CHCC China Chemical Corp (CE)

FORM 10-Q/A  

 

EXPLANATORY NOTE

We are filing this Amendment No. 1 to the Quarterly Report on Form 10-Q/A (the “Amendment”) to amend certain disclosure under Item 2 Management’s Discussion and Analysis of Financial Condition and Result of Operation in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, originally filed with the Securities and Exchange Commission (the “SEC”) on May 16, 2011 (our “Quarterly Report). We are also filing a copy of an agreement between the Company and ZJHP, dated March 26, 2011 as an exhibit to this Amendment.

 

In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), this Amendment contains new certifications pursuant to Rules 13a-14 and 15d-14 under the Exchange Act and Section 302 of the Sarbane-Oxley Act of 2002.

 

All other information contained in our Quarterly Report remains unchanged. 

 

This Amendment continues to speak as of the date of the Quarterly Report, and except as expressly set forth herein we have not updated the disclosures contained in this Amendment to reflect any events that occurred at a date subsequent to the filing of the Quarterly Report.  The filing of this Amendment is not a representation that any statements contained in items of the Quarterly Report other than that information being amended are true or complete as of any date subsequent to the date of the Quarterly Report.

 

CHINA CHEMICAL CORP.

AND SUBSIDIARIES

CONTENTS

PAGE	F-2-3	CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2011 AND DECEMBER 31, 2010 (UNAUDITED)
PAGE	F - 4	CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 (UNAUDITED)
PAGE	F - 5-6	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 (UNAUDITED)
PAGE	F - 7-34	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 (UNAUDITED)

 

 

 

 

 

 

 

 

ASSETS
		March 31, 2011				December 31, 2010
CURRENT ASSETS
Cash and cash equivalents		$	2,660,958			$	3,260,299
Restricted cash			64,244,030				57,718,999
Accounts receivable			19,791,730				19,903,437
Inventories			11,527,960				10,306,029
Notes receivable			-				2,727,968
Prepayments for goods, net of allowance of $161,170 and $159,538 at March 31, 2011
and December 31, 2010, respectively			13,206,615				15,782,623
Prepaid expenses and other receivables			213,578				184,498
Lease income receivable			1,815,041				-
Due from a related party			2,692,604				19,640,240
Deferred taxes			42,051				105,476
Total current assets			116,194,567				129,629,569
LONG-TERM ASSETS
Plant and equipment, net			74,770,568				74,428,715
Construction in progress			41,292,433				32,151,137
Land use rights, net			3,178,623				3,224,995
Due from related parties			32,176,666				17,679,267
Initial cost for financial obligation, sale-leaseback			550,474				600,778
Deferred taxes			588,709				416,656
Total long-term assets			152,557,473				128,501,548
TOTAL ASSETS		$	268,752,040			$	258,131,117

See accompanying notes to condensed consolidated financial statements.

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY
		March 31, 2011				December 31, 2010
CURRENT LIABILITIES
Accounts payable		$	3,639,134			$	4,972,972
Other payables and accrued liabilities			1,809,908				3,363,998
Short-term bank loans			45,631,030				47,593,169
Customer deposits			3,292,200				62,945
Notes payable			85,845,124				75,546,569
Income tax payable			3,583,685				2,917,250
Payable to contractors			578,926				633,522
Due to related parties			542,692				545,858
Current portion of financial obligations, sale-leaseback			6,096,870				5,892,988
Current portion of long-term bank loans			7,458,030				5,831,080
Total current liabilities			158,477,599				147,360,351
LONG-TERM LIABILITIES
Long-term portion of financial obligations, sale-leaseback			8,846,613				10,391,835
Long-term bank loans			17,046,925				19,613,634
Total long-term liabilities			25,893,538				30,005,469
TOTAL LIABILITIES			184,371,137				177,365,820
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Common stock, $0.0001 par value, 80,000,000 shares authorized, 30,015,000 shares issued
and outstanding at March 31, 2011 and December 31, 2010			3,002				3,002
Additional paid-in capital			12,184,672				12,184,672
Retained earnings (restricted portion is $1,857,451 at March 31, 2011 and December 31, 2010)			64,280,776				61,070,315
Accumulated other comprehensive income			7,912,453				7,507,308
TOTAL SHAREHOLDERS’ EQUITY			84,380,903				80,765,297
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	268,752,040			$	258,131,117

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

		Three Months Ended March 31,
		2011				2010
REVENUES		$	18,417,150			$	16,781,643
COST OF GOODS SOLD			14,656,333				12,298,949
GROSS PROFIT			3,760,817				4,482,694
General and administrative expenses			440,083				263,988
Selling and distribution expenses			19,115				2,641
INCOME FROM OPERATIONS			3,301,619				4,216,065
OTHER INCOME (EXPENSES)
Lease income, net			802,715				704,857
Interest expense, net			(981,171	)			(348,646	)
Other income (expense), net			629,564				(50,283	)
INCOME BEFORE INCOME TAXES			3,752,727				4,521,993
INCOME TAX EXPENSE			(542,266	)			(562,947	)
NET INCOME			3,210,461				3,959,046
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain			405,145				175,218
COMPREHENSIVE INCOME		$	3,615,606			$	3,783,828
WEIGHTED-AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED			30,015,000				19,867,000
NET INCOME PER SHARE, BASIC AND DILUTED		$	0.11			$	0.20

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

		Three Months Ended March 31,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,210,461			$	3,959,046
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			2,106,186				1,489,202
Deferred taxes			(108,360	)			27,817
Amortization of initial cost of financial obligation, sales-leaseback			53,141				-
Amortization of financial obligations, sale-leaseback			527,114				-
Changes in operating assets and liabilities:
(Increase) Decrease In:
Accounts receivable			111,707				(1,007,436	)
Inventories			(1,221,931	)			(771,789	)
Prepayments for goods			2,576,008				(2,768,948	)
Prepaid expenses and other receivables			(29,080	)			1,412
Lease income receivable			(1,815,041	)			-
Due from a related party			(468,339	)			(1,224,804	)
Increase (Decrease) In:
Accounts payable			(1,333,838	)			(1,222,427	)
Other payables and accrued liabilities			(1,554,090	)			572,716
Customer deposits			3,229,255				11,354
Income tax payable			666,435				521,386
Payable to contractors			(54,596	)			(338,666	)
Due to related parties			(3,166	)			9,841
Net cash provided by (used in) operating activities			5,891,866				(741,296	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment			-				(312,445	)
Purchases of construction in progress			(10,978,755	)			(510,964	)
Issuance of notes receivable			-				(2,948,588	)
Repayments of notes receivable			2,734,698				202,587
Due from related parties			3,096,420				(1,955,052	)
Net cash used in investing activities			(5,147,637	)			(5,524,462	)

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

		Three Months Ended March 31,
		2011				2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash		$	(6,525,031	)		$	(14,859,320	)
Due from an employee			-				(1,454,711	)
Proceeds from short-term bank loans			20,011,300				15,954,209
Repayments of short-term bank loans			(22,203,100	)			(10,667,960	)
Proceeds from notes payable			55,571,573				101,273,302
Repayments of notes payable			(45,670,559	)			(84,439,713	)
Repayments of long-term bank loans			(1,062,812	)			-
Repayment of financial obligations, sale-leaseback			(1,945,387	)			-
Net cash (used in) provided by financing activities			(1,824,016	)			5,805,807
NET DECREASE IN CASH AND CASH EQUIVALENTS			(1,079,787	)			(459,951	)
Effect of exchange rate changes on cash			480,446				(158,412	)
Cash and cash equivalents at beginning of period			3,260,299				828,919
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	2,660,958			$	210,556

SUPPLEMENTARY CASH FLOW INFORMATION:

Income taxes paid		$	203			$	9,446
Interest paid		$	833,417			$	457,863

SUPPLEMENTAL NON-CASH DISCLOSURES:

1.   During the three months ended March 31, 2011 and 2010, $2,018,347 and $0, respectively, were transferred from construction in progress to plant and equipment.

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

China Chemical Corp. (formerly Bomps Mining, Inc.) was incorporated in the state of California on July 16, 2008. Effective September 24, 2010, Bomps Mining, Inc. changed its name to China Chemical Corp. (“CHCC” or the “Company”).

Gold Champ Consultants Limited, a Hong Kong corporation (“Gold Champ”) is a holding company whose asset is 100% of the registered capital of Zibo Costar Information Consulting Co., Ltd. ("Zibo Costar"), a Wholly Owned Foreign Enterprise ("WFOE") organized under the laws of the People's Republic of China ("PRC").

Zibo Jiazhou Chemical Industry Co., Ltd., a limited liability enterprise organized under the laws of the People's Republic of China ("ZBJZ") is a manufacturing company that is based in Shandong, China. It is principally engaged in the manufacturing of organic chemical compounds.

On September 30 2010, CHCC entered into a Share Exchange Agreement (the “share exchange”) with Gold Champ and the shareholders of Gold Champ.  As a result of the share exchange, CHCC acquired 100% of the issued and outstanding capital of Gold Champ in exchange for 19,861,700 shares of CHCC’s common stock, par value $0.0001, thereby providing the former shareholders of Gold Champ approximately 66% ownership equity in CHCC at September 30, 2010.

On September 30, 2010, Zibo Costar entered into a series of contractual agreements (known as a “variable interest entity” (VIE) arrangement,) with ZBJZ and its shareholders to govern Zibo Costar’s relationships with ZBJZ.  These contractual arrangements allow the Company to obtain effective control over ZBJZ through the ability to exercise all the rights of ZBJZ's shareholders, the rights to absorb substantially all of the economic residual benefits and the obligation to fund all of the expected losses of ZBJZ. Zibo Costar has been determined to be the primary beneficiary of ZBJZ because it is most closely associated with ZBJZ due to its obligation to provide unlimited financial support and its ability to determine strategic business decisions of ZBJZ through voting rights.  In accordance with SEC Regulation SX-3A-02 and Accounting Standards Codification ("ASC") Topic 810 ("ASC 810"), Consolidation, the Company, through Zibo Costar, consolidates the operating results of ZBJZ.

 

 

 

 

 

As of March 31, 2011, the total assets of the consolidated VIE were $269 million, mainly comprising cash and cash equivalents, restricted cash, accounts receivable, plant and equipment, net, construction in progress and due from related parties.  As of March 31, 2011, the total liabilities of the consolidated VIE were $184 million, mainly comprising short-term bank loans, notes payable and long-term bank loans.  These balances are reflected in Company’s condensed consolidated financial statements with intercompany transactions eliminated. Under the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs, and can have assets freely transferred out of the VIEs without any restrictions. Therefore, the Company considers that there is no asset in the VIE that can be used only to settle obligations of the VIE, except for its registered capital of $4.5 million and PRC statutory reserves of $1.9 million as of March 31, 2011. As the VIE is incorporated as a limited liability company under the PRC Company Law, creditors of the VIE do not have recourse to the general credit of the Company for any of the liabilities of the consolidated VIE.

Currently there is no contractual arrangement that requires the Company to provide additional financial support to the VIE. As the Company is conducting its business mainly through the VIE, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.

 

 

 

 

 

 

(a)	Basis of Presentation

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Rule 8.03 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The condensed balance sheet information as of December 31, 2010 was derived from the audited consolidated financial statements included in the Form 10-K filed with the Securities and Exchange Commission on March 30, 2011. The interim condensed consolidated financial statements should be read in conjunction with the Form 10-K.

(b)	Principles of Consolidation

The condensed consolidated financial statements include the accounts of CHCC and its subsidiaries and VIE.

Inter-company balances and transactions have been eliminated in consolidation.

 

 

 

(c)	Concentrations

The Company has major customers who accounted for the following percentages of total revenues and accounts receivable:

Customers		Revenues Three Months Ended March 31,						Accounts Receivable
		2011			2010			March 31, 2011			December 31, 2010
Zibo Xinghua Resin Co., Ltd		24%			22%			55%			55%
Dongying Shengli Chemical Co., Ltd		20%			21%			2%			-
Kaifeng Taihua Chemical Co., Ltd		7%			10%			1%			-
Shandong Rixin Co		7%			-			12%			-
Linzi Dongsheng Industry Co		6%			-			9%			-

The Company has major suppliers who accounted for the following percentages of total purchases and accounts payable:

 

Suppliers		Purchases Three Months Ended March 31,						Accounts Payable
		2011			2010			March 31, 2011			December 31, 2010
Qingzhou Ousinuo Chemical Co., Ltd		44%			42%			-			-
Weifang Zhenxin Risheng Chemical Co., Ltd		18%			1%			-			-
C&S Chemical Co., Ltd		8%			38%			71%			30%

 

 

 

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(d)	Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Management makes these estimates using the best information available at the time the estimates are made. Actual results could differ materially from those estimates.

(e)	Fair Value of Financial Instruments

ASC 820-10, Fair Value Measurements, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.

 

 

 

(e)      Fair Value of Financial Instruments (Continued)

These tiers include:

•Level 1—defined as observable inputs such as quoted prices in active markets;

•Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

•Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well-known PRC and international institutions with original maturities of three months or less. Restricted cash represents time deposits on account for bank acceptance notes, open letters of credit and short-term bank loans. The original cost of these assets approximates fair value due to their short-term maturity.

The carrying amounts of other financial assets and liabilities, such as accounts receivable, notes receivable, prepayments for goods, prepaid expenses and other receivables, lease income receivable, accounts payable, other payables and accrued liabilities, short-term bank loans, customer deposits, notes payable, income tax payable, payable to contractors, due to related parties, current portion of long-term bank loans and current portion of financial obligations, sale-leaseback approximate their fair values because of the short maturity of these instruments. The fair value of the Company’s long-term bank loans, financial obligations, sale-lease back and due from related parties is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Under this method, the Company’s fair value of long-term bank loans, financial obligation, sale-lease back and due from related parties was not significantly different from the carrying value at March 31, 2011.

 

 

 

Restricted cash represents PRC time deposits reserved for settlement of notes payable, open letters of credit in connection with inventory purchases and short-term bank loans. The cash is held in the custody of the bank issuing the notes payable, letter of credit or short-term bank loans, and is restricted as to withdrawal or use, and is currently earning interest.

 

Accounts and notes receivable are carried at net realizable value. An allowance for doubtful accounts is recorded in the period when loss is probable based on an assessment of specific evidence indicating troubled collection, historical experience, accounts aging and other factors. A receivable is written off after all collection efforts have ceased.  There is no provision for accounts receivable or notes receivable for the three months ended March 31, 2011 and 2010.

(h)	Prepayment for Goods

Prepayments for goods represent cash paid in advance to suppliers for purchases of raw materials. An estimate for doubtful accounts is made when realization of the full amount is no longer probable. At March 31, 2011 and December 31, 2010, the Company has an allowance for doubtful accounts of $161,170 and $159,538, respectively.

(i)	Capitalized Interest

The interest cost associated with debt relating to construction projects is capitalized and included in the cost of the project. When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using the weighted-average cost of the Company’s outstanding borrowings. Capitalization of interest ceases when the project is substantially completed or development activity is suspended for more than a brief period. Capitalized interest for the three months ended March 31, 2011 and 2010 was $427,452 and $348,045, respectively. See Notes 10 and 13.

 

 

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(j)	Revenue Recognition

Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met:

-Persuasive evidence of an arrangement exists,

-Delivery has occurred or services have been rendered,

-The seller’s price to the buyer is fixed or determinable, and

-Collectability is reasonably assured.

(k)	Retirement Benefits

Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to operations as incurred. Retirement benefits amounting to $28,233 and $18,537 were charged to operations for the three months ended March 31, 2011 and 2010, respectively.

(l)	Foreign Currency Translation

The accompanying condensed financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The condensed financial statements are translated into United States dollars from RMB at period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

		March 31,				December 31,				March 31,
		2011				2010				2010
Period end RMB: US$ exchange rate			6.5701				6.6026				-
Average period RMB: US$ exchange rate			6.5863				-				6.8267

 

 

 

 

(m)	Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to recognize under current accounting standards as components of comprehensive income should be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s current component of other comprehensive income is the foreign currency translation adjustment.

(n)	Earnings Per Share

Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company does not have dilutive securities for the three months ended March 31, 2011 and 2010.

(o)

Segment

The Company operates in one business segment, the design, development, manufacture, and commercialization of organic chemical materials, such as phthalic anhydride and maleic anhydride and their byproducts, mainly in the PRC. The Company’s chief operating decision maker (“CODM”) is the Chief Executive Officer who, as of March 31, 2011, reviews the operating results when making decisions about allocating resources and assessing performance.

The Company had no sales outside of the PRC for the three months ended March 31, 2011 and 2010.  As substantially all of the Company's long-lived assets and revenues are in and derived from the PRC, geographical segments are not presented.

(p)	New Accounting Pronouncements

There were no new accounting pronouncements not yet adopted by the Company that would have a material effect on the Company’s condensed consolidated financial statements as of March 31, 2011.

 

 

3.

LIQUIDITY

The Company has a working capital deficit of $42,283,032 at March 31, 2011. This was in part due to the Company’s use of cash to purchase construction in progress. The Company had $131 million of short-term bank loans and notes payable at March 31, 2011.

The Company currently generates its cash flow through operating income, and the Company had net income of $3,210,461 for the three months ended March 31, 2011. As of the date of this report, the Company has not experienced any liquidity problems in settling payables in the normal course of business or repaying the bank loans or notes payable when they become due.

To improve liquidity, the Company may explore new expansion opportunities and funding sources from which the management may consider seeking external funding and financing. At March 31, 2011, the Company has unused credit lines of approximately $30.4 million in total with two banks for short-term borrowings.

In May 2011, the Company obtained a written commitment from the chief executive officer of the Company to provide working capital to the Company, if needed, in the form of notes payable or personal loans. There can be no assurance that the chief executive officer  will actually execute the commitment or has the ability to execute such commitment, if and when needed.

In May 2011, the Company signed supplemental agreements with certain contractors to extend approximately $15 million of the $32,274,255 purchase commitment payments over the next three years.  See Note 16 (III).

 

 

 

 

Inventories consist of the following:

 

		March 31, 2011				December 31, 2010
Raw materials		$	8,594,531			$	9,422,808
Work-in-progress			200,000				199,017
Finished goods			2,733,429				684,204
Total inventories		$	11,527,960			$	10,306,029

The net book value of $8,594,531 and $9,422,808 of raw materials inventory is pledged as collateral for a short-term bank loan at March 31, 2011 and December 31, 2010, respectively. See Note 11.

Notes receivable consisted of the following:

 

		March 31, 2011				December 31, 2010
Notes Receivable from Unreleated Companies (aggregated by month):
Due February, 2011 (Settled on the due date)		$	-			$	2,727,968
Total notes receivable		$	-			$	2,727,968

The notes receivable from unrelated companies were interest free.

 

 

 

 

 

(I) Current receivable due from a related party

						March 31, 2011				December 31, 2010
Zibo Jiazhou Heat and Power Co., Ltd. (“ZJHP”), no fixed repayment term, interest free, guaranteed by the vice chairman of the Company			a	)		$	483,344			$	19,640,240
ZJHP, due October 1, 2011, interest rate at 6% per annum, guaranteed by the vice chairman of the Company. The interest is paid quarterly starting June 30, 2011 till the principal is paid			a	)			2,209,260				-
Total current receivable due from a related party						$	2,692,604			$	19,640,240

(II) Long-term receivable due from related parties

						March 31, 2011				December 31, 2010
ZJHP, due May 1, 2015, interest rate at 6% per annum, guaranteed by the vice chairman of the Company. Principal is to be repaid every year in 4 unequal installments starting May 1, 2012. The interest is paid quarterly starting June 30, 2011 till the principal is paid			a	)		$	14,410,080			$	-
Zibo Eagle Textile Co., Ltd. (“Eagle”)			b	)			17,766,586				17,679,267
Total long-term receivable due from related parties						$	32,176,666			$	17,679,267

(III) Due To Related Parties

						March 31, 2011				December 31, 2010
Lu Feng			c	)		$	360,440			$	367,661
Due to employees			d	)			182,252				178,197
Total due to related parties						$	542,692			$	545,858

 

 

 

 

 

6.	RELATED PARTY TRANSACTIONS (CONTINUED)

a)        ZJHP is controlled by the vice chairman of the Company.

For the three months ended March 31, 2011 and 2010, the Company had transactions with ZJHP as follows:

 

		Three Months Ended March 31,
		2011				2010
Sales of steam to ZJHP		$	1,141,099			$	1,780,143
Lease of equipment to ZJHP			-				1,673,564
Purchases of electricity from ZJHP			672,760				555,338
Interest income from ZJHP			13,815				76,411

ZJHP generated the due from related party balances of $19,640,240 through the nonpayment of the current balances of the sales of steam and lease of equipment to ZJHP less the purchases of electricity starting in 2008. This balance was the amount build up over the time period from 2008 to December 31, 2010. On March 26, 2011, ZJHP signed an agreement to repay $19,640,240 to the Company within the next 5 years ending May 1, 2015. The total amount due is comprised of $2,209,260 which is due October 1, 2011 and $14,410,080 which is due May 1, 2015. The amount due May 1, 2015 is payable in four unequal installments starting May 1, 2012. ZJHP repaid $3,020,900 of $19,640,240 in advance of its due date prior to March 31, 2011. For the three months ended March 31, 2011 and 2010, interest income was $13,815 and $76,411, respectively.

On January 1, 2010, the Company signed a one year lease agreement for equipment and buildings with ZJHP with an annual rental fee of $6,810,782. For the three months ended March 31, 2010, the net lease income was $704,857, after deducting business tax of $83,678 and depreciation cost of $885,029. See Notes 7 and 8.

b)  Eagle is controlled by the vice chairman of the Company. On December 23, 2007, the Company entered into an agreement with Eagle to purchase a land use right and fixed assets on the land with a total contract amount of $20,446,646. The balances represent deposits paid to Eagle, and they are refundable, if the land and fixed assets are not transferred to the Company. The Company is required to pay the remaining purchase price of approximately $2,781,046 at the end of 2011. The transaction is expected to be closed at the end of 2011.  See Note 16.

 

 

 

6.	RELATED PARTY TRANSACTIONS (CONTINUED)

d)  Due to employees primarily represent business and travel related expenses paid by employees on behalf of the Company. The amounts are interest-free, unsecured and have no fixed repayment terms.

Plant and equipment consist of the following:

		March 31, 2011				December 31, 2010
At cost:
Buildings		$	3,333,488			$	1,303,725
Machinery			3,533,470				3,516,104
Motor Vehicles			1,113,045				1,107,575
Office equipment			127,771				127,143
Leased fixed assets			43,914,990				43,699,158
Assets recorded under financial obligations, sale-leaseback			47,099,190				46,867,709
			99,121,954				96,621,414
Less : Accumulated depreciation
Buildings		$	181,688			$	169,051
Machinery			1,854,270				1,686,085
Motor Vehicles			465,013				430,040
Office equipment			56,769				51,757
Leased fixed assets			11,954,724				10,980,895
Assets recorded under financial obligations, sale-leaseback			9,838,922				8,874,871
			24,351,386				22,192,699
Plant and equipment, net		$	74,770,568			$	74,428,715

For the three months ended March 31, 2011 and 2010, depreciation expense was $2,044,038 and $1,429,243, respectively. See Notes 8 and 14.

 

 

 

 

 

 

On January 1, 2011 and 2010, the Company signed one year lease agreements for buildings and machinery with an unrelated company and ZJHP with an aggregate annual rental fee of $7,242,306 and 6,703,583, respectively. The Company leased the assets because the Company is not at an operating capacity to fully utilize the assets. The Company’s assets on operating leases by major classes consist of the following:

		March 31, 2011				December 31, 2010
At cost:
Buildings		$	758,855			$	755,125
Machinery			43,156,135				42,944,033
			43,914,990				43,699,158
Less : Accumulated depreciation
Buildings			102,912				94,528
Machinery			11,851,812				10,886,367
			11,954,724				10,980,895
Leased fixed assets, net		$	31,960,266			$	32,718,263

The lease income from the unrelated party was $1,815,041 for the three months ended March 31, 2011, which was recorded as a lease income receivable in the Company’s condensed consolidated balance sheets.

The January 1, 2010 lease with ZJHP expired and was not renewed. For the three months ended March 31, 2011 and 2010, the depreciation expense for the leased fixed assets was $917,332 and $885,029, respectively, which was netted in the Company’s statements of income and comprehensive income against lease income, net.

 

 

 

 

 

 

Land use rights consist of the following:

		March 31, 2011				December 31, 2010
Cost of land use rights		$	3,949,802			$	3,930,389
Less: Accumulated amortization			771,179				705,394
Land use rights, net		$	3,178,623			$	3,224,995

Amortization expense for the three months ended March 31, 2011 and 2010 was $62,148 and $59,959, respectively.

Amortization expense for the next five years and thereafter is as follows:

 

Period ended March 31,		Amount
2012		$	249,204
2013			249,204
2014			249,204
2015			51,998
2016			51,998
Thereafter			2,327,015
Total		$	3,178,623

All of land use rights are pledged as collateral for a long-term bank loan at March 31, 2011 and December 31, 2010, respectively. See Note 13.

 

 

 

 

Construction in progress consists of the following:

		March 31, 2011				December 31, 2010
Buildings		$	-			$	1,877,304
Machinery			41,292,433				30,273,833
Total		$	41,292,433			$	32,151,137

Capitalized interest for the three months ended March 31, 2011 and 2010 was $427,452 and $348,045, respectively. See Note 13.

Short-term bank loans consist of the following:

		March 31, 2011				December 31, 2010
Agricultural Bank of China Zhoucan Branch due March 20, 2012, interest rate 6.06%, guaranteed by Shandong Jide Ecological Technology Co., Ltd. (“Jide”) (See Note 16)		$	4,109,526			$	-
Bank of Rizhao due March 1, 2012, interest rate 7.27%, guaranteed by Jide (See Note 16), the CEO of the Company, an employee and secured by raw materials inventory (See Note 4)			4,566,141				-
Agricultural Bank of China Zhoucan Branch due February 20, 2012, interest rate 6.67%, guaranteed by Jide (See Note 16)			1,902,559				-
CITIC Qingdao Branch due January 20, 2012, interest rate 6.790%, guaranteed by the CEO of the Company, an employee and secured by raw materials inventory (See Note 4)			4,566,141

 

 

 

11.	SHORT-TERM BANK LOANS (CONTINUED)

		March 31, 2011				December 31, 2010
ICBC Zhoucan Branch due January 4, 2012, interest rate 5.81%, guaranteed by Jide (See Note 16)		$	1,522,047			$	-
Qishang Bank due October 29, 2011, interest rate 9.88%, guaranteed by Jide, Zibo Lanyan Group Co. Ltd (“Lanyan”) (See Note 16) and the CEO of the Company (See Note 6)			2,739,684				2,726,219
Shanghai Pudong Development Bank due July 20, 2011, interest rate 6.67%, guaranteed by Shandong Fengyang Group Co., Ltd (“Shandong Fengyang”) (See Note 16), and the CEO of the Company (See Note 6)			3,044,094				3,029,133
Bank Austria Beijing due June 8, 2011, interest rate 7.88%, guaranteed by restricted cash of $1,141,535, the CEO of the Company (See Note 6) and secured by raw materials inventory (See Note 4)			7,610,234				7,572,832
China Merchant Bank of Jinan Branch due May 31, 2011, interest rate 6.44%, guaranteed by Jide, Lanyan (See Note 16) and the CEO of the Company (See Note 6)			3,044,094				3,029,133
Agricultural Bank of China Zhoucun Branch due May 20, 2011, interest rate 6.16%, guaranteed by Jide (See Note 16)			1,111,094				-
Agricultural Bank of China Zhoucun Branch due May 16, 2011, interest rate 7.88%, guaranteed by Jide (See Note 16)			1,522,047				1,514,566