| • AMENDMENT TO FORM 10-Q • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q/A (Amendment No. 1) (Mark one)
For the Quarterly Period Ended June 30, 2012
or
Commission File Number 001-33929
China Shen Zhou Mining & Resources, Inc. (Name of small business issuer in its charter)
Issuer's telephone number: 86-010-88906927
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 (Sec.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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
As of August 10, 2012, the Registrant had 39,323,772 shares of common stock outstanding.
Except as otherwise indicated by the context, references in this Form 10-Q to:
“SHZ,” the “Company,” “we,” “our,” or “us” are references to China Shen Zhou Mining & Resources, Inc and its subsidiaries, unless the context indicates otherwise. “U.S. Dollar,” “$” and “US$” mean the legal currency of the United States of America. “RMB” means Renminbi, the legal currency of China. “China” or the “PRC” are references to the People’s Republic of China. “U.S.” is a reference to the United States of America. “SEC” is a reference to the Securities & Exchange Commission of the United States of America.
Explanatory Note
The purpose of this Amendment No. 1 (“Amendment No. 1”) to the Quarterly Report on Form 10-Q of China Shen Zhou Mining & Resources, Inc. for the quarterly period ended June 30, 2012, filed with the Securities and Exchange Commission on August 14, 2012, (“Form 10-Q”), is to furnish Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T and to amend certain information in Note 2 to the financial statements and in Item 2 of the Form 10-Q.
Exhibit 101 to this report provides the consolidated financial statements and relates notes from the Form 10-Q formatted in XBRL (eXtensible Business Reporting Language). Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
The Company is also filing this Amendment No. 1 for the purpose of revising the six months net operating loss figure found in Note 2 to the financial statements from $4.69 million to $6.40 million.
The Company is also filing this Amendment No. 1 for the purpose of revising certain clerical errors in Item 2 of the 10-Q, specifically, the following figures related to sales of fluorite powder found in the discussion provided by management:
The Company also revised the estimated sale amount for Xinyi Fluorite from 60,000 metric tons of fluorite lumps to 10,000 metric tons. The 60,000 metric ton figure is the figure for Xiangzhen Mining (as stated in the same section).
No other changes have been made to the Form 10-Q. This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not beyond the amendments discussed above modify or update in any way disclosures made in the original Form 10-Q.
China Shen Zhou Mining & Resources, Inc.
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CHINA SHEN ZHOU MINING & RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CHINA SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Amounts in thousands, except per share data) (Unaudited)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CHINA SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands, except share data) (Unaudited)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
China Shen Zhou Mining & Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS AND ORGANIZATION
China Shen Zhou Mining & Resources, Inc. and its subsidiaries (collectively known as the “Company” or “we”) are principally engaged in the exploration, development, mining, and processing of fluorite, barite, zinc, lead, copper, and other nonferrous metals in the People’s Republic of China (“PRC” or “China”).
At June 30, 2012, the subsidiaries of China Shen Zhou Mining & Resources, Inc. were as follows:
NOTE 2- BASIS OF PRESENTATION AND GOING CONCERN
These consolidated financial statements for interim periods are unaudited. In the opinion of management, all adjustments, consisting of normal, recurring adjustments, and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these consolidated financial statements are not necessarily indicative of the results that may be reported for the entire year. The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed on March 27, 2012.
The accompanying consolidated financial statements have been prepared on a going concern basis. The Company had net operating loss of approximately $6.40 million and $0.48 million for the six months ended June 30, 2012 and 2011, respectively. The Company’s ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, to fund possible future acquisitions, and to generate profitable operations in the future. In addition, if needed management plans to issue additional equity securities and or debt to meets its obligations on a timely basis. The outcome of these matters cannot be predicted at this time and there are no assurances that if achieved, the Company will have sufficient funds to execute its business plan or generate positive operating results. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.
NOTE 3 – ACQUISITION
On January 16, 2012, the Company through its subsidiary Xiangzhen Mining entered into an equity transfer and capital increase agreement (the “Wuchuan Agreement”) to acquire 60% of the equity interests of Dongsheng Mining.
Pursuant to the Wuchuan Agreement, the Company acquired the equity from the two shareholders of Dongsheng Mining (Gang Liu, a Chinese citizen, and Qiang Liu, a Chinese citizen) for total consideration in the form of 2,418,448 shares of the Company’s common stock and approximately US$7,897,000 in cash.
On February 7, 2012, the Company through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Qianshi Resources, from Qianshi Resources’ two shareholders (Gang Liu and Guojian Zhou, a Chinese citizen) for total consideration in the form of 337,457 shares of the Company’s common stock. On February 7, 2012, the Company through its subsidiary Xiangzhen Mining also purchased a 60% equity interest in Meilan Mining, from Meilan Mining’s shareholder (Gang Liu) for total consideration in the form of 506,186 shares of the Company’s common stock.
Below are tables containing the preliminary estimated purchase price allocations for Dongsheng Mining, Meilan Mining, and Qianshi Resources:
The fair value of identifiable extraction rights of Dongsheng Mining, Meilan Mining, and Qianshi Resources were estimated according to the 2011 mineralized material evaluation report. In 2012, exploration activities will be finished to renovate the mines of Dongsheng Mining, Meilan Mining, and Qianshi Resources, and the fair value of identifiable extraction rights will be determined according to the 2012 mineralized material evaluation report. Once determined, the Company will record the acquisition at fair value. In addition, the full value of their share of the noncontrolling interest in Dongsheng Mining, Meilan Mining, and Qianshi Resources will be reflected upon completion of the valuation.
The unaudited pro forma consolidated results of Dongsheng Mining, Meilan Mining, and Qianshi Resources’ operations for the second quarter of 2012 did not materially differ from the unaudited consolidated statement of operations for the six months ended June 30, 2012.
The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Dongsheng Mining, Meilan Mining, and Qianshi Resources had occurred during the period of January 1, 2011 through June 30, 2011:
The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Dongsheng Mining, Meilan Mining, and Qianshi Resources had occurred during the period of April 1, 2011 through June 30, 2011:
The unaudited pro forma information does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the period presented and is not intended to be indicative of future results.
NOTE 4 - DISCONTINUED OPERATIONS
On April 12, 2011, the Company through its subsidiary Qianzhen Mining entered into an equity transfer agreement (the “Agreement”) to sell its 60% equity interest in Qingshan Metal to a Chinese citizen Mr. Mao Huang (the “Investor”), a related party of the Company.
Pursuant to the Agreement, Qianzhen Mining sold all of its Equity in Qingshan Metal to the Investor for total consideration in the amount of RMB 8.5 million (approximately $1.3 million) (the “Transfer Price”). The payment of the Transfer Price offset the debt owed by Qianzhen Mining to the Investor. Qianzhen Mining no longer holds any equity interests in Qingshan Metal.
The Company has recorded a loss from operations of discontinued component, net of income taxes, of approximately $7,000 for the six months ended June 30, 2011. In accordance with Accounting Standard Codification (“ASC”) 360 (Formerly FAS 144) of Financial Accounting Standards Board (“FASB”), Accounting for Impairment or Disposal of Long-Lived Assets, the Company has reflected Qingshan Metal’s results of operations through the date of the sale in the consolidated statements of operations through the date of the sale as discontinued operations for all periods presented. The cash flows of discontinued operations also have been reclassified.
The following table presents the revenue, net loss from discontinued operations and net loss on disposal of Qingshan Metal for the periods presented:
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The Company’s consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of the Company’s consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. The calculations more dependent on management’s use of estimates and assumptions are those related to mineral reserves and valuations of proven and probable reserves that are the basis for future cash flow estimates utilized in impairment calculations; the estimated lives of the mineralized bodies based on estimated recoverable volume through the end of the period over which the company has extraction rights that are the basis for units-of-production depreciation; depletion and amortization calculations; estimates of fair value for certain reporting units and asset impairments (including impairments of goodwill, long-lived assets and investments); write-downs of inventory to net realizable value; reserves for contingencies and litigation; and the fair value and accounting treatment of financial instruments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates.
Certain of the Company’s accounting policies require higher degrees of judgment than others in their application. Management evaluates all of its estimates and judgments on an on-going basis.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries (AFMG, Xiangzhen Mining, and Qianzhen Mining) and its majority owned subsidiaries (Xingzhen Mining, Xinyi Fluorite, Dongsheng Mining, Meilan Mining, and Qianshi Resources). All inter-company balances and transactions have been eliminated.
The minority interest in the net assets and earnings or losses of Xingzhen Mining have been absorbed by the Company as the minority interest holders in the subsidiary have no basis in their investment in the subsidiary.
Basis of Preparation
The accompanying consolidated financial statements have been prepared in conformity with US GAAP. The basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the accounting principles of the PRC (“PRC GAAP”). The Company’s U.S. entity’s functional currency is the U.S. dollar and the Company’s PRC subsidiaries’ functional currency is the Chinese Renminbi (“RMB”). The accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”). All significant inter-company transactions and balances have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity period of three months or less to be cash or cash equivalents. The carrying amounts reported in the accompanying consolidated balance sheets for cash and cash equivalents approximate their fair value. Substantially all of the Company’s cash is held in bank accounts in the PRC and is not protected by FDIC insurance or any other similar insurance. Restricted cash is excluded from cash and cash equivalents and is included in restricted assets.
Accounts Receivable
Accounts receivable is stated at cost, net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectibility of individual balances. In evaluating the collectibility of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history and current credit-worthiness, and current economic trends.
Inventories
Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Costs of finished goods are composed of direct materials, direct labor and an attributable portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. Our management regularly evaluates the composition of our inventory to identify slow-moving and obsolete inventory to determine if a valuation allowance is required.
Deferred Financing costs
Deferred financing costs represent legal, due diligence and other direct costs incurred to raise capital or obtain debt. Direct costs include only “out-of-pocket” or incremental costs directly related to the effort, such as a finder’s fee and accounting and legal fees. These costs will be capitalized if the efforts are successful, or expensed when unsuccessful. Indirect costs are expensed as incurred. Deferred financing costs related to convertible preferred stock are amortized over the life of the debt. Deferred financing costs related to issuing equity are charged to Paid in Capital. The treatment of issuance costs on liability for which the Company has elected the fair value option is further described in “Debt or derivative liabilities recorded at fair value” below.
Derivative Financial instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible promissory note instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under FASB ASC 815, Derivatives and Hedging (“ASC 815”) to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.
Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments, and are evaluated and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability.
On January 19, 2011, the Company agreed to sell to certain institutional investors 2,836,883 shares of the Company’s common stock and warrants to purchase up to 851,066 shares of the Company’s common stock in a registered direct public offering (the “offering”). The warrants were exercisable immediately following the closing date of the Offering and will remain exercisable for three years thereafter at an exercise price of $8.46 per share. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and in the event the Company issues or is deemed to issue shares of common stock for less than the exercise price then in effect. The Company also granted to the placement agent at the closing of the Offering warrants to purchase that number of shares of our common stock equal to 8% of the aggregate number of shares underlying the warrants placed in the Offering. The Placement Agent’s Warrants had the same terms as the warrants offered in the Offering, except that the initial exercise price was 120% of the exercise price in the warrants offered in the Offering. On March 21, 2012, the exercise price of the warrants was adjusted to $1.21 and these warrants have been reclassified from equity to a derivative liability for their future fair market value. The valuation of warrants, as a derivative liability, will be valued at market. Under ASC 815, the warrants will be carried at fair value and adjusted during each reporting period subsequent to reclassification to a derivative liability from that of an equity instrument. The aggregate fair value of derivative liabilities at June 30, 2012 amounted to $232,000.
On March 21, 2012, the Company entered into a Securities Purchase Agreement (the “2012 SPA”) with certain institutional investors (the “Investors”), pursuant to which the Company will offer up to an aggregate of $10 million of Series A Convertible Preferred Stock, $0.001 par value per share (the “Preferred Stock”) and warrants to purchase approximately 1,960,785 shares of common stock of the Company, par value $0.001 per share. Under the 2012 SPA, the Investors may purchase up to an aggregate of 10,000 shares of Preferred Stock. FT Global Capital, Inc. acted as the sole placement agent for the transaction. The Company also issued to the placement agent warrants to purchase up to 392,157 shares of common stock. The Placement Agent’s Warrants shall have the same general terms as the Warrants issued to the Investors, except that the initial exercise price was 120% of the initial exercise price in the Warrants issued to the Investors.
The Company will issue the Preferred Stock and Warrants in two $5 million tranches. Upon the closing of the first tranche on Monday, March 26, 2012, the Investors purchased $5.0 million of newly issued Preferred Stock and related Warrants. Each of the Investors, at their option, may purchase their allocation of Preferred Stock in the second tranche by delivery of written notice to the Company at any time prior to the first anniversary of the initial closing date. Subject to the satisfaction of certain conditions, the Company may force the initial purchasers to purchase the Preferred Stock in the second tranche at any time after the satisfaction of such conditions and prior to the four month anniversary of the initial closing date. In order for the Company to trigger the mandatory purchase requirement, the Company must obtain shareholder approval as may be required by the NYSE Amex and the Company must also satisfy certain other conditions.
The rights, preferences and privileges of the Preferred Stock are set forth in the Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock, that the Company filed with the Secretary of State of the State of Nevada on March 26, 2012. The initial conversion price of the preferred stock was $2.04 (the “Conversion Price”), subject to anti-dilution adjustments.
The Preferred Stock will amortize in installment payments, which will be payable in common stock, subject to certain equity conditions, or, at the Company’s discretion, in cash. The dividend rate on the Preferred Stock is 5% per annum, payable quarterly in common stock, subject to certain equity conditions, or, at the Company’s discretion, in cash.
At the closing of the initial tranche, the Investors received warrants to purchase, in the aggregate, approximately 1,960,785 shares of common stock, which are exercisable for 42 months beginning on the initial closing date (including warrants to purchase approximately 980,393 shares of common stock, which were paid as additional consideration for the commitment of the initial purchasers to fund the second tranche). No additional warrants will be issued upon the consummation of the second tranche. The warrants have an initial exercise price of $2.04, and are subject to anti-dilution adjustments.
On May 7, 2012 and June 5, 2012, the Company redeemed $1,666,667 of the Preferred Stock through the issuance of 1,475,225 and 976,249 shares of the Company’s common stock, respectively. As of June 30, 2012, the Company has accrued $60,520 of dividends payable on the Preferred Stock, including the Preferred Stock which has converted into common stock, and is included in other payables.
The Company accounted for the embedded conversion features included in its Preferred Stock as well as the related warrants issued during 2012 and the warrants issued in connection with the issuance of the Company’s shares of common stock during 2011 as derivative liabilities through June 30, 2012. The aggregate fair value of derivative liabilities at June 30, 2012 amounted to $1,145,000.
Equity Investment
The Company accounts for its equity investment using the equity method unless its value has been determined to be other than temporarily impaired, in which case we write the investment down to its impaired value. The Company reviews its investment periodically for impairment and makes appropriate reductions in carrying value when an other-than-temporary decline is evident; however, for non-marketable equity securities, the impairment analysis requires significant judgment. During its review, the Company evaluates the financial condition of the issuer, market conditions, and other factors providing an indication of the fair value of the investments. Adverse changes in market conditions or operating results of the issuer that differ from expectation, could result in additional other-than-temporary losses in future periods. As of June 30, 2012, the Company had accrued 100% impairment provision of $1,836,000.
Property, Machinery and Mining Assets
Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives, which do not exceed the related estimated mine lives, of such facilities based on mineralized material.
Mineral exploration costs are expensed as incurred. After a mine is considered to be in the development or production stage or considered to have proven or probable reserves further exploration costs are also expensed as incurred.
Extraction rights are stated at the lower of cost and recoverable amount. When extraction rights are obtained from the government according to mining industry practice in the PRC, extraction rights are capitalized as incurred and are amortized using the units-of-production (“UOP”) method over the estimated life of the mineralized body based on estimated recoverable volume through to the end of the period over which the Company has extraction rights.
The Company determines whether a mine is accounted for as being in an exploration stage or a production stage based upon US GAAP. The Company commences capitalizing development costs upon establishing proven and probable reserves (to the extent necessary to meet the definition under Industry Guide 7). Once a mine is considered to be in the development or production stage, the mines capitalized development costs are amortized using the UOP method based on the estimated recoverable volume of the mineralized material. Based on these criteria the Company believes it is appropriate to account for Xiangzhen Mining property as a production-stage operation that has capitalized development costs and to account for Xingzhen Mining, Xinyi Fluorite, Dongsheng Mining, Meilan Mining and Qianshi Resources properties as exploration stage projects that has expensed their development costs.
At the Company’s surface mines, development costs include costs to further delineate the mineralized body and remove overburden to initially expose the mineralized body. At the Company’s underground mines, development costs include the costs of building access ways, shaft sinking and access, lateral development, drift development, and ramps and infrastructure development.
To the extent that these costs benefit the entire mineralized body, they are amortized over the estimated life of the mineralized body. Costs incurred to access specific mineralized blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific mineralized block or area. Interest cost allocable to the cost of developing mining properties and to constructing new facilities, if any, is capitalized until such assets are ready for their intended use.
Land use rights are stated at cost, less accumulated amortization. Land use right amortization is computed using the straight-line method over the estimated useful lives of 25 years.
Estimated useful lives of the Company’s assets are as follows:
Foreign Currency
The Company’s principal country of operations is the PRC. The financial position and results of operations of the Company’s subsidiaries located in the PRC are recorded using Renminbi (“RMB”) as the functional currency. The results of operations denominated in foreign currencies are translated at the average rate of exchange during the reporting period.
Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the market rate of exchange at that date. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (“US dollar”) are recorded in accumulated other comprehensive income, a separate component within shareholders’ equity.
The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the consolidated financial statements are as follows:
For the six months ended June 30, 2012 and 2011, foreign currency translation adjustment was approximately $367,000 and $772,000 respectively, and has been reported as comprehensive income in the consolidated statement of comprehensive income.
Although government regulations now allow conversion of RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that RMB could be converted into U.S. Dollars at that rate or any other rate.
The value of the RMB against the U.S. Dollar and other currencies may fluctuate and is affected by, among other things, changes in Chinese political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s financial condition in terms of U.S. Dollar reporting.
Noncontrolling Interest
Noncontrolling interests in the Company’s subsidiaries are recorded in accordance with the provisions of FASB ASC 810 and are reported as a component of equity, separate from the parent’s equity. Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the noncontrolling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.
Revenue Recognition
Revenue is recognized on the sale of products when title has transferred to the customer in accordance with the specified terms of each product sales agreement and all of the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured. Generally, the Company’s product sales agreements provide that title and risk of loss pass to the customer when the quantity and quality of the products delivered are certified and accepted by the customer.
Sales revenue is recognized, net of PRC business taxes, sales discounts and returns at the time when the merchandise is sold to the customer. Based on historical experience, management estimates that returns of sold products are immaterial and has not made allowance for estimating such amounts.
Stripping Costs
Stripping costs are costs of removing overburden and other mine waste materials. Stripping costs incurred during the production phase of a mine are variable production costs that are included as a component of inventory to be recognized in cost of sales in the same period as the revenue from the sale of the related inventory.
Asset Impairment – Long-lived Assets
The Company reviews and evaluates its long-lived assets including property, machinery and mining assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows are estimated based on quantities of recoverable metals, corresponding expected commodity prices (considering current and historical prices, price trends and related factors), production levels and operating costs of production and capital, all based on life-of-mine plans. Existing proven and probable reserves and value beyond proven and probable reserves are included when determining the fair value of mine site reporting units acquired and, subsequently, in determining whether the assets are impaired. The term “recoverable metals” refers to the estimated amount of metals that will be obtained after taking into account losses during ore processing and treatment. Estimates of recoverable metals from such exploration stage metal interests are risk adjusted based on management’s relative confidence in such materials. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. The Company’s estimates of future cash flows are based on numerous assumptions and it is possible that actual future cash flows will differ significantly from the estimates, as actual future quantities of recoverable metals, prices, production levels and operating costs of production and capital are each subject to significant risks and uncertainties. Accumulated impairment provisions of $1,081,000 and $1,073,000, respectively as of June 30, 2012 and December 31, 2011 were recorded for the property and machinery of Qianzhen Mining.
Financial Instruments
Effective January 1, 2008, the Company adopted FASB ASC 820-Fair Value Measurements and Disclosure or ASC 820 for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.
ASC 820 defines fair value as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs for which there is little or no market data and require the use of the reporting entity’s own assumptions.
The Company values its financial instruments by estimating their fair value. The estimated fair value amounts have been determined by the Company using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, restricted assets, accounts payable, other payables and accruals, short-term bank loans, convertible preferred stock, derivative liabilities, and other current liabilities.
Cash and cash equivalents include money market securities and commercial paper that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy.
As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented due to the relatively short maturities of these instruments and to the fact that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at the respective year ends.
Taxation
(a) Enterprise Income Tax
Taxes on profits earned in the PRC are calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC after taking into account the benefits from any special tax credits or “tax holidays” allowed in the PRC.
The Company provides for deferred income taxes using the asset and liability method. Under this method, the Company recognizes deferred income taxes for tax credits and net operating losses available for carry-forwards and significant temporary differences. The Company classifies deferred tax assets and liabilities as current or non-current based upon the classification of the related asset or liability in the financial statements or the expected timing of their reversal if they do not relate to a specific asset or liability. The Company provides a valuation allowance to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of or all of the deferred tax assets will not be realized.
Income taxes are accounted for under the Statement of FASB ASC 740, Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss carry forwards. Any deferred tax assets and liabilities would be measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
(b) Value Added Tax
The Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, a value added tax is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC.
Value added tax payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in both cases, any amount paid in respect of value added tax included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year.
(c) Resource Tax
All units and individuals engaged in the exploitation of mineral products as prescribed in the Regulations within the territory of the PRC shall pay a Resource Tax. The tax payable for Resource Tax shall be computed in accordance with the assessable volume of the taxable products and the prescribed unit tax amount.
Transportation charges
Transportation charges represent costs to deliver the Company’s inventory to points of sale. Transportation costs are expensed and charged to cost of sales as incurred.
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB ASC 718-10-55 - Compensation-Stock Compensation, or ASC 718-10-55. Under ASC 718-10-55, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In addition, FASB ASC 825-10-50-10 – Financial Instruments – Overall – Disclosures, or ASC 825-10-50-10, expresses views of the Securities and Exchange Commission, or the SEC, staff regarding the interaction between ASC 718-10-55 and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. The Company’s compensation cost is measured on the date of grant at its fair value. Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant.
Net Income Per Common Share
Basic and diluted earnings per share are presented for net income and for income from continuing operations. Basic earnings per share is computed by dividing net income by the weighted-average number of outstanding common shares for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts that may require the issuance of common shares in the future were converted. Diluted earnings per share is computed by increasing the weighted-average number of outstanding common shares to include the additional common shares that would be outstanding after conversion and adjusting net income for changes that would result from the conversion. Only those securities or other contracts that result in a reduction in earnings per share are included in the calculation.
Comprehensive Income (Loss)
Accumulated other comprehensive income includes foreign currency translation adjustments. Total comprehensive loss for the six months ended June 30, 2012 and 2011 was approximately ($4,776,000) and ($709,000), respectively.
Reclassifications
Certain reclassifications have been made to the prior periods’ financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or the sum of retained earnings and statutory reserves.
Recently Issued Accounting Pronouncements
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would result in material changes to our consolidated financial statements.
NOTE 6 – NOTES RECEIVABLE
At June 30, 2012 and December 31, 2011, notes receivable were approximately $805,000 and $1,019,000, respectively. Notes receivable consisted of bank’s acceptance bills from customers for the purchase of the Company’s products. Bank’s acceptance bills which entitle the holders to receive the full face amount from the banks at maturity, bear no interest and generally ranges from three to six months from the date of issuance, are accepted by the remitters’ bank. The Company can also endorse a bank’s acceptance bill as payment to its suppliers before the bank’s acceptance bill maturity date.
NOTE 7 – ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
The activities in the Company’s allowance for doubtful accounts are summarized as follows:
NOTE 8 - ADVANCES TO SUPPLIERS
Advances to suppliers consist of the following:
The activities in the Company’s allowance for doubtful accounts are summarized as follows:
NOTE 9 - OTHER RECEIVABLE
Other receivable consists of the following:
(a) As of June 30, 2012 and December 31, 2011, other receivable was approximately $1,699,000 and $0, respectively. This receivable was a loan on April 13, 2012 to a third party, Ms. Guiying Zhao, without interest and collateral. This loan will be due on August 8, 2012. An accumulated impairment provision of $1,699,000 for the six months ended June 30, 2012 was recorded for the loan for it’s over due.
The activities in the Company’s allowance for doubtful accounts are summarized as follows:
NOTE 10 - OTHER DEPOSITS
Other deposits consist of the following:
The activities in the Company’s allowance for doubtful accounts are summarized as follows:
NOTE 11 - DUE FROM RELATED PARTIES
Due from related parties consist of the following:
(a) (c) The funds were loaned to the Mr. Gang Liu and his controlled companies to repay their liabilities without interest and collateral after Dongsheng Mining, Meilan Mining, and Qianshi Resources acquired. According to Wuchuan Agreement, the Company shall bear the original debts of Dongsheng Mining, Meilan Mining, and Qianshi Resources amounting to no more than RMB 50,000,000 ($7.90 million). The remaining original liabilities of Dongsheng Mining, Meilan Mining, and Qianshi Resources will be transferred to Mr. Gang Liu and his controlled companies to eliminate the funds loaned to them.
NOTE 12 - INVENTORIES
Inventories consist of the following:
Under normal circumstances, minerals / ores will be extracted, processed and sold within the same month. When the price of fluorite powder rose significantly in 2011, the Company increased extraction of fluorite ore in order to produce fluorite powder. However, due to certain issues in processing minerals the capacity of the processing plant was limited and a large quantity of minerals were not processed and sold in the usual timeframe.
NOTE 13 - RESTRICTED ASSETS
Restricted assets are the deposits consisting of the following:
NOTE 14 - PROPERTY, MACHINERY AND MINING ASSETS, NET
Property, machinery and mining assets consist of the following:
Depreciation and Amortization
Depreciation and amortization expense in the aggregate for the six months ended June 30, 2012 and 2011 was approximately $3,013,000 and $2,096,000, respectively.
Impairment Provision
The accumulated impairment provision was recorded for the assets of Qianzhen Mining, a subsidiary of the Company within the nonferrous metals segment.
Exploration and Extraction Rights
As in most jurisdictions, mineral rights in China are divided into two types: extraction rights and exploration rights. Extraction rights refer to the rights obtained in accordance with the law for exploitation of mineral reserves and market control of mineral products. In nearly every jurisdiction in the world, mineral rights are absolutely exclusive. In China, however, there are no clear stipulations regarding the exclusivity of mineral rights. The Amendment of China Mining Regulation stressed the security of mineral rights and its Article 6 stated that “upon discovery of mineral reserves, the exploration licensees have the privileged priority to obtain mining rights to the mineral reserves within the exploration area.” According to the Ministry of Land and Resources, this privileged priority will be guaranteed under further amendments to be made in the near future.
Exploration rights refer to the rights obtained in accordance with the law for exploring for mineral reserves within the areas authorized by the exploration license. The Company has been granted mineral exploration permits. These exploration rights enable the Company to explore selected prospective mines for possible economic value to mine and develop. Under Chinese mining laws and regulations, generally an exploration license is valid for no more than three years and extension of the exploration license shall not exceed two years and two extensions.
NOTE 15 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At June 30, 2012 and December 31, 2011, accounts payable and accrued liabilities were approximately $2,197,000 and $3,324,000, respectively. Accounts payable and accrued liabilities are primarily payments due to suppliers and vendors for mining and transportation services.
NOTE 16 - SHORT-TERM LOANS
Short-term loans consisted of the following:
(a) The loan amount of approximately $1,663,000 was repaid before July 20, 2012.
NOTE 17 - LONG-TERM LOANS
Long-term loans consisted of the following:
NOTE 18 – RECEIPTS IN ADVANCE
Receipts in advance consisted of the following:
As of June 30, 2012, receipts in advance totaled approximately $5,305,000, which consisted of advances from 37 customers.
The following table shows the receipts in advance of the Company’s major customers (10% or more of consolidated receipts in advance) as of June 30, 2012:
As of December 31, 2011, receipts in advance totaled approximately $1,528,000, which consisted of advances from 15 customers.
The following table shows the receipts in advance of the Company’s major customers (10% or more of consolidated receipts in advance) as of December 31, 2011:
NOTE 19 – GOVERNMENT LOAN
As of June 30, 2012, the government loan amount of approximately $1.63 million was a fiscal appropriation from the local government for the construction of Fenshui Town Fluorite and Barite Flotation Plant in Wuchuan Yilao & Miao Autonomous County, Zunyi City, Guizhou Province in the PRC. If the Company’s construction does not meet the manufacturing standards of fluorite and flotation plants and is not certified by the local government, the loan may be required to be paid back to the local government. If the Company’s construction meet the standards and certified by the local government, the loan will not be required to be paid back to the local government and will be a deduction of the Company’s construction cost. As of June 30, 2012, the construction was still in progress and is expected to be completed in 2012.
NOTE 20 – OTHER PAYABLES AND ACCRUALS
Other payables and accruals consist of the following:
NOTE 21 - DUE TO RELATED PARTIES
Due to related parties classified as long term liabilities consist of the following:
NOTE 22 - SERIES A CONVERTIBLE PREFERRED STOCK
On March 21, 2012, the Company entered into a Securities Purchase Agreement (the “2012 SPA”) with certain institutional Investors (the “Investors”), pursuant to which the Company will offer up to an aggregate of $10 million of Series A Convertible Preferred Stock, $0.001 par value per share (the “Preferred Stock”) and warrants (the “Warrants”) to purchase approximately 1,960,785 shares of common stock of the Company, par value $0.001 per share (such offer being the “Offering”). Under the 2012 SPA, the Investors may purchase up to an aggregate of 10,000 shares of Preferred Stock in the Offering. The Offering was effected as a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-171243), which became effective on January 7, 2011, pursuant to a prospectus supplement to be filed with the U.S. Securities and Exchange Commission. FT Global Capital, Inc. acted as the sole placement agent for the transaction.
The Company will issue the Preferred Stock and Warrants in two $5 million tranches. Upon the closing of the first tranche on Monday, March 26, 2012, the Investors purchased $5.0 million of newly issued Preferred Stock and related Warrants. Each of the initial purchasers, at their option, may purchase their allocation of Preferred Stock in the second tranche by delivery of written notice to the Company at any time prior to the first anniversary of the initial closing date. Subject to the satisfaction of certain conditions, the Company may force the Investors to purchase the Preferred Stock in the second tranche at any time after the satisfaction of such conditions and prior to the four month anniversary of the initial closing date. In order for the Company to trigger the mandatory purchase requirement, the Company must obtain shareholder approval as may be required by the NYSE Amex and the Company must also satisfy certain other conditions. Accordingly, the Preferred Stock has been classified as a liability. The Company did not pursue the sale of the second tranche after the four month anniversary date.
The rights, preferences and privileges of the Preferred Stock are set forth in the Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock (the “Certificate of Designations”), that the Company filed with the Secretary of State of the State of Nevada on March 26, 2012. The initial conversion price of the preferred stock was $2.04 (the “Conversion Price”), subject to anti-dilution adjustments.
The Preferred Stock will amortize in installment payments, which will be payable in common stock, subject to certain equity conditions, or, at the Company’s discretion, in cash. The dividend rate on the Preferred Stock is 5% per annum, payable quarterly in common stock, subject to certain equity conditions, or, at the Company’s discretion, in cash.
At the closing of the initial tranche, the Investors received Warrants to purchase, in the aggregate, approximately 1,960,785 shares of common stock, which are exercisable for 42 months beginning on the initial closing date (including Warrants to purchase approximately 980,393 shares of common stock, which were paid as additional consideration for the commitment of the initial purchasers to fund the second tranche). No additional Warrants will be issued upon the consummation of the second tranche. The Warrants have an initial exercise price of $2.04, and are subject to anti-dilution adjustments.
A holder of Preferred Stock or Warrants, subject to certain exceptions, will be prohibited from converting Preferred Stock or exercising Warrants for shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 4.99% (or up to 9.99%, as elected by such holder upon 61 days prior written notice) of the total number of shares of the Company’s common stock then issued and outstanding.
Pursuant to terms of the Offering, the Company is restricted during certain periods of time and in certain circumstances in its ability to issue securities. Also, for a period of 18 months following the initial closing, the Investors shall have certain participation rights.
The aggregate net proceeds to the Company, after deducting placement agent fees and other estimated Offering expenses payable by the Company, are estimated to be approximately $4.5 million. The placement agent will receive a placement fee equal to 5% of the gross proceeds of the Offering. The agreement with the placement agent contains certain representations, warranties, and covenants by the Company. It also provides for indemnification by the Company of the placement agent in certain circumstances.
The Company has also agreed to grant to the placement agent at the initial closing of the Offering warrants (the “Placement Agent’s Warrants”) to purchase 392,157 shares of common stock. The Placement Agent’s Warrants shall have the same general terms as the Warrants offered in the Offering, except that the initial exercise price was 120% of the initial exercise price in the Warrants offered in the Offering. The Company has recorded approximately $1,010,000 in financing costs related to the issuance of the Preferred Stock of which approximately $632,000 has been paid in cash or is to be paid in cash at a future date. The Company has valued the Placement Agent’s warrants at approximately $378,000. The financing costs related to the issuance of the Preferred Stock are being amortized over the thirteen months conversion period. The Company has amortized approximately $270,000 of deferred financing costs for the Preferred Stock during the six months ended June 30, 2012, leaving a remaining balance of approximately $740,000 unamortized as of June 30, 2012.
On May 7, 2012 and June 5, 2012, the Company redeemed $1,666,667 of the Preferred Stock through the issuance of 1,475,225 and 976,249 shares of the Company’s common stock, respectively. As of June 30, 2012, the Company has accrued $60,520 of dividends payable on the Preferred Stock, including the Preferred Stock which has converted into common stock, and is included in other payables.
NOTE 23 - STOCKHOLDERS’ EQUITY
Common Stock
We have 50,000,000 shares of common stock, par value $0.001, authorized. At June 30, 2012 and December 31, 2011 there were 39,323,772 shares and 32,285,973 shares of common stock issued and outstanding, respectively.
After negotiations with the original shareholders of Xinyi Fluorite and as required by the Agreement in circumstances where the Company’s stock price has changed, the Company on February 13, 2012 issued an additional 1,139,128 shares of common stock to the original shareholders.
On March 30, 2012, the Company issued 185,106 shares of the common stock in connection with a partial exercise of the warrants granted in January 2011 with the adjusted exercise price $1.21 per share.
On May 2, 2012, 3,262,091 shares of the Company’s common stock were issued as the noncash acquisition consideration to the original shareholders of Dongsheng Mining, Meilan Mining, and Qianshi Resources.
On May 7, 2012 and June 5, 2012, the Company redeemed $1,666,667 of the Preferred Stock through the issuance of 1,475,225 and 976,249 shares of the Company’s common stock, respectively. As of June 30, 2012, the Company has accrued $60,520 of dividends payable on the Preferred Stock, including the Preferred Stock which has converted into common stock, and is included in other payables.
Common stock authorized and outstanding table
Common Stock Purchase Warrants
▼ Warrants granted in 2011
On January 19, 2011, the Company agreed to sell to certain institutional investors 2,836,883 shares of the Company’s common stock and warrants to purchase up to 851,066 shares of the Company’s common stock in a registered direct public offering (the “Offering”). The Offering was effected as a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-171243), which became effective on January 7, 2011, pursuant to a prospectus supplement to be filed with the U.S. Securities and Exchange Commission.
The common stock and warrants were sold in fixed combinations, with each combination consisting of one share of common stock and a warrant to purchase 0.30 shares of common stock. The purchase price was $7.05 per fixed combination. The warrants were exercisable immediately following the closing date of the Offering and will remain exercisable for three years thereafter at an exercise price of $8.46 per share. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and in the event the Company issues or is deemed to issue shares of common stock for less than the exercise price then in effect. The nature of the Offering was that of a derivative instrument upon its issuance due to the reset provisions in the Offering. A derivation was not recorded when the Offering was originally entered into as the value of the such a derivative was immaterial due to the Company's limited history with adjusting their previous fundraising's equity issuance. On March 21, 2012, the exercise price of the warrants was adjusted to $1.21 and these warrants have been reclassified from equity to a derivative liability for their future fair market value The valuation of the warrants, as a derivative liability, will be valued at market at each reporting date. Under ASC 815, the warrants will be carried at fair value and adjusted during each reporting period subsequent to reclassification to a derivative liability from that of an equity instrument.
The exercisability of the warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.99% of the Company’s common stock.
The Company also granted to the placement agent at the closing of the Offering warrants (the “Placement Agent’s Warrants”) to purchase that number of shares of our common stock equal to 8% of the aggregate number of shares underlying the warrants placed in the Offering. The Placement Agent’s Warrants had the same terms as the warrants offered in the Offering, except that the initial exercise price was 120% of the exercise price in the warrants offered in the Offering. The Placement Agent’s Warrants, and shares underlying the Placement Agent’s Warrants, were each included in the prospectus supplement to be filed with the U.S. Securities and Exchange Commission. On March 21, 2012, the exercise price of the Placement Agent’s Warrants was adjusted to $1.21 and these warrants have been reclassified from equity to a derivative liability for their future fair market value. The valuation of warrants, as a derivative liability, will be valued at market. Under ASC 815, the Placement Agent’s Warrants will be carried at fair value and adjusted during each reporting period subsequent to reclassification to a derivative liability from that of an equity instrument.
During the six months ended June 30, 2012, 185,106 warrants were exercised.
Warrants granted in January 2011
The fair value of the warrants to the investors and the Placement were estimated as of the grant date using the Black Scholes option pricing model. The determination of the value is affected by the price of the Company’s common stock at the date of the grant as well as assumptions made regarding the expected price volatility of the common stock over the terms of the grant, the risk-free interest rate and any expected dividends.
The table below provides the estimated fair value of the warrants, beneficial conversion features and the significant assumptions used to determine their value.
▼ Warrants granted in 2012
On March 21, 2012, the Company entered into a Securities Purchase Agreement (the “2012 SPA”) with a certain institutional Investors (the “Investors”), pursuant to which the Company will offer up to an aggregate of $10 million of Series A Convertible Preferred Stock, $0.001 par value per share (the “Preferred Stock”) and warrants (the “Warrants”) to purchase approximately 1,960,785 shares of common stock of the Company, par value $0.001 per share (such offer being the “Offering”). Under the 2012 SPA, the Investors may purchase up to an aggregate of 10,000 shares of Preferred Stock. The Offering was effected as a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-171243), which became effective on January 7, 2011, pursuant to a prospectus supplement to be filed with the U.S. Securities and Exchange Commission. FT Global Capital, Inc. acted as the sole placement agent for the Offering.
The Company also granted to the placement agent at the initial closing of the Offering warrants (the “Placement Agent’s Warrants”) to purchase 392,157 shares of common stock. The Placement Agent’s Warrants shall have the same general terms as the Warrants offered in the Offering, except that the initial exercise price was 120% of the initial exercise price in the Warrants offered in the Offering.
Warrants granted in March 2012
The fair value of the warrants to the investors and the Placement were estimated as of the grant date using the Black Scholes option pricing model. The determination of the value is affected by the price of the Company’s common stock at the date of the grant as well as assumptions made regarding the expected price volatility of the common stock over the terms of the grant, the risk-free interest rate and any expected dividends.
The table below provides the estimated fair value of the warrants, beneficial conversion features and the significant assumptions used to determine their value.
Common Stock Future issuance plan
On March 21, 2012, the Company entered into the 2012 SPA with certain institutional investors, pursuant to which the Company will offer up to an aggregate of $10 million of Series A Convertible Preferred Stock, and warrants to purchase approximately 1,960,785 shares of common stock of the Company (such offer being the “Offering”). Under the 2012 SPA, the investors may purchase up to an aggregate of 10,000 shares of preferred stock in the Offering. The initial conversion price of the preferred stock is $2.04, subject to anti-dilution adjustments. The Company has also agreed to grant to the placement agent at the initial closing of the Offering warrants to purchase 392,157 shares of common stock. The placement agent’s warrants shall have the same general terms as the warrants offered in the Offering, except that the initial exercise price was 120% of the initial exercise price in the warrants offered in the Offering.
Available common stock in the future table
NOTE 24 - DEFINED CONTRIBUTION RETIREMENT PLANS
As stipulated by the regulations of the PRC government, companies operating in the PRC have defined contribution retirement plans for their employees. The PRC government is responsible for the pension liability to these retired employees. Commencing January 1, 2002, the Company is required to make specified contributions to the state-sponsored retirement plan at 20% of the basic salary cost of their staff. Each of the employees of the PRC subsidiaries is required to contribute 6% of his/her basic salary.
NOTE 25 - STATUTORY RESERVES
In accordance with the PRC Companies Law, the Company’s PRC subsidiaries were required to transfer 10% of their profit after tax, as determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve and a percentage of not less than 5%, as determined by management, of the profit after tax to the public welfare fund. With the amendment of the PRC Companies Law which became effective January 1, 2006, enterprises in the PRC are no longer required to transfer any profit to the public welfare fund. Any balance of public welfare fund brought forward from December 31, 2005 should be transferred to the statutory surplus reserve. The statutory surplus reserve is non-distributable. There was no statutory reserve transferred for the six months ended June 30, 2012 and 2011.
NOTE 26 - ASSET RETIREMENT OBLIGATIONS
According to the “Rules on Mineral Resources Administration” and “Rules on Land Rehabilitation” of the PRC, mining companies causing damages to cultivated land, grassland or forests are required to restore the land to a condition approved by the local government.
The Company has identified and recognized the asset retirement obligations related to the Company’s mining sites. As of June 30, 2012, the total estimated discounted cash value for the future assets retirement obligations was approximately $237,000 for Sumochaganaobao fluorite mine, Qingzhen Fluorite Xinyi mine No. 1. Shuanghe Fluorite mine, Fenshui Qingshuzi Barite and Fluorite mine, Baicun Fluorite mine, and Keyinbulake Copper-Zinc mine. The Company has deposited approximately $310,000 and $175,000, respectively, in the Company’s bank accounts at June 30, 2012 and December 31, 2011 as guaranteed funds for the Company’s future asset retirement obligations. The following is a reconciliation for the Company’s restricted for assets retirement obligation to be used for future environmental remediation on the mines.
The following is a reconciliation for the Company’s assets retirement obligation:
NOTE 27 - OPERATING RISK
Country risk
Currently, the Company’s revenues are mainly derived from sales in the PRC. The Company hopes to expand its operations in the PRC, however, there are no assurances that the Company will be able to achieve such an expansion successfully. Therefore, a downturn or stagnation in the economic environment of the PRC could have a material adverse effect on the Company’s financial condition.
Products risk
The Company competes with larger companies, who have greater funds available for expansion, marketing, research and development and to attract more qualified personnel. There can be no assurance that the Company will remain competitive with larger competitors.
Exchange risk
The Company cannot guarantee that the current exchange rate will remain steady, therefore there is a possibility that the Company could post the same amount of profit for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange rate of PRC Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice.
Political risk
Currently, the PRC is in a period of growth and is openly promoting business development in order to bring more business into the PRC. Additionally, the PRC allows a PRC corporation to be owned by a United States corporation. If the laws or regulations are changed by the PRC government, the Company’s ability to operate in the PRC could be affected.
Key personnel risk
The Company’s future success depends on the continued services of executive management in China. The loss of any of their services would be detrimental to the Company and could have an adverse effect on business development. The Company does not currently maintain key-man insurance on their lives. Future success is also dependent on the ability to identify, hire, train and retain other qualified managerial and other employees. Competition for these individuals is intense and increasing.
Non-compliance with financing requirements
The Company might need to obtain future financings that requiring timely filing of registration statements, having those registration statements declared effective, and registering the shares offered. The Company might be subject to liquidated damages and other penalties if they continue to obtain future financings requiring registration statements, and do not having those registration statements filed and declared effective in a prompt manner.
NOTE 28 - COMMITMENTS AND CONTINGENCIES
General
The Company follows ASC 450, Accounting for Contingencies, in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be been incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.
Mining Industry in PRC
The Company’s mining operations are and will be subject to extensive national and local governmental regulations in China, which may be revised or expanded at any time. A broad number of matters are subject to regulations. Generally, compliance with these regulations requires the Company to obtain permits issued by government, state and local regulatory agencies. Certain permits require periodic renewal or review of their terms and conditions. The Company cannot predict whether it will be able to obtain or renew such permits or whether material changes in permit terms and conditions will be imposed. The inability to obtain or renew permits or the imposition of additional terms and conditions could have a material adverse effect on the Company’s ability to develop and operate its properties.
Environmental matters
Environmental laws and regulations to which the Company is subject as it progresses from the development stage to the production stage create additional concerns and mandate additional requirements for the Company. Failure to comply with applicable laws, regulations and permits can result in injunctive actions, damages and civil and criminal penalties. The laws and regulations applicable to the Company’s activities change frequently and it is not possible to predict the potential impact on the Company from any such future changes.
Although management believes that the Company is in material compliance with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company’s compliance with the applicable statutes, laws, rules and regulations will not be challenged by governing authorities or private parties, or that such challenges will not lead to material adverse effects on the Company’s financial position, results of operations, or cash flows.
The Company is not involved in any legal matters arising in the normal course of business. While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which it might be involved in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
NOTE 29 - SEGMENT INFORMATION
The Company follows FASB ASC 280-Segment Reporting, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluating their performance. The Company has two operating segments identified by product, “fluorite” and “nonferrous metals”. The fluorite segment consists of our fluorite extraction and processing operations conducted through the Company’s subsidiaries Xiangzhen Mining, Xinyi Fluorite, Dongsheng Mining, Meilan Mining, and Qianshi Resources. The nonferrous metals segment consists of the Company’s copper, zinc, lead and other nonferrous metal exploration, extraction and processing activities conducted through the Company’s subsidiaries Qianzhen Mining and Xingzhen Mining.
The Company primarily evaluates performance based on income before income taxes and excluding non-recurring items.
The segment data presented below was prepared on the same basis as the Company’s consolidated financial statements.
The following summarizes identifiable assets by geographic area:
The following summarizes net losses:
NOTE 30 - OTHER INCOME, NET
NOTE 31 - EARNINGS PER SHARE
The following table is a reconciliation of the weighted average shares used in the computation of basic and diluted earnings per share from continuing and discontinued operations for the periods presented (amounts in thousands, except per share data):
The outstanding warrants were not included in the calculation since they were out-of-the money as of June 30, 2012.
NOTE 32 - CONCENTRATION OF CUSTOMERS AND SUPPLIERS
The Company had five customers who contributed approximately $4,498,000 or 50% of the Company’s consolidated net revenue for the six months ended June 30, 2012. For the same period of 2011, the Company had five main customers who contributed approximately $9,259,000 or 84% of the Company’s consolidated net revenue.
The following table shows the Company’s major customers (5% or more of consolidated net revenue) for the six months ended June 30, 2012:
The following table shows the Company’s major customers (5% or more of consolidated net revenue) for the six months ended June 30, 2011:
The Company had no concentrated suppliers for the six months ended June 30, 2012 and 2011.
NOTE 33 - SUBSEQUENT EVENT
On August 7, 2012 the Company and all of the holders of the Series A convertible Preferred Stock (the “Preferred Stock”) of the Company reached an agreement to amend certain terms of the Preferred Stock and to exchange warrants held by such holders for new warrants with a reduction in the exercise price to be $1.00.
According to the Agreement, August 6, 2012 was the second pre- installment amortization date, and September 17, 2012 will be the payment day for the second installment payment; October 6, 2012 will be the third pre- installment amortization date, and November 17, 2012 will be the payment day for the third installment payment; 10 days prior to payment date, the Company has the right to choose cash to pay off the price difference. Investors waived certain rights with respect to the August 1 installment payment upon the closing following the execution of certain Amendment and Exchange Agreements on August 7, 2012.
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion contains certain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as “may”, “will”, “could”, “expect”, “anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of the Annual Report on Form 10-K filed on March 29, 2011. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Our financial statements are prepared in U.S. Dollars and in accordance with generally accepted accounting principles in the United States of America. See “Exchange Rates” below for information concerning the exchange rates at which Renminbi (“RMB”) were translated into U.S. Dollars (“USD”) at various pertinent dates and for pertinent periods.
OVERVIEW
The Company through its subsidiaries, is engaged in the exploration, development, mining, and processing of fluorite, barite and nonferrous metals such as zinc, lead and copper in China. The Company has the following principal areas of interest in China: (a) fluorite extraction and processing in the Sumochaganaobao region of Inner Mongolia; (b) fluorite and barite extraction and processing in the Wuchuan County of Guizhou province; (c) fluorite and barite extraction and processing in the Yanhe County of Guizhou province; (d) fluorite extraction and processing in Jingde County, Anhui Province; (e) zinc/copper/lead processing in Wulatehouqi of Inner Mongolia; and (f) zinc/copper exploration, mining and processing in Xinjiang.
BUSINESS STRATEGY
Resumption of Production Capacity to Meet Demand
▼ Fluorite
Xiangzhen Mining
In November 2007, Xiangzhen Mining finished construction of a mining project with a capacity of 300,000 metric tons and a processing plant with a capacity of 200,000 metric tons. Xiangzhen Mining owns 100% of the fluorite mining rights of Inner Mongolia Sumochaganaobao.
In 2011, Xiangzhen Mining extracted approximately 190,000 metric tons of fluorite ore, produced 41,000 metric tons of fluorite lumps and sold 49,000 metric tons of fluorite lumps with total sales of approximately US$ 6.38 million, accounting for approximately 25% of the revenues of our fluorite business. Xiangzhen Mining also produced 56,000 metric tons of fluorite powder and sold 49,000 metric tons of fluorite powder for approximately US$ 16.03 million, which accounted for approximately 63% of the revenues of our fluorite business.
Xinyi Fluorite
On January 13, 2011, the Company through its subsidiary Xingzhen Mining acquired 55% of the equity interests of Xinyi Fluorite. Xinyi Fluorite owns 100% of one processing plant with a processing capacity of 60,000 metric tons of fluorite ore per year and the mining rights of the Guangrong Mine and the Qingzhen Fluorite Xinyi Mine No. 1.
After the acquisition, the Company performed certain renovations and Xinyi Mine No. 1 resumed production on February 10, 2011. The processing plant resumed its production on March 26, 2011.
In 2011, Xinyi Fluorite extracted approximately 14,000 metric tons of fluorite ore, produced 9,000 metric tons of fluorite powder and sold 9,000 metric tons of fluorite powder for approximately US$3.16 million, which accounted for approximately 12% of the revenues of our fluorite business.
On November 18, 2011, Xinyi Fluorite engaged geological evaluation institution SRK Consulting China Ltd. (SRK) to evaluate the current situation and potential extraction volume at Xinyi Mine No. 1. SRK completed additional drilling and collected more technical datasets on Xinyi Fluorite's reserves in May 2012. Subsequently, SRK commissioned Hefei Mineral Resources Supervision and Inspection Center, an affiliate of the Ministry of Land and Resources of the PRC, to inspect the fluorite samples. It is expected that SRK will provide a complete and JORC-compliant technical report on Xinyi's reserves by the end of 2012.
Plans for extraction and processing fluorite in 2012
In 2012, Xiangzhen Mining plans to be in normal production. We plan to extract 150,000 metric tons of fluorite ore, produce 40,000 metric tons of fluorite powder, and produce 60,000 metric tons of fluorite lumps. We plan to sell 40,000 metric tons of fluorite powder and 60,000 metric tons of fluorite lumps.
In 2012, Xinyi Fluorite plans to be in normal production. We plan to extract 60,000 metric tons of fluorite ore produce 25,000 metric tons of fluorite powder, and produce 10,000 metric tons of fluorite lumps. We plan to sell 25,000 metric tons of fluorite powder and 10,000 metric tons of fluorite lumps.
We also plan to do the following work in 2012:
Ensure and stabilized our current production, extract and process to capacity and carry-out our current plans.
According to changes in the prices of fluorite powder and fluorite lumps, adjust the proportion of fluorite powder and fluorite lumps in our product structure to ensure the highest profit.
We will still strive to leverage our position as one of the leaders in the industry to acquire additional appropriate fluorite reserves.
Acquire advanced fluorine chemical technology and develop and construct down stream products using fluorite as a raw material.
Dongsheng Mining
On January 16, 2012, the Company through its subsidiary Xiangzhen Mining, entered into an equity transfer and capital increase agreement to acquire 60% of the equity interests of Dongsheng Mining. Dongsheng Mining is a limited liability company legally incorporated on December 13, 1999 and validly existing in Wuchuan Yilao & Miao Autonomous County, Zunyi City, Guizhou Province in the PRC. Dongsheng Mining has a registered capital of RMB 2,000,000 with its business mainly in extraction and processing of fluorite ore and barite ore. Currently, it owns 100% of the mining rights of Shuanghe Fluorite Mine, Fenshui Qingshuzi Barite and Fluorite Mine, Baicun Fluorite Mine, Luping Fluorite Mine and Shibuya Barite and Fluorite Mine, and it also owns Douru Town Fluorite Flotation Plant and the Fenshui Town Fluorite and Barite Flotation Plant, and a 30% equity interest in Wuchuan Chenhe Dongsheng Fluoride Industry Co., Ltd. in Wuchuan Yilao & Miao Autonomous County, Zunyi City, Guizhou Province in the PRC.
Meilan Mining
On February 7, 2012, the Company through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Meilan Mining. Meilan Mining is a PRC limited liability company legally incorporated on November 20, 2007 and validly existing in Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province in the PRC. Meilan Mining has a registered capital of RMB 1,334,000 and its primary business is the extraction of fluorite ore and barite ore. Currently, Meilan Mining owns 100% of the mining rights to the fluorite ores in Fengshuiling, Banchang Town, Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province in the PRC.
Qianshi Resources
On February 7, 2012, the Company through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Qianshi Resources. Qianshi Resources is a PRC limited liability company legally incorporated on April 30, 2005 and validly existing in Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province in the PRC. Qianshi Resources has a registered capital of RMB 1,000,000 and its primary business is the extraction and processing of fluorite ore and barite ore. Currently, Qianshi Resources owns 100% of the mining rights of Jingliang Fluorite Mine, and the Fluorite Flotation Plant in the Huangtu Town, Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province in the PRC.
▼ Non-ferrous Metals
Xingzhen Mining
In July 2006, Xingzhen Mining started to build a 200,000 metric tons/year zinc-copper ore mining and processing project at Keyinbulake Multi-Metal Mine in Buerjin County, Aletai Region, Xinjiang Uygur Autonomous Region.
On April 28, 2008, Xingzhen Mining completed a successful test of its facilities and subsequently started production. In parallel with processing, Xingzhen Mining continued exploration in the area.
In 2011, Xingzhen produced zinc concentrates and copper concentrates equivalent to 2,639 metric tons of zinc metal and 214 metric tons of copper metal as compared to 3,129 and 155 metric tons in 2010, respectively, and sold zinc concentrates and copper concentrates equivalent to 2,761 metric tons of zinc metal and 254 metric tons of copper metal, as compared to 2,538 and 115 metal tons in 2010, respectively, accounting for approximately 63% and 37%, respectively, of the total revenues of our nonferrous business of approximately $4.98 million as compared to 79%, 21% and $3.60 million in 2010, respectively.
We started production at the end of April 2012. We did not stop excavating in 2011. We plan to extract ores of 130,000 metric tons, process ores of 130,000 metric tons, and produce approximately 5,000 metal tons of zinc concentrate and approximately 470 metal tons of copper concentrate.
Qianzhen Mining
Before the end of 2007, Qianzhen Mining processed ores supplied by local mining companies. Since then, the supplier contracts expired.
No production occurred at Qianzhen Mining in 2011 due to a lack of ore supply.
Due to a potential asset reorganization, we do not plan to produce at Qianzhen Mining in 2012.
Exploration Activities
Keyinbulake Copper-Zinc Mine
In 2011, Xingzhen Mining continued exploration as planned, with a focus on: ground drilling, surveying, geophysical prospecting, geological surveying, documenting, rock-mineral experimenting, etc. A summary of the work completed is as follows:
Ground drilling: drilled 23 holes, total project amount was 8,335.29 meters.
Surveying: tunnel survey was 2,000 meters, 1:1000 survey was 1.485 square kilometers.
Geophysical prospecting: powerful induced polarization sounding (VIP method) a hundred points, advanced magnetic survey (network 50X20 meters) was 3.92 square kilometers.
Documenting: tunneling 138.54 meters, trenching 1,629.91 square meters, drilling 8,335.29 meters.
Rock-mineral experimenting: sampling 687 items, rock-mineral determined 37 items.
In 2012, we plan to channel 1,000 cubic meters, drill underground 2,500 meters, and ground drill 1,000 meters.
Qingzheng Fluorite Xinyi Mine No. 1
In 2011, we renovated our mines and increased capacity to 60,000 metric tons per year. We expanded our work based in two areas: underground mining projects and geophysical exploration.
Underground mining project: the plan was started during 2011 and we will finish the project in July 2012. The project’s main focus is 216, 256 middle section reclamation works and development, venting system rehabilitation and implementation of the six security systems and production safety standards required by the State Council. We successfully implemented the six security systems required by State Council and passed inspection of safety standard V required by the local government. We also developed 1,500 meters of drift tunnels; performed ground drilling of 300 meters, and underground drilling of 250 meters.
In 2012, in order to continue underground exploration, we plan to drill 6 holes and develop 2,000 meters of drift tunnels.
Xinglong Town Guangrong Fluorite Mine
No exploration work was done in 2011.
Considering the self development, we plan to increase the mining depth to below +60 meter level, therefore we need to drill and control below +60 meters elevation minerals. In 2012, we plan to drill 3 holes, and develop 1,000 meters of drift tunnels.
Acquiring More Mineral Reserves
To increase our reserve base and insure supply to our processing facilities, we plan to acquire domestic and foreign large-scale mines when the right opportunities arise. We also expect to acquire additional nonferrous metal mines and fluorite mines domestically that have good extracting and operating conditions and possess all necessary governmental licenses.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2012 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2011
Selected information from the Consolidated Statements of Operations
REVENUES. Net revenues for the three months ended June 30, 2012 were approximately $7,550,000, representing an approximate $1,567,000 or 17% decrease as compared to the same period of 2011. The decrease was primarily due to the decrease in sales volume for fluorite powder and zinc concentrate powder. The fluorite powder sales volume for the three months ended June 30, 2012 was approximate 14,770 tons, representing an approximate 1,780 ton or 11% decrease as compared to the same period of 2011. Zinc concentrate powder sales volume for the three months ended June 30, 2012 was 585 metal tons, representing an approximate 942 metal ton or 62% decrease as compared to the same period of 2011.
GROSS PROFIT AND GROSS PROFIT MARGIN. For the three months ended June 30, 2012, gross profit was approximately $1,386,000, which decreased by approximately 68% from $4,344,000 in gross profit for the same period of 2011. The gross profits from the fluorite segment were approximately $1,503,000 and $3,735,000 for the three months ended June 30, 2012 and 2011, respectively. The gross profits (loss) from the non-ferrous metal segment were approximately ($117,000) and $609,000 for the three months ended June 30, 2012 and 2011, respectively. The fluorite segment’s gross profits decrease was mainly due to the decrease in sales volume and sale price for fluorite powder. The fluorite powder sales volume for the three months ended June 30, 2012 was approximate 14,770 tons, representing an approximate 1,780 ton or 11% decrease as compared to the same period of 2011. The fluorite powder average sales price for the three months ended June 30, 2012 was $258 per ton, representing an approximate $91 per ton or 26% decrease as compared to the same period of 2011. Gross profit margin was approximately 18% for the three months ended June 30, 2012, a decrease from the gross profit margin of 48% for the same period of 2011.
GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended June 30, 2012, general and administrative expenses decreased by approximately $451,000 to $2,862,000 in 2012 as compared to $3,313,000 in 2011.
INTEREST EXPENSE. Interest expense increased by approximately $230,000 from the same period of 2011. The increase was mainly due to the increase in the principal and the interest rate of the short term loans.
NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY. Net (loss) income attributable to the Company for the three months ended June 30, 2012 was approximately ($1,966,000), as compared to $128,000 for the same period of 2011. Basic net (loss) income per share were ($0.05) and $0.01 for the three months ended June 30, 2012 and 2011, respectively.
SEGMENT PERFORMANCE ANALYSIS
Fluorite
For the second quarter of 2012, the fluorite segment revenue decreased by 9% from approximately $6,714,000 for the three months ended June 30, 2011 to approximately $6,089,000 for the three months ended June 30, 2012. The decrease was primarily due to the decrease in sales volume and sale price for fluorite powder. The fluorite powder sales volume for the three months ended June 30, 2012 was approximately 14,770 tons, representing an approximate 1,780 ton or 11% decrease as compared to the same period of 2011. The fluorite powder average sales price for the three months ended June 30, 2012 was $258 per ton, representing an approximate $91 per ton or 26% decrease as compared to the same period of 2011.
Our fluorite segment loss was approximately $2,894,000 for the three months ended June 30, 2012, compared to a segment income of approximately $2,133,000 in the same period of 2011.
Nonferrous Metals
Nonferrous metals segment revenue for the three months ended June 30, 2012 amounted to $1,461,000, representing a decrease of approximately $942,000 or 39% as compared to the same period of 2011. The decrease was primarily due to the decrease in sales volume for zinc concentrate powder. Zinc concentrate powder sales volume for the three months ended June 30, 2012 was 585 metal tons, representing an approximate 942 metal ton or 62% decrease as compared to the same period of 2011.
Our nonferrous metals segment loss was approximately $1,403,000 for the three months ended June 30, 2012, compared to a segment loss of $164,000 in the same period of 2011.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2012 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2011
Selected information from the Consolidated Statements of Operations
REVENUES. Net revenues for the six months ended June 30, 2012 were approximately $9,056,000, representing an approximate $1,957,000 or 18% decrease as compared to the same period of 2011. The decrease was primarily due to the decrease in sales volume for fluorite powder and zinc concentrate powder. The fluorite powder sales volume for the six months ended June 30, 2012 was approximate 16,000 tons, representing an approximate 6,600 ton or 29% decrease as compared to the same period of 2011. Zinc concentrate powder sales volume for the six months ended June 30, 2012 was 585 metal tons, representing an approximate 942 metal ton or 62% decrease as compared to the same period of 2011.
GROSS PROFIT AND GROSS PROFIT MARGIN. For the six months ended June 30, 2012, gross profit was approximately $2,030,000, which decreased by approximately 59% from $5,008,000 in gross profit for the same period of 2011. The gross profits from the fluorite segment were approximately $2,147,000 and $4,399,000 for the six months ended June 30, 2012 and 2011, respectively. The gross profits from the non-ferrous metal segment were approximately ($117,000) and $609,000 for the six months ended June 30, 2012 and 2011, respectively. The fluorite segment’s gross profits decrease was mainly due to the decrease in sales volume and sale price for fluorite powder. The fluorite powder sales volume for the six months ended June 30, 2012 was approximately 16,000 tons, representing an approximate 6,600 ton or 29% decrease as compared to the same period of 2011. The fluorite powder average sales price for the six months ended June 30, 2012 was $260 per ton, representing an approximate $62 per ton or 19% decrease as compared to the same period of 2011. Gross profit margin was approximately 22% for the six months ended June 30, 2012, a decrease from the gross profit margin of 45% for the same period of 2011.
GENERAL AND ADMINISTRATIVE EXPENSES. For the six months ended June 30, 2012, general and administrative expenses increased by approximately $221,000 to $5,724,000 in 2012 as compared to $5,503,000 in 2011. The increase was mainly due to the increased administrative expense associated with the newly acquired Dongsheng Mining, Meilan Mining, and Qianshi Resources entities.
INTEREST EXPENSE. Interest expense increased by approximately $547,000 from the same period of 2011. The increase was mainly due to the increase in the principal and the interest rate of the short term loans.
NET LOSS ATTRIBUTABLE TO THE COMPANY. Net loss attributable to the Company for the six months ended June 30, 2012 was approximately $5,143,000, as compared to $1,481,000 for the same period of 2011. Basic net losses per share were $0.15 and $0.05 for the six months ended June 30, 2012 and 2011, respectively.
SEGMENT PERFORMANCE ANALYSIS
Fluorite
For the six months ended June 30, 2012, fluorite segment revenue decreased by 12% from $8,610,000 for 2011 to $7,595,000 for 2012. The decrease was primarily due to the decrease in sales volume and sale price for fluorite powder. The fluorite powder sales volume for the six months ended June 30, 2012 was approximately 16,000 tons, representing an approximate 6,600 ton or 29% decrease as compared to the same period of 2011. The fluorite powder average sales price for the six months ended June 30, 2012 was $260 per ton, representing an approximate $62 per ton or 19% decrease as compared to the same period of 2011.
Our fluorite segment loss was approximately $4,601,000 for the six months ended June 30, 2012, compared to a segment income of approximately $1,820,000 in the same period of 2011.
Nonferrous Metals
Nonferrous metals segment revenue for the six months ended June 30, 2012 amounted to amounted to $1,461,000, representing a decrease of approximately $942,000 or 39% as compared to the same period of 2011. The decrease was primarily due to the decrease in sales volume for zinc concentrate powder. Zinc concentrate powder sales volume for the six months ended June 30, 2012 was 585 metal tons, representing an approximate 942 metal ton or 62% decrease as compared to the same period of 2011.
Our nonferrous metals segment loss was approximately $1,975,000 for the six months ended June 30, 2012, compared to a segment loss of $1,139,000 in the same period of 2011.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $1.25 million as of June 30, 2012, a decrease of $4.32 million as compared to the balance at December 31, 2011 of $5.57 million.
Net cash used in operating activities for the six months ended June 30, 2012 was $9.19 million, representing a $5.23 million increase as compared to $3.96 million in cash used for the same period in 2011.
Net cash used in investing activities for the six months ended June 30, 2012 was $1.59 million, as compared to $5.78 million used for the same period of 2011.
Net cash provided by financing activities for the six months ended June 30, 2012 was $6.45 million, as compared to $16.89 million provided for the same period of 2011.
OFF-BALANCE SHEET ARRANGEMENTS
We have never entered into any off-balance sheet financing arrangements and have not formed any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
INFLATION
The Company does not foresee any material adverse effects on its earnings as a result of inflation.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are 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.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimates are made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements.
We believe that the following critical accounting policies reflect the significant estimates and assumptions which are used in the preparation of the consolidated financial statements and affect our financial condition and results of operations.
Property, Plant and Mine Development
Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives, which do not exceed the related estimated mine lives, of such facilities based on mineralized material.
Mineral exploration costs are expensed as incurred. After a mine is considered to be in the development or production stage or considered to have proven or probable reserves further exploration costs are also expensed as incurred.
Extraction rights are stated at the lower of cost and recoverable amount. When extraction rights are obtained from the government according to mining industry practice in the PRC, extraction rights are capitalized as incurred and are amortized using the units-of-production (“UOP”) method over the estimated life of the mineralized body based on estimated recoverable volume through to the end of the period over which the Company has extraction rights.
The Company determines whether a mine is accounted for as being in an exploration stage or a production stage based upon US GAAP. The Company commences capitalizing development costs upon establishing proven and probable reserves (to the extent necessary to meet the definition under Industry Guide 7). Once a mine is considered to be in the development or production stage, the mines capitalized development costs are amortized using the UOP method based on the estimated recoverable volume of the mineralized material. Based on these criteria the Company believes it is appropriate to account for the Xiangzhen Mining property as a production-stage operation that has capitalized development costs and to account for the Xingzhen Mining, Xinyi Fluorite, Dongsheng Mining, Meilan Mining and Qianshi Resources properties as exploration stage projects that has expensed their development costs.
At the Company’s surface mines, development costs include costs to further delineate the mineralized body and remove overburden to initially expose the mineralized body. At the Company’s underground mines, development costs include the costs of building access ways, shaft sinking and access, lateral development, drift development, and ramps and infrastructure development.
To the extent that these costs benefit the entire mineralized body, they are amortized over the estimated life of the mineralized body. Costs incurred to access specific mineralized blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific mineralized block or area. Interest cost allocable to the cost of developing mining properties and to constructing new facilities, if any, is capitalized until such assets are ready for their intended use.
Land use rights are stated at cost, less accumulated amortization. Land use right amortization is computed using the straight-line method over the estimated useful lives of 25 years.
Estimated useful lives of the Company’s assets are as follows:
Asset Impairment
Long-lived Assets
The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows are estimated based on quantities of recoverable metals, corresponding expected commodity prices (considering current and historical prices, price trends and related factors), production levels and operating costs of production and capital, all based on life-of-mine plans. Existing proven and probable reserves and value beyond proven and probable reserves are included when determining the fair value of mine site reporting units at acquisition and, subsequently, in determining whether the assets are impaired. The term “recoverable metals” refers to the estimated amount of gold or other commodities that will be obtained after taking into account losses during ore processing and treatment. Estimates of recoverable metals from such exploration stage metal interests are risk adjusted based on management’s relative confidence in such materials. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. The Company’s estimates of future cash flows are based on numerous assumptions and it is possible that actual future cash flows will be significantly different than the estimates, as actual future quantities of recoverable metals, gold and other commodity prices, production levels and operating costs of production and capital are each subject to significant risks and uncertainties.
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB ASC 718-10-55 - Compensation-Stock Compensation, or ASC 718-10-55. Under ASC 718-10-55, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In addition, FASB ASC 825-10-50-10 – Financial Instruments – Overall – Disclosures, or ASC 825-10-50-10, expresses views of the Securities and Exchange Commission, or the SEC, staff regarding the interaction between ASC 718-10-55 and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. The Company’s compensation cost is measured on the date of grant at its fair value. Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. This information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Our financial individuals involved in preparing our financial statements according to U.S. GAAP do not hold a license, such as Certified Public Accountant in the U.S., and have not attended U.S. institutions or extended educational programs that would provide enough of the relevant education relating to U.S. GAAP. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.
Remediation of Material Weaknesses
In light of the conclusion that our Company’s internal control over financial reporting was not effective, our management has developed a plan intended to remediate such ineffectiveness and to strengthen our internal controls over financial reporting through the implementation of certain remedial measures, which include:
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter 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
None
Item 1A. Risk Factors
Not required
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mining Safety Disclosure
Not applicable
Item 5. Other Information
None
Item 6. Exhibits
The following exhibits are hereby filed or furnished with this Quarterly Report on Form 10-Q.
*Filed herewith. †Furnished herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant certifies that it has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in Beijing.
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