UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
[X] Annual Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended: December 31,
2013
[_] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______ to
_______
Commission file number:
001-34649
CHINA GENGSHENG MINERALS, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA
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91-0541437
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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No. 88 Gengsheng Road
Dayugou Town, Gongyi, Henan
Peoples Republic of China, 451271
(Address of Principal Executive
Offices and Zip Code)
(86) 371-64059863
(Registrants Telephone Number,
Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange on which
registered
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Common Stock, par value $0.001 per share
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NYSE MKT LLC
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
[_] No [X]
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
[_] No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definition for large accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated Filer [_]
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Accelerated Filer [_]
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Non-Accelerated Filer [_]
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Smaller Reporting Company
[X]
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Indicate by check mark whether registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [_] No [X]
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant as of June 28, 2013, was approximately
$1,562,125 based on $0.135, the price at which the registrants common stock was
last sold on that date.
There were a total of 26,803,044 shares of the registrants
common stock outstanding as of April 14, 2014.
Documents Incorporated by Reference:
None
TABLE OF CONTENTS
PART I
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ITEM 1. BUSINESS
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2
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ITEM 1A. RISK FACTORS
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12
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ITEM 1B. UNRESOLVED STAFF COMMENTS
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23
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ITEM 2. PROPERTIES
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23
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ITEM 3. LEGAL PROCEEDINGS
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23
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ITEM 4. MINE SAFETY DISCLOSURES
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23
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PART II
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ITEM 5. MARKET FOR OUR REGISTRANTS COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
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23
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ITEM 6. SELECTED FINANCIAL DATA
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25
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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25
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ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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37
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ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY
DATA
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37
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ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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38
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ITEM 9A. CONTROLS AND PROCEDURES.
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38
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ITEM 9B. OTHER INFORMATION
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39
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PART III
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
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39
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ITEM 11. EXECUTIVE COMPENSATION
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42
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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44
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ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
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45
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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45
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PART IV
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ITEM 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
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46
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Special Note Regarding Forward Looking Statements
The following discussion of the financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related notes thereto. The following discussion
contains forward-looking statements. Unless the context requires otherwise,
references to we, us, our, the Registrant, or the Company refer to
China GengSheng Minerals, Inc. and its subsidiaries. The words or phrases would
be, will allow, expect to, intends to, will likely result, are
expected to, will continue, is anticipated, estimate, or similar
expressions are intended to identify forward-looking statements. Such statements
include those concerning our expected financial performance, our corporate
strategy and operational plans. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including: (a) those risks and uncertainties related to
general economic conditions in China, including regulatory factors that may
affect such economic conditions; (b) whether we are able to manage our planned
growth efficiently and operate profitable operations, including whether our
management will be able to identify, hire, train, retain, motivate and manage
required personnel or that management will be able to successfully manage and
exploit existing and potential market opportunities; (c) whether we are able to
generate sufficient revenues or obtain financing to sustain and grow our
operations; and (d) whether we are able to successfully fulfill our primary
requirements for cash which are explained below under Liquidity and Capital
Resources. Such risks and uncertainties also include the risks noted under
Item 1A Risk Factors. Unless otherwise required by applicable law, we do not
undertake, and we specifically disclaim any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
Use of Certain Defined Terms
In this Form 10-K, unless indicated otherwise, references to:
-
China GengSheng Minerals, we, us, our, the
Registrant or the Company refer to the combined business of China GengSheng
Minerals, Inc., a Nevada corporation (formerly, China Minerals Technologies,
Inc.) and its wholly-owned BVI subsidiary, GengSheng International Corporation,
or GengSheng International, GengSheng Internationals wholly-owned BVI
subsidiary, Smarthigh Holdings Limited, or Smarthigh and GengSheng
Internationals wholly-owned Chinese subsidiary, Zhengzhou Duesail Fracture
Proppant Co. Ltd., or Duesail, and Duesails wholly-owned subsidiary, Henan
Yuxing Proppant Co., Ltd., or Yuxing and GengSheng Internationals wholly-owned
Chinese subsidiary, Henan GengSheng Refractories Co., Ltd., or Refractories, and
Refractoriess majority-owned subsidiary, Henan GengSheng High-Temperature
Materials Co., Ltd., or High Temperature, and Refractoriess wholly-owned
subsidiary, Henan GengSheng Micronized Powder Materials Co., Ltd., or
Micronized, and Henan GengSheng's wholly-owned subsidiary, Guizhou Southeast
Prefecture GengSheng New Materials Co., Ltd, or Prefecture;
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Powersmart or GengSheng International refer to GengSheng
International Corporation, a BVI company (formerly, Powersmart Holdings Limited)
that is wholly-owned by China GengSheng Minerals;
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Securities Act refers to the Securities Act of 1933, as
amended, and Exchange Act refer to Securities Exchange Act of 1934, as
amended;
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China and PRC refer to the People's Republic of China,
and BVI refers to the British Virgin Islands;
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RMB refers to Renminbi, the legal currency of China; and
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U.S. dollar, $ and US$ refers to the legal currency of
the United States. For all U.S. dollar amounts reported, the dollar amount has
been calculated on the basis that RMB1 = $0.1637 for its December 31, 2013
audited balance sheet, and RMB1 = $0.1585 for its December 31, 2012 audited
balance sheet, which were determined based on the currency conversion rate at
the end of each respective period. The conversion rates of RMB1 = $0.1615 is
used for the consolidated statement of income and comprehensive income and
consolidated statement of cash flows for the year ended December 31, 2013, and
RMB1 = $0.1584 is used for the consolidated statement of income and
comprehensive income and consolidated statement of cash flows for the year ended
December 31, 2012; both of which were based on the average currency conversion
rate for each respective period.
PART I
ITEM 1. BUSINESS
Overview
We are a Nevada holding company operating in the materials
technology industry through our subsidiaries in China. We develop, manufacture
and sell a broad range of mineral-based, heat-resistant products capable of
withstanding high temperatures, saving energy and boosting productivity in
industries such as steel and oil. Our products include refractory products,
industrial ceramics, fracture proppants and fine precision abrasives.
2
Currently, we conduct our operations in China through our
wholly owned subsidiaries, Henan GengSheng Refractories Co., Ltd.
(Refractories), Zhengzhou Duesail Fracture Proppant Co., Ltd. (Duesail),
Henan GengSheng Micronized Powder Materials Co., Ltd. (Micronized), Guizhou
Southeast Prefecture GengSheng New Materials Co., Ltd. (Prefecture) and Henan
Yuxing Proppant Co., Ltd., (Yuxing) , and through our majority owned
subsidiary, Henan GengSheng High-Temperature Materials Co., Ltd.
(High-Temperature). Through our wholly owned BVI subsidiary, GengSheng
International, and its wholly owned Chinese subsidiary, Refractories, which has
an annual production capacity of approximately 127,000 tons, we manufacture
refractory products. We manufacture fracture proppant products through Duesail,
which has an annual production capacity of approximately 66,000 tons, and
Yuxing, which has designed annual production capacity of approximately 60,000
tons. We manufacture fine precision abrasives products through Micronized, which
has designed annual production capacity of approximately 22,000 tons. Through
our majority owned subsidiary, High-Temperature, which has an annual production
capacity of approximately 150,000 units, we manufacture industrial and
functional ceramic products.
We sell our products to over 300 customers in the iron, steel,
oil, glass, cement, aluminum, chemical and solar industries located in China and
other countries in Asia and Europe. Our refractory customers are companies in
the steel, iron, petroleum, chemical, coal, glass and mining industries. Our
fracture proppant products are sold to oil and gas companies. Our industrial
ceramics are used in the utilities and petrochemical industries. Our fine
precision abrasives are marketed to solar companies and optical equipment
manufacturers. Our largest customers, measured by percentage of our revenue,
mainly operate in the steel industry and oil industry. Currently, most of our
revenues are derived from the sale of our monolithic refractory products and
fracture proppants products to customers in China.
Our principal executive offices are located at No. 88 Gengsheng
Road, Dayugou Town, Gongyi, Henan, Peoples Republic of China 451271 and our
telephone number is (86) 371-6405-9863.
Available Information
We are required to file annual, quarterly and current reports,
proxy statements and other information required by the Securities Exchange Act
of 1934, as amended (the Exchange Act), with the Securities and Exchange
Commission (the SEC). You may read and copy any document we file with the SEC
at the SECs Public Reference Room located at 100 F Street, N.E., Washington, DC
20549. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet
website at http://www.sec.gov, from which interested persons can electronically
access our SEC filings.
We make available free of charge through our internet site
http://www.gengsheng.com
our annual reports on
Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; proxy
statements, if any, Forms 3, 4 and 5 filed by or on behalf of directors,
executive officers and certain large stockholders; and any amendments to those
documents filed or furnished pursuant to the Exchange Act. These filings will
become available as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC.
In addition, the following information is available on the
Investor Relations page of our website: (i) Corporate Governance and (ii)
Quarterly Results. These documents will also be available in print without
charge to any person who requests them by writing or telephoning our principal
executive offices: China GengSheng Minerals, Inc. No. 88 Gengsheng Road, Dayugou
Town, Gongyi, Henan, 451271, P.R. China, Tel:(86) 371-6405-9863, Fax:(86)
371-6405-9846. The information posted on our website is not incorporated into
this annual report on Form 10-K.
3
Corporate Structure
We conduct our operations in China through our wholly owned
subsidiaries Refractories, Duesail, Yuxing, Micronized and Prefecture and
through our majority owned subsidiary, High-Temperature.
The following chart reflects our organizational structure as of
the date of this report.
Corporate History
We were originally incorporated under the laws of the State of
Washington, on November 13, 1947, under the name Silver Mountain Mining Company.
From our inception until 2001, we operated various unpatented mining claims and
deeded mineral rights in the State of Washington, but we abandoned these
operations entirely by 2001. On August 15, 2006, we changed our domicile from
Washington to Nevada when we merged with and into Point Acquisition Corporation,
a Nevada corporation. From about 2001 until our reverse acquisition of
Powersmart on April 25, 2007, which is discussed in the next section entitled
"Acquisition of Powersmart and Related Financing", we were a blank check company
and had no active business operations. On June 11, 2007, we changed our
corporate name from "Point Acquisition Corporation" to "China Minerals
Technologies, Inc." and subsequently changed our name again to "China GengSheng
Minerals, Inc." on July 26, 2007.
Acquisition of Powersmart and Related Financing
On April 25, 2007, we completed a reverse acquisition
transaction through a share exchange with GengSheng International Corporation
(formerly, Powersmart Holdings Limited) whereby we issued to the sole
shareholder of Powersmart Holdings Limited, Shunqing Zhang, 16,887,815 shares of
China GengSheng Minerals common stock, in exchange for all of the issued
and outstanding capital stock of Powersmart. By this transaction, Powersmart
became our wholly owned subsidiary and Mr. Zhang became our controlling
stockholder.
4
On April 25, 2007, we also completed a private placement
financing transaction pursuant to which we issued and sold 5,347,594 shares of
our common stock to certain accredited investors for $10 million in gross
proceeds.
On January 4, 2011, the Company and certain institutional
investors entered into a securities purchase agreement pursuant to which the
Company sold to such investors an aggregate of 2,500,000 shares of common stock
at a price of $4.00 per share for aggregate gross proceeds to the Company of
$10,000,000. The shares of common stock were issued pursuant to a prospectus
supplement dated as of January 10, 2011, which was filed with the Securities and
Exchange Commission in connection with a takedown from the Companys shelf
registration statement on Form S-3 (File No. 333-165486), which became effective
on April 28, 2010, and the base prospectus dated as of April 28, 2010 contained
in such registration statement.
Segmental Information
Our operating segments are functioned by our manufacturing
facilities and include four reportable segments: refractories, industrial
ceramics, fracture proppants and fine precision abrasives.
For financial information relating to our business segments,
see Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations and Note 21 to the consolidated financial statements
appearing elsewhere in this annual report. For a discussion of the risks
attendant to our foreign operations and of any dependence on one or more of the
Companys segments upon such foreign operations, please see Item 1A, Risk
Factors.
Our Products and Markets
The following table set forth sales information about our
product mix in each of the last three years.
(All amounts, other than percentages, in thousands of U.S.
dollars)
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Year Ended December 31,
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2013
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2012
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2011
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Percentage
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Percentage
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Percentage
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Sales
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of sales
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Sales
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of sales
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Sales
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of sales
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revenue
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revenue
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revenue
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revenue
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revenue
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revenue
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Refractories
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$
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33,131
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54.4%
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$
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38,878
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52.9%
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$
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46,572
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60.5%
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Industrial Ceramics
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1,096
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1.8%
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1,802
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2.5%
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430
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0.6%
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Fracture Proppants
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22,749
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37.4%
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24,517
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33.3%
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22,526
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29.3%
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Fine Precision Abrasive
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3,905
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6.4%
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8,338
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11.3%
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7,408
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9.6%
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$
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60,881
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100.0%
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$
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73,535
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100.0%
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$
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76,936
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100.0%
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Refractories
Our largest product segment is the refractories segment, which
accounted for approximately 54.4% of total revenue in 2013. Our refractory
products have high-temperature resistance and can function under thermal stress
that is common in many heavy industrial production environments. Because of
their unique high-temperature resistant qualities, the refractory products are
used as linings and key components in many industrial furnaces, such as steel
production furnaces, ladles, vessels, and other high-temperature processing
machines that must operate at high temperatures for a long period of time
without interruption. The majority of our customers are in the iron, steel,
cement, chemical, coal, glass, petro-chemical and nonferrous industries.
We provide a customized solution for each order of our
monolithic refractory materials based on customer-specific formulas. Upon
delivery to customers, the monolithic materials are applied to the inner
surfaces of our customers furnaces, ladles or other vessels to improve the
productivity of that equipment. The product benefits our customers as it lowers
the overall cost of production and improves financial performance. The reasons
that the monolithic materials can help our customers improve productivity, lower
production costs and achieve stronger financial performance include the
following: (i) monolithic refractory castables can be cast into complex shapes
which are unavailable or difficult to achieve by alternative products such as
shaped bricks; (ii) monolithic refractory linings can be repaired, and in some
cases, even reinstalled, without furnace cool-down periods or steel-production
interruptions, and therefore improve the steel makers productivity; (iii)
monolithic refractories can form an integral surface without joints, enhancing
resistance to penetration, impact and erosion, and thereby improving the
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:
5
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Castable, coating, and dry mix materials
. Offerings within this
product line are used as linings in containers such as a tundish used for
pouring molten metal into a mold. The primary advantages of these products are
speed and ease of installation for heat treatment.
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Low-cement and non-cement castables
. Our low-cement and non-cement
castable products are typically used in reheating furnaces for producing
steel. These castable products are highly durable and can last up to five
years.
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Pre-cast roofs
. These products are usually used as a component of
electric arc furnaces. They are highly durable, and in the case of our
corundum-based, pre-cast roof, products can endure approximately 160 to 220
complete operations of furnace heating.
We also have a production line for pressed bricks, which is a
type of shaped refractory, for steel production. The annual designed
production capacity of our shaped refractory products is approximately 15,000
metric tons.
Finally, we provide a full-service option to our steel
customers, which include refractory product installation, testing, maintenance,
repair and replacement. Refractory products sales are often enhanced by our
on-site installation and technical support personnel. Our installation services
include applying refractory materials to the walls of steel-making furnaces and
other high temperature vessels to maintain and extend their lives. Our technical
service staff assure that our customers can achieve their desired productivity
objectives. They also measure the refractory wear at our customer sites to
improve the quality of maintenance and overall performance of our customers
equipment. Full-service customers contributed approximately 29.6% of the
Companys total sales in 2013, compared with 28.9% in 2012. We believe that
these services, together with our refractory products, provide us a strategic
advantage for profits.
Industrial Ceramics
Industrial Ceramics accounted for approximately 1.8% of the
total revenue in 2013. Our industrial ceramic products, including abrasive balls
and tiles, valves, electronic ceramics and structural ceramics, are components
for a variety of end products such as fuses, vacuum interrupters, electrical
components, mud slurry pumps, and high-pressure pumps. Such end use products are
used in the electric power, electronic component, industrial pump, and
metallurgy industries.
Fracture Proppants
Fracture Proppants accounted for approximately 37.4% of the
total revenue in 2013. Our fracture proppant products are very fine ball-like
pellets, used to reach pockets of oil and natural gas deposits that are trapped
in the fractures under the ground. Oil drillers inject the pellets into those
fractures, squeezing out the trapped oil or natural gas, which leads to higher
yield. Our fracture proppant products are available in several different
particle sizes (measured in millimeters). They are typically used to extract
crude oil and natural gas, which increases the productivity of crude oil and
natural gas wells. These products are highly resistant to pressure. In October
2007, our fracture proppant products were recognized by China National Petroleum
Corporation (the CNPC), China Petroleum & Chemical Corporation (the
Sinopec) and the China National Offshore Oil Corporation (the CNOOC) as
their supplier of fracture proppant products for their oil and gas-drilling
operation.
Fine Precision Abrasives
Fine Precision Abrasives accounted for 6.4% of our total
revenue in 2013. Fine precision abrasives are used for producing a super-fine,
super-consistent finish on certain products. A high-strength polyester backing
provides a uniform base for a coating of micron-graded mineral particles that
are uniformly dispersed for greater finishing efficiency. Our fine precision
abrasives are made from silicon carbide (SiC). They are ultra-fine,
high-strength pellets with uniform shape, and are used for surface-polishing and
slicing of precision instruments such as solar panels. Currently, the type of
abrasives that we produce is in high demand among solar-energy companies. Solar
energy companies use fine precision abrasives to cut silicon bars and to polish
equipment surfaces so that they can be smooth and reflective. Our products can
be utilized in a broad range of areas including machinery manufacturing,
electronics, optical glass, architecture, industry development, semiconductor,
silicon chip, plastic and lens.
Our Competition Strength and Challenges
With over 1,500 manufacturers in China, the refractory market
in which we compete is highly fragmented and highly competitive. In each of our
product segments, there is at least one major competitor. Many of our products
are made to industry specifications and may be interchangeable with our
competitors products. Some of our competitors are large and well-established
companies, such as Puyang Refractories Co., Ltd., Wuhan Ruisheng Specialty
Refractory Materials Co., Ltd., and Beijing Lirr Refractories Co., Ltd., and
their financial resources and ability to gain market share may be greater than
ours, which limits our pricing power in the market. Due to the diversity of our
product offering, we believe that we still enjoy a competitive advantage as many
of our competitors do not offer the entire spectrum of our product line.
6
Refractories and Industrial Ceramics
Through our wholly-owned Chinese subsidiaries Refractories and
High-Temperature, we manufacture refractory products and industrial ceramic
products in China. We believe that we are well positioned to compete in the
refractories segment and the industrial ceramics segment, because of our
long-standing business relationships with major steel companies, the quality and
diversity of our products and our competitive price.
We have distinguished ourselves through our customer service
team that provides a full range of refractory services, including refractory
construction, on-site maintenance and technical support. Our national registered
laboratory with high-quality research team meets our customers diverse product
requirements in a timely manner based on the differences of construction sites.
Our products compete on efficient operations, price differential and our quality
of service.
Most of our large customers, measured by percentage of our
revenue, operate in the steel industry. The steel industry is characterized by
intense price competition, which results in continuing emphasis on our need to
increase product productivity and performance. Our strategy has been to fulfill
the steel industrys need by developing technologically advanced refractory
products to help our customers increase their productivity. We believe that the
trend towards greater productivity in the highly competitive steel industry will
continue to provide a growing opportunity for our products, especially
monolithic refractories.
Fracture Proppants
We first started production of fracture proppant products in
December 2006, through our wholly-owned BVI subsidiary, GengSheng International,
and its wholly-owned Chinese subsidiary, Duesail. Our products have passed the
testing conducted by China Petroleum and Chemical Industry Association (the
CPCIA), which strengthens our competitiveness in the market compared to our
competitors. We were recognized as their fracture proppant supplier by China
National Petroleum Corporation (CNPC), China Petroleum & Chemical
Corporation (Sinopec) and China National Offshore Oil Corp. (CNOOC), who
monopolize the oil and gas drilling business in China, and we are the signed
provider for China National Offshore Oil Corp. (CNOOC). Our main competitors for
the production of fracture proppants are Carbo Ceramics Inc. and Saint-Gobain
Proppants (Guanghan) Co., Ltd, while these two companies are both subsidiaries
of international magnates, which focus on international sales.
Fine Precision Abrasives
Our fine precision abrasives facility is designed to have a
production capacity of 22,000 tons per year. Our products can be used in wire
slicing of solar ingots for solar cell makers to make wafers and polishing
surface of solar panels or high-precision instruments. Our main competitors are
two Japanese companies, namely Nanxing and FUJIMI, which currently have the
largest share of the fine precision abrasives market in China.
Overall, we believe that our competitive strengths include the
following:
-
Market Position
.
We believe that we hold a
competitive position in the monolithic refractory marketplace. According to
the most recent Chinese steel industry publication available, during 2013,
total national sales were approximately 29.3 million tons, 70% of which were
from refractories applied in steel making, of which 40% is monolithic
refractories. The industry is highly competitive and consists of more than
1,500 manufacturers. However, we believe our well recognized GengSheng
brand, leading position in research and development and full-service business
model place us in a strong competitive position in the monolithic refractory
market. We have broad customer base, good recognition of the GengSheng
brand, flexible manufacturing capabilities and easily accessed distribution
channels. These capabilities enable us to introduce new refractory product
categories to our customers efficiently and cost-effectively.
-
Broad Product Offering.
Our refractory product segment
offers over 25 product categories that cover a wide range of customer
specifications for use in the iron and steel manufacturing industries, in
industrial furnaces and other heavy machinery. Our broad product offerings
allow us to offer our customers a single-source solution for many of their
refractory product requirements.
-
Diversified End Market/Customer Base
.
We sell our
refractory products in over 25 provinces in China and 11 countries overseas.
In 2013, we had over 250 customers for the refractories segment, and none of
them accounted for more than 10% of our 2013 net sales. Our largest customer
in refractories segment, Shandong Steel Co., Ltd, Rizhao Subsidiary accounted
for 9.0% of 2013 net sales. Our broad product line and diversified target
markets and customer base have contributed to greater stability in our sales
and operating profit margin. We have long term relationships with steel and
iron industry leaders in China, such as Shangdong Steel and Fushun New Steel
Co., Ltd.
-
Experienced Management Team.
Our senior management team has
an average of over 20 years of experience in the refractory industry and with
the Company.
-
Access to Raw Materials
.
We are located in Gongyi,
Henan Province, an area of China which has abundant reserves of bauxite and
other key raw materials used in refractory manufacturing. We have diversified
our access to raw materials by acquiring Prefecture, a subsidiary of our
wholly own subsidiary Refractories, to secure and stabilize the supply and the
price of raw materials. Prefecture has access to bauxite reserve and
provided processed raw material for Refractories. It is currently not in
operation, but we can resume operation anytime if we need to further secure and
stabilize the supply and the price of raw materials.
7
-
Research and Development Capabilities
.
We utilize our
research and development capabilities to supply our customers with cutting
edge refractory products designed to meet their specific demands. To achieve
the highest quality product developments, we established a modern,
state-of-the- art laboratory in China dedicated to quality control and
testing.
-
Maintenance Service Capabilities
.
We dedicate over
300 employees to the installation and service of our products at the client
sites. This service contributes greatly to positive business relationship with
our customers and makes our products more attractive and competitive.
Our Customers
We have over 300 customers in 25 provinces in China, as well as
in greater Asia and Europe. Our customers include some of the largest steel and
iron producers and petroleum & chemical producers in China. During 2013,
sales to one of our customers, PetroChina Changqing Oil Field (Changqing)
represented 10% or more of our consolidated sales. Our sales to Changqing
amounted to approximately $11.1 million or 18.2% of our revenue. During 2012,
sales to two of our customers, Jilin Petroleum Group Company Ltd. (Jilin) and
Shandong Steel Co., Ltd, Rizhao Subsidiary (Rizhao) represented 10% or more of
our consolidated sales. Our sales to Jilin amounted to $9.0 million or 12.3% of
our revenue and sales to Rizhao amounted to $8.6 million or 11.7% of our
revenue. During 2011, sales to Shanghai Jolly Trading Co., Ltd. (Jolly) and
Rizhao represented 10% or more of our consolidated sales. Our sales to Jolly
amounted to $10.9 million or 14.1% of our revenue and sales to Rizhao amounted
to $8.5 million or 11.1% of our revenue.
Our top ten customers among our segmental lines for the years
ended December 31, 2011, 2012 and 2013, which are listed below, accounted for
approximately 63.9%, 57.0% and 63.2% of our consolidated revenues,
respectively.
Our Top 10 Customers
(As of December 31, 2013)
|
|
Sales (in
|
|
|
|
|
|
|
|
|
|
thousands of
|
|
|
Percentage of
|
|
|
Locations of
|
|
Customers
|
|
US dollars)
|
|
|
net sales
|
|
|
Customers
|
|
PetroChina Changqing Oil Field
|
$
|
11,108
|
|
|
18.2%
|
|
|
Xian,
China
|
|
Shandong Steel Co., Ltd., Rizhao Subsidiary
|
|
5,460
|
|
|
9.0%
|
|
|
Rizhao, China
|
|
Fushun New Steel Co., Ltd.
|
|
5,173
|
|
|
8.5%
|
|
|
Fushun,
China
|
|
CNPC Chuanqing Drilling & Exploration Corporation
|
|
4,600
|
|
|
7.6%
|
|
|
Xian, China
|
|
Heilongjiang Jianlong Iron & Steel LLC.
|
|
2,976
|
|
|
4.9%
|
|
|
Shuangyashan China
|
|
Anshan Baode Iron & Steel Ltd.
|
|
2,440
|
|
|
4.0%
|
|
|
Anshan, China
|
|
Gansu Jiu Steel Group Hongxing Iron &
Steel Co., Ltd.
|
|
2,012
|
|
|
3.3%
|
|
|
Jiayu,
China
|
|
Tuha Oil Drilling & Exploration
|
|
1,979
|
|
|
3.3%
|
|
|
Kumul, China
|
|
Anhui Chang Jiang Iron & Steel Co.,
Ltd.
|
|
1,676
|
|
|
2.8%
|
|
|
Maanshan
China
|
|
Gangyu Fracture Proppants Co., Ltd
|
|
999
|
|
|
1.6%
|
|
|
Yuanqu, China
|
|
Total
|
$
|
38,423
|
|
|
63.2%
|
|
|
|
|
8
(As of December 31, 2012)
|
|
Sales (in
|
|
|
|
|
|
|
|
|
|
thousands of
|
|
|
Percentage of
|
|
|
Locations of
|
|
Customers
|
|
US dollars)
|
|
|
net sales
|
|
|
Customers
|
|
Jilin Petroleum Group Company Ltd.
|
$
|
9,016
|
|
|
12.3%
|
|
|
Jilin,
China
|
|
Shandong Steel Co., Ltd., Rizhao Subsidiary
|
|
8,586
|
|
|
11.7%
|
|
|
Rizhao, China
|
|
Trina Solar
|
|
5,206
|
|
|
7.1%
|
|
|
Changzhou, China
|
|
Fushun New Steel Co., Ltd.
|
|
5,194
|
|
|
7.1%
|
|
|
Fushun, China
|
|
Heilongjiang Jianlong Iron & Steel LLC.
|
|
2,777
|
|
|
3.8%
|
|
|
Shuangyashan China
|
|
Zibo Hongda Steel LLC
|
|
2,540
|
|
|
3.5%
|
|
|
Zibo, China
|
|
Sinopec Shengli Oilfield
|
|
2,440
|
|
|
3.3%
|
|
|
Dongying, China
|
|
CNPC Chuanqing Drilling & Exploration Corporation
|
|
2,254
|
|
|
3.1%
|
|
|
Xian, China
|
|
Gansu Jiu Steel Group Hongxing Iron &
Steel Co., Ltd.
|
|
1,937
|
|
|
2.6%
|
|
|
Jiayu,
China
|
|
Anshan Baode Iron & Steel Ltd.
|
|
1,829
|
|
|
2.5%
|
|
|
Anshan, China
|
|
Total
|
$
|
41,779
|
|
|
57.0%
|
|
|
|
|
(As of December 31, 2011)
|
|
Sales (in
|
|
|
|
|
|
|
|
|
|
thousands of
|
|
|
Percentage of
|
|
|
Locations of
|
|
Customers
|
|
US dollars)
|
|
|
net sales
|
|
|
Customers
|
|
Shanghai Jolly Trading Co., Ltd
|
$
|
10,873
|
|
|
14.1%
|
|
|
Shanghai, China
|
|
Shandong Steel Co., Ltd., Rizhao Subsidiary
|
|
8,539
|
|
|
11.1%
|
|
|
Rizhao, China
|
|
AMSAT International
|
|
6,504
|
|
|
8.5%
|
|
|
USA
|
|
Trina Solar
|
|
5,864
|
|
|
7.6%
|
|
|
Changzhou, China
|
|
Fushun New Steel Co., Ltd.
|
|
3,946
|
|
|
5.1%
|
|
|
Fushun,
China
|
|
Zibo Hongda Steel LLC
|
|
3,222
|
|
|
4.2%
|
|
|
Zibo, China
|
|
Xianyang Chuanqing Qingxinyuan Engineering
Co., Ltd.
|
|
3,197
|
|
|
4.2%
|
|
|
Xianyang, China
|
|
Gansu Jiu Steel Group Hongxing Iron & Steel Co., Ltd.
|
|
2,732
|
|
|
3.6%
|
|
|
Jiayu, China
|
|
Heilongjiang Jianlong Iron & Steel LLC.
|
|
2,258
|
|
|
2.9%
|
|
|
Shuangyashan China
|
|
Anshan Baode Iron & Steel Ltd.
|
|
1,988
|
|
|
2.6%
|
|
|
Anshan, China
|
|
Total
|
$
|
49,123
|
|
|
63.9%
|
|
|
|
|
Our Suppliers of Raw Materials
The principal raw materials used in our refractory products and
fracture proppants products are various forms of aluminum oxide, including
bauxite, corundum, processed AI203, magnesia, calcium aluminates cement, resin,
and silica. Bauxite is used in the production of refractory materials, fracture
proppants products and some industrial ceramic products. Bauxite is abundantly
available from mines close to our manufacturing facilities. We purchase a
significant portion of our magnesia requirements from sources in Liaoning
Province. If we experience supply interruptions of our raw materials, we believe
that we could still obtain adequate supplies from alternate sources in local
areas or elsewhere in China. However, we may incur higher costs related to
transportation and storage.
The average costs of some of our raw materials from 2012 to
2013 are as follows:
9
(Per ton and stated in US dollar)
|
|
2013
|
|
|
2012
|
|
|
%
change
|
|
Ordinary bauxite
|
|
81.7
|
|
|
112.4
|
|
|
-27.3%
|
|
Refined bauxite
|
|
294.3
|
|
|
280.9
|
|
|
4.8%
|
|
Middle class magnesia
|
|
228.2
|
|
|
220.3
|
|
|
3.6%
|
|
High class magnesia
|
|
318.7
|
|
|
307.9
|
|
|
3.5%
|
|
Silica
|
|
392.5
|
|
|
339.9
|
|
|
15.5%
|
|
Calcium aluminates cement
|
|
881.9
|
|
|
847.8
|
|
|
4.0%
|
|
Processed aluminum oxide
|
|
723.4
|
|
|
755.2
|
|
|
-4.2%
|
|
Brown fused corundum
|
|
630.6
|
|
|
616.2
|
|
|
2.3%
|
|
White fused corundum
|
|
673.9
|
|
|
784.8
|
|
|
-14.1%
|
|
The average costs of some of our raw materials from 2011 to
2012 are as follows:
(Per ton and stated in US dollar)
|
|
2012
|
|
|
2011
|
|
|
%
change
|
|
Ordinary bauxite
|
|
112.4
|
|
|
86.0
|
|
|
30.7%
|
|
Refined bauxite
|
|
280.9
|
|
|
261.3
|
|
|
7.5%
|
|
Middle class magnesia
|
|
220.3
|
|
|
218.8
|
|
|
0.7%
|
|
High class magnesia
|
|
307.9
|
|
|
270.5
|
|
|
13.8%
|
|
Silica
|
|
339.9
|
|
|
334.6
|
|
|
1.6%
|
|
Calcium aluminates cement
|
|
847.8
|
|
|
817.6
|
|
|
3.7%
|
|
Processed aluminum oxide
|
|
755.2
|
|
|
733.3
|
|
|
3.0%
|
|
Brown fused corundum
|
|
616.2
|
|
|
581.7
|
|
|
5.9%
|
|
White fused corundum
|
|
784.8
|
|
|
825.6
|
|
|
-4.9%
|
|
We typically have supply agreements with terms of one to two
years that do not impose minimum purchase requirements. The cost of raw
materials purchased during the term of a supply agreement usually is the market
price for the raw materials at the time of purchase. Our centralized procurement
system helps to reduce raw material costs. We generally are not engaged in
speculative raw material commodity contracts and attempt to reflect raw material
price changes in the sale price of our products. Our ability to achieve
anticipated operating results depends in part on having an adequate supply of
raw materials for our manufacturing operations. Because of our strategy to
maintain multiple suppliers for each material we source, we do not particularly
rely on one single supplier.
Our Sales and Marketing
Our sales and marketing group is comprised of over 100
employees who focus on managing specific product lines across several
distribution channels. Our marketing process involves an integrated process of
sales leads screening, bidding and negotiating and executing definitive sales
agreements.
To maximize the accessibility of our products to a diverse
group of end users, we market our products through a variety of distribution
channels. We have separate sales and marketing groups that work directly with
our customers in each of our target market. Marketing and sales are accomplished
through the mailing of brochures, industry trade advertising, trade show
exhibitions, online sales and sales presentations.
Our Growth Strategy
The key elements of our growth strategy are summarized as
follow:
-
Adjust Cost Structure Through Operating Efficiency and Productivity
Improvements.
We regularly evaluate our operating productivity and
efficiency and focus on reducing our manufacturing and distribution costs. We
have planned to further utilize internal capacity for new refractory product
developments while continuing to meet customers needs throughout our supply
chain. We believe that these initiatives will provide significant costs
savings and improve operating profits.
-
Expand Product Lines and Specialty Product Lines.
We seek to
identify, develop and commercialize new products that use our core technology.
In particular, we intend to develop a variety of specialty, high margin
mineral-based products, including fracture proppant products and fine
precision abrasives.
10
-
Pursue Sales Opportunities in Existing and New Markets.
We
believe that we have significant growth opportunities by increasing our
penetration within our existing customer base, adding new customers, further
expanding product offering, and pursuing additional marketing channels. In
addition to continuing to target leading steel and iron manufacturers for
refractory products, we have been receiving contracts from major oil &
chemical manufacturers, large wholesalers and solar producer in China who
started business with us for our proppant products and fine precision
abrasives.
-
Selectively Pursue Strategic Acquisitions.
As a strong
competitor in our core refractory manufacturing market, we believe that we are
well-positioned to benefit from the consolidation of manufacturers in these
markets. We also believe that our management has the ability to identify and
integrate strategic acquisitions. We will continue to selectively pursue
acquisitions that will improve our market position within our existing target
markets, expand our product offerings, and increase our manufacturing
efficiency.
-
Expand International Operations.
We are expanding operations
to overseas market to increase our presence and our sales efforts in countries
outside China. When opportunity arises, we will consider setting up sales
office in our main overseas market to better serve our customer.
Regulation
Because our operations are based in China, we are regulated by
the national and local laws of the Peoples Republic of China. The refractory
materials industry is generally subject to national, local laws and regulations
related to the environment, health, and safety. The manufacturing of refractory
materials involves the release of powder and dust which are classified as
environmental pollutants under applicable government laws and regulations. We
regularly monitor and review our operations, procedures, and policies for
compliance with these laws and regulations. We have made substantial capital
investments in our facilities to ensure compliance with environmental and
regulatory laws. We believe that our operations are in substantial compliance
with the laws and regulations and that there are no violations that would have a
material effect on us. The cost of compliance with these laws and regulations is
not expected to have a large financial impact on us.
In addition, we are also subject to PRCs foreign currency
regulations. The PRC government has control over Renminbi reserves through,
among other things, direct regulation of the conversion of Renminbi into other
foreign currencies. Although foreign currencies which are required for current
account transactions can be bought freely at authorized Chinese banks, the
proper procedural requirements prescribed by Chinese law must be met. At the
same time, Chinese companies are also required to sell their foreign exchange
earnings to authorized Chinese banks and the purchase of foreign currencies for
capital account transactions still requires prior approval of the Chinese
government.
We do not face any significant government regulation in
connection with the production of our products. We do not need any special
government permits to produce our products other than those permits that are
required of all corporations in China.
Our Intellectual Property
While we consider our patents and trademarks valuable assets,
we do not consider any single patent or trademark to be of such material
importance that its absence would harm or cause a material disruption of our
business. We also consider the production of our refractories to involve
proprietary know-how, and we adjust and test the specific composition formulas
to ensure optimal product performance.
Patents
We currently own 113 Chinese patents which are approved by and
registered with the China State Intellectual Property Office. The following
table lists part of our important patents:
Patent Name
|
Patent Number
|
Application Date
|
Patent Term
|
Country
|
Integral casting technology in mixer
furnaces
|
ZL00137106.1
|
December
29, 2000
|
20 years
|
PRC
|
Light-slag heat-retaining refractory castables in
high-furnaces clinders
|
ZL200510107341.X
|
December 27, 2005
|
20 years
|
PRC
|
Ceramic sealing double-gate valve
|
ZL200520029858.7
|
January
24, 2005
|
10 years
|
PRC
|
Ceramic plunger in pumps
|
ZL200520029859.1
|
January 24, 2005
|
10 years
|
PRC
|
Ceramic cylinder in slurry pumps
|
ZL200820148214.3
|
July 25,
2008
|
10 years
|
PRC
|
Ceramic plunger pump
|
ZL200820148089.6
|
July 21, 2008
|
10 years
|
PRC
|
Ceramic lining in abrasion-resistance tubes
|
ZL20082014090.9
|
July 21,
2008
|
10 years
|
PRC
|
11
In addition, we have nine pending patent applications with the
China State Intellectual Property Office.
Trademarks
We also own the following registered trademark associated with
the brand GengSheng that were issued by the State Industrial and Commercial
Administration Bureau of the PRC.
Trademark
|
Registered Number
|
Termination Date
|
Use
|
|
6269829
|
March 6, 2020
|
Used for refractories catalogued
as class number 19
|
Our Research and Development Activities
We believe that the development of new products and new
technology is critical to our success. We are continuously working to improve
the quality, efficiency and cost-effectiveness of our existing products and
develop technology to expand the range of specifications of our products.
We have spent $1,394,331, $923,403 and $699,367 on
Company-sponsored research and development activities in fiscal years of 2013,
2012 and 2011, respectively. The expenses on research and development include
salary, cost of raw material consumed, testing expenses and other costs incurred
for research and development of potential new products. We do not have any
customer-sponsored research and development activities.
Our Employees
As of April 14, 2014, we had approximately 1,200 full time
employees, all of whom are salaried employees and members of a labor union.
Approximately 4% of our employees hold a bachelors degree, and approximately 1%
of our employees hold a masters degree. We actively recruit our employees from
the local market and expect to focus our recruiting efforts on candidates
holding bachelor degree in material science, refractory materials and marketing
as we implement our expansion plans. We have implemented a comprehensive
training program for our employees that focus not only on skills and knowledge
for their specific duties, but also on our corporate culture and core values.
Our employees participate in a mandated state pension scheme
and social insurance programs managed by Chinese municipal and provincial
governments which cover pensions, unemployment and injury insurance. We are
required to contribute to the scheme at a rate of 28% of the average monthly
salary for employee pensions, 3% of the average monthly salary for the state
unemployment fund and 1% of the average monthly salary for injury insurance. Our
compensation expenses related to this scheme were $578,770, $522,336 and
$466,371 for the years ended December 31, 2013, 2012 and 2011, respectively.
Our Chinese subsidiaries have labor unions which protect
employees rights, assist in the fulfillment of our economic objectives,
encourage employee participation in management decisions and assist in mediating
disputes between us and union members. We believe that we maintain a
satisfactory working relationship with our employees and we have not experienced
any significant labor disputes or any difficulty in recruiting staff for our
operations.
China enacted a new Labor Contract Law, which became effective
on January 1, 2008. We have updated our employment contracts and employee
handbook and been in compliance with the new law. We will work with the
employees and the labor union to ensure that the employees obtain the full
benefit of the law. We do not anticipate that changes in the law will materially
impact our financial results.
ITEM 1A. RISK FACTORS
The market price of our common stock could fluctuate
substantially due to a variety of factors, including market perception of our
ability to achieve our planned growth, quarterly operating results of other
companies in the same industry, trading volume in our common stock, changes in
general conditions in the economy and the financial markets or other
developments affecting our competitors or us. In addition, the stock market is
subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies
for reasons unrelated to their operating performance and could have the same
effect on our common stock.
RISKS RELATED TO OUR BUSINESS
The slow recovery from the global economic crisis could
affect the overall availability and cost of external financing for our
operation.
12
The slow recovery of the global financial markets from the
global economic crisis and turmoil may adversely impact our business, the
business and financial condition of our customers and the business of potential
investors from whom we expect to generate our potential sources of capital
financing. Presently it is unclear to what extent the economic stimulus measures
and other actions taken or contemplated by the Chinese governments and other
governments throughout the world will mitigate the effects of the negative
impact caused by the economic turmoil on our industry and other industries that
affect our business. Although these conditions have not presently impaired our
ability to access credit markets and finance our operations, the impact of the
current crisis on our ability to obtain capital financing in the future, and the
cost and terms of same, is unclear.
A downturn or negative changes in the highly volatile
steel and iron industry will harm our business and profitability.
The iron and steel industries accounted for approximately 70%
of the consumption in the Chinese refractory industry according to the industry
association statistics. Because our largest customers are in the steel industry,
our business performance is closely tied to the performance of the steel
industry. The sector as a whole is cyclical and its profitability can be
volatile as a result of general economic conditions, labor costs, competition,
import duties, tariffs and currency exchange rates. These macroeconomic factors
have historically resulted in wide fluctuations in Chinese and global economies
in which steel companies sell their products. In our case, future economic
downturns, stagnant economies or currency fluctuations in China or globally
could decrease the demand for steel products both in China and overseas and, in
turn, could negatively impact our sales, margins and profits.
Industry growth rate for refractory products may
decelerate and may affect our future revenue growth.
In China, the production of refractory materials has
experienced fast growth in recent years driven largely by growth in Chinas
steel production. China has become the largest country for producing and
consuming refractories, a majority of which were demanded by companies in the
steel industry. Our industrys growth has been primarily driven by the growth in
the Chinese steel industry. According to figures provided by World Steel
Association, Chinese steel output grew from an annual output of 157 million tons
in 2001 to approximately 779 million tons in 2013, representing a compounded
annual growth rate of 14.3% . Going forward, however, the forecast provided by
the China International Capital Corporation suggests that the annual output of
steel in China will not maintain this growth rate.
If the steel industry experiences such a slowdown, our growth
prospects will likewise be curtailed. Additionally, the market for monolithic
refractories in China is still in the developmental stage, and successful market
penetration of the monolithic refractories depends heavily on two factors.
First, successful market penetration depends on technological progress that
results in products that provide better performance for our customers, new
varieties of products that meet our customers future requirements, and more
efficient and effective installation and maintenance methods. Second, successful
market penetration also depends on our marketing strategy and our ability to
execute that strategy while maintaining a high quality of service to our
customers. Our future revenue growth without acquisitions may maintain, but
nevertheless, we may not match our past growth rate.
Our inability to overcome fierce competition in the
highly fragmented and highly competitive Chinese refractory market could reduce
our revenue and net income.
The refractory market in China is highly fragmented with over
1,500 producers of refractory products, according to the Chairman of the
Association of China Refractory Industry. Our competitors manufacture products
that are similar to and directly compete with the products that we manufacture
and market. We compete with many other refractory manufacturers in China, on a
region-by-region basis, and with international competitors on a world-wide
basis. Our main competitors are located in China and include Puyang Punai
High-temperature Materials Co., Ltd., Wuhan Ruisheng Specialty Refractory
Materials Co., Ltd., Beijing Lirr Refractories Co., Ltd. and others. Currently,
our primary international competitor is Mineral Technologies, Inc. in the United
States.
As a regional market leader in the monolithic refractory
marketplace in China, we can buy raw materials in large quantities allowing us
to negotiate volume discount that results in lower price than what is offered to
our smaller competitors. As our smaller competitors consolidate and grow larger,
they may be able to negotiate similar volume discount from raw material
suppliers. Under such scenario, any cost advantage that we currently enjoy may
be reduced or eliminated altogether. Although our smaller competitors may pay
higher materials costs relative to our material costs, their operating and
administrative costs may be lower than ours, which may allow our competitors to
offer very competitive prices for their products and services. Their competitive
prices may force us to lower our prices, and to sell products and services at a
loss in order to maintain our market share. Currently, we have a policy for
setting a pricing floor so that we do not sell products at a loss; however, we
cannot assure that we can maintain this policy indefinitely. Thus, increased
competition in our industry could reduce our revenue and net income.
Any decrease in the availability, or increase in the cost
of raw materials and energy could materially increase our costs and jeopardize
our current profit margins and profitability.
13
The principal raw materials used in our refractory products are
several forms of the minerals SiO
2
, Al
2
0
3
, and
MgO, including bauxite, mullite, corundum, processed Al203, Spinel, magnesia,
calcium aluminates cement, and silica. We use bauxite primarily in the
production of refractory materials, fracture proppants and some industrial
ceramic products. The availability of these raw materials and energy resources
may decrease and their prices can become volatile as a result of, among other
things, changes in overall supply and demand levels and new laws or regulations.
Our ability to achieve our sales target depends on our ability to maintain what
we believe to be adequate inventories of raw materials to meet reasonably
anticipated orders from our customers. In 2013, raw material costs accounted for
approximately 63.9% of the production cost for refractory products,
approximately 39.3% for fracture proppant products, approximately 55.0% for
industrial ceramics products and 78.0% for micropowder products.
Our production facilities are located in Gongyi, Henan
Province, where there is currently abundant reserve of bauxite and corundum for
refractory manufacturing. Although our proximity to bauxite allows us to benefit
from a relatively short delivery time and lower shipping costs, we may
experience supply shortages or price increases or both due to sharp increases in
overall industry demand for bauxite. Besides purchasing bauxite from local
suppliers, we also purchase bauxite, mullite, magnesia, calcium aluminates
cement and other raw materials from suppliers in Shanxi Province, Shandong
Province, Liaoning Province and Gansu Province. All of these locations are
outside of Henan Province and any increase in shipping costs will increase our
cost of raw materials from these sources and will decrease our revenues and
profitability.
Further, if our existing suppliers are unable or unwilling to
deliver raw materials needed on time to meet our production schedules, we may be
unable to produce certain products, which could result in a decrease in revenues
and profitability, a loss of goodwill with our customers, and could damage our
reputation as a reliable supplier in our industry. In the event that our raw
material and energy costs increase, we may not be able to pass these higher
costs on to our customers in full or at all due to contractual agreements or
pricing pressures in the refractory market. Any increase in the prices for raw
materials or energy resources could materially increase our costs and therefore
lower our earnings and profitability.
Actions by the Chinese government could drive up our
material costs and could have a negative impact on our profitability.
In past years, the Chinese government has shut down some
outdated mineral mines in China. These shutdowns have decreased the overall
supply of raw materials needed to produce refractory products. As a result, the
materials costs for our products have increased. If the Chinese government shuts
down more mineral mines, we could experience further supply shortages and price
increases that could have a negative impact on our profitability.
We may experience fluctuation of profit performance and
our future profitability is not assured.
As we are facing fierce competition and the cost of our raw
materials and energy keep rising, we have experienced significant pressure in
the refractories segment of our business, our largest product segment which
accounted for approximately 54.4% of total revenue in 2013. We may experience
fluctuation of profit performance and our profitability is not assured.
Specific factors that may undermine our financial objectives
include, among others:
-
Volatile iron and steel producer spending levels, which particularly
affects our refractories segment which constitutes the largest portion of mix;
-
Adverse changes to our product mix, both fundamentally (resulting from new
product transitions, the declining profitability of certain legacy products
and the termination of certain products with declining margins, among other
things) and due to demand fluctuations;
-
Intense pricing pressure across our product lines due to competitive
forces, which continues to offset many of the cost improvements we are
realizing quarter over quarter;
-
Rising cost of materials and energy that significantly impact our
profitability, particularly in our refractories segment;
-
Execution challenges, which limit revenue opportunities and harm
profitability, market opportunities and customer relations;
-
Continuing high levels of selling, general and administrative expenses.
Taken together, these factors limit our ability to predict
future profitability levels and to achieve our long-term profitability
objectives. While some of these factors may diminish over time as we improve our
cost structure and focus on enhancing our product mix, several factors, such as
continuous pricing pressure, increasing competition, rising costs of raw
materials and energy, are likely to remain endemic to our businesses. If we fail
to achieve profitability expectations, our business and financial condition may
be materially adversely impacted.
14
We may not be able to implement our business plan because
we may be unable to fund the substantial ongoing capital and maintenance
expenditures needed for our operations and to invest in new projects at the same
time.
Our operations are capital intensive and the nature of our
business and our business strategy need substantial additional working capital
investment. We need capital to build new production lines, acquire new
equipment, maintain the condition of our existing equipment, maintain compliance
with environmental laws and regulations, and to pursue new market opportunities.
We may not be able to fund our capital expenditures from operating cash flow and
from the proceeds of borrowings available for capital expenditures under our
credit facilities, and we may need additional debt or equity financing. We
cannot assure that this type of financing will be available or, if available, it
may result in increased interest expenses, increased leverage and decreased
income available to fund further expansion. In addition, future debt financings
may limit our ability to withstand competitive pressures and render us more
vulnerable to economic downtowns. If we are unable to fund our capital
requirements, we may be unable to implement our business plan and our financial
performance may be adversely impacted.
Approximately 63.2% of our sales revenues were derived
from our ten largest customers, and any reduction in revenues from any of these
customers would reduce our revenues and net income.
While we have over 300 active customers, approximately 63.2% of
our sales revenue came from our top ten customers in 2013, with Changqing
accounting for 18.2% of our sales revenue in the same period. If we cease to do
business at or above current levels with Changqing or any one of our other
largest customers which contribute significantly to our sales revenues, and we
are unable to generate additional sales revenues with new and existing customers
that purchase a similar amount of our products, then our revenues and net income
would decline considerably.
A significant interruption or casualty loss at any of our
facilities could increase our production costs and reduce our sales and
earnings.
Our manufacturing process requires large industrial facilities
for crushing, smashing, batching, molding and baking raw materials. After the
refractory products come off the production line, we need additional facilities
to inspect, package, and store the finished goods. Our facilities may experience
interruptions or major accidents and may be subject to unplanned events such as
explosions, fires, inclement weather, acts of God, terrorism, accidents and
transportation interruptions. Any shutdown or interruption of any facility would
reduce the output from that facility, which could substantially impair our
ability to meet sales targets. Interruptions in production capabilities will
inevitably increase production costs and reduce our sales and earnings. In
addition to the revenue losses, longer-term business disruption could result in
the loss of goodwill with our customers. To the extent these events are not
covered by insurance, our revenues, margins and cash flows may be adversely
impacted by events of this type.
Environmental regulations impose substantial costs and
limitations on our operations.
Our products are not considered environmentally hazardous
materials, however, the powder and dust produced during our production process
is considered hazardous to the environment. We have environmental liability
risks and limitations on operations brought about by the requirements of
environmental laws and regulations. We are subject to various national and local
environmental laws and regulations concerning issues such as air emissions,
waste water discharges, and solid and hazardous waste management and disposal.
These laws and regulations are becoming increasingly stringent. While we believe
that our facilities are in material compliance with all applicable environmental
laws and regulations, the risks of substantial unanticipated costs and
liabilities related to compliance with these laws and regulations are an
inherent part of our business. It is possible that future conditions may
develop, arise or be discovered that create new environmental compliance or
remediation liabilities and costs. While we believe that we can comply with
environmental legislation and regulatory requirements and that the costs of
compliance have been included within budgeted cost estimates, compliance may
prove to be more costly than anticipated.
Climate change and related regulatory responses may
impact our business.
Climate change as a result of emissions of greenhouse gases is
a significant topic of discussion. It is impracticable to predict with any
certainty the impact of climate change on our business or the regulatory
responses to it, although we recognize that they could be significant. The most
direct impact is likely to be an increase in energy costs, which would increase
our operating costs, primarily through increased utility and transportations
costs. In addition, many of our customers operate in the manufacturing industry.
Any restrictions or penalties imposed under a cap and trade system might
significantly impact their operations, which in turn, would adversely affect
their demand for our products. However, it is too soon for us to predict with
any certainty the ultimate impact, either directionally or quantitatively, of
climate change and related regulatory responses.
15
If our customers and/or the ultimate consumers of
products which use our products successfully assert product liability claims
against us due to defects in our products, our operating results may suffer and
our reputation may be harmed.
Our products are widely used as protective linings in
industrial furnaces operating in highly hazardous environments because those
furnaces must operate under extremely high temperatures in order to produce
iron, steel and other industrial products. Significant property damage, personal
injuries and even death can result from the malfunctioning of high temperature
furnaces as a result of defects in our refractory products. The costs and
resources needed to defend product liability claims could be substantial. We
could be responsible for paying some or all of the damages if found liable. We
do not have product liability insurance. The publicity surrounding these sorts
of claims is also likely damage our reputation, regardless of whether such
claims are successful. Any of these consequences resulting from defects in our
products would hurt our operating results and stockholder value.
If we are not able to adequately secure and protect our
patent, trademark and other proprietary rights our business may be materially
affected.
We hold 113 patents related to our production and some of these
patents are key technology widely used in our process to improve the efficiency
of production. We also rely on non-disclosure agreements and other
confidentiality procedures to protect our intellectual property rights in
various jurisdictions. These technologies are very important to our business and
it may be possible for unauthorized third parties to copy or reverse engineer
our products, or otherwise obtain and use information that we regard as
proprietary. Furthermore, third parties could challenge the scope or
enforceability of our patents. In certain foreign countries, including China
where we operate, the laws do not protect our proprietary rights to the same
extent as the laws of the United States. Decided court cases in Chinas civil
law system do not have binding legal effect on future decisions and even where
adequate law exists in China, enforcement based on existing law may be uncertain
and sporadic and it may be difficult to obtain enforcement of a judgment by a
court of another jurisdiction. In addition, the relative inexperience of Chinas
judiciary in many cases creates additional uncertainty as to the outcome of any
litigation, and interpretation of statutes and regulations may be subject to
government policies reflecting domestic political changes. Any misappropriation
of our intellectual property could have a material adverse effect on our
business and results of operations, and we cannot assure that the measures we
take to protect our proprietary rights are adequate.
Expansion of our business may place a significant strain
on our management and operational infrastructure and impede our ability to meet
any increased demand for our products.
Our business plan is to significantly grow our operations by
meeting the anticipated growth in demand for existing products and by
introducing new product offerings. Growth in our business may place a
significant strain on our personnel, management, financial systems and other
resources. Our business growth also presents numerous risks and challenges,
including:
-
Our ability to successfully and rapidly expand sales to potential
customers in response to increasing demand;
-
The costs associated with such growth, which are difficult to quantify,
but could be significant; and
-
The costs associated with developing new products to keep pace with rapid
technological changes.
To accommodate the growth and compete effectively, we may need
to obtain additional funding to improve information systems, procedures and
controls and expand, train, motivate and manage existing and additional
employees. Funding may not be available in a sufficient amount or on favorable
terms, if at all. If we are not able to manage these activities and implement
these strategies successfully to expand to meet any increased demand, our
operating results could suffer.
Improvements in the quality and lifespan of refractory
products may decrease product turnover and our sales revenues.
Technological and manufacturing improvements have made
refractory products more durable and more efficient. While making products more
durable and more efficient is generally a positive development, the increased
quality and durability of refractory products could lead to declining
consumption and turnover of refractory products. With the growth rate in the
steel industry decelerating and with the consumption rate of refractory products
per metric ton of steel produced decreasing, the refractory industrys future
growth rate may decelerate. We can increase our prices to offset the decrease in
product consumption, but we cannot assure that price increases will be
acceptable to our customers.
Our new products are complex and may contain defects that
are detected only after their release to our customers, which may cause us to
incur significant unexpected expenses and lost sales.
Our products are highly complex and must operate at high
temperatures for a long period of time. Although our new products are tested
prior to release, they can only be fully tested when they are used by our
customers. Consequently, our customers may discover defects after new products
have been released. Although we have test procedures and quality control
standards in place designed to minimize the number of defects in our products, we cannot guarantee that our
new products will be completely free of defects when released. If we are unable
to quickly and successfully correct the defects identified after their release,
we could experience significant costs associated with compensating our customers
for damages caused by our products, costs associated with correcting the
defects, costs associated with design modifications, and costs associated with
service or warranty claims or both. Additionally, we could lose customers, lose
market share and suffer damage to our reputation.
16
Our holding company structure may limit the payment of
dividends.
We have no direct business operations, other than our ownership
of our subsidiaries. While we have no current intention of paying dividends,
should we decide in the future to do so, as a holding company, our ability to
pay dividends and meet other obligations depends upon the receipt of dividends
or other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries, from time to time, may be
subject to restrictions on their ability to make distributions to us, including
as a result of restrictive covenants in loan agreements, restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions as discussed below. If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of RMB into U.S. dollars
may reduce the amount received by U.S. stockholders upon conversion of the
dividend payment into U.S. dollars.
Chinese regulations currently permit the payment of dividends
only out of accumulated profits as determined in accordance with Chinese
accounting standards and regulations. Our subsidiaries in China are also
required to set aside a portion of their after-tax profits according to Chinese
accounting standards and regulations to fund certain reserve funds. Currently,
our subsidiaries in China are the only sources of revenues or investment
holdings for the payment of dividends. If they do not accumulate sufficient
profits under Chinese accounting standards and regulations to first fund certain
reserve funds as required by Chinese accounting standards, we will be unable to
pay any dividends.
We completed our new fine precisions abrasives production
facility in 2009 and we have earned revenue in 2012 and 2013 but we cannot
guarantee that we will earn the estimated revenues in the future or that it
ultimately will be profitable.
We initiated the construction of our fine precisions abrasives
production facility in 2008 and completed it in 2009. We entered into trial
production in July 2009 and initiated sales in August 2010. In 2013, the Company
sold approximately 1,702 tons of abrasives. However, we cannot guarantee that we
will continue to earn revenue or that the business will be profitable.
We may incur significant costs to ensure compliance with
United States corporate governance and accounting requirements.
We may incur significant costs associated with our public
company reporting requirements, costs associated with newly applicable corporate
governance requirements, including requirements under the Sarbanes-Oxley Act of
2002 (Sarbanes-Oxley Act) and other rules implemented by the Securities and
Exchange Commission. We expect all of these applicable rules and regulations to
significantly increase our legal and financial compliance costs and to make some
activities more time consuming and costly. We also expect that these applicable
rules and regulations may make it more difficult and more expensive for us to
obtain director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified individuals to serve on our board of directors or
as executive officers. We are currently evaluating and monitoring developments
with respect to these newly applicable rules, and we cannot predict or estimate
the amount of additional costs we may incur or the timing of such costs.
If we fail to maintain an effective system of internal
control over financial reporting, our ability to accurately and timely report
our financial results or prevent fraud may be adversely affected and investor
confidence and the market price of our common stock may be adversely impacted.
Section 404 of the Sarbanes-Oxley Act requires annual
management assessments of the effectiveness of our internal controls over
financial reporting. Pursuant to Rule 13a-15(b) under the Exchange Act, the
Company carried out an evaluation with the participation of the Companys
management, including our Chairman, Chief Executive Officer and President,
Shunqing Zhang, our Interim Chief Financial Officer, Weina Zhang, of the
effectiveness of the Companys disclosure controls and procedures (as defined
under Rule 13a-15(e) under the Exchange Act) as of December 31, 2013. Based on
this evaluation, our Chief Executive Officer and Interim Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.
However, a control system, no matter how well designed and
implemented, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Furthermore, the design of a control
system must reflect the fact that there are internal resource constraints, and
the benefit of controls must be weighed relative to their corresponding costs.
Because of the limitations in all control systems, no evaluation of controls can
provide complete assurance that all control issues and instances of error, if
any, within our company are detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur due to human error or mistake. Additionally, controls, no matter how
well designed, could be circumvented by the individual acts of specific persons
within the organization. The design of any system of controls is also based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated
objectives under all potential future conditions. If we fail to achieve and
maintain the adequacy of our internal controls, we may not be able to ensure
that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those
related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to helping prevent financial fraud. If we
cannot provide reliable financial reports or prevent fraud, our business and
operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our common stock could
drop significantly. In addition, we cannot be certain that material weaknesses
or significant deficiencies in our internal controls will not be discovered in
the future.
17
RISKS RELATED TO DOING BUSINESS IN CHINA
Chinese corporate income tax law could adversely affect
our business and our net income.
China passed a new Enterprise Income Tax Law, or the New EIT
Law, and its implementation regulations, both of which became effective on
January 1, 2008. Under the New EIT Law, an enterprise established outside of
China with de facto management bodies within China is considered a resident
enterprise, meaning that it can be treated in a manner similar to a Chinese
domestic enterprise for enterprise income tax purposes. The implementing rules
of the New EIT Law define de facto management as substantial and overall
management and control over the production and operations, personnel,
accounting, and properties of the enterprise. On April 22, 2009, the State
Administration of Taxation issued the Notice Concerning Relevant Issues
Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated
Offshore as Resident Enterprises pursuant to Criteria of de facto Management
Bodies, or the Notice, further interpreting the application of the New EIT Law
and its implementation with respect to non-Chinese enterprises or group
controlled offshore entities. Pursuant to the Notice, an enterprise incorporated
in an offshore jurisdiction and controlled by a Chinese enterprise or group will
be classified as a non-domestically incorporated resident enterprise if (i)
its senior management in charge of daily operations reside or perform their
duties mainly in China; (ii) its financial or personnel decisions are made or
approved by bodies or persons in China; (iii) substantial assets and properties,
accounting books, corporate chops, board and shareholder minutes are kept in
China; and (iv) at least half of its directors with voting rights or senior
management often resident in China. A resident enterprise would be generally
subject to the uniform 25% enterprise income tax rate as to its worldwide
income. Although the Notice is directly applicable to enterprises registered in
an offshore jurisdiction and controlled by Chinese domestic enterprises or
groups, it is uncertain whether the PRC tax authorities will make reference to
the Notice when determining the resident status of other offshore companies,
such as China GengSheng Minerals, Inc., Gengsheng International Corporation and
Smarthigh Holding Limited. Since substantially all of our management is
currently based in China, it is likely we may be treated as a Chinese resident
enterprise for enterprise income tax purposes. The tax consequences of such
treatment are currently unclear, as they will depend on how local tax
authorities apply or enforce the New EIT Law or the implementation regulations.
In addition, under the New EIT Law and implementation
regulations, PRC income tax at the rate of 10% is applicable to dividends
payable to investors that are non-resident enterprises (and that do not have
an establishment or place of business in the PRC, or that have such
establishment or place of business but the relevant income is not effectively
connected with the establishment or place of business) to the extent that such
dividends have their source within the PRC unless there is an applicable tax
treaty between the PRC and the jurisdiction in which an overseas holder resides
which reduces or exempts the relevant tax. Similarly, any gain realized on the
transfer of shares by such investors is also subject to the 10% PRC income tax
if such gain is regarded as income derived from sources within the PRC.
If we are considered a PRC resident enterprise, it is unclear
whether the dividends we pay with respect to our shares, or the gain you may
realize from the transfer of our shares, would be treated as income derived from
sources within the PRC and be subject to PRC tax. If we are required under the
New EIT Law to withhold PRC income tax on our dividends payable to our foreign
shareholders, or if you are required to pay PRC income tax on the transfer of
your shares, the value of your investment in our shares may be materially and
adversely affected.
Future inflation in China may inhibit our ability to
conduct business in China.
In recent years, the Chinese economy has experienced periods of
rapid expansion and highly fluctuating rates of inflation. During the past ten
years, the rate of inflation in China has been as high as 5.9% and as low as
-0.7% . These factors have led to the adoption by the Chinese government, from
time to time, of various corrective measures designed to restrict the
availability of credit or regulate growth and contain inflation. High inflation
may in the future cause the Chinese government to impose controls on credit or
prices, or to take other action, which could inhibit economic activity in China,
and thereby harm the market for our products and our company.
Our business is largely subject to the uncertain legal
environment in China and our legal protection could be limited.
The Chinese legal system is a civil law system based on written
statutes. Unlike common law systems, it is a system in which precedents set in
earlier legal cases are not generally used. The overall effect of legislation
enacted over the past 20 years has been to enhance the legal protections
afforded to foreign-invested enterprises in China. However, these laws,
regulations and legal requirements are relatively recent and are evolving rapidly, and their
interpretation and enforcement involve uncertainties. These uncertainties could
limit the legal protections available to foreign investors, such as the right of
foreign-invested enterprises to hold licenses and permits such as requisite
business licenses. In addition, all of our executive officers and our directors
are residents of China and not of the U.S., and substantially all the assets of
these persons are located outside the U.S. As a result, it could be difficult
for investors to effect service of process in the U.S., or to enforce a judgment
obtained in the U.S. against our Chinese operations and subsidiaries.
18
The Chinese government exerts substantial influence over
the manner in which we must conduct our business activities.
China only recently has permitted provincial and local economic
autonomy and private economic activities. The Chinese government has exercised
and continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership. Our ability to operate
in China may be harmed by changes in its laws and regulations, including those
relating to taxation, import and export tariffs, environmental regulations, land
use rights, property and other matters. We believe that our operations in China
are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of the jurisdictions in
which we operate may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any
decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the
implementation of economic policies, could have a significant effect on economic
conditions in China or particular regions thereof, and could require us to
divest ourselves of any interest we then hold in Chinese properties or joint
ventures.
Restrictions on currency exchange may limit our ability
to receive and use our revenues effectively.
The majority of our revenues are settled in Renminbi, or RMB.
Any future restrictions on currency exchanges may limit our ability to use
revenue generated in RMB to fund any future business activities outside of China
or to make dividend or other payments in U.S. dollars. Although the Chinese
government introduced regulations in 1996 to allow greater convertibility of the
RMB for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises may only
buy, sell or remit foreign currencies after providing valid commercial documents
at those banks in China authorized to conduct foreign exchange business. In
addition, conversion of RMB for capital account items, including direct
investment and loans, is subject to governmental approval in China, and
companies are required to open and maintain separate foreign exchange accounts
for capital account items. We cannot be certain that the Chinese regulatory
authorities will not impose more stringent restrictions on the convertibility of
the RMB.
Failure to comply with PRC regulations relating to the
establishment of offshore special purpose companies by PRC residents may subject
our PRC resident stockholders to personal liability, limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiaries, limit our
PRC subsidiaries ability to distribute profits to us or otherwise materially
adversely affect us.
In October 2005, the PRC State Administration of Foreign
Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire control over domestic companies or assets, even in the
absence of legal ownership; adding requirements relating to the source of the
PRC residents funds used to establish or acquire the offshore entity; covering
the use of existing offshore entities for offshore financings; purporting to
cover situations in which an offshore SPV establishes a new subsidiary in China
or acquires an unrelated company or unrelated assets in China; and making the
domestic affiliate of the SPV responsible for the accuracy of certain documents
which must be filed in connection with any such registration, notably, the
business plan which describes the overseas financing and the use of proceeds.
Amendments to registrations made under Circular 75 are required in connection
with any increase or decrease of capital, transfer of shares, mergers and
acquisitions, equity investment or creation of any security interest in any
assets located in China to guarantee offshore obligations, and Notice 106 makes
the offshore SPV jointly responsible for these filings. In the case of an SPV
which was established, and which acquired a related domestic company or assets,
before the implementation date of Circular 75, a retroactive SAFE registration
was required to have been completed before March 31, 2006; this date was
subsequently extended indefinitely by Notice 106, which also required that the
registrant establish that all foreign exchange transactions undertaken by the
SPV and its affiliates were in compliance with applicable laws and regulations.
Failure to comply with the requirements of Circular 75, as applied by SAFE in
accordance with Notice 106, may result in fines and other penalties under PRC
laws for evasion of applicable foreign exchange restrictions. Any such failure
could also result in the SPVs affiliates being impeded or prevented from
distributing their profits and the proceeds from any reduction in capital, share
transfer or liquidation to the SPV, or from engaging in other transfers of funds
into or out of China.
We believe our stockholders who are PRC residents as defined in
Circular 75 have registered with the relevant branch of SAFE, as currently
required, in connection with their equity interests in us and our acquisitions
of equity interests in our PRC subsidiaries.
19
However, we cannot provide any assurances that their existing
registrations have fully complied with, and they have made all necessary
amendments to their registration to fully comply with, all applicable
registrations or approvals required by Circular 75. Moreover, because of
uncertainty over how Circular 75 will be interpreted and implemented, and how or
whether SAFE will apply it to us, we cannot predict how it will affect our
business operations or future strategies. For example, our present and
prospective PRC subsidiaries ability to conduct foreign exchange activities,
such as the remittance of dividends and foreign currency-denominated borrowings,
may be subject to compliance with Circular 75 by our PRC resident beneficial
holders. In addition, such PRC residents may not always be able to complete the
necessary registration procedures required by Circular 75. We also have little
control over either our present or prospective direct or indirect stockholders
or the outcome of such registration procedures. A failure by our PRC resident
beneficial holders or future PRC resident stockholders to comply with Circular
75, if SAFE requires it, could subject these PRC resident beneficial holders to
fines or legal sanctions, restrict our overseas or cross-border investment
activities, limit our subsidiaries ability to make distributions or pay
dividends or affect our ownership structure, which could adversely affect our
business and prospects.
Changes in China's political or economic situation could
harm us and our operating results.
Economic reforms adopted by the Chinese government have had a
positive effect on the economic development of the country, but the government
could change these economic reforms or any of the legal systems at any time.
This could either benefit or damage our operations and profitability. Some of
the things that could have this effect are:
-
Level of government involvement in the economy;
-
Control of foreign exchange;
-
Methods of allocating resources;
-
Balance of payments position;
-
International trade restrictions; and
-
International conflict.
The Chinese economy differs from the economies of most
countries belonging to the Organization for Economic Cooperation and
Development, or OECD, in many ways. For example, state-owned enterprises still
constitute a large portion of the Chinese economy and weak corporate governance
and a lack of flexible currency exchange policy still prevail in China. As a
result of these differences, we may not develop in the same way or at the same
rate as might be expected if the Chinese economy was similar to those of the
OECD member countries.
The value of our securities will be affected by the
currency exchange rate between U.S. dollars and RMB.
The value of our common stock will be affected by the foreign
exchange rate between U.S. dollars and RMB, and between those currencies and
other currencies in which our sales may be denominated. For example, if we need
to convert U.S. dollars into RMB for our operational needs and the RMB
appreciate against the U.S. dollar at that time, our financial position, our
business, and the price of our common stock may be harmed. Conversely, if we
decide to convert our RMB into U.S. dollars for the purpose of declaring
dividends on our common stock or for other business purposes and the U.S. dollar
appreciates against the RMB, the U.S. dollar equivalent of our earnings from our
subsidiaries in China would be reduced.
Our procurement strategy is to diversify our suppliers both in
the PRC and overseas. And some of our raw materials and major equipments are
currently imported. These transactions are often settled in U.S. dollars or
other foreign currency. In the event that the U.S. dollars or other foreign
currency appreciate against RMB, our costs will increase. Our profitability and
operating results will suffer if we cannot pass the resulted cost increase to
our customers. In addition, because our sales to international customers are
growing, we are subject to the risk of foreign currency depreciation.
Until 1994, the RMB experienced a gradual but significant
devaluation against most major currencies, including the U.S. dollar, and there
was a significant devaluation of the RMB on January 1, 1994 in connection with
the replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the RMB relative to the
U.S. dollar has remained stable and has appreciated slightly. Countries,
including the United States, have argued that the RMB is artificially
undervalued due to Chinas current monetary policies and have pressured China to
allow the RMB to float freely in world markets. In July 2005, the PRC government
changed its policy of pegging the value of the RMB to the U.S. dollar. Under
this policy, which was halted in 2008 due to the worldwide financial crisis, the
Renminbi was permitted to fluctuate within a narrow and managed band against a
basket of certain foreign currencies. In June 2010, the Chinese government
announced its intention to again allow the Renminbi to fluctuate within the 2005
parameters. It is possible that the Chinese government could adopt an even more
flexible currency policy, which could result in more significant fluctuation of
Renminbi against the U.S. dollar, or it could adopt a more restrictive policy.
While the international reaction to the RMB revaluation has generally been positive,
there remains significant international pressure on the PRC government to adopt
an even more flexible currency policy, which could result in further and more
significant appreciation of the RMB against the U.S. dollar.
20
A slowdown or other adverse developments in the Chinese
economy may materially and adversely affect our customers demand for our
products and services.
All of our operations are conducted in China and a major
portion of our revenues are generated from sales to businesses operating in
China. Although the Chinese economy has grown significantly in recent years,
such growth may not continue. We do not know how sensitive we are to a slowdown
in economic growth or other adverse changes in Chinese economy which may affect
demand for our products. A slowdown in overall economic growth, an economic
downturn or recession or other adverse economic developments in China may
materially reduce the demand for our services and in turn reduce our results of
operations.
Failure to comply with the U.S. Foreign Corrupt Practices
Act and Chinese anti-corruption laws could subject us to penalties and other
adverse consequences.
Our executive officers, employees and other agents may violate
applicable law in connection with the marketing or sale of our products,
including Chinas anti-corruption laws and the U.S. Foreign Corrupt Practices
Act, or the FCPA, which generally prohibits United States companies from
engaging in bribery or other prohibited payments to foreign officials for the
purpose of obtaining or retaining business. In addition, we are required to
maintain records that accurately and fairly represent our transactions and have
an adequate system of internal accounting controls. Foreign companies, including
some that may compete with us, are not subject to these prohibitions, and
therefore may have a competitive advantage over us. The PRC also strictly
prohibits bribery of government officials. However, corruption, extortion,
bribery, pay-offs, theft and other fraudulent practices occur from time-to-time
in the PRC.
While we intend to implement measures to ensure compliance with
the FCPA and Chinese anti-corruption laws by all individuals involved with our
company, our employees or other agents may engage in such conduct for which we
might be held responsible. If our employees or other agents are found to have
engaged in such practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial
condition and results of operations. In addition, our brand and reputation, our
sales activities or the price of our common stock could be adversely affected if
we become the target of any negative publicity as a result of actions taken by
our employees or other agents.
The implementation of the new PRC labor law and increases
in the labor costs in China may hurt our business and profitability.
On June 29, 2007, the PRC government promulgated a new labor
law, the Labor Agreement Law of the PRC, or the New Labor Agreement Law, which
became effective on January 1, 2008. The New Labor Agreement Law imposes greater
liability on employers and significantly affects the cost of an employers
decision to reduce its workforce. Further, it requires certain terminations be
based upon seniority and not merit. In the event we decide to significantly
change or decrease our workforce, the New Labor Agreement Law could adversely
affect our ability to enact such changes in a manner that is most advantageous
to our business or in a timely and cost-effective manner, thus materially and
adversely affecting our financial condition and future operating prospects.
RISKS RELATED TO THE MARKET FOR OUR STOCK
As our common stock is thinly traded, the stock price may
be volatile and investors may have difficulty disposing of their investments at
prevailing market prices.
On March 4, 2010, our common stock began trading on the NYSE
MKT LLC (NYSE MKT, formerly NYSE Amex LLC, American Stock Exchange) under the
symbol CHGS. Prior to March 4, 2010, our common stock was traded
over-the-counter under the symbol CHGS.OB. Despite the relisting on the larger
stock exchange, our common stock remains thinly and sporadically traded and no
assurances can be given that a larger market will ever develop, or if developed,
that it will be maintained.
Our common stock is subject to price volatility unrelated
to our operations.
The market price of our common stock could fluctuate
substantially due to a variety of factors, including market perception of our
ability to achieve our planned growth, quarterly operating results of other
companies in the same industry, trading volume in our common stock, changes in
general conditions in the economy and the financial markets or other
developments affecting our competitors or us. In addition, the stock market is
subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies
for reasons unrelated to their operating performance and could have the same
effect on our common stock.
We cannot assure you that our common stock will be liquid
or that it will remain listed on the NYSE MKT.
We cannot assure you that we will be able to maintain the
continued listing standards of the NYSE MKT. The NYSE MKT requires companies to
meet certain continued listing criteria including certain minimum stockholders'
equity and equity prices per share as outlined in the NYSE MKT LLC Company Guide. We may not be able
to maintain such minimum stockholders' equity or prices per share or may be
required to effect a reverse stock split to maintain such minimum prices and/or
issue additional equity securities in exchange for cash or other assets, if
available, to maintain certain minimum stockholders' equity required by the NYSE
MKT. If we are delisted from the NYSE MKT then our common stock will trade, if
at all, only on the over-the-counter market, such as the OTC Bulletin Board
securities market, and then only if one or more registered broker-dealer market
makers comply with quotation requirements. In addition, delisting of our common
stock could depress our stock price, substantially limit liquidity of our common
stock and materially adversely affect our ability to raise capital on terms
acceptable to us, or at all. Delisting from the NYSE MKT could also have other
negative results, including the potential loss of confidence by suppliers and
employees, the loss of institutional investor interest and fewer business
development opportunities.
21
Techniques employed by manipulative short sellers in
Chinese small cap stocks may drive down the market price of our common
stock.
Short selling is the practice of selling securities that the
seller does not own but rather has, supposedly, borrowed from a third party with
the intention of buying identical securities back at a later date to return to
the lender. The short seller hopes to profit from a decline in the value of the
securities between the sale of the borrowed securities and the purchase of the
replacement shares, as the short seller expects to pay less in that purchase
than it received in the sale. As it is therefore in the short sellers best
interests for the price of the stock to decline, many short sellers (sometime
known as disclosed shorts) publish, or arrange for the publication of,
negative opinions regarding the relevant issuer and its business prospects in
order to create negative market momentum and generate profits for themselves
after selling a stock short. While traditionally these disclosed shorts were
limited in their ability to access mainstream business media or to otherwise
create negative market rumors, the rise of the Internet and technological
advancements regarding document creation, videotaping and publication by weblog
(blogging) have allowed many disclosed shorts to publicly attack a companys
credibility, strategy and veracity by means of so-called research reports that
mimic the type of investment analysis performed by large Wall Street firm and
independent research analysts. These short attacks have, in the past, led to
selling of shares in the market, on occasion in large scale and broad base.
Issuers with business operations based in China and who have limited trading
volumes and are susceptible to higher volatility levels than U.S. domestic
large-cap stocks can be particularly vulnerable to such short attacks.
These short seller publications are not regulated by any
governmental, self-regulatory organization or other official authority in the
U.S., are not subject to the certification requirements imposed by the
Securities and Exchange Commission in Regulation AC (Regulation Analyst
Certification) and, accordingly, the opinions they express may be based on
distortions of actual facts or, in some cases, fabrications of facts. In light
of the limited risks involved in publishing such information, and the enormous
profit that can be made from running just one successful short attack, unless
the short sellers become subject to significant penalties, it is more likely
than not that disclosed shorts will continue to issue such reports.
Recently, some short sellers actively attack on Chinese small
cap stocks. We are a Chinese small cap public company and may be attacked by
some short sellers. While we intend to strongly defend our public filings
against any such short teller attacks, oftentimes we are constrained, either by
principles of freedom of speech, applicable state law (often called Anti-SLAPP
statutes), or issues of commercial confidentiality, in the manner in which we
can proceed against the relevant short seller. You should be aware that in light
of the relative freedom to operate that such persons enjoy - oftentimes blogging
from outside the U.S. with little or no assets or identity requirements - should
we be targeted for such an attack, our stock will likely suffer from a
temporary, or possibly long term, decline in market price.
In addition, as many Chinese small cap public companies have
been recently subject to intense scrutiny, criticism and negative publicity by
investors, short sellers, financial commentators and regulatory agencies, such
as the United States Securities and Exchange Commission, and much of the
scrutiny, criticism and negative publicity has centered around financial and
accounting irregularities and mistakes, a lack of effective internal controls
over financial accounting, inadequate corporate governance policies or a lack of
adherence thereto and, in many cases, allegations of fraud, it is not clear what
affect this sector-wide scrutiny, criticism and negative publicity will have on
our company, our business and our stock price. If we become the subject of any
unfavorable allegations, whether such allegations are proven to be true or
untrue, we will have to expend significant resources to investigate such
allegations and/or defend our company. This situation could be costly and time
consuming and distract our management from growing our company. If such
allegations are not proven to be groundless, our company and business operations
will be severely impacted. It could seriously affect our ability to raise money
and your investment in our stock could be rendered worthless.
Our President and CEO hold a significant percentage of
our outstanding voting securities.
As of the date of this report, Mr. Shunqing Zhang, our
President and CEO, was the beneficial owner of approximately 56.8% of our
outstanding voting securities. As a result, he possessed significant influence,
giving him the ability to elect a majority of our board of directors and to
authorize or prevent significant corporate transactions. His ownership and
control may impede or delay any future change in control through merger,
consolidation, takeover or other business combinations and may discourage a
potential acquirer from making a tender offer.
Certain provisions of our articles of incorporation may
make it more difficult for a third party to effect a change-in-control.
22
Our articles of incorporation authorize the Board of Directors
to issue up to 50,000,000 shares of preferred stock. The preferred stock may be
issued in one or more series, the terms of which may be determined at the time
of issuance by the board of directors without further action by the
stockholders. These terms may include voting rights including the right to vote
as a series on particular matters, preferences as to dividends and liquidation,
conversion rights and redemption rights provisions. The issuance of any
preferred stock could diminish the rights of holders of our common stock, and
therefore could reduce the value of such common stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
our ability to merge with, or sell assets to, a third party. The ability of the
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent the stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
All land in China is owned by the government authority.
Individuals and companies are permitted to acquire rights to use land or land
use rights for specific purposes. In the case of land used for industrial
purposes, the land use rights are granted for a period of up to 50 years. This
period may be renewed at the expiration of the initial and any subsequent terms.
Granted land use rights are transferable and may be used as security for
borrowings and other obligations.
We currently have about 23 manufacturing facilities located on
five manufacturing sites in China. We have obtained the land use rights for four
of our five manufacturing sites and are in the process of obtaining the right
from the relevant governmental authority for periods ranging from 39 to 50 years
to use the land on which our Yuxing subsidiary is located. In our Refractories
subsidiary in Gongyi City, Henan Province, we have offices and workshops that
total approximately 366,166 square feet. In our High-Temperature subsidiary in
Zhengzhou City, Henan Province, we have offices and workshops that total
approximately 115,777 square feet. In our Duesail subsidiary in Gongyi City,
Henan Province, we have offices and workshops that total approximately 193,750
square feet. In our Micronized subsidiary in Gongyi City, Henan Province, we
have offices and workshops that total approximately 739,114 square feet, and we
have offices and workshops that total approximately 753,000 square feet in the
Yuxing subsidiary in Gongyi City, Henan Province.
We believe that our facilities, which are of varying ages and
are of different construction types, have been satisfactorily maintained. They
are in good conditions and are suitable for our operations and generally provide
sufficient capacity to meet our production and operational requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits
and legal proceedings which arise in the ordinary course of business. We are
currently not aware of any such legal proceedings or claims that we believe will
have a material adverse affect on our business, financial condition or operating
results. However, litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to time that may
harm our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR OUR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
On March 4, 2010, our common stock commenced trading on the
NYSE MKT LLC under the symbol CHGS. Before that, our common stock was traded
over-the-counter under the symbol CHGS.OB.
The following table sets forth, for the periods indicated, the
high and low sale prices of our common stock as reported on the NYSE MKT LLC.
These prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
23
Year Ended December 31, 2013
|
|
Sale Prices
(1)
|
|
|
|
High
|
|
|
Low
|
|
4
th
Quarter
|
$
|
0.39
|
|
$
|
0.13
|
|
3
rd
Quarter
|
|
0.21
|
|
|
0.07
|
|
2
nd
Quarter
|
|
0.28
|
|
|
0.12
|
|
1
st
Quarter
|
|
0.39
|
|
|
0.19
|
|
Year Ended December 31, 2012
|
|
Sale Prices
|
|
|
|
High
|
|
|
Low
|
|
4
th
Quarter
|
$
|
0.48
|
|
$
|
0.28
|
|
3
rd
Quarter
|
|
0.51
|
|
|
0.34
|
|
2
nd
Quarter
|
|
1.08
|
|
|
0.45
|
|
1
st
Quarter
|
|
1.19
|
|
|
0.69
|
|
(1)
The above tables set forth the range of high and
low bid prices per share of our common stock as reported in our SEC filings and
by www.nasdaq.com for the periods indicated.
Holder
s
On April 14, 2014, there were approximately 215 stockholders of
record of our common stock. The number of record holders does not include
persons who held our common stock in nominee or street name accounts through
brokers.
Dividend Policy
We have never declared dividends or paid cash dividends. Our
board of directors, which currently consists of five directors, has complete
discretion on whether to pay dividends, subject to the approval of our
shareholders. We currently intend to retain and use any future earnings for the
development and expansion of our business and do not anticipate paying any cash
dividends in the near future. Even if our board of directors decides to pay
dividends, the form, frequency and amount will depend upon our future operations
and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that the board of directors may deem
relevant.
Securities Authorized for Issuance under Equity Compensation
Plans
At the Companys annual shareholder meeting, which was held on
September 28, 2011, the Companys shareholders approved the 2011 Long-Term
Incentive Plan (the Plan), which authorized a total of 3,000,000 shares of the
Company common stock. The maximum number of shares of common stock that may be
issued to any one grantee during any calendar year shall not exceed 100,000.
The Plan is designed to enhance the Companys and its
affiliates ability to attract and retain highly qualified officers, directors,
key employees and other persons, and to motivate such officers, directors, key
employees and other persons to serve the Company and its affiliates and to
expend maximum effort to improve the business results and earnings of the
Company, by providing to such persons an opportunity to acquire or increase a
direct proprietary interest in the operations and future success of the
Company.
As of April 14, 2014, no securities have been issued under the
Plan.
For a detailed description of the Plan, see Schedule 14A
Information Proxy Statement filed with the SEC on August 15, 2011. The following
table sets forth information regarding the Plan.
Equity Compensation Plan Information
24
Plan category
|
Number of securities to be
issued
upon exercise of
outstanding options, warrants
and
rights
|
Weighted-average exercise price
of
outstanding options, warrants
and rights
|
Number of securities remaining
available for future issuance
under equity compensation
plans
|
Equity compensation plans approved by security holders
|
3,000,000
|
n/a
|
3,000,000
|
Equity compensation plans not approved by security holders
|
0
|
n/a
|
0
|
Total
|
3,000,000
|
n/a
|
3,000,000
|
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, as defined by Item 10 of
Regulation S-K, the Company is not required to provide this information.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial Condition and
Results of Operations, which we refer to as the MD&A, is intended to help
the reader understand our Company, our operations and our present business
environment. The MD&A is provided as a supplement to, and should be read in
conjunction with, our consolidated financial statements and the accompanying
notes.
The following discussion and analysis of our financial
condition and results of operations should be read in conjunction with our
audited consolidated financial statements and related notes included elsewhere
in this annual report on Form 10-K. Some of the information contained in this
discussion and analysis constitutes forward-looking statements that involve
risks and uncertainties. Actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed
below and elsewhere in this annual report on Form 10-K particularly under
Special Note Regarding Forward-Looking Statements and Risk Factors.
Unless otherwise specified, references to Notes to our
consolidated financial statements are to the Notes to our audited consolidated
financial statements as of December 31, 2013 and 2012.
Overview
We are a Nevada holding company that operates through our
direct and indirect subsidiaries. Through our wholly-owned BVI subsidiary,
GengSheng International, and its wholly-owned Chinese subsidiary, Refractories,
we manufacture monolithic refractory products in China. Through our wholly-owned
BVI subsidiary, GengSheng International, and its wholly-owned Chinese
subsidiary, Duesail and Duesails wholly-owned subsidiary Yuxing, we manufacture
fracture proppant products. Through Micronized, wholly-owned subsidiary of
Refractories, we manufacture fine precision abrasives. Through High-Temperature,
89% owned subsidiary of Refractories, we manufacture industrial ceramic
products. We have four primary business segments: refractories, industrial
ceramics, fracture proppant and fine precision abrasives. Refractories product
is a nonmetallic material that is used in heavy industrial processes present
with extremely high temperatures, and the main customers for the segment are
steel makers. Our industrial ceramic products, including abrasive balls and
tiles, valves, electronic ceramics and structural ceramics, are components for a
variety of end-use products such as fuses, vacuum interrupters, electrical
components, mud slurry pumps, and high-pressure pumps. Such end use products are
used in the electric power, electronic component, industrial pump, and
metallurgy industries. Our fracture proppants are very fine ball-like pellets,
highly resistant to pressure, and used to reach pockets of oil and natural gas
deposits that are trapped in the fractures under the ground. Oil drillers inject
the pellets into those fractures, squeezing out the trapped oil or natural gas,
which leads to higher yield. The fine precision abrasives are essentially very
fine, uniformly round, silicon carbide (SiC) based particles. These ultra-fine
high-strength particles are applicable in a broad range of applications,
including machine manufacturing, electronics, optical glass, architecture,
semiconductors, silicon chips, plastics and lenses. In 2013, the refractories
segment contributed approximately $33.1 million or 54.4% of our total revenue of
approximately $60.9 million, industrial ceramics contributed approximately $1.1
million or 1.8% of the total revenue, fracture proppants contributed
approximately $22.7 million or 37.4% of our total revenue and fine precision
abrasives contributed approximately $3.9 million or 6.4% of the total
revenue.
25
We sell our products to over 300 customers in the iron, steel,
oil, glass, cement, aluminum, chemical and solar industries located in China and
11 countries in other parts of Asia and Europe. Our refractory customers are
companies in the steel, iron, petroleum, chemical, coal, glass and mining
industries. Our fracture proppant products are sold to oil and gas companies.
Our industrial ceramics are products used by the utilities and petrochemical
industries. The Companys fine precision abrasives target solar companies and
optical equipment manufacturers. Most of our large customers, measured by
percentage of our revenue, mainly operate in the steel industry. Currently, most
of our revenues are derived from the sale of our monolithic refractory products
and fracture proppants products to customers in China.
Summary of Business Operations in 2013
During 2013, we experienced further decline in net sales as all
of our segments are still facing challenges from deteriorating market condition.
From the beginning of 2009, the PRC central government has labeled the steel
sector in China an overcapacity-burdened industry and the government is resolved
to cut back the industry's excessive capacity. Since then some small and
mid-sized steel producers have been shut down, which resulted in the decrease in
the demand for refractories. To face the changing market environment, we have
adjusted product offerings in the refractories segment, entered into more
full-service contracts to sell both our products and service and focused on
maintaining current customers. However, due to the weak demand of our products
and the inability to find new customers, the sales in our refractories segment
declined further in 2013. In the fracture proppant segment, our sales decreased
as the price of fracture proppant products continued to decline in 2013. In our
fine precision abrasives segment, we failed to maintain our market share and
incurred further losses in 2013 as the overcapacity and uncertainty surrounding
the solar industry still exists.
Our financial performance in 2013 is summarized as follows:
-
Net sales decreased by approximately $12.6 million, or 17.2% to
approximately $60.9 million in 2013 from approximately $73.5 million in 2012.
-
Gross margin decreased by approximately $4.5 million, or 36.2%, to
approximately $8.1 million in 2013, from approximately $12.6 million in 2012.
Gross margin was 13.2% for 2013, compared with 17.2% for 2012. The
decrease in gross margin was largely attributable to the lower gross
margin in our fine precision abrasives segment as overcapacity and weak
demand from solar industry continued to impact us negatively; the lower gross
margin in fracture proppants segment as well as rising costs in
refractories segment as compared to 2012.
-
Net loss increased by approximately $4.7 million, to approximately $18.2
million in 2013, from a net loss of approximately $13.5 million in 2012.
-
Our consolidated balance sheet as of December 31, 2013 included current
assets of approximately $100.0 million and total assets of approximately
$141.9 million, with working capital deficit of approximately $19.0 million.
Major Factors that Affected our Financial Condition in
2013
Continued Industry Consolidation of Steel Makers Further
Squeezed Our Profit in Refractories Segment
Although the crude steel output in China reached a new record
of approximately 779 million metric tons in 2013, the steel industry still faces
overcapacity and weak demand from both domestic and international market. In
addition, the PRC governments continued policy to close small to mid-sized
steel makers reduced the overall demand for refractories. As revenue from our
refractories segment accounted for a large portion of our total sales revenue
and many of our customers are in the steel industry, the continued industry
consolidation of steel makers have a deep impact on us and further reduced our
profit in the refractories segment.
Increase in Financing Costs Further Limited Our Ability to
Expand Business
The unfavorable payment terms offered by our customers in the
refractories segment and fine precision abrasives segment strained our working
capital needs, and as a result, significantly increased our financing costs, as
banks charged higher interest rates when we discounted more notes receivables to
meet our working capital needs.
Uncertainties Facing Our Fracture Proppants Segment
Starting from 2012, more and more Chinese manufacturers of
fracture proppants products started to sell their products directly in the U.S.
market. Since our sales of fracture proppants products in the U.S. market were
mainly through wholesalers and distributors, the change in the market condition
made it nearly impossible for us to continue sales in the U.S. market while
still maintaining a reasonable profit margin. As a result, our sales in the U.S.
market were discontinued in 2012. We are currently selling all our fracture
proppants products to oil drillers in the domestic market. Although the sales
volume is higher, the profit margin is lower and the payment terms are less
favorable.
Deteriorating Market for Our Fine Precision Abrasives
Segment
26
Chinas solar industry is experiencing severe challenge with
many large solar panel manufacturers struggling to survive. As a supplier of
solar-energy companies, we are facing remarkable uncertainties in maintaining
our current customers. If we cannot continue our sales of fine precision
abrasives products to solar industry we may have to reduce selling price
significantly to stay competitive, and this will affect our revenue negatively
and we may ultimately need to discontinue our production.
Results of Operations
The following table summarizes the results of our operations
during the fiscal years ended December 31, 2013 and 2012, respectively, and
provides information regarding the dollar and percentage increase or (decrease)
during such years.
(All amounts, other than percentages, in U.S. dollars)
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
As a percentage
|
|
|
|
|
|
As a percentage
|
|
|
|
Dollars
|
|
|
of
|
|
|
Dollars
|
|
|
of
|
|
Statement of operations data:
|
|
in thousands
|
|
|
sales revenue
|
|
|
in thousands
|
|
|
sales revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
$
|
60,881
|
|
|
100.0%
|
|
|
73,535
|
|
|
100.0%
|
|
Cost of goods sold
|
|
52,815
|
|
|
86.8%
|
|
|
60,886
|
|
|
82.8%
|
|
Gross margin
|
|
8,066
|
|
|
13.2%
|
|
|
12,649
|
|
|
17.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expenses
|
|
6,947
|
|
|
11.4%
|
|
|
1,731
|
|
|
2.4%
|
|
Selling expenses
|
|
4,804
|
|
|
7.9%
|
|
|
9,630
|
|
|
13.1%
|
|
Research and development expenses
|
|
1,394
|
|
|
2.3%
|
|
|
923
|
|
|
1.3%
|
|
General &
administrative expenses
|
|
6,957
|
|
|
11.4%
|
|
|
7,319
|
|
|
10.0%
|
|
Impairment of fixed assets
|
|
-
|
|
|
0.0%
|
|
|
287
|
|
|
0.4%
|
|
Total operating expenses
|
|
20,102
|
|
|
33.0%
|
|
|
19,890
|
|
|
27.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(12,036
|
)
|
|
-19.8%
|
|
|
(7,241
|
)
|
|
-9.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
(1,181
|
)
|
|
-1.9%
|
|
|
(813
|
)
|
|
-1.1%
|
|
Interest
expense and bankers acceptance notes discount
|
|
7,744
|
|
|
12.7%
|
|
|
7,301
|
|
|
9.9%
|
|
Government grant
|
|
(1,163
|
)
|
|
-1.9%
|
|
|
(559
|
)
|
|
-0.8%
|
|
CHGS share of
net loss from a non-consolidated entity
|
|
101
|
|
|
0.2%
|
|
|
59
|
|
|
0.1%
|
|
Loan guarantee income
|
|
(338
|
)
|
|
-0.6%
|
|
|
(563
|
)
|
|
-0.8%
|
|
Loan guarantee expenses
|
|
257
|
|
|
0.4%
|
|
|
462
|
|
|
0.6%
|
|
Other (income) expense
|
|
496
|
|
|
0.8%
|
|
|
(25
|
)
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision
|
|
(17,951
|
)
|
|
-29.5%
|
|
|
(13,103
|
)
|
|
-17.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
291
|
|
|
0.5%
|
|
|
492
|
|
|
0.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before non-controlling interest
|
|
(18,242
|
)
|
|
-30.0%
|
|
|
(13,595
|
)
|
|
-18.5%
|
|
Net loss attributable to non-controlling
interest
|
|
(61
|
)
|
|
-0.1%
|
|
|
(56
|
)
|
|
-0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to CHGS stockholders
|
|
(18,181
|
)
|
|
-29.9%
|
|
|
(13,539
|
)
|
|
-18.4%
|
|
27
|
|
|
|
|
|
|
|
Dollar ($)
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Increase
|
|
Dollars in thousands
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Net Sales
|
$
|
60,881
|
|
$
|
73,535
|
|
$
|
(12,654
|
)
|
|
-17.2%
|
|
Cost of goods sold
|
|
52,815
|
|
|
60,886
|
|
|
(8,071
|
)
|
|
-13.3%
|
|
Gross margin
|
|
8,066
|
|
|
12,649
|
|
|
(4,583
|
)
|
|
-36.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expenses
|
|
6,947
|
|
|
1,731
|
|
|
5,216
|
|
|
301.4%
|
|
Selling expenses
|
|
4,804
|
|
|
9,630
|
|
|
(4,826
|
)
|
|
-50.1%
|
|
Research and development expenses
|
|
1,394
|
|
|
923
|
|
|
471
|
|
|
51.0%
|
|
General &
administrative expenses
|
|
6,957
|
|
|
7,319
|
|
|
(362
|
)
|
|
-4.9%
|
|
Impairment of fixed assets
|
|
-
|
|
|
287
|
|
|
(287
|
)
|
|
-100.0%
|
|
Total operating expenses
|
|
20,102
|
|
|
19,890
|
|
|
212
|
|
|
1.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(12,036
|
)
|
|
(7,241
|
)
|
|
(4,795
|
)
|
|
66.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
(1,181
|
)
|
|
(813
|
)
|
|
(368
|
)
|
|
45.3%
|
|
Interest
expense and bankers acceptance notes discount
|
|
7,744
|
|
|
7,301
|
|
|
443
|
|
|
6.1%
|
|
Government grant
|
|
(1,163
|
)
|
|
(559
|
)
|
|
(604
|
)
|
|
108.2%
|
|
CHGS share of
net loss from a non-consolidated entity
|
|
101
|
|
|
59
|
|
|
42
|
|
|
70.8%
|
|
Loan guarantee income
|
|
(338
|
)
|
|
(563
|
)
|
|
225
|
|
|
-39.9%
|
|
Loan guarantee expenses
|
|
257
|
|
|
462
|
|
|
(205
|
)
|
|
-44.3%
|
|
Other (income) expense
|
|
496
|
|
|
(25
|
)
|
|
521
|
|
|
-2,015.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision
|
|
(17,951
|
)
|
|
(13,103
|
)
|
|
(4,848
|
)
|
|
37.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
291
|
|
|
492
|
|
|
(201
|
)
|
|
-40.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before non-controlling interest
|
|
(18,242
|
)
|
|
(13,595
|
)
|
|
(4,647
|
)
|
|
34.2%
|
|
Net loss attributable to non-controlling
interest
|
|
(61
|
)
|
|
(56
|
)
|
|
(6
|
)
|
|
10.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to CHGS stockholders
|
|
(18,181
|
)
|
|
(13,539
|
)
|
|
(4,642
|
)
|
|
34.3%
|
|
The average conversion rates between RMB and U.S. dollar used
for the consolidated statements of operations and comprehensive loss increased
approximately 2.0% during the reporting period of 2013 compared with the
reporting period of 2012. As substantially all of our revenues and most expenses
are denominated in RMB, the appreciation in the value of RMB relative to the
U.S. dollar affected our financial results reported in the U.S. dollar terms
without giving effect to any underlying change in our business or results of
operations.
Net sales.
Net sales decreased approximately $12.6
million, or 17.2%, to approximately $60.9 million in 2013 from approximately
$73.5 million in 2012. Excluding foreign currency translation, the revenue
decreased approximately $13.8 million, or 18.8% compared with 2012. The decrease
was mainly attributable to the decreased sales from all of our segments.
In our refractory segment, we sold 74,281 metric tons of
refractory products in 2013, a 5.0% decrease compared with 78,186 metric tons
sold in 2012. The revenue from our refractory products decreased to
approximately $33.1 million in 2013 from approximately $38.9 million in 2012.
Excluding foreign currency translation, the revenue decreased approximately $6.4
million, or 16.4% compared with 2012. The average selling prices decreased to
$446 per metric ton in 2013, representing a 10.3% decrease compared with $497
per metric ton in 2012. Excluding foreign currency translation, the average
selling prices decreased to $437 per metric ton, or a decrease of 12.0% compared
with 2012.
In our fracture proppant segment, we sold 88,388 metric tons of
fracture proppant products in 2013, compared with 73,958 metric tons in 2012.
The increase in sales volume was primarily driven by the increased sales in
domestic market as the demand for our products from oil producers in China
increased in 2013. Revenue from fracture proppant products was approximately
$22.7 million in 2013, a decrease of approximately $1.8 million or 7.2% compared with
approximately $24.5 million in 2012. Excluding foreign currency translation, the
revenue decreased approximately $2.2 million, or 9.0% compared with 2012.
Average selling price decreased to $257 per metric ton in 2013, compared with
$331 per metric ton in 2012. Excluding foreign currency translation, the average
selling prices decreased $79 per metric ton, or 23.9% compared with 2012. The
decrease in average selling price was primarily attributable to the increased
sales of low-grade products and generally lower market price for fracture
proppant products in 2013.
28
In our industrial ceramics segment, revenue was approximately
$1.1 million in 2013 compared with approximately $1.8 million in 2012. The
decrease was primarily attributable to the lower demand for our industrial
ceramics products in 2013.
In our fine precision abrasives segment, we realized sales of
1,702 metric tons in 2013, generating revenue of approximately $3.9 million. We
sold 3,054 metric tons of fine precision abrasives products for approximately
$8.3 million in 2012. The decrease in sales revenue was a result of weak demand
for our fine precision abrasives products under current market condition and
declined sales to a major customer.
Cost of goods sold.
Our cost of goods sold decreased by
approximately $8.1 million or 13.3% to approximately $52.8 million in 2013 from
approximately $60.9 million in 2012. Excluding foreign currency translation, our
cost of goods sold decreased approximately $9.1 million or 14.9% compared with
2012. As a percentage of sales revenue, the cost of goods sold increased by
approximately 4.0% to 86.8% in 2013 from 82.8% in 2012. The decrease in cost of
goods sold was primarily attributable to the decreased sales in our refractory
segment as we terminated more unprofitable full-service contracts in 2013.
Gross margin.
Our gross margin decreased by
approximately $4.5 million, or 36.2% to approximately $8.1 million in 2013 from
approximately $12.6 million in 2012. Excluding foreign currency translation, our
gross margin decreased approximately $4.7 million, or 37.5% compared with 2012.
Gross margin was 13.2% in 2013, as compared with 17.2% in 2012. The
decrease was primarily attributable to the decreased gross margin in our
refractory segment and fracture proppants segment.
Bad debt expenses.
Bad debt expenses increased
approximately $5.2 million, or 301.4% to approximately $6.9 million in 2013 from
approximately $1.7 million in 2012. Excluding foreign currency translation, the
bad debt expenses increased approximately $5.1 million, or 293.7% compared with
2012. The increase was primarily attributable to the managements decision to
increase the reserve for other receivables due to their uncertainties in collectability in 2013 and increased allowance for accounts receivable as some
of our customers failed to make payments on time.
Selling expenses.
Selling expenses decreased by
approximately $4.8 million, or 50.1%, to approximately $4.8 million in 2013
compared with approximately $9.6 million in 2012. Excluding foreign currency
translation, the selling expenses decreased approximately $4.9 million, or 51.1%
compared with 2012. As a percentage of sales revenue, our selling expenses
decreased to 7.9% in 2013, as compared with 13.1% in 2012. The decrease in
selling expenses as a percentage of sales revenue was primarily attributable to
the lower sales related expenses as we terminated several full-service contracts
in our refractory segment in 2013.
Research and development cost.
Our research and
development cost increased to approximately $1.4 million in 2013 compared with
approximately $923,000 in 2012. The increase in research and development cost
was attributable to more research and development activities in 2013.
General and administrative expenses.
Our general and
administrative expenses decreased by approximately $362,000 or 4.9%, to
approximately $7.0 million in 2013 from approximately $7.3 million in 2012.
Excluding foreign currency translation, the general and administrative expenses
decreased approximately $495,000, or 6.8% compared with 2012. As a percentage of
net sales, general and administrative expenses increased 1.4% to 11.4% in 2013,
compared with 10.0% in 2012 as net sales decreased over the year.
Impairment of fixed assets.
There was no impairment
expense of fixed assets in 2013 as compared with approximately $287,000 in 2012.
The impairment expenses in 2012 were related to write-off fixed assets at
Prefecture.
Interest income.
Interest income was approximately $1.2
million in 2013, an increase of approximately $368,000 or 45.3% compared with
approximately $813,000 in 2012. The increase in interest income was primarily
due to higher interest earned on our restricted cash accounts held at local
financial institutions in 2013.
Interest expenses and bankers acceptance notes discount.
Our interest expenses and bankers acceptance notes discount increased by
approximately $443,000, or 6.1% to approximately $7.7 million in 2013, from
approximately $7.3 million in 2012. Excluding foreign currency translation, our
interest expenses and bankers acceptance notes discount increased approximately
$294,000 or 4.0% compared with 2012. The increase was primarily attributable to
an increase in bankers acceptance notes discount charges as we discounted more
banker's acceptance notes receivable instead of holding them to maturity.
Government grant.
Our government grant was approximately
$1.2 million in 2013, compared with approximately $559,000 in 2012. The increase
in government grant was primarily attributable to a one-time government grant
received at Refractory in 2013.
29
Share of net loss from a non-consolidated entity.
Share
of net loss from a non-consolidated entity was approximately $101,000 in 2013,
compared with approximately $59,000 in 2012. This was related to our investment
in Yili Yi Qiang Silicon Limited.
Loss before income tax provision.
Our loss before income
tax provision was approximately $18.0 million in 2013 as compared to
approximately $13.1 million in 2012. Excluding foreign currency translation, our
loss before income tax provision was approximately $17.6 million. The increase
in loss before income tax provision was primarily attributable to the lower net
revenue and the higher operating losses in 2013.
Income tax provision.
Our income tax provision was approximately
$291,000 in 2013, a decrease of approximately $201,000 from approximately
$492,000 in 2012. Despite a net loss, as certain of our PRC subsidiaries
recognized taxable income, we still incurred income taxes in 2013.
Net loss attributable to shareholders.
Our net loss
attributable to shareholders was approximately $18.2 million in 2013, an
increase of approximately $4.7 million from approximately $13.5 million in 2012.
Excluding foreign currency translation, our net loss attributable to
shareholders was approximately $17.8 million. The increase in net loss
attributable to shareholders was attributable to the factors described above.
Liquidity and Capital Resources
As of December 31, 2013, we had cash of
approximately $1.2 million and pledged deposits of approximately $29.1 million.
Our current assets were approximately $100.0 million and our current liabilities
were approximately $119.0 million as of December 31, 2013 which resulted in a
current ratio of approximately 0.84. Total stockholders equity as of December
31, 2013 was approximately $23.0 million. The following table sets forth summary
of our cash flows for the periods indicated:
Dollars in thousands
|
|
2013
|
|
|
2012
|
|
Net cash provided by (used in) operating
activities
|
$
|
9,162
|
|
$
|
(16,899
|
)
|
Net cash used in investing activities
|
|
(2,240
|
)
|
|
(1,267
|
)
|
Net cash provided by (used in) financing
activities
|
|
(11,241
|
)
|
|
19,965
|
|
Effect of foreign currency translation on cash and cash
equivalents
|
|
80
|
|
|
15
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
(4,239
|
)
|
|
1,814
|
|
Cash, beginning of year
|
|
5,408
|
|
|
3,594
|
|
Cash, end of year
|
$
|
1,169
|
|
$
|
5,408
|
|
Operating Activities
Net cash provided by operating activities was approximately
$9.2 million in 2013, compared with net cash used in operating activities of
approximately $16.9 million in 2012. The increase in net cash provided by
operating activities was primarily attributable to the decreased accounts
receivable, prepayments and other current assets and bankers acceptance notes
receivable in 2013, which were partly offset by the increase in net loss and
decreased bankers acceptance notes payable compared with 2012.
Investing Activities
Net cash used in investing activities in 2013 was approximately
$2.2 million, an increase of approximately $0.9 million from net cash used in
investing activities of approximately $1.3 million in 2012. The increase in net
cash used in investing activities in 2013 was primarily attributable to more
activities related to our construction and renovation of our manufacturing and
administrative facilities as compared with 2012.
Financing Activities
Net cash used in financing activities was approximately $11.2
million in 2013, compared with net cash provided by financing activities of
approximately $20.0 million in 2012 as we repaid more bank loans in 2013.
Loan Facilities
We secured new loans totaling approximately $114.9 million from
banks for our working capital needs and we repaid approximately $121.9 million
in bank loans during the year ended December 31, 2013. As a result, the balance
of all of our bank loans and bank borrowings as of December 31, 2013 was
approximately $60.3 million, which includes short-term bank loans of
approximately $29.9 million and bank borrowings secured by bank deposits of
approximately $30.4 million.
30
As of December 31, 2013, the details of all our short-term bank
loans and bank borrowings are as follows:
All amounts, other than percentages, are in U.S. dollar.
No
|
Type
|
Contracting Party
|
Valid Date
|
Duration
|
Amount
|
1
|
Facility Bank Loan
|
Zhengzhou Bank
|
2013-01-07 to 2014-01-06
|
1 year
|
$4,911,000
|
2
|
Facility Bank Loan
|
Pingdingshan Bank
|
2013-03-28 to 2014-03-28
|
1 year
|
$1,399,635
|
3
|
Facility Bank Loan
|
Luoyang Bank
|
2013-04-10 to 2014-04-09
|
1 year
|
$3,274,000
|
4
|
Facility Bank Loan
|
Agricultural Bank of China
|
2013-05-08 to 2014-05-07
|
1 year
|
$1,637,000
|
5
|
Facility Bank Loan
|
Bank of China
|
2013-05-14 to 2014-05-13
|
1 year
|
$1,309,600
|
6
|
Facility Bank Loan
|
Kunlun Bank
|
2013-05-31 to 2014-05-30
|
1 year
|
$1,637,000
|
7
|
Facility Bank Loan
|
Shanghai Pudong Development
Bank Village Bank
|
2013-06-24 to 2014-06-24
|
1 year
|
$736,650
|
8
|
Facility Bank Loan
|
China CITIC Bank
|
2013-06-26 to 2014-06-26
|
1 year
|
$2,291,800
|
9
|
Facility Bank Loan
|
China CITIC Bank
|
2013-06-27 to 2014-06-26
|
1 year
|
$1,473,300
|
10
|
Facility Bank Loan
|
China CITIC Bank
|
2013-06-28 to 2014-06-27
|
1 year
|
$982,200
|
11
|
Facility Bank Loan
|
Shanghai Pudong Development
Bank Village Bank
|
2013-08-22 to 2014-08-21
|
1 year
|
$818,500
|
12
|
Facility Bank Loan
|
Shanghai Pudong Development Bank Village Bank
|
2013-08-22 to 2014-08-21
|
1 year
|
$409,250
|
13
|
Facility Bank Loan
|
Pingdingshan Bank
|
2013-08-23 to 2014-02-22
|
6 months
|
$818,500
|
14
|
Facility Bank Loan
|
Pingdingshan Bank
|
2013-08-27 to 2014-02-26
|
6 months
|
$1,637,000
|
15
|
Facility Bank Loan
|
Industrial and Commercial Bank
of China
|
2013-08-31 to 2014-02-21
|
6 months
|
$2,373,650
|
16
|
Facility Bank Loan
|
Shanghai Pudong Development Bank Village Bank
|
2013-09-02 to 2014-02-25
|
6 months
|
$818,500
|
17
|
Facility Bank Loan
|
Shanghai Pudong Development
Bank
|
2013-09-11 to 2014-09-10
|
1 year
|
$2,946,600
|
18
|
Facility Bank Loan
|
Shanghai Pudong Development Bank Village Bank
|
2013-10-16 to 2014-10-15
|
1 year
|
$441,990
|
19
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-07-08 to 2014-01-05
|
6 months
|
$982,200
|
20
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-07-10 to 2014-01-10
|
6 months
|
$818,500
|
21
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-08-09 to 2014-02-08
|
6 months
|
$1,145,900
|
22
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-08-13 to 2014-02-12
|
6 months
|
$1,637,000
|
23
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-09-04 to 2014-03-03
|
6 months
|
$1,637,000
|
24
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-09-10 to 2014-03-09
|
6 months
|
$1,637,000
|
25
|
Bank Borrowing
|
Industrial and Commercial Bank
of China
|
2013-09-11 to 2014-03-05
|
6 months
|
$818,500
|
26
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-09-13 to 2014-03-12
|
6 months
|
$4,911,000
|
27
|
Bank Borrowing
|
Puyang Commerical Bank
|
2013-09-17 to 2014-03-16
|
6 months
|
$1,637,000
|
28
|
Bank Borrowing
|
Industrial and Commercial Bank of China
|
2013-10-25 to 2014-01-30
|
4 months
|
$196,440
|
31
29
|
Bank Borrowing
|
Other
|
2013-10-28 to 2014-03-23
|
5 months
|
$49,110
|
30
|
Bank Borrowing
|
Agricultural Bank of China
|
2013-11-05 to 2014-05-05
|
6 months
|
$1,637,000
|
31
|
Bank Borrowing
|
Industrial and Commercial Bank
of China
|
2013-11-11 to 2014-05-06
|
6 months
|
$982,200
|
32
|
Bank Borrowing
|
China Minsheng Bank
|
2013-11-11 to 2014-11-11
|
1 year
|
$3,274,000
|
33
|
Bank Borrowing
|
Industrial and Commercial Bank
of China
|
2013-11-13 to 2014-05-05
|
6 months
|
$327,400
|
34
|
Bank Borrowing
|
Industrial and Commercial Bank of China
|
2013-11-13 to 2014-05-05
|
6 months
|
$130,960
|
35
|
Bank Borrowing
|
Agricultural Bank of China
|
2013-11-14 to 2014-05-13
|
6 months
|
$1,227,750
|
36
|
Bank Borrowing
|
Industrial and Commercial Bank of China
|
2013-11-26 to 2014-03-22
|
4 months
|
$327,400
|
37
|
Bank Borrowing
|
Industrial and Commercial Bank
of China
|
2013-11-26 to 2014-03-25
|
4 months
|
$114,590
|
38
|
Bank Borrowing
|
Other
|
2013-11-26 to 2014-04-11
|
5 months
|
$27,829
|
39
|
Bank Borrowing
|
Industrial and Commercial Bank
of China
|
2013-12-03 to 2014-05-27
|
6 months
|
$818,500
|
40
|
Bank Borrowing
|
Agricultural Bank of China
|
2013-12-04 to 2014-06-03
|
6 months
|
$1,637,000
|
41
|
Bank Borrowing
|
Agricultural Bank of China
|
2013-12-05 to 2014-06-04
|
6 months
|
$982,200
|
42
|
Bank Borrowing
|
Agricultural Bank of China
|
2013-12-09 to 2014-06-05
|
6 months
|
$1,637,000
|
43
|
Bank Borrowing
|
Other
|
2013-12-17 to 2014-03-26
|
4 months
|
$49,110
|
44
|
Bank Borrowing
|
China Minsheng Bank
|
2013-12-18 to 2014-06-10
|
6 months
|
$1,637,000
|
45
|
Bank Borrowing
|
Other
|
2013-12-23 to 2014-05-19
|
5 months
|
$32,740
|
46
|
Bank Borrowing
|
Other
|
2013-12-23 to 2014-06-05
|
6 months
|
$81,850
|
We have facility bank loans of approximately $29.9 million,
maturing from January 6, 2014 to October 15, 2014 and bank borrowings secured by
bank deposits of approximately $30.4 million. We will also consider refinancing
debts. However, we cannot provide assurance that we will be able to refinance
any of our debts on terms favorable to us in a timely manner.
Below is a brief summary of the payment obligations under
material contracts to which we are a party:
On January 7, 2013, our subsidiary, Refractories, entered into
a short-term working capital loan agreement with Zhengzhou Bank (ZB), whereby
ZB has agreed to loan approximately $4.9 million (RMB 30 million) to
Refractories for a term of one year, at an interest rate of 7.80% per year on
all outstanding principal.
On March 28, 2013, our subsidiary, Refractories, entered into a
short-term working capital loan agreement with Pingdingshan Bank (PB), whereby
PB has agreed to loan approximately $1.4 million (RMB 8.55 million) to
Refractories for a term of one year, at an interest rate of 6.60% per year on
all outstanding principal.
On April 10, 2013, our subsidiary, Refractories, entered into a
short-term working capital loan agreement with Luoyang Bank (LYB), whereby LYB
has agreed to loan approximately $3.3 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 May 8, 2013, our subsidiary, Refractories, entered into a
short-term working capital loan agreement with Agricultural Bank of China
(ABC), whereby ABC has agreed to loan approximately $1.6 million (RMB 10
million) to Refractories for a term of one year, at an interest rate of 8.53%
per year on all outstanding principal.
On May 14, 2013, our subsidiary, Duesail, entered into a
short-term working capital loan agreement with Bank of China (BC), whereby BC
has agreed to loan approximately $1.3 million (RMB 8 million) to Duesail for a
term of one year, at an interest rate of 7.86% per year on all outstanding
principal.
32
On May 31, 2013, our subsidiary, Duesail, entered into a
short-term working capital loan agreement with Kunlun Bank, (KB), whereby KB
has agreed to loan approximately $1.6 million (RMB 10 million) to Duesail for a
term of one year, at an interest rate of 8.70% per year on all outstanding
principal.
On June 24, 2013, 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
$737,000 (RMB 4.5 million) to Refractories for a term of one year, at an
interest rate of 6.06% per year on all outstanding principal.
On June 26, 2013, our subsidiary, Micronized, entered into a
short-term working capital loan agreement with China CITIC Bank (CITIC),
whereby CITIC has agreed to loan approximately $2.3 million (RMB 14 million) to
Micronized for a term of one year, at an interest rate of 6.60% per year on all
outstanding principal.
On June 27, 2013, our subsidiary, Refractories, entered into a
short-term working capital loan agreement with CITIC, whereby CITIC has agreed
to loan approximately $1.5 million (RMB 9 million) to Refractories for a term of
one year, at an interest rate of 6.60% per year on all outstanding
principal.
On June 28, 2013, our subsidiary, Refractories, entered into a
short-term working capital loan agreement with CITIC, whereby CITIC has agreed
to loan approximately $982,000 (RMB 6 million) to Refractories for a term of one
year, at an interest rate of 6.60% per year on all outstanding principal.
On August 22, 2013, our subsidiary, Refractories, entered into
a short term working capital loan agreement with SPDVB, whereby SPDVB has agreed
to loan approximately $819,000 (RMB5 million) to Refractories for a term of one
year, at an interest rate of 8.46% per year on all outstanding principal.
On August 22, 2013, our subsidiary, Duesail, entered into a
short-term working capital loan agreement with SPDVB, whereby SPDVB has agreed
to loan approximately $409,000 (RMB 2.5 million) to Duesail for a term of one
year, at an interest rate of 8.40% per year on all outstanding principal.
On August 23, 2013, our subsidiary, Duesail, entered into a
short-term working capital loan agreement with PB, whereby PB has agreed to loan
approximately $819,000 (RMB 5 million) to Duesail for a term of six months, at
an interest rate of 6.16% per year on all outstanding principal.
On August 27, 2013, our subsidiary, Refractories, entered into
a short-term working capital loan agreement with PB, whereby PB has agreed to
loan approximately $1.6 million (RMB 10 million) to Refractories for a term of
six months, at an interest rate of 6.16% per year on all outstanding principal.
On August 31, 2013, 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 $2.4 million
(RMB 14.5 million) to Refractories for a term of six months, at an interest rate
of 8.40% per year on all outstanding principal.
On September 2, 2013, our subsidiary, Duesail, entered into a
short-term working capital loan agreement with SPDVB, whereby SPDVB has agreed
to loan approximately $819,000 (RMB 5 million) to Duesail for a term of six
months, at an interest rate of 7.84% per year on all outstanding principal.
On September 11, 2013, our subsidiary, Refractories, entered
into a short-term working capital loan agreement with Shanghai Pudong
Development Bank (SPDB), whereby SPDB has agreed to loan approximately $2.9
million (RMB 18 million) to Refractories for a term of one year, at an interest
rate of 6.60% per year on all outstanding principal.
On October 16, 2013, our subsidiary, Refractories, entered into
a short-term working capital loan agreement with SPDVB, whereby SPDVB has agreed
to loan approximately $442,000 (RMB 2.7 million) to Refractories for a term of
one year, at an interest rate of 6.06% 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.
33
Restrictions on net assets also include the conversion of local
currency into foreign currencies, tax withholding obligations on dividend
distributions, the need to obtain State Administration of Foreign Exchange
approval for loans to a non-PRC consolidated entity and the covenants or
financial restrictions related to outstanding debt obligations. We did not have
these restrictions on our net assets as of December 31, 2013 and December 31,
2012.
The following table provides the amount of our statutory
reserves, special reserve, the amount of restricted net assets, consolidated net
assets, and the amount of restricted net assets as a percentage of consolidated
net assets, as of December 31, 2013 and December 31, 2012.
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Statutory reserves
|
$
|
4,685,523
|
|
$
|
4,554,936
|
|
Special reserve
|
|
3,556,036
|
|
|
3,556,036
|
|
Total restricted net assets
|
$
|
8,241,559
|
|
$
|
8,110,972
|
|
Consolidated net assets
|
$
|
22,866,306
|
|
$
|
40,331,549
|
|
Restricted net assets as percentage of
consolidated net assets
|
|
36.0%
|
|
|
20.1%
|
|
Total restricted net assets accounted for approximately 36.0%
of our consolidated net assets as of December 31, 2013. As our subsidiaries
usually set aside only 10% of after-tax net profits each year to fund the
statutory reserves and are not required to fund the statutory reserves when they
incur losses, we believe the potential impact of such restricted net assets on
our liquidity is limited.
Accounts Receivable and Bankers Acceptance Notes
Receivable
Accounts receivable represents amounts due to us by our
customers on the sale of products or services on credit.
Bankers acceptance notes 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. Bankers acceptance notes receivable can
be sold by us at a discount before maturity.
The following is the aging analysis for accounts receivable as
of December 31, 2013 and December 31, 2012:
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Due within 1 year
|
$
|
35,803,737
|
|
$
|
49,553,183
|
|
Due from 1 to 2 years
|
|
9,007,009
|
|
|
4,821,849
|
|
Due from 2 to 3 years
|
|
2,752,596
|
|
|
2,521,481
|
|
Due over 3 years
|
|
2,806,595
|
|
|
1,646,402
|
|
|
|
|
|
|
|
|
Total
|
$
|
50,369,937
|
|
$
|
58,542,915
|
|
The following is the aging analysis for notes receivable as of
December 31, 2013 and December 31, 2012:
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Due within 6 months
|
$
|
6,325,532
|
|
$
|
9,913,668
|
|
Total
|
$
|
6,325,532
|
|
$
|
9,913,668
|
|
34
We generally provide our customers in the refractories segment
with a payment period of 90 days and our customers in the fine precision
abrasives segment with a payment period of 180 days. As there are many producers
in the refractories and fine precision abrasives market competing with us, we
find it difficult to change these payment terms. The payment term for our other
segments varies by customers.
We noted that turnover days of accounts receivable in our
refractories segment increased in 2013 due to the macro economic situation.
However, we are usually willing to continue the relationship with our customers
in the refractory segment and allow for additional time for them to make
payments. In the meantime, since most of our large customers are state-owned
steel producers and our products are essential for their daily operations, we
have not seen a significant increase of risk related to the collection of
accounts receivables.
Critical Accounting Policies
Critical accounting policies and practices are those that are
both most important to the portrayal of the Companys financial condition and
results and require managements most difficult, subjective, or complex
judgments, often as a result of the need to make estimates about the effects of
matters that are inherently uncertain. The management of the Company considers
its significant and critical accounting policies and practices as follows:
Basis of Presentation
The Companys consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP).
Use of Estimates and Assumptions and Critical Accounting
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date(s) of the financial statements and the reported amounts
of revenues and expenses during the reporting period(s).
Critical accounting estimates are estimates for which (a) the
nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility
of such matters to change and (b) the impact of the estimate on financial
condition or operating performance is material. The Companys critical
accounting estimates and assumptions affecting the financial statements were:
|
(i)
|
Allowance for doubtful accounts
: Managements
estimate of the allowance for doubtful accounts is based on historical
sales, historical loss levels, and an analysis of the collectability of
individual accounts; and general economic conditions that may affect a
clients ability to pay. The Company evaluated the key factors and
assumptions used to develop the allowance in determining that it is
reasonable in relation to the financial statements taken as a
whole.
|
|
(ii)
|
Inventory obsolescence and markdowns
: The
Companys estimate of potentially excess and slow-moving inventories is
based on evaluation of inventory levels and aging, review of inventory
turns and historical sales experiences. The Companys estimate of reserve
for inventory shrinkage is based on the historical results of physical
inventory cycle counts.
|
|
(iii)
|
Fair value of long-lived assets
: Fair value is
generally determined using the assets expected future discounted cash
flows or market value, if readily determinable. If long-lived assets are
determined to be recoverable, but the newly determined remaining estimated
useful lives are shorter than originally estimated, the net book values of
the long-lived assets are depreciated over the newly determined remaining
estimated useful lives. The Company considers the following to be some
examples of important indicators that may trigger an impairment review:
(i) significant under-performance or losses of assets relative to expected
historical or projected future operating results; (ii) significant changes
in the manner or use of assets or in the Companys overall strategy with
respect to the manner or use of the acquired assets or changes in the
Companys overall business strategy; (iii) significant negative industry
or economic trends; (iv) increased competitive pressures; (v) a
significant decline in the Companys stock price for a sustained period of
time; and (vi) regulatory changes. The Company evaluates acquired assets
for potential impairment indicators at least annually and more frequently
upon the occurrence of such events.
|
|
(iv)
|
Valuation allowance for deferred tax assets
:
Management assumes that the realization of the Companys net deferred tax
assets resulting from its net operating loss (NOL) carryforwards for
Federal income tax purposes that may be offset against future taxable
income was not considered more likely than not and accordingly, the
potential tax benefits of the net loss carry-forwards are offset by a full
valuation allowance. Management made this assumption based on (a) the
Company has incurred recurring losses, (b) general economic conditions,
and (c) its ability to raise additional funds to support its daily
operations by way of a public or private offering, among other
factors.
|
|
(v)
|
Accrued warranty
: The Company estimates accrued
warranty costs at the time of sale of the total costs that the Company
will incur to repair or replace product parts that fail while still under
warranty. The amount of the accrued estimated warranty costs obligation
for established products is primarily based on historical experience as to
product failures adjusted for current information on repair costs. For new
products, estimates include the historical experience of similar products,
as well as reasonable allowance for warranty expenses associated with new
products.
|
|
(vi)
|
Revenue recognition
: The Company assumes all of
the revenue recognition criteria are met including reasonable assurance of
collectability when recognizing revenue. The Company evaluates the key
factors and assumptions used to determine the collectability of revenue being recognized.
|
35
|
(vii)
|
Sales returns and allowances:
Managements
estimate of sales returns and allowances is based on an analysis of
historical returns and allowance activity to establish a baseline reserve
level. The Company then evaluates whether there are any underlying product
quality or other customer specific issues that require additional specific
reserves above the baseline level.
|
These significant accounting estimates or assumptions bear the
risk of change due to the fact that there are uncertainties attached to these
estimates or assumptions, and certain estimates or assumptions are difficult to
measure or value.
Management bases its estimates on historical experience and on
various assumptions that are believed to be reasonable in relation to the
financial statements taken as a whole under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions
used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions.
After such evaluations, if deemed appropriate, those estimates are adjusted
accordingly.
Actual results could differ from those estimates.
Pledged Deposits
Pledged deposits consist of amounts held in financial
institutions for (i) open bankers acceptance notes payable maturing between
three and nine months from the date of issuance and (ii) outstanding loans
payable banks, secured, maturing one year from the date of signing.
The Company satisfies certain accounts payable, through
bankers acceptance notes issued by financial institutions to certain of the
Companys vendors. The issuing financial institutions of the bankers acceptance
notes require the Company to deposit certain percentage of the amount stipulated
under the bankers acceptance notes as collateral which will be released to the
Company as part of the payment toward bankers acceptance notes payable upon
maturity.
The Management of the Company believes that it is appropriate
to classify such amounts as current assets as these pledged deposits are of a
short term nature, three to nine months in length from the date of issuance.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable are recorded at the invoiced amount, net of
an allowance for doubtful accounts. The Company follows paragraph 310-10-50-9 of
the FASB Accounting Standards Codification to estimate the allowance for
doubtful accounts. The Company performs on-going credit evaluations of its
customers and adjusts credit limits based upon payment history and the
customers current credit worthiness, as determined by the review of their
current credit information; and determines the allowance for doubtful accounts
based on historical write-off experience, customer specific facts and economic
conditions.
Pursuant to paragraph 310-10-50-2 of the FASB Accounting
Standards Codification account balances are charged off against the allowance
after all means of collection have been exhausted and the potential for recovery
is considered remote. The Company has adopted paragraph 310-10-50-6 of the FASB
Accounting Standards Codification and determine when receivables are past due or
delinquent based on how recently payments have been received.
Outstanding account balances are reviewed individually for
collectability. The allowance for doubtful accounts is the Companys best
estimate of the amount of probable credit losses in the Companys existing
accounts receivable. Bad debt expense is included in general and administrative
expenses, if any.
The Company does not have any off-balance-sheet credit exposure
to its customers.
Revenue Recognition
The Company applies paragraph 605-10-S99-1 of the FASB
Accounting Standards Codification for revenue recognition. The Company
recognizes revenue when it is realized or realizable and earned. The Company
considers revenue realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the
product has been shipped or the services have been rendered to the customer,
(iii) the sales price is fixed or determinable, and (iv) collectability is
reasonably assured. In addition to the aforementioned general policy, the
following are the specific revenue recognition policies for each category of
revenue:
|
(i)
|
Sale of products:
The Company derives its revenue
from sales contracts with customers with revenue being generated upon the
shipment of merchandise. Persuasive evidence of an arrangement is
demonstrated via sales invoice or contract; product delivery is evidenced
by warehouse shipping log as well as a signed bill of lading from the
vessel or rail company and title transfers upon shipment, based on free on board (FOB)
warehouse terms; the sales price to the customer is fixed upon acceptance
of the signed purchase order or contract and there is no separate sales
rebate, discount, or volume incentive. When the Company recognizes
revenue, no provisions are made for returns because, historically, there
have been very few sales returns and adjustments that have impacted the
ultimate collection of revenue.
|
36
|
(ii)
|
Sale of products with services:
The Company
derives its revenue from sales contracts with customers with revenue being
generated upon completion of installation and testing services. The
Company initially signs a sale of products with services contract with its
customers for a fixed fee and delivers the products upon receipt of signed
contracts or purchase orders. After delivery of products to its customers,
the Company will perform the installation and testing services, which
usually takes one to two days, before acceptance and usage by customers.
The product can normally be used for approximately 80 cycles of production
by customers (about two to three days). Thereafter the customers will need
maintenance, repair and replacement of the Companys products. For each
maintenance, repair and replacement, the Company will supply products and
do the installation and testing work again, which are treated as separate
sales by the Company. The Company recognizes the revenue from the sale of
product with services when the significant risks and rewards of ownership
have been transferred to the buyer at the time when the installation and
testing are completed and accepted by customers, the sales price is fixed
upon acceptance of the signed purchase order or contract and collection is
reasonably assured.
|
Net sales of products represent the invoiced value of goods,
net of value added taxes (VAT). The Company is subject to VAT which is levied
on the majority of the Companys products at the rate of 17% on the invoiced
value of sales. Sales or Output VAT is borne by customers in addition to the
invoiced value of sales and Purchase or Input VAT is borne by the Company in
addition to the invoiced value of purchases to the extent not refunded for
export sales.
Recently Issued Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board, or
FASB, issued ASU No. 2013-04, "
Liabilities (Topic 405): Obligations Resulting
from Joint and Several Liability Arrangements for which the Total Amount of the
Obligation Is Fixed at the Reporting Date
." This ASU addresses the
recognition, measurement, and disclosure of certain obligations resulting from
joint and several arrangements including debt arrangements, other contractual
obligations, and settled litigation and judicial rulings. The ASU is effective
for public entities for fiscal years, and interim periods within those years,
beginning after December 15, 2013.
In March 2013, the FASB issued ASU No. 2013-05, "
Foreign
Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation
Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within
a Foreign Entity or of an Investment in a Foreign Entity
." This ASU
addresses the accounting for the cumulative translation adjustment when a parent
either sells a part or all of its investment in a foreign entity or no longer
holds a controlling financial interest in a subsidiary or group of assets that
is a nonprofit activity or a business within a foreign entity. The guidance
outlines the events when cumulative translation adjustments should be released
into net income and is intended by FASB to eliminate some disparity in current
accounting practice. This ASU is effective prospectively for fiscal years, and
interim periods within those years, beginning after December 15, 2013.
In March 2013, the FASB issued ASU 2013-07,
Presentation of
Financial Statements (Topic 205): Liquidation Basis of Accounting.
The
amendments require an entity to prepare its financial statements using the
liquidation basis of accounting when liquidation is imminent. Liquidation is
imminent when the likelihood is remote that the entity will return from
liquidation and either (a) a plan for liquidation is approved by the person or
persons with the authority to make such a plan effective and the likelihood is
remote that the execution of the plan will be blocked by other parties or (b) a
plan for liquidation is being imposed by other forces (for example, involuntary
bankruptcy). If a plan for liquidation was specified in the entitys governing
documents from the entitys inception (for example, limited-life entities), the
entity should apply the liquidation basis of accounting only if the approved
plan for liquidation differs from the plan for liquidation that was specified at
the entitys inception. The amendments require financial statements prepared
using the liquidation basis of accounting to present relevant information about
an entitys expected resources in liquidation by measuring and presenting assets
at the amount of the expected cash proceeds from liquidation. The entity should
include in its presentation of assets any items it had not previously recognized
under U.S. GAAP but that it expects to either sell in liquidation or use in
settling liabilities (for example, trademarks). The amendments are effective for
entities that determine liquidation is imminent during annual reporting periods
beginning after December 15, 2013, and interim reporting periods therein.
Entities should apply the requirements prospectively from the day that
liquidation becomes imminent. Early adoption is permitted.
Management does not believe that any other recently issued, but
not yet effective accounting pronouncements, if adopted, would have a material
effect on the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
As a smaller reporting company, as defined by Item 10 of
Regulation S-K, the Company is not required to provide this information.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
Consolidated Financial Statements
37
The financial statements required by this item begin on page
F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) that are designed to ensure that
information that would be required to be disclosed in Exchange Act reports is
recorded, processed, summarized and reported within the time period specified in
the SECs rules and forms, and that such information is accumulated and
communicated to our management, including to our Chief Executive Officer and
Interim Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our
management, including our Chief Executive Officer, Mr. Shunqing Zhang, and our
Interim Chief Financial Officer, Ms. Weina Zhang, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as of
December 31, 2013. Based on our assessment, Mr. Zhang and Ms. Zhang determined
that, as of December 31, 2013, our disclosure controls and procedures were
effective.
Internal Controls over Financial Reporting
Managements Annual Report on Internal Control over
Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Interim Chief Financial Officer,
and effected by our Board of Directors, management and other personnel, to
provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. GAAP, and includes those policies and procedures that:
|
1)
|
pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of
our assets;
|
|
|
|
|
2)
|
provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. GAAP, and that our receipts and expenditures are
being made only in accordance with the authorization of our management and
directors; and
|
|
|
|
|
3)
|
provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
|
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2013. In making this assessment,
management used the framework set forth in the report entitled Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on that evaluation, our management concluded that
our internal control over financial reporting was effective as of December 31,
2013.
The Companys management, including its Chief Executive Officer
and Interim Chief Financial Officer, does not expect that the Companys
disclosure controls and procedures and its internal control processes will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of error or
fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
the breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected. However, these
inherent limitations are known features of the financial reporting process.
Therefore, it is possible to design into the process safeguards to reduce,
though not eliminate, this risk.
38
The annual report does not include an attestation report of the
Companys registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by the
Companys registered accounting firm pursuant to temporary rules of the SEC that
permit the Company to provide only managements report in this annual report.
Changes in Internal Control
There has been no change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that
occurred during our fiscal quarter ended December 31, 2013 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Directors, Executive Officers, Promoter and Control Persons
Identification of Directors and Executive
Officers
The following sets forth the name and position of each of our
current executive officers and our directors. All directors of our Company hold
office until our next annual board meeting or until their successors have been
elected and qualified. The executive officers of our Company and operating
subsidiary are appointed by our board of directors and hold office until their
death, resignation or removal from office.
Name
|
Age
|
Date of Appt
.
|
Position
|
Shunqing Zhang
|
60
|
April 25,
2007
|
Chief Executive Officer,
President and Chairman
|
Weina Zhang
|
37
|
September 16, 2013
|
Interim Chief Financial Officer
|
Jingzhong Yu
|
49
|
November
18, 2009
|
Director
|
Ningsheng Zhou
|
55
|
July 15, 2011
|
Director
|
Hsin-I Lin
|
61
|
October 5,
2011
|
Director
|
Jeffrey Friedland
|
62
|
July 1, 2013
|
Director
|
There are no arrangements or understandings between our
directors and executive officers and any other person pursuant to which any
director or officer was or is to be selected as a director or officer, and there
are no arrangements, plans or understandings as to whether non-management
shareholders will exercise their voting rights to continue to elect the current
board of directors. There are also no arrangements, agreements or understandings
to our knowledge between non-management shareholders that may directly or
indirectly participate in or influence the management of our affairs.
Identification of Certain Significant
Employees
Other than the executive officers named above, the Company does
not have any significant employees.
Family Relationships
There are no family relationships among our directors or
officers.
Business Experience
The following is a brief account of the education and business
experience during at least the past five years of each director, executive
officer and key employee of our Company and operating subsidiary, indicating the
persons principal occupation during that period, and the name and principal
business of the organization in which such occupation and employment were
carried out.
39
Shunqing Zhang,
age 60. Mr. Zhang became CEO and
President of China GengSheng Minerals, Inc. on April 25, 2007 and has served as
Chairman of the Board since May 3, 2007. Mr. Zhang was elected Chairman of the
Board and CEO of Henan Gengsheng in December, 2005. Prior to that, he served as
President of Henan Gengsheng for June 2002 to December 2005, and served as
Chairman of the Board and President of the Gengsheng Industry Group of Henan
Province, from 1997 to 2002. Prior to that, Mr. Zhang served as Director of the
Academy of the Ministry of Metallurgy Lofa Resistance Associated Experimental
Plant in Gongyi City, a refractories manufacturer, from 1986 to 1997. Mr. Zhang
holds an associate degree from China Central Radio and TV University. In
December of 2008, Mr. Zhang was awarded the title of "Gongyi City's Most
Influential Person in the 30 Years of Opening & Reform" by the City of
Gongyi in Henan Province. In naming Mr. Zhang, the city cited his achievements
in creating jobs in the local community, stimulating the rapid growth of
Gongyi's economy and setting excellent examples of taking social
responsibilities. As Chief Executive Officer of the Company, Mr. Zhang provides
the Board with an intimate understanding of the Companys operations and
industry.
Weina Zhang,
age 37. Ms. Zhang has been serving as the
head of the Corporate Finance Department of Henan GengSheng High-Temperature
Materials Co., Ltd., a subsidiary of the Company, since 2002. She worked as the
head of the Audit Department of Henan GengSheng Refractories Co., Ltd., another
subsidiary of the Company, from January 2000 to December 2001. Prior to that,
Ms. Zhang was the secretary to the general manager of Henan GengSheng
Refractories Co., Ltd. from August 1997 to December 1999. Ms. Zhang received a
bachelors degree in accounting from Henan Industry University. Ms. Zhang is a
qualified accountant in China and holds the certification of Registered Advanced
Tax Planner.
Jingzhong Yu
, age 49. Prof. Yu currently is an
accounting professor at Zhongnan University of Economics and Law and has served
in such position since 1985. Prof. Yu also served as an investment advisor from
December 2003 to December 2007 to China Wanke Co., Ltd., which is a residential
property developer, 999 Group, which is a pharmaceutical manufacturing company,
Sanyi Group., Ltd., which is in the equipment and machinery manufacturing
business, and China National Salt Industry Corporation, which is in the business
of producing salt and salt chemicals. From December 2003 to June 2008, Prof. Yu
served as an investment advisor to China Tobacco Group, which manufactures
tobacco products. Prof. Yu serves as the chair of the Compensation Committee and
is a member of the Audit Committee and Nominating Committee of the Board.
Ningsheng Zhou
, age 55. Prof. Zhou has been a professor
and director of High Temperature Materials Institute of Henan University of
Science and Technology since 2004. From 2000 to 2004, he was a Vice President of
Luoyang Institute of Refractories Research (LIRR) in China. Mr. Zhou is an
expert in refractories R&D and applications with 30 years of experiences in
the refractory industry. Mr. Zhou received his Ph. D. degree from University of
Montreal in Canada in 2000 and a Master of Science degree in Inorganic
Non-Metallic Materials from LIRR in 1987. He received his Bachelor of Science
degree in Refractories Technology from Wuhan University of Science and
Technology in 1982 and also worked as a visiting scholar in Germany during 1991
and 1993.
Hsin-I Lin,
age 61. Mr. Lin has been with Rim Asia
Capital Partners since 2004, where he served as Partner. Prior to joining Rim
Asia Capital Partners, he worked as a Partner at SVO, from 2002-2004. Mr. Lin
has approximately twenty years of experience in business administration, direct
investment, corporate finance, and investment banking in the United States and
China. Mr. Lin received his B.A. from Tamkang University in Taiwan, his M.A.
from Waseda University in Japan, his M.B.A from Oklahoma City University in the
United States and his PhD in economics from Northwest University in China.
Jeffrey Friedland
, age 62. Mr. Friedland has been
Managing Director of the corporate finance advisory firm, Friedland Global
Capital Pte. Ltd. and its predecessor companies since 1979. Friedland Global
Capital provides client companies with assistance in achieving their business
planning and financing objectives. Mr. Friedland also has been the CEO of U.S.
based Global Corporate Strategies LLC, since 2011, a firm that provides liaison
services for non-U.S. companies in primarily the United States and Europe. Mr.
Friedland has traveled globally with management of companies based in the United
States and overseas, with the objective of assisting them in obtaining capital,
expanding globally and entering into strategic alliances. Mr. Friedland has been
featured or quoted in numerous publications including the Wall Street Journal,
USA Today, The South China Morning Post (Hong Kong) and Forbes and on Bloomberg
Radio, and Bloomberg Television. Mr. Friedland has been a frequent speaker at
various tradeshows, conferences, conventions and meetings throughout North
America, Europe and Asia, including as a panel participant at a Bloomberg
Chinese equities conference in London. Mr. Friedland holds a BS in Business from
University of Colorado.
Except as noted above, there are no other agreements or
understandings for any of our executive officers or directors to resign at the
request of another person and no officer or director is acting on behalf of nor
will any of them act at the direction of any other person. Directors are elected
until their successors are duly elected and qualified.
Board Meetings and Committees
Board Composition
. All actions of board of directors
require the approval of a majority of the directors in attendance at a meeting
at which a quorum is present. Our board of directors is composed of Mr. Shunqing
Zhang, who is also our President and Chief Executive Officer, Mr. Jingzhong Yu,
Mr. Ningsheng Zhou, Mr. Hsin-I Lin and Mr. Jeffrey Friedland. The Board has
determined that the following directors, who constitute a majority of the Board
(three), are independent in accordance with the NYSE MKT and SEC rules governing
director independence: Jeffrey Friedland, Jingzhong Yu and Hsin-I Lin.
40
Meetings of the Board of Directors.
During 2013, the
Board of Directors met fourteen times. During that period, each of the incumbent
directors attended 100% of the aggregate number of meetings held by the Board
and by each of the committees on which such director served.
Board Committees.
Our Board of Directors currently has
three standing committees: the Audit Committee, the Compensation Committee and
the Nominating Committee. The principal functions and the names of the directors
currently serving as members of each of those committees are set forth below. In
accordance with applicable NYSE MKT and SEC requirements, the Board of Directors
has determined that each director serving on the Audit, Compensation and
Nominating committees is an independent director.
Audit Committee
. The Audit Committee assists the Board
in fulfilling its oversight responsibilities with respect to our financial
matters. The Audit Committee operates under a written charter, a copy of which
is available on our website at
www.gengsheng.com
under the heading
Investor Relations. Under the charter, the committees principal
responsibilities include reviewing our financial statements, reports and
releases; reviewing with the independent auditor all critical accounting
policies and alternative treatments of financial information under generally
accepted accounting principles; and appointing, compensating, retaining and
overseeing the work of the independent auditor.
The Audit Committee met six times during 2013. The current
members of the Audit Committee are Jeffrey Friedland (Chairman), Jingzhong Yu
and Hsin-I Lin. The Board of Directors has determined that Mr. Friedland is an
audit committee financial expert, as that term is defined in SEC rules.
Compensation Committee
. The Compensation Committee has
the primary authority to determine our compensation philosophy and to establish
compensation for our executive officers. The Compensation Committee operates
under a written charter, a copy of which is available on our website at
www.gengsheng.com
under the heading Investor Relations. Under the
charter, the committees principal responsibilities include making
recommendations to the Board on the Companys compensation policies, determining
the compensation of senior management, making recommendations to the Board on
the compensation of independent directors and approving performance-based
compensation.
The Compensation Committee met three times during 2013. The
current members of the Compensation Committee are Jingzhong Yu (Chairman),
Hsin-I Lin and Jeffrey Friedland.
Nominating Committee
. The Nominating Committee provides
for the nomination of persons to serve on our Board. The qualifications of
recommended candidates also will be reviewed and approved by the full Board. The
Committee considered the following factors when qualifying candidates: current
composition of the Board and the characteristics of each candidate under
consideration, including that candidates competencies, experience, reputation,
integrity, independence, potential for conflicts of interest and other
appropriate qualities. When considering a director standing for re-election, in
addition to the factors described above, the Committee considers that
individuals past contribution and future commitment to the Company. The
independent directors evaluate all candidates, regardless of the source from
which the candidate was first identified, based upon the totality of the merits
of each candidate and not based upon minimum qualifications or attributes. The
Nominating Committee operates under a written charter, a copy of which is
available on our website at
www.gengsheng.com
under the heading Investor
Relations.
The Nominating Committee met three times during 2013. The
current members of the Nominating Committee are Hsin-I Lin (Chairman), Jingzhong
Yu and Jeffrey Friedland.
Material Changes to the Procedures by which Security Holders
May Recommend Nominees to the Board of Directors
There have been no material changes to the procedures by which
security holders may recommend nominees to the Board of Directors.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none
of our officers or directors were involved in any of the following: (1) any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time; (2) any conviction in a criminal proceeding
or being subject to a pending criminal proceeding (excluding traffic violations
and other minor offenses); (3) being subject to any order, judgment, or decree,
not subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business, securities or
banking activities; and (4) being found by a court of competent jurisdiction (in
a civil action), the Commission or the Commodities Futures Trading Commission to
have violated a federal or state securities or commodities law, and the judgment
has not been reversed, suspended or vacated.
Section 16(a) Beneficial Ownership Reporting Compliance
41
Under U.S. securities laws, directors, certain executive
officers and persons holding more than 10% of our common stock must report their
initial ownership of the common stock, and any changes in that ownership, to the
SEC. The SEC has designated specific due dates for these reports. Based solely
on our review of the copies of such reports received by us and on written
representations by our officers and directors regarding their compliance with
the applicable reporting requirements under Section 16(a) of the Exchange Act,
we believe that, with respect to the fiscal year ended December 31, 2013, our
officers and directors, and all of the persons known to us to own more than 10%
of our common stock, filed all required reports on a timely basis.
Code of Ethics
On April 25, 2007, our then sole director adopted a code of
ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 that applies to
all of our directors, officers and employees, including our principal executive
officer, principal financial officer, and principal accounting officer. The code
of ethics is designed to deter wrongdoing and to promote:
-
Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships;
-
Full, fair, accurate, timely and understandable disclosure in reports and
documents that we file with, or submit to, the SEC, and in other public
communications that we made;
-
Compliance with applicable government laws, rules and regulations;
-
The prompt internal reporting of violations of the code to the appropriate
person or persons; and
-
Accountability for adherence to the code.
The code requires the highest standard of ethical conduct and
fair dealing of its senior financial officers, or SFO, defined as the Chief
Executive Officer and Interim Chief Financial Officer. While this policy is
intended to only cover the actions of the SFO, in accordance with
Sarbanes-Oxley, we expect our other officers, directors and employees will also
review our code and abide by its provisions. We believe that our reputation is a
valuable asset and must continually be guarded by all associated with us so as
to continue the trust, confidence and respect of our suppliers, customers and
stockholders.
Our SFO are committed to conducting business in accordance with
the highest ethical standards. The SFO must comply with all applicable laws,
rules and regulations. Furthermore, SFO must not commit an illegal or unethical
act, or instruct or authorize others to do so.
Board Leadership Structure and Role in Risk Oversight
Mr. Shunqing Zhang is our chairman and chief executive officer.
We have three independent directors. Our lead independent director is Jeffrey
Friedland. Our Board has three standing committees, each of which is comprised
solely of independent directors with a committee chair. The Board believes that
the Companys chief executive officer is best situated to serve as Chairman of
the Board because he is the director most familiar with our business and
industry and the director most capable of identifying strategic priorities and
executing our business strategy. In addition, having a single leader eliminates
the potential for confusion and provides clear leadership for the Company. We
believe that this leadership structure has served the Company well.
Our Board of Directors has overall responsibility for risk
oversight. The Board has delegated responsibility for the oversight of specific
risks to Board committees as follows:
-
The Audit Committee oversees the Companys risk policies and processes
relating to the financial statements and financial reporting processes, as
well as key credit risks, liquidity risks, market risks and compliance, and
the guidelines, policies and processes for monitoring and mitigating those
risks.
-
The Nominating Committee oversees risks related to the Companys
governance structure and processes.
Our Board of Directors is responsible to approve all related
party transactions. We have not adopted written policies and procedures
specifically for related person transactions.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
42
The following table sets forth information concerning all cash
and non-cash compensation awarded to, earned by or paid to the following persons
for services rendered in all capacities during the noted periods: Shunqing
Zhang, our President and Chief Executive Office, Shuxian Li, our former interim
Chief Financial Officer and Weina Zhang, our current interim Chief Financial
Officer.
No executive officers salary and bonus exceeded $100,000 in
any of the applicable years. The following information includes the dollar value
of base salaries, bonus awards, the number of stock options granted and certain
other compensation, if any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
Name and
principal
position
|
Year
|
Salary
($)
|
($)
|
Stock awards
($)
|
Option
awards
($)
|
Nonequity incentive
plan
compensation
($)
|
Nonqualified
deferred
compensation
earnings
($)
|
All other
compensation
($)
|
Total
($)
|
Shunqing Zhang,
Chairman, CEO, President
|
2013
|
48,450
|
-
|
-
|
-
|
-
|
-
|
-
|
48,450
(1)
|
2012
|
47,520
|
-
|
-
|
-
|
-
|
-
|
-
|
47,520
(1)
|
Weina Zhang
,
Interim CFO
|
2013
|
3,768
|
-
|
-
|
-
|
-
|
-
|
-
|
3,768
|
2012
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Shuxian Li,
former Interim CFO
(2)
|
2013
|
19,380
|
-
|
-
|
-
|
-
|
-
|
-
|
19,380
|
2012
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1)
|
Mr. Zhang took a voluntary pay cut in 2012 and
2013.
|
(2)
|
Ms. Li resigned as our interim CFO on September 16,
2013.
|
Outstanding Equity Awards at Fiscal Year End
None.
Employment Agreement
As required by applicable PRC law, we have entered into
employment agreements with most of our officers, managers and employees. We have
employment agreements with the following named executive officers:
Shunqing Zhang
. Mr. Zhangs preliminary employment
agreement became effective as of January 1, 2007 and expired on December, 31,
2009. We have renewed his employment agreement in January 2010 and 2012, which
continue on a year-to-year basis unless terminated by either party on not less
than 30 days notice. Mr. Zhang is entitled to an annual salary of RMB 500,000
(approximately $80,750) under the agreement but voluntarily received a reduced
salary of approximately $48,450 and $47,520 during the fiscal year of 2013 and
2012.
Shuxian Li.
Ms. Li was appointed the interim Chief
Financial Officer of the Company on January 11, 2013. Pursuant to the employment
agreement dated January 11, 2013 between the Company and Ms. Li, Ms. Li will be
entitled to an annual salary of Renminbi 180,000 (approximately $29,070) and
will serve as the Companys interim Chief Financial Officer until a suitable
candidate for Chief Financial Officer has been qualified and selected by the
Company. On September 16, 2013, Ms. Li resigned as our interim Chief Financial
Officer.
Weina Zhang.
Ms. Zhang was appointed the interim Chief
Financial Officer of the Company on September 16, 2013. Pursuant to the
employment agreement dated September 16, 2013 between the Company and Ms. Zhang,
Ms. Zhang will be entitled to an annual salary of Renminbi 70,000 (approximately
$11,305) and will serve as the Companys interim Chief Financial Officer until a
suitable candidate for Chief Financial Officer has been qualified and selected
by the Company.
Director Compensation
On November 18, 2009, we appointed Mr. Jingzhong Yu as our
independent director, with engagement term to be one year, renewable for
additional one year terms unless terminated by 30 days notice. On July 15,
2011, we appointed Mr. Ningsheng Zhou as our director for one year, renewable for additional one year terms unless
terminated by 30 days notice. On October 5, 2011, we appointed Mr. Hsin-I Lin
as our independent director, with engagement term to be one year, renewable for
additional one year terms unless terminated by 30 days notice. On July 1, 2013,
we appointed Mr. Jeffrey Friedland as our independent director, until he fails
to be re-elected at an annual general meeting of the Company or until
termination by the Company or his resignation. Our board consists of five
members, including the CEO, Mr. Shunqing Zhang, sits as the Chairman, Mr.
Ningsheng Zhou, and along with the three independent directors. During the
fiscal year of 2013 we did not pay Mr. Shunqing Zhang any compensation for his
services as our director. For their function as directors, we paid Mr. Zhou, Mr.
Yu, Mr. Lin and Mr. Friedland in the amount of $19,380 (RMB 120,000), $8,075
(RMB 50,000), $25,000 and $12,500 respectively. We do reimburse our directors
for reasonable travel expenses related to duties as a director.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth information regarding beneficial
ownership of our common stock as of April 14, 2014 (i) by each person who is
known by us to beneficially own more than 5% of our common stock; (ii) by each
of our officers and directors; and (iii) by all of our officers and directors as
a group.
Unless otherwise specified, the address of each of the persons
set forth below is in care of GengSheng International, No. 88 Gengsheng Road,
Dayugou Town, Gongyi, Henan, China 451271.
Name & Address of Beneficial
Owner
|
Office, if Any
|
Title of Class
|
Amount
& Nature of
Beneficial Ownership
(1)
|
Percent of
Class
(2)
|
Officers and
Directors
|
Shunqing Zhang
|
CEO, President and Director
|
Common Stock, $0.001 par value
|
15,231,748
|
56.83%
|
Weina Zhang
|
Interim Chief Financial
Officer
|
Common Stock, $0.001 par
value
|
0
|
*
|
Jingzhong Yu
|
Independent Director
|
Common Stock, $0.001 par value
|
0
|
*
|
Ningsheng Zhou
|
Director
|
Common Stock, $0.001 par
value
|
0
|
*
|
Hsin-I Lin
|
Independent Director
|
Common Stock, $0.001 par value
|
0
|
*
|
Jeffrey Friedland
|
Independent Director
|
Common Stock, $0.001 par
value
|
0
|
*
|
All officers and directors as a group (6 persons named
above)
|
|
Common Stock, $0.001 par value
|
15,231,748
|
56.83%
|
* Less than 1%
1
Beneficial ownership is determined in accordance
with the rules of the SEC and generally includes voting or investment power with
respect to securities. Each of the beneficial owners listed above has direct
ownership of and sole voting power and investment power with respect to the
shares of our common stock.
2
As of April 14, 2014, a total of 26,803,044 shares
of our common stock are considered to be outstanding pursuant to SEC Rule
13d-3(d)(1). For each beneficial owner above, any options, warrants and other
convertible securities exercisable within 60 days have been included in the
denominator.
Changes in Control
There are no arrangements known to us, including any pledge by
any person of our securities, the operation of which may at a subsequent date
result in a change in control of our Company.
44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
During the year of 2012, Mr. Shunqing Zhang, our Chairman and
Chief Executive Officer, loaned the Company an aggregate of $158,400. The loans
are interest free and unsecured. During the year of 2013, the Company repaid Mr.
Zhang $140,386 and the outstanding balance is $18,014 as of the date of this
report.
Additionally, Mr. Zhang also guaranteed a short term loan for
the Company from a third party company of $3,170,000 in 2012, with an interest
of $24% per annum. The loan was fully settled on March 11, 2013.
In 2013, Mr. Zhang guaranteed (a) a short term loan for the
Company from a third party company of $2,046,250, with an interest rate of
$21.6% per annum, which was fully settled in February 2014, and (b) a short term
loan for the Company from a third party company of $1,637,000, with an interest
rate of 24% per annum. The loan will mature on June 5, 2014.
Except described above, there were no other material
transactions, or series of similar transactions, during our last two fiscal
year, or any currently proposed transactions, or series of similar transactions,
to which our Company or any of our subsidiaries was or is to be a party, in
which the amount involved exceeded the lesser of $120,000 and in which any
director, executive officer or any security holder who is known to us to own of
record or beneficially more than five percent of any class of our common stock,
or any member of the immediate family of any of the foregoing persons, had an
interest.
Related Person Transaction Policy
The Companys board of directors has not adopted a written
Related Person Transaction Policy that requires the board of directors or Audit
Committee to approve or ratify transactions between the Company or one or more
of its subsidiaries and any related person involving an amount in excess of
$120,000; however, all related party transactions that has not been previously
approved or previously ratified during the two most recent reporting period have
been ratified by the Company's board of directors and audit committee as of the
date when the financial statements were issued.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PKF Hong Kong was our independent registered public accounting
firm engaged to examine our consolidated financial statements from the date of
recapitalization on April 25, 2007 to December 7, 2012.
EFP Rotenberg, LLP was our independent registered public
accounting firm engaged to examine our consolidated financial statements from
January 2, 2013 to June 28, 2013.
Li and Company, PC was appointed our independent registered
public accounting firm on July 19, 2013.
Fees for the fiscal years ended December 31, 2013 and
2012
Audit Fees
.
PKF Hong Kong, was paid
aggregate fees of approximately $45,144 for the reviews of the financial
statements for the quarters ended March 31, 2012, June 30, 2012 and September
30, 2012.
EFP Rotenberg, LLP was paid aggregate fee of approximately
$18,400 for the review of the financial statements for the quarter ended March
31, 2013 and approximately $140,000 for professional services rendered for the
audit of our annual financial statements for the year ended December 31, 2012.
Li and Company, PC was paid aggregate fee of approximately
$20,000 for the review of the financial statements for the quarters ended June
30, 2013 and September 30, 2013.
Audit Related Fees
.
Our auditors were not
paid additional fees for the fiscal years ended December 31, 2013 and December
31, 2012 for assurance and related services reasonably related to the
performance of the audit or review of our financial statements.
Tax Fees
.
We did not pay our auditors any
fees for the fiscal years ended December 31, 2013 and December 31, 2012 for
professional services rendered for tax compliance, tax advice and tax planning.
This service was not provided.
All Other Fees.
Li and Company, PC was paid
$1,500 for its service of verifying restricted cash at June 30, 2013 per the
request of NYSE MKT LLC. We did not pay our auditors any
other fees for professional services during the fiscal year ended December 31, 2012.
Policy on Audit Committee Pre-Approval of Audit and
Permissible Non-Audit Services of Independent Auditors
Our audit committee and board of directors reviewed and
approved all audit services provided by our auditors, and has determined that
our auditors provision of such services to us during 2013 and 2012 is
compatible with and did not impair their independence. It is the practice of our
audit committee and board of directors to consider and approve in advance all
auditing services provided to us by our independent auditors.
45
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
Exhibit No.
|
Description
|
2.1
|
Share Exchange Agreement, dated April 25, 2007, among the
Registrant, Gengsheng International and Shunqing Zhang [Incorporated by
reference to Exhibit 2.1 to the Registrants current report on Form 8-K
filed on April 27, 2007].
|
3.1
|
Articles of Incorporation of the Registrant as filed with
the Secretary of State of the State of Nevada on May 22, 2006
[Incorporated by reference to Exhibit 3i.1 to the Registrants current
report on Form 8-K filed on October 10, 2006].
|
3.2
|
Articles of Merger of the Registrant as filed with the
Secretary of State of the State of Nevada on August 15, 2006 [Incorporated
by reference to Exhibit 3i.2 to the Registrants current report on Form
8-K filed on October 10, 2006,].
|
3.3
|
Certificate of Amendment to Articles of Incorporation as
filed with the Secretary of State of the State of Nevada [Incorporated by
reference to Exhibit 3.1 to the Registrants current report on Form 8-K
filed on December 13, 2006].
|
3.4
|
Certificate of Correction as filed with the Secretary of
State of the State of Nevada on April 17, 2007 [Incorporated by reference
to Exhibit 3.4 to the Registrants current report on Form 8-K filed on
April 27, 2007].
|
3.5
|
Amended and Restated Bylaws of the Registrant, adopted on
May 23, 2006 [Incorporated by reference to Exhibit 3.5 to the Registrants
current report on Form 8-K filed on April 27, 2007].
|
4.1
|
Form of Registration Rights Agreement, dated April 25,
2007 [Incorporated by reference to Exhibit 4.1 to the Registrants current
report on Form 8-K filed on April 27, 2007].
|
10.1
|
Employment Agreement, dated January 1, 2012, by and
between China GengSheng Minerals, Inc. and Shunqing Zhang [Incorporated by
reference to Exhibit 10.1 to the Registrants annual report on Form 10-K
filed on April 15, 2013].
|
10.2
|
Agreement, dated June 19, 2011, by and between Zhengzhou
Duesail Fracture Proppant Co., Ltd. and another party. (confidential
treatment has been requested with respect to certain portions of this
agreement) [Incorporated by reference to Exhibit 10.1 to the Registrants
current report on Form 8-K filed on June 23, 2011]
|
10.3
|
Subscription Agreement dated March 31, 2011, by and
between China GengSheng Minerals, Inc. and Yili Yiqiang Silicon Company
(the Silicon) and Silicons two shareholders [Incorporated by reference
to Exhibit 10.1 to the Registrants current report on Form 8-K filed on
April 6, 2011]
|
10.4
|
Employment Agreement, dated January 11, 2013, by and
between Ms. Shuxian Li and the Company [Incorporated by reference to
Exhibit 10.1 to the Registrations current report on Form 8-K filed on
January 14, 2013].
|
10.5
|
Appointment Letter for Jeffrey Friedland, dated July 1,
2013 [Incorporated by reference to Exhibit 20.1 to the Registrants
current report on Form 8-K filed on July 5, 2013]
|
14
|
Business Ethics Policy and Code of Conduct, adopted on
April 25, 2007 [Incorporated by reference to Exhibit 14 to the
Registrants current report on Form 8-K filed on April 27, 2007].
|
21.1
|
Subsidiaries of the Registrant. [Incorporated by
reference to Exhibit 21 to the Registrants current report on Form 8-K
field on April 16, 2012.]
|
31.1
|
Certification of Principal Financial Officer filed
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
46
101.INS
|
XBRL Instance Document*
|
101.SCH
|
XBRL Taxonomy Extension Schema*
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase*
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase*
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase*
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase*
|
Notes to exhibits
* Filed herewith
*Furnished herewith
47
China GengSheng Minerals, Inc.
December 31, 2013 and 2012
Index to the Consolidated Financial Statements
Contents
|
Page(s)
|
|
|
Report of Independent Registered
Public Accounting Firm
|
F-2
|
|
|
Report of Independent Registered
Public Accounting Firm
|
F-3
|
|
|
Consolidated Balance Sheets at
December 31, 2013 and 2012
|
F-4
|
|
|
Consolidated Statements of Operations
for the Year Ended December 31, 2013 and 2012
|
F-5
|
|
|
Consolidated Statement of
Stockholders Equity for the Year Ended December 31, 2013 and
2012
|
F-6
|
|
|
Consolidated Statements of Cash Flows
for the Year Ended December 31, 2013 and 2012
|
F-7
|
|
|
Notes to the Consolidated Financial
Statements
|
F-8
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
China
GengSheng Minerals, Inc.
We have audited the accompanying consolidated balance sheet of
China GengSheng Minerals, Inc. (the "Company") as of December 31, 2013, and the
related consolidated statements of operations and comprehensive loss,
stockholders equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
The balance sheet of the Company as of December 31, 2012 and
the related statements of operations and comprehensive loss, stockholders
equity and cash flows for the year then ended was audited by another independent
registered public accounting firm whose report was dated April 15, 2013. The
other independent registered public accounting firms report has been furnished
to us, and our opinion, insofar as it relates to amounts included for such prior
period, is based solely on the report of such other independent registered
public accounting firm.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 2013, and the consolidated results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3 to the consolidated financial statements, the Company had working capital
deficiency at December 31, 2013 and a net loss for the reporting period then ended. These factors raise substantial doubt about the Companys ability to
continue as a going concern. Managements plans in regards to these matters are
also described in Note 3. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/Li and Company, PC
Li and Company,
PC
Skillman, New Jersey
April 15, 2014
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of:
China
GengSheng Minerals, Inc.
We have audited the accompanying consolidated balance sheet of
China GengSheng Minerals, Inc. and its subsidiaries (the "Company") as of
December 31, 2012, and the related consolidated statements of operations and
comprehensive loss, stockholders equity and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 2012, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ EFP Rotenberg, LLP
EFP Rotenberg, LLP
Certified
Public Accountants
Rochester, New York
April 15, 2013
F - 3
China GengSheng Minerals, Inc.
Consolidated Balance
Sheets
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
$
|
1,169,371
|
|
$
|
5,408,309
|
|
Pledged deposits
|
|
29,061,661
|
|
|
27,079,527
|
|
Banker's acceptance notes receivable
|
|
6,325,532
|
|
|
9,913,668
|
|
Accounts receivable, net
|
|
45,291,341
|
|
|
55,811,468
|
|
Inventories, net
|
|
13,044,545
|
|
|
12,971,168
|
|
Prepayments and other current
assets
|
|
5,077,041
|
|
|
9,509,182
|
|
Deferred tax
assets
|
|
2,502
|
|
|
210,544
|
|
Total
current assets
|
|
99,971,993
|
|
|
120,903,866
|
|
Investment in a
non-consolidated entity
|
|
|
|
|
|
|
Investment
|
|
972,386
|
|
|
1,040,492
|
|
Accumulated
earnings and losses
|
|
-
|
|
|
-
|
|
Investment
in a non-consolidated entity, net
|
|
972,386
|
|
|
1,040,492
|
|
Property, plant and equipment
|
|
|
|
|
|
|
Property, plant and equipment
|
|
51,383,596
|
|
|
47,273,179
|
|
Accumulated
depreciation
|
|
(14,422,743
|
)
|
|
(10,848,175
|
)
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
36,960,853
|
|
|
36,425,004
|
|
Land use rights
|
|
|
|
|
|
|
Land use rights
|
|
4,536,072
|
|
|
4,427,495
|
|
Accumulated amortization
|
|
(492,512
|
)
|
|
(391,547
|
)
|
Land use rights, net
|
|
4,043,560
|
|
|
4,035,948
|
|
Total Assets
|
$
|
141,948,792
|
|
$
|
162,405,310
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Loans payable
|
$
|
76,267,390
|
|
$
|
75,127,348
|
|
Banker's
acceptance notes payable
|
|
10,460,430
|
|
|
13,995,550
|
|
Accounts payable
|
|
24,372,133
|
|
|
23,808,926
|
|
Accrued warranty
|
|
76,961
|
|
|
100,570
|
|
Corporate tax payable
|
|
170,333
|
|
|
166,719
|
|
Value added tax
and other taxes payable
|
|
2,670,647
|
|
|
2,979,261
|
|
Accrued expenses and other
current liabilities
|
|
4,468,946
|
|
|
4,581,885
|
|
Deferred tax
liabilities
|
|
396,629
|
|
|
513,524
|
|
Unearned government grants
|
|
98,220
|
|
|
649,612
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
118,981,689
|
|
|
121,923,395
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
118,981,689
|
|
|
121,923,395
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
CHGS stockholders' equity
|
|
|
|
|
|
|
Preferred stock par value $0.001: 50,000,000
shares
authorized;
none
issued or outstanding
|
|
-
|
|
|
-
|
|
Common stock
par value $0.001: 100,000,000 shares authorized,
26,803,044 shares
issued and outstanding
|
|
26,803
|
|
|
26,803
|
|
Additional
paid-in capital
|
|
28,197,310
|
|
|
28,197,310
|
|
Statutory and other
reserves
|
|
8,241,559
|
|
|
8,110,972
|
|
Retained
earnings (accumulated deficits)
|
|
(22,309,574
|
)
|
|
(3,997,894
|
)
|
Accumulated
other comprehensive income (loss):
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
8,710,208
|
|
|
7,994,358
|
|
|
|
|
|
|
|
|
Total CHGS stockholders' equity
|
|
22,866,306
|
|
|
40,331,549
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
100,797
|
|
|
150,366
|
|
|
|
|
|
|
|
|
Total equity
|
|
22,967,103
|
|
|
40,481,915
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
$
|
141,948,792
|
|
$
|
162,405,310
|
|
See accompanying notes to the consolidated financial
statements.
F-4
China GengSheng Minerals, Inc.
Consolidated Statements of Operations and Other Comprehensive
Income (Loss)
|
|
For the Year
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
60,881,377
|
|
$
|
73,534,827
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
52,814,862
|
|
|
60,885,990
|
|
|
|
|
|
|
|
|
Gross margin
|
|
8,066,515
|
|
|
12,648,837
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
Bad debt expense
|
|
6,946,970
|
|
|
1,730,835
|
|
Selling expenses
|
|
4,803,553
|
|
|
9,629,997
|
|
Research and development
|
|
1,394,331
|
|
|
923,403
|
|
General and administrative
expenses
|
|
6,957,202
|
|
|
7,318,775
|
|
Impairment of fixed assets
|
|
-
|
|
|
287,247
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
20,102,056
|
|
|
19,890,257
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(12,035,541
|
)
|
|
(7,241,420
|
)
|
|
|
|
|
|
|
|
Other (income) expense
|
|
|
|
|
|
|
Interest income
|
|
(1,181,389
|
)
|
|
(813,049
|
)
|
Interest expense and banker's acceptance notes
discount
|
|
7,743,649
|
|
|
7,300,886
|
|
Government grant
|
|
(1,162,913
|
)
|
|
(558,665
|
)
|
CHGS share of net loss from a non-consolidated
entity
|
|
100,868
|
|
|
59,143
|
|
Loan guarantee income
|
|
(338,285
|
)
|
|
(562,847
|
)
|
Loan guarantee expense
|
|
256,785
|
|
|
461,578
|
|
Other (income) expense
|
|
496,875
|
|
|
(25,845
|
)
|
|
|
|
|
|
|
|
Other (income)
expense, net
|
|
5,915,590
|
|
|
5,861,201
|
|
|
|
|
|
|
|
|
Loss before income tax provision
|
|
(17,951,131
|
)
|
|
(13,102,621
|
)
|
|
|
|
|
|
|
|
Income tax provision
|
|
291,340
|
|
|
492,289
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
Net loss before non-controlling interest
|
|
(18,242,471
|
)
|
|
(13,594,910
|
)
|
Net loss attributable to
non-controlling interest
|
|
(61,378
|
)
|
|
(55,456
|
)
|
|
|
|
|
|
|
|
Net loss
attributable to CHGS stockholders
|
|
(18,181,093
|
)
|
|
(13,539,454
|
)
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
FX translation loss before non-controlling
interest
|
|
727,659
|
|
|
292,439
|
|
FX translation loss
attributable to non-controlling interest
|
|
11,809
|
|
|
11,422
|
|
|
|
|
|
|
|
|
Other
comprehensive loss attributable to CHGS stockholders
|
|
715,850
|
|
|
281,017
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
Comprehensive loss before non-controlling
interest
|
|
(17,514,812
|
)
|
|
(13,302,471
|
)
|
Comprehensive loss
attributable to non-controlling interest
|
|
(49,569
|
)
|
|
(44,034
|
)
|
|
|
|
|
|
|
|
Comprehensive
loss attributable to CHGS stockholders
|
$
|
(17,465,243
|
)
|
$
|
(13,258,437
|
)
|
|
|
|
|
|
|
|
Net loss per common share - Basic and
diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share -
basic and diluted
|
$
|
(0.65
|
)
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
Weighted Average Common Shares
Outstanding - basic and diluted
|
|
26,803,044
|
|
|
26,803,044
|
|
See accompanying notes to the consolidated financial
statements.
F-5
China GengSheng Minerals, Inc.
Consolidated Statement of
Equity
For the Year Ended December 31, 2013 and
2012
|
|
CHGS Stockholders' Equity
|
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
Common Stock Par Value $0.001
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Statutory
|
|
|
Retained Earnings
|
|
|
Foreign Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
Total Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Paid-in
|
|
|
and other
|
|
|
(Accumulated
|
|
|
Translation Gain
|
|
|
Total CHGS
|
|
|
Capital
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Translation Gain
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
reserves
|
|
|
Deficit)
|
|
|
(Loss)
|
|
|
Stockholders' Equity
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss)
|
|
|
Interest
|
|
|
Total Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2011
|
|
26,803,044
|
|
$
|
26,803
|
|
|
28,197,310
|
|
$
|
8,110,972
|
|
$
|
9,541,560
|
|
$
|
7,713,341
|
|
$
|
53,589,986
|
|
|
19,400
|
|
$
|
289,917
|
|
$
|
(48,282
|
)
|
$
|
(47,235
|
)
|
$
|
194,400
|
|
$
|
53,784,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,539,454
|
)
|
|
|
|
|
(13,539,454
|
)
|
|
|
|
|
|
|
|
(55,456
|
)
|
|
|
|
|
(55,456
|
)
|
|
(13,594,910
|
)
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281,017
|
|
|
281,017
|
|
|
|
|
|
|
|
|
|
|
|
11,422
|
|
|
11,422
|
|
|
292,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,258,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,034
|
)
|
|
(13,302,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2012
|
|
26,803,044
|
|
|
26,803
|
|
|
28,197,310
|
|
|
8,110,972
|
|
|
(3,997,894
|
)
|
|
7,994,358
|
|
|
40,331,549
|
|
|
19,400
|
|
|
289,917
|
|
|
(103,738
|
)
|
|
(35,813
|
)
|
|
150,366
|
|
|
40,481,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,181,093
|
)
|
|
|
|
|
(18,181,093
|
)
|
|
|
|
|
|
|
|
(61,378
|
)
|
|
|
|
|
(61,378
|
)
|
|
(18,242,471
|
)
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
715,850
|
|
|
715,850
|
|
|
|
|
|
|
|
|
|
|
|
11,809
|
|
|
11,809
|
|
|
727,659
|
|
Appropriation to reserves
|
|
|
|
|
|
|
|
|
|
|
130,587
|
|
|
(130,587
|
)
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,465,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,569
|
)
|
|
(17,514,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
26,803,044
|
|
$
|
26,803
|
|
$
|
28,197,310
|
|
$
|
8,241,559
|
|
$
|
(22,309,574
|
)
|
$
|
8,710,208
|
|
$
|
22,866,306
|
|
$
|
19,400
|
|
$
|
289,917
|
|
$
|
(165,116
|
)
|
$
|
(24,004
|
)
|
$
|
100,797
|
|
$
|
22,967,103
|
|
See
accompanying
notes to the
consolidated
financial
statements.
F-6
China GengSheng Minerals, Inc.
Consolidated Statements of Cash
Flows
|
|
For the Year
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before
non-controlling interest
|
$
|
(18,242,471
|
)
|
$
|
(13,594,910
|
)
|
Adjustments to reconcile net loss before
non-controlling interest to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
Depreciation
|
|
3,175,595
|
|
|
3,041,657
|
|
Amortization - land use
rights
|
|
86,935
|
|
|
229,498
|
|
Impairment of property, plant and equipment
|
|
-
|
|
|
287,247
|
|
Deferred income taxes
|
|
81,207
|
|
|
189,696
|
|
Earned
government grant
|
|
-
|
|
|
(316,800
|
)
|
(Gain) loss from disposal
of property, plant and equipment
|
|
-
|
|
|
318,826
|
|
Allowance
for doubtful accounts
|
|
4,758,484
|
|
|
1,730,835
|
|
Provision for inventory
obsolencence
|
|
1,149,587
|
|
|
123,422
|
|
Provision
for warranty
|
|
(26,547
|
)
|
|
(85,446
|
)
|
Guarantee expenses
|
|
256,785
|
|
|
461,578
|
|
Guarantee
income
|
|
(338,285
|
)
|
|
(562,847
|
)
|
CHGS share of net loss of
a non-consolidated entity
|
|
100,868
|
|
|
59,143
|
|
Exchange
gain
|
|
(283,145
|
)
|
|
(60,073
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts
receivable
|
|
9,846,452
|
|
|
(7,452,975
|
)
|
Bank acceptance notes
receivable
|
|
4,618,717
|
|
|
(3,451,040
|
)
|
Prepayments and other
current assets
|
|
9,152,467
|
|
|
(2,185,817
|
)
|
Inventories
|
|
272,375
|
|
|
3,978,007
|
|
Accounts payable
|
|
(214,976
|
)
|
|
4,721,613
|
|
Banker's acceptance notes payable
|
|
(4,698,530
|
)
|
|
(2,586,867
|
)
|
Accrued expenses and
other current liabilities
|
|
(541,154
|
)
|
|
(1,901,343
|
)
|
Corporate
income tax payable
|
|
(1,832
|
)
|
|
(157,566
|
)
|
Travel advances to
officers
|
|
9,175
|
|
|
315,157
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used
in) operating activities
|
|
9,161,707
|
|
|
(16,899,005
|
)
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
Acquisition of property, plant and equipment
|
|
(2,239,927
|
)
|
|
(1,276,883
|
)
|
Proceeds from disposal of
property, plant and equipment
|
|
-
|
|
|
9,477
|
|
|
|
|
|
|
|
|
Net cash flows used in
investing activities
|
|
(2,239,927
|
)
|
|
(1,267,406
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Pledged deposits
|
|
(8,176,947
|
)
|
|
(5,834,418
|
)
|
Receipt (reserve) of government grant
|
|
(158,545
|
)
|
|
357,984
|
|
Proceeds
from loans payable - banks, secured
|
|
114,948,626
|
|
|
75,040,860
|
|
Repayments of loans
payable - banks, secured
|
|
(121,879,690
|
)
|
|
(56,151,216
|
)
|
Proceeds
from loans payable - non-interes bearing from third parties
|
|
15,899,437
|
|
|
4,222,128
|
|
Repayments of loans
payable - non-interes bearing from third parties
|
|
(14,766,595
|
)
|
|
(996,432
|
)
|
Proceeds
from advances from Chairman and CEO
|
|
-
|
|
|
158,400
|
|
Repayment of advances
from Chairman and CEO
|
|
(143,728
|
)
|
|
-
|
|
Proceeds
from loans payable - third parties
|
|
11,918,700
|
|
|
11,088,000
|
|
Repayments of loans
payable - third parties
|
|
(8,882,500
|
)
|
|
(7,920,000
|
)
|
|
|
|
|
|
|
|
Net Cash flows provided by (used in)
financing activities
|
|
(11,241,242
|
)
|
|
19,965,306
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on
cash
|
|
80,524
|
|
|
15,053
|
|
|
|
|
|
|
|
|
Net changes in cash
|
|
(4,238,938
|
)
|
|
1,813,948
|
|
|
|
|
|
|
|
|
Cash, beginning of reporting period
|
|
5,408,309
|
|
|
3,594,361
|
|
|
|
|
|
|
|
|
Cash, end of reporting period
|
$
|
1,169,371
|
|
$
|
5,408,309
|
|
|
|
|
|
|
|
|
Supplementary disclosures for cash flow
information:
|
|
|
|
|
|
|
Interest
paid
|
$
|
7,743,649
|
|
$
|
7,055,208
|
|
|
|
|
|
|
|
|
Income
tax paid
|
$
|
618,103
|
|
$
|
346,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Consideration from disposal of property, plant and equipment used to
offset accounts payable
|
$
|
-
|
|
$
|
82,338
|
|
|
|
|
|
|
|
|
Deposit
used as part of the consideration for acquisition of a non-consolidated
entity
|
$
|
-
|
|
$
|
1,098,979
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment through the offset of
accounts receivable
|
$
|
-
|
|
$
|
1,496,356
|
|
See accompanying notes to the consolidated financial
statements.
F-7
China GengSheng Minerals, Inc.
December 31, 2013 and 2012
Notes to the Consolidated
Financial Statements
Note 1 Organization and Operations
China GengSheng Minerals, Inc. (formerly Silver Mountain Mining
Company, Leadpoint Consolidated Mines Company, Point Acquisition Corporation, or
China Minerals Technologies, Inc.) (CHGS or the Company) was originally
incorporated on November 13, 1947, in accordance with the laws of the State of
Washington and on August 15, 2006 changed its state of incorporation from
Washington to Nevada by means of a merger with and into a Nevada corporation
formed on May 23, 2006, solely for the purpose of effectuating the
reincorporation. On July 26, 2007, the Company changed to its current name,
China GengSheng Minerals, Inc.
The Company is a holding company whose primary business
operations are conducted through its subsidiaries located in the Henan Province
of the Peoples Republic of China (PRC). Through its operating subsidiaries,
the Company produces and markets a broad range of monolithic refractory,
functional ceramics, fracture proppant, fine precision abrasives, and corundum
materials.
Note 2 - Significant and Critical Accounting Policies and
Practices
The Management of the Company is responsible for the selection
and use of appropriate accounting policies and the appropriateness of accounting
policies and their application. Critical accounting policies and practices are
those that are both most important to the portrayal of the Companys financial
condition and results and require managements most difficult, subjective, or
complex judgments, often as a result of the need to make estimates about the
effects of matters that are inherently uncertain. The Companys significant and
critical accounting policies and practices are disclosed below as required by
generally accepted accounting principles.
Basis of Presentation
The Companys consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP).
Use of Estimates and Assumptions and Critical Accounting
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date(s) of the financial statements and the reported amounts
of revenues and expenses during the reporting period(s).
Critical accounting estimates are estimates for which (a) the
nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility
of such matters to change and (b) the impact of the estimate on financial
condition or operating performance is material. The Companys critical
accounting estimates and assumptions affecting the financial statements were:
|
(i)
|
Allowance for doubtful accounts
: Managements
estimate of the allowance for doubtful accounts is based on historical
sales, historical loss levels, and an analysis of the collectability of
individual accounts; and general economic conditions that may affect a
clients ability to pay. The Company evaluated the key factors and
assumptions used to develop the allowance in determining that it is
reasonable in relation to the financial statements taken as a
whole.
|
|
(ii)
|
Inventory obsolescence and markdowns
: The
Companys estimate of potentially excess and slow-moving inventories is
based on evaluation of inventory levels and aging, review of inventory
turns and historical sales experiences. The Companys estimate of reserve
for inventory shrinkage is based on the historical results of physical
inventory cycle counts.
|
|
(iii)
|
Fair value of long-lived assets
: Fair value is
generally determined using the assets expected future discounted cash
flows or market value, if readily determinable. If long-lived assets are
determined to be recoverable, but the newly determined remaining estimated
useful lives are shorter than originally estimated, the net book values of
the long-lived assets are depreciated over the newly determined remaining
estimated useful lives. The Company considers the following to be some
examples of important indicators that may trigger an impairment review:
(i) significant under-performance or losses of assets relative to expected
historical or projected future operating results; (ii) significant changes
in the manner or use of assets or in the Companys overall strategy with
respect to the manner or use of the acquired assets or changes in the
Companys overall business strategy; (iii) significant negative industry
or economic trends; (iv) increased competitive pressures; (v) a
significant decline in the Companys stock price for a sustained period of
time; and (vi) regulatory changes. The Company evaluates acquired assets
for potential impairment indicators at least annually and more frequently
upon the occurrence of such events.
|
|
(iv)
|
Valuation allowance for deferred tax assets
:
Management assumes that the realization of the Companys net deferred tax
assets resulting from its net operating loss (NOL) carryforwards for
Federal income tax purposes that may be offset against
future taxable income was not considered more likely than not
and accordingly, the potential tax benefits of the net loss carry-forwards
are offset by a full valuation allowance. Management made this assumption
based on (a) the Company has incurred recurring losses, (b) general
economic conditions, and (c) its ability to raise additional funds to
support its daily operations by way of a public or private offering, among
other factors.
|
F - 8
|
(v)
|
Accrued warranty
: The Company estimates accrued
warranty costs at the time of sale of the total costs that the Company
will incur to repair or replace product parts that fail while still under
warranty. The amount of the accrued estimated warranty costs obligation
for established products is primarily based on historical experience as to
product failures adjusted for current information on repair costs. For new
products, estimates include the historical experience of similar products,
as well as reasonable allowance for warranty expenses associated with new
products.
|
|
(vi)
|
Revenue recognition
: The Company assumes all of
the revenue recognition criteria are met including reasonable assurance of
collectability when recognizing revenue. The Company evaluates the key
factors and assumptions used to determine the collectability of revenue
being recognized.
|
|
(vii)
|
Sales returns and allowances:
Managements
estimate of sales returns and allowances is based on an analysis of
historical returns and allowance activity to establish a baseline reserve
level. The Company then evaluates whether there are any underlying product
quality or other customer specific issues that require additional specific
reserves above the baseline level.
|
These significant accounting estimates or assumptions bear the
risk of change due to the fact that there are uncertainties attached to these
estimates or assumptions, and certain estimates or assumptions are difficult to
measure or value.
Management bases its estimates on historical experience and on
various assumptions that are believed to be reasonable in relation to the
financial statements taken as a whole under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions
used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions.
After such evaluations, if deemed appropriate, those estimates are adjusted
accordingly.
Actual results could differ from those estimates.
Principles of Consolidation
The Company applies the guidance of Topic 810
Consolidation
of the FASB Accounting Standards Codification to
determine whether and how to consolidate another entity. Pursuant to ASC
Paragraph 810-10-15-10 all majority-owned subsidiariesall entities in which a
parent has a controlling financial interestshall be consolidated except (1)
when control does not rest with the parent, the majority owner; (2) if the
parent is a broker-dealer within the scope of Topic 940 and control is likely to
be temporary; (3) consolidation by an investment company within the scope of
Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph
810-10-15-8 the usual condition for a controlling financial interest is
ownership of a majority voting interest, and, therefore, as a general rule
ownership by one reporting entity, directly or indirectly, of more than 50
percent of the outstanding voting shares of another entity is a condition
pointing toward consolidation. The power to control may also exist with a lesser
percentage of ownership, for example, by contract, lease, agreement with other
stockholders, or by court decree. The Company consolidates all
less-than-majority-owned subsidiaries, if any, in which the parents power to
control exists.
The Company's consolidated subsidiaries and/or entities are as
follows:
Company name
|
|
Place/date of incorporation or
establishment
|
The Company's effective
ownership
interest
|
Common stock / registered
capital
|
|
Principal activities
|
|
|
|
|
|
|
|
GengSheng International Corporation
(GengSheng International)
|
|
The British Virgin Islands (the
BVI)/ November 3, 2004
|
100%
|
Ordinary shares :- Authorized:
50,000 shares of $1 each Paid up: 100 shares of $1 each
|
|
Investment holding
|
|
|
|
|
|
|
|
Henan GengSheng Refractories Co.,
Ltd.
(Refractories)
|
|
The People's Republic of China
(the PRC)/ December 20, 1996
|
100%
|
Registered capital of
$12,089,879 fully paid up
|
|
Manufacturing and distribution
of refractory products
|
|
|
|
|
|
|
|
Henan GengSheng High-Temperature Materials
Co., Ltd.
(High-Temperature)
|
|
PRC/ September 4, 2002
|
89.33%
|
Registered capital of
$1,246,300 fully paid up
|
|
Manufacturing and distribution
of functional ceramic products
|
F - 9
Smarthigh Holdings Limited
(Smarthigh)
|
|
BVI/ November 5, 2004
|
100%
|
Ordinary shares :- Authorized:
50,000 shares of $1 each Paid up: 100 shares of $1 each
|
|
Investment holding
|
|
|
|
|
|
|
|
Zhengzhou Duesail Fracture Proppant Co.,
Ltd.
(Duesail)
|
|
PRC/ August 14, 2006
|
100%
|
Registered capital of
$2,800,000 fully paid up
|
|
Manufacturing and distribution
of fracture proppant products
|
|
|
|
|
|
|
|
Henan GengSheng Micronized Powder Materials
Co., Ltd.
(Micronized)
|
|
PRC/ March 31, 2008
|
100%
|
Registered capital of
$5,823,000 fully paid up
|
|
Manufacturing and distribution
of fine precision abrasives
|
|
|
|
|
|
|
|
Guizhou Southeast Prefecture GengSheng New
Materials Co., Ltd.
(Prefecture)
|
|
PRC/ April 13, 2004
|
100%
|
Registered capital of $141,840
fully paid up
|
|
Manufacturing and distribution
of corundum materials
|
|
|
|
|
|
|
|
Henan Yuxing Proppant Co., Ltd.
(Yuxing)
|
|
PRC/ June 3, 2011
|
100%
|
Registered capital of
$3,086,000 fully paid up
|
|
Manufacturing and distribution
of fracture proppant products
|
The consolidated financial statements include all accounts of
the Company and the consolidated subsidiaries and/or entities as of reporting
period ending date(s) and for the reporting period(s) then ended.
All inter-company balances and transactions have been
eliminated.
Reclassification
Certain amounts in the prior period consolidated financial
statements have been reclassified to conform to the current period presentation.
These reclassifications had no effect on reported earnings or (losses).
Fair Value of Financial Instruments
The Company follows paragraph 825-10-50-10 of the FASB
Accounting Standards Codification for disclosures about fair value of its
financial instruments and has adopted paragraph 820-10-35-37 of the FASB
Accounting Standards Codification (Paragraph 820-10-35-37) to measure the fair
value of its financial instruments. Paragraph 820-10-35-37 establishes a
framework for measuring fair value in accounting principles generally accepted
in the United States of America (U.S. GAAP), and expands disclosures about fair
value measurements. To increase consistency and comparability in fair value
measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair
value hierarchy which prioritizes the inputs to valuation techniques used to
measure fair value into three (3) broad levels. The three (3) levels of fair
value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level 1
|
Quoted market prices available in active markets for
identical assets or liabilities as of the reporting date.
|
|
|
Level 2
|
Pricing inputs other than quoted prices in active markets
included in Level 1, which are either directly or indirectly observable as
of the reporting date.
|
|
|
Level 3
|
Pricing inputs that are generally observable inputs and
not corroborated by market data.
|
Financial assets are considered Level 3 when their fair values
are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is
unobservable.
The fair value hierarchy gives the highest priority to quoted
prices (unadjusted) in active markets for identical assets or liabilities and
the lowest priority to unobservable inputs. If the inputs used to measure the
financial assets and liabilities fall within more than one level described
above, the categorization is based on the lowest level input that is significant
to the fair value measurement of the instrument.
The carrying amounts of the Companys financial assets and
liabilities, such as cash, pledged deposits, accounts receivable, prepayments and other current assets, accounts payable, accrued warranty, corporate income/VAT tax payable, accrued expenses
and other current liabilities approximate their fair values because of the short
maturity of these instruments.
The Companys bankers acceptance notes receivable, loans
payable, and bankers acceptance notes payable approximate the fair value of
such instruments based upon managements best estimate of interest rates that
would be available to the Company for similar financial arrangements at December 31, 2013 and 2012.
F - 10
Transactions involving related parties cannot be presumed to be
carried out on an arm's-length basis, as the requisite conditions of
competitive, free-market dealings may not exist. Representations about
transactions with related parties, if made, shall not imply that the related
party transactions were consummated on terms equivalent to those that prevail in
arm's-length transactions unless such representations can be substantiated.
Fair Value of Non-Financial Assets or Liabilities
Measured on a Recurring Basis
The Companys non-financial assets include inventories. The
Company identifies potentially excess and slow-moving inventories by evaluating
turn rates, inventory levels and other factors. Excess quantities are identified
through evaluation of inventory aging, review of inventory turns and historical
sales experiences. The Company provides lower of cost or market reserves for
such identified excess and slow-moving inventories. The Company establishes a
reserve for inventory shrinkage, if any, based on the historical results of
physical inventory cycle counts.
Carrying Value, Recoverability and Impairment of
Long-Lived Assets
The Company has adopted paragraph 360-10-35-17 of the FASB
Accounting Standards Codification for its long-lived assets. The Companys
long-lived assets, which include property, plant and equipment and land use
rights are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
The Company assesses the recoverability of its long-lived
assets by comparing the projected undiscounted net cash flows associated with
the related long-lived asset or group of long-lived assets over their remaining
estimated useful lives against their respective carrying amounts. Impairment, if
any, is based on the excess of the carrying amount over the fair value of those
assets. Fair value is generally determined using the assets expected future
discounted cash flows or market value, if readily determinable. When long-lived
assets are determined to be recoverable, but the newly determined remaining
estimated useful lives are shorter than originally estimated, the net book
values of the long-lived assets are depreciated over the newly determined
remaining estimated useful lives.
The Company considers the following to be some examples of
important indicators that may trigger an impairment review: (i) significant
under-performance or losses of assets relative to expected historical or
projected future operating results; (ii) significant changes in the manner or
use of assets or in the Companys overall strategy with respect to the manner or
use of the acquired assets or changes in the Companys overall business
strategy; (iii) significant negative industry or economic trends; (iv) increased
competitive pressures; (v) a significant decline in the Companys stock price
for a sustained period of time; and (vi) regulatory changes. The Company
evaluates acquired assets for potential impairment indicators at least annually
and more frequently upon the occurrence of such events.
The key assumptions used in managements estimates of projected
cash flow deal largely with forecasts of sales levels, gross margins, and
operating costs of the manufacturing facilities. These forecasts are typically
based on historical trends and take into account recent developments as well as
managements plans and intentions. Any difficulty in manufacturing or sourcing
raw materials on a cost effective basis would significantly impact the projected
future cash flows of the Companys manufacturing facilities and potentially lead
to an impairment charge for long-lived assets. Other factors, such as increased
competition or a decrease in the desirability of the Companys products, could
lead to lower projected sales levels, which would adversely impact cash flows. A
significant change in cash flows in the future could result in an impairment of
long lived assets.
The impairment charges, if any, is included in operating
expenses in the accompanying consolidated statements of income and comprehensive
income (loss).
Cash Equivalents
The Company considers all highly liquid investments with
maturities of three months or less at the time of purchase to be cash
equivalents.
Pledged Deposits
Pledged deposits consist of amounts held in financial
institutions for (i) open bankers acceptance notes payable maturing between
three and nine months from the date of issuance and (ii) outstanding loans
payable banks, secured, maturing one year from the date of signing.
The Company satisfies certain accounts payable, through
bankers acceptance notes issued by financial institutions to certain of the
Companys vendors. The issuing financial institutions of the bankers acceptance
notes require the Company to deposit certain percentage of the amount stipulated
under the bankers acceptance notes as collateral which will be released to the
Company as part of the payment toward bankers acceptance notes payable upon
maturity.
F - 11
The Management of the Company believes that it is appropriate
to classify such amounts as current assets as these pledged deposits are of a
short term nature, three to nine months in length from the date of issuance.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable are recorded at the invoiced amount, net of
an allowance for doubtful accounts. The Company follows paragraph 310-10-50-9 of
the FASB Accounting Standards Codification to estimate the allowance for
doubtful accounts. The Company performs on-going credit evaluations of its
customers and adjusts credit limits based upon payment history and the
customers current credit worthiness, as determined by the review of their
current credit information; and determines the allowance for doubtful accounts
based on historical write-off experience, customer specific facts and economic
conditions.
Pursuant to paragraph 310-10-50-2 of the FASB Accounting
Standards Codification account balances are charged off against the allowance
after all means of collection have been exhausted and the potential for recovery
is considered remote. The Company has adopted paragraph 310-10-50-6 of the FASB
Accounting Standards Codification and determine when receivables are past due or
delinquent based on how recently payments have been received.
Outstanding account balances are reviewed individually for
collectability. The allowance for doubtful accounts is the Companys best
estimate of the amount of probable credit losses in the Companys existing
accounts receivable. Bad debt expense is included in general and administrative
expenses, if any.
The Company does not have any off-balance-sheet credit exposure
to its customers.
Bankers Acceptance Notes Receivable
Certain of the Companys customers satisfy their accounts
receivable, through the issuance of bankers acceptance notes issued by
financial institutions to the Company. These notes are usually of a short term
nature, three (3) to nine (9) months in length. They are non-interest bearing,
due upon maturity, and are paid by the Customers financial institutions
directly to the Company upon presentation on the date of maturity and the
Customers are obliged to repay the note in full to the financial institutions.
Inventories
Inventory Valuation
The Company values inventories, consisting of raw materials,
consumables, packaging material, finished goods, and purchased merchandise for
resale, at the lower of cost or market. Cost is determined on the first-in and
first-out (FIFO) method for raw materials and packaging materials and the
weighted average cost method for finished goods. Cost of finished goods
comprises direct labor, direct materials, direct production cost and an
allocated portion of production overhead. The Company reduces inventories for
the diminution of value, resulting from product obsolescence, damage or other
issues affecting marketability, equal to the difference between the cost of the
inventory and its estimated market value. Factors utilized in the determination
of estimated market value include (i) current sales data and historical return
rates, (ii) estimates of future demand, (iii) competitive pricing pressures,
(iv) new product introductions, (v) product expiration dates, and (vi) component
and packaging obsolescence.
Normal Capacity and Period Costs
of Underutilized or Idle Capacity of the Production Facilities
The Company follows paragraph 330-10-30-3 of the FASB
Accounting Standards Codification for the allocation of production costs and
charges to inventories. The Company allocates fixed production overhead to
inventories based on the normal capacity of the production facilities expected
to be achieved over a number of periods or seasons under normal circumstances,
taking into account the loss of capacity resulting from planned maintenance.
Judgment is required to determine when a production level is abnormally low
(that is, outside the range of expected variation in production). Factors that
might be anticipated to cause an abnormally low production level include
significantly reduced demand, labor and materials shortages, and unplanned
facility or equipment down time. The actual level of production may be used if
it approximates normal capacity. In periods of abnormally high production, the
amount of fixed overhead allocated to each unit of production is decreased so
that inventories are not measured above cost. The amount of fixed overhead
allocated to each unit of production is not increased as a consequence of
abnormally low production or idle plant and unallocated overheads of
underutilized or idle capacity of the production facilities are recognized as
period costs in the period in which they are incurred rather than as a portion
of the inventory cost.
F - 12
Inventory Obsolescence and
Markdowns
The Company evaluates its current level of inventories
considering historical sales and other factors and, based on this evaluation,
classify inventory markdowns in the income statement as a component of cost of
goods sold pursuant to Paragraph 420-10-S99 of the FASB Accounting Standards
Codification to adjust inventories to net realizable value. These markdowns are
estimates, which could vary significantly from actual requirements if future
economic conditions, customer demand or competition differ from expectations.
Other significant estimates include the allocation of variable and fixed
production overheads. While variable production overheads are allocated to each
unit of production on the basis of actual use of production facilities, the
allocation of fixed production overhead to the costs of conversion is based on
the normal capacity of the Companys production facilities, and recognizes
abnormal idle facility expenses as current period charges. Certain costs,
including categories of indirect materials, indirect labor and other indirect
manufacturing costs which are included in the overhead pools are estimated. The
management of the Company determines its normal capacity based upon the amount
of operating hours of the manufacturing machinery and equipment in a reporting
period.
Investments - Equity Method and
Joint Ventures
The Company accounts for investments in common stock or
in-substance common stock (or both common stock and in-substance common stock)
of an investee of which the Company has significant influence (see paragraph
323-10-15-6) in the operating or financial policies even though the Company
holds 50% or less of the common stock or in-substance common stock, in
accordance with sub-topic 323-10 of the FASB Accounting Standards Codification
(Sub-topic 323-10).
Method of Accounting
Investments held in stock of entities other than subsidiaries,
namely corporate joint ventures and other non-controlled entities usually are
accounted for by one of three methods (i) the fair value method (addressed in
Topic 320), (ii) the equity method (addressed in Topic 323), or (iii) the cost
method (addressed in Subtopic 325-20). Pursuant to paragraph 323-10-05-5 the
equity method tends to be most appropriate if an investment enables the investor
to influence the operating or financial policies of the investee.
The Ability to Exercise
Significant Influence
Pursuant to paragraph 323-10-15-6 the ability to exercise
significant influence over operating and financial policies of an investee may
be indicated in several ways, including but limited to the following: a.
Representation on the board of directors, b. Participation in policy-making
processes, c. Material intra-entity transactions, d. Interchange of managerial
personnel, and e. Technological dependency. Pursuant to paragraph 323-10-15-8 an
investment (direct or indirect) of 20 percent or more of the voting stock of an
investee shall lead to a presumption that in the absence of predominant evidence
to the contrary an investor has the ability to exercise significant influence
over an investee. Conversely, an investment of less than 20 percent of the
voting stock of an investee shall lead to a presumption that an investor does
not have the ability to exercise significant influence unless such ability can
be demonstrated.
Initial and Subsequent
Measurement
Pursuant to Paragraph 323-10-30-2 an investor shall measure an
investment in the common stock of an investee (including a joint venture)
initially at cost in accordance with the guidance in Section 805-50-30. An
investor shall initially measure, at fair value, a retained investment in the
common stock of an investee (including a joint venture) in a deconsolidation
transaction in accordance with paragraphs 810-10-40-3A through 40-5.
Pursuant to Section 323-10-35 under the equity method, an
investor shall recognize its share of the earnings or losses of an investee in
the periods for which they are reported by the investee in its financial
statements rather than in the period in which an investee declares a dividend.
An investor shall adjust the carrying amount of an investment for its share of
the earnings or losses of the investee after the date of investment including
adjustments similar to those made in preparing consolidated financial statements
and shall report the recognized earnings or losses in income. An investor's
share of losses of an investee may equal or exceed the carrying amount of an
investment accounted for by the equity method plus advances made by the
investor. An equity method investor shall continue to report losses up to the
investor's investment carrying amount, including any additional financial
support made or committed to by the investor and the investor ordinarily shall
discontinue applying the equity method if the investment (and net advances) is
reduced to zero and shall not provide for additional losses unless the investor
has guaranteed obligations of the investee or is otherwise committed to provide
further financial support for the investee. If the investee subsequently reports
net income, the investor shall resume applying the equity method only after its
share of that net income equals the share of net losses not recognized during
the period the equity method was suspended. If a series of operating losses of
an investee or other factors indicate that a decrease in value of the investment
has occurred that is other than temporary the loss in value of an investment
that is other than a temporary decline shall be recognized. Evidence of a loss
in value might include, but would not necessarily be limited to, absence of an
ability to recover the carrying amount of the investment or inability of the
investee to sustain an earnings capacity that would justify the carrying amount
of the investment. A current fair value of an investment that is less than its
carrying amount may indicate a loss in value of the investment. However, a
decline in the quoted market price below the carrying amount or the existence of
operating losses alone is not necessarily indicative of a loss in value that is
other than temporary.
F - 13
Disclosure
Pursuant to paragraph 323-10-50-3 all of the following
disclosures generally shall apply to the equity method of accounting for
investments in common stock:
|
a.
|
Financial statements of an investor shall disclose all of
the following parenthetically, in notes to financial statements, or in
separate statements or schedules: (1) the name of each investee and
percentage of ownership of common stock. (2) The accounting policies of
the investor with respect to investments in common stock. Disclosure shall
include the names of any significant investee entities in which the
investor holds 20 percent or more of the voting stock, but the common
stock is not accounted for on the equity method, together with the reasons
why the equity method is not considered appropriate, and the names of any
significant investee corporations in which the investor holds less than 20
percent of the voting stock and the common stock is accounted for on the
equity method, together with the reasons why the equity method is
considered appropriate. (3) The difference, if any, between the amount at
which an investment is carried and the amount of underlying equity in net
assets and the accounting treatment of the difference.
|
|
b.
|
For those investments in common stock for which a quoted
market price is available, the aggregate value of each identified
investment based on the quoted market price usually shall be
disclosed.
|
|
c.
|
If investments in common stock of corporate joint
ventures or other investments accounted for under the equity method are,
in the aggregate, material in relation to the financial position or
results of operations of an investor, it may be necessary for summarized
information as to assets, liabilities, and results of operations of the
investees to be presented in the notes or in separate statements, either
individually or in groups, as appropriate.
|
|
d.
|
Conversion of outstanding convertible securities,
exercise of outstanding options and warrants, and other contingent
issuances of an investee may have a significant effect on an investor's
share of reported earnings or losses. Accordingly, material effects of
possible conversions, exercises, or contingent issuances shall be
disclosed in notes to financial statements of an
investor.
|
Property, Plant and Equipment
Property, plant and equipment are recorded at cost.
Expenditures for major additions and betterments are capitalized. Maintenance
and repairs are charged to statements of operations as incurred. Depreciation of
property, plant and equipment is computed by the straight-line method (after
taking into account their respective estimated residual values) over the
estimated useful lives of the respective assets as follows:
|
Estimated Useful
|
|
Life
(Years)
|
|
|
Auto
|
3
|
|
|
Buildings and leasehold improvements (i)
(ii)
|
20
|
|
|
Construction in progress (iii)
|
-
|
|
|
Furniture and fixture
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4-5
|
|
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Machinery and equipment
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5-10
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(i)
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Amortization of leasehold improvements: Amortized on a
straight-line basis over the term of the lease or the estimated useful
lives, whichever is shorter.
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(ii)
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Capitalized interest: The interest cost associated with
the major development and construction projects is capitalized and
included in the cost of the project. When no debt is incurred specifically
for a project, interest is capitalized on amounts expended on the project
using weighted-average cost of the Companys outstanding borrowings.
Capitalization of interest ceases when the project is substantially
completed or development activity is suspended for more than a brief
period.
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(iii)
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Construction in progress: Construction in progress
represents direct costs of construction or the acquisition cost of
long-lived assets. Under U.S. GAAP, all costs associated with construction
of long-lived assets should be reflected as long-term as part of
construction-in-progress. Capitalization of these costs ceases and the
construction in progress is transferred to property, plant and equipment
when substantially all of the activities necessary to prepare the
long-lived assets for their intended use are completed. No depreciation is
provided until the construction of the long-lived assets is complete and
ready for their intended use.
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Upon sale or retirement of property, plant and equipment, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is reflected in the consolidated statements of income and
comprehensive income.
Leases
F - 14
Lease agreements are evaluated to determine whether they are
capital leases or operating leases in accordance with paragraph 840-10-25-1 of
the FASB Accounting Standards Codification (Paragraph 840-10-25-1). Pursuant
to Paragraph 840-10-25-1 A lessee and a lessor shall consider whether a lease
meets any of the following four criteria as part of classifying the lease at its
inception under the guidance in the Lessees Subsection of this Section (for the
lessee) and the Lessors Subsection of this Section (for the lessor): a. Transfer
of ownership. The lease transfers ownership of the property to the lessee by the
end of the lease term. This criterion is met in situations in which the lease
agreement provides for the transfer of title at or shortly after the end of the
lease term in exchange for the payment of a nominal fee, for example, the
minimum required by statutory regulation to transfer title. b. Bargain purchase
option. The lease contains a bargain purchase option. c. Lease term. The lease
term is equal to 75 percent or more of the estimated economic life of the leased
property. d. Minimum lease payments. The present value at the beginning of the
lease term of the minimum lease payments, excluding that portion of the payments
representing executory costs such as insurance, maintenance, and taxes to be
paid by the lessor, including any profit thereon, equals or exceeds 90 percent
of the excess of the fair value of the leased property to the lessor at lease
inception over any related investment tax credit retained by the lessor and
expected to be realized by the lessor. In accordance with paragraphs
840-10-25-29 and 840-10-25-30, if at its inception a lease meets any of the four
lease classification criteria in Paragraph 840-10-25-1, the lease shall be
classified by the lessee as a capital lease; and if none of the four criteria in
Paragraph 840-10-25-1 are met, the lease shall be classified by the lessee as an
operating lease. Pursuant to Paragraph 840-10-25-31 a lessee shall compute the
present value of the minimum lease payments using the lessee's incremental
borrowing rate unless both of the following conditions are met, in which
circumstance the lessee shall use the implicit rate: a. It is practicable for
the lessee to learn the implicit rate computed by the lessor. b. The implicit
rate computed by the lessor is less than the lessee's incremental borrowing
rate. Capital lease assets are depreciated on a straight line method, over the
capital lease assets estimated useful lives consistent with the Companys normal
depreciation policy for tangible fixed assets. Interest charges are expensed
over the period of the lease in relation to the carrying value of the capital
lease obligation.
Operating leases primarily relate to the Companys leases of
office spaces. When the terms of an operating lease include tenant improvement
allowances, periods of free rent, rent concessions, and/or rent escalation
amounts, the Company establishes a deferred rent liability for the difference
between the scheduled rent payment and the straight-line rent expense
recognized, which is amortized over the underlying lease term on a straight-line
basis as a reduction of rent expense.
Land Use Rights
Land use rights represent the cost to obtain the right to use
certain parcels of land in China. Land use rights are carried at cost and
amortized on a straight-line basis over the lives of the rights of ranging from
39 to 50 years. Upon becoming fully amortized, the related cost and accumulated
amortization are removed from the accounts.
Bankers Acceptance Notes Payable
The Company satisfies certain accounts payable, through the
issuance of bankers acceptance notes issued by financial institutions to
certain of the Companys vendors. These notes are usually of a short term
nature, three (3) to nine (9) months in length. They are non-interest bearing
and due upon maturity, and are paid by the Companys banks directly to the
vendors upon presentation on the date of maturity and the Company is obliged to
repay the note in full to the financial institutions. In the event of
insufficient funds to repay these notes, the Company's bank will convert them to
loans on demand with interest at a predetermined rate per annum payable monthly.
Related Parties
The Company follows subtopic 850-10 of the FASB Accounting
Standards Codification for the identification of related parties and disclosure
of related party transactions.
Pursuant to Section 850-10-20 the related parties include a.
affiliates of the Company; b. entities for which investments in their equity
securities would be required, absent the election of the fair value option under
the Fair Value Option Subsection of Section 8251015, to be accounted for by
the equity method by the investing entity; c. trusts for the benefit of
employees, such as pension and profit-sharing trusts that are managed by or
under the trusteeship of management; d. principal owners of the Company; e.
management of the Company; f. other parties with which the Company may deal if
one party controls or can significantly influence the management or operating
policies of the other to an extent that one of the transacting parties might be
prevented from fully pursuing its own separate interests; and g. other parties
that can significantly influence the management or operating policies of the
transacting parties or that have an ownership interest in one of the transacting
parties and can significantly influence the other to an extent that one or more
of the transacting parties might be prevented from fully pursuing its own
separate interests.
The financial statements shall include disclosures of material
related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of
business. However, disclosure of transactions that are eliminated in the
preparation of consolidated or combined financial statements is not required in
those statements. The disclosures shall include: a. the nature of the
relationship(s) involved; b. a description of the transactions, including
transactions to which no amounts or nominal amounts were ascribed, for each of
the periods for which income statements are presented, and such other
information deemed necessary to an understanding of the effects of the
transactions on the financial statements; c. the dollar amounts of transactions
for each of the periods for which income statements are presented and the
effects of any change in the method of establishing the terms from that used in
the preceding period; and d. amounts due from or to related parties as of the
date of each balance sheet presented and, if not otherwise apparent, the terms
and manner of settlement.
F - 15
Product Warranty
The Company estimates future costs of warranty obligations in
accordance with ASC 460-10, which requires an entity to disclose and recognize a
liability for the fair value of the obligation it assumes upon issuance of a
warranty. The Company warrants its refractory products for a specific period of
time, usually 12 months, against material defects. The Company provides for the
estimated future costs of warranty obligations in cost of revenues when the
related revenues are recognized. The accrued warranty costs represent the best
estimate at the time of sale of the total costs that the Company will incur to
repair or replace product parts that fail while still under warranty. The amount
of the accrued estimated warranty costs obligation for established products is
primarily based on historical experience as to product failures adjusted for
current information on repair costs. For new products, estimates include the
historical experience of similar products, as well as reasonable allowance for
warranty expenses associated with new products. On a quarterly basis, the
Company reviews the accrued warranty costs and updates the historical warranty
cost trends, if required.
Commitment and Contingencies
The Company follows subtopic 450-20 of the FASB Accounting
Standards Codification to report accounting for contingencies. Certain
conditions may exist as of the date the consolidated financial statements are
issued, which may result in a loss to the Company but which will only be
resolved when one or more future events occur or fail to occur. The Company
assesses such contingent liabilities, and such assessment inherently involves an
exercise of judgment. In assessing loss contingencies related to legal
proceedings that are pending against the Company or un-asserted claims that may
result in such proceedings, the Company evaluates the perceived merits of any
legal proceedings or un-asserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is
probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Companys
consolidated financial statements. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or is
probable but cannot be estimated, then the nature of the contingent liability,
and an estimate of the range of possible losses, if determinable and material,
would be disclosed.
Loss contingencies considered remote are generally not
disclosed unless they involve guarantees, in which case the guarantees would be
disclosed. Management does not believe, based upon information available at this
time, that these matters will have a material adverse effect on the Companys
consolidated financial position, results of operations or cash flows. However,
there is no assurance that such matters will not materially and adversely affect
the Companys business, financial position, and results of operations or cash
flows.
Non-controlling Interest
The Company follows paragraph 810-10-65-1 of the FASB
Accounting Standards Codification to report the non-controlling interests in its
majority owned subsidiary in the consolidated statements of balance sheets
within the equity section, separately from the Companys stockholders equity.
Non-controlling interests represents the non-controlling interest holders
proportionate share of the equity of the Companys majority-owned subsidiary.
Non-controlling interest is adjusted for the non-controlling interest holders
proportionate share of the earnings or losses and other comprehensive income
(loss) and the non-controlling interest continues to be attributed its share of
losses even if that attribution results in a deficit non-controlling interest
balance.
Revenue Recognition
The Company applies paragraph 605-10-S99-1 of the FASB
Accounting Standards Codification for revenue recognition. The Company
recognizes revenue when it is realized or realizable and earned. The Company
considers revenue realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the
product has been shipped or the services have been rendered to the customer,
(iii) the sales price is fixed or determinable, and (iv) collectability is
reasonably assured. In addition to the aforementioned general policy, the
following are the specific revenue recognition policies for each category of
revenue:
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(i)
|
Sale of products:
The Company derives its revenue
from sales contracts with customers with revenue being generated upon the
shipment of merchandise. Persuasive evidence of an arrangement is
demonstrated via sales invoice or contract; product delivery is evidenced
by warehouse shipping log as well as a signed bill of lading from the
vessel or rail company and title transfers upon shipment, based on free on
board (FOB) warehouse terms; the sales price to the customer is fixed
upon acceptance of the signed purchase order or contract and there is no
separate sales rebate, discount, or volume incentive.
When the Company recognizes revenue, no provisions are made
for returns because, historically, there have been very few sales returns
and adjustments that have impacted the ultimate collection of
revenue.
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F - 16
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(ii)
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Sale of products with services:
The Company
derives its revenue from sales contracts with customers with revenue being
generated upon completion of installation and testing services. The
Company initially signs a sale of products with services contract with its
customers for a fixed fee and delivers the products upon receipt of signed
contracts or purchase orders. After delivery of products to its customers,
the Company will perform the installation and testing services, which
usually takes one to two days, before acceptance and usage by customers.
The product can normally be used for approximately 80 cycles of production
by customers (about two to three days). Thereafter the customers will need
maintenance, repair and replacement of the Companys products. For each
maintenance, repair and replacement, the Company will supply products and
do the installation and testing work again, which are treated as separate
sales by the Company. The Company recognizes the revenue from the sale of
product with services when the significant risks and rewards of ownership
have been transferred to the buyer at the time when the installation and
testing are completed and accepted by customers, the sales price is fixed
upon acceptance of the signed purchase order or contract and collection is
reasonably assured.
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Net sales of products represent the invoiced value of goods,
net of value added taxes (VAT). The Company is subject to VAT which is levied
on the majority of the Companys products at the rate of 17% on the invoiced
value of sales. Sales or Output VAT is borne by customers in addition to the
invoiced value of sales and Purchase or Input VAT is borne by the Company in
addition to the invoiced value of purchases to the extent not refunded for
export sales.
Shipping and Handling Costs
The Company accounts for shipping and handling fees in
accordance with paragraph 605-45-45-19 of the FASB Accounting Standards
Codification. While amounts charged to customers for shipping products are
included in revenues, the related costs are classified in cost of goods sold as
incurred.
Research and Development
The Company follows paragraph 730-10-25-1 of the FASB
Accounting Standards Codification (formerly Statement of Financial Accounting
Standards No. 2
Accounting for Research and Development Costs
) and
paragraph 730-20-25-11 of the FASB Accounting Standards Codification (formerly
Statement of Financial Accounting Standards No. 68
Research and Development
Arrangements
) for research and development costs. Research and development
costs are charged to expense as incurred. Research and development costs consist
primarily of remuneration for research and development staff, depreciation and
maintenance expenses of research and development equipment, material and testing
costs for research and development as well as research and development
arrangements with unrelated third party research and development institutions.
Nonrefundable Advance Payments
for Goods or Services to be Used in Future Research and Development
Activities
The research and development arrangements usually involve
specific research and development projects. Often times, the Company makes
non-refundable advances upon signing of these research and development
arrangements. The Company adopted paragraph 730-20-25-13 and 730-20-35-1 of the
FASB Accounting Standards Codification (formerly Emerging Issues Task Force
Issue No. 07-3
Accounting for Nonrefundable Advance Payments for Goods or
Services to be Used in Future Research and Development Activities
) for
those non-refundable advances. Non-refundable advance payments for goods or
services that will be used or rendered for future research and development
activities are deferred and capitalized. Such amounts are recognized as an
expense as the related goods are delivered or the related services are
performed. The management continues to evaluate whether the Company expect the
goods to be delivered or services to be rendered. If the management does not
expect the goods to be delivered or services to be rendered, the capitalized
advance payment are charged to expense.
Government Grants
Receipts of government grants (i) to construct environmental
protection and improvement projects and (ii) to encourage research and
development and (iii) to subsidize energy conservation activities which are
non-refundable are credited to unearned government grants upon receipt. The
grants are used for purchases of assets, to subsidize the research and
development and energy conservation expenses incurred, for compensation expenses
already incurred or for good performance of the Company.
Grants applicable to the construction of the environmental
protection and improvement projects are recorded as a credit to the total cost
of pollution prevention projects upon completion of the pollution prevention
projects. For research and development expenses, the Company matches and offsets
the government grants with the expenses of the research and development
activities as specified in the grant approval document in the corresponding
period when such expenses are incurred and records related government grants as
credit to research and development and pollution prevention project cost
accordingly. For government grants received as compensation for expenses already
incurred are recognized as income in the period they become recognizable.
Guarantee
F - 17
The Company has acted as guarantor for certain bank loans
granted to third parties which provide guarantees to the Companys loans
payable. 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.
Foreign Currency Transactions
The Company applies the guidelines as set out in Section
830-20-35 of the FASB Accounting Standards Codification (Section 830-20-35)
for foreign currency transactions. Pursuant to Section 830-20-35 of the FASB
Accounting Standards Codification, foreign currency transactions are
transactions denominated in currencies other than U.S. Dollar, the Companys
reporting currency or Chinese Yuan or Renminbi, the Companys Chinese operating
subsidiaries' functional currency. Foreign currency transactions may produce
receivables or payables that are fixed in terms of the amount of foreign
currency that will be received or paid. A change in exchange rates between the
functional currency and the currency in which a transaction is denominated
increases or decreases the expected amount of functional currency cash flows
upon settlement of the transaction. That increase or decrease in expected
functional currency cash flows is a foreign currency transaction gain or loss
that generally shall be included in determining net income for the period in
which the exchange rate changes. Likewise, a transaction gain or loss (measured
from the transaction date
or the most recent intervening balance sheet
date, whichever is later) realized upon settlement of a foreign currency
transaction generally shall be included in determining net income for the period
in which the transaction is settled. The exceptions to this requirement for
inclusion in net income of transaction gains and losses pertain to certain
intercompany transactions and to transactions that are designated as, and
effective as, economic hedges of net investments and foreign currency
commitments. Pursuant to Section 830-20-25 of the FASB Accounting Standards
Codification, the following shall apply to all foreign currency transactions of
an enterprise and its investees: (a) at the date the transaction is recognized,
each asset, liability, revenue, expense, gain, or loss arising from the
transaction shall be measured and recorded in the functional currency of the
recording entity by use of the exchange rate in effect at that date as defined
in section 830-10-20 of the FASB Accounting Standards Codification; and (b) at
each balance sheet date, recorded balances that are denominated in currencies
other than the functional currency or reporting currency of the recording entity
shall be adjusted to reflect the current exchange rate.
Income Tax Provision
The Company accounts for income taxes under Section 740-10-30
of the FASB Accounting Standards Codification, which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are based on the differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets are reduced by a valuation allowance to the
extent management concludes it is more likely than not that the assets will not
be realized. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
Consolidated Statements of Income and Comprehensive Income in the period that
includes the enactment date.
The Company adopted section 740-10-25 of the FASB Accounting
Standards Codification (Section 740-10-25). Section 740-10-25 addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under Section 740-10-25,
the Company may recognize the tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a
position should be measured based on the largest benefit that has a greater than
fifty (50) percent likelihood of being realized upon ultimate settlement.
Section 740-10-25 also provides guidance on de-recognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures.
The estimated future tax effects of temporary differences
between the tax basis of assets and liabilities are reported in the accompanying
consolidated balance sheets, as well as tax credit carry-backs and
carry-forwards. The Company periodically reviews the recoverability of deferred
tax assets recorded on its consolidated balance sheets and provides valuation
allowances as management deems necessary.
Management makes judgments as to the interpretation of the tax
laws that might be challenged upon an audit and cause changes to previous
estimates of tax liability. In addition, the Company operates within multiple
taxing jurisdictions and is subject to audit in these jurisdictions. In
managements opinion, adequate provisions for income taxes have been made for
all years. If actual taxable income by tax jurisdiction varies from estimates,
additional allowances or reversals of reserves may be necessary.
Uncertain Tax
Positions
The Company did not take any uncertain tax positions and had no
adjustments to its income tax liabilities or benefits pursuant to the provisions
of Section 740-10-25 for the reporting period ended December 31, 2013 or 2012.
F - 18
Foreign Currency Translation
The Company follows Section 830-10-45 of the FASB Accounting
Standards Codification (Section 830-10-45) for foreign currency translation to
translate the financial statements of the foreign subsidiary from the functional
currency, generally the local currency, into U.S. Dollars. Section 830-10-45
sets out the guidance relating to how a reporting entity determines the
functional currency of a foreign currency (including of a foreign entity in a
highly inflationary economy), re-measures the books of record (if necessary),
and characterizes transaction gains and losses. Pursuant to Section 830-10-45,
the assets, liabilities, and operations of a foreign entity shall be measured
using the functional currency of that entity. An entitys functional currency is
the currency of the primary economic environment in which the entity operates;
normally, that is the currency of the environment, or local currency, in which
an entity primarily generates and expends cash.
The functional currency of each foreign subsidiary is
determined based on managements judgment and involves consideration of all
relevant economic facts and circumstances affecting the subsidiary. Generally,
the currency in which the subsidiary transacts a majority of its transactions,
including billings, financing, payroll and other expenditures, would be
considered the functional currency, but any dependency upon the parent and the
nature of the subsidiarys operations must also be considered. If a subsidiarys
functional currency is deemed to be the local currency, then any gain or loss
associated with the translation of that subsidiarys financial statements is
included in accumulated other comprehensive income. However, if the functional
currency is deemed to be the U.S. Dollar, then any gain or loss associated with
the re-measurement of these financial statements from the local currency to the
functional currency would be included in the consolidated statements of income
and comprehensive income (loss). If the Company disposes of foreign
subsidiaries, then any cumulative translation gains or losses would be recorded
into the consolidated statements of income and comprehensive income (loss). If
the Company determines that there has been a change in the functional currency
of a subsidiary to the U.S. Dollar, any translation gains or losses arising
after the date of change would be included within the statement of income and
comprehensive income (loss).
Based on an assessment of the factors discussed above, the
management of the Company determined the relevant subsidiaries local currencies
to be their respective functional currencies.
The financial records of the Company's Chinese operating
subsidiaries are maintained in their local currency, the Renminbi (RMB), which
is the functional currency. Assets and liabilities are translated from the local
currency into the reporting currency, U.S. dollars, at the exchange rate
prevailing at the balance sheet date. Revenues and expenses are translated at
weighted average exchange rates for the period to approximate translation at the
exchange rates prevailing at the dates those elements are recognized in the
consolidated financial statements. Foreign currency
translation gain
(loss) resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining accumulated other
comprehensive income in the consolidated statement of stockholders equity.
RMB is not a fully convertible currency. All foreign exchange
transactions involving RMB must take place either through the Peoples Bank of
China (the PBOC) or other institutions authorized to buy and sell foreign
exchange. The exchange rate adopted for the foreign exchange transactions are
the rates of exchange quoted by the PBOC. Commencing July 21, 2005, China
adopted a managed floating exchange rate regime based on market demand and
supply with reference to a basket of currencies. The exchange rate of the US
dollar against the RMB was adjusted from approximately RMB 8.28 per U.S. dollar
to approximately RMB 8.11 per U.S. dollar on July 21, 2005. Since then, the PBOC
administers and regulates the exchange rate of the U.S. dollar against the RMB
taking into account demand and supply of RMB, as well as domestic and foreign
economic and financial conditions.
Unless otherwise noted, the rate presented below per U.S. $1.00
was the midpoint of the interbank rate as quoted by OANDA Corporation (
www.oanda.com
) contained in its consolidated financial
statements. Management believes that the difference between RMB vs. U.S. dollar
exchange rate quoted by the PBOC and RMB vs. U.S. dollar exchange rate reported
by OANDA Corporation were immaterial. Translations do not imply that the RMB
amounts actually represent, or have been or could be converted into, equivalent
amounts in U.S. dollars. Translation of amounts from RMB into U.S. dollars has
been made at the following exchange rates for the respective periods:
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December 31, 2013
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December 31, 2012
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Balance sheets
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6.1087
|
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6.3091
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Statements of operations and
comprehensive income (loss)
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6.1920
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6.3131
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Comprehensive Income (Loss)
The Company has applied section 220-10-45 of the FASB
Accounting Standards Codification. This statement establishes rules for the
reporting of comprehensive income and its components. Comprehensive income
(loss), for the Company, consists of net income (loss) and foreign currency
translation adjustments and is presented in the Companys Consolidated
Statements of Operations and Comprehensive Income (Loss) and Stockholders
Equity.
F - 19
Net Income (Loss) per Common Share
Net income (loss) per common share is computed pursuant to
section 260-10-45 of the FASB Accounting Standards Codification. Basic net
income (loss) per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock and potentially
outstanding shares of common stock during the period to reflect the potential
dilution that could occur from common shares issuable through contingent share
arrangements, stock options and warrants.
There were no potentially dilutive common shares outstanding
for the reporting period ended December 31, 2013 or 2012.
Cash Flows Reporting
The Company adopted paragraph 230-10-45-24 of the FASB
Accounting Standards Codification for cash flows reporting, classifies cash
receipts and payments according to whether they stem from operating, investing,
or financing activities and provides definitions of each category, and uses the
indirect or reconciliation method (Indirect method) as defined by paragraph
230-10-45-25 of the FASB Accounting Standards Codification to report net cash
flow from operating activities by adjusting net income to reconcile it to net
cash flow from operating activities by removing the effects of (a) all deferrals
of past operating cash receipts and payments and all accruals of expected future
operating cash receipts and payments and (b) all items that are included in net
income that do not affect operating cash receipts and payments. The Company
reports the reporting currency equivalent of foreign currency cash flows, using
the current exchange rate at the time of the cash flows and the effect of
exchange rate changes on cash held in foreign currencies is reported as a
separate item in the reconciliation of beginning and ending balances of cash and
cash equivalents and separately provides information about investing and
financing activities not resulting in cash receipts or payments in the period
pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards
Codification.
Segment Information
The Company follows Topic 280 of the FASB Accounting Standards
Codification for segment reporting. Pursuant to Paragraph 280-10-50-1 an
operating segment is a component of a public entity that has all of the
following characteristics: a. It engages in business activities from which it
may earn revenues and incur expenses (including revenues and expenses relating
to transactions with other components of the same public entity). b. Its
operating results are regularly reviewed by the public entity's chief operating
decision maker to make decisions about resources to be allocated to the segment
and assess its performance. c. Its discrete financial information is available.
In accordance with Paragraph 280-10-50-5 the term
chief operating decision
maker
identifies a function, not necessarily a manager with a specific
title. That function is to allocate resources to and assess the performance of
the segments of a public entity. Often the chief operating decision maker of a
public entity is its chief executive officer or chief operating officer, but it
may be a group consisting of, for example, the public entity's president,
executive vice presidents, and others. Pursuant to Paragraph 280-10-50-10 a
public entity shall report separately information about each operating segment
that meets both of the following criteria: a. Has been identified in accordance
with paragraphs 280-10-50-1 and 280-10-50-3 through 50-9 or results from
aggregating two or more of those segments in accordance with the following
paragraph; and b. Exceeds the quantitative thresholds in paragraph 280-10-50-12.
In accordance with Paragraph 280-10-50-12 a public entity shall report
separately information about an operating segment that meets any of the
following quantitative thresholds: a. Its reported revenue, including both sales
to external customers and intersegment sales or transfers, is 10 percent or more
of the combined revenue, internal and external, of all operating segments. b.
The absolute amount of its reported profit or loss is 10 percent or more of the
greater, in absolute amount, of either: 1. The combined reported profit of all
operating segments that did not report a loss, or 2. The combined reported loss
of all operating segments that did report a loss. c. Its assets are 10 percent
or more of the combined assets of all operating segments. Pursuant to Paragraphs
280-10-50-22 and 280-10-50-29, a public entity shall report a measure of profit
or loss and total assets for each reportable segment and provide an explanation
of the measurements of segment profit or loss and segment assets for each
reportable segment. At a minimum, a public entity shall disclose all of the
following: a. The basis of accounting for any transactions between reportable
segments. b. The nature of any differences between the measurements of the
reportable segments' profits or losses and the public entity's consolidated
income (loss) before income tax provision, extraordinary items, and discontinued
operations (if not apparent from the reconciliations described in paragraphs
280-10-50-30 through 50-31). c. The nature of any differences between the
measurements of the reportable segments assets and the public entity's
consolidated assets (if not apparent from the reconciliations described in
paragraphs 280-10-50-30 through 50-31). d. The nature of any changes from prior
periods in the measurement methods used to determine reported segment profit or
loss and the effect, if any, of those changes on the measure of segment profit
or loss. e. The nature and effect of any asymmetrical allocations to reportable
segments.
Subsequent Events
The Company follows the guidance in Section 855-10-50 of the
FASB Accounting Standards Codification for the disclosure of subsequent events.
The Company will evaluate subsequent events through the date when the financial
statements are issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards
Codification, the Company as an SEC filer considers its financial statements
issued when they are widely distributed to users, such as through filing them on
EDGAR.
F - 20
Recently Issued Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board, or
FASB, issued ASU No. 2013-04, "
Liabilities (Topic 405): Obligations Resulting
from Joint and Several Liability Arrangements for which the Total Amount of the
Obligation Is Fixed at the Reporting Date
." This ASU addresses the
recognition, measurement, and disclosure of certain obligations resulting from
joint and several arrangements including debt arrangements, other contractual
obligations, and settled litigation and judicial rulings. The ASU is effective
for public entities for fiscal years, and interim periods within those years,
beginning after December 15, 2013.
In March 2013, the FASB issued ASU No. 2013-05, "
Foreign
Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation
Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within
a Foreign Entity or of an Investment in a Foreign Entity
." This ASU
addresses the accounting for the cumulative translation adjustment when a parent
either sells a part or all of its investment in a foreign entity or no longer
holds a controlling financial interest in a subsidiary or group of assets that
is a nonprofit activity or a business within a foreign entity. The guidance
outlines the events when cumulative translation adjustments should be released
into net income and is intended by FASB to eliminate some disparity in current
accounting practice. This ASU is effective prospectively for fiscal years, and
interim periods within those years, beginning after December 15, 2013.
In March 2013, the FASB issued ASU 2013-07,
Presentation of
Financial Statements (Topic 205): Liquidation Basis of Accounting.
The
amendments require an entity to prepare its financial statements using the
liquidation basis of accounting when liquidation is imminent. Liquidation is
imminent when the likelihood is remote that the entity will return from
liquidation and either (a) a plan for liquidation is approved by the person or
persons with the authority to make such a plan effective and the likelihood is
remote that the execution of the plan will be blocked by other parties or (b) a
plan for liquidation is being imposed by other forces (for example, involuntary
bankruptcy). If a plan for liquidation was specified in the entitys governing
documents from the entitys inception (for example, limited-life entities), the
entity should apply the liquidation basis of accounting only if the approved
plan for liquidation differs from the plan for liquidation that was specified at
the entitys inception. The amendments require financial statements prepared
using the liquidation basis of accounting to present relevant information about
an entitys expected resources in liquidation by measuring and presenting assets
at the amount of the expected cash proceeds from liquidation. The entity should
include in its presentation of assets any items it had not previously recognized
under U.S. GAAP but that it expects to either sell in liquidation or use in
settling liabilities (for example, trademarks). The amendments are effective for
entities that determine liquidation is imminent during annual reporting periods
beginning after December 15, 2013, and interim reporting periods therein.
Entities should apply the requirements prospectively from the day that
liquidation becomes imminent. Early adoption is permitted.
Management does not believe that any other recently issued, but
not yet effective accounting pronouncements, if adopted, would have a material
effect on the consolidated financial statements.
Note 3 Going Concern
The consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
continuity of operations, realization of assets, and liquidation of liabilities
in the normal course of business.
As reflected in the consolidated financial statements, the
Company had working capital deficiency at December 31, 2013 and a net loss for the
reporting period then ended. These factors raise substantial doubt
about the Companys ability to continue as a going concern.
The Company is attempting to further implement its business
plan and generate sufficient revenue; however, the Companys cash position may
not be sufficient to support the Companys daily operations. While the Company
believes in the viability of its strategy to further implement its business plan
and generate sufficient revenue and in its ability to raise additional funds by
way of a public or private offering, there can be no assurances to that effect.
The ability of the Company to continue as a going concern is dependent upon the
Companys ability to further implement its business plan and generate sufficient
revenue and its ability to raise additional funds by way of a public or private
offering.
The consolidated financial statements do not include any
adjustments related to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Note 4 Pledged Deposits
Pledged deposits consisted of the following:
F - 21
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Bank deposits held as collateral for
bankers acceptance notes payable (i)
|
$
|
1,969,311
|
|
$
|
9,585,882
|
|
|
|
|
|
|
|
|
Bank deposits held as collateral for loans
payable banks, secured (ii)
|
|
27,092,350
|
|
|
17,493,645
|
|
|
|
|
|
|
|
|
|
$
|
29,061,661
|
|
$
|
27,079,527
|
|
|
(i)
|
Certain suppliers require the Company to settle accounts
payable in the form of bankers acceptance notes issued by banks for which
the banks undertake to guarantee the Companys settlement of these amounts
at maturity. These bankers acceptance notes are interest free and usually
mature within six to nine months from the date of issuance. The Company is
required to pay the bank charges as well as maintain deposits with such
banks in amounts ranging from 50% to 100% of the face amount of bankers
acceptance notes as collateral for the banks undertakings.
|
|
(ii)
|
The Company is required to maintain deposits with banks
in the amounts ranging from 75% to 100% of the principal amount of the
loans as collateral for the loans payable.
|
Note 5 Accounts Receivable
Accounts receivable consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
50,369,937
|
|
$
|
58,542,915
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
(5,078,596
|
)
|
|
(2,731,447
|
)
|
|
|
|
|
|
|
|
|
$
|
45,291,341
|
|
$
|
55,811,468
|
|
An analysis of the allowance for doubtful accounts is as
follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Balance at the beginning of the reporting
period
|
$
|
(2,731,447
|
)
|
$
|
(2,046,820
|
)
|
|
|
|
|
|
|
|
Additions to allowance for doubtful
accounts
|
|
(2,227,197
|
)
|
|
(669,900
|
)
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(119,952
|
)
|
|
(14,727
|
)
|
|
|
|
|
|
|
|
Balance at the end of the reporting period
|
$
|
(5,078,596
|
)
|
$
|
(2,731,447
|
)
|
Note 6 Inventories
Inventories consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
4,397,033
|
|
$
|
4,327,856
|
|
|
|
|
|
|
|
|
Work-in-process
|
|
2,938,559
|
|
|
2,249,471
|
|
|
|
|
|
|
|
|
Finished goods
|
|
5,940,565
|
|
|
6,543,959
|
|
|
|
|
|
|
|
|
Total inventories
|
|
13,276,157
|
|
|
13,121,286
|
|
|
|
|
|
|
|
|
Inventory obsolescence reserve
|
|
(231,612
|
)
|
|
(150,118
|
)
|
|
|
|
|
|
|
|
Inventory lower of cost or market reserve
|
|
(-)
|
|
|
(-)
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
(231,612
|
)
|
|
(150,118
|
)
|
|
|
|
|
|
|
|
Inventories, net
|
$
|
13,044,545
|
|
$
|
12,971,168
|
|
Slow-Moving or Obsolescence Markdowns
The Company recognized inventory obsolescence adjustments of
$75,540 and $123,422 in the cost of goods sold for the year ended December 31, 2013 or 2012, respectively.
F - 22
Lower of Cost or Market Adjustments
There were no lower of cost or market adjustments for the
reporting period ended December 31, 2013 or 2012.
Note 7 Prepayments and Other Current Assets
Prepayments and other current assets consisted of the
following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Government grants receivable (i)
|
$
|
-
|
|
$
|
398,913
|
|
|
|
|
|
|
|
|
Loans to third parties (ii)
|
|
1,460,363
|
|
|
1,532,455
|
|
|
|
|
|
|
|
|
Value added tax and other tax recoverable
|
|
240,423
|
|
|
569,886
|
|
|
|
|
|
|
|
|
Advances on purchase of raw materials
|
|
1,724,763
|
|
|
2,145,583
|
|
|
|
|
|
|
|
|
Other deposits
|
|
26,257
|
|
|
1,140,410
|
|
|
|
|
|
|
|
|
Prepayments
|
|
1,580,597
|
|
|
874,873
|
|
|
|
|
|
|
|
|
Other receivables
|
|
700,588
|
|
|
489,653
|
|
|
|
|
|
|
|
|
Advances to senior management
|
|
-
|
|
|
9,005
|
|
|
|
|
|
|
|
|
Advances for sourcing and logistics (iii)
|
|
4,882,456
|
|
|
4,172,518
|
|
|
|
|
|
|
|
|
Total prepayments and other current assets
|
|
10,615,447
|
|
|
11,333,296
|
|
|
|
|
|
|
|
|
Reserve
|
|
(5,538,406
|
)
|
|
(1,824,114
|
)
|
|
|
|
|
|
|
|
|
$
|
5,077,041
|
|
$
|
9,509,182
|
|
(i)
|
Government grants receivable as of December 31, 2012
represented incentive bonus of $398,913 from the local government for good
performance by Refractories. Based on the evaluation of the collectability
made at the end of 2013, management decided to write off the government
grants receivable against the full reserve taken against it.
|
|
|
(ii)
|
The loans to third parties primarily represent loans to
companies which have business connections with the Company. The amounts
are non-interest-bearing, unsecured and due on demand.
|
|
|
(iii)
|
The amounts primarily represent staff drawings for
handling sourcing and logistic activities for the Company in the ordinary
course of business.
|
An analysis of the reserve is as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Balance at the beginning of the reporting
period
|
$
|
(1,824,114
|
)
|
$
|
(757,217
|
)
|
|
|
|
|
|
|
|
Additions to reserve
|
|
(3,605,334
|
)
|
|
(1,060,935
|
)
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(108,958
|
)
|
|
(5,962
|
)
|
|
|
|
|
|
|
|
Balance at the end of the reporting period
|
$
|
(5,538,406
|
)
|
$
|
(1,824,114
|
)
|
Note 8 Investment in a Non-consolidated Entity
The Company acquired a 24.5% equity interest in Yili YiQiang
Silicon Limited ("Yili"), a company incorporated in China and engaged in
manufacturing and trading of silicon carbide, for RMB 15 million (approximately
$2.36 million).
Investment in an entity over which the Company does not have
control, but has significant influence in the operating or financial policies,
is accounted for using the equity method of accounting. The Company accounts for
its investment in Yili using the equity method of accounting and reports such in
the consolidated balance sheets as investment in a non-consolidated affiliate.
F - 23
The management of the Company performed its annual impairment
testing and determined that there was no impairment as of December 31, 2013 or
2012.
Investment in a non-consolidated entity consisted of the
following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Investment in a non-consolidated affiliate
|
$
|
1,040,492
|
|
$
|
1,092,041
|
|
|
|
|
|
|
|
|
Less: proportional share of net loss of a
non-consolidated affiliate
|
|
(100,868
|
)
|
|
(59,143
|
)
|
|
|
|
|
|
|
|
Translation adjustment
|
|
32,762
|
|
|
7,594
|
|
|
|
|
|
|
|
|
|
$
|
972,386
|
|
$
|
1,040,492
|
|
Note 9 Property, Plant and Equipment
Property, plant and equipment, stated at cost, less accumulated
depreciation consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Buildings and leasehold improvements (i)
|
$
|
26,383,233
|
|
$
|
25,669,609
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
1,802,691
|
|
|
2,497,799
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
18,742,961
|
|
|
15,289,765
|
|
|
|
|
|
|
|
|
Vehicles
|
|
2,788,696
|
|
|
2,369,478
|
|
|
|
|
|
|
|
|
Furniture, fixtures and office equipment
|
|
1,896,887
|
|
|
1,670,067
|
|
|
|
|
|
|
|
|
Less accumulated impairment
|
|
(230,872
|
)
|
|
(223,539
|
)
|
|
|
|
|
|
|
|
|
|
51,383,596
|
|
|
47,273,179
|
|
|
|
|
|
|
|
|
Less accumulated depreciation (ii)
|
|
(14,422,743
|
)
|
|
(10,848,175
|
)
|
|
|
|
|
|
|
|
|
$
|
36,960,853
|
|
$
|
36,425,004
|
|
|
(i)
|
Capitalized Interest
|
|
|
|
|
|
The Company did not capitalize any of interest to fixed
assets for the reporting period ended December 31, 2013 or 2012.
|
|
|
|
|
(ii)
|
Depreciation Expense
|
|
|
|
|
|
Depreciation expense was $3,175,595 and
$3,041,657 for the reporting period ended December 31, 2013 and 2012,
respectively.
|
|
|
|
|
(iii)
|
Annual Impairment Testing
|
|
|
|
|
|
The Company conducted its impairment testing of property,
plant and equipment on an annual basis. The management of the Company
determined that there was no impairment as the fair value of property,
plant and equipment exceeded their carrying values at December 31, 2013.
There was an impairment of $223,539 at December 31,
2012.
|
Note 10 Land Use Rights
Land use rights, stated at cost, less accumulated amortization
consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Land use rights
|
$
|
4,536,072
|
|
$
|
4,427,495
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
(492,512
|
)
|
|
(391,547
|
)
|
|
|
|
|
|
|
|
|
$
|
4,043,560
|
|
$
|
4,035,948
|
|
F - 24
|
(i)
|
Amortization Expense
|
|
|
|
|
|
Amortization expense was $86,935 and $229,498 for the
reporting period ended December 31, 2013 and 2012, respectively.
|
|
|
|
|
(ii)
|
Collateralization of Land Use
Rights
|
|
|
|
|
|
$1,102,783 and $3,062,931 of the Companys land use
rights were collateralized for certain bank loan arrangements at December
31, 2013 and 2012, respectively.
|
|
|
|
|
(iii)
|
Impairment
|
|
|
|
|
|
The Company completed its annual impairment testing of
the land use rights and determined that there was no impairment as the
fair value of land use rights exceeded their carrying values at December
31, 2013.
|
Note 11 Loans Payable
Loans payable consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Loans payable non-interest bearing from
third parties (i)
|
$
|
9,587,462
|
|
$
|
6,601,065
|
|
|
|
|
|
|
|
|
Loan payable non-interest bearing from
Chairman and CEO (ii)
|
|
18,014
|
|
|
158,400
|
|
|
|
|
|
|
|
|
Loans payable banks, secured (iii)
|
|
60,310,354
|
|
|
65,196,883*
|
|
|
|
|
|
|
|
|
Loans payable non-financial institutions
(iv)
|
|
6,351,560
|
|
|
3,170,000*
|
|
|
|
|
|
|
|
|
|
$
|
76,267,390
|
|
$
|
75,127,348
|
|
(*) All loans payable outstanding at December 31, 2012 were
fully repaid.
|
(i)
|
Loans payable non-interest bearing represent unsecured
and due on demand advances from third parties.
|
|
(ii)
|
Loan payable non-interest bearing and due on demand
advances from the Companys Chairman and CEO were RMB110,042
(approximately $18,014) and RMB1 million (approximately $158,400) as of
December 31, 2013 and December 31, 2012, respectively.
|
|
(iii)
|
Loans payable banks, secured, are denominated in RMB
and carry an average interest rate of 7.45% per annum with maturity dates
ranging from four months to twelve months. These loans were secured by (a)
bankers acceptance notes receivable; (b) restricted cash deposits; (c)
certain land use rights; and (d) guaranteed by Mr. Shunqing Zhang,
Chairman and CEO of the Company and third parties.
|
|
(iv)
|
Loans payable non-financial institutions includes (a)
loans payable of $2,046,250 from a third party with interest at 21.6% per
annum, guaranteed by Mr. Shunqing Zhang, the Chairman and CEO of the
Company and another employee of the Company, which was fully repaid in
February 2014; (b) loan payable of $2,668,310 from a third party with
interest at 14.4% per annum, which was fully repaid in April 2014; and (c)
loan payable of $1,637,000 from a third party with interest at 24% per
annum, guaranteed by Mr. Shunqing Zhang and another employee of the
Company maturing on June 5, 2014.
|
Note 12 Bankers Acceptance Notes Payable
Bankers acceptance notes payable consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Bankers acceptance notes payable maturing
from January 5, 2014 through June 4, 2014, RMB57,500,000 (approximately
$9,412,750 of which have been repaid upon maturity)
|
$
|
10,460,430
|
|
$
|
13,995,550*
|
|
|
|
|
|
|
|
|
|
$
|
10,460,430
|
|
$
|
13,995,550
|
|
(*) All bankers acceptance notes payable outstanding at
December 31, 2012 were fully repaid.
Note 13 Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the
following:
F - 25
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Accrued expenses
|
$
|
212,788
|
|
$
|
310,241
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
98,100
|
|
|
392,898
|
|
|
|
|
|
|
|
|
Salary and wages payable
|
|
1,573,821
|
|
|
1,360,136
|
|
|
|
|
|
|
|
|
Accrued payroll tax and benefits
|
|
171,263
|
|
|
196,048
|
|
|
|
|
|
|
|
|
Advances from employees
|
|
704,137
|
|
|
1,066,429
|
|
|
|
|
|
|
|
|
Guaranty liability
|
|
134,992
|
|
|
210,690
|
|
|
|
|
|
|
|
|
Other payables
|
|
1,573,845
|
|
|
1,045,443
|
|
|
|
|
|
|
|
|
|
$
|
4,468,946
|
|
$
|
4,581,885
|
|
Note 14 Accrued Warranty
Accrued warranty consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Balance, beginning of the reporting period
|
$
|
100,570
|
|
$
|
184,778
|
|
|
|
|
|
|
|
|
Claims paid during the period
|
|
(52,077
|
)
|
|
(81,346
|
)
|
|
|
|
|
|
|
|
Additional accrual during the period
|
|
28,468
|
|
|
(2,862
|
)
|
|
|
|
|
|
|
|
Balance, end of the reporting period
|
$
|
76,961
|
|
$
|
100,570
|
|
Note 15 Related Party Transactions
Related Parties
Related parties with whom the Company had transactions are:
Related
Parties
|
Relationship
|
|
|
Mr. Shunqing Zhang
|
Chairman, CEO,
significant stockholder and director
|
Advances from Chairman, CEO and Significant
Stockholder
From time to time, the Chairman, CEO and significant
stockholder of the Company advances funds to the Company for working capital
purpose. Those advances are unsecured, non-interest bearing and due on demand
and recorded as loan payable non-interest bearing from the Companys Chairman
and CEO in the consolidated balance sheets.
Guarantee of Loans Payable Banks by Chairman, CEO and
Significant Stockholder
Mr. Shunqing Zhang, the Chairman, CEO and significant
stockholder of the Company, provided the guarantee to loans payable banks and
loan payable non-financial institutions.
Related Person Transaction Policy
The Companys board of directors has not adopted a written
Related Person Transaction Policy that requires the board of directors or Audit
Committee to approve or ratify transactions between the Company or one or more
of its subsidiaries and any related person involving an amount in excess of
$120,000; however, all related party transactions that has not been previously
approved or previously ratified during the two most recent reporting period have
been ratified by the Company's board of directors and audit committee as of the
date when the financial statements were issued.
Note 16 Commitments and Contingencies
F - 26
Employment Agreements
Employment Agreement with
Chairman and CEO
On January 1, 2012 the Company entered into an employment
agreement with Mr. Shunqing Zhang, Chairman and CEO of the Company effective
upon signing.
(i)
Term
Unless terminated earlier as provided in Section 5 of this
Agreement, this Agreement shall have an initial term (the Initial Term)
commencing as of the date of this Agreement and expiring on December 31, 2013
and continuing on a year-to-year basis thereafter unless terminated by either
party on not less than thirty (30) day notice prior to the expiration of the
Initial Term or any one-year extension. The Initial Term and the one-year
extensions are collectively referred to as the Term.
(ii)
Compensation
For her services to the Company during the Term, the Company
shall pay Executive an annual salary (Salary) at the rate of RMB 70,000
(approximately $11,305) per annum. All Salary payments shall be payable in such
installments as the Company regularly pays its employees in accordance with
normal payroll practices.
(iii)
Covenant
Not To Solicit or Compete
During the period from the date of this Agreement until one (1)
year following the date on which Executives employment is terminated, he will
not, directly or indirectly: (1) Persuade or attempt to persuade any person or
entity which is or was a customer, client or supplier of the Company to cease
doing business with the Company, or
to reduce the amount of business it
does with the Company (the terms customer and client as used in Section 7 to
include any potential customer or client to whom the Company submitted bids or
proposals, or with whom the Company conducted negotiations, during the term of
Executives employment hereunder or during the twelve (12) months preceding the
termination of his employment); (2) solicit for himself or any other person or
entity other than the Company the business of any person or entity which is a
customer or client of the Company, or was a customer or client of the Company
within one (1) year prior to the termination of his employment; or (3) persuade
or attempt to persuade any employee of the Company, or any individual who was an
employee of the Company during the one (1) year period prior to the lawful and
proper termination of this Agreement, to leave the Companys employ, or to
become employed by any person or entity other than the Company.
Mr. Zhang voluntarily received a reduced salary of
approximately $48,450 and $47,520 during the fiscal year of 2013 and 2012.
Employment Agreement with Chief
Financial Officer
On September 16, 2013 the Company entered into an employment
agreement with Ms. Zhang was appointed the interim Chief Financial Officer
effective upon signing.
(i)
Term
Unless terminated earlier as provided in Section 6 of this
Agreement, this Agreement shall have a term (the Term) commencing as of
September 16, 2013 and expiring on the date when a suitable candidate for Chief
Financial Officer has been qualified and selected unless terminated by either
party on not less than thirty (30) day notice prior to the expiration of the
Term.
(ii)
Compensation
For his services to the Company during the Term, the Company
shall pay Executive an annual salary (Salary) at the rate of $78,700. All
Salary payments shall be payable in such installments as the Company regularly
pays its employees in accordance with normal payroll practices.
(iii)
Covenant
Not To Solicit or Compete
During the period from the date of this Agreement until one (1)
year following the date on which Executives employment is terminated, he will
not, directly or indirectly: (1) Persuade or attempt to persuade any person or
entity which is or was a customer, client or supplier of the Company to cease
doing business with the Company, or
to reduce the amount of business it
does with the Company (the terms customer and client as used in Section 7 to
include any potential customer or client to whom the Company submitted bids or
proposals, or with whom the Company conducted negotiations, during the term of
Executives employment hereunder or during the twelve (12) months preceding the
termination of his employment); (2) solicit for himself or any other person or
entity other than the Company the business of any person or entity which is a
customer or client of the Company, or was a customer or client of the Company
within one (1) year prior to the termination of his employment; or (3) persuade
or attempt to persuade any employee of the Company, or any individual who was an employee of the Company during the
one (1) year period prior to the lawful and proper termination of this
Agreement, to leave the Companys employ, or to become employed by any person or
entity other than the Company.
F - 27
VAT Taxes Subject to Audit
In accordance with the PRC tax regulations, the Companys sales
are subject to value added tax (VAT) at 17% upon the issuance of VAT invoices
to its customers. When preparing these consolidated financial statements, the
Company recognized revenue when the significant risks and rewards of ownership
have been transferred to the buyer at the time when the products are delivered
to and accepted by customers, and made full tax provision in accordance with
relevant national and local laws and regulations of the PRC.
The Company follows the practice of reporting its revenue for
PRC tax purposes when invoices are issued. In the statutory financial statements
prepared for VAT and corporate income tax purposes the Company recognized
revenue on an invoice basis instead of when the significant risks and rewards
of ownership have been transferred to the buyer at the time when the products
are delivered to and accepted by customers. Accordingly, despite the fact the
Company has made full tax provision in the consolidated financial statements,
the Company may be subject to a penalty for the deferred reporting of tax
obligations. The exact amount of penalty cannot be estimated with any reasonable
degree of certainty. The management considers it is very unlikely that the tax
penalty will be imposed.
Loan Guarantees to Third Parties
The Company has acted as guarantor for bank loans granted to
third parties which provide guarantees to the Companys loans payable.
The amount of bank loans guaranteed by the Company as of
December 31, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
repaid
|
|
|
Balance
|
|
|
Outstanding
|
|
|
|
|
|
|
Term loan
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Outstanding
|
|
|
interest at
|
|
|
Estimated
|
|
Guarantee
|
|
draw down
|
|
|
Date of
|
|
|
Interest rate
|
|
|
Principal of
|
|
|
December
|
|
|
at December
|
|
|
December
|
|
|
maximum
|
|
(a)
|
|
date
|
|
|
Expiration
|
|
|
per annum
|
|
|
the loan
|
|
|
31, 2013
|
|
|
31, 2013
|
|
|
31, 2013
|
|
|
exposure (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
08/27/2012
|
|
|
08/26/2015
|
|
|
11.664%
|
|
|
1,637,000
|
|
|
-
|
|
|
1,637,000
|
|
|
320,674
|
|
|
1,957,674
|
|
|
|
01/12/2013
|
|
|
01/11/2014
|
|
|
8.640%
|
|
|
8,185,000
|
|
|
-
|
|
|
8,185,000
|
|
|
40,687
|
|
|
8,225,687
|
|
|
|
06/08/2013
|
|
|
06/06/2014
|
|
|
6.000%
|
|
|
3,274,000
|
|
|
-
|
|
|
3,274,000
|
|
|
89,878
|
|
|
3,363,878
|
|
|
|
06/29/2013
|
|
|
06/25/2014
|
|
|
11.520%
|
|
|
818,500
|
|
|
-
|
|
|
818,500
|
|
|
48,050
|
|
|
866,550
|
|
|
|
10/23/2013
|
|
|
10/22/2014
|
|
|
6.000%
|
|
|
3,274,000
|
|
|
-
|
|
|
3,274,000
|
|
|
164,148
|
|
|
3,438,148
|
|
|
|
10/29/2013
|
|
|
10/28/2014
|
|
|
7.800%
|
|
|
736,650
|
|
|
-
|
|
|
736,650
|
|
|
48,958
|
|
|
785,608
|
|
|
|
11/25/2013
|
|
|
11/24/2014
|
|
|
6.000%
|
|
|
3,274,000
|
|
|
-
|
|
|
3,274,000
|
|
|
181,909
|
|
|
3,455,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,199,150
|
|
$
|
-
|
|
$
|
21,199,150
|
|
$
|
894,304
|
|
$
|
22,093,454
|
|
The amount of bank loans guaranteed by the Company as of
December 31, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
repaid
|
|
|
Balance
|
|
|
Outstanding
|
|
|
|
|
|
|
Term loan
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Outstanding
|
|
|
interest at
|
|
|
Estimated
|
|
Guarantee
|
|
draw down
|
|
|
Date of
|
|
|
Interest rate
|
|
|
Principal of
|
|
|
December
|
|
|
at December
|
|
|
December
|
|
|
maximum
|
|
(a)
|
|
date
|
|
|
Expiration
|
|
|
per annum
|
|
|
the loan
|
|
|
31, 2012
|
|
|
31, 2012
|
|
|
31, 2012
|
|
|
exposure (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
01/12/2012
|
|
|
01/11/2013
|
|
|
6.588%
|
|
|
7,925,000
|
|
|
-
|
|
|
7,925,000
|
|
|
30,039
|
|
|
7,955,039
|
|
|
|
03/06/2012
|
|
|
03/05/2013
|
|
|
7.216%
|
|
|
2,060,500
|
|
|
-
|
|
|
2,060,500
|
|
|
30,144
|
|
|
2,090,644
|
|
|
|
06/05/2012
|
|
|
06/04/2013
|
|
|
7.930%
|
|
|
4,755,000
|
|
|
-
|
|
|
4,755,000
|
|
|
170,457
|
|
|
4,925,457
|
|
|
|
06/29/2012
|
|
|
06/26/2013
|
|
|
12.096%
|
|
|
792,500
|
|
|
-
|
|
|
792,500
|
|
|
49,112
|
|
|
841,612
|
|
|
|
07/16/2012
|
|
|
07/15/2013
|
|
|
7.200%
|
|
|
3,170,000
|
|
|
-
|
|
|
3,170,000
|
|
|
129,440
|
|
|
3,299,440
|
|
|
|
08/27/2012
|
|
|
08/26/2015
|
|
|
11.664%
|
|
|
1,585,000
|
|
|
-
|
|
|
1,585,000
|
|
|
495,869
|
|
|
2,080,869
|
|
|
|
08/31/2012
|
|
|
08/30/2013
|
|
|
6.600%
|
|
|
713,250
|
|
|
-
|
|
|
713,250
|
|
|
32,630
|
|
|
745,880
|
|
|
|
09/10/2012
|
|
|
09/09/2013
|
|
|
6.000%
|
|
|
427,950
|
|
|
-
|
|
|
427,950
|
|
|
18,502
|
|
|
446,452
|
|
|
|
09/20/2012
|
|
|
09/19/2013
|
|
|
6.000%
|
|
|
3,170,000
|
|
|
-
|
|
|
3,170,000
|
|
|
142,259
|
|
|
3,312,259
|
|
|
|
10/26/2012
|
|
|
10/25/2013
|
|
|
6.160%
|
|
|
3,170,000
|
|
|
-
|
|
|
3,170,000
|
|
|
165,312
|
|
|
3,335,312
|
|
|
|
11/23/2012
|
|
|
11/22//2013
|
|
|
6.160%
|
|
|
3,170,000
|
|
|
-
|
|
|
3,170,000
|
|
|
179,757
|
|
|
3,349,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,939,200
|
|
$
|
-
|
|
$
|
30,939,200
|
|
$
|
1,443,521
|
|
$
|
32,382,721
|
|
All of bank loans guaranteed by the Company at December 31,
2012 have been fully repaid by relevant third party borrowers for both principal
and interest when they became due.
|
(a)
|
The Company has acted as guarantor for certain bank loans
granted to third parties which in turn provided guarantees for certain
bank loans to the Company. None of the Companys directors, director
nominees or executive officers is involved in normal operations or
investing in the business of the third parties loan
guarantors.
|
F - 28
|
(b)
|
If third parties fail to fully repay bank loans under
their contractual obligation, the Company is bound by the bank loan
guarantees to make full payments including principal amounts and related
accrued interest and penalties. There was no recourse provision that would
enable the Company to recover from third parties of any amounts paid under
bank loan guarantees and any assets held either as collateral or by third
parties that the Company can obtain or liquidate to recover all or a
portion of the amounts paid under the guarantees in the event of default
by third parties; however, the Company has not experienced losses on these
accounts and management believes that the Company is not exposed to
significant risks on such accounts.
|
An analysis of the guarantee liability is as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Balance at the beginning of the reporting
period
|
$
|
(210,690
|
)
|
$
|
(309,858
|
)
|
|
|
|
|
|
|
|
Guarantee expenses recognized during the
period
|
|
(256,785
|
)
|
|
(461,578
|
)
|
|
|
|
|
|
|
|
Guarantee income recognized during the
period
|
|
338,285
|
|
|
562,847
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
(5,802
|
)
|
|
(2,101
|
)
|
|
|
|
|
|
|
|
Balance at the end of the reporting period
|
$
|
(134,992
|
)
|
$
|
(210,690
|
)
|
Note 17 Stockholders Equity
Shares Authorized
Shares Authorized upon
Incorporation
Upon formation the aggregate number of shares which the
Corporation shall have authority to issue is 3,000,000 shares of common stock
par value $0.10.
Articles of Amendment to the
Articles of Incorporation
On April 15, 1978 the Company filed first Articles of Amendment
with the Secretary of the State of the State of Washington to change total
number of shares of Common Stock the Company is authorized to issue to Ten
Million (10,000,000) shares, par value $0.05.
Shares Authorized upon
Re-domicile in the State of Nevada
On May 22, 2006 the Company formed a Nevada corporation by
filing the Articles of Incorporation with the Secretary of the State of the
State of Nevada whereby the Company is authorized to issue is One Hundred Fifty
Million (150,000,000) shares of which Fifty Million (50,000,000) shares shall be
Preferred Stock, par value $0.001 per share, and One Hundred Million
(100,000,000) shares shall be Common Stock, par value $0.001 per share.
On August 15, 2006 the Company changed its state of
incorporation from Washington to Nevada by means of a merger with and into a
Nevada corporation formed on May 22, 2006, solely for the purpose of
effectuating the reincorporation.
2011 Stock Incentive Plan
Adoption of 2011 Stock Incentive
Plan
At the annual meeting of stockholders of the Company held on
September 28, 2011, the majority stockholders of the Company approved the 2011
Stock Incentive Plan (the 2011 Stock Incentive Plan). The purpose of the 2011
Stock Incentive Plan is to advance the interests of the Company by providing an
incentive to attract, retain and motivate highly qualified and competent persons
who are important to us and upon whose efforts and judgment the success of the
Company is largely dependent. Grants to be made under the 2011 Stock Incentive
Plan are limited to the Companys employees, including employees of the
Companys subsidiaries, the Companys directors and consultants to the Company.
The recipients of any grant under the 2011 Stock Incentive Plan, and the amount
and terms of a specific grant, are determined by the Board of Directors of the
Company. Should any option granted or stock awarded under the 2011 Stock
Incentive Plan expire or become un-exercisable for any reason without having
been exercised in full or fail to vest, the shares subject to the portion of the
option not so exercised or lapsed will become available for subsequent stock or
option grants.
Shares of stock issuable under the 2011 Stock Incentive Plan
are available either from authorized but unissued shares or from shares
reacquired by us on the open market. Subject to the adjustment provision
mentioned below, the maximum number of shares of Stock available for issuance
under the 2011 Stock Incentive Plan shall be 3,000,000. All of the shares of
Stock available for issuance under the 2011 Stock Incentive Plan shall be available for issuance
pursuant to Incentive Stock Options. To the extent shares of Stock not issued
under an Option must be counted against this limit as a condition to satisfying
the rules applicable to incentive stock options, such rule shall apply to the
limit on incentive stock options granted under the 2011 Stock Incentive Plan.
Stock issued or to be issued under the 2011 Stock Incentive Plan shall be
authorized but unissued shares; or, to the extent permitted by applicable law,
issued shares that have been reacquired by the Company. The maximum number of
shares of Common Stock that may be subject to Awards (denominated in shares of
Stock) to any one Grantee during any calendar year shall not exceed 100,000. If
an Award is denominated in shares of Stock but an equivalent value of cash is
paid in lieu of shares, the foregoing limit shall be applied to the shares based
on the methodology used by the Committee to convert the shares to cash. For any
awards that are stated with reference to a specified dollar limit, the maximum
amount that may be paid to any one Grantee with respect to a 12 month
performance period shall equal to the dollar equivalent of the number of shares
that can be awarded to any one Grantee during a 12-month performance period
(prorated up or down for performance periods that are greater or lesser than 12
months). If a SAR is granted in tandem with an Option, the SAR and the Option
are considered one Award.
F - 29
Summary of the Companys Amended
2011 Stock Incentive Plan Activities
The Board of Directors of the Company did not grant any stock
option or stock appreciation right under its 2011 Stock Incentive Plan as of the
date when the financial statements were issued for the reporting period ended
December 31, 2013 or 2012.
As of December 31, 2013, there were 3,000,000 shares of common
stock remaining available for issuance under the 2011 Stock Incentive Plan.
Statutory and Other Reserves
Statutory Surplus Reserve and
Common Welfare Fund
Under the laws of the PRC, net income after taxation can only
be distributed as dividends after appropriation has been made for the following:
(i) cumulative prior years losses, if any; (ii) allocations to the Statutory
Surplus Reserve of at least 10% of net income after tax, as determined under
PRC accounting rules and regulations, until the fund amounts to 50% of the
Companys registered capital; (iii) allocations of 5-10% of income after tax, as
determined under PRC accounting rules and regulations, to the Companys
Statutory Common Welfare Fund, which is established for the purpose of
providing employee facilities and other collective benefits to employees in PRC;
and (iv) allocations to any discretionary surplus reserve, if approved by
stockholders.
Other 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.
As of December 31, 2013, the Company had $8,241,559 statutory
and other special reserves established and segregated in the retained earnings.
Note 18 Income Tax Provision
United States Income Tax
The Company is incorporated in the United States of America
(U.S.) and is subject to U.S. tax laws. No income tax provision has been made
as the Company has no U.S. taxable income for the reporting periods. The
applicable statutory income tax rate is 34% for the reporting periods. The
Company has not provided deferred tax on undistributed earnings of its non-U.S.
subsidiaries as of December 31, 2013, as it is the Company's current policy to
reinvest these earnings in non-U.S. operations.
BVI Income Tax
GengSheng International and Smarthigh were incorporated in the
BVI and are not subject to income tax under the current laws of the BVI.
PRC Income Tax
The Companys PRC subsidiaries are governed by and file
separate income tax returns under the Income Tax Law of the Peoples Republic of
China concerning Foreign Investment Enterprises and Foreign Enterprises and
local income tax laws (the PRC Income Tax Law), which, until January 2008, generally subject to tax at a
statutory rate of 33% (30% state income tax plus 3% local income tax) on income
reported in the statutory financial statements after appropriate tax
adjustments. On March 16, 2007, the National Peoples Congress of China approved
the Corporate Income Tax Law of the Peoples Republic of China (the PRC New CIT
Law), effective January 1, 2008. Under the PRC New CIT Law, the corporate
income tax rate applicable to all Companies, including both domestic and
foreign-invested companies, will be 25%. Enterprises that are currently entitled
to exemptions for a fixed term will continue to enjoy such treatment until the
exemption term expires. Preferential tax treatment will continue to be granted
to industries and projects that qualify for such preferential treatments under
the new tax law.
F - 30
Income Tax Provision in the
Consolidated Statements of Operations and Comprehensive Income (Loss)
A reconciliation of the Chinese statutory income tax rate and
the effective income tax rate as a percentage of income before income tax
provision for PRC subsidiaries is as follows:
|
For the Reporting
|
For the Reporting
|
|
Period Ended
|
Period Ended
|
|
December 31, 2013
|
December 31, 2012
|
|
|
|
Refractories (i)
|
15.0%
|
15.0%
|
|
|
|
High-Temperature (i)
|
15.0%
|
15.0%
|
|
|
|
Duesail (i) (ii)
|
15.0%
|
12.5%
|
|
|
|
Prefecture
|
25.0%
|
25.0%
|
|
|
|
Micronized
|
25.0%
|
25.0%
|
|
|
|
Yuxing
|
25.0%
|
25.0%
|
|
(i)
|
The PRC New CIT Law grants preferential tax treatment to
High and New Technology Enterprises (NHTEs). Under this preferential tax
treatment, NHTEs can enjoy a preferential income tax rate of 15% for three
years upon approval which can be extended after initial certification.
Both Refractories and High-Temperature were certified as NHTE by relevant
PRC government body in 2011 and was subject to preferential enterprise
income tax rate of 15% starting from year 2011 for three years due to its
engagement in an advanced technology industry. Duesail was certified as
NHTE by relevant PRC government body in 2012 and was subject to
preferential enterprise income tax rate of 15% starting from year 2013 for
three years due to its engagement in an advanced technology
industry.
|
|
(ii)
|
Entities entitled to a tax holiday in which they are
fully exempted from the PRC enterprise income tax for two years starting
from their first profit-making year after netting off accumulated tax
losses, followed by a 50% reduction in the PRC enterprise income tax for
the next three years (tax holidays). Any unutilized tax holidays will
continue until expiration while tax holidays were deemed to start from
January 1, 2008, even if the entity was not yet making profit after
netting off its accumulated tax losses. 2012 was Duesails last (fifth)
year of tax holidays.
|
During the year ended December 31, 2013 and 2012, the amounts
of benefit from the tax holiday and tax concession were $155,725 and $99,218 and
the effect on net loss per common share basic and diluted were $0.006 and
$0.004, respectively.
Income Tax Provision
The components of the aggregate PRC income tax provision are as
follows:
|
|
For the
|
|
|
For the
|
|
|
|
Reporting
|
|
|
Reporting
|
|
|
|
Period ended
|
|
|
Period ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Income tax provision - current
|
$
|
233,587
|
|
$
|
291,588
|
|
|
|
|
|
|
|
|
Income tax provision deferred
|
|
57,753
|
|
|
200,701
|
|
|
|
|
|
|
|
|
|
$
|
291,340
|
|
$
|
492,289
|
|
Note 19 Concentrations and Credit Risk
Credit Risk Arising from Financial Instruments
Financial instruments that potentially subject the Company to
significant concentration of credit risk consist primarily of cash and cash equivalents.
F - 31
As of December 31, 2013, all of the Companys cash and cash
equivalents were held by major financial institutions located in the PRC, none
of which are insured; however, the Company has not experienced losses on these
accounts and management believes that the Company is not exposed to significant
risks on such accounts.
Customers and Credit Concentrations
Customer concentrations and credit concentrations are as
follows:
|
|
Net Sales
|
|
|
Accounts Receivable
|
|
|
|
for
the Reporting Period Ended
|
|
|
At
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PetroChina Changqing Oil Field
|
|
18.2 %
|
|
|
3.1 %
|
|
|
3.3 %
|
|
|
-%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jilin Petroleum Group Company
Ltd.
|
|
1.4 %
|
|
|
12.3 %
|
|
|
0.4 %
|
|
|
4.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong Steel Co., Ltd.
Rizhao Subsidiary
|
|
9.0 %
|
|
|
11.7 %
|
|
|
3.1 %
|
|
|
5.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.6 %
|
|
|
27.1 %
|
|
|
6.8 %
|
|
|
10.4%
|
|
A reduction in sales from or loss of such customers would have
a material adverse effect on the Companys results of operations and financial
condition.
Note 20 - Foreign Operations
Operations
Substantially all of the Companys operations are carried out
and all of its assets are located in the PRC, which may be adversely affected by
significant political, economic and social uncertainties in the PRC. Although
the PRC government has been pursuing economic reform policies since 1980, no
assurance can be given that the PRC Government will continue to pursue such
policies or that such policies may not be significantly altered, especially in
the event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRCs political, economic and social
conditions; nor that the PRC governments pursuit of economic reforms will be
consistent or effective.
Interest Risk
Substantially all of the Companys operations are carried out
in the PRC. The tight monetary policy currently instituted by the PRC government
and increases in interest rate would have a material adverse effect on the
Companys results of operations and financial condition.
Currency Convertibility Risk
Substantially all of the Companys businesses are transacted in
RMB, which is not freely convertible into foreign currencies. Under Chinas
Foreign Exchange Currency Regulation and Administration, the Company is
permitted to exchange RMB for foreign currencies through banks authorized to
conduct foreign exchange business. All foreign exchange transactions continue to
take place either through the Peoples Bank of China or other banks authorized
to buy and sell foreign currencies at the exchange rates quoted by the Peoples
Bank of China. Approval of foreign currency payments by the Peoples Bank of
China or other institutions requires submitting a payment application form
together with invoices and signed contracts.
Foreign Currency Exchange Rate Risk
On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of the RMB to U.S. Dollar. Under the new policy, the
RMB is permitted to fluctuate within a narrow and managed band against a basket
of certain foreign currencies. While the international reaction to the RMB
revaluation has generally been positive, there remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in a further and more significant volatility of the RMB
against the U.S. Dollar.
Any significant revaluation of RMB may materially and adversely
affect the cash flows, revenues, earnings and financial position reported in
U.S. Dollar.
F - 32
The Company had no foreign currency hedges in place to reduce
such exposure for the year ended December 31, 2013 or 2012.
Note 21 Segment Reporting
The Company uses the management approach in determining
reportable operating segments. The management approach considers the internal
organization and reporting used by the Company's chief operating decision maker
for making operating decisions and assessing performance as the source for
determining the Company's reportable segments. Management, including the chief
operating decision maker, reviews operating results solely by the revenue of
monolithic refractory products, industrial ceramic products, fracture proppant
products, fine precision abrasives and operating results of the Company. As
such, the Company has determined that it has four operating segments as defined
by ASC 280, Segment Reporting: refractories, industrial ceramic, fracture
proppant and fine precision abrasives.
Adjustments and eliminations of inter-company transactions were
not included in determining segment (loss) profit, as they are not used by the
chief operating decision maker.
|
|
Refractories
|
|
|
Industrial ceramic
|
|
|
Fracture proppant
|
|
|
Fine
precision abrasives
|
|
|
Total
|
|
|
|
Year
ended December 31,
|
|
|
Year
ended December 31,
|
|
|
Year
ended December 31,
|
|
|
Year
ended December 31,
|
|
|
Year
ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
$
|
33,130,518
|
|
$
|
38,877,865
|
|
$
|
1,096,224
|
|
$
|
1,802,386
|
|
$
|
22,748,958
|
|
$
|
24,516,603
|
|
$
|
3,905,677
|
|
$
|
8,337,973
|
|
$
|
60,881,377
|
|
$
|
73,534,827
|
|
Interest income
|
|
640,126
|
|
|
550,913
|
|
|
38
|
|
|
74
|
|
|
180,626
|
|
|
261,725
|
|
|
360,539
|
|
|
-
|
|
|
1,181,329
|
|
|
812,711
|
|
Interest expenses
|
|
5,024,944
|
|
|
4,244,148
|
|
|
8,876
|
|
|
1,966
|
|
|
1,245,408
|
|
|
1,456,920
|
|
|
1,464,421
|
|
|
1,597,118
|
|
|
7,743,649
|
|
|
7,300,152
|
|
Depreciation
|
|
769,555
|
|
|
735,391
|
|
|
122,203
|
|
|
115,394
|
|
|
1,290,885
|
|
|
1,217,880
|
|
|
992,952
|
|
|
972,992
|
|
|
3,175,595
|
|
|
3,041,657
|
|
Amortization
|
|
18,073
|
|
|
42,762
|
|
|
5,325
|
|
|
5,223
|
|
|
18,653
|
|
|
132,600
|
|
|
44,884
|
|
|
48,913
|
|
|
86,935
|
|
|
229,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) Profit
|
|
(10,574,352
|
)
|
|
(8,376,074
|
)
|
|
(575,240
|
)
|
|
(512,232
|
)
|
|
(2,044,388
|
)
|
|
1,309,176
|
|
|
(4,180,843
|
)
|
|
(5,234,674
|
)
|
|
(17,374,823
|
)
|
|
(12,813,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
68,847,030
|
|
|
80,170,355
|
|
|
3,460,712
|
|
|
3,778,461
|
|
|
40,456,779
|
|
|
44,524,087
|
|
|
28,011,885
|
|
|
31,709,484
|
|
|
140,776,406
|
|
|
160,182,387
|
|
Capital expenditure
|
$
|
-
|
|
$
|
1,897,177
|
|
$
|
-
|
|
$
|
27,540
|
|
$
|
2,029,633
|
|
$
|
715,830
|
|
$
|
210,294
|
|
$
|
132,692
|
|
$
|
2,239,927
|
|
$
|
2,773,239
|
|
Segment information by products for the years ended December
31, 2013 and 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine
|
|
|
|
|
|
|
Monolithic
|
|
|
|
|
|
Pre-cast
|
|
|
Ceramic
|
|
|
Ceramic
|
|
|
Wearable
|
|
|
Fracture
|
|
|
Precision
|
|
|
|
|
|
|
materials
1
|
|
|
Mortar
|
|
|
roofs
|
|
|
tubes
2
|
|
|
cylinders
3
|
|
|
ceramic valves
|
|
|
proppant
|
|
|
Abrasives
|
|
|
Total
|
|
Year ended December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
20,604,539
|
|
|
1,799,421
|
|
$
|
10,726,558
|
|
$
|
985,564
|
|
$
|
75,346
|
|
$
|
35,314
|
|
$
|
22,748,958
|
|
$
|
3,905,677
|
|
$
|
60,881,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
23,154,143
|
|
|
715,221
|
|
$
|
15,008,501
|
|
$
|
1,408,738
|
|
$
|
338,480
|
|
$
|
55,168
|
|
$
|
24,516,603
|
|
$
|
8,337,973
|
|
$
|
73,534,827
|
|
|
1.
|
Castable, coating, and dry mix materials & low-cement
and non-cement castables generally refer as Monolithic
materials.
|
|
2.
|
Ceramic plates, tubes, elbows, and rollers generally
refer as Ceramic tubes.
|
|
3.
|
Ceramic cylinders and plugs comprehensively refer to
Ceramic cylinders.
|
Note 22 Subsequent Events
The Company has evaluated all events that occurred after the
balance sheet date through the date when the financial statements were issued.
The Management of the Company determined that there were no reportable
subsequent events to be disclosed.
F - 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 15, 2014
CHINA GENGSHENG MINERALS, INC.
/s/ Shunqing Zhang
Shunqing
Zhang
Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
Signature
|
Capacity
|
Date
|
|
|
|
|
|
|
/s/ Shunqing Zhang
|
Chief Executive Officer, President and
Chairman
|
April 15, 2014
|
Shunqing Zhang
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Weina Zhang
|
Interim Chief Financial Officer
|
April 15, 2014
|
Weina Zhang
|
(Principal Financial and Accounting
Officer)
|
|
|
|
|
|
|
|
/s/ Jingzhong Yu
|
Director
|
April 15, 2014
|
Jingzhong Yu
|
|
|
|
|
|
|
|
|
/s/ Ningsheng Zhou
|
Director
|
April 15, 2014
|
Ningsheng Zhou
|
|
|
|
|
|
|
|
|
/s/ Hsin-I Lin
|
Director
|
April 15, 2014
|
Hsin-I Lin
|
|
|
|
|
|
|
|
|
/s/ Jeffrey Friedland
|
Director
|
April 15, 2014
|
Jeffrey Friedland
|
|
|
China Gengsheng Minerals (CE) (USOTC:CHGS)
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