China Runji Cement Inc.
Condensed Consolidated Balance Sheets
(UNAUDITED)
ASSETS
|
|
November 30,
2010
|
|
|
August 31,
2010
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,585,518
|
|
|
|
683,545
|
|
Accounts receivable, net of allowance for doubful account of $197,443 and $193,339
as of 11/30/2010 and 08/31/2010, respectively
|
|
|
14,573,743
|
|
|
|
9,364,751
|
|
Accounts receivable from related party
|
|
|
296,191
|
|
|
|
212,374
|
|
Advances to suppliers
|
|
|
3,473,204
|
|
|
|
826,994
|
|
Short term deferred assets
|
|
|
100,004
|
|
|
|
151,296
|
|
Inventory
|
|
|
2,436,857
|
|
|
|
2,090,248
|
|
Other receivables
|
|
|
1,798,431
|
|
|
|
1,678,279
|
|
Other current assets
|
|
|
32,607
|
|
|
|
143,124
|
|
Total current assets
|
|
|
24,296,555
|
|
|
|
15,150,611
|
|
|
|
|
|
|
|
|
|
|
Advance for purchase of fixed assets
|
|
|
809,662
|
|
|
|
467,225
|
|
Property, plant and equipment, net
|
|
|
55,651,574
|
|
|
|
54,801,428
|
|
Intangible Assets & Deferred Charges
|
|
|
4,352,491
|
|
|
|
4,357,468
|
|
Total assets
|
|
|
85,110,282
|
|
|
|
74,776,732
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
28,428,273
|
|
|
|
23,805,922
|
|
Short-term loans
|
|
|
13,340,223
|
|
|
|
14,094,478
|
|
Long-term loan-current portion
|
|
|
37,994
|
|
|
|
236,148
|
|
Due to related parties
|
|
|
10,716,256
|
|
|
|
10,625,700
|
|
Taxes payable and other
|
|
|
2,812,297
|
|
|
|
970,841
|
|
Total current liabilities
|
|
|
55,335,043
|
|
|
|
49,733,089
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
55,335,043
|
|
|
|
49,733,089
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock: 20,000,000 shares authorized,
$0.0001 par value, No shares issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock: 200,000,000 shares authorized,
$0.0001 par value,
78,832,064 shares issued
and outstanding
|
|
|
7,883
|
|
|
|
7,883
|
|
Additional paid in capital
|
|
|
15,984,109
|
|
|
|
15,984,109
|
|
Accumulated other comprehensive income
|
|
|
3,172,875
|
|
|
|
2,623,937
|
|
Retained earnings
|
|
|
10,610,372
|
|
|
|
6,427,714
|
|
Total Stockholders' Equity
|
|
|
29,775,239
|
|
|
|
25,043,643
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
|
85,110,282
|
|
|
|
74,776,732
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Operations and Comprehensive Income
(UNAUDITED)
|
|
For the three months ended
|
|
|
|
November 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
20,801,677
|
|
|
|
10,930,701
|
|
Cost of goods sold
|
|
|
14,067,990
|
|
|
|
10,225,190
|
|
Gross profit
|
|
|
6,733,687
|
|
|
|
705,511
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
61,533
|
|
|
|
86,647
|
|
G&A expenses:
|
|
|
710,139
|
|
|
|
625,380
|
|
Depreciation on office equipment:
|
|
|
101,788
|
|
|
|
39,566
|
|
Total operating expenses
|
|
|
873,460
|
|
|
|
751,593
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
5,860,227
|
|
|
|
(46,082
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(295,040
|
)
|
|
|
(222,098
|
)
|
Government subsidies/grants and other income
|
|
|
11,697
|
|
|
|
1,871,361
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
5,576,884
|
|
|
|
1,603,181
|
|
|
|
|
|
|
|
|
|
|
Income taxes expense
|
|
|
1,394,226
|
|
|
|
403,247
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,182,658
|
|
|
|
1,199,934
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
548,938
|
|
|
|
54,559
|
|
Comprehensive income
|
|
|
4,731,596
|
|
|
|
1,254,493
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic and diluted
|
|
|
0.05
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
78,832,064
|
|
|
|
78,832,064
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
|
|
Three Months Ended
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
Net income
|
|
|
4,182,658
|
|
|
|
1,199,934
|
|
Adjustments to reconcile net income
to
net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
97,060
|
|
|
|
69,289
|
|
Depreciation expense
|
|
|
1,399,252
|
|
|
|
1,159,684
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,089,536
|
)
|
|
|
1,319,321
|
|
Advances to suppliers
|
|
|
(2,628,657
|
)
|
|
|
5,334
|
|
Inventory
|
|
|
(302,244
|
)
|
|
|
(326,896
|
)
|
Other receivables
|
|
|
(84,531
|
)
|
|
|
(949,992
|
)
|
Other current assets
|
|
|
113,555
|
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
|
|
4,117,072
|
|
|
|
1,298,818
|
|
Tax payable
|
|
|
1,820,850
|
|
|
|
(380,423
|
)
|
Net cash provided by operating activities
|
|
|
3,625,480
|
|
|
|
3,395,069
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Cash paid for property, plant and equipment
additions
|
|
|
(1,428,756
|
)
|
|
|
(3,902,162
|
)
|
Net cash used in investing activities
|
|
|
(1,428,756
|
)
|
|
|
(3,902,162
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Short term loan proceeds
|
|
|
895,644
|
|
|
|
878,928
|
|
Short term loan (repayment)
|
|
|
(1,940,562
|
)
|
|
|
(878,928
|
)
|
(Repayments) of due to related parties
|
|
|
(134,904
|
)
|
|
|
146,488
|
|
Principle payment of the sale-leaseback financing
|
|
|
(202,326
|
)
|
|
|
(175,126
|
)
|
Net cash used in financing activities
|
|
|
(1,382,148
|
)
|
|
|
(28,638
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
87,397
|
|
|
|
(131,958
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
901,973
|
|
|
|
(667,689
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
683,545
|
|
|
|
752,952
|
|
Cash and cash equivalents, end of year
|
|
|
1,585,518
|
|
|
|
85,263
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
Interest Paid
|
|
|
113,837
|
|
|
|
98,225
|
|
Income taxes paid
|
|
|
-
|
|
|
|
403,247
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing Activity:
|
|
|
|
|
|
|
|
|
Construction in progress transferred to fixed assets
|
|
|
-
|
|
|
|
7,160,024
|
|
Advance transfer to CIP
|
|
|
-
|
|
|
|
3,496,594
|
|
Advances transferred to fixed asset
|
|
|
1,097,610
|
|
|
|
-
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – ORGANIZATION AND BUSINESS
China Runji Cement Inc. and our wholly owned subsidiaries (“we”, “us”, “our” or the Company) are a leading producer and distributor of cement, primarily in An Hui Province of central China and neighboring locations. Anhui Province Runji Cement Co. Ltd. (“Anhui Runji”) is our operating subsidiary located in Xianzong Town, An Hui province, China, where the factory occupies an area of 418 mu, and its limestone mine comprises an area of 1,000 mu. The Anhui Runji factory, limestone reserve and storing mine together comprise an area of approximately 50,000 square meters.
At present, the Company has one cement production line and one cement clinker production line. The production capacity of each line amounts to 2,500 tons per day and one million tons per year. Presently, the Company mainly focuses production on Runji Brand cement P.II52.5, P.O42.5, P.O32.5 P.C32.5 as well as cement clinker. P.II52.5 is a high grade, high strength cement that is made for Anhui and Jiangsu Provinces and the region north of the Changjiang River and is used in large infrastructure projects. The cement clinker is the semi-finished ingredient of cement, which is able to be processed into different categories of cement products.
The Company produces cement through the advanced dry production process, an energy efficient and environmentally friendly cement production technique. Although the Chinese government has mandated the elimination of 250 million tons of outdated cement production capacity by 2010, only 60% of the total output in the region is currently produced by dry process. The Company has a rigorous quality control system and received ISO9001 quality system certification and international accreditation in March 2006. In addition, our Company passed the national GB/T 19001-2000 standard authentication. The Company’s pollution control exceeds the national standard and received “green building material” certification in 2007.
The Company has an abundant supply of high quality raw materials. The Company has obtained a 30 year mining right for 87 million tons of limestone reserve, which can supply two cement clinker production lines with a daily output of 2,500 tons for 40 years.
Presently, the Company is one of the largest cement producers and distributors in the north Changjiang region of Anhui, with a 10% market share within a 100 mile radius of its facility. The Company is the only producer of P.II52.5 cement (the highest quality cement) in the north Changjiang region of Anhui and Jiangsu Provinces, with 70% market share within a 100 miles radius of its facility. Annual production capacity of the Company is two million tons cement and cement clinker. The Company’s main market for cement is in Hefei (Anhui Province), with total sales of 750 thousand tons, representing 75% of our total annual cement production and an additional 25% is sold in Chaohu and its surrounding areas, Moreover, the Company’s main cement clinker market is in Chaohu with total sales of 800 thousand tons in the area, representing 80% of our total annual cement clinker production, and an additional 20% is sold in Hefei.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Ren Ji Cement Investment Co., Ltd (a BVI corporation), Ren Ji Cement Company Limited (a Hong Kong corporation) and Anhui Province Runji Cement Co., Ltd. (a PRC corporation), and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, the interim financial statements reflect all normal adjustments that are necessary to provide a fair presentation of the financial results for the interim periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for an entire fiscal year. The condensed consolidated balance sheet as of August 31, 2010 has been derived from the audited consolidated financial statements as of such date. For a more complete understanding of the Company’s financial position, operating results, risk factors, and other matters, please refer to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2010.
All significant inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
In preparing these financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the year reported. Actual results may differ from these estimates.
CHINA RUNJI CEMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2010
(UNAUDITED)
NOTE 3 – ACCOUNTS RECEIVABLE
|
|
30-Nov-10
|
|
|
31-Aug-10
|
|
|
|
|
|
|
|
|
Notes Receivable
|
|
$
|
1,506,061
|
|
|
$
|
138,118
|
|
Accounts Receivable –Trade
|
|
$
|
13,265,125
|
|
|
$
|
9,419,972
|
|
Accounts Receivable from related party
|
|
|
296,191
|
|
|
|
212,374
|
|
Allowance for Doubtful Accounts
|
|
|
(197,443
|
)
|
|
|
(193,339
|
)
|
|
|
$
|
14,869,934
|
|
|
$
|
9,577,125
|
|
The accounts receivable from related party was $296,191 and $212,374 at November 30, 2010 and August 31, 2010 respectively. The related party is an entity controlled by the President and CEO of the Company.
The accounts receivable amount of $3,300,035 and $2,539,569 at November 30, 2010 and August 31, 2010, respectively, is used as a securitization for the ICBC Hanshan bank loan.
NOTE 4 – INVENTORY
Inventory consists of the following:
|
|
30-Nov-10
|
|
|
31-Aug-10
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
1,679,858
|
|
|
$
|
741,645
|
|
Packaging Materials
|
|
|
14,496
|
|
|
|
27,258
|
|
Semi-Finished Goods
|
|
|
215,521
|
|
|
|
599,178
|
|
Finished Goods
|
|
|
526,982
|
|
|
|
722,167
|
|
|
|
$
|
2,436,857
|
|
|
$
|
2,090,248
|
|
NOTE 5 – ADVANCES TO SUPPLIERS
Advances to suppliers consist of the following:
|
|
30-Nov-10
|
|
|
31-Aug-10
|
|
Advances to suppliers
|
|
$
|
3,473,204
|
|
|
$
|
826,994
|
|
Advance for purchase of fixed assets
|
|
|
809,662
|
|
|
|
467,225
|
|
Advances
|
|
$
|
4,282,886
|
|
|
$
|
1,294,219
|
|
Advances to suppliers represent amounts prepaid for raw materials. Advances for purchase of fixed assets represents amounts prepaid for the purchase of fixed assets. The advances are applied against amounts due to the supplier as the materials are received.
CHINA RUNJI CEMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2010
(UNAUDITED)
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
30-Nov-10
|
|
|
31-Aug-10
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
33,006,409
|
|
|
$
|
32,320,411
|
|
Equipment & machinery
|
|
|
41,262,028
|
|
|
|
39,325,188
|
|
Automobiles
|
|
|
326,707
|
|
|
|
319,917
|
|
Other equipment
|
|
|
31,752
|
|
|
|
31,092
|
|
Computer equipment
|
|
|
33,677
|
|
|
|
32,977
|
|
Construction in progress
|
|
|
32,796
|
|
|
|
32,114
|
|
Total property, plant and equipment (gross)
|
|
|
74,693,369
|
|
|
|
72,061,699
|
|
Accumulated depreciation
|
|
|
(19,041,795)
|
|
|
|
(17,260,271)
|
|
Total property, plant and equipment (net)
|
|
|
55,651,574
|
|
|
|
54,801,428
|
|
NOTE 7 –INTANGIBLE ASSETS & DEFERRED CHARGES
Intangibles and deferred charges include the following:
|
|
30-Nov-10
|
|
|
31-Aug-10
|
|
Terms
|
|
|
|
|
|
|
|
|
Mineral exploration right-Shihuishi
|
|
$
|
3,354,874
|
|
|
$
|
3,316,634
|
|
30 years
|
Mineral exploration right-Shayan
|
|
|
193,391
|
|
|
|
196,562
|
|
10 years
|
Land acquisition compensation (compensating fee for mine and forest)
|
|
|
466,637
|
|
|
|
473,066
|
|
10 years
|
Planting fee in working place
|
|
|
198,395
|
|
|
|
221,363
|
|
3 years
|
Compensating fee for stone materials in Baxiong Village
|
|
|
14,334
|
|
|
|
14,531
|
|
10 years
|
Compensating fee for limekiln and drought land in Baxiong Village
|
|
|
12,465
|
|
|
|
12,637
|
|
10 years
|
Compensating fee for sandstone land in Qiaomai Village
|
|
|
99,653
|
|
|
|
100,839
|
|
10 years
|
Debt issue cost
|
|
|
12,742
|
|
|
|
21,836
|
|
2 years
|
Total intangible assets & deferred charges
|
|
$
|
4,352,491
|
|
|
$
|
4,357,468
|
|
|
The total amortization expenses related to the intangibles and deferred charges are $97,060 and $69,289 for the three months ended November 30, 2010 and 2009, respectively.
CHINA RUNJI CEMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2010
(UNAUDITED)
NOTE 8 – SHORT-TERM LOANS
Short term loans consist of:
|
|
30-Nov-10
|
|
|
31-Aug-10
|
|
|
|
|
|
|
|
|
Xian Zong Credit Bank
|
|
$
|
899,361
|
|
|
$
|
880,670
|
|
PuFa Bank WenHu business branch
|
|
|
4,346,914
|
|
|
|
4,256,568
|
|
ICBC Hanshan
|
|
|
1,948,616
|
|
|
|
2,953,564
|
|
Huishang Bank Sales Department
|
|
|
5,396,169
|
|
|
|
5,284,015
|
|
Runfeng company
|
|
|
749,163
|
|
|
|
737,661
|
|
|
|
$
|
13,340,223
|
|
|
$
|
14,094,478
|
|
The details for the Company’s bank loans at November 30, 2010 are as follows:
|
Borrowing bank
|
|
Amount
|
|
|
Starting date
|
|
|
Maturity date
|
|
|
Interest rate (monthly)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Xian Zong Credit Bank
|
|
|
899,361
|
|
|
|
2010-11-22
|
|
|
|
2011-11-22
|
|
|
|
0.834
|
%
|
**
|
PuFa Bank WenHu business branch
|
|
|
4,346,914
|
|
|
|
2010-05-05
|
|
|
|
2011-04-27
|
|
|
|
0.5310
|
%
|
***
|
ICBC Hanshan
|
|
|
1,948,616
|
|
|
|
2010-03-15
|
|
|
|
2011-03-15
|
|
|
|
0.6058
|
%
|
****
|
Huishang Bank Sales Department
|
|
|
5,396,169
|
|
|
|
2010-07-22
|
|
|
|
2011-07-21
|
|
|
|
0.5310
|
%
|
|
Runfeng Company
|
|
|
749,163
|
|
|
|
2010-05-26
|
|
|
|
2011-05-25
|
|
|
|
0.8835
|
%
|
____________
*
|
The loan from the Xian Zong Credit Bank was pledged in collateral of machine equipment in value of RMB 24,025,000.
|
**
|
The loan from the Wenhu branch of PuFa Bank was pledged in collateral of the Company’s building and land user right.
|
***
|
The loan from the Hanshan branch of ICBC Bank is securitized by an accounts receivable balance of $3,300,035 and $2,923,464 at November 30, 2010 and August 31, 2010 respectively.
|
****
|
The loan from the sales department of Huishang Bank was guaranteed by Anhui Province Credit Guarantee (Group) Co., Ltd.
|
CHINA RUNJI CEMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2010
(UNAUDITED)
NOTE 9 –DUE TO RELATED PARTIES
(a) Names and relationship of related parties
|
Existing relationships with the Company
|
|
|
Nanjing Hongren
|
A company controlled by shareholder
|
|
|
Nanjing Runji
|
A company controlled by shareholder
|
|
|
Zhao, Shouren
|
Shareholder & president & CEO of the Company
|
|
|
Yang, Xuanjun
|
Shareholder of the Company
|
(b) Due to Related Parties (S/T) consists of the following:
|
|
30-Nov-10
|
|
|
31-Aug-10
|
|
|
|
|
|
|
|
|
Due to related party – Nanjing Hongren
|
|
$
|
5,516,708
|
|
|
|
5,622,218
|
|
Due to related party – Nanjing Runji
|
|
|
4,518,830
|
|
|
|
4,424,912
|
|
Due to related party – Zhao, Shouren
|
|
|
60,876
|
|
|
|
59,611
|
|
Due to related party – Yang, Xuanjun
|
|
|
616,560
|
|
|
|
515,677
|
|
Miscellaneous
|
|
|
3,282
|
|
|
|
3,282
|
|
|
|
$
|
10,716,256
|
|
|
|
10,625,700
|
|
The above amounts due to related parties represent loans payable, are short-term loans that are unsecured and non-interest bearing, and the loans’ use will depend on the Company’s business operations.
NOTE 10 – LONG-TERM LOAN
The details for the Company’s long-term loan are as follows:
|
|
30-Nov-10
|
|
|
31-Aug-10
|
|
|
|
|
|
|
|
|
Long-term loan – Anhui Yuanzhong (current portion)
|
|
$
|
37,994
|
|
|
$
|
236,148
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,994
|
|
|
$
|
236,148
|
|
CHINA RUNJI CEMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2010
(UNAUDITED)
NOTE 11 – COMMITMENTS AND CONTINGECIES
Social insurance for employees
According to the prevailing laws and regulations of the PRC, the Company is required to cover its employees with medical, retirement and unemployment insurance programs. Management believes that due to the transient nature of its employees, the Company does not need to provide all employees with such social insurances, and has paid the social insurances for the Company’s employees who have completed three months’ continuous employment with the Company.
In the event that any current or former employee files a complaint with the PRC government, the Company may be subject to making up the social insurances as well as administrative fines. As the Company believes that these fines would not be material, no provision has been made in this regard.
Tax issues
The tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises have completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings, which may lead to additional tax liabilities.
The Company does not have any operating leases and other long-term commitments
NOTE 12 – INCOME TAXES
The Company’s Chinese Enterprise Income Tax (“EIT”) rate is 25%,
|
|
Three
months
ended
30-Nov-10
|
|
|
Three
months
ended
30-Nov-09
|
|
Income Taxes
|
|
$
|
1,394,226
|
|
|
$
|
403,247
|
|
A reconciliation between the income tax computed at the U.S. statutory rate and the Company’s provision for income tax is as follows:
|
Three months ended
|
|
|
November 30,
|
|
November 30,
|
|
|
2010
|
|
2009
|
|
U.S. statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Foreign income not recognized in the U.S.
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
PRC preferential enterprise income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Others permanent differences
|
|
|
0
|
%
|
|
|
0
|
%
|
Provision for income tax
|
|
|
25
|
%
|
|
|
25
|
%
|
There are no significant temporary differences between book and tax income. The tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises have completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings, which may lead to additional tax liabilities.
The Company’s corporate income tax liability is $2,065,099 and $651,263 as of November 30, 2010 and August 31, 2010, respectively.
ITEM
2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL DESCRIPTION OF BUSINESS
Introduction
China Runji Cement Inc. and our wholly owned subsidiaries (“we”, “us”, “our” or the Company) are a leading producer and distributor of cement, primarily in An Hui Province of central China and neighboring locations. Anhui Province Runji Cement Co. Ltd. (“Anhui Runji”) is our operating subsidiary located in Xianzong Town, An Hui province, where the factory occupies an area of 418 mu, and its limestone mine comprises an area of 1,000 mu. The Anhui Runji factory, limestone reserve and storing mine together comprise an area of approximately 50,000 square meters.
At present, the Company has one cement production line and one cement clinker production line. The production capacity of each line amounts to 2,500 tons per day and one million tons per year. Presently, the Company mainly focuses production on Runji Brand cement P.II52.5, P.O42.5, P.O32.5 P.C32.5 as well as cement clinker. P.II52.5 is a high grade, high strength cement that is made for Anhui and Jiangsu Provinces and the region north of the Changjiang River and is used in large infrastructure projects. The cement clinker is the semi-finished ingredient of cement, which is able to be processed into different categories of cement products.
The Company produces cement through the advanced dry production process, an energy efficient and environmentally friendly cement production technique. Although the Chinese government has mandated the elimination of 250 million tons of outdated cement production capacity by 2010, only 60% of the total output in the region is currently produced by dry process. The Company has a rigorous quality control system and received ISO9001 quality system certification and international accreditation in March 2006. In addition, our Company passed the national GB/T 19001-2000 standard authentication. The Company’s pollution control exceeds the national standard and received “green building material” certification in 2007.
The Company has an abundant supply of high quality raw materials. The Company has obtained a 30 year mining right for 87 million tons of limestone reserve, which can supply two cement clinker production lines with a daily output of 2,500 tons for 40 years.
Presently, the Company is one of the largest cement producers and distributors in the north Changjiang region of Anhui, with a 10% market share within a 100 mile radius of its facility. The Company is the only producer of P.II52.5 cement (the highest quality cement) in the north Changjiang region of Anhui and Jiangsu Provinces, with 70% market share within a 100 miles radius of its facility. Annual production capacity of the Company is two million tons cement and cement clinker. The Company’s main market for cement is in Hefei (Anhui Province), with total sales of 750 thousand tons, representing 75% of our total annual cement production and an additional 25% is sold in Chaohu and its surrounding areas, Moreover, the Company’s main cement clinker market is in Chaohu with total sales of 800 thousand tons in the area, representing 80% of our total annual cement clinker production, and an additional 20% is sold in Hefei.
Summary of the Operations of Anhui Runji
The Company’s net sales to customers for the three months ended November 30, 2010 and November 30, 2009, were $20,801,677 and $10,930,701, respectively.
Anhui Runji’s Plan of Operation
Ÿ
|
We plan to raise adequate capital over the next five years for expansion and growth.
|
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2010 AND 2009
The following discussion should be read in conjunction with the financial statements included in this report and is qualified in its entirety by the foregoing.
FORWARD LOOKING STATEMENTS
Certain statements in this report, including statements of our expectations, intentions, plans and beliefs, including those contained in or implied by "Management's Discussion and Analysis" and the Notes to Financial Statements, are "forward-looking statements", within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are subject to certain events, risks and uncertainties that may be outside our control. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements.
Revenues
We generated all of our revenue primarily by selling cement products. Revenues increased by $9,928,941 or 90.8% to $20,859,647 for the three months ended November 30, 2010 from $10,930,706 for the three months ended November 30, 2009. The increase is due to the increase in retail prices of cement products and increased sales volume. The breakdown of our revenue and volume is shown as follows:
|
For the Three Months Ended
|
|
November 30,2010
|
|
|
|
November 30,2009
|
|
|
|
Difference
|
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
20,801,677
|
|
100
|
%
|
|
$
|
10,930,706
|
|
100
|
%
|
|
$
|
9,870,971
|
|
90.30
|
%
|
Cement
|
|
|
10,251,712
|
|
49
|
%
|
|
|
4,852,748
|
|
44
|
%
|
|
|
5,398,964
|
|
111.26
|
%
|
Cement clinker
|
|
|
10,549,965
|
|
51
|
%
|
|
|
6,077,958
|
|
56
|
%
|
|
|
4,472,007
|
|
73.58
|
%
|
|
For the Three Months Ended
|
|
November 30,2010
|
|
|
|
November 30,2009
|
|
|
|
Difference
|
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
tons
|
|
|
|
tons
|
|
|
|
|
|
|
|
Sales Volume
|
|
|
484,182
|
|
100
|
%
|
|
|
381,104
|
|
100
|
%
|
|
$
|
103,079
|
|
27.0
|
%
|
Cement
|
|
|
228,381
|
|
47
|
%
|
|
|
143,036
|
|
38
|
%
|
|
|
85,345
|
|
59.7
|
%
|
cement clinker
|
|
|
255,801
|
|
53
|
%
|
|
|
238,067
|
|
62
|
%
|
|
|
17,734
|
|
7.4
|
%
|
Note: Comparing with the same period last year, the revenue of cement increased by $5,398,964 to $10,251,712 for the three months ended November 30, 2010 from $4,852,748 for the three months ended November 30, 2009; and that of cement clinker increased by $4,472,007 to $10,549,965 for the three months ended November 30, 2010 from $6,077,958 for the three months ended November 30, 2009; the percentage of revenue of cement increased to 49% for the three months ended November 30, 2010 from 44% for the three months ended November 30, 2009, the percentage of revenue of cement clinker decreased to 51% for the three months ended November 30, 2010 from 56% for the three months ended November 30, 2009; the percentage of volume of cement increased to 47% for the three months ended November 30, 2010 from 38% for the three months ended November 30, 2009, and the percentage of volume of cement clinker decreased to 53% for the three months ended November 30, 2010 from 62% for the three months ended November 30, 2009.
Cost of Goods Sold
Our cost of goods sold for the three months ended November 30, 2009 was $14,067,990, compared to $10,225,190 for the three months ended November 30, 2009, an increase of $3,842, 800 or approximately 38%. This is attributed to an increase in our sales volume and increased production costs.
|
For the Three Months Ended
|
|
November 30,2010
|
|
|
|
November 30,2009
|
|
|
|
Difference
|
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
14,067,990
|
|
100
|
%
|
|
$
|
10,225,195
|
|
100
|
%
|
|
$
|
3,842,795
|
|
38
|
%
|
Cement
|
|
|
6,882,311
|
|
49
|
%
|
|
|
4,573,174
|
|
45
|
%
|
|
|
2,309,137
|
|
50
|
%
|
Cement clinker
|
|
|
7,185,679
|
|
51
|
%
|
|
|
5,652,021
|
|
55
|
%
|
|
|
1,533,658
|
|
27
|
%
|
Gross Profit
Our gross profit increased by $6,028,176 or approximately 854% to $6,733,687 for the three months ended November 30, 2010 from $705,511 for the three months ended November 30, 2009. The increase was primarily due to the higher sales volume and an increase in the retail price for cement products.
Operating Expenses
Total operating expenses for the three months ended November 30, 2010 was $873,460, compared to $751,593 for the three months ended November 30, 2009, an increase of $121,867 or approximately 16.2%. The increase was mainly due to consulting, depreciation and office expenses.
Interest Expenses
Our interest expense for
the three months ended November 30, 2010 and November 30, 2009 was $295,040 and $222,098, respectively. The increased interest expense of $72,942 was due mainly to the increase in short-term loans.
Liquidity and Capital Resources
Net cash flows provided by operating activities for the three months ended November 30, 2010 and November 30, 2009 were $3,625,480 and $3,395,069, respectively. This was primarily due to net income.
Net cash flows used in investing activities for the three months ended November 30, 2010 and November 30, 2009 were $1,428,756 and $3,902,162. This was due mainly to decreased expenditures for property.
Net cash flows used in financing activities for the three months ended November 30, 2010 and November 30, 2009 were $1, 382,148 and $28,639, respectively. The decrease is primarily due to the decrease in repayment of related party loans.
Overall, we have funded most of our cash needs from inception through November 30, 2010 with operating activities and loans from related parties.
On November 30, 2010, we had cash and cash equivalents of $1,585,518 on hand. We anticipate raising funds through an equity or debt offering or with a strategic partner in the coming year.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company’s financial condition presented in this section are based upon the unaudited consolidated financial statements of China Runji Cement Inc., which have been prepared in accordance with the generally accepted accounting principles in the United States. During the preparation of the financial statements China Runji Cement Inc. is required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, China Runji Cement Inc. evaluates its estimates and judgments, including those related to sales, returns, pricing concessions, bad debts, inventories, investments, fixed assets, intangible assets, income taxes and other contingencies. China Runji Cement Inc. bases its estimates on historical experience and on various other assumptions that it believes are reasonable under current conditions. Actual results may differ from these estimates under different assumptions or conditions.
In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policy,” China Runji Cement Inc. identified the most critical accounting principles upon which its financial status depends. China Runji Cement Inc. determined that those critical accounting principles are related to the use of estimates, inventory valuation, revenue recognition, income tax and impairment of intangibles and other long-lived assets. China Runji Cement Inc. presents these accounting policies in the relevant sections in this management’s discussion and analysis, including the Recently Issued Accounting Pronouncements discussed below.
Revenue Recognition
. China Runji Cement Inc. recognizes sales when revenue is realized or realizable, and has been earned, in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”. China Runji Cement Inc.’ sales are related to sales of product. Revenue for product sales is recognized as risk and title to the product transfer to the customer, which usually occurs at the time shipments are made. Substantially all of China Runji Cement Inc.’ products are sold FOB (“free on board”) shipping point. Title to the product passes when the product is delivered to the freight carrier.
Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT). All of China Runji Cement Inc.’s products that are sold in the China are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT may be offset by VAT paid by China Runji Cement Inc. on raw materials and other materials included in the cost of producing their finished product.
Accounts Receivable, Trade and Allowance for Doubtful Accounts.
China Runji Cement Inc.’ business operations are conducted in the People's Republic of China. During the normal course of business, China Runji Cement Inc. extends unsecured credit to its customers. Management reviews accounts receivable on a regular basis to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable.
I
nventories.
Inventories are stated at the lower of cost or market using the weighted average method. China Runji Cement Inc. reviews its inventory on a regular basis for possible obsolete goods or to determine if any reserves are necessary for potential obsolescence.
Recently Issued Accounting Pronouncements
The Company does not believe that there are any new pronouncements that have been issued since December 14, 2010 that might have a material impact on its consolidated financial statements.
ITEM
3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, operations of the Company are exposed to fluctuations in interest rates. These fluctuations can vary the costs of financing and investing yields. In view of the financing arrangements during the first three months of 2010, the Company is not currently subject to significant market risk.
ITEM
4 - CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit 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 and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2010. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.
The material weakness relates to the lack of personnel with the appropriate knowledge of generally accepted accounting principles (GAAP) and SEC reporting experience, coupled with a lack of segregation of duties and minimal staffing. To remedy this material weakness, management is actively searching for competent candidates and working with outside consultants in the financial reporting process.
Changes in Internal Control over Financial Reporting
During the fourth fiscal quarter of 2010, we implemented the following measures to improve our internal control over financial reporting:
(1) Engaged outside consultants to assist in our assessment of the effectiveness of the company’s internal control over financial reporting; and
(2) Developed and instituted new internal control procedures to strengthen our month-end close and financial reporting processes.
We believe these measures have strengthened our internal control over financial reporting and disclosure controls and procedures.
Our senior executives and our Board of Directors are committed to achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity. This commitment has been and will continue to be communicated to and reinforced with our employees and to external stakeholders.
In addition, under the direction of the Board of Directors, management will continue to review and make changes to the overall design of our internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting and our disclosure controls and procedures.
Except for the changes discussed above, there was no change in our internal control over financial reporting that occurred during the quarter ended November 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM 6 – EXHIBITS
31.1
|
Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
|
|
|
31.2
|
Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
|
|
|
32.1
|
Certification of the Company's Chief Executive Officer Pursuant to 18 U.S.C. SS. 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. SS. 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
CHINA RUNJI CEMENT INC.
|
|
|
|
Date: January 14, 2011
|
By:
|
/s/ Shouren Zhao
|
|
Shouren Zhao
Chairman and Chief Executive Officer
|