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EX-31.2 - EXHIBIT 31.2 - CHINA GENGSHENG MINERALS, INC.exhibit31-2.htm
EX-32.1 - EXHIBIT 32.1 - CHINA GENGSHENG MINERALS, INC.exhibit32-1.htm
EX-31.1 - EXHIBIT 31.1 - CHINA GENGSHENG MINERALS, INC.exhibit31-1.htm
EX-32.2 - EXHIBIT 32.2 - CHINA GENGSHENG MINERALS, INC.exhibit32-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2011

OR

 [  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________to ________________

Commission File Number: 0-51527

CHINA GENGSHENG MINERALS, INC.
(Exact Name of Registrant as Specified in Its Charter)

NEVADA 91-0541437
(State or Other jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)

No. 88 Gengsheng Road, Dayugou Town, Gongyi, Henan Province P.R. China 451271
(Address of Principal Executive Offices) (Zip Code)

(86) 371-64059818
(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]       No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [  ]       No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

  Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]       No [X]

As of August 15, 2011, there were 26,794,386 shares of Common Stock of the Company, $0.001 par value, outstanding.


Table of Contents

  Page
PART I - FINANCIAL INFORMATION  
Item 1. Financial Statements. 1

Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010

1

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months and Six Months Ended June 30, 2011 (Unaudited) and 2010 (Unaudited)

3

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2011 and 2010

5

Condensed Consolidated Statements of Equity for the Six Months Ended June 30, 2011 (Unaudited)

7

Notes to Condensed Consolidated Financial Statements (Unaudited)

8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 24
Item 3. Quantitative and Qualitative Disclosure About Market Risk. 40
Item 4. Controls and Procedures. 40
   
PART II - OTHER INFORMATION  
Item 1.    Legal Proceedings. 41
Item 1A. Risk Factors. 41
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds. 41
Item 3.    Defaults Upon Senior Securities. 41
Item 5.    Other Information. 42
Item 6.    Exhibits. 42
   
SIGNATURES 43


China GengSheng Minerals, Inc.
Condensed Consolidated Balance Sheets

 

  As of     As of  

 

  June 30,     December 31,  

 

  2011     2010  

 

  (Unaudited)     (Audited)  

ASSETS

           

 Current assets

           

   Cash and cash equivalents

$ 9,489,179   $ 925,052  

   Restricted cash - Note 5

  54,456,767     21,693,100  

   Trade receivables, net

  43,440,099     43,240,996  

   Bills receivable

  14,342,701     3,074,156  

   Other receivables, prepayments and payment in advance - Note 6

  12,457,256     7,024,142  

   Advances to senior management

  -     51,449  

   Inventories - Note 7

  21,887,036     15,679,492  

   Deferred tax assets

  90,633     244,046  

 

           

 Total current assets

  156,163,671     91,932,433  

 

           

 Deposits for acquisition of a non-consolidated affiliate

  2,320,500     2,275,500  

 Deposits for acquisition of land use right, property, plant and equipment

  5,118,267     1,061,502  

 Goodwill - Note 8

  467,693     441,089  

 Intangible assets, net - Note 8

  348,570     379,250  

 Property, plant and equipment, net - Note 9

  30,007,413     26,188,235  

 Land use rights, net

  951,726     944,166  

 

           

TOTAL ASSETS

$ 195,377,840   $ 123,222,175  

 

           

LIABILITIES AND EQUITY

           

 

           

 Current liabilities

           

   Trade payables

$ 19,930,549   $ 14,279,568  

   Bills payable - Note 5

  27,343,225     8,495,200  

   Other payables and accrued expenses

  6,432,959     5,198,131  

   Deferred revenue - Government grants

  355,810     394,420  

   Provision for warranty

  71,118     69,739  

   Income taxes payable

  580,847     606,877  

   Non-interest-bearing loans - Note 10

  906,651     1,062,114  

   Collateralized bank loans - Note 11

  79,314,071     41,641,650  

   Deferred tax liabilities

  132,093     149,578  

   Warrant liabilities - Note 12

  60,000     -  

 

           

TOTAL LIABILITIES

$ 135,127,323   $ 71,897,277  

 

           

COMMITMENTS AND CONTINGENCIES - Note 17

           

1


China GengSheng Minerals, Inc.
Condensed Consolidated Balance Sheets (Cont’d)

 

  As of     As of  

 

  June 30,     December 31,  

 

  2011     2010  

 

  (Unaudited)     (Audited)  

STOCKHOLDERS' EQUITY

           

   Preferred stock - par value $0.001 per share
Authorized 50,000,000 shares; none issued and outstanding

$ -   $ -  

   Common stock - par value $0.001 per share - Note 13
Authorized 100,000,000 shares; issued and outstanding 26,794,386 shares as of June 30, 2011 and 24,294,386 shares as of December 31, 2010

  26,794     24,294  

   Additional paid-in capital - Note 13

  28,189,354     19,903,388  

   Statutory and other reserves

  7,521,114     7,521,114  

   Accumulated other comprehensive income

  6,940,695     5,949,455  

   Retained earnings

  17,309,758     17,636,730  

 

           

Total China GengSheng Minerals, Inc. (the “Company”) stockholders' equity

  59,987,715     51,034,981  

NONCONTROLLING INTEREST

  262,802     289,917  

 

           

TOTAL EQUITY

  60,250,517     51,324,898  

 

           

TOTAL LIABILITIES AND EQUITY

$ 195,377,840   $ 123,222,175  

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


China GengSheng Minerals, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income

 

  Three months ended     Six months ended  

 

  June 30,     June 30,  

 

  (Unaudited)     (Unaudited)  

 

  2011     2010     2011     2010  

 

                       

Sales revenue

$ 20,435,922   $ 14,994,327   $ 36,619,751   $ 26,855,679  

Cost of goods sold

  (15,101,251 )   (10,078,087 )   (26,997,445 )   (17,966,145 )

 

                       

Gross profit

  5,334,671     4,916,240     9,622,306     8,889,534  

 

                       

Operating expenses

                       

   General and administrative expenses

  1,629,380     1,419,680     3,133,598     2,848,652  

   Research and development expenses

  145,202     313,474     286,529     497,707  

   Selling expenses

  2,761,122     1,810,607     4,733,057     3,305,556  

 

                       

Total operating expenses

  4,535,704     3,543,761     8,153,184     6,651,915  

 

                       

Net operating income

  798,967     1,372,479     1,469,122     2,237,619  

 

                       

Other income (expenses)

                       

   Government grant income

  16,802     -     17,685     71,032  

   Guarantee income

  122,952     -     210,248     -  

   Guarantee expenses

  (88,877 )   -     (176,392 )   -  

   Interest income

  62,893     123,773     182,381     158,499  

   Change in fair value of warrant liabilities - Note 12

  650,000     -     910,000     -  

   Other (expenses) income

  (33,533 )   3,087     (67,722 )   3,696  

   Finance costs - Note 14

  (1,571,367 )   (343,762 )   (2,537,099 )   (748,958 )

 

                       

Total other expenses

  (841,130 )   (216,902 )   (1,460,899 )   (515,731 )

 

                       

(Loss) income before income taxes and noncontrolling interest

  (42,163 )   1,155,577     8,223     1,721,888  

Income taxes - Note 15

  (226,139 )   (121,495 )   (362,310 )   (284,610 )

 

                       

Net (loss) income before noncontrolling interest

  (268,302 )   1,034,082     (354,087 )   1,437,278  

Net loss (income) attributable to noncontrolling interest

  21,264     (11,151 )   27,115     (27,065 )

 

                       

Net (loss) income attributable to Company’s common stockholders

$ (247,038 ) $ 1,022,931   $ (326,972 ) $ 1,410,213  

 

                       

Net (loss) income before noncontrolling interest

$ (268,302 ) $ 1,034,082   $ (354,087 ) $ 1,437,278  

Other comprehensive income

                       

Foreign currency translation adjustments

  786,396     196,977     991,240     197,417  

 

                       

Comprehensive income

  518,094     1,231,059     637,153     1,634,695  

Comprehensive loss (income) attributable to noncontrolling interest

  21,264     (12,815 )   27,115     (28,729 )

 

                       

Comprehensive income attributable to Company’s common stockholders

$ 539,358   $ 1,218,244   $ 664,268   $ 1,605,966  

3


China GengSheng Minerals, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Cont’d)

 

  Three months ended     Six months ended  

 

  June 30,     June 30,  

 

  (Unaudited)     (Unaudited)  

 

  2011     2010     2011     2010  

(Loss) earnings per share - Note 16 - Basic and diluted attributable to Company’s common stockholders

$ (0.01 ) $ 0.04   $ (0.01 ) $ 0.06  

Weighted average number of shares - Basic and diluted

  26,794,386     24,267,820     26,711,513     24,187,475  

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


China GengSheng Minerals, Inc.
Condensed Consolidated Statements of Cash Flows

 

  Six months ended June 30,  

 

  (Unaudited)  

 

  2011     2010  

Cash flows from operating activities

           

  Net (loss) income before noncontrolling interest

$ (354,087 ) $ 1,437,278  

  Adjustments to reconcile net (loss) income before noncontrolling interest to net cash flows (used in) provided by operating activities:

       

         Depreciation

  1,040,195     715,568  

         Amortization of land use right

  10,481     11,305  

         Amortization of intangible assets

  38,180     26,673  

         Deferred taxes

  153,413     (30,558 )

         Allowance for (reversal of) doubtful accounts

  432,040     (7,347 )

         Share-based compensation

  -     274,100  

         Deferred revenue amortized

  (45,816 )   -  

         Loss on disposal of property, plant and equipment

  29,813     -  

         Change in fair value of warrant liabilities

  (910,000 )   -  

  Changes in operating assets and liabilities:

           

         Restricted cash

  (4,859,443 )   (5,868,000 )

         Trade receivables

  215,589     (2,343,030 )

         Bills receivable

  (11,064,303 )   1,295,022  

         Other receivables and prepayments

  (5,214,083 )   (2,972,917 )

         Inventories

  (5,821,702 )   (3,073,420 )

         Other payables and accrued expenses

  1,117,543     2,364,009  

         Trade payables

  5,299,877     923,879  

         Bills payable

  18,440,940     7,247,800  

         Income taxes payable

  (54,322 )   91,166  
             

Net cash flows (used in) provided by operating activities

  (1,545,685 )   91,528  

 

           

Cash flows from investing activities

           

   Payments for deposits of acquisition of land use right,

           

             property, plant and equipment

  (3,984,119 )   (558,923 )

         Proceeds from disposal of property, plant and equipment

  64,092     -  

         Payments for acquisition of property, plant and equipment

  (4,397,877 )   (2,964,340 )

 

           

Net cash flows used in investing activities

  (8,317,904 )   (3,523,263 )
             

Cash flows from financing activities

           

         Net proceeds from issue of shares

  9,258,466     -  

         (Increase) decrease in restricted cash

  (27,061,374 )   4,987,800  

         Proceeds from bank loans

  64,935,933     19,364,400  

         Repayment of bank loans

  (28,558,640 )   (18,044,100 )

         Proceeds from non-interest-bearing loans

  305,440     1,503,675  

         Repayment of non-interest-bearing loans

  (479,649 )   (611,006 )

         Government grant received

  -     178,974  

 

           

Net cash flows provided by financing activities

  18,400,176     7,379,743  

 

           

Effect of foreign currency translation on cash and cash equivalents

  27,540     20,074  

 

           

Net increase in cash and cash equivalents

  8,564,127     3,968,082  

Cash and cash equivalents - beginning of period

  925,052     992,204  

 

           

Cash and cash equivalents - end of period

$ 9,489,179   $ 4,960,286  

5


China GengSheng Minerals, Inc.
Condensed Consolidated Statements of Cash Flows (Cont’d)

 

  Six months ended June 30,  

 

  (Unaudited)  

 

  2011     2010  

Supplemental disclosure of cash flow information:

           

Cash paid for:

           

Interest

$ 2,537,099   $ 481,138  

Income taxes

$ 262,133   $ 191,789  

 

           

Non-cash investing and financing transactions:

           

Warrants issued to investors in connection with the private placement

$ 970,000   $ -  

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


China GengSheng Minerals, Inc.
Condensed Consolidated Statements of Equity

 

  China GengSheng Minerals, Inc. stockholders              

 

                          Accumulated                    

 

  Common stock                 other                    

 

  Number of           Additional     Statutory and     comprehensive     Retained     Noncontrolling        

 

  shares     Amount     paid-in capital     other reserves     income     earnings     interest     Total  

 

                                               

Balance, December 31, 2010

  24,294,386   $ 24,294   $ 19,903,388   $ 7,521,114   $ 5,949,455   $ 17,636,730   $ 289,917   $ 51,324,898  

   Share issued for proceeds of $10 million - Note 13

  2,500,000     2,500     9,027,500     -     -     -     -     9,030,000  

   Cost of raising capital

  -     -     (741,534 )   -     -     -     -     (741,534 )

   Net loss

  -     -     -     -     -     (326,972 )   (27,115 )   (354,087 )

   Foreign currency translation adjustments

  -     -     -     -     991,240     -     -     991,240  

 

                                               

Balance, June 30, 2011

  26,794,386   $ 26,794   $ 28,189,354   $ 7,521,114   $ 6,940,695   $ 17,309,758   $ 262,802   $ 60,250,517  

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


China GengSheng Minerals, Inc.
Notes to Condensed Consolidated Financial Statements

1.

Basis of presentation and change of accounting estimate

   

Basis of presentation

   

These unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (the “US GAAP”) have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2010, included in our Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on March 31, 2011.

   

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the six-month period have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year.

   

Change of accounting estimate

   

During the first quarter of 2011, the Company completed a review of the estimated useful life of its unpatented technology. Based on historical useful life information, as well as forecasted product life cycles and demand expectations, the remaining useful life of that unpatented technology is five years. In accordance with authoritative guidance, this was accounted for as a change in accounting estimate and was made on a prospective basis effective January 1, 2011. For the six months ended June 30, 2011, amortization expense, which is included in administrative expenses, was $38,180. The effect of this change on basic and diluted loss per share for the six months ended June 30, 2011 was $0.0014 per share.


2.

Corporate information

   

The Company was originally incorporated on November 13, 1947, in accordance with the laws of the State of Washington as Silver Mountain Mining Company. On August 20, 1979, the Articles of Incorporation were amended to change the corporate name of the Company to Leadpoint Consolidated Mines Company. On August 15, 2006, the Company changed its state of incorporation from Washington to Nevada by means of a merger with and into a Nevada corporation formed on May 23, 2006, solely for the purpose of effecting the reincorporation and changed its name to Point Acquisition Corporation. On June 11, 2007, the Company changed its name to China Minerals Technologies, Inc. and on July 26, 2007, the Company changed its name to China GengSheng Minerals, Inc. On March 4, 2010, the Company’s common stock began trading on the NYSE Amex Stock Exchange (formerly the American Stock Exchange) under the symbol “CHGS.” Prior to March 4, 2010, the Company’s common stock traded on the Over-the-Counter Bulletin Board under the symbol “CHGS.OB”.

Currently the Company has the following eight subsidiaries:

  Company name     Place/date of
incorporation or
establishment
    The Company's
effective ownership
interest
    Common stock/
registered capital
    Principal activities  
                               
    GengSheng International Corporation ( “GengSheng International”  )     The British Virgin Islands (the “BVI”)/ November 3, 2004     100%     Ordinary shares :- Authorized: 50,000 shares of $1 each Paid up: 100 shares of $1 each     Investment holding  
                               
    Henan GengSheng Refractories Co., Ltd. ( “Refractories”  )     The People's Republic of China (the “PRC”)/ December 20, 1996     100%     Registered capital of $12,089,879 fully paid up     Manufacturing and selling of refractory products  

8


China GengSheng Minerals, Inc.
Notes to Condensed Consolidated Financial Statements

2.

Corporate information (Cont’d)


    Henan GengSheng High-Temperature Materials Co., Ltd. (“High-Temperature” )     PRC/ September 4, 2002     89.33%     Registered capital of $1,246,300 fully paid up     Manufacturing and selling of functional ceramic products  
                               
    Smarthigh Holdings Limited (“Smarthigh” )     BVI/ November 5, 2004     100%     Ordinary shares :- Authorized: 50,000 shares of $1 each Paid up: 100 shares of $1 each     Investment holding  
                               
    ZhengZhou Duesail Fracture Proppant Co., Ltd. (“Duesail” )     PRC/ August 14, 2006     100%     Registered capital of $2,800,000 fully paid up     Manufacturing and selling of fracture proppant products  
                               
    Henan GengSheng Micronized Powder Materials Co., Ltd. (“Micronized” )     PRC/ March 31, 2008     100%     Registered capital of $5,823,000 fully paid up     Manufacturing and selling of fine precision abrasives  
                               
    Guizhou Southeast Prefecture GengSheng New Materials Co., Ltd. (“Prefecture” )     PRC/ April 13, 2004     100%     Registered capital of $141,840 fully paid up     Manufacturing and selling of corundum materials  
                               
    Henan Yuxing Proppant Co., Ltd. (“Yuxing” )     PRC/ June 3, 2011     100%     Registered capital of $3,086,000 fully paid up     Manufacturing and selling of fracture proppant products  

3.

Description of business

   

The Company is a holding company whose primary business operations are conducted through its subsidiaries located in the PRC’s Henan Province. Prefecture is located in Guizhou Province and is manufacturing corundum materials, a major raw material for monolithic refractory. Through its operating subsidiaries, the Company produces and markets a broad range of monolithic refractory, functional ceramics, fracture proppants, fine precision abrasives, and corundum materials.

   

The principal raw materials used in the products are several forms of aluminum oxide, including bauxite, processed AI2 O3 and calcium aluminates cement, and other materials, such as corundum, magnesia, resin and silica, which are primarily sourced from suppliers located in the PRC. The production facilities of the Company, other than the Prefecture’s sub-processing factory located in Guizhou, are also located in Henan Province.

   

Refractories products allow steel makers and other customers to improve the productivity and longevity of their equipment and machinery. Functional ceramic products mainly include abrasive balls and tiles, valves, electronic ceramics and structural ceramics. Fracture proppant products are used to reach trapped pockets of oil and natural gas deposits, which lead to higher productivities of oil and natural gas wells. Due to their heat-resistant qualities and ability to function under thermal stress, refractories serve as components in industrial furnaces and other heavy industrial machinery. Corundum materials are a major raw material for producing monolithic refractory. Fine precision abrasive is the Company’s new product that was commercially launched in the fourth quarter of 2009, and is used for slicing the solar-silicon bar and polishing the equipment surface. The Company’s customers include some of the largest steel and iron producers located in 25 provinces in the PRC, as well as in the United States and other countries in Asia, and Europe.

   
4.

Summary of significant accounting policies

Basis of consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

9


China GengSheng Minerals, Inc.
Notes to Condensed Consolidated Financial Statements

4.

Summary of significant accounting policies (Cont’d)

   

Concentrations of credit risk

   

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, trade, bills and other receivables. As of June 30, 2011 and December 31, 2010, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC, which management believes are of high credit quality. With respect to trade and other receivables, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade and other receivables and maintains an allowance for doubtful accounts of trade and other receivables.

   

Regarding bills receivable, they are undertaken by the banks to honor the payments at maturity and the customers are required to place deposits with the banks equivalent to a certain percentage of the bills amount as collateral. These bills receivable can be sold to any third party at a discount before maturity. The Company does not maintain allowance for bills receivable in the absence of bad debt experience and the payments are undertaken by the banks.

   

During the reporting periods, customers represented 10% or more of the Company’s condensed consolidated sales are:


      Three months ended June 30,     Six months ended June 30,  
      (Unaudited)     (Unaudited)  
      2011     2010     2011     2010  
                           
  Shangdong Steel Co., Ltd. $ 2,306,904   $ 1,880,601   $ 4,102,856   $ 3,730,914  
  AMSAT International Limited   2,655,875     -     5,327,097     1,987,089  
  Shanghai Jolly Trading Co., Ltd.   3,282,103     -     4,371,176     -  
                           
    $ 8,244,882   $ 1,880,601   $ 13,801,129   $ 5,718,003  

Fair value of financial instruments

ASC 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which fair value option was not elected. The Company’s financial instruments carried at fair value include warrant liabilities only. The required disclosure is set out in Note 12.

Except for the warrant liabilities, the carrying amounts of financial assets and liabilities approximate their fair value due to short maturities.

Recently issued accounting pronouncements

In July 2010, the FASB issued ASU 2010-20 “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. The objective of ASU 2010-20 is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. Under ASU 2010-20, an entity is required to provide disclosures so that financial statement users can evaluate the nature of the credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed to arrive at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. ASU 2010-20 is applicable to all entities, both public and non-public and is effective for interim and annual reporting periods beginning on or after December 15, 2010. Comparative disclosure for earlier reporting periods that ended before initial adoption is encouraged but not required. However, comparative disclosures are required to be disclosed for those reporting periods ending after initial adoption. The adoption of this ASU has no material impact on the Company’s financial statements.

The FASB issued ASU 2011-01 “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”. The amendments in this Update temporarily delay the effective date of the disclosure about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructuring for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The adoption of this ASU has no material impact on the Company’s financial statements.

10


China GengSheng Minerals, Inc.
Notes to Condensed Consolidated Financial Statements

4.

Summary of significant accounting policies (Cont’d)

   

Recently issued accounting pronouncements (cont’d)

   

In April 2011, the FASB issued ASU 2011-02 “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”. The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debts in foreseeable future without the modification. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies – Loss Contingencies. The management is assessing the impact of this ASU on the Company’s financial statements.

   

In April 2011, the FASB issued ASU 2011-03 “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements”. The amendments in this ASU update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of this ASU has no material impact on the Company’s financial statements.

   

In May 2011, the FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The FASB and the International Accounting Standard Board (IASB) work together to ensure that fair value has the same meaning in U.S. GAAP and IFRSs and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The Boards concluded that the amendments in this ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The management is assessing the impact of this ASU on the Company’s financial statements.

   

In June 2011, the FASB issued ASU 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. In this ASU, the entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU are to be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application by public entities is permitted. The management is assessing the impact of this ASU on the Company’s financial statements.

11


China GengSheng Minerals, Inc.
Notes to Condensed Consolidated Financial Statements

5.

Restricted cash and bills payable


      As of     As of  
      June 30,     December 31,  
      2011     2010  
      (Unaudited)     (Audited)  
               
  Bank deposits held as collateral for bills payable (Note) $ 13,585,646   $ 8,495,200  
  Bank deposits held as collateral for bank loans   40,871,121     13,197,900  
               
    $ 54,456,767   $ 21,693,100  

Note :-

The Company is requested by certain of its suppliers to settle amounts owed to such suppliers by the issuance of bills through banks for which the banks undertake to guarantee the Company’s settlement of these amounts at maturity. These bills are interest free and would be matured within six months from the date of issuance. As collateral security for the banks’ undertakings, the Company is required to pay the bank charges as well as maintaining deposits with such banks amounts equal to 50% to 100% of the bills’ amounts issued.

   
6.

Other receivables, prepayments and payment in advance


      As of     As of  
      June 30,     December 31,  
      2011     2010  
      (Unaudited)     (Audited)  
               
  Other receivables $ 7,527,809   $ 5,475,245  
  Allowance for doubtful accounts   (381,997 )   (374,590 )
               
      7,145,812     5,100,655  
  Prepayments   4,339,928     970,811  
  Government grants receivable (Note)   971,516     952,676  
               
    $ 12,457,256   $ 7,024,142  

Note :-

The government grants receivable of $971,516 was granted by two local government bureaus to the Company in 2007 and 2009. The Company is currently evaluating the collectability and timing of the receipt of these grants. No allowance against these receivable has been recorded as of June 30, 2011.

12


China GengSheng Minerals, Inc.
Notes to Condensed Consolidated Financial Statements

7.

Inventories


      As of     As of  
      June 30,     December 31,  
      2011     2010  
      (Unaudited)     (Audited)  
               
  Raw materials $ 7,849,046   $ 7,699,321  
  Work-in-progress   3,676,645     1,796,236  
  Finished goods   10,387,325     6,209,411  
               
      21,913,016     15,704,968  
  Allowance for obsolete inventories   (25,980 )   (25,476 )
               
    $ 21,887,036   $ 15,679,492  

No allowance for obsolete inventories was recognized in the cost of goods sold during the six months ended June 30, 2011 and 2010.

8.

Goodwill and intangible assets, net


      As of     As of  
      June 30,     December 31,  
      2011     2010  
      (Unaudited)     (Audited)  
  Costs:            
  Unpatented technology (Note a) $ 386,750   $ 379,250  
  Accumulated amortization   (38,180 )   -  
               
  Net $ 348,570   $ 379,250  
               
  Goodwill (Note b) $ 467,693   $ 441,089  

Notes :-

  a)

During 2007, Refractories entered into a contract with an independent third party to purchase unpatented technical technology in relation to the production of mortar, at a cash consideration of $342,750. This consideration was mutually agreed between Refractories and such third party and this unpatented technology can be used for an unlimited period of time. Since its acquisition, an annual impairment review was performed by management and no impairment was identified and accordingly, it is stated at cost in 2008. In 2011, the expected useful life of the unpatented technology was reviewed and can be used up to 2015.

     
  b)

The goodwill was identified upon the acquisition of 100% equity interest in Prefecture, which represented the excess of the purchase price of $875,400 over the fair value of acquired identified net assets of Prefecture of $434,311 at the time of acquisition on June 12, 2008. Since its acquisition, annual impairment reviews have been performed by management and no impairment was identified.

During the six months ended June 30, 2011 and 2010, amortization charge was $38,180 and $Nil respectively.

13


China GengSheng Minerals, Inc.
Notes to Condensed Consolidated Financial Statements

9.

Property, plant and equipment, net


      As of     As of  
      June 30,     December 31,  
      2011     2010  
      (Unaudited)     (Audited)  
  Costs:            
           Buildings $ 20,022,672   $ 19,737,372  
           Plant and machinery   9,403,254     9,070,723  
           Furniture, fixture and equipment   747,145     675,398  
           Motor vehicles   2,120,406     2,093,928  
               
      32,293,477     31,577,421  
  Accumulated depreciation   (6,689,899 )   (5,589,635 )
  Construction in progress (Note)   4,403,835     200,449  
               
  Net $ 30,007,413   $ 26,188,235  

Note :-

Construction in progress mainly comprises capital expenditure for construction of the Company’s new office and factories.

10.

Non-interest-bearing loans

   

The loans represent interest-free and unsecured loans from third parties and government authority and are repayable on demand.


11.

Collateralized bank loans


      As of     As of  
      June 30,     December 31,  
      2011     2010  
      (Unaudited)     (Audited)  
               
  Bank loans repayable within 1 year $ 79,314,071   $ 41,641,650  

The above bank loans are denominated in RMB and carry average interest rates at 6.86% per annum with maturity dates ranging from three months to nine months.

The bank loans as of June 30, 2011 were secured by the followings:

(a) Guarantee executed by Mr. Shunqing Zhang, a director and a shareholder of the Company;
(b) Guarantee executed by business associates (Note 17(b)); and
(c) Bank deposits of $40,871,121 (Note 5).

During the reporting periods, there was no covenant requirement under the banking facilities granted to the Company.

14


China GengSheng Minerals, Inc.
Notes to Condensed Consolidated Financial Statements

12.

Warrant liabilities

     

In accordance with ASC 815, the one year warrants, which were issued in a private placement completed as of January 7, 2011 as stated in Note 13, to purchase up to 1,000,000 common shares are not considered indexed to the Company’s own equity and should be classified as derivative financial liability at fair value for each reporting period. Accordingly, a part of the net proceed from the private placement amounting to $970,000 representing the fair value at initial recognition, was allocated to warrant liabilities.

     

The fair value of these warrants was calculated using black-scholes option valuation model. The assumptions that were used to calculate fair value of the warrants as of June 30, 2011 are as follows: -

     
  •  
  • Expected volatility of 76.53%

  •  
  • Expected dividend yield of 0%

  •  
  • Risk-free interest rate of 0.07%

  •  
  • Expected lives of 1/2 year

  •  
  • Exercise price of $4 per share

         

    As of June 30, 2011, the fair value of warrant liabilities was $60,000, and corresponding gain on change in fair value of warrant liabilities of $910,000 was recognized in the condensed consolidated statement of operations and comprehensive income for the six months ended June 30, 2011.

         

    Fair value accounting : ASC 820 establishes a valuation hierarchy for disclosure of the inputs to fair value measurement. This hierarchy prioritizes the inputs into three broad levels as follows :-

         

    Level 1 - Quoted prices in active markets for identical assets or liabilities.

         

    Level 2 - Observable inputs other than quoted prices in active markets for identical assets or liabilities.

         

    Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

         

    The warrant liabilities are determined by using Level 3 inputs. The following tables summarize the changes in Level 3 items measured at fair value on a recurring basis on our condensed consolidated balance sheet during the period ended June 30, 2011 :-


          Warrant  
          liabilities  
             
      Balance, January 1, 2011 $ -  
      Purchase, issuances and settlements   970,000  
      Total gains (realized/unrealized)   (910,000 )
      Transfer in and/or out of Level 3   -  
             
      Balance, June 30, 2011 $ 60,000  

    15


    China GengSheng Minerals, Inc.
    Notes to Condensed Consolidated Financial Statements

    13.

    Common stock and additional paid-in capital


                      Additional  
          Number of           paid-in  
          shares     Amount     capital  
                         
      Balance, January 1, 2011   24,294,386   $ 24,294   $ 19,903,388  
      Share issued for proceeds of $10 million (Note)   2,500,000     2,500     9,027,500  
      Cost of raising capital   -     -     (741,534 )
                         
      Balance, June 30, 2011   26,794,386   $ 26,794   $ 28,189,354  

    Note :-

    As of January 7, 2011, the Company completed a private placement of 2,500,000 common shares and warrants to purchase up to 1,000,000 common shares at an exercise price of $4 per share for a gross proceeds of $10,000,000 with related issuance expenses of $741,534. Because the warrants are denominated in U.S. dollars and the Company’s functional currency is Renminbi, they do not meet the requirements of the accounting standard to be indexed only to the Company’s stock. Accordingly, they are accounted for at fair value as derivative liabilities and marked to market in each period.

    14.

    Finance costs


          Three months ended June 30,     Six months ended June 30,  
          (Unaudited)     (Unaudited)  
          2011     2010     2011     2010  
                               
      Interest expenses $ 247,815   $ 281,315   $ 1,061,541   $ 512,005  
      Bills discounting charges   1,323,552     32,596     1,475,558     203,156  
      Bank charges   -     29,851     -     33,797  
                               
        $ 1,571,367   $ 343,762   $ 2,537,099   $ 748,958  

    15.

    Income taxes

       

    UNITED STATES

       

    The Company is incorporated in the United States of America (“U.S.”) and is subject to U.S. tax law. No provisions for income taxes have been made as the Company has no U.S. taxable income for reporting periods. The applicable income tax rate for the reporting periods is 34%. The Company has not provided deferred tax on undistributed earnings of its non-U.S. subsidiaries as of June 30, 2011, as it is the Company's current policy to reinvest these earnings in non-U.S. operations.

       

    BVI

       

    GengSheng International and Smarthigh were incorporated in the BVI and are not subject to income taxes under the current laws of the BVI.

    16


    China GengSheng Minerals, Inc.
    Notes to Condensed Consolidated Financial Statements

    15.

    Income taxes (Cont’d)

       

    PRC

       

    The PRC’s legislative body, the National People’s Congress, adopted the unified Corporate Income Tax Law (“CIT Law”) on March 16, 2007. This new tax law replaces the existing separate income tax laws for domestic enterprises and foreign-invested enterprises and became effective on January 1, 2008. Under the new tax law, an unified income tax rate is set at 25% for both domestic enterprises and foreign-invested enterprises. However, there will be a transition period for enterprises, whether foreign-invested or domestic, that are currently receiving preferential tax treatments granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and will transit into the new tax rate over a five year period beginning on the effective date of the CIT Law. Enterprises that are currently entitled to exemptions for a fixed term will continue to enjoy such treatment until the exemption term expires. Preferential tax treatment will continue to be granted to industries and projects that qualify for such preferential treatments under the new tax law.

       

    Pursuant to the income tax rules and regulations of the PRC, provision for PRC income tax of the PRC subsidiaries is calculated based on the following rates : -


                  Period ended June 30,  
            Note     2011     2010  
                           
        Refractories   (a)     15%     15%  
        High-Temperature         25%     25%  
        Duesail   (a)     12.5%     12.5%  
        Prefecture         25%     25%  
        Micronized         25%     25%  
        Yuxing         25%     N/A  

    Note :-

      (a)

    Entities entitled to a tax holiday in which they are fully exempted from the PRC enterprise income tax for 2 years starting from their first profit-making year after netting off accumulated tax losses, followed by a 50% reduction in the PRC enterprise income tax for the next 3 years (“tax holidays”). Any unutilised tax holidays will continue until expiry while tax holidays were deemed to start from January 1, 2008, even if the entity was not yet making profit after netting off its accumulated tax losses. Duesail is in the third year of tax holidays in 2010. Refractories is in the third year of tax holidays in 2009 and starting from the fiscal year 2010, Refractories is subject to enterprise income tax at unified rate of 15% for three years due to its engagement in an advance technology industry and has passed the inspection of the provincial high-tech item. The relevant authority granted it a certificate at end of 2008.

    In July 2006, the FASB issued ASC 740-10-25. This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The Company adopted this ASC 740-10-25 on January 1, 2007. Under the new CIT Law which became effective on January 1, 2008, the Company may be deemed to be a resident enterprise by the PRC tax authorities. If the Company was deemed to be resident enterprise, the Company may be subject to the CIT at 25% on the worldwide taxable income and dividends paid from the PRC subsidiaries to their overseas holding companies may be exempted from 10% PRC withholding tax. Except for certain immaterial interest income from bank deposits placed with financial institutions outside the PRC, all of the Company’s income is generated from the PRC operations. Given the immaterial amount of income generated from outside the PRC and the PRC subsidiaries do not intend to pay dividends for the foreseeable future, the management considers that the impact arising from resident enterprise on the Company’s financial position is not significant. The management evaluated the Company's tax positions and considered no provision for uncertainty in income taxes is necessary as of June 30, 2011 and 2010.

    17


    China GengSheng Minerals, Inc.
    Notes to Consolidated Financial Statements

    16.

    (Loss) earnings per share

       

    During the reporting periods, certain share-based awards and warrants were not included in the computation of diluted (loss) earnings per share because they were anti-dilutive. Accordingly, the basic and diluted (loss) earnings per share are the same.


    17.

    Commitments and contingencies

         
    (a)

    The Company’s operations are subject to the laws and regulations in the PRC relating to the generation, storage, handling, emission, transportation and discharge of certain materials, substances and waste into the environment, and various other health and safety matters. Governmental authorities have the power to enforce compliance with their regulations, and violators may be subject to fines, injunctions or both. The Company must devote substantial financial resources to ensure compliance and believes that it is in substantial compliance with all the applicable laws and regulations.

         

    The Company is currently not involved in any environmental remediation and has not accrued any amounts for environmental remediation relating to its operations. Under existing legislation, management believes that there are no probable liabilities that will have a material adverse effect on the financial position, operating results or cash flows of the Company.

         
    (b)

    The Company guaranteed the following debts of third parties, which is summarized as follows:-


          As of     As of  
          June 30,     December 31,  
          2011     2010  
          (Unaudited)     (Audited)  
                   
      Guaranteed amount $ 43,780,100   $ 34,587,600  

    In 2010, the Company, in accordance with ASC 460, commenced to recognize the liability arising from guarantees given for the debts granted to third parties by financial institutions.

    An analysis of the guarantee liability is as follows:

          Six months        
          ended     Year ended  
          June 30,     December 31,  
          2011     2010  
                   
      Balance at beginning of period/year $ 392,978   $ -  
      Recognized as expenses for the period/year   176,392     622,192  
      Recognized as income for the period/year   (210,248 )   (238,798 )
      Translation adjustments   7,332     9,584  
                   
      Balance at end of period/year $ 366,454   $ 392,978  

    The fair value of such guarantees is determined by reference to fees charged in an arm’s length transaction for similar services.

    18


    China GengSheng Minerals, Inc.
    Notes to Condensed Consolidated Financial Statements

    17.

    Commitments and contingencies (Cont’d)

       

    Guarantees as of June 30, 2011 are further analyzed as below :-


     

     

      Term loan           Interest           Principal     Outstanding     Outstanding     Estimated  
     

     

      draw down           rate (per           repaid up to     as of     interest as of     maximum  
     

    Guarantee

      date     Expiry date     annum)     Loan principal     June 30, 2011     June 30, 2011     June 30, 2011     exposure  
     

     

                                                   
     

    Local government authorities and their controlled entity

                                   
     

    (Note i)

      6/21/2011     6/20/2012     5.31%   $ 3,867,500   $ -   $ 3,867,500   $ 202,736   $ 4,070,236  
     

     

      12/30/2009     12/29/2012     7.56%     7,735,000     -     7,735,000     865,922     8,600,922  
     

     

                                                   
     

    Business associates

                                                   
     

    (Note ii)

      8/13/2010     8/12/2011     5.31%     1,547,000     -     1,547,000     6,758     1,553,758  
     

     

      7/29/2010     7/28/2011     6.37%     3,094,000     -     3,094,000     16,219     3,110,219  
     

     

      9/27/2010     9/26/2011     5.31%     3,094,000     -     3,094,000     40,547     3,134,547  
     

     

      10/29/2010     10/28/2011     5.31%     3,094,000     -     3,094,000     54,063     3,148,063  
     

     

      12/8/2010     12/7/2011     5.56%     3,094,000     -     3,094,000     70,760     3,164,760  
     

     

      12/22/2010     12/21/2011     5.56%     3,094,000     -     3,094,000     84,912     3,178,912  
     

     

      1/24/2011     1/23/2012     5.83%     7,735,000     -     7,735,000     259,688     7,994,688  
     

     

      3/8/2011     3/8/2012     6.43%     2,011,100     -     2,011,100     85,041     2,096,141  
     

     

      3/22/2011     3/21/2012     5.84%     4,641,000     -     4,641,000     200,709     4,841,709  
     

     

      12/25/2010     12/24/2011     8.41%     773,500     -     773,500     32,117     805,617  
     

     

                                                   
     

     

                      $ 43,780,100   $ -   $ 43,780,100   $ 1,919,472   $ 45,699,572  

    Notes :-

      i)

    To maintain a good relationship with the local government of Gongyi City, the Company has been so requested to act as guarantor for bank loans granted to certain local government authorities and their controlled entity.

         
      ii)

    During the period ended June 30, 2011, the Company has acted as guarantor for bank loans granted to certain business associates. Certain of these associates also provided guarantees for bank loans to the Company. (Note 11(b)). None of our directors, director nominees or executive officers is involved in normal operation or investing in the business of the guaranteed business associates. All the business associates have a healthy record to pay back loans on a timely manner, in the People’s Bank of China’s (Central Bank of China) credit rating system.

    All the above guarantees have no recourse provision that would enable the Company to recover from third parties of any amounts paid under the guarantees and any assets held either as collateral or by third parties that the Company can obtain or liquidate to recover all or a portion of the amounts paid under the guarantees.

    If the third parties fail to perform under their contractual obligations, the Company will make future payments including the contractual principal amounts, related interest and penalties.

      (c)

    As of June 30, 2011, the Company had capital commitments in respect of the acquisition of property, plant and equipment amounting to $2,961,616, which was contracted for but not provided in these financial statements.

         
      (d)

    As of June 30, 2011, the Company had capital commitments in respect of the acquisition of land use right amounting to $530,480, which was not contracted for but provided in these financial statements.

    19


    China GengSheng Minerals, Inc.
    Notes to Condensed Consolidated Financial Statements

    17.

    Commitments and contingencies (Cont’d)

       
    (e)

    In accordance with the PRC tax regulations, the Company’s sales are subject to value added tax (“VAT”) at 17% upon the issuance of VAT invoices to its customers. When preparing these condensed consolidated financial statements, the Company recognized revenue when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to and accepted by customers, and made full tax provision in accordance with relevant national and local laws and regulations of the PRC.

       

    The Company follows the practice of reporting its revenue for PRC tax purposes when invoices are issued. In the local statutory financial statements prepared under PRC GAAP, the Company recognized revenue on an “invoice basis” instead of when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to and accepted by customers. Accordingly, despite the fact that the Company has made full tax provision in the condensed consolidated financial statements, the Company may be subject to a penalty for the deferred reporting of tax obligations. The exact amount of penalty cannot be estimated with any reasonable degree of certainty. The director considers it is very unlikely that the tax penalty will be imposed.


    18.

    Defined contribution plan

      

    The Company has a defined contribution plan for all qualified employees in the PRC. The employer and its employees are each required to make contributions to the plan at the rates specified in the plan. The only obligation of the Company with respect to the retirement plan is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in the future years. The defined contribution plan contributions were charged to the condensed consolidated statements of operations and comprehensive income. The Company contributed $215,052 and $152,076 for the six months ended June 30, 2011 and 2010, respectively.


    19.

    Segment information

      

    The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company's chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company's reportable segments. Management, including the chief operating decision maker, reviews operating results solely by the revenue of monolithic refractory products, industrial ceramic products, fracture proppant products, fine precision abrasives and operating results of the Company. As such, the Company has determined that it has four operating segments as defined by ASC 280, “Segment Reporting”: refractories, industrial ceramic, fracture proppant and fine precision abrasives.

      

    Adjustments and eliminations of inter-company transactions were not included in determining segment (loss) profit, as they are not used by the chief operating decision maker.

    20


    China GengSheng Minerals, Inc.
    Notes to Condensed Consolidated Financial Statements

    19.

    Segment information (Cont'd)

    Three months ended June 30, (Unaudited)

     

      Refractories     Industrial ceramic     Fracture proppant     Fine precision abrasives     Total    

     

      2011     2010     2011     2010     2011     2010     2011     2010     2011     2010  

     

                                                               

     

                                                               

    Revenue from external customers

    $ 12,544,952   $ 11,342,586   $ 492,443   $ 559,158   $ 5,936,034   $ 3,092,583   $ 1,462,493   $ -   $ 20,435,922   $ 14,994,327  

    Segment (loss) profit

    $ (915,604 ) $ 550,773   $ (51,008 ) $ 113,527   $ 132,931   $ 681,845   $ 33,610   $ (186,218 ) $ (800,071 ) $ 1,159,927  

    Six months ended June 30, (Unaudited)

     

      Refractories     Industrial ceramic     Fracture proppant     Fine precision abrasives     Total    

     

      2011     2010     2011     2010     2011     2010     2011     2010     2011     2010  

     

                                                               

    Revenue from external customers

    $ 22,479,878   $ 21,726,148   $ 722,045   $ 835,255   $ 11,135,889   $ 4,294,276   $ 2,281,939   $ -   $ 36,619,751   $ 26,855,679  

    Segment (loss) profit

    $ (1,469,391 ) $ 1,205,638   $ (105,847 ) $ 304,173   $ 693,199   $ 886,220   $ (123,599 ) $ (407,663 ) $ (1,005,638 ) $ 1,988,368  

        As of     As of     As of     As of     As of     As of     As of     As of     As of     As of  
        June     December     June     December     June     December     June     December     June     December  
        30,     31,     30,     31,     30,     31,     30,     31,     30,     31,  
        2011     2010     2011     2010     2011     2010     2011     2010     2011     2010  
        (Unaudited)     (Audited)     (Unaudited)     (Audited)     (Unaudited)     (Audited)     (Unaudited)     (Audited)     (Unaudited)     (Audited)  
                                                                 
    Segment assets $ 91,734,332   $ 77,755,761   $ 3,748,445   $ 3,919,714   $ 69,494,216   $ 22,978,666   $ 26,901,375   $ 18,533,348   $ 191,878,368   $ 123,187,489  

    21


    China GengSheng Minerals, Inc.
    Notes to Condensed Consolidated Financial Statements

    19.

    Segment information (Cont'd)

       

    Segment information by products for the three months ended June 30, 2011 and 2010


     

                                    Wearable            Fine        

     

      Monolithic           Pre-cast     Ceramic     Ceramic     ceramic     Fracture     precision        

     

      materials1     Mortar     roofs     tubes2     cylinders3      valves     proppant     abrasives     Total  

     

                                                         

    Three months ended June 30, 2011 (Unaudited) 

     

     

                                               

         Revenue

    $ 7,601,630   $ 279,013   $ 4,664,310   $ 334,239   $ 156,882   $ 1,321   $ 5,936,034   $ 1,462,493   $ 20,435,922  

     

                                                         

    Three months ended June 30, 2010 (Unaudited)

     

     

                                               

         Revenue

    $ 7,678,127   $ -   $ 3,664,459   $ 203,677   $ 351,348   $ 4,134   $ 3,092,582   $ -   $ 14,994,327  

    Segment information by products for the six months ended June 30, 2011 and 2010

                                      Wearable           Fine        
      Monolithic           Pre-cast     Ceramic     Ceramic     ceramic     Fracture     precision        
      materials1     Mortar       roofs     tubes2     cylinders3     valves     proppant     abrasives     Total  
                                                           
    Six months ended June 30, 2011 (Unaudited)    
                                                       
         Revenue $ 12,898,420   $ 279,013   $ 9,302,445   $ 334,239   $ 381,738   $ 6,068   $ 11,135,889   $ 2,281,939   $ 36,619,751  
                                                           
    Six months ended June 30, 2010 (Unaudited)  
                                                       
         Revenue $ 14,162,699   $ -   $ 7,563,449   $ 229,184   $ 593,437   $ 12,634   $ 4,294,276   $ -   $ 26,855,679  

    1 Castable, coating, and dry mix materials & low-cement and non-cement castables generally refer as Monolithic materials.
    2 Ceramic plates, tubes, elbows, and rollers generally refer as Ceramic tubes.
    3 Ceramic cylinders and plugs comprehensively refer to Ceramic cylinders.

    Reconciliation is provided for unallocated amounts relating to corporate operations which are not included in the segment information.

          Three months ended June 30,  
          (Unaudited)  
          2011     2010  
                   
      Total (loss) profit for reportable segments $ (800,071 ) $ 1,159,927  
      Unallocated amounts relating to operations:            
           General and administrative expenses   -     (4,350 )
           Other income   107,908     -  
           Change in fair value of warrant liabilities   650,000     -  
                   
      (Loss) income before income taxes and noncontrolling interest $ (42,163 ) $ 1,155,577  

          Six months ended June 30,  
          (Unaudited)  
          2011     2010  
                   
      Total (loss) profit for reportable segments $ (1,005,638 ) $ 1,988,368  
      Unallocated amounts relating to operations:            
          General and administrative expenses   (4,047 )   (266,480 )
          Other income   107,908     -  
          Change in fair value of warrant liabilities   910,000     -  
                   
      Income before income taxes and noncontrolling interest $ 8,223   $ 1,721,888  

    22


    China GengSheng Minerals, Inc.
    Notes to Condensed Consolidated Financial Statements

    19.

    Segment information (Cont'd)


          As of     As of  
          June 30,     December 31,  
          2011     2010  
          (Unaudited)     (Audited)  
      Assets            
                   
      Total assets for reportable segments $ 191,878,368   $ 123,187,489  
      Cash and cash equivalents   3,491,925     27,132  
      Other receivables   7,547     7,554  
                   
        $ 195,377,840   $ 123,222,175  

    All of the Company's long-lived assets are located in the PRC. Geographic information about the revenues, which are classified based on customers, is set out as follows:

          Three months ended June 30,  
          (Unaudited)  
          2011     2010  
                   
      PRC $ 17,063,408   $ 11,833,099  
      United States of America   2,745,380     1,986,702  
      Others (Note)   627,134     1,174,526  
                   
      Total $ 20,435,922   $ 14,994,327  

          Six months ended June 30,  
          (Unaudited)  
          2011     2010  
                   
      PRC $ 30,313,507   $ 23,279,069  
      United States of America   5,474,481     2,010,632  
      Others (Note)   831,763     1,565,978  
                   
      Total $ 36,619,751   $ 26,855,679  

    Note :-

    They include Asia and Europe and are not further analyzed as none of them contributed more than 10% of the total revenue.

    20.

    Related party transactions

       

    Apart from the information as disclosed in elsewhere in the condensed consolidated financial statements, the Company had no material transactions carried out with related parties during the reporting periods.


    21.

    Subsequent events

       

    The Company evaluated all events or transactions that occurred after June 30, 2011 and through the date the financial statements were issued and have determined that there is no material recognizable nor subsequent events or transactions which would require recognition or disclosure in the financial statements.

    23


    ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

    Forward-Looking Statements:

    The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains forward-looking statements. China GengSheng Minerals, Inc. is referred to herein as “we” or “our.” The words or phrases “would be,” “will allow,” “expect to”, “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” or similar expressions are intended to identify forward-looking statements. Such statements include those concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general economic conditions in China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under “Liquidity and Capital Resources. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

    Conventions

    In this Form 10-Q, unless indicated otherwise, references to:

    • “China GengSheng Minerals”, “we”, “us”, “our”, the “Registrant” or the “Company” refer to the combined business of China GengSheng Minerals, Inc., a Nevada corporation (formerly, China Minerals Technologies, Inc.) and its direct, wholly-owned BVI subsidiary, GengSheng International Corporation, or International, and International 's direct and wholly-owned Chinese subsidiary, Zhengzhou Duesail Fracture Proppant Co. Ltd., or Duesail, and Duesail’s direct and wholly-owned subsidiary, Henan Yuxing Proppant Co., Ltd., or Yuxing and International’s wholly-owned Chinese subsidiary Henan GengSheng Refractories Co., Ltd., or Refractories, and Refractories’s direct majority-owned subsidiary, Henan GengSheng High-Temperature Materials Co., Ltd., or High Temperature and Refractories’s direct and wholly-owned subsidiary, Henan GengSheng Micronized Powder Materials Co., Ltd., or Micronized and Henan GengSheng's direct and wholly-owned subsidiary, GengSheng Shunda New Materials Co., Ltd, SouthEast Prefecture, Guizhou or Shunda;

    • “Powersmart” or “GengSheng International” refer to GengSheng International Corporation, a BVI company (formerly, Powersmart Holdings Limited) that is wholly-owned by China GengSheng Minerals;

    • “Securities Act” refers to the Securities Act of 1933, as amended, and “Exchange Act” refer to Securities Exchange Act of 1934, as amended;

    •  “China” and “PRC” refer to the People's Republic of China, and “BVI” refers to the British Virgin Islands;

    • “RMB” refers to Renminbi, the legal currency of China; and

    • “U.S. dollar,” “$” and “US$” refers to the legal currency of the United States. For all U.S. dollar amounts reported, the dollar amount has been calculated on the basis that RMB1 = $0.1517 for its December 31, 2010 audited balance sheet, and RMB1 = $0.1547 for its June, 30 2011 unaudited balance sheet, which were determined based on the currency conversion rate at the end of each respective period. The conversion rates of RMB1 = $0.15272 is used for the condensed consolidated statement of income and comprehensive income and consolidated statement of cash flows for the second quarter of 2011, and RMB1 = $0.1467 is used for the condensed consolidated statement of income and comprehensive income and consolidated statement of cash flows for the second quarter of 2010; both of which were based on the average currency conversion rate for each respective quarter.

    Overview of Company

    We are a Nevada holding company operating in the materials technology industry through our direct and indirect subsidiaries in China. We develop, manufacture and sell a broad range of mineral-based, heat-resistant products capable of withstanding high temperatures, saving energy and boosting productivity in industries such as steel and oil. Our products include refractory products, industrial ceramics, fracture proppants and fine precision abrasives.

    Currently, we conduct our operations in China through our wholly owned subsidiaries, Henan GengSheng Refractories Co., Ltd. (“Refractories”), Zhengzhou Duesail Fracture Proppant Co., Ltd. (“Duesail”), Henan GengSheng Micronized Powder Materials Co., Ltd. (“Micronized”), Guizhou Southeast Prefecture GengSheng New Materials Co., Ltd. (“Prefecture”) and Henan Yuxing Proppant Co., Ltd., (“Yuxing”) , and through our majority owned subsidiary, Henan GengSheng High-Temperature Materials Co., Ltd. (“High-Temperature”). Through our direct, wholly owned BVI subsidiary, GengSheng International, and its direct and wholly owned Chinese subsidiary, Refractories, which has an annual production capacity of approximately 127,000 tons, we manufacture refractories products. We manufacture fracture proppant products through Duesail, which has an annual production capacity of approximately 66,000 tons. We manufacture fine precision abrasives products through Micronized, which has designed annual production capacity of approximately 22,000 tons. Through our majority owned subsidiary, High-Temperature, which has an annual production capacity of approximately 150,000 units, we manufacture industrial and functional ceramic products.

    24


    We sell our products to over 200 customers in the iron, steel, oil, glass, cement, aluminum and chemical businesses located in China and other countries in Asia, Europe and North America. Our refractory customers are companies in the steel, iron, petroleum, chemical, coal, glass and mining industries. Our fracture proppant products are sold to oil and gas companies. Our industrial ceramics are used in the utilities and petrochemical industries. Our fine precision abrasives are marketed to solar companies and optical equipment manufacturers. Our largest customers, measured by percentage of our revenue, mainly operate in the steel industry. Currently, most of our revenues are derived from the sale of our monolithic refractory products to customers in China.

    Our principal executive offices are located at No. 88 Gengsheng Road, Dayugou Town, Gongyi, Henan, People’s Republic of China 451271 and our telephone number is (86) 371-6405-9818.

    Corporate Structure

    We conduct our operations in China through our wholly owned subsidiaries Refractories, Duesail, Micronized and Prefecture and through our majority owned subsidiary, High-Temperature.

    The following chart reflects our organizational structure as of the date of this report.

    25


    Corporate Background

    We were originally incorporated under the laws of the State of Washington, on November 13, 1947, under the name Silver Mountain Mining Company. From our inception until 2001, we operated various unpatented mining claims and deeded mineral rights in the State of Washington, but we abandoned these operations entirely by 2001. On August 15, 2006, we changed our domicile from Washington to Nevada when we merged with and into Point Acquisition Corporation, a Nevada corporation. From about 2001 until our reverse acquisition of Powersmart on April 25, 2007, which is discussed in the next section entitled "Acquisition of Powersmart and Related Financing," we were a blank check company and had no active business operations. On June 11, 2007, we changed our corporate name from "Point Acquisition Corporation" to "China Minerals Technologies, Inc." and subsequently changed our name again to "China GengSheng Minerals, Inc." on July 26, 2007 as we found a Delaware company with a similar corporate name.

    Acquisition of Powersmart and Related Financing

    On April 25, 2007, we completed a reverse acquisition transaction through a share exchange with Powersmart Holdings Limited whereby we issued to the sole shareholder of Powersmart Holdings Limited, Shunqing Zhang, 16,887,815 shares of China GengSheng Minerals, Inc. common stock, in exchange for all of the issued and outstanding capital stock of Powersmart Holdings Limited. By this transaction, Powersmart Holdings Limited became our wholly owned subsidiary and Mr. Zhang became our controlling stockholder.

    On April 25, 2007, we also completed a private placement financing transaction pursuant to which we issued and sold 5,347,594 shares of our common stock to certain accredited investors for $10 million in gross proceeds. In connection with this private placement, we paid a fee of $683,618 to Brean Murray Carret & Co., LL, or Brean Murray, and Civilian Capital, Inc. for services as placement agents for the private placement. We also issued to Brean Murray Carret & Co., LLC and Civilian Capital, Inc. warrants for the purchase of 374,331 shares of our common stock in the aggregate. The warrants are immediately exercisable, have piggyback registration rights and have a three-year term, expiring on April 26, 2010. On March 10, 2010, Brean Murray Carret & Co., LLC exercised the warrant cashlessly, which was converted to 108,349 shares of the Corporation’s common stock, and on April 21, 2010, Civilian Capital, Inc. exercised the warrant cashlessly, which was converted to 27,869 shares of the Corporation’s common stock.

    Also, on April 25, 2007, our majority stockholder, Shunqing Zhang, entered into an escrow agreement with the private placement investors, pursuant to which, Mr. Zhang agreed to deposit in an escrow account a total of 2,673,796 shares of the Company's common stock owned by him, to be held for the benefit of the investors. Mr. Zhang agreed that if the Company does not attain a minimum after-tax net income threshold of $8,200,000 for the fiscal year ended December 31, 2007 and $13,500,000 for the fiscal year ending December 31, 2008, the escrow agent may deliver his escrowed shares to the investors, based upon a pre-defined formula agreed to between the investors and Mr. Zhang. However, if the after-tax net income threshold is met, the shares in escrow will be returned to Mr. Zhang. In addition, on April 25, 2007, Mr. Zhang entered into a similar escrow agreement with HFG International, Limited. Under such agreement, Mr. Zhang placed into escrow a total of 638,338 shares of the Company's common stock to cover the same minimum net income thresholds as described above with respect to the investor make-good. Similarly, if the thresholds are not achieved in either year, the escrow agent must release certain amounts of the make-good shares that were put into escrow. As a result, we met the after-tax net income threshold of $8,200,000 for the fiscal year ended December 31, 2007 and the pro rata shares in escrow were returned to Mr. Zhang, while we did not meet the after-tax net income threshold of $13,500,000 for the fiscal year ended December 31, 2008, and the pro rata shares in escrow were transferred to the investors on March 8, 2010.

    Our Products

    The following table set forth sales information about our product mix in each of the second quarter of 2011 and 2010, and the first six months of 2011 and 2010.

     (All amounts, other than percentages, in thousands of U.S. dollars)    
        Three Months Ended June 30     Six Months Ended June 30  
         2011     2010     2011     2010  
              Percentage           Percentage           Percentage           Percentage  
        Revenue     of net     Revenue     of net     Revenue     of net     Revenue     of net  
              revenues           revenues           revenues           revenues  
    Refractories   12,545     61.4%     11,342     75.7%     22,480     61.4%     21,726     80.9%  
    Industrial Ceramics   492     2.4%     559     3.7%     722     2.0%     835     3.1%  
    Fracture Proppants   5,936     29.0%     3,093     20.6%     11,136     30.4%     4,294     16.0%  
    Fine Precision Abrasives   1,463     7.2%     0     0%     2,282     6.2%     0     0%  
        20,436     100.0%     14,994     100.0%     36,620     100.0%     26,855     100.0%  

    26


    Refractories

    Our largest product segment is the refractories segment, which accounted for approximately 61.4% of total revenue in the second quarter of 2011. Our refractory products have high-temperature resistant qualities and can function under thermal stress that is common in many heavy industrial production environments. Because of their unique high-temperature resistant qualities, the refractory products are used as linings and key components in many industrial furnaces, such as steel production furnaces, ladles, vessels, and other high-temperature processing machines that must operate at high temperatures for a long period of time without interruption. The majority of our customers are in the iron, steel, cement, chemical, coal, glass, petro-chemical and nonferrous industries.

    We provide a customized solution for each order of our monolithic refractory materials based on customer-specific formulas. Upon delivery to customers, the monolithic materials are applied to the inner surfaces of our customers’ furnaces, ladles or other vessels to improve the productivity of that equipment. The product is beneficial because it lowers the overall cost of production and improves financial performance for our customers. The reasons that the monolithic materials can help our customers improve productivity, lower production costs and achieve stronger financial performance include the following: (i) monolithic refractory castables can be cast into complex shapes which are unavailable or difficult to achieve by alternative products such as shaped bricks; (ii) monolithic refractory linings can be repaired, and in some cases, even reinstalled, without furnace cool-down periods or steel-production interruptions, and therefore improve the steel makers’ productivity; (iii) monolithic refractories can form an integral surface without joints, enhancing resistance to penetration, impact and erosion, and thereby improving the equipment’s operational safety and extending their useful service lives; (iv) monolithic refractories can be installed by specialty equipment either automatically or manually, thus saving construction and maintenance time as well as costs; and (v) monolithic refractories can be customized to specific requirements by adjusting individual formulas without the need to change batches of shaped bricks, which is a costly procedure. Our refractory products and their features are described as follows:

    • Castable, coating, and dry mix materials. Offerings within this product line are used as linings in containers such as a tundish used for pouring molten metal into a mold. The primary advantages of these products are speed and ease of installation for heat treatment.
    • Low-cement and non-cement castables. Our low-cement and non-cement castable products are typically used in reheating furnaces for producing steel. These castable products are highly durable and can last up to five years.
    • Pre-cast roofs. These products are usually used as a component of electric arc furnaces. They are highly durable, and in the case of our corundum-based, pre-cast roof, products, can endure approximately 160 to 220 complete operations of furnace heating.

    We also have a production line for pressed bricks, which is a type of “shaped” refractory, for steel production. The annual designed production capacity of our shaped refractory products is approximately 15,000 metric tons. Finally, we provide a full-service option to our steel customers, which include refractory product installation, testing, maintenance, repair and replacement. Refractory product sales are often enhanced by our on-site installation and technical support personnel. Our installation services include applying refractory materials to the walls of steel-making furnaces and other high temperature vessels to maintain and extend their lives. Our technical service staff provides assurances that our customers will achieve their desired productivity objectives. They also measure the refractory wear at our customer sites to improve the quality of maintenance and overall performance of our customers’ equipment. Full-service customers contributed approximately 32.4% of the Company’s total sales in the first six months of 2011, compared with 40.6% in the same period of 2010. We believe that these services together with our refractory products provide us with a strategic advantage to secure our profits.

    Industrial Ceramics

    Industrial Ceramics accounted for approximately 2.4% of the total revenue in the second quarter of 2011. Our industrial ceramic products, including abrasive balls and tiles, valves, electronic ceramics and structural ceramics, are components for a variety of end products such as fuses, vacuum interrupters, electrical components, mud slurry pumps, and high-pressure pumps. Such end use products are used in the electric power, electronic component, industrial pump, and metallurgy industries. We install and maintain some of these products.

    Some of our products and their benefits are introduced as follows:

    • Ceramic plates, tubes, elbows, and rollers. These products are used in heavy machines for steel production, power generation, and mining. They are highly resistant to heat, erosion, abrasion, and impact.

    • Ceramic cylinders and plugs. Our ceramic cylinders and plugs are often used in plug pumps for drilling crude oil. They are highly resistant to pressure.

    27


    • Wearable ceramic valves. Our wearable ceramic valves are used for transferring gas and liquid products. They are highly resistant to wash out, erosion, abrasion, and impact.

    We signed a five-year collaboration agreement with the Ceramics Research Institute of Zhengzhou University (the "CRI") in Henan province of China in 2008, to research and develop innovative ways of improving the manufacturing process and functionality of an array of bauxite-based materials. Specifically, we will work with CRI to optimize and reduce costs for the production of fine precision abrasives, which are bauxite-based, ultra-fine, grain-like materials used to polish fine-metal or optical equipment surfaces, including solar panels. CRI will also help us develop next-generation industrial ceramics that can reduce energy use and pollution. In addition, we and CRI will jointly apply for government grants for bauxite-based materials research.

    Fracture Proppants

    Fracture Proppants accounted for approximately 29.0% of the total revenue in the second quarter of 2011. Our fracture proppants are very fine ball-like pellets, used to reach pockets of oil and natural gas deposits that are trapped in the fractures under the ground. Oil drillers inject the pellets into those fractures, squeezing out the trapped oil or natural gas, which leads to higher yield. Our fracture proppant products are available in several different particle sizes (measured in millimeters). They are typically used to extract crude oil and natural gas, which increases the productivity of crude oil and natural gas wells. These products are highly resistant to pressure. In October 2007, our fracture proppant products were recognized by China National Petroleum Corporation (the “CNPC”), China Petroleum & Chemical Corporation (the “Sinopec”) and the China National Offshore Oil Corporation (the “CNOOC”) as their supplier of fracture proppants for their oil and gas-drilling operation.

    Fine precision abrasives

    Fine precision abrasives accounted for 7.2% of our total revenue in the second quarter of 2011. Fine precision abrasives are used for producing a super-fine, super-consistent finish on certain products. A high-strength polyester backing provides a uniform base for a coating of micron-graded mineral particles that are uniformly dispersed for greater finishing efficiency. Our fine precision abrasives are made from silicon carbide (“SiC”). They are ultra-fine, high-strength pellets with uniform shape, and they are used for surface-polishing and slicing of precision instruments such as solar panels. Currently, the type of abrasives that we produce is in high demand among solar-energy companies. Solar energy companies use fine precision abrasives to cut silicon bars and to polish equipment surfaces so that they can be smooth and reflective. Our products can be utilized in a broad range of areas including machinery manufacturing, electronics, optical glass, architecture industry development, semiconductor, silicon chip, plastic and lens. A description of its features is as follows:

    Ultrafine precision abrasives. This product is a fine alumina or silicon carbide powder whose size is measured in microns. This product has characteristics suitable for wire slicing and specific polishing.

    Second Quarter of 2011 Highlights

    In the second quarter of 2011, revenue from fracture proppant products reached $5.9 million, a 90.3% increase compared with $3.1 million during the same period of 2010. The revenue growth is driven mainly by significant demand from our US customers who use our products in their new exploration technologies for natural gas.

    Meanwhile, in our fine precision abrasives segment, we realized sales of 623 ton in the first six months of 2011, for revenue of approximately $2.3 million. The sales of fine precision abrasives products started in the third quarter of 2010.

    Our financial performance in the second quarter is summarized as follows:

    • Sales revenue increased by approximately $5.4 million, or 36.3%, to $20.4 million for the second quarter of 2011, from $15.0 million for the same period in 2010.

    • Gross profit increased by approximately $0.4 million, or 8.5%, to approximately $5.3 million for the three months ended June 30, 2011, from approximately $4.9 million for the same period in 2010. Gross margin was 26.1% for the three months ended June 30, 2011, compared with 32.8% for the same period in 2010. The decrease in gross margin was largely attributed to the higher raw material costs in refractories segment, lower selling price in fracture proppants segment due to the volume discount given to our customers and lower gross margin in our fine precision abrasives segment before the product line reaching full capacity.

    • Net income decreased by approximately $1.3 million, to a net loss of approximately $0.2 million for the second quarter of 2011, from net income of approximately $1.0 million for the same period in 2010.

    • Our condensed consolidated balance sheet (unaudited) as of June 30, 2011 included current assets of approximately $156.2 million and total assets of approximately $195.4 million, with working capital of $21.0 million.

    28


    Uncertainties that Affect our Financial Condition

    Industry Consolidation of Steel Millers

    The steel industry in China achieved record raw steel output of approximately $570 million metric tons in 2010, an increase of 2.6% over 2009. Despite this record output, the industry is facing challenges related to overcapacity and the global economic recession. In addition, the PRC government’s policy aimed at improving the operational and energy efficiency of the Chinese steel industry is expected to squeeze out small to mid-sized steel makers, which may reduce market demand for refractories. To address these potential challenges, we plan to focus on providing high-efficiency, low-carbon, environmentally-friendly monolithic refractories.

    Considerable Increase of Raw Material Prices and Decreasing Gross Margin

    Along with most Chinese companies, we are facing higher raw material, fuel and utilities prices during the first half of 2011 as inflation and upstream pricing pressure continued. We raised selling prices of certain products to pass through some of these costs to our customers. However, due to the fragmented nature of our market, the increase was not in line with the increase in raw material prices. Although soaring materials costs and slower sales growth have impacted us less than some of our competitors, our gross margin and net income were negatively impacted by the slowdown in global economy. We will continue to optimize our products offering in an effort to ensure the most efficient resource allocation.

    Longer payment term and significant receivables

    Currently, the payment term of our receivables has cast certain concerns of the adequacy of our cash flow used in operating activities time by time. The payment term of receivables from our main steel customers is approximately 120-180 days. We have attempted to negotiate purchase agreements with our steel customers that call for either shortened payment terms or down payments to maintain sufficient cash flow for us to purchase raw materials and support our operations. We have successfully obtained down payments from certain customers in the second quarter. We have continued to receive the form of bankers’ acceptance drafts from some customers, allowing us to settle some trade debts among our suppliers. The maturity dates of these bankers’ acceptance drafts are 60 to 90 days, and we expect that our customers will pay off these drafts upon maturity. We expect to reach agreements with our major customers on shortened payment terms, which will relieve these capital constraints.

    Recent Development

    On July 19, 2011, the Company finished construction of the new fracture proppant manufacturing facility in Gongyi, Henan Province. The new facility is expected to increase the Company’s annual proppant manufacturing capacity by 60,000 tons.

    Results of Operations

    Comparison of Three-Month Periods ended June 30, 2011 and 2010

    The following table summarizes the results of our operations during the three month periods ended June 30, 2011 and 2010, and provides information regarding the dollar and percentage increase or (decrease) during the three month periods ended June 30, 2011 and 2010.

    (All amounts, other than percentages, in U.S. dollars)

     

      Three-Month Period     Three-Month Period  

     

      Ended June 30, 2011     Ended June 30, 2010  

     

                        As a percentage  

     

      Dollars     As a percentage of     Dollars     of  

    Statement of operations data:

      in thousands     net revenues     in thousands     net revenues  

     

                           

    Net Sales

      20,436     100.0%     14,994     100.0%  

    Cost of sales

      15,101     73.9%     10,078     67.2%  

    Gross profit

      5,335     26.1%     4,916     32.8%  

     

                           

    Operating expenses

                           

         General & administrative expenses

      1,630     8.0%     1,420     9.5%  

         Research and development cost

      145     0.7%     313     2.1%  

         Selling expenses

      2,761     13.5%     1,811     12.1%  

    Total operating expenses

      4,536     22.2%     3,544     23.7%  
                             

    Income from operations

      799     3.9%     1,372     9.1%  

    Government grant income

      17     0.1%     0     0.0%  

    Guarantee income

      123     0.6%     0     0.0%  

    Guarantee expenses

      (89 )   -0.4%     0     0.0%  

    Interest income

      63     0.3%     124     0.8%  

    Change in fair value warranty liabilities

      650     3.2%     0     0.0%  

    Other (expenses) income

      (34 )   -0.2%     3     0.0%  

    Finance costs, net

      (1,571 )   -7.7%     (344 )   -2.2%  

     

                           

    (Loss) income before income taxes and noncontrolling interest

      (42 )   -0.2%     1,155     7.7%  

    Income taxes

      (226 )   -1.1%     (121 )   - 0.8%  

    Noncontrolling interest

      21     0.1%     (11 )   -0.1%  

     

                           

    Net (loss) income attributable to Company’s common stockholders

      (247 )   -1.2%     1,023     6.8%  

    29




     

      Three-Month     Three-Month     Dollar ($)     Percentage  

     

      Period Ended     Period Ended     Increase     Increase  

     

      June 30, 2011     June 30, 2010     (Decrease)     (Decrease)  

    Dollars in thousands

                           

     

                           

    Net Sales

      20,436     14,994     5,442     36.3%  

    Cost of sales

      15,101     10,078     5,023     49.8%  

    Gross profit

      5,335     4,916     419     8.5%  

     

                           

    Operating expenses

                           

         General & administrative expenses

      1,630     1,420     210     14.8%  

         Research and development cost

      145     313     (168 )   -53.7%  

         Selling expenses

      2,761     1,811     950     52.5%  

    Total operating expenses

      4,536     3,544     992     28.0%  

     

                           

    Income from operations

      799     1,372     (573 )   -41.8%  

    Government grant income

      17     0     17     100%  

    Guarantee income

      123     0     123     100%  

    Guarantee expenses

      (89 )   0     (89 )   -100%  

    Interest income

      63     124     (61 )   -49.2%  

    Change in fair value warranty liabilities

      650     0     650     100%  

    Other (expenses) income

      (34 )   3     (37 )   -1,233.3%  

    Finance costs, net

      (1,571 )   (344 )   (1,227 )   356.7%  

     

                           

    (Loss) income before income taxes and noncontrolling interest

      (42 )   1,155     (1,197 )   -103.6%  

    Income taxes

      (226 )   (121 )   (105 )   86.8%  

    Noncontrolling interest

      21     (11 )   32     290.9%  

     

                           

    Net (loss) income attributable to Company’s common stockholders

      (247 )   1,023     (1,270 )   -124.1%  

    30


    Sales revenues. Sales revenues increased approximately $5.4 million, or 36.3%, to approximately $20.4 million for the three months ended June 30, 2011 from approximately $15.0 million for the three months ended June 30, 2010. Our sales revenue is currently generated from sales of our mineral-based refractory products, primarily our refractory products, industrial ceramic products, fracture proppant products and fine precision abrasives products. The increase was mainly attributable to increased sales from our fracture proppant segment and fine precision abrasives segment, particularly increased export sales of fracture proppant products compared with the same period in 2010.

    In our refractory segment, we sold 27,686 metric tons of refractory products in the second quarter of 2011, a 9.5% decrease compared with 30,600 metric tons sold in the same period of 2010. The revenue from our refractory products increased to approximately $12.5 million in the second quarter of 2011 from approximately $11.3 million in the same period of 2010. The sales increase was primarily due to an increase in average selling prices, which reached $452 per metric ton in the second quarter of 2011, representing a 22.2% increase compared with $370 per metric ton in the same period of 2010.

    In our fracture proppant segment, we sold 16,029 metric tons of fracture proppant products in the second quarter of 2011, compared with 7,700 metric tons sold in the same period of 2010. The large increase in sales volume was primarily driven by strong demand from our US customers who use our proppant products in their new natural gas exploration technologies. Revenue from fracture proppant products was approximately $5.9 million in the second quarter of 2011, an increase of 90.3% compared with approximately $3.1 million in the second quarter of 2010. Average selling price decreased to $373 per metric ton in the second quarter of 2011, compared with $400 per metric ton in the same period of 2010. The decrease in average selling price was the result of the volume discount given to our main customers.

    In our industrial ceramics segment, revenue was $0.5 million in the second quarter of 2011 compared with $0.6 million in the same period of 2010.

    In our fine precision abrasives segment, we realized sales of 421 ton for the three months ended June 30, 2011, for revenue of approximately $1.5 million. The sales of fine precision abrasives products started in the third quarter of 2010.

    Cost of goods sold. Our cost of goods sold is primarily comprised of the cost of our raw materials, components, labor and overhead. Our cost of goods sold increased approximately $5.0 million, or approximately 49.8%, to approximately $15.1 million for the three months ended June 30, 2011 from approximately $10.1 million during the three months ended June 30, 2010. As a percentage of net revenues, the cost of goods sold increased by approximately 6.7% to 73.9% in the three months ended June 30, 2011 from 67.2% during the three months ended June 30, 2010. This was mainly due to the higher raw material costs compared with the same period in 2010.

    Gross profit. Our gross profit increased approximately $0.4 million, or 8.5%, to $5.3 million for the three months ended June 30, 2011 from $4.9 million for the three months ended June 30, 2010. Gross profit as a percentage of net revenues was 26.1% for the three months ended June 30, 2011, as compared with 32.8% for the three months ended June 30, 2010. The percentage decrease was mainly due to the decrease in average selling price and the increase in the cost of raw materials compared with the same period in 2010.

    General and administrative expenses. Our general and administrative expenses consist of the costs associated with staff and support personnel who manage our business activities and professional fees paid to third parties. Our general administrative expenses increased 14.8%, to approximately $1.6 million for the three months ended June 30, 2011, from approximately $1.4 million for the same period in 2010. The increase was primarily due to the higher salary expenses as a result of increase in the average salary level and higher audit fees and legal fees for continuing listing purpose. As a percentage of net revenues, administrative expenses decreased to 8.0% for the three months ended June 30, 2011 as compared with 9.5% for the three months ended June 30, 2010.

    Selling expenses. Our selling expenses include sales commissions, the cost of advertising and promotional materials, transportation expenses, benefits of sales personnel, after-sale support services and other sales related costs. Selling expenses increased by approximately $1.0 million to approximately $2.8 million compared with approximately $1.8 million in the three months ended June 30, 2010. As a percentage of net revenues, our selling expenses increased to 13.5% for the three months ended June 30, 2011, as compared to 12.1% for the same period in 2010. The increase in selling expenses was primarily attributable to the increase in allowance for doubtful accounts and higher transportation costs.

    Research and development cost. Our research and development cost decreased to $145 thousand for the three months ended June 30, 2011, compared with approximately $313 thousand for the same period in 2010. The decrease in R&D is mainly due to fewer research projects in progress during the three months ended June 30, 2011 compared to the same period in 2010.

    Government grant income. Our government grant income was $17 thousand in the second quarter of 2011 while we did not have any government grant income in the same period in 2010.

    Finance costs. Our finance costs increased by approximately $1.2 million, or 356.7%, to approximately $1.6 million in the three months end June 30, 2011, from approximately $0.3 million in the same period in 2010. As a percentage of net revenues, our finance costs were 7.7% in the second quarter in 2011 and 2.2% in the same period in 2010. This significant increase was due to an increase of approximately $1.3 million in bills discounting charges as we discounted more bills receivable instead of holding them to maturity.

    31


    Loss (income) before income taxes and non-controlling interests. Our loss before income taxes and non-controlling interest was approximately $42 thousand for the three months ended June 30, 2011, compared to approximately $1.2 million income for the same period in 2010. The decrease was primarily attributable to lower operating income and higher finance costs during this quarter.

    Income taxes. Our income taxes were $226 thousand for the three months ended June 30, 2011, an increase of approximately $105 thousand or 86.8% from approximately $121 thousand for the three months ended June 30, 2010.

    Net (loss) income. Our net loss for the three months ended June 30, 2011 was approximately $0.2 million, a decrease of $1.3 million from a net income of approximately $1.0 million for the same period of 2010. The decrease was attributable to the factors described above.

    Comparison of Six-Month Periods ended June 30, 2011 and 2010

    The following table summarizes the results of our operations during the six-month periods ended June 30, 2011 and 2010, and provides information regarding the dollar and percentage increase or (decrease) during the six-month periods ended June 30, 2011 and 2010.

    (All amounts, other than percentages, in U.S. dollars)

     

      Six-Month Period     Six-Month Period  

     

      Ended June 30, 2011     Ended June 30, 2010  

     

            As a percentage           As a percentage  

     

      Dollars     of     Dollars     of  

    Statement of operations data:

      in thousands     net revenues     in thousands     net revenues  

     

                           

    Net Sales

      36,620     100.0%     26,856     100.0%  

    Cost of sales

      26,998     73.7%     17,966     66.9%  

    Gross profit

      9,622     26.3%     8,890     33.1%  

     

                           

    Operating expenses

                           

         General & administrative expenses

      3,133     8.6%     2,849     10.6%  

         Research and development cost

      287     0.8%     498     1.9%  

         Selling expenses

      4,733     12.9%     3,305     12.3%  

    Total operating expenses

      8,153     22.3%     6,652     24.8%  

     

                           

    Income from operations

      1,469     4.0%     2,238     8.3%  

    Government grant income

      18     0.0%     71     0.3%  

    Guarantee income

      210     0.6%     0     0.0%  

    Guarantee expenses

      (176 )   -0.5%     0     0.0%  

    Interest income

      182     0.5%     158     0.6%  

    Change in fair value warranty liabilities

      910     2.5%     0     0.0%  

    Other (expenses) income

      (68 )   -0.2%     4     0.0%  

    Finance costs, net

      (2,537 )   -6.9%     (749 )   -2.8%  

     

                           

    Income before income taxes and noncontrolling interest

      8     0.0%     1,722     6.4%  

    Income taxes

      (362 )   -1.0%     (285 )   -1.1%  

    Noncontrolling interest

      27     0.1%     (27 )   -0.1%  

     

                           

    Net (loss) income attributable to Company’s common stockholders

      (327 )   -0.9%     1,410     5.2%  

    32



        Six-Month     Six-Month     Dollar ($)     Percentage  
        Period Ended     Period Ended     Increase     Increase  
        June 30, 2011     June 30, 2010     (Decrease)     (Decrease)  
    Dollars in thousands                        
                             
    Net Sales   36,620     26,856     9,764     36.4%  
    Cost of sales   26,998     17,966     9,032     50.3%  
    Gross profit   9,622     8,890     732     8.2%  
                             
    Operating expenses                        
         General & administrative expenses   3,133     2,849     284     10.0%  
         Research and development cost   287     498     (211 )   -42.4%  
         Selling expenses   4,733     3,305     1,428     43.2%  
    Total operating expenses   8,153     6,652     1,501     22.6%  
                             
    Income from operations   1,469     2,238     (769 )   -34.4%  
    Government grant income   18     71     (53 )   -74.6%  
    Guarantee income   210     0     210     100%  
    Guarantee expenses   (176 )   0     (176 )   -100%  
    Interest income   182     158     24     15.2%  
    Change in fair value warranty liabilities   910     0     910     100%  
    Other (expenses) income   (68 )   4     (72 )   -1,800%  
    Finance costs, net   (2,537 )   (749 )   (1,788 )   238.7%  
                             
    Income before income taxes and noncontrolling interest   8     1,722     (1,714 )   -99.5%  
    Income taxes   (362 )   (285 )   (77 )   27.0%  
    Noncontrolling interest   27     (27 )   54     200.0%  
                             
    Net (loss) income attributable to Company’s common stockholders   (327 )   1,410     (1,737 )   -123.2%  

    Sales revenues. Sales revenues increased approximately $9.8 million, or approximately 36.4%, to approximately $36.6 million for the six months ended June 30, 2011 from approximately $26.8 million for the six months ended June 30, 2010. The increase was mainly attributable to increased sales from our fracture proppant segment and fine precision abrasives segment, particularly increased export sales of fracture proppant products compared with the same period in 2010.

    In our refractory segment, we sold 47,891 metric tons of refractory products in the six months ended June 30, 2011, a 6.5% decrease compared with 51,200 metric tons sold in the same period of 2010. The revenue from our refractory products increased to approximately $22.5 million for the six months ended June 30, 2011 from approximately $21.7 million in the same period of 2010. The sales increase was primarily due to an increase in average selling prices, which reached $470 per metric ton in the six months ended June 30, 2011, representing a 10.8% increase compared with $424 per metric ton in the same period of 2010.

    In our fracture proppant segment, we sold 28,542 metric tons of fracture proppant products in the six months ended June 30, 2011, compared with the 10,300 metric tons in the same period of 2010. The large increase in sales volume was primarily driven by strong demand from our US customers who use our proppant products in their new natural gas exploration technologies. Revenue from fracture proppant products was approximately $11.1 million for the six months ended June 30, 2011, an increase of 158.1% compared with approximately $4.3 million in the same period of 2010. Average selling price decreased to $390 per metric ton in the six months ended June 30, 2011, compared with $417 per metric ton in the same period of 2010. The decrease in average selling price is the result of the volume discount given to our customers and the change in product mix during the first six months of 2011 compared with the same period of 2010.

    33


    In our industrial ceramics segment, revenue was $0.7 million for the six months ended June 30, 2011 compared with $0.8 million in the same period of 2010.

    In our fine precision abrasives segment, we realized sales of 623 ton in 2011, for revenue of approximately $2.3 million. The sales of fine precision abrasives products started in the third quarter of 2010.

    Cost of goods sold. Our cost of goods sold increased approximately $9.0 million, or 50.3%, to approximately $27.0 million for the six months ended June 30, 2011 from approximately $18.0 million during the same period of 2010. As a percentage of net revenues, the cost of goods sold increased by approximately 6.8% to 73.7% in the six months ended June 30, 2011 from 66.9% during the same period in 2010. This was mainly due to the higher raw materials costs compared with the same period in 2010.

    Gross profit. Our gross profit increased approximately $0.7 million, or 8.2%, to $9.6 million for the six months ended June 30, 2011 from $8.9 million for the six months ended June 30, 2010. Gross profit as a percentage of net revenues was 26.3% for the six months ended June 30, 2011, as compared with 33.1% for the six months ended June 30, 2010. The percentage decrease was mainly due to the decrease in average selling price and the increase in the cost of raw materials compared with the same period in 2010.

    General and administrative expenses. Our general and administrative expenses increased 10.0%, to approximately $3.1 million for the six months ended June 30, 2011, from approximately $2.8 million for the same period in 2010. The increase was primarily due to the higher salary expenses as a result of increase in the average salary level and higher audit fees and legal fees for continuing listing purpose. As a percentage of net revenues, administrative expenses decreased to 8.6% for the six months ended June 30, 2011 as compared with 10.6% for the six months ended June 30, 2010.

    Selling expenses. Selling expenses increased by approximately $1.4 million to approximately $4.7 million compared with approximately $3.3 million in the six months ended June 30, 2010. As a percentage of net revenues, our selling expenses increased to 12.9% for the six months ended June 30, 2011, as compared to 12.3% for the same period in 2010. The increase in selling expenses was primarily attributable to higher transportation costs, increase in allowance for doubtful accounts and higher export expenses related to fracture proppant products.

    Research and development cost. Our research and development cost decreased to $287 thousand for the six months ended June 30, 2011, compared with approximately $498 thousand for the same period in 2010 due to fewer R&D activities.

    Government grant income. Our government grant income was $18 thousand for the six months ended June 30, compared with $71 thousand for the same period in 2010.

    Finance costs. Our finance costs increased by approximately $1.8 million, or 238.7 %, to approximately $2.5 million in the six months ended June 30, 2011, from approximately $0.7 million in the same period in 2010. As a percentage of net revenues, our finance costs were 6.9% in the six months ended June 30, 2011 and 2.8% in the same period in 2010. This significant increase was primarily due to an increase of approximately $1.3 million in bills discounting charges as we discounted more bills receivable instead of holding them to maturity; and an increase of approximately $0.5 million in interest expenses as we increased borrowing activities for the six months ended June 30, 2011.

    Income before income taxes and non-controlling interests. Our income before income taxes and non-controlling interest was $8 thousand for the six months ended June 30, 2011, compared to approximately $1.7 million income for the same period in 2010. The decrease was primarily attributable to lower operating income and higher finance costs during the first six months.

    Income taxes. Our income taxes were $0.4 million for the six months ended June 30, 2011, an increase of approximately $0.1 million or 27.0% from approximately $0.3 million for the six months ended June 30, 2010.

    Net (loss) income. Our net loss for the six months ended June 30, 2011 was approximately $0.3 million, a decrease of $1.7 million from a net income of approximately $1.4 million for the same period of 2010. The decrease was attributable to the factors described above.

    34


    Liquidity and Capital Resources

    As of June 30, 2011, we had cash and cash equivalents of $9.5 million. The following table sets forth a summary of our cash flows for the periods indicated:

        Six-month period ended June 30,  
        2011     2010  
        (Dollars in thousands)  
                 
    Net cash (used in) provided by operating activities   (1,546 )   92  
    Net cash used in investing activities   (8,318 )   (3,523 )
    Net cash provided by financing activities   18,400     7,380  
    Net cash inflows   8,564     3,968  

    Operating Activities

    Net cash used in operating activities was approximately $1.5 million in the first six months ended June 30, 2011, as compared with net cash provided by operating activities of approximately $92 thousand in the same period of 2010. The increase in net cash outflow from operations was primarily attributable to the net loss incurred in the first six months ended June 30, 2011, which was partly offset by the decrease in cash used in operating between the two comparable periods.

    Investing Activities

    Net cash used in investing activities during the six months ended June 30, 2011 was approximately $8.3 million, an increase of approximately $4.8 million from net cash used in investing activities of $3.5 million during the same period in 2010. The increase in net cash used in investing activities for the first six months of 2011 was primarily due to the expansion of our proppant production lines and renovation of our office building.

    Financing Activities

    Net cash provided by financing activities was approximately $18.4 million during the six months ended June 30, 2011, compared with net cash provided by financing activities of approximately $7.4 million during the same period of 2010. The increase in cash flow from financing activities was mainly due to the net increase of $36.4 million in bank loans and net proceeds from our January 2011 equity financing of $9.3 million, partially offset by the increase in restricted cash of $27.1 million.

    Loan Facilities

    In the six months ended June 30, 2011, we secured new loans totaling $64.9 million from banks for our working capital needs, and we repaid $28.6 million in other loans during the period. As a result, the balance of all bank loans and borrowing as of June 30, 2011 was approximately $79.3 million, which includes $33.0 million short-term bank loans and $46.3 million of bank borrowing secured by bank deposits.

    As of June 30, 2011, the detail of all our short-term bank loans and bank borrowing are as follows:

    All amounts, other than percentages, are in U.S. dollars

    No Type                  Contracting Party Valid Date Duration Amount
    1 Facility Bank Loan Shanghai Pudong Development Bank Village Bank 2010-09-16 to 2011-09-15 1 year $773,500
    2 Facility Bank Loan Shanghai Pudong Development Bank Village Bank 2010-09-16 to 2011-09-15 1 year $386,750
    3 Facility Bank Loan Kaifeng Commercial Bank 2010-09-28 to 2011-09-27 1 year $4,641,000
    4 Facility Bank Loan Zhengzhou Bank 2010-12-17 to 2011-12-16 1 year $4,641,000
    5 Facility Bank Loan Zhengzhou Bank 2010-12-17 to 2011-12-16 1 year $3,094,000

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    6 Facility Bank Loan Shanghai Pudong Development Bank Village Bank 2011-01-06 to 2012-01-05 1 year $3,094,000
    7 Facility Bank Loan Industrial and Commercial Bank of China 2011-01-18 to 2012-01-09 1 year $3,094,000
    8 Facility Bank Loan Bank of China 2011-03-21 to 2012-03-21 1 year $928,200
    9 Facility Bank Loan Luoyang Bank 2011-04-18 to 2012-04-17 1 year $3,094,000
    10 Facility Bank Loan Agricultural Bank of China 2011-04-28 to 2012-04-27 1 year $6,188,000
    11 Facility Bank Loan China CITIC Bank 2011-05-13 to 2012-05-12 1 year $2,320,500
    12 Facility Bank Loan City Credit Cooperatives in Gongyi 2011-06-28 to 2012-06-25 1 year $773,500
    13 Bank borrowing Luoyang Bank 2011-01-02 to 2011-07-02 6 months $773,500
    14 Bank borrowing Luoyang Bank 2011-01-08 to 2011-07-08 6 months $741,941
    15 Bank borrowing City Credit Cooperatives in Luohe 2011-01-12 to 2011-07-12 6 months $2,939,300
    16 Bank borrowing City Credit Cooperatives in Luohe 2011-01-13 to 2011-07-13 6 months $1,547,000
    17 Bank borrowing City Credit Cooperatives in Luohe 2011-01-17 to 2011-07-17 6 months $1,547,000
    18 Bank borrowing Industrial and Commercial Bank of China 2011-01-21 to 2011-07-21 6 months $773,500
    19 Bank borrowing Shanghai Pudong Development Bank Village Bank 2011-01-29 to 2011-07-29 6 months $3,094,000
    20 Bank borrowing Luoyang Bank 2011-02-15 to 2011-08-15 6 months $773,500
    21 Bank borrowing Shanghai Pudong Development Bank Village Bank 2011-02-25 to 2011-08-25 6 months $1,547,000
    22 Bank borrowing Agricultural Bank of China 2011-02-28 to 2011-08-28 6 months $1,547,000
    23 Bank borrowing Agricultural Bank of China 2011-03-02 to 2011-09-02 6 months $1,547,000
    24 Bank borrowing Agricultural Bank of China 2011-03-04 to 2011-09-04 6 months $1,547,000
    25 Bank borrowing Agricultural Bank of China 2011-03-09 to 2011-09-09 6 months $1,547,000
    26 Bank borrowing Luoyang Bank 2011-03-11 to 2011-09-11 6 months $1,547,000
    27 Bank borrowing Luoyang Bank 2011-03-18 to 2011-09-18 6 months $1,547,000
    28 Bank borrowing City Credit Cooperatives in Luohe 2011-03-22 to 2011-09-21 6 months $1,392,300
    29 Bank borrowing City Credit Cooperatives in Luohe 2011-03-23 to 2011-09-23 6 months $1,237,600
    30 Bank borrowing Luoyang Bank 2011-03-25 to 2011-09-25 6 months $1,237,600
    31 Bank borrowing Guiyang Bank 2011-03-31 to 2011-09-27 6 months $618,800
    32 Bank borrowing City Credit Cooperatives in Luohe 2011-04-11 to 2011-10-11 6 months $773,500
    33 Bank borrowing City Credit Cooperatives in Luohe 2011-04-13 to 2011-10-13 6 months $773,500
    34 Bank borrowing City Credit Cooperatives in Luohe 2011-04-14 to 2011-10-14 6 months $1,547,000
    35 Bank borrowing Industrial and Commercial Bank of China 2011-04-14 to 2011-10-14 6 months $1,547,000
    36 Bank borrowing Industrial and Commercial Bank of China 2011-04-19 to 2011-10-19 6 months $309,400
    37 Bank borrowing Shanghai Pudong Development Bank Village Bank 2011-05-10 to 2011-11-10 6 months $77,350

    36



    38 Bank borrowing Industrial and Commercial Bank of China 2011-05-20 to 2011-11-20 6 months $758,030
    39 Bank borrowing China Merchants Bank 2011-06-08 to 2011-12-08 6 months $1,547,000
    40 Bank borrowing China Merchants Bank 2011-06-14 to 2011-12-14 6 months $1,547,000
    41 Bank borrowing City Credit Cooperatives in Luohe 2011-06-15 to 2011-12-15 6 months $3,094,000
    42 Bank borrowing City Credit Cooperatives in Luohe 2011-06-16 to 2011-12-16 6 months $1,547,000
    43 Bank borrowing City Credit Cooperatives in Luohe 2011-06-17 to 2011-12-17 6 months $2,320,500
    44 Bank borrowing City Credit Cooperatives in Luohe 2011-06-21 to 2011-12-21 6 months $1,547,000
    45 Bank borrowing City Credit Cooperatives in Luohe 2011-06-21 to 2011-12-21 6 months $773,500
    46 Bank borrowing Industrial and Commercial Bank of China 2011-06-24 to 2011-12-24 6 months $618,800

    We have approximately $33.0 million of facility bank loans, maturing from September 15, 2011 to June 25, 2012 and approximately $46.3 million of bank borrowing secured by bank deposits. We will also consider refinancing debt. However, we cannot provide assurance that we will be able to refinance any of our debt on terms favorable to us in a timely manner.

    Below is a brief summary of the payment obligations under material contacts to which we are a party:

    On September 16, 2010, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Shanghai Pudong Development Bank Village Bank of Gongyi (“SPDVB”), whereby SPDVB has agreed to loan approximately $0.8 million (RMB 5 million) to Refractories for a term of one year, at an interest rate of 5.31% per year on all outstanding principal.

    On September 16, 2010, our subsidiary, Duesail, entered into a short-term working capital loan agreement with Shanghai Pudong Development Bank Village Bank of Gongyi (“SPDVB”), whereby SPDVB has agreed to loan approximately $0.4 (RMB 2.5 million) to Duesail for a term of one year, at an interest rate of 5.31% per year on all outstanding principal.

    On September 28, 2010, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Kaifeng Commercial Bank (“KCB”), whereby KCB has agreed to loan approximately $4.6 million (RMB 30 million) to Refractories for a term of one year, at an interest rate of 5.31% per year on all outstanding principal.

    On December 17, 2010, our subsidiary Refractories entered into a short-term working capital loan agreement with Zhengzhou Bank, whereby Zhengzhou Bank has agreed to loan approximately $4.6 million (RMB 30 million) to Refractories for a term of one year, at an interest rate of 5.56% per year on all outstanding principal.

    On December 17, 2010, our subsidiary Refractories entered into a short-term working capital loan agreement with Zhengzhou Bank, whereby Zhengzhou Bank has agreed to loan approximately $3.1 million (RMB 20 million) to Refractories for a term of one year, at an interest rate of 5.81% per year on all outstanding principal.

    On January 6, 2011, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Shanghai Pudong Development Bank Village Bank of Gongyi (“SPDVB”), whereby SPDVB has agreed to loan approximately $3.1 million (RMB 20 million) to Refractories for a term of one year, at an interest rate of 5.81% per year on all outstanding principal.

    On January 18, 2011, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Industrial and Commercial Bank of China (“ICBC”), whereby ICBC has agreed to loan approximately $3.1 million (RMB 20 million) to Refractories for a term of one year, at an interest rate of 5.81% per year on all outstanding principal.

    On March 21, 2011, our subsidiary, Duesail, entered into a short-term working capital loan agreement with Bank of China of Gongyi (“BC”), whereby BC has agreed to loan approximately $0.9 million (RMB 6.0 million) to Duesail for a term of one year, at an interest rate of 8.76% per year on all outstanding principal.

    On April 18, 2011, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Luoyang Bank (“LYB”), whereby LYB has agreed to loan approximately $3.1 million (RMB 20 million) to Refractories for a term of one year, at an interest rate of 6.94% per year on all outstanding principal.

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    On April 28, 2011, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Agricultural Bank of China (“ABC”), whereby ABC has agreed to loan approximately $6.2 million (RMB 40.0 million) to Refractories for a term of one year, at an interest rate of 6.94% per year on all outstanding principal.

    On May 13, 2011, our subsidiary, Refractories, entered into a short-term working capital loan agreement with China CITIC Bank (“CITIC”), whereby CITIC has agreed to loan approximately $2.3 million (RMB 15.0 million) to Refractories for a term of one year, at an interest rate of 6.94% per year on all outstanding principal.

    On June 28, 2011, our subsidiary, Duesail, entered into a short term working capital loan agreement, with City Credit Cooperatives in Gongyi whereby City Credit Cooperatives agreed to loan approximately $0.8 million (RMB5.0 million) to Duesail for a term of one year, at an interest rate of 12.1% per year on all outstanding principle.

    Critical Accounting Policies

    Basis of consolidation

    The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America.

    The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

    Use of estimates

    In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of trade receivables, other receivables, inventories, deferred income taxes, provision of warranty, the estimation on useful lives of property, plant and equipment and the impairment of goodwill and know-how. Actual results could differ from those estimates.

    Allowance for doubtful accounts

    The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance. The Company considers the historical level of credit losses and applies percentages to aged receivable categories. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.

    Based on the above assessment, during the reporting periods, the management established the general provisioning policy to make allowance equivalent to 1% of trade receivables due over 6 months but within 1 year, 5% of trade receivables due from 1 to 2 years, 40% of trade receivables due from 2 to 3 years and 70% of trade receivables due over 3 years. Additional specific provision is made against trade receivables to the extent which they are considered to be doubtful.

    Bad debts are written off when identified. The Company does not accrue interest on trade receivables.

    Historically, losses from uncollectible accounts have not significantly deviated from the general allowance estimated by the management and no significant additional bad debts have been written off directly to the profit and loss. This general provisioning policy has not changed in the past since establishment and the management considers that the aforementioned general provisioning policy is adequate and not too excessive and they do not expect to change this established policy in the near future.

    Impairment of long-lived assets

    Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets. During the reporting periods, the Company has not identified any indicators that would require testing for impairment.

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    Financial guarantee issued

    The Company has acted as guarantor for bank loans granted to certain local authorities and certain business associates. The Company assessed its obligation under this guarantee pursuant to the provision of ASC 460 “Guarantee”. The Company recognized in its consolidated financial statements a liability for that guarantee at fair value at the date of inception and recognized as an expense in profit or loss immediately. The amount of guarantee liability is amortized in profit or loss over the term of the guarantee as income from financial guarantees issued.

    Revenue recognition

    Pure products sales - Sales revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to and accepted by customers, the sales price is fixed or determinable and collection is reasonably assured.

    Products sales with installation, testing, maintenance, repair and replacement - This kind of contract is signed as a whole such that all of these services are provided for one fixed fee, and it does not separate the components of products, installation, testing, maintenance, repair and replacement. After delivery of products/materials to customers, the Company will do the installation and testing works, which takes one to two days, before acceptance and usage by customers. The product life cycle is very short and can normally be used for 80 cycles of production by customers (about two to three days). Thereafter the customers will need maintenance, repair and replacement of the Company’s materials. For each maintenance, repair and replacement, the Company will supply materials and do the installation and testing works again, which are regarded as separate sales by the Company. In other words, the Company will have sales to this kind of customers every couple of days. This kind of sales revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the installation and testing works are completed and after acceptance by customers, the sales price is fixed or determinable and collection is reasonably assured.

    Stock-based compensation

    The Company adopted the provisions of ASC 718, which requires the use of the fair value method of accounting for share-based compensation. Under the fair value based method, compensation cost related to employee stock options or similar equity instruments which are equity-classified awards, is measured at the grant date based on the value of the award and is recognized over the requisite service period, which is usually the vesting period. ASC 718 also requires measurement of cost of a liability-classified award based on its current fair value.

    Recently issued accounting pronouncements

    In July 2010, the FASB issued ASU 2010-20 “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. The objective of ASU 2010-20 is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. Under ASU 2010-20, an entity is required to provide disclosures so that financial statement users can evaluate the nature of the credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed to arrive at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. ASU 2010-20 is applicable to all entities, both public and non-public and is effective for interim and annual reporting periods beginning on or after December 15, 2010. Comparative disclosure for earlier reporting periods that ended before initial adoption is encouraged but not required. However, comparative disclosures are required to be disclosed for those reporting periods ending after initial adoption. The adoption of this ASU has no material impact on the Company’s financial statements.

    The FASB issued ASU 2011-01 “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”. The amendments in this Update temporarily delay the effective date of the disclosure about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructuring for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The adoption of this ASU has no material impact on the Company’s financial statements.

    In April 2011, the FASB issued ASU 2011-02 “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”. The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debts in foreseeable future without the modification. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies – Loss Contingencies. The management is assessing the impact of this ASU on the Company’s financial statements.

    39


    In April 2011, the FASB issued ASU 2011-03 “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements”. The amendments in this ASU update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of this ASU has no material impact on the Company’s financial statements.

    In May 2011, the FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The FASB and the International Accounting Standard Board (IASB) work together to ensure that fair value has the same meaning in U.S. GAAP and IFRSs and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The Boards concluded that the amendments in this ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The management is assessing the impact of this ASU on the Company’s financial statements.

    In June 2011, the FASB issued ASU 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. In this ASU, the entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU are to be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application by public entities is permitted. The management is assessing the impact of this ASU on the Company’s financial statements.

    ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

    As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

    ITEM 4. CONTROLS AND PROCEDURES.

    Evaluation of Disclosure Controls and Procedures

    Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

    Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including our Chairman, Chief Executive Officer and President, Shunqing Zhang, our Chief Financial Officer, Ningfang Liang, our interim Chief Financial Officer, Hongfeng Jin, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of June 30, 2011. Based upon that evaluation, our management concluded that the material weakness in our disclosure controls and procedures, lack of sufficient accounting personnel with appropriate understanding of U.S. GAAP and SEC reporting requirements, which was disclosed under Item 9A-"Controls and Procedures- Management's Annual Report on Internal Control Over Financial Reporting" in the Company's Annual Report on Form 10-K filed with the SEC on March 31, 2011, and also Item 4-“Controls and Procedures-Evaluation of Disclosure Controls and Procedures” in the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 16, 2011, still exists.

    40


    We are committed to remediating the material weakness identified above. Because this material weakness was related to a lack of sufficient technical accounting expertise and knowledge of U.S. GAAP that are relevant to the Company’s financial reporting requirements, on June 30, 2011, we entered into an employment agreement with Mr. Ningfang Liang as our new Chief Financial Officer. Mr. Liang has over 15 years of finance and accounting experience, including over six years at U.S. public companies, where he managed SEC reporting, internal control, GAAP compliance, as well as internal auditing, financial analysis and management reporting activities. Mr. Liang is a licensed CPA in the states of New Jersey and Illinois and a member of the American Institute of Certified Public Accountants. We believe that the hiring of Mr. Liang who is experienced in and knowledgeable of U.S. GAAP will permit our senior financial management team, led by Mr. Liang, to increase its focus on our compliance with U.S. GAAP. In addition, since July 2010, we have conducted several internal training sessions for various members of our accounting staff relating to various subjects including understanding and application of US GAAP and communication skills such as English-language report writing. We believe our greater emphasis on the hiring and training of internal accounting staff and our improved internal audit procedures will substantially improve the effectiveness and reliability of our internal control over financial reporting for future periods.

    As a result of the material weakness described above, our CEO and CFO concluded that, as of June 30, 2011, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, or that such information is accumulated and communicated to the Company’s management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

    Changes in Internal Control Over Financial Reporting

    Other than as disclosed above, there were no changes in our internal controls over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

    Limitations on the Effectiveness of Controls

    Our disclosure controls and procedures provide our Chief Executive Officer and Chief Financial Officer with reasonable assurances that our disclosure controls and procedures will achieve their objectives. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within our company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.

    PART II - OTHER INFORMATION

    ITEM 1. LEGAL PROCEEDINGS.

    None for the period covered by this report.

    ITEM 1A. RISK FACTORS.

    As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

    ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

    We have not sold any equity securities during the fiscal quarter ended June 30, 2011.

    ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

    There were no defaults upon senior securities during the fiscal quarter ended June 30, 2011.

    ITEM 4. (REMOVED AND RESERVED)

    41


    ITEM 5. OTHER INFORMATION.

    None.

    ITEM 6. EXHIBITS.

    (a) Exhibits

    31.1

    Certification of the CEO

       
    31.2

    Certification of the CFO

       
    32.1

    Certification of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith.

       
    32.2

    Certification of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith.

       
    101.INS* 

    XBRL Instance Document

       
    101.SCH*

    XBRL Taxonomy Extension Schema Document

       
    101.CAL*

    XBRL Taxonomy Extension Calculation Linkbase Document

       
    101.DEF* 

    XBRL Taxonomy Extension Definition Linkbase Document

       
    101.LAB* 

    XBRL Taxonomy Extension Label Linkbase Document

       
    101.PRE* 

    XBRL Taxonomy Extension Presentation Linkbase Document

    * to be filed by Amendment

    42


    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 hereunto duly authorized.

      CHINA GENGSHENG MINERALS, INC.
       
    Date: August 15, 2011 By: /s/ Shunqing Zhang
      Shunqing Zhang
      Chief Executive Officer and Chairman
       
    Date: August 15, 2011 By: /s/ Ningfang Liang
      Ningfang Liang
      Chief Financial Officer
      (On behalf of the Registrant and as its Principal Financial Officer)

    43