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EX-31.1 - EXHIBIT 31.1 - Annec Green Refractories Corpv318756_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Annec Green Refractories Corpv318756_ex32-1.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2012

 

¨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 x                           No ¨

 

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

Yes x 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  ¨

(Do not check if smaller reporting company)

Smaller reporting company    x

 

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

Yes ¨                           No x

 

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 x                          No ¨

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

As of August 7, 2012, 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   3
  Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011   3
  Condensed Consolidated Statements of Operations and Comprehensive loss for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)   4
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)   5
  Notes to Condensed Consolidated Financial Statements (Unaudited)   6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   25
Item 3. Quantitative and Qualitative Disclosures About Market Risk   33
Item 4. Controls and Procedures   34
       
PART II – OTHER INFORMATION    
Item 1. Legal Proceedings   34
Item 1A. Risk Factors   34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   34
Item 3. Defaults Upon Senior Securities   35
Item 4. Mine Safety Disclosures   35
Item 5. Other Information   35
Item 6. Exhibits   35
Signature Page   36

 

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”, “our” and the Company refer to Annec Green Refractories Corporation and its consolidated subsidiaries.

 

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. 

 

2
 

 

ANNEC GREEN REFRACTORIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
ASSETS          
Current assets:          
Cash  $495,734   $343,028 
Restricted cash   7,199,599    1,571,166 
Bank notes receivable   250,930    2,026,885 
Accounts receivable (net of allowance of $480,000 and $792,000 at June 30, 2012 and December 31, 2011, respectively)   28,189,700    34,410,920 
Retentions receivable   10,391,329    11,570,262 
Prepaid expenses and deposits   7,404,143    10,515,009 
Other receivables   5,048,662    3,815,159 
Inventories   35,983,259    34,418,964 
Total current assets   94,963,356    98,671,393 
Long-term retentions receivable   4,775,623    4,926,856 
Deposits for capital expenditure   677,293    493,402 
Plant and equipment, net   16,610,103    16,480,469 
Land use rights, net   2,217,521    2,225,555 
Long-term investment   158,507    157,117 
           
Total assets  $119,402,403   $122,954,792 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Short-term loans  $16,462,536   $15,218,314 
Bank notes payable   6,023,266    1,571,166 
Accounts payable and accrued expenses   16,403,616    19,315,558 
Advances from customers   25,757,525    29,726,898 
Salaries payable   681,460    530,219 
Taxes payable   2,406,894    3,301,944 
Related party payables   682,753    764,461 
Loans payable to employees   2,111,977    1,619,827 
Loans payable to other individuals   4,478,140    6,481,374 
Other payable   2,431,041    3,680,223 
Total current liabilities   77,439,208    82,209,984 
Deferred income   2,749,369    2,812,556 
Long-term loans   776,684    923,846 
           
Total liabilities   80,965,261    85,946,386 
Commitments and contingencies (Note 13)          
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 issued and outstanding at June 30, 2012 and December 31, 2011   2,000    2,000 
Additional paid-in capital   4,046,992    4,046,992 
Retained earnings   32,413,924    31,311,752 
Accumulated other comprehensive income   1,974,226    1,647,662 
Total stockholders' equity   38,437,142    37,008,406 
Total liabilities and stockholders' equity  $119,402,403   $122,954,792 

 

See accompanying notes to the consolidated financial statements.

 

3
 

 

ANNEC GREEN REFRACTORIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2012   2011   2012   2011 
Revenues  $17,884,034   $24,271,294   $33,734,005   $37,329,323 
Cost of revenues   10,393,274    15,791,816    20,670,630    23,365,232 
Gross profit   7,490,760    8,479,478    13,063,375    13,964,091 
                     
Operating expenses:                    
Sales and marketing   3,219,462    4,540,047    6,380,751    6,637,934 
General and administrative   1,328,102    1,329,832    2,922,369    2,681,962 
Total operating expenses   4,547,564    5,869,879    9,303,120    9,319,896 
                     
Income from operations   2,943,196    2,609,599    3,760,255    4,644,195 
                     
Other income (expense):                    
Interest income   65,545    85,808    162,733    184,644 
Interest expense   (996,960)   (1,087,524)   (2,276,862)   (1,692,784)
Other (expense) income, net   (29,101)   105,213    (30,444)   241,763 
Total other expense   (960,516)   (896,503)   (2,144,573)   (1,266,377)
                     
Income before provision for income taxes   1,982,680    1,713,096    1,615,682    3,377,818 
Provision for income taxes   487,598    326,020    513,510    587,891 
Net income   1,495,082    1,387,076    1,102,172    2,789,927 
                     
Other comprehensive income:                    
Foreign currency translation adjustment   92,209    358,179    326,564    518,595 
Comprehensive income  $1,587,291   $1,745,255   $1,428,736   $3,308,522 
                     
Net income per share-basic and dilutive  $0.07   $0.07   $0.06   $0.14 
                     
Shares used in computing net income per share-basic and dilutive   19,995,701    19,995,701    19,995,701    19,995,701 

 

See accompanying notes to the consolidated financial statements.

 

4
 

 

ANNEC GREEN REFRACTORIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six months Ended June 30, 
   2012   2011 
Cash flows from operating activities:          
           
Net income  $1,102,172   $2,789,927 
Adjustments to reconcile net income to net cash (used in ) provided by operating activities:          
Depreciation and amortization   862,424    687,595 
Provision (recovery) for bad debt   (132,211)   216,518 
Loss (gain) on sale of plant and equipment   144,909    34,700 
Change in assets and liabilities:          
Restricted cash   (5,603,010)   (891,829)
Bank notes receivable   1,796,449    (386,224)
Accounts receivable, retentions, and long-term retentions receivable   7,570,001    (5,457,306)
Prepaid expenses and deposits   3,197,484    (6,376,591)
Other receivables   (1,193,542)   734,212 
Inventories   (1,256,072)   (4,115,567)
Bank notes payable   4,428,767    1,521,392 
Accounts payable and accrued expenses   (2,992,392)   6,590,848 
Advances from customers   (4,234,505)   4,634,280 
Salary payable   146,622    47,956 
Tax payable   (921,295)   (737,228)
Deferred income   (88,006)   (84,857)
Other payable   (1,279,733)   234,732 
Net cash provided by (used in) operating activities   1,548,062    (557,442)
           
Cash flows from investing activities:          
Deposits for capital expenditure   (179,336)   126,799 
Purchase of plant and equipment   (457,334)   (1,129,047)
Purchase of land use rights   -    - 
(Payments) Proceeds from sale of plant and equipment   (3,171)   79,411 
Net cash used in investing activities   (639,841)   (922,837)
           
Cash flows from financing activities:          
Payments of dividends   -    (700,731)
Proceeds from loans to related parties, employees, and other individuals, net of payments   (1,671,639)   933,845 
Proceeds from short-term borrowings   9,496,179    10,280,604 
Payment of short-term borrowings   (8,386,442)   (9,358,576)
Proceeds from issuance of long-term borrowings, net of payments   (155,212)   (149,659)
Net cash (used in) provided by financing activities   (717,114)   1,005,483 
           
Net (decrease) increase in cash  191,107   (474,796)
           
Effect of exchange rate changes   (38,401)   14,610 
Cash at beginning of period   343,028    1,504,971 
           
Cash at end of period  $495,734   $1,044,785 
           
Supplementary disclosure of cash flow information          
Noncash investing activities:          
Reduction of accounts payable through disposal of plant and equipment   85,695    42,302 
Reduction of accounts receivable through purchase of plant and equipment   548,527      
           
Cash paid during the period          
Interest   677,148    1,362,834 
Income taxes   356,811    420,887 

 

See accompanying notes to the consolidated financial statements.

 

5
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

1.Basis of Presentation and Description of the Company

 

The accompanying unaudited condensed consolidated financial statements of Annec Green Refractories Corporation (the Company) have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information in pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included. The financial information for December 31, 2011 has been derived from the consolidated audited financial statements included in our annual report filed on Form 10-K with the SEC for the year ended December 31, 2011.

 

The accompanying unaudited condensed 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which was filed with the Securities and Exchange Commission (SEC) on April 25, 2012. The results of operations for the six-month period ended June 30, 2012 are not necessarily indicative of the results for the year ending December 31, 2012 or any other interim period. The accompanying condensed consolidated financial statements include all wholly-owned subsidiaries and all subsidiaries over which the Company exercises the power and control to direct activities significantly impacting financial performance. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

On February 11, 2011, Annec Green Refractories Corporation, formerly E-Band Media, Inc. (“E-Band Media”) entered and closed a Share Exchange Agreement (“Share Exchange Agreement”), with certain shareholders and warrant holders, Dean Konstantine, Muzeyyen Balaban, Bernieta Masters, and Linda Masters, and with China Green Refractories Limited, a BVI corporation (“China Green”), and its shareholders, New-Source Group Limited, a BVI company, High-Sky Assets Management Limited, a BVI company, Joint Rise Investments Limited, a BVI company, Giant Harvest Investment Limited, a BVI company, and Mr. QIAN Yun Ting (collectively the “China Green Shareholders”), pursuant to which E-Band Media acquired 100% of the issued and outstanding capital stock of China Green in exchange for 19,220 shares of E-Band Media’s Series A Convertible Preferred Stock (“Series A Preferred Stock”). Pursuant to the terms of the Share Exchange Agreement, E-Band Media agreed to affect a 1-for-14.375 reverse stock split (“Reverse Split”) of its outstanding common stock. The Reverse Stock Split was affected on April 18, 2011. In addition, pursuant to the Share Exchange Agreement, the China Green shareholders acquired all 10,000,000 shares of E-Band Media’s common stock from Dean Konstantine (“Controlled Shares”) and all outstanding warrants of E-Band Media from Muzeyyen Balaban, Bernieta Masters, and Linda Masters, representing warrants to purchase up to 5,000,000 shares of our common stock (“Warrants”) for an aggregate purchase price of $250,000 and 100 shares of Series A Preferred Stock held by China Green shareholders. The Warrants were cancelled by the China Green shareholders pursuant to the Share Exchange Agreement. As a result of the Share Exchange Agreement, the China Green shareholders owned 96% of our issued and outstanding common stock on an as-converted common stock basis as of and immediately after the effectiveness of the Reverse Split as contemplated by the Share Exchange Agreement.

 

6
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

1.Basis of Presentation and Description of the Company, continued

 

The consolidated financial statements following unaudited combined condensed financial statements have been prepared with the effect of the merger of China Green and E-Band Media, Inc. as a reverse acquisition of assets and a recapitalization in accordance with accounting principles generally accepted in the United States. For accounting purposes, China Green was considered to be the acquirer of E-Band Media, Inc. in the merger and E-Band Media, Inc. did not meet the definition of a business in accordance with ASC Topic 805-10, Business Combinations, because E-Band Media, Inc. had no material assets or liabilities at the time of closing of the merger and these assets and liabilities did not constitute a business pursuant to ASC Topic 805. Consequently, all of the assets and liabilities of E-Band Media, Inc. were reflected in the financial statements at their respective fair values and no goodwill or other intangibles were recorded as part of acquisition accounting, and the cost of the merger was measured at net assets acquired.

 

7
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

1.Basis of Presentation and Description of the Company, continued

 

Business Description

 

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.

 

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 material

 

8
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The consolidated financial statements include the balances and results of Zhengzhou Annec and Beijing Annec (collectively, the “Company”). 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.

 

The preparation of financial statements in conformity with U.S. 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.

 

Cash

 

Cash consists primarily of cash on hand or cash deposits in banks that are available for withdrawal without restriction.

 

Bank Notes Receivable

 

Bank notes receivable consists of bank notes from various banks in the PRC, which generally have a maturity of one to six months. The bank notes are highly liquid and are given to or received by vendors and customers instead of the local currency (“Renminbi” or “RMB”). The bank notes can generally be presented to the bank before maturity and in such case are redeemable at a slight discount.

 

9
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

2.Summary of Significant Accounting Policies, continued

 

Accounts Receivable

 

Accounts receivable are reported at net realizable value. The Company has established an allowance for doubtful accounts based on an estimate of the amounts that may be uncollectible. On a monthly basis, the Company examines all significant past due amounts. The Company considers the age of the receivable, the financial standing and credit rating of the customer, and the history of payments or guarantee of payment made by the customer. Many of the Company’s contracts are with large Chinese government-backed organizations with an excellent but slow payment history. Normal payment terms for custom contract sales are: (i) 30% of the contract price as advanced payment after signing of the contract which is used to buy materials and production; (ii) 30% of the contract price will be collected when production is finished and goods are inspected by the customer; (iii) 30% of the contract price will be received after the completion of refractory installation and testing by the customer; and (iv) the final installment of 10% retentions are usually due one year after the hot air stove is put into service to allow for quality guarantee. Such retentions are presented as retentions receivable or long-term retentions receivable on the consolidated balance sheets.

 

Estimated warranty costs, if material, are accrued at the time of sales. Such costs have not been material to date.

 

Concentration of Credit and Other Risks

 

Financial instruments which potentially subject us 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 June 30, 2012. 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 30% and 25% of our trade receivables balance as of June 30, 2012 and December 31, 2011. An additional customer accounted for 19% and 16% of the Company’s trade receivables balance as of June 30, 2012 and December 31, 2011.

 

10
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

2.Summary of Significant Accounting Policies, continued

  

Concentration of Credit and Other Risks, continued

 

Two customers individually accounted for 39% and 21% of our revenue in three months ended June 30, 2012, and two customers individually accounted for 31% and 21% of our revenue in three months ended June 30, 2011, respectively. Two customers individually accounted for 38%, and 15% of our revenue in the six month periods ended June 30, 2012. Two customers individually accounted for 26%, and 14% of our revenue in the six month periods ended June 30, 2011.

 

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. During January 2008 to June 2012, the exchange rate between RMB and U. S. Dollars (USD) has fluctuated from USD $1.00 to RMB 7.3141 and USD $1.00 to RMB 6.3089, respectively. There can be no assurance that the exchange rate will remain stable. The Renminbi could appreciate or depreciate against the U .S .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.

 

Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined on an average cost basis, which approximates actual cost on a first-in, first-out (FIFO) method. Lower of cost or market is evaluated by considering obsolescence, excessive levels of inventory, deterioration, and other factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolescence and are charged to cost of revenues.

 

Plant and Equipment

 

Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line basis over the estimated useful lives of the related assets as follows:

 

Plant and buildings 20 years
Machinery and equipment 10 years
Vehicles 4 years
Electronic equipment 3 years
Furniture and tools 5 years
Software 5 years

 

11
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

2.Summary of Significant Accounting Policies, continued

 

Plant and Equipment, continued

 

Repairs and maintenance costs are expensed as incurred. Gains or losses on disposals are included in general and administrative expense.

 

The Company capitalizes interest attributable to capital construction projects, if material, in accordance with Accounting Standards Codification (ASC) Subtopic 835-20, Capitalization of Interest, which defines that interest shall be capitalized for assets that are constructed or otherwise produced for an entity’s own use, including assets constructed or produced for the entity by others for which deposits or progress payments have been made.

 

Occasionally the Company will settle outstanding accounts receivable and accounts payable balances through non-monetary exchanges such as receiving or signing over the title to vehicles. The Company accounts for these transactions in accordance with ASC 845, Nonmonetary Transactions. The Company records a gain or loss on the disposal/transfer of the vehicles to the extent that the fair value of the receivable or payable balance differs from the book value of the vehicles.

 

Land Use Rights

 

In the PRC there is no land ownership, but land use rights can be obtained. Land use rights are stated at cost less accumulated amortization. Amortization expense is recorded on a straight-line basis over the term of the land use rights. Land use rights are an intangible asset. The Company reviews intangible assets for impairment periodically and at least annually.

 

Long-term Investment

 

Long-term investment represents an investment the Company has in a regional bank within China. The Company does not hold a greater than a 5% interest and has determined that the Company does not have significant control or influence in the bank. Accordingly, The Company records the investment at cost. The Company’s investment is in a private company where there is not a market to determine the value of the investment.

 

Impairment of Long-Lived Assets

 

Long-lived assets held and used by the Company, including long-term investments, are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of an asset or asset group (in use or under development) is evaluated and found not to be recoverable (carrying amount exceeds the gross, undiscounted cash flows from use and disposition), then an impairment loss is recognized. The impairment loss is measured as the excess of the carrying amount over the asset’s or asset group’s fair value. Through June 30, 2012, the Company has not recorded any impairment of its long-lived assets.

 

12
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

2.Summary of Significant Accounting Policies, continued

 

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.

 

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; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

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

 

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.

 

13
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

2.Summary of Significant Accounting Policies, continued

 

Government Assistance

 

The Company is currently the beneficiary of government grants that are generally intended to be used towards capital technology improvement with the end goal of increased production and energy efficiency. These grants are recorded as deferred income in the liabilities section of the balance sheet when cash is received and are accreted into non-operating income over the life of the asset, to the extent that the grant is related to an asset. For grants not related to any assets in certain cases, the Company records non-operating income when earned. The government grant income included in other income amounted to approximately $44,000 and $88,800 for the three month periods ended June 30, 2012 and 2011, respectively, and approximately $170,500 and $140,200 for the six month periods ended June 30, 2012 and 2011.

 

Foreign Currency Translation

 

The accompanying financial statements are presented in United States Dollars. The functional currency of the Company is the Renminbi, the official currency of the PRC. Capital accounts of the financial statements are translated into United States Dollars 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 periods ended June 30, 2012 and 2011. 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 U.S. Dollars 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   December 
   June 30,   31 
   2012   2011   2011 
             
Period end RMB: U.S. Dollar exchange rate   6.3089    6.4640    6.3647 
                
Average RMB: U.S. Dollar exchange rate   6.3078    6.5074    6.4735 

 

14
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

2.Summary of Significant Accounting Policies, continued

 

Accumulated Other Comprehensive Income

 

The Company reports comprehensive income in accordance with the provisions of ASC Topic 220, Comprehensive Income, which establishes standards for reporting comprehensive income or loss and its components in the financial statements. The accumulated other comprehensive income represents foreign currency translation adjustments.

 

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.

 

During 2011, Zhengzhou ANNEC began entering into certain short-term contracts to build blast furnaces and hot blast stoves. These contracts have an average duration of approximately three to six months and do not exceed a period of one year. Zhengzhou ANNEC recognizes these revenues based on project completion and acceptance by the customer.

 

Beijing Annec enters into contracts to design and build blast furnaces and hot-air stoves and recognizes revenues during the construction period using the percentage of completion method. Most of the contracts are fixed-price contracts, which typically provide for a stated contract price and a specified scope of the work to be performed. Beijing Annec estimates the percentage of the job that is complete using variations of the cost-to-cost method. Cost is used as the primary indicator, but the Company also considers contract milestones and work in progress from subcontractor companies. If the estimate of costs left to be incurred plus actual costs already incurred exceeds the total revenue to be expected from a contract, then the full amount of the difference is recognized in the current period as a loss and presented on the consolidated balance sheet as a current liability. Beijing Annec also generates revenue from the sale of a variety of machines and equipment which the Company purchases from vendors. Beijing Annec recognized revenue from this type of sale when the machines and equipment have been delivered and accepted by the customer.

 

15
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

2.Summary of Significant Accounting Policies, continued

 

Sales Returns Allowance

 

The Company estimates future product returns related to current period product revenue. The Company analyzes historical returns, and changes in customer demand and acceptance of the Company’s products when evaluating the adequacy of the sales returns allowance. Significant management judgment and estimates must be made and used in connection with establishing the sales returns allowance in any accounting period. Material differences may result in the amount and timing of the Company’s revenue for any period if management made different judgments or utilized different estimates. Based on the Company’s analysis, The Company did not record any provision for sales returns as of June 30, 2012 and 2011.

 

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 $279,796 and $2,307,394 for the three month periods ended June 30, 2012 and 2011, respectively, and $771,074 and $3,110,010 for the six month periods ended June 30, 2012 and 2011, respectively.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. ASC 740 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company adopted accounting policies in accordance to U.S. GAAP as its basis for computing the current income tax provision. Therefore, there were no significant deferred tax assets or liabilities during the quarter ended June 30, 2012 and 2011.

 

The Company adopted the Interpretation provisions of ASC 740, Income Taxes, on January 1, 2009, that clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the Company’s financial statements. The Interpretation also provides guidance for the measurement and classification of tax positions, interest and penalties, and requires additional disclosure on an annual basis. The adoption had no effect on the Company’s financial statements. Following implementation, the ongoing recognition of changes in measurement of uncertain tax positions will be reflected as a component of income tax expense. Interest and penalties incurred associated with unresolved income tax positions will continue to be included in other income (expense).

 

16
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

2.Summary of Significant Accounting Policies, continued

 

Reclassification

 

Certain amounts reported in the 2011 consolidated statement of cash flows have been reclassified to conform to the 2012 presentation. The Company determined that the net change in bank notes receivable and payable should be reclassified from investing and financing activities, respectively, to operating activities, because such receivables and payables arise directly in connection with the sale of products and purchases of raw materials. The net change in restricted cash used to secure the related payables has also been reclassified from financing activities to operating activities. As a result of the reclassifications, net cash used in operating activities decreased by $243,000, net cash used in investing activities decreased by $1,278,000, and net cash provided by financing activities decreased by $1,521,000 from the amounts previously presented in the June 30, 2011 statement of cash flows. There was no impact to the Company’s June 30, 2011 consolidated balance sheet or statement of operations and no impact to the net decrease in cash for the period ended June 30, 2011.

 

Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, comprehensive income (Topic 220): Presentation of Comprehensive Income. The objective of this Update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under the amendments to Topic 220, Comprehensive Income, in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this Update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has adopted this standard since January 1, 2012. The adoption of this standard does not have a material impact on the Company’s financial position, results of operations, or cash flows.

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U. S. GAAP and IFRSs. The amendments in this Update are the result of the work by the FASB and the IASB to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs). The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. The amendments in this Update are to be applied prospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has adopted this standard since January 1, 2012. The adoption of this standard does not have a material impact on our financial position, results of operations, or cash flows.

 

17
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

3.Retentions Receivable and Long-term Retentions Receivable

 

The Company enters into sales contracts with customers whereas there is a retainage provision in which the customer can retain a portion of the payment, generally 10% of the contract price, until the completed stoves or refractory materials sold by the Company have been demonstrated to be of good quality. The retention period is usually one year from the date the stoves are placed into service. The current portion on the Balance Sheet represents amounts due within a year. The long-term portion represents the amount that are due over a year or that is already over a year old.

 

The following table shows the components of retentions receivable from long-term contracts:

 

   June 30, 2012    December 31, 2011
   Retentions
receivable
   Long-term
retention
receivable
    Retentions receivables     Long-term
retention
receivables
                   
Chinese government or province owned customers:                    
Amounts billed and due  $335,733   $718,245    $ 794,088     $ 3,368,750
Amounts billed and not due   5,462,843    1,882,806    6,113,772     87,671
    5,798,576    2,601,051    6,907,860     3,456,421
Commercial customers:                    
Amounts billed and due   148,348    881,749    178,392     1,470,435
Amounts billed and not due   4,444,405    1,292,823    4,484,010     -
    4,592,753    2,174,572    4,662,402     1,470,435
Total  $10,391,329   $4,775,623    $ 11,570,262     $ 4,926,856

 

The balances billed but not due by customers pursuant to retainage provisions in contracts will generally be due one year after the blast furnaces or hot air stoves are placed in service by the customers. Based on the Company’s historical experience with similar contracts, all such retention amounts are expected to be collectible, and accordingly, no allowance has been recorded.

 

4.Other Receivables

 

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

 

   June 30,   December 31, 
   2012   2011 
         
Other receivables–individuals and employees  $1,604,794   $1,713,371 
Other receivables–companies   2,611,327    1,097,453 
Security deposits   832,541    1,004,335 
Total other receivables  $5,048,662   $3,815,159 

 

18
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

Other receivables are comprised of three categories: receivables from individuals (both employees and other individuals), receivables from other companies and security deposits for large contracts and are generally unsecured. Security deposits are to be returned to the Company upon the completion of the projects. Receivables from employees include cash advanced to employees for purchased supplies and services and employees’ travel and miscellaneous business expenses.

 

5.Inventories

 

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

 

   June 30,   December 31, 
   2012   2011 
         
Raw materials  $3,579,193   $4,100,556 
Work in process   233,567    692,465 
Finished goods   32,170,499    29,625,943 
Total inventories  $35,983,259   $34,418,964 

 

6.Plant and Equipment, net

 

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

 

   June 30,   December 31, 
   2012   2011 
         
Plant and buildings  $14,290,394   $14,352,338 
Machinery and equipment   5,076,890    4,499,602 
Vehicles   2,239,155    1,763,312 
Others   338,370    462,897 
    21,944,809    21,078,149 
Less accumulated depreciation   (5,334,706)   (4,597,680)
Total plant and equipment, net  $16,610,103   $16,480,469 

 

Depreciation expense related to property and equipment was $436,838 and $337,790 for the three month periods ended June 30, 2012 and 2011, respectively, and was $834,713 and $660,176 for the six month periods ended June 30, 2012 and 2011, respectively. The Company recorded a loss on sale of property and equipment of $123,337 and $6,118 for the three month periods ended June 30, 2012 and 2011, respectively, and $144,909 and $34,700 for the six month periods ended June 30, 2012 and 2011, respectively.

 

19
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

7.Land Use Rights, net

 

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

 

   Estimated        
   Remaining  June 30,   December 31, 
   Life  2012   2011 
Land use rights  47.40 years  $2,334,872   $2,314,389 
Less accumulated amortization      (117,351)   (88,834)
Total land use rights, net     $2,217,521   $2,225,555 

 

Amortization expense related to land use rights was $11,825 and $14,705 for the three month periods ended June 30, 2012 and 2011, respectively, and $27,711 and $27,419 for the six month periods ended June 30, 2012 and 2011, respectively. The difference between the amortization expense and accumulated amortization is due to exchange rate differences as we translate expense using an average exchange rate for the fiscal year and translate the accumulated amortization using the fiscal year end exchange rate.

 

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

 

Period ending June 30:     
2013  $47,293 
2014   47,293 
2015   47,293 
2016   47,293 
2017   47,293 
Thereafter   1,981,056 
      
   $2,217,521 

 

8Short-Term Loans

 

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

 

   June 30,   December 31, 
   2012   2011 
           
   $16,462,536   $15,218,314 

 

At June 30, 2012, the Company has ten loans with four different banks that are due within one year and have interest rates ranging from 6.941% to 11.628% during 2012 and 2011. Five of the short-term loans are guaranteed by the third parties, Beijing Annec or Fuchao Li, the Company’s Chairman. Four of the loans are collateralized by the Company’s office building, land use rights, or machinery and equipment. One of the loans is secured by a cash deposit of the Company.

 

20
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

9.Bank Notes Payable

 

The components of the Company’s bank notes payable are as follows:

 

   June 30,   December 31, 
   2012   2011 
           
   $6,023,266   $1,571,166 

 

Bank notes payable represent bank notes paid to the Company’s vendors for purchase of inventory. At June 30, 2012, the Company had bank notes payable with four different banks with maturity dates of six 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.

 

10.Long-Term Loan

 

The Company’s long-term loan is as follows:

 

   June 30,   December 31, 
   2012   2011 
           
   $776,684   $923,846 

 

The long-term loan is due on December 13, 2015, and has an interest rate of 7.152% and is secured by one of the Company’s office buildings.

 

Future minimum payments for the long-term loan are as follows:

 

Period ending June 30:     
2013  $310,672 
2014   310,672 
2015   155,340 
      
   $776,684 

 

21
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

11.Related Party Transactions

 

At June 30, 2012, the Company had loans payable to the Chairman (Fuchao Li), and a minority shareholder (Yinling Fan) of the Company. The Company and the owners have not signed notes, there are no specific due dates, and no interest is paid on the loans. Money is transferred between the owners and the Company mainly for cash flow purposes. The amounts loaned to the Company are short-term in nature. The following amounts were payable to the owners as of June 30, 2012 and December 31, 2011:

 

   June 30,   December 31, 
   2012   2011 
           
Fuchao Li  $489,374   $572,779 
Yinling Fan   193,379    191,682 
           
   $682,753   $764,461 

 

During six months ended June 30, 2012, the Company repaid $88,320 to Fuchao Li.

 

12.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 and six month ended June 30, 2012 and 2011. Zhengzhou Annec will become subject to a rate of 25% after 2012 unless Zhengzhou Annec applies for and receives a further tax holiday for the succeeding five years.

 

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

 

22
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

13.Commitments and Contingencies

 

Third Party Guarantees

 

The Company entered into agreements as a debt guarantor during 2012 for seven third parties. The maximum guaranteed amount is $16,009,000. The total outstanding borrowings by these parties were approximately $12,839,000 as of June 30, 2012.

 

These parties also acted as debt guarantors for the Company during 2012 with a maximum guaranteed amount of 12,680,000. As of June 30, 2012, the Company’s loans guaranteed by these parties were approximately $6,340,000. The Company has not historically incurred any losses due to such debt guarantees. Additionally, the Company has determined that the difference between fair value and the carrying amount of the guarantees is immaterial.

 

Leases

 

The Company leases one factory and one office building under non-cancelable operating leases with the third parties through April 1, 2014 and May 31, 2013, respectively. Rent expense included in general and administrative expense is $84,430 and $66,429 for the three months end June 30, 2012 and 2011, and $177,282 and $120,452 for the six months ended June 30, 2012 and 2011. A summary of future minimum lease payments as of June 30, 2012 is presented below.

 

   Minimum 
   Lease 
   Payments 
Year ending June 30:     
2013  $262,070 
2014   168,809 
      
   $430,879 

 

14.Segment Reporting

 

The Company operates in two reportable segments: Zhengzhou Annec and Beijing Annec. The Zhengzhou Annec segment manufactures and sells a variety of refractory bricks and kits of pre-assembled hot-air ovens. The Beijing Annec segment designs and builds blast furnaces and hot-air stoves on a contract basis and uses subcontractors throughout the construction process.

 

All revenues are related to end customers in China.

 

Information on reportable segments for the three and six months ended June 30, 2012 and 2011 is as follows:

 

23
 

 

Annec Green Refractories Corporation and Subsidiaries

 

Notes to CONDENSED consolidated financial statements

(unaudited)

 

14.Segment Reporting, continued

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Revenues:                    
Zhengzhou Annec  $17,884,034   $18,694,933   $33,734,005   $31,752,962 
Beijing Annec   -    5,576,361    -    5,576,361 
Total   17,884,034    24,271,294    33,734,005    37,329,323 
Cost of revenues:                    
Zhengzhou Annec   10,393,274    10,957,026    20,670,630    18,530,442 
Beijing Annec   -    4,834,790    -    4,834,790 
Total   10,393,274    15,791,816    20,670,630    23,365,232 
Operating expenses:                    
Zhengzhou Annec   3,738,430    5,606,846    8,368,075    8,611,256 
Beijing Annec   809,134    263,033    935,045    708,640 
Total   4,547,564    5,869,879    9,303,120    9,319,896 
Income from operations  $2,943,196   $2,609,599   $3,760,255   $4,644,195 

 

   June 30,   December 31, 
   2012   2011 
Plant and equipment, net:          
Zhengzhou Annec  $13,345,348   $13,177,027 
Beijing Annec   3,264,755    3,303,442 
Total identifiable assets  $16,610,103   $16,480,469 

 

24
 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report.  In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially from those discussed in the forward-looking statements.  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 amended current report on Form 10-K filed on April 25, 2012.

 

Overview

 

We are a refractory and production-based company that designs, develops, produces, and markets refractory products.  All of our current business operations are conducted through our wholly-foreign owned Chinese subsidiary, Zhengzhou Annec Industrial Co., Ltd. (“Zhengzhou Annec”) and our variable interest entity, Annec (Beijing) Engineering Technology Co., Ltd. (“Beijing Annec”).

 

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, 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.   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 sub-contractors. 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.

 

Recent Developments

 

In 2011, Xinmi Technological and Industrial Information Bureau released a document titled “On the Special Protection of Enterprises for Their Patents”. The document is to enhance the protection of enterprises for their patents, contain the infringement on the intellectual property, encourage innovation and creation, and improve capacity for independent innovation so as to develop an array of products and techniques with significant intellectual property advantage and core competiveness and to propel economic development of Xinmi city. On April 26, 2012, Zhengzhou Annec Industrial Co., Ltd was accredited as “Specially Protected Enterprise for Its Patents” in accordance with the requirements of the document.

 

On May 14, 2012, Zhengzhou Annec entered into an Amendment to Supplemental Agreement to Exclusive Business Cooperation (“Amendment”) with Annec (Beijing) Engineering Technology Co., Ltd, a PRC limited company and a variable interest entity of Zhengzhou Annec (“Annec Beijing”), pursuant to which certain provisions of the Supplement Agreement to Exclusive Business Cooperation Agreement dated January 16, 2011 (the “Original Agreement”) was amended. Under the Original Agreement, Zhengzhou Annec agreed to provide Annec Beijing with exclusive technical, consulting and other services in connection with Annec Beijing’s principal business utilizing its own advantages in human resources, technology and information in exchange for an annual service fee. Under the Amendment, Article 2.2 and 2.3 of the Original Agreement were amended to specify that the payment of the annual service fee will be made upon request of Zhengzhou Annec.

 

25
 

 

Summary of Critical Accounting Policies and Estimates

 

 Management’s discussion and analysis of results of operations and financial condition are based upon our financial statements.  These statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes.  See Note 2 to our financial statements, “Summary of Significant Accounting Policies.”  We believe that the following paragraphs reflect our most critical accounting policies that currently affect our financial condition and results of operations.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. 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.

 

Accounts Receivable 

 

Accounts receivable are reported at net realizable value. We have established an allowance for doubtful accounts based on an estimate of the amounts that may be uncollectible. On a monthly basis, we examine all significant past due amounts. We consider the age of the receivable, the financial standing and credit rating of the customer, and the history of payments or guarantee of payment made by the customer. Many of our contracts are with large Chinese government-backed organizations with an excellent but slow payment history. Normal payment terms for custom contract sales are: (i) 30% of the contract price as advanced payment after signing of the contract which is used to buy materials and production; (ii) 30% of the contract price will be collected when production is finished and goods are inspected by the customer; (iii) 30% of the contract price will be received after the completion of refractory installation and testing by the customer; and (iv) the final installment of 10% (retentions) is usually due one year after the stove is put into service to allow for quality guarantee. Such retentions are presented as retentions receivable or long-term retentions receivable on the consolidated balance sheets.

 

Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined on an average cost basis, which approximates actual cost on a first-in, first-out (FIFO) method. Lower of cost or market is evaluated by considering obsolescence, excessive levels of inventory, deterioration, and other factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolescence and are charged to cost of revenues.

 

26
 

 

Revenue Recognition 

 

Our 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 generates revenue from the sale of a variety of refractory bricks and the sales from kits of pre-assembled hot-air ovens. Zhengzhou Annec primarily 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.

 

During 2011, Zhengzhou ANNEC began entering into short-term contracts to build blast furnaces and hot blast stoves. These contracts have an average duration of three to six months and do not exceed a period of one year. Zhengzhou ANNEC recognizes these revenues based on project completion and acceptance by the customer.

 

Beijing Annec enters into contracts to design and build blast furnaces and hot-air stoves and recognizes revenues during the construction period using the percentage of completion method. Most of the contracts are fixed-price contracts, which typically provide for a stated contract price and a specified scope of the work to be performed. Beijing Annec estimates the percentage of the job that is complete using variations of the cost-to-cost method. Cost is used as the primary indicator, but we also consider contract milestones and work in progress from subcontractor companies. If the estimate of costs left to be incurred plus actual costs already incurred exceeds the total revenue to be expected from a contract, then the full amount of the difference is recognized in the current period as a loss and presented on the consolidated balance sheet as a current liability. Beijing Annec also generates revenue from the sale of a variety of machines and equipment which we purchase from vendors. Beijing Annec recognized revenue from this type of sale when the machines and equipments have been delivered and accepted by the customer. 

 

Shipping and Handling Costs

 

Shipping and handling costs billed to customers are recorded net of the amount collected. Shipping and handling expense included in sales and marketing expenses amounted to $279,796 and $2,307,394 for the three months ended June 30, 2012, and 2011, respectively, and $771,074 and $3,110,010 for the six months ended June 30, 2012 and 2011, respectively.

  

Results of Operations

 

Comparison for the Three Months ended June 30, 2012 and 2011 

 

   Three Months Ended June 30 
       As % of       As % of 
Statements of Operations Data  2012   Revenues   2011   Revenues 
Revenues  $17,884,034    100%  $24,271,294    100%
Cost of Revenues   10,393,274    58%   15,791,816    65%
Gross Profit   7,490,760    42%   8,479,478    35%
Operating Expenses:                    
Sales and marketing   3,219,462    18%   4,540,047    19%
General and administrative   1,328,102    7%   1,329,832    5%
Total other expense   (960,516)   (6)%   (896,503)   (4)%
Income before provision for income taxes   1,982,680    11%   1,713,096    7%
Provision for income taxes   487,598    3%   326,020    1%
Net income   1,495,082    8%   1,387,076    6%

 

Revenues

 

We operate in two reportable segments: Zhengzhou Annec and Beijing Annec. The Zhengzhou Annec segment manufactures and sells a variety of refractory bricks and kits of pre-assembled hot-air ovens. In 2011, Zhengzhou Annec signed several refractory turnkey projects which was under a new business model. 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. We purchase these machines and equipment from outside vendors and generally sell them at cost plus a small mark-up.

 

27
 

 

Segments  June 30, 
2012
   % of
Revenue
   June 30, 
2011
   % of
Revenue
 
Zhengzhou Annec  $17,884,034    100%  $18,694,933    77%
Beijing Annec   -    -    5,576,361    23%
Total  $17,884,034    100%  $24,271,294    100%

 

Revenues for the three months ended June 30, 2012 was $17,884,034 compared to $24,271,294 for the three months ended June 30, 2011. Revenues for the three months ended June 30, 2012 decreased by $6,387,260 or by 26% because the iron industry demands are weak, and no new contracts were entered into and no projects were completed during the three months ended June 30, 2012, which lead to no revenues from Beijing Annec for the three months ended June 30, 2012. Revenues for Zhengzhou Annec for the three month ended June 30, 2012, decreased by $810,899 or 4% to $17,884,034 from $18,694,933 for the three months ended June 30, 2011. The decrease in sales of refractory products by Zhengzhou Annec was mainly due to a decrease in the number of orders. The following table shows product sales of Zhengzhou Annec from existing and new customers during the three months ended June 30, 2012: 

 

Type of Customers’ Sales  Amount (US$) 
     
Existing customers  $17,858,879 
      
New customers  $25,155 

 

Cost of Revenue

 

Cost of revenue was $10,393,274 and $15,791,816 for the three months ended June 30, 2012 and 2011, respectively. Cost of revenue for the three months ended June 30, 2012 decreased by $5,398,542 or by 34%.  Stated as a percentage of revenues, the cost of revenue for the three months ended June 30, 2012 was 58% compared to 65% for the three months ended June 30, 2011. Cost of revenue related to Zhengzhou Annec for the three months ended June 30, 2012 decreased by $563,752, or 5% to $10,393,274 from $10,957,026 for the same period in 2011. The decrease in cost of revenue was primarily a result of decrease in sales in Zhengzhou Annec and no sales in Beijing Annec for the three months ended June 30, 2012.

 

Operating Expenses

 

General and Administrative.  General and administrative expenses include payroll and related employee benefits, and other headcount-related costs associated with facilities, and other administrative expenses. General and administrative expenses were $1,328,102 and $1,329,832 for the three months ended June 30, 2012 and 2011, respectively. There was a slight decrease of $1,730, or 0.1%, in general and administrative expenses.

 

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 $3,219,462 and $4,540,047 for the three months ended June 30, 2012 and 2011, respectively. The decrease of $1,320,585, or 29%, in sales and marketing expense was due to decreased revenue and variable cost like shipping expense, packaging expense and traveling expense.

 

28
 

 

Total Other Expense.  The total other expense was $960,516 and $896,503 for the three months ended June 30, 2012 and 2011, respectively. The increase of $64,013, or 7%, in total other expense was primarily attributable to recognition of a government grant in the three months ended June 30, 2011 and there was no government grant in the same period as of June 30, 2012, and an increase in other expense as detailed in the following table:

 

   Three Months End 
   June 30,   June 30, 
   2012   2011 
Other income (expense):          
Interest income  $65,545    85,808 
Interest expense   (996,960)   (1,087,524)
Other income (expense), net   (29,101)   105,213 
Total Other expense  $(960,516)   (896,503)

 

Comparison for the Six Months ended June 30, 2012 and 2011 

 

   Six  Months Ended June 30 
       As % of       As % of 
Statements of Operations Data  2012   Revenues   2011   Revenues 
Revenues  $33,734,005    100%  $37,329,323    100%
Cost of Revenues   20,670,630    61%   23,365,232    63%
Gross Profit   13,063,375    39%   13,964,091    37%
Operating Expenses:                    
Sales and marketing   6,380,751    19%   6,637,934    18%
General and administrative   2,922,369    9%   2,681,962    7%
Total other expense   (2,144,573)   (6)%   (1,266,377)   (3)%
Income before provision for income taxes   1,615,682    5%   3,377,818    9%
Provision for income taxes   513,510    2%   587,891    2%
Net income   1,102,172    3%   2,789,927    7%

 

Segments  June 30, 
2012
   % of
Revenue
   June 30, 
2011
   % of
Revenue
 
Zhengzhou Annec  $33,734,005    100%  $31,752,962    85%
Beijing Annec   -    -    5,576,361    15%
Total  $33,734,005    100%  $37,329.323    100%

 

Revenues for the six months ended June 30, 2012 was $33,734,005 compared to $37,329,323 for the six months ended June 30, 2011. Revenues for the six months ended June 30, 2012 decreased by $3,595,318, or by 10%.  The decrease of the total revenue was due to the decline of the iron industry demands, and no new contracts were entered into and no projects were completed in Beijing Annec during the six months ended June 30, 2012. Revenues for Zhengzhou Annec for the six month ended June 30, 2012 increased by $1,981,043 or 6%, to $33,734,005 from $31,752,962 for the six months ended June 30, 2011. The increase in sales of refractory products by Zhengzhou Annec was mainly due to the increase in number of orders in the first quarter 2012. The existing customers increased their demand and Zhengzhou Annec obtained new customers in the six months ended June 30, 2012 compared to June 30, 2011, as set forth below: 

 

29
 

 

Type of Customers’ Sales  Amount (US$) 
     
Existing customers  $33,694,282 
      
New customers  $39,723 

 

Cost of Revenue

 

Cost of revenue was $20,670,630 and $23,365,232 for the six months ended June 30, 2012 and 2011, respectively. Cost of revenue for the six months ended June 30, 2012 decreased $2,694,602 or by 12%. Stated as a percentage of revenues, the cost of revenue for the six months ended June 30, 2012 was 61% compared to 63% for the six months ended June 30, 2011. Cost of revenue related to Zhengzhou Annec for the six months ended June 30, 2012 increased by $2,140,188 or 12% to $20,670,630 from $18,530,442 for the same period in 2011. The increase in cost of revenue of Zhengzhou Annec was primarily attributable to the increase of sales for the same proportion. The total cost of revenue decreased because there was no revenue in Beijing Annec for the six months ended June 30, 2012.

 

Operating Expenses

 

General and Administrative.  General and administrative expenses include payroll and related employee benefits, and other headcount-related costs associated with facilities, and other administrative expenses.  General and administrative expenses were $2,922,369 and $2,681,962 for the six months ended June 30, 2012 and 2011, respectively. The increase of $240,407 or 9% in general and administrative expense was primarily due to an increase of salaries of managements. 

 

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 $ 6,380,751 and $6,637,934 for the six months ended June 30, 2012 and 2011, respectively. The decrease of $257,183 or 4%, in sales and marketing expense was due to decreased revenue and variable cost like shipping expense, packaging expense and traveling expense.

 

Total Other Expense. The total other expense was $2,144,573 and $1,266,377 for the six months ended June 30, 2012 and 2011, respectively.  The increase of $878,196, or 69%, in total other expense was primarily due to increase of interest expense for increased loans and increase in other expense as detailed in the following table:

 

   Six Months Ended 
   June 30,   June 30, 
   2012   2011 
Other income (expense):          
Interest income  $162,733    184,644 
Interest expense   (2,276,862)   (1,692,784)
Other income (expense), net   (30,444)   241,763 
Total other expense  $(2,144,573)   (1,266,377)

 

Liquidity and Capital Resources

 

We had retained earnings $32,413,924 and $31,311,752 as of June 30, 2012 and December 31, 2011 respectively.

 

30
 

 

As of June 30, 2012, we had cash and restricted cash of $7,695,333 and total current assets of $94,963,356 compared to cash and restricted cash of $1,914,194 and total current assets of $98,671,393 as of December 31, 2011. Restricted cash is used to secure bank notes. The guaranteed percentage at June 30, 2012 was 100% compared to 100% at December 31, 2011.

 

As of June 30, 2012, we had accounts receivable $28,189,700, representing 30% of our total current assets compared to $34,410,920, representing 35% of total current assets as of December 31, 2011. Accounts receivable had decreased $6,221,220 or 18% because of the collection of accounts receivable and 10% decrease of total revenue.

 

Our total liabilities as of June 30, 2012 were $80,965,261 compared to $85,946,386 at December 31, 2011. The decrease of $4,981,125 or 6% was a result of decrease in advances from customers, loans payables to other individuals, accounts payables and accrued expenses, taxes payable, and other payable.

 

We generally require 30% of contract price as advanced payment after we sign contract which is used to buy materials and production. 30% of contract price will be collected when we finished 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 year 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 sale, differentiations exist between contracts signed by different customer.

 

As of June 30, 2012 we had working capital of $17,524,148, compared to working capital of $16,461,409 as of December 31, 2011.  We believe our cash and accounts receivable are adequate to satisfy our working capital needs and sustain our ongoing operations for the remainder of our fiscal year. However, to develop new product and expand our market, 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.

 

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 Provided by (Used in) Operating Activities. For the six months ended June 30, 2012, net cash used in operating activities was $1,548,062 compared to cash used in operating activities of  $557,442 for the six months ended June 30, 2011. The increase in net cash provided by operating activities for the six months ended June 30, 2012 was primarily due to changes in prepaid expenses and deposits, account receivable, retentions receivable and long term retentions receivable, advances from customers, account payable and accrued expenses, restricted cash for issuance of bank notes payable, net proceeds from bank notes receivable and proceeds from notes payable as set forth below:

 

31
 

 

Items  2012
 (US$)
   2011
(US$)
   Increase
/(Decrease)(US$)
   Percentage 
Prepaid expenses and deposits   3,197,484    (6,376,591)   9,574,075    150%
Accounts receivable, retentions receivable, and long term retentions receivable   7,570,001    (5,457,306)   13,027,307    239%
Advances from customers   (4,234,505)   4,634,280    (8, 868,785)   (191)%
Account payable and accrued expenses   (2,992,392)   6,590,848    (9,583,240)   (145)%
Restricted cash for issuance of bank notes payable   (5,603,010)   (891,829)   (4,711,181)   (528)%
Net proceeds from bank notes receivable   1,796,449    (386,224)   2,182,673    565%
Proceeds from notes payable   4,428,767    1,521,392    2,907,375    191%

  

New Cash Used in Investing Activities.   For the six months ended June 30, 2012, net cash used in investing activities was $639,841, compared to net cash used in investing activities of $922,837, for the six months ended June 30, 2011. The increase of net cash used in investment activities for six months ended June 30, 2012 was primarily due to the increase of purchase of plant and equipment, and deposits in capital expenditures.

 

Items  2012 (US$)   2011(US$)   Increase/(Decrease)(US$)   Percentage 
Deposits for capital expenditure   (179,336)   (126,799)   (306,135)   (241)%
Purchase of plant and equipment   (457,334)   (1,129,047)   671,173    59%

 

Net Cash (Used in) Provided by Financing Activities.   For the six months ended June 30, 2012, net cash used in financing activities was  $717,114 compared to $1,005,483 in net cash provided by financing activities for the six months ended June 30, 2011. The increase of the net cash used in financing activities was primarily due to the changes of payments of dividends, payment of short-term borrowings, proceeds from loans to related parties, employees, and other individuals, net of payments, proceeds from short-term borrowings.

 

Type of Proceeds  2012 (US$)   2011(US$)   Increase/(Decrease)(US$)   Percentage 
Payments of dividends   -    (700,731)   700,731    100%
Proceeds from loans to related parties, employees, and other individuals, net of payments   (1,671,639)   933,845    (2,605,484)   (279)%
Proceeds from short-term borrowings   9,496,179    10,280,604    (784,425)   (8)%
Payment of short-term borrowings   (8,386,442)   (9,358,576)   972,134    10%
Proceeds from issuance of long-term borrowings, net of payments   (155,212)   (149,659)   (5,553)   4%

 

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 with Chinese banks are for a period of 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 June 30, 2012, we borrowed approximately $16.46 million 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 June 30, 2012, the Company and its subsidiaries have the following loan facilities with the following terms:

 

32
 

 

Lender   Secured   Duration   Outstanding as of
June, 30 2012
  Interest
rates
 
Agricultural credit union   By third parties   1 year     1,585,070   8.640 %
Agricultural credit union   Machinery and equipment   1 year     317,014   11.628 %
Shanghai Pufa Development Bank   Office building and land   1 year     3,170,140   7.216 %
Shanghai Pufa Development Bank   Office building and land   6 months     1,585,070   7.216 %
Shanghai Pufa Development Bank   By cash deposit   6 months     2,647,067   7.900 %
Shanghai Pufa Development Bank   By Beijing Annec   6 months     1,299,757   7.216 %
Shanghai Pufa Development Bank   Office building and land   1 year     310,674   7.152 %
China Citic Bank   By Fuchao Li   1 year     1,585,070   6.941 %
China Citic Bank   By third parties   1 year     792,535   7.216 %
LuoYang  Bank   By third parties   1 year     3,170,140   7.872 %
            $ 16,462,537      

 

The Company also has a long-term bank loan with a balance of $776,684 as of June 30, 2012. The long-term loan is due on December 13, 2015, and has an interest rate of 7.152% and is secured by one of the Company’s office buildings.

 

Future minimum payments for the long-term loan are as follows:

 

Period ending June 30:    
2013    $ 310,672
2014             310,672
2015            155,340
     
     $ 776,684

  

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 2012, Zhengzhou Annec had agreements as a debt guarantor for seven unaffiliated companies (“Unaffiliated Companies”). We do not consolidate the Unaffiliated Companies into our financial statements. In China, companies provide guarantees to other companies in the community to assist them in getting bank loans. The guaranteed amount is approximately $12,839,000 as of June 30, 2012 compared to $9,584,000 as of December 31, 2011. In exchange, the other unaffiliated companies also act as a debt guarantor for Zhengzhou Annec. As of June 30, 2012, Zhengzhou Annec's loans guaranteed by other unaffiliated companies are approximately $6,340,000 compared to $9,427,000 as of December 31, 2011. Zhengzhou Annec has not historically incurred any losses due to such debt guarantees.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

 Not Applicable.

  

33
 

 

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 quarter ended June 30, 2012 and inability to file our Form 10-Q for the quarter ended March 31, 2012 in a timely manner, we have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report.

 

We discovered information that indicated deficiencies in the controls and procedures we use to ensure that information we are required to disclose in our reports to the SEC is summarized and reported within the required periods. The material weakness we have found include: (1) lack of sufficient staff with appropriate knowledge, experience, and training in the application of U.S. GAAP, and (2) lack of an appropriate level of company qualified resources to perform internal audit properly and inability to effectively communicate its accounting policies and procedures to its accounting staff resulting in inconsistent practice. As a result of these deficiencies, we determined that our internal controls over financial reporting were not effective as of the end of the period covered by this Report.

 

Remediation Plan

 

We intend to devote resources to remediating, improving and documenting our disclosure controls and procedures and internal controls and procedures, including actively 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, and implementing additional financial and management controls, reporting systems and procedures. These measures may not ensure the adequacy of our internal controls over our financial processes and reporting in the future.

 

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.

 

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.

 

Item 1A. Risk Factors

 

Not Applicable

 

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

 

None.

 

34
 

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits no material agreements

 

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 Interactive Data File will be filed by amendment to this Form 10-Q within 30 days of the filing date of this Form 10-Q, as permitted by Rule 405(f)(3) of Regulation S-T

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ANNEC GREEN REFRACTORIES
CORPORATION
   
Dated: August 14, 2012 /s/ LI Jiantao
  By: LI Jiantao
  Its: Chief Executive Officer and Chief Financial
Officer
(Principal Executive Officer and Principal Financial
Officer)

 

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