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
Signature
|
Capacity
|
Date
|
|
|
|
|
|
|
/s/ Shunqing Zhang
|
Chief Executive Officer, President and Chairman
|
April 15, 2013
|
Shunqing Zhang
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Shuxian Li
|
Interim Chief Financial Officer
|
April 15, 2013
|
Shuxian Li
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Ming He
|
Director
|
April 15, 2013
|
Ming He
|
|
|
|
|
|
|
|
|
/s/ Jingzhong Yu
|
Director
|
April 15, 2013
|
Jingzhong Yu
|
|
|
|
|
|
|
|
|
/s/ Ningsheng Zhou
|
Director
|
April 15, 2013
|
Ningsheng Zhou
|
|
|
|
|
|
|
|
|
/s/ Hsin-I Lin
|
Director
|
April 15, 2013
|
Hsin-I Lin
|
|
|
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