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. MANAGEMENTS 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 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;
-
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 = $0.1574 for its December 31, 2011 audited
balance sheet, and RMB1 = $0.1581 for its September 30, 2012 unaudited balance
sheet, which were determined based on the currency conversion rate at the end
of each respective period. The conversion rates of RMB1 = $0.1581 is used for
the condensed consolidated statement of income and comprehensive income and
consolidated statement of cash flows for the third quarter of 2012, and RMB1 =
$0.1537 is used for the condensed consolidated statement of income and
comprehensive income and consolidated statement of cash flows for the third
quarter of 2011; 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.
25
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.
We sell our products to over 170 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.
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.
26
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, warrants to purchase common stock and
shares of common stock issuable upon exercise of the investor warrants 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.
Our Products
The following table set forth sales information about our
product mix in each of the third quarter of 2012 and 2011, and the first nine
months of 2012 and 2011.
(All amounts, other than percentages, in thousands of U.S.
dollars)
|
|
Three Months Ended September 30
|
|
|
Nine Months Ended September 30
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
Sales
|
|
|
of sales
|
|
|
Sales
|
|
|
of sales
|
|
|
Sales
|
|
|
of sales
|
|
|
Sales
|
|
|
of sales
|
|
|
|
revenue
|
|
|
revenue
|
|
|
revenue
|
|
|
revenue
|
|
|
revenue
|
|
|
revenue
|
|
|
revenue
|
|
|
revenue
|
|
Refractories
|
$
|
9,251
|
|
|
39.2%
|
|
$
|
13,380
|
|
|
62.4%
|
|
$
|
30,809
|
|
|
54.1%
|
|
$
|
35,859
|
|
|
61.7%
|
|
Industrial Ceramics
|
|
573
|
|
|
2.4%
|
|
|
157
|
|
|
0.7%
|
|
|
1,434
|
|
|
2.5%
|
|
|
879
|
|
|
1.5%
|
|
Fracture Proppants
|
|
12,840
|
|
|
54.3%
|
|
|
5,709
|
|
|
26.6%
|
|
|
18,059
|
|
|
31.7%
|
|
|
16,845
|
|
|
29.0%
|
|
Fine Precision Abrasive
|
|
963
|
|
|
4.1%
|
|
|
2,217
|
|
|
10.3%
|
|
|
6,656
|
|
|
11.7%
|
|
|
4,499
|
|
|
7.8%
|
|
|
$
|
23,627
|
|
|
100.0%
|
|
$
|
21,463
|
|
|
100.0%
|
|
$
|
56,958
|
|
|
100.0%
|
|
$
|
58,082
|
|
|
100.0%
|
|
Refractories
Revenue from our refractories segment accounted for approximately 39.2% of
sales revenue in the third quarter of 2012. Our refractory products have
high-temperature resistant qualities 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:
27
-
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 35.2% of the
Companys total sales in the first nine months of 2012, compared with 31.1% in
the same period of 2011. We believe that these services, together with our
refractory products, provide us a strategic advantage.
Industrial Ceramics
Revenue from our Industrial Ceramics segment accounted for approximately 2.4% of sales
revenue in the third quarter of 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
Revenue from our Fracture Proppants segment accounted for approximately 54.3% of sales
revenue in the third quarter of 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 China National Offshore Oil Corporation
(the CNOOC) as their supplier of fracture proppant products for their oil and
gas-drilling operation.
Fine Precision Abrasives
Revenue from our Fine Precision Abrasives segment accounted for approximately 4.1% of
our sales revenue in the third quarter of 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. 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.
28
Third Quarter of 2012 Summary
Our financial performance in the third quarter of 2012 is
summarized as follows:
-
Sales revenue increased by approximately $2.1 million, or 10.1%, to
approximately $23.6 million for the third quarter of 2012, from approximately
$21.5 million for the same period in 2011.
-
Gross profit decreased by approximately $380,000, or 6.9%, to
approximately $5.1 million for the third quarter of 2012, from approximately
$5.5 million for the same period in 2011. Gross profit margin was 21.7% for
the third quarter of 2012, compared with 25.6% for the same period in 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 drive down our selling price in the third quarter,
the lower gross profit margin in fracture proppants segment as well as the
rising costs of raw materials and energy in refractories segment. Net loss
increased by approximately $3.1 million, to approximately $2.2 million for the
third quarter of 2012, from a net income of approximately $853,000 for the
same period in 2011.
-
Our condensed consolidated balance sheet (unaudited) as of September 30,
2012 included current assets of approximately $138.0 million and total assets
of approximately $179.3 million, with working capital of approximately $3.8
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 696 million metric tons in 2011, the steel industry still faces
overcapacity and weak demand from both domestic and international market. In
addition, the PRC governments continued policy to squeeze out 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 squeezed our profit in the refractories segment.
Considerable Increase of Raw Material Prices and Decrease in
Gross Profit Margin
In 2011, China saw its highest inflation rate in over 10 years.
While the overall inflation 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, hardly could the selling price of our products
keep pace with the increase in raw materials prices on a timely basis.
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 temporarily in the first nine months of 2012. We are
currently looking at other alternatives to increase our sales of fracture
proppants products, especially restore our profitable sales in the U.S. market;
however, we cannot guarantee sales and gross profit margin in fracture proppants
segment can maintain the level seen in 2011.
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 or have to reduce selling price
significantly, our revenue will decline and we may need to discontinue our
production.
29
Results of Operations
Comparison of Three-Month Periods ended September 30,
2012 and 2011
The following table summarizes the results of our operations
during the three-month periods ended September 30, 2012 and 2011, and provides
information regarding the dollar and percentage increase or (decrease) during
the three-month periods ended September 30, 2012 and 2011.
(All amounts, other than percentages, in U.S. dollars)
|
|
Three-Month Period
|
|
|
Three-Month Period
|
|
|
|
Ended September 30,
2012
|
|
|
Ended September 30,
2011
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
As a
|
|
|
|
Dollars in
|
|
|
percentage of
|
|
|
Dollars in
|
|
|
percentage of
|
|
Statement of operations data:
|
|
thousands
|
|
|
sales revenue
|
|
|
thousands
|
|
|
sales revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Revenue
|
|
23,627
|
|
|
100.0%
|
|
|
21,463
|
|
|
100.0%
|
|
Cost of goods sold
|
|
(18,503
|
)
|
|
-78.3%
|
|
|
(15,959
|
)
|
|
-74.4%
|
|
Gross profit
|
|
5,124
|
|
|
21.7%
|
|
|
5,504
|
|
|
25.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
1,693
|
|
|
7.2%
|
|
|
1,683
|
|
|
7.8%
|
|
Research and
development expenses
|
|
308
|
|
|
1.3%
|
|
|
272
|
|
|
1.3%
|
|
Selling expenses
|
|
3,599
|
|
|
15.2%
|
|
|
2,100
|
|
|
9.8%
|
|
Total operating expenses
|
|
5,600
|
|
|
23.7%
|
|
|
4,055
|
|
|
18.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
(476
|
)
|
|
-2.0%
|
|
|
1,449
|
|
|
6.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant income
|
|
164
|
|
|
0.7%
|
|
|
360
|
|
|
1.7%
|
|
Guarantee income
|
|
142
|
|
|
0.6%
|
|
|
174
|
|
|
0.8%
|
|
Guarantee expenses
|
|
(137
|
)
|
|
-0.6%
|
|
|
(67
|
)
|
|
-0.3%
|
|
Equity in net loss of a non-consolidated affiliate
|
|
(24
|
)
|
|
-0.1%
|
|
|
-
|
|
|
0.0%
|
|
Interest income
|
|
186
|
|
|
0.8%
|
|
|
368
|
|
|
1.7%
|
|
Change in fair value of warranty liabilities
|
|
-
|
|
|
0.0%
|
|
|
60
|
|
|
0.3%
|
|
Other income
|
|
1
|
|
|
0.0%
|
|
|
36
|
|
|
0.2%
|
|
Finance costs
|
|
(1,989
|
)
|
|
-8.4%
|
|
|
(1,364
|
)
|
|
-6.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and noncontrolling
interest
|
|
(2,133
|
)
|
|
-9.0%
|
|
|
1,016
|
|
|
4.7%
|
|
Income taxes
|
|
(59
|
)
|
|
-0.3%
|
|
|
(176
|
)
|
|
-0.8%
|
|
Noncontrolling interest
|
|
(8
|
)
|
|
0.0%
|
|
|
13
|
|
|
0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Companys common
stockholders
|
|
(2,200
|
)
|
|
-9.3%
|
|
|
853
|
|
|
4.0%
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month
|
|
|
Three-Month
|
|
|
Dollar ($)
|
|
|
Percentage
|
|
|
|
Period Ended
|
|
|
Period Ended
|
|
|
Increase
|
|
|
Increase
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Dollars in thousands
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Revenue
|
|
23,627
|
|
|
21,463
|
|
|
2,164
|
|
|
10.1%
|
|
Cost of goods sold
|
|
(18,503
|
)
|
|
(15,959
|
)
|
|
2,544
|
|
|
15.9%
|
|
Gross profit
|
|
5,124
|
|
|
5,504
|
|
|
(380
|
)
|
|
-6.9%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative expenses
|
|
1,693
|
|
|
1,683
|
|
|
10
|
|
|
0.6%
|
|
Research and development expenses
|
|
308
|
|
|
272
|
|
|
36
|
|
|
13.2%
|
|
Selling
expenses
|
|
3,599
|
|
|
2,100
|
|
|
1,499
|
|
|
71.4%
|
|
Total operating expenses
|
|
5,600
|
|
|
4,055
|
|
|
1,545
|
|
|
38.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
(476
|
)
|
|
1,449
|
|
|
(1,925
|
)
|
|
-132.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant income
|
|
164
|
|
|
360
|
|
|
(196
|
)
|
|
-54.4%
|
|
Guarantee income
|
|
142
|
|
|
174
|
|
|
(32
|
)
|
|
-18.4%
|
|
Guarantee expenses
|
|
(137
|
)
|
|
(67
|
)
|
|
70
|
|
|
104.5%
|
|
Equity in net loss of a non-consolidated
affiliate
|
|
(24
|
)
|
|
-
|
|
|
(24
|
)
|
|
-100.0%
|
|
Interest income
|
|
186
|
|
|
368
|
|
|
(182
|
)
|
|
-49.5%
|
|
Change in fair value of warranty
liabilities
|
|
-
|
|
|
60
|
|
|
(60
|
)
|
|
-100%
|
|
Other income
|
|
1
|
|
|
36
|
|
|
(35
|
)
|
|
-97.2%
|
|
Finance costs
|
|
(1,989
|
)
|
|
(1,364
|
)
|
|
625
|
|
|
45.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and
noncontrolling interest
|
|
(2,133
|
)
|
|
1,016
|
|
|
(3,149
|
)
|
|
-309.9%
|
|
Income taxes
|
|
(59
|
)
|
|
(176
|
)
|
|
(117
|
)
|
|
-66.5%
|
|
Noncontrolling interest
|
|
(8
|
)
|
|
13
|
|
|
(21
|
)
|
|
-161.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Companys
common stockholders
|
|
(2,200
|
)
|
|
853
|
|
|
(3,053
|
)
|
|
-357.9%
|
|
The average conversion rates between RMB and U.S. dollar used
for the condensed consolidated statements of operations and comprehensive loss
increased approximately 2.9% 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 increased approximately
$2.1 million, or 10.1% to approximately $23.6 million for the three months ended
September 30, 2012 from approximately $21.5 million in the same period of 2011.
Excluding foreign currency translation, the revenue increased approximately $1.8
million, or 8.3% compared with the same period of 2011. 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 increase was mainly attributable
to the increased sales of our fracture proppant products.
In our refractory segment, we sold 20,299 metric tons of
refractory products in the third quarter of 2012, compared with 29,463 metric
tons sold in the same period of 2011. The revenue from our refractory products
was approximately $9.3 million in the third quarter of 2012, a decrease of
approximately $4.1 million, or 30.9% compared with approximately $13.4 million
in the same period of 2011. The decrease was due to the weak demand from our
main customers in steel industry. Excluding foreign currency translation, the
revenue decreased approximately $4.2 million, or 31.5% compared with the same
period of 2011. The average selling price increased to $456 per metric ton
compared with $454 per metric ton in the third quarter of 2011. Excluding
foreign currency translation, the average selling price decreased to $443 per
metric ton in the third quarter of 2012.
In our fracture proppant segment, we sold 38,855 metric tons of
fracture proppant products in the third quarter of 2012, compared with 14,877
metric tons sold in the same period of 2011. Revenue was approximately $12.8
million in the third quarter of 2012, an increase of approximately $7.1 million,
or 124.9% compared with approximately $5.7 million in the same period of 2011.
Excluding foreign currency translation, the revenue increased approximately $6.8
million, or 119.4% compared with the same period of 2011. The increase in
revenue was due to our expansion in the domestic market as we increased sales to
oil producers in China. Average selling price decreased to $330 per metric ton
in the third quarter of 2012, compared with $384 per metric ton in the same
period of 2011. Excluding foreign currency translation, the average selling
price decreased to $321 per metric ton in the third quarter of 2012. The
decrease in average selling price was primarily due to the increased sales in
domestic market where the fracture proppant products are typically priced lower
than in the U.S. market.
In our industrial ceramics segment, sales revenue was
approximately $573,000 in the third quarter of 2012 compared with approximately
$157,000 in the same period of 2011. Excluding foreign currency translation, the
revenue was approximately $407,000.
In our fine precision abrasives segment, we realized sales of
421 ton in the third quarter of 2012, for revenue of approximately $963,000.
Excluding foreign currency translation, the revenue was approximately $935,000.
We sold 643 metric tons of fine precision abrasives products for approximately
$2.2 million in the same period of 2011. The decrease in sales revenue was
primarily due to the weak demand of our products as our major customers in solar
industry reduced their production.
31
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 increased approximately $2.5 million, or 15.9%, to approximately
$18.5 million in the third quarter of 2012 from approximately $16.0 million in
the same period of 2011. Excluding foreign currency translation, our cost of
goods sold increased approximately $2.3 million, or 14.1% compared with the same
period of 2011. As a percentage of sales revenue, the cost of goods sold
increased by 3.9% to 78.3% in the third quarter of 2012 from 74.4% in the same
period of 2011. This increase was primarily due to the higher raw material costs
and energy costs compared with the same period in 2011.
Gross profit.
Our gross profit decreased approximately
$380,000, or 6.9% to approximately $5.1 million in the third quarter of 2012
from approximately $5.5 million in the same period of 2011. Excluding foreign
currency translation, our gross profit decreased approximately $475,000, or 8.6%
compared with the same period of 2011. Gross profit margin was 21.7% in the
third quarter of 2012, as compared with 25.6% in the same period of 2011. The
decrease was primarily attributable to the decreased gross profit margin in our
fine precision abrasives segment and fracture proppants segment.
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 third quarter of 2012. As a percentage of
sales revenue, administrative expenses decreased to 7.2% in the third quarter of
2012 as compared with 7.8% in the same period in 2011.
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 increased approximately $1.5 million,
or 71.4% in the third quarter of 2012. The increase was primarily due to the
increase in transportation expenses and sales commissions resulting from higher
sales volume in our fracture proppants products. Excluding foreign currency
translation, the selling expenses increased approximately $1.4 million, or 68.6%
compared with the same period of 2011. As a percentage of sales revenue, our
selling expenses increased to 15.2% in the third quarter of 2012, as compared
with 9.8% in the same period in 2011.
Research and development expenses.
Our research and
development expenses increased to approximately $308,000 in the third quarter of
2012, compared with approximately $272,000 in the same period in 2011 due to
more research and development activities in the third quarter of 2012. Excluding
foreign currency translation, the research and development expenses were
approximately $303,000.
Government grant income.
Our government grant income was
$164,000 in the third quarter of 2012 compared with approximately $360,000 in
the same period in 2011. Excluding foreign currency translation, the government
grant income was approximately $163,000.
Finance costs.
Our finance costs increased by
approximately $625,000, or 45.8% to approximately $2.0 million in the third
quarter of 2012, from approximately $1.4 million in the same period in 2011.
Excluding foreign currency translation, our finance costs increased
approximately $598,000, or 43.8% compared with the same period of 2011. As a
percentage of sales revenue, our finance costs were 8.4% in the third quarter of
2012 and 6.4% in the same period in 2011. This increase was primarily
attributable to an increase of approximately $547,000 in bills discounting
charges as we increased borrowing activities in the third quarter of 2012.
(Loss) income before income taxes and non-controlling
interests.
Our loss before income taxes and non-controlling interest was
approximately $2.1 million in the third quarter of 2012, compared with an income
of approximately $1.0 million in the same period of 2011. The decrease was
primarily attributable to the decrease in income from operations and higher finance costs in
the third quarter of 2012.
Income taxes.
Our income taxes were approximately
$59,000 in the third quarter of 2012, a decrease of approximately $117,000 or
66.5% from approximately $176,000 in the same period of 2011. Income taxes
incurred in the PRC were calculated based on the Chinese GAAP for each
individual subsidiary. Despite that we reported a net loss, as certain of our
PRC subsidiaries recognized taxable income, we still incurred income taxes for
the third quarter of 2012.
Net (loss) income.
Our net loss in the third quarter of
2012 was approximately $2.2 million, a decrease of approximately $3.1 million
from an income of approximately $853,000 in the same period in 2011. The
decrease was attributable to the factors described above.
Comparison of Nine-Month Periods Ended September 30, 2012
and 2011
The following table summarizes the results of our operations
during the nine-month periods ended September 30, 2012 and 2011, and provides
information regarding the dollar and percentage increase or (decrease) during
the nine-month periods ended September 30, 2012 and 2011.
32
(All amounts, other than percentages, in U.S. dollars)
|
|
Nine-Month Period
|
|
|
Nine-Month Period
|
|
|
|
Ended September 30, 2012
|
|
|
Ended September 30, 2011
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
As a
|
|
|
|
Dollars in
|
|
|
percentage of
|
|
|
Dollars in
|
|
|
percentage of
|
|
Statement of operations data:
|
|
thousands
|
|
|
sales revenue
|
|
|
thousands
|
|
|
sales revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue
|
|
56,958
|
|
|
100.0%
|
|
|
58,082
|
|
|
100.0%
|
|
Cost of goods sold
|
|
(46,063
|
)
|
|
-80.9%
|
|
|
(42,957
|
)
|
|
-74.0%
|
|
Gross profit
|
|
10,895
|
|
|
19.1%
|
|
|
15,125
|
|
|
26.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
5,359
|
|
|
9.4%
|
|
|
4,816
|
|
|
8.3%
|
|
Research and
development expenses
|
|
707
|
|
|
1.2%
|
|
|
558
|
|
|
1.0%
|
|
Selling expenses
|
|
8,870
|
|
|
15.6%
|
|
|
6,833
|
|
|
11.7%
|
|
Total operating expenses
|
|
14,936
|
|
|
26.2%
|
|
|
12,207
|
|
|
21.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
(4,041
|
)
|
|
-7.1%
|
|
|
2,918
|
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant income
|
|
549
|
|
|
1.0%
|
|
|
377
|
|
|
0.6%
|
|
Guarantee income
|
|
443
|
|
|
0.8%
|
|
|
385
|
|
|
0.7%
|
|
Guarantee expenses
|
|
(374
|
)
|
|
-0.7%
|
|
|
(243
|
)
|
|
-0.4%
|
|
Equity in net loss of a non-consolidated affiliate
|
|
(33
|
)
|
|
-0.1%
|
|
|
-
|
|
|
0.0%
|
|
Interest income
|
|
425
|
|
|
0.8%
|
|
|
551
|
|
|
0.9%
|
|
Change in fair value of warranty liabilities
|
|
-
|
|
|
0.0%
|
|
|
970
|
|
|
1.7%
|
|
Other income (expenses)
|
|
45
|
|
|
0.1%
|
|
|
(32
|
)
|
|
-0.1%
|
|
Finance costs
|
|
(5,689
|
)
|
|
-10.0%
|
|
|
(3,902
|
)
|
|
-6.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and noncontrolling
interest
|
|
(8,675
|
)
|
|
-15.2%
|
|
|
1,024
|
|
|
1.7%
|
|
Income taxes
|
|
(273
|
)
|
|
-0.5%
|
|
|
(538
|
)
|
|
-0.9%
|
|
Noncontrolling interest
|
|
41
|
|
|
0.1%
|
|
|
40
|
|
|
0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Companys common
stockholders
|
|
(8,907
|
)
|
|
-15.6%
|
|
|
526
|
|
|
0.9%
|
|
|
|
Nine-Month
|
|
|
Nine-Month
|
|
|
Dollar ($)
|
|
|
Percentage
|
|
|
|
Period Ended
|
|
|
Period Ended
|
|
|
Increase
|
|
|
Increase
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Dollars in thousands
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue
|
|
56,958
|
|
|
58,082
|
|
|
(1,124
|
)
|
|
-1.9%
|
|
Cost of goods sold
|
|
(46,063
|
)
|
|
(42,957
|
)
|
|
3,106
|
|
|
7.2%
|
|
Gross profit
|
|
10,895
|
|
|
15,125
|
|
|
(4,230
|
)
|
|
-28.0%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative expenses
|
|
5,359
|
|
|
4,816
|
|
|
543
|
|
|
11.3%
|
|
Research and development expenses
|
|
707
|
|
|
558
|
|
|
149
|
|
|
26.7%
|
|
Selling expenses
|
|
8,870
|
|
|
6,833
|
|
|
2,037
|
|
|
29.8%
|
|
Total operating expenses
|
|
14,936
|
|
|
12,207
|
|
|
2,729
|
|
|
22.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
(4,041
|
)
|
|
2,918
|
|
|
(6,959
|
)
|
|
-238.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant income
|
|
549
|
|
|
377
|
|
|
172
|
|
|
45.6%
|
|
Guarantee income
|
|
443
|
|
|
385
|
|
|
58
|
|
|
15.1%
|
|
Guarantee expenses
|
|
(374
|
)
|
|
(243
|
)
|
|
131
|
|
|
53.9%
|
|
Equity in net loss of a non-consolidated
affiliate
|
|
(33
|
)
|
|
-
|
|
|
(33
|
)
|
|
-100.0%
|
|
Interest income
|
|
425
|
|
|
551
|
|
|
(126
|
)
|
|
-22.9%
|
|
Change in fair value of warranty
liabilities
|
|
-
|
|
|
970
|
|
|
(970
|
)
|
|
-100%
|
|
Other income (expenses)
|
|
45
|
|
|
(32
|
)
|
|
77
|
|
|
-240.6%
|
|
Finance costs
|
|
(5,689
|
)
|
|
(3,902
|
)
|
|
1,787
|
|
|
45.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and
noncontrolling interest
|
|
(8,675
|
)
|
|
1,024
|
|
|
(9,699
|
)
|
|
-947.2%
|
|
Income taxes
|
|
(273
|
)
|
|
(538
|
)
|
|
(265
|
)
|
|
-49.3%
|
|
Noncontrolling interest
|
|
41
|
|
|
40
|
|
|
1
|
|
|
2.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Companys
common stockholders
|
|
(8,907
|
)
|
|
526
|
|
|
(9,433
|
)
|
|
-1,793.4%
|
|
33
Sales revenue
. Sales revenue decreased approximately
$1.1 million, or 1.9% to approximately $57.0 million for the nine months ended
September 30, 2012, from approximately $58.1 million in the same period of 2011.
Excluding foreign currency translation, the revenue decreased approximately $2.7
million, or 4.7% compared with the same period of 2011. The decrease was mainly
attributable to the decreased sales in our refractory segment.
In our refractory segment, we sold 63,284 metric tons of
refractory products in the nine months ended September 30, 2012, compared with
76,962 metric tons sold in the same period of 2011. The revenue from our
refractory products was approximately $30.8 million in the nine months ended
September 30, 2012, a decrease of approximately $5.1 million, or 14.1% compared
with approximately $35.9 million in the same period of 2011. Excluding foreign
currency translation, the revenue decreased approximately $5.9 million, or 16.5%
compared with the same period of 2011. The decrease was a result of weak demand
from our main customers in steel industry. The average selling price was $487
per metric ton in the nine months ended September 30, 2012, representing a 4.5%
increase compared with $466 per metric ton in the same period of 2011. Excluding
foreign currency translation, the average selling price increased to $473 per
metric ton, or an increase of 1.5% in the nine months ended September 30, 2012.
In our fracture proppant segment, we sold 57,558 metric tons of
fracture proppant products in the nine months ended September 30, 2012, compared
with 42,541 metric tons sold in the same period of 2011. The increase in sales
volume was primarily due to 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 $18.1 million in the nine months ended September 30,
2012, an increase of 7.2% compared with approximately $16.8 million in the same
period of 2011. Excluding foreign currency translation, the revenue decreased
approximately $711,000, or 4.2% compared with the same period of 2011. Average
selling price decreased to $314 per metric ton in the nine months ended
September 30, 2012, compared with $396 per metric ton in the same period of
2011. Excluding foreign currency translation, the average selling price
decreased to $305 per metric ton in the nine months ended September 30, 2012.
The decrease in average selling price was primarily due to the increased sales
in domestic market where the fracture proppant products are typically priced
lower than in the U.S. market.
In our industrial ceramics segment, sales revenue was
approximately $1.4 million in the nine months ended September 30, 2012 compared
with approximately $879,000 in the same period of 2011.
In our fine precision abrasives segment, we realized sales of
2,476 ton in the nine months ended September 30, 2012, for revenue of
approximately $6.7 million. Excluding foreign currency translation, the revenue
was approximately $6.5 million. We sold 1,276 metric tons of fine precision
abrasives products for approximately $4.5 million in the same period of 2011.
The increase in sales revenue was primarily due to the increased sales to a
major customer in the first six months of 2012.
Cost of goods sold.
Our cost of goods sold increased
approximately $3.1 million, or 7.2%, to approximately $46.1 million in the nine
months ended September 30, 2012 from approximately $43.0 million in the same
period of 2011. Excluding foreign currency translation, our cost of goods sold
decreased approximately $1.8 million, or 4.2% compared with the same period of
2011. As a percentage of sales revenue, the cost of goods sold increased by 6.9%
to 80.9% in the nine months ended September 30, 2012 from 74.0% in the same
period of 2011. This increase was primarily due to the higher raw material costs
and energy costs compared with the same period in 2011.
Gross profit.
Our gross profit decreased approximately
$4.2 million, or 28.0% to approximately $10.9 million in the nine months ended
September 30, 2012 from approximately $15.1 million in the same period of 2011.
Excluding foreign currency translation, our gross profit decreased approximately
$4.5 million, or 30.0% compared with the same period of 2011. Gross profit as a
percentage of sales revenue was 19.1% in the nine months ended September 30,
2012, as compared with 26.0% in the same period of 2011. The percentage decrease
was primarily attributable to the decreased gross profit margin in refractory
segment and fracture proppants segment.
General and administrative expenses.
Our general and
administrative expenses increased to approximately $5.4 million in the nine
months ended September 30, 2012, from approximately $4.8 million in the same
period in 2011. Excluding foreign currency translation, the general and
administrative expenses increased approximately $394,000, or 8.2% compared with
the same period of 2011. The increase was primarily due to the loss on disposal
of equipment in our fine precision abrasives segment as we upgraded the
production facilities and higher salary expenses. As a percentage of sales
revenue, administrative expenses increased to 9.4% in the nine months ended
September 30, 2012 as compared with 8.3% in the same period in 2011.
34
Selling expenses.
Selling expenses increased by
approximately $2.1 million, or 29.8% to approximately $8.9 million in the nine
months ended September 30, 2012, compared with approximately $6.8 million in the
same period in 2011. Excluding foreign currency translation, the selling
expenses increased approximately $1.8 million, or 26.2% compared with the same
period of 2011. As a percentage of sales revenue, our selling expenses increased
to 15.6% in the nine months ended September 30, 2012, as compared with 11.7% in
the same period in 2011. The increase in selling expenses was primarily
attributable to the higher transportation expenses, sales related expenses and
the increase in the allowance for doubtful accounts compared to the same period
in 2011.
Research and development expenses.
Our research and
development expenses increased to approximately $707,000 in the nine months
ended September 30, 2012, compared with approximately $558,000 in the same
period in 2011. Excluding foreign currency translation, the research and
development expenses were approximately $687,000. The increase was mainly due to
more research and development activities in the nine months ended September 30,
2012.
Government grant income.
Our government grant income was
approximately $549,000 in the nine months ended September 30, 2012 compared with
approximately $377,000 in the same period in 2011. Excluding foreign currency
translation, the government grant income was approximately $534,000.
Finance costs.
Our finance costs increased by
approximately $1.8 million, or 45.8% to approximately $5.7 million in the nine
months ended September 30, 2012, from approximately $3.9 million in the same
period in 2011. Excluding foreign currency translation, our finance costs
increased approximately $1.6 million, or 41.7% compared with the same period of
2011. As a percentage of sales revenue, our finance costs were 10.0% in the nine
months ended September 30, 2012 and 6.7% in the same period in 2011. This
increase was primarily attributable to an increase of approximately $1.0 million
in bills discounting charges and an increase of approximately $760,000 in
interest expenses as we increased borrowing activities in the nine months ended
September 30, 2012.
(Loss) income before income taxes and non-controlling
interests.
Our loss before income taxes and non-controlling interest was
approximately $8.7 million in the nine months ended September 30, 2012, compared
with an income of approximately $1.0 million in the same period of 2011.
Excluding foreign currency translation, our loss before income taxes and
non-controlling interest was approximately $8.4 million. The decrease was
primarily attributable to the decrease in income from operations and higher finance costs in
the nine months ended September 30, 2012.
Income taxes.
Our income taxes were approximately
$273,000 in the nine months ended September 30, 2012, a decrease of
approximately $265,000 or 49.3% from approximately $538,000 in the same period
of 2011. Excluding foreign currency translation, our income taxes were
approximately $265,000. Income taxes incurred in the PRC were calculated based
on the Chinese GAAP for each individual subsidiary. Despite that we reported a
net loss, as certain of our PRC subsidiaries recognized taxable income, we still
incurred income taxes for the nine months ended September 30, 2012.
Net (loss) income.
Our net loss in the nine months ended
September 30, 2012 was approximately $8.9 million, a decrease of approximately
$9.4 million from an income of approximately $526,000 in the same period in
2011. Excluding foreign currency translation, our net loss was approximately
$8.7 million. The decrease was attributable to the factors described above.
Liquidity and Capital Resources
As of September 30, 2012, we had cash and cash equivalents of
approximately $2.6 million and restricted cash of approximately $41.9 million.
Our current assets were approximately $138.0 million and our current liabilities
were approximately $134.3 million as of September 30, 2012 which resulted in a
current ratio of approximately 102.8. Total equity as of September 30, 2012 was
approximately $45.0 million. The following table sets forth a summary of our
cash flows for the periods indicated:
|
|
Nine Months Ended
September 30,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
487
|
|
|
3,571
|
|
Net cash used in investing activities
|
|
(2,567
|
)
|
|
(11,682
|
)
|
Net cash provided by financing activities
|
|
1,104
|
|
|
15,047
|
|
Net cash (outflows) inflows
|
|
(965
|
)
|
|
6,956
|
|
Operating Activities
Net cash provided by operating activities was approximately
$487,000 in the nine months ended September 30, 2012, compared with net cash
provided by operating activities of approximately $3.6 million in the same
period of 2011. The decrease in net cash provided by operating activities was primarily due to the net loss and the
increase in trade receivables in the nine months ended September 30, 2012.
35
Investing Activities
Net cash used in investing activities in the nine months ended
September 30, 2012 was approximately $2.6 million, a decrease of approximately
$9.1 million from net cash used in investing activities of approximately $11.7
million in the same period in 2011. The decrease in net cash used in investing
activities in the nine months ended September 30, 2012 was primarily due to
fewer activities related to our construction of manufacturing and administrative
facilities and no acquisition of land use right occurred as compared with the
nine months ended September 30, 2011.
Financing Activities
Net cash provided by financing activities was approximately
$1.1 million in the nine months ended September 30, 2012, compared with net cash
provided by financing activities of approximately $15.0 million in the same
period of 2011 when we received our $9.3 million from equity financing activities. The
decrease in net cash provided by financing activities was also attributable to
the increase in the restricted cash related to financing activities.
Loan Facilities
In the nine months ended September 30, 2012, we secured new
loans totaling approximately $52.2 million from banks for our working capital
needs, and we repaid approximately $22.7 million in bank loans during the
period. As a result, the balance of all bank loans and bank borrowings as of
September 30, 2012 was approximately $75.7 million, which includes approximately
$35.0 million short-term bank loans and approximately $40.7 million of bank
borrowings secured by bank deposits.
As of September 30, 2012, the detail of all our short-term bank
loans and bank borrowings are as follows:
36
All amounts, other than percentages, are in U.S. dollar.
No
|
Type
|
Contracting Party
|
Valid Date
|
Duration
|
Amount
|
1
|
Facility Bank Loan
|
Shanghai Pudong Development
Bank Village Bank
|
2011-10-14 to
2012-10-13
|
1 year
|
$426,870
|
2
|
Facility Bank Loan
|
City Credit Cooperatives in Gongyi
|
2011-12-12 to 2012-12-5
|
1 year
|
$2,845,800
|
3
|
Facility Bank Loan
|
Zhengzhou Bank
|
2012-01-5 to
2013-01-04
|
1 year
|
$4,743,000
|
4
|
Facility Bank Loan
|
China Construction Bank
|
2012-01-10 to 2013-01-09
|
1 year
|
$3,162,000
|
5
|
Facility Bank Loan
|
Industrial and Commercial Bank
of China
|
2012-02-03 to
2013-01-08
|
1 year
|
$2,845,800
|
6
|
Facility Bank Loan
|
Agricultural Bank of China
|
2012-02-20 to 2013-02-19
|
1 year
|
$1,849,770
|
7
|
Facility Bank Loan
|
China CITIC Bank
|
2012-03-01 to
2013-02-28
|
1 year
|
$1,470,330
|
8
|
Facility Bank Loan
|
Luoyang Bank
|
2012-04-25 to 2013-04-24
|
1 year
|
$3,162,000
|
9
|
Facility Bank Loan
|
Agricultural Bank of China
|
2012-04-28 to
2013-04-27
|
1 year
|
$5,059,200
|
10
|
Facility Bank Loan
|
Industrial and Commercial Bank of China
|
2012-05-09 to 2013-05-08
|
1 year
|
$711,450
|
11
|
Facility Bank Loan
|
China CITIC Bank
|
2012-06-26 to
2013-06-25
|
1 year
|
$2,371,500
|
12
|
Facility Bank Loan
|
City Credit Cooperatives in Gongyi
|
2012-07-31 to 2013-07-25
|
1 year
|
$711,450
|
13
|
Facility Bank Loan
|
China EverBright Bank
|
2012-08-16 to
2013-02-01
|
6 months
|
$516,988
|
14
|
Facility Bank Loan
|
China EverBright Bank
|
2012-08-21 to 2013-02-06
|
6 months
|
$898,640
|
15
|
Facility Bank Loan
|
Shanghai Pudong Development
Bank Village Bank
|
2012-08-27 to
2013-08-26
|
1 year
|
790,500
|
16
|
Facility Bank Loan
|
Shanghai Pudong Development Bank Village Bank
|
2012-08-29 to 2013-08-28
|
1 year
|
395,250
|
17
|
Facility Bank Loan
|
Shanghai Pudong Development
Bank
|
2012-09-05 to
2013-09-04
|
1 year
|
2,845,800
|
18
|
Facility Bank Loan
|
China EverBright Bank
|
2012-09-25 to 2013-03-12
|
6 months
|
$181,625
|
19
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-04-06 to 2012-10-05
|
6 months
|
$3,162,000
|
20
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-04-11 to 2012-10-10
|
6 months
|
$3,162,000
|
21
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-04-13 to 2012-10-12
|
6 months
|
$4,663,950
|
22
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-04-28 to 2012-10-19
|
6 months
|
$158,100
|
23
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-05-04 to 2012-11-03
|
6 months
|
$3,162,000
|
24
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-05-07 to 2012-11-04
|
6 months
|
$948,600
|
25
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-05-09 to 2012-11-07
|
6 months
|
$1,581,000
|
26
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-05-09 to 2012-11-08
|
6 months
|
$790,500
|
27
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-05-11 to 2012-11-03
|
6 months
|
$142,290
|
28
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-05-14 to 2012-11-09
|
6 months
|
$158,100
|
29
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-05-17 to 2012-11-10
|
6 months
|
$79,050
|
30
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-05-17 to 2012-11-16
|
6 months
|
$2,845,800
|
31
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-05-30 to 2012-11-10
|
6 months
|
$79,050
|
32
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-05-30 to 2012-11-17
|
6 months
|
$94,860
|
33
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-05-31 to 2012-11-17
|
6 months
|
$126,480
|
34
|
Bank Borrowing
|
Hana Bank
|
2012-06-05 to 2012-11-25
|
6 months
|
$632,400
|
35
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-06-07 to 2012-12-06
|
6 months
|
$3,162,000
|
36
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-06-08 to 2012-11-21
|
6 months
|
$79,050
|
37
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-06-08 to 2012-12-08
|
6 months
|
$948,600
|
38
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-06-14 to 2012-12-14
|
6 months
|
$632,400
|
39
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-06-15 to 2012-11-29
|
6 months
|
$790,500
|
40
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-06-19 to 2012-12-18
|
6 months
|
$948,600
|
41
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-06-20 to 2012-12-19
|
6 months
|
$948,600
|
42
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-06-29 to 2012-12-08
|
6 months
|
$94,860
|
43
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-06-29 to 2012-12-12
|
6 months
|
$158,100
|
44
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-06-29 to 2012-12-13
|
6 months
|
$79,050
|
45
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-07-17 to 2013-01-02
|
6 months
|
$237,150
|
46
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-07-30 to 2012-12-26
|
5 months
|
$15,810
|
47
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-07-30 to 2013-01-18
|
6 months
|
$15,810
|
48
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-07-31 to 2013-01-11
|
6 months
|
$79,050
|
49
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-08-04 to 2013-01-11
|
6 months
|
$158,100
|
50
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-08-07 to 2012-11-09
|
4 months
|
$79,050
|
51
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-08-07 to 2013-01-01
|
5 months
|
$63,240
|
52
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-08-07 to 2013-01-24
|
6 months
|
$25,296
|
53
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-08-13 to 2013-02-03
|
6 months
|
$474,300
|
54
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-08-30 to 2013-02-15
|
6 months
|
$1,581,000
|
55
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-08-31 to 2013-02-23
|
6 months
|
$316,200
|
56
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-09-04 to 2013-03-03
|
6 months
|
$869,550
|
57
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-09-06 to 2013-03-05
|
6 months
|
$3,162,000
|
58
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-09-10 to 2013-03-07
|
6 months
|
$869,550
|
59
|
Bank Borrowing
|
Puyang Commerical Bank
|
2012-09-10 to 2013-03-10
|
6 months
|
$711,450
|
60
|
Bank Borrowing
|
Pingdingshan Bank
|
2012-09-12 to 2013-03-04
|
6 months
|
$1,581,000
|
61
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-09-16 to 2013-02-28
|
6 months
|
$158,100
|
62
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-09-28 to 2013-01-27
|
4 months
|
$79,050
|
63
|
Bank Borrowing
|
Shanghai Pudong Development
Bank Village Bank
|
2012-09-28 to 2013-03-21
|
6 months
|
$316,200
|
64
|
Bank Borrowing
|
Shanghai Pudong Development Bank Village Bank
|
2012-09-30 to 2013-03-21
|
6 months
|
$316,200
|
37
We have approximately $35.0 million of facility bank loans,
maturing from October 13, 2012 to September 4, 2013 and approximately $40.7
million of bank borrowings secured by bank deposits. 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 loan agreements to which we are a party:
On October 14, 2011, 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 $427,000 (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 12, 2011, 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 $2.8 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 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 $4.7 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 $2.8 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.
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 $1.8 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.
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.
38
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 $711,000 (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 CCCG, whereby CCCG has agreed to loan
approximately $711,000 (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 $517,000 (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 $899,000 (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 SPDVB, whereby SPDVB has agreed
to loan approximately $791,000 (RMB 5.0 million) to Refractories for a term of
one year, at an interest rate of 8.4% 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 $395,000 (RMB 2.5 million) to Duesail for a term of one
year, at an interest rate of 8.4% 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 $2.8
million (RMB 18 million) to Refractories for a term of one year, at an interest
rate of 6.6% 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.
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 September 30, 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 September 30, 2012 and December 31, 2011.
39
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
44,799,961
|
|
$
|
53,589,986
|
|
Restricted net assets as percentage of consolidated net
assets
|
|
18.1%
|
|
|
15.1%
|
|
Total restricted net assets accounted for approximately 18.1%
of our consolidated net assets as of September 30, 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 GengSheng 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 September 30, 2012 and December 31, 2011:
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Due within 1 year
|
$
|
54,670,146
|
|
$
|
43,781,105
|
|
Due from 1 to 2 years
|
|
4,511,957
|
|
|
4,863,486
|
|
Due from 2 to 3 years
|
|
1,713,899
|
|
|
1,037,185
|
|
Due over 3 years
|
|
1,779,576
|
|
|
1,532,792
|
|
|
|
|
|
|
|
|
Total
|
$
|
62,675,578
|
|
$
|
51,214,568
|
|
The following is the aging analysis for bills receivable as of
September 30, 2012 and December 31, 2011:
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Due within 6 months
|
$
|
6,685,200
|
|
$
|
6,331,997
|
|
|
|
|
|
|
|
|
Total
|
$
|
6,685,200
|
|
$
|
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.
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.
40
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 significant 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 goodwill,
know-how and deposit for acquisition of a non-consolidated affiliate. 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, during the reporting periods,
the management established the general provisioning policy to make allowance
equivalent to 5% (2011: 5%) of trade receivables due from 1 to 2 years, 40%
(2011: 40%) of trade receivables due from 2 to 3 years and 90% (2011: 70%) 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 condensed 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. 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.
41
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 customers 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.
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 September 2011, the FASB issued ASU 2011-08, Intangibles -
Goodwill and Other (Topic 350). The amendments in this update will allow an
entity to first assess qualitative factors to determine whether it is necessary
to perform the two-step quantitative goodwill impairment test. Under these
amendments, an entity would not be required to calculate the fair value of a
reporting unit unless the entity determines, based on a qualitative assessment,
that it is more likely than not that its fair value is less than its carrying
amount. The amendments include a number of events and circumstances for an
entity to consider in conducting the qualitative assessment. The amendments in
this ASU are effective for annual and interim goodwill impairment tests
performed for fiscal years beginning after December 15, 2011. Early adoption is
permitted. The adoption of this ASU has no material impact on the Companys
condensed consolidated financial statements.
In September 2011, the FASB issued ASU 2011-09, Compensation -
Retirement Benefits - Multiemployer Plans (Subtopic 715 - 80). The amendments
in this update require additional disclosures about an employer's participation
in a multiemployer plan. ASU 2011-09 is effective for annual periods for fiscal
years ending after December 15, 2011, and early adoption is permitted. ASU
2011-09 should be applied retrospectively for all prior periods presented. The
adoption of this ASU has no material impact on the Companys condensed
consolidated financial statements.
In December 2011, the FASB issued ASU 2011-11, Balance Sheet
(Topic 210). The objective of this update is to provide enhanced disclosures
that will enable users of its financial statements to evaluate the effect or
potential effect of netting arrangements on an entitys financial position. This
includes the effect or potential effect of rights of setoff associated with an
entitys recognized assets and recognized liabilities within the scope of this
update. The amendments require enhanced disclosures by requiring improved
information about financial instruments and derivative instruments that are
either (1) offset in accordance with either Section 210-20-45 or Section
815-10-45 or (2) subject to an enforceable master netting arrangement or similar
agreement, irrespective of whether they are offset in accordance with either
Section 210-20-45 or Section 815-10-45. An entity is required to apply the
amendments retrospectively for annual reporting periods beginning on or after
January 1, 2013, and interim periods within those annual periods. The adoption
of this ASU has no material impact on the Companys condensed consolidated
financial statements.
In December 2011, the FASB issued ASU 2011-12, Comprehensive
Income (Topic 220). The amendments in this update supersede certain pending
paragraphs in Accounting Standards Update No. 2011-05, Comprehensive Income
(Topic 220): Presentation of Comprehensive Income, to effectively defer only
those changes in ASU 2011-05 that relate to the presentation of reclassification
adjustments out of accumulated other comprehensive income. The amendments will
be temporary to allow the Board time to redeliberate the presentation
requirements for reclassifications out of accumulated other comprehensive income
for annual and interim financial statements for public, private, and non-profit
entities. The amendments are effective for fiscal years, and interim periods
within those years, beginning after December 15, 2011. Early application is
permitted. The adoption of this ASU has no material impact on the Companys condensed consolidated financial statements.
42
In July 2012, the FASB issued ASU 2012-02 on impairment testing
for indefinite-lived intangible assets. This ASU amends FASB Codification Topic
350, Intangibles-Goodwill and Other to allow, but not require, an entity, when
performing its annual or more frequent indefinite-lived intangible asset
impairment test, to first assess qualitative factors to determine whether the
existence of events and circumstances indicates that it is more likely than not
that the indefinite-lived intangible asset is impaired. If, after assessing the
totality of events and circumstances, an entity concludes that it is not more
likely than not that the indefinite-lived intangible asset is impaired, then the
entity is not required to take further action. However, if an entity concludes
otherwise, then it is required to determine the fair value of the
indefinite-lived intangible asset and perform the quantitative impairment test
by comparing the fair value with the carrying amount. ASU2012-02 is effective
for annual and interim impairment tests performed for fiscal years beginning
after September 15, 2012. Early adoption is permitted. The Company is currently
evaluating ASU 2012-02. The adoption of this ASU will not have a material impact
on the Companys condensed consolidated financial statements.
In October 2012, the FASB issued ASU 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 condensed consolidated
financial statements.