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 whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one)
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
As of June 3, 2013, there were 26,803,044 shares of Common
Stock of the Company, $0.001 par value
,
outstanding.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
These unaudited condensed consolidated
financial statements of the Company and its subsidiaries have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (the “SEC”) including the instructions to Form 10-Q and Regulation
S-X. Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America (the “US GAAP”) have been condensed or omitted
from these statements pursuant to such rules and regulations and, accordingly,
they do not include all the information and notes necessary for comprehensive
consolidated financial statements and should be read in conjunction with our
audited consolidated financial statements for the year ended December 31, 2012,
included in our Annual Report on Form 10-K for the year ended December 31, 2012
as filed with the Securities and Exchange Commission on April 15, 2012.
In the opinion of the management of the
Company, all adjustments, which are of a normal recurring nature, necessary for
a fair statement of the results for the three-month period have been made.
Results for the interim period presented are not necessarily indicative of the
results that might be expected for the entire fiscal year.
Certain reclassifications have been
made to December 31, 2012 to conform with current period’s presentation.
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 Company’s common stock began
trading on the NYSE MKT LLC (formerly the American Stock Exchange) under the
symbol CHGS. Prior to March 4, 2010, the Company’s common stock traded on the
Over-the-Counter Bulletin Board under the symbol CHGS.OB.
The Company is a holding company whose
primary business operations are conducted through its subsidiaries located in
the PRC’s 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 proppants,
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 Prefecture’s 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 used for slicing the
solar-silicon bar and polishing the equipment surface. The Company’s 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.
The condensed consolidated financial
statements include the accounts of the Company and its subsidiaries. All
inter-company accounts and transactions have been eliminated in
consolidation.
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 March 31, 2013 and December 31, 2012, substantially all of the Company’s 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 customer’s 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 Company’s condensed
consolidated sales:
During the reporting periods, no
customer represented 10% or more of the Company’s trade receivables.
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 fair value of
collateralized borrowings are estimated using discounted cash flow analysis,
based on the Company’s current incremental borrowing rates for similar types of
borrowing arrangement. The carrying amount of financial assets and liabilities
approximate their fair value due to short maturities.
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 adoption
of this ASU had no significant impact on the Company’s condensed consolidated
financial statements.
An analysis of the allowance for
doubtful accounts for the three months ended March 31, 2013 and 2012 is as
follows:
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 March 31, 2013, the balance of
bills receivable was $9,104,834 with maturities ranging from 1 month to 6
months. As of December 31, 2012, the balance of bills receivable was
$9,913,668.
An analysis of the allowance for
doubtful accounts for the three months ended March 31, 2013 and 2012 is as
follows:
No allowance for obsolete inventories
was recognized in the cost of goods sold during the three months ended March 31,
2013 and 2012.
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. The acquisition was
completed on May 28, 2012.
The loans represent interest-free and
unsecured loans from the Company’s associates and a government entity and are
repayable on demand. The balance of non-interest-bearing loans as of March 31,
2013 and December 31, 2012 included loans from related parties. Details of
non-interest-bearing loans as of March 31, 2013 and December 31, 2012 are as
follow.
The above bank loans are denominated in
RMB and carry average interest rates at 5.87% (2012: 8.14%) per annum with
maturity dates ranging from one month to twelve months.
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 March 31, 2013, as it is the Company's current
policy to reinvest these earnings in non-U.S. operations.
GengSheng International and Smarthigh
were incorporated in the BVI and are not subject to income taxes under the
current laws of the BVI.
The PRC’s legislative body, the
National People’s Congress, adopted the unified Corporate Income Tax Law (“CIT
Law”) on March 16, 2007. This new tax law replaces the then 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 rate
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:
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 Company’s income is generated from the
PRC operations. 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 Company’s financial position is not significant. The
management evaluated the Company's tax positions and considered no provision for
uncertainty in income taxes is necessary as of March 31, 2013 and December 31,
2012.
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.
In accordance with ASC 460, the
Company recognized a liability arising from guarantees given for the debts
granted to third parties by financial institutions.
The fair value of such guarantees is
determined by reference to fees charged in an arm’s length transaction for
similar services.
During the period, 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 14). 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 People’s Bank of China’s
(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.
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 condensed consolidated
statements of operations and comprehensive loss. The Company contributed
$116,353 and $124,491 for the three months ended March 31, 2013 and 2012,
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.
Reconciliation is provided for
unallocated amounts relating to corporate operations which are not included in
the segment information.
All of the Company's long-lived assets
are located in the PRC. Geographic information about the revenues, which are
classified based on customers, is set out as follows:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
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.” 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.
Conventions
In this Form 10-Q, unless indicated otherwise, references
to:
-
“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 International’s wholly-owned BVI subsidiary,
Smarthigh Holding Limited, or Smarthigh and GengSheng International’s
wholly-owned Chinese subsidiary, Zhengzhou Duesail Fracture Proppant Co. Ltd.,
or Duesail, and Duesail’s wholly-owned subsidiary, Henan Yuxing Proppant Co.,
Ltd., or Yuxing and GengSheng International’s wholly-owned Chinese subsidiary,
Henan GengSheng Refractories Co., Ltd., or Refractories, and Refractories’s
majority-owned subsidiary, Henan GengSheng High-Temperature Materials Co.,
Ltd., or High Temperature, and Refractories’s 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;
-
“Powersmart” or “GengSheng International” refer to GengSheng International
Corporation, a BVI company (formerly, Powersmart Holdings Limited) that is
wholly-owned by China GengSheng Minerals;
-
“Securities Act” refers to the Securities Act of 1933, as amended, and
“Exchange Act” refer to Securities Exchange Act of 1934, as amended;
-
“China” and “PRC” refer to the People's Republic of China, and “BVI” refers
to the British Virgin Islands;
-
“RMB” refers to Renminbi, the legal currency of China; and
-
“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 = $0.1594 for its March 31, 2013 unaudited balance
sheet, which were determined based on the currency conversion rate at the end
of each respective period. The conversion rates of RMB1 = $0.1592 is used for
the condensed consolidated statement of income and comprehensive income and
consolidated statement of cash flows for the first quarter of 2013, and RMB1 =
$0.1585 is used for the condensed consolidated statement of income and
comprehensive income and consolidated statement of cash flows for the first
quarter of 2012; both of which were based on the average currency conversion
rate for each respective quarter.
Overview of Company
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.
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 refractories 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.
21
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, People’s Republic of China 451271 and our
telephone number is (86) 371-6405-9863.
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.
22
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.
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 Company’s 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.
Our Products
The following table set forth sales information about our
product mix in each of the first quarter of 2013 and 2012.
(All amounts, other than percentages, in thousands of U.S.
dollars)
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
|
Revenue
|
|
|
net
revenues
|
|
|
Revenue
|
|
|
net
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refractories
|
$
|
7,235
|
|
|
69.4%
|
|
$
|
9,942
|
|
|
72.5%
|
|
|
Industrial Ceramics
|
|
264
|
|
|
2.5%
|
|
|
332
|
|
|
2.4%
|
|
|
Fracture Proppants
|
|
2,647
|
|
|
25.4%
|
|
|
998
|
|
|
7.3%
|
|
|
Fine Precision Abrasives
|
|
287
|
|
|
2.7%
|
|
|
2,439
|
|
|
17.8%
|
|
|
|
$
|
10,433
|
|
|
100.0%
|
|
$
|
13,711
|
|
|
100.0%
|
|
Refractories
Our largest product segment is the refractories segment, which
accounted for approximately 69.4% of total revenue in the first quarter of 2013.
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 equipment’s 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:
23
-
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.
-
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.
-
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 product 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 42.2% of the
Company’s total sales in the first quarter of 2013, compared with 41.8% in the
same period of 2012. 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 the first quarter of 2013. 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 25.4% of the
total revenue in the first quarter of 2013. 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 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 approximately 2.7% of
our total revenue in the first quarter of 2013. 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 they
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.
24
Summary of Business Operations in First Quarter of
2013
Our financial performance in the first quarter of 2013 is
summarized as follows:
-
Sales revenue decreased by approximately $3.3 million, or 23.9%, to
approximately $10.4 million for the first quarter of 2013, from approximately
$13.7 million for the same period in 2012.
-
Gross profit decreased by approximately $1.8 million, or 67.5%, to
approximately $882,000 for the first quarter of 2013, from approximately $2.7
million for the same period in 2012. Gross profit margin was 8.5% for the
first quarter of 2013, compared with 19.8% for the same period in 2012. The
decrease in gross profit margin was primarily due to the lower gross profit
margin in our refractories segment as the rising costs of production continued
to impact us. Net loss increased by approximately $896,000, to approximately
$3.8 million for the first quarter of 2013, from a net loss of approximately
$2.9 million for the same period in 2012.
-
Our condensed consolidated balance sheet (unaudited) as of March 31, 2013
included current assets of approximately $116.2 million and total assets of
approximately $158.0 million.
Uncertainties that Affect our Financial
Condition
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 approximate 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 government’s 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
continued 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 term offered by our customers in
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.
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.
Deteriorating Market for Our Fine Precision Abrasives
Segment
China’s 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.
25
Results of Operations
Comparison of Three-Month Periods Ended March 31, 2013
and 2012
The following table summarizes the results of our operations
during the three-month periods ended March 31, 2013 and 2012, respectively, and
provides information regarding the dollar and percentage increase or (decrease)
during the three-month periods ended March 31, 2013 and 2012.
(All amounts, other than percentages, in U.S. dollars)
|
|
|
Three-Month Period
|
|
|
Three-Month Period
|
|
|
|
|
Ended March 31, 2013
|
|
|
Ended March 31, 2012
|
|
|
|
|
|
|
|
As a percentage
|
|
|
|
|
|
As a
|
|
|
|
|
Dollars in
|
|
|
of
|
|
|
Dollars in
|
|
|
percentage of
|
|
|
Statement of operations data:
|
|
thousands
|
|
|
net revenues
|
|
|
thousands
|
|
|
net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Revenue
|
|
10,433
|
|
|
100.0%
|
|
|
13,711
|
|
|
100.0%
|
|
|
Cost of goods sold
|
|
9,551
|
|
|
91.5%
|
|
|
10,995
|
|
|
80.2%
|
|
|
Gross profit
|
|
882
|
|
|
8.5%
|
|
|
2,716
|
|
|
19.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative expenses
|
|
1,721
|
|
|
16.5%
|
|
|
1,729
|
|
|
12.6%
|
|
|
Research and
development expenses
|
|
216
|
|
|
2.1%
|
|
|
163
|
|
|
1.2%
|
|
|
Selling expenses
|
|
1,608
|
|
|
15.4%
|
|
|
2,480
|
|
|
18.1%
|
|
|
Total operating expenses
|
|
3,545
|
|
|
34.0%
|
|
|
4,372
|
|
|
31.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(2,663
|
)
|
|
-25.5%
|
|
|
(1,656
|
)
|
|
-12.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant income
|
|
16
|
|
|
0.2%
|
|
|
385
|
|
|
2.8%
|
|
|
Guarantee income
|
|
99
|
|
|
0.9%
|
|
|
153
|
|
|
1.2%
|
|
|
Guarantee expenses
|
|
(92
|
)
|
|
-0.9%
|
|
|
(129
|
)
|
|
-0.9%
|
|
|
Equity in net loss of a non-consolidated affiliate
|
|
(25
|
)
|
|
-0.2%
|
|
|
-
|
|
|
0.0%
|
|
|
Interest income
|
|
351
|
|
|
3.4%
|
|
|
53
|
|
|
0.4%
|
|
|
Other income (expenses)
|
|
(4
|
)
|
|
0.0%
|
|
|
6
|
|
|
0.0%
|
|
|
Finance costs
|
|
(1,428
|
)
|
|
-13.7%
|
|
|
(1,750
|
)
|
|
-12.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and noncontrolling
interest
|
|
(3,746
|
)
|
|
-35.9%
|
|
|
(2,938
|
)
|
|
-21.4%
|
|
|
Income taxes
|
|
(80
|
)
|
|
-0.8%
|
|
|
(12
|
)
|
|
-0.1%
|
|
|
Noncontrolling interest
|
|
17
|
|
|
0.2%
|
|
|
37
|
|
|
0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company’s common
stockholders
|
|
(3,809
|
)
|
|
-36.5%
|
|
|
(2,913
|
)
|
|
-21.2%
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month
|
|
|
Three-Month
|
|
|
Dollar ($)
|
|
|
Percentage
|
|
|
|
|
Period Ended
|
|
|
Period Ended
|
|
|
Increase
|
|
|
Increase
|
|
|
Dollars in thousands
|
|
March 31, 2013
|
|
|
March 31, 2012
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Revenue
|
|
10,433
|
|
|
13,711
|
|
|
(3,278
|
)
|
|
-23.9%
|
|
|
Cost of goods sold
|
|
9,551
|
|
|
10,995
|
|
|
(1,444
|
)
|
|
-13.1%
|
|
|
Gross profit
|
|
882
|
|
|
2,716
|
|
|
(1,834
|
)
|
|
-67.5%
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General &
administrative expenses
|
|
1,721
|
|
|
1,729
|
|
|
(8
|
)
|
|
-0.5%
|
|
|
Research and development expenses
|
|
216
|
|
|
163
|
|
|
53
|
|
|
32.5%
|
|
|
Selling expenses
|
|
1,608
|
|
|
2,480
|
|
|
(872
|
)
|
|
-35.2%
|
|
|
Total operating expenses
|
|
3,545
|
|
|
4,372
|
|
|
(827
|
)
|
|
-18.9%
|
|
|
Loss from operations
|
|
(2,663
|
)
|
|
(1,656
|
)
|
|
(1,007
|
)
|
|
60.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant income
|
|
16
|
|
|
385
|
|
|
(369
|
)
|
|
-95.8%
|
|
|
Guarantee income
|
|
99
|
|
|
153
|
|
|
(54
|
)
|
|
-35.3%
|
|
|
Guarantee expenses
|
|
(92
|
)
|
|
(129
|
)
|
|
37
|
|
|
-28.7%
|
|
|
Equity in net loss of a non-consolidated affiliate
|
|
(25
|
)
|
|
-
|
|
|
(25
|
)
|
|
-100.0%
|
|
|
Interest income
|
|
351
|
|
|
53
|
|
|
298
|
|
|
562.3%
|
|
|
Other income (expenses)
|
|
(4
|
)
|
|
6
|
|
|
(10
|
)
|
|
-166.7%
|
|
|
Finance costs
|
|
(1,428
|
)
|
|
(1,750
|
)
|
|
322
|
|
|
-18.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and noncontrolling
interest
|
|
(3,746
|
)
|
|
(2,938
|
)
|
|
(808
|
)
|
|
27.5%
|
|
|
Income taxes
|
|
(80
|
)
|
|
(12
|
)
|
|
(68
|
)
|
|
566.7%
|
|
|
Noncontrolling interest
|
|
17
|
|
|
37
|
|
|
(20
|
)
|
|
-54.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company’s common
stockholders
|
|
(3,809
|
)
|
|
(2,913
|
)
|
|
(896
|
)
|
|
30.8%
|
|
The average conversion rates between RMB and U.S. dollar used
for the condensed consolidated statements of operations and comprehensive loss
increased approximately 0.4% during the reporting period of 2013 compared with
the reporting period of 2012. 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 revenues
. Sales revenues decreased approximately
$3.3 million, or 23.9% to approximately $10.4 million in the first quarter of
2013, from approximately $13.7 million in the same period of 2012. Our sales
revenue is currently generated from sales of our mineral-based products,
primarily our refractory products, fracture proppant products, fine precision
abrasives products and industrial ceramic products. The decrease was mainly
attributable to the decreased sales from our refractories products and fine
precision abrasives products which was partially offset by the increased sales
from our fracture proppant products in the first quarter of 2013.
In our refractory segment, we sold 16,619 metric tons of
refractory products in the first quarter of 2013, a 17.5% decrease compared with
20,143 metric tons sold in the same period of 2012. The revenue from our
refractory products decreased to approximately $7.2 million in the first quarter
of 2013 from approximately $9.9 million in the same period of 2012. In the first
quarter of 2013, the average selling prices was $435 per metric ton, a decrease
of 11.9% compared with the average selling price of $494 in the first quarter of
2012. The decrease in average selling prices reflected the weak demand of our
refractories products.
In our fracture proppant segment, we sold 10,699 metric tons of
fracture proppant products in the first quarter of 2013, compared with 2,673
metric tons sold in the same period of 2012. 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
was approximately $2.6 million in the first quarter of 2013, an increase of
165.2% compared with approximately $998,000 in the same period of 2012.
Excluding foreign currency translation, the revenue increased approximately
164.1% compared with the same period of 2012. Average selling price decreased to
$247 per metric ton in the first quarter of 2013, compared with $373 per metric
ton in the same period of 2012. The decrease in average selling price was
primarily due to the increased sales of low-grade products with lower selling prices in the first quarter
of 2013.
In our industrial ceramics segment, sales revenue was
approximately $264,000 in the first quarter of 2013 compared with approximately
$332,000 in the same period of 2012.
In our fine precision abrasives segment, we realized sales of
174 metric tons in the first quarter of 2013, generating revenue of
approximately $287,000. We sold 883 metric tons of fine precision abrasives
products for approximately $2.4 million in the same period of 2012. The decrease
in sales revenue was the result of weaker demand for fine precision abrasives
products under current market conditions.
Cost of goods sold.
Our cost of goods sold is primarily
comprised of the cost of raw materials, components, labor and overhead. Our cost
of goods sold decreased approximately $1.4 million, or 13.1%, to approximately
$9.6 million in the first quarter of 2013 from approximately $11.0 million in
the same period of 2012. Excluding foreign currency translation, our cost of
goods sold decreased approximately $1.5 million, or 13.5% compared with the same
period of 2012. As a percentage of net revenues, the cost of goods sold
increased by 11.3% to 91.5% in the first quarter of 2013 from 80.2% in the same
period of 2012. This increase was primarily due to higher raw material costs and
lower revenue compared with the same period in 2012.
Gross profit.
Our gross profit decreased approximately
$1.8 million, or 67.5% to approximately $882,000 in the first quarter of 2013
from approximately $2.7 million in the same period of 2012. Gross profit as a
percentage of net revenues was 8.5% in the first quarter of 2013, as compared
with 19.8% in the same period of 2012. The decrease was primarily attributable
to the higher raw material costs and labor and overhead costs in our refractory segment and the decreased
gross profit in our fracture proppant segment as we sold more low-grade products
with lower proft margin compared with the same period in 2012.
27
General and administrative expenses.
Our general and
administrative expenses consist of the expenses associated with staff and
support personnel who manage our business activities and professional fees paid
to third parties. Our general administrative expenses stayed flat at
approximately $1.7 million in the first quarter of 2013. As a percentage of net
revenues, administrative expenses increased to 16.5% in the first quarter of
2013 as compared with 12.6% in the same period in 2012.
Research and development expenses.
Our research and
development expenses increased to approximately $216,000 in the first quarter of
2013, compared with approximately $163,000 in the same period in 2012, mainly
due to more research and development activities in the first quarter of
2013.
Selling expenses.
Our selling expenses include sales
commissions, expenses of advertising and promotional materials, transportation
expenses, benefits of sales personnel, after-sale support services and other
sales related expenses. Selling expenses decreased by approximately $872,000, or
35.2% to approximately $1.6 million in the first quarter of 2013, compared with
approximately $2.5 million in the same period in 2012. As a percentage of net
revenues, our selling expenses decreased to 15.4% in the first quarter of 2013,
as compared with 18.1% in the same period in 2012. The decrease in selling
expenses was primarily attributable to the decrease in the transportation
expenses and other sales related expenses compared to the same period in
2012.
Government grant income.
Our government grant income was
approximately $16,000 in the first quarter of 2013 compared with approximately
$385,000 in the same period in 2012.
Equity in net loss of a non-consolidated affiliate.
Equity in net loss of a non-consolidated affiliate was approximately $25,000
in the first quarter of 2013, relating to our investment in Yili YiQiang Silicon
Limited (“Yili”).
Interest income.
Our interest income increased by
approximately $298,000 as more bank deposits are used as collateral for loans.
These deposits usually have higher interest rates.
Finance costs.
Our finance costs decreased by
approximately $322,000, or 18.4% to approximately $1.4 million in the first
quarter of 2013, from approximately $1.8 million in the same period in 2012. The
decrease was primarily attributable to a decrease of approximately $239,000 in
bills discounting charges and a decrease of approximately $83,000 in interest
expense as the interest rates charged by banks were lower in the first quarter
of 2013.
Loss before income taxes and non-controlling interests.
Our loss before income taxes and non-controlling interest was approximately
$3.7 million in the first quarter of 2013, compared with approximately $2.9
million in the same period of 2012. The decrease was primarily attributable to
the increase in loss from operations in the first quarter of 2013.
Income taxes.
Our income taxes were approximately
$80,000 in the first quarter of 2013, an increase of approximately $68,000 from
approximately $12,000 in the same period of 2012. Despite a net loss, as certain
of our PRC subsidiaries recognized taxable income, we still incurred income
taxes for the first quarter of 2013.
Net loss.
Our net loss in the first quarter of 2013 was
approximately $3.8 million, an increase of approximately $896,000 from
approximately $2.9 million in the same period in 2012. The decrease was
attributable to the factors described above.
Liquidity and Capital Resources
As of March 31, 2013, we had cash and cash equivalents of
approximately $4.3 million and restricted cash of approximately $26.1 million.
Our current assets were approximately $116.2 million and our current liabilities
were approximately $121.2 million as of March 31, 2013 which resulted in a
current ratio of approximately 0.96. Total stockholders’ equity as of March 31,
2013 was approximately $36.8 million. The following table sets forth a summary
of our cash flows for the periods indicated:
|
|
|
Three Months ended March 31,
|
|
|
Dollars in thousands
|
|
2013
|
|
|
2012
|
|
|
Net cash used in operating activities
|
|
(4,127
|
)
|
|
(14,699
|
)
|
|
Net cash used in investing activities
|
|
(859
|
)
|
|
(1,196
|
)
|
|
Net cash provided by financing activities
|
|
3,882
|
|
|
14,988
|
|
|
Net cash outflows
|
|
(1,085
|
)
|
|
(898
|
)
|
28
Operating Activities
Net cash used in operating activities was approximately $4.1
million in the first quarter of 2013, compared with net cash used in operating
activities of approximately $14.7 million in the same period of 2012. The
decrease in net cash used in operating activities was primarily due to the
decrease in trade receivables and bills receivable which was partially offset by
the decrease in bills payable in the first quarter of 2013.
Investing Activities
Net cash used in investing activities in the first quarter of
2013 was approximately $859,000, a decrease of approximately $337,000 from net
cash used in investing activities of approximately $1.2 million in the same
period in 2012. The decrease in net cash used in investing activities in the
first quarter of 2013 was primarily due to fewer activities related to our
construction of manufacturing and administrative facilities.
Financing Activities
Net cash provided by financing activities was approximately
$3.9 million in the first quarter of 2013, compared with net cash provided by
financing activities of approximately $15.0 million in the same period of 2012.
The decrease in cash flows from financing activities was primarily due to the
increased repayments of loans in the first quarter of 2013.
Loan Facilities
We secured new loans totaling approximately $38.6 million from
banks for our working capital needs and we repaid approximately $27.6 million in
bank loans in the three months ended March 31, 2013. As a result, the balance of
all our bank loans and bank borrowings as of March 31, 2013 was approximately
$76.6 million, which includes short-term bank loans of approximately $30.6
million and bank borrowings secured by bank deposits of approximately $46.0
million.
As of March 31, 2013, the details of all our short-term bank
loans and bank borrowings are as follows:
All amounts, other than percentages, are in U.S. dollar.
|
No
|
Type
|
Contracting Party
|
Valid Date
|
Duration
|
Amount
|
|
|
|
|
|
|
|
|
1
|
Facility Bank Loan
|
Luoyang Bank
|
2012-04-25 to 2013-04-24
|
1 year
|
$3,188,000
|
|
|
|
|
|
|
|
|
2
|
Facility Bank Loan
|
Agricultural Bank of China
|
2012-04-28 to 2013-04-27
|
1 year
|
$5,100,800
|
|
|
|
|
|
|
|
|
3
|
Facility Bank Loan
|
Industrial and Commercial Bank
of China
|
2012-05-09 to 2013-05-08
|
1 year
|
$717,300
|
|
|
|
|
|
|
|
|
4
|
Facility Bank Loan
|
China CITIC Bank
|
2012-06-26 to 2013-06-25
|
1 year
|
$2,391,000
|
|
|
|
|
|
|
|
|
5
|
Facility Bank Loan
|
City Credit Cooperatives in
Gongyi
|
2012-07-31 to 2013-07-25
|
1 year
|
$717,300
|
|
|
|
|
|
|
|
6
|
Facility Bank Loan
|
Shanghai Pudong Development
Bank Village Bank
|
2012-08-27 to 2013-08-26
|
1 year
|
$797,000
|
|
|
|
|
|
|
|
7
|
Facility Bank Loan
|
Shanghai Pudong Development
Bank Village Bank
|
2012-08-29 to 2013-08-28
|
1 year
|
$398,500
|
|
|
|
|
|
|
|
|
8
|
Facility Bank Loan
|
Shanghai Pudong Development
Bank
|
2012-09-05 to 2013-09-04
|
1 year
|
$2,869,200
|
|
|
|
|
|
|
|
9
|
Facility Bank Loan
|
Shanghai Pudong Development
Bank Village Bank
|
2012-10-15 to 2013-10-14
|
1 year
|
$430,380
|
|
|
|
|
|
|
|
|
10
|
Facility Bank Loan
|
City Credit Cooperatives in
Gongyi
|
2012-12-26 to 2013-12-25
|
1 year
|
$2,869,200
|
|
|
|
|
|
|
|
|
11
|
Facility Bank Loan
|
Zhengzhou Bank
|
2013-01-07 to 2014-01-06
|
1 year
|
$4,782,000
|
|
|
|
|
|
|
|
|
12
|
Facility Bank Loan
|
Industrial and Commercial Bank
of China
|
2013-02-26 to 2013-08-02
|
6 months
|
$2,550,400
|
|
|
|
|
|
|
|
|
13
|
Facility Bank Loan
|
Pingdingshan Bank
|
2013-02-27 to 2013-08-26
|
6 months
|
$1,594,000
|
|
|
|
|
|
|
|
|
14
|
Facility Bank Loan
|
Pingdingshan Bank
|
2013-02-27 to 2013-08-26
|
6 months
|
$797,000
|
|
|
|
|
|
|
|
|
15
|
Facility Bank Loan
|
Pingdingshan Bank
|
2013-03-28 to 2014-03-28
|
1 year
|
$1,362,870
|
|
|
|
|
|
|
|
|
16
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-10-16 to 2013-04-16
|
6 months
|
$797,000
|
29
|
17
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-10-17 to 2013-04-17
|
6 months
|
$797,000
|
|
|
|
|
|
|
|
|
18
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-10-30 to 2013-04-30
|
6 months
|
$797,000
|
|
|
|
|
|
|
|
|
19
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-10-31 to 2013-04-30
|
6 months
|
$797,000
|
|
|
|
|
|
|
|
|
20
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-11-01 to 2013-05-01
|
6 months
|
$478,200
|
|
|
|
|
|
|
|
21
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-11-02 to 2013-04-30
|
6 months
|
$844,820
|
|
|
|
|
|
|
|
|
22
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-11-12 to 2013-05-12
|
6 months
|
$1,594,000
|
|
|
|
|
|
|
|
23
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-11-13 to 2013-05-02
|
6 months
|
$478,200
|
|
|
|
|
|
|
|
|
24
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-11-13 to 2013-05-31
|
6 months
|
$3,188,000
|
|
|
|
|
|
|
|
|
25
|
Bank Borrowing
|
China Minsheng Bank
|
2012-11-15 to 2013-05-15
|
6 months
|
$2,657,198
|
|
|
|
|
|
|
|
|
26
|
Bank Borrowing
|
Other
|
2012-11-16 to 2013-04-26
|
6 months
|
$79,700
|
|
|
|
|
|
|
|
27
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-11-19 to 2013-05-16
|
6 months
|
$223,160
|
|
|
|
|
|
|
|
28
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-11-29 to 2013-05-20
|
6 months
|
$79,700
|
|
|
|
|
|
|
|
|
29
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-11-29 to 2013-05-28
|
6 months
|
$318,800
|
|
|
|
|
|
|
|
|
30
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-12-06 to 2013-06-05
|
6 months
|
$2,391,000
|
|
|
|
|
|
|
|
|
31
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-12-12 to 2013-06-11
|
6 months
|
$876,700
|
|
|
|
|
|
|
|
|
32
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-12-13 to 2013-06-13
|
6 months
|
$398,500
|
|
|
|
|
|
|
|
|
33
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-12-14 to 2013-06-13
|
6 months
|
$462,260
|
|
|
|
|
|
|
|
|
34
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-12-18 to 2013-06-17
|
6 months
|
$478,200
|
|
|
|
|
|
|
|
35
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-12-20 to 2013-06-13
|
6 months
|
$797,000
|
|
|
|
|
|
|
|
|
36
|
Bank Borrowing
|
China EverBright Bank
|
2013-01-17 to 2013-07-10
|
6 months
|
$1,084,175
|
|
|
|
|
|
|
|
|
37
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-01-21 to 2013-07-21
|
6 months
|
$876,700
|
|
|
|
|
|
|
|
|
38
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-01-22 to 2013-07-22
|
6 months
|
$876,700
|
|
|
|
|
|
|
|
|
39
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-01-23 to 2013-07-23
|
6 months
|
$876,700
|
|
|
|
|
|
|
|
|
40
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-01-24 to 2013-07-24
|
6 months
|
$797,000
|
|
|
|
|
|
|
|
|
41
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-01-28 to 2013-07-25
|
6 months
|
$797,000
|
|
|
|
|
|
|
|
42
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2013-01-29 to 2013-07-23
|
6 months
|
$478,200
|
|
|
|
|
|
|
|
43
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2013-01-31 to 2013-09-03
|
8 months
|
$1,275,200
|
|
|
|
|
|
|
|
|
44
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-02-01 to 2013-09-11
|
8 months
|
$1,434,600
|
|
|
|
|
|
|
|
|
45
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-02-05 to 2013-08-04
|
6 months
|
$956,400
|
|
|
|
|
|
|
|
|
46
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-02-06 to 2013-08-05
|
6 months
|
$637,600
|
|
|
|
|
|
|
|
|
47
|
Bank Borrowing
|
China Construction Bank
|
2013-02-07 to 2013-07-11
|
6 months
|
$318,800
|
|
|
|
|
|
|
|
|
48
|
Bank Borrowing
|
China EverBright
Bank
|
2013-03-05 to 2013-09-01
|
6 months
|
$191,121
|
|
|
|
|
|
|
|
|
49
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-03-07 to 2013-09-06
|
6 months
|
$1,434,600
|
|
|
|
|
|
|
|
|
50
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-03-08 to 2013-09-08
|
6 months
|
$1,434,600
|
|
|
|
|
|
|
|
|
51
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-03-13 to 2013-09-13
|
6 months
|
$1,594,000
|
|
|
|
|
|
|
|
|
52
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-03-15 to 2013-09-14
|
6 months
|
$1,434,600
|
|
|
|
|
|
|
|
|
53
|
Bank Borrowing
|
China EverBright Bank
|
2013-03-21 to 2013-09-15
|
6 months
|
$139,252
|
|
|
|
|
|
|
|
|
54
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-03-21 to 2013-09-20
|
6 months
|
$9,564,000
|
|
|
|
|
|
|
|
|
55
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-03-26 to 2013-09-25
|
6 months
|
$1,275,200
|
We have facility bank loans of approximately $30.6 million,
maturing from April 24, 2013 to March 28, 2014 and bank borrowings secured by
bank deposits of approximately $46.0 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:
30
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 Agricultural Bank of China
(“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 Industrial and Commercial Bank of
China (“ICBC”), whereby ICBC has agreed to loan approximately $717,000 (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 China CITIC Bank (“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 $717,000 (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 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 $797,000 (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 $399,000 (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 October 15, 2012, our subsidiary, Refractories, entered into
a short-term working capital loan agreement with SPDVB, whereby SPDVB has agreed
to loan approximately $430,000 (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.
On January 7, 2013, 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 7.80% per year on
all outstanding principal.
On February 26, 2013, our subsidiary, Refractories, entered
into a short-term working capital loan agreement with ICBC, whereby ICBC has
agreed to loan approximately $2.6 million (RMB 16 million) to Refractories for a
term of six months, at an interest rate of 7.56% per year on all outstanding
principal.
On February 27, 2013, our subsidiary, Refractories, entered
into a short-term working capital loan agreement with Pingdingshan Bank (“PB”),
whereby PB has agreed to loan approximately $1.6 million (RMB 10 million) to
Refractories for a term of six months, at an interest rate of 6.16% per year on
all outstanding principal.
On February 27, 2013, our subsidiary, Duesail, entered into a
short-term working capital loan agreement with PB, whereby PB has agreed to loan
approximately $797,000 (RMB 5 million) to Duesail for a term of six months, at
an interest rate of 6.16% per year on all outstanding principal.
On March 28, 2013, our subsidiary, Refractories, entered into a
short-term working capital loan agreement with PB, whereby PB has agreed to loan
approximately $1.4 million (RMB 8.6 million) to Refractories for a term of one
year, at an interest rate of 6.60% per year on all outstanding principal.
31
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.
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 March 31, 2013 and December 31,
2012.
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 March 31, 2013 and December 31, 2012.
|
|
|
As of
|
|
|
As of
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
36,684,218
|
|
$
|
40,331,549
|
|
|
Restricted net assets as percentage of
consolidated net assets
|
|
22.1%
|
|
|
20.1%
|
|
Total restricted net assets accounted for approximately 22.1%
of our consolidated net assets as of March 31, 2013. 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 March 31, 2013 and December 31, 2012:
|
|
|
As of
|
|
|
As of
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Due within 1 year
|
$
|
41,263,128
|
|
$
|
49,553,183
|
|
|
Due from 1 to 2 years
|
|
4,686,250
|
|
|
4,821,849
|
|
|
Due from 2 to 3 years
|
|
3,113,558
|
|
|
2,521,481
|
|
|
Due over 3 years
|
|
1,668,520
|
|
|
1,646,402
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
50,731,456
|
|
$
|
58,542,915
|
|
32
The following is the aging analysis for bills receivable as of
March 31, 2013 and December 31, 2012:
|
|
|
As of
|
|
|
As of
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Due within 6 months
|
$
|
9,104,834
|
|
$
|
9,913,668
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
9,104,834
|
|
$
|
9,913,668
|
|
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.
We noted that turnover days of accounts receivable in our
refractories segment increased in the first quarter of 2013 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 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.
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 management’s 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.
The Company’s general provisioning policy is to record an
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 Company’s investment in Yili YiQiang Silicon Limited ("Yili")
is reported in the consolidated balance sheets as investment in a
non-consolidated affiliate.
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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.
During the reporting periods, the Company has not identified
any indicators that would require testing for impairment.
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.
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 Company’s 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 Company’s product represents the
invoiced value of goods, net of the value-added tax (“VAT”). The Company’s
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
Company’s products.
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 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 adoption of this ASU had no
significant impact on the Company’s condensed consolidated financial
statements.