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EXCEL - IDEA: XBRL DOCUMENT - SMSA Treemont Acquisition Corp | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - SMSA Treemont Acquisition Corp | c24647exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - SMSA Treemont Acquisition Corp | c24647exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - SMSA Treemont Acquisition Corp | c24647exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - SMSA Treemont Acquisition Corp | c24647exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 September 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
þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(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: September 30, 2011: 13,294,500
Transitional Small Business Disclosure Format (check one): YES o NO þ
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 September 2011 and the related
consolidated income statement and cash flow statement for the nine-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
14 October 2011
Shanghai, China
14 October 2011
2
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
30 SEPTEMBER | 31 DECEMBER | |||||||||
Notes | 2011 | 2010 | ||||||||
US$ | US$ | |||||||||
ASSETS |
||||||||||
Current Assets |
||||||||||
Cash |
745,631 | 6,634,012 | ||||||||
Restricted Cash |
3,933,972 | 226,494 | ||||||||
Notes receivable |
3 | 2,502,006 | 2,236,468 | |||||||
Accounts receivable, net |
3 | 1,070,313 | 255,870 | |||||||
Inventories, net |
4,149,579 | 1,954,879 | ||||||||
Advances to third party suppliers |
2,713,068 | 907,796 | ||||||||
Other receivables |
271,986 | 104,681 | ||||||||
VAT taxes refundable |
464,604 | | ||||||||
Deferred tax assets |
7 | 276,432 | 265,254 | |||||||
Total Current Assets |
16,127,591 | 12,585,454 | ||||||||
Non-current Assets |
||||||||||
Property, plant and equipment, net |
4 | 12,664,150 | 2,973,276 | |||||||
Land use rights, net |
5 | 2,499,584 | 2,542,749 | |||||||
Total Non-current Assets |
15,163,734 | 5,516,025 | ||||||||
TOTAL ASSETS |
31,291,325 | 18,101,479 | ||||||||
The accompanying notes are integral part of the financial statements.
3
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
(UNAUDITED)
30 SEPTEMBER | 31 DECEMBER | |||||||||
Notes | 2011 | 2010 | ||||||||
US$ | US$ | |||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||
Current Liabilities |
||||||||||
Short-term bank borrowings |
6 | 11,565,878 | 8,078,276 | |||||||
Accounts payable to third parties |
2,413,681 | 827,993 | ||||||||
Notes payable |
6,294,355 | | ||||||||
Advance from third party customers |
623,850 | 167,704 | ||||||||
Payroll and welfare payable |
35,262 | 19,305 | ||||||||
Accrued expenses |
213,897 | 106,179 | ||||||||
Amounts due to related parties |
11 | 215,337 | 2,249,526 | |||||||
Income tax payable |
7 | 478,769 | 150,218 | |||||||
VAT tax payable |
| 859,128 | ||||||||
Miscellaneous taxes payable |
8 | 30,130 | 88,937 | |||||||
Other payables to third parties |
9 | 100,688 | 205,481 | |||||||
Total Current Liabilities |
21,971,847 | 12,752,747 | ||||||||
Non-current liabilities |
||||||||||
Deferred tax liabilities |
7 | 99,563 | 172,363 | |||||||
Total Non-current Liabilities |
99,563 | 172,363 | ||||||||
Total Liabilities |
22,071,410 | 12,925,110 | ||||||||
Shareholders Equity |
||||||||||
Common stock, $.0001 par
value, 13,294,500 shares authorized,
issued and outstanding |
13,295 | 12,895 | ||||||||
Additional paid-in capital |
2,440,323 | 2,416,446 | ||||||||
Statutory reserves |
10 | 1,189,484 | 522,591 | |||||||
Accumulated other comprehensive income |
(571,692 | ) | (427,019 | ) | ||||||
Retained earnings |
6,148,505 | 2,651,456 | ||||||||
Total Shareholders Equity |
9,219,915 | 5,176,369 | ||||||||
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY |
31,291,325 | 18,101,479 | ||||||||
The accompanying notes are integral part of the financial statements.
4
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
(UNAUDITED)
THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||||
30 SEPTEMBER | 30 SEPTEMBER | |||||||||||||||||
Notes | 2011 | 2010 | 2011 | 2010 | ||||||||||||||
US$ | US$ | US$ | US$ | |||||||||||||||
Revenues |
||||||||||||||||||
Cornstarch |
17,709,011 | 8,204,538 | 47,432,809 | 23,619,326 | ||||||||||||||
Glucose |
3,577,417 | 2,706,725 | 9,395,846 | 6,965,949 | ||||||||||||||
Others |
88,164 | 25,982 | 177,010 | 78,376 | ||||||||||||||
Total Revenues |
21,374,592 | 10,937,245 | 57,005,665 | 30,663,651 | ||||||||||||||
Cost of Sales |
||||||||||||||||||
Cornstarch |
15,913,714 | 7,668,105 | 41,785,639 | 21,152,713 | ||||||||||||||
Glucose |
2,912,832 | 2,286,621 | 7,312,627 | 5,877,754 | ||||||||||||||
Others |
2,672 | 2,511 | 91,964 | 46,402 | ||||||||||||||
Total Cost of Sales |
18,829,218 | 9,957,237 | 49,190,230 | 27,076,869 | ||||||||||||||
Gross Profit |
2,545,374 | 980,008 | 7,815,435 | 3,586,782 | ||||||||||||||
Operating expenses |
||||||||||||||||||
Selling and distribution |
415,074 | 244,703 | 956,457 | 751,519 | ||||||||||||||
General and administrative |
132,200 | 42,021 | 620,214 | 160,724 | ||||||||||||||
Total Operating Expenses |
547,274 | 286,724 | 1,576,671 | 912,243 | ||||||||||||||
Interest income |
2,668 | 14,707 | 5,012 | 22,036 | ||||||||||||||
Interest expenses |
270,504 | 133,828 | 669,023 | 273,483 | ||||||||||||||
Other expenses, net |
(100,255 | ) | (147,547 | ) | 21,449 | (133,910 | ) | |||||||||||
Income Before Income Tax
Expenses |
7 | 1,830,519 | 721,710 | 5,553,304 | 2,557,002 | |||||||||||||
Income tax expenses |
7 | 438,058 | 154,012 | 1,389,362 | 635,622 | |||||||||||||
NET INCOME |
1,392,461 | 567,698 | 4,163,942 | 1,921,380 | ||||||||||||||
Basic and diluted
weighted average shares
outstanding |
13,294,500 | 12,814,500 | 13,904,500 | 12,894,500 | ||||||||||||||
Basic net earnings per
share |
0.1 | 0.04 | 0.3 | 0.15 |
The accompanying notes are integral part of the financial statements.
5
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(UNAUDITED)
(UNAUDITED)
Accumulated | ||||||||||||||||||||||||
other | Total | |||||||||||||||||||||||
Common | Additional | Statutory | Retained | comprehensive | shareholders | |||||||||||||||||||
Stock | Paid-incapital | 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 |
| | | 4,163,942 | | 4,163,942 | ||||||||||||||||||
Foreign currency translation
adjustment |
| | | | (144,673 | ) | (144,673 | ) | ||||||||||||||||
Total comprehensive income |
| | | 4,163,942 | (144,673 | ) | 4,019,269 | |||||||||||||||||
New shares issued |
400 | | | | | 400 | ||||||||||||||||||
Appropriation of statutory
reserve |
| | 666,893 | (666,893 | ) | | | |||||||||||||||||
Contribution from shareholders |
23,877 | | | | 23,877 | |||||||||||||||||||
Balance at 30 September 2011 |
13,295 | 2,440,323 | 1,189,484 | 6,148,505 | (571,692 | ) | 9,219,915 | |||||||||||||||||
The accompanying notes are integral part of the financial statements.
6
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
(UNAUDITED)
NINE MONTHS ENDED | ||||||||
30 SEPTEMBER | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
4,163,942 | 1,921,380 | ||||||
Adjustment to reconcile net income to net cash
provided by operating activities |
||||||||
Depreciation of property, plant and equipment |
463,674 | 559,615 | ||||||
Amortization of land use rights |
43,165 | 46,308 | ||||||
Gain from disposals of fixed assets and other |
3,504 | |||||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable to third parties |
(814,443 | ) | (3,010,274 | ) | ||||
Notes receivable |
(265,539 | ) | 110,224 | |||||
Advances to third party suppliers, net |
(1,805,272 | ) | 31,838 | |||||
Other receivables |
(167,305 | ) | (1,486,313 | ) | ||||
Amounts due from related parties |
| (1,585,985 | ) | |||||
Inventories |
(2,194,700 | ) | 221,948 | |||||
Accounts payable to third parties |
1,585,688 | (551,673 | ) | |||||
Notes payable |
6,294,355 | (2,196,772 | ) | |||||
Income tax payable |
328,551 | 818,374 | ||||||
VAT tax payable |
(1,323,732 | ) | 996,635 | |||||
Miscellaneous taxes payable |
(58,807 | ) | 14,364 | |||||
Advances from third party customers |
456,146 | 130,149 | ||||||
Payroll and welfare payable |
15,957 | | ||||||
Other payables to third parties |
(104,793 | ) | 326,412 | |||||
Amounts due to related parties |
(2,034,189 | ) | (129,174 | ) | ||||
Accrued expenses |
107,718 | 93,713 | ||||||
Deferred tax assets |
(11,178 | ) | 9,402 | |||||
Deferred tax liabilities |
(72,800 | ) | (44,188 | ) | ||||
Net cash provided by /(used in) operating
activities |
4,609,942 | (3,724,017 | ) | |||||
The accompanying notes are integral part of the financial statements.
7
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SMSA TREEMONT ACQUISITION CORP.
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (continued)
(UNAUDITED)
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (continued)
(UNAUDITED)
NINE MONTHS ENDED | ||||||||
30 SEPTEMBER | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Release of restricted cash |
(3,707,478 | ) | 2,416,449 | |||||
Purchases of property and equipment |
(10,158,052 | ) | (352,905 | ) | ||||
Net cash provided by investing activities |
(13,865,530 | ) | 2,063,544 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Bank loan repaid |
| (5,855,018 | ) | |||||
Proceeds from additional paid-in capital |
23,877 | | ||||||
Proceeds from short-term bank borrowings |
3,487,602 | 7,863,022 | ||||||
Net cash provided by financing activities |
3,511,479 | 2,008,004 | ||||||
Effect of foreign exchange rate changes |
(144,272 | ) | 45,642 | |||||
Net increase/(decrease) in cash |
(5,888,381 | ) | 393,173 | |||||
Cash, beginning of year |
6,634,012 | 881,229 | ||||||
Cash, end of year |
745,631 | 1,274,402 | ||||||
Supplementary disclosure of cash flow
information: |
||||||||
Interest expense paid |
669,023 | 244,166 | ||||||
Income taxes paid |
1,144,789 | 732,116 | ||||||
The accompanying notes are integral part of the financial statements.
8
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
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 to effect the reincorporation of Treemont Management Services, Inc., a
Texas corporation, mandated by the plan of reorganization as discussed below. |
On 17 January 2007, Treemont Management Services, Inc. and its affiliated companies
(collectively SMS Companies), filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code. On 1 August 2007, the bankruptcy court confirmed the First
Amended, Modified Chapter 11 Plan (the Plan), as presented by SMS Companies and their
creditors. The effective date of the Plan was 10 August 2007. |
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 US$0.001 per share in consideration for in country due diligence
services provided to the Company in connection with the evaluation of merits of the exchange
transaction with Xiangrui. On 13 May 2011, the Company entered into the Share Exchange
Agreement with Xiangrui and its sole shareholder, Mr. Xu. Pursuant to the Share Exchange
Agreement the Company issued 12,363,885 newly created shares to Mr. Xu, and became the sole
shareholder of Xiangrui. The shares the Company issued to Mr. Xu constitute 93% of our issued
and outstanding capital stock on a fully-diluted basis as of and immediately after the
consummation of the transactions contemplated by the Share. |
9
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SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
1. | CORPORATE INFORMATION AND BASIS OF PRESENTATION (CONTINUED) |
Following table illustrates the equity transactions of the Company during the nine months
period ended 30 September 2011: |
Common Stock | ||||||||
Shares | Amount(US$) | |||||||
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 of 30 September 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
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. |
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. |
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) |
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 | |||
September 30, 2011 |
6.3549 | N/A | ||
December 31,2010 |
N/A | 6.6227 |
Three months average | Nine months average | |||
US$:RMB | US$:RMB | |||
Third quarter of 2011 |
6.3953 | N/A | ||
Nine months of 2011 |
N/A | 6.4984 | ||
Third quarter of 2010 |
6.7622 | N/A | ||
Nine months of 2010 |
N/A | 6.7538 |
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) |
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. |
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. |
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) |
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 |
5-10 years | 5 | % | 9.5%-19 | % | |||||||
Office equipments |
5-10 years | 5 | % | 9.5%-19 | % | |||||||
Vehicles |
10 years | 5 | % | 9.5 | % |
Expenditures for major additions or improvement that extend the useful lives of property and
equipment are capitalized as additions to the related assets. Expenditure for minor
replacements, maintenance and repairs that do not improve or extend the lives of the assets are
charged to expense when incurred. Retirement, sales and disposals of assets are recorded by
removing the cost and accumulated depreciation, with any resulting gain or loss reflected in
the statements of income. |
All direct and indirect costs that are related to the construction of property and equipment
and incurred before the assets are ready for their intended use are capitalized as construction
in progress. Construction in progress is transferred to specific property and equipment
accounts and commences depreciation when these assets are ready for their intended use.
Interest costs are capitalized if they are incurred during the acquisition, construction or
production of a qualifying asset and such costs could have been avoided if expenditures for the
assets have not been made. Capitalization of interest costs commences when the activities to
prepare the asset are in progress and expenditures and borrowing costs are being incurred.
Interest costs are capitalized until the assets are ready for their intended use.
Capitalization of interest costs is suspended during extended periods in which activities
related to the acquisition or construction of the qualifying assets are interrupted. |
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) |
k) | 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. |
l) | 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 collectability 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. |
m) | Shipping and handling costs |
Shipping and handling costs are included in selling expenses. The shipping and handling costs
for the nine-month period ended September 30, 2011 and 2010 were US$510,981 and US$367,541,
respectively. |
n) | 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. |
o) | Advertising expenditures |
Advertising expenditures are expensed as incurred. There were no advertising costs incurred in
the reporting period. |
p) | 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. |
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) |
q) | 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 carry forwards 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. According to relevant laws and regulation,
the Company is subject a statutory tax rate of 25 percent. |
r) | 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. |
s) | 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. |
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) |
t) | 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. |
u) | 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. |
v) | 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). |
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 September 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. |
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)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
w) | 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. |
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. |
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)
3. | NOTES AND ACCOUNTS RECEIVABLE, NET |
Accounts receivable is stated at net value. As of 30 September 2011, the allowance for doubtful
accounts recorded by the Group amounted to US$953,869. |
Notes receivable represent bank drafts that are non-interest bearing and due within six months.
Such bank drafts have been arranged with third party financial institutions by certain
customers to settle their purchases from us. The carrying amount of notes receivable
approximate their fair values due to their short maturities. |
4. | PROPERTY, PLANT AND EQUIPMENT, NET |
30 SEPTEMBER | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Buildings |
2,518,482 | 2,368,933 | ||||||
Machinery |
14,186,684 | 6,934,521 | ||||||
Office equipment |
22,253 | 18,911 | ||||||
Motor vehicles |
59,260 | 59,098 | ||||||
Total |
16,786,679 | 9,381,463 | ||||||
Less: Accumulated depreciation |
(6,911,936 | ) | (6,484,434 | ) | ||||
Subtotal |
9,874,743 | 2,897,029 | ||||||
Construction in progress |
2,789,407 | 76,247 | ||||||
Property, plant and equipment, net |
12,664,150 | 2,973,276 | ||||||
As of 30 September 2011, Shandong Xiangrui pledged its building with net book value of
US$1,851,035 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 September 2011 and 2010 were US$80,583 and
US$178,398 and for the nine months ended 30 September 2011 and 2010 were US$463,674 and
US$559,615, respectively. |
5. | LAND USE RIGHTS, NET |
As of 30 September 2011, Shandong Xiangrui pledged its land use rights with net book value of
US$643,855 to Citibank (China) Co., Ltd., Shanghai Branch to secure a long term bank loan
provided by the bank to Shandong Runyin Bio-Chemical Co., Ltd, a related party. |
Land use rights are summarized as follows: |
30 SEPTEMBER | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Land use rights, cost |
2,766,860 | 2,766,860 | ||||||
Less: accumulated amortization |
(267,276 | ) | (224,111 | ) | ||||
Land use rights, net |
2,499,584 | 2,542,749 | ||||||
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)
6. | BANK BORROWINGS |
The Group had the following outstanding short-term loans with banks: |
30 SEPTEMBER | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Rural Cooperative Bank of
Dongping, Shandong |
4,484,728 | 2,793,422 | ||||||
China Merchant Bank |
1,573,589 | | ||||||
Agricultural Develop Bank |
4,720,767 | 4,529,875 | ||||||
Bank of Communications |
786,794 | 754,979 | ||||||
Total |
11,565,878 | 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 September
2011 and 2010 was US$270,504 and US$119,169 and for nine months ended 30 September 2011 and
2010 was US$669,023 and US$244,166, respectively. All bank loans are due within one year from
balance sheet date or the period end. |
7. | INCOME TAXES |
On 13 May 2011, income from the Companys foreign subsidiaries became subject to U.S. income
tax liability; however, this tax is deferred until foreign source income is repatriated to the
Company from earnings and profits after foreign income taxes, which has not yet occurred. |
All of Shandong Xiangruis operations are in the PRC, and in accordance with the relevant tax
laws and regulations of PRC, the corporate income tax rate is 25%. |
Income before taxes and the provision for taxes consists of the following: |
THREE MONTHS ENDED 30 SEPTEMBER | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Income before taxes: |
||||||||
US Federal |
| | ||||||
US State |
| | ||||||
BVI |
| | ||||||
PRC |
1,830,519 | 721,710 | ||||||
Total income before taxes |
1,830,519 | 721,710 | ||||||
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) |
THREE MONTHS ENDED 30 SEPTEMBER | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Provision for income taxes: |
||||||||
Current: |
||||||||
US Federal |
| | ||||||
US State |
| | ||||||
BVI |
| | ||||||
PRC |
508,089 | 181,586 | ||||||
Current income taxes |
508,089 | 181,586 | ||||||
Deferred: |
||||||||
US Federal |
| | ||||||
US State |
| | ||||||
BVI |
| | ||||||
PRC |
(70,031 | ) | (27,574 | ) | ||||
Deferred income taxes |
(70,031 | ) | (27,574 | ) | ||||
Total provision for income taxes |
438,058 | 154,012 | ||||||
NINE MONTHS ENDED 30 SEPTEMBER | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Income (loss) before taxes: |
||||||||
US Federal |
| | ||||||
US State |
(3,877 | ) | (6,095 | ) | ||||
BVI |
| | ||||||
PRC |
5,557,181 | 2,563,097 | ||||||
Total income (loss) before taxes |
5,553,304 | 2,557,002 | ||||||
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)
7. INCOME TAXES (CONTINUED)
NINE MONTHS ENDED 30 SEPTEMBER | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Provision for income taxes: |
||||||||
Current: |
||||||||
US Federal |
| | ||||||
US State |
| | ||||||
BVI |
| | ||||||
PRC |
1,473,340 | 670,408 | ||||||
Current income taxes |
1,473,340 | 670,408 | ||||||
Deferred: |
||||||||
US Federal |
| | ||||||
US State |
| | ||||||
BVI |
| | ||||||
PRC |
(83,978 | ) | (34,786 | ) | ||||
Deferred income taxes |
(83,978 | ) | (34,786 | ) | ||||
Total provision for income taxes |
1,389,362 | 635,622 | ||||||
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 SEPTEMBER | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Profit before income tax |
1,830,519 | 721,710 | ||||||
Corporate income tax rate |
25 | % | 25 | % | ||||
Computed tax at statutory rate |
457,630 | 180,428 | ||||||
Income exempted from taxation |
(19,572 | ) | (26,416 | ) | ||||
Expenses not deductible for tax
purposes |
| | ||||||
Provision for income taxes |
438,058 | 154,012 | ||||||
NINE MONTHS ENDED 30 SEPTEMBER | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Profit before income tax |
5,553,304 | 2,557,002 | ||||||
Corporate income tax rate |
25 | % | 25 | % | ||||
Computed tax at statutory rate |
1,388,326 | 639,251 | ||||||
Income exempted from taxation |
| (3,629 | ) | |||||
Expenses not deductible for tax
purposes |
1,036 | | ||||||
Provision for income taxes |
1,389,362 | 635,622 | ||||||
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)
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 SEPTEMBER | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Deferred tax assets |
||||||||
Allowance for doubtful accounts |
276,432 | 265,254 | ||||||
Total deferred tax assets |
276,432 | 265,254 | ||||||
Deferred tax liabilities |
||||||||
Depreciation of property, plant and
equipments |
99,563 | 172,363 | ||||||
Total deferred tax liabilities |
99,563 | 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. | 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 miscellaneous taxes payable are
set forth in the following table: |
30 SEPTEMBER | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Urban construction tax |
7,530 | 46,064 | ||||||
Education tax |
4,518 | 25,837 | ||||||
Local supplementary tax |
4,517 | 8,613 | ||||||
Land use tax |
4,083 | 3,918 | ||||||
Real estate tax |
2,958 | 2,838 | ||||||
Stamp duty |
2,926 | | ||||||
Personal income tax payable on
behalf of staffs |
3,598 | 1,667 | ||||||
Total |
30,130 | 88,937 | ||||||
22
Table of Contents
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 SEPTEMBER | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Purchases of property and
equipment |
100,688 | 111,535 | ||||||
Others |
| 93,946 | ||||||
Total |
100,688 | 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 SEPTEMBER | 31 DECEMBER | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Statutory reserve |
737,480 | 326,619 | ||||||
Discretionary reserve |
452,004 | 195,972 | ||||||
Total |
1,189,484 | 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 |
23
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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 nine months ended 30 September 2011, and 2010, the Group engaged in the following
significant related party transactions: |
(a) | Utility (steam and electricity) supply |
Steam supply received from |
NINE MONTHS ENDED 30 SEPTEMBER | ||||||||||||
2011 | 2010 | |||||||||||
US$ | US$ | |||||||||||
Shandong Runyin
Bio-chemical
Co., Ltd. |
(i | ) | 1,533,339 | 1,310,960 | ||||||||
Electricity supply received from
NINE MONTHS ENDED 30 SEPTEMBER | ||||||||||||
2011 | 2010 | |||||||||||
US$ | US$ | |||||||||||
Shandong Runyin
Bio-chemical
Co., Ltd. |
(i | ) | 1,617,326 | 1,298,795 | ||||||||
Electricity supplied to
NINE MONTHS ENDED 30 SEPTEMBER | ||||||||||||
2011 | 2010 | |||||||||||
US$ | US$ | |||||||||||
Shandong Xinrui
Chemical
Devices Co.,
Ltd. |
(i | ) | | 441,867 | ||||||||
(b) | Raw materials purchased from |
NINE MONTHS ENDED 30 SEPTEMBER | ||||||||||||
2011 | 2010 | |||||||||||
US$ | US$ | |||||||||||
Shandong Runyin
Bio-chemical Co., Ltd. |
2,173,537 | 598,639 | ||||||||||
(c) | Plant facility lease from |
NINE MONTHS ENDED 30 SEPTEMBER | ||||||||||||
2011 | 2010 | |||||||||||
US$ | US$ | |||||||||||
Shandong
Runyin
Bio-chemical
Co., Ltd. |
(ii) | 7,050 | 6,861 | |||||||||
(i) | In January 2009, the Company entered into a non-cancelable contract with Shandong
Runyin Bio-chemical Co., Ltd. to secure the steam and electricity supply for the
Companys cornstarch and glucose production. The non-cancelable utility supply contract
with the Shandong Runyin Bio-chemical Co., Ltd. expires in December 2014 whose price was
determined by reference to market price. |
|
(ii) | In December 2008, the Company entered into a rental contract with the Shandong Runyin
Bio-chemical Co., Ltd. for leasing two plants. The lease contract was renewed on annual basis with
yearly payment of US$9,000, which was determined by reference to market price. |
24
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
11. | RELATED PARTY TRANSACTIONS (CONTINUED) |
As of 30 September 2011 and 31 December 2010, the Group had following balances with related
parties: |
(d) | Amounts due to related parties |
30 SEPTEMBER | DECEMBER 31 | |||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Ruixing Group Co., Ltd. |
8,812 | 297,285 | ||||||
Shandong Runyin Bio-chemical Co., Ltd. |
206,525 | 1,952,241 | ||||||
Total |
215,337 | 2,249,526 | ||||||
Amounts due from and due to related parties are unsecured, interest-free and repayable on
demand. |
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 nine months ended 30 September 2011
and 2010 respectively. |
(b) | Loan Guarantee |
As of 30 September 2011, Shandong Xiangrui pledged its building with net book value of
US$1,851,035 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 September 2011, Shandong Xiangrui pledged its land use rights with net book value
of US$643,855 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). |
||
(c) | Capital Purchase Commitment |
As of 30 September 2011, Shandong Xiangrui entered into non-cancellable contracts with some
constructor and machinery suppliers for purchase of plant and machinery with amount of
US$2,318,428. |
||
(d) | Contingencies |
The Group had no material contingent events during the reporting period. |
25
Table of Contents
SMSA TREEMONT ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
13. | SEGMENT AND GEOGRAPHIC INFORMATION |
Business segments |
The main products of the Company are cornstarch and glucose, which have almost the same
production process. Both are produced from corn as raw materials while the only minor difference
is that glucose is further processed from cornstarch by simply mixing up a few auxiliaries. The
two products are sold to same type of customers with same distribution method. |
While the cost base being similar for the two products, the selling prices are independently
determined by reference to their respective market price, which resulted in different trend of
gross profit margin of the two products as shown in the following table. The economics of scale
also contributed to the overall rise of gross profit margin. |
NINE MONTHS ENDED 30 SEPTEMBER | ||||||||
2011 | 2010 | |||||||
US$ | US$ | |||||||
Revenues |
||||||||
Cornstarch |
47,432,809 | 23,619,326 | ||||||
Glucose |
9,395,846 | 6,965,949 | ||||||
Cost of sales |
||||||||
Cornstarch |
41,785,639 | 21,152,713 | ||||||
Glucose |
7,312,627 | 5,877,754 | ||||||
GPM |
||||||||
Cornstarch |
11.9 | % | 10.4 | % | ||||
Glucose |
22.2 | % | 15.6 | % |
The deviating of the gross profit margin of the two products as determined by market prices is
believed to continue in the future. |
With similar production process and raw materials and same type of customers and distribution
method, the cornstarch and glucose production are not individually assessed when the Companys
chief operating decision maker reviews the operation results and make resources allocation.
Therefore, it is not practical to separate out for the two products the assets information and
other profit and loss information which are believed to have no relevance to the decision-making
of 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. |
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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 mainland China. Approximately 83% of our products are
comprised of corn starch or its by-products and approximately 17% of our products are comprised
of glucose and its by-products. 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 64% of our revenue for the
nine month period ended September 30, 2011. Our other corn-refined products are principally sold
to the animal feed industry, which accounted for approximately 18% of our revenue for the nine
months ended September 30, 2011. Sales of our products to the industrial manufacturing sector
accounted for approximately 18% of our revenue for the nine months ended September 30, 2011. |
As of September 30, 2011, we had an annual production capacity of 140,000 tonnes of cornstarch.
We have invested about US$9.7 million in new equipments and a new building to install a new
product line and expect to invest an additional US$2.3 million into this project by the end of
2011. The new production line was initially planned to be ready by October 2011, however, due to
a long and heavy rain season this year during August and September, the construction is behind
schedule. We expect the new production line will be for use in December 2011 and we expect to
increase our annual capacity to 240,000 tonnes at such time. |
(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. |
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Results of operations for the three months ended September 30, 2011 as compared with the three
months ended September 30, 2010.
Three months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
(unaudited) | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Statement of operations data |
||||||||||||||||
Revenues |
$ | 21,374 | 10,937 | 10,437 | 95 | % | ||||||||||
Cost of sales |
18,829 | 9,957 | 8,872 | 89 | % | |||||||||||
Gross profit |
2,545 | 980 | 1,565 | 160 | % | |||||||||||
Operating expenses |
||||||||||||||||
Selling and distribution expenses |
415 | 245 | 170 | 69 | % | |||||||||||
General and administrative expenses |
132 | 42 | 90 | 214 | % | |||||||||||
Total operating expenses |
547 | 287 | 260 | 91 | % | |||||||||||
Income from operations |
1,998 | 693 | 1,305 | 188 | % | |||||||||||
Interest income |
2 | 15 | 13 | 87 | % | |||||||||||
Interest expenses |
270 | 134 | 136 | 101 | % | |||||||||||
Other expenses, net |
-100 | -148 | 48 | -32 | % | |||||||||||
Income before income tax expenses |
1,830 | 722 | 1,108 | 153 | % | |||||||||||
Income taxes expenses |
438 | 154 | 284 | 184 | % | |||||||||||
Net income attributable to ordinary shareholders |
1,392 | 568 | 824 | 145 | % |
Revenues
Revenues increased by US$10.4 million, or 95%, to US$21.4 million in the three months ended
September 30, 2011, from US$10.9 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 53,800 tonnes in the three months ended September 30, 2011, at an increase of 19,810
tonnes from 33,989 tonnes in the same period in 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 16.6% to US$401 per tonne in
the three months ended September 30, 2011, from US$344 per tonne in the same period in 2010. 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 US$8.8 million, or 89%, to US$18.8 million in the three months ended
September 30, 2011, from US$9.9 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. The
increase in the cost of corn kernels can be attributable to the seasonal shortage in the third
quarter, since the market reserves of corn kernels continued to decrease while new supplies of corn
kernels had not been available in the market. We anticipate that the market price for corn kernels
will decrease slightly in October and November this year due to an increased supply of newly harvested corn
kernels. We expect a steady increase in the market price for corn kernels towards the end of this
year and early next year, which is parallel to the increase of the consumer price index in China. 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.
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Table of Contents
Gross Profits
Our gross profits increased by US$1.6 million, or 160%, to US$2.5 million during the three months
ended September 30, 2011, from US$1 million for the same period in 2010. Gross profits from
cornstarch increased by US$1.3 million, or 235%, to approximately US$1.8 million in the three
months ended September 30, 2011, from US$0.6 million for the same period in 2010. Gross profits
from glucose increased by US$0.2 million, or 58%, to approximately US$0.6 million in the three
months ended September 30, 2011, from US$0.4 million for the same period in 2010. The increase in
gross profits was due to both the increase in our sales volumes and the increase of gross margins.
Gross profits as a percentage of revenues increased by 2.9% to 11.9% during the three months ended
September 30, 2011, as compared to 9.0% for the same period in 2010. The increase is mainly due to
the selling price of our products increasing at a faster rate than our cost of goods sold.
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 increased by
US$0.17 million, or 69%, to US$0.42 million during the three months ended September 30, 2011, from
US$0.25 million for the same period in 2010. The increase is mainly due to the increase of our
sales staff on September 20, 2011 to 33 personnel from 28 personnel 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 US$0.09 million, or
214%, to US$0.13 million during the three months ended September 30, 2011, from US$0.04 million for
the same period in 2010. The increase was mainly attributable to professional fees incurred in
connection with the compliance requirements associated with being a public company.
Interest Expenses
Interest expenses are related to our bank borrowings, which are Renminbi denominated loans with
fixed interest rates ranging from 5.85% to 11.62%. Our interest expenses increased by US$0.129
million to US$0.27 million during the three months ended September 30, 2011, from US$0.14 million
for the same period in 2010. The increase is mainly due to approximately US$5.5 million more in
borrowings during the third quarter of 2011.
Income Before Income Tax Expenses
Income before income tax expenses increased by US$1.1 million, or 153%, to US$1.8 million in the
three months ended September 30, 2011, from US$0.7 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 US$0.28 million to US$0.44 million during the three months
ended September 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 September 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 US$0.8 million, or 145%, to
US$1.39 million in the three months ended September 30, 2011 from US$0.6 million in the same period
of 2010 as result of the above factors.
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Results of operations for the nine months ended September 30, 2011 as compared with the nine months
ended September 30, 2010.
Nine Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
(unaudited) | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Statement of operations data |
||||||||||||||||
Revenues |
$ | 57,005 | 30,664 | 26,341 | 86 | % | ||||||||||
Cost of sales |
49,190 | 27,077 | 22,113 | 82 | % | |||||||||||
Gross profit |
7,815 | 3,587 | 4,228 | 118 | % | |||||||||||
Operating expenses |
||||||||||||||||
Selling and distribution expenses |
957 | 752 | 205 | 27 | % | |||||||||||
General and administrative expenses |
620 | 160 | 460 | 288 | % | |||||||||||
Total operating expenses |
1,577 | 912 | 665 | 73 | % | |||||||||||
Income from operations |
6,238 | 2,675 | 3,563 | 133 | % | |||||||||||
Interest income |
5 | 22 | -17 | -77 | % | |||||||||||
Interest expenses |
669 | 274 | 395 | 144 | % | |||||||||||
Other expenses, net |
21 | -134 | 155 | -116 | % | |||||||||||
Income before income tax expenses |
5,553 | 2,557 | 2,996 | 117 | % | |||||||||||
Income taxes |
1389 | 636 | 753 | 118 | % | |||||||||||
Net income attributable to ordinary shareholders |
4,164 | 1,921 | 2,243 | 117 | % |
Revenues
Revenues increased by US$26.3 million, or 86%, to US$57.0 million in the nine months ended
September 30, 2011, from US$30.6 million for the same period in 2010. The increase was primarily
due to an increase in sales volumes and an increase in average selling prices. Sales volumes
increased to 150,149 tonnes in the nine months ended September 30, 2011, at an increase of 53,533
tonnes, from 96,616 tonnes in the same period in 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 20% to US$383.58 per tonne in the nine months ended
September 30, 2011, from US$319.61 per tonne in the same period in 2010.
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 nine months ended September 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
increases 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 US$22.1 million, or 82%, to US$49.2 million in the nine months ended
September 30, 2011, from US$27.1 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 the increase in our sales
revenues, and partly due to an increase in the average purchase price of raw materials.
Gross Profits
Our gross profits increased by US$4.2 million, or 118%, to US$7.8 million during the nine months
ended September 30, 2011, from US$3.6 million for the same period in 2010. Gross profits from
cornstarch increased by US$3.2 million, or 129%, to approximately US$5.6 million in the nine months
ended September 30, 2011, from US$2.5 million for the same period in 2010. Gross profits from
glucose increased by US$1.0 million, or 92%, to approximately US$2.1 million in the nine months
ended September 30, 2011, from US$1.1 million for the same period in 2010. This increase in gross
profits was mainly due to the increase in our sales volumes. Gross profits as a percentage of
revenues increased to 13.7% during the nine months ended September 30, 2011, as compared to 11.7%
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 US$0.21, or 27%, to US$0.96 million during the
nine months ended September 30, 2011, from US$0.75 million for the same period in 2010. The
increase is mainly due to the increase of our sales staff on September 20, 2011 to 33 personnel
from 28 personnel for the same period in 2010.
General and Administrative Expenses
Our general and administrative expenses increased by US$0.46 million, or 288%, to US$0.62 million
during the nine months ended September 30, 2011, from US$0.16 million for the same period in 2010.
This increase was mainly attributable to professional fees incurred in connection with the
compliance requirements associated with being a public company.
Interest Expenses
Our interest expenses increased by US$0.40 million to US$0.67 million during the nine months ended
September 30, 2011, from US$0.27 million for the same period in 2010. This increase is mainly due
to increased borrowings during 2011 and the increases in interest rates.
Income Before Income Tax Expenses
Income before income tax expenses increased by US$3.0 million, or 117%, to US$5.6 million in the
nine months ended September 30, 2011, from US$2.6 million for the same period in 2010. This
increase was mainly attributable to higher sales volumes.
Income Tax Expenses
Our income tax expenses increased to US$1.4 million from US$0.64 million during the nine months
ended September 30, 2011, as compared to the same period of 2010. This increase in income tax
expenses was mainly attributable to the increase in income before income tax expenses in the nine
months ended September 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 US$2.2 million, or 117%, to
US$4.2 million in the nine months ended September 30, 2011, from US$1.9 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 nine months ended September 30, 2011 was US$4.6
million, at an increase of US$8.3 million from US$3.7 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 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 nine months ended September 30, 2011 was US$13.9
million, at an increase of US$15.9 million from US$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 progress of approximately
US$10 million, while the remainder of the US$5.9 million increase in restricted cash is
attributable to the requirements of certain local banks which require the company to keep 50% of
borrowings as bank deposits according to the respective borrowing agreements.
Financing Activities
Net cash provided in financing activities for the nine months ended September 30, 2011 was US$3.5
million, as compared to US$2.0 million provided by financing activities for the same period in
2010. The increase in cash provided in financing activities is mainly due to fewer bank loan
payoffs in the nine months ended September 30, 2011, as compared to the same period in 2010.
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Loans
We have financed our operations primarily through bank loans and operating income. We have a total
of US$11.6 million short-term loans outstanding as of September 30, 2011. The terms of each of
these respective short-term loans are one year. As of the date of this quarterly report, we have
not defaulted on any of these loans.
Guarantees
We have guaranteed certain borrowings of related parties including short-term bank loans. The total
guaranteed amount was approximately US$2.5 million as of September 30, 2011.
Future Cash Commitments and Needs
We may require additional operating 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 November
3, 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.
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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 in the 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 September 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 nine months ended September 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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ITEM 5. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer 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 September 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) |
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ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
Exhibit No. | Description | |||
10.1 | 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] |
|||
10.2 | 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] |
|||
10.3 | 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] |
|||
10.4 | 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] |
|||
10.5 | 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] |
|||
10.6 | 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 |
||
101 | The following materials from the Companys Form 10-Q for the quarter ended September 30, 2011, formatted in
eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, and
(iv) Notes to Consolidated Financial Statements. |
|||
101.INS | XBRL Instance Document |
|||
101.SCH | XBRL Taxonomy Extension Schema Document |
|||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
|||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
|||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Filed herein |
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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 14, 2011 | By: | /s/ Guo Wang | ||
Guo Wang | ||||
Chief Executive Officer | ||||
Dated: November 14, 2011 | By: | /s/ Wencai Pan | ||
Wencai Pan | ||||
Chief Financial Officer |