Attached files
file | filename |
---|---|
EX-32.2 - China Shuangji Cement Ltd. | exhibit322.htm |
EX-31.2 - China Shuangji Cement Ltd. | exhibit312.htm |
EX-32.1 - China Shuangji Cement Ltd. | exhibit321.htm |
EX-31.1 - China Shuangji Cement Ltd. | exhibit311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X |
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2010 |
¨ |
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ |
Commission file number: 000-52440
CHINA SHUANGJI CEMENT LTD.
______________________________________________________ |
(Exact name of small business issuer as specified in its charter) |
Delaware | 95-3542340 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer identification No.) |
221 Linglong Road, Zhaoyuan City, Shandong Province
Peoples Republic of China, 265400
(Address of principal executive offices)
011 - (86) 535-8213217
(Registrants telephone number, including area code)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 □ No □
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes □ No □
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 filero
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company T
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes □ No T
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
1
Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes □ No □
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 28,157,246 shares of common stock, $.0001 par value, were outstanding as of May 1, 2010.
2
TABLE OF CONTENTS
|
| Page |
| PART I |
|
Item 1. | Financial Statements | 4 |
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operation | 28 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 34 |
Item 4T. | Controls and Procedures | 34 |
| PART II |
|
Item 1. | Legal Proceedings | 36 |
Item 1A. | Risk Factors | 36 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 36 |
Item 3. | Defaults Upon Senior Securities | 36 |
Item 4. | (Removed and Reserved) | 36 |
Item 5. | Other Information | 36 |
Item 6. | Exhibits | 36 |
SIGNATURES | 37 | |
|
|
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CHINA SHUANGJI CEMENT LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)
|
|
Financial Statements- |
|
|
|
Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009 | 5 |
|
|
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2010 and 2009 (Unaudited) | 6 |
|
|
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (Unaudited) | 7 |
|
|
Notes to Consolidated Financial Statements as of March 31, 2010 (Unaudited) | 8 |
4
CHINA SHUANGJI CEMENT LTD.
CONSOLIDATED BALANCE SHEETS
|
| As of | ||
|
| March 31, 2010 |
| December 31, 2009 |
|
| (US$) |
| (US$) |
|
| (Unaudited) |
|
|
ASSETS |
|
|
|
|
Current Assets |
|
|
|
|
Cash and cash equivalents | $ | 27,165 | $ | 47,513 |
Accounts receivable, net |
| 3,750,653 |
| 3,382,114 |
Other receivable, net |
| 1,080,689 |
| 1,186,481 |
Inventories |
| 9,979,128 |
| 9,215,333 |
Subsidy receivables |
| 5,412,443 |
| 5,411,572 |
Total Current Assets |
| 20,250,078 |
| 19,243,013 |
|
|
|
|
|
Plant, property and equipment, Net |
| 16,277,022 |
| 16,261,527 |
Construction In Progress |
| 2,959,046 |
| 2,958,570 |
Land use right, Net |
| 168,532 |
| 169,502 |
Goodwill |
| 205,411 |
| 205,378 |
| $ | 39,860,089 | $ | 38,837,990 |
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
Current Liabilities |
|
|
|
|
Accounts payable | $ | 833,126 | $ | 735,381 |
Short-term bank loans |
| 1,227,750 |
| 1,227,553 |
Accrued payroll |
| 181,049 |
| 229,687 |
Other payable |
| 222,721 |
| 293,264 |
Taxes payable |
| 5,060,449 |
| 5,025,270 |
Accrued liability |
| 1,064,190 |
| 1,064,019 |
Total Current Liabilities |
| 8,589,285 |
| 8,575,174 |
|
|
|
|
|
Long-term liabilities |
|
|
|
|
Deferred Revenue |
| 877,693 |
| 877,552 |
Long term payable |
| 2,047,951 |
| 2,047,622 |
|
|
|
|
|
EQUITY |
|
|
|
|
Stockholders' Equity |
|
|
|
|
Preferred Stock, $.0001 par value, 100,000,000 shares authorized, Zero shares issued and outstanding as of March 31, 2010 and December 31, 2009 |
| - |
| - |
Common stock, $.0001 par value, 100,000,000 shares authorized, 28,157,246 and 27,839,346 shares issued and outstanding as of March 31, 2010 and December 31, 2009 |
| 2,816 |
| 2,784 |
Additional paid-in capital |
| 17,829,459 |
| 17,617,355 |
Appropriated retained earnings |
| 9,418,306 |
| 9,418,306 |
Unappropriated retained earnings |
| (406,828) |
| (1,168,960) |
Accumulated other comprehensive income |
| 283,490 |
| 279,291 |
Total Stockholders' Equity |
| 27,127,243 |
| 26,148,776 |
Noncontrolling interest |
| 1,217,917 |
| 1,188,866 |
Total Equity |
| 28,345,160 |
| 27,337,642 |
| $ | 39,860,089 | $ | 38,837,990 |
See notes to consolidated financial statements
5
CHINA SHUANGJI CEMENT LTD.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(UNAUDITED)
See notes to consolidated financial statements
6
CHINA SHUANGJI CEMENT LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
| Three months ended March 31, | ||
|
|
| 2010 |
| 2009 |
|
|
| (US$) |
| (US$) |
|
|
|
| Restated | |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
| |
| Net Income | $ | 790,993 | $ | 1,206,349 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
| |
| Warrants issuance for consulting service |
| 33,765 |
| - |
| Stock issuance for consulting service |
| 178,371 |
| - |
| Gain from sale of property |
| - |
| (423,276) |
| Depreciation |
| 244,581 |
| 245,612 |
| Amortization |
| 997 |
| 996 |
Change in operating assets and liabilities |
|
|
|
| |
| Accounts receivable |
| (367,999) |
| (283,392) |
| Other receivable |
| 105,984 |
| (4,427) |
| Inventories |
| (762,320) |
| 1,419,446 |
| Accounts payable |
| 97,409 |
| (497,976) |
| Accrued payroll |
| (48,675) |
| (76,671) |
| Other payable |
| (70,591) |
| (380,294) |
. | Tax payable |
| 34,371 |
| 38,497 |
| Accrual expenses |
| - |
| (260,601) |
Net cash provided by operating activities |
| 236,886 |
| 984,263 | |
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
| |
| Purchase of property & equipment |
| (257,460) |
| (292,117) |
Net cash used in investing activities |
| (257,460) |
| (292,117) | |
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
| |
| Loan payments |
| - |
| (730,292) |
Net cash used in financing activities |
| - |
| (730,292) | |
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
| (20,574) |
| (38,146) | |
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE FLUCTUATION ON CASH AND CASH EQUIVALENTS |
| 226 |
| 53 | |
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
| 47,513 |
| 60,954 | |
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 27,165 | $ | 22,861 | |
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES: |
|
|
|
| |
| Cash paid during the year for: |
|
|
|
|
| Income tax payments | $ | 129,465 | $ | 116,622 |
| Interest payments | $ | 30,207 | $ | 51,538 |
See notes to consolidated financial statement
7
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
China Shuangji Cement Ltd. (the Company) was incorporated September 15, 1980 in the state of California under the name Trans-Science Corporation. From September 1980 until September 2004 it provided consulting services on the use of high technology products and processes to the construction industry, specializing in earthquake retrofit activities. During the period 2005 through October 3, 2007 the Company was involved in a search for a merger partner.
On October 3, 2007 a British Virgin Islands company named China Shuangji Cement Holdings, Ltd. (Holdings) purchased 16,000,000 shares of the Companys common stock, which represented 74% of the total shares of Company stock outstanding. Holdings is owned by a group of shareholders who also own all of the equity interests of Zhaoyuan Shuangji Co. Ltd. (Zhaoyuan Shuangji), a cement manufacturer incorporated in the Peoples Republic of China (PRC).
Wenji Song, our Chairman and President, beneficially owns 51.3% of Holdings. In addition, Hongcheng Liu, our Chief Financial Officer, owns 0.34%, Bo Wu, our Secretary and Director, owns 1.2%, Jun Song, our Director, owns 1.7%, Linxin Cui, Director, owns 2.5%, and Shouheng Yuan, our Director and Vice President of Sales, owns 0.9%, respectively of Holdings.
Each of Wenji Song, Jun Song, and Bo Wu is an officer and/or director of Holdings, and each such party is deemed a beneficial owner of the shares of Holdings. Each such party disclaims such beneficial ownership.
On October 31, 2007, the Company consummated a migratory merger whereby the Company re-domiciled to Delaware via a merger with and into a newly formed entity, China Shuangji Cement Ltd., a Delaware corporation. Coincident with the merger, the Company effected a one-for-two forward split, whereby each share of the outstanding common stock of the Company was exchanged for two shares of the surviving company and the par value of the common stock became $0.0001 per share.
As part of a plan to effect control of Zhaoyuan Shuangji, on December 1, 2007, the Company acquired 100% of the outstanding capital stock of Chine Holdings, Ltd. (Chine Holdings), a British Virgin Islands corporation incorporated on June 28, 2007, from Wenji Song for an aggregate purchase price of $16,000. At the closing of the acquisition of Chine Holdings, the Company did not pay a cash consideration of $16,000 but accounted for the purchase price in the form of a $16,000 loan.
Chine Holdings owns 100% of Jili Zhaoyuan Investment Consulting Co. Ltd. (JZIC), a Wholly Foreign-Owned Entity formed under the laws of the PRC on March 9, 2007. On September 13, 2007, Chine Holdings acquired 100% of the outstanding equity of JZIC from Holdings. As such, as of December 1, 2007, Chine Holdings is a direct wholly-owned subsidiary of the Company, and JZIC is an indirect wholly-owned subsidiary of the Company.
On August 9, 2008, an aggregate of 20,250,000 shares of Series 2008 preferred stock of the Company were issued to Wenji Song, the Companys president and majority shareholder. Of the 20,250,000 shares, 4,250,000 shares were issued to 16 investors for an aggregate purchase price of $4,250 and 16,000,000 shares of Series 2008 preferred stock were issued as consideration for the cancellation of the $16,000 loan due to Wenji Song that had been used to purchase Chine Holdings.
On August 11, 2008, JZIC entered into a number of contractual agreements with Zhaoyuan Shuangji, pursuant to which the Company, by way of JZIC, effectively acquired control over Zhaoyuan Shuangji. The agreements with Zhaoyuan Shuangji include one through which JZIC has the right to manage and operate Zhaoyuan Shuangji and collect quarterly management fees; one granting JZIC voting rights in Zhaoyuan Shuangji; and one granting JZIC an option to acquire all of the equity interests in Zhaoyuan Shuangji. The agreements also give JZIC operating control of Zhaoyuan Shuangji and the right to its profits. The Company regards the totality of these transactions as constituting an acquisition of Zhaoyuan Shuangji,
8
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and requiring consolidation of the Company, Chine Holdings, JZIC, and Zhaoyuan Shuangji under the provisions of Financial Interpretation 46R (FIN-46R).
Because the Company and Zhaoyuan Shuangji are under common control since October 3, 2007, we combined Zhaoyuan Shuangjis financial at historical cost with the Company. The accompanying consolidated financial statements include the effect of the acquisition on the financial position of the Company and the results of its operations. The consolidated statements of income for the three months ended March 31, 2010 and 2009 are based on the historical statements of operations of Zhaoyuan Shuangji, and the Company and its subsidiaries.
Zhaoyuan Shuangji was incorporated in the PRC on March 29, 2002 for the purpose of acquiring and operating cement manufacturing subsidiaries in China. Three such subsidiaries have been acquired, one in Zhaoyuan (a city in Shandong province) and two in the Province of Hainan (one in a city named Danzhou and one in a city named Dongfang).
In September 2008, the City of Zhaoyuan withdrew the rights of Zhaoyuan Shuangji to the land on which its Zhaoyuan plant was located and asked Zhaoyuan Shuangji to relocate the plant within the City of Zhaoyuan (See Note 4). During the fourth quarter of 2008, Zhaoyuan ceased operations at this plant and began construction of a new plant at a site selected by the City of Zhaoyuan. The new plant is expected to have significantly more capacity than the old plant.
On April 15, 2009, Zhaoyuan Shuangji concluded a joint venture agreement with Longkou Bahai Cement Co. Ltd (Bahai) under which Zhaoyuan Shuangji became a 51% owner of a new company named Longkou Shuangji Cement Co. Ltd. (Longkou). The joint venture was made by the contribution of $1,170,070 in cash by Zhaoyuan Shangji and a contribution by Baihai of the net assets formerly owned by Baihai, altogether with a contribution in cash of $290,000. So far the Zhaoyuan Shuangji only contributed $570,000 and is committed to contributing additional $600,070 as needed. The new company has an annual capacity to produce 500,000 tons of cement, and will also operate in Shandong Province.
The assets of Longkou have been recorded on the books of the new company at fair market value. The accounts of Longkou have been consolidated in these financial statements; all intercompany transactions have been eliminated.
9
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Companys current structure is set forth in the diagram below:
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results for any future period. These statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 2009. The results of the three month period ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year ending December 31, 2010.
a)
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries- Chine Holdings, Ltd., Jili Zhaoyuan Investment Consulting Co. Ltd. and Zhaoyuan Shuangji Co. Ltd. All significant inter-company accounts and transactions have been eliminated in consolidation.
b)
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best
10
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
information available at the time the estimates are made. However, actual results could differ materially from those estimates.
c)
Foreign currency translation and transactions
The reporting currency of the Company is the United States Dollar (U.S. dollar). The functional currency of China Shuangji Cement Ltd., Chine Holdings, Ltd. and Jili Zhaoyuan Investment Consulting Co. Ltd. is the U.S. dollar. The functional currency of Zhaoyuan Shuangji Co. Ltd. is the Chinese Yuan or Renminbi (RMB).
For financial reporting purposes, the financial statements of the Companys PRC operating entities, which are prepared using the RMB, are translated into the Companys reporting currency, the U.S. dollar. Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and stockholders equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in stockholders equity.
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. The resulting exchange differences are included in the determination of net income of the consolidated financial statements for the respective periods.
The exchange rates used to translate amounts in RMB into U.S. dollar for the purposes of preparing the consolidated financial statements are as follows:
|
| 2010 |
| 2009 |
|
|
|
|
|
Balance sheet items, except for equity accounts |
| 6.8361 |
| 6.8456 |
|
|
|
|
|
Items in the statements of income and comprehensive income, and statements of cash flows |
| 6.8361 |
| 6.8466 |
No representation is made that the RMB amounts could have been, or could be converted into U.S. dollar at the above rates.
d)
Cash and cash equivalents
For statement of cash flows purposes, the Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. Cash overdraft as of balance sheet date will be reflected as liabilities in the balance sheet. As of March 31, 2010 and December 31, 2009, cash and cash equivalents amounted to $27,165 and $47,513 respectively.
e)
Accounts receivable
The Company's policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As of March 31, 2010 and December 31,
11
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2009, the Company had accounts receivable of $3,750,653 and $3,382,114, net of allowance for doubtful accounts of $2,385,180 and $2,384,796 respectively.
f)
Inventories
Inventory is valued at the lower of cost (determined on a weighted average basis) or net realizable value. Management compares the cost of inventory with the net realizable value and an allowance is made for writing down the inventory to its net realizable value, if lower than the cost.
g)
Property, plant and equipment
Property, plant and equipment are recorded at cost. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of property, plant, and equipment are capitalized. These capitalized costs may include structural improvements, equipment, and fixtures. All ordinary repair and maintenance costs are expensed as incurred.
Depreciation is computed using the straight line method, with lives of forty years for buildings, twelve years for production equipment, ten years for vehicles, and five years for office furniture and equipment.
h)
Impairment
The Company applies the provisions of Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (ASC 360) issued by the Financial Accounting Standards Board ("FASB"). ASC 360 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property, plant and equipment and intangible assets subject to periodic amortization, for recoverability at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows as the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary. There was no impairment of long-lived assets for the three months ended March 31, 2010 and 2009, respectively.
i)
Business combinations
The Company accounts for its business combinations using the purchase method of accounting in accordance with FASB Statement No. 141 (ASC topic 805), Business Combinations. This method requires that the acquisition cost to be allocated to the assets and liabilities of the Company acquired based on their fair values. The Company makes estimates and judgments in determining the fair value of the acquired assets and liabilities, based on valuations using managements estimates and
12
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
assumptions including its experience with similar assets and liabilities in similar industries. If different judgments or assumptions were used, the amounts assigned to the individual acquired assets or liabilities could be materially different.
j)
Goodwill and purchased intangible assets
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is reviewed for impairment at least annual in accordance with FASB Statement No. 142 (ASC topic 350), Goodwill and Other Intangible Assets. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting units goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with ASC topic 805, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed and no impairment was deemed necessary.
k)
Revenue recognition
The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104 (ASC topic 605). Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
The Company's revenue consists of invoiced value of goods, net of a value-added tax (VAT). No product return or sales discount allowance is made as products delivered and accepted by customers are normally not returnable and sales discounts are normally not granted after products are delivered.
l)
Advertising costs
The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. There was no advertising cost incurred for the three months ended March 31, 2010 or 2009.
m)
Income taxes
The Company utilizes SFAS No. 109 (ASC topic 740), Accounting for Income Taxes, which 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. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
On January 1, 2007, the Company adopted FASB Interpretation No. 48 (ASC topic 740), Accounting for Uncertainties in Income Taxes, an interpretation of Statement of Financial Accounting Standards
13
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
No. 109. ASC topic 740 clarifies the accounting for uncertain tax positions. The interpretation requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The adoption of ASC topic 740 on January 1, 2007 did not have any effect on the Companys consolidated financial statements. Prior to the adoption of FIN 48, the Company recognized the effect of income tax positions only if such positions were probable of being sustained.
Beginning January 1, 2008, the new Enterprise Income Tax (EIT) law replaced the existing laws for Domestic Enterprises (DES) and Foreign Invested Enterprises (FIEs). The new standard EIT rate of 25% replaced the 33% rate currently applicable to both DES and FIEs.
n)
Fair values of financial instruments
Statement of Financial Accounting Standard No. 107 (ASC topic 820), "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values of financial instruments.
The Company's financial instruments primarily consist of cash and cash equivalents, accounts receivable, other receivables, advances to suppliers, accounts payable, other payable, tax payable, and related party advances and borrowings.
As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates.
o)
Statement of cash flows
In accordance with Statement of Financial Accounting Standards No. 95 (ASC topic 825), "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
p)
Earnings Per Share
Statement of Financial Accounting Standards No. 128 (ASC 420), Earnings per share requires the presentation of basic earnings per share and diluted earnings per share. Basic and diluted earnings per share computations are presented by the Company conform to the standard and are based on the weighted average number of shares of Common Stock outstanding during the year.
Basic earnings per share is computed by dividing net income or loss by the weighted average number of shares outstanding for the year. Diluted earnings per share is computed by dividing net income or loss by the total of the weighted average number of shares outstanding, and the dilutive effect of convertible shares and outstanding stock options and warrants (applying the treasury stock method).
14
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
q)
Recent accounting pronouncements
In June 2009, the FASB issued ASC 105 (previously SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP") - a replacement of FASB Statement No. 162), which will become the source of authoritative accounting principles generally accepted in the United States recognized by the FASB to be applied to nongovernmental entities. The Codification is effective in the third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature. The Company does not believe that this will have a material effect on its consolidated financial statements.
In June 2009, the FASB issued amended standards for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. These amended standards are effective for us beginning in the first quarter of fiscal year 2010 and we are currently evaluating the impact that adoption will have on our consolidated financial statements.
In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, Subsequent Events), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on the Companys consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value, which provides additional guidance on the measurement of liabilities at fair value. These amended standards clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, we are required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, we are required to use another valuation technique, such as an income approach or a market approach. These amended standards are effective for us beginning in the fourth quarter of fiscal year 2009 and are not expected to have a significant impact on our consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820, adding new requirements for disclosures for Levels 1 and 2, separate disclosures of purchases, sales, issuances, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010; early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2009-14 on its financial statements.
15
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. INVENTORIES
Inventories consist of the following as of March 31, 2010 and December 31, 2009:
|
| As of |
| |||||
|
| March 31, |
|
| December 31, |
| ||
|
| 2010 |
|
| 2009 |
| ||
|
| Unaudited |
|
|
|
| ||
Raw materials |
| $ | 7,927,965 |
|
| $ | 7,341,966 |
|
|
|
|
|
|
|
|
|
|
Work in progress |
|
| 999,608 |
|
|
| 962,999 |
|
|
|
|
|
|
|
|
|
|
Finished goods |
|
| 1,051,555 |
|
|
| 910,368 |
|
|
|
|
|
|
|
|
|
|
Totals |
| $ | 9,979,128 |
|
| $ | 9,215,333 |
|
4. PROPERTY, PLANT AND EQUIPMENT, AND CONSTRUCTION IN PROGRESS
Property, plant and equipment consist of the following as of March 31, 2010 and December 31, 2009:
|
| As of |
| |||||
|
| March 31, |
|
| December 31, |
| ||
|
| 2010 |
|
| 2009 |
| ||
|
|
| Unaudited |
|
|
|
|
|
Building and improvements |
| $ | 14,334,361 |
|
| $ | 15,716,586 |
|
Vehicles |
|
| 364,987 |
|
|
| 364,928 |
|
Machinery and equipment |
|
| 35,354,297 |
|
|
| 33,706,663 |
|
|
|
|
|
|
|
|
|
|
Total |
|
| 50,053,645 |
|
|
| 49,788,177 |
|
Less: accumulated depreciation |
|
| (33,776,623) |
|
|
| (33,526,650) |
|
Total property, plant and equipment |
| $ | 16,277,022 |
|
| $ | 16,261,527 |
|
Depreciation expenses for the three months ended March 31, 2010 and 2009 were $244,581 and $245,612, respectively.
Construction in Progress:
As of March 31, 2010 and December 31, 2009, construction in progress, representing construction for a new plant, amounted to $2,959,046 and $2,958,570, respectively.
5. INTANGIBLE ASSETS
LAND USE RIGHTS
Under the People's Republic of China's governmental regulations, the government owns all land. However, the government grants the user a land use right (the Right) to use land. The Company has recognized the amounts paid for the acquisition of rights to use land as an intangible asset and amortizing over a period of fifty years which was approved by the government.
16
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The land use right consists of the following as of March 31, 2010 and December 31, 2009:
|
| As of |
| |||||
|
| March 31, |
|
| December 31, |
| ||
|
| 2010 |
|
| 2009 |
| ||
|
| Unaudited |
|
|
|
| ||
Land use rights |
| $ | 199,446 |
|
| $ | 199,414 |
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
| (30,914) |
|
|
| (29,912) |
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 168,532 |
|
| $ | 169,502 |
|
Total amortization expense of intangible assets for the three months ended March 31, 2010 and 2009 amounted to $997 and $996, respectively.
Amortization expenses of intangible assets for the next five years after March 31, 2010 are as follows:
March 31, 2011 |
| $ | 3,986 |
|
March 31, 2012 |
|
| 3,986 |
|
March 31, 2013 |
|
| 3,986 |
|
March 31, 2014 |
|
| 3,986 |
|
March 31, 2015 |
|
| 3,986 |
|
Total |
| $ | 19,930 |
|
6. SHORT-TERM BANK LOANS
As of March 31, 2010 and December 31, 2009, the loans payable were as follows:
|
| As of |
| |||||
|
| March 31, |
|
| December 31, |
| ||
|
| 2010 |
|
| 2009 |
| ||
|
| Unaudited |
|
|
|
| ||
Short term bank loans: |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Zhaoyuan City State Assets Management Co., Ltd., interest at 5.3% annually, due by September 31, 2010
|
| $ | 149,308 |
|
| $ | 149,284 |
|
China Industrial & Commercial Bank, interest at 3.7% annually, due by December 31, 2010
|
|
| 242,483 |
|
|
| 242,444 |
|
China Industrial & Commercial Bank, interest at 5.3% annually, due by May 31, 2010
|
|
| 36,819 |
|
|
| 36,813 |
|
China Construction Bank, interest at 8.9% annually, due by December 17, 2010 |
|
| 475,125 |
|
|
| 475,048 |
|
Agricultural Bank, interest at 8.9% annually, due by December 17, 2010 |
|
| 324,015 |
|
|
| 323,964 |
|
Total |
| $ | 1,227,750 |
|
| $ | 1,227,553 |
|
The interest expense was $30,745 and $51,538 for the three months ended March 31, 2010 and 2009, respectively.
17
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. TAXES PAYABLE
Taxes payables consist of the following as of March 31, 2010 and December 31, 2009:
|
| As of |
| |||||
|
| March 31, |
|
| December 31, |
| ||
|
| 2010 |
|
| 2009 |
| ||
|
| Unaudited |
|
|
|
| ||
Value added tax payable |
| $ | 72,656 |
|
|
| 135,882 |
|
Income tax payable |
|
| 4,989,161 |
|
|
| 4,890,755 |
|
Other levies |
|
| (1,368) |
|
|
| (1,367) |
|
|
|
|
|
|
|
|
|
|
|
| $ | 5,060,449 |
|
|
| 5,025,270 |
|
8. SUBSIDY RECEIVABLES, ACCURED LIABILITY, LONG-TERM PAYABLE, DEFERRED REVENUE, INCOME FROM INVOLUNTARY CONVERNSION
In September 2008 the City of Zhaoyuan ordered Zhaoyuan Shuangji to relocate its plant which is expected to last 2 years. This transaction was termed as involuntary conversion. Details see following.
INVOLUNTARY CONVERSION
In September 2008, the City of Zhaoyuan withdrew the rights of Zhaoyuan Shuangji to the land on which the Zhaoyuan plant was located and asked Zhaoyuan Shuangji to relocate the plant to a new site within the City of Zhaoyuan. During the fourth quarter of 2008, Zhaoyuan Shuangji ceased operations at the plant and began construction of a new plant at a site selected by the City.
As consideration for this involuntary conversion, the City agreed to pay Zhaoyuan Shuangji $13,860,115 in installments over the relocation period. Of the $13,860,115 to be paid by the City, $5,106,358 and $3,342,185 were received by Zhaoyuan Shuangji during 2008 and 2009. The City of Zhaoyuan has specified usage of subsidy proceeds. The receipt of $5,106,358 in 2008 was specified to repay the bank loan of Zhanyuan Shuangji. The receipt of $3,342,185 in 2009 was specified to compensate for the relocation loss due to disposal of fixed assets.
|
|
|
|
|
| As of December 31, |
|
| Year ended |
| |||||||
|
|
|
|
|
| March 31, |
|
| December 31, |
|
| December 31, |
| ||||
|
|
|
|
|
| 2010 |
|
| 2009 |
|
| 2008 |
| ||||
|
| As of Sep 30, 2008 |
| Recorded in |
| Unaudited |
|
|
|
|
|
|
| ||||
Subsidy from local government |
|
| 13,860,115 |
| Subsidy receivables |
|
| 5,412,443 |
|
|
| 5,411,572 |
|
|
|
| |
Specific usage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loan payment |
|
| 5,106,358 |
| Subsidy income |
|
| - |
|
|
| - |
|
|
| 5,027,110 |
|
Compensation for loss of relocation |
|
| 5,835,838 |
| Accrued liabilities |
|
| 1,064,190 |
|
|
| 1,064,019 |
|
|
| - |
|
Payment to purchase new land use right |
|
| 2,042,543 |
| Long-term payable |
|
| 2,047,951 |
|
|
| 2,047,622 |
|
|
| - |
|
Compensation for purchase of new fixed assets |
|
| 875,376 |
| Deferred revenue |
|
| 877,693 |
|
|
| 877,552 |
|
|
| - |
|
18
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Income from involuntary conversion: Zhuangyuan Shuangji received $5,106,358 in 2008 from City of Zhaoyuan to repay its bank loan.
Accrued liability: Approximately 64% of the equipment of the old plant will be reconditioned and moved to the new plant. The balance of the equipment of the old plant will be sold or scrapped. The company accrued $5,835,838 liabilities for the disposal of fixed assets and loss of inventories during the relocation periods as of December 31, 2008, when $4,771,819 was reversed due to actual loss from disposal of fixed assets and inventories during 2009.
Long-term payable: Zhaoyuan Shuangji is obligated to pay $2,042,543 to purchase the land rights to new plant, which is recorded as long term payable amounted to $2,047,951 and $2,047,622 as of March 31, 2010 and December 31, 2009, respectively. This liability would be settled after receipt of subsidy proceeds from City of Zhaoyuan.
Deferred revenue: The subsidy was recorded as deferred revenue in compensation for future purchase of new fixed asset.
9. OTHER INCOME (EXPENSES)
Other income (expenses) mainly consists gain from sale of property.
10. INCOME TAXES
The Company utilizes SFAS No. 109 (ASC topic 740), "Accounting for Income Taxes," which 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. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
i). The Company is incorporated in the state of Delware. Under the current law the company is not subject to state corporate income tax. The Company become a holding company and does not conduct any substantial operations of its own. No provision for federal corporate income tax have been made in the financial statements as the Company has no assessable profits for the three months ended March 31, 2010 and 2009, respectively.
ii). Chine Holdings was incorporated in the British Virgin Islands (BVI). Under the current law of the BVI, the Company is not subject to tax on income or capital gains. Additionally, upon payments of dividends by the Company to its shareholders, no BVI withholding tax will be imposed.
iii). The Companys PRC operating entities, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income tax (EIT). Effective from January 1, 2008, the EIT rate of PRC was changed from 33% of to 25%, and applies to both domestic and foreign invested enterprises.
19
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The provision for income taxes for the three months ended March 31, 2010 and 2009 consisted of the following:
|
| For the three months |
| |||||
|
| Ended March 31, |
| |||||
|
| 2010 |
|
| 2009 |
| ||
|
|
| Unaudited |
|
|
| Unaudited |
|
|
|
|
|
|
|
| Restated |
|
Current income tax - Provision for China income and local tax |
| $ | 383,410 |
|
| $ | 404,311 |
|
Deferred taxes |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
| $ | 383,410 |
|
| $ | 404,311 |
|
The following table reconciles the U.S. statutory rates to the Companys effective tax rate for the three months ended March 31, 2010 and 2009:
|
| 2010 |
|
| 2009 |
| ||
Tax at statutory rate |
|
| 34 | % |
|
| 34 | % |
Foreign tax rate difference |
|
| (9) | % |
|
| (9) | % |
Net operating loss in other tax jurisdiction for where no benefit is realized |
|
| 8 | % |
|
| - |
|
Total |
|
| 33 | % |
|
| 25 | % |
11. ACQUISITIONS AND IMPAIRMENT OF INTANGIBLE ASSETS
On April 15, 2009, Zhaoyuan Shuangji concluded a joint venture agreement with Longkou Bahai Cement Co. Ltd (Bahai) under which Zhaoyuan Shuangji became a 51% owner of a new company named Longkou Shuangji Cement Co. Ltd. (Longkou). The joint venture was made by the contribution of $1,170,070 in cash by Zhaoyuan Shangji and a contribution by Baihai of the net assets formerly owned by Baihai, altogether with a contribution in cash of $290,000. So far Zhaoyuan Shuangji only contributed $570,000 and is committed to contributing additional $600,070 as needed. The new company has an annual capacity to produce 500,000 tons of cement, and will also operate in Shandong Province.
The assets of Longkou have been recorded on the books of the new company at fair market value. The accounts of Longkou have been consolidated in these financial statements; all intercompany transactions have been eliminated.
The following table summarizes total purchase price allocated to the fair value of the Companys share of the net assets acquired as of the acquisition date:
| April 15, 2009 |
Consideration | $1,170,070 |
|
|
Allocation of purchase price |
|
Cash | 4,921 |
Account Receivable, net | 42,015 |
Other Receivable, net | 318,029 |
Inventories | 73,521 |
Fixed assets | 638,493 |
Total assets acquired | 1,076,979 |
Current Liabilities | (112,287) |
Net assets acquired | 964,692 |
Goodwill | 205,378 |
Total | $ 1,170,070 |
20
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unaudited Pro Forma Consolidated Financial Information Disclosure for the three months ended March 31, 2010
The following un-audited pro forma consolidated financial information for the three months ended March 31, 2009, as presented below, reflects the results of operations of the Company assuming the Longkou acquisition occurred on January 1, 2009. These pro forma results have been prepared for information purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place on January 1, 2009, and may not be indicative of future operating results.
|
| For the three months ended March 31, |
|
| 2009 (US$) |
|
| Unaudited |
|
| Restated |
Sales | $ | 13,909,671 |
Cost of Sales |
| (12,124,135) |
Gross Margin |
| 1,785,536 |
|
|
|
Operating Expenses |
|
|
Selling expenses |
| 77,129 |
General and administrative expenses |
| 411,287 |
|
| 488,416 |
|
|
|
Income From Operations |
| 1,297,120 |
|
|
|
Other Income ( Expense) |
|
|
Interest expense |
| (51,815) |
Gain from sale of property |
| 423,276 |
Other income |
| 13,016 |
|
| 384,477 |
|
|
|
Operating Income Before Income Tax Expense And Noncontrolling Interest |
| 1,681,597 |
|
|
|
Income Tax Expense |
| 422,045 |
|
|
|
Net Income |
| 1,259,552 |
|
|
|
Less: Net income attributable to Noncontrolling Interest |
| (26,069) |
Net Income attributable to shareholders |
| 1,233,483 |
|
|
|
Earning per share |
|
|
Basic | $ | 0.18 |
Diluted | $ | 0.05 |
21
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Noncontrolling interest
On April 15, 2009, Zhaoyuan Shuangji concluded a joint venture agreement with Longkou Bahai Cement Co. Ltd (Bahai) under which Zhaoyuan Shuangji became a 51% owner of a new company named Longkou Shuangji Cement Co. Ltd. (Longkou). The following table summarizes the noncontrolling interest of Longkou:
| March 31, 2010 |
Share capital | $ 2,925,174 |
Statuary reserve | 106,090 |
Retained earnings | (1,139,712) |
Net equity as of acquisition date | 1,891,552 |
Acquisition of 49% of noncontrolling interest | 926,861 |
Net income transfer to noncontrolling interest | 287,353 |
Foreign Currency Translation Gain attributable to Noncontrolling Interest | 3,703 |
Noncontrolling interest balance | $ 1,217,917 |
Impairments of Goodwill
The Company evaluates intangible assets and other long-lived assets for impairment, at a minimum, on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets, other long-lived assets and goodwill is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. The Company assessed the carrying value of intangible assets in accordance with the requirements of SFAS No.142 (ASC topic 350) "Goodwill and Other Intangible Assets". There was no impairment of long-lived assets for the three months ended March 31, 2010 and 2009, respectively.
12. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's operations are all 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 PRC's economy.
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.
MAJOR CUSTOMERS AND VENDORS
There were three vendors from which the Company purchased more than 10% of its raw materials for the three months ended March 31, 2010 which each vendor individually accounting for about 14%, 13%, and 11%. Accounts payable to the venders amounted to $0 as of March 31, 2010.
22
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
There were four venders from which the Company purchased more than 10% of its raw material for the three months ended March 31, 2009 with each vendor individually accounting for about 19%, 14%, 13%, and 12%. Account payable to the venders amounted to $0 as of March 31, 2009.
There was no major customer that accounted for over 10% of the total sales for the three months ended March 31, 2010 and 2009, respectively.
13. STOCKHOLDERS EQUITY
COMMON STOCK
The Company had 100,000,000 shares of common stock authorized, with a par value of $.0001 per share.
On April 16, 2009, the Company affected a reverse split of Company common stock under which shareholders will receive one share of common stock for every four shares currently owned. Wherever common shares are presented in these financial statements they have been adjusted to a post-split basis.
On June 14, 2009, the Board of Directors of the Company authorized and approved the conversion of 20,250,000 preferred shares that were originally issued on August 9, 2008 to 20,250,000 common shares.
On October 1, 2009, the Board of Directors of the Company authorized and approved the conversion of 856,250 preferred shares that were originally issued on April 1, 2009 to 856,250 common shares.
On January 4, 2010, the Company issued 60,000 shares of common stock to an investment relation firm in exchange for consulting services to be rendered to the Company. The shares were valued at a total of $48,000.
On February 23, 2010, the Company issued 57,900 shares of common stock to attorneys in exchange for professional services to be rendered to the Company. The shares were valued at a total of $28,371.
On February 26, 2010, the Company issued 200,000 shares of common stock to an investment relation firm in exchange for consulting services to be rendered to the Company. The shares were valued at a total of $102,000.
PREFERRED STOCK
The Company is authorized to issue up to 100,000,000 shares of preferred stock with a par value of $0.0001. On July 15, 2008, the Board of Directors (the Board) designated a 2008 series of preferred consisting of 30,000,000 shares. Each share of the 2008 series preferred stock is convertible into one share of Company common stock. Such conversion may not occur until six months after issuance and until one of four designated triggering events has occurred. The 2008 series is not entitled to receive dividends; is not redeemable; and is not entitled to vote on matters voted upon only by common shareholders.
On August 9, 2008, 4,250,000 shares of the 2008 series were issued for $4,250 and 16,000,000 were issued to the Company president and majority shareholder for cancellation of a $16,000 advance that had been made to the Company.
23
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On April 1, 2009, the Board of Directors authorized the issuance of 550,000 shares of Company Series 2008 preferred stock to three entities in return for services. On that same date, the Board also approved the issuance of 306,250 shares of Company Series 2008 preferred stock to our largest shareholder, which is a company controlled by the Company president, in return for cancellation of $49,000 of advances that had been made to the Company.
On June 14, 2009, the Board of Directors of the Company authorized and approved the conversion of 20,250,000 preferred shares that were originally issued on August 9, 2008 to 20,250,000 common shares.
On October 1, 2009, the Board of Directors of the Company authorized and approved the conversion of 856,250 preferred shares that were originally issued on April 1, 2009 to 856,250 common shares.
The Company follows ASC topic 470-50-40-2, the extinguishment transactions between related entities may be in essence capital transactions. Therefore, no gain has been recognized.
WARRANTS
Following is a summary of the warrant activity for the three months ended March 31, 2010:
Outstanding, December 31, 2009 |
|
| - |
|
Granted during the year |
|
| 100,000 |
|
Expired during the year |
|
| - |
|
Exercised during the year |
|
| - |
|
Outstanding, March 31, 2010 |
|
| 100,000 |
|
Following is a summary of the status of warrants outstanding as of March 31, 2010:
Outstanding Warrants |
|
| Exercisable Warrants |
| ||||||||||||||||
Exercise Price |
| Number of Warrants |
|
| Average Remaining Contractual Life |
|
| Average Exercise Price |
|
| Number of Warrants |
|
| Intrinsic Value |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
$0.71 |
|
| 100,000 |
|
|
| 3.83 |
|
| $ | 0.71 |
|
|
| 100,000 |
|
|
| 20,000 |
|
The assumptions used in calculating the fair value of options granted using the Black-Scholes option-pricing model are as follows:
The 100,000 warrants granted during the three months period ended March 31, 2010:
Risk-free interest rate |
|
| 1.38 | % | |
Expected life of the warrants |
| 4 years |
| ||
Expected volatility |
|
| 275 | % | |
Expected dividend yield |
|
| 0 |
|
During the three months period ended March 31, 2010 the Company granted 100,000 warrants at exercise prices of $0.71 per share, to the Companys exclusive placement agent. The Black-Scholes fair market value of the warrants was $50,647. The Company recorded an expense of $33,765 during the three months period ended March 31, 2010 in the consolidated financial statements for the warrants.
24
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14. STATUTORY RESERVE
As stipulated by the Company Law of the People's Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following:
Allocations to the "Statutory surplus reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital;
i)
Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's "Statutory common welfare fund", which is established for the purpose of providing employee facilities and other collective benefits to the Company's employees; and Statutory common welfare fund is no longer required per the new cooperation law executed in 2006.
ii)
Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting.
In accordance with the Chinese Company Law, the Company has allocated 10% of its net income to surplus. The amount allocated to the surplus reserve amounted to $0 for the three months ended March 31, 2010 and 2009, respectively.
15. SUBSEQUENT EVENTS
As of May 20, 2010, which is the consolidated financial statements issuance date, Management identified the following subsequent events:
In April 2010, the Company issued 42,100 shares of common stock to a consultant and attorney as consideration for consulting and professional services to be rendered to the Company.
16. RESTATEMENTS
The Companys financial statements have been restated to reflect corrections and changes in presentation of the financial statements required reclassification of certain accounts. Effects on previously issued financial statements for the three months ended March 31, 2009 as follows:
Decrease in sales |
| $ | (17,271) |
|
Decrease in cost of sales |
|
| 253,503 |
|
Increase of selling and administrative expenses |
|
| (107,707) |
|
Decrease of interest expense |
|
| 78 |
|
Increase of gain from sale of property |
|
| 423,276 |
|
Decrease of other income |
|
| (30) |
|
Subtotal |
|
| 551,849 |
|
Income tax effect of restatement |
|
| (162,381) |
|
Increase in net income for the three months ended March 31, 2009 |
|
| 389,468 |
|
The effect on the Companys previously issued financial statements for the three months ended March 31, 2009 in summarized as follows:
25
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2009
|
| Previously Reported |
|
| Net Change |
|
| Restated |
|
|
|
| ||||
|
| 2009 |
|
|
|
|
| 2009 |
|
|
|
| ||||
Sales |
| $ | 11,499,100 |
|
| (17,271) |
|
| $ | 11,481,829 |
|
|
|
| ||
Cost of Sales |
|
| 10,099,534 |
|
|
| (253,503) |
|
|
| 9,846,031 |
|
|
| a |
|
Gross Profit |
|
| 1,399,566 |
|
|
| 236,232 |
|
|
| 1,635,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
| 302,185 |
|
|
| 107,707 |
|
|
| 409,892 |
|
|
| b |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
| 1,097,381 |
|
|
| 128,525 |
|
|
| 1,225,906 |
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (51,616) |
|
|
| 78 |
|
|
| (51,538) |
|
|
|
|
|
Gain from sale of property |
|
|
|
|
|
| 423,276 |
|
|
| 423,276 |
|
|
| c |
|
Other income |
|
| 13,046 |
|
|
| (30) |
|
|
| 13,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
| 1,058,811 |
|
|
| 551,849 |
|
|
| 1,610,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Provision |
|
| 241,930 |
|
|
| 162,381 |
|
|
| 404,311 |
|
|
| d |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income for the Period |
| $ | 816,881 |
|
|
| 389,468 |
|
| $ | 1,206,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.12 |
|
|
| 0.06 |
|
| $ | 0.18 |
|
|
|
|
|
Diluted |
| $ | 0.12 |
|
|
| (0.08) |
|
| $ | 0.04 |
|
|
|
|
|
Weighted average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 6,733,042 |
|
|
| 54 |
|
|
| 6,733,096 |
|
|
|
|
|
Diluted |
|
| 6,733,042 |
|
|
| 20,250,054 |
|
|
| 26,983,096 |
|
|
|
|
|
a) | Correction of error to decrease depreciation expense to the cost of goods sold |
b) | Correction of error to increase selling and administrative expenses |
c) | Correction of error to record gain from sale of property |
d) | Correction of error to recorded proper income tax expense |
26
CHINA SHUANGJI CEMENT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2009
|
| Previously Reported |
|
| Net Change |
|
| Restated |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 816,882 |
|
|
| 389,467 |
|
|
| 1,206,349 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Charges and credits not involving the use of cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain from sale of property |
|
| - |
|
|
| (423,276) |
|
|
| (423,276) |
|
Depreciation and Amortization |
|
| 409,580 |
|
|
| (162,972) |
|
|
| 246,608 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable |
|
| (165,313) |
|
|
| (118,079) |
|
|
| (283,392) |
|
Decrease in other receivables |
|
| 2,855,522 |
|
|
| (2,859,949) |
|
|
| (4,427) |
|
Decrease (increase) in inventory |
|
| 1,421,581 |
|
|
| (2,135) |
|
|
| 1,419,446 |
|
Increase (decrease) in accounts payable |
|
| (264,526) |
|
|
| (233,450) |
|
|
| (497,976) |
|
Accrued payroll |
|
|
|
|
|
| (76,671) |
|
|
| (76,671) |
|
Increase (decrease) in other payables |
|
| (2,455,162) |
|
|
| 2,074,868 |
|
|
| (380,294) |
|
Increase (decrease) in tax payable |
|
|
|
|
|
| 38,497 |
|
|
| 38,497 |
|
Accrual expenses |
|
| (381,353) |
|
|
| 120,752 |
|
|
| (260,601) |
|
Net Cash Provided By Operating Activities |
|
| 2,237,211 |
|
|
| (1,252,948) |
|
|
| 984,263 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property & equipment |
|
| (292,556) |
|
|
| 439 |
|
|
| (292,117) |
|
Expenditures for construction in progress |
|
| (1,170,224) |
|
|
| 1,170,224 |
|
|
| - |
|
Increase in long term receivables |
|
| (31,586) |
|
|
| 31,586 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided(Consumed) By Investing Activities |
|
| (1,494,366) |
|
|
| 1,202,249 |
|
|
| (292,117) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Loan payments |
|
| (731,390) |
|
|
| 1,098 |
|
|
| (730,292) |
|
Net Cash Consumed By Financing Activities |
|
| (731,390) |
|
|
| 1,098 |
|
|
| (730,292) |
|
17. BASIC AND DILUTED EARNINGS PER SHARE
Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares comprise shares issuable upon the exercise of share based awards, using the treasury stock method. The reconciliation of the numerators and denominators of the basic and diluted EPS computations for income is shown as follows:
| Three Months Ended March 31, | ||||
|
| 2010 |
|
| 2009 |
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
Net income | $ | 762,132 |
| $ | 1,206,349 |
Denominator for basic earnings per shareweighted average shares outstanding |
| 27,995,218 |
|
| 6,733,096 |
Dilutive effect of preferred stocks and warrants |
| 21,978 |
|
| 20,250,000 |
Denominator for diluted earnings per share |
| 28,017,196 |
|
| 26,983,096 |
Basic earnings per share | $ | 0.03 |
| $ | 0.18 |
Diluted earnings per share | $ | 0.03 |
| $ | 0.04 |
27
Item 2. Managements Discussion and Analysis or Plan of Operation
Cautionary Notice Regarding Forward-Looking Statements
In this quarterly report, references to China Shuangji Cement, CSGJ, the Company, we, our, us, and the Companys variable interest entity, Zhaoyuan Shuangji Co. Ltd., refer to China Shuangji Cement Ltd.
We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions Managements Discussion and Analysis of Financial Condition and Results of Operations, Business, as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as anticipate, believe, estimate, expect, intend, plan, project, target, can, could, may, should, will, would, and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the Securities Act) and in Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.
The nature of our business makes predicting the future trends of our revenue, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:
·
the effect of political, economic, and market conditions and geopolitical events;
·
legislative and regulatory changes that affect our business;
·
the availability of funds and working capital;
·
the actions and initiatives of current and potential competitors;
·
investor sentiment; and
·
our reputation.
We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this Report.
28
Executive Summary
We are a supplier of high-grade portland cement to the industrial sector in the Shandong and Hainan provinces of the Peoples Republic of China (PRC). Our processed cement products are primarily purchased by the cement industry for the purpose of making the cement required for the construction of buildings, roads, and other infrastructure projects. Our products have been sold nationally (in the PRC) and internationally in 10 countries. We own and operate four cement plants in the PRC, with a total capacity of approximately 1.5 million MT.
We wholly-own Chine Holdings Ltd., a company incorporated in the British Virgin Islands; which owns Jili Zhaoyuan Investment Consulting Co., Ltd. (JZIC), a Wholly Foreign-Owned Enterprise (WFOE) established under the laws of the PRC. Through contractual agreements in place between our affiliates and other commonly controlled entities, we control the operating cement company Zhaoyuan Shuangji Co. Ltd, a PRC company (Zhaoyuan Shuangji).
Except for our contractual rights related to the operations of Zhaoyuan Shuangji, we have no other operations or assets. As a result, all the information presented in this discussion is based on the operations of Zhaoyuan Shuangji.
Results of Operations
Comparison of the Three Months Ended March 31, 2010 and 2009
Sales. Revenue for the three months ended March 31, 2010 increased $469,566, or 4%, to $11,951,395 from $11,481,829 for the comparable period in 2009. During the three months ended March 31, 2010, our cement sales increased from 304,276 metric tons to 314,231 metric tons, representing a 3% increase from the comparable period in 2009. The increase in revenue was primarily due to production from the new Longkou Cement plant that was acquired in April 2009.
Cost of Sales. The cost of sales for the three months ended March 31, 2010 increased $257,121, or 3%, to $10,103,152 from $9,846,031 for the comparable period in 2009. The increase was primarily due to the increase in sales. Cost of sales as a percentage of total net revenue decreased by 1.21% from 85.75% in the three months ended March 31, 2009 to 84.54% for the three months ended March 31, 2010. The difference represents a decrease of 1.41%, which is primarily due to higher product prices.
Gross Margin. Gross profit for the three months ended March 31, 2010 increased $212,445, or 13%, to $1,848,243 from $1,635,798 for the comparable period in 2009. The increase was primarily due to the increase in sales.
Income from Operations. Income from operations for the three months ended March 31, 2010 decreased $20,758, or 2%, to $1,205,148 from $1,225,906 for the comparable period in 2009. The decrease was primarily due to an increase in General and Administrative Expenses which was not offset by the increase in sales.
Selling Expenses and General and Administrative Expenses. Selling expenses and general and administrative expenses for the three months ended March 31, 2010 increased $233,203, or 57%, to $643,095 from $409,892 for the comparable period in 2009. The increase was primarily due to issuances of stock and warrants as consideration for certain consulting and professional services.
Other Income (Expense). Other income (expenses) for the three months ended March 31, 2010 decreased $415,499, or 108%, to $(30,745) from $384,754 for the comparable period in 2009. The decrease was primarily due to gain from sale of property occurring in 2009 and not in 2010.
28
Operating Income Before Income Tax And Minority Interest. Operating income before income taxes for the three months ended March 31, 2010 decreased $436,257, or 27%, to $1,174,403 from $1,610,660 for the comparable period in 2009. The decrease was primarily due to the increase in General and Administrative Expenses and gain from sale of property occurring in 2009 and not in 2010.
Income Tax Expense. Income taxes for the three months ended March 31, 2010 decreased $20,901, or 5%, to $383,410 from $404,311 for the comparable period in 2009. The decrease was primarily due to the decrease in Operating Income Before Income Tax and Minority Interest, which is discussed above.
Net Income Attributable to Stockholders. Net income for the three months ended March 31, 2010 decreased $444,217, or 37%, to $762,132 from $1,206,349 for the comparable period in 2009. The decrease was primarily due to increase in General and Administrative Expenses and gain from sale of property occurring in 2009 and not in 2010.
Liquidity and Capital Resources
As of March 31, 2010, we had current assets of $20,250,078, compared with $19,243,013 as of December 31, 2009. The increase is primarily due to an increase in inventories.
We have historically financed our operations from bank loans and cash flow from operations.
Net cash provided by operating activities for the three months ended March 31, 2010 decreased $747,377, or 76%, to $236,886 from $984,263 for the comparable period in 2009. The decrease was primarily due to the decrease in net income.
Net cash used in investing activities for the three months ended March 31, 2010 decreased $34,657, or 12%, to $257,460 from $292,117 for the comparable period in 2009. The decrease was primarily due to the decrease in purchase of property and equipment.
Net cash used in financing activities for the three months ended March 31, 2010 decreased $730,292, or 100%, to $0 from $730,292 for the comparable period in 2009. The decrease was primarily due to the repayment of bank loans occurring in 2009 and not in 2010.
Short term loans
At March 31, 2010, the Company had a loan payable of $149,308 to Zhaoyuan City State Assets Management Co., Ltd. with an annual interest rate of 5.3%, and due on September 31, 2010. The loan is secured by the land use right of the Company.
At March 31, 2010, the Company had a loan payable of $242,483 to China Industrial & Commercial Bank, with an annual interest rate of 3.7%, and due on December 31, 2010. The loan is secured by the land use right of the Company.
At March 31, 2010, the Company had a loan payable of $36,819 to China Industrial & Commercial Bank, with an annual interest rate of 5.3%, and due on May 31, 2010. The loan is secured by the land use right of the Company.
At March 31, 2010, the Company had a loan payable of $475,125 to China Construction Bank, with an annual interest rate of 8.9%, and due on December 17, 2010. The loan is secured by the land use right of the Company.
30
At March 31, 2010, the Company had a loan payable of $324,015 to Agricultural Bank, with an annual interest rate of 8.9%, and due on December 17, 2010. The loan is secured by the land use right of the Company.
We believe that our liquidity will be adequate to satisfy our obligations for the foreseeable future. Future requirements for our business needs, including the funding of capital expenditures and debt service for outstanding financings are expected to be financed by a combination of internally generated funds, the proceeds from the sale of our securities, borrowings and other external financing sources. However, we may not be able to generate sufficient operating cash flow and external financing sources may not be available in amounts or on terms sufficient to meet our liquidity needs. Our opinion concerning our liquidity is based on current information. If this information proves to be inaccurate, or if circumstances change, we may not be able to meet our liquidity needs.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
The following table sets forth our contractual obligations (refer to the above short term loans) to make future payments as of March 31, 2010.
|
| Payments due | ||||||||
|
| Total |
| < 1 year |
| 1-3 years |
| 3-5 years |
| > 5 years |
|
| (in $ thousands) | ||||||||
Bank Loans |
|
|
|
| | | | |
| |
Total obligations: |
| 1,227,750 |
| 1,227,750 | | | | |
| |
|
|
|
|
|
|
|
|
|
|
|
Other than as stated herein, we did not have any long-term debt obligations, operating lease obligations, purchase obligations or other long-term liabilities as of March 31, 2010.
Off-Balance Sheet Commitments and Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Critical accounting policies and estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates.
31
Accounts receivable
The Company's policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
Inventories
Inventory is valued at the lower of cost (determined on a weighted average basis) or net realizable value. Management compares the cost of inventory with the net realizable value and an allowance is made for writing down the inventory to its net realizable value, if lower than the cost.
Property, plant and equipment
Property, plant and equipment are recorded at cost. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of property, plant, and equipment are capitalized. These capitalized costs may include structural improvements, equipment, and fixtures. All ordinary repair and maintenance costs are expensed as incurred.
Depreciation is computed using the straight line method, with lives of forty years for buildings, twelve years for production equipment, ten years for vehicles, and five years for office furniture and equipment.
Business combinations
The Company accounts for its business combinations using the purchase method of accounting in accordance with FASB Statement No. 141 (ASC topic 805), Business Combinations (SFAS 141). This method requires that the acquisition cost to be allocated to the assets and liabilities of the Company acquired based on their fair values. The Company makes estimates and judgments in determining the fair value of the acquired assets and liabilities, based on valuations using managements estimates and assumptions including its experience with similar assets and liabilities in similar industries. If different judgments or assumptions were used, the amounts assigned to the individual acquired assets or liabilities could be materially different.
Goodwill and purchased intangible assets
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is reviewed for impairment at least annual in accordance with FASB Statement No. 142 (ASC topic 350), Goodwill and Other Intangible Assets (SFAS 142). The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting units goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with FASB statement No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.
32
Revenue recognition
The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104 (ASC topic 605). Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
The Company's revenue consists of invoiced value of goods, net of a value-added tax (VAT). No product return or sales discount allowance is made as products delivered and accepted by customers are normally not returnable and sales discounts are normally not granted after products are delivered.
Income taxes
The Company utilizes SFAS No. 109 (ASC topic 740), Accounting for Income Taxes, which 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. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
On January 1, 2007, the Company adopted FASB Interpretation No. 48 (ASC topic 740), Accounting for Uncertainties in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertain tax positions. The interpretation requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The adoption of FIN 48 on January 1, 2007 did not have any effect on the Companys consolidated financial statements. Prior to the adoption of FIN 48, the Company recognized the effect of income tax positions only if such positions were probable of being sustained.
Beginning January 1, 2008, the new Enterprise Income Tax (EIT) law replaced the existing laws for Domestic Enterprises (DES) and Foreign Invested Enterprises (FIEs). The new standard EIT rate of 25% replaced the 33% rate currently applicable to both DES and FIEs.
New Financial Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of Accounting Research Bulletin No. 51 (SFAS 160), included in the Codification as ASC 810-10-65-1. This topic establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This topic also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This topic is effective for fiscal years beginning October 1, 2009. The Company does not expect the impact of the adoption of SFAS 160 to be material.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165), included in the Codification as ASC 855, Subsequent Events. This topic establishes the period in which management of a reporting entity should evaluate events and transactions for recognition or disclosure in the financial statements. It also describes the circumstances under which an entity should recognize events or
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transactions that occur after the balance sheet date. This topic is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not expect the adoption of this topic to have a material effect on its financial statements and related disclosures.
In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (SFAS No. 166), expected to be included in the FASB Accounting Standards Codification (Codification) as Accounting Standards Codification (ASC 860), Transfers and Servicing. This topic improves the comparability of information that a reporting entity provides regarding transfers of financial assets and the effects on its financial statements. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that this topic will have on its financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No. 167), expected to be included in the Codification as ASC 810, Consolidation. This topic changes the consolidation guidance applicable to a variable interest entity. Among other things, it requires a qualitative analysis to be performed in determining whether an enterprise is the primary beneficiary of a variable interest entity. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that SFAS No. 167 will have on its financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162 (SFAS No. 168), included in the Codification as ASC 105, Generally Accepted Accounting Principles. This topic is the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with generally accepted accounting principles. This topic is effective for interim and annual reporting periods ending after September 15, 2009. On September 30, 2009, the Company adopted this topic, which has no effect on the Companys financial statements as it is for disclosure purposes only.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
N/A.
Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SECs rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Companys management, including the Companys chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
During the course of internal evaluation, our accounting staff found a number of misstatements in our previously reported financial statements for the fiscal year ended December 31, 2008 that required correction. It also found a number of misstatements in our previously reported financial statements for the periods ended March 31, 2009, June 30, 2009, and September 30, 2009. Our management determined that these misstatements arose due to the lack of a sufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience appropriate to its financial reporting requirements at that time.
Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2010, such controls and procedures were ineffective.
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Managements Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed 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. Internal control over financial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company's ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company's annual or interim financial statements that is more than inconsequential will not be prevented or detected.
Management has conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2010. In making its assessment of internal control over financial reporting, management used the criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). During the course of internal evaluation, our accounting staff found a number of misstatements in our previously reported financial statements for the fiscal year ended December 31, 2008 that required correction. Our management determined that these misstatements arose due to the lack of a sufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience appropriate to its financial reporting requirements at that time and that such conditions gave rise to a material weakness in the Companys internal controls over financial reporting as of December 31, 2008. Additionally, in the course of preparation of this Quarterly Report on Form 10-Q for the period ended March 31, 2010, the Companys management also found a number of misstatements in our previously reported financial statements for the periods ended March 31, 2009, June 30, 2009, and September 30, 2009. Accordingly, management's assessment is that the Company's internal controls over financial reporting were ineffective as of March 31, 2010.
In light of this material weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the three months ended March 31, 2010 on Form 10-Q were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the period ended March 31, 2010 are fairly stated, in all material respects, in accordance with US GAAP.
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The Company will file amendments to the above-mentioned Forms 10-Q and 10-K for the fiscal year ended December 31, 2008 to restate the relevant financial statements as soon as practicable and intends to strengthen its accounting and compliance procedures further in 2010.
Changes in Internal Control over Financial Reporting
The term "internal control over financial reporting" (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed 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. The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company's internal control over financial reporting that occurred during the three months ended March 31, 2010, and they have concluded that other than as disclosed above, there was no change to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 1.
Legal Proceedings.
To our knowledge, there is no material litigation pending or threatened against us.
Item 1A. Risk Factors.
N/A.
Item 2.
Unregistered Sale of Equity Securities and Use of Proceeds.
On January 4, 2010, the Company issued 60,000 shares of common stock to an investment relation firm in exchange for consulting services to be rendered to the Company. The shares were valued at a total of $48,000.
On February 26, 2010, the Company issued 200,000 shares of common stock to an investment relation firm in exchange for consulting services to be rendered to the Company. The shares were valued at a total of $102,000.
In connection with the foregoing, we relied upon the exemption from securities registration afforded by Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933, and transfers of such shares were restricted by Southern Sauce in accordance with the requirements of the Securities Act. All of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.
Item 3.
Defaults Upon Senior Securities.
To our knowledge, there are no material defaults upon senior securities.
Item 4.
(Removed and Reserved).
Item 5.
Other Information.
None.
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Item 6. | Exhibits. |
(a)
Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| CHINA SHUANGJI CEMENT LTD. | |
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Dated: May 21, 2010 | By: | /s/ Jun Song |
| Name: Jun Song | |
| Title: Chief Executive Officer |
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Dated: May 21, 2010 | By: | /s/ Michelle Zhu |
| Name: Michelle Zhu | |
| Title: Chief Financial Officer |
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