Attached files
file | filename |
---|---|
EX-31.1 - RINO International CORP | v166110_ex31-1.htm |
EX-31.2 - RINO International CORP | v166110_ex31-2.htm |
EX-32.1 - RINO International CORP | v166110_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(MARK
ONE)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
2009.
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM ________ TO
__________
|
COMMISSION
FILE NUMBER: 0-52549
RINO
International Corporation
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA
|
41-1508112
|
|
(STATE
OR OTHER JURISDICTION OF
|
(I.R.S.
EMPLOYER IDENTIFICATION NO.)
|
|
INCORPORATION
OR ORGANIZATION
|
11
Youquan Road, Zhanqian Street, Jinzhou District
Dalian,
People’s Republic of China 116100
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES) (ZIP
CODE)
|
REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE:
+86-411-87661222
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 o.
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date 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 o No o
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes o No x
The
number of shares of Common Stock of the Registrant, par value $.0001 per share,
outstanding on November 12, 2009, was 25,351,289.
RINO
INTERNATIONAL CORPORATION
Page
Number
|
||
Part I - Financial
Information
|
F-1
|
|
Item 1 - Financial
Statements
|
F-1
|
|
Consolidated
Balance Sheets as of September 30, 2009 (unaudited) and December 31,
2008
|
F-1
|
|
Consolidated
Statements of Income and Other Comprehensive Income for the Three Months
and Nine Months ended September 30, 2009 and 2008
(unaudited)
|
F-2
|
|
Consolidated
Statements of Shareholders’ Equity (unaudited)
|
F-3
|
|
Consolidated
Statements of Cash Flows for the Nine Months ended September 30, 2009 and
2008 (unaudited)
|
F-4
|
|
Notes
to the Consolidated Financial Statements (unaudited)
|
F-5 - F-30
|
|
Item
2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
|
2
|
|
Item
4 - Controls and Procedures
|
12
|
|
Part
II - Other Information
|
13
|
|
Item
2 - Unregistered Sales of Equity Securities and Use of
Proceeds
|
13
|
|
Item 6 - Exhibits
|
13
|
|
Signature Page
|
14
|
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS OF
SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 29,020,242 | $ | 19,741,982 | ||||
Restricted
cash
|
- | 1,030,317 | ||||||
Notes
receivable
|
717,363 | 2,157,957 | ||||||
Accounts
receivable, trade, net of allowance for doubtful accounts of $342,749
and $0
as of September 30, 2009 and December 31, 2008,
respectively
|
44,559,387 | 51,503,245 | ||||||
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
13,202,094 | - | ||||||
Inventories
|
1,793,396 | 1,203,448 | ||||||
Advances
for inventory purchases
|
56,754,792 | 21,981,669 | ||||||
Other
current assets and prepaid expenses
|
678,271 | 517,847 | ||||||
Total
current assets
|
146,725,545 | 98,136,465 | ||||||
PROPERTY,
PLANT AND EQUIPMENT, NET
|
12,516,348 | 13,197,119 | ||||||
OTHER
ASSETS
|
||||||||
Prepaid
expenses (non-current)
|
64,576 | 73,350 | ||||||
Advances
for equipment and construction material purchases
|
5,550,966 | 5,550,966 | ||||||
Prepayment
for land use right
|
799,965 | 458,292 | ||||||
Intangible
assets, net
|
1,161,499 | 1,211,608 | ||||||
Total
other assets
|
7,577,006 | 7,294,216 | ||||||
Total
assets
|
$ | 166,818,899 | $ | 118,627,800 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 5,471,857 | $ | 5,816,714 | ||||
Short-term
loan
|
8,802,000 | 8,802,000 | ||||||
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
1,484,554 | - | ||||||
Customer
deposits
|
3,712,082 | 3,609,407 | ||||||
Liquidated
damages payable
|
20,147 | 2,598,289 | ||||||
Other
payables and accrued liabilities
|
427,043 | 746,267 | ||||||
Notes
payable
|
73,790 | - | ||||||
Due
to a stockholder
|
308,182 | 596,023 | ||||||
Tax
Payable
|
11,013,805 | 5,062,901 | ||||||
Total
current liabilities
|
31,313,460 | 27,231,601 | ||||||
Warrant
Liabilities
|
512,498 | - | ||||||
REDEEMABLE
COMMON STOCK ($0.0001 par value, 5,464,357 shares
|
||||||||
issued
with conditions for redemption outside the control of the
company)
|
24,480,319 | 24,480,319 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Preferred
Stock ($0.0001 par value, 50,000,000 shares authorized,
|
||||||||
none
issued and outstanding)
|
- | - | ||||||
Common Stock
($0.0001 par value, 10,000,000,000 shares authorized, 25,330,769 shares
and 25,040,000 shares issued
and outstanding as of September 30, 2009
and December 31, 2008)
|
2,533 | 2,504 | ||||||
Additional
paid-in capital
|
30,492,770 | 25,924,007 | ||||||
Retained
earnings
|
63,271,930 | 28,570,948 | ||||||
Statutory
reserves
|
10,491,526 | 6,196,478 | ||||||
Accumulated
other comprehensive income
|
6,253,863 | 6,221,943 | ||||||
Total
shareholders' equity
|
110,512,622 | 66,915,880 | ||||||
Total
liabilities and shareholders' equity
|
$ | 166,818,899 | $ | 118,627,800 |
The
accompanying notes are an integral part of these statements.
F-1
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
REVENUES:
|
||||||||||||||||
Contracts
|
$ | 62,194,946 | $ | 43,575,844 | $ | 138,030,264 | $ | 92,060,717 | ||||||||
Services
|
1,107,257 | 1,305,292 | 1,602,308 | 6,482,958 | ||||||||||||
63,302,203 | 44,881,136 | 139,632,572 | 98,543,675 | |||||||||||||
COST
OF SALES
|
||||||||||||||||
Contracts
|
36,452,495 | 23,298,573 | 81,701,500 | 51,144,465 | ||||||||||||
Services
|
531,440 | 848,959 | 1,124,270 | 3,341,128 | ||||||||||||
Depreciation
|
185,201 | 165,889 | 555,528 | 486,145 | ||||||||||||
37,169,136 | 24,313,421 | 83,381,298 | 54,971,738 | |||||||||||||
GROSS
PROFIT
|
26,133,067 | 20,567,715 | 56,251,274 | 43,571,937 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Selling,
general and administrative expenses
|
6,615,171 | 4,849,778 | 14,111,637 | 11,182,374 | ||||||||||||
Research
and development
|
(61,564 | ) | - | (31,749 | ) | 267,817 | ||||||||||
Stock
compensation expense-shares placed in escrow
|
- | 5,832,960 | - | 11,665,920 | ||||||||||||
TOTAL
OPERATING EXPENSES
|
6,553,607 | 10,682,738 | 14,079,888 | 23,116,111 | ||||||||||||
INCOME
FROM OPERATIONS
|
19,579,460 | 9,884,977 | 42,171,386 | 20,455,826 | ||||||||||||
OTHER
INCOME (EXPENSE), NET
|
||||||||||||||||
Other
(expense) income, net
|
(3,144 | ) | 44,947 | (8,923 | ) | 50,651 | ||||||||||
Change
in fair value of warrants
|
(2,592,201 | ) | - | (4,402,335 | ) | - | ||||||||||
Interest
income (expense), net
|
101,785 | (72,810 | ) | (90,148 | ) | (241,650 | ) | |||||||||
Gain
on liquidated damage settlement
|
- | - | 1,746,120 | - | ||||||||||||
TOTAL
OTHER EXPENSES, NET
|
(2,493,560 | ) | (27,863 | ) | (2,755,286 | ) | (190,999 | ) | ||||||||
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
17,085,900 | 9,857,114 | 39,416,100 | 20,264,827 | ||||||||||||
PROVISION
FOR INCOME TAXES
|
- | - | - | - | ||||||||||||
NET
INCOME
|
17,085,900 | 9,857,114 | 39,416,100 | 20,264,827 | ||||||||||||
OTHER
COMPREHENSIVE INCOME:
|
||||||||||||||||
Foreign
currency translation adjustment
|
169,559 | 335,796 | 31,920 | 4,051,389 | ||||||||||||
COMPREHENSIVE
INCOME
|
$ | 17,255,459 | $ | 10,192,910 | $ | 39,448,020 | $ | 24,316,216 | ||||||||
WEIGHTED
AVERAGE NUMBER OF SHARES:
|
||||||||||||||||
Basic
|
25,204,199 | 25,000,000 | 25,104,972 | 25,000,000 | ||||||||||||
Diluted
|
25,220,159 | 25,153,941 | 25,112,087 | 25,152,127 | ||||||||||||
EARNINGS
PER SHARE:
|
||||||||||||||||
Basic
|
$ | 0.68 | $ | 0.39 | $ | 1.57 | $ | 0.81 | ||||||||
Diluted
|
$ | 0.68 | $ | 0.39 | $ | 1.57 | $ | 0.81 |
The
accompanying notes are an integral part of these statements.
F-2
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Common
Stock
|
Accumulated
|
|||||||||||||||||||||||||||
Par
Value $0.0001
|
Additional
|
Retained
Earnings
|
other
|
|||||||||||||||||||||||||
Number
|
Common
|
Paid-in
|
Unrestricted
|
Statutory
|
comprehensive
|
|||||||||||||||||||||||
of
shares
|
stock
|
capital
|
earnings
|
reserve
|
income
|
Totals
|
||||||||||||||||||||||
BALANCE,
January 1, 2008
|
25,000,000 | $ | 2,500 | $ | 8,221,663 | $ | 11,376,163 | $ | 2,109,539 | $ | 1,987,272 | $ | 23,697,137 | |||||||||||||||
Stock
compensation expense-options issued
|
38,204 | 38,204 | ||||||||||||||||||||||||||
Stock
compensation expense-shares placed in escrow
|
11,665,920 | 11,665,920 | ||||||||||||||||||||||||||
Imputed
interest on advances from a shareholder
|
21,974 | 21,974 | ||||||||||||||||||||||||||
Net
income
|
20,246,827 | 20,246,827 | ||||||||||||||||||||||||||
Allocation
to statutory reserve
|
(3,878,631 | ) | 3,878,631 | - | ||||||||||||||||||||||||
Foreign
currency translation gain
|
4,051,389 | 4,051,389 | ||||||||||||||||||||||||||
BALANCE,
September 30, 2008 (unaudited)
|
25,000,000 | $ | 2,500 | $ | 19,947,761 | $ | 27,744,359 | $ | 5,988,170 | $ | 6,038,661 | $ | 59,721,451 | |||||||||||||||
Stock
compensation expense-shares placed in escrow
|
5,794,756 | 5,794,756 | ||||||||||||||||||||||||||
Imputed
interest on advances from a shareholder
|
2,294 | 2,294 | ||||||||||||||||||||||||||
Shares
issued for services
|
40,000 | 4 | 179,196 | 179,200 | ||||||||||||||||||||||||
Net
income
|
1,034,897 | 1,034,897 | ||||||||||||||||||||||||||
Allocation
to statutory reserve
|
(208,308 | ) | 208,308 | - | ||||||||||||||||||||||||
Foreign
currency translation gain
|
183,282 | 183,282 | ||||||||||||||||||||||||||
BALANCE,
December 31, 2008
|
25,040,000 | $ | 2,504 | $ | 25,924,007 | $ | 28,570,948 | $ | 6,196,478 | $ | 6,221,943 | $ | 66,915,880 | |||||||||||||||
Cumulative
effect of reclassification of warrants
|
(1,058,702 | ) | (420,070 | ) | (1,478,772 | ) | ||||||||||||||||||||||
Shares
issued to settle liquidated damage payable
|
48,438 | 5 | 216,999 | 217,004 | ||||||||||||||||||||||||
Stock
compensation expense-shares & options issued
|
2,000 | - | 28,324 | 28,324 | ||||||||||||||||||||||||
Imputed
interest on advances from a shareholder
|
13,557 | 13,557 | ||||||||||||||||||||||||||
Non
cash exercise of warrant at $5.38
|
240,331 | 24 | 5,368,585 | 5,368,609 | ||||||||||||||||||||||||
Net
income
|
39,416,100 | 39,416,100 | ||||||||||||||||||||||||||
Allocation
to statutory reserve
|
(4,295,048 | ) | 4,295,048 | - | ||||||||||||||||||||||||
Foreign
currency translation gain
|
31,920 | 31,920 | ||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||
BALANCE,
September 30, 2009 (unaudited)
|
25,330,769 | $ | 2,533 | $ | 30,492,770 | $ | 63,271,930 | $ | 10,491,526 | $ | 6,253,863 | $ | 110,512,622 |
The
accompanying notes are an integral part of these statements.
F-3
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$ | 39,416,100 | $ | 20,264,827 | ||||
Adjusted
to reconcile net income to cash used in operating
activities:
|
||||||||
Depreciation
|
717,490 | 603,965 | ||||||
Amortization
|
50,072 | 48,972 | ||||||
Allowance
for bad debt
|
342,495 | - | ||||||
Imputed
interest
|
13,558 | 21,974 | ||||||
Amortization
of long term prepaid expense
|
10,994 | 25,090 | ||||||
Stock
compensation expense
|
28,324 | 11,665,920 | ||||||
Gain
(expense) on liquidated damage settlement
|
(1,746,120 | ) | 1,116,708 | |||||
Change
in fair value of warrants
|
4,402,335 | - | ||||||
Changes
in operating assets and liabilities
|
||||||||
Notes
receivable
|
1,439,514 | (4,804,195 | ) | |||||
Accounts
receivable
|
6,596,159 | (29,979,156 | ) | |||||
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
(13,192,194 | ) | 2,413,818 | |||||
Inventories
|
(589,505 | ) | (63,928 | ) | ||||
Advances
for inventory purchase
|
(34,747,048 | ) | (10,826,678 | ) | ||||
Other
current assets and prepaid expenses
|
(160,940 | ) | 39,658 | |||||
Accounts
payable
|
(344,598 | ) | (851,537 | ) | ||||
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
1,483,440 | 110,250 | ||||||
Customer
deposits
|
102,598 | 3,816,435 | ||||||
Other
payables and accrued liabilities
|
(318,983 | ) | 1,169,036 | |||||
Tax
payable
|
5,946,440 | (4,739,308 | ) | |||||
Net
cash provided by (used in) operating activities
|
9,450,131 | (9,968,149 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase
of property and equipment
|
(37,232 | ) | (902,594 | ) | ||||
Advances
for construction material and equipment purchases
|
- | (3,231,748 | ) | |||||
Prepayment
for land use right
|
(341,417 | ) | - | |||||
Net
cash used in investing activities
|
(378,649 | ) | (4,134,342 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Payment
on due to shareholder
|
(1,058,480 | ) | (1,785,305 | ) | ||||
Proceeds
from shareholder advances
|
770,889 | 2,334,594 | ||||||
Decrease
(increase) of restricted cash
|
1,030,317 | (24,951 | ) | |||||
Increase
in notes payable
|
73,735 | - | ||||||
Proceeds
from short-term loan
|
29,360,000 | 7,168,500 | ||||||
Bank
loan repaid
|
(29,315,000 | ) | - | |||||
Payment
to liquidated damage penalty
|
(615,018 | ) | - | |||||
Net
cash provided by financing activities
|
246,443 | 7,692,838 | ||||||
EFFECT
OF EXCHANGE RATE ON CASH
|
(39,665 | ) | 385,533 | |||||
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
9,278,260 | (6,024,120 | ) | |||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
19,741,982 | 7,390,631 | ||||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 29,020,242 | $ | 1,366,511 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | 632,816 | $ | 352,529 | ||||
Income
taxes
|
$ | 229,880 | $ | 5,384,128 | ||||
Shares
issuance for liquidated damage penalty settlement
|
$ | 217,004 | $ | - |
The
accompanying notes are an integral part of these statements.
F-4
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BASIS OF PRRSENTATION
References
herein to “we,” “us,” “our,” the “Company” and “RINO International” refer to
RINO International Corporation and its consolidated subsidiaries unless the
context specifically requires otherwise.
RINO
International through its 100% owned subsidiaries and variable interest entities
(“VIE”), engages in the design, development, manufacture and installation of
industrial equipment used mainly for environmental protection purposes in the
People’s Republic of China (“PRC”). The consolidated financial statements of
RINO International reflect the activities of the following subsidiaries and
VIEs. All material intercompany transactions have been
eliminated.
Place
incorporated
|
Ownership
percentage
|
|||
Innomind
Group Limited (“Innomind”)
|
BVI
|
100%
|
||
Dalian
Innomind Environment Engineering Co., Ltd. (“Dalian
Innomind”)
|
Dalian,
China
|
100%
|
||
Dalian
Rino Environment Engineering Science and Technology Co., Ltd. (“Dalian
Rino”)
|
Dalian,
China
|
VIE
|
||
Dalian
Rino Environmental Engineering Project Design Co., Ltd. (“Dalian Rino
Design”)
|
Dalian,
China
|
VIE
|
||
Dalian
Rino Environmental Construction & Installation Project Co., Ltd.
(“Dalian Rino Installation”)
|
Dalian,
China
|
VIE
|
ASC 810
(Financial Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 46
(revised December 2003), “Consolidation of Variable Interest Entities, and
Interpretation of ARB No. 51” (“FIN 46R”)), addresses whether certain types of
entities referred to as variable interest entities (“VIEs”), should be
consolidated in a company’s consolidated financial statements. In
accordance with the provisions of ASC 810, the Company has determined that
Dalian Rino, Dalian Rino Design and Dalian Rino Construction are VIE and that
the Company is the primary beneficiary, and accordingly, the financial
statements of Dalian Rino, Dalian Rino Design and Dalian Rino Construction are
consolidated into the financial statements of the Company.
The
interim unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
or GAAP, for interim financial information and with the instructions to
Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC
Regulation S-X and consistent with the accounting policies stated in the
Company’s 2008 Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 (the “2008 10-K”). Certain information and
note disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted pursuant to such rules and
regulations. Therefore, these financial statements should be read in conjunction
with our audited consolidated financial statements and notes thereto for the
fiscal year ended December 31, 2008, included in our 2008 10-K filed with
the SEC.
F-5
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
interim consolidated financial statements included herein are unaudited;
however, they contain all normal recurring accruals and adjustments that, in the
opinion of management, are necessary to present fairly our consolidated
financial position as of September 30, 2009, and our consolidated results
of operations and cash flows for the three and nine months ended
September 30, 2009 and 2008. The results of operations for the three and
nine months ended September 30, 2009 are not necessarily indicative of the
results to be expected for future quarters or the full year.
Certain
prior period amounts have been reclassified for consistent presentation. These
reclassifications had no material effect on previously reported net income or
cash flows.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the Unites States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Management believes that the estimates used in
preparing its financial statements are reasonable and prudent. Actual results
could differ from those estimates.
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents, for cash
flow statement purposes. Cash includes cash on hand and demand
deposits in accounts maintained with state owned banks within the PRC, Hongkong
and the United States.
The
Company maintains balances at financial institutions which, from time to time,
may exceed Hong Kong Deposit Protection Board insured limits for the banks
located in Hong Kong. Balances at financial institutions or state
owned banks within the PRC are not covered by insurance. As of
September 30, 2009 and December 31, 2008, the Company has $28,969,676 and
$19,744,139 cash balance not covered by FDIC insurance in the United States,
respectively. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant risks on its cash in
bank accounts.
The cash
held in escrow pursuant to the Board Escrow Holdback as described in Note 10 is
accounted for as other current assets and is not shown as cash or cash
equivalents on the balance sheet until such funds have been released from escrow
pursuant to the terms of the Securities Purchase Agreement and the Escrow
Agreement. During June 2009, all restrictions imposed by the
agreements have been lifted and all cash in the escrow account was accounted for
as cash and cash equivalents.
F-6
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Restricted
Cash
The
Company records cash deposits in banks or other institutions subject to
restrictions on the withdrawal or use of the funds as restricted
cash.
Accounts
Receivable
Accounts
receivable represents amounts due from customers for contract sales and
services. The Company grants credit to customers without collateral. Accounts
receivable balances are considered past due if payment has not been received
within the payment terms established on the sales contracts or granted by the
Company, typically up to one year. Management periodically reviews its accounts
receivable to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of
an account may be in doubt. An estimate for doubtful accounts is made when
collection of the full amount is no longer probable. When the Company has
exhausted all collection efforts, the receivable and any specific allowance is
written off.
Inventories
Inventories
consist of raw materials and low cost consumption supplies used in the
manufacturing process and work in process. Inventory is valued at the lower of
cost or market value using the weighted average cost method. Management reviews
its inventories periodically to determine if any reserves are necessary for
potential obsolescence or if a write down is necessary because the carrying
value exceeds net realizable value. There are no provisions for
obsolete or slow moving inventories as of September 30, 2009 and December 31,
2008.
Property, Plant and
Equipment
Property
and equipment are stated at cost, less accumulated
depreciation. Expenditures for additions, major renewals and
betterments are capitalized while expenditures for maintenance and repairs are
charged to expense as incurred.
Construction
in progress represents direct costs of construction as well as acquisition and
design fees and interest expense incurred. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed as
incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until construction is completed and the asset is
ready for its intended use. Maintenance, repairs and minor renewals are charged
directly to expense as incurred. Major additions and betterments to buildings
and equipment are capitalized.
Depreciation
is provided on a straight-line basis, less estimated residual value over the
assets’ estimated useful lives. The estimated useful lives are as
follows:
30
Years
|
|
Plant
and machinery
|
15
Years
|
10
Years
|
|
Furniture,
fixtures and equipment
|
5
Years
|
F-7
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GAAP
requires the Company to evaluate the carrying value of long-lived
assets. When estimated cash flows generated by those assets are less
than the carrying amounts of the asset, the Company recognizes an impairment
loss. Based on its review, the Company believes as of September 30, 2009, there
were no impairments of its long-lived assets.
Intangible Assets
Intangible
assets consist of land use rights and patents. Land use rights are stated at
cost, less accumulated amortization and are amortized over the term of the
relevant rights of 50 years from the date of acquisition. Patent A and patent B
are stated at cost, less accumulated amortization and are amortized over patent
terms of 15 and 10 years, respectively.
Certain
identifiable intangible assets are reviewed for impairment, at least annually or
more often whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of evaluating
the recoverability of long-lived assets, the recoverability test is performed
using undiscounted net cash flows related to the long-lived assets. As of
September 30, 2009, the Company expected all of its intangible assets to be
fully recoverable.
Fair Value of Financial
Instruments
On
January 1, 2008, the Company began recording financial assets and liabilities
subject to recurring fair value measurement at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. On January 1, 2009 the Company began recording
non-recurring financial as well as all non-financial assets and liabilities
subject to fair value measurement under the same principles. These fair value
principles prioritize valuation inputs across three broad levels. The three
levels are defined as follows:
|
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for
substantially the full term of the financial
instruments.
|
|
·
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value.
|
Effective
January 1, 2009, warrants to purchase 382,500 shares of the Company’s
common stock previously treated as equity pursuant to the derivative treatment
exemption are no longer afforded equity treatment because the strike price of
the warrants is denominated in the U.S. dollar, a currency other than the
Company’s functional currency, the Chinese Renminbi. As a
result, the warrants are not considered indexed to the Company’s own stock, and
as such, all future changes in the fair value of these warrants will be
recognized currently in earnings until such time as the warrants are exercised
or expired.
F-8
As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to a liability, as if these warrants were treated as a
derivative liability since their issuance in October, 2007. On January 1,
2009, the Company reclassified $1,058,702 from additional paid-in capital, as a
cumulative effect adjustment, $420,070 to beginning retained earnings and
$1,478,772 to warrant liabilities to recognize the fair value of such warrants.
In July and August of 2009, warrants to purchase 356,047 shares of the Company’s
common stock were exercised through cashless conversion. The fair value of the
exercised warrants amounted to $5,368,609. The fair value of the
remaining outstanding 26,453 warrants was $512,498 on September 30,
2009. Therefore, the Company recognized a $2,592,201 loss and
$4,402,335 loss from the change in fair value of derivative liability for the
three and nine months ended September 30, 2009, respectively.
The
warrants referred to in the preceding two paragraphs do not trade in an active
securities market, and as such, the Company estimates the fair value of these
warrants using the Black-Scholes option pricing model using the following
assumptions:
September
30,
2009
|
January
1,
2009
|
|||||||
(Unaudited)
|
||||||||
Annual
dividend yield
|
- | - | ||||||
Expected
life (years)
|
4.15 | 4.76 | ||||||
Risk-free
interest rate
|
2.23 | % | 1.48 | % | ||||
Expected
volatility
|
130.68 | % | 138.91 | % |
In light
of the Company’s thin stock trading history, expected volatility is based on
historical stock pricing data (adjusting for stock splits and dividends) of six
publicly traded peer companies and the Company’s own data. The
Company-specific volatility is computed annually by taking the base-10 logarithm
of each daily stock closing price divided by the previous stock closing
price (adjusted for stock splits and dividends). The logarithm
smoothes the daily results so that percentage differences are computed and
tailed. Each annual volatility calculation is weighted along with the
other (non-excluded) annual volatility result to produce the average historical
volatility for the selected period. The Company believes
this method produces an estimate that is representative of the Company’s
expectations of future volatility over the expected term of these warrants. The
Company has no reason to believe future volatility over the expected remaining
life of these warrants is likely to differ materially from historical
volatility. The expected life is based on the remaining term of the
warrants. The risk-free interest rate is based on U.S. Treasury securities
according to the remaining term of the warrants.
F-9
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table sets forth by level within the fair value hierarchy of the
Company’s financial assets and liabilities that was accounted for at fair value
on a recurring basis as of September 30, 2009.
Carrying
Value at
September
30,
|
Fair
Value Measurement at
September
30, 2009
|
|||||||||||||||
2009
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
Warrant
liability
|
$ | 512,498 | - | - | $ | 512,498 |
The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the balance sheet at fair value.
Derivative
liability
GAAP
provides criteria for determining whether freestanding contracts that are
settled in a company’s own stock, including common stock warrants, should be
designated as either an equity instrument, an asset or as a liability. Under
GAAP, a contract designated as an asset or a liability must be carried at fair
value on a company’s balance sheet, with any changes in fair value recorded in a
company’s results of operations. The Company determines which
options, warrants and embedded features require liability accounting and record
the fair values as a derivative liability. The change in the values of these
instruments is shown in the accompanying consolidated statements of income and
other comprehensive income as “change in fair value of warrants.”
Revenue
Recognition
Contracts. The Company enters
into long-term fixed-price contracts with customers to manufacture and install
industrial equipment. Revenue on long-term fixed-price contracts is recognized
under the percentage-of-completion method. Under the
percentage-of-completion method, management estimates the
percentage-of-completion based upon costs incurred to date as a percentage of
the total estimated costs to the customer. When total cost estimates exceed
revenues, the Company accrues for the estimated losses immediately. The use of
the percentage-of-completion method requires significant judgment to estimating
total contract revenues and costs, including assumptions relative concerning the
length of time to complete the project, the nature and complexity of the work to
be performed, and anticipated changes in estimated costs. Estimates of total
contract revenues and costs are continuously monitored during the term of the
contract, and recorded revenues and costs are subject to revision as the
contract progresses. When revisions in estimated contract revenues and costs are
determined, such adjustments are recorded in the period in which they are first
identified.
Services. In
addition to the Company’s specialty equipment sales, the Company uses heavy
machining equipment to perform machining services for third parties. These
engagements, numbering several hundred per year, are essentially piecework and
are completed in usually less than one month. Each machining engagement is
governed by a separate contract, indicating existence of an
arrangement. Revenue is recognized when service is performed, which
is usually concurrent with delivery to the customer, the contract price is set
by contract, and collectability is reasonably assured.
The
Company also provides technical professional services to its customers based on
a fixed-price time contract. The Company recognizes services-based revenue from
all of its contracts when the services have been performed, the customers have
approved the completion of the services and invoices have been issued and
collectability is reasonably assured.
F-10
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Enterprise Wide
Disclosure
The
Company’s chief operating decision-makers (i.e. chief executive officer and his
direct reports) review financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by business lines for
purposes of allocating resources and evaluating financial performance. There are
no segment managers who are held accountable for operations, operating results
and plans for levels or components below the consolidated unit level. Based on
qualitative and quantitative criteria established by “Disclosures about Segments
of an Enterprise and Related Information”, the Company considers itself to be
operating within one reportable segment
Government
Grant
The
Dalian municipal government approved grants to the Company to encourage
high-technology industry research and development. The grants are netted with
the research and development expenses upon receipt from the local
government.
Shipping and
Handling
Shipping
and handling for raw materials purchased are included in cost of goods sold.
Shipping and handling costs incurred for shipping of finished products to
customers are included in selling expenses. Shipping and handling expenses
included in selling expense for the three months ended September 30, 2009 and
2008 amounted to $71,849 and $217,657, respectively. Shipping and
handling expenses included in selling expense for the nine months ended
September 30, 2009 and 2008 amounted to $219,862 and $385,219,
respectively.
Research and Development
Costs
Research
and development (or “R&D”) expenses include salaries, material, contract and
other outside service fees, facilities and overhead costs. Under the guidance of
GAAP, the Company expenses the costs associated with the R&D activities when
incurred.
Stock-based
Compensation
We are
required to estimate the fair value of share-based awards on the date of grant.
The value of the award is principally recognized as expenses ratably over the
requisite service periods. The fair value of our restricted stock units is based
on the closing market price of our common stock on the date of grant. We have
estimated the fair value of stock options and stock purchase rights as of the
date of grant or assumption using the Black-Scholes option pricing model, which
was developed for use in estimating the value of traded options that have no
vesting restrictions and that are freely transferable. The Black-Scholes model
considers, among other factors, the expected life of the award and the expected
volatility of our stock price. We evaluate the assumptions used to value
stock options and stock purchase rights on a quarterly basis. The fair values
generated by the Black-Scholes model may not be indicative of the actual fair
values of our equity awards, as it does not consider other factors important to
those awards to employees, such as continued employment, periodic vesting
requirements and limited transferability.
F-11
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company is required to measure the costs of the equity instruments issued in
exchange for the receipt of goods or services from other than employees at the
estimated fair market value of the consideration received or the estimated fair
value of the equity instruments issued, whichever is more reliably determinable.
The value of equity instruments issued for consideration other than
employee services is determined on the earlier of a performance commitment or
completion of performance by the provider of goods or services.
Stock
compensation expense is recognized based on awards expected to
vest. GAAP requires forfeitures to be estimated at the time of grant
and revised in subsequent periods, if necessary, if actual forfeitures differ
from those estimates. There were no estimated forfeitures as the
Company has a short history of issuing options.
Income
Taxes
The
Company reports income taxes pursuant to FASB’s accounting standard for income
taxes. Under the asset and liability method of accounting for income taxes
as required by this accounting standard, deferred taxes are determined based on
the temporary differences between the financial statement and tax basis of
assets and liabilities using tax rates expected to be in effect during the years
in which the basis differences reverse. A valuation allowance is recorded when
it is more likely than not that some of the deferred tax assets will not be
realized. FASB’s accounting standard for accounting for uncertainty
in income taxes requires the 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. As of January 1, 2007,
income tax positions must meet a more-likely-than-not recognition threshold to
be recognized. A tax position is recognized as a benefit only if it is
“more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded.
China Income
Taxes
The
Company’s subsidiaries are governed by the Income Tax Law of the PRC concerning
Foreign Investment Enterprises and Foreign Enterprises and various local income
tax laws.
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).
The key
changes are:
|
a.
|
The
new standard EIT rate of 25% replaces the 33% rate applicable to both DES
and FIEs, except for High Tech companies that pay a reduced rate of
15%;
|
|
b.
|
Companies
established before March 16, 2007 continue to enjoy tax holiday treatment
approved by local government for a grace period of either for the next 5
years following January 1, 2008 or until the tax holiday term is
completed, whichever is sooner.
|
F-12
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
addition, the new EIT also grants tax holidays to entities operating in certain
beneficial industries, such as the agriculture, fishing, and environmental
protection industries. Entities in beneficial industries enjoy preferential tax
treatment for 5 years with a two-year tax exemption period and thereafter, a
three-year tax reduction period with 50% reduction in the income tax
rates.
Before
July 2007, Dalian Rino was qualified as a Foreign Invested Enterprise (“FIE”).
On July 12, 2007, Dalian Rino changed its license status from Foreign Invested
Enterprise (“FIE”) to a domestic entity and was subject to an income tax rate of
33%. Starting January 1, 2008, under new EIT law, Dalian Rino was subject to the
new standard EIT rate of 25%. On December 10, 2008, Dalian Rino was
approved for a reduced tax rate at 15% for being qualified as an entity
operating with high technology.
Dalian
Innomind is in the environmental protection industry, and is qualified for a tax
exemption for two years and a 50% reduction for the following three years. As a
result, Dalian Innomind enjoys a 100% tax exemption for the years 2008 through
2009 and a 50% income tax reduction for the years 2010 through
2012.
Foreign Currency
Translation
The
reporting currency of the Company is the US dollar. The functional currency is
the Chinese Renminbi (”RMB”). The Company’s PRC subsidiary, Dalian Innomind, and
the Company’s VIEs conduct business in RMB, and maintain their accounting
records in RMB. Innomind Group Limited, the Company’s 100% owned BVI subsidiary
headquartered in Hong Kong, maintains its accounting records in its local
currency, Hong Kong Dollars.
The
financial statements of the Company’s PRC subsidiary and VIEs are translated
into US dollars using period-end exchange rates ($0.14670 at September
30, 2009 and December 31, 2008) as to assets and liabilities and weighted
average exchange rates for the periods ($0.14659 and $0.14337 for the nine
months ended September 30 2009 and 2008, respectively) as to income and
cash flow statement. The equity accounts are translated at their
historical exchange rates. Resulting translation adjustments are
recorded as a component of accumulated other comprehensive income (loss) within
shareholders’ equity. The resulting translation gains and losses that
arise from exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are included in the results of operations as
incurred.
GAAP
requires cash flows from the Company's operations calculated based upon the
local currencies using the average translation rate. As a result, amounts
related to assets and liabilities reported on the consolidated statements of
cash flows will not necessarily agree with changes in the corresponding balances
on the consolidated balance sheets.
Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. Gains and losses from foreign currency
transactions are included in the results of operations for the periods
presented. For the three months and nine months ended September 30, 2009 and
2008, no material transaction gains and losses occurred.
F-13
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the
PRC, RMB is not freely convertible into foreign currency and all foreign
currency exchange transactions must take place through government authorized
financial institutions. No representation is made that RMB amounts could have
been, or could be, converted into U.S. dollars at the rates used in
translation.
Comprehensive
income
GAAP
establishes standards for reporting and display of comprehensive income and its
components in financial statements. It requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in financial statements that are displayed with the same
prominence as other financial statements.
Earnings Per
Share
GAAP
requires presentation of basic and diluted earnings per share in conjunction
with the disclosure of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock using the treasury
method.
Common
stock equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method, at
either the beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company's net income (loss) position at the calculation
date.
Segments
The
Company is engaged in designing, developing, manufacturing, and installing
environmental protection and energy saving equipment for the Chinese iron and
steel industry and no other business segment.
NOTE
3 – Recent Accounting Pronouncements
In
December 2007, the FASB issued revised business combinations guidance. The
revised guidance retains the fundamental requirements of the previous guidance
in that the acquisition method of accounting be used for all business
combinations, that an acquirer be identified for each business combination and
for goodwill to be recognized and measured as a residual. The revised guidance
expands the definition of transactions and events that qualify as business
combinations to all transactions and other events in which one entity obtains
control over one or more other businesses. The revised guidance broadens the
fair value measurement and recognition of assets acquired, liabilities assumed
and interests transferred as a result of business combinations. The guidance
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The Company has adopted the guidance and believes that
if the Company consummated a business combination transaction, the Company’s
adoption of the guidance would have a material impact on the consolidated
financial statements.
F-14
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
January 2009, the FASB issued an accounting standard which amended the
impairment model by removing its exclusive reliance on “market participant”
estimates of future cash flows used in determining fair value. Changing the cash
flows used to analyze other-than-temporary impairment from the “market
participant” view to a holder’s estimate of whether there has been a “probable”
adverse change in estimated cash flows allows companies to apply reasonable
judgment in assessing whether an other-than-temporary impairment has occurred.
The adoption of this accounting standard did not have a material impact on the
Company’s consolidated financial statements because all of the investments in
debt securities are classified as trading securities.
In April
2009, the FASB issued authoritative guidance related to the determination of
fair value when the volume and level of activity for an asset or liability has
significantly decreased, the identification of transactions that are not
orderly, the recognition and presentation of other-than-temporary impairments,
and the disclosure of the fair value of financial instruments on an interim
basis. The adoption of the guidance did not have a material impact on the
Company’s consolidated financial statements.
In April
2009, the FASB issued an accounting standard to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This standard will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This standard provides increased disclosure
about the credit and noncredit components of impaired debt securities that are
not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this standard does not result in a
change in the carrying amount of debt securities, it does require that the
portion of an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This standard became effective
for interim and annual periods ending after June 15, 2009. The adoption of
this standard did not have a material impact on the Company’s consolidated
financial statements.
In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did not
have a material impact on the disclosures related to its consolidated financial
statements.
F-15
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In May
2009, the FASB an accounting standard which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for
why that date was selected. The standard is effective for interim and annual
periods ending after June 15, 2009, and accordingly, the Company adopted
this Standard during the second quarter of 2009. The standard requires that
public entities evaluate subsequent events through the date that the
financial statements are issued.
In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009. The Company has not completed its
assessment of the impact this new standard will have on the Company’s
financial condition, results of operations or cash flows.
In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of VIEs. The elimination of the
concept of a QSPE, as discussed above, removes the exception from applying the
consolidation guidance within this accounting standard. Further, this
accounting standard requires a company to perform a qualitative analysis
when determining whether or not it must consolidate a VIE. It also requires
a company to continuously reassess whether it must consolidate a VIE.
Additionally, it requires enhanced disclosures about a company’s
involvement with VIEs and any significant change in risk exposure due to that
involvement, as well as how its involvement with VIEs impacts the company’s
financial statements. Finally, a company will be required to disclose
significant judgments and assumptions used to determine whether or not
to consolidate a VIE. This accounting standard is effective for financial
statements issued for fiscal years beginning after November 15,
2009. The Company has not completed its assessment of the impact
that this pronouncement will have on the Company’s financial condition,
results of operations or cash flows.
In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards Codification™ (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S.
GAAP by providing all the authoritative literature related to a particular
topic in one place. The Codification is effective for interim and annual periods
ending after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
for the Company in the third quarter of 2009, and accordingly, the
Company’s Form 10-Q for the quarter ending September 30, 2009 and all current
and subsequent public filings made by the Company will reference
the Codification as the sole source of authoritative
literature.
F-16
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for
the first reporting period, including interim periods, beginning after the
issuance of this ASU. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning
of those fiscal years. The Company is currently evaluating the impact of
this ASU on its consolidated financial statements.
NOTE
4 – INVENTORIES
Inventories
consisted of the following raw material, work-in-process and
supplies:
September
30,
2009
|
December
31,
2008
|
|||||||
(Unaudited)
|
||||||||
Raw
material
|
$ | 243,228 | $ | 223,168 | ||||
Work-in-process
|
1,491,872 | 921,985 | ||||||
Low
cost consumption supplies
|
58,296 | 58,295 | ||||||
Total
|
$ | 1,793,396 | $ | 1,203,448 |
For the
three and nine months ended September 30, 2009 and 2008, no provision for
obsolete inventories was recorded by the Company.
NOTE
5 – NOTES RECEIVABLE
Notes
receivable represents trade accounts receivable due from various customers where
the customers’ banks have guaranteed the payment of the
receivables. This amount is non-interest bearing and is normally paid
within three to six months. The Company has the ability to submit
requests for payment to the customer’s bank earlier than the scheduled payment
date, but will incur an interest charge and a processing fee when it submits an
early payment request. The Company had $717,363 and $2,157,957 in
notes receivables as of September 30, 2009 and December 31, 2008,
respectively.
F-17
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
6 – COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
Costs and
estimated earnings in excess of billings on uncompleted contracts represent
revenues recognized in excess of amounts billed pursuant to the
percentage-of-completion method used to recognize contract
revenue. As of September 30, 2009 and December 31, 2008, the Company
had $13,202,094 and $0 of cost and estimated earnings in excess of billings,
respectively.
As of
September 30, 2009 and December 31, 2008, total costs on uncompleted contracts
amounted to $32,556,931 and $4,648,357, respectively.
As of
September 30, 2009 and December 31, 2008, total estimated earnings on
uncompleted contracts amounted to $22,025,413 and $3,856,481,
respectively.
Costs and
estimated earnings in excess of billings consist of the following:
September
30,
2009
|
December
31,
2008
|
|||||||
(Unaudited)
|
||||||||
Contract
costs incurred plus recognized profits less recognized losses to
date
|
$ | 48,042,282 | $ | 8,504,838 | ||||
Less:
progress billings
|
34,840,188 | 8,504,838 | ||||||
Costs
and estimated earnings in excess of billings
|
$ | 13,202,094 | $ | - |
NOTE
7 – BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS
“Billings
in excess of costs and estimated earnings on uncompleted contracts” represents
billings in excess of revenues recognized. As of September 30, 2009 and December
31, 2008, the Company has $1,484,554 and $0 of billings in excess of revenues
recognized on uncompleted contracts, respectively.
As of
September 30, 2009 and December 31, 2008, total progress billings on uncompleted
contracts amounted to $42,864,803 and $8,504,838, respectively.
Billings
in excess of costs and estimated earnings consists of the
following:
September
30,
2009
|
December
31,
2008
|
|||||||
(Unaudited)
|
||||||||
Progress
billings
|
$ | 8,024,616 | $ | 8,504,838 | ||||
Less:
contracts costs incurred plus recognized profits less recognized
losses to date
|
6,540,062 | 8,504,838 | ||||||
Billings
in excess of costs and estimated earnings
|
$ | 1,484,554 | $ | - |
F-18
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 – PROPERTY, PLANT AND EQUIPMENT
The
following is a summary of property, plant and equipment at September 30, 2009
and December 31, 2008:
September
30,
2009
|
December
31,
2008
|
|||||||
(Unaudited)
|
||||||||
Buildings
|
$ | 3,936,775 | $ | 3,936,775 | ||||
Equipment
and machinery
|
9,508,465 | 9,508,465 | ||||||
Motor
Vehicles
|
1,647,515 | 1,647,515 | ||||||
Furniture
and office equipment
|
445,170 | 407,912 | ||||||
Construction
in progress
|
6,768 | 6,768 | ||||||
Total
|
15,544,693 | 15,507,435 | ||||||
Less:
accumulated depreciation
|
3,028,345 | 2,310,316 | ||||||
Property,
plant and equipment, net
|
$ | 12,516,348 | $ | 13,197,119 | ||||
Depreciation
expense for the three months ended September 30, 2009 and 2008 was $239,239 and
$214,412, respectively. Depreciation expense for the nine months ended September
30, 2009 and 2008 was $717,490 and $603,965, respectively. For the three months
and nine months ended September 30, 2009 and 2008, no interest was capitalized
into construction in progress.
NOTE
9 – INTANGIBLE ASSETS
The
following is a summary of intangible assets:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Land
use rights
|
$ | 651,136 | $ | 651,136 | ||||
Patents
and licenses
|
733,500 | 733,500 | ||||||
1,384,636 | 1,384,636 | |||||||
Less:
accumulated amortization
|
223,137 | 173,028 | ||||||
Intangibles,
net
|
$ | 1,161,499 | $ | 1,211,608 | ||||
Amortization
expense for the three months ended September 30, 2009 and 2008 amounted to
$16,695 and $16,672, respectively. Amortization expense for the nine
months ended September 30, 2009 and 2008 amounted to $50,072 and $48,972,
respectively. The estimated aggregate amortization expenses for each
of the five succeeding years ended are as follows:
Period
ending:
|
Estimated
Amortization
schedule
|
|||
Three
months ending December 31, 2009
|
$
|
16,666
|
||
Year
ending December 31, 2010
|
66,722
|
|||
Year
ending December 31, 2011
|
66,722
|
|||
Year
ending December 31, 2012
|
66,722
|
|||
Year
ending December 31, 2013
|
66,722
|
|||
Thereafter
|
$
|
876,346
|
F-19
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of
September 30, 2009, the Company prepaid $799,965 for purchase of land use
rights, but had not obtained the title to the land use right. Therefore, as of
September 30, 2009, the amount has been recorded as a prepayment for land use
right in other assets.
NOTE
10 – LIQUIDATED DAMAGES PAYABLE
Registration
Rights
Pursuant
to the Securities Purchase Agreement entered into between the Company and a
group of accredited investors (“Securities Purchase Agreement”) on October 5,
2007, the Company was obligated to make efforts to file a registration statement
with the Securities and Exchange Commission (“SEC”) to be declared effective by
the SEC on or before March 3, 2008. After March 3, 2008 and for each 30 calendar
day period thereafter in which the registration statement fails to be declared
effective, the Company shall pay liquidated damages to investors equal to 1% of
the funds raised, or $244,353, subject to a cap of 10% of total funds raised, or
total liquidated damages of $2,443,532. On the date of the
transaction, the Company determined that the registration statement would not be
filed and declared effective within the required period and accrued $500,000 as
liquidated damages payable. The liquidated damages was treated as financing cost
at the inception and was recorded as a deduction from additional paid-in
capital. This amount accrued is based on the penalties due between March 4, 2008
and May 3, 2008, the date before which the Company originally anticipated the
registration statement would be declared effective. The registration statement
has been declared effective on October 2, 2008. Accordingly, the total
liquidated damages the Company recorded for failing to meet the filing deadline
as required by the agreement amounted to $1,971,116.
Independent
Directors
Pursuant
to the Securities Purchase Agreement, the Company’s Board of Directors must
consist of a minimum of 5 members, a majority of whom must be “independent
directors” as defined in NASDAQ Marketplace Rule 4200(a) (15) not later than 120
days after the date of the agreement. Failing to comply with this requirement,
the Company shall pay liquidated damages to investors equal to 1% of the funds
raised, or $244,353, for each month or part of a month, pro rata, in which
independent directors do not constitute a majority of the 5-member
board.
On the
date of the transaction, the Company determined that this requirement would not
be met within the required period and accrued $500,000 as liquidated damages
payable. The liquidated damages was treated as financing cost at the inception
and was recorded as a deduction from additional paid-in capital. This amount
accrued is based on the penalties due between December 8, 2007 and April 8, 2008
on or before which the Company originally anticipated the Board of Directors
would consist of a minimum of 5 members with a majority being independent
directors. The independent directors were seated on March 20, 2008, curing this
delinquency. Total liquidated damages payable for the independent board member
requirement therefore is $627,173.
F-20
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On April
3, 2009, the Company entered into a Waiver and Amendment Agreement (the
“Amendment Agreement”) with certain holders of the shares of the Company’s
common stock representing holders of a majority in interest of the shares of the
Company’s common stock issued in the private placement transaction consummation
on October 5, 2007. The Amendment Agreement amends the relevant
provisions of the Securities Purchase Agreement and the Registration Rights
Agreement, respectively, such that (i) no amount of liquidated damages shall
have been incurred and payable to the investors due to the late appointment of
independent directors, (ii) the liquidated damages incurred due to the late
effectiveness of the registration statement shall be paid in the form of shares
the Company’s common stock of up to 192,045 shares, or at the election of each
investor, in cash of (up to an aggregate of $860,362 for all investors), each as
provided in the Amendment Agreement, and (iii) the Escrow Agreement to reflect
the amendments made to the Securities Purchase Agreement with regard to the
distribution of the Board Holdback Escrow Amount.
Upon
effectiveness of the Amendment Agreement, each current holder of the Company’s
common stock issued in the Private Financing is required to elect, by written
notice to the Company, whether to receive shares of the Company’s common stock
or cash as provided by the Amendment Agreement. As of September 30,
2009, the Company paid $615,018 to shareholders who elected to receive cash and
issued 48,438 shares of common stocks to shareholders who elected to receive
shares of the Company’s common stock. $1,746,120 of liquidated damage
payable that was forgiven was recognized as other income. The unpaid
liquidated damages payable at September 30, 2009 amounted to
$20,147.
NOTE
11 – SHORT TERM BANK LOANS PAYABLE
Short
term bank loans consist of the following:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Due
to Shanghai Pudong Development Bank interest at 5.31%, due in
December
|
||||||||
2009,
secured by certain buildings, equipment, and land use
rights
|
$ | 8,802,000 | $ | 8,802,000 | ||||
Total
|
$ | 8,802,000 | $ | 8,802,000 | ||||
Total
interest expense on the bank loans for the three months ended September 30, 2009
and 2008 amounted to $286,647 and $127,121, respectively. Total
interest expense on the bank loans for the nine months ended September 30, 2009
and 2008 amounted to $655,793 and $352,529, respectively.
F-21
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
12 – INCOME TAXES
Income
Taxes
The
Company is subject to income taxes on an entity basis on income arising in or
derived from the tax jurisdiction in which each entity is
domiciled.
The
Company was incorporated in the United States and has incurred a net operating
loss for income tax purposes for the nine months ended September 30, 2009. The
Company had estimated loss carry forwards of approximately $521,000 and $223,726
as of September 30, 2009 and December 31, 2008, respectively, for U.S. income
tax purposes, available for offset against future taxable U.S. income expiring
in 2028.
Management
believes that the realization of the benefits from the loss carryforward appears
uncertain due to the Company’s historical operating income and continuing
losses. Accordingly, 100% valuation allowance has been provided and no deferred
tax asset benefit has been recorded. The valuation allowance at September 30,
2009 and December 31, 2008 was $177,000 and $76,000. The net change in the
valuation allowance was an increase of $101,000.
The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $ 93,950,871 as of September 30, 2009 which is included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations. Accordingly, no provision has been made for
U.S. deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
Innomind
Group Limited was incorporated in the BVI and under current law of the BVI;
income is not subject to income tax. Dalian Innomind, Dalian Rino,
Dalian Rino Design and Dalian Rino Construction were incorporated in the PRC and
are subject to PRC income tax which is computed according to the relevant laws
and regulations in the PRC.
In 2007,
Dalian Innomind was entitled to tax exemption granted to entities qualified as
FIEs so no provision for income tax was made.
Before
July 2007, Dalian Rino was also qualified as an FIE. On July 12, 2007, Dalian
Rino changed its license status from FIE to a domestic entity and was subject to
an income tax rate of 33% for the period entitled to tax exemption. Starting
January 1, 2008, under new EIT law, Dalian Rino was subject to new standard EIT
rate of 25%. On December 10, 2008, Dalian Rino was approved for a
reduced tax rate at 15% for being qualified as an entity operating with high
technology.
Pursuant
to an Entrusted Management Agreement by and between Dalian Innomind and Dalian
Rino, dated October 3, 2007, Dalian Rino and its shareholders agreed to entrust
the operations and management of the Business to Dalian Innomind and Dalian
Innomind is entitled to Dalian Rino’s net profit as an entrusted management fee,
which resulted in no income tax provision for Dalian Rino.
F-22
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dalian
Innomind is entitled to a two-year income tax exemption and a 50% income tax
reduction for the three years ending 2012. No provision for income
tax was made for three and nine months ended September 30, 2009 and 2008,
respectively.
The
provision for income taxes differs from the amount computed by applying the
statutory United States federal income tax rate to income before income taxes.
The following table reconciles the statutory rates to the Company’s effective
tax rate for the three and nine months ended September 30, 2009 and
2008:
2009
|
2008
|
|||||||
U.S.
Statutory rate
|
34.0 | % | 34.0 | % | ||||
Foreign
income not recognized in U.S.
|
(34.0 | ) | (34.0 | ) | ||||
China
income taxes
|
25.0 | 25.0 | ||||||
China
income tax exemption
|
(25.0 | ) | (25.0 | ) | ||||
Effective
income tax rate
|
0.0 | % | 0.0 | % |
The
estimated tax savings for the three months ended September 30, 2009 and 2008
amounted to $4,544,051 and $4,049,879, respectively. The net effect on earnings
per share had the income tax been applied would decrease basic and
dilutedearnings per share from $0.68 to $0.50 in 2009 and $0.39 to $0.23 in
2008.
The
estimated tax savings for the nine months ended September 30, 2009 and 2008
amounted to $10,737,620 and $8,272,710, respectively. The net effect on earnings
per share had the income tax been applied would decrease basic and diluted
earnings per share from $1.57 to $1.14 in 2009 and $0.81 to $0.48 in 2008,
respectively.
Value Added
Tax
Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax, or VAT, in
accordance with Chinese laws. The VAT standard rate is 17% of the gross sales
price. A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on sales of the finished
product.
VAT on
sales and VAT on purchases amounted to $17,375,881 and $10,565,781 for the three
months ended September 30, 2009 and $13,642,041 and $9,859,471 for the three
months ended September 30, 2008, respectively. VAT on sales and VAT on purchases
amounted to $41,314,005 and $29,373,079 for the nine months ended September 30,
2009 and $29,372,547 and $21,226,924 for the nine months ended September 30,
2008, respectively. Sales and purchases are recorded net of VAT
collected and paid as the Company acts as an agent because the VAT taxes are not
impacted by the income tax holiday. As of September 30, 2009 and December 31,
2008, the VAT payable amounted to $10,360,243 and $4,186,822,
respectively.
F-23
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
13 – RELATED PARTY TRANSACTIONS
The
Company owed $308,182 and $596,023 to a stockholder as of September 30, 2009 and
December 31, 2008, respectively, for advances made on an unsecured basis,
payable on demand and interest free. The ultimate manner of settlement will be
in cash. Imputed interest is charged per annum on the amount due at
approximately 5.24% and 7.47% for the nine months ended September 30, 2009 and
2008, respectively. Total imputed interest recorded as additional paid-in
capital amounted to $13,557 and $21,974 for the nine months ended September 30,
2009 and 2008, respectively.
NOTE
14 – REDEEMABLE COMMON STOCK
On
October 5, 2007, the Company received $24,480,319 (or $21,253,722 net proceeds
after deducting the offering expenses) from a group of accredited investors and
issued 5,464,357 shares of restricted common stock at $4.48 per share. The
Securities Purchase Agreement contained a transferrable provision such that if
any governmental agency in the PRC takes action that adversely affects the
Restructuring Agreements or the Share Exchange Agreement entered into in
connection with the Securities Purchase Agreement and the Company doesn’t
mitigate the adverse effect to the investors’ reasonable satisfaction within 60
days of the PRC action, then the Company is required to pay liquidated damages
in an amount equal to the initial investment without interest and the
shareholder must return the shares acquired under the Securities Purchase
Agreement. Consequently, the total amount of the gross proceeds has been
excluded from permanent equity and recorded as redeemable common stock in
accordance with Rule 5-02.28 of Regulation S-X and Section 211 of the
Codification of Financial Reporting Policies. Although there is no fixed
redemption requirement in any of the next five years, the entire amount of
$24,480,319 could become redeemable in any of the next five years. These shares
are included as outstanding common stock for purposes of earnings per
share.
NOTE
15 – COMMON STOCK AND OTHER SHAREHOLDERS’ EQUITY
Statutory
Reserves
The
Company is required to make appropriations to the statutory surplus reserve
based on the after-tax net income determined in accordance with the laws and
regulations of the PRC. Prior to January 1, 2006 the appropriation to
the statutory surplus reserve should be at least 10% of the after tax net income
determined in accordance with the laws and regulations of the PRC until the
reserve is equal to 50% of the entities’ registered
capital. Appropriations to the statutory public welfare fund are at
5% to 10% of the after tax net income determined by the Board of
Directors. Effective January 1, 2006, the Company is only required to
contribute to one statutory reserve fund at 10 % of net income after tax per
annum, such contributions not to exceed 50% of the respective company’s
registered capital. As of September 30, 2009 and December 31, 2008,
the remaining reserve needed to fulfill the 50% registered capital requirement
totaled $2,558,583 and $6,856,854, respectively.
The
statutory reserve funds are restricted for use to offset against prior period
losses, expansion of production and operation, or for the increase in the
registered capital of the Company. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation.
F-24
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Common Stock and
Warrants
Issuance
of Common Stock in Private Placement
In
connection with the Private Financing, 250,000 shares of the Company’s common
stock were issued to a consultant for advisory services. This expense is
recorded as additional paid-in capital in the accompanying financial
statements.
In
connection with the Private Financing and pursuant to the Engagement Agreement
Providing for Investment Banking Services, dated October 5, 2007 by and between
the Company and a placement agent for the Private Financing, as amended, the
placement agent received the following compensation: (i) $80,000 cash as an
engagement and documentation fee; (ii) $1,750,000 as a placement commission;
(iii) 875,000 shares of Common Stock, and (iv) warrants to purchase 382,500
shares of Common Stock at an exercise price of $5.376 per share, exercisable
within 6 years of the date of issuance. The exercise price of the warrants is
subject to adjustment under certain circumstances and the warrants permit
cashless exercise by the holders. This expense is recorded as additional paid-in
capital in the accompanying financial statements.
The
warrants issued to the placement agent, initially qualify as permanent equity,
the value of such warrants has created offsetting debit and credit entries to
additional paid-in capital.
Effective
January 1, 2009, 382,500 warrants previously treated as equity pursuant to
the derivative treatment exemption are no longer afforded equity treatment
because the strike price of the warrants is denominated in the U.S. dollar, a
currency other than the Company’s functional currency, the Chinese
Renminbi. As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired.
A
discussion of the valuation techniques used to measure fair value for the
warrant liabilities listed above and activity for these liabilities for the
three and nine months ended September 30, 2009 is provided elsewhere in this
footnote and in Note 2.
Liquidated
damage payable settlement
Upon
effectiveness of the Amendment Agreement, each current holder of the Company’s
common stock issued in the Private Financing is required to elect, by written
notice to the Company, whether to receive shares of the Company’s common stock
or cash as provided by the Amendment Agreement. As of September 30,
2009, the Company issued 48,438 shares of common stocks for a total $217,004 to
shareholders who elected to receive shares of the Company’s common
stock.
F-25
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Warrants
Following
is a summary of the warrant activity:
Number
of Shares
|
||||
Outstanding
as of January 1, 2008
|
382,500 | |||
Granted
|
- | |||
Forfeited
|
- | |||
Exercised
|
- | |||
Outstanding
as of December 31, 2008
|
382,500 | |||
Granted
|
- | |||
Forfeited
|
- | |||
Exercised
|
356,047 | |||
Outstanding
as of September 30, 2009 (Unaudited)
|
26,453 |
Following
is a summary of the status of warrants outstanding at September 30,
2009:
Outstanding
Warrants
|
Exercisable
Warrants
|
|||||||||
Exercise
Price
|
Number
of Shares
|
Average
Remaining Contractual Life
|
Average
Exercise Price
|
Number
of Shares
|
Average
Remaining Contractual Life
|
|||||
$5.376
|
26,453
|
4.01
years
|
$5.376
|
26,453
|
4.01
years
|
|||||
Total
|
26,453
|
26,453
|
Stock
Options
On June
30, 2009, pursuant to an Employment Agreement, the Company granted to Yi (Jenny)
Liu, the Chief Financial Officer, a non-qualified stock option to purchase
50,000 shares of its Common Stock at an exercise price of $6.15 per share,
vesting in 3 equal annual installments beginning on June 30, 2010, with a term
life of five years.
The fair
values of stock options granted to the executive were estimated at the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
|
Expected
|
Expected
|
Dividend
|
Risk Free
|
Grant Date
|
|||||
|
Life
|
Volatility
|
Yield
|
Interest Rate
|
Fair Value
|
|||||
Executives
|
3.3
yrs
|
|
121.7%
|
|
0%
|
|
1.64%
|
|
$9.80
|
Volatility:
In light of the Company’s thin stock trading history, expected volatility is
based on historical stock pricing data (adjusting for stock splits and
dividends) of six publicly traded peer companies and the Company’s own
data. The Company-specific volatility is computed annually by taking
the base-10 logarithm of each daily stock closing price divided by the previous
stock closing price (adjusted for stock splits and dividends). The
logarithm smoothes the daily results so that percentage differences are computed
and tailed. Each annual volatility calculation is weighted along with
the other (non-excluded) annual volatility result to produce the average
historical volatility for the selected period. The
Company believes this method produces an estimate that is representative of the
Company’s expectations of future volatility over the expected term of these
warrants.
F-26
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dividend
Yield: The expected dividend yield is zero. The Company has not paid a cash
dividend and does not anticipate paying cash dividends in the foreseeable
future.
Risk Free
Rate: Risk-free interest rate of 1.64% was used. The risk-free interest rate was
based on U.S. Treasury yields with a remaining term that corresponded to the
expected term of the option calculated on the granted date.
Expected
Life: Because the Company has no historical share option exercise experience to
estimate future exercise patterns, the expected life was determined using the
simplified method as these awards meet the definition of "plain-vanilla" options
under the rules prescribed by GAAP.
Stock
compensation expense is recognized based on awards expected to vest. There were
no estimated forfeitures as the Company has a short history of issuing options.
GAAP requires forfeitures to be estimated at the time of grant and revised in
subsequent periods, if necessary, if actual forfeitures differ from those
estimates.
The
50,000 options granted in 2009 had fair value of approximately $397,222. The
Company recognized $19,061 and $19,364 of compensation expense in general and
administrative expenses for the three months and nine months ended September 30,
2009, respectively.
As of
September 30, 2009, the total compensation cost related to stock options not yet
recognized was $377,858 and will be recognized over the weighted average life of
3 years.
The
following is a summary of the stock options activity:
|
Number of
Options
Outstanding
|
Weighted-
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|||||||||
Balance, January
1, 2009
|
- | $ | - | $ | - | |||||||
Granted
|
50,000 | 6.15 | 182,500 | |||||||||
Forfeited
|
||||||||||||
Exercised
|
||||||||||||
Balance,
September 30, 2009
|
50,000 | $ | 6.15 | $ | 749,500 |
Outstanding
Options
|
Exercisable
Options
|
|||||||||||||||||||
Exercise
Price
|
Number
|
Average
Remaining Contractual Life
|
Average
Exercise Price
|
Number
|
Average
Remaining Contractual Life
|
|||||||||||||||
$6.15
|
50,000
|
4.75
yrs
|
$
|
-
|
-
|
-
|
||||||||||||||
Total
|
50,000
|
-
|
F-27
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Issuance
of Common Stock to Chairman of Audit Committee
On May
13, 2009, the Company issued 2,000 shares of common stock to the Chairman of the
Audit Committee for his service provided based upon the agreement dated April 4,
2008. The shares were valued at $4.48, yielding an aggregate fair
value of total $8,960. This expense was recorded as stock
compensation expense.
NOTE
16 - EARNINGS PER SHARE
The
following sets forth the calculation of earnings per share for the three months
ended September 30, 2009 and 2008:
2009
|
2008
|
|||||||
Net
income
|
$ | 17,085,900 | $ | 9,857,114 | ||||
Adjustments
for diluted EPS calculation
|
- | - | ||||||
Adjusted
net income for calculating EPS-diluted
|
$ | 17,085,900 | $ | 9,857,114 | ||||
Weighted
average number of common stock – Basic
|
25,204,199 | 25,000,000 | ||||||
Effect
of dilutive securities:
|
||||||||
Warrants
|
15,960 | 153,941 | ||||||
Weighted
average number of common stock – Diluted
|
25,220,159 | 25,153,941 | ||||||
Earnings
per share:
|
||||||||
Basic
|
$ | 0.68 | $ | 0.39 | ||||
Diluted
|
$ | 0.68 | $ | 0.39 |
The
following sets forth the calculation of earnings per share for the nine months
ended September 30, 2009 and 2008:
2009
|
2008
|
|||||||
Net
income
|
$ | 39,416,100 | $ | 20,264,827 | ||||
Adjustments
for diluted EPS calculation
|
- | - | ||||||
Adjusted
net income for calculating EPS-diluted
|
$ | 39,416,100 | $ | 20,264,827 | ||||
Weighted
average number of common stock – Basic
|
25,104,972 | 25,000,000 | ||||||
Effect
of dilutive securities:
|
||||||||
Warrants
|
7,115 | 152,127 | ||||||
Weighted
average number of common stock – Diluted
|
25,112,087 | 25,152,127 | ||||||
Earnings
per share:
|
||||||||
Basic
|
$ | 1.57 | $ | 0.81 | ||||
Diluted
|
$ | 1.57 | $ | 0.81 |
F-28
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
17 – CONCENTRATIONS AND RISKS
Customers
During
the three months ended September 30, 2009 and 2008, no customer accounted for
more than 10% of the Company’s total sales.
During
the nine months ended September 30, 2009 and 2008, no customer accounted for
more than 10% of the Company’s total sales.
Suppliers
Two major
suppliers provided approximately 90% of the Company’s purchases of raw materials
for the three months ended September 30, 2009. The same two major suppliers
provided approximately 95% of the Company’s purchases of raw materials for the
nine months ended September 30, 2009 and the amount of advance to this supplier
as of September 30, 2009 and December 31, 2008 were $54,989,367 and $21,376,932,
respectively.
Two major
suppliers provided approximately 92% of the Company’s purchases of raw materials
for the three months and nine months ended September 30, 2008.
PRC
Risks
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the economy in the regions where the Company’s customers are located. The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the
PRC. Under existing PRC foreign exchange regulations, payment of
current account items, including profit distributions, interest payments and
expenditures from the transaction, can be made in foreign currencies without
prior approval from the PRC State Administration of Foreign Exchange by
complying with certain procedural requirements. However, approval
from appropriate governmental authorities is required where RMB is to be
converted into foreign currency and remitted out of the PRC to pay capital
expenses, such as the repayment of bank loans denominated in foreign
currencies. The PRC government may also at its discretion restrict
access in the future to foreign currencies for current account
transactions.
F-29
RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
18 – COMMITMENTS AND CONTINGENCIES
Employee
Benefits
The full
time employees of the Company are entitled to employee benefits including
medical care, welfare subsidies, unemployment insurance and pension benefits
through a Chinese government mandated multi-employer defined contribution plan.
The Company is required to accrue for those benefits based on certain
percentages of the employees’ salaries and make contributions to the plans out
of the amounts accrued for medical and pension benefits. The total
provisions and contributions made for such employee benefits were $44,739 and
$19,112 for the three months ended September 30, 2009 and 2008,
respectively. The total provisions and contributions made for such
employee benefits were $101,796 and $56,425 for the nine months ended September
30, 2009 and 2008, respectively. The Chinese government is responsible for the
medical benefits and the pension liability to be paid to these
employees.
Capital
Commitments
As of
September 30, 2009 and December 31, 2008, the Company had firm purchase
commitments for capital projects in progress of $3,809,213 and $10,594,674
respectively.
NOTE
19 – SUBSEQUENT EVENT
We have
performed an evaluation of subsequent events for the accompanying financial
statements and notes included through November 13, 2009, the date these
consolidated financial statements were issued, to determine whether the
circumstances warranted recognition and disclosure of those events or
transactions in the financial statements as of September 30,
2009.
F-30
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Disclaimer
Regarding Forward-looking Statements
Certain
statements made in this report, and other written or oral statements made by or
on behalf of RINO International Corporation and its direct and indirect
subsidiaries and controlled affiliates (collectively, the “Company”),
may constitute “forward-looking statements” under the Private Securities
Litigation Reform Act of 1995, which represent the expectations or beliefs
of the Company. Such “forward-looking statements” include, but are not
limited to, statements concerning the operations, performance, financial
condition and growth of the Company. For this purpose, any statements
contained in this report that are not statements of historical fact may be
deemed forward-looking statements. Without limiting the generality of the
foregoing, when used in this report, the word “believes,” “expects,”
“estimates,” “intends,” “will,” “may,” “anticipate,” “could,” “should,” “can,”
or “continue” or the negative or other variations thereof or comparable
terminology are intended to identify forward-looking statements. Examples of
such statements in this report include descriptions of our plans and strategies
with respect to developing certain market opportunities, our overall business
plan, our plans to develop additional strategic partnerships, our intention to
develop our products and platform technologies, our continuing growth and
our ability to contain our operating expenses. All forward-looking statements
are subject to certain risks and uncertainties that could cause actual events to
differ materially from those projected, including those described under Item
1.A. of Part I of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, and matters described in this report generally. In light of
these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur. You
should not place undue reliance on these forward-looking
statements.
The
following is management’s discussion and analysis of certain significant factors
that have affected aspects of our financial position and results of operations
during the periods included in the accompanying unaudited financial
statements. You should read this in conjunction with discussion under
“Management’s Discussion and Analysis of Financial Conditions and Results of
Operations” and the audited consolidated financial statements and accompanying
notes for the year ended December 31, 2008 included in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2008 and the unaudited
consolidated financial statements and accompanying notes and the other financial
information appearing in Item 1 of this report and elsewhere in this
report.
Except
as otherwise specifically stated or unless the context otherwise requires, the
"Company", "we," "us," "our," and the "Registrant" refer to, collectively, (i)
RINO International Corporation (formerly Jade Mountain Corporation), (ii)
Innomind Group Limited (“Innomind”), a wholly-owned subsidiary of RINO
International Corporation organized under the laws of the British Virgin
Islands, Dalian Innomind Environment Engineering Co., Ltd. (“Dalian
Innomind”), a wholly-owned subsidiary of Innomind organized under the laws
of the People’s Republic of China (the “PRC”), Dalian RINO Environment
Engineering Science and Technology Co., Ltd., a contractually controlled
affiliate of Dalian Innomind organized under the laws of the PRC (“Dalian
Rino”) and Dalian Rino’s wholly owned subsidiaries, Dalian Rino Environmental
Engineering Project Design Co., Ltd. (“Dalian Rino Design”) and Dalian Rino
Environmental Construction & Installation Project Co., Ltd. (“Dalian Rino
Installation”).
Company
Overview
We are
engaged in designing, developing, manufacturing, installing and servicing
proprietary and patented environmental protection and energy saving equipments
for the large, state-owned iron and steel industry manufacturers in the People’s
Republic of China. Our business operations are conducted throughout
China.
On July
13, 2009, our common stock, par value of $0.0001 per share (“Common Stock”),
started trading under the symbol "RINO" on the Nasdaq Global
Market.
Following
the expansion of China’s economy and growth in the size of its manufacturing
sectors such as its iron and steel industry, the total volume of waterborne and
airborne industrial waste and pollution have grown higher, and as a
consequence China’s industries face increasingly stringent governmental mandates
to reduce or eliminate sulphur dioxide emissions and untreated wastewater
discharges. Failure to meet mandated emission and discharge standards can result
in financial penalties. On July 31, 2009, the Chinese Ministry of Industry and
Information Technology published a formal plan for the implementation of Flue
Gas Desulphurization system in the sintering plants of Chinese steel
companies, which is a specific roadmap to accelerate the number of
desulphurization projects completed throughout the PRC. During the
nine months ended September 30, 2009, our revenues reached $139.6 million,
representing an increase of 41.7% from the total revenues of $98.5 million for
the same period ended September 30, 2008. Our gross profit increased from $43.6
million for the nine months ended September 30, 2008 to $56.3 million for
the same period ended September 30, 2009, representing an increase of
29.1%. Our income from operations reached $42.2 million for the
nine months ended September 30, 2009 from $20.5 million for the
same period ended September 30, 2008, representing an increase of
106.2%. Our net income for the nine months period ended
September 30, 2009 grew to $39.4 million from $20.3 million for the same
period ended September 30, 2008, representing an increase of
94.5%.
Traditionally,
we have three principal products and product lines:
|
·
|
Lamella
Inclined Tube Settler Waste Water Treatment System, a highly efficient
wastewater treatment system that incorporates our proprietary and patented
‘Lamella Inclined Tube Settler’
technology.
|
|
·
|
Circulating,
Fluidized Bed, Flue Gas Desulphurization System, a highly effective system
that removes particulate sulphur from flue gas emissions generated by the
sintering process in the production of iron and steel (a process in which
sulphur and other impurities are removed from iron ore by heating, without
melting, pulverized iron ore) with the resulting discharge meeting all
relevant PRC air pollution standards,
and
|
2
|
·
|
High
Temperature Anti-Oxidation System for Hot Rolled Steel, a set of products
and a mechanized system that substantially reduce oxidation-related output
losses in the production of continuous cast, hot rolled
steel.
|
In the
first quarter of 2008, the Company introduced a new integrated dust catching
system which removes up to 99% of the dust from sintering iron during the
production process and which complements its current desulphurization equipment.
To date, the Company’s integrated dust catchers have been installed in the flues
of several steelmakers in China. The Company anticipates the average selling
price will be around $2.0 million and the time from contract signing to final
installation will equate to approximately two to three months. The dust catching
system has been an add-on system to most of our desulphurization
projects..
In
November 2008, we successfully developed a new sludge treatment system through
cooperation with the Dalian University of Technology. The new sludge treatment
system can be used to treat sludge generated by the municipal wastewater
treatment process, industrial sludge generated by chemical industry and oil
sludge generated by the oil industry. We estimate that there is a market of
approximately $28.8 billion for the treatment of sludge generated by various
municipal wastewater and industrial processing systems in the PRC market. On
October 20, 2009 we entered into a contract valued at $18.4 million with the
government of Dalian Development District, Under this contract, the Company will
provide and install its Rotary Drum Film Dryer ("DWM") sludge treatment system
in the Dalian Development District in two phases. The first phase has a contract
value of $9.6 million and will commence in December 2009. The new sludge
treatment system is expected to initiate operations by July 2010 and will
achieve a processing capacity of 200 tons per day. After the $8.8 million second
phase installation, which will commence in September 2010 and is expected to be
online by February 2011, the processing capacity of the sludge treatment system
will increase by an additional 200 tons per day. After the evaluation of various
technologies and systems in the current market by the Dalian Development
District Government for more than a year, RINO's DWM sludge treatment system was
chosen for deployment.
All
of our products are custom-built to our customers’ specific requirements. We
enter into fixed price equipment sales contracts with our customers that are
performed in engineering, manufacturing, construction and installation phases.
Equipment and components are engineered and manufactured primarily at our Dalian
facilities. Generally, we fulfill our contractual obligations within twelve
months.
Our
project-based revenue is affected directly by our customers’ capital budgets and
their need to build new plants. Because most of our customers are
state-owned-enterprises, their budgeting decisions are influenced by the Chinese
central government’s environmental protection and pollution control policies,
which presently are favorable to our business and products. We believe that such
policy emphasis will continue for the foreseeable future.
The cost
of revenue for our products includes direct materials, direct labor, and
manufacturing overhead, with a significant portion allocated to materials costs,
which are subject to fluctuation.
Recent
Developments
Adoption
of 2009 RINO International Stock Incentive Plan
In July
2009, the Board of Directors of the Company adopted the RINO International
Corporation 2009 Stock Incentive Plan (the “Plan”) to enhance the
profitability and value of the Company for the benefit of its shareholders by
enabling the Company to offer certain eligible employees, consultants and
non-employee directors cash and stock-based incentives in the Company to
attract, retain and reward such individuals and strengthen the mutuality of
interests between such individuals and the Company’s shareholders.
The
aggregate number of shares of our Common Stock that may be issued under the Plan
is 2,500,000 shares, subject to adjustment under the Plan.
Qualified
to Do Business in California
The
Company is a corporation organized and existing under the laws of
Nevada. Effective June 23, 2009, the Company complied with the
requirements of California law and is now qualified and authorized to transact
business in the State of California. The purpose of the California
office is to provide improved communications and administrative support for
Dalian RINO, as well as research and development of U.S. business opportunities
as they arise. The development of the California office provides the Company
with a vehicle to survey the U.S. markets for corporate growth and technology
acquisition opportunities.
Recent
policy guideline on FGD set agenda for implementation through 2011.
On July
31, 2009, China’s Ministry of Industry and Information Technology (MIIT)
released the “Iron and Steel Industry Flue Gas Desulphurization
Implementation Guideline,” as a supplement to the iron and steel industry
stimulus released earlier in 2009. The guideline sets forth a detailed agenda
for stringent control of industrial pollutants, primarily sulfur dioxide.
Specifically, the guideline mandates the addition of new sintering
desulphurization equipment with a total coverage area of 15,800 square meters
and new capacity of 200,000 tons by 2011. Detailed progress reports are required
for submission in February every year.
3
The new
policy carries important implications for RINO’s business as it prioritizes the
steel sinter FGD as a priority environmental project, sets specific
desulphurization targets, and enables both the central and local governments to
provide priority funding for the installation of FGD equipment, while offering
further support for domestic based technology. The government plan
calls for the number of sinters to be equipped with FGD systems to double
annually through 2011. Specifically, the government aims to install FGD for an
additional 15,800 square meters of sintering bed capacity with a total of
200,000 tons of annual desulphurization capacity. To support adoption, the
government will encourage the build-out through BOT (build-operate-transfer)
ownership structures which would allow the financier to operate the system for
up to 20 years and then transfer ownership to the steel producer. The government
will increase its ongoing inspection of sulphur dioxide emissions by steel
companies and plans to install on-line, real time monitoring devices to ensure
compliance.
DXT
System
In early
September 2009, we commenced installation of our new proprietary ammonia-based
desulphurization system (the "DXT system") on a 280 square meter sinter
system at Hunan Lianyuan Iron and Steel Company. The total contract value is $14
million with the installation scheduled to be completed during the second
quarter of 2010. We designed our DXT system based on a technology that we
exclusively licensed from Baosteel Group Co., China's largest Steel Producer,
which has been applying this technology to its manufacturing process during the
past 10 years. Our DXT system applies such technology, for the first time, in
the desulphurization process in China’s iron and steel industry. Our new DXT
operating system utilizes coking waste ammonia in the flue gas to effectively
remove the sulphur dioxide from the sinter flue gas and produces ammonia sulfate
as a by-product which can be used as fertilizer. In addition to filtering out
more than 99% of harmful sulphur emissions, the DXT system utilizes considerably
less energy, decreases operating and maintenance costs, and creates a
sustainable revenue generating activity through the production of fertilizer.
The Chinese government strongly supports technologies which are both
environmentally friendly and economical. Our customers in the iron and steel
manufacturing industry that use the DXT system will be eligible for tax credits
and government subsidies to offset the costs.
Results
of Operations
Three
Months Ended September 30, 2009 And September 30, 2008.
Results
of Operations
Net
Sales
Net sales
increased by $18.4 million to $63.3 million or an increase of 41.0% for the
three months ended September 30, 2009, as compared to the net sales $44.9
million for the three months ended September 30, 2008. Revenue growth was driven
by demand for RINO’s major product lines as the Company continued to execute on
new and existing project installations. The breakdown of the revenue growth is
as follows:
For the three months ended September 30,
|
||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||
Net Sales
(in thousand)
|
% to
Total
|
Net Sales
(in thousand)
|
% to
Total
|
%
Increase
|
||||||||||||||||
Wastewater treatment equipment
|
$ | 15,077 | 23.8 | % | $ | 4,410 | 9.9 | % | 241.9 | % | ||||||||||
Flue
gas desulphurization
|
33,269 | 52.6 | % | 37,712 | 84.0 | % | -11.8 | % | ||||||||||||
Anti-oxidation
equipment and coatings
|
13,849 | 21.9 | % | 1,454 | 3.2 | % | 852.5 | % | ||||||||||||
Machining
services
|
1,107 | 1.7 | % | 1,305 | 2.9 | % | -15.1 | % | ||||||||||||
Total
Net Sales
|
$ | 63,302 | 100.0 | % | $ | 44,881 | 100.0 | % | 41.0 | % |
Demand
for our Lamella Wastewater System, increased 241.9% to $15.1 million for
the three months ended September 30, 2009, as compared with $4.4 million for the
three months ended September 30, 2008.
Our
Desulphurization System, which we introduced in late 2006, utilizes proprietary
technology we jointly developed with the Research Institute of the Chinese
Academy of Sciences, and can reduce flue gas sulphur dioxide levels by over 90%.
We anticipate strong demand from the iron and steel industry for the solutions
that our Desulphurization System offers for airborne sulphur dioxide emissions.
For the three months ended September 30, 2009, we recorded revenues of
$33.3 million, as compared to revenues of $37.7 million for the three
months ended September 30, 2008, representing a decrease of
11.8%. The decrease is based on the stage of the completion of
projects.
4
Our
Anti-Oxidation System, which we introduced in January 2007, materially reduces
oxidation loss in the production of hot rolled steel plates. Anti-oxidation is a
long-sought solution in the iron and steel industry. We believe our
Anti-Oxidation System, including coatings and spraying equipment, is the only
online system that prevents or reduces oxidation without needing to first cool
down the steel slab. For the three months ended September 30, 2009, we
recorded revenues of $13.8 million anti-oxidation equipment and related
coatings sales, as compared to revenues of $1.5 million for the three months
ended September 30, 2008, representing an increase of 852.5%. The increase
in revenues reflects the 7 projects on going during the quarter.
In
addition to the foregoing, we provide machining services to third parties,
utilizing our heavy machine tools’ idle time to generate contract manufacturing
revenue. The revenue generated from our machining services fluctuates based on
the level of our using our heavy machining equipment to produce more of our own
products rather than for third-party contract work. For the three months ended
September 30, 2009, revenues accounted for 1.7% of the total revenue as compared
to 2.9% for the corresponding period in 2008, reflecting a higher level of our
own production and reduced level of contractual work.
Cost
of Sales
The cost
of sales for the three months ended September 30, 2009 increased by
$12.9 million to $37.2 million from $24.3 million for the three months
ended September 30, 2008, representing an increase of 52.9%. The
increase was largely due to increased sales. As a percentage of sales, the cost
of sales increase to 58.7% for the three months ended September 30, 2009
compared to 54.2% for the same period of 2008. The breakdown of the
cost of sales is as follows:
For the three months ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Total
(in thousands)
|
% of Sales
|
Total
(in thousands)
|
% of Sales
|
|||||||||||||
Revenues
|
||||||||||||||||
Contracts
|
$ | 62,195 | $ | 43,576 | ||||||||||||
Machining
Services
|
1,107 | 1,305 | ||||||||||||||
Cost
of Sales
|
||||||||||||||||
Contracts
|
$ | 36,638 | 58.9 | % | $ | 23,464 | 53.8 | % | ||||||||
Machining
Services
|
531 | 48.0 | % | 849 | 65.0 | % | ||||||||||
Gross
Profit
|
$ | 26,133 | $ | 20,568 |
As a
result of the growth in our business, our capacity has directly impacted how we
operate and how much we can charge from period to period, depending on demand
level, production efficiency and location of the contracts. When we approach our
maximum production capacity as a result of by increased
demand, we tend to outsource some of our production and this consequently
resulted in higher costs and a lower profit margin in 2009. During
the three months ended September 30, 2009, the need to outsource certain
production was the main cause for the 5.1% increase in cost of contract sales as
a percentage of total contract sales.
Operating
Expense
Operating
expenses for the three months ended September 30, 2009 decreased to $6.6 million
from $10.7 million for the same period ended September 30, 2008, representing a
decrease of 38.7%. The $4.1 million decrease in our operating expenses was
largely result of a decrease of $5.8 million in charges for stock compensation
expense related to the 2008 earnings target or “Make Good” provision pursuant to
Agreement entered in October 2007 which was partially offset by a $2.4 million
increase in commission expenses which is in line with our increase in
revenue.
Compensation
expenses related “Make Good Escrow Shares”
According
to the Securities Purchase Agreement entered into between the Company and a
group of accredited investors (“Securities Purchase Agreement”), which was
consummated on October 5, 2007, Zou Dejun and Qiu Jianping, who, through The
Innomind Trust, together control 71.6% of the Company’s outstanding Common
Stock, and are the founders of Dalian Rino, delivered to an escrow agent a total
of 5,580,000 of their beneficially owned shares of Common Stock in order to
secure the Company’s obligation under the Securities Purchase Agreement to
deliver additional Common Stock to the private placement investors in the event
the Company fails to achieve certain after-tax net income targets for fiscal
years 2007 and 2008 (“Make Good Escrow Shares”). Those targets are $16,000,000
in after-tax net income (“ATNI”) for the fiscal year ended December 31, 2007,
and $28,000,000 in ATNI for the fiscal year ending December 31,
2008. The shares held in escrow as Make Good Escrow Shares will not
be accounted for on our books until such shares became releasable from escrow
pursuant to the terms of the Securities Purchase Agreement. If any Make Good
Escrow Shares are released to the Company management or employees, the value of
such shares at the time of release will be recorded as compensation expense with
a corresponding offset to additional paid-in capital in accordance with SFAS
123(R) paragraph 11. Based on the performance for the year ended December 31,
2008, the Company achieved 2008 after-tax net income target. Therefore, the
Company accrued $17.5 million of compensation expense for the year ended
December 31, 2008. The Company allocated one-third of that amount to selling,
general and administration expenses in third quarter of 2008. There
was no such compensation expenses recorded for the three months ended September
30, 2009.
5
Other
Expense, net
Other
Expense, net, for three months ended September 30, 2009 increased by $2.47
million to $2.49 million from $27,863 in 2008. The increase in other
expenses, net, was mainly due to a change of the fair value of the warrant
liability in the amount of $2.6 million, which was recognized as other loss and
offset by a $0.18 million increase in interest income, net. The
net interest income increased $0.33 million as a higher interest rate was earned
on the cash deposited by the Company in a bank, during the three months ended
September 30, 2009, reduced by a $0.12 million increase in interest expenses
paid by the Company on short term bank loans.
Nine Months
Ended September 30, 2009 And September 30, 2008.
Results
of Operations
Net
Sales
Net sales
increased by $41.1 million to $139.6 million or an increase of 41.7% for the
nine months ended September 30, 2009, as compared to $98.5 million net
sales for the nine months ended September 30, 2008. Such increase was due
to continued growth in demand and sales across our three major product lines in
2009. Since June 2008, the Chinese government tightened the gas emission
control regulations and all coal-fired sinters are now required to have
desulphurization equipment installed. The breakdown of the Company’s
revenue growth is as follows:
For the nine months ended September 30,
|
||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||
Net Sales
(in thousand)
|
% to
Total
|
Net Sales
(in thousand)
|
% to
Total
|
%
Increase
|
||||||||||||||||
Wastewater
treatment equipment
|
$ | 31,573 | 22.6 | % | $ | 12,623 | 12.8 | % | 150.1 | % | ||||||||||
Flue
gas desulphurization
|
89,057 | 63.8 | % | 75,183 | 76.3 | % | 18.5 | % | ||||||||||||
Anti-oxidation
equipment and coatings
|
17,401 | 12.5 | % | 4,255 | 4.3 | % | 308.9 | % | ||||||||||||
Machining
services
|
1,602 | 1.1 | % | 6,483 | 6.6 | % | -75.3 | % | ||||||||||||
Total
Net Sales
|
$ | 139,633 | 100.0 | % | $ | 98,544 | 100.0 | % | 41.7 | % |
Demand
for our Lamella Wastewater System, increased 150.1% to $31.6 million for the
nine months ended September 30, 2009, as compared with $12.6 million
for the nine months ended September 30, 2008. Our increase
in the waste water system sales was mainly due to the demand from the iron and
steel industry for the solutions.
Our
Desulphurization System, which we introduced in late 2006, utilizes proprietary
technology we jointly developed with the Research Institute of the Chinese
Academy of Sciences, and can reduce flue gas sulphur dioxide levels by over 90%.
Our increase in the flue gas desulphurization sales were mainly due to the
demand from the iron and steel industry for the solutions, as our
Desulphurization System offers for airborne sulphur dioxide emissions. For the
nine months ended September 30, 2009, we recorded revenues of $89.1 million, as
compared to revenues of $75.2 million for the nine months ended September 30,
2008, representing an increase of 18.5%.
Our
Anti-Oxidation System, which we introduced in January 2007, materially reduces
oxidation loss in the production of hot rolled steel plates. Anti-oxidation is a
long-sought solution in the iron and steel industry. We believe our
Anti-Oxidation System, including coatings and spraying equipment, is the only
online system that prevents or reduces oxidation without needing to first cool
down the steel slab. We anticipate that our Anti-Oxidation System will be an
important driver of revenue growth. For the nine months ended September 30,
2009, we recorded revenues of $17.4 million anti-oxidation equipment and related
coatings sales, as compared to revenues of $4.3 million for the nine months
ended September 30, 2008, representing an increase of $13.1 million or 308.9%.
The increase in revenues largely reflects our increased pricing and demand as
the value of the anti-oxidation technology has been proven in commercial
practice.
In
addition to the foregoing, we provide machining services to third parties,
utilizing our heavy machine tools’ idle time to generate contract manufacturing
revenue. The revenue generated from our machining services fluctuates based on
the level of our using our heavy machining equipment to produce more of our own
products rather than for third-party contract work. For the nine months
ended September 30, 2009, revenues accounted for 1.1% of the total revenue as
compared to 6.6% for the corresponding period in 2008, reflecting a higher level
of our own production and reduced level of contractual work.
6
Cost
of Sales
The cost
of sales for the nine months ended September 30, 2009 increased by $28.4 million
to $83.4 million from $55.0 million for the nine months ended September 30,
2008, representing an increase of 51.7%. The increase of cost of
sales was mainly due to increased sales. As a percentage of sales, the cost of
sales increased to 59.7% for the nine months ended September 30, 2009 compared
to 55.8% for the same period of 2008. The breakdown of the cost of
sales is as follows:
For the nine months ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Total
(in thousands)
|
% of Sales
|
Total
(in thousands)
|
% of Sales
|
|||||||||||||
Revenues
|
||||||||||||||||
Contracts
|
$ | 138,030 | $ | 92,061 | ||||||||||||
Machining
Services
|
1,602 | 6,483 | ||||||||||||||
Cost
of Sales
|
||||||||||||||||
Contracts
|
$ | 82,257 | 59.6 | % | $ | 51,631 | 56.1 | % | ||||||||
Machining
Services
|
1,124 | 70.2 | % | 3,341 | 51.5 | % | ||||||||||
Gross
Profit
|
$ | 56,251 | $ | 43,572 |
Our gross
profit has increased by $12.7 million or 29.1%, increased of gross profit was
mainly because we have received and completed more projects in 2009, due to the
high demand of our products, and the Chinese government regulation, which has
significantly increased our product sales demand. Following the growing in our
business, our capacity directly impacted how we operate and can change from
period to period, depending on demand level, production efficiency and location
of the contracts. When the capacity is approaching peak level by the increasing
demand, we tend to outsource the capacity and consequently resulted in higher
cost and lower profit margin. During the nine months ended September
30, 2009, the 3.5% increase in cost of contract sales as percentage of total
contract sale was directly attributable to outsourcing costs to complement
in-house production capabilities and meet project implementation
timelines.
Operating
Expense
Operating
expenses for the nine months ended September 30, 2009 decreased to
$14.1 million from $23.1 million for the same period ended September 30,
2008, representing a decrease of 39.1%. The $9.0 million decrease in our
operating expenses was largely result of a decrease of $11.7 million in charges
for stock compensation expense related to the 2008 earnings target or “Make
Good” provision pursuant to Agreement entered in October 2007 which was
partially offset by a $3.6 million increase in commission expenses which is
in line with our increase in revenue.
Liquidated
Damage Expenses
In
connection with the consummation of the Private Financing, and pursuant to the
Registration Rights Agreement entered into between the Company and a group of
accredited investors (the “Registration Rights Agreement”) on October 5, 2007,
we were required to register for resale shares of our common stock issued to the
investors and cause the registration statement to be declared effective by the
SEC on or before March 3, 2008. In addition, under the Securities Purchase
Agreement dated October 5, 2007, by and among the Company and such investors, we
are required to appoint a 5 member board and a majority of the board members
must be “independent directors” as defined in NASDAQ Marketplace Rule 4200(a)
(15) not later than 120 days after the date of the agreement. The
Securities Purchase Agreement required us to pay liquidated damages to the
investors if we do not timely comply with these requirements. We were
late in complying with both requirements. As a result, we accrued liquidated
damages on both accounts in the aggregate amount of $0.5 million in the first
quarter of 2008.
On April
3, 2009, the Company entered into a Waiver and Amendment Agreement (the
“Amendment Agreement”) with certain holders of the shares of the Company’s
Common Stock representing holders of a majority in interest of the shares of the
Company’s Common Stock issued in the Private Financing. The Amendment
Agreement amends the relevant provisions of the Securities Purchase Agreement
and the Registration Rights Agreement, respectively, such that (i) no amount of
liquidated damages shall have been incurred and payable to the investors due to
the late appointment of independent directors and (ii) the liquidated damages
incurred due to the late effectiveness of the registration statement shall be
paid in the form of shares of the Company’s Common Stock of up to 192,045
shares, or, at the election of each investor, in cash of (up to an aggregate of
$860,362 for all investors). Pursuant to the Amendment Agreement, as
of June 30, 2009, the Company paid an aggregate of $615,018 to shareholders who
elected to receive cash and issued an aggregate of 48,438 shares of the
Company’s Common Stock to shareholders who elected to receive shares of the
Company’s Common Stock.
Other
Expense, net
Other
expense, net, for the nine months ended September 30, 2009 increased by
$2.6 million to $2.8 million from $0.2 million in 2008. The increase in other
expense, net, was mainly due to a change of the fair value of the warrant
liability in the amount of $4.4 million, which was recognized as other
loss, and which was partially offset by a gain on liquidated damage
settlement in the amount of $1,746,120.
7
Liquidity
and Capital Resources
We have
historically funded our working capital needs from operations, advance payments
from customers, bank borrowings, and capital from shareholders. Our working
capital requirements are influenced by the level of our operations, the
numerical and dollar volume of our project contracts, the progress of our
contract execution, and the timing of accounts receivable
collections.
In
connection with our Securities Purchase Agreement with the investors entered
into and consummated in October, 2007, we agreed to a provision which provides
that in the event that the legal structure of our Company is challenged by
Chinese authorities and we do not mitigate the adverse effect to the investors’
reasonable satisfaction within 60 days of the Chinese government’s action, then
we are required to redeem the investors’ Common Stock for
$24.5 million. Consequently, this amount has been excluded from permanent
equity and recorded as redeemable common stock in accordance with Rule 5-02.28
of Regulation S-X and Section 211 of the Codification of Financial Reporting
Policies. While we believe that the possibility of such redemption is remote, we
may not continuously holding adequate cash on hand for such redemption and the
requirement to pay this amount would result in our having to borrow funds or
raise additional capital. There can be no assurance that loans or additional
capital would be available, if necessary, or that they would be available on
terms acceptable to us.
Without
the redemption, we believe that we have sufficient cash, along with projected
cash to be generated by our business to support operations for at least the next
12 months.
Cash
and Cash Equivalents
Our
liquidity position remains strong, supported by approximately $29.0 million cash
and cash equivalents as of September 30, 2009, representing an increase of 47.0%
as compared to $19.7 million as of December 31, 2008. Cash generated from
operations and financing activities fully supported the needs of our working
capital, and capital investments in 2009. We believe that our cash position is
adequate to meet future short-term and mid-term liquidity
requirements.
Cash
provided by operations totaled $9.5 million in the nine months ended September
30, 2009, representing an increase of 194.8% as compared to $10.0 million cash
used in operations in the same period of 2008. The major components of cash
provided by operations are net earnings from operations adjusted for non-cash
income and expense items and changes in working capital. Cash provided by
operations increased by $19.4 million in the nine months ended September 30,
2009 as compared to the same period of 2008.
The
following tables present our net cash flows for the nine months ended
September 30, 2009 and for the same period ended September 30,
2008.
For the nine months ended
September 30,
|
||||||||
US$ (in thousands)
|
2009
|
2008
|
||||||
Cash
provided by (used in) operating activities
|
$ | 9,450 | $ | (9,968 | ) | |||
Cash
(used in) investing activities
|
$ | (379 | ) | $ | (4,134 | ) | ||
Cash
provided by financing activities
|
$ | 246 | $ | 7,693 |
Cash
flow from operating activities
Net cash
provided by operating activities was $9.5 million for the nine months
ended September 30, 2009 as compared to net cash used in operations of
$10.0 million in the same period ended September 30, 2008. An increase in net
income, change in fair value of warrants, decrease in accounts receivable and
increase in tax payable contributed to increased cash flows from operations.
These increases to cash flow from operations were offset by an increase in
advances for inventory purchases and an increase in costs and estimated earnings
in excess of billings on uncompleted contracts.
Accounts
Receivable
Our
accounts receivable at September 30, 2009 decreased to $44.6 million from $51.5
million at December 31, 2008, representing a decrease of 13.5%. As a percentage
of total sales, our accounts receivable decreased to 31.9% at September 30,
2009, as compared to that of 37.0% at December 31, 2008. The decrease in
our accounts receivable was result of increased unbilled projects and also
reflects the Company’s effort to timely collect the accounts
receivable.
The
Company grants credit to customers without collateral. Accounts receivable
balances are considered past due if payment has not been received within the
payment terms established on the sales contracts or granted by the Company,
typically up to one year. Management periodically reviews its accounts
receivable to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of
an account may be in doubt. Allowance for bad debts amounted to $342,749
and $0 as of September 30, 2009 and December 31, 2008,
respectively.
8
Costs
and estimated earnings in excess of billings on uncompleted
contracts
Cost s
and estimated earnings in excess of billings on uncompleted contracts increased
to $13.2 million from $0 at December 31, 2008. The increase was
mainly due to the fact that there were only three contracts uncompleted as of
December 31, 2008, and percentages of completion of those three contracts
were over 80%. As of September 30, 2009, fifteen contracts
remained open, with average less than 50% completed, which resulted in increase
of unbilled projects.
Advances
for inventory purchase
Advances
for inventory purchase are required to ensure timely delivery of raw materials
needed to execute existing production contracts as well as to expand the
business. Our advances for inventory purchase increased to $56.8 million at
September 30, 2009, an increase of $34.8 million or 158.2%, from the $22.0
million recorded at December 31, 2008. The increase was largely related to
in crease in the backlogged orders and greater purchases of raw materials in the
third quarter of fiscal year 2009 to take advantage of the more favorable
prices.
Cash
used in investing activities
For the
nine months ended September 30, 2009, net cash used in investing
activities decreased to $378,649 as compared to $4.1 million used for the same
period ended September 30, 2008, representing a decrease of $3.8 million or
90.8%. This decrease primarily resulted from no additional advances payments
made for equipment and construction material purchase in the nine months
ended September 30, 2009, as compared to a $3.2 million prepayment made in the
same period of 2008.
Cash
provided by financing activities
For the
nine months ended September 30, 2009, net cash provided by financing
activities decreased to $246,443 as compared to cash provided by
financing of $7.7 million for the same period ended September 30, 2008,
representing a decrease of 96.8%. The decrease was primarily due to
the additional bank loan received in the amount of $7.2 million for the nine
months ended September 30, 2008, and for the nine months ended September 30,
2009, the Company has borrowed and repaid the short term loan within three
months period of time.
Related
Party Transactions
The
Company owed $308,182 and $596,023 to a stockholder as of September 30, 2009 and
December 31, 2008, respectively, for advances made on an unsecured basis,
payable on demand and interest free. Imputed interest is charged per annum on
the amount with loan in nature due at 5.24% and 7.47% for the nine months
periods ended September 30, 2009 and 2008, respectively. Total
imputed interest recorded as additional paid-in capital amounted to $13,557 and
$21,974 for the nine months ended September 30, 2009 and 2008,
respectively.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
CRITICAL
ACCOUNTING POLICIES
We
believe that the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant judgments and estimates on the part of management. Our critical
accounting policies and estimates present an analysis of the uncertainties
involved in applying a principle, while the accounting policies note to the
financial statements (Note 2) describe the method used to apply the accounting
principle.
Accounts
Receivable
Accounts
receivable represents amounts due from customers for contract sales and
services. The Company grants credit to customers without collateral. Accounts
receivable balances are considered past due if payment has not been received
within the payment terms established on the sales contracts or granted by the
Company, typically up to one year. Management periodically reviews its accounts
receivable to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of
an account may be in doubt. An estimate for doubtful accounts is made when
collection of the full amount is no longer probable. When the Company has
exhausted all collection efforts, the receivable and any specific allowance is
written off.
Fair Value of Financial
Instruments
On
January 1, 2008, the Company began recording financial assets and liabilities
subject to recurring fair value measurement at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. On January 1, 2009 the Company began recording
non-recurring financial as well as all non-financial assets and liabilities
subject to fair value measurement under the same principles. These fair value
principles prioritize valuation inputs across three broad levels. The three
levels are defined as follows:
9
·
|
Level
1 inputs
to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active
markets.
|
·
|
Level
2 inputs
to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the
assets or liability, either directly or indirectly, for substantially the
full term of the financial
instruments.
|
·
|
Level
3 inputs
to the valuation methodology are unobservable and significant to the fair
value.
|
Effective
January 1, 2009, warrants previously treated as equity pursuant to the
derivative treatment exemption are no longer afforded equity treatment because
the strike price of the warrants is denominated in the U.S. dollar, a currency
other than the Company’s functional currency, the Chinese
Renminbi. As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired.
Revenue
Recognition
Contracts. The Company enters
into long-term fixed-price contracts with customers to manufacture and install
industrial equipment. Revenue on long-term fixed-price contracts is recognized
under the percentage-of-completion method. Under the
percentage-of-completion method, management estimates the
percentage-of-completion based upon costs incurred to date as a percentage of
the total estimated costs to the customer. When total cost estimates exceed
revenues, the Company accrues for the estimated losses immediately. The use of
the percentage-of- completion method requires significant judgment relative to
estimating total contract revenues and costs, including assumptions relative
concerning the length of time to complete the project, the nature and complexity
of the work to be performed, and anticipated changes in estimated costs.
Estimates of total contract revenues and costs are continuously monitored during
the term of the contract, and recorded revenues and costs are subject to
revision as the contract progresses. When revisions in estimated contract
revenues and costs are determined, such adjustments are recorded in the period
in which they are first identified.
Services. In
addition to the Company’s specialty equipment sales, the Company uses heavy
machining equipment to perform machining services for third parties. These
engagements, numbering several hundred per year, are essentially piecework and
are completed in usually less than one month. Each machining engagement is
governed by a separate contract, indicating existence of an
arrangement. Revenue is recognized when service is performed, which
is usually concurrent with delivery to the customer, the contract price is set
by contract, and collectability is reasonably assured.
The
Company also provides technical professional services to its customers based on
a fixed-price time contract. The Company recognizes services-based revenue from
all of its contracts when the services have been performed, the customers have
approved the completion of the services and invoices have been issued and
collectability is reasonably assured.
Enterprise Wide
Disclosure
The
Company’s chief operating decision-makers (i.e., the Chief Executive Officer and
personnel reporting directly to the Chief Executive Officer) review financial
information presented on a consolidated basis, accompanied by disaggregated
information about revenues by business lines for purposes of allocating
resources and evaluating financial performance. There are no segment managers
who are held accountable for operations, operating results and plans for levels
or components below the consolidated unit level. Based on qualitative and
quantitative criteria established by “Disclosures about Segments of an
Enterprise and Related Information”, the Company considers itself to be
operating within one reportable segment.
Recently issued accounting
pronouncements and adopted accounting
In
January 2009, the FASB issued an accounting standard which amended the
impairment model by removing its exclusive reliance on “market participant”
estimates of future cash flows used in determining fair value. Changing the cash
flows used to analyze other-than-temporary impairment from the “market
participant” view to a holder’s estimate of whether there has been a “probable”
adverse change in estimated cash flows allows companies to apply reasonable
judgment in assessing whether an other-than-temporary impairment has occurred.
The adoption of this accounting standard did not have a material impact on the
Company’s consolidated financial statements because all of the investments in
debt securities are classified as trading securities.
In April
2009, the FASB issued authoritative guidance related to the determination of
fair value when the volume and level of activity for an asset or liability has
significantly decreased, the identification of transactions that are not
orderly, the recognition and presentation of other-than-temporary impairments,
and the disclosure of the fair value of financial instruments on an interim
basis. The adoption of the guidance did not have a material impact on the
Company’s consolidated financial statements.
10
In April
2009, the FASB issued an accounting standard to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This standard will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This standard provides increased disclosure
about the credit and noncredit components of impaired debt securities that are
not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this standard does not result in a
change in the carrying amount of debt securities, it does require that the
portion of an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This standard became
effective for interim and annual periods ending after June 15, 2009. The
adoption of this standard did not have a material impact on the Company’s
consolidated financial statements.
In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did not
have a material impact on the disclosures related to its consolidated financial
statements.
In May
2009, the FASB an accounting standard which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for
why that date was selected. The standard is effective for interim and annual
periods ending after June 15, 2009, and accordingly, the Company adopted
this Standard during the second quarter of 2009. The standard requires that
public entities evaluate subsequent events through the date that the
financial statements are issued.
In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009. The Company has not completed the
assessment of the impact this new standard will have on the Company’s
financial condition, results of operations or cash flows.
In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes
the exception from applying the consolidation guidance within
this accounting standard. Further, this accounting standard requires a
company to perform a qualitative analysis when determining whether or not it
must consolidate a VIE. It also requires a company to continuously reassess
whether it must consolidate a VIE. Additionally, it requires enhanced
disclosures about a company’s involvement with VIEs and any significant
change in risk exposure due to that involvement, as well as how its involvement
with VIEs impacts the company’s financial statements. Finally, a company will be
required to disclose significant judgments and assumptions used to determine
whether or not to consolidate a VIE. This accounting standard is effective
for financial statements issued for fiscal years beginning after November 15,
2009. The Company has not completed their assessment of the
impact that this pronouncement will have on the Company’s financial condition,
results of operations or cash flows.
In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards Codification™ (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
for the Company in the third quarter of 2009, and accordingly, this
Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and all
subsequent public filings to be made by the Company will reference
the Codification as the sole source of authoritative
literature.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value
using one or more of valuation techniques, as defined. This ASU is
effective for the first reporting period, including interim periods, beginning
after the issuance of this ASU. The adoption of this ASU did not have a material
impact on the Company’s consolidated financial statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic
and diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning
of those fiscal years. The Company is currently evaluating the impact of
this ASU on its consolidated financial statements.
11
Item
3. Quantitative and Qualitative Disclosure About Market Risk
Not
applicable.
Disclosure
Controls and Procedures
The
Company’s management, with participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period covered by this
report.
The term
“disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e)
means controls and other procedures of the Company that are designed to ensure
that information required to be disclosed by a company in reports, such as this
reports, that it files, or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
U.S. Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our Chief Executive Officer and our Chief Financial Officer.
Based on that evaluation, management concluded that our disclosure controls and
procedures were effective as of September 30, 2009.
Changes
in internal control over financial reporting
In our
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 we
identified certain material weaknesses in our internal control over financial
reporting, and we stated in such Annual Report and in our Quarterly Reports on
Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009 that our
management concluded that our internal controls over financial reporting were
not effective during the quarters ended March 31and June 30, 2009.
We
therefore have taken the following steps to remediate the material weaknesses
that we identified and described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008:
•
|
Effective
June 30, 2009, the Company’s Board of Directors approved the
appointment of Yi (Jenny) Liu as its Chief Financial
Officer.
|
•
|
In
the fiscal quarter ended June 30, 2009, the Company engaged
PricewaterhouseCoopers as the Company SOX 404 compliance
consultants.
|
•
|
The
Company instituted formal contract review process to establish and
document the revenue recognition events and methodology at the inception
of revenue generating contracts.
|
•
|
The
Company delivered training on revenue recognition principles and budgeting
to sales and operational members of our
divisions.
|
Management
believes that the actions described above have remediate the material weaknesses
we have identified in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 and strengthened our internal control over financial
reporting. Except as described above, there were no changes in our internal
control over financial reporting during the fiscal quarter ended September 30,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
A
company's "internal control over financial reporting" is a process designed by,
or under the supervision of, a company's principal executive and principal
financial officers, and effected by a company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting 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 the
assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Our
management, including our Chief Executive Officer and our Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent or detect 100% of all errors and fraud that may
occur. 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. Due to the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been
detected.
12
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
During
the three-month period ended September 30, 2009, a total of 240,331 shares of
Common Stock of the Company were issued as a result of the cashless exercise
of 356,047 shares of warrants that were issued pursuant to the
Engagement Agreement Providing for Investment Banking Services, dated October 5,
2007 by and between the Company and a placement agent for the Private Financing.
Such issuances of the Company’s Common Stock were effectuated pursuant to the
exemption from the registration requirements of the Securities Act of 1933 (the
“Act”), as amended, provided by Section 4(2) of the Act and/or Regulation D, and
Regulation S promulgated thereunder.
(a)
|
Exhibits
|
31.1 - Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 - Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 - Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
13
Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned there unto duly
authorized.
RINO
INTERNATIONAL CORPORATION
|
|||
Date:
November 13, 2009
|
BY:
|
/s/
Zou Dejun
|
|
Zou
Dejun
|
|||
Chief
Executive Officer
|
14
INDEX TO
EXHIBITS
EXHIBIT
NUMBER
|
DESCRIPTION
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.
|
15