U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(
Amendment No. 1)
(Mark one)
|
x
|
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
|
For the Quarterly Period Ended June 30,
2012
or
|
¨
|
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
|
Commission File Number 001-33929
China Shen Zhou Mining & Resources,
Inc.
(Name of small business issuer in its charter)
Nevada
|
|
87-0430816
|
(State or other jurisdiction
of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
No. 166 Fushi Road, Zeyang Tower,
Suite 1211
Shijingshan District, Beijing, China
100043
People’s Republic of China
|
|
100043
|
(Address of principal executive offices)
|
|
(Zip Code)
|
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.
Large accelerated filer
¨
|
Accelerated filer
¨
|
Non-accelerated filer
¨
(Do not check if a smaller reporting
company)
|
Smaller reporting company
x
|
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes
¨
No
x
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:
Figure
|
Amount from 10-Q
|
Amended Amount
|
Three month fluorite powder sales volume
|
13,100 tons
|
14,770 tons
|
Decrease from same period of prior year
|
3,450 tons
|
1,780 tons
|
Percentage Decrease from same period of prior year
|
21%
|
11%
|
Three month fluorite powder average price per ton
|
$291
|
$258
|
Decrease from same period of prior year
|
$58
|
$91
|
Percentage Decrease from same period of prior year
|
17%
|
26%
|
Six month fluorite powder sales volume
|
14,200 tons
|
16,000 tons
|
Decrease from same period of prior year
|
8,400 tons
|
6,600 tons
|
Percentage Decrease from same period of prior year
|
37%
|
29%
|
Six month fluorite powder average price per ton
|
$294
|
$260
|
Decrease from same period of prior year
|
$28
|
$62
|
Percentage Decrease from same period of prior year
|
9%
|
19%
|
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
|
|
Page
|
|
|
|
PART I
|
FINANCIAL INFORMATION
|
3
|
Item 1.
|
Financial Statements:
|
3
|
|
Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011 (Audited)
|
3
|
|
Consolidated Statements of Operations and
Comprehensive Income (Unaudited)
Three and Six Months Ended June 30, 2012 and
2011
|
4
|
|
Consolidated Statements of Cash Flows (Unaudited)
Six months Ended June 30, 2012 and 2011
|
5
|
|
|
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
6
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
39
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
48
|
|
|
|
Item 4.
|
Controls and Procedures
|
48
|
|
|
|
PART II
|
OTHER INFORMATION
|
50
|
|
|
|
Item 1.
|
Legal Proceedings
|
50
|
|
|
|
Item 1A.
|
Risk Factors
|
50
|
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
50
|
|
|
|
Item 3.
|
Defaults Upon Senior Securities
|
50
|
|
|
|
Item 4.
|
Mining Safety Disclosure
|
50
|
|
|
|
Item 5.
|
Other Information
|
50
|
|
|
|
Item 6.
|
Exhibits
|
50
|
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)
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,245
|
|
|
$
|
5,569
|
|
Notes receivable, net
|
|
|
805
|
|
|
|
1,019
|
|
Accounts receivable, net
|
|
|
427
|
|
|
|
3,332
|
|
Advances to suppliers
|
|
|
1,375
|
|
|
|
1,833
|
|
Acquisition deposit
|
|
|
-
|
|
|
|
2,359
|
|
Other deposits
|
|
|
293
|
|
|
|
258
|
|
Inventories
|
|
|
10,667
|
|
|
|
7,479
|
|
Due from related parties
|
|
|
3,094
|
|
|
|
-
|
|
Restricted assets
|
|
|
1,583
|
|
|
|
2,536
|
|
Deferred financing costs
|
|
|
740
|
|
|
|
-
|
|
Total current assets
|
|
|
20,229
|
|
|
|
24,385
|
|
|
|
|
|
|
|
|
|
|
Restricted assets
|
|
|
310
|
|
|
|
175
|
|
Prepayment for vehicle rent
|
|
|
400
|
|
|
|
443
|
|
Property, machinery and mining assets, net
|
|
|
82,899
|
|
|
|
60,313
|
|
Total assets
|
|
$
|
103,838
|
|
|
$
|
85,316
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,197
|
|
|
$
|
3,324
|
|
Short term loans
|
|
|
10,532
|
|
|
|
11,996
|
|
Receipts in advance
|
|
|
5,305
|
|
|
|
1,528
|
|
Other payables and accruals
|
|
|
3,940
|
|
|
|
2,772
|
|
Government loan
|
|
|
1,631
|
|
|
|
-
|
|
Convertible preferred stock
|
|
|
3,333
|
|
|
|
-
|
|
Derivative liabilities
|
|
|
1,377
|
|
|
|
-
|
|
Due to related parties
|
|
|
239
|
|
|
|
250
|
|
Taxes payable
|
|
|
1,932
|
|
|
|
1,877
|
|
Total current liabilities
|
|
|
30,486
|
|
|
|
21,747
|
|
|
|
|
|
|
|
|
|
|
Long term loans
|
|
|
1,742
|
|
|
|
-
|
|
Total liabilities
|
|
|
32,228
|
|
|
|
21,747
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock ($0.001 par value; 10,000
shares and 0 share authorized as of June 30, 2012 and December 31, 2011 respectively; 3,333 shares and 0 shares issued and outstanding
as of June 30, 2012 and December 31, 2011 respectively)
|
|
|
-
|
|
|
|
-
|
|
Common stock ($0.001 par value; 50,000,000 shares authorized;
39,323,772
shares and 32,285,973 shares issued and outstanding as of June 30, 2012 and December 31, 2011 respectively)
|
|
|
39
|
|
|
|
32
|
|
Additional paid-in capital
|
|
|
62,925
|
|
|
|
58,425
|
|
Statutory reserves
|
|
|
1,732
|
|
|
|
1,732
|
|
Accumulated other comprehensive income
|
|
|
6,476
|
|
|
|
6,109
|
|
Accumulated deficit
|
|
|
(18,487
|
)
|
|
|
(13,344
|
)
|
Stockholders' equity - China Shen Zhou Mining & Resources, Inc. and Subsidiaries
|
|
|
52,685
|
|
|
|
52,954
|
|
Noncontrolling interest
|
|
|
18,925
|
|
|
|
10,615
|
|
Total stockholders’ equity
|
|
|
71,610
|
|
|
|
63,569
|
|
Total liabilities and stockholders’ equity
|
|
$
|
103,838
|
|
|
$
|
85,316
|
|
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)
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
2012
|
|
|
June 30,
2011
|
|
|
June 30,
2012
|
|
|
June 30,
2011
|
|
Net revenue
|
|
$
|
7,550
|
|
|
$
|
9,117
|
|
|
$
|
9,056
|
|
|
$
|
11,013
|
|
Cost of sales
|
|
|
6,164
|
|
|
|
4,773
|
|
|
|
7,026
|
|
|
|
6,005
|
|
Gross profit
|
|
|
1,386
|
|
|
|
4,344
|
|
|
|
2,030
|
|
|
|
5,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
|
20
|
|
|
|
24
|
|
|
|
44
|
|
|
|
60
|
|
General and administrative expenses
|
|
|
2,862
|
|
|
|
3,313
|
|
|
|
5,724
|
|
|
|
5,503
|
|
Provision for doubtful accounts
|
|
|
2,044
|
|
|
|
13
|
|
|
|
2,113
|
|
|
|
(77
|
)
|
Impairment provision for inventories
|
|
|
547
|
|
|
|
-
|
|
|
|
547
|
|
|
|
-
|
|
Total operating expenses
|
|
|
5,473
|
|
|
|
3,350
|
|
|
|
8,428
|
|
|
|
5,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from operations
|
|
|
(4,087
|
)
|
|
|
994
|
|
|
|
(6,398
|
)
|
|
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(431
|
)
|
|
|
(201
|
)
|
|
|
(893
|
)
|
|
|
(346
|
)
|
Warrant modification
|
|
|
-
|
|
|
|
-
|
|
|
|
(578
|
)
|
|
|
-
|
|
Fair value change at derivative liabilities
|
|
|
3,035
|
|
|
|
-
|
|
|
|
3,006
|
|
|
|
-
|
|
Amortization of Warrants attached to preferred stock
|
|
|
(346
|
)
|
|
|
-
|
|
|
|
(375
|
)
|
|
|
-
|
|
Amortization of deferred financing cost for preferred stock
|
|
|
(253
|
)
|
|
|
-
|
|
|
|
(270
|
)
|
|
|
-
|
|
Other, net
|
|
|
(110
|
)
|
|
|
115
|
|
|
|
(135
|
)
|
|
|
73
|
|
Total other income (loss)
|
|
|
1,895
|
|
|
|
(86
|
)
|
|
|
755
|
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(2,192
|
)
|
|
|
908
|
|
|
|
(5,643
|
)
|
|
|
(751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
|
(178
|
)
|
|
|
(280
|
)
|
|
|
(178
|
)
|
|
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(2,370
|
)
|
|
|
628
|
|
|
|
(5,821
|
)
|
|
|
(1,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued component, net of taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
Loss on disposal of discontinued subsidiary, net of taxes
|
|
|
-
|
|
|
|
(82
|
)
|
|
|
-
|
|
|
|
(82
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
(82
|
)
|
|
|
-
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,370
|
)
|
|
|
546
|
|
|
|
(5,821
|
)
|
|
|
(1,120
|
)
|
Add (less): Noncontrolling interests attributable to the noncontrolling interests
|
|
|
460
|
|
|
|
(418
|
)
|
|
|
739
|
|
|
|
(361
|
)
|
Less: Preferred stock dividends
|
|
|
(56
|
)
|
|
|
-
|
|
|
|
(61
|
)
|
|
|
-
|
|
Net income (loss) - attributable to China Shen Zhou Mining & Resources, Inc. and Subsidiaries
|
|
|
(1,966
|
)
|
|
|
128
|
|
|
|
(5,143
|
)
|
|
|
(1,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(20
|
)
|
|
|
615
|
|
|
|
367
|
|
|
|
772
|
|
Comprehensive income (loss)
|
|
$
|
(1,986
|
)
|
|
$
|
743
|
|
|
$
|
(4,776
|
)
|
|
$
|
(709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share – basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.05
|
)
|
From discontinued operations
|
|
|
-
|
|
|
|
(0.00
|
)
|
|
|
-
|
|
|
|
(0.00
|
)
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
36,974
|
|
|
|
30,836
|
|
|
|
34,932
|
|
|
|
30,448
|
|
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)
|
|
For the Six Months Ended
|
|
|
|
June 30,
2012
|
|
|
June 30,
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,143
|
)
|
|
$
|
(1,481
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued component, net of income tax benefits
|
|
|
-
|
|
|
|
7
|
|
Loss on sale of discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
82
|
|
Provision for doubtful accounts
|
|
|
2,113
|
|
|
|
(78
|
)
|
Impairment provision for inventories
|
|
|
547
|
|
|
|
-
|
|
Warrant modification
|
|
|
578
|
|
|
|
-
|
|
Deemed dividend expense
|
|
|
61
|
|
|
|
-
|
|
Amortization of warrants attached to preferred stock
|
|
|
375
|
|
|
|
-
|
|
Amortization of deferred financing costs for preferred stock
|
|
|
270
|
|
|
|
-
|
|
Fair value change at derivative liabilities
|
|
|
(3,006
|
)
|
|
|
-
|
|
Depreciation and amortization
|
|
|
3,013
|
|
|
|
2,096
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
972
|
|
Noncontrolling interests
|
|
|
(739
|
)
|
|
|
361
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
222
|
|
|
|
(774
|
)
|
Accounts receivable
|
|
|
3,312
|
|
|
|
(1,922
|
)
|
Advances to suppliers
|
|
|
813
|
|
|
|
(503
|
)
|
Other receivable
|
|
|
(1,699
|
)
|
|
|
-
|
|
Other deposits
|
|
|
124
|
|
|
|
(417
|
)
|
Prepayment for vehicle rent
|
|
|
45
|
|
|
|
-
|
|
Prepayment for office rent
|
|
|
-
|
|
|
|
82
|
|
Due from related parties
|
|
|
(3,080
|
)
|
|
|
-
|
|
Inventories
|
|
|
(3,243
|
)
|
|
|
(586
|
)
|
Restricted assets
|
|
|
921
|
|
|
|
(101
|
)
|
Increase (decrease) in
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(1,756
|
)
|
|
|
(886
|
)
|
Receipts in advance
|
|
|
2,896
|
|
|
|
56
|
|
Other payables and accruals
|
|
|
(4,705
|
)
|
|
|
(1,489
|
)
|
Taxes payable
|
|
|
(1,106
|
)
|
|
|
656
|
|
Net cash used in operating activities from continuing operations
|
|
|
(9,187
|
)
|
|
|
(3,925
|
)
|
Net cash used in operating activities from discontinued operations
|
|
|
-
|
|
|
|
(37
|
)
|
Net cash used in operating activities
|
|
|
(9,187
|
)
|
|
|
(3,962
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, machinery and mining assets
|
|
|
(1,592
|
)
|
|
|
(2,179
|
)
|
Acquisition of subsidiaries, net of cash and cash equivalents acquired
|
|
|
-
|
|
|
|
(3,604
|
)
|
Net cash used in investing activities
|
|
|
(1,592
|
)
|
|
|
(5,783
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Due to related parties
|
|
|
(249
|
)
|
|
|
(646
|
)
|
Proceeds from issuance of common stock
|
|
|
-
|
|
|
|
20,000
|
|
Issuance costs of common stock
|
|
|
-
|
|
|
|
(1,516
|
)
|
Proceeds from convertible preferred stock
|
|
|
5,000
|
|
|
|
-
|
|
Proceeds from warrants
|
|
|
224
|
|
|
|
-
|
|
Issuance costs of convertible preferred stock
|
|
|
(506
|
)
|
|
|
-
|
|
Repayment of short-term loans
|
|
|
(14,016
|
)
|
|
|
(7,396
|
)
|
Proceeds from short-term loans and long-term loans
|
|
|
15,995
|
|
|
|
6,452
|
|
Net cash provided by financing activities
|
|
|
6,448
|
|
|
|
16,894
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
7
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(4,324
|
)
|
|
|
7,287
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
5,569
|
|
|
|
1,545
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
1,245
|
|
|
$
|
8,832
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Shares issued to Acquire Xinyi Fluorite
|
|
$
|
-
|
|
|
$
|
9,467
|
|
Additional shares issued to Acquire Xinyi Fluorite
|
|
$
|
1
|
|
|
$
|
-
|
|
Shares issued as acquisition consideration for Dongsheng Mining, Meilan Mining and Qianshi Resources
|
|
$
|
5,676
|
|
|
$
|
-
|
|
Shares issued as the installment shares to redeem a third of the convertible preferred stock
|
|
$
|
1,667
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest expenses
|
|
$
|
873
|
|
|
$
|
262
|
|
Cash paid for income tax
|
|
$
|
789
|
|
|
$
|
-
|
|
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:
Name
|
|
Domicile and Date
of Incorporation
|
|
Paid-in Capital
|
|
Percentage
of Effective
Ownership
|
|
|
Principal Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Federal Mining Group, Inc. (“AFMG”)
|
|
Illinois
November 15, 2005
|
|
USD
|
10
|
|
100
|
%
|
|
Investments holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inner Mongolia Xiangzhen Mining Industry Group Co. Ltd. (“Xiangzhen Mining”)
|
|
The PRC
July 3, 2002
|
|
RMB
|
88,860,699
|
|
100
|
%
|
|
Acquisition, exploration and extraction, and development of natural resource properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inner Mongolia Wulatehouqi Qianzhen Ore Processing Co., Ltd. (“Qianzhen Mining”)
|
|
The PRC
September 22, 2002
|
|
RMB
|
37,221,250
|
|
100
|
%
|
|
Sales and processing of nonferrous metals and chemical products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xinjiang Buerjin County Xingzhen Mining Company (“Xingzhen Mining”)
|
|
The PRC
April 10, 2006
(Acquired on April 28, 2006)
|
|
RMB
|
50,000,000
|
|
90
|
%
|
|
Exploration of solid metals, processing and sales of mining products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinde Xinyi Fluorite Company (“Xinyi Fluorite”)
|
|
The PRC
September 18, 2003
(Acquired on January 13, 2011)
|
|
RMB
|
3,200,000
|
|
55
|
%
|
|
Extraction, processing and sales of fluorite products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wuchuan Dongsheng Mining Co., Ltd. (“Dongsheng Mining”)
|
|
The PRC
December 13, 1999
(Acquired on January 16, 2012)
|
|
RMB
|
3,000,000
|
|
60
|
%
|
|
Extraction, processing and sales of fluorite and barite products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guizhou Qianshi Resources Development Co., Ltd.(“Qianshi Resources”)
|
|
The PRC
April 30, 2005
(Acquired on February 7, 2012)
|
|
RMB
|
1,000,000
|
|
60
|
%
|
|
Extraction, processing and sales of fluorite and barite products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yanhe Tujiazu Autonomous County Meilan Mining Co., Ltd.(“Meilan Mining”)
|
|
The PRC
November 20, 2007
(Acquired on February 7, 2012)
|
|
RMB
|
1,334,000
|
|
60
|
%
|
|
Extraction and sales of fluorite and barite products
|
|
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:
|
Shares
|
|
Price per share
|
|
|
|
|
Fair value of the Company’s stock issued - Dongsheng Mining
|
|
2,418,448
|
|
$
|
1.74
|
|
|
$
|
4,208,000
|
|
Fair value of the Company’s stock issued - Qianshi Resources
|
|
337,457
|
|
|
1.74
|
|
|
|
587,000
|
|
Fair value of the Company’s stock issued - Meilan Mining
|
|
506,186
|
|
|
1.74
|
|
|
|
881,000
|
|
|
|
|
|
|
|
|
|
|
5,676,000
|
|
Cash
|
|
|
|
|
|
|
|
|
7,897,000
|
|
Total purchase price
|
|
|
|
|
|
|
|
$
|
13,573,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of acquired assets and liabilities:
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
$
|
6,860,000
|
|
Estimated fair value of identifiable extraction rights
|
|
|
|
|
|
|
18,269,000
|
|
Cash consideration will be invested to increase the stockholders' equity
|
|
|
|
|
|
|
7,897,000
|
|
Liabilities
|
|
|
|
|
|
|
(10,404,000
|
)
|
|
|
|
|
22,622,000
|
|
Acquisition of 60% share
|
|
|
|
60
|
%
|
|
|
|
|
13,573,000
|
|
Purchase price
|
|
|
|
13,573,000
|
|
Goodwill
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interests
|
|
|
|
|
$
|
22,622,000
|
|
|
|
|
|
40
|
%
|
|
|
|
$
|
9,049,000
|
|
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:
Net revenue
|
|
$
|
14,595
|
|
Cost of sales
|
|
|
8,312
|
(a)
|
Gross profit
|
|
|
6,283
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Selling and distribution expenses
|
|
|
80
|
|
General and administrative expenses
|
|
|
6,137
|
|
Provision for doubtful accounts
|
|
|
(19
|
)
|
Total operating expenses
|
|
|
6,198
|
|
|
|
|
|
|
Net income from operations
|
|
|
85
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
Interest expense
|
|
|
(490
|
)
|
Investment loss
|
|
|
(79
|
)
|
Other, net
|
|
|
24
|
|
Total other loss
|
|
|
(545
|
)
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(460
|
)
|
|
|
|
|
|
Income tax expense
|
|
|
(519
|
)
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(979
|
)
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
Loss from operations of discontinued component, net of taxes
|
|
|
(7
|
)
|
Loss on disposal of discontinued subsidiary, net of taxes
|
|
|
(82
|
)
|
Loss from discontinued operations
|
|
|
(89
|
)
|
|
|
|
|
|
Net loss
|
|
|
(1,068
|
)
|
Add: Noncontrolling interests attributable to the noncontrolling interests
|
|
|
(382
|
)(b)
|
Net loss - attributable to China Shen Zhou Mining & Resources, Inc. and Subsidiaries
|
|
|
(1,450
|
)
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
772
|
|
Comprehensive loss
|
|
$
|
(678
|
)
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
|
|
|
From continuing operations
|
|
$
|
(0.04
|
)
|
From discontinued operations
|
|
|
(0.00
|
)
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
Basic and Diluted
|
|
|
33,710
|
(c)
|
|
(a)
|
Includes amortization of acquired intangible assets of approximately $307,000 based on the unit-of-production
method.
|
|
(b)
|
Noncontrolling interest of 40% of ownership in Dongsheng Mining, Meilan Mining, and Qianshi Resources
for purpose of pro forma. Upon final evaluation of assets acquired, the Company will report the proper value of the noncontrolling
interest.
|
|
(c)
|
Assumes 3,262,091 common shares issued for the purchase of Dongsheng Mining, Meilan Mining, and Qianshi
Resources were outstanding for the entire three month pro forma period.
|
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:
Net revenue
|
|
$
|
11,905
|
|
Cost of sales
|
|
|
6,501
|
(a)
|
Gross profit
|
|
|
5,404
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Selling and distribution expenses
|
|
|
36
|
|
General and administrative expenses
|
|
|
3,470
|
|
Provision for doubtful accounts
|
|
|
24
|
|
Total operating expenses
|
|
|
3,530
|
|
|
|
|
|
|
Net income from operations
|
|
|
1,874
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
Interest expense
|
|
|
(273
|
)
|
Investment loss
|
|
|
(33
|
)
|
Other, net
|
|
|
109
|
|
Total other loss
|
|
|
(197
|
)
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,677
|
|
|
|
|
|
|
Income tax expense
|
|
|
(560
|
)
|
|
|
|
|
|
Income from continuing operations
|
|
|
1,117
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
Loss on disposal of discontinued subsidiary, net of taxes
|
|
|
(82
|
)
|
Loss from discontinued operations
|
|
|
(82
|
)
|
|
|
|
|
|
Net income
|
|
|
1,035
|
|
Add: Noncontrolling interests attributable to the noncontrolling interests
|
|
|
(615
|
)(b)
|
Net loss - attributable to China Shen Zhou Mining & Resources, Inc. and Subsidiaries
|
|
|
420
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
615
|
|
Comprehensive income
|
|
$
|
1,035
|
|
|
|
|
|
|
Net income (loss) per common share – basic and diluted
|
|
|
|
|
From continuing operations
|
|
$
|
0.01
|
|
From discontinued operations
|
|
|
(0.00
|
)
|
|
|
$
|
0.01
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
Basic and Diluted
|
|
|
34,098
|
(c)
|
|
(a)
|
Includes amortization of acquired intangible assets of approximately $100,000 based on the unit-of-production
method.
|
|
(b)
|
Noncontrolling interest of 40% of ownership in Dongsheng Mining, Meilan Mining, and Qianshi Resources
for purpose of pro forma. Upon final evaluation of assets acquired, the Company will report the proper value of the noncontrolling
interest.
|
|
(c)
|
Assumes 3,262,091 common shares issued for the purchase of Dongsheng Mining, Meilan Mining, and Qianshi
Resources were outstanding for the entire three month pro forma period.
|
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:
|
|
Six Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations,
|
|
$
|
Not Applicable
|
|
|
$
|
(7)
|
|
|
|
|
|
|
|
|
|
|
Net loss on disposal of subsidiary
|
|
$
|
Not Applicable
|
|
|
$
|
(82)
|
|
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:
|
Useful Life
|
|
(In years)
|
Land use rights
|
25
|
Buildings
|
3-25
|
Machinery
|
12
|
Mining assets
|
License term
|
Motor vehicle
|
6
|
Equipment
|
5
|
Extraction rights
|
License term
|
Exploration rights
|
License term
|
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:
|
|
June 30, 2012
|
|
December 31, 2011
|
|
Balance sheet items, except for the registered and paid-up capital and retained earnings, as of the period ended
|
|
|
US$1=RMB6.3143
|
|
|
US$1=RMB6.3585
|
|
|
|
|
For the
Six Months Ended
June 30, 2012
|
|
|
For the
Six Months Ended
June 30, 2011
|
|
Amounts included in the statements of operations and statements of cash flow for the period
|
|
|
US$1=RMB6.3141
|
|
|
US$1=RMB6.5352
|
|
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:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Accounts receivable
|
|
$
|
864
|
|
|
$
|
3,413
|
|
Less: Allowance for doubtful accounts
|
|
|
(437
|
)
|
|
|
(81
|
)
|
|
|
$
|
427
|
|
|
$
|
3,332
|
|
The activities in the Company’s allowance
for doubtful accounts are summarized as follows:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
81
|
|
|
$
|
166
|
|
Add: Allowance for doubtful accounts
|
|
|
356
|
|
|
|
-
|
|
Less: write off the provision during the period
|
|
|
-
|
|
|
|
(85
|
)
|
Balance at the end of the period
|
|
$
|
437
|
|
|
$
|
81
|
|
NOTE 8 - ADVANCES TO SUPPLIERS
Advances to suppliers consist of the following:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Advances to suppliers
|
|
$
|
1,752
|
|
|
$
|
1,943
|
|
Less: Allowance for doubtful accounts
|
|
|
(377
|
)
|
|
|
(110
|
)
|
|
|
$
|
1,375
|
|
|
$
|
1,833
|
|
The activities in the Company’s allowance
for doubtful accounts are summarized as follows:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
110
|
|
|
$
|
192
|
|
Add: provision during the period
|
|
|
267
|
|
|
|
-
|
|
Less: write off the provision during the period
|
|
|
-
|
|
|
|
(82
|
)
|
Balance at the end of the period
|
|
$
|
377
|
|
|
$
|
110
|
|
NOTE 9 - OTHER RECEIVABLE
Other receivable consists of the following:
|
|
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Other receivable
|
|
(a)
|
|
$
|
1,699
|
|
|
$
|
-
|
|
Less: Allowance for doubtful accounts
|
|
(a)
|
|
|
(1,699
|
)
|
|
|
-
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(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:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
-
|
|
|
$
|
-
|
|
Add: provision during the period
|
|
|
1,699
|
|
|
|
-
|
|
Balance at the end of the period
|
|
$
|
1,699
|
|
|
$
|
-
|
|
NOTE 10 - OTHER DEPOSITS
Other deposits consist of the following:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Other deposits
|
|
$
|
471
|
|
|
$
|
357
|
|
Less: Allowance for doubtful accounts
|
|
|
(178
|
)
|
|
|
(99
|
)
|
|
|
$
|
293
|
|
|
$
|
258
|
|
The activities in the Company’s allowance
for doubtful accounts are summarized as follows:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
99
|
|
|
$
|
63
|
|
Add: provision during the period
|
|
|
79
|
|
|
|
36
|
|
Balance at the end of the period
|
|
$
|
178
|
|
|
$
|
99
|
|
NOTE 11 - DUE FROM RELATED PARTIES
Due from related parties consist of the following:
|
|
|
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Mr. Gang Liu
|
|
|
(a)
|
|
|
$
|
1,163
|
|
|
$
|
-
|
|
Mr. Wenrui Li
|
|
|
(b)
|
|
|
|
32
|
|
|
|
-
|
|
Due from Guizhou Yanhe Dongsheng Mining, Ltd. (“Yanhe Dongsheng”)
|
|
|
(c)
|
|
|
|
83
|
|
|
|
-
|
|
Due from Chongqing Fengdu Dongsheng Mining, Ltd. (“Fengdu Dongsheng”)
|
|
|
(c)
|
|
|
|
420
|
|
|
|
-
|
|
Due from Hubei Dongsheng Mining, Ltd. (“Hubei Dongsheng”)
|
|
|
(c)
|
|
|
|
193
|
|
|
|
-
|
|
Due from Chongqing Henrun Mining, Ltd. (“Chongqing Henrun”)
|
|
|
(c)
|
|
|
|
95
|
|
|
|
-
|
|
Due from Guizhou Wuchuan Shanxian Food, Ltd. (“Shanxian Food”)
|
|
|
(c)
|
|
|
|
919
|
|
|
|
-
|
|
Due from Guizhou Zhengan Zunzheng Mining Development, Ltd. (“Zunzheng Mining”)
|
|
|
(c)
|
|
|
|
189
|
|
|
|
-
|
|
Due from Wuchuan Chenhe Dongsheng Fluoride Industry Co., Ltd. (“Chenhe Fluoride”)
|
|
|
(d)
|
|
|
|
270
|
|
|
|
-
|
|
Less: Allowance for doubtful accounts
|
|
|
(e)
|
|
|
|
(270
|
)
|
|
|
-
|
|
|
|
|
|
|
|
$
|
3,094
|
|
|
$
|
-
|
|
|
(a)
|
Mr. Gang Liu is a minor shareholder and the General Manager of Dongsheng Mining, Meilan Mining, and Qianshi Resources.
|
|
(b)
|
Mr. Li is a family member of Mr. Gang Liu.
|
|
(c)
|
Yanhe Dongsheng, Fengdu Dongsheng, Hubei Dongsheng, Chongqing Henrun, Shanxian Food and Zunzheng Mining are owned by Mr. Gang Liu.
|
|
(d)
|
Chenhe Fluoride’s 30% equity interest is owned by Dongsheng Mining.
|
|
(e)
|
An accumulated impairment provision of $270,000 for the six months ended June 30, 2012 was recorded
for
Chenhe
Fluoride for its losses during last three years.
|
(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:
|
|
|
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Raw materials
|
|
|
|
|
|
$
|
1,705
|
|
|
$
|
1,623
|
|
Unprocessed mineral / ore
|
|
|
(a)
|
|
|
|
4,738
|
|
|
|
3,204
|
|
Consumables
|
|
|
|
|
|
|
230
|
|
|
|
181
|
|
Finished goods and semi-manufactured goods
|
|
|
|
|
|
|
4,541
|
|
|
|
2,471
|
|
Impairment provision for inventories
|
|
|
|
|
|
|
(547
|
)
|
|
|
-
|
|
|
|
|
|
|
|
$
|
10,667
|
|
|
$
|
7,479
|
|
|
(a)
|
Unprocessed mineral / ore included in the inventory consists of materials extracted from the mines
that have not been processed. These inventories are primarily maintained in large mounds of materials stored in the mine field
in the form of a “stockpile.” These unprocessed inventories are primarily in large mounds of material stored in the
min field in the form of a “stockpile”. These stockpiles are measured at the reporting date by qualified experts using
industry standards. Such standards taking into account the volume, density, and mineral content in such stockpiles. The cost for
such stockpiles includes extraction cost from mines, labor, amortization and depreciation, and other overhead costs.
|
|
|
|
|
|
Proven or probable reserves
that are in the mines and have not been extracted are not included in the Company’s inventory.
|
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:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Bank drafts pledged for the short term bank loans (see Note 16)
|
|
$
|
1,583
|
|
|
$
|
2,536
|
|
NOTE 14 - PROPERTY, MACHINERY AND MINING
ASSETS, NET
Property, machinery and mining assets consist
of the following:
|
|
|
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Land use rights
|
|
|
|
|
|
$
|
1,787
|
|
|
$
|
1,764
|
|
Buildings
|
|
|
|
|
|
|
18,898
|
|
|
|
15,452
|
|
Machinery
|
|
|
|
|
|
|
15,737
|
|
|
|
13,316
|
|
Mining assets
|
|
|
|
|
|
|
14,505
|
|
|
|
13,476
|
|
Motor vehicles
|
|
|
|
|
|
|
3,137
|
|
|
|
2,465
|
|
Equipment
|
|
|
|
|
|
|
591
|
|
|
|
437
|
|
Extraction rights
|
|
|
(a)
|
|
|
|
50,460
|
|
|
|
31,703
|
|
Construction in progress
|
|
|
|
|
|
|
770
|
|
|
|
325
|
|
|
|
|
|
|
|
|
105,885
|
|
|
|
78,938
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(21,905
|
)
|
|
|
(17,552
|
)
|
Impairment provision
|
|
|
|
|
|
|
(1,081
|
)
|
|
|
(1,073
|
)
|
|
|
|
|
|
|
$
|
82,899
|
|
|
$
|
60,313
|
|
|
(a)
|
The extraction right’s significant increase of approximately $18.72 million was mainly due to the acquisition cost of the extraction rights of Dongsheng Mining, Qianshi Resources and Meilan Mining, which were acquired in January and February 2012.
|
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:
|
|
|
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
7.01% note payable to China Citic Bank matures on March 31, 2012, collateralized with Xiangzhen’s extraction right, land use right and some machineries
|
|
|
|
|
|
$
|
-
|
|
|
$
|
3,145
|
|
7.01% note payable to China Citic Bank matures on March
31, 2012, collateralized with Xiangzhen’s extraction right, land use right and some machineries
|
|
|
|
|
|
|
-
|
|
|
|
3,145
|
|
5.15% note payable to Mr. Mao Huang, a related party of the Company, matures on January 26, 2012, collateralized with Xingzhen’s extraction right and the ore processing plant
|
|
|
|
|
|
|
-
|
|
|
|
2,560
|
|
9.76% note payable to Baiyin Credit Union matures on Janurary 17, 2012, guaranteed by the bank draft of the Company
|
|
|
|
|
|
|
-
|
|
|
|
944
|
|
9.76% note payable to Baiyin Credit Union matures on April 21, 2012, guaranteed by the bank draft of the Company
|
|
|
|
|
|
|
-
|
|
|
|
786
|
|
9.76% note payable to Baiyin Credit Union matures on May 9, 2012, guaranteed by the bank draft of the Company
|
|
|
|
|
|
|
-
|
|
|
|
786
|
|
11.15% note payable to Baiyin Credit Union matures on December 17, 2012 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Xingzhen Mining
|
|
|
|
|
|
|
316
|
|
|
|
315
|
|
11.15% note payable to Baiyin Credit Union matures on December 21, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Xingzhen Mining
|
|
|
|
|
|
|
316
|
|
|
|
315
|
|
9.18% note payable to China Citic Bank matures on March 31, 2013, collateralized with Xiangzhen’s extraction right
|
|
|
|
|
|
|
7,920
|
|
|
|
-
|
|
9.76% note payable to Baiyin Credit Union matures on July 20, 2012, guaranteed by the bank draft of the Company
|
|
|
(a)
|
|
|
|
1,663
|
|
|
|
-
|
|
7.93% note payable to Mr. Xin Li, a vice general manager of Xinyi Fluorite, matures on November 18, 2012
|
|
|
|
|
|
|
317
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
10,532
|
|
|
$
|
11,996
|
|
(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:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
13.30% note payable to Wuchuan Credit Union matures on January 11, 2015 with interest due on the 20th day of each month, collateralized with Dongsheng Mining’s extraction rights.
|
|
$
|
1,742
|
|
|
$
|
-
|
|
NOTE 18 – RECEIPTS IN ADVANCE
Receipts in advance consisted of the following:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Receipts in advance from fluorite customers
|
|
$
|
2,761
|
|
|
$
|
1,528
|
|
Receipts in advance from nonferrous metals customers
|
|
|
2,544
|
|
|
|
-
|
|
|
|
$
|
5,305
|
|
|
$
|
1,528
|
|
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:
|
|
Receipts in advance
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Ruipeng Mining
|
|
$
|
1,611
|
|
|
|
30
|
%
|
Xinjiang Lianhe Xinwang Copper, Ltd.
|
|
|
933
|
|
|
|
18
|
%
|
Shandong Zhaohe New Material Ltd
|
|
|
517
|
|
|
|
10
|
%
|
|
|
$
|
3,061
|
|
|
|
58
|
%
|
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:
|
|
Receipts in advance
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Inner Mongolia Huadesanli Trading Ltd
|
|
$
|
472
|
|
|
|
31
|
%
|
Weichang Jintai Mining Ltd
|
|
|
295
|
|
|
|
20
|
%
|
Houma Huatai Furnace Charge Ltd
|
|
|
215
|
|
|
|
14
|
%
|
Anhui Jinyang fluorine Chemical Ltd
|
|
|
157
|
|
|
|
10
|
%
|
|
|
$
|
1,139
|
|
|
|
75
|
%
|
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:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Accruals for payroll, bonus and other operating expenses
|
|
$
|
1,730
|
|
|
$
|
841
|
|
Payables for construction service vender
|
|
|
740
|
|
|
|
135
|
|
Loan to a third company
|
|
|
111
|
|
|
|
-
|
|
Loan to individuals
|
|
|
79
|
|
|
|
-
|
|
Asset retirement obligations (see Note 26)
|
|
|
237
|
|
|
|
-
|
|
Others payables
|
|
|
1,043
|
|
|
|
1,796
|
|
|
|
$
|
3,940
|
|
|
$
|
2,772
|
|
NOTE 21 - DUE TO RELATED PARTIES
Due to related parties classified as long
term liabilities consist of the following:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Due to directors of the Company:
|
|
|
|
|
|
|
|
|
Ms. Xiaojing Yu, CEO of the Company
|
|
$
|
-
|
|
|
$
|
106
|
|
Mr. Xueming Xu, Director of the Company
|
|
|
12
|
|
|
|
13
|
|
Due to Mr. Xiaoming Yu, General Manager of Xiangzhen Mining
|
|
|
46
|
|
|
|
127
|
|
Due to Mr. Mao Huang, a minority shareholder of Xingzhen Mining
|
|
|
4
|
|
|
|
4
|
|
Due to Mr. Guojian Zhou, a minor shareholder of Qianshi Resources
|
|
|
126
|
|
|
|
-
|
|
Due to Mr. Shuanglong Tian, a minor shareholder of Meilan Mining
|
|
|
51
|
|
|
|
-
|
|
|
|
$
|
239
|
|
|
$
|
250
|
|
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
|
|
Par value
authorized
|
|
|
Issuance date
|
|
Shares
outstanding
|
Common stock at 01/01/2012
|
|
|
50,000,000
|
|
|
|
|
32,285,973
|
Additional shares issued as acquisition consideration for Xinyi Fluorite
|
|
|
|
|
|
02/13/2012
|
|
1,139,128
|
Shares issued in connection with a partial exercise of warrants granted in 2011
|
|
|
|
|
|
03/30/2012
|
|
185,106
|
Shares issued as acquisition consideration for Dongsheng Mining, Meilan Mining and Qianshi Resources
|
|
|
|
|
|
05/02/2012
|
|
3,262,091
|
Shares
issued as the pre-installment shares to redeem a
third of the convertible preferred stock
|
|
|
|
|
|
05/07/2012
|
|
1,475,225
|
Additional shares
issued as the installment
shares to complete the redemption of a third of the convertible preferred stock
|
|
|
|
|
|
06/05/2012
|
|
976,249
|
Common stock at 06/30/2012
|
|
|
|
|
|
|
|
39,323,772
|
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
|
|
Warrants to purchase
The Company’s
common stock
|
|
|
Original
exercise price
|
|
|
Adjusted Average
exercise price
|
|
|
|
(Shares)
|
|
|
(In US dollars)
|
|
|
(In US dollars)
|
|
Warrants granted to investors at January 19, 2011
|
|
|
851,066
|
|
|
$
|
8.46
|
|
|
$
|
1.21
|
|
Warrants granted to the placement agent at January 19, 2011
|
|
|
68,085
|
|
|
|
10.15
|
|
|
|
1.21
|
|
Exercised
|
|
|
(185,106
|
)
|
|
|
-
|
|
|
|
1.21
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding warrants at June 30, 2012
|
|
|
734,045
|
|
|
$
|
8.59
|
|
|
$
|
1.21
|
|
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.
|
|
Investors warrants
|
|
|
Placement Agent Warrants
|
|
Expected life in years
|
|
|
1.58
|
|
|
|
1.58
|
|
Dividend Yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Stock Price Volatility
|
|
|
155.18
|
%
|
|
|
155.18
|
%
|
Risk Free interest Rate
|
|
|
0.33
|
%
|
|
|
0.33
|
%
|
▼
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
|
|
Warrants to purchase
The Company’s
common stock
|
|
|
Average
exercise price
|
|
|
|
(Shares)
|
|
|
(In US dollars)
|
|
Warrants granted to investors at March 21, 2012
|
|
|
1,960,785
|
|
|
$
|
2.04
|
|
Warrants granted to the placement agent at March 21, 2012
|
|
|
392,157
|
|
|
|
2.45
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding warrants at June 30, 2012
|
|
|
2,352,942
|
|
|
$
|
2.11
|
|
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.
|
|
Investors warrants
|
|
|
Placement Agent Warrants
|
|
Expected life in years
|
|
|
3.25
|
|
|
|
3.25
|
|
Dividend Yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Stock Price Volatility
|
|
|
222.33
|
%
|
|
|
222.33
|
%
|
Risk Free interest Rate
|
|
|
0.33
|
%
|
|
|
0.33
|
%
|
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
|
|
Par value
authorized
|
|
|
Shares
outstanding
|
|
|
Available
Shares
|
|
Common stock authorized and outstanding at 06/30/2012
|
|
|
50,000,000
|
|
|
|
39,323,772
|
|
|
|
10,676,228
|
|
Warrants granted in January 2011 to purchase the Company’s common stock
|
|
|
|
|
|
|
|
|
|
|
(734,045
|
)
|
Will issue shares to employees based on the 2009 Omnibus Long-term Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
(840,000
|
)
|
Series A Convertible Preferred Stock to purchase the Company’s common stock
|
|
|
|
|
|
|
|
|
|
|
(1,633,987
|
)
|
Warrants granted in March 2012 to purchase the Company’s common stock
|
|
|
|
|
|
|
|
|
|
|
(2,352,942
|
)
|
Available Common stock at 06/30/2012
|
|
|
|
|
|
|
|
|
|
|
5,115,254
|
|
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.
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
175
|
|
|
$
|
-
|
|
Funds used
|
|
|
135
|
|
|
|
175
|
|
Balance at the end of the period
|
|
$
|
310
|
|
|
$
|
175
|
|
The following is a reconciliation for the
Company’s assets retirement obligation:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
-
|
|
|
$
|
-
|
|
Liabilities accrued
|
|
|
237
|
|
|
|
-
|
|
Balance at the end of the period
|
|
$
|
237
|
|
|
$
|
-
|
|
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.
Six Months Ended June 30, 2012
|
|
Fluorite
|
|
|
Nonferrous metals
|
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Segment revenue
|
|
$
|
7,595
|
|
|
$
|
1,461
|
|
|
$
|
9,056
|
|
Inter-segment revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Revenue from external customers
|
|
$
|
7,595
|
|
|
$
|
1,461
|
|
|
$
|
9,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss)
|
|
$
|
(4,601
|
)
|
|
$
|
(1,975
|
)
|
|
$
|
(6,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate income
|
|
|
|
|
|
|
|
|
|
|
933
|
|
Loss from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(5,643
|
)
|
Income tax expenses
|
|
|
|
|
|
|
|
|
|
|
(178
|
)
|
Loss from discontinuing operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
$
|
(5,821
|
)
|
As of June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
$
|
108,451
|
|
|
$
|
38,588
|
|
|
$
|
147,039
|
|
Inter-segment receivables
|
|
|
(26,342
|
)
|
|
|
(17,716
|
)
|
|
|
(44,058
|
)
|
|
|
$
|
82,109
|
|
|
$
|
20,872
|
|
|
$
|
102,981
|
|
Other unallocated corporate assets
|
|
|
|
|
|
|
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
2,436
|
|
|
$
|
577
|
|
|
$
|
3,013
|
|
Expenditure for segment assets
|
|
$
|
919
|
|
|
$
|
673
|
|
|
$
|
1,592
|
|
Six Months Ended June 30, 2011
|
|
Fluorite
|
|
|
Nonferrous metals
|
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Segment revenue
|
|
$
|
8,610
|
|
|
$
|
2,403
|
|
|
$
|
11,013
|
|
Inter-segment revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Revenue from external customers
|
|
$
|
8,610
|
|
|
$
|
2,403
|
|
|
$
|
11,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment loss
|
|
$
|
1,820
|
|
|
$
|
(1,139
|
)
|
|
$
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate income
|
|
|
|
|
|
|
|
|
|
|
(1,432
|
)
|
Loss from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(751
|
)
|
Income tax expenses
|
|
|
|
|
|
|
|
|
|
|
(280
|
)
|
Loss from discontinuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
(89
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
$
|
(1,120
|
)
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets as of December 31, 2011
|
|
$
|
79,076
|
|
|
$
|
15,392
|
|
|
$
|
94,468
|
|
Inter-segment receivables as of December 31, 2011
|
|
|
(12,660
|
)
|
|
|
2,966
|
|
|
|
(9,694
|
)
|
|
|
$
|
66,416
|
|
|
$
|
18,358
|
|
|
$
|
84,774
|
|
Other unallocated corporate assets as of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,540
|
|
|
$
|
556
|
|
|
$
|
2,096
|
|
Expenditure for segment assets
|
|
$
|
1,695
|
|
|
$
|
484
|
|
|
$
|
2,179
|
|
The following summarizes identifiable assets
by geographic area:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
China
|
|
$
|
102,981
|
|
|
$
|
84,774
|
|
Unallocated corporate assets
|
|
|
857
|
|
|
|
542
|
|
|
|
$
|
103,838
|
|
|
$
|
85,316
|
|
The following summarizes net losses:
|
|
For Six Months Ended
|
|
|
|
June 30,
2012
|
|
|
June 30,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
China
|
|
$
|
(6,754
|
)
|
|
$
|
312
|
|
Unallocated corporate operating income (loss)
|
|
|
933
|
|
|
|
(1,432
|
)
|
|
|
$
|
(5,821
|
)
|
|
$
|
(1,120
|
)
|
NOTE 30 - OTHER INCOME, NET
|
|
For Six Months Ended
|
|
|
|
June 30,
2012
|
|
|
June 30,
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Subsidiary income
|
|
$
|
16
|
|
|
$
|
-
|
|
Penalty (loss) income
|
|
|
(73
|
)
|
|
|
147
|
|
Donation
|
|
|
(75
|
)
|
|
|
(61
|
)
|
others
|
|
|
(3
|
)
|
|
|
(13
|
)
|
|
|
$
|
(135
|
)
|
|
$
|
73
|
|
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):
|
|
For Six Months Ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
|
|
(In thousands,
except per
share data)
|
|
|
(In thousands,
except per
share data)
|
|
Loss from continuing operations available to common shareholders:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(5,143
|
)
|
|
$
|
(1,392
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations available to common shareholders:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
-
|
|
|
$
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
34,932
|
|
|
|
30,448
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.15
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
-
|
|
|
$
|
(0.00
|
)
|
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:
|
|
Revenue
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Ningxia Jinhe chemistry Ltd
|
|
$
|
1,378
|
|
|
|
15
|
%
|
Hangzhou Changan Fluorite Sale, Ltd
|
|
|
1,140
|
|
|
|
13
|
%
|
Xinjiang United Xinwang Copper, Ltd
|
|
|
827
|
|
|
|
9
|
%
|
Ruipeng Mining Ltd
|
|
|
634
|
|
|
|
7
|
%
|
Huade Sanli
|
|
|
519
|
|
|
|
6
|
%
|
|
|
$
|
4,498
|
|
|
|
50
|
%
|
The following table shows the Company’s
major customers (5% or more of consolidated net revenue) for the six months ended June 30, 2011:
|
|
Revenue
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Ningxia Jinhe chemistry Ltd
|
|
$
|
2,872
|
|
|
|
26
|
%
|
Ruipeng Mining Ltd
|
|
|
2,403
|
|
|
|
22
|
%
|
Henan Zhongse Dongfang Shaoxing, Ltd
|
|
|
2,257
|
|
|
|
20
|
%
|
Xuancheng Hengyuan, Ltd
|
|
|
1,025
|
|
|
|
9
|
%
|
Jiangxi Danshuihu Chmistry, Ltd
|
|
|
701
|
|
|
|
6
|
%
|
|
|
$
|
9,258
|
|
|
|
84
|
%
|
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
|
|
For the three months ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Net revenue
|
|
$
|
7,550
|
|
|
$
|
9,117
|
|
Gross profit
|
|
$
|
1,386
|
|
|
$
|
4,344
|
|
Gross profit margin
|
|
|
18
|
%
|
|
|
48
|
%
|
General and administrative expenses
|
|
$
|
2,862
|
|
|
$
|
3,313
|
|
Interest expenses
|
|
$
|
431
|
|
|
$
|
201
|
|
Net (loss) income attributable to the Company
|
|
$
|
(1,966
|
)
|
|
$
|
128
|
|
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
|
|
Segment revenue
|
|
|
Segment income (loss)
|
|
|
|
For the three months ended June 30,
|
|
|
For the three months ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Fluorite
|
|
$
|
6,089
|
|
|
$
|
6,714
|
|
|
$
|
(2,894
|
)
|
|
$
|
2,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonferrous metals
|
|
$
|
1,461
|
|
|
$
|
2,403
|
|
|
$
|
(1,403
|
)
|
|
$
|
(164
|
)
|
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
|
|
For the six months ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Net revenue
|
|
$
|
9,056
|
|
|
$
|
11,013
|
|
Gross profit
|
|
$
|
2,030
|
|
|
$
|
5,008
|
|
Gross profit margin
|
|
|
22
|
%
|
|
|
45
|
%
|
General and administrative expenses
|
|
$
|
5,724
|
|
|
$
|
5,503
|
|
Interest expenses
|
|
$
|
893
|
|
|
$
|
346
|
|
Net loss attributable to the Company
|
|
$
|
(5,143
|
)
|
|
$
|
(1,481
|
)
|
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
|
|
Segment revenue
|
|
|
Segment loss
|
|
|
|
For the six months ended June 30,
|
|
|
For the six months ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Fluorite
|
|
$
|
7,595
|
|
|
$
|
8,610
|
|
|
$
|
(4,601
|
)
|
|
$
|
1,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonferrous metals
|
|
$
|
1,461
|
|
|
$
|
2,403
|
|
|
$
|
(1,975
|
)
|
|
$
|
(1,139
|
)
|
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:
|
|
|
Useful Life
|
|
|
|
|
(In years)
|
|
Land use rights
|
|
|
25
|
|
Buildings
|
|
|
3-25
|
|
Machinery
|
|
|
12
|
|
Mining assets
|
|
|
License term
|
|
Motor vehicle
|
|
|
6
|
|
Equipment
|
|
|
5
|
|
Extraction rights
|
|
|
License term
|
|
Exploration rights
|
|
|
License term
|
|
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:
|
1)
|
Enhancing our U.S. GAAP training program for our existing
personnel and recruiting additional professional personnel; and
|
|
2)
|
Improving the collection from our head office and our
subsidiaries of financial data required to produce U.S. GAAP statements, standardizing the data collection procedures and assigning
data collection responsibilities to designated personnel.
|
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.
Exhibit
Number
|
|
Description
|
|
|
|
31.1*
|
|
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2*
|
|
Certification of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32*
|
|
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
|
|
|
|
101.INS†
|
|
XBRL Instance Document
|
|
|
|
101.SCH†
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
101.CAL†
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.DEF†
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
101.LAB†
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
101.PRE†
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
*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.
|
CHINA SHEN ZHOU MINING & RESOURCES, INC.
|
|
|
Date: September 13, 2012
|
By:
|
/s/
Xiaojing Yu
|
|
|
Xiaojing Yu, Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
Date: September 13, 2012
|
By:
|
/s/
Jiayin Zhu
|
|
|
Jiayin Zhu, Chief Financial Officer
|
|
|
(Principal Financial Officer and Principal Accounting Officer)
|
China Shen Zhou Mining & Resources, Inc. (AMEX:SHZ)
Historical Stock Chart
From Jun 2024 to Jul 2024
China Shen Zhou Mining & Resources, Inc. (AMEX:SHZ)
Historical Stock Chart
From Jul 2023 to Jul 2024