UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 3)
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 3, 2011 (May 13, 2011)
SMSA Treemont Acquisition Corp.
(Exact name of registrant as specified in its charter)
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Nevada
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000-54096
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27-2969090 |
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(State or other jurisdiction
of incorporation)
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(Commission File Number)
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(IRS Employer Identification No.) |
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Ruixing Industry Park Dongping County
Shandong Province, Peoples Republic of China
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271509 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: 86-538-241-7858
174 FM 1830, Argyle, TX 76226
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, which reflect our views with respect to future
events and financial performance. These forward-looking statements are subject to certain
uncertainties and other factors that could cause actual results to differ materially from such
statements. These forward-looking statements are identified by, among other things, the words
anticipates, believes, estimates, expects, plans, projects, targets and similar
expressions. Readers are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date the statement was made. We undertake no obligation to update or
revise any forward-looking statements, whether as a result of new information, future events or
otherwise. Important factors that may cause actual results to differ from those projected include
the risk factors specified below.
USE OF DEFINED TERMS AND TREATMENT OF STOCK
Except as otherwise indicated by the context, references in this report to:
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SMSA, the Company, we, us, or our, refers to the combined business of
SMSA Treemont Acquisition Corp., and its wholly-owned subsidiaries, Xiangrui
Pharmaceutical International Limited, and Shandong Xiangrui Pharmacy Co., Ltd.; |
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SMSA refers to SMSA Treemont Acquisition Corp.; |
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Xiangrui refers to Xiangrui Pharmaceutical International Limited, a BVI company
and our direct, wholly owned subsidiary, and/or its direct and indirect
subsidiaries, as the case may be; |
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WFOE refers to Taian Yisheng Management & Consulting Co., Ltd., a PRC company
and our direct, wholly owned subsidiary, and/or its direct and indirect
subsidiaries, as the case may be; |
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Shandong Xiangrui refers to Shandong Xiangrui Pharmacy Co., Ltd., a PRC company; |
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China, Chinese and PRC, refer to the Peoples Republic of China; |
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BVI refers to the British Virgin Islands; |
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RMB refers to Renminbi, the legal currency of China; |
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U.S. dollar, $ and US$ refer to the legal currency of the United States; |
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Securities Act refers to the U.S. Securities Act of 1933, as amended; and |
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Exchange Act refers to the U.S. Securities Exchange Act of 1934, as amended. |
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ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
On May 13, 2011, we entered into a share exchange agreement (the Share Exchange Agreement) with
Xiangrui, and Mr. Chongxin Xu, the sole shareholder of Xiangrui. Pursuant to the Share Exchange
Agreement, on May 13, 2011, Mr. Xu transferred to us all of the shares of the capital stock of
Xiangrui in exchange for 12,363,885 newly issued shares of our common stock, which constituted 93%
of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after
the consummation of the transactions contemplated by the Share Exchange Agreement. Mr. Chongxin Xu
has no relationships with any members of the Companys management or its affiliates.
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
On May 13, 2011, we completed an acquisition of Xiangrui pursuant to the Share Exchange Agreement.
The acquisition was accounted for as a recapitalization effected by a share exchange. Xiangrui is
considered the acquirer for accounting and financial reporting purposes. The assets and liabilities
of the acquired entity have been brought forward at their book value and no goodwill has been
recognized.
FORM 10 DISCLOSURE
As disclosed elsewhere in this report, on May 13, 2011, we acquired Xiangrui in a reverse
acquisition transaction. Item 2.01(f) of Form 8-K states that if the registrant was a shell company
like we were immediately before the reverse acquisition transaction disclosed under Item 2.01, then
the registrant must disclose the information that would be required if the registrant were filing a
general form for registration of securities on Form 10.
Accordingly, we are providing below the information that would be included in a Form 10 if we were
to file a Form 10. Please note that the information provided below relates to the combined
enterprises after the acquisition of Xiangrui, except that information relating to periods prior to
May 13, 2011, the date of the reverse acquisition, only relate to Xiangrui unless otherwise
specifically indicated.
BUSINESS
Our Corporate Structure
We are a Nevada holding company for several direct and indirect subsidiaries in the BVI and China.
We own all of the issued and outstanding capital stock of Xiangrui, a BVI company. Xiangrui is a
holding company that owns 100% of the outstanding capital stock of WFOE, a PRC company, which has
contractual arrangements with Shandong Xiangrui and its shareholders that enable us to
substantially control Shandong Xiangrui.
The following chart reflects our organizational structure as of the date of this report.
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Our Corporate History
We were originally incorporated in the State of Nevada on May 3, 2010 to effect the reincorporation
of Treemont Management Services, Inc., a Texas corporation, mandated by the plan of reorganization
discussed below.
On January 17, 2007 Treemont Management Services, Inc. and its affiliated companies (collectively
SMS Companies), filed a petition for reorganization under Chapter 11 of the United States
Bankruptcy Code. On August 1, 2007, the bankruptcy court confirmed the First Amended, Modified
Chapter 11 Plan (the Plan), as presented by SMS Companies and their creditors. The effective date
of the Plan was August 10, 2007.
On May 12, 2011, the Company sold to New Fortress Group, Ltd., 400,000 restricted shares of common
stock at a price of $0.001 per share in consideration for in country due diligence services
provided to SMSA in connection with the evaluation of merits of the exchange transaction with
Xiangrui. Neither New Fortress Group, Ltd. nor its controlling shareholder, Mr. John Zhang, are
affiliated with Xiangrui. New Fortress Group, Ltd. has no continuing relationship with either SMSA
or Xiangrui, except in its capacity as a seven percent (7%) shareholder of the Company.
On May 13, 2011, we entered into the Share Exchange Agreement with Xiangrui and its sole
shareholder, Mr. Xu. Pursuant to the Share Exchange Agreement we issued 12,363,885 newly created
shares to Mr. Xu, and became the sole shareholder of Xiangrui. The shares we issued to Mr. Xu
constitute 93% of our issued and outstanding capital stock on a fully-diluted basis as of and
immediately after the consummation of the transactions contemplated by the Share Exchange
Agreement.
Upon the closing of the share exchange transaction, Mr. Timothy P. Halter, our sole director and
officer, submitted a resignation letter pursuant to which he resigned from all offices that he held
effective immediately and from his position as our director that will become effective on the tenth
day following the mailing by us of an information statement, or the Information Statement, to our
stockholders that complies with the requirements of Section 14f-1 of the Exchange Act. The
information statement was mailed out on or about May 18, 2011. Mr. Dianshun Zhang and Mr. Guangyin
Meng were appointed as our directors effective upon the closing of the reverse acquisition. In
addition, our executive officers were replaced by two of the Shandong Xiangrui executive officers,
namely Mr. Guo Wang and Mr. Qingtai Wang, upon the closing of the reverse acquisition as indicated
in more detail below. Effective July 12, 2011, Mr. Qingtai Wang resigned from his position as Chief
Financial Officer of our Company and was replaced by Mr. Wencai Pan. The announcement was made on
the Companys Current Report on Form 8-K filed on July 13, 2011.
The following table sets forth the names, ages and positions of our directors and executive
officers as of July 20, 2011:
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Name |
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Age |
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Position |
Guangyin Meng
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46 |
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Chairman and Director |
Dianshun Zhang
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56 |
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Director |
Guo Wang
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37 |
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Chief Executive Officer |
Qingtai Wang
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45 |
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Former Chief Financial Officer |
Wencai Pan
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34 |
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Chief Financial Officer |
Shoubing Tang
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44 |
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Vice President of Sales |
For accounting purposes, the share exchange transaction was treated as a reverse acquisition with
Xiangrui as the acquirer and SMSA as the acquired party. When we refer in this report to business
and financial information for periods prior to the consummation of the reverse acquisition, we are
referring to the business and financial information of Shandong Xiangrui on a single entity basis
unless the context suggests otherwise.
Background and History of Xiangrui and the WFOE
Xiangrui was incorporated in the British Virgin Islands on November 29, 2010. Xiangrui is a holding
company that has no operations or assets other than its ownership of all of the capital stock of
the WFOE. Mr. Chongxin Xu, a non-PRC citizen, the sole shareholder of Xiangrui, has no
relationships with any members of the Companys management or affiliates.
The WFOE was incorporated in China on May 6, 2011, as a wholly foreign owned enterprise in China,
with total registered capital of $20,000. The WFOEs business license is valid from May 6, 2011 to
May 3, 2031. The sole shareholder of the WFOE is Xiangrui. The registered capital shall be fully
contributed within 90 days of the issuance of the WFOEs business license on May 6, 2011. As of the
date of this Current Report, the registered capital of the WFOE has been fully contributed by
Xiangrui and its Entity Code Certificate has been obtained. The WFOEs business scope includes
enterprise management and consulting. The WFOE is still in the process of completing its tax
registration with the PRC government. We believe that the absence of such registration will not
affect the incorporation of the WFOE. Mr. Xu, the sole direct shareholder of Xiangrui and the sole
indirect shareholder of the WFOE, is acting as a nominee for Shandong Xiangruis direct and
indirect shareholders such that the latter may exercise control from outside the PRC over our
operating subsidiary, Shandong Xiangrui.
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The management of the WFOE consists of: (1) Mr. Zhongzhang Li, who simultaneously holds the
positions of legal representative, executive director and general manager, and (2) Mr. Zhiyong
Wang, the supervisor. Neither Mr. Zhongzhang Li nor Mr. Zhiyong Wang has any relationships with the
members of the Companys management or its affiliates. Pursuant to the applicable PRC laws and the
Articles of Association of the WFOE, Mr. Zhongzhang Li and Mr. Zhiyong Wang have limited decision
making powers as to major matters of the WFOE, which are exercised by the ultimate beneficial
owners of the WFOE, that is, the shareholders of Ruixing Group, who are also the ultimate
beneficial owners of Shandong Xiangrui.
The potential conflicts of interest of our WFOE with the interests of Shandong Xiangrui and our
affiliates are discussed in the section below entitled Risk Factors Risks Related to Our
Corporate Structure on page 25 of this Current Report.
The WFOE has entered into a series of contractual arrangements, agreements known as variable
interest agreements, with Shandong Xiangrui and its shareholders which enable us to substantially
control Shandong Xiangrui, through which we conduct our corn refinery business in China. These
contracts are discussed in more detail in the section below entitled VIE Arrangements.
Background and History of Shandong Xiangrui
Shandong Xiangrui was originally founded as a limited liability company on April 15, 2005 by five
shareholders: (1) Mr. Xuchun Wang, (2) Mr. Lingfa Huang, (3) Mr. Binglong Qiao, (4) Shandong
Ruixing Chemical Co., Ltd. (the former name of Ruixing Group, as discussed below), and (5) Mr. Guo
Wang, our current CEO, holding 2%, 8%, 2%, 86% and 2%, respectively, of the equity interests in
Shandong Xiangrui.
Mr. Xuchun Wang, Mr. Lingfa Huang, Mr. Binglong Qiao and Mr. Guo Wang are option right holders
under four option agreements. The Company understands that the Shandong Xiangrui shareholders were
advised that entering into the option agreements with Mr. Chongxin Xu would allow them to obtain
beneficial ownership of Xiangrui but reduce the risk that the governmental approval of the PRC
Ministry of Commerce, or MOFCOM, under the M&A Rule, which the Shandong Xiangrui shareholders had
not obtained, could be required under PRC law. The particular details of the Chinese regulatory
environment concerning the Companys restructuring options are discussed in more detail below in
the section entitled Government Approvals and Regulations SAFE Regulations on Round Trip
Investments. For the risks involved in this type of arrangement and a discussion of the M&A Rule,
refer to the section entitled Risk Factors If the China Securities Regulatory Commission, or
CSRC, or another PRC regulatory agency determines that CSRC or other approval is required in
connection with the reverse acquisition of Xiangrui, the reverse acquisition may be unwound, or we
may become subject to penalties. on page 24 of this Current Report. These option agreements are
discussed in more detail in the section below entitled Option Agreements.
On March 2, 2006, Shandong Xiangrui was issued a new business license amending its name from its
former name Shandong Ruixing Starch Co., Ltd. to its current name Shandong Xiangrui Pharmacy
Co., Ltd. According to an equity transfer agreement dated December 20, 2008, Ruixing Group agreed
to transfer its entire equity interests in Shandong Xiangrui to Mr. Xuchun Wang who acted for and
on behalf of the shareholders of Ruixing Group as a whole, except to the extent of his pecuniary
interest therein as a shareholder of Ruixing Group, for consideration of RMB
17,200,000(approximately US$ 2.7 million). The transfer was completed on December 26, 2008,
resulting in a change of shareholding of Shandong Xiangrui with Mr. Xuchun Wang, Mr. Lingfa Huang,
Mr. Binglong Qiao and Mr. Guo Wang holding 88%, 8%, 2% and 2%, respectively, of the equity
interests in Shandong Xiangrui. Mr. Xuchun Wang disclaims the beneficial ownership with respect to
86% equity interests held for and on behalf of the shareholders of Ruixing Group as a whole, except
to the extent of his pecuniary interest therein as a shareholder of Ruixing Group, and the
shareholders of Ruixing Group have the sole voting and investment powers over such equity
interests. As Mr. Lingfa Huang, Mr. Binglong Qiao and Mr. Xuchun Wang are shareholders of Ruixing
Group, the shareholders of Ruixing Group are holding, directly and indirectly, 98% in aggregate of
the equity interests in Shandong Xiangrui. The shareholders of Ruixing Group are also the ultimate
beneficial owners of Xiangrui and the WFOE. Therefore, the interest of Shandong Xiangrui aligns
with the interest of Xiangrui and the WFOE given the same ultimate beneficial ownership.
Shandong Xiangrui has operated in the corn refinery industry since its establishment in 2005.
Shandong Xiangruis business scope has remained the same before and after both the name change and
the share transfer. Shandong Xiangruis total registered capital is RMB 20,000,000 ($3.1 million),
which was fully paid on April 8, 2005. Of the payment of registered capital, RMB 17,200,000 ($2.7
million) was paid by Shandong Ruixing Chemical Co., Ltd. in the form of tangible goods, Mr. Lingfa
Huang contributed RMB 1,600,000 ($250,528), and Mr. Xuchun Wang, Mr. Binglong Qiao and Mr. Guo Wang
each respectively contributed RMB 400,000 ($62,632).
The board of directors of Shandong Xiangrui is composed of Mr. Guangyin Meng, Mr. Yanpeng Zhao and
Mr. Lingfa Huang. In addition to the board of directors, Mr. Guo Wang, as CEO and Mr. Wencai Pan,
as CFO also participate in the day to day management of Shandong Xiangrui. Our former CFO Mr.
Qingtai Wang served as the CFO of Shandong Xiangrui from 2009 until July 12, 2011 when Mr. Wencai
Pan assumed the position as CFO of our Company.
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The following table sets forth the names, ages and positions of the directors and executive
officers of Shandong Xiangrui as of July 20, 2011:
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Name |
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Age |
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Position |
Guangyin Meng
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46 |
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Director |
Yanpeng Zhao
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44 |
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Director |
Lingfa Huang
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43 |
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Director, Legal Representative, General Manager |
Qinghua Meng
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41 |
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Supervisor |
Guo Wang
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37 |
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Chief Executive Officer |
Qingtai Wang
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45 |
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Former Chief Financial Officer |
Wencai Pan
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34 |
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Chief Financial Officer |
Shoubing Tang
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44 |
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Vice President of Sales |
Background and History of the Affiliated Companies
Ruixing Group Co., Ltd. (Ruixing Group), was incorporated in China on October 24, 2003 under its
former name Shandong Ruixing Chemical Co., Ltd. Shandong Ruixing Chemical Co., Ltd.s name was
changed to Ruixing Group Co., Ltd. on September 6, 2007. Ruixing Group is principally engaged in
the industries of electricity generation and chemical products manufacturing. Ruixing Group has
been engaged in these industries since its establishment on December 24, 2003. The following
persons hold equity interests in Ruixing Group: Mr. Guangyin Meng, 41.67%; Mr. Dianshun Zhang,
2.08%; Mr. Lingfa Huang, 2.40%; Mr. Binglong Qiao, 2.29%; Mr. Xuchun Wang, 1.53%; and Mr. Qintai
Wang, 1.53%. The management of Ruixing Group consists of: Mr. Guangyin Meng, as chairman and CEO;
Mr. Dianshun Zhang, as director and vice president; Mr. Lingfa Huang, as director; Mr. Binglong
Qiao, as vice president of the purchasing department; and Mr. Xuchun Wang, as a manager in the
production department. None of the Companys other executive officers hold any positions or have
any interest in Ruixing Group.
Shandong Runyin Bio-chemical Co., Ltd. (Runyin Bio-chemical), was incorporated in China on
November 8, 1993 and is principally engaged in chemical products manufacturing. Runyin
Bio-chemicals major shareholder is Ruixing Group, which holds 84.38% of its total equity
interests. The following persons indirectly hold equity interests in Runyin Bio-chemical through
their ownership interests in Ruixing Group: Mr. Guangyin Meng, 35.16%; Mr. Dianshun Zhang, 1.75%;
Mr. Lingfa Huang, 2.03%; Mr. Binglong Qiao, 1.93%; and Mr. Xuchun Wang, 1.29%. Mr. Xuchun Wang has
a direct ownership of 0.23%. Our former CFO Mr. Qingtai Wang directly holds 0.05% and through
Ruixing Group indirectly holds 1.29% of Runyin Bio-chemicals total equity interests. Our chairman
Mr. Guangyin Meng and our director Mr. Dianshun Zhang also hold the positions of chairman and
director, respectively, in Runyin Bio-chemical. None of the Companys other executive officers hold
any positions or have any interest in Runyin Bio-chemical.
Shandong Xinrui Chemical Devices Co., Ltd. (Xinrui Chemical), was incorporated in China on May
31, 2006 and principally engages in chemical installment and repairing of water supply and drainage
devices, heating and ventilation machinery, construction lighting and also manufacturing of
chemical products. Our chairman Mr. Guangyin Meng is a director of Xinrui Chemical. None of the
Companys other directors or executive officers hold any positions or have any interest in Xinrui
Chemical.
The term in office that each of our directors and executive officers has served in each of our
affiliate companies is detailed below in the section entitled Directors and Executive Officers.
We do not currently share office space, facilities, employees and general administrative expenses
with our affiliated entities. Ruixing Group, Runyin Bio-chemical and Xinrui Chemical are under
common control of our Company by virtue of our chairman Mr. Guangyin Mengs concurrent executive
positions in each of the respective affiliates. Mr. Meng also holds more than ten percent equity
interests in Ruixing Group and Runyin Bio-chemical, respectively. As disclosed above, our other
directors and executive officers also hold executive positions and have equity interests in our
affiliates. Runyin Bio-chemical and Xinrui Chemical support our business and operations by
providing utilities that are necessary for the manufacturing of our products. The total energy
costs represent approximately 7.5% of our product costs, among which electricity accounts for
approximately 2.5% while steam accounts for approximately 5%. Our affiliates have also provided
cross guarantees under certain loan agreements entered into by Shandong Xiangrui. Refer to the
section entitled Risk Factors The directors, executive officers, shareholders and ultimate
beneficial shareholders of our variable interest entity and our affiliates may have potential
conflicts of interest with us, which may materially and adversely affect our business and financial
condition on page 27 of this Current Report.
VIE Arrangements
Foreign ownership of companies within the corn refinery industry is subject to significant
restrictions under current PRC laws and regulations.
Every foreign investment in China falls into one of four categories, which are (i) encouraged, (ii)
permitted, (iii) restricted, and (iv) prohibited. The guidelines under which industries are
classified are quite specific, and are outlined in the 2007 amendment of the Foreign Investment
Industrial Guidance Catalogue, or the Catalogue. Pursuant to the Catalogue, the corn refinery
industry is a
restricted industry for foreign investment. Restricted industries are subject to higher-level
government approvals, i.e., by the Ministry of Commerce. The process to obtain such approvals is
time-consuming and uncertain.
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In addition, in February 2011, the State Council and the Ministry of Commerce respectively
promulgated regulations that require national security review on mergers and acquisitions and
obtaining of control by foreign investors of domestic enterprises in significant or sensitive
industries. Industries that fall within the scope of these regulations will be subject to review by
the Ministry of Commerce. The review process is time-consuming and uncertain. Moreover, because
these regulations were recently promulgated, the scope of the regulations and the effect of their
enforcement remain unclear. There is uncertainty, for example, as to whether the corn refinery
industry falls within the scope of a significant or sensitive industry subject to national security
review.
In order to comply with these foreign ownership restrictions, we conduct our operations in China
through our variable interest entity, Shandong Xiangrui. On May 9, 2011, the WFOE, the wholly-owned
subsidiary of Xiangrui, entered into a series of variable interest entity contractual agreements
(the VIE Agreements) with Shandong Xiangrui and the shareholders of Shandong Xiangrui namely, Mr.
Xuchun Wang, Mr. Lingfa Huang, Mr. Binglong Qiao and Mr. Guo Wang, or the Shandong Xiangrui
shareholders, who are all PRC citizens. Pursuant to the VIE Agreements, we control Shandong
Xiangrui. The VIE Agreements are comprised of a series of agreements, including an Exclusive
Technical and Consulting Service Agreement, Management Fee Payment Agreement, Equity Interest
Pledge Agreement, Exclusive Equity Interest Purchase Agreement, Operating Agreement and Proxy
Agreement. Through these agreements the WFOE has the right to advise, manage and operate Shandong
Xiangrui for an annual consulting service fee in an amount equal to Shandong Xiangruis yearly net
income before tax. In order to further reinforce the WFOEs rights to control Shandong Xiangrui,
the Shandong Xiangrui shareholders have entrusted their shareholders rights in Shandong Xiangrui
to a person to be designated by the WFOE.
The terms of the VIE Agreements are more fully described below:
Exclusive Technical and Consulting Service Agreement
The WFOE and Shandong Xiangrui have entered into an Exclusive Technical and Consulting Service
Agreement. This agreement provides that the WFOE will be the exclusive provider of technical and
consulting services to Shandong Xiangrui. The annual consulting service fee is one hundred percent
of the pre-tax net income of Shandong Xiangrui for each year for twenty-five years. Shandong
Xiangrui agrees to reimburse all the WFOEs costs, except income tax, related to performance of the
agreement and surrenders all rights held by it in any intellectual property arising out of
performance of this agreement. Any payment to the WFOE would need to comply with applicable Chinese
laws affecting payments from Chinese Companies to foreign companies. See Risk Factors Risks
Related to Doing Business in China on page 22 of this Current Report.
Management Fee Payment Agreement
The WFOE, Shandong Xiangrui and the Shandong Xiangrui shareholders have entered into a Management
Fee Payment Agreement for a term of twenty-five years. Under this agreement, the Shandong Xiangrui
shareholders have agreed to pay the WFOE a management fee in an amount equal to a transfer fee that
the Shandong Xiangrui shareholders will receive from the WFOE if the WFOE exercises its purchase
right under the Exclusive Equity Interest Purchase Agreement. According to the Exclusive Equity
Interest Purchase Agreement, the transfer fee payable by the WFOE shall not be significantly lower
than the value of the net assets of Shandong Xiangrui, as determined by an appraiser. Such payment
would be in consideration of the management and proxy services performed by the WFOE under the VIE
Agreements.
Exclusive Equity Interest Purchase Agreement
The WFOE, Shandong Xiangrui and the Shandong Xiangrui shareholders have entered into an Exclusive
Equity Interest Purchase Agreement. Under this agreement the Shandong Xiangrui shareholders
irrevocably grant the WFOE the exclusive right, over the term of twenty-five years, to purchase or
designate another person to purchase the equity interest in Shandong Xiangrui from the Shandong
Xiangrui shareholders. When the purchase right is exercised, the transfer fee payable by the WFOE
shall not be significantly lower than the value of the net assets of Shandong Xiangrui, as
determined by an appraiser. Compliance with Chinese laws is a condition precedent to exercise of
the purchase right by the WFOE. Moreover, Shandong Xiangrui agrees that, without the prior consent
of the WFOE, Shandong Xiangrui will not engage in any transactions that could materially affect its
equity structure, obligations, rights or operations, including assumption of indebtedness,
incurrence of encumbrance on its assets or entry into a material agreement outside the ordinary
course of business. The Shandong Xiangrui shareholders agree that without the prior consent of the
WFOE, the Shandong Xiangrui shareholders will not sell or mortgage their equity interests in
Shandong Xiangrui and will also exercise reasonable efforts to prevent the other shareholders of
Shandong Xiangrui from effecting any change of control of Shandong Xiangrui.
Equity Interest Pledge Agreement
The WFOE and the Shandong Xiangrui shareholders have entered into an Equity Interest Pledge
Agreement for a term of twenty-five years. Under this agreement, the Shandong Xiangrui shareholders
pledge one hundred percent of their equity interests in Shandong Xiangrui, respectively, as
security for the WFOEs collection of 100% of the pre-tax net income of Shandong Xiangrui according
to the terms of the Exclusive Technical Consulting Service Agreement. Shandong Xiangrui agrees to
bear all expenses including tax
burdens relating to the performance of this agreement. This agreement entitles the WFOE to collect
dividends from Shandong Xiangrui during the term of the pledge. Any foreclosure on the pledge would
need to comply with applicable Chinese laws affecting one hundred percent equity transfers between
Chinese companies and foreign companies. The pledge was recorded with the Dongping County
Administration of Industry and Commerce on May 13, 2011.
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Operating Agreement
Pursuant to the Operating Agreement among the WFOE, Shandong Xiangrui and the Shandong Xiangrui
shareholders, the WFOE agrees to serve as the guarantor for Shandong Xiangrui in all contracts
between Shandong Xiangrui and third parties that relate to Shandong Xiangruis operation, for a
term of twenty-five years. Shandong Xiangrui in turn agrees to pledge all account receivables
arising out of its operation, equipments and other operating assets to the WFOE. Furthermore, the
Operating Agreement provides that the WFOE may direct the day to day operations of Shandong
Xiangrui through the provision of management services and that Shandong Xiangrui and the Shandong
Xiangrui shareholders shall appoint directors and senior management of Shandong Xiangrui according
to the WFOEs recommendations. Moreover, Shandong Xiangrui agrees that, without the prior consent
of the WFOE, Shandong Xiangrui will not engage in any transactions that could materially affect its
assets, obligations, rights or operations, including assumption of indebtedness, incurrence of
encumbrance on any of its assets in favor of a third party or assignment of agreements relating to
its operation to any third party.
Proxy Agreement
The WFOE, Shandong Xiangrui and the Shandong Xiangrui shareholders have entered into a Proxy
Agreement with a term of twenty-five years. Under this agreement, the Shandong Xiangrui
shareholders agree to irrevocably entrust the person designated by the WFOE with their shareholder
rights in Shandong Xiangrui. In order for the parties to perform their obligations under the VIE
Agreements, the Proxy Agreement provides that the WFOEs designee may attend shareholder meetings
and execute resolutions, sell or pledge the shareholders respective equity interests in Shandong
Xiangrui and vote for directors, executive officers and other personnel of Shandong Xiangrui.
As a result of the VIE Agreements described above, we will included Shandong Xiangruis historical
financial results in our consolidated financial statements as a variable interest entity pursuant
to U.S. GAAP following the date of the VIE Agreements. We have also consolidated such results prior
to the date of the VIE Agreements in our Pro Forma financial information. As of the date of this
Current Report, the WFOE has not yet appointed directors or management of Shandong Xiangrui
according to the Operating Agreement. The original directors and management of Shandong Xiangrui
prior to the share exchange transaction continue to serve in their respective positions at Shandong
Xiangrui as of the date of this Current Report. The right to appoint directors and management under
the VIE Agreements was designed to enable the WFOE to directly control Shandong Xiangrui.
Option Agreements
Four option agreements have been entered into between Mr. Chongxin Xu, the sole shareholder of
Xiangrui prior to the exchange, and the Shandong Xiangrui shareholders, dated May 13, 2011. Under
these agreements, each of the optionees has an option to purchase the capital stock in the Company
held by Mr. Xu at any time during the period commencing on the 90th day following the signing date
of the option agreements and ending on the second anniversary of the signing date of the option
agreements, at an aggregate exercise price of twenty thousand U.S. dollars ($20,000). Moreover,
during the term of the option agreements, Mr. Xu has agreed that he will not transfer, dispose of
or encumber the option shares held by him. Mr. Xu agrees that he will not, without the prior
approval of the optionees, vote the option shares with regard to Xiangrui or any direct or indirect
subsidiary or affiliate of Xiangrui, in respect of, change of control, increase of authorized
shares, payment of dividends, liquidation or dissolution, and other material changes to the
operation and day-to-day businesses of the respective companies. The terms of the option agreements
are more fully described below:
|
|
On May 13, 2011, Mr. Xu and Mr. Xuchun Wang entered into an option
agreement pursuant to which Mr. Wang has the option to purchase ten
million eight hundred eighty thousand two hundred nineteen
(10,880,219) shares of the capital stock of our Company currently held
by Mr. Xu representing 81.84% of the issued and outstanding capital
stock of our Company. The exercise price of the option is $0.001 per
share, for an aggregate purchase price of $17,600. The option vests
and becomes exercisable on the 90th day following the
execution date of the option agreement. The option has a term of 2
years. Out of the total 10,880,219 shares to be acquired upon exercise
of the option, 247,278 shares representing 1.86% of the issued and
outstanding capital stock of our Company shall be held by Mr. Xuchun
Wang for himself and 10,632,941 shares representing 79.98% of the
issued and outstanding capital stock of our Company shall be held by
Mr. Xuchun Wang for and on behalf of the shareholders of Ruixing Group
as a whole, except to the extent of his pecuniary interest therein as
a shareholder of Ruixing Group, according to an oral arrangement
between Mr. Wang and the shareholders of Ruixing Group. Upon receipt
of the instruction to exercise the option from the shareholders of
Ruixing Group, which decision shall be made by the majority in
interest of the shareholders of Ruixing Group, Mr. Wang shall exercise
the option accordingly. Upon the exercise of the option Mr. Xuchun
Wang would hold 79.98% of the issued and outstanding capital stock of
our Company for and on behalf of the shareholders of Ruixing Group as
a whole, except to the extent of his pecuniary interest therein as a
shareholder of Ruixing Group. |
8
|
|
On May 13, 2011, Mr. Xu and Mr. Lingfa Huang entered into an option
agreement pursuant to which Mr. Huang has the option to purchase nine
hundred eighty nine thousand one hundred twelve (989,112) shares of
the capital stock of our Company currently held by Mr. Xu representing
7.44% of the issued an outstanding capital stock of our Company. The
exercise price of the option is $0.001 per share, for an aggregate
purchase price of $1,600. The option right vests and becomes
exercisable on the 90th day following the execution date of
the option agreement. The option has a term of 2 years. |
|
|
|
On May 13, 2011, Mr. Xu and Mr. Guo Wang, our current CEO, entered
into an option agreement pursuant to which Mr. Wang has the option to
purchase two hundred forty seven thousand two hundred seventy seven
(247,277) shares of the capital stock of our company currently held by
Mr. Xu representing 1.86% of the issued an outstanding capital stock
of our Company. The exercise price of the option is $0.001 per share,
for an aggregate purchase price of $400. The option right vests and
becomes exercisable on the 90th day following the execution
date of the option agreement. The option has a term of 2 years. |
|
|
|
On May 13, 2011, Mr. Xu and Mr. Binglong Qiao entered into an option
agreement pursuant to which Mr. Qiao has the option to purchase two
hundred forty seven thousand two hundred seventy seven (247,277)
shares of the capital stock of our company currently held by Mr. Xu
representing 1.86% of the issued an outstanding capital stock of our
Company. The exercise price of the option is $0.001 per share, for an
aggregate purchase price of $400. The option right vests and becomes
exercisable on the 90th day following the execution date of
the option agreement. The option has a term of 2 years. |
The relationships between the optionees and members of our management and affiliates are discussed
in more detail in the section above entitled Business.
Our Business
Principal Products and Distribution
We operate in the corn-refinery industry. We are a producer of pharmaceutical- and food-grade
refined corn products for the domestic China market and are headquartered in Shandong Province in
China. We purchase raw corn from corn growers located near us in Shandong Province, and refine the
corn at our plant into corn starch and glucose. Corn starch and glucose are our principal products,
and contributed 78.4% and 21.2%, respectively, to our total revenues in calendar year 2010.
Our customers are located primarily in Shandong Province. We sell products constituting
approximately 90% of our revenues through our direct sales force, with the remaining 10% sold to
distributors. Our principal customers purchase corn starch and glucose products for use in the food
and beverages as well as the pharmaceuticals industries, which together constituted approximately
66.5% of our 2010 revenue. Our other corn-refined products are principally sold to the animal feed
industry, which accounted for approximately 17.9% of our 2010 revenue. Sales of our products to the
industrial manufacturing sector accounted for approximately 9.0% of our 2010 revenue.
Competitive Strengths
We are a corn processor located in Shandong province. Corn is one of the highly cultivated crops
globally, and in China, corn is the second largest crop. There are more than 1,000 types of
corn-based products in the world which are widely used in food, beverages, animal feed, and
industrial production. The corn refinery industry has witnessed rapid growth recently, with total
sales of Chinas corn refinery industry having grown at a compound annual growth rate of 35.7%
during the period from 2005 to 2010, 2010 China Corn Refinery Industry Analysis Report (the
Report) issued by Beijing Wisdom Information Consulting Co., Ltd. The Report can be purchased
online at the research institutions website (http://www.cninfo360.com). The Report is only
available in Chinese. According to the Report, the total sales of Chinas corn refinery industry
are projected to reach $138.3 billion in 2015 from $62.5 billion in 2011, representing a compound
annual growth rate of 22.0%. Chinas corn refinery industry is highly competitive. In the corn
refinery industry, companies compete on price, quality and product availability. The Report states
that Chinas five largest corn refinery companies account for approximately 19% of Chinas total
corn processing capacity. Our production capacity accounts for less than 1% of Chinas total corn
processing capacity.
We believe that the following strengths enable us to compete effectively in and to capitalize on
this growing corn refinery industry in China:
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|
|
Strategic location. Our factory is strategically located in Shandong
province. Shandong province became Chinas largest corn producer in
2010 and accounted for 11.7% of Chinas total corn output. We believe
this strategic location allows us better access to corn suppliers at a
lower transportation cost than other corn refinery factories located
outside Shandong province. |
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|
|
|
Entry Barrier. In 2010, we had an annual production capacity of 80,000
tonnes. As of the date of this Current Report we have an annual
production capacity of 120,000 tonnes. The National Development and
Reform Commission of China (NDRC), which formulates and implements
strategies of national economic and social development, has issued
policies to ensure the healthy development of Chinas corn refinery
industry in an environmentally friendly and sustainable way. The NDRC
has commanded small-scale corn refinery factories without waste water
treatment systems to cease operation and halted approval of new
small-scale corn refinery projects. These policies establish a higher
entry barrier for Chinas corn refinery industry. We have complied
with the mandated environmental requirements and are equipped with
waste water treatment facilities. |
9
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|
|
Business to business sales model. We use a business to business
sales model and sell more than 90% of our products to end users of our
products directly. We believe this sales model enables us to better
manage our supply chain and reduce distribution costs. Selling
directly to end users also better equips us to gather information on
consumption of our products and make more effective production
decisions. Moreover, it encourages us and our end users to establish a
long-term business relationship which may provide stability in our
sales. |
|
|
|
|
GMP Certification. As required by the State Foods and Drugs
Administration of China (SFDA), only good manufacturing practice
(GMP) certified factories can produce pharmaceutical grade
crystalline glucose in China. We have a GMP certified crystalline
glucose production line. |
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|
Quality Standards. Manufacturing of certain corn-based products
requires certain approvals, licenses and certifications issued by
relevant governmental authorities. Securing approvals, licenses and
certifications can be an entry barrier for new businesses. We have
secured relevant approvals, licenses and certifications for our
products. For manufacturing and sale of corn starch and related
products, we hold a Food Sanitary License issued by the Dongping
County Sanitation Administration and a National Industrial Product
Manufacturing License issued by the Quality and Technology Supervision
Bureau of Shandong Province. For the glucose we produce for medical
use, we hold a Drug Manufacturing License issued by the Shandong Food
and Drug Administration and a Certificate of Good Manufacturing
Practices for Pharmaceutical Products of the PRC issued by the
Shandong Food and Drug Administration. For procurement of raw
materials, we hold a License for Grain Procurement issued by the
Dongping County Administration of Grain. The terms of these licenses
and certifications are detailed in the sections below entitled
Licenses and Government Approvals and Regulations. |
|
|
|
|
Experienced Management Team. Our senior management team has extensive
experience in the corn refinery industry. A majority of our senior
management team members have been with us since the formation of
Shandong Xiangrui. Mr. Guangyin Meng, our chairman, has nearly twenty
years of experience in the agricultural industry. Mr. Dianshun Zhang,
our director, has over twenty years of experience in the agricultural
industry. Mr. Guo Wang, our CEO, has nearly ten years of experience in
the agricultural industry. For details of the experience and
qualifications of our directors and senior officers refer to the
section entitled Directors and Executive Officers. |
Research and Development
Our research and development team, or R&D team, consists of six full time staff that mainly focus
on developing better waste water treatment technology, improving the product quality of our corn
starch and glucose, and conducting feasibility studies of new products. We spent approximately
12,480 man-hours on R&D in the last two fiscal years. In 2010, we spent approximately $30,000 on
R&D, which was mainly for labor costs of our six research staff. We did not make an expenditure on
R&D in 2009.
Raw Materials
Our principal raw material is corn kernels, which we procure principally from individual farmers
close to our plant in Dongping County, Shandong Province and nearby counties in Shandong Province.
In general, we do not enter into long-term supply contracts for our corn kernel purchases, in order
to provide us with flexibility in purchasing corn kernels at competitive prices. We anticipate that
we will be able to obtain sufficient supply of corn kernels, because (a) our plant is strategically
located in Dongping County, Shandong Province, which is the top corn growing province in China; (b)
in the second quarter of 2011 we entered into corn kernel supply agreements with four enterprises,
namely Taian Branch of China Grain Reserves Corporation, Jinan Jinliang Grains Storage Co., Ltd.,
Shanghai Yihai Commerce & Trade Co., Ltd., and Zhongjiao Grain and Oil Storage Center, Qingdao
Tariff-free Area. Pursuant to such agreements, the corn kernels purchased from such enterprises
account for approximately 60% of those ordinarily consumed by our Company. Under these supply
agreements, a stable supply of corn kernels at market prices can be guaranteed to us during the low
season of corn supply starting in July to September. These agreements have been filed as exhibits
10.22, 10.23, 10.24 and 10.25 to this Current Report. For risks relating to the supply of raw
materials, refer to the section entitled Risk Factors Significant fluctuations in raw material
prices may have a material adverse effect on us on page 18 of this Current Report.
Major Customers
Our sales are based on purchase orders with our customers. Sales to our top ten customers
represented 30.8% and 22% of our total revenues in 2010 and 2009 respectively. Sales to Shandong
Sanxing Corn Technology, our biggest customer in terms of sales, accounted for 5.9% of our total
revenues in 2010. No single customer accounted for more than 10% of our revenues in 2010 and 2009.
10
The following tables set forth our top ten customers in 2010 and 2009.
2010 top ten customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
|
Sales |
|
Client |
|
Product |
|
(tonnes) |
|
|
Contribution |
|
Shangdong Sanxing Corn Technology |
|
Corn Starch |
|
|
5200 |
|
|
|
5.9 |
% |
Hunan Hongyingxiang Biology |
|
Corn Starch |
|
|
4680 |
|
|
|
4.6 |
% |
Qupu Pharmacy |
|
Corn Starch |
|
|
4300 |
|
|
|
4.3 |
% |
Linyi Lihua Paper |
|
Corn Starch |
|
|
1630 |
|
|
|
1.6 |
% |
Yishui Hengye Commerce |
|
Corn Starch |
|
|
2250 |
|
|
|
3.3 |
% |
Yanzhou Minhe Forage |
|
Corn Starch |
|
|
1980 |
|
|
|
2.9 |
% |
Dongying Xiaguang Chemical Engineering |
|
Corn Starch |
|
|
2500 |
|
|
|
2.5 |
% |
Shandong Hualu Pharmacy |
|
Glucose |
|
|
1600 |
|
|
|
2.1 |
% |
Jinhu Xinyuan Starch Adhesive |
|
Corn Starch |
|
|
1970 |
|
|
|
1.9 |
% |
Shandong Quanrun Paper |
|
Corn Starch |
|
|
1760 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
30.8 |
% |
|
|
|
|
|
|
|
|
|
|
2009 top ten customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
|
Sales |
|
Client |
|
Product |
|
(tonnes) |
|
|
Contribution |
|
Qupu Pharmacy |
|
Corn Starch |
|
|
2950 |
|
|
|
5.3 |
% |
Baolingbao Biology |
|
Corn Starch |
|
|
2450 |
|
|
|
4.4 |
% |
Guizhou Kelun Pharmacy |
|
Glucose |
|
|
481 |
|
|
|
1.2 |
% |
Shandong Lukang Pharmacy |
|
Glucose |
|
|
670 |
|
|
|
1.8 |
% |
Jinhu Xinyuan Starch Adhesive |
|
Corn Starch |
|
|
980 |
|
|
|
1.7 |
% |
Wuxi Saide Biological Engineering |
|
Corn Starch |
|
|
675 |
|
|
|
1.2 |
% |
Shandong Qifa Pharmacy |
|
Corn Starch |
|
|
940 |
|
|
|
1.7 |
% |
Hunan Hongyingxiang Biology |
|
Corn Starch |
|
|
880 |
|
|
|
1.6 |
% |
Shandong Hualu Pharmacy |
|
Glucose |
|
|
600 |
|
|
|
1.6 |
% |
Anhui Huanqiu Pharmacy |
|
Glucose |
|
|
556 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements
Patents
We have developed technology and know-how in our manufacturing activities but have not patented our
technology and know-how. On January 1, 2009, Ruixing Group and the Company entered into a Patent
License Agreement. We currently hold a license (Patent Number ZL 200320121543.6) granted by Ruixing
Group Co., Ltd. to use its patent for Upflow Anaerobic Sludge Blanket from January 1, 2009 to
January 1, 2019. We obtained the license for free. The Upflow Anaerobic Sludge Blanket license is a
waste water treatment technology license. With such technology, the Company is able to recycle
waste water that comes from the production process of corn starch so that the water meets the
chemical oxygen demand (COD) standard required by the Chinese government. Possessing a qualified
waste water treatment facility and water treatment technology is crucial in the corn refinery
industry as the government of China intends to shut down small factories that operate without the
required waste water treatment systems.
Franchises, Concessions, Royalty Agreements
We currently hold no franchise, concession, or royalty agreements with third parties.
Trademarks
We sell our corn starch and other corn based products under the trademark Ruixing Pinghu and the
following logo
, with Trademark Numbers 3481175, 4505548 and 4671028.
The trademark and logo were
licensed to us for use from January 1, 2008 to January 1, 2018 by Ruixing Group, pursuant to the
Trademark License Agreement entered into between the Company and Ruixing Group on January 1, 2008.
We obtained the licenses for the trademark and logo for free.
We sell our pharmaceutical grade crystalline glucose products under the trademark Xiangxing.
11
Licenses
Drug Manufacturing License
The Company currently holds a Drug Manufacturing License (Ref: Lu Ha 20100011) with a term from
July 18, 2010 to July 17, 2015. The license was issued by the Shandong Food and Drug Administration
and the scope includes bulk drugs.
Food Sanitary License
The Company currently holds a Food Sanitary License (Ref: Lu Wei Shi Zheng Zi (2009) No.
370923-000165) with a term from February 26, 2009 to February 25, 2013. The license was issued by
the Dongping County Sanitation Administration and the scope includes the sale of corn starch and
related products.
National Industrial Product Manufacturing License
The Company currently holds a National Industrial Product Manufacturing License (Ref: QS 3709 2301
0032) with a term from May 18, 2009 to June 18, 2012. The license was issued by the Quality and
Technology Supervision Bureau of Shandong Province and the scope includes starch and starch
products.
Certificate of Good Manufacturing Practices for Pharmaceutical Products of the PRC
The Company currently holds a Certificate of Good Manufacture Practices for Pharmaceutical Products
of the PRC (Ref: Lu K0595), with a term from June 18, 2009 to June 17, 2014. The license was issued
by the Shandong Food and Drug Administration and the scope includes inspection of bulk drugs
(glucose).
Certificate of Fodder Manufacturer Investigation
The Company currently holds a Certificate of Fodder Manufacturer Investigation (Ref: Lu Si Shen
(2009)09043) dated August 20, 2009. The certificate was issued by the Shandong Animal Husbandry and
Veterinary Bureau and the product class includes single fodder (corn gluten and corn bran). If any
enterprise fails to make an annual filing with the relevant authority, and such failure has
continued for 2 years, the authority may issue a notice to the enterprise requiring it to make an
annual filing. Under such circumstances, if the enterprise still fails to make the annual filing,
such certificate will be revoked. We are in the process of applying for the 2011 certificate.
License for Grain Procurement
The Company currently holds a License for Grain Procurement (Ref: Lu 1860007.0) issued by the
Dongping County Administration of Grain. The term of this license is from January 6, 2011 to
January 6, 2013.
Sewage Discharge Permit
The Company currently holds a Sewage Discharge Permit (Ref. No.: Lu Huan Xu Zi No. 370923009-1)
issued on January 5, 2011 by the Dongping County Environmental Protection Bureau. The term of this
permit is from January 2011 to December 2012.
Government Approvals and Regulations
Because our operating subsidiaries are located in the PRC, we are subject to extensive PRC
governmental laws and regulations relating to licensure, conduct of operations, ownership of
facilities and land use rights, employment, tax, foreign exchange and environmental compliance. We
believe that we are in material compliance with all PRC laws, rules or regulations relating to our
operations in the PRC.
Regulations of Variable Interest Entities
Under PRC law, the following government registrations and filings are required in connection with
the execution, delivery or performance of the VIE Agreements.
(i) Under the Equity Interest Pledge Agreement described in the section entitled Business VIE
Arrangements Equity Interest Pledge Agreement, the Shandong Xiangrui shareholders have pledged
one hundred percent of their equity interests in Shandong Xiangrui, respectively, as security for
the WFOEs collection of 100% of the pre-tax net income of Shandong Xiangrui. According to the PRC
Property Rights Law, which became effective on October 1, 2007, a pledge is created only when such
pledge is registered with the relevant office of the Administration For Industry and Commerce, or
AIC. We completed the registration of the equity pledge by the shareholders of Shandong Xiangrui
with the relevant office of the AIC on May 13, 2011.
12
(ii) Under the four Option Agreements described in the section entitled Business VIE
Arrangements Option Agreements, each of the four domestic individual shareholders of Shandong
Xiangrui, namely, Mr. Xuchun Wang, Mr. Lingfa Huang, Mr. Binglong Qiao and Mr. Guo Wang has an
option to purchase the capital stock in the Company held by Mr. Xu during the option period.
According to the Operating Rules on the Foreign Exchange Administration of the Participation of
Domestic Citizens in the Employee Stock Ownership Plans, Share Option Plans, Etc. of Overseas
Listed Companies, or Circular 78, issued by SAFE in March 2007, Chinese citizens who are granted
share options by an overseas publicly-listed company should register with SAFE through a Chinese
agent and complete certain other procedures. Such Chinese agent may include, without limitation, a
Chinese subsidiary of the overseas publicly-listed company. We believe that when each optionee
exercises his option, he may need to file with SAFE to be in compliance with the regulations of
foreign exchange listed above. Failure of our PRC share option holders to complete their SAFE
registrations may subject these PRC residents to fines and legal sanctions and may also limit our
ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries
ability to distribute dividends to us, or otherwise materially adversely affect our business.
Please refer to the section entitled Risk Factors Failure to comply with PRC regulations
relating to the establishment of offshore special purpose companies by PRC residents may subject
our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or
to inject capital into our PRC subsidiaries, limit our PRC subsidiaries ability to distribute
profits to us or otherwise materially adversely affect us. on page 23 of this Current Report and
the section entitled Risk Factors The PRC government may determine that the VIE Agreements are
not in compliance with applicable PRC laws, rules and regulations. on page 26 of this Current
Report.
Regulations of Manufacturing of Pharmaceutical Products
In the PRC, the State Food and Drug Administration, or SFDA, is the authority that monitors and
supervises the administration of pharmaceutical products, medical appliances and equipments, as
well as food and cosmetics.
Pursuant to the Law on the Administration of Pharmaceuticals of the PRC and its implementation
regulations, and the Measures on the Supervision and Administration of the Manufacturing of
Pharmaceuticals, a pharmaceutical manufacturing enterprise is required to obtain a drug
manufacturing license and a business license in order to legally operate its business. The drug
manufacturing license is issued by a local branch of SFDA at the provincial level. The license is
valid for five years. A pharmaceutical manufacturing enterprise must apply for an extension six
months prior to the licenses expiration. We currently hold a business license and a Drug
Manufacturing License. For more details of these licenses refer to the section above entitled
Licenses.
Furthermore, a pharmaceutical manufacturing enterprise must comply with the GMP Standards which
impose various requirements on production plants, facilities, raw materials, manufacturing
management and quality control processes. We have obtained a Certificate of Good Manufacturing
Practices for Pharmaceutical Products of the PRC. For more details of this license refer to the
section above entitled Licenses.
Regulations of Foreign Funded Enterprises
Statutory Reserve Fund Requirements
According to Chinese laws, regulations and accounting standards, enterprises in China are required
to set aside, at minimum, 10% of their respective after tax profits as a statutory reserve. After
these reserves have reached 50% of the registered capital, appropriations to the reserve account
are no longer required. These reserves are statutorily required in order to fund possible operating
losses. The reserves are not distributable as cash dividends. Furthermore, at the discretion of our
directors, a portion of our after-tax profits may be used for a discretionary reserve. The
discretionary reserve, like the statutory reserve, cannot be distributed as dividends. The
discretionary reserve could however be used for funding operating losses, business expansion or
increasing registered capital.
The registered capital of our WFOE is US$20,000. As our WFOE was established on May 6, 2011, our
WFOE has not generated any after-tax profits in the year 2011. As such, our WFOE has not begun to
set aside amounts for either reserve fund.
Shandong Xiangruis registered capital is US$2,416,480 (RMB 20,000,000 as converted into U.S.
dollars on the contribution date). For the year 2009 and 2010, Shandong Xiangrui provided 10% of
the statutory reserve and 6% of the discretionary reserve out of its distributable profits. Details
of the contributions to the reserves are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
Statutory Reserve |
|
|
326,619 |
|
|
|
27,561 |
|
Discretionary Reserve |
|
|
195,972 |
|
|
|
16,537 |
|
|
|
|
|
|
|
|
Total |
|
|
522,591 |
|
|
|
44,098 |
|
|
|
|
|
|
|
|
13
Provisions on Guiding the Orientation of Foreign Investment and the Guidance Catalogue of
Industries for Foreign Investment
Foreign ownership of companies within the corn refinery industry is subject to significant
restrictions under current PRC laws and regulations. For more details, refer to our disclosure in
the section entitled Business VIE Arrangements.
Regulations on Tax
PRC Enterprise Income Tax
Pursuant to the 2008 amendment of the PRC Enterprise Income Tax Law and its implementing rules, or
the EIT Law, the enterprise income tax rate for foreign invested entities such as our WFOE is 25%.
In addition, an enterprise established outside of China with de facto management bodies within
China is considered a resident enterprise and will normally be subject to enterprise income tax of
25% on its global income. The implementing rules define the term de facto management bodies as
an establishment that exercises, in substance, overall management and control over the production,
business, personnel, accounting, etc., of a Chinese enterprise. If the PRC tax authorities
subsequently determine that we should be classified as a resident enterprise, then our
organizations global income will be subject to PRC income tax of 25%. For detailed discussion of
PRC tax issues related to resident enterprises, see Risk FactorsRisks Related to Doing Business
in China Under the new EIT Law, we may be classified as a resident enterprise of China on
page 24 of this Current Report. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC stockholders.
Tax relating to Dividends Distributed by Foreign Invested Enterprises
According to the EIT Law, dividends payable to foreign investors will be subject to withholding tax
at the rate of 10%, unless the foreign investors jurisdiction of incorporation has a tax treaty
with the PRC that provides for a different withholding arrangement. Thus, if our WFOE distributes
any dividends, our WFOE will be subject to a withholding tax of 10% on all dividends because
currently the U.S. and China do not have a relevant tax treaty.
PRC Value Added Tax
Pursuant to the Provisional Regulation of China on Value Added Tax and its implementing rules, all
entities and individuals that are engaged in the sale and importation of goods in China are
generally required to pay value added tax, or VAT, at a rate of 17% on the gross sales proceeds,
less any deductible VAT already paid or borne by the taxpayer. The rate of value added tax applied
to Shandong Xiangrui on products sold is 17%.
Regulations of Currency Conversion and Foreign Exchange
SAFE Regulation on Foreign Exchange
The State Administration of Foreign Exchange, or SAFE, regulates foreign exchange in China. The
Renminbi (RMB) is the official currency of the PRC. The PRC government imposes strict control
over the conversion of RMB into foreign currencies. The Peoples Bank of China publishes the
exchange rates based on the previous days dealings in the inter-bank foreign exchange market. In
July 2005, the Chinese government changed its ten year old policy of pegging the value of the RMB
with the U.S. dollar. Under this new policy, RMB is permitted to fluctuate within a narrow band
against certain foreign currencies. When the U.S. dollar peg was removed, the RMB appreciated more
than 20% against the U.S. dollar over the subsequent three years. Since July 2008, the RMB has
traded within a narrow range of the U.S. dollar, but has fluctuated significantly against other
freely traded currencies in tandem with the U.S. dollar.
Use of currency from current accounts, which are used for day-to-day business activities, and
capital accounts, which are used for investments, are regulated by the Regulation on the
Administration of Foreign Exchange, effective August 5, 2008. Prior approval from SAFE must be
obtained before one can engage in foreign exchange sales and settlements under capital accounts.
Foreign invested enterprises are generally granted a quota for foreign exchange conversions to be
made out of current accounts. Such permission is granted on a per deal basis.
Although we do not currently intend to pay dividends, any inability to convert RMB into U.S.
dollars will limit our ability to pay dividends in the future.
For risks relating to currency exchange, refer to the section entitled Risk Factors
Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively on page 23 of this Current Report.
SAFE Regulations on Round Trip Investments
Pursuant to the Notice of the State Administration of Foreign Exchange on Relevant Issues
concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and
Roundtrip Investment via Overseas Special Purpose Vehicles (Circular 75) and its operating rules,
a domestic resident engaging in equity financing (including convertible bond financing) abroad
with assets or interests in a domestic enterprise via a special purpose vehicle, shall apply to the
local branch of SAFE, for registration of the overseas investment before the special purpose
vehicle is set up or controlled. Only after completing the foreign exchange registration with
respect to an overseas investment, may the domestic resident pay profits, dividends, liquidation
proceeds, equity transfer prices, or other capital proceeds to the special purpose vehicle.
Furthermore, the domestic resident is required to modify the registration within 30 days of any
material capital change event, such as increase or decrease of capital, share transfer or swap,
merger or split, long term equity or debt investments and foreign guarantees.
14
Because of uncertainty over how Circular 75 and its operating rules will be interpreted and
implemented, we cannot predict how they will affect our business operations or future strategies.
For risks relating to Circular 75 refer to the section entitled Risk Factors Failure to comply
with PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident stockholders to personal liability, limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries
ability to distribute profits to us or otherwise materially adversely affect us on page 23 of this
Current Report.
SAFE Requirements for Option Holders
In March 2007, SAFE issued Operating Rules on the Foreign Exchange Administration of the
Participation of Domestic Citizens in the Employee Stock Ownership Plans, Share Option Plans, Etc.
of Overseas Listed Companies, or Circular 78, which requires Chinese citizens who are granted share
options by an overseas publicly-listed company to register with SAFE. Four option agreements have
been entered into between Mr. Chongxin Xu, the sole shareholder of Xiangrui prior to the stock
exchange and the Shandong Xiangrui shareholders. For more information on the option agreements
refer to the section entitled Business Option Agreements. Failure of our PRC optionees to
complete SAFE registrations may subject them to fines and legal sanctions and may also limit our
ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries
ability to distribute dividends to us, or otherwise materially adversely affect our business.
Furthermore, we believe that if the optionees exercise their options, the optionees may need to
file with SAFE to be in compliance with Circular 75 as discussed above. For more information,
please refer to the section entitled Risk Factors Risks Related to Doing Business in China
Failure to comply with PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may subject our PRC resident stockholders to personal liability, limit
our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC
subsidiaries ability to distribute profits to us or otherwise materially adversely affect us on
page 23 of this Current Report.
Environmental Regulations
The major environmental regulations applicable to us include the PRC Environmental Protection Law,
the Administrative Regulations on Environmental Protection for Construction Projects, the Law on
Appraisal of Impact on the Environment, the PRC Law on the Prevention and Control of Water
Pollution and its implementing rules, the PRC Law on the Prevention and Control of Air Pollution
and its implementing rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and
the PRC Law on the Prevention and Control of Noise Pollution.
Our manufacturing facilities are subject to sewage discharge regulations. We are also subject to
periodic inspections by local environmental protection authorities. Shandong Xiangrui currently
holds a Sewage Discharge Permit. For details of this permit refer to the section above entitled
Licenses. Our operating subsidiaries have received certifications from the relevant PRC
government agencies indicating that their business operations are in material compliance with the
relevant PRC environmental laws and regulations. We are not currently subject to any pending
actions alleging any violations of applicable PRC environmental laws.
We are also subject to approvals by the NDRC described in the preceding section entitled Our
Business Competitive Strengths Entry Barrier. We have materially complied with these
environmental regulations. Our waste water treatment facilities recycle waste water that meet the
chemical oxygen demand standard set by the Chinese government.
Land Use Rights
All urban land in China is owned by the State. Pursuant to the Interim Regulations of the Peoples
Republic of China Concerning the Assignment and Transfer of the Right to the Use of the State-owned
Land in Urban Areas, effective May 19, 1990, individuals and companies are permitted to acquire
rights to use urban land, or land use rights for specific purposes, including residential,
industrial and commercial purposes. The land use rights are granted for a period of 70 years for
residential purposes, 50 years for industrial purposes and 40 years for commercial purposes. These
periods may be renewed at the expiration of the initial and any subsequent terms. Upon approval by
both the land administrative authorities and city planning authorities, land reserved for
industrial use may be converted to land for other uses. Granted land use rights are transferable
and may be used as security for loans and other obligations. We have received the necessary land
use rights certificates for two plots of industrial land. See Management Discussion and Analysis
of Financial Condition and Results of Operations Description of Property Land Use Rights.
15
Employees
As of December 31, 2010, we had a total of 214 employees, all of whom are full-time employees.
The following table sets forth the number of employees by function:
|
|
|
|
|
HR & Admin. |
|
|
6 |
|
Sales |
|
|
23 |
|
Production |
|
|
159 |
|
R & D |
|
|
6 |
|
Sourcing |
|
|
4 |
|
Quality Control |
|
|
12 |
|
Finance |
|
|
4 |
|
|
|
|
|
Total |
|
|
214 |
|
|
|
|
|
The PRC Labor Contract Law, which became effective on January 1, 2008, requires that we enter into
employment contracts with all of our employees and respect statutory guidelines with respect to
social insurance contributions, employment safety, wages, vacation and rest. We believe we are in
material compliance with applicable PRC employment laws and regulations. We have entered into
employment contracts with our officers, managers and employees. We believe that we maintain a
satisfactory working relationship with our employees, and we have not experienced any significant
disputes or any difficulty in recruiting staff for our operations. None of our employees are
represented by a labor union or similar collective bargaining organization.
Our employees in China participate in a state pension scheme organized by PRC municipal and
provincial governments. We are currently required to contribute to the scheme at the rate of 29% of
the average monthly salary. We have made all of the requisite contributions as of the date of this
Current Report.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the
risks described below, together with all of the other information included in this report, before
making an investment decision. If any of the following risks actually occurs, our business,
financial condition or results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
We face stiff competition, some of which may be from companies which may be better capitalized and
more experienced than us.
We operate in a highly competitive environment. The industry in which we operate is characterized
by quality and price sensitivity. Many of our products compete with virtually identical or similar
products manufactured by other domestic and global manufacturers, several of which have more
financial resources than we do. While we expect to continue to invest in product development and
productivity improvements to compete effectively in our markets, we cannot assure you that we can
successfully remain competitive.
We face changing economic and market conditions in the corn refinery industry in China.
In China, the corn refinery industry may be affected by changing economic and market conditions.
Following Chinas accession to the World Trade Organization, an increasing number of foreign
investors may set up production facilities in the PRC, which could lead to increased competition.
If we are unable to compete with our competitors or we are unable to react promptly to changes in
the business environment, this could have a material adverse effect on our business, results of
operations or financial condition.
We have not entered into long-term sales agreements with most of our customers.
We have not entered into long-term sales agreements with most of our customers. Each year our
customers give us their proposed purchase plan for the year. Our business with our customers always
has been, and will continue to be, conducted on the basis of actual purchase orders received from
them from time-to-time. If any of our customers, particularly our ten largest customers, reduce its
purchase orders or terminate its business relationship with us, this could have a material adverse
effect on our business, results of operations or financial condition.
The corn refinery industry may be affected by changes in weather patterns.
Changes in weather patterns affect the supply of corn kernels. Any material change in climate
conditions could adversely affect our manufacturing costs and this could have a material adverse
effect on our business, results of operations or financial condition.
16
We face risks of epidemics and other disasters, which could severely disrupt our business
operations.
Our business operations could be adversely and materially affected by the outbreak of H1N1, avian
influenza, swine influenza, severe acute respiratory syndrome, or SARS, or another epidemic. In
2009 and 2010, there were outbreaks of swine influenza in China and certain regions of the world.
In 2006 and 2007, there were occurrences of avian influenza in various parts of China, including a
few confirmed human cases. An adverse public health development in China could require the
temporary closure of our offices and facilities. Such closures could severely disrupt our business,
results of operations or financial condition.
Our operations are vulnerable to interruption and damage from man-made or natural disasters,
including acts of terrorism, earthquakes, fire, floods, war, environmental accidents, power
failure, communications failures and similar events, which may disrupt raw materials, utilities or
our production facilities. If any significant natural or man-made disaster were to occur in the
future, this could severely disrupt our business, results of operations or financial condition.
We do not have patents or other intellectual property rights over our technology and know-how that
would prevent third parties from selling products similar to ours, which may allow competitors to
capture market share from us.
As of December 31, 2010, we hold no patents over our technology and know-how and thus cannot
prevent third parties from selling products similar to us. In addition, we do not have any
confidential or proprietary processes or procedures that would make it difficult for a competitor
to produce products like ours. This lack of intellectual property protection permits competitors to
manufacture and sell products that compete directly with us, which may allow them to capture market
share from us and therefore adversely affect our results of operations. Moreover, competition in
markets in which we compete is largely based on price, quality and product availability. If our
competitors develop a more efficient product or undertake more aggressive and costly marketing
campaigns than us, this could have a material adverse effect on our business, results of operations
or financial condition.
Our limited operating history may not serve as an adequate basis to judge our future prospects and
results of operations.
Shandong Xiangrui was founded and commenced business in April 2005. Our limited operating history
in the corn refinery industry may not provide a meaningful basis on which to evaluate our business.
Although Shandong Xiangruis revenue has grown since its inception, we cannot assure you that we
will maintain our profitability or that we will not incur net losses in the future. We expect that
our operating expenses will increase as we expand. Any significant failure to realize anticipated
revenue growth could result in significant operating losses. We will continue to encounter risks
and difficulties frequently experienced by companies at a similar stage of development, including
our potential failure to:
|
|
|
expand our product offerings and maintain the high quality of our products; |
|
|
|
|
manage our expanding operations, including the integration of any future acquisitions; |
|
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|
|
obtain sufficient working capital to support expansion and fill customers orders in time; |
|
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|
|
maintain adequate control of our expenses; |
|
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|
|
implement our product development, marketing, sales, and acquisition strategies and adapt
and modify them as needed; or |
|
|
|
|
anticipate and adapt to changing conditions in the corn refinery industry in which we
operate as well as the impact of any changes in government regulations, mergers and
acquisitions involving our competitors, technological developments and other significant
competitive and market dynamics. |
If we are not successful in addressing any of these risks, and other risks as indicated in this
section of Risk Factors, our business may be materially and adversely affected.
We cannot give any assurance that any plans for future expansion will be implemented or that they
will be successful.
There is no guarantee that any expansion plans we may have now or in the future will be implemented
or that they will be successful. These plans are subject to, among other things, their feasibility
to meet the challenges we face, our ability to arrange for sufficient funding, our ability to
obtain government approvals and our ability to hire qualified and capable employees to carry out
these expansion plans.
Inadequate funding for our capital expenditures may affect our growth and profitability.
Our total revenues have increased from $17.12 million for the 2009 fiscal year to $42.05 million
for the 2010 fiscal year. Our continued growth is dependent upon our ability to raise capital from
outside sources and improve our profitability. Our ability to obtain financing will depend upon a
number of factors, including:
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|
|
our financial condition and results of operations; |
|
|
|
|
the condition of the PRC economy and the corn refinery industry in the PRC; |
|
|
|
|
conditions in the relevant financial markets; and |
|
|
|
|
relevant PRC laws and regulations. |
17
The industry in which we operate is capital intensive and requires a substantial amount of capital
and other long-term investments, including those relating to construction or expansion of
production facilities. If we are unable to obtain financing, as needed, on a timely basis and on
acceptable terms to our investors or lenders, our financial position, competitive position, growth
and profitability may be adversely affected.
We may not be able to effectively control and manage our growth.
When our business and markets grow and develop, it will be necessary for us to finance and manage
expansion in an orderly fashion. We may not have the requisite experience to manage and operate a
larger, more modern cornstarch manufacturing plant and an enhanced glucose production line. In
addition, we may face challenges in managing our expanding product offerings and in integrating
acquired businesses with our own. These events would increase demands on our existing management,
workforce and facilities. Failure to satisfy these increased demands could interrupt or adversely
affect our operations and cause production backlogs, longer product development time frames and
administrative inefficiencies.
Significant fluctuations in raw material prices may have a material adverse effect on us.
We do not have any long-term supply contracts with our raw materials suppliers. Any significant
fluctuation in price of our raw materials could have a material adverse effect on the manufacturing
cost of our products. We are subject to market conditions and although raw materials are generally
available and we have not experienced any raw materials shortage in the past, we cannot assure you
that the necessary materials will continue to be available to us at prices currently in effect or
acceptable to us.
We may have limited options in the short-term for alternative supplies if our suppliers fail for
any reason, including their business failure or financial difficulties, to continue the supply of
raw materials. Moreover, identifying and accessing alternative sources may increase our costs.
Although we are in the corn-producing region in Shandong province, there is no guarantee that we
will not face a shortage of corn kernels because of some natural calamity or other reasons beyond
our control.
We intend to mitigate the risks of a shortage in corn kernels by taking advantage of low season
prices and storing a certain amount of raw materials. We cannot guarantee these measures will be
effective in eliminating or mitigating all risks attendant to the supply of raw materials. In the
event that our cost of materials increase, we may have to raise prices of our products, making us
less competitive in price. Alternatively, we may not be able to pass potential increases in the
cost of materials on to customers through raising prices of our products. This may result in our
profit margin being adversely affected.
Energy price fluctuations could adversely affect our results of operations.
We consume electricity and steam to generate energy. The total energy costs represent approximately
7.5% of our product costs, among which electricity accounts for approximately 2.5% while steam
accounts for approximately 5%. We use energy primarily in our manufacturing process. If the supply
of electricity is interrupted or the cost of electricity increases substantially, and we are unable
to secure an alternative source of electricity for our manufacturing process, our manufacturing
activities could be adversely affected or our manufacturing costs could increase substantially. If
the supply of steam is interrupted or the steam supplied to us is contaminated or otherwise becomes
unsuitable or unavailable for our manufacturing activities, and we are unable to secure an
alternative source of steam for our manufacturing requirements, our manufacturing activities could
be adversely affected or our manufacturing costs could increase substantially. The market prices
for these utilities may vary considerably depending on supply and demand, and other factors. As
Chinas economy has grown rapidly, demand for these utilities has increased resulting in higher
prices for these utilities, shortage of supply, or rationing of such utilities. We cannot assure
you that we will be able to purchase these utilities at prices that we can adequately pass on to
customers to sustain or increase profitability.
Unexpected equipment failures may damage our business due to production curtailments or shutdowns.
We conduct periodic inspection and maintenance of all of our equipment to minimize the impact of
interruption of production and prevent breakdown because our machinery is highly specialized and
cannot be repaired or replaced without significant expense and time delay. On occasion, our
equipment may be out of service as a result of unanticipated failures which may result in material
plant shutdowns or periods of reduced production. Interruptions in production capabilities will
inevitably increase production costs and reduce our sales and earnings. In addition to equipment
failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated
events such as fires, explosions or adverse weather conditions. Furthermore, any interruption in
production capability may require us to make large capital expenditures to remedy the situation,
which could have a negative effect on our profitability and cash flows. In addition, longer-term
business disruption could result in a loss of customers. If this were to occur, our future sales
levels, and therefore our profitability, could be adversely affected.
18
If our customers and/or the ultimate consumers of our products successfully assert product
liability claims against us due to defects in our products, our operating results may suffer and
our reputation may be harmed.
Since some of our products are used by pharmaceutical companies, we face an inherent risk of
exposure to claims in the event that the failure, use or misuse of our products results, or is
alleged to result, in bodily injury, property damage or economic loss. We believe that we meet or
exceed existing professional specification standards recognized or required in the industries in
which we operate. We have not been subject to claims in the past, but there is no guarantee that we
will not be subject to claims in the future. We currently do not maintain product liability
coverage and such insurance may be difficult to obtain on terms acceptable to us and may not cover
warranty claims.
A successful product liability claim or series of claims against us, including one or more consumer
claims purporting to constitute class actions, or a significant warranty claim or series of claims
against us could materially decrease our liquidity and impair our financial condition.
Our products may become subject to recall in the event of defects or other performance related
issues.
We are at risk for product recall costs which are costs incurred when, either voluntarily or
involuntarily, a product is recalled through a formal campaign to solicit the return of specific
products due to a known or suspected performance defect. Costs typically include the cost of the
product and the cost of the recall borne by our customers and labor to remove and replace the
defective product. Our products have not been the subject of an open recall. If a recall decision
is made, we will need to estimate the cost of the recall and record a charge to earnings in that
period. In making this estimate, judgment is required as to the quantity or volume to be recalled,
the total cost of the recall campaign, the ultimate negotiated sharing of the cost between us and
our distributor or customer. As a result, these estimates are subject to change. Excessive recall
costs or our failure to adequately estimate these costs may negatively affect our operating
results.
Our reliance on certain industries for a significant portion of our sales could have a material
adverse affect on our business.
Approximately 78.4% of our 2010 revenue was from sales of corn starch and 21.2% of our 2010 revenue
was from sales of crystalline glucose to the pharmaceutical and food and beverage industries. If
our customers were to substantially decrease their purchases, our business could be materially
adversely affected.
Our inability to contain costs could adversely affect our future profitability and growth.
Our future profitability and growth depend on our ability to contain operating costs and per-unit
product costs and to maintain and/or implement effective cost control programs, while at the same
time maintaining competitive pricing and superior quality products, customer service and support.
Our ability to maintain a competitive cost structure depends on continued containment of
manufacturing, delivery and administrative costs, as well as the implementation of cost-effective
purchasing programs for raw materials, energy and related manufacturing requirements.
If we are unable to contain our operating costs and maintain the productivity and reliability of
our production facilities, our profitability and growth could be adversely affected.
Our profitability may be affected by other factors beyond our control.
Our operating income and ability to increase profitability depend to a large extent upon our
ability to price finished products at a level that will cover manufacturing and raw material costs
and provide an acceptable profit margin. Our ability to maintain appropriate price levels is
determined by a number of factors largely beyond our control, such as aggregate industry supply and
market demand, which may vary from time to time, and the economic conditions of the geographic
regions where we conduct our operations.
Potential environmental liability could have a material adverse effect on our operations and
financial condition.
Although it has not been alleged by PRC government officials that we have violated any current
environmental regulations, we cannot assure you that the PRC government will not amend the current
PRC environmental protection laws and regulations. Our business and operating results may be
materially and adversely affected if we were to be held liable for violating PRC environmental
regulations or if we were to increase expenditures to comply with environmental regulations
affecting our operations.
We have inadequate insurance coverage.
We do not presently maintain product liability insurance which leaves us with exposure to claims
filed against us. We cannot assure you that we would not face liability in the event of the failure
of any of our products.
19
We do not have other insurance such as business liability or disruption insurance coverage for
our operations in the PRC.
We do not maintain a reserve fund for warranty or defective products claims. Our costs could
substantially increase if we experience a
significant number of warranty claims. We have not established any reserve funds for potential
warranty claims since historically we have experienced few warranty claims for our products so that
the costs associated with our warranty claims have been low. If we experience an increase in
warranty claims or if our repair and replacement costs associated with warranty claims increase
significantly, it would have a material adverse effect on our financial condition and results of
operations.
We rely on our senior management team for the management of our business, and the loss of their
services may significantly harm our business and prospects.
We depend, to a large extent, on the abilities and participation of our current senior management
team, but have a particular reliance upon Mr. Guangyin Meng, chairman of our Board of Directors,
Mr. Dianshun Zhang, our director, Mr. Guo Wang, our current CEO, Mr. Wencai Pan, our CFO and Mr.
Shoubing Tang our vice president of sales for the direction of our business. The loss of the
services of these individuals, for any reason, may have a material adverse effect on our business
and prospects. We cannot assure you that the services of these individuals will continue to be
available to us, or that we will be able to find a suitable replacement for these individuals. We
do not have key man insurance policy on these individuals. If we are unable to replace these
individuals for a prolonged period of time, we may be unable to carry out our long term business
plan and our future prospect for growth, and our business may be harmed.
We may not be able to hire and retain qualified personnel to support our growth and if we are
unable to retain or hire such personnel in the future, our ability to improve our products and
implement our business objectives could be adversely affected.
Our future success depends heavily upon the continuing services of the members of our current
senior management team. If one or more of our senior executives or other key personnel is/are
unable or unwilling to continue in his/her/their present positions, we may not be able to replace
them easily or at all, and our business may be disrupted and our financial condition and results of
operations may be materially and adversely affected. Competition for senior management and
personnel is intense, the pool of qualified candidates is very limited, and we may not be able to
retain the services of our senior executives or senior personnel, or attract and retain
high-quality senior executives or senior personnel in the future. This failure could materially and
adversely affect our future growth and financial condition.
We may have difficulty establishing adequate management, legal and financial controls in the PRC,
and such difficulties could reduce the value of any investment in our common stock.
The PRC historically has not adopted a Western style of management and financial reporting concepts
and practices, or a modern Western style of banking, computer and other control systems. We may
have difficulty in hiring and retaining a sufficient number of employees qualified in these areas
to work for Shandong Xiangrui in the PRC. As a result of these factors, we have had, and may
continue to have difficulty in establishing management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and corporate records and
instituting business practices relating to our PRC operations that meet Western standards.
Our employees who have the primary responsibility of preparing and supervising the preparation of
our financial statements have limited knowledge of and professional experience with U.S. GAAP and
SEC rules and regulations. These rules and regulations can be complex and the compliance
obligations burdensome.
Our senior management has limited knowledge of SEC rules and regulations. Our senior management is
currently experienced in operating our business in compliance with Chinese law only. We are
required to file periodic reports and to otherwise comply with U.S. securities and other applicable
laws. Failure to comply with such obligations could have a material adverse effect on SMSA. In
addition, we expect that the process of learning to comply with such obligations as a public
company in the United States will require our senior management to devote significant time and
resources to such efforts that might otherwise be spent on the operation of our business.
Further, because historically our operations have been in China, we have complied with PRC GAAP and
have not previously been required to comply with U.S. GAAP. As of the date of this Current Report,
our books and records are still maintained and prepared according to PRC GAAP. Our employees who
have the primary responsibility of preparing and supervising the preparation of our financial
statements have limited knowledge of and professional experience with U.S. GAAP. We cannot assure
you that our management has identified or fully remedied all material weaknesses in our internal
controls over financial reporting pursuant to U.S. GAAP.
Our existing stockholder has substantial influence over our company, and his interests may not be
aligned with the interests of our other stockholders.
Mr. Chongxin Xu is the controlling shareholder of our common stock. As a result, he has significant
influence over our business, including decisions regarding mergers, consolidations and the sale of
all or substantially all of our assets, election of directors and other significant corporate
actions. This concentration of ownership may also have the effect of discouraging, delaying or
preventing a future change of control, which could deprive our stockholders of an opportunity to
receive a premium for their shares as part of a sale of our company and might reduce the price of
our shares.
20
We will incur significant expenses as a result of continuing to be a public company, which will
negatively impact our financial performance.
We will incur significant legal, accounting, insurance and other expenses as a result of continuing
to be a public company. The Sarbanes-Oxley Act of 2002, as well as related rules implemented by the
Securities and Exchange Commission, or the SEC, have required changes in corporate governance
practices of public companies. We expect that compliance with these laws, rules and regulations,
including compliance with Section 404 of the Sarbanes-Oxley Act as discussed below, will
substantially increase our expenses, including our legal and accounting costs, and make some
activities more time-consuming and costly. We also expect these laws, rules and regulations to make
it more expensive for us to obtain director and officer liability insurance, and we may be required
to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same
or similar coverage, which may make it more difficult for us to attract and retain qualified
persons to serve on our board of directors or as officers. As a result of the foregoing, we expect
a substantial increase in legal, accounting, insurance and certain other expenses in the future,
which will negatively impact our results of operations and financial condition.
We may be exposed to potential risks relating to our internal controls over financial reporting and
our ability to have those controls attested to by our independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC adopted rules
requiring public companies to include a report of management on the companys internal controls
over financial reporting in their annual reports, including Form 10-K. In addition, for companies
that are accredited filers or large accelerated filers the independent registered public
accounting firm auditing a companys financial statements must also attest to and report on the
operating effectiveness of the companys internal controls. Shandong Xiangrui was not subject to
these requirements for the fiscal year ended December 31, 2010; accordingly, we have not evaluated
our internal control systems in order to allow our management to report on our internal controls as
required by these requirements of SOX 404. Our current board of directors has insufficient
knowledge, training and experience in U.S. GAAP and internal control over financial reporting.
Under current law, we will be required to issue a report on management of the companys internal
controls over financial reporting beginning with our annual report for the fiscal year ending
December 31, 2011. If we continue to qualify as a smaller reporting company for the fiscal year
ending December 31, 2011, as we currently do, we will not be required to include an attestation
from our independent auditors. We can provide no assurance that we will comply with the
requirements imposed thereby. However, in the event that we no longer qualify as a smaller
reporting company, there can be no assurance that we will receive a positive attestation from our
independent auditors. In the event we identify significant deficiencies or material weaknesses in
our internal controls that we cannot remediate in a timely manner or we are unable to receive a
positive attestation from our independent auditors with respect to our internal controls, where
applicable, investors and others may lose confidence in the reliability of our financial
statements.
Current economic conditions may adversely impact demand for our products, reduce access to credit
and cause our customers and others with which we do business to suffer financial hardship, all of
which could adversely impact our business, results of operations, financial condition and cash
flows.
Economic conditions may remain challenging for the foreseeable future in China and globally.
General business and economic conditions that could affect us include short-term and long-term
interest rates, unemployment, inflation, fluctuations in debt markets and the strength of the
Chinese economy and the local economies in which we operate. While currently these conditions have
not impaired our ability to access credit markets and finance our operations, there can be no
assurance that there will not be a further deterioration in the financial markets.
There could be a number of other effects from these economic developments on our business,
including reduced consumer demand for products; insolvency of our customers, resulting in increased
provisions for credit losses; decreased customer demand, including order delays or cancellations
and counterparty failures negatively impacting our operations.
In addition, the currently weak worldwide economic conditions and market instability make it
increasingly difficult for us, our customers and our suppliers to accurately forecast future
product demand trends, which could cause us to produce excess products that can increase our
inventory carrying costs. Alternatively, this forecasting difficulty could cause a shortage of
products that could result in an inability to satisfy demand for our products.
Our holding company structure may limit the payment of dividends.
We have no direct business operations, other than our ownership of our subsidiaries. While we have
no current intention of paying dividends, should we decide in the future to do so, as a holding
company, our ability to pay dividends and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiaries and other holdings and investments. In
addition, our operating subsidiaries, from time to time, may be subject to restrictions on their
ability to make distributions to us, including as a result of restrictive covenants in loan
agreements, restrictions on the conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB,
fluctuations in the
exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S.
stockholders upon conversion of the dividend payment into U.S. dollars.
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Chinese regulations currently permit the payment of dividends only out of accumulated profits as
determined in accordance with Chinese accounting standards and regulations. Our subsidiaries and
affiliates in China are also required to set aside a portion of their after tax profits according
to Chinese accounting standards and regulations to fund certain reserve funds. Currently, our
subsidiaries and affiliates in China are the only sources of revenues or investment holdings for
the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting
standards and regulations to first fund certain reserve funds as required by Chinese accounting
standards, we will be unable to pay any dividends.
Risks Related to Doing Business in China
We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination
that we violated the Foreign Corrupt Practices Act could hurt our business.
We are subject to the Foreign Corrupt Practices Act, or FCPA, and other laws that prohibit improper
payments or offers of payments to foreign governments and their officials and political parties by
U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining
business. We have operations, agreements with third parties and make sales in China, which may
experience corruption. Our activities in China create the risk of unauthorized payments or offers
of payments by one of the employees, consultants, sales agents or distributors of our company, even
though these parties are not always subject to our control. It is our policy to implement
safeguards to discourage these practices by our employees. However, our existing safeguards and any
future improvements may prove to be less than effective, and the employees, consultants, sales
agents or distributors of our company may engage in conduct for which we might be held responsible.
Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to
other liabilities, which could negatively affect our business, operating results and financial
condition. In addition, the government may seek to hold our Company liable for successor liability
FCPA violations committed by companies in which we invest or that we acquire.
Changes in Chinas political or economic situation could harm us and our operating results.
Economic reforms adopted by the Chinese government have had a positive effect on the economic
development of the country, but the government could change these economic reforms or any of the
legal systems at any time. This could either benefit or damage our operations and profitability.
Some of the things that could have this effect are:
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International trade restrictions; and |
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International conflicts. |
The Chinese economy differs from the economies of most countries belonging to the Organization for
Economic Cooperation and Development, or OECD, in many ways. For example, state-owned enterprises
still constitute a large portion of the Chinese economy and weak corporate governance and a lack of
flexible currency exchange policy still prevail in China. As a result of these differences, we may
not develop in the same way or at the same rate as might be expected if the Chinese economy was
similar to those of the OECD member countries.
Our business is largely subject to the uncertain legal environment in China and your legal
protection could be limited.
The Chinese legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which precedents set in earlier legal cases are not generally used. The
overall effect of legislation enacted over the past 20 years has been to enhance the legal
protections afforded to foreign invested enterprises in China. However, these laws, regulations and
legal requirements are relatively recent and are evolving rapidly, and their interpretation and
enforcement involve uncertainties. Recently enacted legislation and regulations may not adequately
cover all aspects of economic activities in the PRC. The interpretation and enforcement of these
laws and regulations involve uncertainties because these laws and regulations are relatively new,
and because of the limited volume of published decisions and their nonbinding nature. Furthermore,
the PRC legal system is influenced by government policies and internal rules that may have a
retroactive effect. Some of these government policies and internal rules, however, are not
published on a timely basis or at all. Therefore, we may not be aware of our violation of these
rules and policies until after a violation. Furthermore, litigation in China may be protracted and
could result in substantial costs and diversion of management attention and economic resources.
These uncertainties could limit the legal protections available to foreign investors, such as the
right
of foreign invested enterprises to hold licenses and permits such as requisite business licenses.
In addition, all of our executive officers and our directors are residents of China and not of the
U.S., and substantially all the assets of these persons are located outside the U.S. As a result,
it could be difficult for investors to effect service of process in the U.S., or to enforce a
judgment obtained in the U.S. against our Chinese operations and subsidiaries.
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The Chinese government exerts substantial influence over the manner in which we must conduct our
business activities.
China only recently has permitted provincial and local economic autonomy and private economic
activities. The Chinese government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state ownership. Our ability
to operate in China may be harmed by changes in its laws and regulations, including those relating
to taxation, import and export tariffs, environmental regulations, land use rights, property and
other matters. We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local governments of the
jurisdictions in which we operate may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on our part to ensure
our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support
recent economic reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a significant effect on economic
conditions in China or particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Future inflation in China may inhibit our ability to conduct business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and highly
fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been
as high as 20.7% and as low as -2.2%. These factors have led to the adoption by the Chinese
government, from time to time, of various corrective measures designed to restrict the availability
of credit or regulate growth and contain inflation. High inflation may in the future cause the
Chinese government to impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in China, and thereby harm the market for our products and our company.
Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.
The majority of our revenues will be settled in Renminbi, and any future restrictions on currency
exchanges may limit our ability to use revenue generated in Renminbi to fund any future business
activities outside China or to make dividend or other payments in U.S. dollars. Although the
Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi
for current account transactions, significant restrictions still remain, including primarily the
restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after
providing valid commercial documents, at those banks in China authorized to conduct foreign
exchange business. In addition, conversion of Renminbi for capital account items, including direct
investment and loans, is subject to governmental approvals in China, and companies are required to
open and maintain separate foreign exchange accounts for capital account items. We cannot be
certain that the Chinese regulatory authorities will not impose more stringent restrictions on the
convertibility of the Renminbi.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may subject our PRC resident stockholders to personal liability, limit
our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC
subsidiaries ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on
Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in
Financing and Roundtrip Investment via Overseas Special Purpose Vehicles, generally referred to as
Circular 75. In May 2011, SAFE promulgated the Operating Rules of Circular 75, or the operating
rules, which requires PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose
of engaging in an equity financing outside of China on the strength of domestic PRC assets
originally held by those residents. Amendments to registrations made under Circular 75 and its
operating rules are required in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security interest in any
assets located in China to guarantee offshore obligations. Subsequent regulations further clarified
that PRC subsidiaries of an offshore company governed by the SAFE regulations are required to
coordinate and supervise the filing of SAFE registrations in a timely manner by the offshore
holding companys shareholders who are PRC citizens or residents. Failure to comply with the
requirements of Circular 75 and its operating rules may result in fines and other penalties under
PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also
result in the SPVs affiliates being impeded or prevented from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging
in other transfers of funds into or out of China.
In March 2007, SAFE issued further regulations requiring Chinese citizens who are granted share
options by an overseas publicly-listed company to register with SAFE through a Chinese agent
(including without limitation a Chinese subsidiary of the overseas publicly-listed company) and
complete certain other procedures. We and our PRC employees who have been granted share options
will be subject to these regulations upon the completion of this offering. Failure of our PRC share
option holders to complete their SAFE registrations may subject these PRC residents to fines and
legal sanctions and may also limit our ability to contribute additional
capital into our PRC subsidiaries, limited our PRC subsidiaries ability to distribute dividends to
us, or otherwise materially adversely affect our business.
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A number of option agreements have been entered into between Mr. Chongxin Xu and four PRC citizens.
Each of the optionees has an option to purchase capital stock in our Company held by Mr. Xu. We
believe that when each optionee exercises his option, he may need to file with SAFE to be in
compliance with the regulations of foreign exchange listed above. The terms of the option
agreements are more fully described in the section above entitled Business Option Agreements.
If the China Securities Regulatory Commission, or CSRC, or another PRC regulatory agency determines
that CSRC or other approval is required in connection with the reverse acquisition of Xiangrui, the
reverse acquisition may be unwound, or we may become subject to penalties.
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Provisions
Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule,
which became effective on September 8, 2006. The M&A Rule requires that an offshore company
controlled by PRC companies or individuals that have acquired a PRC domestic company for the
purpose of listing the PRC domestic companys equity interest on an overseas stock exchange obtain
the approval of the CSRC prior to the listing and trading of such offshore companys securities on
an overseas stock exchange. In addition, when an offshore company acquires a PRC domestic company,
the offshore company is generally required to pay the acquisition consideration within three months
after the issuance of the foreign-invested companys business license unless certain ratification
from the relevant PRC regulatory agency is obtained. On September 21, 2006, the CSRC, pursuant to
the M&A Rule, published on its official web site procedures specifying documents and materials
required to be submitted to it by offshore companies seeking CSRC approval of their overseas
listings.
We believe that the M&A Rule concerning the CSRC approval for acquisition of a PRC domestic company
by an offshore company controlled by PRC companies or individuals should not apply to our reverse
acquisition of Xiangrui because none of Xiangrui and SMSA is a special purpose vehicle or an
offshore company controlled by PRC companies or individuals at the moment of acquisition. A
number of option agreements have been entered into between Mr. Chongxin Xu and four PRC citizens.
Each of the optionees has an option to purchase capital stock in our Company held by Mr. Xu.
Because of the substantial uncertainties regarding the interpretation and application of the M&A
Rule by PRC governmental authorities, should a PRC governmental authority challenge the purpose or
effect of the option agreements, such governmental authority could regard the transactions
contemplated by the option agreements as an affiliated acquisition and round-trip investment for
which approval of the Ministry of Commerce, or MOFCOM, would be required. We cannot assure you that
we would be able to obtain the approval required from MOFCOM. If the PRC regulatory authorities
take the view that the reverse acquisition of Xiangrui constitutes a round-trip investment without
MOFCOM approval, they could invalidate our acquisition and ownership of Xiangrui. The terms of the
option agreements are more fully described in the section above entitled Business Option
Agreements.
The M&A Rule establishes more complex procedures for some acquisitions of Chinese companies by
foreign investors, which could make it more difficult for us to pursue growth through acquisitions
in China.
The M&A Rule establishes additional procedures and requirements that could make some acquisitions
of Chinese companies by foreign investors more time-consuming and complex, including requirements
in some instances that MOFCOM be notified in advance of any change-of-control transaction and in
some situations, require approval of MOFCOM when a foreign investor takes control of a Chinese
domestic enterprise. In the future, we may grow our business in part by acquiring complementary
businesses, although we do not have any plans to do so at this time. The M&A Rule also requires
MOFCOM anti-trust review of any change-of-control transactions involving certain types of foreign
acquirers. Complying with the requirements of the M&A Rule to complete such transactions could be
time-consuming, and any required approval processes, including obtaining approval from MOFCOM, may
delay or inhibit our ability to complete such transactions, which could affect our ability to
expand our business or maintain our market share.
Under the New EIT Law, we may be classified as a resident enterprise of China. Such
classification will likely result in unfavorable tax consequences to us and our non-PRC
shareholders.
China passed a new Enterprise Income Tax Law, or the EIT Law, and its implementing rules, both of
which became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of
China with de facto management bodies within China is considered a resident enterprise, meaning
that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax
purposes. The implementing rules of the EIT Law define de facto management as substantial and
overall management and control over the production and operations, personnel, accounting, and
properties of the enterprise.
On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant
Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as
Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice. The Notice
provides that an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese
enterprise or group will be classified as a non-domestically incorporated resident enterprise if
(i) its senior management in charge of daily operation reside or perform their duties mainly in
China; (ii) its financial or personnel decisions are made or approved by bodies or persons in
China; (iii) its substantial properties, accounting books, corporate chops, board and shareholder
minutes are kept in China; and (iv) 50% of the directors with voting rights or senior management
often reside in China. Such resident enterprise
would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a
withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. It is unclear
as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural
person. Detailed measures on taxation of non-domestically incorporated resident enterprises are not
available. Therefore, it is unclear how tax authorities will determine tax residency based on the
facts of each case.
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If the PRC tax authorities determine that we are a resident enterprise for PRC enterprise income
tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject
to enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise
income tax reporting obligations. In our case, this would mean that income such as interest on
financing proceeds and non-China sourced income would be subject to PRC enterprise income tax at a
rate of 25%. Second, although under the EIT Law dividends paid to us from our PRC subsidiaries
would qualify as tax-exempt income, we cannot guarantee that such dividends will not be subject
to a 10% withholding tax. The PRC foreign exchange control authorities, which enforce the
withholding tax, have not yet issued guidance with respect to the processing of outbound
remittances to entities that are treated as resident enterprises for PRC enterprise income tax
purposes. Finally, it is possible that future rules that clarify the definition of resident
enterprises could result in a situation in which a 10% withholding tax will be imposed on the
dividends we pay to our non-PRC shareholders and on gains derived by our non-PRC shareholders from
transferring our shares.
If we were treated as a resident enterprise by PRC tax authorities, we would be subject to
taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.
The value of our securities will be affected by the currency exchange rate between U.S. dollars and
RMB.
The value of our common stock will be affected by the foreign exchange rate between U.S. dollars
and RMB, and between those currencies and other currencies in which our sales may be denominated.
For example, if we need to convert U.S. dollars into RMB for our operational needs and the RMB
appreciates against the U.S. dollar at that time, our financial position, our business, and the
price of our common stock may be harmed. Conversely, if we decide to convert our RMB into U.S.
dollars for the purpose of declaring dividends on our common stock or for other business purposes
and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of our earnings from
our subsidiaries in China would be reduced.
Risks Related to Our Corporate Structure
We rely on contractual arrangements with our consolidated variable interest entity and its
shareholders for our China operations, which may not be as effective as direct ownership in
providing us with operational control.
We rely on contractual arrangements with our consolidated variable interest entity, Shandong
Xiangrui, and its shareholders, to operate our business in China. For a description of these
contractual arrangements, see the preceding section entitled Business Our Company History
VIE Arrangements. Neither SMSA nor the WFOE has any ownership interest in Shandong Xiangrui, nor
do we have business assets or revenue streams other than through our VIE Agreements with Shandong
Xiangrui. These contractual arrangements may not be as effective as direct ownership in providing
us with control over our PRC variable interest entity, Shandong Xiangrui. Direct ownership would
allow us, for example, to directly or indirectly exercise our rights as a shareholder to effect
changes in the board of directors of our PRC variable interest entity, Shandong Xiangrui, which, in
turn, could effect changes, subject to any applicable fiduciary obligations, at the management
level. Under these VIE Agreements, Shandong Xiangruis direct or indirect shareholders may have
conflicts of interest with us. Shandong Xiangruis shareholders may breach or cause Shandong
Xiangrui to breach contracts with us or cause such contracts to be amended in a manner contrary to
our interests, in order to further their own interests, or if they otherwise act in bad faith. For
example, Shandong Xiangrui may decide to withhold contractual payments to the WFOE, and
consequently to SMSA in breach of the existing VIE Agreements. In the event of any such breach, we
may have to incur substantial costs and expend significant resources to enforce such arrangements
in reliance on legal remedies under PRC law. These remedies may not always be effective,
particularly in light of uncertainties in the PRC legal system. Such disputes and proceedings may
significantly disrupt our business operations, adversely affect our ability to control our PRC
variable interest entity, Shandong Xiangrui, and otherwise result in negative publicity. We cannot
assure you that the outcome of such disputes and proceedings will be in our favor.
Currently we cannot predict the extent to or the possibility of occurrence of such conflicts
between us and our PRC variable interest entity, Shandong Xiangrui, and Shandong Xiangruis
shareholders. Therefore, if we are unable to effectively control Shandong Xiangrui, it may have an
adverse effect on our ability to achieve our business objectives and grow our revenues.
All of these contractual arrangements are governed by PRC law and provide for the resolution of
disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in
accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures.
The legal environment in the PRC is not as developed as in other jurisdictions, such as the United
States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these
contractual arrangements. In the event that we are unable to enforce these contractual
arrangements, or if we suffer significant time delays or other obstacles in the process of
enforcing these contractual arrangements, it would be very difficult to exert effective control
over Shandong Xiangrui, and our ability to conduct our business and our financial conditions and
results of operation may be materially and adversely affected. See Risk Factors Risks Related to
Doing Business in China Our business is largely subject to the uncertain legal environment in
China and your legal protection could be limited on page 22 of this Current Report.
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The PRC government may determine that the VIE Agreements are not in compliance with applicable PRC
laws, rules and regulations.
Because foreign investment within the corn refinery industry is subject to significant restrictions
under current PRC laws and regulations, we operate our business in China through our operating
entity Shandong Xiangrui. We manage and operate Shandong Xiangrui through the WFOE pursuant to the
rights it holds under the VIE Agreements. By reason of these VIE Agreements, Shandong Xiangrui is a
variable interest entity, or VIE. Almost all economic benefits and risks arising from Shandong
Xiangruis operations are transferred to the WFOE under these agreements. Details of the VIE
Agreements are set out in the section entitled Business Our Company History VIE
Arrangements.
There are risks involved with the operation of our business in reliance on the VIE Agreements,
including the risk that the VIE Agreements may be determined by PRC courts or regulators to be
unenforceable. The PRC government may find that the agreements that establish the VIE structure for
operating our China business do no comply with restrictions on foreign investment in the corn
refinery industry and regulations requiring national security review. As an example, to implement
the February 2011 Notice of the General Office of the State Council on Establishing the Security
Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or
Circular No. 6, in August 2011, MOFCOM, promulgated the Rules of Ministry of Commerce on
Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors, or the Security Review Rules. The Security Review Rules which officially became
effective in September 2011, replace the March 2011 Interim Provisions of the Ministry of Commerce
on Matters Relating to the Implementation of the Security Review System for Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors. According to these rules and circulars,
acquisitions by which foreign investors may acquire the de facto control of domestic enterprises
having national security concerns and mergers and acquisitions by foreign investors having
national defense and security concerns are required to undergo a security review. MOFCOM will
look into the substance and actual impact of the transaction when deciding whether a specific
merger or acquisition of a domestic enterprise by a foreign investor is subject to such review. The
Security Review Rules further prohibit foreign investors from bypassing the security review
requirement by structuring transactions through indirect investments, trusts, leases, proxies,
loans, control through contractual arrangements such as VIE arrangements or offshore transactions.
There is no explicit provision or official interpretation stating that our corn refinery business
falls into the scope subject to the security review. Furthermore, there is no express requirement
for foreign investors in those mergers and acquisitions transactions already completed prior to the
promulgation of Circular No. 6 to submit such transactions to MOFCOM for security review. However,
these rules and circulars are relatively new and clear statutory interpretation is lacking
regarding their implementation. Therefore, there is no assurance how MOFCOM will going forward
apply these national security review-related circulars and rules.
Furthermore, media sources have recently reported that the CSRC has submitted a report to the State
Council suggesting regulation of VIE arrangements, such as ours, in the context of foreign
investment in China and overseas listings. It is unclear, however, what specific content such
report contains, whether the CSRC officially submitted such report, and whether and when any
further action will be taken by the State Council, MOFCOM, CSRC or any other PRC government
authority regarding the use of VIE structure.
We cannot assure you that we will not be found in violation of any current or future PRC laws and
regulations. If we are found to be in violation of any existing or future PRC laws or regulations,
including the Security Review Rules and any future regulations regarding the use of the VIE
structure or fail to obtain or maintain any of the required permits or approvals, the relevant
regulatory authorities would have broad discretion in dealing with such breach, including:
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imposing economic penalties; |
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discontinuing or restricting the operations of the WFOE or Shandong Xiangrui; |
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imposing conditions or requirements with respect to the VIE Agreements with which
the WFOE or Shandong Xiangrui may not be able to comply; |
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requiring our Company to restructure the relevant ownership structure or operations; |
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taking other regulatory or enforcement actions, including levying fines, that could
adversely affect our Companys business; or |
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revoking the business licenses and/or the licenses or certificates of the WFOE or
Shandong Xiangrui, and/or voiding the VIE Agreements. |
Any of these actions could adversely affect our ability to manage, operate and gain the financial
benefits of Shandong Xiangrui, which would have a material adverse impact on our business,
financial condition and results of operations. If we are unable to restructure our relationship
with Shandong Xiangrui in such circumstances, our resulting corporate structure would have
essentially no operations or means of operating a corn refinery business.
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We may encounter difficulty in pursing growth through acquisitions in China because PRC laws and
regulations establish more complex procedures for some acquisitions of Chinese companies by foreign
investors.
PRC laws and regulations, such as the M&A Rules, the Security Review Rules and the Anti-Monopoly
Law, established additional procedures and requirements that are expected to make merger and
acquisition activities in China by foreign investors more complex and time-consuming. This
includes, for example, requirements in some instances that MOFCOM be notified in advance of any
change-of-control transaction in which a foreign investor takes control of a PRC domestic
enterprise. In some cases, approval from MOFCOM must be obtained where overseas companies
established or controlled by PRC enterprises or residents acquire affiliated domestic companies.
PRC laws and regulations also require certain merger and acquisition transactions to be subject to
merger control review or security review. The Security Review Rules, effective from September 1,
2011 further prohibit foreign investors from bypassing the security review requirement by
structuring transactions through indirect investments, trusts, leases, proxies, loans, control
through contractual arrangements such as VIE arrangements or offshore transactions. We may grow our
business in part by acquiring other companies operating in the corn refinery industry. Complying
with the relevant regulatory requirements to complete such transactions could be time-consuming,
and any required approval processes, such as approval from MOFCOM, may delay or prevent us from
completing such transactions, which could affect our ability to maintain our market share or expand
our business.
The directors, executive officers, shareholders and ultimate beneficial shareholders of our
consolidated variable interest entity and our affiliates may have potential conflicts of interest
with us, which may materially and adversely affect our business and financial condition.
Neither we nor the WFOE owns any portion of the equity interests of Shandong Xiangrui. Instead, we
rely on the WFOEs contractual rights to enforce our interest in receiving payments from Shandong
Xiangrui. The directors, executive officers, shareholders and ultimate beneficial shareholders of
Shandong Xiangrui, and our affiliates Ruixing Group, Runyin Bio-chemical and Xinrui Chemical are
also the directors, executive officers, employees and ultimate beneficial owners of our Company.
Conflicts of interests may arise between Shandong Xiangruis shareholders and our Company if, for
example, their interests in receiving dividends from Shandong Xiangrui were to conflict with our
interests in requiring these companies to make contractually obligated payments to the WFOE. The
fact that affiliates of Shandong Xiangrui are also affiliates of our Company may also result in
conflicting fiduciary duties.
We cannot assure you that if and when conflicts of interest arise, these individuals will act in
the best interests of our Company or that conflicts of interests will be resolved in our favor. In
addition, these individuals may breach or cause our consolidated variable interest entity to breach
the existing contractual arrangements. Currently, we do not have arrangements to address potential
conflicts of interest between these individuals and our Company. We rely on these individuals to
abide by the laws of BVI and China. If we cannot resolve any conflicts of interest or disputes
between us and the shareholders of our consolidated variable interest entity, we would have to rely
on legal proceedings, which could result in disruption of our business and substantial uncertainty
as to the outcome of any such legal proceedings.
We may lose the ability to use and enjoy assets held by our consolidated variable interest entity
that are important to the operation of our business if it goes bankrupt or becomes subject to a
dissolution or liquidation proceeding.
As part of our contractual arrangements with our consolidated variable interest entity, Shandong
Xiangrui, and its shareholders, Shandong Xiangrui holds certain assets that are important to our
business operations. If Shandong Xiangrui goes bankrupt and all or part of its assets become
subject to liens or rights of third-party creditors, we may be unable to continue some or all of
our business operations, which could materially and adversely affect our business, financial
condition and results of operations. If Shandong Xiangrui undergoes a voluntary or involuntary
liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to
some or all of these assets, thereby hindering our ability to operate our business, which could
materially and adversely affect our business, financial condition and results of operations.
The WFOEs contractual arrangements with Shandong Xiangrui and the payment arrangement thereunder
may be challenged by the PRC tax authorities and may result in adverse tax consequences to us.
We generate our revenues through the payments we receive pursuant to the VIE Agreements. We could
face adverse tax consequences if the PRC tax authorities determine that the VIE Agreements were not
entered into based on arms length negotiations. For example, the PRC tax authorities may adjust
the WFOEs and/or Shandong Xiangruis income and expenses for PRC tax purposes in the form of a
transfer pricing adjustment. A transfer pricing adjustment could result in a reduction, for Chinese
tax purposes, of costs and an increase of income recorded by Shandong Xiangrui, which could
adversely affect us by increasing Shandong Xiangruis tax liability without reducing the WFOEs tax
liability, which could further result in late payment fees and other penalties to Shandong Xiangrui
for underpaid taxes.
We rely on the approval certificates and business licenses held by the WFOE and Shandong Xiangrui,
and any deterioration of the relationship between the WFOE and Shandong Xiangrui could materially
and adversely affect our business operations.
We operate our business in China on the basis of the approval certificates, business licenses and
other requisite licenses held by the WFOE and Shandong Xiangrui. There is no assurance that the
WFOE and Shandong Xiangrui will be able to renew their licenses or certificates when their terms
expire with substantially similar terms as the ones they currently hold.
Further, our relationship with Shandong Xiangrui is governed by the VIE Agreements that are
intended to provide us with effective control over the business operations of Shandong Xiangrui.
Yet, the VIE Agreements may not be effective in providing control over
the application for and maintenance of the licenses required for our business operations. Shandong
Xiangrui could violate the VIE Agreements, go bankrupt, suffer from difficulties in its business or
otherwise become unable to perform its obligations under the VIE Agreements and, as a result, our
operations, reputation and business could be materially adversely affected.
27
If the WFOE exercises the purchase right over Shandong Xiangruis share capital pursuant to the VIE
Agreements, the payment of the purchase price could materially and adversely affect our financial
position.
Under the VIE Agreements, Shandong Xiangruis shareholders have granted the WFOE an option that is
valid for twenty-five years to purchase all of the equity interests held by the Shandong Xiangrui
shareholders in Shandong Xiangrui. On exercise of such option, the WFOE shall pay a transfer fee
which shall not be significantly lower than the value of the net assets of Shandong Xiangrui, as
determined by an appraiser. As Shandong Xiangrui is already our contractually controlled affiliate,
the WFOEs exercising of the option would not bring immediate benefits to our Company other than
the possible resolution of uncertainties regarding the relationship between Shandong Xiangrui and
us, and payment of the purchase price could adversely affect our financial position.
Risks Related to the Market for Our Stock
Our common stock is eligible to trade on the OTC Bulletin Board which may have an unfavorable
impact on our stock price and liquidity.
Our common stock is eligible to trade on the OTC Bulletin Board. The OTC Bulletin Board is a
significantly more limited market than the New York Stock Exchange or NASDAQ system. The
eligibility of our shares to trade on the OTC Bulletin Board may result in a less liquid market
available for existing and potential stockholders to trade shares of our common stock, could
depress the trading price of our common stock and could have a long-term adverse impact on our
ability to raise capital in the future.
We are subject to penny stock regulations and restrictions.
The SEC has adopted regulations which generally define so-called penny stocks to be an equity
security that has a market price less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exemptions. If our common stock becomes a penny stock, we may
become subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes
additional sales practice requirements on broker-dealers that sell such securities to persons other
than established customers and accredited investors (generally, individuals with a net worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their
spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchasers written consent to the
transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell
our securities and may affect the ability of purchasers to sell any of our securities in the
secondary market.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to
any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the
penny stock market. Disclosure is also required to be made about sales commissions payable to both
the broker-dealer and the registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny stock.
There can be no assurance that our common stock will qualify for exemption from the Penny Stock
Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain
subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any
person from participating in a distribution of penny stock, if the SEC finds that such a
restriction would be in the public interest.
Certain provisions of our Articles of Incorporation may make it more difficult for a third party to
effect a change-in-control.
Our Articles of Incorporation authorize our Board of Directors to issue up to 10,000,000 shares of
preferred stock. The preferred stock may be issued in one or more series, the terms of which may be
determined at the time of issuance by the board of directors without further action by the
stockholders. These terms may include voting rights including the right to vote as a series on
particular matters, preferences as to dividends and liquidation, conversion rights and redemption
rights provisions. The issuance of any preferred stock could diminish the rights of holders of our
common stock, and therefore could reduce the value of such common stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict our ability to merge
with, or sell assets to, a third party. The ability of our Board of Directors to issue preferred
stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or
effect a change-in-control, which in turn could prevent the stockholders from recognizing a gain in
the event that a favorable offer is extended and could materially and negatively affect the market
price of our common stock.
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of our operations
should be read in conjunction with our financial statements and related notes included elsewhere in
this Current Report. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those expressed or implied by those
forward-
looking statements. Factors that could cause or contribute to such difference include, but are not
limited to, those identified below and those discussed in the section entitled Risk Factors
included elsewhere in this Current Report.
Overview
We were originally incorporated in the State of Nevada on May 3, 2010 to effect the reincorporation
of Treemont Management Services, Inc. The Company, through its direct and indirect subsidiaries in
China, manufactures and distributes cornstarch, glucose, and other by-products. Most of the
Companys sales are made in the PRC. Our products are important ingredients for a wide range of
industries, including food and beverages, animal nutrition, pharmaceuticals, textile and other
industrial manufacturing industries. We have had an annual capacity of 80,000 tonnes since 2010. As
of the date of this Current Report our annual production capacity is 120,000 tonnes. We have a good
manufacturing practice (GMP) certified glucose production line in China.
We purchase raw corn kernels from corn growers located near us in Shandong Province. We refine the
corn at our plant into corn starch and glucose. Our customers are located primarily in Shandong
Province. We sell products constituting approximately 90% of our revenues through our direct sales
force, with the remaining 10% sold to distributors.
We plan to further expand our corn starch processing capacity to 240,000 tonnes by the end of 2011,
with an estimated capital expenditure of $12 million, to take advantage of the economy of scales in
production. We expect that out of the total capital expenditures, $3.8 million will be invested in
plants and buildings and $8.2 million in the purchase of equipments and machines. These projects
will be financed out of our 2010 and 2011 operating cash flow. The net cash provided by operating
activities in 2010 was approximately US$2.1 million. The net cash provided by operating activities
in the first 6 months of 2011 was approximately US$5.5 million. The purchase price of US$12 million
will be made in installments to the equipment suppliers, construction companies and water treatment
suppliers; approximately US$4.4 million will be paid in the second half of 2011. We expect to
generate enough operating cash flow to pay for the rest of the capital expenditure in the second
half of 2011.
As the market demand for corn kernels is expected to continue to grow due to strong demand of corn
for animal feeds in China, we anticipate that the market price for corn kernels will increase in
the future as the supplies will likely lag behind the increase in demand. As corn kernels are the
primary raw material that we use in production and the market demand for both corn starch and
glucose remains robust, we expect to be able to raise the price of our products in line with
increases in corn kernel prices. Our profit and operating cash flow will be negatively impacted if
the price of corn kernels increases and we are unable to increase the price of corn starch and
glucose. The cost of corn kernels represents approximately 90% of our total cost of goods sold,
and the price fluctuation of corn kernels will have a significant impact on our cost of goods sold
and margin.
We also may launch two new products, Monosodium glutamate, or MSG, and 1, 3-propanediol, or PDO, by
early 2013. We are evaluating the feasibility and profitability of these two new products.
MSG
MSG is used as a food additive and is commonly marketed as a flavor enhancer. Chinas MSG market
has grown significantly since the 1990s as the worlds major MSG production facilities moved to
China to take advantage of low production costs and large domestic demand. According to a MSG
industry report issued by Bioon.com, Chinas MSG production accounted for approximately 75% of the
worlds total production in 2005. This report is only available in Chinese and was originally
published in the Pharmaceuticals Economic Journal on October 9, 2009. This report has been
republished on the following website,
http://www.bioon.com/bioindustry/ferment/375274.shtml. Our major product, corn starch, is
one of the most important raw materials used in the production of MSG. The Company is currently
conducting a feasibility analysis on the MSG investment.
PDO
PDO is mainly used as a building block in the production of polymers such as polytrimethylene
terephthalate (PTT). PTT fiber is a high end fiber that has various functions. PDO can also be
formulated into a variety of food and industrial products including animal feed additives,
composites, adhesives, laminates, coatings, moldings, aliphatic polyesters and copolyesters.
The Company has completed a pilot plant test and expects to test a production capacity of 5,000
tonnes by the end of 2011. As there is uncertainty associated with the commercialization of the PDO
product line, the Company expects to launch its PDO product only if the technology is proven ready.
Reverse Acquisition
On May 13, 2011, we completed a reverse acquisition transaction through a share exchange with
Xiangrui and its sole shareholder, Mr. Chongxin Xu, whereby we acquired 100% of the issued and
outstanding capital stock of Xiangrui, in exchange for 12,363,885 shares of our common stock, which
constituted 93% of our issued and outstanding shares on a fully-diluted basis immediately after the
consummation of the reverse acquisition. As a result of the reverse acquisition, Xiangrui became
our wholly-owned subsidiary and Mr. Xu became our controlling stockholder.
29
Upon the closing of the reverse acquisition, Mr. Timothy P. Halter, our then sole director and
officer, immediately resigned from all offices that he held and from the board. Also upon the
closing of the reverse acquisition, our board of directors increased its size from one to two
directors and appointed Mr. Guangyin Meng and Mr. Dianshun Zhang to fill the vacancies created by
the resignation of Mr. Halter. In addition, Mr. Guo Wang was appointed as our chief executive
officer and Mr. Qingtai Wang was appointed as our chief financial officer. Mr. Qingtai Wang
resigned as our CFO on July 12, 2011 and was replaced by Mr. Wencai Pan.
For accounting purposes, the share exchange transaction was treated as a reverse acquisition, with
Xiangrui as the accounting acquirer and SMSA as the acquired party.
Our results of operations and financial condition are affected by numerous factors, including those
described above under Risk Factors and elsewhere in this Current Report.
Financial Operations Overview
Revenues
Our revenues are comprised principally of sales of cornstarch and glucose. In the three months
ended March 31, 2011, we generated total revenues of $16.1 million, of which $13.2 million, or
81.6%, was from sales of cornstarch. The remaining $2.9 million, or 18.4%, was from sales of
glucose. In 2010, we generated total revenues of $42 million, of which $33 million, or 78.4%, was
from sales of cornstarch. The remaining $8.9 million, or 21.2%, was from sales of glucose. For
details on the breakdown of our revenues refer to the section entitled Results of Operations.
Cost of Goods Sold
The cost of goods sold consists primarily of purchase costs of raw materials, direct labor costs
and overhead expenses attributable to production and machine depreciation.
Operating Expenses
We classify our operating expenses into two categories: selling and distribution, and general and
administrative.
Selling and Distribution
Selling and distribution expenses consist primarily of sales personnel salaries and benefits and
freight expenses.
General and Administrative
General and administrative expenses consist primarily of personnel costs of our executive, finance
and administrative personnel, accounting, legal and professional services fees, allowances for bad
debts, travel, allocations for facilities and information technology services and other corporate
expenses. We expect general and administrative expenses to increase as we continue to invest in
corporate infrastructure and incur additional expenses associated with being a public company,
including increased legal and accounting costs, investor relations costs, insurance premiums and
compliance costs associated with the Sarbanes-Oxley Act of 2002.
Interest Expenses, Net
Interest expenses, net consists of our payments on borrowings under our revolving credit facility,
other indebtedness and capital leases, less interest received on our cash.
Other Income (Expenses), Net
Other income (expenses), net consists of foreign currency gains or losses and scrap sales.
Taxation
Because SMSA, our subsidiaries and Shandong Xiangrui are incorporated in different jurisdictions,
we file separate income tax returns.
United States.
We are subject to United States tax at a tax rate of 34%. No payment of United States income tax
has been made as we had no U.S. taxable income for 2010 and 2009 and for the three months ended
March 31, 2011.
British Virgin Islands.
Xiangrui was incorporated in the BVI and under the current laws of the BVI, is not subject to
income tax.
30
China.
Shandong Xiangrui is subject to a 25% EIT rate.
Under the EIT law, a 10% withholding tax applies to China-sourced income derived by non-resident
enterprises for PRC enterprise income tax purposes, unless, the jurisdiction of incorporation of
such enterprises stockholder has a tax treaty with China that provides for a different withholding
arrangement.
We incurred income tax of $1.021 million for the year ended December 31, 2010, an increase of
$0.894 million, or 702.3%, from the tax we incurred in 2009, which was $0.13 million. This increase
in tax was due to the increase in our pre-tax income.
The income tax rate that we will be subject to in the future will depend on various factors,
including tax legislation, the geographic composition of our pre-tax income and non-tax deductible
expenses. Our management carefully monitors legal and other developments and will create an
appropriate tax saving plan when necessary and available.
Internal Control Over Financial Reporting
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC adopted rules
requiring public companies to include a report of management on the companys internal controls
over financial reporting in their annual reports, including Form 10-K. In addition, for companies
that are accredited filers or large accelerated filers the independent registered public
accounting firm auditing a companys financial statements must also attest to and report on the
operating effectiveness of the companys internal controls. Shandong Xiangrui was not subject to
these requirements for the fiscal year ended December 31, 2010. Accordingly we have not evaluated
our internal control systems in order to allow our management to report on our internal controls as
required by SOX 404. Under current law, we will be required to issue a report of management on the
companys internal controls over financial reporting beginning with our annual report for the
fiscal year ending December 31, 2011. If we continue to qualify as a smaller reporting company for
the fiscal year ending December 31, 2011, as we currently do, we will not be required to include an
attestation from our independent auditors.
Critical Accounting Policies and Estimates
We prepare financial statements in accordance with U.S. GAAP, which requires us to make judgments,
estimates and assumptions that affect the reported amounts of our assets and liabilities and the
disclosure of our contingent assets and liabilities at the end of each fiscal period and the
reported amounts of revenues and expenses during each fiscal period. We continually evaluate these
judgments and estimates based on our own historical experience, knowledge and assessment of current
business and other conditions, our expectations regarding the future based on available information
and assumptions that we believe to be reasonable, which together form our basis for making
judgments about matters that are not readily apparent from other sources. Since the use of
estimates is an integral component of the financial reporting process, our actual results could
differ from those estimates. Some of our accounting policies require a higher degree of judgment
than others in their application.
The selection of critical accounting policies, the judgments and other uncertainties affecting
application of those policies and the sensitivity of reported results to changes in conditions and
assumptions are factors that should be considered when reviewing our financial statements. We
believe the following accounting policies involve the most significant judgments and estimates used
in the preparation of our financial statements.
For further information on our critical and significant accounting policies, see note 2 to our
Audited Financial Statements, which are included elsewhere in this Current Report.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures
of contingent assets and liabilities at the balance sheet dates and the reported amounts of
revenues and expenses during the reporting periods. Significant estimates and assumptions reflected
in the financial statements include revenue recognition, allowance for doubtful accounts, provision
for inventories, useful lives of property and equipment and intangible assets, income tax and tax
related valuation allowance, and contingencies. Actual results could differ significantly from
those estimates.
Fair value of financial instruments
The Company adopted ASC 820 Fair Value Measurements and Disclosures, or ASC 820. ASC 820 defines
fair value, establishes a framework for measuring fair value, and requires disclosures to be
provided on fair value measurement.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value as follows:
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Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
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Level 2 Include other inputs that are directly or indirectly observable in the marketplace; and |
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Level 3 Unobservable inputs which are supported by little or no market activity, therefore requiring an entity to
develop its own assumptions. |
31
The carrying values of cash and cash equivalents, accounts receivable, other current assets,
accounts payable, other current liabilities, and amounts due to employees approximate their fair
value due to their short-term maturities.
Notes and accounts receivable
Notes receivable represent bank notes which are paid by third party commercial banks when due.
Therefore, they are generally believed to pose low credit risk. Provisions are made against notes
and accounts receivable for estimated losses resulting from the inability of collecting payments
from our customers. The Company periodically assesses notes and accounts receivable balances to
determine whether an allowance for doubtful accounts should be made based upon historical bad debt
analysis, specific customer creditworthiness, and current economic trends. Notes and accounts
receivable in the balance sheets are stated net of such provision, if any.
As at December 31, 2010 and 2009, the Company provided US$1,002,080 and US$915,298 for allowances
against accounts receivable. Managements estimate of the appropriate allowance on accounts
receivable was based on historical bad debt analysis, specific customer creditworthiness, and
current economic trends. In making its judgment, management assessed the Companys customers
ability to continue to pay their outstanding invoices on a timely basis, and whether their
financial position might deteriorate significantly in the future, which would result in their
inability to pay their debts to the Company. The Companys allowance is consistent with its
historical experience and considered adequate by management.
While the Company currently believes that there is little likelihood that actual results will
differ materially from current estimates, if the financial condition of our customers deteriorates
in the near future, the Company could realize significant write downs for uncollectible accounts
receivable.
Inventories
Inventories are stated at the lower of cost or net realizable value at the balance sheet date. Cost
of inventories is determined using the weighted average method. Provisions are made for excessive,
slow moving and obsolete inventories as well as inventories whose carrying value exceeds their net
realizable value. Net realizable value is the estimated selling price in the ordinary course of
business, less estimated costs and expenses and related taxes necessary to make the sale. Provision
for inventories is determined on an individual item basis. Raw material costs are based on purchase
costs while work-in-progress and finished goods comprise direct materials, direct labor and an
allocation of manufacturing overhead costs.
As at December 31, 2010 and 2009, the Company had not provided any provision for inventories as the
carrying value of inventories are lower than their net realizable value. By considering the
probable demand for our products in the future and historical trends in the turnover of our
inventories, management believes that there is no need to provide any provision for obsolescent
goods.
While the Company currently believes that there is little likelihood that actual results will
differ materially from current estimates, if customer demand for our products decreases
significantly in the near future, the Company could realize significant write downs for slow-moving
inventories.
Revenue recognition
The Company recognizes revenue pursuant to ASC 605 Revenue Recognition when a contract exists,
delivery has occurred and the price is fixed or determinable and collectability is reasonably
assured. This generally occurs when the customer receives the product or at the time title passes
to the customer. Our customers generally do not have the right to return products unless they are
damaged or defective. The Company does not provide discounts for early payments or other sales
allowances.
Income taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and
liabilities are recognized for future tax consequences attributable to differences between the
financial statements carrying amounts of existing assets and liabilities and their respective tax
asset bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance is provided to reduce the carrying amount of deferred tax
assets if some portion, or all, of the deferred tax assets will not be realized. The Company is
subject to Chinas new EIT Law, effective January 1, 2008. We are subject to a 25% enterprise
income tax rate.
32
We are regularly audited by local tax authorities. Sometimes as a result of these audits, the tax
authorities may determine that we are responsible for payment of additional taxes. We evaluate our
potential tax liability each quarter and adjust the reserves and the related interest and penalties
in light of changing circumstances such as the settlement of a tax audit or the expiration of a
statute of
limitations. We believe the estimates used to support our evaluation of our tax liabilities are
reasonable. However, the final determination of a prior-years tax liabilities, either by
settlement with the tax authorities or the expiration of a statute of limitations, could be
materially different than our estimates as reflected in our statement of assets and liabilities and
historical income tax provisions. The outcome of these final determinations could have a material
effect on our income tax liability, net income or cash flows for the period in which the
determination is made.
Consolidation of Variable Interest Entities
Our business is conducted through our operating company, Shandong Xiangrui. Our WFOE has
contractual arrangements with Shandong Xiangrui and its shareholders that enable us to
substantially control Shandong Xiangrui, including substantially influencing its daily operations
and financial affairs, appoint its senior executives and approve all matters requiring shareholder
approval. As a result of these contractual arrangements, we are considered the primary beneficiary
of Shandong Xiangrui. Accordingly, we regard Shandong Xiangrui as a Variable Interest Entity under
FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, Interpretation ARB No.
51 of FIN 46R, and have consolidated its results, assets and liabilities in our financial
statements from the date of signing of the VIE agreements on May 9, 2011. For the purpose of
demonstrating the effect of the formation of Xiangrui and the reverse acquisition between Xiangrui
and SMSA, Shandong Xiangruis operating results, assets and liabilities are consolidated from
January 1, 2009, which is based on the assumption that the formation and acquisition were completed
at the beginning of the reporting period.
Results of Operations
The following table shows the line items that appear on our statement of operations, expressed in
dollars and as a percentage of net revenues, for the periods presented.
The table below sets forth an analysis of sales by volume and price.
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For the year ended 31 December |
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For the three months ended 31 March |
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(audited) |
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(unaudited) |
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2009 |
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2010 |
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YoY growth |
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2010 |
|
|
2011 |
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QoQ growth |
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|
volume |
|
|
price |
|
|
volume |
|
|
price |
|
|
volume |
|
|
price |
|
|
volume |
|
|
price |
|
|
volume |
|
|
price |
|
|
volume |
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|
Sale price |
|
|
|
(tonnes) |
|
|
(USD) |
|
|
(tonnes) |
|
|
(USD) |
|
|
% |
|
|
% |
|
|
(tonnes) |
|
|
(USD) |
|
|
(tonnes) |
|
|
(USD) |
|
|
% |
|
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% |
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Cornstarch |
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48,770 |
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262.03 |
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110,221 |
|
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299.31 |
|
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126.0 |
% |
|
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14.2 |
% |
|
|
23,373 |
|
|
|
295.36 |
|
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37,504 |
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350.66 |
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60.5 |
% |
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|
18.7 |
% |
Glucose |
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13,170 |
|
|
|
329.26 |
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|
22,464 |
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|
397.72 |
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|
|
70.6 |
% |
|
|
20.8 |
% |
|
|
5,172 |
|
|
|
400.30 |
|
|
|
6,305 |
|
|
|
461.83 |
|
|
|
21.9 |
% |
|
|
15.4 |
% |
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Total |
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61,940 |
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|
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276.32 |
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|
|
132,684 |
|
|
|
315.97 |
|
|
|
114.2 |
% |
|
|
14.3 |
% |
|
|
28,545 |
|
|
|
314.37 |
|
|
|
43,809 |
|
|
|
366.66 |
|
|
|
53.5 |
% |
|
|
16.6 |
% |
|
|
|
Note: |
|
The above volume calculation also includes corn by-products that are produced during the
process of cornstarch and glucose manufacturing. |
Sales volumes increased to 43,809 tonnes in the three months ended March 31, 2011, at an increase
of 15,264 tonnes from 28,545 tonnes in the same period of 2010. Sales volumes increased to 132,684
tonnes in 2010, at an increase of 70,744 tonnes, from 61,940 tonnes in 2009. The increase in sales
volumes is mainly attributable to high market demand for our products and increase in the
production utilization rate. The average selling price of our products increased 16.6% from $314.4
per tonne in the three months ended March 31, 2010 to $366.8 per tonne in the same period of 2011.
The average selling price increased 14.3% from $276.3 per tonne in 2009 to $316 per tonne in 2010.
The increase of the average selling price of our products is attributable to the price increases of
corn kernels, the major raw material we use in production. We anticipate that the market price for
corn kernels will continue to increase in the future as the supplies will likely lag behind the
increase in demand. Improved standard of living in China results in higher demand for poultry and
meat, which results in higher demand for animal feed. Corn is a major type of animal feed.
33
Revenues
Our revenues comprised principally of sales of cornstarch and glucose. The following table shows
the breakdown of revenues by products.
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 31 December |
|
|
For the three months ended 31 March |
|
|
|
(audited) |
|
|
(unaudited) |
|
|
|
2009 |
|
|
2010 |
|
|
YoY |
|
|
2010 |
|
|
2011 |
|
|
QoQ |
|
|
|
(audited) |
|
|
(audited) |
|
|
growth |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
growth |
|
|
|
(USD000) |
|
|
% |
|
|
(USD000) |
|
|
% |
|
|
(USD000) |
|
|
% |
|
|
(USD000) |
|
|
% |
|
|
(USD000) |
|
|
% |
|
|
(USD000) |
|
|
% |
|
Cornstarch |
|
|
12,779 |
|
|
|
74.7 |
% |
|
|
32,990 |
|
|
|
78.4 |
% |
|
|
20,211 |
|
|
|
158.2 |
% |
|
|
6,903 |
|
|
|
76.8 |
% |
|
|
13,151 |
|
|
|
81.6 |
% |
|
|
6,248 |
|
|
|
90.5 |
% |
Glucose |
|
|
4,337 |
|
|
|
25.3 |
% |
|
|
8,934 |
|
|
|
21.2 |
% |
|
|
4,597 |
|
|
|
106.0 |
% |
|
|
2,070 |
|
|
|
23.0 |
% |
|
|
2,912 |
|
|
|
18.1 |
% |
|
|
842 |
|
|
|
40.7 |
% |
Others |
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
0.3 |
% |
|
|
129 |
|
|
|
|
|
|
|
10 |
|
|
|
0.1 |
% |
|
|
59 |
|
|
|
0.4 |
% |
|
|
49 |
|
|
|
490.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
17,116 |
|
|
|
100.0 |
% |
|
|
42,053 |
|
|
|
100.0 |
% |
|
|
24,937 |
|
|
|
145.7 |
% |
|
|
8,983 |
|
|
|
100.0 |
% |
|
|
16,122 |
|
|
|
100.0 |
% |
|
|
7,139 |
|
|
|
79.5 |
% |
Revenues increased by $7.1 million, or 80%, to $16.1 million in the three months ended March 31,
2011. In the same period of 2010, our revenues were $8.9 million. Revenues increased by $24.94
million, or 146%, to $42 million in 2010. In 2009, our revenues were $17.1 million. The increase in
revenues was mainly attributable to the increase in sales volume and rise in the average selling
price of our products. The increase in our sales volume was due to our increased processing
capacity. The increase in the average selling price of our products is attributable to strong
demand in China and increase of the market prices of glucose and cornstarch.
Cost of Goods Sold
Our cost of goods sold in the second quarter of 2011 remained stable as compared to the same period
of 2010. Our cost of goods sold in the first quarter of 2011 decreased 2.9% to 83.2%, from 86.1% in
the same period of 2010. This decrease is mainly attributable to our decision to increase the price
of our corn starch and glucose products, which exceeded the price of our major raw material corn
kernels. Management has increased the prices of our products in line with inflation in China over
the past 18 months.
Our cost of goods sold increased $5.7 million, or 74.0%, to $13.4 million, in the three months
ended March 31, 2011. In the same period of 2010, our cost of goods sold was $7.7 million. This
increase is mainly attributable to increased sales volume.
Our cost of goods sold increased $21.05 million, or 135.5%, to $36.6 million in 2010. Our cost of
goods sold as a percentage of sales in 2010 decreased 4.1% to 86.7%, from 90.8% in 2009. This
decrease is mainly attributable to the significant increase of sales volume in both corn starch and
glucose products in 2010, which lowered our fixed costs as a percentage of revenue.
Our cost of goods sold was $15.5 million in 2009. This increase is in line with the increase in
sales of our products.
Corn kernels are the principal raw material used in our production. Corn kernels accounted for
approximately 92% and 87% of our cost of goods sold in the three months ended March 31, 2011 and in
the same period of 2010, respectively. Corn kernels accounted for approximately 88% and 82% of our
cost of goods sold in 2010 and 2009, respectively. The remaining cost of goods sold is attributable
to utilities (steam, electricity and water) and depreciation and labor costs.
Gross Profit
Our gross profits increased $1.5 million, or 117.3%, to $2.7 million, during the three months ended
March 31, 2011. Our gross profits were $1.2 million in the same period of 2010. In 2010, our gross
profits increased by $3.9 million, or 246.7%, to $5.5 million, from $1.6 million in 2009. Gross
profits as a percentage of revenues were 16.8% during the three months ended March 31, 2011,
compared to 13.9% during the same period of 2010. Gross profits as a percentage of revenues were
13.3% in 2010, compared to 9.2% in 2009. As sales volumes increase, the unit cost of our products
decrease. This results in increases of our gross profit margins. The table below sets forth the
gross profit margin of each of our products.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 31 December |
|
|
For the three months ended 31 March |
|
|
|
(audited) |
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YoY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QoQ |
|
|
|
2009 |
|
|
2010 |
|
|
growth |
|
|
2010 |
|
|
2011 |
|
|
growth |
|
|
|
Gross |
|
|
GP |
|
|
Gross |
|
|
GP |
|
|
|
|
|
|
Gross |
|
|
GP |
|
|
Gross |
|
|
GP |
|
|
|
|
|
|
Profit |
|
|
margin |
|
|
Profit |
|
|
margin |
|
|
|
|
|
|
Profit |
|
|
margin |
|
|
Profit |
|
|
margin |
|
|
Profit |
|
|
|
(USD000) |
|
|
% |
|
|
(USD000) |
|
|
% |
|
|
% |
|
|
(USD000) |
|
|
% |
|
|
(USD000) |
|
|
% |
|
|
% |
|
Cornstarch |
|
|
1,290 |
|
|
|
10.1 |
% |
|
|
4,236 |
|
|
|
12.8 |
% |
|
|
228.4 |
% |
|
|
857 |
|
|
|
12.4 |
% |
|
|
1,976 |
|
|
|
15.0 |
% |
|
|
130.6 |
% |
Glucose |
|
|
288 |
|
|
|
6.6 |
% |
|
|
1,186 |
|
|
|
13.3 |
% |
|
|
312.1 |
% |
|
|
389 |
|
|
|
18.8 |
% |
|
|
731 |
|
|
|
25.1 |
% |
|
|
87.9 |
% |
Others |
|
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,577 |
|
|
|
9.2 |
% |
|
|
5,467 |
|
|
|
13.0 |
% |
|
|
246.6 |
% |
|
|
1,246 |
|
|
|
13.9 |
% |
|
|
2,707 |
|
|
|
16.8 |
% |
|
|
117.3 |
% |
The gross profit margin increase was mainly due to our ability to increase the unit selling price
of our products higher than the purchase price of corn kernels. The total supply of cornstarch and
glucose did not increase as fast as the increase in market demand. This was mainly because the
Chinese government shut down small factories which were operating without the required waste water
treatment systems. The Chinese government also halted approval of new small corn-refinery projects,
due to the governments commitment to environmental protection. The improvement in gross profit
margins is also attributable to the economies of scale we achieved with expanded production volume.
34
Operating Expenses
We have two categories of operating expenses: selling and distribution expenses and general and
administrative expenses.
Selling and Distribution Expense
Our sales expenses increased by $50,912, or 21%, to $0.29 million during the three months ended
March 31, 2011, from $0.24 million in the same period of 2010. Our sales expenses increased by
$0.43 million, or 75.6%, to $1 million in 2010, from $0.57 million in 2009. The increase is in line
with the growth in sales revenue. As a percentage of revenues, sales expenses in the three months
ended March 31, 2011 decreased to 1.8% from 2.7% for the same period of 2010, and decreased to 2.4%
in 2010 from 3.3% in 2009.
General and Administrative Expenses
General and administrative expenses are comprised of salary and benefits for administrative
personnel, depreciation and amortization of non-production equipments and miscellaneous expenses
unrelated to production.
Our general and administrative expenses increased $57,225, or 103%, to $0.11 million during the
three months ended March 31, 2011, from $55,345 in the same period of 2010. In 2010, our general
and administrative expenses decreased by $0.50 million, or 67%, to $0.25 million, from $0.75
million in 2009. As a percentage of revenues, general and administrative expenses in the three
months ended March 31, 2011 increased to 0.7%, compared to 0.6% for the same period of 2010, and
decreased to 0.6% in 2010, compared to 4.4% in 2009.
The increase in the three months ended March 31, 2011 is due to the professional fees that we
incurred relating to the reverse acquisition. The decrease in 2010 was mainly attributable to the
suspension of production because of a technological and equipment upgrade for the Quality Standard
(QS) and GMP certification in 2009. During 2010, the depreciation of fixed assets, employee
salaries and other production related expenses were recorded in general and administrative expenses
and amounted to $0.36 million. The decrease is also attributable to decrease of bad debt provision
in 2010 by $0.14 million.
Interest Expenses, Net
Our interest expenses, net increased by $87,517, or 101%, to $0.17 million during the three months
ended March 31, 2011, from $86,347 in the same period of 2010. Our interest expenses increased
$0.13 million, or 52%, to $0.38 million in 2010 from $0.25 million in 2009. The increase is mainly
attributable to an increase in short-term bank loans.
Other Income (Expenses), Net
Other income (expenses), net decreased by $46,900 for the three months ended March 31, 2011,
compared to $5,611 for the same period in 2010. Other income (expenses), net decreased by $0.33
million, from $0.42 million in 2009, to $94,916 in 2010. The decrease is mainly attributable to the
decrease in profits realized from selling stearic acid, which had a gross profit of $295, 470 in
2009 and only $42, 926 in 2010.
Liquidity and Capital Resources
Our primary operating cash requirements are for the purchase of corn kernels.
We finance our operations primarily through cash flow from operations and short-term bank loans. We
collect cash on delivery on sales of our by-products. Approximately 50% of the total sales of our
corn starch are settled in cash. The remaining 50% has a credit term of 15 days. Sales of glucose
also has a 15-day credit term. The turnover for finished goods is approximately five days and one
month for raw materials. We settle the purchase of corn kernels in cash. Suppliers of utilities and
other consumable materials provide credit terms of about one month. We also finance our operations
with the proceeds from loans.
Contractual Obligations and Commercial Commitments
On January 1, 2009, we entered into a non-cancellable contract with Shandong Runyin Bio-chemical to
secure the steam and electricity supply for our corn starch and glucose production. This contract
expires December 31, 2014. The utilities have been offered to us at market prices. The prices that
we will pay for these utilities per year would be determined by the actual quantity of utilities
consumed by us.
In 2010, we entered into non-cancellable contracts with certain machinery suppliers for the
purchase of machinery and equipment, which amounted to $4.7 million. In 2009, we also entered into
non-cancellable contracts with certain machinery suppliers for the purchase of machinery and
equipment, which amounted to $0.55 million. These contracts will be settled in 2011.
35
As of July 13, 2009, we pledged our building which has a net book value of $2.3 million to Citibank
(China) Co., Ltd., Shanghai Branch, or Citibank Shanghai, to secure a long-term bank loan provided
by Citibank to Runyin Bio-chemical.
As of July 13, 2009, we pledged our land use rights to one plot of industrial land located in Penji
Town, Dongping County to Citibank Shanghai to secure a long-term bank loan provided by Citibank to
Runyin Bio-chemical. The mortgage term is from August 10, 2009 to August 10, 2014.
In April and May 2011, we entered into corn kernel supply agreements with four enterprises for the
supply of corn kernels, namely Taian Branch of China Grain Reserves Corporation for 30,000 tonnes
at an aggregate price of $10.42 million, Jinan Jinliang Grains Storage Co., Ltd. for 30,000 tonnes
at an aggregate price of $10.20 million, Shanghai Yihai Commerce & Trade Co., Ltd. for 20,077
tonnes at an aggregate price of $6.83 million, and Zhongjiao Grain and Oil Storage Center, Qingdao
Tariff-free Area for 7236.442 tonnes at a variable price from $360.31 to $350.99 per tonne at an
aggregate price of $2.50 million.
As of December 31, 2010, we had cash and cash equivalents of $6.6 million and restricted cash of
$0.23 million. The following table provides detailed information about our net cash flow for 2009
and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 31 December |
|
|
For the three months ended 31 March |
|
|
|
(audited) |
|
|
(unaudited) |
|
|
|
2009 |
|
|
2010 |
|
|
2010 |
|
|
2011 |
|
|
|
(audited) |
|
|
(audited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
|
(USD000) |
|
|
(USD000) |
|
|
(USD000) |
|
|
(USD000) |
|
Net cash provided by (used in) operating activities |
|
|
1,910 |
|
|
|
2,112 |
|
|
|
(913 |
) |
|
|
(2,355 |
) |
Net cash provided by (used in) investing activities |
|
|
(2,455 |
) |
|
|
1,251 |
|
|
|
2,281 |
|
|
|
127 |
|
Net cash provided by (used in) financing activities |
|
|
5 |
|
|
|
2,220 |
|
|
|
1,160 |
|
|
|
1,432 |
|
Effect of foreign exchange rate changes |
|
|
4 |
|
|
|
170 |
|
|
|
(110 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows |
|
|
(536 |
) |
|
|
5,753 |
|
|
|
2,418 |
|
|
|
(795 |
) |
Operating Activities
Net cash used in operating activities was $2.4 million for the three months ended March 31, 2011,
compared to $0.9 million for the same period in 2010. Net cash provided by operating activities was
$2.11 million in 2010, compared to $1.91 million in net cash provided by operating activities in
2009.
The increase in net cash used in operating activities for the three months ended March 31, 2011 was
mainly attributable to the increase of accounts receivable and notes receivable, which are in line
with the growth of our sales since the credit term remains stable. The increase in net cash used in
operating activities is also due to the increase of advances to third party suppliers. These
advances were used for the expansion of our corn processing capacity in 2010. The increase in net
cash provided by operating activities for 2010 was in line with the increase in our net profits.
The change in notes payable should be analyzed with the change in restricted cash. Corresponding
bank deposits are required for the issuance of notes payable. However, according to U.S. GAAP, a
change in restricted cash is classified under the investing cash flow caption. There has been no
significant change in our working capital turnover days since 2010.
Investing Activities
Net cash provided by investing activities for the three months ended March 31, 2011 was $0.13
million, as compared to $2.3 million for the same period in 2010. The decrease was due to less cash
being released from restricted cash, which was a deposit with Rural Cooperative Bank of Dongping
County, or Rural Cooperative Bank, in connection with issuance of bank acceptances. For the three
months ended March 31, 2010, $2.4 million restricted cash was released from Rural Cooperative Bank.
Net cash provided by investing activities was $1.3 million in 2010 as compared to negative $2.5
million in 2009. The increase was also mainly due to more restricted cash being released from a
bank deposit with Rural Cooperative Bank in 2010. In 2010, $2.2 million of restricted cash was
released and $0.9 million was used to purchase property and equipments. In 2009, $2.4 million was
deposited with Rural Cooperative Bank as restricted cash in connection with the issuance of bank
acceptances.
Financing Activities
Net cash provided by financing activities was $1.4 million for the three months ended March 31,
2011, as compared to $1.2 million for the same period in 2010, and was $2.2 million in 2010, as
compared to $5,486 in 2009.
All of our bank borrowings are RMB denominated loans with fixed interest rates ranging from 4.86%
to 11.62%, for working capital and fixed assets purchasing purposes, with a balance of $9.7 million
and $8 million at the end of March 30, 2011 and December 31, 2010, respectively.
We believe that we maintain good relationships with the various banks we deal with, and based on
current conditions we adequately manage our accounts receivable and accounts payables. We believe
our current available working capital, and bank loans referenced above, should be adequate to
sustain our operations at our current levels through at least the next twelve months.
36
Holding Company Structure
We are a holding company with no material operations of our own. We conduct our operations
primarily through our wholly-owned subsidiaries and affiliated entities in China. As a result, our
ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our PRC
subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the
instruments governing their debt may restrict their ability to pay dividends to us. In addition,
our PRC subsidiaries are permitted to pay dividends to us only out of their retained earnings, if
any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each
of our subsidiaries and affiliated entities in China is required to set aside at least 10% of its
after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve
funds reach 50% of its registered capital. In addition, at its discretion, each of our subsidiaries
and affiliated entities in China may allocate a portion of its after-tax profits based on PRC
accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and
bonus funds are not distributable as cash dividends. Our PRC subsidiaries have not paid our
offshore entities any dividends nor have set aside any money to fund certain statutory reserve
funds or staff welfare and bonus funds as they have not been profitable. Our PRC subsidiaries will
not be able to pay dividends to our offshore entities until they generate accumulated profits and
meet the requirements for statutory reserve funds.
Off-Balance Sheet Comments and Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, sales or expenses, results of operations,
liquidity or capital expenditures, or capital resources that is material to an investment in our
securities.
Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06 (ASU 2010-06),
Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new
disclosures about recurring or nonrecurring fair-value measurements including significant transfers
into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales,
issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value
measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15,
2009, except for Level 3 reconciliation disclosures which are effective for annual periods
beginning after December 15, 2010. The Company does not expect that the adoption of ASU 2010-06
will have a material impact on its financial statements.
In February 2010, the FASB issued ASU No. 2010-09 (ASU 2010-09), Subsequent Events (Topic 855). The
amendments remove the requirements for an SEC filer to disclose a date, in both issued and revised
financial statements, through which subsequent events have been reviewed. Revised financial
statements include financial statements revised as a result of either correction of an error or
retrospective application of U.S. GAAP. ASU 2010-09 is effective for interim or annual financial
periods ending after June 15, 2010. The provisions of ASU 2010-09 are not expected to have a
material effect on the financial position, results of operations or cash flows of the Company.
Quantitative and Qualitative Disclosures about Market Risk
Inflation
Since our inception, inflation in China has not materially impacted our results of operations.
According to the National Bureau of Statistics of China, the change of consumer price index in
China was 3.3% in 2010. Although we have not in the past been materially affected by inflation
since our inception, we can provide no assurance that we will not be affected in the future by
higher rates of inflation in China.
Foreign Currency Exchange Risk
Substantially all of our revenues and expenses are denominated in Renminbi. We do not believe that
we currently have any significant direct foreign exchange risk and have not used any derivative
financial instruments to hedge our exposure to such risk. Although in general, our exposure to
foreign exchange risks should be limited, the value of your investment in our shares will be
affected by the exchange rate between the U.S. dollar and the Renminbi because the value of our
business is effectively denominated in Renminbi, while the shares will be traded in U.S. dollars.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in Chinas political and economic conditions. The
conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set
by the Peoples Bank of China. On July 21, 2005, the PRC government changed its decade-old policy
of pegging the value of the Renminbi to the U.S. dollar. Under the revised policy, the Renminbi is
permitted to fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy resulted in a more than 20% appreciation of the Renminbi against
the U.S. dollar in the following three years. Since July 2008, however, the Renminbi has traded
within a narrow range against the U.S. dollar. As a consequence, the Renminbi has fluctuated
significantly since July 2008 against other freely traded currencies, in tandem with the U.S.
dollar. On June 20, 2010, the Peoples Bank of China announced that the PRC government would
further reform the Renminbi exchange rate regime and increase the flexibility of the exchange rate.
It is difficult to predict how this new policy may impact the Renminbi exchange rate. To the extent
that we need to convert U.S. dollars into Renminbi for our
operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on
the Renminbi amount we receive from the conversion. Conversely, if we decide to convert the
Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or
for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a
negative effect on the U.S. dollar amounts available to us.
37
Interest Rate Risk
We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although
the interest rates, which are based on the banks prime rates with respect to our short-term loans,
are fixed for the terms of the loans, the terms are typically three to twelve months for short-term
bank loans and interest rates are subject to change upon renewal. There were no material changes in
interest rates for short-term bank loans renewed during the year ended December 31, 2010.
Management monitors the banks prime rates in conjunction with our cash requirements to determine
the appropriate level of debt balances relative to other sources of funds. We have not entered into
any hedging transactions in an effort to reduce our exposure to interest rate risk.
We are also exposed to interest rate risk relating to the interest income generated by excess cash,
which is mostly held in interest-bearing bank deposits. We have not used derivative financial
instruments in our investment portfolio. Interest earning instruments carry a degree of interest
rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due
to changes in market interest rates. However, our future interest income may fall short of
expectations due to changes in market interest rates.
DESCRIPTION OF PROPERTY
Factories
Our production facilities are located in Dongping County, Shandong Province, and consists of a
starch processing plant of 2,800 square meters, a glucose production plant of 4,140 square meters,
a corn decontaminate plant of 480 square metes, a by-product plant of 1,120 square meters, a starch
drying plant of 2,800 square meters, a sorbierite plant of 1,250 square meters, a power
distribution room, weight house, finished product warehouse, cooling column and administrative
offices.
The starch processing plant is used for producing corn starch which contributed to 78.4% of our
total revenues in the 2010 fiscal year. The glucose production plant is used for producing glucose
products which contributed to 21.2% of our total revenues in the 2010 fiscal year. The following
table sets forth the actual production capacity and the utilization rate of each of our production
plants during the 2009 and 2010 fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
Production |
|
|
Average |
|
|
Production |
|
|
Average |
|
|
|
capacity |
|
|
utilization |
|
|
capacity |
|
|
utilization |
|
Production Facilities |
|
(tonnes) |
|
|
(%) |
|
|
(tonnes) |
|
|
(%) |
|
Corn starch processing plant |
|
|
50,000 |
|
|
|
61.2 |
% |
|
|
63,000 |
|
|
|
100 |
% |
Glucose production plant |
|
|
15,000 |
|
|
|
65.4 |
% |
|
|
18,000 |
|
|
|
90 |
% |
We plan to further expand our corn starch processing capacity to 240,000 tonnes by the end of 2011
by renovating the existing production line and adding a new production line. By the end of June 30,
2011, we expanded our annual production capacity from 80,000 tonnes to 140,000 tonnes by renovating
the existing production line and adding new machinery for some critical processes. For example, we
replaced all the old drying machines in the drying process with automated drying machines. At the
same time, we also installed a parallel new production line which is designed for the entire
process of processing starch and producing glucose. The new production line will raise our annual
production capacity from 140,000 tonnes to 240,000 tonnes by the end of 2011. We have invested
about $7.6 million in new equipments and a new building to install the new production line and
expect to invest an additional $4.4 million into the new production line by the end of 2011. The
planned expansion does not require material capital expenditures outside of the $12 million we have
estimated. For a discussion on how we will fund our $12 million expansion refer to the section
entitled Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview. The new investment will not have any material impact on the nature of our principal
production facilities.
Land Use Rights
There is no private land ownership in China. Individuals and companies are permitted to acquire
land use rights for specific purposes. We were granted land use rights from the PRC government for
two plots of land for industrial use with 123,820 and 43,249 square meters, respectively, located
at Pengji Town, Dongping County, Shandong Province, China. The land use rights for these two plots
of land will expire on September 18, 2056 and November 14, 2051 respectively.
38
As of December 31, 2010, Shandong Xiangrui pledged its land use right to the 43,249 square meter
plot of land, with a net book value of US$768,827 to Citibank (China) Co., Ltd., Shanghai Branch to
secure a long term bank loan for Runyin Bio-chemical, an affiliate of Shandong Xiangrui. We believe
that all our properties have been adequately maintained, are generally in good condition and are
suitable and adequate for our business.
Buildings
As of December 31, 2010, we have the lawful rights to four buildings located at Western State Road
105, Pengji Town, Dongping County, Shandong Province, three of which are used for production and
one of which is used as a warehouse. The buildings are subject to mortgage to Citibank (China) Co.,
Ltd., Shanghai Branch.
Leased Property
We have entered into a lease with our affiliated company Runyin Bio-chemical, for a plant located
in Ruixing Industry Park, Dongping County, Shandong Province, for a lease term from December 1,
2008 to November 30, 2011.
Transportation Vehicles
We do not currently own any transportation vehicles. In order to meet our transportation needs we
have entered into a vehicle lease contract with our affiliated company Runyin Bio-chemical, for
vehicle rental, in which we pay a rental fee per vehicle and per kilometer for each day of use.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of our common stock as of
July 20, 2011 (i) by each person who is known by us to beneficially own more than 5% of our common
stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors
as a group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature |
|
|
|
Name and Address of |
|
|
|
|
|
of Beneficial |
|
|
|
Beneficial Owner |
|
Office, If Any |
|
Title of Class |
|
Ownership |
|
|
Percent of Class |
|
|
|
Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangyin Meng
|
|
Director
|
|
Common
|
|
|
4,533,787 |
*(2) |
|
|
34.10 |
% |
Dianshun Zhang
|
|
Director
|
|
Common
|
|
|
226,309 |
*(2) |
|
|
1.70 |
% |
Guo Wang
|
|
CEO
|
|
Common
|
|
|
247,277 |
*(1) |
|
|
1.86 |
% |
Wencai Pan*
|
|
CFO
|
|
|
|
|
|
|
|
|
0 |
|
Qingtai Wang*
|
|
Former CFO
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% Security Holders
|
|
|
|
|
|
|
|
|
Chongxin Xu
Flat 10, 84-88 Pitt St.
Mortdale NSW 2223
|
|
|
|
Common
|
|
|
12,363,885 |
|
|
|
93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Xuchun Wang
17 Guo Dao Road, 6-3-206
Pengji Town, Dongping County, Shandong
Province, China 271509
|
|
|
|
Common
|
|
|
10,880,219 |
*(2) |
|
|
81 .84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lingfa Huang
17 Guo Dao Road, 7-3-205
Pengji Town, Dongping County, Shandong
Province, China 271509
|
|
|
|
Common
|
|
|
989,112 |
*(3) |
|
|
7.44 |
% |
|
|
|
* |
|
Mr. Wencai Pan does not hold any shares in our Company as of the date of this Current Report. While Mr. Qingtai Wang served as our CFO, he
did not hold any shares in our Company. |
|
|
|
Under applicable SEC rules, a person is deemed the beneficial owner of a security with regard to which the person directly or indirectly,
has or shares (a) the voting power, which includes the power to vote or direct the voting of the security, or (b) the investment power,
which includes the power to dispose, or direct the disposition, of the security, in each case irrespective of the persons economic
interest in the security. Under SEC rules, a person is deemed to beneficially own securities which the person has the right to acquire
within 60 days through the exercise of any option or warrant or through the conversion of another security. |
39
|
|
|
*(1) |
|
Mr. Guo Wang has an option to acquire 247,277 shares of our common stock currently owned by Mr. Chongxin Xu. For details regarding this
option agreement, see our disclosures under Business Option Agreements. |
|
*(2) |
|
Mr. Xuchun Wang has an option to acquire 10,880,219 shares of our common stock currently owned by Mr. Chongxin Xu, out of which, 247,278
shares to be acquired upon exercise of the option will be held by Mr. Xuchun Wang for himself and 10,632,941 shares to be acquired upon
exercise of the option will be held by Mr. Xuchun Wang for and on behalf of the shareholders of Ruixing Group as a whole, except to the
extent of his pecuniary interest therein as a shareholder of Ruixing Group. Mr. Wang disclaims the beneficial ownership of all the
applicable 10,632,941 shares upon exercise of the option except to the extent of his pecuniary interest therein as a shareholder of Ruixing
Group. Mr. Guangyin Meng and Mr. Dianshun Zhang, two shareholders of Ruixing Group, will beneficially own 4,533,787 shares representing
approximately 34.10% of the total issued and outstanding shares of our Company and 226,309 shares representing approximately 1.70% of the
total issued and outstanding shares of our Company, respectively, upon exercise of the option by Mr. Xuchun Wang. For details regarding
this option agreement, see our disclosures under Business Option Agreements. |
|
*(3) |
|
Mr. Lingfa Huang has an option to acquire 989,112 shares of our common stock currently owned by Mr. Chongxin Xu. For details regarding this
option agreement, see our disclosures under Business Option Agreements. |
Changes in Control
Pursuant to an option agreement, dated May 13, 2011, between Mr. Xuchun Wang and Mr. Chongxin Xu,
Mr. Wang was granted an option to acquire 10,880,219 shares of Xiangrui owned by Mr. Xu, out of
which, 247,278 shares to be acquired upon exercise of the option will be held by Mr. Xuchun Wang
for himself and 10,632,941 shares to be acquired upon exercise of the option will be held by Mr.
Xuchun Wang for and on behalf of the shareholders of Ruixing Group as a whole, except to the extent
of his pecuniary interest therein as a shareholder of Ruixing Group. Based on the current number of
our shares that are issued and outstanding, Mr. Wang will hold 81.84% of the total issued and
outstanding shares of our Company upon exercise of such option, among which, 79.98% of the total
issued and outstanding shares of our Company shall be held for and on behalf of the shareholders of
Ruixing Group as a whole, except to the extent of Mr. Wangs pecuniary interest therein as a
shareholder of Ruixing Group. Mr. Wang disclaims the beneficial ownership of 79.98% of the total
issued and outstanding shares of our Company except to the extent of his pecuniary interest therein
as a shareholder of Ruixing Group. For details regarding this option agreement, see our disclosures
under Business Option Agreements. Other than the foregoing, we do not currently have any
arrangements which if consummated may result in a change of control of our Company.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of our executive officers and
directors as of July 20, 2011:
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
Guangyin Meng
|
|
|
46 |
|
|
Chairman |
Dianshun Zhang
|
|
|
56 |
|
|
Director |
Guo Wang
|
|
|
37 |
|
|
Chief Executive Officer |
Qingtai Wang*
|
|
|
45 |
|
|
Former Chief Financial Officer |
Wencai Pan
|
|
|
34 |
|
|
Chief Financial Officer |
Shoubing Tang
|
|
|
44 |
|
|
Vice President of Sales |
Our directors serve in such capacity until the next annual meeting of our stockholders and until
their successors have been elected and qualified. Our executive officers serve at the discretion of
our Board of Directors until they resign or have been removed from office.
For a discussion of the relationship between the various affiliates and our Company, please see our
discussion in the section above entitled Business Our Corporate History.
Guangyin Meng. Mr. Meng became our chairman on May 13, 2011, the day that we consummated our
reverse acquisition of Xiangrui. Prior to the reverse acquisition, Mr. Meng has served as a
director of Shandong Xiangrui since 2005, a position that he still currently holds. Mr. Meng spends
approximately 20% of his time on our business affairs. Mr. Meng has also served as the chairman and
CEO, since 2003, of Ruixing Group, positions that he still currently holds. Mr. Meng spends
approximately 30% of his time on the business affairs of Ruixing Group. Mr. Meng has served as the
chairman of Runyin Bio-chemical since 2002, a position that he still currently holds. Mr. Meng
spends approximately 40% of his time on the business affairs of Runyin Bio-chemical. Furthermore,
Mr. Meng has served as the director of Xinrui Chemical since 2006, a position that he still
currently holds. Mr. Meng spends approximately 10% of his time on the business affairs of Xinrui
Chemical. Mr. Meng has nearly 20 years of corporate management
experience and nearly 20 years of experience in the agricultural industry. He holds a bachelors
degree in chemical engineering from East China University of Science and Technology.
40
Dianshun Zhang. Mr. Zhang became our director on May 13, 2011, the day that we consummated our
reverse acquisition of Xiangrui. Mr. Zhang spends approximately 50% of his time on our business
affairs. Mr. Zhang has also served as a director since 2003 and vice president since 1997 in
Ruixing Group, positions that he still currently holds. Mr. Zhang spends approximately 30% of his
time on the business affairs of Ruixing Group. Mr. Zhang has been a director of Runyin Bio-chemical
since 1997, a position that he still currently holds. Mr. Zhang spends approximately 20% of his
time on the business affairs of Runyin Bio-chemical. Mr. Zhang has over 20 years of corporate
management experience and machinery technician experience in the agricultural industry. Mr. Zhang
is an expert in quantitative and statistical analysis. He has been awarded honors from the Taian
Bureau of Technical Supervision and the Shandong Chemical Bureau. He holds a bachelors degree in
equipment manufacturing from Shandong Dianshi University.
Guo Wang. Mr. Wang became our CEO on May 13, 2011, the day that we consummated our reverse
acquisition of Xiangrui. Mr. Wang has served as the CEO of Shandong Xiangrui since 2005, a position
that he still currently holds. Mr. Wang spends 100% of his time on our business affairs. Mr. Wang
has also served as an engineer in the research and development department of Ruixing Group, from
1997 until 2005. Mr. Wang has over 10 years of agricultural industry experience and over 10 years
of management experience in the engineering sector. He holds a masters degree in chemistry from
Shandong Agricultural University.
*Qingtai Wang. Mr. Wang became our CFO on May 13, 2011, the day that we consummated our reverse
acquisition of Xiangrui. Prior to the reverse acquisition, Mr. Wang served as the CFO of Shandong
Xiangrui from 2009 until July 12, 2011 when we appointed Mr. Wencai Pan as our full time CFO. Mr.
Wang has also served as an accounting manager in Ruixing Group from 1999 to 2009. Mr. Wang has over
ten years of experience in accounting and finance where he has specialized in providing
book-keeping and accounting management. He holds a bachelors degree in accounting from Shandong
University of Finance.
Wencai Pan. Mr. Pan became our CFO on July 12, 2011 replacing Mr. Qingtai Wang. Mr. Pan obtained a
Masters in Professional Accountancy from the University of Utah in 2003. In 1998, Mr. Pan received
a bachelors degree in Economics from The University of International Business & Economics,
Beijing, China. Mr. Pan passed the Chinese CPA exams in 1997 and passed the Uniform CPA exams in
the United States in 2002. Prior to joining the Company, Mr. Pan had been employed at Aramex
Express Logistics Services (Shanghai) Co. Ltd., a global logistics and transportation company,
since 2007, as controller for its China operations and was based out of Shanghai. During 2006, Mr.
Pan had been employed as a consultant by the Centergate Securities Bankruptcy Committee, which was
set up by the China Securities Regulatory Commission, where he assisted on bankruptcy audits on
Centergate Securities Ltd. Co. Previously, Mr. Pan served as the finance manager for Shera
International Limited, a technology product development, production and distribution company, from
2004 until the end of 2005 and was based out of Shanghai. Mr. Pan was employed as an internal
auditor by Valley National Bank, located in Wayne, New Jersey, U.S., from 2003 to 2004. None of Mr.
Pans previous employers is a parent, subsidiary or other affiliate of the Company.
Shoubing Tang. Mr. Tang has served as the vice president of sales of Shandong Xiangrui since 2009,
a position that he still currently holds. Mr. Tang has also served as a manager and a vice
president in the sales department of Ruixing Group from 1999 until 2009. Mr. Tang devotes 100% of
his time on our business affairs. Mr. Tang has 20 years of comprehensive sales and marketing
experience in the agricultural and chemicals industry and is well positioned to lead our sales
function.
Family Relationships
Our chairman Mr. Guangyin Meng and an option holder Mr. Xuchun Wang are brother-in-laws. Other than
the foregoing, there are no family relationships among our directors or officers.
Involvement in Certain Legal Proceedings
Over the past ten years, to our knowledge, none of our directors or executive officers has been (i)
involved in any petition under Federal bankruptcy laws or any state insolvency law, convicted, (ii)
convicted in a criminal proceeding or is a named subject of a pending criminal proceeding
(excluding traffic violations and other minor offenses), (iii) subject of any order, judgment, or
decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining him from (a) acting as a futures commission merchant,
introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage
transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an
associated person of any of the foregoing, or as an investment adviser, underwriter, broker or
dealer in securities, or as an affiliated person, director or employee of any investment company,
bank, savings and loan association or insurance company, or engaging in or continuing any conduct
or practice in connection with such activity, (b) engaging in any type of business practice, or (c)
engaging in any activity in connection with the purchase or sale of any security or commodity or in
connection with any violation of Federal or State securities laws or Federal commodities laws, or
(d) subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of
any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the
right to engage in any activity described in (iii)(a), (iv) found by a court of competent
jurisdiction in a civil action or by the Commission to have violated any Federal or State
securities law, and the judgment in such civil action or finding by the Commission has not been
subsequently reversed, suspended, or vacated, (v) found by a court of competent jurisdiction in a
civil action or by the Commodity Futures Trading Commission to have violated any Federal
commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated. (vi)
subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree,
or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of
(a) any Federal or State securities or commodities law or regulation, (b) any law or regulation
respecting financial institutions or insurance companies, or (c) any law or regulation prohibiting
mail or wire fraud or fraud in connection with any business entity, or (vii) the subject of, or a
party to, any sanction or order, not subsequently reversed, suspended or vacated, of any
self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. §
78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act
(7 U.S.C. §1(a)(29))), or any equivalent exchange, association, entity or organization that has
disciplinary authority over its members or persons associated with a member. Except as set forth in
our discussion below in Transactions with Related Persons and Director Independence, none of our
directors, director nominees or executive officers has been involved in any transactions with us or
any of our directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.
41
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Background and Compensation Philosophy
Prior to our reverse acquisition of SMSA in 2011, Xiangrui was a privately-held BVI company that
had no operations or assets other than its ownership of the capital stock of the WFOE.
Following the reverse acquisition of SMSA, our named executive officers included Mr. Guo Wang, Mr.
Shoubing Tang and Mr. Qingtai Wang. Mr. Wencai Pan replaced Mr. Qingtai Wang as our CFO on July 12,
2011. From and after our reverse acquisition of SMSA, our board of directors became responsible for
determining the compensation of our named executive officers, based on our financial and operating
performance and prospects and the contributions made by each of the executive officers to our
success. In determining the compensation paid to our officers, our board of directors will make
reference to similarly-sized manufacturing companies operating in our geographic region.
We do not currently have a compensation committee. As the membership of our board of directors
increases, our board of directors expects to form a compensation committee charged with the
oversight of our executive compensation plans, policies and programs and the authority to determine
and approve the compensation of our Chief Executive Officer and make recommendations with respect
to the compensation of our other executive officers.
Our board of directors goal in determining compensation levels is to adequately reward the efforts
and achievements of executive officers in the management of our company. The objective of our
compensation program is to incentivize our employees and to retain employees and avoid employee
turnover. We currently have no pension plan, stock option plan, non-equity incentive plan or
deferred compensation arrangement. We have not used a compensation consultant in any capacity but
believe that our executive compensation package is comparable to similar businesses in the areas
where we operate.
Elements of Compensation
We provide our executive officers with a base salary and discretionary bonuses to compensate them
for services rendered during the year. We believe that our policy of compensating our executives in
this way has served the company well and does not encourage unreasonable risk-taking.
|
|
|
Base Salary. The base salary we provide is intended to equitably
compensate the named executive officers based upon their level of
responsibility, complexity and importance of role, leadership and
growth potential, and experience. The base salary paid to our named
executive officers is governed by their respective employment
agreements and is reflected in the Summary Compensation Table below. |
|
|
|
|
Equity Incentives. Presently, we do not have an equity based incentive
program. In the future, we may adopt and establish an equity incentive
plan pursuant to which awards may be granted and which will provide us
with the ability to provide to our eligible employees, including each
of our named executive officers, grants of stock compensation awards
based on our shares if our compensation committee determines that such
awards are in our and our stockholders best interests. |
42
Summary Compensation Table Fiscal Year Ended December 31, 2010
The following table sets forth information concerning all cash and non-cash compensation awarded
to, earned by or paid to the named persons for services rendered in all capacities during the noted
periods. No executive officer received total annual salary and bonus compensation in excess of
$100,000.
|
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|
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|
|
|
|
|
|
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|
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|
|
Non- |
|
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|
|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
Non-Equity |
|
|
Qualified |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Option |
|
|
Compensation |
|
|
Compensation |
|
|
All Other |
|
|
|
|
Name and Principal |
|
|
|
|
|
Salary |
|
|
Bonus |
|
|
Awards |
|
|
Awards |
|
|
Earnings |
|
|
Earnings |
|
|
Compensation |
|
|
Total |
|
Position |
|
Year |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
Timothy P. Halter*
Former Principal
Executive Officer |
|
|
2010 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guo Wang*
CEO |
|
|
2010 |
|
|
|
7,168 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
7,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qingtai Wang*
Former CFO |
|
|
2010 |
|
|
|
4,533 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
4,533 |
|
|
|
|
* |
|
Mr. Timothy P. Halter resigned from all offices he held with us and his position as our director upon closing of the share exchange transaction on May 13, 2011. |
|
* |
|
On May 13, 2011, in connection with the reverse acquisition of SMSA, Mr. Guo Wang became our chief executive officer. Prior to the effective date of the reverse acquisition, Mr. Wang served at
our subsidiary Shandong Xiangrui as its chief executive officer, a position that he still currently holds. In 2010, Mr. Wang was compensated in full by Shandong Xiangrui. Now that our Company is
a public reporting company, Mr. Wang will be paid an annual cash compensation of $50,000. He will be compensated in full by Shandong Xiangrui. |
|
* |
|
On May 13, 2011, in connection with the reverse acquisition of SMSA, Mr. Qingtai Wang became our chief financial officer. Prior to the effective date of the reverse acquisition, Mr. Wang served
at our subsidiary Shandong Xiangrui as its chief financial officer from 2009 until his appointment as our chief financial officer on May 13, 2011. In 2010, Mr. Wang was compensated in full by
Ruixing Group, an affiliate of Shandong Xiangrui. Mr. Wang resigned from his position as our chief financial officer on July 12, 2011. The announcement was made on the Companys Current Report on
Form 8-K filed on July 13, 2011. |
Employment and Change of Control Severance Agreements
During the year ended December 31, 2010, none of our named executive officers have been part of
employment and change of control severance agreements.
Outstanding Equity Awards at Fiscal Year End
None of our named executive officers received any equity awards, including options, restricted
stock or other equity incentives during the fiscal year ended December 31, 2010.
Option Exercises and Stock Vested
During the year ended December 31, 2010, there were no option exercises or vesting of stock awards
to our named executive officers.
Non-qualified Deferred Compensation
During the year ended December 31, 2010, there was no non-qualified deferred compensation of any of
our named executive officers.
Potential Payments on Termination or Change in Control
During the year ended December 31, 2010, there were no payments on termination or change of control
to any of our named executive officers.
Audit and Compensation Committee
We do not have a standing audit, compensation or nominating committee. Our entire board of
directors acts in such capacities. The board of directors of our company does believe that it is
necessary to have an audit committee because we believe that shareholder value will be better
protected with an independent audit committee. We plan to recruit an experienced independent
director who has a financial reporting background and is familiar with U.S. GAAP to join our board.
In the long term, we plan to set up an audit committee and a compensation committee.
43
TRANSACTIONS WITH RELATED PERSONS AND DIRECTOR INDEPENDENCE
In addition to the director and executive compensation arrangements discussed above in Executive
Compensation, we have been a party to the following transactions since the beginning of the 2009
fiscal year in which the amount involved exceeded or will exceed $120,000 and in which any
director, executive officer or holder of more than 5% of our common stock, or any member of the
immediate family of any of them, had or will have a material interest. We believe that the terms
obtained or the consideration paid or received, as applicable, in connection with the transactions
described below were comparable to the terms available or the amounts paid or received, as
applicable, in arms-length transactions.
Mr. Lingfa Huang, a shareholder of Shandong Xiangrui, is a beneficial owner of more than 5% of our
common stock as of the date of this Current Report. Mr. Guangyin Meng is our chairman and also
holds equity interests indirectly and directly and holds executive positions in Shandong Xiangrui
and in our affiliates Ruixing Group, Runyin-bio Chemical and Xinrui Chemical. Mr. Guangyin Meng is
a beneficial owner of more than 5% of our common stock as of the date of this Current Report. For
details on the nature of the relationships among Mr. Huang, Mr. Meng, and our Company, see our
disclosures under the sections entitled Business Option Agreements and Security Ownership of
Certain Beneficial Owners and Management. Our other directors and officers also hold equity
interests or executive positions in Shandong Xiangrui and our affiliates. For details, refer to our
disclosure under the section entitled Directors and Executive Officers. For details on the nature
of the relationships that we have with our operating entity Shandong Xiangrui and our affiliates,
see our disclosure under the section entitled Our Corporate History.
Contractual Arrangements with Shandong Xiangrui and its Shareholders
Due to certain restrictions under PRC law on foreign ownership of companies within the corn
refinery industry, we conduct our operations in China through contractual arrangements among our
wholly foreign owned PRC subsidiary, Tai an Yisheng Management & Consulting Co., Ltd., or the
WFOE, Shandong Xiangrui, and the shareholders of Shandong Xiangrui. Please refer to the section
entitled Our Corporate History VIE Arrangements for a description of these contractual
arrangements.
Transactions with Entities Controlled by Certain Directors, Officers or Shareholders
On January 1, 2009, Shandong Xiangrui entered into a Patent License Agreement with Ruixing Group.
Under this agreement, Ruixing Group has licensed the right to use its patent for the Upflow
Anaerobic Sludge Blanket from January 1, 2009 to January 1, 2019 to Shandong Xiangrui free of
charge. For a description of this license please refer to the section entitled Our Business
Patents.
On January 1, 2008, Shandong Xiangrui entered into a Trademark License Agreement with Ruixing
Group. Under this agreement,
Ruixing Group has licensed the right to use its trademark Ruixing
Pinghu and the following logo
from January 1, 2008 to
January 1, 2018 to Shandong Xiangrui free of
charge. For a description of this license please refer to the section entitled Our Business
Trademarks.
In December 2008, Shandong Xiangrui entered into a Plant Lease Agreement with Runyin Bio-chemical.
Under this agreement Shandong Xiangrui leases a 2,717 square meter plant located in Ruixing
Industry Park from Runyin Bio-chemical. The term of the lease is from December 1, 2008 to November
30, 2011. The annual rental, which includes water, electricity, heating and office appliances, is
RMB 61,902 (approximately $9,676). As of the date of this Current Report, Shandong Xiangrui has
paid Runyin Bio-chemical approximately RMB 116,357 ($18,209) under this lease agreement. This lease
is renewable annually upon mutual agreement by the parties.
On January 1, 2009, Shandong Xiangrui entered into a Steam the Purchase Agreement with Runyin
Bio-chemical. Under this agreement, Runyin Bio-chemical agrees to supply steam to Shandong Xiangrui
at the price of RMB 113 ($17.67) per tonne from January 1, 2009 to December 31, 2014. As of the
date of this Current Report, Shandong Xiangrui has paid Runyin Bio-chemical approximately RMB 19.6
million ($2.9 million) for the supply of steam.
On January 1, 2009, Shandong Xiangrui entered into a Steam Sales Agreement with Xinrui Chemical.
Under this agreement, Shandong Xiangrui agrees to supply steam to Xinrui Chemical at the price of
RMB 113 ($17.7) per tonne from January 1, 2009 to December 31, 2014. As of the date of this Current
Report, Xinrui Chemical has paid Shandong Xiangrui approximately RMB 19.6 million ($2.9 million)
for the supply of steam.
On January 1, 2009, Shandong Xiangrui entered into an Electricity Purchase Agreement with Runyin
Bio-chemical. Under this agreement, Runyin Bio-chemical agrees to supply electricity to Shandong
Xiangrui at the price of RMB 0.68/KWH ($0.1) from January 1, 2009 to December 31, 2014. As of the
date of this Current Report, Shandong Xiangrui has paid Runyin Bio-chemical approximately RMB 17.2
million ($2.5 million) for the supply of electricity.
On January 1, 2009, Shandong Xiangrui entered into an Electricity Sales Agreement with Xinrui
Chemical. Under this agreement, Shandong Xiangrui agrees to supply electricity to Xinrui Chemical
at the price of RMB 0.68/KWH ($0.1) from January 1, 2009 to
December 31, 2014. As of the date of this Current Report, Xinrui Chemical has paid Shandong
Xiangrui RMB 3.98 million ($0.58 million) for the supply of electricity.
44
On January 1, 2009, Shandong Xiangrui entered into an Auxiliary Material Purchase Agreement with
Runyin Bio-chemical Co. Under this agreement, Runyin Bio-chemical supplies H2, coal,
soft water and sulfur, to Shandong Xiangrui. H2 is sold for RMB 60 ($9.4) per tonne.
Coal is sold for RMB 585 ($91.4) per tonne. Soft water is sold for RMB 1.77 ($0.3) per cubic meter.
Sulfur is sold for RMB 351 ($54.9) per tonne. As of the date of this Current Report, Shandong
Xiangrui paid Runyin Bio-chemical approximately RMB 9.4 million ($1.4 million) for the supply of
auxiliary materials.
Loans and Guarantees Involving Entities Controlled by Certain Directors, Officers or Shareholders
On July 13, 2009, Citibank (China) Co., Ltd., Shanghai Branch, or Citibank Shanghai, extended a RMB
80 million ($12.5 million) revolving credit to Runyin Bio-chemical. The loan period is from August
10, 2009 to August 10, 2014. Xinrui Chemical, Shandong Xiangrui, Runyin Bio-chemical, Ruixing
Group, and our chairman Mr. Guangyin Meng provided guarantees for this loan. Shandong Xiangrui used
its land use right and its properties which were valued at RMB 20 million ($3.1 million) and RMB
14.9 million ($2.3 million), respectively, to guarantee this loan. The interest rate on the loan is
4.86%. Approximately RMB 72 million ($11.3 million) of the principal was outstanding during the
disclosure period. Approximately RMB 73.5 million ($11.5 million) of the principal is outstanding
as of the date of this Current Report. Approximately RMB 3 million ($0.46 million) interest has
been paid on this loan. Approximately RMB 18.5 million ($2.9 million) of the principal has been
paid on this loan.
On June 11, 2010, Agricultural Development Bank extended a RMB 30 million ($4.7 million) one year
loan to Shandong Xiangrui at the interest rate of 5.31%. Ruixing Group provided the guarantee for
this loan. The loan was fully paid off on June 10, 2011 and was not renewed. Approximately RMB 0.89
million ($0.14 million) interest was paid on this loan.
On June 17, 2010, Bank of Communications Taian Branch extended a RMB 5 million ($0.8 million) one
year loan to Shandong Xiangrui at an interest rate 20% higher than the benchmark borrowing rate
published by the Peoples Bank of China. Runyin Bio-chemical and Mr. Xuchun Wang provided the
guarantee for this loan. The loan was fully paid off on June 16, 2011 and was not renewed.
Approximately RMB 0.14 million ($0.02 million) interest was paid on this loan.
On November 24, 2010, Rural Cooperative Bank of Dongping County extended a RMB 8.5 million ($1.3
million) one year loan to Shandong Xiangrui at the interest rate of 9.452%. Runyin Bio-chemical
provided a guarantee for this loan. The full amount of the principal is outstanding as of the date
of this Current Report. Approximately RMB 0.08 million ($0.01 million) interest has been paid on
this loan.
On April 15, 2011, China Merchants Bank Jinan Branch extended a RMB 10 million ($1.6 million)
six-month loan to Shandong Xiangrui at the interest rate of 7.02%. Runyin Bio-chemical, Shandong
Dongshun Group (an unrelated party) and Mr. Xuchun Wang provided guarantees for this loan. As of
the date of this Current Report, no interest or principal has been paid on this loan.
On July 6, 2011, Shandong Xiangrui obtained a RMB 20 million ($3.1 million) bank draft from the
Agricultural Development Bank of China Dongping Branch. The bank draft will be due in six months
from July 6, 2011. Runyin Bio-chemical is the beneficiary. Shandong Xiangrui is required to keep
RMB 10 million ($1.6 million) in the bank as a deposit. Ruixing Group, Mr. Lingfa Huang and Mr.
Xuchun Wang provided guarantees for this bank draft. There is not interest charged on this bank
draft. As of the date of this Current Report, no interest or principal has been paid on this bank
draft.
On August 3, 2011, Agriculture Development Bank of China, Dongping Branch extended a RMB 30 million
($4.7 million) one year loan to Shandong Xiangrui at an interest rate of 6.56%. Ruixing Group and
Mr. Lingfa Huang provided the guarantee for this loan. As of the date of this Current Report, no
interest or principal has been paid on this loan.
On August 23, 2011, Bank of Communications Taian Branch extended a RMB 5 million ($0.8 million)
one year loan to Shandong Xiangrui at an interest rate 30% higher than the benchmark borrowing rate
published by the Peoples Bank of China. Runyin Bio-chemical and Mr. Xuchun Wang provided the
guarantee for this loan. As of the date of this Current Report, no interest or principal has been
paid on this loan.
Promoters and Certain Control Persons
We did not have any promoters at any time during the past five years.
Director Independence
We currently do not have any independent directors, as the term independent is defined by the
rules of the Nasdaq Stock Market.
45
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings which arise in
the ordinary course of business. However, litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to time that may harm our business. We
are currently not aware of any such legal proceedings or claims that we believe will have a
material adverse affect on our business, financial condition or operating results.
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is eligible to trade under the symbol SAQU, however there is not currently, and
there has never been, an active trading market for our common stock, and no information is
available for the prices of our common stock.
Approximate Number of Holders of Our Common Stock
As of May 13, 2011, there were approximately 570 stockholders of record of our common stock, as
reported by our transfer agent. In computing the number of holders of record, each broker-dealer
and clearing corporation holding shares on behalf of its customers is counted as a single
stockholder.
Dividends
We have never declared dividends or paid cash dividends. Our board of directors will make any
future decisions regarding dividends. We currently intend to retain and use any future earnings for
the development and expansion of our business and do not anticipate paying any cash dividends in
the near future. Our board of directors has complete discretion on whether to pay dividends,
subject to the approval of our shareholders. Even if our board of directors decides to pay
dividends, the form, frequency and amount will depend upon our future operations and earnings,
capital requirements and surplus, general financial condition, contractual restrictions and other
factors that the board of directors may deem relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
We do not have in effect any compensation plans under which our equity securities are authorized
for issuance and we do not have any outstanding stock options.
RECENT SALES OF UNREGISTERED SECURITIES
Reference is made to the disclosure set forth under Item 3.02 of this report, which disclosure is
incorporated herein by reference.
DESCRIPTION OF SECURITIES
Common Stock
Our authorized capital stock consists of 100,000,000 shares of $0.001 par value common stock and
10,000,000 shares of $0.001 par value preferred stock. Each share of common stock entitles a
stockholder to one vote on all matters upon which stockholders are permitted to vote. No
stockholder has any preemptive right or other similar right to purchase or subscribe for any
additional securities issued by us, and no stockholder has any right to convert the common stock
into other securities. No shares of common stock are subject to redemption or any sinking fund
provisions. Subject to the rights of the holders of the preferred stock, if any, our stockholders
of common stock are entitled to dividends when, as and if declared by our board from funds legally
available therefore and, upon liquidation, to a pro-rata share in any distribution to stockholders.
We do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable
future.
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of $0.001 par value preferred stock.
Pursuant to our Articles of Incorporation, our board has the authority, without further stockholder
approval, to provide for the issuance of up to 10,000,000 million shares of our preferred stock in
one or more series and to determine the dividend rights, conversion rights, voting rights, rights
in terms of redemption, liquidation preferences, the number of shares constituting any such series
and the designation of such series. Our Board has the power to afford preferences, powers and
rights (including voting rights) to the holders of any preferred stock preferences, such rights and
preferences being senior to the rights of holders of common stock. No shares of our preferred stock
are currently outstanding. Although we have no present intention to issue any shares of preferred
stock, the issuance of
shares of preferred stock, or the issuance of rights to purchase such shares, may have the effect
of delaying, deferring or preventing a change in control of our company.
46
PROVISIONS HAVING A POSSIBLE ANTI-TAKEOVER EFFECT
Our Articles of Incorporation and Bylaws contain certain provisions that are intended to enhance
the likelihood of continuity and stability in the composition of our board and in the policies
formulated by our board and to discourage certain types of transactions which may involve an actual
or threatened change of our control. Our board is authorized to adopt, alter, amend and repeal our
Bylaws or to adopt new Bylaws. In addition, our board has the authority, without further action by
our stockholders, to issue up to 10 million shares of our preferred stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof. The issuance of our preferred
stock or additional shares of common stock could adversely affect the voting power of the holders
of common stock and could have the effect of delaying, deferring or preventing a change in our
control.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our bylaws provide for the indemnification of our directors to the fullest extent permitted by the
Nevada Revised Statutes and may, if and to the extent authorized by our board of directors, so
indemnify our officers and any other person whom we have the power to indemnify against liability,
reasonable expense or other matter. This indemnification policy could result in substantial
expenditure by us, which we may be unable to recoup.
Insofar as indemnification by us for liabilities arising under the Exchange Act may be permitted to
our directors, officers and controlling persons pursuant to provisions of our Articles of
Incorporation and bylaws, or otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore, unenforceable. In the event that a
claim for indemnification by such director, officer or controlling person of us in the successful
defense of any action, suit or proceeding is asserted by such director, officer or controlling
person, we will, unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification
by us is against public policy as expressed in the Exchange Act and will be governed by the final
adjudication of such issue.
At the present time, there is no pending litigation or proceeding involving a director, officer,
employee or other agent of ours in which indemnification would be required or permitted. We are not
aware of any threatened litigation or proceeding which may result in a claim for such
indemnification.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Reference is made to the disclosure set forth under Item 4.01 of this report, which disclosure is
incorporated herein by reference.
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES
On May 13, 2011, we issued 12,363,885 shares of our common stock to Mr. Xu, the sole shareholder of
Xiangrui. The total consideration for the 12,363,885 shares of our common stock was 1 share of
Xiangrui, which is all the issued and outstanding capital stock of Xiangrui. The number of our
shares issued to Mr. Xu was determined based on an arms-length negotiation. The issuance of our
shares to Mr. Xu was made in reliance on the exemption provided by Section 4(2) of the Securities
Act for the offer and sale of securities not involving a public offering.
ITEM 4.01 CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
On May 13, 2011 concurrent with the share exchange transaction, our board of directors recommended
and approved the dismissal of S.W. Hatfield CPA, or S.W. Hatfield, as our independent auditor,
effective upon the filing of the consummation of the share exchange transaction.
SW Hatfields reports on our financial statements as of and for the fiscal years ended December 31,
2009 and December 31, 2010 did not contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope, or accounting principles, except that its
report for the fiscal year ended December 31, 2010 contained a going concern qualification as to
the ability of us to continue.
During our two most recent fiscal years ended 2009 and 2010 and during the subsequent interim
period through the date of this report, there were (1) no disagreements with S.W. Hatfield on any
matter of accounting principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of S.W. Hatfield, would have
caused S.W. Hatfield to make reference to the subject matter of the disagreements in connection
with its reports, and (2) no events of the type listed in paragraphs (A) through (D) of Item
304(a)(1)(v) of Regulation S-K.
47
Concurrent with the decision to dismiss S.W. Hatfield as our independent auditor, our board of
directors elected to continue the existing relationship of our new subsidiary Xiangrui with BDO
China Shu Lun Pan CPAs and appointed BDO China Shu Lun Pan CPAs as our independent registered
public accounting firm.
During the fiscal years ended 2009 and 2010 and through the date hereof, neither us nor anyone
acting on our behalf consulted BDO China Shu Lun Pan CPAs with respect to (i) the application of
accounting principles to a specified transaction, either completed or proposed, or the type of
audit opinion that might be rendered on our financial statements, and neither a written report was
provided to us or oral advice was provided that BDO China Shu Lun Pan CPAs concluded was an
important factor considered by us in reaching a decision as to the accounting, auditing or
financial reporting issue; or (ii) any matter that was the subject of a disagreement or reportable
events set forth in Item 304(a)(1)(iv) and (v), respectively, of Regulation S-K.
We furnished S.W. Hatfield with a copy of this disclosure on May 13, 2011, providing S.W. Hatfield
with the opportunity to furnish us with a letter addressed to the SEC stating whether it agrees
with the statements made by us herein in response to Item 304(a) of Regulation S-K and, if not,
stating the respect in which it does not agree. A letter from S.W. Hatfield, dated May 16, 2011 is
filed as Exhibit 16.1 to this report.
ITEM 5.01 CHANGES IN CONTROL OF REGISTRANT
Reference is made to the disclosure set forth under Item 2.01 of this report, which disclosure is
incorporated herein by reference.
As a result of the closing of the reverse acquisition with Xiangrui, the former shareholder of
Xiangrui owns 93% of the total outstanding shares of our capital stock and 93% total voting power
of all our outstanding voting securities.
ITEM 5.02 DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF
DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY
ARRANGEMENTS OF CERTAIN OFFICERS
In connection with the closing of the reverse acquisition on May 13, 2011, Mr. Timothy P. Halter,
our sole director and officer, submitted a resignation letter pursuant to which he resigned from
all offices of that he held effective immediately and from his position as our director that will
become effective on the tenth day following the mailing by us of the Information Statement to our
stockholders, which will be mailed out on or about May 17, 2011. The resignation of Mr. Timothy P.
Halter is not in connection with any known disagreement with us on any matter.
Guangyin Meng and Dianshun Zhang were appointed to our board of directors effective as of the
closing of the reverse acquisition on May 13, 2011.
A copy of this report has been provided to Mr. Timothy P. Halter. Mr. Timothy P. Halter has been
provided with the opportunity to furnish us as promptly as possible with a letter addressed to us
stating whether he agrees with the statements made by us in this report, and if not, stating the
respects in which he does not agree. No such letter has been received by us.
Effective July 12, 2011, Mr. Qingtai Wang resigned from his position as Chief Financial Officer of
our Company and was replaced by Mr. Wencai Pan. The announcement was made on the Companys Current
Report on Form 8-K filed on July 13, 2011.
For certain biographical and other information regarding the newly appointed officers and
directors, see the disclosure under Item 2.01 of this report, which disclosure is incorporated
herein by reference.
ITEM 5.06 CHANGE IN SHELL COMPANY STATUS
Reference is made to the disclosure set forth under Item 2.01 and 5.01 of this report, which
disclosure is incorporated herein by reference.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
Filed herewith are the following:
1. |
|
Unaudited financial statements of Shandong Xiangrui for the period ended March 31, 2011. |
|
2. |
|
Audited financial statements of Shandong Xiangrui for the fiscal years ended December 31, 2009 and 2010. |
|
3. |
|
Unaudited Pro Forma Financial Information. |
48
(d) Exhibits
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
2.1 |
** |
|
Share Exchange Agreement, dated May 13, 2011, among the Company, Xiangrui and Mr. Chongxin Xu. |
|
|
|
|
|
|
2.2 |
|
|
First Amended, Chapter 11 Plan of Reorganization [Incorporated by reference to Exhibit 2.1 to
the Companys Registration Statement on Form 10 filed on August 27, 2010]. |
|
|
|
|
|
|
2.3 |
|
|
Order Confirming First Amended, Chapter 11 Plan of Reorganization [Incorporated by reference to
Exhibit 2.2 to the Companys Registration Statement on Form 10 filed on August 27, 2010]. |
|
|
|
|
|
|
3.1 |
* |
|
Agreement and Plan of Merger by and between Senior Management Services of Treemont, Inc. and SMSA Treemont Acquisition Corp., dated May 3, 2010. |
|
|
|
|
|
|
3.2 |
* |
|
Articles of Merger as filed with the Secretary of State of the State of Nevada on May 12, 2010. |
|
|
|
|
|
|
3.3 |
* |
|
Certificate of Merger as filed with the Secretary of State of the State of Texas on May 12, 2010. |
|
|
|
|
|
|
3.4 |
* |
|
Corporate Charter as filed with the Secretary of State of the State of Nevada on May 3, 2010. |
|
|
|
|
|
|
3.5 |
* |
|
Certificate of Correction in relation to the correction of authorised shares of preferred stock
as filed with the Secretary of State of the State of Nevada on July 14, 2010. |
|
|
|
|
|
|
3.6 |
* |
|
Articles of Incorporation of the Company as filed as Exhibit 3.4 to the Companys Registration
Statement on Form 10 on August 27, 2010. |
|
|
|
|
|
|
3.7 |
* |
|
Bylaws of the Company as filed as Exhibit 3.6 to the Companys Registration Statement on Form 10
on August 27, 2010. |
|
|
|
|
|
|
10.1 |
* |
|
Trademark License Agreement, dated January 1, 2008, between Shandong Xiangrui and Ruixing Group
Co., Ltd. [English Translation] |
|
|
|
|
|
|
10.2 |
* |
|
Patent License Agreement, dated January 1, 2009, between Shandong Xiangrui and Ruixing Group Co.
[English Translation] |
|
|
|
|
|
|
10.3 |
* |
|
Maximum Property Guarantee Contract, dated July 13, 2009, by and among Shandong Xiangrui,
Shandong Xinrui Chemical Devices Co., Ltd., and Citibank Shanghai, for a RMB 80 million loan.
[English Translation of Summary] |
|
|
|
|
|
|
10.4 |
** |
|
Loan Agreement, dated June 11, 2010, between Shandong Xiangrui and Agricultural Development Bank
of China, Dongping Branch, for RMB 30 million. [English Translation of Summary] [previously
filed as Exhibit 10.9] |
|
|
|
|
|
|
10.5 |
** |
|
Guarantee Contract, dated June 11, 2010, between Ruixing Group Co., Ltd. and Agricultural
Development Bank of China, Dongping Branch, for RMB 30 million. [English Translation of Summary]
[previously filed as Exhibit 10.10] |
|
|
|
|
|
|
10.6 |
** |
|
Loan Agreement, dated June 17, 2010, between Shandong Xiangrui and Bank of Communications,
Taian Branch, for RMB 5 million. [English Translation of Summary] [previously filed as Exhibit
10.1] |
|
|
|
|
|
|
10.7 |
** |
|
Guarantee Contract, dated June 17, 2010, between Shandong Runyin Biochemical Co., Ltd. and Bank
of Communications, Taian Branch, for a RMB 5 million loan. [English Translation of Summary]
[previously filed as Exhibit 10.2] |
|
|
|
|
|
|
10.8 |
* |
|
Guarantee Contract, dated June 17, 2010, between Mr. Xuchun Wang and Bank of Communications, for
a RMB 5 million loan. [English Translation] |
|
|
|
|
|
|
10.9 |
** |
|
Loan Agreement, dated November 24, 2010, between Shandong Xiangrui and Rural Cooperative Bank of
Dongping, Shandong, for RMB 8.5 million. [English Translation of Summary] [previously filed as
Exhibit 10.7] |
49
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
10.10
|
** |
|
Maximum Amount Mortgage Contract, dated November
24, 2010, between Shandong Runyin Biochemical
Co., Ltd. and Rural Cooperative Bank of
Dongping, Shandong, for RMB 8.5 million.
[English Translation of Summary] [previously
filed as Exhibit 10.8] |
|
|
|
|
10.11
|
* |
|
Loan Agreement, dated December 29, 2010, between
Shandong Xiangrui and Rural Cooperative Bank of
Dongping County, for RMB 10 million [English
Translation of Summary] |
|
|
|
|
10.12
|
** |
|
Loan Agreement, dated March 15, 2011, between
Shandong Xiangrui and Rural Cooperative Bank of
Dongping, Shandong, for RMB 5 million. [English
Translation of Summary] [previously filed as
Exhibit 10.4] |
|
|
|
|
10.13
|
** |
|
Loan Agreement, dated March 16, 2011, between
Shandong Xiangrui and Rural Cooperative Bank of
Dongping, Shandong, for RMB 5 million. [English
Translation of Summary] [previously filed as
Exhibit 10.5] |
|
|
|
|
10.14
|
** |
|
Guarantee Agreement, dated March 15, 2011,
between Shandong Guangda Sun & Moon Grease Co.,
Ltd. and Rural Cooperative Bank of Dong Ping,
Shandong for RMB 10 million loan. [English
Translation of Summary] [previously filed as
Exhibit 10.6] |
|
|
|
|
10.15
|
* |
|
Loan Agreement, dated April 15, 2011, between
Shandong Xiangrui and China Merchant Bank, Jinan
Branch, for RMB 10 million. [English Translation
of Summary] |
|
|
|
|
10.16
|
* |
|
Irrevocable Maximum Guarantee Letter, dated
April 15, 2011, issued to China Merchant Bank,
Jinan Branch, by Shandong Runyin Bio-chemical,
for a RMB 10 million loan. [English Translation
of Summary] |
|
|
|
|
10.17
|
* |
|
Irrevocable Maximum Guarantee Letter, dated
April 15, 2011, issued to China Merchant Bank,
Jinan Branch, by Mr. Xuchun Wang, for a RMB 10
million loan. [English Translation] |
|
|
|
|
10.18
|
* |
|
Acceptance Agreement, dated July 6, 2011,
between Shandong Xiangrui and Agriculture
Development Bank of China, Dongping Branch, for
a RMB 20 million loan.[English Translation of
Summary] |
|
|
|
|
10.19
|
* |
|
Guarantee Contract, dated July 6, 2011, between
Ruixing Group and Agriculture Development Bank
of China Dongping Branch, for a RMB 20 million
loan. [English Translation of Summary] |
|
|
|
|
10.20
|
* |
|
Guarantee Contract, dated July 6, 2011, between
Mr. Xuchun Wang (and his wife Ms. Meng
Guangxiang) and Agriculture Development Bank of
China, Dongping Branch, for a RMB 20 million
loan. [English Translation] |
|
|
|
|
10.21
|
* |
|
Guarantee Agreement, dated July 6, 2011, between
Mr. Lingfa Huang (and his wife Ms. Ma Hong) and
Agriculture Development Bank of China, Dongping
Branch, for a RMB 20 million loan. [English
Translation] |
|
|
|
|
10.22
|
** |
|
Contract of Offering Technology Design, Key
Equipments, Materials and Technique Service for
Effluent Disposal Project, dated February 1,
2011, between Shandong Xiangrui and Park
Environment Protection Technology (Shanghai)
Co., Ltd. [English Translation of Summary]
[previously filed as Exhibit 10.24] |
|
|
|
|
10.23
|
* |
|
Corn Kernels Purchase Agreement, dated April 1,
2011, between Shandong Xiangrui and Jinan
Jingliang Grains Storage Co., Ltd. [English
Translation] |
|
|
|
|
10.24
|
* |
|
Corn Kernels Purchase Agreement, dated May 6,
2011, between Shandong Xiangrui and Zhongjiao
Grain and Oil Storage Center, Qingdao
Tariff-free Area. [English Translation] |
|
|
|
|
10.25
|
* |
|
Corn Kernels Purchase Agreement, dated May 9,
2011, between Shandong Xiangrui and Taian
Branch of China Grain Reserves Corporation.
[English Translation] |
|
|
|
|
10.26
|
* |
|
Corn Kernels Purchase Agreement, dated May 11,
2011, between Shandong Xiangrui and Shanghai
Yihai Commerce & Trade Co., Ltd. [English
Translation] |
|
|
|
|
10.27
|
** |
|
Exclusive Technical and Consulting Service
Agreement, dated May 9, 2011, between the WFOE
and Shandong Xiangrui. [previously filed as
Exhibit 10.33] |
50
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
10.28
|
** |
|
Management Fee Payment Agreement, dated May 9, 2011, among the WFOE, Shandong Xiangrui and
the Shandong Xiangrui Shareholders. [previously filed as Exhibit 10.34] |
|
|
|
|
10.29
|
** |
|
Equity Interest Pledge Agreement, dated May 9, 2011, between the WFOE and the Shandong
Xiangrui Shareholders. [previously filed as Exhibit 10.35] |
|
|
|
|
10.30
|
** |
|
Exclusive Equity Interest Purchase Agreement, dated May 9, 2011, among the WFOE, Shandong
Xiangrui and the Shandong Xiangrui Shareholders. [previously filed as Exhibit 10.36] |
|
|
|
|
10.31
|
** |
|
Operating Agreement, dated May 9, 2011, among the WFOE, Shandong Xiangrui and the Shandong
Xiangrui Shareholders. [previously filed as Exhibit 10.37] |
|
|
|
|
10.32
|
** |
|
Proxy Agreement, dated May 9, 2011, among the WFOE, Shandong Xiangrui and the Shandong
Xiangrui Shareholders. [previously filed as Exhibit 10.38] |
|
|
|
|
10.33
|
** |
|
Option Agreement, dated May 13, 2011, between Mr. Chongxin Xu and Mr. Binglong Qiao.
[previously filed as Exhibit 10.39] |
|
|
|
|
10.34
|
** |
|
Option Agreement, dated May 13, 2011, between Mr. Chongxin Xu and Mr. Guo Wang. [previously
filed as Exhibit 10.40] |
|
|
|
|
10.35
|
** |
|
Option Agreement, dated May 13, 2011, between Mr. Chongxin Xu and Mr. Lingfa Huang.
[previously filed as Exhibit 10.41] |
|
|
|
|
10.36
|
** |
|
Option Agreement, dated May 13, 2011, between Mr. Chongxin Xu and Mr. Xuchun Wang.
[previously filed as Exhibit 10.42] |
|
|
|
|
10.37
|
** |
|
Form of Labor Contract for contracts signed by and between Shandong Xiangrui and its
employees. [English Translation] [previously filed as Exhibit 10.25] |
|
|
|
|
10.38
|
*** |
|
Plant Lease Agreement, dated December 1, 2008, between Shandong Xiangrui and Runyin
Bio-chemical. [English Translation] |
|
|
|
|
10.39
|
*** |
|
Transportation Lease Agreement, dated January 1, 2009, between Shandong Xiangrui and Runyin
Bio-chemical. [English Translation of Summary] |
|
|
|
|
10.40
|
*** |
|
Steam Purchase Agreement, dated January 1, 2009, between Shandong Xiangrui and Runyin
Bio-chemical. [English Translation of Summary] |
|
|
|
|
10.41
|
*** |
|
Electricity Purchase Agreement, dated January 1, 2009, between Shandong Xiangrui and Runyin
Bio-chemical. [English Translation of Summary] |
|
|
|
|
10.42
|
*** |
|
Auxiliary Materials Purchase Agreement, dated January 1, 2009, between Shandong Xiangrui and
Runyin Bio-chemical. [English Translation of Summary] |
|
|
|
|
10.43
|
*** |
|
Steam Sales Agreement, dated January 1, 2009, between Shandong Xiangrui and Xinrui Chemical.
[English Translation of Summary] |
|
|
|
|
10.44
|
*** |
|
Electricity Sales Agreement, dated January 1, 2009, between Shandong Xiangrui and Xinrui Chemical. [English Translation of Summary] |
|
|
|
|
10.45
|
*** |
|
Loan Agreement, dated August 23, 2011, between Shandong Xiangrui and Bank of Communications
Taian Branch for RMB 5 million. [English Translation of Summary] |
|
|
|
|
10.46
|
*** |
|
Guaranty Contract, dated August 23, 2011, between Runyin Bio-chemical and Bank of
Communications, Taian Branch, for a RMB 5 million loan. [English Translation of Summary] |
|
|
|
|
10.47
|
*** |
|
Guaranty Contract, dated August 23, 2011, between Mr. Xuchun Wang and Bank of Communications
Taian Branch, for a RMB 5 million loan. [English Translation] |
51
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
10.48
|
*** |
|
Loan Agreement, dated August 3, 2011, between Shandong Xiangrui and Agriculture Development
Bank of China, Dongping Branch, for RMB 30 million. [English Translation of Summary] |
|
|
|
|
10.49
|
*** |
|
Guarantee Contract, dated August 3, 2011, between Ruixing Group and Agriculture Development
Bank of China, Dongping Branch, for a RMB 30 million loan. [English Translation of Summary] |
|
|
|
|
10.50
|
*** |
|
Guarantee Contract, dated August 3, 2011, between Mr. Lingfa Huang (and his wife Ma Hong)
and Agriculture Development Bank of China, Dongping Branch, for a RMB 30 million loan. [English Translation] |
|
|
|
|
10.51
|
**** |
|
Equity Transfer Agreement, dated December 20, 2008, between Shandong Ruixing Chemical Co.,
Ltd. and Mr. Xuchun Wang [English Translation] |
|
|
|
|
16.1
|
** |
|
Letter, dated May 16, 2011, from S.W. Hatfield CPA regarding change in certifying accountant. |
|
|
|
|
20
|
** |
|
Press Release. |
|
|
|
|
21
|
** |
|
Subsidiaries of the Registrant. |
|
|
|
* |
|
Previously filed in the Companys Current Report on Amendment No. 1 to Form 8-K filed on July 20, 2011. |
|
** |
|
Previously filed in the Companys Current Report on Form 8-K filed on May 16, 2011. |
|
*** |
|
Previously filed in the Companys Current Report on Amendment No. 2 to Form 8-K filed on September 6, 2011. |
|
**** |
|
Filed herein. |
52
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.
|
|
|
|
|
|
SMSA TREEMONT ACQUISITION CORP.
|
|
|
By: |
/s/ Guo Wang
|
|
|
|
Chief Executive Officer |
|
Dated: November 3, 2011
SHANDONG XIANGRUI PHARMACY CO., LTD.
UNAUDITED CONDENSED FINANCIAL STATEMENTS
Period ended 31 March, 2011
CONTENTS
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
3 4 |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
6 7 |
|
|
|
|
|
|
|
|
|
8 22 |
|
1
INDEPENDENT AUDITORS REPORT
PCPAR[2011]-[B073]
Board of Directors and Shareholders of
Shandong Xiangrui Pharmacy Co., Ltd.
Shandong, China
We have reviewed the accompanying balance sheets of Shandong Xiangrui Pharmacy Co., Ltd. (the
Company) as of March 31, 2011 and 2010, and the related statements of income, and cash flows for
the periods then ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All information included
in these financial statements is the representation of the management of the Company.
A review consists principally of inquiries of company personnel and analytical procedures applied
to financial data. It is substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the
accompanying financial statements in order for them to be in conformity with generally accepted
accounting principles.
BDO China Shu Lun Pan Certified Public Accountants LLP
Shanghai, China
April 22, 2011
2
SHANDONG XIANGRUI PHARMACY CO., LTD.
CONDENSED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31, |
|
|
|
Notes |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
US$ |
|
|
US$ |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
5,838,523 |
|
|
|
6,634,012 |
|
Restricted Cash |
|
|
|
|
|
|
|
|
|
|
226,494 |
|
Notes receivable |
|
|
3 |
|
|
|
4,074,507 |
|
|
|
2,236,468 |
|
Accounts receivable, net |
|
|
3 |
|
|
|
618,221 |
|
|
|
255,870 |
|
Inventories, net |
|
|
|
|
|
|
2,787,813 |
|
|
|
1,954,879 |
|
Advances to third party suppliers |
|
|
|
|
|
|
2,589,162 |
|
|
|
907,796 |
|
Other receivables |
|
|
|
|
|
|
149,360 |
|
|
|
104,681 |
|
Amounts due from related parties |
|
|
11 |
|
|
|
6,334 |
|
|
|
|
|
Deferred tax assets |
|
|
7 |
|
|
|
267,936 |
|
|
|
265,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
|
|
|
|
16,331,856 |
|
|
|
12,585,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
4 |
|
|
|
2,943,717 |
|
|
|
2,973,276 |
|
Land use rights, net |
|
|
5 |
|
|
|
2,526,883 |
|
|
|
2,542,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-current Assets |
|
|
|
|
|
|
5,470,600 |
|
|
|
5,516,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
|
|
|
|
|
21,802,456 |
|
|
|
18,101,479 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the financial statements.
3
SHANDONG XIANGRUI PHARMACY CO., LTD.
CONDENSED BALANCE SHEETS (continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31, |
|
|
|
Notes |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
US$ |
|
|
US$ |
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank borrowings |
|
|
6 |
|
|
|
9,685,193 |
|
|
|
8,078,276 |
|
Accounts payable to third parties |
|
|
|
|
|
|
1,159,288 |
|
|
|
827,993 |
|
Advance from third party customers |
|
|
|
|
|
|
348,326 |
|
|
|
167,704 |
|
Payroll and welfare payable |
|
|
|
|
|
|
4,762 |
|
|
|
19,305 |
|
Accrued expenses |
|
|
|
|
|
|
191,308 |
|
|
|
106,179 |
|
Amounts due to related parties |
|
|
11 |
|
|
|
2,292,012 |
|
|
|
2,249,526 |
|
Income tax payable |
|
|
7 |
|
|
|
715,043 |
|
|
|
150,218 |
|
VAT tax payable |
|
|
|
|
|
|
414,377 |
|
|
|
859,128 |
|
Miscellaneous tax payables |
|
|
|
|
|
|
38,105 |
|
|
|
88,937 |
|
Other payables to third parties |
|
|
8 |
|
|
|
77,731 |
|
|
|
205,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
|
|
|
|
14,926,145 |
|
|
|
12,752,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
7 |
|
|
|
158,740 |
|
|
|
172,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-current Liabilities |
|
|
|
|
|
|
158,740 |
|
|
|
172,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
|
|
|
|
15,084,885 |
|
|
|
12,925,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in capital |
|
|
9 |
|
|
|
2,416,480 |
|
|
|
2,416,480 |
|
Statutory reserves |
|
|
10 |
|
|
|
522,591 |
|
|
|
522,591 |
|
Accumulated other comprehensive income |
|
|
|
|
|
|
(426,267 |
) |
|
|
(427,019 |
) |
Retained earnings |
|
|
|
|
|
|
4,204,767 |
|
|
|
2,664,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
|
|
|
|
6,717,571 |
|
|
|
5,176,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY |
|
|
|
|
|
|
21,802,456 |
|
|
|
18,101,479 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the financial statements.
4
SHANDONG XIANGRUI PHARMACY CO., LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
|
|
|
|
|
MARCH 31, |
|
|
|
Notes |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
US$ |
|
|
US$ |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Cornstarch |
|
|
|
|
|
|
13,151,195 |
|
|
|
6,903,457 |
|
Glucose |
|
|
|
|
|
|
2,911,882 |
|
|
|
2,070,238 |
|
Others |
|
|
|
|
|
|
58,759 |
|
|
|
10,218 |
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
|
|
|
|
16,121,836 |
|
|
|
8,983,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales |
|
|
|
|
|
|
|
|
|
|
|
|
Cornstarch |
|
|
|
|
|
|
(11,174,542 |
) |
|
|
(6,045,909 |
) |
Glucose |
|
|
|
|
|
|
(2,180,337 |
) |
|
|
(1,681,267 |
) |
Others |
|
|
|
|
|
|
(58,759 |
) |
|
|
(10,218 |
) |
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales |
|
|
|
|
|
|
(13,413,638 |
) |
|
|
(7,737,394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
|
|
|
|
2,708,198 |
|
|
|
1,246,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution |
|
|
|
|
|
|
(293,519 |
) |
|
|
(242,607 |
) |
General and administrative |
|
|
|
|
|
|
(112,570 |
) |
|
|
(55,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
|
|
|
|
(406,089 |
) |
|
|
(297,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income |
|
|
|
|
|
|
1,310 |
|
|
|
|
|
Interest Expenses |
|
|
|
|
|
|
(175,174 |
) |
|
|
(86,347 |
) |
Other Income, net |
|
|
|
|
|
|
(41,289 |
) |
|
|
5,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Tax
Expenses |
|
|
|
|
|
|
2,086,956 |
|
|
|
867,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expenses |
|
|
7 |
|
|
|
(546,506 |
) |
|
|
(219,976 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
|
|
|
|
1,540,450 |
|
|
|
647,855 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the financial statements.
5
SHANDONG XIANGRUI PHARMACY CO., LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
|
MARCH 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,540,450 |
|
|
|
647,855 |
|
|
|
|
|
|
|
|
|
|
Adjustment to reconcile net income to net cash
provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment |
|
|
128,787 |
|
|
|
196,847 |
|
Amortization of land use rights |
|
|
15,866 |
|
|
|
63,547 |
|
Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
Finance expense |
|
|
175,174 |
|
|
|
86,347 |
|
Gain from disposal of fixed assets and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable to third parties |
|
|
(362,351 |
) |
|
|
(877,114 |
) |
Notes receivable |
|
|
(1,838,039 |
) |
|
|
36,034 |
|
Advances to third party suppliers, net |
|
|
(1,681,366 |
) |
|
|
12,592 |
|
Other receivables |
|
|
(44,679 |
) |
|
|
(3,750 |
) |
Amounts due from related parties |
|
|
(6,334 |
) |
|
|
(2,026,749 |
) |
Inventories |
|
|
(832,934 |
) |
|
|
486,405 |
|
Accounts payable to third parties |
|
|
331,295 |
|
|
|
(170,378 |
) |
Notes payable |
|
|
|
|
|
|
611 |
|
Tax payable |
|
|
564,825 |
|
|
|
(75,808 |
) |
Advances from third party customers |
|
|
180,622 |
|
|
|
19,347 |
|
Payroll and welfare payable |
|
|
(14,543 |
) |
|
|
|
|
Other payables to third parties |
|
|
(623,333 |
) |
|
|
829,184 |
|
Amounts due to related parties |
|
|
42,486 |
|
|
|
(189,168 |
) |
Accrued expenses |
|
|
85,129 |
|
|
|
64,383 |
|
Deferred tax assets |
|
|
(2,682 |
) |
|
|
20,962 |
|
Deferred tax liabilities |
|
|
(13,623 |
) |
|
|
(33,963 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
(2,355,250 |
) |
|
|
(912,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease of restricted cash |
|
|
226,494 |
|
|
|
2,416,449 |
|
Purchase of property and equipment |
|
|
(99,228 |
) |
|
|
(135,636 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
127,266 |
|
|
|
2,280,813 |
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the financial statements.
6
SHANDONG XIANGRUI PHARMACY CO., LTD.
CONDENSED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
|
MARCH 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
|
(175,174 |
) |
|
|
(86,347 |
) |
Proceeds from short-term bank borrowings |
|
|
1,606,917 |
|
|
|
1,246,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,431,743 |
|
|
|
1,160,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes |
|
|
752 |
|
|
|
(110,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash |
|
|
(795,489 |
) |
|
|
2,418,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of year |
|
|
6,634,012 |
|
|
|
881,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year |
|
|
5,838,523 |
|
|
|
3,299,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest expense paid |
|
|
(175,174 |
) |
|
|
(86,347 |
) |
Income taxes paid |
|
|
(562,812 |
) |
|
|
(308,785 |
) |
|
|
|
|
|
|
|
The accompanying notes are integral part of the financial statements.
7
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. |
|
CORPORATE INFORMATION AND BASIS OF PRESENTATION |
|
a) |
|
Corporate information |
|
|
|
Shandong Xiangrui Pharmacy Co., Ltd. (the Company) was incorporated in Dongping county of Shandong
province, China on April 15, 2005 with a registered capital of RMB 20,000,000. The company is
principally engaged in corn processing, manufacturing and sale of corn starch and pharmaceutical
grade crystalline glucose. The Company is a single entity with no subsidiaries and operates its
business in mainland China. Sales are virtually all attributable to domestic customers. |
|
|
|
Xiangrui Pharmaceutical International Limited (Xiangrui) was incorporated in the British Virgin
Islands on November 29, 2010. Taian Yisheng Management & Consulting Co., Ltd (WFOE) was
incorporated by Xiangrui on May 6, 2011 as a wholly foreign owned enterprise in China. Xiangrui is a
holding company that has no operations or assets other than its ownership of all of the capital
stock of the WFOE. |
|
|
|
On May 9, 2011, the WFOE entered into a series of variable interest entity contractual agreements
(the VIE Agreements) with the Company and its shareholders. The VIE Agreements are comprised of a
series of agreements, including an Exclusive Technical and Consulting Service Agreement, Management
Fee Payment Agreement, Equity Interest Pledge Agreement, Exclusive Equity Interest Purchase
Agreement, Operating Agreement and Proxy Agreement, through which the WFOE has the right to advise,
consult, manage and operate the Company for an annual consulting services fee in the amount of the
Companys yearly net income before tax. In order to further reinforce the WFOEs rights to control
and operate the Company, the Companys shareholders have entrusted their shareholders rights in the
Company to a person designated by the WFOE. |
|
|
|
The following chart reflects the Companys organizational structure after the date of VIE Agreements: |
b) |
|
Basis of preparation |
|
|
|
The unaudited condensed financial statements have been prepared and
presented in accordance with the accounting principles generally
accepted in the United States of America (US GAAP) for interim
financial information and with the instruction to Form [10-Q] and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by US GAAP. However, the
information included in these interim financial statements reflects
all adjustments (consisting solely normal recurring adjustments) which
are, in the opinion of management, necessary for the fair presentation
of financial position and the results of operations. Results shown for
interim periods are not necessarily indicative of the results to be
obtained for the full year. |
8
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
Significant accounting policies in the preparation of the accompanying financial statements are as follows: |
|
a) |
|
Use of estimates |
|
|
|
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in the
financial statements include, but are not limited to, revenue recognition, allowance for doubtful accounts, provision for inventories, useful lives of property and equipment and intangible assets,
income tax and tax related valuation allowance, and contingencies. Actual results could differ significantly from those estimates. |
|
b) |
|
Foreign currency |
|
|
|
The functional currency of the Company is Chinese Renminbi (RMB), as determined based on the criteria of FASB ASC 830 Foreign Currency Matters. The Company uses the U.S. dollar for financial
reporting purouse. |
|
|
|
The Company translates assets and liabilities into U.S. dollars using the applicable exchange rate quoted by the Peoples Bank of China at the balance sheet date. The income and expenses items are
translated using average rates during the reporting period. Adjustments resulting from the translation of financial statements from RMB into U.S. dollars are recorded in shareholders equity as
part of accumulated other comprehensive income translation adjustments. The exchange rates used for the translation are listed below. |
|
|
|
|
|
|
|
|
|
|
|
Period end exchange rate |
|
|
Average of first quarter |
|
|
|
US$:RMB |
|
|
US$:RMB |
|
March 31, 2011 |
|
|
6.5564 |
|
|
|
6.5736 |
|
March 31, 2010 |
|
|
6.8263 |
|
|
|
6.8267 |
|
December 31,2010 |
|
|
6.6227 |
|
|
|
N/A |
|
c) |
|
Fair value of financial instruments |
|
|
|
The Company adopted ASC 820 Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value, and requires disclosures to be provided on fair
value measurement. |
|
|
|
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: |
|
|
|
Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
|
|
|
Level 2 Include other inputs that are directly or indirectly observable in the marketplace; and |
|
|
|
|
Level 3 Unobservable inputs which are supported by little or no market activity, therefore requiring an entity to develop its own assumptions. |
9
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
c) |
|
Fair value of financial instruments (continued) |
|
|
|
The carrying values of cash and cash equivalents, accounts receivable,
other current assets, accounts payable, other current liabilities, and
amounts due to employees approximate their fair value due to their
short-term maturities. |
|
d) |
|
Cash |
|
|
|
The Company considers all cash on hand and demand deposits as cash. |
|
e) |
|
Restricted cash |
|
|
|
Restricted cash represents amounts held by banks, which are not
available for the Company use, as security for issuance of letters of
credit. |
|
f) |
|
Notes and accounts receivable |
|
|
|
Notes receivable represent bank notes which are paid by third party
commercial banks upon due thus are believed to have low credit risk.
Provisions are made against notes and accounts receivable for
estimated losses resulting from the inability of collecting payments
from our customers. The Company periodically assesses notes and
accounts receivable balances to determine whether an allowance for
doubtful accounts should be made based upon historical bad debt
analysis, specific customer creditworthiness, and current economic
trends. Notes and accounts receivable in the balance sheets are stated
net of such provision, if any. |
|
g) |
|
Inventories |
|
|
|
Inventories are stated at the lower of cost or net realizable value at
balance sheet date. Cost of inventories is determined using the
weighted average method. Provisions are made for excessive, slow
moving and obsolete inventories as well as inventories whose carrying
value exceeds their net realizable value. Net realizable value is the
estimated selling price in the ordinary course of business, less
estimated costs and expenses and related taxes necessary to make the
sale. Provision for inventories is determined on an individual item
basis. Raw material costs are based on purchase costs while
work-in-progress and finished goods comprise direct materials, direct
labor and an allocation of manufacturing overhead costs. |
10
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
h) |
|
Property, plant and equipment |
|
|
|
Property, plant and equipment are stated at cost less accumulated depreciation and are depreciated on a
straight-line basis over the estimated useful lives detailed as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
Estimated |
|
|
Annual |
|
Category |
|
useful life |
|
residual value |
|
|
depreciation rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings |
|
20 years |
|
|
5 |
% |
|
|
4.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery |
|
5-10 years |
|
|
5 |
% |
|
|
9.5%-19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Office equipments |
|
5-10 years |
|
|
5 |
% |
|
|
9.5%-19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicles |
|
10 years |
|
|
5 |
% |
|
|
9.5 |
% |
|
|
Expenditures for major additions or improvement that extend the useful lives of property and equipment are
capitalized as additions to the related assets. Expenditure for minor replacements, maintenance and repairs
that do not improve or extend the lives of the assets are charged to expense when incurred. Retirement,
sales and disposals of assets are recorded by removing the cost and accumulated depreciation, with any
resulting gain or loss reflected in the statements of income. |
|
|
|
All direct and indirect costs that are related to the construction of property and equipment and incurred
before the assets are ready for their intended use are capitalized as construction in progress.
Construction in progress is transferred to specific property and equipment accounts and commences
depreciation when these assets are ready for their intended use. Interest costs are capitalized if they are
incurred during the acquisition, construction or production of a qualifying asset and such costs could have
been avoided if expenditures for the assets have not been made. Capitalization of interest costs commences
when the activities to prepare the asset are in progress and expenditures and borrowing costs are being
incurred. Interest costs are capitalized until the assets are ready for their intended use. Capitalization
of interest costs is suspended during extended periods in which activities related to the acquisition or
construction of the qualifying assets are interrupted. No interest costs were capitalized for the periods
ended March 31, 2011 and 2010. |
|
i) |
|
Land use rights |
|
|
|
Prepayments for land use rights represent amounts paid for the right to use land in China and are recorded
at cost less accumulated amortization. Amortization is recorded on a straight-line basis over the terms of
the respective land use rights agreements, which are 50 years. |
11
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
j) |
|
Revenue recognition |
|
|
|
The Company recognizes revenue pursuant to ASC 605 Revenue Recognition, where persuasive evidence of an arrangement
exists (demonstrated via contract with purchasers), delivery has occurred, the sellers price is fixed or
determinable and collectibility is reasonably assured. This generally occurs when the customer receives the product
or at the time title passes to the customer. Customers generally do not have the right to return product unless
damaged or defective. The Company does not provide discount for early payments or any other allowances on sales. |
|
k) |
|
Shipping and handling costs |
|
|
|
Shipping and handling costs are included in selling expenses. The shipping and handling costs for the three months
period ended March 31, 2011 and 2010 were US$167,358 and US$110,794, respectively. |
|
l) |
|
Cost of goods sold |
|
|
|
Cost of goods sold consists primarily of purchase costs of raw material, direct labor costs and overhead expenses
attributable to production and machine depreciation. |
|
m) |
|
Advertising expenditures |
|
|
|
Advertising expenditures are expensed as incurred. There were no advertising costs incurred in the reporting period. |
|
n) |
|
Comprehensive income |
|
|
|
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, ASC 220 Comprehensive Income requires that all items that are
required to be recognized under current accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other financial statements. The Company has
chosen to report comprehensive income in the Statements of Stockholders Equity. The Companys other comprehensive
income represents foreign currency translation adjustments. |
|
o) |
|
Income taxes |
|
|
|
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statements carrying
amounts of existing assets and liabilities and their respective tax assets bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided to reduce the carrying amount of deferred tax assets
if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be
realized. |
12
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
o) |
|
Income taxes (continued) |
|
|
|
The Company is subject to Chinas New Corporate Income Tax (CIT)
Law, which became effective on January 1, 2008 and has a uniform
statutory tax rate of 25 percent. |
|
p) |
|
Value-added tax (VAT) |
|
|
|
In accordance with the relevant tax laws of China, value-added taxes
(VAT) are levied on the invoiced value of sales and are payable by the
purchaser. The Company is required to remit the VAT it collects to the
tax authority, but can deduct the VAT it has paid on eligible
purchases. The difference between the amounts collected and paid is
presented as VAT recoverable or payable balance on the balance sheets. |
|
q) |
|
Employee benefits |
|
|
|
Full-time employees of the Company participate in a
government-mandated multi-employee defined contribution plan pursuant
to which certain pension benefits, medical care, unemployment
insurance, employee housing fund and other welfare benefits are
provided to employees. Chinese labor regulations require the Company
make contributions to the government for these benefits based on a
specific percentage of the employees salaries up to a maximum of
three times the average annual salary for the city in which the
Company operates for the prior year. The Company has no legal
obligation for the benefits beyond the contributions made. The total
contribution for such employee benefits was US$39,798 and US$50,270
for the year ended March 31, 2011 and 2010, respectively. |
|
r) |
|
Impairment of long-lived assets |
|
|
|
The Company evaluates its long-lived assets, including property and
equipment for impairment whenever events or changes in circumstances,
such as a significant adverse change to market conditions that will
impact the future use of the assets, indicate that the carrying amount
of an asset may not be recoverable in accordance with ASC 360
Property, Plant and Equipment. When these events occur, the Company
assesses the recoverability of long-lived assets by comparing the
carrying amount of the assets to the expected future undiscounted cash
flows resulting from the use of the assets and their eventual
disposition. If the sum of the expected undiscounted cash flow is less
than the carrying amount of the assets, the Company recognizes an
impairment loss based on the excess of the carrying amount of the
assets over their fair value. Fair value is generally determined by
discounting the cash flows expected to be generated by the assets,
when the market prices are not readily available. No impairment of
long-lived assets was recognized for any of the years presented. |
13
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
s) |
|
Government grants |
|
|
|
We receive grants from the government. The grants received from
government are recorded in the financial statements in accordance with
the purpose and the nature of the grant, either as other income, a
reduction of expenses, or a reduction of the cost of the capital
investment. The benefit of grants is recorded when performance is
complete and all conditions as specified in the agreement are
fulfilled. Any refundable grant is accounted for as a liability. |
|
t) |
|
Recently issued accounting pronouncements |
|
|
|
In January 2010, the FASB issued Accounting Standards Update (ASU) No.
2010-06 (ASU 2010-06), Improving Disclosures About Fair Value
Measurements, which requires reporting entities to make new
disclosures about recurring or nonrecurring fair-value measurements
including significant transfers into and out of Level 1 and Level 2
fair-value measurements and information on purchases, sales,
issuances, and settlements on a gross basis in the reconciliation of
Level 3 fair-value measurements. ASU 2010-6 is effective for annual
reporting periods beginning after December 15, 2009, except for Level
3 reconciliation disclosures which are effective for annual periods
beginning after December 15, 2010. The Company does not expect that
the adoption of ASU 2010-06 will have a material impact on its
financial statements. |
|
|
|
In February 2010, the FASB issued ASU No. 2010-09 (ASU 2010-09),
Subsequent Events (Topic 855). The amendments remove the requirements
for an SEC filer to disclose a date, in both issued and revised
financial statements, through which subsequent events have been
reviewed. Revised financial statements include financial statements
revised as a result of either correction of an error or retrospective
application of U.S. GAAP. ASU 2010-09 is effective for interim or
annual financial periods ending after June 15, 2010. The provisions of
ASU 2010-09 are not expected to have a material effect on the
financial position, results of operations or cash flows of the
Company. |
|
3. |
|
NOTES AND ACCOUNTS RECEIVABLE, NET |
|
|
|
Accounts receivable is stated at net value. As of March 31, 2011 and
December 31, 2010, the allowance for doubtful accounts recorded by the
Company amounted to US$1,002,080. |
|
|
|
Notes receivable represent bank drafts that are non-interest bearing
and due within three months. Such bank drafts have been arranged with
third party financial institutions by certain customers to settle
their purchases from us. The carrying amount of notes receivable
approximate their fair values due to their short maturities. |
14
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
4. |
|
PROPERTY , PLANT AND EQUIPMENT, NET |
|
|
|
Property, plant and equipment consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
Buildings |
|
|
2,427,597 |
|
|
|
2,368,933 |
|
Machinery |
|
|
6,819,902 |
|
|
|
6,934,521 |
|
Office equipment |
|
|
19,867 |
|
|
|
18,911 |
|
Motor vehicles |
|
|
57,592 |
|
|
|
59,098 |
|
|
|
|
|
|
|
|
Total |
|
|
9,324,958 |
|
|
|
9,381,463 |
|
Less: Accumulated depreciation |
|
|
(6,613,222 |
) |
|
|
(6,484,434 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
2,711,736 |
|
|
|
2,897,029 |
|
Construction in progress |
|
|
231,981 |
|
|
|
76,247 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
2,943,717 |
|
|
|
2,973,276 |
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011, the Company pledged its building with net book value of US$2,221,687 to Citibank
(China) Co., Ltd., Shanghai Branch to secure a long term bank loan provided by the bank to Shandong RunYin
Bio-Chemical Co., Ltd., a related party (Note 11). |
|
|
|
Depreciation expenses amounted to US$128,787 and US$196,847 for the periods ended March 31, 2011 and 2010,
respectively. |
|
5. |
|
LAND USE RIGHTS, NET |
|
|
|
As of March 31, 2011, the Company pledged its land use right with net book value of US$2,526,883 to
Dongping Branch of Industrial and Commercial Bank of China and Citibank (China) Co., Ltd., Shanghai Branch
respectively to secure two long term bank loans provided by those banks to Shandong RunYin Bio-Chemical
Co., Ltd., a related party. |
|
|
|
Land use rights are summarized as follows: |
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
Land use rights, cost |
|
|
2,766,860 |
|
|
|
2,766,860 |
|
Less: accumulated amortization |
|
|
(239,977 |
) |
|
|
(224,111 |
) |
|
|
|
|
|
|
|
Land use rights, net |
|
|
2,526,883 |
|
|
|
2,542,749 |
|
|
|
|
|
|
|
|
15
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
6. |
|
BANK BORROWINGS |
|
|
|
The Company had the following outstanding short-term loans with banks: |
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
Agricultural Develop Bank, Dong Ping Branch |
|
|
4,575,682 |
|
|
|
4,529,875 |
|
Rural Cooperative Bank of Dongping, Shandong |
|
|
4,346,898 |
|
|
|
2,793,422 |
|
Bank of Communications |
|
|
762,613 |
|
|
|
754,979 |
|
|
|
|
|
|
|
|
Total |
|
|
9,685,193 |
|
|
|
8,078,276 |
|
|
|
|
|
|
|
|
|
|
The Companys bank borrowings are RMB denominated loans with fixed interest rates ranging from 4.86%
to 11.62%. Interest expense on bank borrowings was US$175,174 and US$86,347 for the periods ended
March 31, 2011 and 2010, respectively. All bank loans are due within one year from balance sheet
date. |
|
7. |
|
INCOME TAXES |
|
|
|
Pursuant to the new Chinas Corporate Income Tax Laws and relevant regulations that were applicable
before January 1, 2008, the Company was subject to corporate income taxes (CIT) at a statutory rate
of 25%. |
The income tax provision is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
Current tax expense |
|
|
562,811 |
|
|
|
232,977 |
|
Deferred tax expense |
|
|
(16,305 |
) |
|
|
(13,001 |
) |
|
|
|
|
|
|
|
Total income tax provision |
|
|
546,506 |
|
|
|
219,976 |
|
|
|
|
|
|
|
|
|
|
A reconciliation for the provision for income taxes with amounts determined by applying the statutory income tax rate to income before
income tax is as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31 |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
Corporate income tax rate |
|
|
25 |
% |
|
|
25 |
% |
Computed tax at statutory rate |
|
|
521,739 |
|
|
|
224,208 |
|
Utilization of the accumulated tax loss |
|
|
|
|
|
|
(4,232 |
) |
Expense not deductible for tax purposes |
|
|
24,767 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
546,506 |
|
|
|
219,976 |
|
|
|
|
|
|
|
|
16
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
7. |
|
INCOME TAXES (CONTINUED) |
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Companys
deferred tax assets and liabilities are as follows: |
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
267,936 |
|
|
|
265,254 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
267,936 |
|
|
|
265,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipments |
|
|
158,740 |
|
|
|
172,363 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
158,740 |
|
|
|
172,363 |
|
|
|
|
|
|
|
|
|
|
Deferred assets are current assets while deferred liabilities are non-current liabilities. No valuation allowance was
provided for deferred tax assets in the periods presented. |
|
8. |
|
OTHER PAYABLE TO THIRD PARTIES |
|
|
|
Other payables to third parties consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31, |
|
|
|
2011 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Purchases of property and equipment |
|
|
42,192 |
|
|
|
111,535 |
|
Others |
|
|
35,539 |
|
|
|
93,946 |
|
|
|
|
|
|
|
|
|
Total |
|
|
77,731 |
|
|
|
205,481 |
|
|
|
|
|
|
|
|
9. |
|
PAID-IN CAPITAL |
|
|
|
The Companys paid-in capital was held by the following shareholders in each period as follows: |
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
Xuchun Wang |
|
|
2,126,502 |
|
|
|
2,126,502 |
|
Lingfa Huang |
|
|
193,318 |
|
|
|
193,318 |
|
Binglong Qiao |
|
|
48,330 |
|
|
|
48,330 |
|
Guo Wang |
|
|
48,330 |
|
|
|
48,330 |
|
|
|
|
|
|
|
|
Total |
|
|
2,416,480 |
|
|
|
2,416,480 |
|
|
|
|
|
|
|
|
17
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
10. |
|
STATUTORY RESERVES |
|
|
|
In accordance with the Company Law of the Peoples Republic of China, the Company should make appropriations from after-tax profit to
non-distributable reserve funds. These reserve funds include (i) a general reserve and (ii) a discretionary fund. The Company adds an
annual statutory common reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective
registered capital based on the enterprises statutory accounts. The appropriations to discretionary fund are at the Companys discretion.
These reserve funds can only be used for specific purposes of enterprises expansion and not distributable as cash dividends. The Company
provided 10% of statutory reserve and 6% of discretionary reserve upon distributable profit. Details of those reserves are presented as
follows: |
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
Statutory reserve |
|
|
326,619 |
|
|
|
326,619 |
|
Discretionary reserve |
|
|
195,972 |
|
|
|
195,972 |
|
|
|
|
|
|
|
|
Total |
|
|
522,591 |
|
|
|
522,591 |
|
|
|
|
|
|
|
|
11. |
|
RELATED PARTY TRANSACTIONS |
|
|
|
As of and for the three months ended March 31, 2011, and 2010, the principal related parties with which the Company had transactions are
listed as follows: |
|
|
|
Name |
|
Relationship |
|
Shandong Runyin Bio-chemical Co., Ltd.
|
|
Affiliates under common control |
Ruixing Group Co., Ltd.
|
|
Affiliates under common control |
Shandong Xinrui Chemical Devices Co., Ltd.
|
|
Affiliates under common control |
|
|
For the three months ended March 31, 2011, and 2010, the Company engaged in the following significant related party transactions: |
(a) Utility (steam and electricity) supply
|
|
Steam supply received from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
US$ |
|
|
US$ |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
|
(i |
) |
|
|
430,360 |
|
|
|
413,747 |
|
|
|
|
|
|
|
|
|
|
|
|
18
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
11. |
|
RELATED PARTY TRANSACTIONS (CONTINUED) |
|
(a) |
|
Utility (steam and electricity) supply (continued) |
Electricity supply received from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
US$ |
|
|
US$ |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
|
(i |
) |
|
|
382,509 |
|
|
|
352,252 |
|
|
|
|
|
|
|
|
|
|
|
|
Electricity supplied to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
US$ |
|
|
US$ |
|
Shandong Xinrui Chemical Devices Co., Ltd. |
|
|
(i |
) |
|
|
|
|
|
|
124,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
Raw materials purchased from |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
|
236,999 |
|
|
|
171,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
Plant facility lease from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
US$ |
|
|
US$ |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
|
(ii |
) |
|
|
2,350 |
|
|
|
2,287 |
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
In January 2009, the Company entered into a non-cancelable contract with Shandong Runyin
Bio-chemical Co., Ltd. to secure the steam and electricity supply for the Companys cornstarch
and glucose production. The non-cancelable utility supply contract with the Shandong Runyin
Bio-chemical Co., Ltd. expires in December 2014 whose price was determined by reference to
market price. |
|
(ii) |
|
In December 2008, the Company entered into a rental contract with the Shandong Runyin
Bio-chemical Co., Ltd. for leasing two plants. The lease contract was renewed on annual basis
with yearly payment of US$9,000, which was determined by reference to market price. |
19
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
11. |
|
RELATED PARTY TRANSACTIONS (CONTINUED) |
|
(d) |
|
Amounts due from related parties |
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31 |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
|
599 |
|
|
|
|
|
Shandong Xinrui Chemical Devices Co., Ltd. |
|
|
1,634 |
|
|
|
|
|
Ruixing Group Co.,Ltd |
|
|
4,141 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(e) |
|
Amounts due to related parties |
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
Ruixing Group Co., Ltd. |
|
|
224,372 |
|
|
|
297,285 |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
|
2,067,640 |
|
|
|
1,952,241 |
|
|
|
|
|
|
|
|
Total |
|
|
2,292,012 |
|
|
|
2,249,526 |
|
|
|
|
|
|
|
|
Amounts due from and due to related parties are unsecured, interest-free and repayable on demand.
12. |
|
COMMITMENTS AND CONTINGENCIES |
In January 2009, the Company entered into a non-cancelable contract with Shandong Runyin Bio-chemical Co., Ltd. to secure the steam and
electricity supply for the Companys cornstarch and glucose production. The non-cancelable utility supply contract with the Shandong Runyin
Bio-chemical Co., Ltd. expires in December 2014 with a price that approximates market price. Total amount of the contract per year would be
determined by the actual quantity of utilities consumed by the Company. For the actual value of supply consumed by the Company in three
months ended March 31, 2011 and 2010, please see Note 11.
As of March 31, 2011, the Company pledged its building with net book value of US$2,221,687 to Citibank (China) Co., Ltd., Shanghai Branch to
secure a long term bank loan provided by the bank to Shandong RunYin Bio-Chemical Co., Ltd.
As of March 31, 2011, the Company pledged its land use right with net book value of US$1,872,503 and US$654,380 to Dongping Branch of
Industrial and Commercial Bank of China and Citibank (China) Co., Ltd., Shanghai Branch respectively to secure two long term bank loans
provided by those banks to Shandong RunYin Bio-Chemical Co., Ltd, a related party (Note 11).
20
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
12. |
|
COMMITMENTS AND CONTINGENCIES (CONTINUED) |
|
(c) |
|
Capital Purchase Commitment |
|
|
|
|
As of March 31, 2011, the Company entered into non-cancellable contracts
with some machinery suppliers for purchase of machinery and equipment,
which amounted to US$4,887,792. |
|
|
(d) |
|
Contingencies |
|
|
|
|
The Company had no material contingent events during the reporting period. |
13. |
|
SEGMENT AND GEOGRAPHIC INFORMATION |
Business segments
The main products of the Company are cornstarch and glucose, which utilize almost the same production processes. Both are produced from the raw
material corn. The difference in production processes is that glucose is further processed from cornstarch by adding in auxiliary materials. The two
products are sold to the same type of customers and use the same distribution methods.
While the cost base is similar for the two products, the selling prices are independently determined by reference to their respective market prices,
which resulted in different trend of gross profit margins of the two products as shown in the following table. The economies of scale also
contributed to the overall rise of gross profit margins.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
2011 |
|
|
2010 |
|
|
|
US$ |
|
|
US$ |
|
Revenues |
|
|
|
|
|
|
|
|
Cornstarch |
|
|
13,151,195 |
|
|
|
6,903,457 |
|
Glucose |
|
|
2,911,882 |
|
|
|
2,070,238 |
|
Cost of sales |
|
|
|
|
|
|
|
|
Cornstarch |
|
|
11,174,542 |
|
|
|
6,045,909 |
|
Glucose |
|
|
2,180,337 |
|
|
|
1,681,267 |
|
GPM |
|
|
|
|
|
|
|
|
Cornstarch |
|
|
15.0 |
% |
|
|
12.4 |
% |
Glucose |
|
|
25.1 |
% |
|
|
18.8 |
% |
The deviation of the gross profit margins of the two products as determined by market prices is expected to continue in the future.
Because of the similar production processes and raw materials and the same type of customers and distribution methods, the cornstarch and glucose
production processes are not individually assessed when the Companys chief operating decision maker reviews the operation results and makes
decisions on resources allocation. Therefore, it is not practical to separate the information on the assets of the two products and other profit and
loss information which are believed to have no relevance to the decision-making relating to the Companys economic activities.
21
Geographical segments
All the revenue is attributed to the revenue from China.
In the opinion of the management, the Company had no significant
subsequent events except for the VIE Agreements described in Note
1(a).
22
SHANDONG XIANGRUI PHARMACY CO., LTD.
FINANCIAL STATEMENTS
Years ended December 31, 2010 and 2009
CONTENTS
|
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Page |
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F-2 |
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F-3 F-4 |
|
|
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|
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|
|
F-5 |
|
|
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|
|
F-6 F-7 |
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|
F-8 |
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|
F-9 F-23 |
|
F-1
INDEPENDENT AUDITORS REPORT
Board of Directors and Shareholders of
Shandong Xiangrui Pharmacy Co., Ltd.
Shandong, China
We have audited the accompanying balance sheets of Shandong Xiangrui Pharmacy Co., Ltd. (the
Company) as of December 31, 2010 and 2009, and the related statements of income, shareholders
equity, and cash flows for the years then ended. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with the standards of Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Shandong Xiangrui Pharmacy Co., Ltd. as of December 31, 2010
and 2009, and the results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
BDO China Shu Lun Pan Certified Public Accountants LLP
Shanghai, China
March 22, 2011
F-2
SHANDONG XIANGRUI PHARMACY CO., LTD.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
Notes |
|
2010 |
|
|
2009 |
|
|
|
|
|
US$ |
|
|
US$ |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
6,634,012 |
|
|
|
881,230 |
|
Restricted Cash |
|
|
|
|
226,494 |
|
|
|
2,416,449 |
|
Notes receivable |
|
3 |
|
|
2,236,468 |
|
|
|
273,045 |
|
Accounts receivable, net |
|
3 |
|
|
255,870 |
|
|
|
1,463,431 |
|
Inventories, net |
|
4 |
|
|
1,954,879 |
|
|
|
1,727,331 |
|
Advances to third party suppliers |
|
5 |
|
|
907,796 |
|
|
|
674,821 |
|
Other receivables |
|
5 |
|
|
104,681 |
|
|
|
103,664 |
|
VAT tax refundable |
|
|
|
|
|
|
|
|
433,239 |
|
Amounts due from related parties |
|
16 |
|
|
|
|
|
|
645,479 |
|
Deferred tax assets |
|
9 |
|
|
265,254 |
|
|
|
250,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
|
|
12,585,454 |
|
|
|
8,869,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current Assets |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
6 |
|
|
2,973,276 |
|
|
|
2,630,076 |
|
Land use rights, net |
|
7 |
|
|
2,542,749 |
|
|
|
2,604,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-current Assets |
|
|
|
|
5,516,025 |
|
|
|
5,234,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
|
|
|
18,101,479 |
|
|
|
14,103,685 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the financial statements.
F-3
SHANDONG XIANGRUI PHARMACY CO., LTD.
BALANCE SHEETS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December |
|
|
|
Notes |
|
2010 |
|
|
2009 |
|
|
|
|
|
US$ |
|
|
US$ |
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
Short-term bank borrowings |
|
8 |
|
|
8,078,276 |
|
|
|
5,858,059 |
|
Notes payable |
|
|
|
|
|
|
|
|
2,196,772 |
|
Accounts payable to third parties |
|
|
|
|
827,993 |
|
|
|
1,025,657 |
|
Advance from third party customers |
|
|
|
|
167,704 |
|
|
|
41,899 |
|
Payroll and welfare payable |
|
|
|
|
19,305 |
|
|
|
|
|
Accrued expenses |
|
12 |
|
|
106,179 |
|
|
|
88,391 |
|
Amounts due to related parties |
|
16 |
|
|
2,249,526 |
|
|
|
2,341,295 |
|
Income tax payable |
|
9 |
|
|
150,218 |
|
|
|
118,855 |
|
VAT tax payable |
|
|
|
|
859,128 |
|
|
|
|
|
Miscellaneous tax payables |
|
11 |
|
|
88,937 |
|
|
|
5,644 |
|
Other payables to third parties |
|
10 |
|
|
205,481 |
|
|
|
111,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
|
|
12,752,747 |
|
|
|
11,787,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
9 |
|
|
172,363 |
|
|
|
222,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-current Liabilities |
|
|
|
|
172,363 |
|
|
|
222,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
|
|
12,925,110 |
|
|
|
12,009,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
Paid-in capital |
|
13 |
|
|
2,416,480 |
|
|
|
2,416,480 |
|
Statutory reserves |
|
14 |
|
|
522,591 |
|
|
|
44,098 |
|
Accumulated other comprehensive income |
|
|
|
|
(427,019 |
) |
|
|
(596,965 |
) |
Retained earnings |
|
|
|
|
2,664,317 |
|
|
|
230,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
|
|
5,176,369 |
|
|
|
2,093,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
18,101,479 |
|
|
|
14,103,685 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the financial statements.
F-4
SHANDONG XIANGRUI PHARMACY CO., LTD.
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
Notes |
|
2010 |
|
|
2009 |
|
|
|
|
|
US$ |
|
|
US$ |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
Cornstarch |
|
|
|
|
32,989,848 |
|
|
|
12,779,162 |
|
Glucose |
|
|
|
|
8,934,164 |
|
|
|
4,336,391 |
|
Others |
|
|
|
|
129,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
|
|
42,053,129 |
|
|
|
17,115,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales |
|
|
|
|
|
|
|
|
|
|
Cornstarch |
|
|
|
|
(28,754,128 |
) |
|
|
(11,489,453 |
) |
Glucose |
|
|
|
|
(7,748,407 |
) |
|
|
(4,048,677 |
) |
Others |
|
|
|
|
(83,978 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales |
|
|
|
|
(36,586,513 |
) |
|
|
(15,538,130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
|
|
5,466,616 |
|
|
|
1,577,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
Selling and distribution |
|
|
|
|
(1,003,500 |
) |
|
|
(571,313 |
) |
General and administrative |
|
|
|
|
(245,515 |
) |
|
|
(753,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
|
|
(1,249,015 |
) |
|
|
(1,324,336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income |
|
|
|
|
30,316 |
|
|
|
28,982 |
|
Interest Expenses |
|
|
|
|
(409,088 |
) |
|
|
(278,179 |
) |
Foreign Exchange Loss |
|
|
|
|
(28 |
) |
|
|
|
|
Gain from disposal of fixed assets |
|
|
|
|
90,663 |
|
|
|
|
|
Other Income, net |
|
|
|
|
4,281 |
|
|
|
422,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Tax Expenses |
|
|
|
|
3,933,745 |
|
|
|
425,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expenses |
|
9 |
|
|
(1,021,064 |
) |
|
|
(127,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
|
|
2,912,681 |
|
|
|
298,634 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the financial statements.
F-5
SHANDONG XIANGRUI PHARMACY CO., LTD.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2,912,681 |
|
|
|
298,634 |
|
|
|
|
|
|
|
|
|
|
Adjustment to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment |
|
|
686,746 |
|
|
|
784,829 |
|
Amortization of land use rights |
|
|
61,652 |
|
|
|
51,421 |
|
Allowance for doubtful accounts |
|
|
27,300 |
|
|
|
166,369 |
|
|
|
|
|
|
|
|
|
|
Gain from disposal of fixed assets and other |
|
|
(90,635 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable to third parties |
|
|
1,180,261 |
|
|
|
(1,211,195 |
) |
Notes receivable |
|
|
(1,963,422 |
) |
|
|
(259,136 |
) |
Advances to third party suppliers, net |
|
|
(232,974 |
) |
|
|
(2,620 |
) |
Other receivables |
|
|
(1,019 |
) |
|
|
1,787,727 |
|
Amounts due from related parties |
|
|
645,479 |
|
|
|
(645,479 |
) |
Inventories |
|
|
(227,548 |
) |
|
|
(345,791 |
) |
Accounts payable to third parties |
|
|
(197,664 |
) |
|
|
(610,135 |
) |
Notes payable |
|
|
(2,196,772 |
) |
|
|
2,196,772 |
|
Tax payable |
|
|
31,363 |
|
|
|
88,808 |
|
Advances from third party customers |
|
|
125,805 |
|
|
|
26,530 |
|
Payroll and welfare payable |
|
|
19,305 |
|
|
|
|
|
Other payables to third parties |
|
|
1,469,863 |
|
|
|
(578,057 |
) |
Amounts due to related parties |
|
|
(91,769 |
) |
|
|
200,978 |
|
Accrued expenses |
|
|
17,788 |
|
|
|
(47,732 |
) |
Deferred tax assets |
|
|
(13,103 |
) |
|
|
(1,509 |
) |
Deferred tax liabilities |
|
|
(51,361 |
) |
|
|
9,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,111,976 |
|
|
|
1,910,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease/(increase) of restricted cash |
|
|
2,189,956 |
|
|
|
(2,416,449 |
) |
Purchase of property and equipment |
|
|
(939,284 |
) |
|
|
(39,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
1,250,672 |
|
|
|
(2,456,235 |
) |
|
|
|
|
|
|
|
The accompanying notes are integral part of the financial statements.
F-6
SHANDONG XIANGRUI PHARMACY CO., LTD.
STATEMENTS OF CASH FLOWS (continued)
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank borrowings |
|
|
10,640,184 |
|
|
|
8,562,747 |
|
Repayment of short-term bank borrowings |
|
|
(8,419,967 |
) |
|
|
(8,557,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
2,220,217 |
|
|
|
5,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes |
|
|
169,919 |
|
|
|
4,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash |
|
|
5,752,784 |
|
|
|
(536,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of year |
|
|
881,229 |
|
|
|
1,417,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year |
|
|
6,634,013 |
|
|
|
881,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest expense paid |
|
|
378,772 |
|
|
|
278,179 |
|
Income taxes paid |
|
|
1,085,528 |
|
|
|
30,012 |
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the financial statements.
F-7
SHANDONG XIANGRUI PHARMACY CO., LTD.
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deficits) |
|
|
other |
|
|
Total |
|
|
|
|
|
|
|
Statutory |
|
|
Retained |
|
|
comprehensive |
|
|
shareholders |
|
|
|
Paid-in capital |
|
|
reserves |
|
|
earnings |
|
|
loss |
|
|
equity |
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
2,416,480 |
|
|
|
3,068 |
|
|
|
(27,475 |
) |
|
|
(601,326 |
) |
|
|
1,790,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
298,634 |
|
|
|
|
|
|
|
298,634 |
|
Foreign currency translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,361 |
|
|
|
4,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
298,634 |
|
|
|
4,361 |
|
|
|
302,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriation of statutory reserve |
|
|
|
|
|
|
41,030 |
|
|
|
(41,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
2,416,480 |
|
|
|
44,098 |
|
|
|
230,129 |
|
|
|
(596,965 |
) |
|
|
2,093,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
2,912,681 |
|
|
|
|
|
|
|
2,912,681 |
|
Foreign currency translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,946 |
|
|
|
169,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
2,912,681 |
|
|
|
169,946 |
|
|
|
3,082,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriation of statutory reserve |
|
|
|
|
|
|
478,493 |
|
|
|
(478,493 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
2,416,480 |
|
|
|
522,591 |
|
|
|
2,664,317 |
|
|
|
(427,019 |
) |
|
|
5,176,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the financial statements.
F-8
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
1. |
|
CORPORATE INFORMATION AND BASIS OF PRESENTATION |
Shandong Xiangrui Pharmacy Co., Ltd. (the Company) was incorporated in Dongping county of
Shandong province, China on April 15, 2005 with a registered capital of RMB 20,000,000. The
company is principally engaged in corn processing, manufacturing and sale of corn starch and
pharmaceutical grade crystalline glucose. The Company is a single entity with no subsidiaries and
operates its business in mainland China. Sales are virtually all attributable to domestic
customers.
The financial statements have been prepared and presented in accordance with the accounting
principles generally accepted in the United States of America (US GAAP).
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Significant accounting policies in the preparation of the accompanying financial statements are as
follows:
The preparation of financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures
of contingent assets and liabilities at the balance sheet dates and the reported amounts of
revenues and expenses during the reporting periods. Significant estimates and assumptions
reflected in the financial statements include, but are not limited to, revenue recognition,
allowance for doubtful accounts, provision for inventories, useful lives of property and
equipment and intangible assets, income tax and tax related valuation allowance, and
contingencies. Actual results could differ significantly from those estimates.
|
|
The functional currency of the Company is Chinese Renminbi (RMB), as determined based on the
criteria of FASB ASC 830 Foreign Currency Matters. The Company uses the U.S. dollar for financial
reporting purposes. |
F-9
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
b) |
|
Foreign currency (continued) |
The Company translates assets and liabilities into U.S. dollars using the applicable exchange
rate quoted by the Peoples Bank of China at the balance sheet date. The income and expenses
items are translated using average rates during the reporting period. Adjustments resulting from
the translation of financial statements from RMB into U.S. dollars are recorded in shareholders
equity as part of accumulated other comprehensive income translation adjustments. The exchange
rates used for the translation are listed below.
|
|
|
|
|
|
|
|
|
|
|
Year end exchange rate |
|
|
Average yearly |
|
|
|
US$:RMB |
|
|
US$:RMB |
|
2009 |
|
|
6.8282 |
|
|
|
6.8319 |
|
2010 |
|
|
6.6227 |
|
|
|
6.7353 |
|
c) |
|
Fair value of financial instruments |
The Company adopted ASC 820 Fair Value Measurements and Disclosures. ASC 820 defines fair value,
establishes a framework for measuring fair value, and requires disclosures to be provided on fair
value measurement.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value as follows:
|
|
|
Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical
assets or liabilities in active markets. |
|
|
|
Level 2 Include other inputs that are directly or indirectly observable in the
marketplace; and |
|
|
|
Level 3 Unobservable inputs which are supported by little or no market activity,
therefore requiring an entity to develop its own assumptions. |
The carrying values of cash and cash equivalents, accounts receivable, other current assets,
accounts payable, other current liabilities, and amounts due to employees approximate their fair
value due to their short-term maturities.
The Company considers all cash on hand and demand deposits as cash.
Restricted cash represents amounts held by banks, which are not available for the Company use, as
security for issuance of letters of credit.
f) |
|
Notes and accounts receivable |
Notes receivable represent bank notes which are paid by third party commercial banks upon due
thus are believed to have low credit risk. Provisions are made against notes and accounts
receivable for estimated losses resulting from the inability of collecting payments from our
customers. The Company periodically assesses notes and accounts receivable balances to
determine whether an allowance for doubtful accounts should be made based upon historical
bad debt analysis, specific customer creditworthiness, and current economic trends. Notes
and accounts receivable in the balance sheets are stated net of such provision, if any.
F-10
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Inventories are stated at the lower of cost or net realizable value at balance sheet date.
Cost of inventories is determined using the weighted average method. Provisions are made for
excessive, slow moving and obsolete inventories as well as inventories whose carrying value
exceeds their net realizable value. Net realizable value is the estimated selling price in the
ordinary course of business, less estimated costs and expenses and related taxes necessary to
make the sale. Provision for inventories is determined on an individual item basis. Raw
material costs are based on purchase costs while work-in-progress and finished goods comprise
direct materials, direct labor and an allocation of manufacturing overhead costs.
h) |
|
Property, plant and equipment |
Property, plant and equipment are stated at cost less accumulated depreciation and are
depreciated on a straight-line basis over the estimated useful lives detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
Estimated |
|
|
Annual |
|
Category |
|
useful life |
|
residual value |
|
|
depreciation rate |
|
|
|
|
|
|
|
|
|
|
|
|
Buildings |
|
20 years |
|
|
5 |
% |
|
|
4.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
Machinery |
|
5-10 years |
|
|
5 |
% |
|
|
9.5%-19 |
% |
|
|
|
|
|
|
|
|
|
|
|
Office equipments |
|
5-10 years |
|
|
5 |
% |
|
|
9.5%-19 |
% |
|
|
|
|
|
|
|
|
|
|
|
Vehicles |
|
10 years |
|
|
5 |
% |
|
|
9.5 |
% |
Expenditures for major additions or improvement that extend the useful lives of property and
equipment are capitalized as additions to the related assets. Expenditure for minor
replacements, maintenance and repairs that do not improve or extend the lives of the assets
are charged to expense when incurred. Retirement, sales and disposals of assets are recorded
by removing the cost and accumulated depreciation, with any resulting gain or loss reflected
in the statements of income.
All direct and indirect costs that are related to the construction of property and equipment
and incurred before the assets are ready for their intended use are capitalized as
construction in progress. Construction in progress is transferred to specific property and
equipment accounts and commences depreciation when these assets are ready for their intended
use. Interest costs are capitalized if they are incurred during the acquisition, construction
or production of a qualifying asset and such costs could have been avoided if expenditures for
the assets have not been made. Capitalization of interest costs commences when the activities
to prepare the asset are in progress and expenditures and borrowing costs are being incurred.
Interest costs are capitalized until the assets are ready for their intended use.
Capitalization of interest costs is suspended during extended periods in which activities
related to the acquisition or construction of the qualifying assets are interrupted. No
interest costs were capitalized for the years ended December 31, 2010 and 2009.
F-11
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Prepayments for land use rights represent amounts paid for the right to use land in China
and are recorded at cost less accumulated amortization. Amortization is recorded on a
straight-line basis over the terms of the respective land use rights agreements, which are 50
years.
The Company recognizes revenue pursuant to ASC 605 Revenue Recognition, where persuasive
evidence of an arrangement exists (demonstrated via contract with purchasers), delivery has
occurred, the sellers price is fixed or determinable and collectibility is reasonably assured.
This generally occurs when the customer receives the product or at the time title passes to the
customer. Customers generally do not have the right to return product unless damaged or
defective. The Company does not provide discount for early payments or any other allowances on
sales.
k) |
|
Shipping and handling costs |
Shipping and handling costs are included in selling expenses. The shipping and handling
costs for the years ended December 31, 2010 and 2009 were US$496,595 and US$303,341,
respectively.
Cost of goods sold consists primarily of purchase costs of raw material, direct labor costs
and overhead expenses attributable to production and machine depreciation.
m) |
|
Advertising expenditures |
Advertising expenditures are expensed as incurred. There were no advertising costs incurred
in the reporting period.
Comprehensive income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, ASC 220 Comprehensive
Income requires that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company has chosen to
report comprehensive income in the Statements of Stockholders Equity. The Companys other
comprehensive income represents foreign currency translation adjustments.
F-12
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Income taxes are accounted for using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between
the financial statements carrying amounts of existing assets and liabilities and their respective
tax assets bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided to reduce the carrying
amount of deferred tax assets if it is considered more likely than not that some portion, or all,
of the deferred tax assets will not be realized.
According to relevant laws and regulation, the Company is subject a statutory tax rate of 25
percent.
In accordance with the relevant tax laws of China, value-added taxes (VAT) are levied on the
invoiced value of sales and are payable by the purchaser. The Company is required to remit the
VAT it collects to the tax authority, but can deduct the VAT it has paid on eligible purchases.
The difference between the amounts collected and paid is presented as VAT recoverable or payable
balance on the balance sheets.
Full-time employees of the Company participate in a government-mandated multi-employee
defined contribution plan pursuant to which certain pension benefits, medical care, unemployment
insurance, employee housing fund and other welfare benefits are provided to employees. Chinese
labor regulations require the Company make contributions to the government for these benefits
based on a specific percentage of the employees salaries up to a maximum of three times the
average annual salary for the city in which the Company operates for the prior year. The Company
has no legal obligation for the benefits beyond the contributions made. The total contribution
for such employee benefits was US$5,849 and US$16,203 for the year ended December 31, 2010 and
2009, respectively.
r) |
|
Impairment of long-lived assets |
The Company evaluates its long-lived assets, including property and equipment for impairment
whenever events or changes in circumstances, such as a significant adverse change to market
conditions that will impact the future use of the assets, indicate that the carrying amount of an
asset may not be recoverable in accordance with ASC 360 Property, Plant and Equipment. When these
events occur, the Company assesses the recoverability of long-lived assets by comparing the
carrying amount of the assets to the expected future undiscounted cash flows resulting from the
use of the assets and their eventual disposition. If the sum of the expected undiscounted cash
flow is less than the carrying amount of the assets, the Company recognizes an impairment loss
based on the excess of the carrying amount of the assets over their fair value. Fair value is
generally determined by discounting the cash flows expected to be generated by the assets, when
the market prices are not readily available. No impairment of long-lived assets was recognized
for any of the years presented.
F-13
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
We receive grants from the government. The grants received from government are recorded in
the financial statements in accordance with the purpose and the nature of the grant, either as
other income, a reduction of expenses, or a reduction of the cost of the capital investment. The
benefit of grants is recorded when performance is complete and all conditions as specified in the
agreement are fulfilled. Any refundable grant is accounted for as a liability.
t) |
|
Recently issued accounting pronouncements |
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06 (ASU
2010-06), Improving Disclosures About Fair Value Measurements, which requires reporting entities
to make new disclosures about recurring or nonrecurring fair-value measurements including
significant transfers into and out of Level 1 and Level 2 fair-value measurements and information
on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3
fair-value measurements. ASU 2010-6 is effective for annual reporting periods beginning after
December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual
periods beginning after December 15, 2010. The Company does not expect that the adoption of ASU
2010-06 will have a material impact on its financial statements.
In February 2010, the FASB issued ASU No. 2010-09 (ASU 2010-09), Subsequent Events (Topic
855). The amendments remove the requirements for an SEC filer to disclose a date, in both issued
and revised financial statements, through which subsequent events have been reviewed. Revised
financial statements include financial statements revised as a result of either correction of an
error or retrospective application of U.S. GAAP. ASU 2010-09 is effective for interim or annual
financial periods ending after June 15, 2010. The provisions of ASU 2010-09 are not expected to
have a material effect on the financial position, results of operations or cash flows of the
Company.
3. |
|
NOTES AND ACCOUNTS RECEIVABLE, NET |
Accounts receivable is stated at net value. As of December 31, 2010 and 2009, the allowance
for doubtful accounts recorded by the Company amounted to US$1,002,080 and US$915,298,
respectively.
Notes receivable represent bank drafts that are non-interest bearing and due within three
months. Such bank drafts have been arranged with third party financial institutions by certain
customers to settle their purchases from us. The carrying amount of notes receivable approximate
their fair values due to their short maturities.
F-14
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Raw materials |
|
|
1,206,001 |
|
|
|
1,026,025 |
|
Work-in-process |
|
|
386,352 |
|
|
|
346,894 |
|
Finished goods |
|
|
362,526 |
|
|
|
354,412 |
|
|
|
|
|
|
|
|
Total |
|
|
1,954,879 |
|
|
|
1,727,331 |
|
|
|
|
|
|
|
|
No provision for inventory was necessary or made at December 31, 2010 and 2009.
5. |
|
ADVANCE TO THIRD PARTY SUPPLIERS AND OTHER RECEIVABLES |
Advances to suppliers represent cash advances paid to suppliers for future purchase of raw
materials. Other receivables mainly include value added tax (VAT) benefit that is expected to be
realized within three months from balance sheet date.
6. |
|
PROPERTY , PLANT AND EQUIPMENT, NET |
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Buildings |
|
|
2,368,933 |
|
|
|
2,257,248 |
|
Machinery |
|
|
6,934,521 |
|
|
|
6,702,356 |
|
Office equipment |
|
|
18,911 |
|
|
|
17,129 |
|
Motor vehicles |
|
|
59,098 |
|
|
|
9,341 |
|
|
|
|
|
|
|
|
Total |
|
|
9,381,463 |
|
|
|
8,986,074 |
|
Less: Accumulated depreciation |
|
|
(6,484,434 |
) |
|
|
(6,370,643 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
2,897,029 |
|
|
|
2,615,431 |
|
Construction in progress |
|
|
76,247 |
|
|
|
14,645 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
2,973,276 |
|
|
|
2,630,076 |
|
|
|
|
|
|
|
|
As of December 31, 2010, the Company pledged its building with net book value of
US$2,332,480 to Citibank (China) Co., Ltd., Shanghai Branch to secure a long term bank loan
provided by the bank to Shandong RunYin Bio-Chemical Co., Ltd., a related party (Note 16).
F-15
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
6. |
|
PROPERTY , PLANT AND EQUIPMENT, NET (CONTINUED) |
Depreciation expenses amounted to US$695,703 and US$794,192 for the
years ended December 31, 2010 and 2009, respectively. Depreciation
expenses have been reported in the following accounts:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Cost of inventory |
|
|
491,475 |
|
|
|
432,968 |
|
General and administrative expenses |
|
|
195,271 |
|
|
|
351,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
686,746 |
|
|
|
784,829 |
|
|
|
|
|
|
|
|
Depreciation expenses reported in cost of inventories are charged to cost of sales upon the sales.
As of December 31, 2010, the Company pledged its land use right with net book value of
US$1,773,922 and US$768,827 to Dongping Branch of Industrial and Commercial Bank of China and
Citibank (China) Co., Ltd., Shanghai Branch respectively to secure two long term bank loans
provided by those banks to Shandong RunYin Bio-Chemical Co., Ltd., a related party (Note 16).
Land use rights are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Land use rights, cost |
|
|
2,766,860 |
|
|
|
2,766,859 |
|
Less: accumulated amortization |
|
|
(224,111 |
) |
|
|
(162,459 |
) |
|
|
|
|
|
|
|
Land use rights, net |
|
|
2,542,749 |
|
|
|
2,604,400 |
|
|
|
|
|
|
|
|
The Company had the following outstanding short-term loans with banks:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Agricultural Develop Bank, Dong Ping Branch |
|
|
4,529,875 |
|
|
|
4,393,544 |
|
Rural Cooperative Bank of Dongping, Shandong |
|
|
2,793,422 |
|
|
|
1,464,515 |
|
Bank of Communications |
|
|
754,979 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
8,078,276 |
|
|
|
5,858,059 |
|
|
|
|
|
|
|
|
The Companys bank borrowings are RMB denominated loans with fixed
interest rates ranging from 4.86% to 11.62%. Interest expense on
bank borrowings was US$409,088 and US$278,179 for the years ended
December 31, 2010 and 2009, respectively. All bank loans are due
within one year from balance sheet date.
F-16
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
Pursuant to the new Chinas Corporate Income Tax Laws and relevant
regulations that were applicable before January 1, 2008, the Company
was subject to corporate income taxes (CIT) at a statutory rate of
25%.
The income tax provision is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Current tax expense |
|
|
1,085,528 |
|
|
|
118,820 |
|
Deferred tax expense |
|
|
(64,464 |
) |
|
|
8,441 |
|
|
|
|
|
|
|
|
Total income tax provision |
|
|
1,021,064 |
|
|
|
127,261 |
|
|
|
|
|
|
|
|
A reconciliation for the provision for income taxes with amounts
determined by applying the statutory income tax rate to income
before income tax is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
Corporate income tax rate |
|
|
25 |
% |
|
|
25 |
% |
Computed tax at statutory rate |
|
|
983,436 |
|
|
|
106,474 |
|
Expense not deductible for tax purposes |
|
|
37,628 |
|
|
|
20,787 |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
1,021,604 |
|
|
|
127,261 |
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. Components of the Companys deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
265,254 |
|
|
|
250,520 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
265,254 |
|
|
|
250,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipments |
|
|
172,363 |
|
|
|
222,093 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
172,363 |
|
|
|
222,093 |
|
|
|
|
|
|
|
|
Deferred assets are current assets while deferred liabilities are
non-current liabilities. No valuation allowance was provided for
deferred tax assets in the periods presented.
F-17
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
10. |
|
OTHER PAYABLE TO THIRD PARTIES |
Other payables to third parties consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Purchases of property and equipment |
|
|
111,535 |
|
|
|
92,654 |
|
Others |
|
|
93,946 |
|
|
|
18,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
205,481 |
|
|
|
111,278 |
|
|
|
|
|
|
|
|
11. |
|
MISCELLANEOUS TAX PAYABLES |
Miscellaneous tax payables mainly comprise local supplementary
taxes that levied as a percentage of the total income tax and VAT
tax paid. Details of miscellaneous tax payables are depicted in
the following table:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Urban construction tax |
|
|
46,064 |
|
|
|
3,135 |
|
Education tax |
|
|
25,837 |
|
|
|
1,881 |
|
Local supplementary tax |
|
|
8,613 |
|
|
|
628 |
|
Land use tax |
|
|
3,918 |
|
|
|
|
|
Real estate tax |
|
|
2,838 |
|
|
|
|
|
Personal income tax payable on behalf of staffs |
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
88,937 |
|
|
|
5,644 |
|
|
|
|
|
|
|
|
Accrued expenses included the following:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Bonus |
|
|
49,944 |
|
|
|
40,841 |
|
Freight |
|
|
56,235 |
|
|
|
47,550 |
|
|
|
|
|
|
|
|
Total |
|
|
106,179 |
|
|
|
88,391 |
|
|
|
|
|
|
|
|
F-18
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
The Companys paid-in capital was held by the following shareholders in each period as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Xuchun Wang |
|
|
2,126,502 |
|
|
|
2,126,502 |
|
Lingfa Huang |
|
|
193,318 |
|
|
|
193,318 |
|
Binglong Qiao |
|
|
48,330 |
|
|
|
48,330 |
|
Guo Wang |
|
|
48,330 |
|
|
|
48,330 |
|
|
|
|
|
|
|
|
Total |
|
|
2,416,480 |
|
|
|
2,416,480 |
|
|
|
|
|
|
|
|
In accordance with the Company Law of the Peoples Republic of
China, the Company should make appropriations from after-tax
profit to non-distributable reserve funds. These reserve funds
include (i) a general reserve and (ii) a discretionary fund. The
Company adds an annual statutory common reserve of at least 10%
of its annual after-tax profit until such reserve has reached 50%
of its respective registered capital based on the enterprises
statutory accounts. The appropriations to discretionary fund are
at the Companys discretion. These reserve funds can only be used
for specific purposes of enterprises expansion and not
distributable as cash dividends. The Company provided 10% of
statutory reserve and 6% of discretionary reserve upon
distributable profit. Details of those reserves are presented as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
Statutory reserve |
|
|
326,619 |
|
|
|
27,561 |
|
Discretionary reserve |
|
|
195,972 |
|
|
|
16,537 |
|
|
|
|
|
|
|
|
Total |
|
|
522,591 |
|
|
|
44,098 |
|
|
|
|
|
|
|
|
The local government granted US$76,113 to the Company in year
2009 to subsidize the Companys operating expenditure. The amount
was recorded as other income in current period. There is no such
government grant received by the Company in year 2010. There are
no contingencies that relate to such government grant.
F-19
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
16. |
|
RELATED PARTY TRANSACTIONS |
As of and for the years ended December 31, 2010, and 2009, the
principal related parties with which the Company had transactions are
listed as follows:
|
|
|
Name |
|
Relationship |
|
|
|
Shandong Runyin Bio-chemical Co., Ltd.
|
|
Affiliates under common control |
Ruixing Group Co., Ltd.
|
|
Affiliates under common control |
Shandong Xinrui Chemical Devices Co., Ltd.
|
|
Affiliates under common control |
For the years ended December 31, 2010, and 2009, the
Company engaged in the following significant related
party transactions:
(a) Utility (steam and electricity) supply
Steam supply received from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
US$ |
|
|
US$ |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
|
(i |
) |
|
|
1,661,430 |
|
|
|
1,228,118 |
|
|
|
|
|
|
|
|
|
|
|
|
Electricity supply received from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
US$ |
|
|
US$ |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
|
(i |
) |
|
|
1,568,885 |
|
|
|
959,893 |
|
|
|
|
|
|
|
|
|
|
|
|
Electricity supplied to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
US$ |
|
|
US$ |
|
Shandong Xinrui Chemical Devices Co., Ltd. |
|
|
(i |
) |
|
|
414,969 |
|
|
|
169,598 |
|
|
|
|
|
|
|
|
|
|
|
|
(b) Raw materials purchased from
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
|
902,054 |
|
|
|
474,192 |
|
|
|
|
|
|
|
|
F-20
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
16. |
|
RELATED PARTY TRANSACTIONS (CONTINUED) |
|
(c) |
|
Plant facility lease from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
US$ |
|
|
US$ |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
(ii) |
|
|
9,148 |
|
|
|
9,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
Guarantee |
|
|
|
|
On June 17, 2010, Shandong Runyin Bio-chemical Co.,
Ltd. entered into a guaranty contract with Bank of
Communications, to guarantee payment obligations under
a five million RMB loan agreement between the Company
and Bank of Communications dated as of June 17, 2010. |
|
|
|
|
On November 24, 2010, Shandong Runyin Bio-chemical
Co., Ltd., entered into a maximum amount mortgage
agreement with Rural Cooperative Bank for a ten
million RMB mortgage. Under the agreement Shandong
Runyin Bio-chemical Co., Ltd. guarantees the Companys
mortgage over land, houses and equipment valued at RMB
23,110,000 for securing the Companys debt under a
loan agreement amounted to RMB 8,500,000. |
|
|
|
|
On June 11, 2010, Ruixing Group Co., Ltd., entered
into a guarantee agreement with Agricultural
Development Bank to guarantee payment obligations
under a thirty million RMB loan agreement between the
Company and Agricultural Development Bank dated as of
June 11, 2010. |
|
|
|
|
On July 13, 2009, the Company, Shandong Xinrui
Chemical Devices Co., Ltd., Shandong Runyin
Bio-chemical Co., Ltd., Ruixing Group Co., Ltd., and
Mr. Guangyin Meng, entered into a guarantee agreement
to guarantee payment obligations under an eighty
million RMB uncommitted short term cycling finance
agreement between Shandong Runyin Bio-chemical Co.,
Ltd. and Citibank (China) Co., Ltd., Shanghai Branch
dated as of July 13, 2009. The Company used its land
use right and its properties to guarantee this loan. |
|
|
(i) |
|
In January 2009, the Company entered into a
non-cancelable contract with Shandong Runyin
Bio-chemical Co., Ltd. to secure the steam and
electricity supply for the Companys cornstarch and
glucose production. The non-cancelable utility supply
contract with the Shandong Runyin Bio-chemical Co.,
Ltd. expires in December 2014 whose price was
determined by reference to market price. |
|
|
(ii) |
|
In December 2008, the Company entered into a rental
contract with the Shandong Runyin Bio-chemical Co.,
Ltd. for leasing two plants. The lease contract was
renewed on annual basis with yearly payment of
US$9,000, which was determined by reference to market
price. |
|
|
(e) |
|
Amounts due from related parties |
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
|
|
|
|
|
477,728 |
|
Shandong Xinrui Chemical Devices Co., Ltd. |
|
|
|
|
|
|
167,751 |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
645,479 |
|
|
|
|
|
|
|
|
F-21
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
16. |
|
RELATED PARTY TRANSACTIONS (CONTINUED) |
|
(f) |
|
Amounts due to related parties |
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Ruixing Group Co., Ltd. |
|
|
297,285 |
|
|
|
244,817 |
|
Shandong Runyin Bio-chemical Co., Ltd. |
|
|
1,952,241 |
|
|
|
2,096,478 |
|
|
|
|
|
|
|
|
Total |
|
|
2,249,526 |
|
|
|
2,341,295 |
|
|
|
|
|
|
|
|
|
|
Amounts due from and due to related parties are unsecured, interest-free and repayable on demand. |
|
17. |
|
COMMITMENTS AND CONTINGENCIES |
|
(a) |
|
Supply Commitment |
|
|
|
|
In January 2009, the Company entered into a non-cancelable contract with
Shandong Runyin Bio-chemical Co., Ltd. to secure the steam and
electricity supply for the Companys cornstarch and glucose production.
The non-cancelable steam and utility supply contract with the Shandong
Runyin Bio-chemical Co., Ltd. expires in December 2014 with a price
determined by reference to market price. Total amount of the contract per
year would be determined by the actual quantity of utilities consumed by
the Company. Please refer to Note 16 for the actual amount of the utility
supply consumed by the Company in 2010 and 2009. |
|
|
(b) |
|
Loan Guarantee |
|
|
|
|
As of December 31, 2010, the Company pledged its building with net book
value of US$2,332,480 to Citibank (China) Co., Ltd., Shanghai Branch to
secure a long term bank loan provided by the bank to Shandong RunYin
Bio-Chemical Co., Ltd. |
|
|
|
|
As of December 31, 2010, the Company pledged its land use right with net
book value of US$1,773,922 and US$768,827 to Dongping Branch of
Industrial and Commercial Bank of China and Citibank (China) Co., Ltd.,
Shanghai Branch respectively to secure two long term bank loans provided
by those banks to Shandong RunYin Bio-Chemical Co., Ltd, a related party
(Note 16). |
|
|
(c) |
|
Capital Purchase Commitment |
|
|
|
|
In 2010, the Company entered into non-cancellable contracts with some
machinery suppliers for purchase of machinery and equipment, which
amounted to US$4,709,815. In 2009, the Company also entered into
non-cancellable contracts with some machinery suppliers for purchase of
machinery and equipment, which amounted to US$545,967. All these
contracts will be settled in 2011. |
|
|
(d) |
|
Contingencies |
|
|
|
|
The Company had no material contingent events during the reporting period. |
F-22
SHANDONG XIANGRUI PHARMACY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
18. |
|
SEGMENT AND GEOGRAPHIC INFORMATION |
Business segments
The main products of the Company are cornstarch and glucose, which utilize almost the same production processes. Both are produced from the raw
material corn. The difference in production processes is that glucose is further processed from cornstarch by adding in auxiliary materials. The two
products are sold to the same type of customers and use the same distribution methods.
While the cost base is similar for the two products, the selling prices are independently determined by reference to their respective market prices,
which resulted in different trend of gross profit margins of the two products as shown in the following table. The economies of scale also
contributed to the overall rise of gross profit margins.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US$ |
|
|
US$ |
|
Revenues |
|
|
|
|
|
|
|
|
Cornstarch |
|
|
32,989,848 |
|
|
|
12,779,162 |
|
Glucose |
|
|
8,934,164 |
|
|
|
4,336,391 |
|
Cost of sales |
|
|
|
|
|
|
|
|
Cornstarch |
|
|
28,754,128 |
|
|
|
11,489,453 |
|
Glucose |
|
|
7,748,407 |
|
|
|
4,048,677 |
|
GPM |
|
|
|
|
|
|
|
|
Cornstarch |
|
|
12.8 |
% |
|
|
10.1 |
% |
Glucose |
|
|
13.3 |
% |
|
|
6.6 |
% |
The deviation of the gross profit margins of the two products as determined by market prices is expected to continue in the future.
Because of the similar production processes and raw materials and the same type of customers and distribution methods, the cornstarch and glucose
production processes are not individually assessed when the Companys chief operating decision maker reviews the operation results and makes
decisions on resources allocation. Therefore, it is not practical to separate the information on the assets of the two products and other profit and
loss information which are believed to have no relevance to the decision-making relating to the Companys economic activities.
Geographical segments
All the revenue is attributed to the revenue from China.
In accordance with ASC 855 Subsequent Events, the Company evaluated subsequent events through March 22, 2011, which was the date that the financial
statements were issued. In the opinion of the management, the Company had no significant subsequent events.
F-23
SMSA TREEMONT ACQUISITION CORP.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
(Amounts in U.S. dollar (US$), except for number of shares)
Shandong Xiangrui Pharmacy Co., Ltd. (the Company) was incorporated in Dongping county of
Shandong province, China on April 15, 2005 with a registered capital of RMB 20,000,000. The company
is principally engaged in corn processing, manufacturing and sale of corn starch and pharmaceutical
grade crystalline glucose. The Company is a single entity with no subsidiaries and operates its
business in mainland China. Sales are virtually all attributable to domestic customers.
Xiangrui Pharmaceutical International Limited (Xiangrui) was incorporated in the British Virgin
Islands on November 29, 2010. Taian Yisheng Management & Consulting Co., Ltd (WFOE) was
incorporated by Xiangrui on May 6, 2011 as a wholly foreign owned enterprise in China. Xiangrui is
a holding company that has no operations or assets other than its ownership of all of the capital
stock of the WFOE.
On May 9, 2011, the WFOE entered into a series of variable interest entity contractual agreements
(the VIE Agreements) with the Company and its shareholders. The VIE Agreements are comprised of a
series of agreements, including an Exclusive Technical and Consulting Service Agreement, Management
Fee Payment Agreement, Equity Interest Pledge Agreement, Exclusive Equity Interest Purchase
Agreement, Operating Agreement and Proxy Agreement, through which the WFOE has the right to advise,
consult, manage and operate the Company for an annual consulting services fee in the amount of the
Companys yearly net income before tax. In order to further reinforce the WFOEs rights to control
and operate the Company, the Companys shareholders have entrusted their shareholders rights in
the Company to a person designated by the WFOE.
On May 13, 2011, Xiangrui and its sole shareholder, Mr. Chongxin Xu, entered into the Share
Exchange Agreement with SMSA Treemont Acquisition Corp. (SMSA). Pursuant to the Share Exchange
Agreement, SMSA issued 12,363,885 newly created shares to Mr. Chongxin Xu, and became the sole
shareholder of Xiangrui. The shares issued to Mr. Chongxin Xu constitute 93% of SMSAs issued and
outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of
the transactions contemplated by the Share Exchange Agreement.
The following chart reflects the organizational structure after May 13, 2011:
For accounting purposes, the share exchange transaction was treated as a reverse acquisition with
Xiangrui as the acquirer and SMSA as the acquired party.
The following unaudited pro forma financial information is provided to demonstrate the effect of
the formation of Xiangrui and the reverse acquisition between Xiangrui and SMSA, which includes
balance sheet data and results of operation, and is prepared with the assumption that the formation
and acquisition were completed at the beginning of the reporting period.
1
SMSA TREEMONT ACQUISITION CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
(Amounts in U.S. dollar (US$), except for number of shares)
31 DECEMBER 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong |
|
|
|
|
|
|
|
|
|
|
|
|
SMSA |
|
|
Xiangrui |
|
|
WFOE |
|
|
Xiangrui |
|
|
Combined |
|
|
Elimination |
|
|
Consolidated |
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,634,012 |
|
|
|
6,634,012 |
|
|
|
|
|
|
|
6,634,012 |
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226,494 |
|
|
|
226,494 |
|
|
|
|
|
|
|
226,494 |
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,236,468 |
|
|
|
2,236,468 |
|
|
|
|
|
|
|
2,236,468 |
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255,870 |
|
|
|
255,870 |
|
|
|
|
|
|
|
255,870 |
|
Notes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,954,879 |
|
|
|
1,954,879 |
|
|
|
|
|
|
|
1,954,879 |
|
Accounts receivable, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
907,796 |
|
|
|
907,796 |
|
|
|
|
|
|
|
907,796 |
|
Inventories, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,681 |
|
|
|
104,681 |
|
|
|
|
|
|
|
104,681 |
|
Advances to third party suppliers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265,254 |
|
|
|
265,254 |
|
|
|
|
|
|
|
265,254 |
|
Amounts due from related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,585,454 |
|
|
|
12,585,454 |
|
|
|
|
|
|
|
12,585,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,973,276 |
|
|
|
2,973,276 |
|
|
|
|
|
|
|
2,973,276 |
|
Non-current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,542,749 |
|
|
|
2,542,749 |
|
|
|
|
|
|
|
2,542,749 |
|
Property and equipment, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land use rights, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,516,025 |
|
|
|
5,516,025 |
|
|
|
|
|
|
|
5,516,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,101,479 |
|
|
|
18,101,479 |
|
|
|
|
|
|
|
18,101,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,634,012 |
|
|
|
6,634,012 |
|
|
|
|
|
|
|
6,634,012 |
|
TOTAL ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226,494 |
|
|
|
226,494 |
|
|
|
|
|
|
|
226,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
SMSA TREEMONT ACQUISITION CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Amounts in U.S. dollar (US$), except for number of shares)
31 DECEMBER 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong |
|
|
|
|
|
|
|
|
|
|
|
|
SMSA |
|
|
Xiangrui |
|
|
WFOE |
|
|
Xiangrui |
|
|
Combined |
|
|
Elimination |
|
|
Consolidated |
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
LIABILITIES AND SHAREHOLDERS
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,078,276 |
|
|
|
8,078,276 |
|
|
|
|
|
|
|
8,078,276 |
|
Accounts payable to third parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
827,993 |
|
|
|
827,993 |
|
|
|
|
|
|
|
827,993 |
|
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from third party customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,704 |
|
|
|
167,704 |
|
|
|
|
|
|
|
167,704 |
|
Accrued expenses and other current
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,179 |
|
|
|
106,179 |
|
|
|
|
|
|
|
106,179 |
|
Payroll and welfare payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,305 |
|
|
|
19,305 |
|
|
|
|
|
|
|
19,305 |
|
Amounts due to related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,249,526 |
|
|
|
2,249,526 |
|
|
|
|
|
|
|
2,249,526 |
|
Taxes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,098,283 |
|
|
|
1,098,283 |
|
|
|
|
|
|
|
1,098,283 |
|
Other payables to third parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205,481 |
|
|
|
205,481 |
|
|
|
|
|
|
|
205,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,752,747 |
|
|
|
12,752,747 |
|
|
|
|
|
|
|
12,752,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,363 |
|
|
|
172,363 |
|
|
|
|
|
|
|
172,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,925,110 |
|
|
|
12,925,110 |
|
|
|
|
|
|
|
12,925,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock-0.001 per value;
13,294,500 shares issued and
outstanding |
|
|
531 |
|
|
|
|
|
|
|
|
|
|
|
2,416,480 |
|
|
|
2,417,011 |
|
|
|
2,403,717 |
|
|
|
13,295 |
|
Additional paid-in capital |
|
|
12,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,330 |
|
|
|
(2,403,717 |
) |
|
|
2,416,047 |
|
Statutory reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
522,591 |
|
|
|
522,591 |
|
|
|
|
|
|
|
522,591 |
|
Accumulated other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(427,019 |
) |
|
|
(427,019 |
) |
|
|
|
|
|
|
(427,019 |
) |
Retained earnings |
|
|
(12,861 |
) |
|
|
|
|
|
|
|
|
|
|
2,664,317 |
|
|
|
2,651,456 |
|
|
|
|
|
|
|
2,651,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,176,369 |
|
|
|
5,176,369 |
|
|
|
|
|
|
|
5,176,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,101,479 |
|
|
|
18,101,479 |
|
|
|
|
|
|
|
18,101,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
SMSA TREEMONT ACQUISITION CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
(Amounts in U.S. dollar (US$), except for number of shares)
31 MARCH 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong |
|
|
|
|
|
|
|
|
|
|
|
|
SMSA |
|
|
Xiangrui |
|
|
WFOE |
|
|
Xiangrui |
|
|
Combined |
|
|
Elimination |
|
|
Consolidated |
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,838,523 |
|
|
|
5,838,523 |
|
|
|
|
|
|
|
5,838,523 |
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,074,507 |
|
|
|
4,074,507 |
|
|
|
|
|
|
|
4,074,507 |
|
Accounts receivable, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
618,221 |
|
|
|
618,221 |
|
|
|
|
|
|
|
618,221 |
|
Inventories, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,787,813 |
|
|
|
2,787,813 |
|
|
|
|
|
|
|
2,787,813 |
|
Advances to third party suppliers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,589,162 |
|
|
|
2,589,162 |
|
|
|
|
|
|
|
2,589,162 |
|
Other receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,360 |
|
|
|
149,360 |
|
|
|
|
|
|
|
149,360 |
|
Amounts due from related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,334 |
|
|
|
6,334 |
|
|
|
|
|
|
|
6,334 |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267,936 |
|
|
|
267,936 |
|
|
|
|
|
|
|
267,936 |
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,331,856 |
|
|
|
16,331,856 |
|
|
|
|
|
|
|
16,331,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,943,717 |
|
|
|
2,943,717 |
|
|
|
|
|
|
|
2,943,717 |
|
Land use rights, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,526,883 |
|
|
|
2,526,883 |
|
|
|
|
|
|
|
2,526,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,470,600 |
|
|
|
5,470,600 |
|
|
|
|
|
|
|
5,470,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,802,456 |
|
|
|
21,802,456 |
|
|
|
|
|
|
|
21,802,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
SMSA TREEMONT ACQUISITION CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Amounts in U.S. dollar (US$), except for number of shares)
31 MARCH 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong |
|
|
|
|
|
|
|
|
|
|
|
|
SMSA |
|
|
Xiangrui |
|
|
WFOE |
|
|
Xiangrui |
|
|
Combined |
|
|
Elimination |
|
|
Consolidated |
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
LIABILITIES AND SHAREHOLDERS
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,685,193 |
|
|
|
9,685,193 |
|
|
|
|
|
|
|
9,685,193 |
|
Accounts payable to third parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,159,288 |
|
|
|
1,159,288 |
|
|
|
|
|
|
|
1,159,288 |
|
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from third party customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348,326 |
|
|
|
348,326 |
|
|
|
|
|
|
|
348,326 |
|
Accrued expenses and other current
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,308 |
|
|
|
191,308 |
|
|
|
|
|
|
|
191,308 |
|
Payroll and welfare payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,762 |
|
|
|
4,762 |
|
|
|
|
|
|
|
4,762 |
|
Amounts due to related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,292,012 |
|
|
|
2,292,012 |
|
|
|
|
|
|
|
2,292,012 |
|
Taxes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,167,525 |
|
|
|
1,167,525 |
|
|
|
|
|
|
|
1,167,525 |
|
Other payables to third parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,731 |
|
|
|
77,731 |
|
|
|
|
|
|
|
77,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,926,145 |
|
|
|
14,926,145 |
|
|
|
|
|
|
|
14,926,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,740 |
|
|
|
158,740 |
|
|
|
|
|
|
|
158,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,084,885 |
|
|
|
15,084,885 |
|
|
|
|
|
|
|
15,084,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock-0.001 per value;
13,294,500 shares issued and
outstanding |
|
|
531 |
|
|
|
|
|
|
|
|
|
|
|
2,416,480 |
|
|
|
2,417,011 |
|
|
|
2,403,717 |
|
|
|
13,295 |
|
Additional paid-in capital |
|
|
16,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,207 |
|
|
|
(2,403,717 |
) |
|
|
2,419,924 |
|
Statutory reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
522,591 |
|
|
|
522,591 |
|
|
|
|
|
|
|
522,591 |
|
Accumulated other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(426,267 |
) |
|
|
(426,267 |
) |
|
|
|
|
|
|
(426,267 |
) |
Retained earnings |
|
|
(16,738 |
) |
|
|
|
|
|
|
|
|
|
|
4,204,767 |
|
|
|
4,188,029 |
|
|
|
|
|
|
|
4,188,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,717,571 |
|
|
|
6,717,571 |
|
|
|
|
|
|
|
6,717,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,802,456 |
|
|
|
21,802,456 |
|
|
|
|
|
|
|
21,802,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
SMSA TREEMONT ACQUISITION CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(Amounts in U.S. dollar (US$), except for number of shares)
YEAR ENDED 31 DECEMBER 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong |
|
|
|
|
|
|
|
|
|
|
|
|
SMSA |
|
|
Xiangrui |
|
|
WFOE |
|
|
Xiangrui |
|
|
Combined |
|
|
Elimination |
|
|
Consolidated |
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cornstarch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,989,848 |
|
|
|
32,989,848 |
|
|
|
|
|
|
|
32,989,848 |
|
Glucose |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,934,164 |
|
|
|
8,934,164 |
|
|
|
|
|
|
|
8,934,164 |
|
Others |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,117 |
|
|
|
129,117 |
|
|
|
|
|
|
|
129,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,053,129 |
|
|
|
42,053,129 |
|
|
|
|
|
|
|
42,053,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cornstarch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,754,128 |
) |
|
|
(28,754,128 |
) |
|
|
|
|
|
|
(28,754,128 |
) |
Glucose |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,748,407 |
) |
|
|
(7,748,407 |
) |
|
|
|
|
|
|
(7,748,407 |
) |
Others |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,978 |
) |
|
|
(83,978 |
) |
|
|
|
|
|
|
(83,978 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,586,513 |
) |
|
|
(36,586,513 |
) |
|
|
|
|
|
|
(36,586,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,466,616 |
|
|
|
5,466,616 |
|
|
|
|
|
|
|
5,466,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,003,500 |
) |
|
|
(1,003,500 |
) |
|
|
|
|
|
|
(1,003,500 |
) |
General and administrative expenses |
|
|
(6,095 |
) |
|
|
|
|
|
|
|
|
|
|
(245,515 |
) |
|
|
(251,610 |
) |
|
|
|
|
|
|
(251,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(6,095 |
) |
|
|
|
|
|
|
|
|
|
|
(1,249,015 |
) |
|
|
(1,255,110 |
) |
|
|
|
|
|
|
(1,255,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
(6,095 |
) |
|
|
|
|
|
|
|
|
|
|
4,217,601 |
|
|
|
4,211,506 |
|
|
|
|
|
|
|
4,211,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
SMSA TREEMONT ACQUISITION CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(Amounts in U.S. dollar (US$), except for number of shares)
YEAR ENDED 31 DECEMBER 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong |
|
|
|
|
|
|
|
|
|
|
|
|
SMSA |
|
|
Xiangrui |
|
|
WFOE |
|
|
Xiangrui |
|
|
Combined |
|
|
Elimination |
|
|
Consolidated |
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,316 |
|
|
|
30,316 |
|
|
|
|
|
|
|
30,316 |
|
Interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(409,088 |
) |
|
|
(409,088 |
) |
|
|
|
|
|
|
(409,088 |
) |
Foreign exchange Gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
(28 |
) |
Investment loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,663 |
|
|
|
90,663 |
|
|
|
|
|
|
|
90,663 |
|
Other (expense) income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,281 |
|
|
|
4,281 |
|
|
|
|
|
|
|
4,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expenses |
|
|
(6,095 |
) |
|
|
|
|
|
|
|
|
|
|
3,933,745 |
|
|
|
3,927,650 |
|
|
|
|
|
|
|
3,927,650 |
|
Income tax expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,021,064 |
) |
|
|
(1,021,064 |
) |
|
|
|
|
|
|
(1,021,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
ordinary shareholders |
|
|
(6,095 |
) |
|
|
|
|
|
|
|
|
|
|
2,912,681 |
|
|
|
2,906,586 |
|
|
|
|
|
|
|
2,906,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
SMSA TREEMONT ACQUISITION CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(Amounts in U.S. dollar (US$), except for number of shares)
THREE MONTHS ENDED 31 MARCH 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong |
|
|
|
|
|
|
|
|
|
|
|
|
SMSA |
|
|
Xiangrui |
|
|
WFOE |
|
|
Xiangrui |
|
|
Combined |
|
|
Elimination |
|
|
Consolidated |
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cornstarch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,151,195 |
|
|
|
13,151,195 |
|
|
|
|
|
|
|
13,151,195 |
|
Glucose |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,911,882 |
|
|
|
2,911,882 |
|
|
|
|
|
|
|
2,911,882 |
|
Others |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,759 |
|
|
|
58,759 |
|
|
|
|
|
|
|
58,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,121,836 |
|
|
|
16,121,836 |
|
|
|
|
|
|
|
16,121,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cornstarch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,174,542 |
) |
|
|
(11,174,542 |
) |
|
|
|
|
|
|
(11,174,542 |
) |
Glucose |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,180,337 |
) |
|
|
(2,180,337 |
) |
|
|
|
|
|
|
(2,180,337 |
) |
Others |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,759 |
) |
|
|
(58,759 |
) |
|
|
|
|
|
|
(58,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,413,638 |
) |
|
|
(13,413,638 |
) |
|
|
|
|
|
|
(13,413,638 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,708,198 |
|
|
|
2,708,198 |
|
|
|
|
|
|
|
2,708,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293,519 |
) |
|
|
(293,519 |
) |
|
|
|
|
|
|
(293,519 |
) |
General and administrative expenses |
|
|
(3,877 |
) |
|
|
|
|
|
|
|
|
|
|
(112,570 |
) |
|
|
(116,447 |
) |
|
|
|
|
|
|
(116,447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(3,877 |
) |
|
|
|
|
|
|
|
|
|
|
(406,089 |
) |
|
|
(409,966 |
) |
|
|
|
|
|
|
(409,966 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
(3,877 |
) |
|
|
|
|
|
|
|
|
|
|
2,302,109 |
|
|
|
2,298,232 |
|
|
|
|
|
|
|
2,298,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
SMSA TREEMONT ACQUISITION CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(Amounts in U.S. dollar (US$), except for number of shares)
THREE MONTHS ENDED 31 MARCH 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong |
|
|
|
|
|
|
|
|
|
|
|
|
SMSA |
|
|
Xiangrui |
|
|
WFOE |
|
|
Xiangrui |
|
|
Combined |
|
|
Elimination |
|
|
Consolidated |
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,310 |
|
|
|
1,310 |
|
|
|
|
|
|
|
1,310 |
|
Interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(175,174 |
) |
|
|
(175,174 |
) |
|
|
|
|
|
|
(175,174 |
) |
Foreign exchange Gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,289 |
) |
|
|
(41,289 |
) |
|
|
|
|
|
|
(41,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expenses |
|
|
(3,877 |
) |
|
|
|
|
|
|
|
|
|
|
2,086,956 |
|
|
|
2,083,079 |
|
|
|
|
|
|
|
2,083,079 |
|
Income tax expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(546,506 |
) |
|
|
(546,506 |
) |
|
|
|
|
|
|
(546,506 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
ordinary shareholders |
|
|
(3,877 |
) |
|
|
|
|
|
|
|
|
|
|
1,540,450 |
|
|
|
1,536,573 |
|
|
|
|
|
|
|
1,536,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
SMSA TREEMONT ACQUISITION CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(Amounts in U.S. dollar (US$), except for number of shares)
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Three months |
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December |
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ended March |
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31, |
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31 |
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2010 |
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2011 |
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US$ |
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US$ |
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Earnings per share: |
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Basic and diluted |
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Income from operations |
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2,906,586 |
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1,536,573 |
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Basic and diluted earnings per share |
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0.219 |
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0.116 |
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Weighted average ordinary shares outstanding: |
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Basic and diluted |
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13,294,500 |
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13,294,500 |
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10