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EXCEL - IDEA: XBRL DOCUMENT - SMSA Treemont Acquisition Corp | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - SMSA Treemont Acquisition Corp | c24374exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - SMSA Treemont Acquisition Corp | c24374exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - SMSA Treemont Acquisition Corp | c24374exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - SMSA Treemont Acquisition Corp | c24374exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment
No. 3
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File number: 0-54096
SMSA Treemont Acquisition Corp.
(Exact name of registrant as specified in charter)
Nevada | 27-2969090 | |
(State of incorporation) | (IRS Employer Identification No.) |
Ruixing Industry Park
Dongping County
Shandong Province, 271509
Peoples Republic of China
(Address of principal executive offices) (Zip Code)
Dongping County
Shandong Province, 271509
Peoples Republic of China
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: 86-538-241-7858
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o NO þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): YES o NO þ
State the number of shares outstanding of each of the issuers classes of common equity as of the
latest practicable date: August 15, 2011: 13,294,500
Transitional Small Business Disclosure Format (check one): YES o NO þ
Table of Contents
EXPLANATORY NOTE
This Amendment No. 3 of Form 10-Q (the Form 10-Q/A) amends our quarterly report on Amendment No.
2 of Form 10-Q for the quarterly period ended June 30, 2011, originally filed with the U.S.
Securities and Exchange Commission on November 3, 2011 (the Amendment No. 2). The sole purpose of
this Form 10-Q/A is to amend the Amendment No. 2 to provide Interactive Data File disclosure in
accordance with Rule 405 of Regulation S-T. The Interactive Data File disclosure is the first
Interactive Data File disclosure to have detailed tagging as required to submit under Rule 405 of
Regulation S-T.
Other than as expressly set forth above, this Form 10- Q/A does not, and does not purport to,
amend, update or restate the information in any Item of the Amendment No.2.
TABLE OF CONTENTS
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | INDEPENDENT AUDITORS REPORT |
INDEPENDENT AUDITORS REPORT
Board of Directors and Shareholders of
SMSA TREEMONT ACQUISITION CORP.
SMSA TREEMONT ACQUISITION CORP.
We have reviewed the accompanying consolidated balance sheet of SMSA Treemont Acquisition Corp.
(the Company) and its subsidiaries (the Group) as of 30 June 2011 and the related consolidated
income statement and cash flow statement for the six-month period 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 consolidated financial statements
is the representation of the management of the Group.
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 review, we are not aware of any material modifications that should be made to the
accompanying consolidated 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
15 July 2011
Shanghai, China
15 July 2011
1
Table of Contents
ITEM 2. | FINANCIAL STATEMENTS |
SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
30 JUNE | 31 DECEMBER | |||||||||
Notes | 2011 | 2010 | ||||||||
US$ | US$ | |||||||||
ASSETS |
||||||||||
Current Assets |
||||||||||
Cash |
2,698,647 | 6,634,012 | ||||||||
Restricted Cash |
| 226,494 | ||||||||
Notes receivable |
3 | 175,560 | 2,236,468 | |||||||
Accounts receivable, net |
3 | 884,824 | 255,870 | |||||||
Inventories, net |
2,114,662 | 1,954,879 | ||||||||
Advances to third party suppliers |
501,444 | 907,796 | ||||||||
Other receivables |
294,376 | 104,681 | ||||||||
Amounts due from related parties |
11 | 980,517 | | |||||||
Deferred tax assets |
7 | 271,447 | 265,254 | |||||||
Total Current Assets |
7,921,477 | 12,585,454 | ||||||||
Non-current Assets |
||||||||||
Property, plant and equipment, net |
4 | 10,043,430 | 2,973,276 | |||||||
Land use rights, net |
5 | 2,510,867 | 2,542,749 | |||||||
Total Non-current Assets |
12,554,297 | 5,516,025 | ||||||||
TOTAL ASSETS |
20,475,774 | 18,101,479 | ||||||||
The accompanying notes are integral part of the financial statements.
2
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(UNAUDITED)
30 JUNE | 31 DECEMBER | |||||||||
Notes | 2011 | 2010 | ||||||||
US$ | US$ | |||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||
Current Liabilities |
||||||||||
Short-term bank borrowings |
6 | 5,949,069 | 8,078,276 | |||||||
Accounts payable to third parties |
1,410,429 | 827,993 | ||||||||
Notes payable |
1,545,213 | | ||||||||
Advance from third party customers |
347,616 | 167,704 | ||||||||
Payroll and welfare payable |
36,074 | 19,305 | ||||||||
Accrued expenses |
132,425 | 106,179 | ||||||||
Amounts due to related parties |
11 | 2,340,448 | 2,249,526 | |||||||
Income tax payable |
7 | 402,076 | 150,218 | |||||||
VAT and miscellaneous taxes payable |
8 | 136,267 | 948,065 | |||||||
Other payables to third parties |
9 | 94,120 | 205,481 | |||||||
Total Current Liabilities |
12,393,737 | 12,752,747 | ||||||||
Non-current liabilities |
||||||||||
Deferred tax liabilities |
7 | 164,609 | 172,363 | |||||||
Total Non-current Liabilities |
164,609 | 172,363 | ||||||||
Total Liabilities |
12,558,346 | 12,925,110 | ||||||||
Shareholders Equity |
||||||||||
Common stock, $.0001 par value, 13,294,500 shares authorized, issued
and outstanding |
13,295 | 12,895 | ||||||||
Additional paid-in capital |
2,440,323 | 2,416,446 | ||||||||
Statutory reserves |
10 | 966,648 | 522,591 | |||||||
Accumulated other comprehensive income |
(481,718 | ) | (427,019 | ) | ||||||
Retained earnings |
4,978,880 | 2,651,456 | ||||||||
Total Shareholders Equity |
7,917,428 | 5,176,369 | ||||||||
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY |
20,475,774 | 18,101,479 | ||||||||
The accompanying notes are integral part of the financial statements.
3
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
CONDENSED CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||||||||
30 JUNE | 30 JUNE | |||||||||||||||||||
Notes | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||
US$ | US$ | US$ | US$ | |||||||||||||||||
Revenues |
||||||||||||||||||||
Cornstarch |
16,572,603 | 8,511,331 | 29,723,798 | 15,414,788 | ||||||||||||||||
Glucose |
2,906,547 | 2,188,986 | 5,818,429 | 4,259,224 | ||||||||||||||||
Others |
30,087 | 42,176 | 88,846 | 52,394 | ||||||||||||||||
Total Revenues |
19,509,237 | 10,742,493 | 35,631,073 | 19,726,406 | ||||||||||||||||
Cost of Sales |
||||||||||||||||||||
Cornstarch |
14,697,383 | 7,438,699 | 25,871,925 | 13,484,608 | ||||||||||||||||
Glucose |
2,219,458 | 1,909,866 | 4,399,795 | 3,591,133 | ||||||||||||||||
Others |
30,533 | 33,673 | 89,292 | 43,891 | ||||||||||||||||
Total Cost of Sales |
16,947,374 | 9,382,238 | 30,361,012 | 17,119,632 | ||||||||||||||||
Gross Profit |
2,561,863 | 1,360,255 | 5,270,061 | 2,606,774 | ||||||||||||||||
Operating expenses |
||||||||||||||||||||
Selling and distribution |
247,862 | 264,209 | 541,383 | 506,816 | ||||||||||||||||
General and administrative |
371,567 | 63,358 | 488,014 | 118,703 | ||||||||||||||||
Total Operating Expenses |
619,429 | 327,567 | 1,029,397 | 625,519 | ||||||||||||||||
Interest income |
1,034 | | 2,344 | | ||||||||||||||||
Interest expenses |
223,345 | 45,979 | 398,519 | 132,326 | ||||||||||||||||
Other expenses, net |
80,415 | 19,248 | 121,704 | 13,637 | ||||||||||||||||
Income Before Income Tax
Expenses |
1,639,708 | 967,461 | 3,722,785 | 1,835,292 | ||||||||||||||||
Income tax expenses |
7 | 404,798 | 261,634 | 951,304 | 481,610 | |||||||||||||||
NET INCOME |
1,234,910 | 705,827 | 2,771,481 | 1,353,682 | ||||||||||||||||
Basic and diluted
weighted average shares
outstanding |
12,934,500 | 12,894,500 | 12,934,500 | 12,894,500 | ||||||||||||||||
Basic net earnings per
share |
0.1 | 0.06 | 0.21 | 0.11 |
The accompanying notes are integral part of the financial statements.
4
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)
Accumulated | ||||||||||||||||||||||||
other | Total | |||||||||||||||||||||||
Common | Additional | Statutory | Retained | comprehensive | shareholders | |||||||||||||||||||
Stock | Paid-in capital | reserves | earnings | loss | equity | |||||||||||||||||||
US$ | US$ | US$ | US$ | US$ | US$ | |||||||||||||||||||
(Note 1) | ||||||||||||||||||||||||
Balance at 31 December 2010 |
12,895 | 2,416,446 | 522,591 | 2,651,456 | (427,019 | ) | 5,176,369 | |||||||||||||||||
Net income |
| | | 2,771,481 | | 2,771,481 | ||||||||||||||||||
Foreign currency translation
adjustment |
| | | | (54,699 | ) | (54,699 | ) | ||||||||||||||||
Total comprehensive income |
| | | 2,771,481 | (54,699 | ) | 2,716,782 | |||||||||||||||||
New shares issued |
400 | 400 | ||||||||||||||||||||||
Appropriation of statutory
reserve |
| | 444,057 | (444,057 | ) | | | |||||||||||||||||
Contribution from shareholders |
23,877 | | | | 23,877 | |||||||||||||||||||
Balance at 30 June 2011 |
13,295 | 2,440,323 | 966,648 | 4,978,880 | (481,718 | ) | 7,917,428 | |||||||||||||||||
The accompanying notes are integral part of the financial statements.
5
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
(UNAUDITED)
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
(UNAUDITED)
SIX MONTHS ENDED | ||||||||
30 JUNE | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
2,771,481 | 1,353,682 | ||||||
Adjustment to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation of property, plant and equipment |
383,091 | 381,217 | ||||||
Amortization of land use rights |
31,882 | 30,885 | ||||||
Gain from disposals of fixed assets and other |
48,518 | | ||||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable to third parties |
(628,954 | ) | (1,688,502 | ) | ||||
Notes receivable |
2,060,907 | 224,966 | ||||||
Advances to third party suppliers, net |
406,352 | 12,085 | ||||||
Other receivables |
(189,295 | ) | 1,260,224 | |||||
Amounts due from related parties |
(980,517 | ) | (2,577,344 | ) | ||||
Inventories |
(159,783 | ) | 38,127 | |||||
Accounts payable to third parties |
582,436 | (418,112 | ) | |||||
Notes payable |
1,545,213 | (2,196,772 | ) | |||||
Tax payable |
251,858 | 609,812 | ||||||
Advances from third party customers |
179,912 | 19,667 | ||||||
Payroll and welfare payable |
16,768 | | ||||||
Other payables to third parties |
(923,159 | ) | 830,092 | |||||
Amounts due to related parties |
90,922 | (160,411 | ) | |||||
Accrued expenses |
26,246 | 81,839 | ||||||
Deferred tax assets |
13,208 | 19,656 | ||||||
Deferred tax liabilities |
(27,155 | ) | (26,868 | ) | ||||
Net cash provided by /(used in) operating activities |
5,499,932 | (2,205,757 | ) |
The accompanying notes are integral part of the financial statements.
6
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (continued)
(UNAUDITED)
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (continued)
(UNAUDITED)
SIX MONTHS ENDED | ||||||||
30 JUNE | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Release of restricted cash |
226,494 | 2,416,449 | ||||||
Purchases of property and equipment |
(7,501,763 | ) | (150,814 | ) | ||||
Net cash provided by (used in) investing activities |
(7,275,269 | ) | 2,265,636 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Bank loan repaid |
(5,349,520 | ) | (5,922,557 | ) | ||||
Proceeds from additional paid-in capital |
23,877 | | ||||||
Proceeds from short-term bank borrowings |
3,056,868 | 6,440,781 | ||||||
Net cash provided by (used in) financing activities |
(2,268,775 | ) | 518,224 | |||||
Effect of foreign exchange rate changes |
108,747 | (46,378 | ) | |||||
Net increase/(decrease) in cash |
(3,935,365 | ) | 531,725 | |||||
Cash, beginning of year |
6,634,012 | 881,229 | ||||||
Cash, end of year |
2,698,647 | 1,412,954 | ||||||
Supplementary disclosure of cash flow information: |
||||||||
Interest expense paid |
398,519 | 132,326 | ||||||
Income taxes paid |
713,393 | 120,989 | ||||||
The accompanying notes are integral part of the financial statements.
7
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. | CORPORATE INFORMATION AND BASIS OF PRESENTATION |
a) | Corporate information |
SMSA Treemont Acquisition Corp. (the Company) was originally incorporated in the State of
Nevada on 3 May 2010. |
Xiangrui Pharmaceutical International Limited (Xiangrui) was incorporated in the British
Virgin Islands on 29 November 2010. Taian Yisheng Management & Consulting Co., Ltd (WFOE)
was incorporated by Xiangrui on 6 May 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 9 May 2011, the WFOE entered into a series of variable interest entity contractual
agreements (the VIE Agreements) with Shandong Xiangrui Pharmacy Co., Ltd., (Shandong
Xiangrui), a PRC 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. |
As a result of entering the abovementioned agreements, the WFOE deems to control Shandong
Xiangrui as a Variable Interest Entity as required by Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 810-10 Consolidated of Variable Interest
Entities. |
On May 12, 2011, the Company issued to New Fortress Group, Ltd., 400,000 restricted shares of
common stock at a price of $0.001 per share in consideration for in country due diligence
services provided to the Company in connection with the evaluation of merits of the exchange
transaction with Xiangrui. On May 13, 2011, the Company entered into the Share Exchange
Agreement with Xiangrui and its sole shareholder, Mr. Xu. Pursuant to the Share Exchange
Agreement the Company issued 12,363,885 newly created shares to Mr. Xu, and became the sole
shareholder of Xiangrui. The shares the Company issued to Mr. Xu constitute 93% of our issued
and outstanding capital stock on a fully-diluted basis as of and immediately after the
consummation of the transactions contemplated by the Share Exchange Agreement. |
The following table illustrates the equity transactions of the Company during the six month
period ended 30 June 2011:
Common Stock | ||||||||
Shares | Amount(US$) | |||||||
Shares issued as of 31 December 2010 |
530,615 | 531 | ||||||
New shares issued |
400,000 | 400 | ||||||
Recapitalization for reverse acquisition |
12,363,885 | 12,364 | ||||||
Balance as at 30 June 2011 |
13,294,500 | 13,295 | ||||||
This transaction has been accounted as a reverse acquisition and recapitalization of the
Company whereby Xiangrui is deemed to be the accounting acquirer (legal acquiree) and the
Company the accounting acquiree (legal acquirer). The historical financial statements for the
periods prior to 13 May 2011 are those of consolidated results of Xiangrui and the Company. |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
a) | Principles of Consolidation |
The accompanying consolidated financial statements include the financial statements of the
Company, Xiangrui, WFOE and Shandong Xiangrui (the Group) |
||
All significant inter-company accounts and transactions have been eliminated in consolidation. |
8
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
a) | Principles of Consolidation (continued) |
The Group has adopted FIN 46R which requires a VIE to be consolidated by a company if that
company is subject to a majority of the risk of loss for the VIE or is entitled to receive a
majority of the VIEs residual returns. |
b) | Basis of preparation |
In the opinion of management, 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. |
c) | 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. |
d) | Foreign currency |
The functional currency of Shandong Xiangrui is Chinese Renminbi (RMB), as determined based on
the criteria of FASB ASC 830 Foreign Currency Matters. The Group uses the U.S. dollar for
financial reporting purpose. |
Shandong Xiangrui 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 | Year end exchange rate | |||||||
US$:RMB | US$:RMB | |||||||
June 30, 2011 |
6.4716 | N/A | ||||||
December 31,2010 |
N/A | 6.6227 |
9
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
d) | Foreign currency (continued) |
Three months average | Six months average | |||||||
US$:RMB | US$:RMB | |||||||
Second quarter of 2011 |
6.4850 | N/A | ||||||
First half of 2011 |
N/A | 6.5426 | ||||||
Second quarter of 2010 |
6.8151 | N/A | ||||||
First half of 2010 |
N/A | 6.7538 |
e) Fair value of financial instruments
The Group 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. |
||
f) | Cash |
The Group considers all cash on hand and demand deposits as cash. |
||
g) | Restricted cash |
Restricted cash represents amounts held by banks, which are not available for the Group use, as
secure for issuance of letters of credit. |
10
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED) |
|
h) | 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 Group 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. |
||
i) | 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. |
||
j) | 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 |
510 years | 5 | % | 9.5%19 | % | |||||||
Office equipments |
510 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. |
11
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
k) | Property, plant and equipment |
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. |
||
l) | 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. |
||
m) | Revenue recognition |
The Group 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 Group does not provide discount for early payments or any other allowances on
sales. |
||
n) | Shipping and handling costs |
Shipping and handling costs are included in selling expenses. The shipping and handling costs
for the six-month period ended June 30, 2011 and 2010 were US$317,347 and US$236,833,
respectively. |
||
o) | 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. |
||
p) | Advertising expenditures |
Advertising expenditures are expensed as incurred. There were no advertising costs incurred in
the reporting period. |
12
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
q) | 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 Group has chosen
to report comprehensive income in the Statements of Stockholders Equity. The Groups other
comprehensive income represents foreign currency translation adjustments. |
||
r) | Income taxes |
The Group uses the accrual method of accounting to determine income taxes for the year. The
Group has implemented Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Income tax liabilities computed according to the United States
and Peoples Republic of China (PRC) tax laws are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to accumulated depreciation, allowance for doubtful
accounts as well as the potential impact of any net operating loss carryforwards and their
potential utilization. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will be either taxable or deductible when
the assets and liabilities are recovered or settled. A valuation allowance is created to
evaluate deferred tax assets if it is more likely than not that these items will either
expire before the Group is able to realize that tax benefit, or that future realization is
uncertain. |
The Groups operation in U.S. files income tax returns in the United States of America and
various states, as appropriate and applicable. As a result of the Companys bankruptcy
action, the Companys operation in U.S. is no longer subject to U.S. federal, state and
local, as applicable, income tax examinations by regulatory taxing authorities for any
period prior to 1 August 2008. The Company does not anticipate any examinations of returns
filed for periods ending after 1 August 2008. |
All of Shandong Xiangruis operations are in China. Shandong Xiangruis operations in
China are subject to Chinas New Enterprise Income Tax (EIT) Law, which became effective on 1
January 2008 and has a uniform statutory tax rate of 25 percent. |
s) | 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. |
13
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
t) | Employee benefits |
Full-time employees of Shandong Xiangrui 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 Shandong Xiangrui 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 Shandong Xiangrui
operates for the prior year. Shandong Xiangrui has no legal obligation for the benefits beyond
the contributions made. |
||
u) | Impairment of long-lived assets |
The Group 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 Group 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 Group 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. |
||
v) | 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. |
||
w) | Income (Loss) per share |
Basic earnings (loss) per share is computed by dividing the net income (loss) available to
common stockholders by the weighted-average number of common shares outstanding during the
respective period presented in our accompanying financial statements.
Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share
except that the denominator is increased to include the number of common stock equivalents
(primarily outstanding options and warrants). |
14
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
w) | Income (Loss) per share (continued) |
Common stock equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method, at either the
beginning of the respective period presented or the date of issuance, whichever is later, and
only if the common stock equivalents are considered dilutive based upon the Groups net income
(loss) position at the calculation date. |
As of 30 June 2011, the Group had no outstanding stock warrants, options or convertible
securities which could be considered as dilutive for purposes of the loss per share
calculation. |
||
x) | Recently issued accounting pronouncements |
In July 2010, the FASB issued ASU 2010-20 an accounting update to provide guidance to
enhance disclosures related to the credit quality of a companys financing receivables
portfolio and the associated allowance for credit losses (FASB ASC Topic 310). Pursuant to
this accounting update, a company is required to provide a greater level of disaggregated
information about its allowance for credit loss with the objective of facilitating users
evaluation of the nature of credit risk inherent in the Groups portfolio of financing
receivables, how that risk is analyzed and assessed in arriving at the allowance for credit
losses, and the changes and reasons for those changes in the allowance for credit losses. The
revised disclosures as of the end of the reporting period are effective for the Group beginning
in the second quarter of fiscal 2011, and the revised discourses related to activities during
the reporting period are effective for the Group beginning in the third quarter of fiscal 2011.
The adoption of such standard did not have a material impact on the Groups consolidated
financial statements and disclosures. |
In December 2010, the FASB issued ASU 2010-28 an accounting pronouncement related to
intangibles goodwill and other (FASB ASC Topic 350), which requires a company to consider
whether there are any adverse qualitative factors indicating that an impairment may exist in
performing step 2 of the impairment test for reporting units with zero or negative carrying
amounts. The provisions for this pronouncement are effective for fiscal years, and interim
periods within those years, beginning after December 15, 2010, with no early adoption. We will
adopt this pronouncement for our fiscal year beginning July 1, 2011. The adoption of this
pronouncement is not expected to have a material impact on our consolidated financial
statements. |
In December 2010, the FASB issued ASU 2010-29 an accounting pronouncement related to
business combinations (FASB ASC Topic 815), which specifies that if a public entity
presents comparative financial statements, the entity should disclose revenue and earnings
of the combined entity as though the business combination(s) that occurred during the
current year had occurred as of the beginning of the comparable prior annual reporting
period only. It also expands the supplemental pro forma disclosures under Topic 805 to
include a description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the reported pro
forma revenue and earnings. The amendments in this Update are effective prospectively for
business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2010. Early adoption is
permitted. The adoption of this pronouncement is not expected to have a material impact on
our consolidated financial statements. |
15
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
y) | Recently issued accounting pronouncements (continued) |
In January 2011, the FASB issued ASU 2011-01 an accounting pronouncement related to
receivables (FASB ASC Topic 310). The amendments in this update temporarily delay the
effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public
entities. The delay is intended to allow the Board time to complete its deliberations on what
constitutes a troubled debt restructuring. The effective date of the new disclosures about
troubled debt restructurings for public entities and the guidance for determining what
constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is
anticipated to be effective for interim and annual periods ending after 15 June 2011. The
adoption of this pronouncement is not expected to have a material impact on our consolidated
financial statements. |
3. | NOTES AND ACCOUNTS RECEIVABLE, NET |
Accounts receivable is stated at net value. As of 30 June 2011, the allowance for doubtful
accounts recorded by the Group amounted to US$936,669. |
Notes receivable represent bank drafts that are non-interest bearing and due within six
months. Such bank drafts have been arranged with third party financial institutions by certain
customers to settle their purchases from us. The carrying amount of notes receivable
approximate their fair values due to their short maturities. |
4. | PROPERTY , PLANT AND EQUIPMENT, NET |
30 JUNE | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Buildings |
2,368,933 | 2,368,933 | ||||||
Machinery |
6,652,819 | 6,934,521 | ||||||
Office equipment |
32,636 | 18,911 | ||||||
Motor vehicles |
60,172 | 59,098 | ||||||
Total |
9,114,560 | 9,381,463 | ||||||
Less: Accumulated depreciation |
(6,625,076 | ) | (6,484,434 | ) | ||||
Subtotal |
2,489,484 | 2,897,029 | ||||||
Construction in progress |
7,553,946 | 76,247 | ||||||
Property, plant and equipment, net |
10,043,430 | 2,973,276 | ||||||
As of 30 June 2011, Shandong Xiangrui pledged its building with net book value of
US$1,152,612 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 for the three months ended 30 June 2011 and 2010 were $254,304 and
$184,370 and for the six months ended 30 June 2011 and 2010 were $383,091 and $381,217,
respectively. |
16
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
5. | LAND USE RIGHTS, NET |
As of 30 June 2011, Shandong Xiangrui pledged its land use rights with net book value of
US$646,372 to Citibank (China) Co., Ltd., Shanghai Branch to secure a long term bank loan
provided by the bank to Shandong RunYin Bio-Chemical Co., Ltd, a related party. |
Land use rights are summarized as follows: |
30 JUNE | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Land use rights, cost |
2,766,860 | 2,766,860 | ||||||
Less: accumulated amortization |
(255,993 | ) | (224,111 | ) | ||||
Land use rights, net |
2,510,867 | 2,542,749 | ||||||
6. | BANK BORROWINGS |
The Group had the following outstanding short-term loans with banks: |
30 JUNE | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Rural Cooperative Bank of Dongping, Shandong |
4,403,856 | 2,793,422 | ||||||
China Merchant Bank |
1,545,213 | | ||||||
Agricultural Develop Bank |
| 4,529,875 | ||||||
Bank of Communications |
| 754,979 | ||||||
Total |
5,949,069 | 8,078,276 | ||||||
The Groups bank borrowings are RMB denominated loans with fixed interest rates ranging from 4.86%
to 7.02%. Interest expense on bank borrowings for the three months ended 30 June 2011 and 2010 was
$223,345 and $38,650 and for six months ended 30 June 2011 and 2010 was $398,519 and $124,997,
respectively. All bank loans are due within one year from balance sheet date.
7. | INCOME TAXES |
On 13 May 2011, income from the Companys foreign subsidiaries became subject to U.S. income
tax liability; however, this tax is deferred until foreign source income is repatriated to the
Company from earnings and profits after foreign income taxes, which has not yet occurred. |
||
All of Shandong Xiangruis operations are in the PRC, and in accordance with the relevant tax
laws and regulations of PRC, the corporate income tax rate is 25%. |
17
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
7. | INCOME TAXES (CONTINUED) |
|
Income before taxes and the provision for taxes consists of the following: |
THREE MONTHS ENDED 30 JUNE | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Income before taxes: |
||||||||
US Federal |
| | ||||||
US State |
| | ||||||
BVI |
| | ||||||
PRC |
1,639,708 | 967,461 | ||||||
Total income before taxes |
1,639,708 | 967,461 | ||||||
THREE MONTHS ENDED 30 JUNE | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Provision for income taxes: |
||||||||
Current: |
||||||||
US Federal |
| | ||||||
US State |
| | ||||||
BVI |
| | ||||||
PRC |
402,440 | 255,845 | ||||||
Current income taxes |
402,440 | 255,845 | ||||||
Deferred |
||||||||
US Federal |
| | ||||||
US State |
| | ||||||
BVI |
| | ||||||
PRC |
2,358 | 5,789 | ||||||
Deferred income taxes |
2,358 | 5,789 | ||||||
Total provision for income taxes |
404,798 | 261,634 | ||||||
SIX MONTHS ENDED 30 JUNE | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Income (loss) before taxes: |
||||||||
US Federal |
| | ||||||
US State |
(3,877 | ) | (6,095 | ) | ||||
BVI |
| | ||||||
PRC |
3,726,662 | 1,841,387 | ||||||
Total income (loss) before taxes |
3,722,785 | 1,835,292 | ||||||
18
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
7. | INCOME TAXES (CONTINUED) |
SIX MONTHS ENDED 30 JUNE | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Provision for income taxes: |
||||||||
Current: |
||||||||
US Federal |
| | ||||||
US State |
| | ||||||
BVI |
| | ||||||
PRC |
965,251 | 488,822 | ||||||
Current income taxes |
965,251 | 488,822 | ||||||
Deferred |
||||||||
US Federal |
| | ||||||
US State |
| | ||||||
BVI |
| | ||||||
PRC |
(13,947 | ) | (7,212 | ) | ||||
Deferred income taxes |
(13,947 | ) | (7,212 | ) | ||||
Total provision for income taxes |
951,304 | 481,610 | ||||||
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 30 JUNE | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Profit before income tax |
1,639,708 | 967,461 | ||||||
Corporate income tax rate |
25 | % | 25 | % | ||||
Computed tax at statutory rate |
409,927 | 241,865 | ||||||
Income exempted from taxation |
(5,129 | ) | | |||||
Expenses not deductible for tax purposes |
| 19,769 | ||||||
Provision for income taxes |
404,798 | 261,634 | ||||||
SIX MONTHS ENDED 30 JUNE | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Profit before income tax |
3,722,785 | 1,835,292 | ||||||
Corporate income tax rate |
25 | % | 25 | % | ||||
Computed tax at statutory rate |
930,696 | 458,823 | ||||||
Income exempted from taxation |
(6,098 | ) | | |||||
Expenses not deductible for tax purposes |
26,706 | 22,787 | ||||||
Provision for income taxes |
951,304 | 481,610 | ||||||
19
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED 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 Groups deferred tax assets and liabilities are as follows: |
30 JUNE | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Deferred tax assets |
||||||||
Allowance for doubtful accounts |
271,447 | 265,254 | ||||||
Total deferred tax assets |
271,447 | 265,254 | ||||||
Deferred tax liabilities |
||||||||
Depreciation of property, plant and equipments |
164,609 | 172,363 | ||||||
Total deferred tax liabilities |
164,609 | 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. | VAT AND MISCELLANEOUS TAXES PAYABLE |
Miscellaneous tax payables mainly comprise local supplementary taxes that levied as a
percentage of the total income tax and VAT tax paid. Details of VAT and miscellaneous taxes payable
are set forth in the following table: |
30 JUNE | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
VAT |
111,293 | 859,128 | ||||||
Urban construction tax |
6,415 | 46,064 | ||||||
Education tax |
3,849 | 25,837 | ||||||
Local supplementary tax |
2,566 | 8,613 | ||||||
Land use tax |
2,905 | 3,918 | ||||||
Real estate tax |
4,010 | 2,838 | ||||||
Stamp duty |
2,829 | |||||||
Personal income tax payable on behalf of staffs |
2,400 | 1,667 | ||||||
Total |
136,267 | 948,065 | ||||||
20
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
9. | OTHER PAYABLE TO THIRD PARTIES |
Other payables to third parties consist of the following: |
30 JUNE | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Purchases of property and equipment |
77,884 | 111,535 | ||||||
Others |
16,236 | 93,946 | ||||||
Total |
94,120 | 205,481 | ||||||
10. | STATUTORY RESERVES |
In accordance with the Company Law of the Peoples Republic of China, Shandong Xiangrui 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. Shandong Xiangrui 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 Shandong Xiangruis discretion. These reserve funds can
only be used for specific purposes of enterprises expansion and not distributable as cash
dividends. Shandong Xiangrui provided 10% of statutory reserve and 6% of discretionary reserve upon
distributable profit. Details of those reserves are presented as follows:
30 JUNE | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Statutory reserve |
604,154 | 326,619 | ||||||
Discretionary reserve |
362,494 | 195,972 | ||||||
Total |
966,648 | 522,591 | ||||||
11. | RELATED PARTY TRANSACTIONS |
The principal related parties with which the Group 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 |
21
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
11. | RELATED PARTY TRANSACTIONS (CONTINUED) |
|
For the six months ended 30 June 2011, and 2010, the Group engaged in the following significant related party transactions: |
(a) | Utility (steam and electricity) supply |
Steam supply received from |
SIX MONTHS ENDED 30 JUNE | ||||||||||||
2011 | 2010 | |||||||||||
US$ | US$ | |||||||||||
Shandong Runyin Bio-chemical Co., Ltd. |
(i | ) | 982,686 | 834,695 | ||||||||
Electricity supply received from |
SIX MONTHS ENDED 30 JUNE | ||||||||||||
2011 | 2010 | |||||||||||
US$ | US$ | |||||||||||
Shandong Runyin Bio-chemical Co., Ltd. |
(i | ) | 998,990 | 763,044 | ||||||||
Electricity supplied to |
SIX MONTHS ENDED 30 JUNE | ||||||||||||
2011 | 2010 | |||||||||||
US$ | US$ | |||||||||||
Shandong Xinrui Chemical Devices Co., Ltd. |
(i | ) | | 273,167 | ||||||||
(b) | Raw materials purchased from |
SIX MONTHS ENDED 30 JUNE | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Shandong Runyin Bio-chemical Co., Ltd. |
1,362,750 | 373,535 | ||||||
(c) | Plant facility lease from |
SIX MONTHS ENDED 30 JUNE | ||||||||||||
2011 | 2010 | |||||||||||
US$ | US$ | |||||||||||
Shandong Runyin Bio-chemical Co., Ltd. |
(ii) | 4,700 | 4,574 | |||||||||
(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-cancellable 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, Shandong Xiangrui entered into a rental
contract with the Shandong Runyin Bio-chemical Co., Ltd. for
some plants, which are used for the production of stearic and
glycerol. The lease contract is renewed on a yearly basis. The
lease payment is around US$9,000 per year, which was determined
in reference to market price. |
22
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
11. | RELATED PARTY TRANSACTIONS (CONTINUED) |
|
As of 30 June 2011 and 31 December 2010, the Group had following balances with related parties: |
(e) | Amounts due from related parties |
30 JUNE | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Shandong Runyin Bio-chemical Co., Ltd. |
980,517 | | ||||||
Total |
980,517 | | ||||||
(f) | Amounts due to related parties |
JUNE 30, | DECEMBER 31 | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Ruixing Group Co., Ltd. |
245,716 | 297,285 | ||||||
Shandong Runyin Bio-chemical Co., Ltd. |
2,094,732 | 1,952,241 | ||||||
Total |
2,340,448 | 2,249,526 | ||||||
12. | COMMITMENTS AND CONTINGENCIES |
(a) | Supply Commitment |
||
In January 2009, Shandong Xiangrui entered into a non-cancelable contract with Shandong Runyin
Bio-chemical Co., Ltd. to secure the steam and electricity supply for Shandong Xiangruis
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 Shandong Xiangrui. Please refer to Note 11 for the actual value of supply consumed by
Shandong Xiangrui in six months ended 30 June 2011 and 2010 respectively. |
|||
(b) | Loan Guarantee |
||
As of 30 June 2011, Shandong Xiangrui pledged its building with net book value of US$2,510,867 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 30 June 2011, Shandong Xiangrui pledged its land use rights with net book value of US$646,372
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). |
23
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
12. | COMMITMENTS AND CONTINGENCIES (CONTINUED) |
(c) | Capital Purchase Commitment |
||
As of 30 June 2011, Shandong Xiangrui entered into non-cancellable contracts with some constructor
and machinery suppliers for purchase of plant and machinery with amount of US$793,576. |
|||
(d) | Contingencies |
||
The Group had no material contingent events during the reporting period. |
13. | SEGMENT AND GEOGRAPHIC INFORMATION |
Business segments |
The main products of the Company are cornstarch and glucose, which utilize almost the same
production processes. Both are produced from the raw material corn. The difference in production
processes is that glucose is further processed from cornstarch by adding in auxiliary materials.
The two products are sold to the same type of customers and use the same distribution methods. |
While the cost base is similar for the two products, the selling prices are independently
determined by reference to their respective market prices, which resulted in different trend of
gross profit margins of the two products as shown in the following table. The economies of scale
also contributed to the overall rise of gross profit margins. |
SIX MONTHS ENDED 30 JUNE | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Revenues |
||||||||
Cornstarch |
29,723,798 | 15,414,788 | ||||||
Glucose |
5,818,429 | 4,259,224 | ||||||
Cost of sales |
||||||||
Cornstarch |
25,871,925 | 13,484,608 | ||||||
Glucose |
4,399,795 | 3,591,133 | ||||||
GPM |
||||||||
Cornstarch |
13.0 | % | 12.5 | % | ||||
Glucose |
24.4 | % | 15.7 | % |
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. |
14. | SUBSEQUENT EVENTS |
In the opinion of the management, the Group had no significant subsequent events. |
24
Table of Contents
ITEM 3. | 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 quarterly 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.
(1) | Overview |
We are a corn processor in Shandong Province, China. We manufacture and distribute cornstarch,
glucose, and other by-products through our direct and indirect subsidiaries in China. Our
products are important ingredients for a wide range of industries, including food and beverages,
animal nutrition, pharmaceuticals, textile and other industrial manufacturing industries. |
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 food
and beverages as well as the pharmaceutical industries, which together constituted approximately
76.38% of our revenue for the six month period ended June 30, 2011. Our other corn-refined
products are principally sold to the animal feed industry, which accounted for approximately
12.5% of our revenue for the six months ended June 30, 2011. Sales of our products to the
industrial manufacturing sector accounted for approximately 11.12% of our revenue for the six
months ended June 30, 2011. |
As of June 30, 2011, we had an annual production capacity of 140,000 tones of cornstarch. We
have invested about $7.6 million in new equipments and a new building to install a new product
line and expect to invest an additional $4.4 million into this project by the end of 2011. Once
the new production line is ready to use by October 2011, we expect to increase our annual
capacity to 240,000 tonnes. |
(2) Results of Operations
The information provided below relates to the combined enterprises after the acquisition of
Xiangrui Pharmaceutical International Limited, a British Virgin Islands company and its direct
and indirect subsidiaries (Xiangrui) pursuant to a share exchange agreement (the Share
Exchange Agreement) dated as of May 13, 2011, among us, Xiangrui, and Mr. Chongxin Xu, the sole
shareholder 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. |
25
Table of Contents
Results of operations for the three months ended June 30, 2011 as compared with the three months
ended June 30, 2010.
Three months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
(unaudited) | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Statement of operations data |
||||||||||||||||
Revenues |
$ | 19,509 | 10,742 | 8,767 | 82 | % | ||||||||||
Cost of sales |
16,947 | 9,382 | 7,565 | 81 | % | |||||||||||
Gross profit |
2,562 | 1,360 | 1,202 | 88 | % | |||||||||||
Operating expenses |
||||||||||||||||
Selling and distribution expenses |
248 | 264 | (16 | ) | (6 | %) | ||||||||||
General and administrative expenses |
371 | 64 | 307 | 480 | % | |||||||||||
Total operating expenses |
619 | 328 | 219 | 89 | % | |||||||||||
Income from operations |
1,943 | 1,032 | 911 | 88 | % | |||||||||||
Interest income |
1 | 1 | ||||||||||||||
Interest expenses |
223 | 45 | 178 | 396 | % | |||||||||||
Other expenses, net |
80 | 19 | 61 | 321 | % | |||||||||||
Income before income tax expenses |
1,640 | 967 | 673 | 70 | % | |||||||||||
Income taxes expenses |
405 | 262 | 143 | 55 | % | |||||||||||
Net income attributable to ordinary shareholders |
1,235 | 706 | 529 | 75 | % |
Revenues.
Revenues increased by $8.8 million, or 82%, to $19.5 million in the three months ended June 30,
2011 from $10.7 million for the same period in 2010. The increase was primarily due to an increase
in sales volume and an increase in average selling prices. Sales volumes increased to 33,721 tonnes
in the three months ended June 30, 2011, at an increase of 13,117 tonnes from 20,604 tonnes in the
same period of 2010. The increase in sales volumes is mainly attributable to high market demand for
corn starch and glucose and increase in the production utilization rate. The average selling price
of our products increased 11% from $521.37 per tonne in the three months ended June 30, 2010 to
$578.5 per tonne in the same period of 2011. The increase of the average selling price of our
products is attributable to strong demand for corn starch and glucose, which is driven by the
higher standard of living in China which creates a higher demand for goods made from our two main
products.
Cost of Sales.
Our cost of sales increased by $7.6 million, or 81%, to $16.9 million in the three months ended
June 30, 2011 from $9.4 million for the same period in 2010. This increase was mainly due to an
increase in the cost of raw materials, which is in line with the increase in our sales revenues
and, in part, due to an increase in the average purchase price of raw materials. Our cost of sales
as a percentage of revenues for the three months ended June 30, 2011 is similar to that for the
same period in 2010. The increase in the cost of corn kernels can be attributable to the drought
which affected Hubei, Hunan, Jiangxi, Anhui and Jiangsu provinces 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. The improved standard of living in China has resulted in a higher demand
for poultry and meat, which results in a higher demand for animal feed. Corn is a major type of
animal feed. According to our past experience, we were able to pass through the increased costs of
corn kernels to our customers. Our profits and operating cash flows 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 sales;
therefore the price fluctuation of corn kernels will have a significant impact on our cost of sales
and margins.
26
Table of Contents
Gross Profit.
Our gross profit increased by $1.2 million, or 88%, to $2.6 million during the three months ended
June 30, 2011 from $1.4 million for the same period in 2010. Gross profit from cornstarch increased
by $0.8 million, or 75%, to approximately $1.9 million in the three months ended June 30, 2011 from
$1.1 million for the same period in 2010. Gross profit from glucose increased by $0.4 million, or
146%, to approximately $0.7 million in the three months ended June 30, 2011 from $0.3 million for
the same period in 2010. The increase in gross profit was mainly due to the increase in our sales
volume. Gross profit as a percentage of revenues remained stable at 13.4% during the three months
ended June 30, 2011, as compared to 12.7% for the same period of 2010.
Selling and Distribution Expenses.
Selling and distribution expenses include freight, salaries and benefits for sales and marketing
personnel, travelling and advertising expenses. Our selling and distribution expenses decreased by
$16,347, or 6%, to $0.25 million during the three months ended June 30, 2011, from $0.26 million
for the same period in 2010.
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 by $0.3 million, or
480%, to $0.4 million during the three months ended June 30, 2011 from $63,358 for the same period
in 2010. The increase was mainly attributable to professional fees incurred in connection with the
acquisition pursuant to the Share Exchange Agreement.
Interest Expenses.
Interest expenses are related to our bank borrowings, which are Renminbi denominated loans with
fixed interest rates ranging from 4.86% to 7.02%. Our interest expenses increased by $0.18 million
to $0.22 million during the three months ended June 30, 2011, from $45,979 for the same period in
2010. The increase is mainly due to new borrowings in April 2011 and the increases in interest
rates.
Income Before Income Tax Expenses.
Income before income tax expenses increased by $0.7 million, or 70%, to $1.6 million in the three
months ended June 30, 2011 from $1.0 million for the same period in 2010. This increase is mainly
attributable to increased sales and gross margins.
Income Tax Expenses.
Our income tax expenses increased by $143,164 to $404,798 during the three months ended June 30,
2011 as compared to the same period in 2010. The increase in income tax expenses was mainly
attributable to the increase in income before income tax expenses in the three months ended June
30, 2011 as compared to the same period in 2010.
Net Income Attributable to Ordinary Shareholders.
Our net income attributable to ordinary shareholders increased by $0.5 million, or 75%, to $1.2
million in the three months ended June 30, 2011 from $0.7 million in the same period of 2010 as
result of the above factors.
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Table of Contents
Results of operations for the six months ended June 30, 2011 as compared with the six months ended
June 30, 2010.
Six months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
(unaudited) | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Statement of operations data |
||||||||||||||||
Revenues |
$ | 35,631 | 19,726 | 15,905 | 81 | % | ||||||||||
Cost of sales |
30,361 | 17,120 | 13,241 | 77 | % | |||||||||||
Gross profit |
5,270 | 2,607 | 2,663 | 102 | % | |||||||||||
Operating expenses |
||||||||||||||||
Selling and distribution expenses |
541 | 507 | 34 | 7 | % | |||||||||||
General and administrative expenses |
488 | 119 | 369 | 310 | % | |||||||||||
Total operating expenses |
1,029 | 626 | 403 | 64 | % | |||||||||||
Income from operations |
4,241 | 1,981 | 2,260 | 114 | % | |||||||||||
Interest income |
2 | 2 | ||||||||||||||
Interest expenses |
399 | 132 | 267 | 202 | % | |||||||||||
Other expenses, net |
122 | 14 | 108 | 771 | % | |||||||||||
Income before income tax expenses |
3,723 | 1,835 | 1,888 | 103 | % | |||||||||||
Income taxes |
951 | 482 | 469 | 97 | % | |||||||||||
Net income attributable to ordinary shareholders |
2,771 | 1,354 | 1,417 | 105 | % |
Revenues.
Revenues increased by $15.9 million, or 81%, to $35.6 million in the six months ended June 30, 2011
from $19.7 million for the same period in 2010. The increase was primarily due to an increase in
sales volume and an increase in average selling prices. Sales volumes increased to 61,913 tonnes in
the six months ended June 30, 2011, at an increase of 23,678 tonnes from 38,235 tonnes in the same
period of 2010. The increase in sales volumes is mainly attributable to high market demand and
increase in the production utilization rate. The average selling price of our products increased by
11.5% from $515.92 per tonne in the six months ended June 30, 2010 to $575.5 per tonne in the same
period of 2011.
The increase in selling prices was mainly due to the increase of the average purchase price of raw
materials, which increased by approximately 16% in the six months ended June 30, 2011 as compared
to the same period in 2010. The increase in the cost of corn kernels can be attributable to strong
demand in China for cornstarch and glucose products. 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. The improved standard of living in China has resulted in a higher demand for poultry and
meat, which has resulted in a higher demand for animal feed. Corn is a major type of animal feed.
Cost of Sales.
Our cost of sales increased by $13.2 million, or 77%, to $30.4 million in the six months ended June
30, 2011 from $17.1 million for the same period in 2010. This increase was mainly due to an
increase in the cost of raw materials, which was in line with an increase in our sales revenues,
and partly due to an increase in the average purchase price of raw materials.
Gross Profit.
Our gross profit increased by $2.7 million, or 102%, to $5.3 million during the six months ended
June 30, 2011 from $2.6 million for the same period in 2010. Gross profit from cornstarch increased
by $1.9 million, or 100%, to approximately $3.9 million in the six months ended June 30, 2011 from
$2 million for the same period in 2010. Gross profit from glucose increased by $0.7 million, or
112%, to approximately $1.4 million in the six months ended June 30, 2011 from $0.7 million for the
same period in 2010. The increase in gross profit was mainly due to the increase in our sales
volume. Gross profit as a percentage of revenues increased by 14.8% during the six months ended
June 30, 2011, as compared to 13.2% for the same period in 2010. 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 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.
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Table of Contents
Selling and Distribution Expenses.
Our selling and distribution expenses increased by $34,567, or 7%, to $0.54 million during the six
months ended June 30, 2011, from $0.51 million for the same period in 2010.
General and Administrative Expenses.
Our general and administrative expenses increased by $0.37 million, or 310%, to $0.49 million
during the six months ended June 30, 2011 from $0.12 million for the same period in 2010. The
increase was mainly attributable to professional fees incurred in connection with the acquisition
pursuant to the Share Exchange Agreement.
Interest Expenses.
Our interest expenses increased by $0.27 million to $0.4 million during the six months ended June
30, 2011, from $0.13 million for the same period in 2010. The increase is mainly due to new
borrowings in March and April and the increases in interest rates.
Income Before Income Tax Expenses.
Income before income tax expenses increased by $1.9 million, or 103%, to $3.7 million in the six
months ended June 30, 2011 from $1.8 million for the same period in 2010. The increase was mainly
attributable to higher sales volumes.
Income Tax Expenses.
Our income tax expenses increased to $0.95 million from $0.48 million during the six months ended
June 30, 2011 as compared to the same period of 2010. The increase in income tax expenses was
mainly attributable to the increase in income before income tax expenses in the six months ended
June 30, 2011 as compared to the same period in 2010.
Net Income Attributable to Ordinary Shareholders.
Our net income attributable to ordinary shareholders increased by $1.4 million, or 105%, to $2.8
million in the six months ended June 30, 2011 from $1.4 million for the same period in 2010 as
result of the above factors.
(3) Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2011 was $5.5 million,
an increase of $7.7 million from $2.2 million used in operating activities for the same period in
2010. The increase in cash provided by operating activities is mainly attributable to higher net
income, decreased notes receivable due to collection of notes receivable and increased notes
payable and accounts payable as a result of longer payment terms offered by our suppliers for
larger purchases.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2011 was $7.2 million, an
increase of $9 million from $2.2 million provided by investing activities for the same period in
2010. The increase in cash used in investing activities is mainly due to more expenditures for
purchases of property and equipments and construction in process.
Financing Activities
Net cash used in financing activities for the six months ended June 30, 2011 was $2.3 million,
compared with $0.5 million provided by financing activities for the same period in 2010. The
increase in cash used in financing activities is mainly due to fewer short-term bank borrowings in
the six months ended June 30, 2011.
Loans
We have financed our operations primarily through bank loans and operating income. We have a total
of $5.9 million short-term loans outstanding as of June 30, 2011. The terms of all these short-term
loans are for one year. As of the date of this quarterly report, we have not defaulted on any of
these loans.
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Guarantees
We have guaranteed certain borrowings of related parties including short-term bank loans. The total
guaranteed amount was approximately $12.4 million as of June 30, 2011.
Future Cash Commitments and Needs
We may require additional capital to run our new production line to expand our production capacity.
The exact amount will be determined based on both the market demand for our products and the period
of time required for these facilities to run at full capacity. We will carefully review our
financial conditions and consider various financing options including internally generated cash,
bank loans and additional equity financing. We expect that the proceeds from our operating cash
flows and cash balances, together with credit lines available under bank loans, will be sufficient
to meet our anticipated liquidity needs for the next twelve months.
(4) Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires our management to make
estimates and judgments that affect the reported amounts of assets and liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities. These estimates are based
on historical information, information that is currently available to us and on various other
assumptions that management believes to be reasonable under the circumstances. Actual results could
vary from those estimates and we may change our estimates and assumptions in future evaluations.
Changes in these estimates and assumptions may have a material effect on our financial condition
and results of operations. We believe that these critical accounting policies affect our more
significant judgments and estimates used in the preparation of our condensed consolidated financial
statements. For a discussion of our significant accounting policies and estimates, please refer to
Managements Discussion and Analysis of Financial Condition and Results of Operations Critical
Accounting Policies and Estimates presented in our Current Report on Form 8-K/A filed on July 20,
2011.
(5) Recently Issued Accounting Pronouncements
See related disclosure at Item 2 Financial Statements Notes to Condensed Consolidated
Financial Statements Note 2 Summary of Significant Accounting Policies Recently issued
accounting pronouncements.
(6) 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.
30
Table of Contents
ITEM 4. | 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, 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 our 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 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.
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
the interest rates for our short-term bank loans renewed during the six months ended June 30, 2011.
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.
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Table of Contents
ITEM 5. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Office and
our Chief Financial Officer (each a Certifying Officer), has evaluated the effectiveness of our
disclosure controls and procedures as defined in Rules 13a-15 promulgated under the Securities
Exchange Act 1934, as amended (the Exchange Act) as of the end of the period covered by this
Quarterly Report. Disclosure controls and procedures are controls and procedures designed to ensure
that information required to be disclosed in our reports filed or submitted under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in the
Commissions rules and forms and include controls and procedures designed to ensure that
information we are required to disclose in such reports is accumulated and communicated to
management, including our Certifying Officers, as appropriate, to allow timely decisions regarding
required disclosure. Based upon that evaluation, our Certifying Officers concluded that as of such
date, our disclosure controls and procedures were not effective to ensure that the information
required to be disclosed by us in our reports is recorded, processed, summarized and reported
within the time periods specified by the SEC due to an inherent weakness in our internal controls
over financial reporting. However, our Certifying Officers believe that the financial statements
included in this report fairly present, in all material respects, our financial condition, results
of operations and cash flows for the respective periods presented.
Changes in Internal Controls
There were no significant changes (including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal controls over financial reporting that
occurred during the quarter ended June 30, 2011 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
None.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | (REMOVED AND RESERVED) |
32
Table of Contents
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
Exhibit No. | Description | |||
2.1 | Share Exchange Agreement, dated May 13, 2011,
among the Company, Xiangrui and Mr. Chonxing Xu.
[Incorporated by reference to Exhibit 2.1 to the
Companys Current Report on Form 8-K/A filed on
July 20 , 2011] |
|||
10.1 | Loan Agreement, dated March 15, 2011, between
Shandong Xiangrui and Rural Cooperative Bank of
Dongping, Shandong, for RMB 5 million. [English
Translation of Summary] [Incorporated by
reference to Exhibit 10.12 to the Companys
Current Report on Form 8-K/A filed on July 20 ,
2011] |
|||
10.2 | Loan Agreement, dated March 16, 2011, between
Shandong Xiangrui and Rural Cooperative Bank of
Dongping, Shandong, for RMB 5 million. [English
Translation of Summary] [Incorporated by
reference to Exhibit 10.13 to the Companys
Current Report on Form 8-K/A filed on July 20 ,
2011] |
|||
10.3 | 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 loans. [English
Translation of Summary] [Incorporated by
reference to Exhibit 10.14 to the Companys
Current Report on Form 8-K/A filed on July 20 ,
2011] |
|||
10.4 | Loan Agreement, dated April 15, 2011, between
Shandong Xiangrui and China Merchant Bank, Jinan
Branch, for RMB 10 million. [English Translation
of Summary] [Incorporated by reference to
Exhibit 10.15 to the Companys Current Report on
Form 8-K/A filed on July 20 , 2011] |
|||
10.5 | 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] [Incorporated by reference to
Exhibit 10.16 to the Companys Current Report on
Form 8-K/A filed on July 20 , 2011] |
|||
10.6 | 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]
[Incorporated by reference to Exhibit 10.17 to
the Companys Current Report on Form 8-K/A filed
on July 20 , 2011] |
|||
10.7 | 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]
[Incorporated by reference to Exhibit 10.22 to
the Companys Current Report on Form 8-K/A filed
on July 20 , 2011] |
|||
10.8 | Corn Kernels Purchase Agreement, dated April 1,
2011, between Shandong Xiangrui and Jinan
Jingliang Grains Storage Co., Ltd. [English
Translation] [Incorporated by reference to
Exhibit 10.23 to the Companys Current Report on
Form 8-K/A filed on July 20 , 2011] |
|||
10.9 | Corn Kernels Purchase Agreement, dated May 6,
2011, between Shandong Xiangrui and Zhongjiao
Grain and Oil Storage Center, Qingdao
Tariff-free Area. [English Translation]
[Incorporated by reference to Exhibit 10.24 to
the Companys Current Report on Form 8-K/A filed
on July 20 , 2011] |
|||
10.10 | Corn Kernels Purchase Agreement, dated May 9,
2011, between Shandong Xiangrui and Taian
Branch of China Grain Reserves Corporation.
[English Translation] [Incorporated by reference
to Exhibit 10.25 to the Companys Current Report
on Form 8-K/A filed on July 20 , 2011] |
33
Table of Contents
Exhibit No. | Description | |||
10.11 | Corn Kernels Purchase Agreement, dated May 11, 2011, between Shandong Xiangrui
and Shanghai Yihai Commerce & Trade Co., Ltd. [English Translation]
[Incorporated by reference to Exhibit 10.26 to the Companys Current Report on
Form 8-K/A filed on July 20 , 2011] |
|||
10.12 | Exclusive Technical and Consulting Service Agreement, dated May 9, 2011, between
the WFOE and Shandong Xiangrui. [previously filed as Exhibit 10.33]
[Incorporated by reference to Exhibit 10.27 to the Companys Current Report on
Form 8-K/A filed on July 20 , 2011] |
|||
10.13 | Management Fee Payment Agreement, dated May 9, 2011, among the WFOE, Shandong
Xiangrui and the Shandong Xiangrui Shareholders. [previously filed as Exhibit
10.34] [Incorporated by reference to Exhibit 10.28 to the Companys Current
Report on Form 8-K/A filed on July 20 , 2011] |
|||
10.14 | Equity Interest Pledge Agreement, dated May 9, 2011, between the WFOE and the
Shandong Xiangrui Shareholders. [Incorporated by reference to Exhibit 10.29 to
the Companys Current Report on Form 8-K/A filed on July 20 , 2011] |
|||
10.15 | Exclusive Equity Interest Purchase Agreement, dated May 9, 2011, among the WFOE,
Shandong Xiangrui and the Shandong Xiangrui Shareholders. [Incorporated by
reference to Exhibit 10.30 to the Companys Current Report on Form 8-K/A filed
on July 20 , 2011] |
|||
10.16 | Operating Agreement, dated May 9, 2011, among the WFOE, Shandong Xiangrui and
the Shandong Xiangrui Shareholders. [Incorporated by reference to Exhibit 10.31
to the Companys Current Report on Form 8-K/A filed on July 20 , 2011] |
|||
10.17 | Proxy Agreement, dated May 9, 2011, among the WFOE, Shandong Xiangrui and the
Shandong Xiangrui Shareholders. [Incorporated by reference to Exhibit 10.32 to
the Companys Current Report on Form 8-K/A filed on July 20 , 2011] |
|||
10.18 | Option Agreement, dated May 13, 2011, between Mr. Chongxin Xu and Mr. Binglong
Qiao. [Incorporated by reference to Exhibit 10.33 to the Companys Current
Report on Form 8-K/A filed on July 20 , 2011] |
|||
10.19 | Option Agreement, dated May 13, 2011, between Mr. Chongxin Xu and Mr. Guo Wang.
[Incorporated by reference to Exhibit 10.34 to the Companys Current Report on
Form 8-K/A filed on July 20 , 2011] |
|||
10.20 | Option Agreement, dated May 13, 2011, between Mr. Chongxin Xu and Mr. Lingfa
Huang. [Incorporated by reference to Exhibit 10.35 to the Companys Current
Report on Form 8-K/A filed on July 20 , 2011] |
|||
10.21 | Option Agreement, dated May 13, 2011, between Mr. Chongxin Xu and Mr. Xuchun
Wang. [Incorporated by reference to Exhibit 10.36 to the Companys Current
Report on Form 8-K/A filed on July 20 , 2011] |
|||
10.22 | Loan Agreement, dated August 23, 2011, between Shandong Xiangrui and Bank of
Communications Taian Branch for RMB 5 million. [Incorporated by reference to
Exhibit 10.45 to the Companys Current Report on Form 8-K/A filed on September
6, 2011] |
|||
10.23 | Guaranty Contract, dated August 23, 2011, between Runyin Bio-chemical and Bank of
Communications, Taian Branch, for a RMB 5 million loan. [Incorporated by
reference to Exhibit 10.46 to the Companys Current Report on Form 8-K/A filed
on September 6, 2011] |
|||
10.24 | Guaranty Contract, dated August 23, 2011, between Mr. Xuchun Wang and Bank of
Communications Taian Branch, for a RMB 5 million loan. [Incorporated by
reference to Exhibit 10.47 to the Companys Current Report on Form 8-K/A filed
on September 6, 2011] |
34
Table of Contents
Exhibit No. | Description | |||
10.25 | Loan Agreement, dated August 3, 2011, between Shandong Xiangrui and Agriculture
Development Bank of China, Dongping Branch, for RMB 30 million. [Incorporated by
reference to Exhibit 10.48 to the Companys Current Report on Form 8-K/A filed
on September 6, 2011] |
|||
10.26 | Guarantee Contract, dated August 3, 2011, between Ruixing Group and Agriculture
Development Bank of China, Dongping Branch, for a RMB 30 million loan.
[Incorporated by reference to Exhibit 10.49 to the Companys Current Report on
Form 8-K/A filed on September 6, 2011] |
|||
10.27 | 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. [Incorporated by reference to Exhibit 10.50 to the Companys
Current Report on Form 8-K/A filed on September 6, 2011] |
|||
31.1 | * | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
||
31.2 | * | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
||
32.1 | * | Section 1350 Certification of Chief Executive Officer |
||
32.2 | * | Section 1350 Certification of Chief Financial Officer |
* | Filed herein |
35
Table of Contents
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SMSA Treemont Acquisition Corp. |
||||
Dated: November 3, 2011 | By: | /s/ Guo Wang | ||
Guo Wang | ||||
Chief Executive Officer | ||||
Dated: November 3, 2011 | By: | /s/ Wencai Pan | ||
Wencai Pan | ||||
Chief Financial Officer |