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EX-32.1 - CERTIFICATION - Annec Green Refractories Corpf10q0314ex32i_annecgreen.htm
EX-31.1 - CERTIFICATION - Annec Green Refractories Corpf10q0314ex31i_annecgreen.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2014

 

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

 

For the transition period from _____ to _____.

 

Commission File No. 0-54117

 

ANNEC GREEN REFRACTORIES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   27-2951584
(State or Other Jurisdiction of   (IRS Employer
Incorporation)   Identification No.)

  

No.5 West Section, Xidajie Street, Xinmi City,    
Henan Province, P.R. China   452370
 (Address of Principal Executive Offices)   (Zip Code) 

 

  86-371- 69999012  
 

(Registrant’s telephone number, including

area code)

 

 

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

Yes ☒    No ☐

 

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

Yes ☐    No ☒

 

Indicate by checkmark 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-3 of the Exchange Act.

 

Large accelerated filer  ☐ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒
 (Do not check if smaller reporting company)  

 

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

Yes ☐   No ☒

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes ☐   No ☐

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

As of October 17, 2014, there were 19,995,701 shares of the registrant’s common stock issued and outstanding.

 

 

 

 
 

 

ANNEC GREEN REFRACTORIES CORPORATION

 

FORM 10-Q INDEX

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
Item 1. Financial Statements 2
  Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013 2
  Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2014 and 2013(Unaudited) 3
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited) 4
  Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29
     
PART II – OTHER INFORMATION  
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Mine Safety Disclosures 30
Item 5. Other Information 30
Item 6. Exhibits 30
Signatures 31

 

 
 

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

In this Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United States dollars and, unless the context otherwise requires, references to “we,” “us” and “our” refer to Annec Green Refractories Corporation and its consolidated subsidiaries and variable interest entity.

 

This Quarterly Report contains certain forward-looking statements. When used in this Quarterly Report, statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “may,” “project,” “plan” or “continue,” and similar expressions are intended to identify forward-looking statements. They also include statements containing anticipated business developments, a projection of revenues, earnings or losses, capital expenditures, dividends, capital structure or other financial terms.

 

The forward-looking statements in this Quarterly Report are based upon management’s beliefs, assumptions and expectations of our future operations and economic performance, taking into account the information currently available to them. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. These forward-looking statements are based on our current plans and expectations and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and our future financial condition and results.  Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report. See also “Risk Factors “contained in our Form 10-K filed on June 13, 2014.

 

 
 

 

ANNEC GREEN REFRACTORIES CORPORATION

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ANNEC GREEN REFRACTORIES CORPORATION

CONSOLIDATED BALANCE SHEETS

 

   March 31,   December 31, 
   2014   2013 
   (Unaudited)     
Assets        
         
Current assets:        
Cash  $592,637   $164,484 
Restricted cash   4,662,982    6,492,268 
Bank notes receivable   1,323,499    193,558 
Accounts receivable, net   22,647,607    36,432,332 
Retentions receivable, net   5,569,999    9,923,726 
Advances to suppliers   3,183,653    4,937,492 
Other receivables   2,731,813    7,525,986 
Related party Receivables   327,516    312,042 
Inventories, net   19,638,425    26,444,864 
Other current assets   51,242    129,362 
Total current assets   60,729,373    92,556,114 
           
Long-term retentions receivable, net   2,946,250    4,203,396 
Deposits for capital expenditure   594,484    24,930 
Plant and equipment, net   15,490,926    16,612,618 
Land use rights, net   3,064,389    2,294,989 
Other   -    8,256 
Total assets  $82,825,422   $115,700,303 
           
Liabilities and Stockholders' Equity          
           
Current liabilities:          
Short-term loans  $25,115,630   $25,327,311 
Bank notes payable   811,438    2,454,831 
Accounts payable and accrued expenses   15,916,998    19,528,729 
Advances from customers   12,769,491    11,196,409 
Salaries payable   632,227    799,555 
Taxes payable   2,974,758    3,032,010 
Related party payables   1,392,536    4,861,981 
Other payables   5,885,145    8,077,875 
Total current liabilities   65,498,223    75,278,701 
           
Deferred income   2,542,283    2,623,619 
Long-term payables   651,874    657,368 
Long-term loan   238,563    320,765 
Total liabilities   68,930,943    78,880,453 
           
Commitments and Contingencies          
           
Stockholders' equity:          
Series A preferred stock, $0.0001 par value; 20,000,000 shares authorized; zero shares issued and outstanding   -    - 
Common stock, $0.0001 par value; 100,000,000 shares authorized; 19,995,701 shares issued and outstanding   2,000    2,000 
Additional paid-in capital   2,661,026    2,661,026 
Statutory reserve   1,385,966    1,385,966 
Retained earnings   6,724,482    29,513,353 
Accumulated other comprehensive income   3,121,005    3,257,505 
Total stockholders' equity   13,894,479    36,819,850 
Total liabilities and stockholders' equity  $82,825,422   $115,700,303 

 

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

 

2
 

 

ANNEC GREEN REFRACTORIES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

    Three Months Ended   
    March 31,   
    2014   2013 
         
Revenues  $5,622,958   $3,619,415 
Cost of revenues   2,858,269    2,294,112 
Gross profit   2,764,689    1,325,303 
           
Operating expenses:          
Sales and marketing   1,412,388    1,103,256 
General and administrative   23,192,156    1,572,347 
Total operating expenses   24,604,544    2,675,603 
           
Loss from operations   (21,839,855)   (1,350,300)
           
Other income (expense):          
Interest income   119,168    129,418 
Interest expense   (1,124,777)   (1,005,185)
Non-operating income   87,659    - 
Non-operating expenditure   (34,727)   - 
Other income, net   27,015    70,849 
Total other expense   (925,662)   (804,918)
           
Loss before provision for income taxes   (22,765,517)   (2,155,218)
Provision for income taxes   23,354    6,418 
Net loss   (22,788,871)   (2,161,636)
           
Other comprehensive income (loss):          
Foreign currency translation adjustment   (136,500)   229,980 
Comprehensive loss   (22,925,371)  $(1,931,656)
           
Net loss income per share-basic and dilutive  $(1.14)  $(0.11)
           
Shares used in computing net loss per share-basic and dilutive   19,995,701    19,995,701 

 

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

 

3
 

 

ANNEC GREEN REFRACTORIES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Three Months Ended 
   March 31, 
   2014   2013 
Cash flows from operating activities:        
Net loss  $(22,788,871)  $(2,161,636)
Adjustments to reconcile net loss to net cash used in operating activities:          
Non cash interest expense, discount on bank notes receivable   227,249    162,365 
Depreciation and amortization   436,987    464,662 
Provision for bad debts   12,744,457    - 
(Gain) loss on sale of plant and equipment   (27,354)   (40,888)
Loss on inventory spoilage and waste   7,147,493    - 
Change in assets and liabilities:          
Restricted cash   1,788,463    (426,973)
Bank notes receivable   (1,367,375)   998,276 
Accounts receivable, retentions receivable and long-term retentions receivable   6,372,217    9,665,625 
Prepaid expenses and deposits   1,725,538    2,174,744 
Other receivables   5,094,124    (1,056,707)
Inventories   (512,219)   (5,192,155)
Non-current assets within one year   77,623    - 
Other current liabilities   88,537    - 
Long-term payables   (80,123)   - 
Bank notes payable   (1,635,163)   238,971 
Accounts payable and accrued expenses   (2,208,424)   (5,973,479)
Advances from customers   1,679,278    556,806 
Salaries payable   (161,862)   523,614 
Taxes payable   (32,153)   (1,912,343)
Deferred income   (59,858)   (30,205)
Other payables   (10,071,549)   (237,923)
Deferred expenses   8,248    - 
Net cash used in operating activities   (1,554,737)   (2,247,246)
           
Cash flows from investing activities:          
Proceeds received from withdrawal of long-term investment   -    159,314 
Purchase of plant and equipment   (628,508)   (539,320)
Purchase of land use rights   (809,103)   (89,809)
Proceeds from sale of plant and equipment   251,670    176,042 
Net cash used in investing activities   (1,185,941)   (293,773)
           
Cash flows from financing activities:          
Payment of other receivables   -    (4,779,429)
Proceeds from other payables   -    4,492,664 
Proceeds from loans to related parties, employees, and other Individuals   (345,252)   - 
Payment of loans to related parties, employees, and other individuals   3,273,029    (1,958,474)
Proceeds from short-term borrowings   6,540,650    6,372,572 
Payment of short-term borrowings   (6,540,650)   (1,593,143)
Payment of long-term borrowings   -    (78,064)
Net cash provided by financing activities   2,927,777    2,456,126
           
Net increase (decrease) in cash   187,099    (84,893)
           
Effect of exchange rate changes   241,054   16,762 
           
Cash at beginning of period   164,484    380,579 
           
Cash at end of period  $592,637   $312,448 
           
Noncash financing and investing activities:          
Reduction of accounts payable through disposal of plant and equipment  $152,289   $220,294 
Reduction of accounts receivable through addition of plant and equipment  $-   $135,417 
           
Supplemental disclosure of cash flow information:          
Interest paid  $894,970   $951,635 
Income taxes paid  $23,354   $41,159 

 

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

 

4
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1. Organization and description of business

 

Annec Green Refractory Corporation (“Annec”) was incorporated in the State of Delaware on April 29, 2010. Annec through its 100% owned subsidiaries and its variable interest entity (“VIE”) (collectively, and together with Annec hereinafter defined, the “Company”), designs, develops, produces, and markets refractory products. In addition, through the VIE, the Company provides integrated stove design, turnkey contracting, refractory production and sales.

 

Annec has a wholly-owned subsidiary in the British Virgin Islands, China Green Refractories Limited (“China Green”), which is a holding company with no operations. China Green has a wholly-owned subsidiary in Hong Kong, Alex Industrial Investment Limited (“Alex Industrial”) which owns Zhengzhou Annec Industrial Co., Ltd. (“Zhengzhou Annec”), a wholly foreign owned subsidiary in China. Zhengzhou Annec has contractual agreements with Annec (Beijing) Engineering Technology Co., Ltd. (“Beijing Annec”), an entity which is considered as a VIE.

 

2.      Basis of Presentation and Description of the Company

 

The accompanying consolidated financial statements of Annec Green Refractories Corporation (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). In management’s opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included. 

 

The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto, together with management’s discussion and analysis of the Company’s financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results for the year ending December 31, 2014 or any interim period. The accompanying consolidated financial statements include all wholly-owned subsidiaries and all subsidiaries over which the Company exercises control to direct activities significantly impacting financial performance. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified in the consolidated financial statements to conform to the current period presentation.

 

Zhengzhou Annec is principally engaged in the manufacture, design, development, sale, installation, and maintenance of refractory materials and products. Zhengzhou Annec’s primary products are heat shock bricks for internal, top, and external combustion hot air stoves, high alumina brick with heat shock, cordierite-mullite bricks, non-recasting, soft and high-heating andalusite brick, and silica bricks with high thermal conductivity and high density. Zhengzhou Annec produces refractory products through three factories in the Henan Province, PRC: Fuliang, Fuhua, and Fugang.

 

5
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Beijing Annec’s primary business is to design and build blast furnaces and hot air stoves. Beijing Annec acts as a general contractor and has outside construction companies serve as sub-contractors. Beijing Annec also derives revenue from technology research and development, graphic design, production, engineering and technical consulting, and sales of building materials.

 

3. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. Significant estimates and assumptions are used for, but not limited to: (1) allowance for doubtful accounts, (2) economic lives of property, plant, and equipment, (3) asset impairments, (4) percentage of completion on construction projects, and (5) contingency reserves. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on our operating results.

 

Concentration of Credit and Other Risks

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, restricted cash, bank notes receivable, accounts receivable and other receivables. The Company holds all its bank deposits with banks in China. In China, there is no equivalent federal deposit insurance as in the United States; as such, these amounts held in banks in China are not insured. The Company has not experienced any losses in such bank accounts through March 31, 2014. In an effort to mitigate any potential risk, the Company periodically evaluates the credit quality of the financial institutions which hold the bank deposits and the Company holds its cash in multiple banks supported by the local and Central Government of the PRC.

 

The Company does not require collateral or other security to support the trade receivables. The Company is exposed to credit risk in the event of nonpayment by customers to the extent of amounts recorded on the balance sheet. One customer accounted for 20% and 23% of the trade receivable balance as of March 31, 2014 and December 31, 2013, respectively. An additional customer accounted for 10% and 13% of the trade receivables balance as of March 31, 2014 and December 31, 2013, respectively.

 

Two customers individually accounted for 24%, and 23% of the total revenue in the quarter ended March 31, 2014 and three customers individually accounted for 24%, 19%, and 12% of the total revenue in the quarter ended March 31, 2013, respectively.

 

6
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environment in the PRC. The Chinese Government controls its foreign currency reserves through restrictions on imports and conversion of Renminbi (“RMB”) into foreign currency. In July 2005, the Chinese Government adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate.” During January 2008 to March 2014, the exchange rate between RMB and US Dollars (“USD” or “$”) has fluctuated from $1.00 to RMB7.3141 and $1.00 to RMB6.1619, respectively. There can be no assurance that the exchange rate will remain stable. The Renminbi could appreciate or depreciate against the US Dollar. The Company’s financial condition and results of operations may also be affected by changes in the value of certain currencies other than the Renminbi in which its earnings and obligations are denominated.

 

Going Concern

 

The Company had accumulated deficit of $6.72 million as of March 31, 2014 and incurred net loss of $22.79 million and $6.72 million for the three months ended March 31, 2014 and 2013, respectively. In addition, the Company had negative working capital of $4,768,850 as of March 31, 2014. These conditions raise a substantial doubt as to whether the Company may continue as a going concern. The Company is seeking to obtain additional financing from local banks in the PRC, however, there is no guarantee the Company will be able to obtain the additional required funds on a timely basis or that funds will be available on terms acceptable to the Company. The Company will also seek to improve its cash flows from operations by implementing cost control measures and reducing inventory purchases.

 

Fair Value of Financial Instruments

 

Fair Value Measurements and Disclosures (ASC 820-10) include a fair value hierarchy that is intended to increase the consistency and comparability in fair value measurements and related disclosures., The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing an asset or liability based upon their own market assumptions. The fair value hierarchy consists of the following three levels: 

 

Level 1–inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date or other inputs that is observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 2–observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active.

 

Level 3–instrument valuations are obtained without observable market values and require a high-level of judgment to determine the fair value.

 

7
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

The Company’s financial instruments consist mainly of cash, restricted cash, bank notes receivable, other receivables, and debt obligations. Other receivable are reflected in the accompanying financial statements at historical cost, which approximates fair value due to the short-term nature of these instruments. Based on the borrowing rates currently available to the Company for loans and similar terms and average maturities, the fair value of debt obligations also approximates its carrying value due to the short-term nature of the instruments. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

The Company had no assets or liabilities measured at fair value and subject to the disclosure requirements based on the fair value hierarchy.

 

Foreign Currency Translation

 

The accompanying financial statements are presented in USD. The functional currency of our Company is the RMB, the official currency of the PRC. Capital accounts of the financial statements are translated into USD from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income and expenditures are translated at the average exchange rates for the quarter ended March 31, 2014 and 2013. Items in the Company’s consolidated statement of cash flows are translated using a weighted average exchange rate, which approximates the exchange rate in effect at the time of the cash flows. For all periods reported, there were no transactions outside the PRC; thus, all of our transactions are in RMB, our functional currency. Currency translation adjustments from translation to USD for financial reporting purposes are recorded in other comprehensive income (loss) as a component of equity.

 

A summary of the conversion rates for the periods presented is as follows:

 

   Three
Months Ended
     
   March 31,   December 31, 
   2014   2013   2013 
             
Period end RMB: USD exchange rate   6.1619    6.2666    6.1104 
Average RMB: USD exchange rate   6.1156    6.2769    6.1905 

 

Revenue Recognition

 

The Company’s principal revenue sources are from the sale of refractory materials and products and from sales generated from the designing and building of blast furnaces and hot-air stoves.

 

Zhengzhou Annec primarily generates revenue from the sale of a variety of refractory bricks and the sales from kits of pre-assembled hot-air ovens. Zhengzhou Annec recognizes such revenue when: (1) there is persuasive evidence of an arrangement; (2) customers have accepted receipt of the goods in accordance with the shipping terms; (3) the amount to be paid by the customer is fixed or determinable; and (4) collectability is reasonably assured. Zhengzhou Annec recognizes revenue from the sale of a kit when the kit has been delivered and accepted by the customer.

 

8
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Shipping and Handling Costs

 

Shipping and handling costs billed to customers are recorded net of the amount collected. Shipping and handling expense included in selling expenses amounted to $151,728 and $213,054 for the quarter ended March 31, 2014 and 2013.

 

Recent Accounting Pronouncements

 

The Company reviews new accounting standards as issued. Some of the accounting standards issued are effective after the end of the Company’s previous fiscal years, and therefore may be applicable to the Company. Management has not identified any standards that it believes will have a significant impact on the Company’s consolidated financial statements.

 

4. Accounts Receivable, net

 

The components of the Company’s net accounts receivable are as follows:

 

   March 31   December 31 
   2014   2013 
   (Unaudited)     
         
Accounts receivable  $33,011,611   $38,507,251 
Provision for bad debt   (10,364,004)   (2,074,919)
Accounts receivable, net  $22,647,607   $36,432,332 

 

5. Retentions Receivable, net and Long-term Retentions Receivable, net

 

The Company enters into sales contracts with customers that provide for a retention provision in that the customers can keep a portion of the payment, generally 10% of the contract price, until the stoves the Company built or supplied refractory materials for were proven to be of good quality. The retention period is usually one to two years from the day the stoves are placed into service.

 

9
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

The following table shows the components of retentions receivable from long-term contracts as of March 31, 2014 and December 31, 2013:

 

   March 31, 2014   December 31, 2013 
   (Unaudited)    
   Current   Long-term   Current   Long-term 
Chinese government or province owned customers:                
Amounts billed and due  $628,435   $321,292   $1,025,085   $1,868,211 
Amounts billed and not due   1,839,238    1,287,814    3,197,211    734,021 
    2,467,673    1,609,106    4,222,296    2,602,232 
Commercial customers:                    
Amount billed and due   1,293,062    950,672    1,446,511    1,235,410 
Amount billed and not due   1,809,264    386,472    4,254,919    365,754 
    3,102,326    1,337,144    5,701,430    1,601,164 
Total retentions receivable, net  $5,569,999   $2,946,250   $9,923,726   $4,203,396 

 

6. Advances to suppliers

 

The components of the Company’s advances to suppliers are as follows:

 

   March  31,   December 31, 
   2014   2013 
   (Unaudited)     
         
KuanCheng Ruifeng Construction Engineering Group Co., LTD  $16,229   $423,868 
Oriental Luyuan Energy Conservation and Environmental Protection Engineering Co., LTD   649,150    654,622 
TangshanRich District XinYi Steel Structure Building Engineering Co., LTD   878,083    1,571,092 
Other Small Suppliers   1,640,191    2,287,910 
Total  $3,183,653   $4,937,492 

 

10
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

7. Other Receivables

 

The components of the Company’s other receivables are as follows:

 

   March  31,   December 31, 
   2014   2013 
   (Unaudited)     
         
Other receivables–individuals and employees  $1,816,434   $878,379 
Other receivables–companies   465,989    893,548 
Security deposits   449,390    5,754,059 
Total other receivables  $2,731,813   $7,525,986 

 

The security deposits relate to a loan made to an employee in connection with the Company’s loan from the Bank of Zhengzhou. See Note 17.

 

8.  Inventories, net

 

The components of the Company’s inventories are as follows:

 

   March 31,   December 31, 
   2014   2013 
  (Unaudited)     
         
Raw materials  $3,032,721   $3,373,620 
Work in process   1,995,605    2,551,042 
Finished goods   21,703,886    22,372,610 
Inventories impairment   (7,093,787)   (1,852,408)
Total inventories, net  $19,638,425   $26,444,864 

 

11
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 9. Plant and Equipment, net

 

The components of the Company’s plant and equipment are as follows:

 

   March 31,   December 31, 
   2014   2013 
   (Unaudited)     
         
Plants and buildings  $15,365,258   $16,100,888 
Machinery and equipment   5,206,378    5,250,258 
Vehicles   2,126,967    2,352,731 
Others   504,786    510,031 
    23,203,389    24,213,908 
Less accumulated depreciation   (7,712,463)   (7,601,290)
Total plant and equipment, net   15,490,926   $16,612,618 

 

Depreciation was $422,435 and $452,941 for the three months ended March 31, 2014 and 2013, respectively. The Company recorded a loss on sale of property and equipment of $27,354 and $40,888 for the three months ended March 31, 2014 and 2013, respectively.

  

10.  Land Use Rights, net

 

The components of the Company’s land use rights are as follows:

 

   Estimated Remaining   March 31,   December 31, 
   Life   2014   2013 
      (Unaudited)     
             
Land use rights     45.60 years   $3,309,592   $2,527,694 
Less accumulated amortization        (245,203)   (232,705)
Total land use rights, net       $3,064,389   $2,294,989 

 

Amortization was $14,552 and $11,721 for the three months ended March 31, 2014 and 2013, respectively. The difference between the amortization expense and accumulated amortization is due to exchange rate fluctuations.

 

12
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Amortization of land use rights attributable to future periods is as follows:

 

12 months ending March 31,    
2015  $67,202 
2016   67,202 
2017   67,202 
2018   67,202 
Thereafter   2,795,581 
   $3,064,389 

 

13
 

  

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

11. Short-Term Loans

 

The components of the Company’s short-term loans are as follows:

 

Lender  Secured by  Starting  Maturity/ Expiration Date  Interest  Rates   Outstanding  as of March 31, 2014 (Unaudited)   Outstanding  as of  December 31, 2013 
Agricultural credit union  Third parties  2014.01.23  2014.01.18   9.72%  $1,622,876   $1,636,554 
Agricultural credit union  Machinery and equipment  2013.08.30  2014.08.19   10.26%   1,460,588    1,472,899 
Shanghai Pudong Development Bank  Office building and land use rights  2013.09.27  2014.09.26   6.00%   3,245,752    3,273,108 
Shanghai Pudong Development Bank  Office building and land use rights  2013.10.24  2014.10.09   6.00%   1,622,876    1,636,554 
China Citic Bank  Third parties  2013.06.26  2014.06.26   6.94%   1,622,876    1,636,554 
China Citic Bank  Fuchao Li  2013.10.26  2014.10.23   7.22%   811,438    818,277 
LuoYang Bank  Third parties  2013.10.16  2014.04.15   7.20%   3,245,752    3,273,108 
LuoYang Bank  Deposit  2013.11.25  2014.11.25   6.00%   3,051,007    3,076,722 
China Guangfa bank  Third parties  2013.09.30  2014.09.30   7.20%   1,622,876    1,636,554 
China Merchants Bank  Third parties  2013.09.26  2014.09.26   7.20%   1,622,876    1,636,554 
Zhengzhou Bank  Third parties  2014.02.08  2015.02.08   7.20%   4,868,628    4,909,662 
Shanghai Pudong Development Bank  Office building  2010.12.13  2015.12.13   7.15%   318,085    320,765 
                         
                 $25,115,630   $25,327,311 

  

14
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

12.  Bank Notes Payable

 

Bank notes payable represent bank notes paid to the Company’s vendors for purchase of inventory. At December 31, 2013, the Company had bank notes payable with two different banks with maturity dates of nine months. All are noninterest-bearing notes. The notes payable require cash to be held in reserve of 100% of the total outstanding notes payable balance. Cash held by the bank as collateral is included in restricted cash.

 

13. Advances from customers

 

The Company’s customer deposits consists of amounts payable to various customers for deposits and prepayments received for products to be delivered or services to be performed.

 

14. Other payables

 

The components of other payables are as follows:

   March 31,   December 31, 
   2014   2013 
   (Unaudited)     
         
Unpaid operating expenses  $1,304,930   $641,448 
Hiring deposits and Unreimbursed expenses payable to employees   1,578,563    2,197,817 
Loans payable to others   3,001,652    5,238,610 
Total  $5,885,145   $8,077,875 

 

The loans payable to others are interest free loans from non-executive employees. Such loans are payable on demand and are not collateralized.

 

15. Deferred income

 

Deferred income refers to revenue or income not yet recognized. The components of the Company’s deferred income are as follows:

 

   March 31,   December 31, 
   2014   2013 
   (Unaudited)     
         
Government incentive for land use rights  $1,671,617   $1,694,884 
Government incentive for energy savings and emission reduction   827,707    870,974 
Government allowance   42,959    57,761 
Total  $2,542,283   $2,623,619 
15
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

16. Long-Term Loan

 

The long-term loan due on December 13, 2015, bears interest at 7.15%, and is secured by one of the Company’s office buildings.

 

17. Related Party Transactions

 

At March 31, 2014 and December 31, 2013, the Company had loans payable to the chairman (Fuchao Li), and a minority shareholder (Yin ling Fan) of the Company. The Company and these parties have not signed notes, there are no specific due dates, and no interest is paid on the loans. Money is transferred between these parties and the Company mainly for cash flow purposes. The amounts loaned and borrowed are short-term in nature and the balances at both year-periods are considered at the fair market value of the amounts owed. The following amounts were payable to the owners as of March 31, 2014 and December 31, 2013:

 

   March 31,   December 31, 
   2014   2013 
   (Unaudited)     
         
Jing Xu  $-   $7,444 
Hongzhe Zhang   -    22,436 
Fuchao Li   33,583    4,615,083 
Yinling Fan   160,665    166,929 
   $194,248   $4,811,892 

 

In February 2013, the Company borrowed $4,868,628 (RMB30 million) from the Bank of Zhengzhou. Similar to other short-term bank loans of the Company, this loan was guaranteed by an unrelated third party (this loan amount is included in the loans guaranteed by third parties in Note 19).

 

As a condition to grant the aforementioned loan to the Company, the Bank of Zhengzhou requested that the chairman of the Company also borrow funds from the bank in a separate transaction and that such borrowings shall be collateralized by a cash security deposit to be held in the Bank of Zhengzhou. In order to provide the cash security deposit required by the chairman’s loan from the Bank of Zhengzhou, the Company loaned an employee $4,868,628 (RMB 30 million) and the employee established the cash security deposit with the Bank of Zhengzhou, with an interest rate at 3.3% for one year. This receivable is classified as a component of “Other Receivables – individuals and employees”. The Company’s chairman borrowed $4,576,510 (RMB 28.2 million) from the Bank of Zhengzhou under a one year loan agreement with interest at 5.4% and then loaned this amount to the Company. This loan from the chairman of the Company is included in “Other payable” on the balance sheet. The Company, the chairman and the employee have agreed that: (1) the Company has the rights to the cash security deposit made by the employee and any interest earned on such deposit (upon the Company receiving the security deposit from the Bank of Zhengzhou, all obligations of the employee to the Company shall be discharged), and (2) the Company is obligated to repay the $4,576,510 (RMB 28.2 million) loan and interest expense on behalf of the chairman to the Bank of Zhengzhou. Upon repayment of the chairman’s loan to the Bank of Zhengzhou, all of the Company’s obligations to the chairman shall be discharged. In March of 2014, the cash security deposit matured and the Bank of Zhengzhou repaid the deposit back to the employee who, per the prior arrangement, assigned the proceeds to the Company. Using the proceeds, the Company repaid the loan from chairman which the chairman in turn repaid his loan from the Bank of Zhengzhou to conclude this transaction. The Company received all interests related to this series of transactions.

 

16
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

18. Income Taxes

 

The Company is subject to applicable local tax statutes and is governed by the Income Tax Law of the PRC and local income tax laws (the “PRC Income Tax Law”).

 

Zhengzhou Annec qualified as a hi-tech corporation and was accorded certain tax incentives for said designation. Accordingly, Zhengzhou Annec was subject to tax at a statutory rate of 15% for the three months ended March 31, 2014 and for the year ended December 31, 2013. Zhengzhou Annec expects that after October 28, 2014 it will become subject to a rate of 25% unless Zhengzhou Annec applies for and receives a further tax holiday for the succeeding five years. The tax savings due to this tax holiday is approximately $0 and $0 for the three month ended March 31, 2014 and 2013, respectively. The high-tech enterprises certificate is valid until October 2014. Zhengzhou Annec has already applied for a new high-tech enterprise certificate which the revenue bureau has reviewed and approved. Once the current certificate expires, Zhengzhou Annec will receive the new certificate, and the statutory rate will be reduced to 15%.

 

Beijing Annec is subject to taxes at a statutory rate of 25%. 

 

 19. Commitments and Contingencies

 

Third Party Guarantees

 

During the three months ended March 31, 2014 and the year ended December 31, 2013, the Company had agreements with unrelated third-party entities in which the Company has guaranteed certain debt of these entities, and these entities have guaranteed certain debt of the Company. As of March 31, 2014 and December 31, 2013, the Company was a debt guarantor to three third-party entities. The maximum guaranteed amount is $27,751,181 as of March 31, 2014. The total guaranteed outstanding borrowings by these parties were $23,369,415 as of March 31, 2014. From April 16, 2014 to February 8, 2015, Zhengzhou Annec paid and will continue to pay the debt guaranteed by the third parties of $17,040,199.

 

These same parties disclosed above also act as debt guarantors on certain of the Company’s debt with a maximum guaranteed amount of $26,452,880 as of March 31, 2014. The Company’s loans guaranteed by these parties are $17,040,199 as of March 31, 2014. The Company has not historically incurred any losses due to such debt guarantees, and the Company has determined that the impact of these guarantees to the Company is not material. 

 

17
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Leases

 

The Company has non-cancelable operating lease agreements principally for its office and factory facilities. These leases have terms expiring in 2015 and April 2014, and are renewable subject to negotiation.

 

During 2010, the Company entered into operating lease agreements with several county governments of Xinmi City to lease three parcels of land where the Company’s factories are located. These lease terms are for fifty years through August 2059. The rent for the land is approximately $54,332 per year.

 

Total rent expense for the leases as mentioned above was $97,823 and $67,533 for the three months ended March 31, 2014 and 2013, respectively. A summary of future minimum lease payments as of March 31, 2014 is presented below.

 

   Minimum 
   Lease 
   Payments 
12 months ending March 31,    
2015  $81,155 
2016   54,107 
2017   54,107 
2018   54,107 
Thereafter   2,297,266 
   $2,540,742 

 

20.  Segment Reporting

 

The Company has two reportable segments: Zhengzhou Annec and Beijing Annec. These segments operate in different geographical areas of China and employ separate management and sales teams. The Zhengzhou Annec segment primarily manufactures and sells a variety of refractory bricks and kits of pre-assembled hot-air ovens. In 2011, Zhengzhou Annec began to enter into contracts to design and build furnaces and stoves. These projects are generally for a term of one year or less. The Beijing Annec segment designs and builds blast furnaces and hot-air stoves on a contract basis and uses subcontractors throughout the construction process. Beijing Annec’s contracts are generally for projects with a term of one year or longer. The Beijing Annec segment purchases substantially all of its bricks and related products from Zhengzhou Annec. In addition, Beijing Annec also sells a variety of machines and equipment which are required as part of the entire blast furnace and hot-air stove package. The Company purchases these machines and equipment from outside vendors and generally sells them at cost plus a small mark-up.

 

18
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

All revenues are related to end customers in China.

 

Information on reportable segments for the three months ended March 31, 2014 and 2013 is as follows:

 

   Three Months Ended
March 31
 
   2014   2013 
   (Unaudited)   (Unaudited) 
         
Revenues:        
Zhengzhou Annec  $5,622,958   $3,619,415 
Beijing Annec   -    - 
Total   5,622,958    3,619,415 
           
Cost of revenues:          
Zhengzhou Annec   2,858,269    2,294,112 
Beijing Annec   -    - 
Total   2,858,269    2,294,112 
           
Operating expenses:          
Zhengzhou Annec   15,951,187    2,560,633 
Beijing Annec   8,653,357    114,970 
Total   24,604,544    2,675,603 
           
(Loss) income from operations  $(21,839,855)  $(1,350,300)

 

   Three Months Ended
March 31
 
   2014   2013 
   (Unaudited)   (Unaudited) 
Depreciation expense        
Zhengzhou Annec  $390,515   $404,819 
Beijing Annec   46,472    48,122 
           
Total  $436,987   $452,941 

 

19
 

 

ANNEC GREEN REFRACTORIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

  

   March 31,   December 31, 
   2014   2013 
   (Unaudited)     
         
Plant and equipment, net:        
Zhengzhou Annec  $12,178,275   $13,226,950 
Beijing Annec   3,312,651    3,385,668 
           
Total  $15,490,926   $16,612,618 

  

   Three Months Ended March 31,   December 31, 
   2014   2013 
   (Unaudited)     
         
Provision for bad debts:        
Zhengzhou Annec  $2,736,762   $1,760,760 
Beijing Annec   7,637,102    314,159 
           
Total  $10,364,004   $2,074,919 

  

20
 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are a refractory and production-based company that designs, develops, produces, and markets refractory products in the PRC. In addition, through our VIE, Beijing Annec, we provide integrated stove design, turnkey contracting, refractory production and sales.

 

Through our subsidiary, Zhengzhou Annec, we are primarily engaged in the manufacture, design, development, sale, installation, and maintenance of refractory materials and products. Zhengzhou Annec’s primary products are heat shock bricks for internal, top, and external combustion hot air stoves, high alumina brick with heat shock, cordierite-mullite bricks, no recasting, soft and high-heating andalusite brick, and silica bricks with high thermal conductivity and high density. Zhengzhou Annec produces refractory products through three factories in the Henan Province, PRC: Fuliang, Fuhua, and Fugang. Through a contractual agreement, between Zhengzhou Annec and Beijing Annec, we design and build blast furnaces and hot air stoves, and act as a general contractor working with outside construction companies which serve as subcontractors. Beijing Annec also derives revenue from technology research and development, graphic design, production, engineering and technical consulting, and sales of building materials.

 

We generate revenues from the sale of our refractory products, which consists of bricks of various size, shape, and construction material, and from services related to the design, engineering and build out of stoves.

 

Summary of Critical Accounting Policies and Estimates

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. Significant estimates and assumptions are used for, but not limited to: (1) allowance for doubtful accounts, (2) economic lives of property, plant, and equipment, (3) asset impairments, (4) percentage of completion on construction projects, and (5) contingency reserves. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on our operating results.

 

There are several accounting policies that involve management’s judgments and estimates and are critical to understanding our historical and future performance, as these policies and estimates affect the reported amounts of revenue and other significant areas in our reported financial statements.

 

21
 

 

Please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” located within our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on June 13, 2014 for further discussion of our “Critical Accounting Policies.”

 

Results of Operations

 

For the Three Months Ended March 31, 2014 and 2013 

 

   Three Months Ended
March 31
 
   2014   2013 
Revenues  $5,6,22,958   $3,619,415 
Cost of revenues   2,858,269    2,294,112 
Gross profit   2,764,689    1,325,303 
Operating expenses          
Sales and marketing   1,412,388    1,103,256 
General and administrative   23,192,156    1,572,347 
Total operating expenses   24,604,544    2,675,603 
Loss from operations   (21,839,855)   (1,350,300)
Other expense   (925,662)   (804,918)
Loss before provision for income taxes   (22,765,517)   (2,155,218)
Provision for income taxes   23,354    6,418 
Net loss  $(22,788,871)  $(2,161,636)

 

Revenues

 

We operate in two reportable segments, Zhengzhou Annec and Beijing Annec: (1) Zhengzhou Annec segment manufactures and sells a variety of refractory bricks and kits of pre-assembled hot-air ovens, and provides EPC services for blast furnace and hot blast stove; and (2) Beijing Annec segment designs and builds blast furnaces and hot-air stoves on a contract basis and uses subcontractors throughout the construction process. In addition, Beijing Annec also sells a variety of machines and equipment which are required as part of the entire blast furnace and hot-air stove package. Beijing Annec purchases these machines and equipment from outside vendors and generally sell them at cost plus a small mark-up. 

 

Segments  Three Months Ended March 31,  2014   % of
Revenue
   Three Months Ended March 31,
2013
   % of
Revenue
 
Zhengzhou Annec  $5,622,958    100%  $3,619,415    100%
Beijing Annec   -    -    -    - 
Total  $5,622,958    100%  $3,619,415    100%

 

22
 

 

Revenues for the three months ended March 31, 2014 were $5,622,958 compared to $ 3,619,415 for the three months ended March 31, 2013. Revenues for the three months ended March 31, 2013 increased by $2,003,543 or 55%, primarily as a result of an increase in sales of new orders for Zhengzhou Annec. Beijing Annec did not generate any revenue for the three months ended March 31, 2014 and 2013 as there was no order for its technology services or product from iron and steel manufacturers. The Company decided to develop new product and markets to improve results of operation, such as tracking and developing markets of functional materials and environment-friendly products, development of the international market. In addition, the Company also intends to maintain contact with current customers, and improve quantity of shipment according to the customer’s payment ability. The following table shows product sales of Zhengzhou Annec from existing and new customers during the three months ended March 31, 2014, and 2013:

 

Type of Customers’ Sales  Amount
2014
  

Amount

2013

 
         
Existing customers  $4,428,017   $2,270,609 
New customers   1,194,941    1,348,806 
Total  $5,622,958   $3,619,415 

 

Cost of Revenue

 

Cost of revenue was $2,858,269 and $2,294,112 for the three months ended March 31, 2014 and 2013, respectively. Cost of revenue for the three months ended March 31, 2014 increased by $564,157, or 25%. Stated as a percentage of revenues, the cost of revenue for the three months ended March 31, 2014 was 51% and for the corresponding period of 2013 was 63%.  The increase in cost of revenue of Zhengzhou Annec was primarily attributable to the change of the structure of the product.

 

Operating Expenses

 

General and Administrative. General and administrative (“G&A”) expenses include payroll and related employee benefits, and other headcount-related costs associated with facilities, and other administrative expenses. G&A expenses were $23,192,156 and $1,572,347 for the three months ended March 31, 2014 and 2013, respectively. The increase of $21,619,809, or 1375%, was mainly due to the increase of provision for bad debts. Our provision for bad debts for the three months ended March 31, 2014 was significantly higher than what we generally recognize due to the Company’s assessment of the generally weak economic and market environment for steel manufacturers and the resulting impacts on our collection risk.

 

Sales and Marketing Expenses. Sales and marketing expenses include payroll, employee benefits, and other headcount-related costs associated with sales and marketing personnel and travel, advertising, promotions, trade shows, seminars, and other programs. Sales and marketing expenses were $1,412,388 and $1,103,256 for the three months ended March 31, 2014 and 2013, respectively. The reduce of $309,132, or 28%, in sales and marketing expense was due to decrease in revenues and variable cost like commission, shipping expense, packaging expense and traveling expense.

 

23
 

 

Other Expense, net. The total other expense was $925,662 and $804,918 for the three months ended March 31, 2014 and 2013, respectively. The increase of $120744 or 15%, in total other expense was primarily due to increase in bank loan interest.

 

 

Items  2014   2013   Change 
Other income (expense)            
Interest income  $119,168   $129,418    8%
Interest expense   (1,124,777)   (1,005,185)   12%
Other income, net   79,947    70,849    13%
Total Other Expense  $(925,662)  $(804,918)   15%

 

Liquidity and Capital Resources

 

As of March 31, 2014, we had cash and restricted cash of $5,255,619 and total current assets of $60,729,373. As of December 31, 2013, we had cash and restricted cash of $6,656,752 and total current assets of $92,556,114. Restricted cash is used to secure bank notes payable and short-term loans.

 

As of March 31, 2014, we had accounts receivable of $22,647,607 representing 37% of our total current assets compared to accounts receivable of $36,432,332, representing 39% of our total current assets as of December 31, 2013. Accounts receivable had decreased by $13,784,725 or 38% because of faster collection of accounts receivable.

 

Our total current liabilities as of March 31, 2014 were $65,498,223 compared to $75,278,701 as of December 31, 2013. The decrease of $9,780,478 or 13% was a result of payment of bank note borrowings.

 

We generally require 30% of contract price as advanced payment after we sign contract which is used to buy materials and for production. 30% of contract price will be collected when we finish production and inspected by customer. These two 30% pieces of the contract price are the main components of our advances from customer. 30% of contract price will be received after the refractory installation is finished and tested by client. The final installment of 10% is due one or two years after the stove is used to allow for quality guarantee. The last 30% and 10% are the main components of our accounts receivable. As our business is contract-based sales, differentiations exist between contracts signed by different customer.

 

As of March 31, 2014, we had working capital of ($4,768,850) compared to $17,277,413 as of December 31, 2013. As discussed further below, we do not believe that our current cash resources are sufficient to meet the Company’s anticipated needs during the next twelve months, and that additional financing is required to support current operations. We need improve our cash support, we must obtain additional short-term and long term-loans from bank and/or- raise additional capital by the sale of our securities in order to implement our strategic growth plans which include increasing our product line, promoting our design and engineering services, improving our products, and the potential acquisitions of mines and other refractory companies.

 

24
 

 

Although we continue to explore opportunities for raising capital, we have no funding commitments in place at this time and we can give no assurance that such capital will be available on favorable terms, or at all. Even if we are successful in raising additional funds, there is no assurance regarding the terms of any additional investment and any such investment or other strategic alternative would likely substantially dilute or eliminate the interests of our shareholders.

 

Below is a summary of our cash flow:

 

Net Cash used in Operating Activities.

 

For the three months ended March 31, 2014, net cash used in operating activities was $1,554,737 compared to $2,247,246 for the three months ended March 31, 2013. The decrease in net cash used in operating activities for the three months ended March 31, 2014 was primarily due to changes in net income, restricted cash, bank notes receivable, prepaid expenses and deposits, accounts receivable, retentions receivable and long-term retentions receivable, other receivables, inventories, bank notes payable, accounts payable and accrued expenses, and other payables as set forth below:

 

Items 

2014

($)

  

2013

($)

   Change
($)
   Percentage 
Net Loss   (22,788,871)   (2,161,636)   (20,627,235)   954%
Restricted cash   1,788,463    (426,973)   2,215,436    (519)%
Bank notes receivable   (1,367,375)   998,276    (2,365,651)   (237)%
Accounts receivable, retentions receivable, and long term retentions receivable   6,372,217    9,665,625    (3,293,408)   (34)%
Prepaid expenses and deposits   1,725,538    2,174,744    (449,206)   (21)%
Other receivables   5,094,124    (1,056,707)   6,150,831    (582)%
Inventories   (512,219)   (5,192,155)   4,679,936    (90)%
Bank notes payable   (1,635,163)   238,971    (1,874,134)   (784)%
Accounts payable and accrued expenses   (2,208,424)   (5,973,479)   3,765,055    (63)%
Other payables   (10,071,549)   (237,923)   (9,833,626)   4133%

 

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Net Cash Used in Investing Activities.  

 

For the three months ended March 31, 2014, net cash used in investing activities was $1,185,941 compared to $293,773 for the three months ended March 31, 2013. The increase of net cash used in investment activities for the three months ended March 31, 2014 was primarily due to the purchase of plant, equipment and land use right.

 

Items  2014
($)
   2013
($)
   Change
($)
   Percentage 
Purchase of plant and equipment   (628,508)   (539,320)   (89,188)   17%
Purchase of land use rights   (809,103)   (89,809)   (719,294)   801%

 

Net Cash Provided by Financing Activities.  

 

For the three months ended March 31, 2014, net cash provided by financing activities was $2,927,777, compared to $2,456,126 in net cash provided by financing activities for the three months ended March 31, 2013. The increase of the net cash provided by financing activities was primarily due to proceeds from loans to related parties, employees and other individuals.

 

Type of Proceeds  2014
($)
   2013
($)
   Increase/ (Decrease)
($)
   Percentage 
Proceeds from loans to related parties, employees and other individuals   3,273,029    -    3,273,029    100%

 

Loan Facilities

 

In China, banks usually do not provide long term loans to businesses. Most loans are short term loans (12 months or less). All of our loans but one with Chinese banks is within twelve months. As such, each year we repay our loans and/or apply for new loans with our banks or with other banks for working capital needs. At March 31, 2014, we borrowed $25,115,630 from various short-term bank loans for the working capital needs. All of our bank borrowings are secured by our land and buildings and/or guaranteed by third parties. As of March 31, 2014, the Company and its subsidiaries have the following short-term loan facilities with the following terms:

 

In February 2013, the Company borrowed $4,868,628 (RMB30 million) from the Bank of Zhengzhou. Similar to other short-term bank loans of the Company, this loan was guaranteed by an unrelated third party (this loan amount is included in the loans guaranteed by third parties in Note 19). As a condition to grant the aforementioned loan to the Company, the Bank of Zhengzhou requested that the chairman of the Company also borrow funds from the bank in a separate transaction and that such borrowings shall be collateralized by a cash security deposit to be held in the Bank of Zhengzhou. In order to provide the cash security deposit required by the chairman’s loan from the Bank of Zhengzhou, the Company loaned an employee $4,868,628 (RMB 30 million) and the employee established the cash security deposit with the Bank of Zhengzhou, with an interest rate at 3.3% for one year. This receivable is classified as a component of “Other Receivables – individuals and employees”. The Company’s chairman borrowed $4,576,510 (RMB 28.2 million) from the Bank of Zhengzhou under a one year loan agreement with interest at 5.4% and then loaned this amount to the Company. This loan from the chairman of the Company is included in “Other payables” on the balance sheet. The Company, the chairman and the employee have agreed that: (1) the Company has the rights to the cash security deposit made by the employee and any interest earned on such deposit (upon the Company receiving the security deposit from the Bank of Zhengzhou, all obligations of the employee to the Company shall be discharged), and (2) the Company is obligated to repay the $4,576,510 (RMB 28.2 million) loan and interest expense on behalf of the chairman to the Bank of Zhengzhou. Upon repayment of the chairman’s loan to the Bank of Zhengzhou, all of the Company’s obligations to the chairman shall be discharged. In March of 2014, the cash security deposit matured and the Bank of Zhengzhou repaid the deposit back to the employee who, per the prior arrangement, assigned the proceeds to the Company. Using the proceeds, the Company repaid the loan from chairman which the chairman in turn repaid his loan from the Bank of Zhengzhou to conclude this transaction. The Company received all interests related to this series of transactions.

 

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In February 2014, the Company borrowed $4,873,928 (RMB30 million) from the Bank of Zhengzhou. Similar to other short-term bank loans of the Company, this loan will be guaranteed by an unrelated third party.

 

Lender  Secured  Duration  Outstanding as of
March 31,
2014
   Interest
rates
 
Agricultural credit union  By third parties  1 year  $1,622,876    9.720%
Agricultural credit union  Machinery and equipment  1 year   1,460,588    12.312%
Shanghai Pudong Development Bank  Office building and land use rights  1 year   3,245,752    6.600%
Shanghai Pudong Development Bank  By third parties and Fuchao Li  1 year   1,622,876    6.600%
Shanghai Pudong Development Bank  Office building  1 year   318,085    7.152%
China Citic Bank  By third parties, Beijing Annec and Alex Industrial  1 year   1,622,876    6.941%
China Citic Bank  By Third parties, Beijing Annec and Alex Industrial  1 year   811,438    7.216%
China Guangfa Bank  By third parties  1 year   1,622,876    7.200%
China Merchants Bank  By third parties  1 year   1,622,876    7.200%
LuoYang Bank  By deposit  1 year   3,245,752    6.000%
LuoYang Bank  By third parties  1 year   3,051,007    7.200%
Bank of Zhengzhou  By third parties  1 year   4,868,628    7.200%
   Total     $25,115,630      

 

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Off-Balance Sheet Arrangements

 

Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

 

Any obligation under certain guarantee contracts;
Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;
Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in stockholder’s equity in our statement of financial position; and
Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

 

In China, because the bank lending system is still relatively new, it is common practice for companies to enter into cross-guarantee arrangements in order to secure lines of credit with banks. During three months ended March 31,2014 and the year ended December 31, 2013, the Company had agreements with third-party entities in which the Company has guaranteed certain debt of these entities, and these entities have guaranteed certain debt of the Company. As of March 31, 2014 and December 31, 2013, the Company was a debt guarantor to three third-party entities. The maximum guaranteed amount is approximately $25,751,181 as of March 31, 2014. The total guaranteed outstanding borrowings by these parties are approximately $23,369,415 as of March 31, 2014. All of the guarantee agreements are for debt with maturities of one year or less, and mature through March 31, 2014. 

 

These same parties disclosed above also act as debt guarantors on certain of the Company’s debt with a maximum guaranteed amount of approximately $26,452,880 as of March 31, 2014. The Company’s loans guaranteed by these parties are approximately $17,040,199 as of March 31, 2014. The Company has not historically incurred any losses due to such debt guarantees, and the Company has determined that the fair value of the guarantees is not material.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not Applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of the end of the period covered by this report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, relating to the Company, including our consolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared.

 

Based on the management's assessment and review of our financial statements and results for the three months ended March 31, 2014, we have concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and regulations.

 

Changes in Internal Controls over Financial Reporting

 

There have been no material changes in our internal controls over financial reporting that occurred during the period covered by this quarterly report, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We intend to continue to devote resources to remediating, improving and documenting our internal controls over financial reporting, including recruiting a new chief financial officer with US GAAP and SEC reporting experience, additional accounting and finance staff, and consultants to assist with these functions.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We may be involved from time to time in ordinary litigation, negotiation and settlement matters that will not have a material effect on our operations or finances.  We are not aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material impact on our operations or finances.

 

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Item 1A. Risk Factors

 

Not Applicable

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit No.   Description
     
31.1   Certification of Officers pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1   Certification of Officers pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS   XBRL Instance Document (1)
101.SCH   XBRL Taxonomy Extension Schema (1)
101.CAL   XBRL Taxonomy Extension Calculation Linkbase (1)
101.DEF   XBRL Taxonomy Extension Definition Linkbase (1)
101.LAB   XBRL Taxonomy Extension Label Linkbase (1)
101.FRE   XBRL Taxonomy Extension Presentation Linkbase (1)

 

 

  *   Filed here with.
  (1)   XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.  

  

30
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ANNEC GREEN REFRACTORIES CORPORATION
   
Dated: November 14, 2014  /s/ LI Jiantao
  By: LI Jiantao
 

Its: Chief Executive Officer and

Chief Financial Officer

(Principal Executive Officer and

Principal Accounting Officer)

 

 

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