Significant
production costs such as raw materials and labor are generally incurred pro rata
over the time required to complete each project, beginning with machining of
equipment parts in production facilities in Dalian to fabrication and assembly
of housings, towers, and other items constructed on site in our clients’ steel
mills. While our production costs also include labor, depreciation, and other
manufacturing costs, we believe that using the application of raw materials to
work in progress to drive our percentage completion estimates offers the most
concrete factual basis for estimation of percentage completion as this prevents
the allocation of overheads and utilities from directly affecting our
recognition of revenues and is in accord with the guidance in SOP
81-1.
Services.
In
addition to the Company’s specialty equipment sales, the Company uses heavy
machining equipment to perform machining services for third parties. These
engagements, numbering several hundred per year, are essentially piecework and
are completed in usually less than one month. Each machining engagement is
governed by a separate contract, indicating existence of an arrangement. Revenue
is recognized when service is performed, which is usually concurrent with
delivery to the client, the contract prices are set by contract, collectability
is assured. Machining services contracts generally set out
the machining work to be performed, including machining tolerances,
number of pieces to be worked, payment terms, timing of delivery, and price
per unit of work. The contract price is generally paid upon acceptance by
the customers of the completed work after testing by the customers according to
the contract specifications.
The
Company also provided technical professional services to its customers based on
a fixed-price time contract. The Company recognized services-based revenue from
all of its contracts when the services have been performed, the customers have
approved the completion of the services and invoices have been issued and
collectability is reasonably assured. Technical services contracts specify the
final user, the nature of the project and the type of technology service to be
provided. Contracts are valid for one year from signing; payments are
generally front-loaded.
BOT Contracts
. Starting from
2010, the Company enters into long-term “build-operate-transfer” contracts (the
“BOT” contracts) with customers to manufacture and install, operate and maintain
the industrial equipments. The revenue and costs relating to construction or
upgrade services are recognized under the cost recovery method as the collection
of the receivable cannot be reasonably assured. Under the cost recovery method,
no gross profit is recognized until the collection of the receivable exceeds the
cost or until such time that the company considers the collections to be
probable and can be reasonably estimated. A BOT service contract has an
indeterminable number of acts to be performed over a specific period of time. As
such, revenue from a BOT service contract is recognized on a straight-line basis
unless it is possible to estimate the stage of completion by some other method
more reliably. When in a series of acts to be performed in rendering a service,
a specific act is much more significant than other acts, and then the
recognition of income is postponed until the significant acts are
performed.
The
Company allows its customers to retain 5% to 10% of the contract prices as
retainage installation of the equipment, usually 12 or 18 months, to guarantee
product quality. Historically, the Company has experienced insignificant
warranty claims resulting in the Company having to repair or exchange a
defective product. Due to the infrequency and insignificant amount of warranty
claims, the ability to collect retainage is reasonably assured and is included
as part of the contract price, and is recognized as revenue based upon
percentage of completion.
Enterprise Wide
Disclosure
The
Company’s chief operating decision-makers review financial information
presented on a consolidated basis, accompanied by disaggregated information
about revenues by business lines for purposes of allocating resources and
evaluating financial performance. The Company is engaged in designing,
developing, manufacturing, and installing environmental protection and energy
saving equipment for the Chinese iron and steel industry and no other business
segment. There are no segment managers who are held accountable for
operations, operating results and plans for levels or components below the
consolidated unit level. Based on qualitative and quantitative criteria
established by “Disclosures about Segments of an Enterprise and Related
Information,” the Company considers itself to be operating within one reportable
segment.
Government
Grant
The
Dalian municipal government approved grants to the Company to encourage
high-technology industry research and development. The grants are netted with
research and development expenses upon receipt from the local government. The
Company received government grants in the amount of $147,100 and $61,568
during the three months ended September 30, 2010 and 2009,
respectively. The Company received government grants in the amount of
$332,446 and $105,545 during the nine months ended September 30, 2010 and 2009,
respectively.
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
Research and
Developm
ent
Costs
Research
and development (“R&D”) expenses include salaries, material, contract and
other outside service fees, facilities and overhead costs. Under the guidance of
GAAP, the Company expenses the costs associated with the R&D activities when
incurred. R&D expenses of $147,100 and $73,796 incurred during
the nine months ended September 30, 2010 and 2009, respectively. Most of
the R&D expenses were incurred in the second quarter of 2010 and
2009.
Shipping and
Handling
Shipping
and handling for raw materials purchased are included in cost of goods sold.
Shipping and handling costs incurred for shipping of finished products to
customers are included in selling expenses. Shipping and handling expenses
included in selling expense for the three months ended September 30, 2010 and
2009, amounted to $12,510 and $71,849, respectively. Shipping and handling
expenses included in selling expense for the nine months ended September 30,
2010 and 2009, amounted to $83,297 and $219,862, respectively.
Stock-
B
ased
Compensation
We are
required to estimate the fair value of share-based awards on the date of grant.
The value of the award is principally recognized as expenses ratably over the
requisite service periods. The fair value of our restricted stock units is based
on the closing market price of our common stock on the date of grant. We have
estimated the fair value of stock options and stock purchase rights as of the
date of grant or assumption using the Black-Scholes option pricing model, which
was developed for use in estimating the value of traded options that have no
vesting restrictions and that are freely transferable. The Black-Scholes model
considers, among other factors, the expected life of the award and the expected
volatility of our stock price. We evaluate the assumptions used to value
stock options and stock purchase rights on a quarterly basis. The fair values
generated by the Black-Scholes model may not be indicative of the actual fair
values of our equity awards, as it does not consider other factors important to
those awards to employees, such as continued employment, periodic vesting
requirements and limited transferability.
The
Company is required to measure the cost of the equity instruments issued in
exchange for the receipt of goods or services from other than employees at the
estimated fair market value of the consideration received or the estimated fair
value of the equity instruments issued, whichever is more reliably determinable.
The value of equity instruments issued for consideration other than
employee services is determined on the earlier of a performance commitment or
completion of performance by the provider of goods or services.
Stock
compensation expense is recognized based on awards expected to vest. GAAP
requires forfeitures to be estimated at the time of grant and revised in
subsequent periods, if necessary, if actual forfeitures differ from those
estimates. There were no estimated forfeitures as the Company has a
short history of issuing options.
Income
Taxes
The
Company reports income taxes pursuant to FASB’s accounting standard for income
taxes. Under the asset and liability method of accounting for income taxes as
required by this accounting standard, deferred taxes are determined based on the
temporary differences between the financial statement and tax basis of assets
and liabilities using tax rates expected to be in effect during the years in
which the basis differences reverse. A valuation allowance is recorded when it
is more likely than not that some of the deferred tax assets will not be
realized. FASB’s accounting standard for accounting for uncertainty in
income taxes requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. As of January 1, 2007,
income tax positions must meet a more-likely-than-not recognition threshold to
be recognized. A tax position is recognized as a benefit only if it is
“more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded.
Under
this method, deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. No material deferred tax amounts were recorded at September
30, 2010 and December 31, 2009. Penalties and interest incurred related to
underpayment of income tax are classified as income tax expense in the year
incurred. No significant penalties or interest relating to income taxes
have been incurred during the three and nine months ended September 30, 2010 and
2009. GAAP also provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosures and
transition.
The
charge for taxation is based on the results for the reporting period as adjusted
for items, which are non-assessable or disallowed. It is calculated
using tax rates that have been enacted or substantively enacted by the balance
sheet date.
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
The
Company and its VIE Rino Technology were incorporated in the United States
and has incurred net operating losses for income tax purposes for the three and
nine months ended September 30, 2010 and 2009. The Company had estimated loss
carry forwards of approximately $3.90 million and $1.51 million as of September
30, 2010 and December 31, 2009, respectively, for U.S. income tax purposes,
available for offset against future taxable U.S. income expiring in 2028.
Management believes that the realization of the benefits from the loss carry
forward appears uncertain due to the Company’s historical operating income and
continuing losses. Accordingly, a 100% valuation allowance has been provided and
no deferred tax asset benefit has been recorded. The valuation allowance at
September 30, 2010 and December 31, 2009 was approximately $1,327,559 and
$505,000, respectively. The net change in the valuation allowance was an
increase of approximately $822,559.
The
Company has cumulative undistributed earnings of foreign subsidiaries and VIE’s
of approximately $137,627,002 as of September 30, 2010 which is included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations. Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
US Income
Taxes
The
Company and its VIE Rino Technology are incorporated in the State of Nevada
in the U.S., and are subject to a gradual U.S. federal corporate income tax of
15% to 38%. The State of Nevada does not impose any corporate state income
tax.
Hong Kong Income
Taxes
The
Company’s subsidiary, Innomind is incorporated in BVI and its office is located
in Hong Kong. Innomind did not earn any income that was derived in Hong Kong for
the three and nine months ended September 30, 20010 and 2009 and therefore was
not subject to Hong Kong Profit Tax.
China Income
Taxes
The
Company conducts all its operating business through its operating subsidiaries
and VIEs, Dalian Innomind, Dalian Rino, Rino Design, Rino Installation,
Rino Logistics, Rino Investment, Rino Heavy Industries and Rino Sludge in China.
The operating subsidiaries and VIEs are governed by the income tax laws of PRC
and do not have any deferred tax assets or deferred tax liabilities under the
income tax laws of the PRC because there are no temporary differences between
financial statement carrying amounts and the tax bases of existing assets and
liabilities.
The
Company’s subsidiaries and VIEs are governed by the Income Tax Law of the PRC
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws.
Starting
January 1, 2008, under new EIT law, Dalian Rino was subject to the new standard
EIT rate of 25%. On December 10, 2008, Dalian Rino was approved for a
reduced tax rate at 15% for being qualified as an entity operating with high
technology.
Dalian
Innomind is subject to EIT at a rate of 25% on its net income, while as a
foreign investment enterprise, Dalian Innomind is qualified for a tax exemption
for two years and a 50% reduction for the following three years. As a result,
Dalian Innomind enjoys a 100% tax exemption for the years 2008 through 2009 and
a 50% income tax reduction for the years 2010 through 2012.
Pursuant
to an Entrusted Management Agreement by and between Dalian Innomind and Dalian
Rino, dated October 3, 2007, Dalian Rino and its shareholders agreed to entrust
the operations and management of the Business to Dalian Innomind and Dalian
Innomind is entitled to Dalian Rino’s net profit as an entrusted management fee,
which resulted in no income tax provision for Dalian Rino.
Dalian
Investment, Dalian Rino Heavy, Dalian Rino Installation, Dalian Rino Design,
Dalian Logistics, and Rino Sludge are subject to an income tax rate of
25%.
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
The
Company’s subsidiaries and VIEs were paying the following tax rate for the three
and nine months ended September 30,
|
|
|
2010
|
|
|
2009
|
|
|
Subsidiaries and VIEs
|
|
Effective
Income Tax Rate
|
|
|
Income Tax
Exemption
|
|
|
Effective
Income Tax Rate
|
|
|
Income Tax
Exemption
|
|
|
|
|
(unaudited)
|
|
|
Dalian
Innomind
|
|
|
12.5
|
%
|
|
|
12.5
|
%
|
|
|
0
|
%
|
|
|
25
|
%
|
|
Dalian
Rino
|
|
|
15
|
%
|
|
|
10
|
%
|
|
|
15
|
%
|
|
|
10
|
%
|
|
Rino
Design
|
|
|
25
|
%
|
|
|
0
|
%
|
|
|
25
|
%
|
|
|
0
|
%
|
|
Rino
Installation
|
|
|
25
|
%
|
|
|
0
|
%
|
|
|
25
|
%
|
|
|
0
|
%
|
|
Rino
Logistics
|
|
|
25
|
%
|
|
|
0
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Rino
Investment
|
|
|
25
|
%
|
|
|
0
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Rino
Heavy Industries
|
|
|
25
|
%
|
|
|
0
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Rino
Sludge
|
|
|
25
|
%
|
|
|
0
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
The
provision for income taxes differs from the amount computed by applying the
statutory United States federal income tax rate to income before income taxes.
The following table reconciles the statutory rates to the Company’s effective
tax rate for the three months ended September 30, 2010 and 2009
(unaudited):
|
|
|
2010
|
|
|
2009
|
|
|
U.S.
Statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
Foreign
income not recognized in U.S.
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
China
income taxes
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
China
income tax exemption
|
|
|
(13.2
|
)%
|
|
|
(25.0
|
)%
|
|
Other
items (a)
|
|
|
2.7
|
%
|
|
|
-
|
|
|
Effective
income tax rate
|
|
|
14.50
|
%
|
|
|
0.0
|
%
|
(a) The
2.7% represents the $754,879 of income and expenses incurred by the Company, and
its VIEs, Innomind Group and Rino Technology that are not deductible in PRC for
the three months ended September 30, 2010.
The
following table reconciles the statutory rates to the Company’s effective tax
rate for the nine months ended September 30, 2010 and 2009
(unaudited):
|
|
|
2010
|
|
|
2009
|
|
|
U.S.
Statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
Foreign
income not recognized in U.S.
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
China
income taxes
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
China
income tax exemption
|
|
|
(9.1
|
)%
|
|
|
(25.0
|
)%
|
|
Other
items (a)
|
|
|
(5.7
|
)%
|
|
|
-
|
|
|
Effective
income tax rate
|
|
|
10.2
|
%
|
|
|
0.0
|
%
|
(a) The
(5.7)% represents the $13,280,084 of income incurred by the Company and its
VIEs, Innomind Group and Rino Technology that are not subject to income tax for
the nine months ended September 30, 2010.
The
estimated tax savings for the three months ended September 30, 2010 amounted to
$1,365,667. The net effect on earnings per share had the income tax been applied
would decrease basic and diluted earnings per share from $0.31 to
$0.26 in 2010.
The
estimated tax savings for the nine months ended September 30, 2010 amounted to
$4,835,681. The net effect on earnings per share had the income tax been applied
would decrease basic and diluted earnings per share from $1.68 to
$1.51 in 2010.
No
provision for income tax was made for three and nine months ended
September 30, 2009.
Value Added
Tax
Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax, or VAT, in
accordance with Chinese laws. The VAT standard rate is 17% of the gross sales
price. A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on sales of the finished
product.
VAT on
sales and VAT on purchases amounted to $10,179,030 and $6,244,656
respectively, for three months ended September 30, 2010, respectively. VAT on
sales and VAT on purchased amounted to $17,375,881 and $10,565,781,
respectively, for three months ended September 30, 2009.
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
VAT on
sales and VAT on purchases amounted to $39,695,649 and $26,957,889 for the nine
months ended September 30, 2010, respectively. VAT on sales and VAT on purchases
amounted to $41,314,005 and $29,373,079 for the nine months ended September 30,
2009, respectively.
Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent because the VAT taxes are not impacted by the income tax holiday. As of
September 30, 2010 and December 31, 2009, the VAT payable amounted to $71,316,
and $3,260,613, respectively.
All of
VAT on sales and purchases amounts including VAT tax on intercompany sales and
purchases. As of September 30, 2010, prepaid VAT in the amount of $2,243,063 was
included in other current assets and prepaid expense on balance
sheet.
Comprehensive
income
GAAP
establishes standards for reporting and display of comprehensive income and its
components in financial statements. It requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in financial statements that are displayed with the
same prominence as other financial statements.
Earnings Per
Share
GAAP
requires presentation of basic and diluted earnings per share in conjunction
with the disclosure of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock using the treasury
method.
Common
stock equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method, at
either the beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company's net income (loss) position at the calculation
date.
Recently Adopted Accounting
Standards
In
January 2010, FASB issued ASU No. 2010-01– Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The adoption of this ASU did not have impact on the
Company’s consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If
an entity has previously adopted SFAS No. 160 as of the date the amendments in
this update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments in this
update should be applied retrospectively to the first period that an entity
adopted SFAS No. 160. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: 1) Level of disaggregation. A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or
liabilities within a line item in the statement of financial position. A
reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities. 2) Disclosures about inputs and valuation techniques. A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. These disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is currently evaluating the impact of this ASU, however, the
Company does not expect the adoption of this ASU to have a material impact on
its consolidated financial statements.
In
February 2010, FASB issued ASU No. 2010-9 – Amendments to Certain
Recognition and Disclosure Requirements. This update addresses certain
implementation issues related to an entity’s requirement to perform and disclose
subsequent-events procedures, removes the requirement that public companies
disclose the date of their financial statements in both issued and revised
financial statements. According to the FASB, the revised statements include
those that have been changed to correct an error or conform to a retrospective
application of U.S. GAAP. The amendment is effective for interim and annual
reporting periods in fiscal year ending after June 15, 2010. The adoption of
this ASU did not have a material impact on the Company’s consolidated financial
statements.
In March
2010, FASB issued ASU No. 2010-10 – Amendments for Certain Investment
Funds. This update defers the effective date of the amendments to the
consolidation requirements made by FASB Statement 167 to a reporting entity’s
interest in certain types of entities. The deferral will mainly impact the
evaluation of reporting enterprises’ interests in mutual funds, private equity
funds, hedge funds, real estate investment entities that measure their
investment at fair value, real estate investment trusts, and venture capital
funds. The ASU also clarifies guidance in Statement 167 that addresses whether
fee arrangements represent a variable interest for all service providers and
decision makers. The ASU is effective for interim and annual reporting periods
in fiscal year beginning after November 15, 2009. The adoption of this ASU did
not have a material impact on the Company’s consolidated financial
statements.
In March
2010, FASB issued ASU No. 2010-11 – Scope Exception Related to Embedded
Credit Derivatives. Embedded credit-derivative features related only to the
transfer of credit risk in the form of subordination of one financial instrument
to another are not subject to potential bifurcation and separate accounting as
clarified by recently issued FASB guidance. Other embedded credit-derivative
features are required to be analyzed to determine whether they must be accounted
for separately. This update provides guidance on whether embedded
credit-derivative features in financial instruments issued by structures such as
collateralized debt obligations (CDOs) and synthetic CDOs are subject to
bifurcation and separate accounting. The guidance is effective at the beginning
of a company’s first fiscal quarter beginning after June 15, 2010. The adoption
of this ASU did not have a material impact on the Company’s consolidated
financial statements.
In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation - Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. This Update provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial porting of
the entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company does not expect the adoption of ASU 2010-17 to have a
significant impact on its consolidated financial statements.
In April
2010, the FASB issued Accounting Standard Update 20-10-17, “Revenue Recognition
- Milestone Method (Topic 605): Milestone Method of Revenue Recognition” or ASU
2010-17. This Update provides guidance on the recognition of revenue under the
milestone method, which allows a vendor to adopt an accounting policy to
recognize all of the arrangement consideration that is contingent on the
achievement of a substantive milestone (milestone consideration) in the period
the milestone is achieved. The pronouncement is effective on a prospective basis
for milestones achieved in fiscal years and interim periods within those years,
beginning on or after June 15, 2010. The adoption of ASU 2010-17 did not
have a material impact on its consolidated financial
statements.
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
In June
2009, the FASB issued authoritative guidance to eliminate the exception to
consolidate a qualifying special-purpose entity, change the approach to
determining the primary beneficiary of a variable interest entity and require
companies to more frequently re-assess whether they must consolidate variable
interest entities. Under the new guidance, the primary beneficiary of a variable
interest entity is identified qualitatively as the enterprise that has both (a)
the power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance, and (b) the obligation
to absorb losses of the entity that could potentially be significant to the
variable interest entity or the right to receive benefits from the entity that
could potentially be significant to the variable interest entity. This guidance
becomes effective for the Company at its fiscal 2011 year-end and interim
reporting periods thereafter. The Company does not expect this guidance to have
a material impact on its consolidated financial statements.
In July
2010, the FASB issued Accounting Standards Update 2010-20, Disclosure about the
Credit Quality of Financing Receivables and the Allowance for Credit losses.
This ASU will increase disclosure made about the credit quality of loans and the
allowances for credit losses. The disclosures will provide additional
information about the nature of credit risk inherent in First Financial loans,
how credit risk is analyzed and assessed, and the reasons for the change in the
allowance for loan losses. The requirements will be effective for first fiscal
year ended December 31, 2010. The Company is evaluating the potential impact to
its consolidated financial statements from the adoption of this
ASU.
In
September 2010, FASB issued Accounting Standard Update 2010-25, “Plan
Accounting—Defined Contribution Pension Plans (Topic 962): Reporting Loans to
Participants by Defined Contribution Pension Plans” or ASU 2010-25. The ASU
clarifies how loans to participants should be classified and measured by defined
contribution plans and how IFRS compare to these provisions. The amendments in
this update are effective for fiscal years ending after December 15 2010. The
Company does not expect the adoption of this ASU to have a material impact on
the Company’s consolidated financial statements.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or cash
flows.
Note
3 – ACCOUNTS RECEIVABLE, TRADE, NET
Accounts
receivable consisted of the following:
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
91,354,033
|
|
|
$
|
39,099,929
|
|
|
Less:
allowance for bad debts
|
|
|
(666,161
|
)
|
|
|
(273,446
|
)
|
|
Accounts
receivable, net
|
|
$
|
90,687,872
|
|
|
$
|
38,826,483
|
|
The
following table consists of allowance for doubtful accounts:
|
Allowance
for doubtful accounts at January 1, 2009
|
|
$
|
-
|
|
|
Additional
reserves
|
|
|
342,492
|
|
|
Accounts
receivable write off
|
|
|
220
|
|
|
Effect
of foreign currency translation
|
|
|
37
|
|
|
Allowance
for doubtful accounts at September 30, 2009 (Unaudited)
|
|
$
|
342,749
|
|
|
Additional
reserves
|
|
|
(69,434
|
)
|
|
Accounts
receivable write off
|
|
|
256
|
|
|
Effect
of foreign currency translation
|
|
|
(125
|
)
|
|
Allowance
for doubtful accounts at December 31, 2009
|
|
$
|
273,446
|
|
|
Additional
reserves
|
|
|
380,399
|
|
|
Accounts
receivable write off
|
|
|
-
|
|
|
Effect
of foreign currency translation
|
|
|
7,316
|
|
|
Allowance
for doubtful accounts at September 30, 2010 (Unaudited)
|
|
$
|
666,161
|
|
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
Accounts Receivable
–
Retentions
As of
September 30, 2010 and December 31, 2009, retainage included in accounts
receivable amounted to $21.3 million and $19.0 million, respectively. According
to our contracts terms, all the retainages are collectable after the
constructions have been completed for one year.
NOTE
4 – COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
Costs and
estimated earnings in excess of billings on uncompleted contracts represent
revenues recognized in excess of amounts billed pursuant to the
percentage-of-completion method used to recognize contract revenue. As of
September 30, 2010 and December 31, 2009, the balances for cost and
estimated earnings in excess of billings are $41,440,413 and $3,258,806,
respectively.
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Cost
incurred on uncompleted contracts
|
|
$
|
35,905,143
|
|
|
$
|
3,173,870
|
|
|
Estimated
earnings
|
|
|
23,214,272
|
|
|
|
2,090,778
|
|
|
Contract
costs incurred plus estimated earnings to date
|
|
$
|
59,119,415
|
|
|
$
|
5,264,648
|
|
|
Less:
progress billings
|
|
|
(17,679,002
|
)
|
|
|
(2,005,842
|
)
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
$
|
41,440,413
|
|
|
$
|
3,258,806
|
|
As of
September 30, 2010, the costs and estimated earnings in excess of billings would
be collected in more than one year based on the contract
agreements amounted to $28,569,291.
NOTE
5 – INVENTORIES
Inventories
consisted of the following raw material, work-in-process and
supplies:
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Raw
material
|
|
$
|
257,191
|
|
|
$
|
246,798
|
|
|
Work-in-process
|
|
|
5,230,703
|
|
|
|
5,101,685
|
|
|
Low
cost consumption supplies
|
|
|
58,581
|
|
|
|
57,383
|
|
|
Total
|
|
$
|
5,546,475
|
|
|
$
|
5,405,866
|
|
For the
three and nine months ended September 30, 2010 and 2009, no provision for
obsolete inventories was recorded by the Company.
NOTE
6 – ADVANCES FOR INVENTORY PURCHASES
The
Company makes advances to certain suppliers for inventory purchases and
subcontracting fees. Most of the Company’s vendors require advances to them
as a guarantee that the Company will receive the goods on a timely
basis. The advances on inventory purchases amounted to $57,244,722 and
$34,056,231 as of September 30, 2010 and December 31, 2009,
respectively.
NOTE 7 –
PLANT AND EQUIPMENT, NET
The
following is a summary of plant and equipment at September 30, 2010 and December
31, 2009:
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Buildings
|
|
$
|
4,017,281
|
|
|
$
|
3,936,775
|
|
|
Equipment
and machinery
|
|
|
9,744,583
|
|
|
|
9,508,465
|
|
|
Motor
vehicles
|
|
|
2,103,862
|
|
|
|
1,647,515
|
|
|
Furniture
and office equipment
|
|
|
468,302
|
|
|
|
447,229
|
|
|
Construction
in progress
|
|
|
12,249,227
|
|
|
|
6,768
|
|
|
Total
|
|
$
|
28,583,255
|
|
|
$
|
15,546,752
|
|
|
Less:
accumulated depreciation
|
|
|
(4,067,221
|
)
|
|
|
(3,281,363
|
)
|
|
Plant
and equipment, net
|
|
$
|
24,516,034
|
|
|
$
|
12,265,389
|
|
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
Depreciation
expense for the three months ended September 30, 2010 and 2009 was $239,521 and
$239,239, respectively. Depreciation expense for the nine months ended September
30, 2010 and 2009 was $706,358 and $717,490, respectively.
Construction in
progress
As of
September 30, 2010 and December 31, 2009, the Company had construction in
progress in the amount of $12,249,227 and $6,768, respectively. For the three
and nine months ended September 30, 2010 and 2009, no interest was capitalized
into construction in progress.
Construction
in progress at September 30, 2010 consisted of the following:
|
Project
Description
|
|
Location
|
|
September 30, 2010
(Unaudited)
|
|
Commencement
Date
|
|
Expected
completion date
|
|
Estimated additional
cost to complete
|
|
|
Changxing
Island
Project
|
|
Industrial
District,
Dalian,
Changxing
Island
Economic and
Technological
Development
Zone
|
|
$
|
12,249,227
|
(1)
|
April
20, 2010
|
|
July
31, 2011
|
|
$
|
85,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The
balance represents construction cost and equipment cost in amount of $11,859,370
and $389,860 respectively.
NOTE
8 – INVESTMENT IN UNCONSOLIDATED AFFILIATE
On
February 22, 2010, the Company invested RMB 3 million (approximately $449,100)
for a 30% noncontrolling interests in Dalian Environment Exchange Co., Ltd., for
which the Company neither has substantive control nor is the primary
beneficiary. Therefore, the Company does not consolidate the results of
operations and financial position of the investee, but rather accounts for its
noncontrolling ownership interest as equity method investments. The company is
in the pre-operating stage as of September 30, 2010.
The
following tables represent summarized combined financial information of Dalian
Environment Exchange Co., Ltd. accounted for under the equity
method:
|
|
|
September 30, 2010
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
831,544
|
|
|
|
|
|
|
|
|
Long-term
assets
|
|
$
|
675,274
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
9,818
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
$
|
-
|
|
NOTE
9 – ADVANCES ON NON CURRENT ASSETS
Advances to
Suppliers
The
Company makes advances to certain suppliers for construction
projects. The advances on equipment and construction were
$7,305,675 and $5,550,966 as of September 30, 2010 and December 31, 2009,
respectively.
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
Prepayment for Land Use
Right
As of
September 30, 2010 and December 31, 2009, the Company prepaid $4,276,032 and
$799,965, respectively, for purchase of land use rights, but had not
obtained the certificate of the land use rights. Therefore, as of September 30,
2010 and December 31, 2009, the amount has been recorded as a prepayment for
land use right in other assets.
Long term prepaid
expenses
As of
September 30, 2010 and December 31, 2009, the Company prepaid $163,948 and
$219,447 for more than one year expenses. The Company amortizes the
prepayment based on the terms, for the three months ended September 30, 2010 and
2009, amortization expense for long term prepayment amounted to $19,748 and
$3,666, respectively. For the nine months ended September 30, 2010 and 2009,
amortization expense for long term prepayment amounted to $58,914 and $10,994,
respectively.
For the
period ended September 30, 2010, amortization schedule for the following period
amounted to:
|
Year
|
|
Amount
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
78,551
|
|
|
|
|
|
|
|
|
2012
|
|
|
78,551
|
|
|
|
|
|
|
|
|
2013
|
|
|
6,846
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
163,948
|
|
NOTE
10 – INTANGIBLE ASSETS, NET
The
following is a summary of intangible assets:
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Land
use rights
|
|
$
|
8,757,467
|
|
|
$
|
651,136
|
|
|
Patents
and licenses
|
|
|
748,500
|
|
|
|
733,500
|
|
|
Total
|
|
$
|
9,505,967
|
|
|
$
|
1,384,636
|
|
|
Less:
accumulated depreciation
|
|
|
(390,298
|
)
|
|
|
(239,840
|
)
|
|
Intangible
asssets, net
|
|
$
|
9,115,669
|
|
|
$
|
1,144,796
|
|
Amortization
expense for the three months ended September 30, 2010 and 2009 amounted to
$56,752 and $17,195, respectively.
Amortization
expense for the nine months ended September 30, 2010 and 2009 amounted to
$143,025 and $50,572, respectively.
NOTE
11 – BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS
Billings
in excess of costs and estimated earnings on uncompleted contracts represent
amounts billed in excess of revenues recognized pursuant to the
percentage-of-completion method used to recognize contract
revenue. As of September 30, 2010 and December 31, 2009, billings in
excess of costs and estimated earnings amounted to $8,125,883 and $0,
respectively.
Billings
in excess of costs and estimated earnings consist of the following:
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Progress
billings
|
|
$
|
20,220,661
|
|
|
$
|
-
|
|
|
Less:
cost incurred on uncompleted contracts
|
|
|
(5,735,515
|
)
|
|
|
-
|
|
|
Less:
estimated earnings
|
|
|
(6,359,263
|
)
|
|
|
-
|
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
$
|
8,125,883
|
|
|
$
|
-
|
|
NOTE
12 – DEFERRED REVENUE
Construction
portion of BOT arrangements are accounted for under cost recovery method.
Deferred revenue represents estimated earnings related to the BOT contract, and
are deferred to until collected the cost of the revenue, or until such time the
Company considers the collections to be probable and estimable. As of September
30, 2010 and December 31, 2009, the deferred revenue amounted to $3,299,242 and
$0, respectively.
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
NOTE
13 – BANK LOANS
Short-term bank
loans
As of
September 30, 2010, short-term bank loans balance represents two loans, the
principals of which aggregately amount to RMB25 million (approximately
$3,742,500) that borrowed from Shanghai Pudong Development Bank for the
Company’s working capital use. The following table identifies the material terms
of short-term loans:
|
|
|
|
|
|
|
Interest Rate
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
Effective Date
|
|
Maturity
|
|
Type
|
|
(Per Annum)
|
|
|
(Unaudited)
|
|
|
|
|
|
11-13-2009
|
|
|
11-13-2010
|
|
Secured
by certain
equipment
|
|
|
5.31
|
%
|
|
$
|
1,497,000
|
|
|
$
|
1,467,000
|
|
|
03-01-2010
|
|
|
02-16-2011
|
|
Secured
by certain
equipments
and
guaranteed
by
shareholder
|
|
|
5.841
|
%
|
|
|
2,245,500
|
|
|
|
—
|
|
|
Total
|
|
|
$
|
3,742,500
|
|
|
$
|
1,467,000
|
|
Long-term
loan
As of
September 30, 2010, the balance of long-term loan consists of a loan that
borrowed from Shanghai Pudong Development Bank, the principal of which amounts
to RMB 55 million (approximately $8,233,500). The following table identifies the
material terms of the long-term loan:
|
|
|
|
|
|
|
Interest Rate
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
Effective Date
|
|
Maturity
|
|
Type
|
|
(Per Annum)
|
|
|
(Unaudited)
|
|
|
|
|
|
03-01-2010
|
|
|
03-01-2014
|
|
Secured
by certain
manufacturing
plants
and
office buildings
|
|
|
6.912
|
%
|
|
|
8,233,500
|
|
|
|
-
|
|
|
Total
|
|
|
$
|
8,233,500
|
|
|
|
-
|
|
The long
term loan is scheduled to be repaid by installments. The following table shows
the installments schedule:
|
Date
|
|
Amount
|
|
|
03-01-2012
|
|
$
|
2,245,500
|
|
|
03-01-2013
|
|
|
2,994,000
|
|
|
03-01-2014
|
|
|
2,994,000
|
|
|
Total
|
|
$
|
8,233,500
|
|
Total
interest expense on the bank loans for the three months ended September 30, 2010
and 2009, amounted to $195,808 and $286,647, respectively. Total interest
expense on the bank loans for the nine months ended September 30, 2010 and 2009,
amounted to $403,217 and $655,793, respectively.
The above
loans are secured by the Company's equipment, buildings and land use rights
located within PRC, with net value as follows:
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Equipment
& machinery in Dalian, China
|
|
$
|
8,396,245
|
|
|
$
|
6,965,057
|
|
|
Buildings
in Dalian, China
|
|
$
|
3,399,274
|
|
|
|
-
|
|
|
Land
use rights in Dalian, China
|
|
$
|
564,833
|
|
|
|
-
|
|
|
Total
assets pledged as collateral for bank loans
|
|
$
|
12,360,352
|
|
|
$
|
6,965,057
|
|
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
NOTE
14 –TAXES PAYABLE
As of
September 30, 2010, and December 31, 2009, taxes payable consisted of the
following at:
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Income
taxes payable
|
|
$
|
4,418,188
|
|
|
$
|
716,795
|
|
|
VAT
payable
|
|
|
71,316
|
|
|
|
3,260,613
|
|
|
Other
miscellaneous taxes
|
|
|
238,311
|
|
|
|
26,301
|
|
|
Total
taxes payable
|
|
$
|
4,727,815
|
|
|
$
|
4,003,709
|
|
NOTE
15 – RELATED PARTY TRANSACTIONS
Loan to
shareholders
On
December 7, 2009, the Company provided a loan to the major shareholders in the
amount of $3.5 million. The loan is short term and due on May 10, 2010, which
has an annual interest rate of 5.25%. Principal and interest are due in
full on maturity date. On May 7, 2010, the Company received principal of
$3,200,000 from the shareholders for the payment of the loan, on May 10, 2010,
the Company received the remaining principle and interest amounted to
$377,527.
As of
September 30, 2010 and December 31, 2009, the Company’s major shareholder
advanced $498,598 and $494,614, respectively, to the Company for operational
purposes. These advances are unsecured, noninterest bearing and payable on
demand.
NOTE
16 – REDEEMABLE COMMON STOCK
On
October 5, 2007, the Company received $24,480,319 or $21,253,722 net proceeds
after deducting the offering expenses from a group of accredited investors and
issued 5,464,357 shares of restricted common stock at $4.48 per share. The
Securities Purchase Agreement contained a transferrable provision such that if
any governmental agency in the PRC takes action that adversely affects the
Restructuring Agreements or the Share Exchange Agreement entered into in
connection with the Securities Purchase Agreement and the Company doesn’t
mitigate the adverse effect to the investors’ reasonable satisfaction within 60
days of the PRC action, then the Company is required to pay liquidated damages
in an amount equal to the initial investment without interest and the
shareholder must return the shares acquired under the Securities Purchase
Agreement. Consequently, the total amount of the gross proceeds has been
excluded from permanent equity and recorded as redeemable common stock in
accordance with Rule 5-02.28 of Regulation S-X and Section 211 of the
Codification of Financial Reporting Policies. Although there is no fixed
redemption requirement in any of the next five years, the entire amount of
$24,480,319 could become redeemable in any of the next five years. These shares
are included as outstanding common stock for purposes of earnings per
share.
NOTE
17 – COMMON STOCK AND OTHER SHAREHOLDERS’ EQUITY
Statutory
Reserves
The
Company is required to make appropriations to the statutory surplus reserve
based on the after-tax net income determined in accordance with the laws and
regulations of the PRC. Prior to January 1, 2006 the appropriation to
the statutory surplus reserve should be at least 10% of the after tax net income
determined in accordance with the laws and regulations of the PRC until the
reserve is equal to 50% of the entities’ registered
capital. Appropriations to the statutory public welfare fund are at
5% to 10% of the after tax net income determined by the Board of
Directors. Effective January 1, 2006, the Company is only required to
contribute to one statutory reserve fund at 10 % of net income after tax
per annum, such contributions not to exceed 50% of the respective company’s
registered capital. As of September 30, 2010 and December 31, 2009,
the remaining reserve needed to fulfill the 50% registered capital requirement
totaled $95.8 million and $84.5 million, respectively.
The
statutory reserve funds are restricted for use to offset against prior period
losses, expansion of production and operation, or for the increase in the
registered capital of the Company. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation.
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
Common Stock and
Warrants
Issuance of Common
Stock
On June
21, 2010, the Company issued 2,000 shares of common stock to the Chairman of the
Audit Committee for his services provided based upon the agreement dated April
4, 2008. The shares were valued at $13.27, yielding an aggregate fair
value of total $26,540. This expense was recorded as stock based
compensation expense.
On
December 7, 2009, the Company closed sales of 3,252,032 shares of its common
stock; Series A Common Stock Warrants, which are exercisable within six months
of the closing date; to purchase up to an aggregate of 1,138,211 shares of
Common Stock at an exercise price of $34.50 per Warrant (the “2009 Series A
Warrants”); and Series B Common Stock Warrants, which are exercisable beginning
on the six month one day anniversary of the closing date until the one year one
day anniversary of the closing date, to purchase up to an aggregate of 1,138,211
shares of Common Stock at an exercise price of $34.50 per Warrant (the “2009
Series B Warrants”). These warrants were treated as a derivative
liability because the strike price of the warrants is denominated in the
U.S. dollar, a currency other than the Company’s functional currency, the
Chinese Renminbi. As a result, the warrants are not considered
indexed to the Company’s own stock, and as such, all future changes in the fair
value of these warrants will be recognized currently in earnings until such time
as the warrants are exercised or expired. The purchase price for each common
share together with Series A Warrants exercisable into 0.35 of a common share
and Series B Warrants exercisable into 0.35 of a common share is $30.75, and the
gross proceeds of the sale were $99,999,984. The following table
represents the allocation of the fair value of warrants and also common stock on
issuance date:
|
Total
proceeds
|
|
$
|
99,999,984
|
|
|
Direct
expenses
|
|
|
(5,144,531
|
)
|
|
Fair
value of warrants
|
|
|
(18,743,862
|
)
|
|
Allocation
to common stock and APIC
|
|
$
|
76,111,591
|
|
On
October 5, 2007, in connection with the Private Financing and pursuant to the
Engagement Agreement Providing for Investment Banking Services, by and between
the Company and a placement agent for the Private Financing, as amended, the
placement agent received the following compensation: (i) $80,000 cash as an
engagement and documentation fee; (ii) $1,750,000 as a placement
commission; (iii) 875,000 shares of Common Stock, and (iv) warrants to purchase
382,500 shares of Common Stock at an exercise price of $5.376 per share,
exercisable within 6 years of the date of issuance. The exercise price of the
warrants is subject to adjustment under certain circumstances and the warrants
permit cashless exercise by the holders. This expense is recorded as additional
paid-in capital in the accompanying financial statements.
The
warrants issued to the placement agent, initially qualify as permanent equity,
the value of such warrants has created offsetting debit and credit entries to
additional paid-in capital.
Effective
January 1, 2009, 382,500 warrants previously treated as equity pursuant to
the derivative treatment exemption are no longer afforded equity treatment
because the strike price of the warrants is denominated in the U.S. dollar, a
currency other than the Company’s functional currency, the Chinese
Renminbi. As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired.
In
connection with the Private Financing, 250,000 shares of the Company’s common
stock were issued to a consultant for advisory services. This expense is
recorded as additional paid-in capital in the accompanying financial
statements.
A
discussion of the valuation techniques used to measure fair value for the
warrant liabilities listed above and activity for these liabilities for the
three and nine months ended September 30, 2010 is provided elsewhere in this
footnote.
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
Warrants
Following
is a summary of the warrant activity:
|
|
|
Number of Shares
|
|
|
Outstanding
as of January 1, 2009
|
|
|
382,500
|
|
|
Granted
|
|
|
2,276,422
|
|
|
Forfeited
|
|
|
-
|
|
|
Exercised
|
|
|
(382,500
|
)
|
|
Outstanding
as of December 31, 2009
|
|
|
2,276,422
|
|
|
Granted
|
|
|
-
|
|
|
Forfeited/Expired
|
|
|
(1,138,211
|
)
|
|
Exercised
|
|
|
-
|
|
|
Outstanding
as of September 30 2010 (Unaudited)
|
|
|
1,138,211
|
|
Following
is a summary of the status of warrants outstanding at September 30,
2010,
|
Outstanding Warrants
|
|
Exercisable Warrants
|
|
Exercise
Price
|
|
|
Number of
Shares
|
|
Average Remaining
Contractual Life
|
|
Average
Exercise Price
|
|
|
Number of
Shares
|
|
Average Remaining
Contractual Life
|
|
$
|
34.50
|
|
|
|
1,138,211
|
|
0.19
year
|
|
$
|
34.50
|
|
|
|
1,138,211
|
|
0.19
year
|
|
Total
|
|
|
|
1,138,211
|
|
|
|
|
|
|
|
|
1,138,211
|
|
|
Stock
Options
On April
27, 2010, pursuant to an Employment Agreement, the Company granted to Ben Wang,
the Chief Financial Officer, a non-qualified stock option to purchase 150,000
shares of its Common Stock at an exercise price of $20 per share, vesting in 3
equal annual installments beginning on April 19, 2011, with a term life of
five years. On August 13, 2010, the Board of Directors of the Company has
authorized this grant of the non-qualified stock option.
On June
30, 2009, pursuant to an Employment Agreement, the Company granted to Yi (Jenny)
Liu, the former Chief Financial Officer, a non-qualified stock option to
purchase 50,000 shares of its Common Stock at an exercise price of $6.15 per
share, vesting in 3 equal annual installments beginning on June 30,
2010, with a term life of five years. On August 12, 2010, pursuant to
an Separation Agreement with former CFO, the options to purchase 10,000 shares
of the Employer’s common stock (the “Shares”) at the exercise price $6.15 per
share granted to Employee shall vest immediately upon the execution of this
Agreement. And the options to purchase 20,000 shares that were to vest on June
30, 2011 and the options to purchase 20,000 shares which were to vest on June
30, 2012 shall be cancelled and be of no further force or effect. Once vested,
the foregoing options to purchase 10,000 shares of the Employer’s common stock
which may be exercised until April 27, 2013, the third anniversary of the
Separation Date. The 10,000 options vested had fair value of approximately
$77,417, $38,992 of which was recorded as compensation expense in general and
administrative expenses for the nine months ended September 30,
2010.
The fair
values of stock options granted to the executives were estimated at the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
Expected Life
|
|
Expected
Volatility
|
|
|
Dividend
Yield
|
|
|
Risk Free
Interest Rate
|
|
|
Grant Date
Fair Value
|
|
|
Options
granted in 2010
|
|
2.98
years
|
|
|
164.2
|
%
|
|
|
0
|
%
|
|
|
1.54
|
%
|
|
$
|
15.15
|
|
|
Options
granted in 2009
|
|
3.3
years
|
|
|
121.7
|
%
|
|
|
0
|
%
|
|
|
1.64
|
%
|
|
$
|
9.80
|
|
Volatility:
In light of the Company’s thin stock trading history, expected volatility is
based on historical stock pricing data (adjusting for stock splits and
dividends) of five publicly traded peer companies and the Company’s own
data. The Company-specific volatility is computed annually by taking
the base-10 logarithm of each daily stock closing price divided by the previous
stock closing price (adjusted for stock splits and dividends). The
logarithm smoothes the daily results so that percentage differences are computed
and tailed. Each annual volatility calculation is weighted along with
the other (non-excluded) annual volatility result to produce the average
historical volatility for the selected period. The Company believes this
method produces an estimate that is representative of the Company’s expectations
of future volatility over the expected term of these warrants.
Dividend
Yield: The expected dividend yield is zero. The Company has not paid a cash
dividend and does not anticipate paying cash dividends in the foreseeable
future.
Risk Free
Rate: The risk-free interest rate was based on U.S. Treasury yields with a
remaining term that corresponded to the expected term of the option calculated
on the granted date.
Expected
Life: Because the Company has no historical share option exercise experience to
estimate future exercise patterns, the expected life was determined using the
simplified method as these awards meet the definition of "plain-vanilla" options
under the rules prescribed by GAAP.
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
The
Company recognized $325,936 and $19,061 compensation expense in general and
administrative expenses for the three months ended September 30, 2010 and 2009,
respectively. The Company recognized $364,928 and $19,364 compensation
expense in general and administrative expenses for the nine months ended
September 30, 2010 and 2009, respectively.
Stock
compensation expense is recognized based on awards expected to vest. There were
no estimated forfeitures as the Company has a short history of issuing options.
GAAP requires forfeitures to be estimated at the time of grant and revised in
subsequent periods, if necessary, if actual forfeitures differ from those
estimates.
The
following is a summary of the stock options activity,
|
|
|
Number of Options
Outstanding
|
|
|
Weighted-Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
Balance
as of January 1, 2009
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Granted
|
|
|
50,000
|
|
|
|
6.15
|
|
|
|
182,500
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2009
|
|
|
50,000
|
|
|
$
|
6.15
|
|
|
|
749,500
|
|
|
Granted
|
|
|
150,000
|
|
|
|
20.00
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(40,000
|
)
|
|
|
6.15
|
|
|
|
1,075,000
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance
as of September 30, 2010 (unaudited)
|
|
|
160,000
|
|
|
$
|
19.13
|
|
|
|
|
|
Following
is a summary of the status of options outstanding at September 30,
2010:
|
Outstanding Options
|
|
Exercisable Options
|
|
|
Exercise
Price
|
|
|
Number of
Shares
|
|
Average Remaining
Contractual Life
|
|
Average
Exercise Price
|
|
|
Number of
Shares
|
|
|
Average Remaining
Contractual Life
|
|
|
$
|
6.15
|
|
|
|
10,000
|
|
0.0
year
|
|
$
|
6.15
|
|
|
|
10,000
|
|
|
0.19
year
|
|
|
$
|
20.0
|
|
|
|
150,000
|
|
4.55
years
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
|
160,000
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
NOTE
18 - EARNINGS PER SHARE
The
following table sets forth the calculation of earnings per share for the three
months ended September 30, 2010 and 2009:
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Net
income
|
|
$
|
8,839,220
|
|
|
$
|
17,085,900
|
|
|
Adjustments
for diluted EPS calculation
|
|
|
-
|
|
|
|
-
|
|
|
Adjusted
net income for calculating EPS - diluted
|
|
$
|
8,839,220
|
|
|
$
|
17,085,900
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common stock – Basic
|
|
|
28,604,061
|
|
|
|
25,204,199
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
6,929
|
|
|
|
15,960
|
|
|
Weighted
average number of common stock – Diluted
|
|
|
28,610,990
|
|
|
|
25,220,159
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
|
$
|
0.68
|
|
|
Diluted
|
|
$
|
0.31
|
|
|
$
|
0.68
|
|
|
RINO
INTERNATIONAL CORPORATION
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(UNAUDITED)
|
The
following table sets forth the calculation of earnings per share for the nine
months ended September 30, 2010 and 2009 (Unaudited):
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Net
income
|
|
$
|
47,931,974
|
|
|
$
|
39,416,100
|
|
|
Adjustments
for diluted EPS calculation
|
|
|
-
|
|
|
|
-
|
|
|
Adjusted
net income for calculating EPS-diluted
|
|
$
|
47,931,974
|
|
|
$
|
39,416,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common stock – Basic
|
|
|
28,605,321
|
|
|
|
25,104,972
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
5,239
|
|
|
|
7,115
|
|
|
Weighted
average number of common stock – Diluted
|
|
|
28,610,560
|
|
|
|
25,112,087
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.68
|
|
|
$
|
1.57
|
|
|
Diluted
|
|
$
|
1.68
|
|
|
$
|
1.57
|
|
All of
the outstanding shares of redeemable common stock have been included as
outstanding common stock for the computations of basic and diluted earnings per
share for the three and nine months ended September 30, 2010 and
2009.
All of
outstanding warrants and 150,000 shares of options are excluded from
diluted earnings per share calculation for the three and nine months ended
September 30, 2010 due to anti-dilutive effect. All of outstanding warrants are
excluded from diluted earnings per share calculation for the three and nine
months ended September 30, 2009 due to the anti-dilutive effect.
NOTE
19 – COMMITMENTS AND CONTINGENCIES
Employee
Benefits
The full
time employees of the Company are entitled to employee benefits including
medical care, welfare subsidies, unemployment insurance and pension
benefits through a Chinese government mandated multi-employer defined
contribution plan. The Company is required to accrue for those benefits based on
certain percentages of the employees’ salaries and make contributions to the
plans out of the amounts accrued for medical and pension benefits. The total
provisions and contributions made for such employee benefits were
$67,625 and
$44,739 for the nine months ended September 30, 2010 and 2009, respectively, and
$157,797 and $101,796 for the three months ended September 30, 2010 and 2009,
respectively. The Chinese government is responsible for the medical benefits and
the pension liability to be paid to these employees.
Capital
Commitments
As of
September 30, 2010, the Company had capital commitments for production equipment
procurement and project construction, mostly for the Chanxing Island Project, in
the amount of $95 million. The Company intends to satisfy the commitments by
unrestricted cash in hand, cash generated from operating activities, and bank
loans if needed.
Register Capital
Commitments
On
December 18, 2009, the Company increased its investment to Dalian Innomind
from $20 million to $80 million and $20 million has been paid as
of September 30, 2010 The remaining $40 million is to be paid in two
years from December 18, 2009.
On
November 30, 2009, Rino Investment was established with registered capital of
$98 million. As of September 30, 2010, Rino Investment received $70
million, and the remaining $28 million is to be paid in two years from
November 30, 2009.
NOTE 20
–
SUBSEQUENT EVENT
On
October 14, 2010, Rino Sludge signed a Build-Operate-Transfer Contract (the “BOT
Contract”), which is the definitive contract to the MOU, with Urban
Administration Bureau of Dalian ETD Zone regarding the treatment of
municipal sludge in Dalian ETD Zone.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Disclaimer
Regarding Forward-looking Statements
Certain
statements made in this report, and other written or oral statements made by or
on behalf of RINO International Corporation and its direct and indirect
subsidiaries and controlled affiliates (collectively, the “Company”), may
constitute “forward-looking statements” under the Private Securities Litigation
Reform Act of 1995, which represent the expectations or beliefs of the Company.
Such “forward-looking statements” include, but are not limited to, statements
concerning the operations, performance, financial condition and growth of the
Company. For this purpose, any statements contained in this report that are not
statements of historical fact may be deemed forward-looking statements. Without
limiting the generality of the foregoing, when used in this report, the word
“believes,” “expects,” “estimates,” “intends,” “will,” “may,” “anticipate,”
“could,” “should,” “can,” or “continue” or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Examples of such statements in this report include descriptions of
our plans and strategies with respect to developing certain market
opportunities, our overall business plan, our plans to develop additional
strategic partnerships, our intention to develop our products and platform
technologies, our continuing growth and our ability to contain our operating
expenses. All forward-looking statements are subject to certain risks and
uncertainties that could cause actual events to differ materially from those
projected, including those described under Item 1.A. of Part I of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009, and matters
described in this report generally. In light of these risks and uncertainties,
there can be no assurance that the forward-looking statements contained in this
filing will in fact occur. You should not place undue reliance on these
forward-looking statements.
The
following is management’s discussion and analysis of certain significant factors
that have affected aspects of our financial position and results of operations
during the periods included in the accompanying unaudited financial statements.
You should read this in conjunction with discussion under “Management’s
Discussion and Analysis of Financial Conditions and Results of Operations” and
the audited consolidated financial statements and accompanying notes for the
year ended December 31, 2009 included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009 and the unaudited consolidated financial
statements and accompanying notes and the other financial information appearing
in Item 1 of this report and elsewhere in this report.
Except as otherwise specifically
stated or u
nless the
context otherwise requires, the "Company", "we," "us," "our," and the
"Registrant" refer to, collectively, (i) RINO International Corporation
(formerly Jade Mountain Corporation); (ii) Innomind Group Limited (“
Innomind
Group
”
), a wholly-owned sub
sidiary of RINO International
Corporation organized under the laws of the Br
itish Virgin Islands; (iii)
RINO
Investment
(Dalian)
Co.,
Ltd.
(“
Rino Investment”
)
, a wholly-owned subsidiary of RINO
International Corporation under the laws of the People
’
s Repub
lic of China (the “
PRC”
); (iv) Dalian Innomind Environment
Engineering Co., Ltd. (“
Dalian Innomind”
), a wholly-owned subsidiary of
Innomind
Group
organized under
the
PRC
laws
; (v) Dalian RINO
H
eavy Industries Co.,
Ltd. (“
Rino
Heavy Industries”
), a
wholly-o
wned subsidiary of Rino
Investment
organized
under the
PRC
laws
;
(vi)
Dalian RINO
Solid Waste Treatment
Co., Ltd. (“
Rino Sludge”
)
, a
wholly-owned subsidiary of Rino
Investment
organi
zed under the PRC
laws;
(vii)
Dalian RINO Environment Engineering
Science
and Technology
Co., Ltd
.
(“
Dalian
Rino”
)
, a contractually controlled
affiliate of Dalian Innomind
organized under the
PRC
laws
;
(viii)
Dalian
RINO
Environmental Engineering Project
Design Co., Ltd.
(“
Rino
Design”
), a
wholly
owned subsidiary of Dalian
Rino
organized under
th
e PRC
laws
; (ix)
Dalian RINO
Environmental Construction &
Installation Project Co., Ltd.
(“
Rino Installation”
)
,
a
wholly
owned subsidiary of Dalian Rino
organized under the PRC
l
aws;
(
x)
RINO
Technology Corporation
(“
Rino Technology”
)
, a
wholly-owned subsidiary of Dalian
Rino organized under the laws of the s
tate of Nevada;
and (xi)
Dalian RINO Logistics Co.,
Ltd.
(“
Rino Logistics”
),
a wholly-owned subsidiary of Dalian
Rino organi
zed under
the PRC laws.
Company
Overview
We are
engaged in designing, developing, manufacturing, installing and servicing
proprietary and patented environmental protection and energy saving equipment
for large, state-owned iron and steel industry manufacturers in the People’s
Republic of China. Our business operations are conducted throughout China and we
do not rely on any particular region for revenues.
On July
13, 2009, our common stock, par value of $0.0001 per share (“Common Stock”),
started trading under the symbol "RINO" on the Nasdaq Global
Market.
Following
the expansion of China’s economy and growth in the size of its manufacturing
sectors, such as the iron and steel industry, the total volumes of waterborne
and airborne industrial waste and pollution have grown, and consequently,
China’s industries face increasingly stringent governmental mandates to reduce
or eliminate sulphur dioxide emissions and untreated wastewater discharges.
Failure to meet mandated emission and discharge standards can result in
financial penalties. On July 31, 2009, the Ministry of Industry and
Information of PRC published a formal plan for the implementation of Flue
Gas Desulphurization systems in the sintering plants of Chinese steel companies,
which is a specific roadmap to accelerate the number of desulphurization
projects completed throughout the PRC.
Customers
Our
customers are mainly large iron and steel companies in China. Generally, our
projects involve manufacturing, installation and testing of the equipment we
sell, and the contract prices vary with products and technical conditions. Due
to the size of our projects, we generally work on a limited number of projects
with a limited number of customers at any given period of time. Since it
normally takes approximately 6 - 8 months to complete a project, our revenues
are generated from a limited number of customers at any given period. There are
approximately 34 iron and steel companies in China of a size and with annual
production levels that may require the sale and installation of our products. In
order to expand our sales, we plan to capture increasing numbers of these
potential customers for primary product sales and aggressively cross-sell our
products to each customer.
For the
three months ended September 30, 2010, one customer, which is Shougang Jingtang
Iron and Steel Co., Ltd., accounted for 18% of the Company’s total revenues,
while sales to another three major customers in the aggregate
another contributed approximately 19.6% of our total revenues. During the
three months ended September 30, 2009, no customer accounted for more than 10%
of the Company’s total sales.
During
the nine months ended September 30, 2010, one customer accounted for 14% of the
Company’s total sales. Accounts receivable and costs and estimated earnings in
excess of billings from this customer totaled $27 million as of September 30,
2010. During the nine months ended September 30, 2009, no customer accounted for
more than 10% of the Company’s total sales.
All of
our products are customized to our customers’ specific requirements. We enter
into fixed-price equipment sales contracts with our customers covering
engineering, manufacturing, construction and installation phases. Generally, we
fulfill our contractual obligations within twelve months.
Our
project-based revenue is affected directly by our customers’ capital budgets and
their needs to build new plants. Because most of our customers are
state-owned-enterprises, their budgeting decisions are influenced by the Chinese
central government’s environmental protection and pollution control policies,
which presently are favorable to our business and products. We believe that such
policy emphasis will continue in the foreseeable future. The cost of revenues
for our products includes direct materials, direct labor, outsourcing costs and
manufacturing overhead.
Competition
Lamella Wastewater
System
Prior to Dalian Rino
’
s introduction of its Lamella
Wastewater technology, the typical industrial wastewater treatment technology
used in China relied on an inclined “
plate settling pool”
process which i
s still generally available in China.
Our advanced technology results in the following competitive advantages: large
hydraulic coefficient, long water power process, high treatment efficiency, etc.
We know of no comparable technology presently available i
n
China
.
Desulphurization
System
Presently
in China, major domestic companies engaged in the desulphurization equipment
market include: Beijing Guodian Longyuan Environmental Company, Zhejiang Feida
Company, Fujian Longjing Environmental Company, Wuhan Kaidi Electric Power
Company, Jiulong Electric Power Company, Qinghua Tongfang, University of Science
& Technology, Beijing ZHTD Technology, Talroad Company, Yonker Environmental
Protection Group and China City Environment Protection Engineering. To
the best of our knowledge, among them, University of Science &
Technology, Beijing ZHTD Technology Co., Talroad Company, Yonker Environmental
Protection Group, China City Environment Protection Engineering Ltd. Co. and
Fujian Longjing Co., Ltd have entered into the desulphurization market of the
iron and steel industry; and the rest are mainly servicing the desulphurization
market of China’s power industry. We consider Fujian Longjing as our major
potential competitor in the desulphurization market, but it is more focused on
the power industry.
Major
international companies in the desulphurization market include: Voestalpine AG
and Mitsubishi, each of which has won one business contract in Taiyuan and Anhui
in China, respectively. We believe we have strong competitive advantages over
these international players in terms of project investments and operating costs.
We don’t believe they will become our strong competitors in the near
future.
Anti-Oxidation
System
We
believe our High Temperature Anti-Oxidation System is unique and virtually no
competition in China. We know of no other entity that is engaged in developing
or supplying anti-oxidation technology that can operate on-line at the high
temperatures (600 – 1000 °C) involved in hot rolled steel production, which
represents 90% of China’s steel output. A number of anti-oxidation technologies
are available internationally, suppliers of which include: Advanced Technical
Products Company, ATP Metallurgical Coatings, Duffy Company, Condursal and
Berktekt. However, the high costs of the anti-oxidizing coatings these
technologies rely on, and especially their ineffectiveness at high temperatures,
have limited their market to specialty steels. We believe that in design and
technology our Anti-Oxidation System is the only anti-oxidation process
available for the iron and steel industry (both in the PRC and internationally)
that can be applied in high temperature environments, and is a unique solution
to the loss of production output due to high-temperature oxidation, which is a
long-standing problem in the world-wide iron and steel industry.
Recent
Developments
Shougang Jingtang
Project
On
December 23, 2009, Shougang Jingtang Iron & Steel Co., Ltd. (“Shougang
Jingtang”), the parent company of which is China's fourth largest steel maker,
Shougang Group, signed two contracts with the Company, one of which is the
Construction Contract for 2 units of Semi-Dry Flue Gas Desulphurization System
("FGD System") (the “Construction Contract”), and the other is the 10 Year
Operation Contract over the FGD Systems ( the “Operation Contract”, together
with the Construction Contract collectively referred to as the “Shougang
Jingtang Project”).
Pursuant
to the Construction Contract, whose total value amounts to RMB 197.5
million (approximately $29.0 million, or $33.9 million if including value added
tax (the “VAT”)), Shougang Jingtang shall pay the contract price by annual
installments in 10 years, commencing from the date after the FGD Systems have
been put into operation for one year. Due to the uncertainty of collection
through the long term and the large scale of this Shougang Jingtang
Project, the Company, in a prudent manner, chose to use cost recovery method to
account for the Construction Contract.
According
to the Operation Contract, whose total value is estimated to be RMB 492.1
million (approximately $72.2 million, or $84.3 million if including VAT), the
operation period of 10 years commences upon the completion of a 7-day trial
production of the FGD Systems, and the inspection by Chinese national
environmental protection authorities. Shougang Jingtang should make payments to
the Company on a monthly basis for the operation service.
As of
September 30, 2010, 89% of the construction of the FGD Systems in the Shougang
Jingtang Project has been completed and is expected to be completed by the
end of the fourth quarter of 2010.
The
Shougang Jingtang Project does not have a material impact over the Company’s
business operations or liquidity because of our strong working capital, and a
bank loan that the Company has successfully secured for the Shougang Jingtang
Project on March 1, 2010. This long-term loan program, with a principal of up to
RMB 55 million (approximately $8.2 million), is provided by Shanghai Pudong
Development Bank. The loan was effective on March 1, 2010, and will mature on
March 1, 2014. The Company is required to repay the loan according to a schedule
commencing on March 1, 2012 and continuing thereafter until the maturity date.
For detailed information about the long-term loan, please refer to Notes to
Consolidated Financial Statements – Note 13 - Bank Loans.
Changxing Island
Project
After the
rapid development over the past few years, the Company’s further expansion is
limited to current production site and capacity. To meet the needs of the
Company’s expanding client base and service scope, and better capture future
business opportunities, the Company believes it’s strategically beneficial to
establish a new production base, which is the Changxing Island
Project.
On March
2, 2010, The Company entered into a Purchase Agreement with Land Resources and
Housing Bureau of Dalian for the use right of a land having an area of 232,906
square meters that is located in Industrial District, Dalian Changxing
Island Harbor Industrial Zone. Pursuant to the Purchase Agreement, the
purchase price of the land use right is RMB 51,239,320 (approximately $7.5
million), which was fully paid as of March 5, 2010.
The
construction plan of the Changxing Island Project consists of an office
building, a dormitory for staff accommodations, production facilities which
include a manufacturing workshop, a gasification workshop and a sandblasting
workshop, etc. The estimated total investment amounts to approximately $107
million, of which $50 million will be funded by existing cash resources of the
Company which was obtained from the proceeds from the financing that the Company
consummated in December 2009, and the remaining balance will be funded by loans
from commercial banks in China.
In May
2010, as approved by State Council of PRC, Dalian Changxing Island Harbor
Industrial Zone was upgraded to a national economic and technological
development zone, after which its name was changed to Dalian Changxing Island
Economic and Technological Development Zone (hereinafter referred to as
“Changxing Island ETD Zone”) in June 2010. Such upgrading, therefore, may lead
to the appreciation of the value of the land use right that the Company acquired
in Changxing Island and further accelerates the development of the Changxing
Island Project.
On July
12, 2010, Agricultural Bank of China (“ABC”) granted the Company a credit
facility of up to RMB 300 million (approximately $44.8 million) for the
Changxing Island Project. The credit facility may be used when the Company has a
demand, and meets the predetermined conditions set by ABC. As of September 30,
2010, the Company has not yet drawn any money from the credit
facility.
As of
September 30, 2010, the Company has invested an aggregate of $20.7 million in
the Changxing Island Project, including acquisition of the land use right,
infrastructure construction, equipment prepayment, taxes and other
miscellaneous costs. We commenced the construction of the Changxing
Island Project in April 2010, and anticipate it to be completed by July
2011. Once the facility in Changxing Island Project is put into
operation, our production capacity and profit margin will be greatly
enhanced. Currently we have to outsource some of our orders to contractors,
since we have reached the maximum production capacity.
Dalian RINO Solid Waste
Treatme
nt Co.,
Ltd.
On
October 20, 2009, the Company signed a memorandum (the “MOU”) with the local
government of Dalian Economic and Technological Zone (hereinafter referred to as
“Dalian ETD Zone”), pursuant to which the Company will be entitled to treat
the municipal sludge generated in Dalian ETD Zone. As stated in the MOU, the
estimated total investment for the Company to develop the production facility
was $18.4 million, which would be spent in two phases, $9.6 million in the first
phase, and $8.8 million in the second phase. The production capacity for Phase I
is 200 tons of municipal sludge per day, and will increase to 400 tons per day
after Phase II is completed.
On July
14, 2010, the Company established Dalian RINO Solid Waste Treatment Co.,
Ltd. (“Rino Sludge”), a wholly owned subsidiary of
Rino Investment in Dalian, with a registered and paid-in capital of $20
million. Rino Sludge is engaged in the business of municipal sludge and solid
waste treatment.
On
October 14, 2010, Rino Sludge signed a Build-Operate-Transfer Contract (the “BOT
Contract”), which is the definitive contract to the MOU, with Urban
Administration Bureau of Dalian ETD Zone regarding the treatment of
municipal sludge in Dalian ETD Zone.
Pursuant
to the BOT Contract, Rino Sludge has an operating period of 20 years starting
from the completion of the construction of the municipal sludge treatment
facility. The designed capacity of such sludge treatment facility, which adopts
Rotary Drum Film Dryer (“RDFD”) technology, is 200 tons of municipal sludge per
day, with a unit price of RMB 275 per ton (approximately $41 per ton). The
estimated total investment by Rino Sludge is $13.5 million, including
acquisition of land use right, infrastructure construction, equipment
procurement, taxes and other miscellaneous expenditures.
As of
September 30, 2010, Rino Sludge has paid RMB 25.44 million (approximately $3.8
million) as prepayment for the acquisition of land use right, and will commence
the construction upon the delivery of the selected site by Dalian ETD Zone for
the sludge treatment project. Once commenced, the construction is expected to be
completed within 10 months.
Dalian RINO Logistics Co.,
Ltd.
On August
3, 2010, the Company established Dalian RINO Logistics Co., Ltd. (“Rino
Logistics”), a wholly owned subsidiary of Dalian Rino in Dalian, with a
registered and paid-in capital of RMB 6 million. Rino Logistics is mainly
engaged in the business of cargo transportation.
Because
the steel skeletons that are used for the construction of workshops of the
Changxing Island Project are manufactured in our current production
facility in Jinzhou District, Dalian, the Company needs to transport the
steel skeletons to the Changxing Island construction site. Outsourced
transportation service usually can not deliver the cargo as timely as the
Company needs; the Company therefore decides to develop its own transportation
capacity, Rino Logistic, so as to ensure the construction progress of the
Changxing Island Project will progress on schedule.
After the
construction of Changxing Island Project is completed, Rino Logistics will
continue to service the transportation needs of the Company, and it will also
provide to third-party customers its cargo transportation services.
Backlog
Backlog,
defined as uncompleted projects, includes any projects that the Company has
undertaken yet has not commenced. As of September 30, 2010 and December 31,
2009, backlog amounted to $56.3 million and $42.9 million (VAT excluded),
respectively, the breakdown of which is set forth in the following table. The
Company expects that approximately 75% of the backlog will turn into revenue by
the end of 2010.
|
|
|
As of September 30, 2010 (Unaudited)
|
|
|
As of December 31, 2009
|
|
|
Product Segment
|
|
Amount
(In millions)
|
|
|
Number of
Uncompleted projects
|
|
|
Amount
(In millions)
|
|
|
Number of
Uncompleted projects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
Desulphurization Systems
|
|
$
|
36.9
|
|
|
|
9
|
|
|
$
|
31.9
|
|
|
|
2
|
|
|
2.
Wastewater Treatment
|
|
|
11.7
|
|
|
|
3
|
|
|
|
11.0
|
|
|
|
2
|
|
|
3.
Anti-oxidation Systems
|
|
|
7.7
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
56.3
|
|
|
|
15
|
|
|
$
|
42.9
|
|
|
|
4
|
|
On
December 23, 2009, the Company signed a Construction Contract, the total value
of which amounts to RMB 197.5 million (approximately $29.0 million), with
Shougang Jingtang Iron & Steel Co., Ltd., to construct 2 units of FGD
System. As of December 31, 2009, the construction had not yet commenced, whereas
as of September 30, 2010, 89% of the construction of the FGD Systems has
been completed, and it is expected to be completed by the end of the fourth
quarter of 2010.
On
October 14, 2010, Rino Sludge signed a Build-Operate-Transfer (“BOT”) Contract
with Urban Administration Bureau of Dalian ETD Zone, pursuant to which the
Company has the exclusive right to treat municipal sludge of Dalian ETD Zone for
20 years after the completion of the construction. The designed capacity of
Phase I of this project, which adopts Rotary Drum Film Dryer technology, is 200
tons of municipal sludge per day, with a unit price of approximately $41 per
ton. The estimated total investment of Phase I of this project is $13.5 million,
including acquisition of land use right, infrastructure construction, equipment
procurement, taxes and other miscellaneous expenditures.
The
Company believes that it has established a nationwide reputation for high
product quality and competitive cost structure within the iron and steel
industry in the past few years. In addition, the environmental protection
regulations in China are becoming stricter year by year, and the Chinese
government is also strengthening the enforcement of such regulations,
especially over the iron and steel industry. The Company, therefore, has
obtained more contracts in recent years. To meet the increasing demands of its
customers, the Company has to outsource some projects to third-party
contractors. At the same time, the Company is trying to accelerate the
construction process of the Changxing Island Project in order to increase our
production capacity.
Results
of Operations
The
following discussion should be read in conjunction with the consolidated
financial statements and notes appearing elsewhere in this quarterly
report.
Three
Months Ended September 30, 2010 and 2009.
Revenue
For the
three months ended September 30, 2010 and 2009, total revenues were $52.7
million and $63.3 million, respectively, representing a decrease of $10.6
million or 16.7%, which is mainly attributable to the decrease in our wastewater
treatment and anxi-oxidation businesses.
The
breakdown of the revenue changes is as follows:
|
|
|
For the three months ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Revenue
(In thousands)
(Unaudited)
|
|
|
As a % of
total revenue
|
|
|
Revenue
(In thousands)
(Unaudited)
|
|
|
As a % of
total revenue
|
|
|
% of
increase
|
|
|
Flue gas desulphurization
|
|
$
|
42,935
|
|
|
|
81.5
|
%
|
|
$
|
33,269
|
|
|
|
52.6
|
%
|
|
|
29.1
|
%
|
|
Wastewater
treatment equipment
|
|
|
7,452
|
|
|
|
14.1
|
%
|
|
|
15,077
|
|
|
|
23.8
|
%
|
|
|
(50.6
|
)%
|
|
Anti-oxidation
equipment and coatings
|
|
|
1,697
|
|
|
|
3.2
|
%
|
|
|
13,849
|
|
|
|
21.9
|
%
|
|
|
(87.8
|
)%
|
|
Machining
services
|
|
|
155
|
|
|
|
0.3
|
%
|
|
|
1,107
|
|
|
|
1.7
|
%
|
|
|
(86.0
|
)%
|
|
Operation
services
|
|
|
486
|
|
|
|
0.9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
revenue
|
|
$
|
52,725
|
|
|
|
100
|
%
|
|
$
|
63,302
|
|
|
|
100
|
%
|
|
|
(16.7
|
)%
|
The
Desulphurization System, which we introduced in late 2006, can reduce flue gas
sulphur dioxide levels by 85-99%. For the three months ended September 30, 2010,
the Company recorded revenues generated from desulphurization business of $43.0
million, as compared to $33.3 million for the same period in 2009, representing
an increase of $9.7 million or 29.1%, which is mainly due to the increasing
demand from the iron and steel industry for this system. The central government
of PRC has been strengthening the enforcement of the laws concerning
environmental protection, especially over steel and iron plants, which used to
be one of the biggest pollution sources in the country. With the prospect of a
large potential market, we anticipate our desulphurization business will
continue to grow in the next few years.
During
the three months ended September 30, 2010, we worked on 16 desulphurization
projects, 11 of which are completed and the remaining 5 are still in process,
whereas in the same period of 2009, we were working on 12 projects. The average
contract size of desulphurization projects was $5.8 million for the three months
ended September 30, 2010 compared to $7.3 million for the same period in
2009.
Revenues
from the Lamella Wastewater treatment business decreased by $7.6 million or
50.6% to $7.5 million for the three months ended September 30, 2010, as compared
to $15.1 million for the same period in 2009. The decrease mainly resulted from
the decrease in newly signed wastewater treatment contracts.
Anti-Oxidation
System, which we introduced in January 2007, reduces oxidation loss in the
production of hot rolled steel plates. For the three months ended September 30,
2010, we generated revenues of $1.7 million from anti-oxidation equipment and
related coatings sales, as compared to $13.8 million for the three months
ended September 30, 2009, representing a decrease of $12.2 million or 87.8%. For
the three months ended September 30, 2010 and 2009, we worked on 6
anti-oxidation and 7 projects, respectively. Generally speaking, turnaround time
of completing an anti-oxidation project is much longer than other projects,
because anti-oxidation projects can only be operational when the customers,
usually steelmakers, stop their production for testing, maintenance and repair.
Since it is more time consuming to realize revenues, the Company decides to
gradually reduce the production and sales of Anti-Oxidation System and withdraw
from the anti-oxidation market.
In
addition to the foregoing, the Company provides machining services to third
parties, utilizing the idle capacity of heavy machinery to generate
manufacturing revenue. The revenue generated from machining services fluctuates
based on the utilization rate of heavy machinery for the Company’s own
production use and for third-party customers. For the three months ended
September 30, 2010, revenues accounted for 0.3% of the total revenue as compared
to 1.7 % for the corresponding period in 2009.
During
the three months ended September 30, 2010, after selling Desulphurization
Systems to one customer, the Company was asked to utilize its technical know-how
to provide operation services over the Desulphurization Systems to the customer.
For the three months ended September 30, 2010, the Company realized revenue of
$0.49 million from operation services. The cost incurred by operation services
mainly consists of labor cost, materials consumption, etc.
Cost
of Sales
Total
cost of sales was $36.4 million and $37.2 million for the three months ended
September 30, 2010 and 2009, respectively, representing a decrease of $0.8
million or 2.2% in the 2010 period. Costs of revenue as a percentage of sales
were 69.1% and 58.7%, respectively, for the three months ended September 30,
2010 and 2009.
The
breakdown of the cost of sales is as follows:
|
|
|
For the three months ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Total
(In thousands)
(Unaudited)
|
|
|
% of sales
|
|
|
Total
(In thousands)
(Unaudited)
|
|
|
% of sales
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
$
|
52,084
|
|
|
|
|
|
$
|
62,195
|
|
|
|
|
|
Machining
and operation services
|
|
|
641
|
|
|
|
|
|
|
1,107
|
|
|
|
|
|
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
$
|
36,199
|
|
|
|
69.5
|
%
|
|
$
|
36,638
|
|
|
|
58.9
|
%
|
|
Machining
and operation services
|
|
|
242
|
|
|
|
37.8
|
%
|
|
|
531
|
|
|
|
48.0
|
%
|
|
Gross
Profit
|
|
$
|
16,283
|
|
|
|
30.
9
|
%
|
|
$
|
26,133
|
|
|
|
41.3
|
%
|
A
detailed breakdown of the cost of sales
for the three months ended September 30 2010 and 2009
is as follows:
|
|
|
For the three months ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
%
Increase/(decrease)
|
|
|
|
|
Amount
(In thousands)
(Unaudited)
|
|
|
% to
Total
|
|
|
Amount
(In thousands)
(Unaudited)
|
|
|
% to
Total
|
|
|
Raw Materials
|
|
$
|
23,574
|
|
|
|
64.7
|
%
|
|
$
|
28,703
|
|
|
|
77.2
|
%
|
|
|
(17.9
|
)%
|
|
Outsourcing
cost
|
|
|
9,715
|
|
|
|
26.7
|
%
|
|
|
3,669
|
|
|
|
9.9
|
%
|
|
|
164.8
|
%
|
|
Other
costs
|
|
|
3,152
|
|
|
|
8.6
|
%
|
|
|
4,797
|
|
|
|
12.9
|
%
|
|
|
(34.3
|
)%
|
|
Total
|
|
$
|
36,441
|
|
|
|
100
|
%
|
|
$
|
37,169
|
|
|
|
100
|
%
|
|
|
(2.0
|
)%
|
Cost of
sales primarily consists of raw materials, outsourcing cost and other costs,
which include labor cost, energy consumption depreciation and amortization
expenses, etc. For the three months ended September 30, 2010, raw material and
other costs decreased by $5.1 million and $1.6 million, respectively, compared
with the same period in 2009. As a result of the rapid growth of our business,
our production capacity has directly impacted how we operate and how much we can
charge from period to period, depending on demand level, production efficiency
and location of the projects. Currently, we have reached our maximum production
capacity, and we have to outsource some of our projects to outside contractors.
The increase in outsourcing costs has significantly increased our cost of sales
and resulted in a decrease in our gross margin. Outsourcing costs for the three
months ended September 30, 2010 were $9.7 million, of which $5.7 million was
incurred by the Shougang Jingtang Project, as compared to $3.7 million in the
same period of 2009.
Gross
profit for the three months ended September 30, 2010 decreased by $9.9 million
or 37.7%, to $16.3 million from $26.1 million for the same period in
2009.
The
decrease in gross profit was mainly due to the intensive competition in
desulphurization market, which leads to our reduced gross margin. At the same
time, the revenue of the Shougang Jingtang Project is recognized under cost
recovery method and no gross margin was recognized during the three months ended
September 30, 2010.
Operating
Expense
Operating
expenses for the three months ended September 30, 2010 were $6.4 million, a
decrease of $0.2 million or 3.0%, compared to $6.6 million for the
corresponding period in 2009.
SG&A
expenses for the three months ended September 30, 2010 and 2009 accounted for
11.4% and 10.4% of the total revenue respectively. However, our total SG&A
expenses for the three months ended September 30, 2010 decreased by $0.5
million compared to the three months ended September 30, 2009. The change in our
SG&A expenses was the result of a $1.6 million decrease in commission
expenses, which is in line with our decrease in revenue and a $0.2 million
increase in salary expenses.
Our
Company’s sales commission is usually determined based on the execution of a
signed contract. The Company agreed to pay 4-8% sales commissions upon the
receipt of first payment from its customers. Sales commission were $3.3 million
and $4.9 million for the three months ended September 30, 2010 and 2009,
respectively, representing a decrease of $1.6 million or 32.7%, which is mainly
attributable to the decrease of revenue for the three months ended September 30,
2010, comparing to that of the same period in 2009. Sales commission
accounts for the majority of SG&A, yet it does not fluctuate proportionately
along with total revenue due to the nature and the Company’s policy set for the
sales commission. For each of our projects, revenue is recognized using the
percentage-of-completion method, while commission payment is recognized when we
sign the contract with a client and we receive the down payment. Therefore,
sometimes during a period, commission is recognized while the project has not
started and no revenue for such project has been recognized.
Other
Income, Net
For the
three months ended September 30, 2010, we had other income, net of $0.4 million
as compared to $2.5 million of other expenses, net, in the three months ended
September 30, 2009.
The
significant increase in other income is mainly attributable to the
changes in fair value of warrants. Effective January 1,
2009, because of the strike price of the warrants is denominated in the
U.S. dollar, a currency other than the Company’s functional currency, the
Renminbi, warrants to purchase the Company’s common stock are recorded at fair
value. As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired. Warrants do not trade in an active securities
market, and as such, the Company estimates the fair value of these warrants
using the Black-Scholes option pricing model. Changes in our stock price cause
gains losses to the income statement item. Warrants were treated as a derivative
liability because the strike price of the warrants is denominated in the U.S.
dollar, a currency other than the Company’s functional currency, the Chinese
Renminbi. As a result, the warrants are not considered indexed to the Company’s
own stock, and as such, all future changes in the fair value of these warrants
will be recognized currently in earnings until such time as the warrants are
exercised or expired. Changes in the fair value of warrants are recognized in
earnings until such time as the warrants are exercised or expired.
For the
three months ended September 30, 2010, the Company booked income from the
changes of fair value of warrants amounting to $97,620, while booked expenses
amounting to $2.6 million for the three months ended September 30, 2009. The
increase in the income recognized in 2010 resulted from a drop in the market
price of the Company’s common stock.
Nine
Months Ended September 30, 2010 and 2009.
Revenue
Total
revenues were $166.0 million and $139.6 million for the nine months ended
September 30, 2010 and 2009, respectively, representing an increase of $26.4
million or 18.9%. Such revenue growth is mainly attributable to the increase of
revenues generated from desulphurization and wastewater treatment businesses,
which is the result of the increasing demand and the Company’s marketing
efforts.
The
breakdown of our revenue changes is as follows:
|
|
|
For the nine months ended September 30,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Revenue
(In thousands)
(Unaudited)
|
|
|
As a % of
total revenue
|
|
|
Revenue
(In thousands)
(Unaudited)
|
|
|
As a % of
total
revenue
|
|
|
% of
increase/(decrease)
|
|
|
Flue gas desulphurization
|
|
$
|
119,266
|
|
|
|
71.9
|
%
|
|
$
|
89,057
|
|
|
|
63.8
|
%
|
|
|
33.9
|
%
|
|
Wastewater
treatment equipment
|
|
|
33,239
|
|
|
|
20.0
|
%
|
|
|
31,573
|
|
|
|
22.6
|
%
|
|
|
5.3
|
%
|
|
Anti-oxidation
equipment and coatings
|
|
|
11,842
|
|
|
|
7.1
|
%
|
|
|
17,401
|
|
|
|
12.5
|
%
|
|
|
(31.9
|
)%
|
|
Machining
services
|
|
|
1,134
|
|
|
|
0.7
|
%
|
|
|
1,602
|
|
|
|
1.1
|
%
|
|
|
(29.2
|
)%
|
|
Operation
services
|
|
|
486
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
revenue
|
|
$
|
165,967
|
|
|
|
100
|
%
|
|
$
|
139,633
|
|
|
|
100
|
%
|
|
|
18.9
|
%
|
The
Desulphurization System, which we introduced in late 2006, can reduce flue gas
sulphur dioxide levels by 85-99%. For the nine months ended September 30, 2010,
the Company recorded revenues generated from desulphurization business of $119.3
million, as compared to $89.1 million for the same period in 2009, representing
an increase of $30.2 million or 33.9%, which is mainly due to the increasing
demand from the iron and steel industry for this system. The central government
of PRC has been strengthening the enforcement of the laws concerning
environmental protection, especially over steel and iron plants, which used to
be one of the biggest pollution sources in the country. With the prospect of a
large potential market, we anticipate our desulphurization business will
continue to grow in the next few years.
During
the nine months ended September 30, 2010, we worked on 19 desulphurization
projects, 14 of which have been completed and the remaining 5 are
still in process, whereas in the same period of 2009, we were working on 17
projects. The average contract size of desulphurization projects is $9.7 million
for the nine months ended September 30, 2010 compared to $8.6 million for
the same period in 2009.
Revenues
generated from the Lamella Wastewater treatment business increased by $1.7
million or 5.3% to $33.2 million for the nine months ended September 30, 2010,
as compared to $31.6 million for the same period in 2009. The increase is mainly
resulted from the increase in newly signed wastewater treatment contracts for
the two periods.
The
Anti-Oxidation System, which we introduced in January 2007, reduces oxidation
loss in the production of hot rolled steel plates. For the nine months ended
September 30, 2010, we generated revenues of $11.8 million from anti-oxidation
equipment and related coatings sales, as compared to $17.4 million for the
nine months ended September 30, 2009, representing a decrease of $5.6 million or
31.9%. Generally speaking, turnaround time of completing an anti-oxidation
project is much longer than other projects, because anti-oxidation projects can
only be operational when the customers, usually steelmakers, stop their
production for testing, maintenance and repair. Since it is more time consuming
to realize revenues, the Company has decided to gradually reduce the production
and sales of Anti-Oxidation System and withdraw from the anti-oxidation
market.
For the
nine months ended September 30, 2010, revenues generated from machining services
accounted for 0.7% of our total revenue as compared to 1.1% for the
corresponding period in 2009. Machining service fluctuates from quarter to
quarter with no pattern as most of such services are non-recurring. The decrease
of machining services is mainly because the Company’s own projects utilized more
its own machinery’s capacity than the same period in 2009 when the Company
serviced more third party customers.
Cost
of Sales
Total
cost of sales was $109.9 million and $83.4 million for the nine months ended
September 30, 2010 and 2009, respectively, representing an increase of $26.5
million or 31.8% in the 2010 period, which is mainly attributable to the
business growth of the Company. Costs of sales as a percentage
of revenues were 66.2% and 59.7%, respectively, for the nine months ended
September 30, 2010 and 2009.
The
breakdown of the cost of sales is as follows:
|
|
|
For the nine months ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Total
(In thousands)
(Unaudited)
|
|
|
% of sales
|
|
|
Total
(In thousands)
(Unaudited)
|
|
|
% of sales
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
$
|
164,347
|
|
|
|
|
|
$
|
138,030
|
|
|
|
|
|
Machining
Services
|
|
|
1,620
|
|
|
|
|
|
|
1,602
|
|
|
|
|
|
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
$
|
109,167
|
|
|
|
66.4
|
%
|
|
$
|
82,257
|
|
|
|
59.6
|
%
|
|
Machining
Services
|
|
|
737
|
|
|
|
45.5
|
%
|
|
|
1,124
|
|
|
|
70.2
|
%
|
|
Gross
Profit
|
|
$
|
56,063
|
|
|
|
33.8
|
%
|
|
$
|
56,251
|
|
|
|
40.3
|
%
|
A
detailed breakdown of the cost of sales in for the nine months ended 2010 and
2009 is as follows:
|
|
|
For the nine months ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
%
Increase
|
|
|
|
|
Amount
(In thousands)
(Unaudited)
|
|
|
% to
Total
|
|
|
Amount
(In thousands)
(Unaudited)
|
|
|
% to
Total
|
|
|
Raw Materials
|
|
$
|
77,877
|
|
|
|
70.9
|
%
|
|
$
|
66,912
|
|
|
|
80.3
|
%
|
|
|
16.4
|
%
|
|
Outsourcing
cost
|
|
|
19,822
|
|
|
|
18.0
|
%
|
|
|
6,993
|
|
|
|
8.4
|
%
|
|
|
183.5
|
%
|
|
Other
costs
|
|
|
12,205
|
|
|
|
11.1
|
%
|
|
|
9,476
|
|
|
|
11.3
|
%
|
|
|
28.8
|
%
|
|
Total
|
|
$
|
109,904
|
|
|
|
100
|
%
|
|
$
|
83,381
|
|
|
|
100
|
%
|
|
|
31.8
|
%
|
Cost of
sales primarily consists of raw materials, outsourcing cost and other costs,
which include labor cost, energy consumption depreciation and amortization
expenses, etc. Raw material costs for the nine months ended September 30, 2010
were $77.9 million, representing an increase of $11.0 million or 16.4%,
compared to $66.9 million for the same period ended September 30, 2009, while
for the same periods, revenues increased by 18.9%. Other costs of good sold were
$12.2 million and $9.5 million for the nine months ended September 30, 2010 and
2009, respectively, representing an increase of $2.7 million or 28.8%, which is
mainly attributable to the business growth of the Company. Currently, we have
reached our maximum production capacity, and we have to outsource some of our
products to outside contractors, and consequently resulted in higher cost and
lower profit margin. Outsourcing cost for the nine months ended September 30,
2010 and 2009 were $19.8 million, of which $10.0 million was incurred by the
Shougang Jingtang Project, and $7.0 million respectively.
Gross
profit for the nine months ended September 30, 2010 decreased by $0.2 million or
0.3%, to $56.1 million from $56.3 million for the same period in
2009.
Operating
Expense
Operating
expenses for the nine months ended September 30, 2010 were $18.2 million,
representing an increase of $4.1 million or 29.2%, compared to $14.1
million for the same period ended September 30, 2009, while for the same
periods, revenues increased by 18.9%. SG&A expenses for the nine months
ended September 30, 2010 and 2009 accounted for 10.7% and 10.1% of the revenue,
respectively, representing an increase of 0.6%. Our total SG&A expenses for
the nine months ended September 30, 2010 increased by $3.7 million compared to
that of the corresponding period in 2009.
There are
primarily four reasons for the increase in operating expenses:
|
i)
|
Sales
commission were $10.4 million and $9.6 million for the nine months ended
September 30, 2010 and 2009, respectively, representing an increase of
$0.8 million or 8.3%.
|
|
ii)
|
The
Company launched two new projects in 2010, which are the Changxing Island
Project, and the Sludge Treatment Project, which contribute to the
increased operating expenses of approximately $0.8
million.
|
|
iii)
|
To
respond to the requirements of the rapid business growth in 2010, the
Company recruited new technicians and workers, resulting in the increased
labor costs of $0.6 million. Business expenses, office expenses, and
traveling expenses aggregately increased by 0.5 million, which is also a
result of our business
expansion.
|
|
iv)
|
On
August 12, the Company entered into a Non-Qualified Stock Option Agreement
with Mr. Ben Wang, Chief Financial Officer of the Company, pursuant to
which Mr. Wang was granted 150,000 options to purchase the Company’s
common stock at an exercise price of $20 per share, vesting in 3 equal
annual installments beginning on April 19, 2011. Each installment of
options, once vested, will expire on the fifth anniversary of its vesting
date. The Company recognized a compensation expense of $325,937 in
operating expense for the three months ended September 30,
2010.
|
Other
Income, Net
Total
other income, net, for the nine months ended September 30, 2010 was $15.5
million and the total other expenses for the nine months ended September 30,
2009 was $2.8 million.
The
significant increase in other income is mainly attributable to the changes of
fair value of warrants. Effective January 1, 2009, because of the
strike price of the warrants is denominated in the U.S. dollar, a currency other
than the Company’s functional currency, the Renminbi, warrants to purchase the
Company’s common stock are recorded at fair value. As a result, the warrants are
not considered indexed to the Company’s own stock, and as such, all future
changes in the fair value of these warrants will be recognized currently in
earnings until such time as the warrants are exercised or expired. Warrants do
not trade in an active securities market, and as such, the Company estimates the
fair value of these warrants using the Black-Scholes option pricing model.
Changes in our stock price cause gains losses to the income statement item.
Warrants were treated as a derivative liability because the strike price of the
warrants is denominated in the U.S. dollar, a currency other than the Company’s
functional currency, the Chinese Renminbi. As a result, the warrants are not
considered indexed to the Company’s own stock, and as such, all future changes
in the fair value of these warrants will be recognized currently in earnings
until such time as the warrants are exercised or expired. Changes in the fair
value of warrants are recognized in earnings until such time as the warrants are
exercised or expired. For the nine months ended September 30, 2010, the Company
booked income from the changes of fair value of warrants amounting to $15.2
million, while booked expenses amounting to $4.4 million for the nine months
ended September 30, 2009. The increase in the income recognized in 2010 resulted
from the drop in the market price of the Company’s common stock. Volatility in
the market price of the Company’s common stock was very high during the nine
months ended September 30, 2010, while the volatility is low during
the nine months ended September 30, 2009.
Please
refer to Notes to Consolidated Financial Statements - Note 2–Summary of
Significant Accounting Policies - Fair Value of Financial Instrument for
detailed information regarding the change in the fair value of
warrants.
Liquidity
and Capital Resources
Cash
and Cash Equivalents
As of
September 30, 2010, the Company had a working capital surplus of $245.0 million,
compared to a surplus of $223.8 million as of December 31, 2009, representing an
increase of 21.2 million or 9.5%. For the nine months ended September 30, 2010,
the Company’s business kept growing, and profitability kept stable, which is
reflected in the increase in working capital.
As of
September 30, 2010, the Company has cash and cash equivalents amounting to $56.1
million, compared to $134.5 million as of December 31, 2009, representing a
decrease of $78.4 million or 58.3%. For the nine months ended September 30,
2010, although the Company borrowed two new loans from banks totally amounting
to $10.3 million, capital expenditures reached $26.0 million for the Changxing
Island Project, the Sludge Treatment Project, and other investments. Besides
capital expenditures, the Company’s business expansion also led to the sharp
increase of balances of accounts receivable, costs and estimated earnings in
excess of uncompleted contracts, and advance for inventory purchase, the
explanations for which are set forth as below:
Accounts
Receivable and Accounts Receivable-Retention
As of
September 30, 2010, accounts receivable including accounts receivable-retentions
increased to $112.0 million from $57.8 million as of December 31, 2009,
representing an increase of $54.2 million or 93.8%. Accounts
receivable turnover was 138 days for the nine months ended September 30, 2010,
compared to 93 days for the same period in 2009, representing an increase of 45
days
The
significant increases are mainly attributable to the reasons as set forth
below:
|
i)
|
With
the strengthening enforcement of environmental protection regulations in
China in 2010 over the steel and iron industry, the strength and
reputation that the Company has established through past years and well
recognized within the steel and iron industry, the Company successfully
secured several construction contracts in early 2010, of which the total
contract value amounted to approximately $121 million, resulting in the
increase in our operating revenue, and accordingly, the balance of
accounts receivables.
|
|
ii)
|
In
order to secure new contracts with the intensified competition it has been
experiencing, the Company had to grant the customers more preferential
payment terms than ever before. The customers are allowed to make payments
by installments lasting for one year and a half or two years, after the
projects are completed. For example, in the Shougang Jingtang Project, the
customer is allowed to pay off the debt by annual installments for 10
years after the project is
completed.
|
|
iii)
|
Year
2010 is the last year of the National 11th Five Year Plan (the “Plan”)
that promulgated by the Chinese government. To achieve the objective as
set forth in the Plan of reducing the unit GDP energy consumption, the
Chinese government implemented a series of measures including imposing
punitive electricity prices and power brownouts over iron and steel
industry, a heavy energy consumption industry, and even requiring some
iron and steel plants to cease or reduce production, which led to a
tightening trend of cash flow in such iron and steel
businesses.
|
The
Company’s customers are mostly iron and steel plants, which are subject to the
more and more stringent environmental protection policy control. Such customers
may also be short of cash and therefore cannot make payments to the Company
timely as required in the construction contracts, causing the balance of
accounts receivable of the Company increased significantly.
Accounts
receivable balances are considered past due if payment has not been received
within the payment terms established on the sales contracts or granted by the
Company, typically up to one year. Management periodically reviews its accounts
receivable to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of
an account may be in doubt. Allowance for bad debts amounted to
$666,161 and $273,446 as of September 30, 2010 and December 31, 2009,
respectively.
Retention
refers to the revenue that the Company has earned and billed but held by the
customers as a warranty against potential defects for sales of equipments or
constructions. Retention is included as part of the contract price, and normally
accounts for 5%-10% of the total contract price. Retention is generally
collected within one year upon the completion of construction
projects.
As of
September 30, 2010 and December 31, 2009, retention included in accounts
receivable amounted to $21.3 million and $19.0 million, respectively. According
to our contracts terms, all the retentions are collectable after the
constructions have been completed for one year.
The aging
of accounts receivable as of September 30, 2010 and December 31, 2009 is set
forth as below:
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
Amount
(In thousands)
(Unaudited)
|
|
|
% to total
|
|
|
Amount
(In thousands)
|
|
|
% to total
|
|
|
<
1 year
|
|
$
|
106,017
|
|
|
|
94.1
|
%
|
|
$
|
52,344
|
|
|
|
90.2
|
%
|
|
Including:
Retention
|
|
|
21,325
|
|
|
|
18.9
|
%
|
|
|
18,985
|
|
|
|
32.7
|
%
|
|
1-2
years
|
|
|
3,653
|
|
|
|
3.2
|
%
|
|
|
5,718
|
|
|
|
9.8
|
%
|
|
2-3
years
|
|
|
2,997
|
|
|
|
2.8
|
%
|
|
|
23
|
|
|
|
0.0
|
%
|
|
>
3 years
|
|
|
12
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
112,679
|
|
|
|
100
|
%
|
|
$
|
58,085
|
|
|
|
100
|
%
|
Since
most of our customers are state-owned-enterprises, the credit we grant them is 1
year. Due to the duration of the project and the strict project approval
procedures in state-owned enterprises, the payment of the bills may take a
longer time than the payment terms as set forth in the construction contracts.
On September 30, 2010, the past-due amounts accounted for less than 6% of the
Company’s total accounts receivable. We have reviewed the past-due accounts and
analyzed historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment
patterns.
According
to our analysis, we believe that the extended credit terms do not have a
material impact on our liquidity in the near term.
Costs
and estimated earnings in excess of billings on uncompleted
contracts
As of
September 30, 2010, costs and estimated earnings in excess of billings on
uncompleted contracts increased to $41.4 million from $3.3 million on December
31, 2009, representing an increase of $38.1. The significant increase is mainly
attributable to below reasons:
|
i)
|
As
of September 30, 2010, we had 14 projects still under
construction, while only 5 were under construction as of December 31,
2009.
|
|
ii)
|
For
the nine months ended September 30, 2010, the cost incurred for the
Shougang Jingtang Projects, which is accounted for using cost recovery
method, amounted to approximately $22.7 million, while the corresponding
billings was $0.
|
Progress
billings may not be synchronous with construction stages under the
percentage-of-completion revenue recognition method. Unbilled revenue, which is
reported as costs and estimated earnings in excess of billings on uncompleted
contracts, which hold up another major part of the Company’s working
capital.
The aging
of costs and estimated earnings in excess of billings as of September 30, 2010
and December 31, 2009 is as follows:
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
Costs and estimated earnings
in excess of billings
(In thousands) (Unaudited)
|
|
|
% to
Total
|
|
|
Costs and estimated earnings
in excess of billings
(In thousands)
|
|
|
% to
Total
|
|
|
< 1
year
|
|
$
|
12,870
|
|
|
|
31.1
|
%
|
|
$
|
3,259
|
|
|
|
100
|
%
|
|
1-2
years
|
|
|
5,883
|
|
|
|
14.2
|
%
|
|
|
—
|
|
|
|
—
|
|
|
>
2 years
|
|
|
22,687
|
|
|
|
54.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
41,440
|
|
|
|
100
|
%
|
|
$
|
3,259
|
|
|
|
100
|
%
|
Advances
for inventory purchase
Advances
for inventory purchase increased to $57.2 million on September 30, 2010, an
increase of $23.1 million or 68.1%, from the $34.1 million on December 31,
2009.
Advances
for inventory purchases are required to ensure timely delivery of raw materials
needed to execute existing contracts as well as to expand the business. The
costs of steel, with its significantly fluctuating price in these years in
China, comprises the majority of our cost of goods sold. In 2010, the
Company forecasted that the price of steel will rise rapidly, based on the fact
that Chines domestic inflation gets intensified monthly, and reduction of steel
production will occur due to the nationwide consolidation of steel plants
conducted by the Chinese central government. Therefore, the Company advanced
more payments than previously to suppliers to guarantee the sufficient supply of
steel so as to meet our current and future production needs, and most
importantly to fix and control the costs of good sold.
We have
historically funded our working capital needs from operations, advance payments
from customers, bank borrowings, and capital from shareholders. Our working
capital requirements are influenced by the level of our operations, the
numerical and dollar volume of our project contracts, the progress of our
contract execution, and the timing of accounts receivable collections. We
believe that our cash position is adequate to meet future short-term and
mid-term liquidity requirements, as well as our obligation to satisfy the PRC’s
statutory reserves requirement.
Cash
flow
The
following tables present our net cash flows for the nine months ended September
30, 2010 and for the same period ended September 30, 2009.
|
|
|
For the nine months ended September 30,
|
|
|
In thousands
|
|
2010
(Unaudited)
|
|
|
2009
(Unaudited)
|
|
|
Net cash provided by (used
in) operating activities
|
|
$
|
(67,643
|
)
|
|
$
|
8,391
|
|
|
Net
cash used in investing activities
|
|
$
|
(25,905
|
)
|
|
$
|
(379
|
)
|
|
Net
cash provided by financing activities
|
|
$
|
13,796
|
|
|
$
|
1,304
|
|
Cash
used in operating activities
Net cash
used in operating activities amounted to $67.6 million for the nine months ended
September 30, 2010, as compared to net cash provided by operating activities in
the amount of $8.4 million for the nine months ended September 30, 2009,
representing a decrease of $76.0 million.
For the
nine months ended September 30, 2010, although the Company’s business kept
growing, and profitability remains strong, a substantial amount of working
capital were held up by the increased accounts receivable, costs and estimated
earnings in excess of uncompleted contracts, and advances for inventory
purchase, etc., all of which are particular and typical to the construction
business.
Cash
used in investing activities
For the
nine months ended September 30, 2010, net cash used in investing activities
increased to $25.9 million as compared to $0.38 million used in the same period
ended September 30, 2009, representing an increase of $25.5
million.
On
February 22, 2010, the Company invested RMB 3 million (approximately $0.44
million) for a 30% noncontrolling interests in Dalian Environment Exchange Co.,
Ltd.
The
Company commenced the construction of the Changxing Island facility construction
in early 2010, and has aggregately invested $20.7 million cash in such project
as of September 30, 2010, including acquisition of land use right,
infrastructure construction, equipment prepayment, taxes and other
miscellaneous costs.
In August
2010, the Company established Rino Logistics to meet the transportation needs of
Changxing Island Project, and correspondingly paid for the procurement of
trucks, trailers and cranes, totaling $1.2 million.
In
September 2010, the Company made a prepayment amounting to RMB 25.44 million
(approximately $3.7 million) for the land use right of the land located in
Dalian ETD Zone, for the construction of a municipal sludge treatment
facility.
Cash
provided by financing activities
For the
nine months ended September 30, 2010, net cash provided by financing activities
was $13.8 million, as compared to net cash provided by financing activities in
the amount of $1.3 million for the nine months ended September 30, 2009,
representing an increase of $12.5 million.
During
the nine months ended September 30, 2010, the Company borrowed a short-term
loan, the principal of which amounts to RMB 15 million (approximately $2.2
million), from Shanghai Pudong Development Bank (“SPD Bank”). The loan was made
on March 1, 2010, and will mature on February 16, 2011.
In
addition to the above mentioned short-term loan, the Company also borrowed from
SPD Bank a long-term loan, the principal of which amounts to RMB 55 million
(approximately $8.1 million). The loan was made on March 1, 2010, and
matures on March 1, 2014. The Company is required to repay the loan according to
a schedule commencing on March 1, 2012 and continuing thereafter until the
maturity date.
Related
Party Transactions
As of
September 30, 2010 and December 31, 2009, the Company owed $498,598 and $
494,614 to Mr. Dejun Zou, CEO and director of the Company, respectively, for
advances made on an unsecured basis, payable on demand and interest
free.
Seasonality
Our sales
are not significantly affected by seasonality.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
CRITICAL
ACCOUNTING POLICIES
We
believe that the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant judgments and estimates on the part of management. Our critical
accounting policies and estimates present an analysis of the uncertainties
involved in applying a principle, while the accounting policies note to the
financial statements (Note 2) describe the method used to apply the accounting
principle.
Fair Value of Financial
Instruments
On
January 1, 2008, the Company began recording financial assets and liabilities
subject to recurring fair value measurement at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. On January 1, 2009 the Company began recording
non-recurring financial as well as all non-financial assets and liabilities
subject to fair value measurement under the same principles. These fair value
principles prioritize valuation inputs across three broad levels. The three
levels are defined as follows:
|
i)
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
ii)
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for
substantially the full term of the financial
instruments.
|
|
iii)
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value.
|
Effective
January 1, 2009, warrants previously treated as equity pursuant to the
derivative treatment exemption are no longer afforded equity treatment because
the strike price of the warrants is denominated in the U.S. dollar, a currency
other than the Company’s functional currency, the Chinese Renminbi (RMB). As a
result, the warrants are not considered indexed to the Company’s own stock, and
as such, all future changes in the fair value of these warrants will be
recognized currently in earnings until such time as the warrants are exercised
or expired.
Revenue
Recognition
Contracts.
The Company
enters into long-term fixed price contracts with customers to manufacture and
install industrial equipment. Revenue on long-term fixed price contracts is
recognized under the percentage-of-completion method in accordance with the
American Institute of Certified Public Accountants Statement of Position (“SOP”)
81-1 “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts”. Our contracts are generally for single, seamless
solutions, a fact that would make estimation of percentage completion by
measuring outputs of little value to financial statement users. Accordingly, we
estimate percentage completion based on inputs rather than on outputs, as
discussed in SOP 81-1 paragraph 47. Under the percentage-of-completion
cost-to-cost method outlined in SOP 81-1 paragraph 44, management estimates the
percentage-of-completion based upon costs incurred as a percentage of the
total estimated costs to complete the contract. When total cost estimates
exceed projected revenues, the Company accrues for the estimated losses
immediately. The use of the percentage of completion method requires significant
judgment relative to estimating total contract revenues and costs, including
assumptions relative to the length of time to complete the project, the nature
and complexity of the work to be performed, and anticipated changes in estimated
costs. Estimates of total contract revenues and costs are continuously monitored
during the term of the contract, and recorded revenues and costs are subject to
revision as the contract progresses. When revisions in estimated contract
revenues and costs are determined, such adjustments are recorded in the period
in which they are first identified.
Our
equipment sales contracts are fixed-price contracts generally for turnkey
projects which include design, manufacture of equipment, and installation of
equipment, which can require extensive fabrication and construction work in the
client’s steel mill. Accordingly, desulphurization projects require in general 6
to 7 months from inception to final installation and commissioning, while our
anti-oxidation systems require about 3 to 4 months from inception to
installation. Wastewater treatment equipment can require from 5 to 8 months from
contract signing, depending mainly on the specific customer’s ability to accept
delivery.
Our
equipment sales contracts have two major components, one contains technical
specifications and performance criteria and the second contains the commercial
terms. As such, our equipment contract generally involves two stages of
discussion and negotiation. At the first stage, our engineers and technicians
work with our customers to jointly develop technical specifications and
performance criteria for each equipment contract. The second stage involves
commercial negotiation of price, installation, delivery and other terms based on
the size, technical complexity and performance level of the equipment as shown
by its specification and performance criteria agreed to by the parties.
Depending on the customer, contracts may also contain penalties for delays and
definitions of breach of contract. Delay penalty provisions generally require us
to pay 0.1% of the contract price for each day the equipment delivery is delayed
and such penalty is generally capped at 3% to 5% of the total contract price.
All equipment sales contracts specify payment terms. In general, the first 30%
is due from the customer within 30 days of contract signing. On average, when
the project is 60% complete an additional 30% payment is due. Equipment is
generally manufactured at our own facilities and the progress is monitored and
signed off by our customers on site on a monthly basis and at each manufacturing
mile stone. As equipment is manufactured based on the specifications and
performance criteria jointly developed by us and our customers and must obtain
our customer’s approval during the manufacturing process, it gives us
opportunities to correct any deviation from the requirements of the equipment
contracts during our manufacturing process. In the event that we fail to
manufacture the equipment in accordance with the technical specifications and
criteria, our customers may withhold the payment until we solve the problems and
correct the deviation. We are not allowed to deliver equipment unless and until
the pre-delivery testing indicates that the equipment meets the technical
specifications and performance criteria under the contract. If equipment has
been accepted by a customer as meeting the contract specifications and the
equipment is delivered for installation at the customer’s site, the customer
does not have a contractual right to reject the equipment after installation and
must make payment when due. In the event that a customer does not pay any amount
when due, we would pursue a breach of contract claim in court in the PRC for all
amounts due to date and cease all work until paid pursuant to the contract
terms. Our customers may only reject the equipment and terminate the contract if
the pre-delivery testing indicates that our equipment does not meet the
technical specifications, performance criteria and we are not able to correct
the problems. In such case, our customers are relieved from any further payment
obligations as our equipment contracts do not require us to provide a refund of
the payment already made. To date, we have not encountered any case in which our
customers reject the equipment after the completion of the manufacturing, final
installation and testing of the equipment. When final installation and testing
are completed, another 30% payment is due, and the remaining 10% performance
bond is held by the customer for up to a year following completion of the
project to ensure quality of installation. To date the Company has not incurred
significant costs toward a project after its completion and has had no
difficulty collecting the full contract amounts when due.
Because
our contracts are generally for single, seamless solutions, we estimate
percentage completion based on inputs rather than on outputs. We use a cost to
cost method of estimating percentage completion for any given reporting period.
Specifically, we use the raw materials applied to a project as a percentage
of total budget for the project to estimate percentage completion.
“Applied” in this context means raw materials that are actually fabricated
into components for a specific project and not held in inventory, for example
“applied” would mean steel on which we have begun fabrication operations, or
welding supplies or coatings that have been used or painted on components. We
believe this accords with the intent of SOP 81-1 paragraph 49, which precludes
using the mere purchase of raw materials to drive percentage completion
estimates.
Significant
production costs such as raw materials and labor are generally incurred pro rata
over the time required to complete each project, beginning with machining of
equipment parts in our production facilities in Dalian to fabrication and
assembly of housings, towers, and other items constructed on site in our
clients’ steel mills. While our production costs also include labor,
depreciation, and other manufacturing costs, we believe that using the
application of raw materials to work in progress to drive our percentage
completion estimates offers the most concrete factual basis for estimation of
percentage completion as this prevents the allocation of overheads and utilities
from directly affecting our recognition of revenues and is in accord with the
guidance in SOP 81-1 paragraph 48.
While our
estimated percentage completion is driven by our application of raw materials,
our contract terms provide the observation and inspection recommended by SOP
81-1 paragraph 51, which causes the customer acceptance provisions in our
contracts to indirectly impact our recognition of revenue. The customer assigns
a project manager to monitor the progress and quality of each installation. The
project manager signs his approval at the end of each month during the
installation, and then upon final installation and testing. The second 30%
progress payment is triggered by a percentage completion milestone, in many
cases when 60% of a project is completed, while the final 30% progress payment
becomes due at final installation and testing. Thus the project manager knows
that each approval of percentage completion of a project brings the project
closer to a progress payment milestone. We believe this act as a natural check
to prevent excessive estimates of percentage completion.
Services.
In
addition to the Company’s specialty equipment sales, the Company uses heavy
machining equipment to perform machining services for third parties. These
engagements, numbering several hundred per year, are essentially piecework and
are completed in usually less than one month. Each machining engagement is
governed by a separate contract, indicating existence of an
arrangement. Revenue is recognized when service is performed, which
is usually concurrent with delivery to the customer, the contract price is set
by contract, and collectability is reasonably assured. We have little or no bad
debt. Accordingly, these revenues can be recognized under SAB Topic 13.
Machining services contracts generally set out the machining work
to be performed, including machining tolerances, number of pieces to be
worked, payment terms, timing of delivery, and price per unit of
work. The contract price is generally paid upon acceptance by the
customers of the completed work after testing by the customers according to the
contract specifications. Dalian RINO is generally responsible for
shipping. Dalian RINO generally accepts responsibility to replace defective
products, paying triple the packaging and related costs as a penalty to the
customer. Escalating penalties of 1-5% apply for missed delivery
deadlines; unilateral cancellation of the contract by Dalian RINO generally
results in a penalty of 10% of contract value. In case of disputes,
parties can accept arbitration or proceed directly to court
action.
The
Company also provides technical professional services, such as operation
services over Flue Gas Desulphurization Systems that the Company sells to the
customers, to its customers based on a fixed-price time contract. The Company
recognizes services-based revenue from all of its contracts when the services
have been performed, the customers have approved the completion of the services
and invoices have been issued and collectability is reasonably assured.
Technical services contracts specify the final user, the nature of the project
and the type of technology service to be provided. Contracts are valid for
one year from signing; payments are generally collected at completion of
construction. In the event of insurmountable technical obstacles caused by the
recipient of the technical services, the recipient need not be refunded monies
already paid and the contract is canceled. In the event of insurmountable
technical obstacles caused by the provider of the technical services, the
provider must repay 50% of monies received and the contract is
canceled.
B
OT Contracts
. Starting from
2010, the Company started entering into long-term “build-operate-transfer”
contracts (the “BOT” contracts) with customers to manufacture and install,
operate and maintain the industrial equipments. The revenue and costs relating
to construction or upgrade services is recognized under the cost recovery method
as the collection of the receivable cannot be reasonably predicted. Under the
cost recovery method, no gross profit is recognized until the Company collected
the cost of the revenue, or until such time that the company considers the
collections to be probable and estimable and begins to recognize income based on
the accrual method. A BOT service contract has an indeterminable number of acts
to be performed over a specific period of time. As such, revenue from a
BOT service contract is recognized on a straight-line basis unless it is
possible to estimate the stage of completion by some other method more reliably.
When in a series of acts to be performed in rendering a service, a
specific act is much more significant than other acts, and then the recognition
of income is postponed until the significant acts are
performed.
Recently Issued Accounting
Pronouncements and Adopted Accounting
In June
2009, the FASB issued authoritative guidance to eliminate the exception to
consolidate a qualifying special-purpose entity, change the approach to
determining the primary beneficiary of a variable interest entity and require
companies to more frequently re-assess whether they must consolidate variable
interest entities. Under the new guidance, the primary beneficiary of a variable
interest entity is identified qualitatively as the enterprise that has both (a)
the power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance, and (b) the obligation
to absorb losses of the entity that could potentially be significant to the
variable interest entity or the right to receive benefits from the entity that
could potentially be significant to the variable interest entity. This guidance
becomes effective for the Company at its fiscal 2011 year-end and interim
reporting periods thereafter. The Company does not expect this guidance to have
a material impact on its consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The adoption of this ASU did not have impact on the
Company’s consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If
an entity has previously adopted SFAS No. 160 as of the date the amendments in
this update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments in this
update should be applied retrospectively to the first period that an entity
adopted SFAS No. 160. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information
about purchases, sales, issuances, and settlements (that is, on a gross
basis rather than as one net number). This update provides amendments to
Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of
disaggregation. A reporting entity should provide fair value measurement
disclosures for each class of assets and liabilities. A class is often a subset
of assets or liabilities within a line item in the statement of financial
position. A reporting entity needs to use judgment in determining
the appropriate classes of assets and liabilities. 2) Disclosures about
inputs and valuation techniques. A reporting entity should provide disclosures
about the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements. Those disclosures are
required for fair value measurements that fall in either Level 2 or Level 3. The
new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. These disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company is currently evaluating
the impact of this ASU, however, the Company does not expect the adoption of
this ASU to have a material impact on its consolidated financial
statements.
In
February 2010, FASB issued ASU No. 2010-9 – Amendments to Certain Recognition
and Disclosure Requirements. This update addresses certain implementation issues
related to an entity’s requirement to perform and disclose subsequent-events
procedures, removes the requirement that public companies disclose the date of
their financial statements in both issued and revised financial statements.
According to the FASB, the revised statements include those that have been
changed to correct an error or conform to a retrospective application of U.S.
GAAP. The amendment is effective for interim and annual reporting periods in
fiscal year ending after September 15, 2010. The Company does not expect the
adoption of this ASU to have a material impact on the Company’s consolidated
financial statements.
In March
2010, FASB issued ASU No. 2010-10 – Amendments for Certain Investment Funds.
This update defers the effective date of the amendments to the consolidation
requirements made by FASB Statement 167 to a reporting entity’s interest in
certain types of entities. The deferral will mainly impact the evaluation of
reporting enterprises’ interests in mutual funds, private equity funds, hedge
funds, real estate investment entities that measure their investment at fair
value, real estate investment trusts, and venture capital funds. The ASU also
clarifies guidance in Statement 167 that addresses whether fee arrangements
represent a variable interest for all service providers and decision makers. The
ASU is effective for interim and annual reporting periods in fiscal year
beginning after November 15, 2009. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial statements.
In March
2010, FASB issued ASU No. 2010-11 – Scope Exception Related to Embedded Credit
Derivatives. Embedded credit-derivative features related only to the transfer of
credit risk in the form of subordination of one financial instrument to another
are not subject to potential bifurcation and separate accounting as clarified by
recently issued FASB guidance. Other embedded credit-derivative features are
required to be analyzed to determine whether they must be accounted for
separately. This update provides guidance on whether embedded credit-derivative
features in financial instruments issued by structures such as collateralized
debt obligations (CDOs) and synthetic CDOs are subject to bifurcation and
separate accounting. The guidance is effective at the beginning of a company’s
first fiscal quarter beginning after September 15, 2010. The Company does not
expect the adoption of this ASU to have a material impact on the Company’s
consolidated financial statements.
In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. This Update provides amendments to
Topic 718 to clarify that an employee share-based payment award with an
exercise price denominated in currency of a market in which a substantial
porting of the entity’s equity securities trades should not be considered to
contain a condition that is not a market, performance, or service condition.
Therefore, an entity would not classify such an award as a liability if it
otherwise qualifies as equity. The amendments in this Update are effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The Company does not expect the adoption of ASU 2010-17
to have a significant impact on its consolidated financial
statements.
In April
2010, the FASB issued Accounting Standard Update 20-10-17, “Revenue
Recognition—Milestone Method (Topic 605): Milestone Method of Revenue
Recognition” or ASU 2010-17. This Update provides guidance on the recognition of
revenue under the milestone method, which allows a vendor to adopt an accounting
policy to recognize all of the arrangement consideration that is contingent on
the achievement of a substantive milestone (milestone consideration) in the
period the milestone is achieved. The pronouncement is effective on a
prospective basis for milestones achieved in fiscal years and interim periods
within those years, beginning on or after September 15, 2010. The Company
does not expect the adoption of ASU 2010-17 have a significant impact on its
consolidated financial statements.
In July
2010, the FASB issued Accounting Standards Update 2010-20, Disclosure about the
Credit Quality of Financing Receivables and the Allowance for Credit losses.
This ASU will increase disclosure made about the credit quality of loans and the
allowances for credit losses. The disclosures will provide additional
information about the nature of credit risk inherent in First Financial
loans, how credit risk is analyzed and assessed, and the reasons for the change
in the allowance for loan losses. The requirements will be effective for first
fiscal year ended December 31, 2010. The Company is evaluating the potential
impact to its consolidated financial statements from the adoption of this
ASU.
In
September 2010, FASB issued Accounting Standard Update 2010-25, “Plan
Accounting—Defined Contribution Pension Plans (Topic 962): Reporting Loans to
Participants by Defined Contribution Pension Plans” or ASU 2010-25. The ASU
clarifies how loans to participants should be classified and measured by defined
contribution plans and how IFRS compare to these provisions. The amendments in
this update are effective for fiscal years ending after December 15, 2010. The
Company does not expect the adoption of this ASU to have a material impact on
the Company’s consolidated financial statements.
Item
3. Quantitative and Qualitative Disclosure About Market Risk
Interest
Rate Risk
The
Company deposits surplus funds with Chinese banks earning daily interest. The
Company does not invest in any instruments for trading purposes. All of the
Company’s outstanding debt instruments carry fixed rates of interest. The
Company’s operations generally are not directly sensitive to fluctuations in
interest rates. The amount of long-term debt outstanding as of September 30,
2010 and December 31, 2009 was $8.2 million and $0.0 million, respectively. A
hypothetical 1.0% increase in the annual interest rates for all of our credit
facilities under which we had outstanding borrowings at September 30, 2010 would
not have any material impact on our net income before provision for income taxes
for the quarter. Management monitors the banks’ prime rates in conjunction with
our cash requirements to determine the appropriate level of debt balances
relative to other sources of funds. We have not entered into any hedging
transactions in an effort to reduce our exposure to interest rate
risk.
Inflation
Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net revenues if the
selling prices of our products do not increase with these
increased costs.
Currency
Fluctuations and Foreign Currency Risk
Substantially
all of our revenues and expenses are denominated in RMB. However, we use the
U.S. dollar for financial reporting purposes. Conversion of RMB into foreign
currencies is regulated by the People’s Bank of China through a unified floating
exchange rate system. Although the PRC government has stated its intention to
support the value of RMB, there can be no assurance that such exchange rate will
not again become volatile or that RMB will not devalue significantly against the
U.S. dollar. Exchange rate fluctuations may adversely affect the value, in U.S.
dollar terms, of our net assets and income derived from our operations in the
PRC.
Our
reporting currency is the U.S. dollar. Except for the U.S. holding companies,
all of our consolidated revenues, consolidated costs and expenses, and our
assets are denominated in RMB. As a result, we are exposed to foreign exchange
risk as our revenues and results of operations may be affected by fluctuations
in the exchange rate between U.S. dollars and RMB. If the RMB depreciates
against the U.S. dollar, the value of our RMB revenues, earnings and assets as
expressed in our U.S. dollar financial statements will decline. Assets and
liabilities are translated at exchange rates at the balance sheet dates and
revenue and expenses are translated at the average exchange rates and
shareholders’ equity is translated at historical exchange rates. Any resulting
translation adjustments are not included in determining net income but are
included in determining other comprehensive income, a component of shareholders’
equity. As of September 30, 2010, our accumulated other comprehensive income was
$11.9 million. We have not entered into any hedging transactions in an effort to
reduce our exposure to foreign exchange risk. The value of the Renminbi against
the U.S. dollar and other currencies is affected by, among other things, changes
in China’s political and economic conditions. Since July 2005, the Renminbi has
not been pegged to the U.S. dollar. Although the People’s Bank of China
regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, the Renminbi may appreciate or
depreciate significantly in value against the U.S. dollar in the medium to long
term. Moreover, it is possible that in the future, PRC authorities may lift
restrictions on fluctuations in the Renminbi exchange rate and lessen
intervention in the foreign exchange market.
Item
4. Controls and Procedures.
Disclosure
Controls and Procedures
The
Company’s management, with participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period covered by this report. The
term “disclosure controls and procedures” as defined in Rules 13a-15(e) and
15d-15(e) means controls and other procedures of the Company that are designed
to ensure that information required to be disclosed by a company in reports,
such as this reports, that it files, or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the U.S. Securities and Exchange Commission’s (“SEC”) rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on that evaluation, management concluded
that because of the material weakness in internal control over financial
reporting described below, our disclosure controls and procedures were not
effective as of September 30, 2010, to satisfy the objectives for which they are
intended.
1)
Insufficient controls over related party transactions and cash disbursement
management
During
the fiscal year ended December 31, 2009, the Company made a loan to certain
officers and directors (the “Loan”) which created a contingent liability for a
possible violation of Section 13(k) of the Exchange Act (Section 402(a) of the
Sarbanes-Oxley Act of 2002). Section 13(k) provides that it is unlawful for a
company, such as the Company, which has a class of securities registered under
Section 12 of the Exchange Act, to directly or indirectly, including through any
subsidiary, extend or maintain credit in the form of a personal loan to or for
any director or executive officer of the company.
The lack of adequate cash disbursement
management by the Company and lack of adequate procedures and controls with
respect to related party transactions which allowed for the Loan to occur are
material weakness
es in the
Company
’
s internal controls.
2)
Lack of controls over fixed assets management
We did
not maintain effective controls over the payment and recording of constructions.
Specifically, the Company has a lack of controls over constructions in the
aspects of status monitoring and payment requisitions, and mistakenly recorded
the payment of certain constructions, which resulted in significant adjustments
between construction in progress and advance to suppliers. The lack of timely
reconciliation procedures and deficient recordkeeping controls constitutes a
material weakness in this area such that there is a reasonable possibility that
due to these control deficiencies a material misstatement may not be prevented
or detected on a timely basis.
3)
Lack of internal audit function
We lack
qualified resources to perform the internal audit functions properly, and the
scope and effectiveness of the internal audit function are yet to be developed.
Specifically, the reporting mechanism between the accounting department and the
Board of Directors and the CFO was not effective, therefore resulting in the
delay of recording, reporting and the failure to comply with the Company’s Code
of Ethics.
Changes
in Internal Control over Financial Reporting
As a
result of the foregoing material weaknesses, as of September 30, 2010, the
Company’s audit committee of its Board of Directors has undertaken to further
review internal controls along with management and in cooperation with outside
consultants in order to remediate all existing material weaknesses and internal
control deficiencies.
In
October 2010, the Company further bolstered its accounting and financial
personnel resources by hiring a new financial controller, who is a certified
public accountant, and is fluent in English with years of working experiences
with PricewaterhouseCoopers and one US listed company.
Since
the beginning of 2010, Management has taken the following further
actions to address the deficiencies that are identified and strengthen our
internal control over financial reporting:
|
l
|
Implemented
proper procedures of cash disbursement approval-control management under
the supervision of the Audit Committee of the Board of
Directors;
|
|
l
|
Created
positions in our accounting department to segregate duties of recording,
authorizing and testing;
|
|
l
|
Increased
our accounting and financing personnel resources, by retaining more U.S.
GAAP knowledgeable financial
professionals;
|
|
l
|
Allocated
sufficient resources to achieve an effective internal audit
function;
|
|
l
|
Established
direct reporting procedures from the Chief Accounting Officer to the
Chief Financial Officer to ensure a better overview of the Company’s
financial reporting system by the
CFO;
|
|
l
|
Reemphasized
to all the officers and employees of the Company the Code of Ethics and to
ensure all officers and employees’ full compliance of the Code of
Ethics;
|
|
l
|
Adopted
policies and procedures regarding related party transactions and to ensure
Audit Committee’s review of all interested
transactions.
|
Except
for the above, there were no other changes in our internal control over
financial reporting during the fiscal quarter ended September 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. Our management, including our Chief Executive
Officer and our Chief Financial Officer, does not expect that our disclosure
controls and procedures or our internal controls will prevent or detect 100% of
all errors and fraud that may occur.
A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs. Due to the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within our company have been detected. And management believes that the
steps we are taking are necessary for remediation of the material weaknesses
identified above, and we will continue to monitor the effectiveness of these
steps and to make any changes that our management deems appropriate.
PART
II - OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
6. Exhibits
|
10.1
|
Purchase
Agreement, dated as of October 3, 2007, by and between Dalian Rino and
Dalian Innomind (Incorporated herein by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed with the SEC on October 12,
2007.).
|
|
|
|
|
10.2
|
Entrusted
Management Agreement, dated as of October 3, 2007, by and among Dalian
Innomund, Dalian Rino, Dejun Zou and Jianping Qiu. (Incorporated herein by
reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the
SEC on October 12, 2007.).
|
|
|
|
|
10.3
|
Patent
Transfer Contract, dated as of October 3, 2007, by and between Dalian Rino
and Dalian Innomind (Incorporated herein by reference to Exhibit 10.4 to
the Current Report on Form 8-K filed with the SEC on October 12,
2007.).
|
|
|
|
|
10.4
|
Shareholders’
Voting Proxy Agreement, dated as of October 3, 2007, by and among Dalian
Innomind, Dejun Zou and Jianping Qiu. (Incorporated herein by reference to
Exhibit 10.5 to the Current Report on Form 8-K filed with the SEC on
October 12, 2007.).
|
|
|
|
|
10.5
|
Exclusive
Option Agreement, dated as of October 3, 2007, by and among Dalian
Innomind, Dejun Zou and Jianping Qiu. (Incorporated herein by reference to
Exhibit 10.6 to the Current Report on Form 8-K filed with the SEC on
October 12, 2007.).
|
|
|
|
|
10.6
|
Pledge
of Equity Agreement, dated as of October 3, 2007, by and among Dalian
Innomind, Dejun Zou and Jianping Qiu. (Incorporated herein by reference to
Exhibit 10.7 to the Current Report on Form 8-K filed with the SEC on
October 12, 2007.).
|
|
|
|
|
10.7
|
Securities
Purchase Agreement, dated as of September 27, 2007 (closed on October 5,
2007) by and among the Company and the named investors (Incorporated
herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed
with the SEC on October 12, 2007.).
|
|
|
|
|
10.8
|
Registration
Rights Agreement, dated as of September 27, 2007(closed on October 5,
2007), by and among the Company and the named investors. (Incorporated
herein by reference to Exhibit 10.10 to the Registration Statement on Form
SB-2 filed with the SEC on November 19, 2007.).
|
|
|
|
|
10.9
|
Agreement
for Developing Environmental Protection and New Energy, dated November 8,
2008, between Dalian Rino and School of Environmental & Biological
Science & Technology in Dalian University of Technology, Environmental
Group. *
|
|
|
|
|
10.10
|
Technology
Transfer Agreement, dated March 8, 2006, between Dalian Rino and Institute
of Process Engineering, Chinese Academy of Sciences. *
|
|
|
|
|
10.11
|
Technology
Transfer Agreement, dated May 18, 2007, between Dalian Rino and Institute
of Process Engineering, Chinese Academy of Sciences. *
|
|
|
|
|
10.12
|
Employment
Agreement, dated August 1, 2007, between Dalian Innomind and Mr. Dejun
Zou.*
|
|
|
|
|
10.13
|
Employment
Agreement, dated August 1, 2007, between Dalian Innomind and Mr. Jianping
Qiu.*
|
|
|
|
|
10.14
|
Form
of the Confidentiality and Non-Competition Agreement between Dalian Rino
and Mr. Dejun Zou/ Ms. Jianping Qiu/ Ms. Li Yu.
*
|
|
10.15
|
Loan
Agreement, dated March 31, 2010, among the Company, Dejun Zou and Jianping
Qiu (Incorporated by reference to the Company’s Quarterly Report on Form
10-Q for the period ended March 31, 2010.).
|
|
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
|
|
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
|
|
|
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.*
|
* Filed
herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned there unto duly
authorized.
|
|
RINO
INTERNATIONAL CORPORATION
|
|
|
|
|
|
|
|
Date:
November 15, 2010
|
By:
|
/s/ Zou
Dejun
|
|
|
|
|
Zou
Dejun
|
|
|
|
|
Chief
Executive Officer
|
|
INDEX TO
EXHIBITS
|
EXHIBIT
NUMBER
|
|
DESCRIPTION
|
|
|
|
|
|
10.1
|
|
Purchase
Agreement, dated as of October 3, 2007, by and between Dalian Rino and
Dalian Innomind (Incorporated herein by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed with the SEC on October 12,
2007.).
|
|
|
|
|
|
10.2
|
|
Entrusted
Management Agreement, dated as of October 3, 2007, by and among Dalian
Innomund, Dalian Rino, Dejun Zou and Jianping Qiu. (Incorporated herein by
reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the
SEC on October 12, 2007.).
|
|
|
|
|
|
10.3
|
|
Patent
Transfer Contract, dated as of October 3, 2007, by and between Dalian Rino
and Dalian Innomind (Incorporated herein by reference to Exhibit 10.4 to
the Current Report on Form 8-K filed with the SEC on October 12,
2007.).
|
|
|
|
|
|
10.4
|
|
Shareholders’
Voting Proxy Agreement, dated as of October 3, 2007, by and among Dalian
Innomind, Dejun Zou and Jianping Qiu. (Incorporated herein by reference to
Exhibit 10.5 to the Current Report on Form 8-K filed with the SEC on
October 12, 2007.).
|
|
|
|
|
|
10.5
|
|
Exclusive
Option Agreement, dated as of October 3, 2007, by and among Dalian
Innomind, Dejun Zou and Jianping Qiu. (Incorporated herein by reference to
Exhibit 10.6 to the Current Report on Form 8-K filed with the SEC on
October 12, 2007.).
|
|
|
|
|
|
10.6
|
|
Pledge
of Equity Agreement, dated as of October 3, 2007, by and among Dalian
Innomind, Dejun Zou and Jianping Qiu. (Incorporated herein by reference to
Exhibit 10.7 to the Current Report on Form 8-K filed with the SEC on
October 12, 2007.).
|
|
|
|
|
|
10.7
|
|
Securities
Purchase Agreement, dated as of September 27, 2007 (closed on October 5,
2007) by and among the Company and the named investors (Incorporated
herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed
with the SEC on October 12, 2007.).
|
|
|
|
|
|
10.8
|
|
Registration
Rights Agreement, dated as of September 27, 2007 (closed on October 5,
2007), by and among the Company and the named investors. (Incorporated
herein by reference to Exhibit 10.10 to the Registration Statement on Form
SB-2 filed with the SEC on November 19, 2007.).
|
|
|
|
|
|
10.9
|
|
Agreement
for Developing Environmental Protection and New Energy, dated November 8,
2008, between Dalian Rino and School of Environmental & Biological
Science & Technology in Dalian University of Technology, Environmental
Group.
|
|
|
|
|
|
10.10
|
|
Technology
Transfer Agreement, dated March 8, 2006, between Dalian Rino and Institute
of Process Engineering, Chinese Academy of Sciences.
|
|
|
|
|
|
10.11
|
|
Technology
Transfer Agreement, dated May 18, 2007, between Dalian Rino and Institute
of Process Engineering, Chinese Academy of Sciences.
|
|
|
|
|
|
10.12
|
|
Employment
Agreement, dated August 1, 2007, between Dalian Innomind and Mr. Dejun
Zou.
|
|
|
|
|
|
10.13
|
|
Employment
Agreement, dated August 1, 2007, between Dalian Innomind and Mr. Jianping
Qiu.
|
|
|
|
|
|
10.14
|
|
Form
of the Confidentiality and Non-Competition Agreement between Dalian Rino
and Mr. Dejun Zou/ Ms. Jianping Qiu/ Ms. Li Yu.
|
|
|
|
|
|
10.15
|
|
Loan
Agreement, dated March 31, 2010, among the Company, Dejun Zou and Jianping
Qiu (Incorporated by reference to the Company’s Quarterly Report on Form
10-Q for the period ended March 31, 2010.).
|
|
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.
|
