UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2015
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OR
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o
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________.
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COMMISSION FILE NUMBER: 000-49729
Adamant DRI Processing and Minerals Group
(Exact Name of Registrant as Specified in its Charter)
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Nevada
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61-1745150
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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Chunshugou Luanzhuang Village, Zhuolu County, Zhangjiakou, Hebei Province, China
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075600
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(Address of principal executive offices)
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(Zip code)
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Issuer's telephone number:
86-313-6732526
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
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State the number of shares outstanding of each of the issuer's classes of common equity, for the period covered by this report and as at the latest practicable date:
At May 1, 2015, we had
63,760,110
shares of common stock outstanding.
ADAMAN
T DRI PROCESSING AND MINERALS GROUP
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
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Item 1. Financial Statements
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Consolidated Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014
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1
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Consolidated Statements of Operations and Other Comprehensive Loss for the Three Months Ended March 31, 2015 and 2014 (Unaudited)
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2
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Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)
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3
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Notes to Consolidated Financial Statements
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4
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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18
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Item 4. Controls and Procedures
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27
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PART II
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OTHER INFORMATION
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Item 1A. Risk Factors
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28
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Item 6. Exhibits
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28
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Signatures
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29
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Special Note Regarding Forward Looking Statements
This report contains forward-looking statements. The forward-looking statements are contained principally in the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference and filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
FINANCIAL INFORMATION
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ADAMANT DRI PROCESSING AND MINERALS GROUP
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CONSOLIDATED BALANCE SHEETS
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MARCH 31, 2015 (UNAUDITED) AND DECEMBER 31, 2014
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March 31, 2015
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December 31, 2014
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ASSETS
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CURRENT ASSETS
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Cash & equivalents
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$ | 338,302 | $ | 269,250 | ||||
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Inventory, net
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2,154,557 | 2,246,243 | ||||||
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Advance to suppliers
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881,728 | 886,543 | ||||||
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Value-added tax receivable
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3,104,829 | 3,132,791 | ||||||
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Other receivables
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1,408,657 | 1,123,695 | ||||||
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Total current assets
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7,888,073 | 7,658,522 | ||||||
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NONCURRENT ASSETS
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Property and equipment, net
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31,567,471 | 32,463,822 | ||||||
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Intangible assets, net
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3,595,060 | 3,635,584 | ||||||
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Construction in progress
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10,229,615 | 10,143,999 | ||||||
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Goodwill
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6,515,055 | 6,539,757 | ||||||
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Advance to suppliers for construction and equipment
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186,609 | 155,735 | ||||||
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Total noncurrent assets
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52,093,810 | 52,938,897 | ||||||
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TOTAL ASSETS
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$ | 59,981,883 | $ | 60,597,419 | ||||
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
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Accounts payable
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$ | 2,725,403 | $ | 2,737,368 | ||||
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Accrued liabilities and other payables
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14,335,834 | 13,981,241 | ||||||
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Income tax payable
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134,594 | 135,103 | ||||||
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Short term loan
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211,651 | 212,453 | ||||||
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Payable to contractors
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895,445 | 898,840 | ||||||
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Advance from related parties
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42,358,338 | 41,847,612 | ||||||
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Total current liabilities
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60,661,265 | 59,812,617 | ||||||
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NONCURRENT LIABILITIES
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Deferred tax liability
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58,858 | 66,493 | ||||||
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Accrued expense
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13,327 | 13,377 | ||||||
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Total noncurrent liabilities
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72,185 | 79,870 | ||||||
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Total liabilities
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60,733,450 | 59,892,487 | ||||||
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STOCKHOLDERS' EQUITY (DEFICIT)
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Convertible preferred stock: $0.001 par value; 1,000,000 shares authorized, no share issued and outstanding
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- | - | ||||||
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Common stock, $0.001 par value; authorized shares 100,000,000; issued and outstanding 63,760,110 shares at March 31, 2015 and December 31, 2014
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63,760 | 63,760 | ||||||
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Additional paid in capital
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6,949,954 | 6,949,954 | ||||||
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Statutory reserves
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557,253 | 557,253 | ||||||
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Accumulated other comprehensive income
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730,053 | 733,361 | ||||||
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Accumulated deficit
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(9,052,587 | ) | (7,599,396 | ) | ||||
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Total stockholders' equity (deficit)
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(751,567 | ) | 704,932 | |||||
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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$ | 59,981,883 | $ | 60,597,419 | ||||
See accompanying notes to the financial statements
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ADAMANT DRI PROCESSING AND MINERALS GROUP
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CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
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THREE MONTHS ENDED MARCH 31, 2015 AND 2014 (UNAUDITED)
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2015
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2014
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Net Sales
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$ | 243,683 | $ | - | ||||
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Cost of Goods Sold
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490,826 | - | ||||||
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Gross Profit
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(247,143 | ) | - | |||||
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Operating expenses
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General and administrative
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935,673 | 935,818 | ||||||
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Loss from operations
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(1,182,816 | ) | (935,818 | ) | ||||
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Non-operating income (expenses)
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Interest income
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292 | 358 | ||||||
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Other expenses
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(1,411 | ) | (1,632 | ) | ||||
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Interest expense
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(276,149 | ) | - | |||||
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Financial expense
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(493 | ) | (213 | ) | ||||
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Total non-operating expenses, net
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(277,761 | ) | (1,487 | ) | ||||
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Loss before income tax
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(1,460,577 | ) | (937,305 | ) | ||||
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Income tax benefit
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(7,388 | ) | (102,127 | ) | ||||
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Net loss
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(1,453,189 | ) | (835,178 | ) | ||||
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Other comprehensive income
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Foreign currency translation gain (loss)
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(3,308 | ) | 70,519 | |||||
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Net comprehensive loss
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(1,456,497 | ) | (764,659 | ) | ||||
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Basic weighted average shares outstanding
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63,760,110 | 55,989,744 | ||||||
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Basic net loss per share
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$ | (0.02 | ) | $ | (0.01 | ) | ||
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Diluted weighted average shares outstanding
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63,760,110 | 57,817,704 | ||||||
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Diluted net loss per share *
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$ | (0.02 | ) | $ | (0.01 | ) | ||
* 1,827,960 weighted average shares issuable upon conversion of convertible debts were excluded in calculating diluted
loss per share for the three months ended March 31, 2015 due to the fact that issuance of the shares is anti-dilutive.
See accompanying notes to the financial statements
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ADAMANT DRI PROCESSING AND MINERALS GROUP
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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THREE MONTHS ENDED MARCH 31, 2015 AND 2014 (UNAUDITED)
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2015
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2014
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$ | (1,453,189 | ) | $ | (835,178 | ) | ||
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Adjustments to reconcile net loss to net cash
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used in operating activities:
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Depreciation and amortization
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803,956 | 630,218 | ||||||
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Changes in deferred taxes
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(7,388 | ) | (102,127 | ) | ||||
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(Increase) decrease in assets and liabilities:
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Inventory
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83,258 | (213,017 | ) | |||||
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Other receivables
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(289,404 | ) | (110,390 | ) | ||||
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Advance to suppliers
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(116,396 | ) | - | |||||
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Accounts payable
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(1,628 | ) | 64,921 | |||||
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Accrued liabilities and other payables
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407,680 | (303,666 | ) | |||||
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Taxes payable
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16,141 | (49,311 | ) | |||||
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Net cash used in operating activities
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(556,970 | ) | (918,550 | ) | ||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Construction in progress
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(124,016 | ) | (1,210,094 | ) | ||||
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Acquisition of China Huaxin, net of cash acquired
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- | (1,504,507 | ) | |||||
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Acquisition of fixed assets
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- | (164,668 | ) | |||||
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Advance to suppliers for construction and equipment
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86,380 | 48,364 | ||||||
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Net cash used in investing activities
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(37,636 | ) | (2,830,905 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Advance from related parties
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664,713 | 2,612,895 | ||||||
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Proceeds from convertible debts
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- | 1,638,002 | ||||||
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Net cash provided by financing activities
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664,713 | 4,250,897 | ||||||
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EFFECT OF EXCHANGE RATE CHANGE ON CASH & EQUIVALENTS
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(1,055 | ) | (2,383 | ) | ||||
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NET INCREASE IN CASH & EQUIVALENTS
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69,052 | 499,059 | ||||||
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CASH & EQUIVALENTS, BEGINNING OF PERIOD
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269,250 | 27,310 | ||||||
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CASH & EQUIVALENTS, END OF PERIOD
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$ | 338,302 | $ | 526,369 | ||||
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Supplemental Cash Flow Data:
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Income tax paid
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$ | - | $ | - | ||||
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Interest paid
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$ | - | $ | - | ||||
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Supplemental Disclosure of Non-Cash Financing Activities:
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Conversion of convertible debts into common stock
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$ | - | $ | 1,638,002 | ||||
See accompanying notes to the financial statements
ADAMANT DRI PROCESSING AND MINERALS GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015 AND 2014 (UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Adamant DRI Processing and Minerals Group (“Adamant’ or “the Company or “Group”), is a Nevada corporation incorporated in July 2014 and successor by merger to UHF Incorporated, a Delaware corporation (“UHF”).
The Company is engaged in the business of producing Direct Reduced Iron (“DRI”) using advanced reduction rotary kiln technology with iron sand as the principal raw material. ‘Reduced Iron’ derives its name from the chemical change that iron ore undergoes when it is heated in a furnace at high temperatures in the presence of hydrocarbon-rich gasses. ‘Direct reduction’ refers to processes which reduce iron oxides to metallic iron below the melting point of iron. The use of DRI for steelmaking in electric arc furnaces allows the production of high quality metal with a low content of harmful impurities which can be used in both high-tech and standard industries. DRI offers an attractive option due to its small scale low capital investment requirements and its adaptability to local raw material situations.
On July 4, 2014, the Company entered into an Agreement and Plan of Merger with UHF, pursuant to which UHF merged with and into Adamant with Adamant as the surviving entity (the “Merger”), as a result of which each outstanding share of common stock of UHF at the effective time of the Merger was converted into one share of the common stock of Adamant, and the outstanding share of series Preferred Stock was converted into 17,839,800 shares of common stock. The Merger was effected on August 29, 2014.
UHF was the successor to UHF Incorporated, a Michigan corporation (“UHF Michigan”), as a result of domicile merger effected on December 29, 2011.
On June 30, 2014, UHF entered into and closed a share exchange agreement, or the Target Share Exchange Agreement, with Target Acquisitions I, Inc., a Delaware corporation (“Target”), and the stockholders of Target (the “Target Stockholders”), pursuant to which UHF acquired 100% of the issued and outstanding capital stock of Target in exchange for 43,375,638 shares of UHF’s common stock and one share of UHF’s series A convertible preferred stock, convertible into an additional 17,839,800 shares of common stock. Since UHF’s certificate of incorporation only authorized the issuance of 50,000,000 shares of common stock, UHF did not have sufficient authorized but unissued shares of common stock to complete the acquisition of Target, and so the Board of Directors authorized the issuance to one of the Target Stockholders of one share of series A convertible preferred stock convertible into 17,839,800 shares of common stock at such time as UHF amended its certificate of incorporation to increase the number of authorized shares of common stock or merged with and into another corporation which had sufficient shares of authorized but unissued shares of common stock for issuance upon conversion. The series A convertible preferred stock votes together with the common stock on an as converted basis on all matters submitted to stockholders, including the election of directors, with the one outstanding share of series A convertible preferred stock entitled to 17,839,800 votes. Following the closing of the share exchange, UHF had outstanding 45,920,310 shares of common stock and one share of series A convertible preferred stock, which was converted into 17,839,800 common shares on August 29, 2014.
For accounting purposes, the transaction has been accounted for as a reverse acquisition of UHF by Target. The shares issued to Target’s shareholders have been accounted for as a recapitalization of Target and have been retroactively restated for the periods presented because after the share exchange, Target’s shareholders owned the majority of the UHF’s outstanding shares and exercised significant influence over the operating and financial policies of the consolidated entity, and UHF was a non-operating shell with nominal net assets prior to the acquisition. Pursuant to Securities and Exchange Commission (“SEC”) rules, this is considered a capital transaction in substance, rather than a business combination. For accounting purposes, the share exchange transaction with Target and the Target Stockholders was treated as a reverse acquisition, with Target as the acquirer and UHF as the acquired party.
As a result of the acquisition of Target and UHF, the Company now owns all of the issued and outstanding capital stock of Real Fortune BVI, which in turn owns all of the issued and outstanding capital stock of Real Fortune Holdings Limited, a Hong Kong limited company (“Real Fortune HK”), which in turn owns all of the issued and outstanding capital stock of Zhangjiakou Tongda Mining Technologies Service Co., Ltd. (“China Tongda”), a Chinese limited company.
The Company operated in China through Zhuolu Jinxin Mining Co., Ltd. (“China Jinxin”), the Company’s variable interest entity which the Company controls through a series of agreements between China Jinxin and China Tongda and, as of January 24, 2014, owned Haixing Huaxin Mining Industry Co., Ltd. (“China Huaxin”) through its wholly-owned subsidiary China Tongda. The Group’s structure as of March 31, 2015 is as follows:
China Jinxin is an early stage mining company which processes iron ore at its production facility in Hebei Province. China Jinxin currently does not own any mines or hold any mining rights. Through contractual arrangements among China Tongda and China Jinxin, and its shareholders, the Company controls China Jinxin’s operations and financial affairs. As a result of these agreements, China Tongda is considered the primary beneficiary of China Jinxin (see Note 2) and accordingly, China Jinxin’s results of operations and financial condition are consolidated in the Group’s financial statements. All issued and outstanding shares of China Jinxin are held by 15 Chinese citizens.
On January 17, 2014, the Company entered into a series of substantially identical agreements with five shareholders of Haixing Huaxin Mining Industry Co., Ltd. (“China Huaxin”) pursuant to which the Company acquired 100% of the outstanding shares of China Huaxin. The consideration paid to the shareholders of China Huaxin for their interests consisted, in the aggregate, of cash of RMB 10 million ($1.64 million) and 5.1 million shares of the Company’s common stock, valued at $0.014 per share.
China Tongda, the Company’s wholly-owned Chinese subsidiary, filed a notice of transfer with respect to the change of ownership of China Huaxin with the local company registration authority which was approved on January 23, 2014.
China Huaxin was established in August 2010 and is located in Haixing Qingxian Industrial Park, Cangzhou, Hebei Province PRC. China Huaxin is engaged in producing and selling DRI. To date, China Huaxin has conducted no business activities other than construction of its DRI production facility. Construction of the DRI Facility has been completed and China Huaxin is currently in trial production, and expects commercial production to commence by the end of May 2015.
The consolidated interim financial information as of March 31, 2015 and for the three month periods ended March 31, 2015 and 2014 was prepared without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) was not included. The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, previously filed with the SEC. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of March 31, 2015, results of operations and cash flows for the three month periods ended March 31, 2015 and 2014, as applicable, were made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements are prepared in conformity with US GAAP. Adamant, UHF, Target, Real Fortune BVI and Real Fortune HK’s functional currency is the US Dollar (‘‘USD’’ or “$”), and China Tongda, China Jinxin and China Huaxin’s functional currency is Chinese Renminbi (‘‘RMB’’). The accompanying financial statements are translated from functional currencies and presented in USD.
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries and its VIE (China Jinxin) for which the Company’s subsidiary China Tongda is the primary beneficiary; and China Tongda’s 100% owned subsidiary China Huaxin. All transactions and balances among the Company, its subsidiaries and VIE are eliminated in consolidation.
The Company follows the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 which requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE or is entitled to a majority of the VIE’s residual returns. In determining China Jinxin is the VIE of China Tongda, the Company considered the following indicators, among others:
China Tongda has the right to control and administer the financial affairs and operations of China Jinxin and to manage and control all assets of China Jinxin. The equity holders of China Jinxin as a group have no right to make any decision about China Jinxin’s activities without the consent of China Tongda. China Tongda will be paid quarterly, management consulting and technical support fees equal to all pre-tax profits, if any, of that quarter. If there are no earnings before taxes and other cash expenses, then no fee shall be paid. If China Jinxin sustains losses, they will be carried to the next period and deducted from the next service fee. China Jinxin has the right to require China Tongda to pay China Jinxin the amount of any loss incurred by China Jinxin.
The shareholders of China Jinxin pledged their equity interests in China Jinxin to China Tongda to guarantee China Jinxin’s performance of its obligations under the Equity Pledge Agreement. If either China Jinxin or its equity owners is in breach of the Equity Pledge or Exclusive Purchase Option Agreements, then China Tongda is entitled to require the equity owners of China Jinxin to transfer their equity interests in China Jinxin to it.
The shareholders of China Jinxin irrevocably granted China Tongda or its designated person an exclusive option to acquire, at any time, all of the assets or outstanding shares of China Jinxin, to the extent permitted by PRC law. The purchase price for the shareholders’ equity interests in China Jinxin shall be the lower of (i) the actual registered capital of China Jinxin or (ii) RMB 500,000 ($78,000), unless an appraisal is required by the laws of China.
Each shareholder of China Jinxin executed an irrevocable power of attorney to appoint China Tongda as its attorney-in-fact to exercise all of its rights as equity owner of China Jinxin, including 1) attend the shareholders’ meetings of China Jinxin and/or sign the relevant resolutions; 2) exercise all the shareholder's rights and shareholder's voting rights that the shareholder is entitled to under the laws of the PRC and the Articles of Association of China Jinxin, including but not limited to the sale or transfer or pledge or disposition of the shares in part or in whole; 3) designate and appoint the legal representative, Chairman of the Board of Directors (“BOD”), Directors, Supervisors, the Chief Executive Officer, Financial Officer and other senior management members of China Jinxin; and 4) execute the relevant share purchases and other terms stipulated in the Exclusive Purchase Option and Share Pledge Agreements.
However, the VIE is monitored by the Company to determine if any events have occurred that could cause its primary beneficiary status to change. These events include:
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a.
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The legal entity's governing documents or contractual arrangements are changed in a manner that changes the characteristics or adequacy of the legal entity's equity investment at risk.
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b.
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The equity investment or some part thereof is returned to the equity investors, and other interests become exposed to expected losses of the legal entity.
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c.
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The legal entity undertakes additional activities or acquires additional assets, beyond those anticipated at the later of the inception of the entity or the latest reconsideration event, that increase the entity's expected losses.
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d.
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The legal entity receives an additional equity investment that is at risk, or the legal entity curtails or modifies its activities in a way that decreases its expected losses.
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There has been no change in the VIE structure during the quarter ended March 31, 2015 and none of the events listed in a-d above have occurred.
Going Concern
The Company incurred a net loss of $1.45 million for the three months ended March 31, 2015. The Company also had a working capital deficit of $52.77 million as of March 31, 2015. In addition, China Jinxin has refused to sell its iron ore concentrate to its sole customer because of the low price offered. These conditions raise a substantial doubt about the Company's ability to continue as a going concern. China Jinxin is upgrading its equipment, which when completed, will enable the Company to resume production. A shareholder of the Company has indicated that she will continue to fund China Jinxin, although there is no written agreement in place and Jinxin currently owes $11.72 million to this shareholder. In addition, China Huaxin currently owes $28.67 million to three of the Company’s shareholders who are also the Company’s management (one is also the fund provider of China Jinxin who lent 20.08 million to China Huaxin) for constructing its DRI facility, and borrowed $0.71 million from a company owned by its major shareholder. China Huaxin is currently in trial production and is expected to commence commercial production by the end of May 2015. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Use of Estimates
In preparing financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates.
Business Combination
For a business combination, the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree are recognized at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, are recognized at the full amounts of their fair values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree that excess in earnings is recognized as a gain attributable to the acquirer.
Deferred tax liability and asset are recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with FASB ASC Subtopic 740-10.
Goodwill
Goodwill is the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with FASB ASC Topic 350, “Intangibles-Goodwill and Other,” goodwill is not amortized but is tested for impairment, annually or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds its fair value, with the fair value of the reporting unit determined using discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the application of DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.
On January 23, 2014, the Company completed the acquisition of China Huaxin. Under the acquisition method of accounting, the total purchase price is allocated to tangible assets and intangible assets acquired and liabilities assumed based on their fair values with the excess recorded to goodwill. The Company recognized $6.54 million goodwill from the acquisition (See Note 19). At December 31, 2014, the Company reappraised the fair value of China Huaxin by using the replacement cost due to the fact China Huaxin will not start the official production until mid of 2015. As of March 31, 2015, the Company evaluated the impairment of goodwill and believes nothing has changed since December 31, 2014. The Company expects to commence commercial production in the second quarter. Accordingly, the Company concluded the goodwill of Huaxin was not impaired.
Cash and Equivalents
For financial statement purposes, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts Receivable, net
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Based on historical collection activity, the Company had no accounts receivable or bad debt allowances at March 31, 2015 and December 31, 2014.
Inventory, net
Inventory mainly consists of iron ore, iron ore concentrate, mineral power and coal slime for DRI. Inventory is valued at the lower of average cost or market, cost being determined on a moving weighted average basis method; including labor and all production overheads.
Property and Equipment, net
Property and equipment are stated at cost, less accumulated depreciation. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is computed using shorter of useful lives of the property or the unit of depletion method. For shorter-lived assets the straight-line method over estimated lives ranging from 3 to 20 years is used as follows:
|
Office Equipment
|
3-5 years
|
|
Machinery
|
10 years
|
|
Vehicles
|
5 years
|
|
Building
|
20 years
|
Impairment of Long-Lived Assets
Long-lived assets, which include property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by comparing of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by it. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value (“FV”). FV is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, as of March 31, 2015 and December 31, 2014, there were no impairments of its long-lived assets.
Income Taxes
The Company utilizes FASB ASC Topic 740, “Income Taxes”, which requires recognition of deferred tax assets and liabilities for expected future tax consequences of events included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax 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.
When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about their merits or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. At March 31, 2015 and December 31, 2014, the Company did not take any uncertain positions that would necessitate recording a tax related liability.
Revenue Recognition
The Company’s revenue recognition policies are in compliance with FASB ASC Topic 605, “Revenue Recognition”. Sales are recognized when a formal arrangement exists, which is generally represented by a contract between the Company and the buyer; the price is fixed or determinable; title has passed to the buyer, which generally is at the time of delivery; no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.
Sales are the invoiced value of iron ore concentrate and DRI products, net of value-added tax (“VAT”). All of the Company’s iron ore concentrate sold in the PRC is subject to a value-added tax of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product. The Company records VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.
Cost of Goods Sold
Cost of goods sold (“COGS”) consists primarily of fuel and power, direct material and labor, depreciation of mining plant and equipment, attributable to the production of iron ore concentrate. Write-down of inventory to lower of cost or market is also recorded in COGS.
Concentration of Credit Risk
The operations of the Company are in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, and by the general state of the PRC economy.
The Company has cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC. Cash in state-owned banks is not covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in these bank accounts.
Statement of Cash Flows
In accordance with FASB ASC Topic 230, “Statement of Cash Flows”, cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet. Cash from operating, investing and financing activities is net of assets and liabilities acquired (See Note 19).
Fair Value of Financial Instruments
Certain of the Company’s financial instruments, including cash and equivalents, accrued liabilities and accounts payable, carrying amounts approximate their fair values due to their short maturities. FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the FV of financial instruments held by the Company. The carrying amounts reported in the balance sheets for current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and the current market rate of interest.
Fair Value Measurements and Disclosures
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” defines FV, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for FV measures. The three levels are defined as follow:
|
●
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
●
|
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 asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
|
●
|
Level 3 inputs to the valuation methodology are unobservable and significant to the FV measurement.
|
As of March 31, 2015 and December 31, 2014, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at FV.
Foreign Currency Translation and Comprehensive Income (Loss)
The functional currency of China Jinxin and China Huaxin is RMB. For financial reporting purposes, RMB is translated into USD as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period.
Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency transactions are included in income. There was no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet date.
The Company uses FASB ASC Topic 220, “Comprehensive Income”. Comprehensive income (loss) is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive loss for the three months ended march 31, 2015 and 2014 consisted of net loss and foreign currency translation adjustments.
Earnings (loss) per Share (EPS)
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar to basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares, warrants and stock options had been issued and if the additional common shares were dilutive. Diluted EPS is based on the assumption that all dilutive convertible shares and stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding options and warrants, and the if-converted method for the outstanding convertible instruments. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, outstanding convertible instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).
The following table presents a reconciliation of basic and diluted loss per share for the three months ended march 31, 2015 and 2014, the diluted loss per share is same as the basic loss per share due to anti-dilutive feature.
|
Three months ended march 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Net loss
|
$
|
(1,453,189)
|
$
|
(835,178
|
)
|
|||
|
Weighted average shares outstanding – basic
|
63,760,110
|
55,989,744
|
||||||
|
Effect of dilutive securities:
|
||||||||
|
Convertible debts
|
-
|
1,827,960
|
||||||
|
Weighted average shares outstanding – diluted *
|
63,760,110
|
57,817,704
|
||||||
|
Loss per share – basic
|
$
|
(0.02)
|
$
|
(0.01)
|
||||
|
Loss per share – diluted
|
$
|
(0.02)
|
$
|
(0.01)
|
||||
* 1,827,960 shares issuable upon conversion of convertible debts were excluded in calculating weighted average diluted loss per share for the three months ended March 31, 2015 as the effect of their issuance is anti-dilutive.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting”, requires use of the “management approach” model for segment reporting. The management approach
model is based on the way a company’s management organizes segments within the Company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
FASB ASC Topic 280 has no effect on the Company’s financial statements as substantially all of its operations are conducted in one industry segment – iron ore mining.
New Accounting Pronouncements
In January 2014, FASB issued, Accounting Standards Update (“ASU”) 2014-05, Service Concession Arrangements (ASC Topic 853). The objective of this Update is to specify that an operating entity should not account for a service concession arrangement within the scope of this Update as a lease in accordance with FASB ASC Topic 840, Leases. Service concession arrangements may become more prevalent in the United States as public-sector entities seek alternative ways to provide public services on a more efficient and cost-effective basis. The amendments apply to an operating entity of a service concession arrangement entered into with a public-sector entity grantor when the arrangement meets certain conditions. The amendments in this Update should be applied on a modified retrospective basis to service concession arrangements that exist at the beginning of an entity’s fiscal year of adoption. The modified retrospective approach requires the cumulative effect of applying this Update to arrangements existing at the beginning of the period of adoption to be recognized as an adjustment to the opening retained earnings balance for the annual period of adoption. The amendments are effective for a public business entity for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this ASU did not affect the Company’s financial statements.
The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in FASB ASC 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
The FASB has issued ASU No. 2014-12, Compensation - Stock Compensation (ASC Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position and results of operations.
3. INVENTORY
Inventory consisted of the following at March 31, 2015 and December 31, 2014:
|
2015
|
2014
(Audited)
|
|||||||
|
Material
|
$
|
2,311,362
|
$
|
2,413,606
|
||||
|
Finished goods
|
680,850
|
673,468
|
||||||
|
Less: inventory impairment
|
(837,655
|
)
|
(840,831)
|
|||||
|
Total
|
$
|
2,154,557
|
$
|
2,246,243
|
||||
4. MINING RIGHTS
The Company is currently negotiating with the Department of Land and Resources of Hebei Province and the local Zhuolu County government to obtain the rights to mine in Zhuolu County where its production facility is located. Pending the final contract, the Company accrued the cost of mining rights based on the quantity of ore extracted (see Note 11). The Company used $0.38 (RMB 2.4 per ton) based on a royalty rate prescribed by the local authority based on the purity of ore in the subject mines. If the rate per ton of ore changes when the contract is finalized, the Company will account for the change prospectively as a change in an accounting estimate. The Company did not extract any ore in the three months ended March 31, 2015 and 2014, and accordingly did not accrue the cost of mining rights for the three months ended March 31, 2015 and 2014.
5. OTHER RECEIVABLES
Other receivables mainly consisted of short-term advances to third party companies or individuals, bore no interest and were payable upon demand.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at March 31, 2015 and December 31, 2014:
|
2015
|
2014
(Audited)
|
|||||||
|
Building
|
$
|
21,146,955
|
$
|
21,227,133
|
||||
|
Production equipment
|
17,376,132
|
17,438,759
|
||||||
|
Transportation equipment
|
1,321,627
|
1,326,638
|
||||||
|
Office equipment
|
159,414
|
160,019
|
||||||
|
Total
|
40,004,128
|
40,152,549
|
||||||
|
Less: Accumulated depreciation
|
(8,436,657
|
)
|
(7,688,727
|
)
|
||||
|
Net
|
$
|
31,567,471
|
$
|
32,463,822
|
||||
Depreciation for the three months ended March 31, 2015 and 2014 was $777,146 and $602,417, respectively.
7. ADVANCE FROM RELATED PARTIES
At March 31, 2015 and December 31, 2014, China Jinxin owed its shareholders $11,723,975 and $ 11,497,548, respectively, for the purchase of equipment
used in construction in progress and for working capital.
The advance from shareholders will not bear interest prior to the commencement of the Company's production pursuant to an amended loan agreement entered on January 16, 2013. Commencing on the production date, interest will begin to accrue at the bank's annual interest rate on certificates of deposit at that time on the amount outstanding from time to time and all amounts inclusive of accrued interest is to be repaid within three years of commencement of production at the Zhuolu Mine. China Jinxin had not commenced production as of March 31, 2015.
In addition, at
March 31, 2015
, China Huaxin owed three shareholders (also the Company’s management)
$28.67 million used to construct its DRI facility. Of the $28.67 million, $7.85 million had an annual interest rate of 10% and a due date of 6 months from the start date of official production. The remaining payable bore no interest, and is payable upon demand. China Huaxin also borrowed $0.71 million from a company owned by its major shareholder, which bore no interest and payable upon demand. At March 31, 2015, China Huaxin also owed one related party who is the brother of the Company’s major shareholder the amount of $81,404, this loan bore annual interest of 10% and is payable upon demand.
At
December 31
, 2014, China Huaxin owed three shareholders (also the Company’s management)
$28.44 million used to construct its DRI facility. Of the $28.44 million, $7.88 million had an annual interest rate of 10% and a due date of 6 months from the start date of official production. The remaining payable bore no interest, and is payable upon demand. China Huaxin also borrowed $0.72 million from a company owned by its major shareholder, which bore no interest and payable upon demand. At December 31, 2014, China Huaxin also owed one related party who is the brother of the Company’s major shareholder the amount of $81,713, this loan bore annual interest of 10% and is payable upon demand.
At March 31, 2015 and December 31, 2014, Real Fortune HK owed one shareholder $1.20 million for advances to meet operating needs. This advance bears no interest and is payable upon demand.
8. INTANGIBLE ASSETS, NET
Intangible assets consisted solely of land use rights. All land in the PRC is government-owned and cannot be sold to any individual or company. However, the government grants the user a “land use right” to use the land. China Jinxin acquired land use rights during 2006 for $0.75 million (RMB 5 million). China Huaxin acquired land use right for $2.96 million (RMB 18.24 million) in November 2012 with fair value of $5.04 million (RMB 31 million) at acquisition date. China Jinxin and China Huaxin have the right to use their land for 20 and 49 years, respectively, and are amortizing such rights on a straight-line basis for 20 and 49 years, respectively.
Intangible assets consisted of the following at March 31, 2015 and December 31,2014:
|
2015
|
2014
(Audited)
|
|||||||
|
Land use rights
|
$
|
3,999,943
|
$
|
4,015,109
|
||||
|
Less: Accumulated amortization
|
(404,883
|
)
|
(379,525
|
)
|
||||
|
Net
|
$
|
3,595,060
|
$
|
3,635,584
|
||||
Amortization of intangible assets for the three months ended March 31, 2015 and 2014 was $26,810 and $27,801, respectively. Annual amortization for the next five years from April 1, 2015, is expected to be: $107,166; $107,166; $107,166; $107,166 and $107,166.
9. CONSTRUCTION IN PROGRESS
Construction in progress is for the purchase and installation of equipment for future iron ore refining for China Jinxin. Jinxin had total construction in progress of $10,229,615 and $10,143,999 at March 31, 2015 and December 31, 2014, respectively.
10. DEFERRED TAX LIABILITY
At March 31, 2015, deferred tax liability of $62,190 represented the differences between the tax bases and book bases of property and equipment and intangible assets arising from the acquisition of China Huaxin. The non-current deferred tax liability is presented net of non-current deferred tax asset of $3,332, which arose from the difference between the tax and book amounts for accrued mine restoration costs.
At December 31, 2014, deferred tax liability of $69,837 represented the differences between the tax bases and book bases of property and equipment and intangible assets arising from the acquisition of China Huaxin. The non-current deferred tax liability is presented net of non-current deferred tax asset of $3,344, which arose from the difference between the tax and book amounts for accrued mine restoration costs.
11. ACCRUED LIABILITIES AND OTHER PAYABLES
CURRENT
Accrued liabilities and other payables consisted of the following at March 31, 2015 and December 31, 2014:
|
2015
|
2014
(Audited)
|
|||||||
|
Accrued payroll
|
$
|
363,841
|
$
|
344,826
|
||||
|
Accrued mining rights (see note 4)
|
72,023
|
72,296
|
||||||
|
Accrued interest
|
3,261,305
|
3,008,685
|
||||||
|
Due to unrelated parties
|
7,830,362
|
7,628,477
|
||||||
|
Payable for social insurance
|
20,868
|
19,550
|
||||||
|
Payable for purchase of equipment and material
|
2,150,104
|
2,169,369
|
||||||
|
Payable for construction
|
613,183
|
735,420
|
||||||
|
Other payables
|
24,148
|
2,618
|
||||||
|
Total
|
$
|
14,335,834
|
$
|
13,981,241
|
||||
As of March 31, 2015, due to unrelated parties of $7,830,362 represented short-term advance from unrelated companies or individuals for the Company’s construction and working capital needs, of which, $2,858,666 bore an annual interest rate of 10% and is due 6 months after the commencement of official production. The remaining amount of short-term advance bore no interest, and is payable upon demand.
As of December 31, 2014, due to unrelated parties of $8,346,073 represented short-term advance from unrelated companies or individuals for the Company’s construction and working capital needs, of which, $2,869,505 bore an annual interest rate of 10% and is due 6 months after the commencement of official production. The remaining amount of short-term advance bore no interest, and is payable upon demand.
NONCURRENT
Under local environmental regulations, the Company is obligated at the end of the mine’s useful life to restore and rehabilitate the land that is used in its mining operations. The Company estimates it would cost $560,000 (RMB 3.5 million) to restore the entire mine after extracting all the economical ore for such efforts.
The Company accrued certain mine restoration expenses based on the actual production volume during the period it extracted ore. As of March 31, 2015 and December 31, 2014, the long term accrued mine restoration cost was $13,327 and $13,377, respectively. There was no production during the three months ended March 31, 2015 and 2014.
12. SHORT TERM LOAN
At March 31, 2015 and December 31, 2014, Jinxin had short term bank loan of $211,651and $212,453, respectively. This loan was entered in June 2013 for one year, and renewed on June 27, 2014 to June 26, 2015, with monthly rate of 0.9%. The loan was guaranteed by a fixed asset of China Jinxin
.
13. PAYABLE TO CONTRACTORS
In 2007 and 2008, the Company entered into contracts with an equipment supplier and a construction company for equipment and construction of a water pipeline for $5.75 million (RMB 38 million). The Company recorded the payable in 2009. In 2010, the Company amended the payment terms and paid $2.2 million (RMB 14.5 million) and agreed to pay the remaining balance as follows: $2.08 million (RMB 13.5 million) on December 31, 2011, and $1.47 million (RMB 10 million) on December 31, 2012. During 2011, the Company paid $2.86 million (RMB 18.0 million). During 2012, the Company did not make any payment on this payable. On March 20, 2013, the Company amended the payment terms and agreed to pay the remaining balance of $902,098 (RMB 5,500,000) on December 31, 2014. Based on the amended agreement, if the Company pays in full by December 31, 2014, no interest will be charged. If the Company defaults, the Company agreed to pay interest starting on January 1, 2015 based on the current bank interest rate for the remaining balance at that time. As of March 31, 2015 and December 31, 2014, the Company has $895,445 and $898,840 of payable to contractors, respectively. Starting from January 1, 2015, the Company agreed to pay interest based on the current bank interest rate of 5.35% per annum for the outstanding balance at December 31, 2014.
The Company recorded the restructuring of this payable in accordance with ASC 470-60-35-5, as it was a modification of its terms, it did not involve a transfer of assets or grant of an equity interest. Accordingly, the Company accounted for the effects of the restructuring prospectively from the time of restructuring, and did not change the carrying amount of the payable at the time of the restructuring as the carrying amount did not exceed the total future cash payments specified by the new terms.
14. CONVERTIBLE NOTES
To consummate the acquisition of China Huaxin, in a private placement completed on January 20, 2014, the Company issued to three Chinese investors 4% convertible promissory notes due June 30, 2014, in the aggregate face amount of RMB 10 million ($1.64 million). The Notes bore interest at the rate of 4% per annum and the face amount of the Notes is convertible into shares of the Company’s common stock at an effective conversion price of RMB 11.11 ($1.79) per share, with accrued interest payable in cash.
On March 20, 2014, all three investors fully converted their convertible promissory notes into 900,000 (equivalent to 2,788,414 shares after the effect of reverse merger with UHF) of the Company’s common shares, and waived the repayment of accrued interest.
15. INCOME TAXES
The Company’s operating subsidiary is governed by the Income Tax Laws of the PRC and various local tax laws. Effective January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises).
The following table reconciles the statutory rates to the Company’s effective tax rate for the three months ended march 31, 2015 and 2014:
|
2015
|
2014
|
|||||||
|
US statutory rates (benefit)
|
(34.0
|
)%
|
(34.0
|
)%
|
||||
|
Tax rate difference
|
9.1
|
%
|
9.0
|
%
|
||||
|
Valuation allowance on NOL
|
24.4
|
%
|
14.1
|
%
|
||||
|
Tax per financial statements
|
(0.5)
|
%
|
(10.9)
|
%
|
||||
The income tax for the three months ended march 31, 2015 and 2014, consisted of the following:
|
2015
|
2014
|
|||||||
|
Income tax (benefit) expense - current
|
$
|
-
|
$
|
-
|
||||
|
Income tax benefit - deferred
|
(7,388
|
)
|
(102,127)
|
|||||
|
Total income tax benefit
|
$
|
(7,388
|
)
|
$
|
(102,127)
|
|||
16. MAJOR CUSTOMER AND VENDORS
There was $243,683 in sales from China Huaxin’s trial production in the three months ended March 31, 2015, and no sales in the three months ended March 31, 2014.
China Jinxin made a 10-year contract with Handan Steel Group Company (“HSG”) a state-owned enterprise, and agreed to sell all of its output from its Zhuolu production facility to HSG. The selling price was to be based on market prices from time to time at a level that would ensure the Company a proper profit margin. HSG agreed to purchase all the Company’s products from its Zhuolu production facility regardless of changes in the market. China Jinxin is economically dependent on HSG. However, due to the high demand of iron ore concentrate in China, the Company believes there are other buyers available if HSG is unable or unwilling to execute the contract.
17. STATUTORY RESERVES
Pursuant to the corporate law of the PRC effective January 1, 2006, the Company is now only required to maintain one statutory reserve by appropriating money from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.
18. OPERATING RISKS
The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company’s sales, purchases and expenses are denominated in RMB and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to effect the remittance.
All mineral resources in China are owned by the state. Thus, the Company’s ability to obtain iron ore is dependent upon its ability to obtain mineral rights from the relevant state authorities, purchase ore from another party that has mining rights from the state or import ore from outside the PRC. It is generally not feasible to transport iron ore any significant distance before processing. The Company has yet to obtain long term rights to any iron mine and there is no assurance the Company will be able to do so. Although the Company has extracted iron ore from the Zhuolu Mine on which the Company’s production facilities are located, the Company does not have the right to do so and can be subjected to various fines and penalties. The Company is not able to determine the amount of fines and penalties at the current stage; however, the Company believes the fine and penalty are negotiable with the authorities. If the Company is not able to obtain mining rights to the Zhuolu Mine in the future, the Company will have to cease mining operations at the Zhuolu Mine and the Company will seek to acquire iron ore from third parties. The failure to obtain iron ore reserves for processing at all or on reasonably acceptable terms would have a material adverse impact on our business and financial results.
19. BUSINESS ACQUISITION AND UNAUDITED PRO FORMA INFORMATION
On January 24, 2014, the Company acquired all the outstanding capital stock representing 100% of the equity interest of China Huaxin for $1.64 million in cash and 5.1 million shares of Target’s common stock valued at $0.014 per share which was paid in full at the closing pursuant to a stock purchase agreement entered into with 5 shareholders of China Huaxin on January 17, 2014. Prior to the acquisition, of the 5 selling shareholders, one major shareholder with 80% ownership of China Huaxin, was also a shareholder of Target with 7.6% ownership of Target, and another shareholder with 10% of China Huaxin was the Chief Executive Officer (“CEO”) of Target.
As a result of the acquisition, China Huaxin became a wholly owned subsidiary of the Company. The purchase of China Huaxin was accounted for as a business combination under FASB ASC Topic 805, “Business Combinations”.
The following table summarizes the fair values of the assets acquired and liabilities assumed as of January 24, 2014. The fair values of the assets acquired and liabilities assumed at closing date were used for the purpose of purchase price allocation. The closing date was January 24, 2014, since there were no material transactions from January 24, 2014 to January 31, 2014, and for convenience of reporting the acquisition for accounting purposes, February 1, 2014 has been designated as the acquisition date. Under purchase method of accounting, the purchase price was allocated to tangible assets and intangible assets acquired and liabilities assumed based on their fair values with the excess recorded as goodwill. Goodwill represents the synergies expected from combining China Huaxin’s business with the Company’s existing operations. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
Cash
|
$
|
133,951
|
||
|
Inventory
|
2,592,170
|
|||
|
Other receivables
|
7,781
|
|||
|
Advance to suppliers
|
523,264
|
|||
|
Advance to related parties
|
391,826
|
|||
|
Tax receivable
|
2,202,788
|
|||
|
Property and equipment, net
|
27,232,303
|
|||
|
Intangible assets, net
|
3,210,162
|
|||
|
Goodwill
|
6,554,754
|
|||
|
Accounts payable
|
(2,648,596
|
)
|
||
|
Other payables and accrued liabilities
|
(21,094,638
|
)
|
||
|
Advance from related parties
|
(17,298,248
|
)
|
||
|
Deferred tax liabilities
|
(98,115
|
)
|
||
|
Purchase price
|
$
|
1,709,402
|
The following unaudited pro forma consolidated results of operations of Target and China Huaxin for the three months ended March 31, 2014, presents the operations of Target and China Huaxin as if the acquisition of China Huaxin occurred on January 1, 2014. The pro forma results are not necessarily indicative of the actual results that would have occurred had the acquisition been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.
|
For the Three Months Ended March 31, 2014
|
||||
|
Net sales
|
$ | - | ||
|
Net loss
|
$ | (1,068,893 | ) | |
|
Basic weighted average shares outstanding
|
58,798,813 | |||
|
Diluted weighted average shares outstanding*
|
60,626,773 | |||
|
Basic net loss per share
|
$ | (0.02 | ) | |
|
Diluted net loss per share
|
$ | (0.02 | ) | |
* 1,827,960 weighted average shares issuable upon conversion of convertible debts were excluded in calculating weighted average diluted loss per share for the three months ended March 31, 2015 as the effect of their issuance is anti-dilutive.
Overview
We seek to profit by participating in various aspects of the Chinese steel making industry including the mining and processing of iron ore and other forms of iron, which can be used to produce iron concentrate, fines, pellets or sinter. To date we have been engaged in iron ore processing and the production of iron ore concentrate in the People’s Republic of China (“PRC”) through our variable interest entity (‘VIE’), China Jinxin. On January 17, 2014, we acquired a direct reduced iron (“DRI”) production facility in Haixing County, Hebei Province. China Jinxin is currently in the process of upgrading its facilities and adding the equipment necessary to produce DRI. To date, our only product has been iron ore concentrate produced at our original facility located at the Zhuolu Mine.
On June 30, 2014, we, then known as UHF Incorporated, a shell company incorporated under the laws of Delaware (“UHF”), completed a reverse acquisition transaction through a share exchange with Target Acquisitions I, Inc. (“Target”) and the its shareholders (the “Target Shareholders”) whereby we acquired 100% of the outstanding shares of common stock of Target in exchange for a total of 43,375,638 shares of our common stock and one share of our series A convertible preferred stock, convertible into an additional 17,839,800 shares common stock at such time as we amended our certificate of incorporation to increase the number of authorized shares of common stock or merge with and into another corporation which has sufficient shares of authorized but unissued shares of common stock for issuance upon conversion. The preferred stock was subsequently converted into shares of common stock upon the merger of UHF with and into its newly-formed wholly-owned Nevada subsidiary, Adamant DRI Processing and Minerals Group, the surviving corporation in the merger. As a result of the reverse acquisition, Target became our wholly-owned subsidiary and the Target Shareholders became our controlling stockholders. For accounting purposes, the share exchange transaction with Target and the Target Stockholders was treated as a reverse acquisition, with Target as the acquirer and UHF as the acquired party.
As a result of our acquisition of Target, we now own all of the issued and outstanding capital stock of Real Fortune BVI, which in turn owns all of the issued and outstanding capital stock of Real Fortune Holdings Limited, a Hong Kong limited company (“Real Fortune HK”), which in turn owns all of the issued and outstanding capital stock of Zhangjiakou Tongda Mining Technologies Service Co., Ltd., a Chinese limited company (“China Tongda”). Real Fortune BVI was established in the BVI in September 2010 to serve as an intermediate holding company. Real Fortune HK was established in HK in April 2010. China Tongda was established in the PRC in August 2010, and in August 2010, the local government of the PRC issued a certificate of approval regarding the foreign ownership of China Tongda by Real Fortune HK. China Jinxin, our operating affiliate, was established in the PRC in December 2006.
We have effective control of the management and operations of Zhuolu Jinxin Mining Co., Ltd., a Chinese limited company (“China Jinxin”), an iron ore processing and high grade iron ore concentrate producer, Zhuolu Jinxin Mining Co., Ltd., a Chinese limited company (“China Jinxin”), with a production line located in Zhuolu County, Zhangjiakou City, Hebei Province, China, through a series of agreements among China Tongda, China Jinxin and its shareholders, referred to as “VIE agreements.” China Jinxin has an annual capacity of approximately 300,000 tons. Under the VIE agreements, China Tongda is entitled to receive the pre-tax profits of China Jinxin.
On January 17, 2014, China Tongda acquired all of the outstanding shares of Haixing Huaxin Mining Industry Co., Ltd. (“China Huaxin”). China Huaxin produces Direct Reduced Iron (DRI) at its DRI production facility (the “DRI Facility”) in Haixing County, Hebei Province, about 50 km from the nearest port, using advanced reduction rotary kiln technology with iron sand as the principal raw material. China Huaxin imports iron sands from New Zealand, Australia, Indonesia and the Philippines. The total amount expended to construct the DRI Facility, inclusive of both hard and soft costs, was approximately 244,270,000 RMB or US $39 million. The DRI Facility will commence its operations in the end of May, 2015. Unlike China Jinxin, which we control through the VIE agreements, China Huaxin is directly owned by China Tongda, our wholly owned subsidiary.
On July 2, 2014, we merged Target, our wholly-owned subsidiary, into our company pursuant to Section 253 of the Delaware General Corporation Law.
On August 29, 2014, we then known as UHF Incorporated, a Delaware corporation, became a Nevada corporation with the corporate name Adamant DRI Processing and Minerals Group as a result of a merger with UHF’s newly formed wholly-owned subsidiary, Adamant DRI Processing and Minerals Group, pursuant to an Agreement and Plan of Merger dated July 4, 2014. The reincorporation was approved by written consent of stockholders of UHF owning in the aggregate 67.58% of its outstanding voting shares as of July 4, 2014. Adamant is deemed to be the successor issuer of UHF under Rule 12g-3 of the Securities Exchange Act of 1934, as amended.
Through China Huaxin we own a direct reduced iron production facility, which was recently constructed at a cost of approximately $34 million. This plant is currently in trial production and we expect commercial production to commence by the end of May 2015. China Huaxin produces DRI using advanced reduction rotary kiln technology with iron sand as the principal raw material. China Huaxin imports iron sands from New Zealand, Australia, Indonesia and the Philippines. The Company’s DRI Facility is projected to produce DRI with an iron grade of over 92%.
Through China Jinxin we currently own an iron ore concentrate production line in Zhuolu County with an annual production capacity of 300,000 tons of iron ore concentrate. We began construction of this facility in 2007 and initiated production in March 2010. Our operations to date have been limited. We have not obtained the necessary permits to mine any iron ore. In December 2011, we stopped mining because we shut down our production facility to upgrade the production lines including the equipment upgrading for producing direct reduced iron. As a result of increased demand for DRI, we decided to produce DRI at its facility using iron ore processed at the facility or by purchasing iron sands to be used as the raw material for production.
To date, we have received only temporary manufacturing licenses granted by the agencies of the local government, which allow us to process ore that we obtained from Zhuolu Mine, the mine on which our facility is located, or other third parties to utilize our facility.
Our ability to profit from our facility in Zhuolu is dependent upon our ability to extract and process iron ore from the Zhuolu Mine and sell the output for a price that enables us to profit. To date, all of our sales from this facility have been made to a single customer. We entered into a ten-year contract with this customer, which expires in January 2019. Pursuant to this agreement, we agreed to sell the customer, Handan Steel Group Company (“HSG”) all of the output from our Zhuolu facility, which it agreed to purchase. The price paid to us by HSG is to be determined by HSG in light of the quality of our product and market prices and is to be such that it results in a proper margin to us. Thus, our ability to profit from our current production facility over the next six years will be determined by the prices we receive from HSG. We cannot guarantee that HSG will not offer a price below what it pays to the Company’s competitors. The lower price will reduce our profit margin. However, if we are not satisfied with the price set by HSG, we can attempt to renegotiate the price. In an effort to obtain a higher price from HSG, we have yet to deliver iron ore concentrate we produced in the fourth quarter of 2011.
The volume of the iron ore concentrate we sell from the Zhuolu facility is determined, in part, by the quality of the crude iron ore we process and the rate at which we process such crude ore. Inasmuch as the price we sell our concentrate to HSG should result in a gross profit, our ability to operate profitably will be determined by the volume of iron ore concentrate we produce and our operating expenses. Our facilities began processing crude iron ore in March 2010 and were idle for approximately six months because of the government shutdown of our electricity and have been idle since December 2011 because of our decision to upgrade our production lines. Thus, to date, our facilities have not operated at maximum capacity for a full year on an uninterrupted basis.
Our current Zhuolu production plant can process up to 800,000 tons of iron ore every year from which we can derive approximately 300,000 tons of iron ore concentrate. However, in December 2011 we halted production to upgrade the production lines to improve their iron ore refinement and iron ore concentration rates as well as the equipment upgrading for procuring direct reduced iron. Because our production lines were shut down and we did not resolve our dispute with HSG and continue to hold the concentrate produced in 2011, we generated no revenues and incurred no production costs during 2012 to date. We are continuing to negotiate with HSG to resolve our dispute over the price to be paid for our output.
Sales for the three months ended March 31, 2015 was $243,683, which was from China Huaxin’s trial production, and there was no production and sales for three months ended March 31, 2014.
All mineral resources in China are owned by the state. Thus, our ability to obtain iron ore depends upon our ability to obtain mineral licenses from the relevant state authorities, purchase ore from another party that has mining rights or import ore from outside of China. It is generally not feasible to transport iron ore any significant distance before processing. We believe, as evidenced by our shareholders willingness to finance the construction of our facilities, there is sufficient iron ore in the vicinity of our facilities to enable us to operate them at a profit. Nevertheless, we have yet to obtain long term rights to any iron mine and there is no assurance we will be able to do so. Although we extracted iron ore from the Zhuolu Mine where our production facilities are located, we do not have the right to do so and can be subjected to various fines and penalties. However, since we paid geological survey fees on behalf of the local government so it could process applications related to the right to mine the Zhuolu Mine and has not received any challenges from any authorities regarding our mining activities, we believe that even if fines and penalties are assessed against us in the future, the amount should be negotiable with the authorities. If we are unable to obtain mining rights to the Zhuolu Mine, we will have to acquire iron ore from third parties. The failure to obtain iron ore reserves for processing at all or on reasonably acceptable terms would have a material adverse impact on our business and financial results.
To date we have been dependent upon cash advances from one of the shareholder of the Company. If we were not to obtain sufficient iron ore for processing, it is likely our operations would cease unless this shareholder continues to provide sufficient funds to maintain our plant and equipment until such time as our operations could be resumed.
We may seek to grow our operations by acquiring mining rights and other production facilities. The cash necessary to acquire such rights may exceed that which we have on hand. In such event, we may seek to raise the necessary cash through bank loans or the issuance of equity to the vendors of such rights, our shareholders or third parties. There can be no assurance such cash will be available to us on reasonable terms, if at all. The prices and terms at which we issue equity securities and the performance of any rights or facilities we acquire, will determine whether we operate profitably.
The profitability of the mining industry in China and of our Company in particular, is dependent upon the demand for iron ore and other metals within China. This demand in turn, is influenced by general economic factors, such as the rate of growth of the economy and of the construction industry. There can be no assurance that China will maintain the rapid rates of growth it has experienced in the recent past. If the rate of growth of the Chinese economy were to slow down, demand for iron and steel could fall, adversely impacting our operations.
Results of Operations
Comparison of the three months ended March 31, 2015 and 2014
|
Dollar
|
Percentage
|
|||||||||||||||||||||||
|
2015
|
% of Sales
|
2014
|
% of Sales
|
Increase
(Decrease)
|
Increase
(Decrease)
|
|||||||||||||||||||
|
Sales
|
243,683 | 100 | % | - | - | % | 243,683 | - | % | |||||||||||||||
|
Cost of goods sold
|
490,826 | 201 | % | - | - | % | 490,826 | - | % | |||||||||||||||
|
Gross Profit
|
(247,143 | ) | 101 | % | - | - | % | 247,143 | - | % | ||||||||||||||
|
Operating expenses
|
$ | 935,673 | 384 | % | $ | 935,818 | - | % | $ | (145 | ) | (0.02 | )% | |||||||||||
|
Loss from operations
|
(1,182,816 | ) | (485 | ) % | (935,818 | ) | - | % | 246,998 | 26 | % | |||||||||||||
|
Other expense, net
|
(277,761 | ) | (114 | ) % | (1,487 | ) | - | % | 276,274 | 18,579 | % | |||||||||||||
|
Loss before income taxes
|
(1,460,577 | ) | (599 | ) % | (937,305 | ) | - | % | 523,272 | 56 | % | |||||||||||||
|
Income tax benefit
|
(7,388 | ) | (3 | ) % | (102,127 | ) | - | % | (94,739 | ) | (93 | ) % | ||||||||||||
|
Net loss
|
$ | (1,453,189 | ) | (596 | ) % | $ | (835,178 | - | % | $ | 618,011 | 74 | % | |||||||||||
Sales
Our revenues are derived from the sale of DRI and iron ore concentrate. We commenced production of iron ore and coal mining in March 2010. However, we ceased production from September 2010 to March 2011 because the local government implemented an “Energy Saving and Emission Reduction Plan” to reduce local power consumption. We installed power equipment to enable it to maintain a stable power supply to our production equipment and management believes the Energy Saving and Emission Reduction Plan is one-time event and disruptions to our access to energy will not have a material impact on our production in the future. We also ceased production since December 2011 to upgrade our production facilities and this upgrade is continuing. Further, due to a pricing dispute with HSG, our customer, we have not delivered concentrate produced in 2011 to date. We acquired a new subsidiary China Huaxin in January 2014, through China Huaxin we own a direct reduced iron production facility, which was recently constructed, and is currently in the trial production, and we expect to commence commercial production by the end of May 2015. Sales for the three months ended March 31, 2015 were $243,683, which was all from China Huaxin’s trial production. We did not have any sales or production in the three months ended March 31, 2014. The upgrade to our China Jinxin facilities and testing of the upgrade is still in process. We are continuing to negotiate with HSG to resolve our dispute over the price to be paid for our output.
Cost of Goods Sold
Cost of goods ("COGS”) sold consists primarily of fuel, power, direct material, direct labor, depreciation of production plant items and equipment, and accrual of the mining rights, which are attributable to the production of iron ore, iron ore concentrate and DRI.
COGS were $490,826 for the three months ended March 31, 2015, which was for China Huaxin’s trial production. COGS for the three months ended March 31, 2014 were $0 due to absence of sales and production.
Gross Loss
For three months ended March 31, 2015, due to small sales volume, low unit selling price resulting from the selling of semi-finished products, but high COGS during the trial production period, we incurred a gross loss of $247,143. We did not have any sales and production for the three months ended March 31, 2014.
Operating Expenses
Operating expenses consists mainly of employee salaries and welfare, business meeting and promotion expense, depreciation and amortization of items not associated with production, utilities expenses, and audit and legal expenses.
Operating expenses were $
935,673
for the three months ended
March
31, 2015, compared to $
935,818
for the 2014 period, a slight decrease of $
145
or 0.02%.
Other Expenses
Other expenses were $
277,761
for the three months ended
March
31, 2015, compared to $1,487 for the 2014 period. The increase in other expense was mainly due to interest expense of $276,149 of China Huaxin.
Net Loss
As a result of the low sales volume and selling price, high COGS of China Huaxin and lack of sales and production of China Jinxin, the Company had a net loss of $1,453,189 for the three months ended March 31, 2015, compared to net loss of $835,178 for the three months ended March 31, 2014.
Liquidity and Capital Resources
The Company’s ability to generate cash from operations is dependent upon its ability to obtain iron ore and iron sands to process and to maintain the permits necessary to process such ore at its current facilities, neither of which is assured. If the Company cannot obtain iron ore and iron sands to process or is no longer able to process ore and sands, it would be dependent upon cash infusions from its current shareholders or third parties in the form of loans or equity contributions, or a combination thereof, to maintain its facilities until it can resume operations. One shareholder has indicated she will continue to fund China Jinxin, though there is no written agreement in place and China Jinxin currently owes $11.72 million to the shareholder. In addition, China Huaxin borrowed $28.67 million from three of the Company’s shareholders (one is the same fund provider of China Jinxin who lent $20.08 million to China Huaxin, the other one is the Company’s CEO for $2.30 million, and the third one is the Company’s shareholder and senior officer for $6.28 million). Despite such commitments, there is no assurance adequate cash will be available from current shareholders or from third parties and, if it is available, what the terms of any loan or investment might be. If we are unable to obtain the funding required, we may have to curtail or cease our operations. The Company has no specific plans, understandings or agreements with respect to the raising of such funds, and it may seek to raise the required capital by the issuance of equity or debt securities or by other means. Since we have no such arrangements or plans currently in effect, its inability to raise funds may have a severe negative impact on its ability to become a viable company.
Other than current construction in progress, which will be funded by one of the Company’s shareholder, we do not anticipate significant cash expenditures in the immediate future on our current production facilities. Nevertheless, we may require working capital once we resume production at our facilities. The shareholders of the Company verbally agreed to continue to provide cash to satisfy the Company’s working capital needs. However, in the future, the Company intends to continue the expansion of operations by acquiring new production facilities and mines. The acquisitions will be paid for with cash or our equity securities, or combinations of both. Failure to obtain such financing could have a material adverse effect on our business expansion. The sale by the Company of its equity securities would dilute the interest of its current shareholders. Further, there is no guarantee of the terms on which such an issuance would occur, if at all, would be favorable to the Company’s current shareholders.
As of March 31, 2015, cash and equivalents were $338,302, compared to $269,250 as of December 31, 2014. The following is a summary of cash provided by or used in each of the indicated types of activities during the three months ended March 31, 2015 and 2014, respectively.
|
2015
|
2014
|
|||||||
|
Net cash used in operating activities
|
$
|
(556,970
|
)
|
$
|
(918,550
|
)
|
||
|
Net cash used in investing activities
|
(37,636
|
)
|
(2,830,905
|
)
|
||||
|
Net cash provided by financing activities
|
$
|
664,713
|
$
|
4,250,897
|
||||
Net cash used in operating activities
Cash has historically been used in operations. Net cash used in operating activities was $0.56 million for the three months ended March 31, 2015, compared to net cash used in operating activities of $0.92 million in the same period of 2014. The decrease of cash outflow from operating activities for the three months ended March 31, 2015 was principally attributable to less payment made for accrued liabilities and other payables and less cash outflow from inventory resulting from decreased inventory in stock.
Net cash used in investing activities
Net cash used in investing activities was $37,636 for the three months ended March 31, 2015, compared to cash used in investing activities of $2.83 million for the same period of 2014. The decreased cash outflow during the three months ended March 31, 2015 was mainly due to the payment of $1.21 million for construction in progress, $0.16 million for purchase of equipment, and $1.50 million for acquisition of China Huaxin during the three months ended March 31, 2014; while we paid $0.12 million for construction in progress, but partially offset with $86,380 cash inflow from advance for constructions and equipment in the three months ended March 31, 2015.
Net cash provided by financing activities
Net cash provided by financing activities was $0.66 million for the three months ended March 31, 2015, compared to $
4.25 million
net cash provided by financing activities in the same period of 2014. The net cash provided by financing activities in the three months ended March 31, 2015 was from advances from related parties of $0.66 million for the Company’s working capital and construction needs.
The Company had $2.61 million cash inflow from advance from related parties, and
proceeds from convertible debts of $1.64 million
in the three months ended March 31, 2014.
At
March 31, 2015
, we had a working capital deficit of $52.77 million, an increase of $0.62 million from the deficit at December 31, 2014 of $52.15 million,
which was mainly from increase of advance from related party.
As of March 31, 2015, China Jinxin borrowed $11.72 million from one of its shareholders for working capital and production facility construction needs.
The loan of $11.72 million will not bear interest prior to the commencement of the Company's production pursuant to an amended loan agreement entered on January 16, 2013. Commencing on the production date, interest will begin to accrue at the bank's annual interest rate on certificate of deposit at that time on the amount outstanding from time to time and all amounts inclusive of accrued interest is to be repaid within three years of our commencement of production at the Zhuolu Mine. China Huaxin borrowed $28.67 million from three shareholders;
of the $28.67 million, $7.85 million had an annual interest rate of 10% with due date on the anniversary of the 6th month from the date of official production. The remaining payable bore no interest, and was payable upon demand. In addition, China Huaxin borrowed $0.71 million from a company owned by its major shareholder, bore no interest and payable upon demand.
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We present below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.
The following table summarizes our contractual obligations as of March 31, 2015, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
|
Payments Due by Period
|
||||||||||||||||||||
|
Total
|
Less than 1
Year
|
1-3 Years
|
3-5 Years
|
5 Years +
|
||||||||||||||||
|
Contractual Obligations:
|
||||||||||||||||||||
|
Payable to contractor
|
$
|
895,445
|
$
|
895,445
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
|
Loan payable to related party with 10% annual interest rate
|
7,847,351
|
7,847,351
|
-
|
-
|
-
|
|||||||||||||||
|
Loan payable to unrelated party with 10% annual interest rate
|
2,858,666
|
2,858,666
|
-
|
-
|
-
|
|||||||||||||||
|
Total
|
$
|
11,601,462
|
$
|
11,601,462
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which were prepared in accordance with US GAAP. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.
Emerging Growth Company
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may, under Section 7(a)(2)(B) of the Securities Act, delay adoption of new or revised accounting standards applicable to public companies until such standards would otherwise apply to private companies. We may take advantage of this extended transition period until the first to occur of the date that we (i) are no longer an "emerging growth company" or (ii) affirmatively and irrevocably opt out of this extended transition period. We elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date we are no longer an "emerging growth company" or affirmatively and irrevocably opt out of the exemption provided by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard. The Jobs Act also provides exemption from auditor reporting on the Company’s Internal Control Over Financial reporting as required by section 404(b) of the Sarbanes Oxley Act of 2002.
Basis of Presentations
Our financial statements are prepared in accordance with US GAAP and the requirements of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”).
Going Concern
We incurred a net loss of $1.45 million for the three months ended March 31, 2015. We also had a working capital deficit of $52.77 million as of March 31, 2015. In addition we have refused to sell our iron ore concentrate to our sole customer because of the low price offered for our product. The price of iron ore concentrate is still in decline. These conditions raise a substantial doubt as to whether we can continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We are in the process of upgrading China Jinxin’s equipment. Once the upgrading project is completed, China Jinxin will be able to resume production. One shareholder has indicated she will continue to fund China Jinxin, though there is no written agreement in place and the Company currently owes $11.72 million to the shareholder. In addition, China Huaxin borrowed $28.67 million from three shareholders, and borrowed $0.71 million from a company owned by its major shareholder. Despite such commitments, there is no assurance that adequate cash will be available from current shareholders or from third parties and, if it is available, what the terms of any loan or investment might be. If we are unable to obtain the funding required, we may have to curtail or cease our operations. The Company has no specific plans, understandings or agreements with respect to the raising of such funds, and it may seek to raise the required capital by the issuance of equity or debt securities or by other means. Since it has no such arrangements or plans currently in effect, its inability to raise funds may have a severe negative impact on its ability to become a viable company.
Use of Estimates
In preparing financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates.
Revenue Recognition
The Company’s revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Sales are recognized when a formal arrangement exists, which is generally represented by a contract between the Company and the buyer; the price is fixed or determinable; title has passed to the buyer, which generally is at the time of delivery; no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.
Sales represent the invoiced value of iron ore and iron ore concentrate, net of value-added tax (“VAT”). All of the Company’s iron ore concentrate sold in the PRC is subject to a VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product. The Company records VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.
The Company uses FASB ASC Topic 220, “Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.
Foreign Currency Translation and Comprehensive Income (Loss)
The functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated into United States Dollars (“USD” or “$”) as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period.
Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet date.
The fluctuation of exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China (“PBOC”) or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the PBOC.
The Company uses FASB ASC Topic 220, “Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.
Segment Reporting
Disclosures about segments of an enterprise and related information require use of the “management approach” model for segment reporting, codified in FASB ASC Topic 280. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
FASB ASC Topic 280 has no effect on the Company’s financial statements as substantially all of its operations are conducted in one industry segment – iron ore refining.
Recent Accounting Pronouncements
In January 2014, FASB issued, Accounting Standards Update (“ASU”) 2014-05, Service Concession Arrangements (ASC Topic 853). The objective of this Update is to specify that an operating entity should not account for a service concession arrangement within the scope of this Update as a lease in accordance with FASB ASC Topic 840, Leases. Service concession arrangements may become more prevalent in the United States as public-sector entities seek alternative ways to provide public services on a more efficient and cost-effective basis. The amendments apply to an operating entity of a service concession arrangement entered into with a public-sector entity grantor when the arrangement meets certain conditions. The amendments in this Update should be applied on a modified retrospective basis to service concession arrangements that exist at the beginning of an entity’s fiscal year of adoption. The modified retrospective approach requires the cumulative effect of applying this Update to arrangements existing at the beginning of the period of adoption to be recognized as an adjustment to the opening retained earnings balance for the annual period of adoption. The amendments are effective for a public business entity for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this ASU did not affect the Company’s financial statements.
The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in FASB ASC 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
The FASB has issued ASU No. 2014-12, Compensation - Stock Compensation (ASC Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position and results of operations.
(a) Evaluation of Disclosure Controls and Procedures.
Management of Adamant DRI Processing and Minerals Group is responsible for maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In addition, the disclosure controls and procedures must ensure that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.
At March 31, 2015, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based on their evaluation of our disclosure controls and procedures, they concluded that at March 31, 2015, such disclosure controls and procedures were not effective. This was due to our limited resources, including the absence of a financial staff with accounting and financial expertise and deficiencies in the design or operation of our internal control over financial reporting that adversely affected our disclosure controls and that may be considered to be “material weaknesses.”
On June 30, 2014, we, then a public shell company, acquired Target Acquisition I, Inc., in a transaction treated as a reverse acquisition. At such time we adopted the system of disclosure controls and procedures of Target Acquisition I, Inc. as ours. Such disclosure controls and procedures were not adequate for a public reporting company and our management began the process of upgrading our disclosure controls and procedures.
We plan to designate individuals responsible for identifying reportable developments and to implement procedures designed to remediate the material weakness by focusing additional attention and resources in our internal accounting functions. However, the material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
(b) Changes in Internal Control over Financial Reporting.
As discussed above and in our Annual Report on Form 10-K for the year ended December 31, 2014filed on April 14, 2015 (the “2014 Form 10-K”), since the acquisition of Target Acquisitions I, Inc.,
we have taken steps to ensure that our financial statements, currently prepared under the supervision of our Chief Financial Officer in PRC GAAP, are in accordance with US GAAP, specifically our hiring of a US accounting firm to work with our PRC accounting personnel and management to convert our books and records to US GAAP and prepare our financial statements. There have been no further changes in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2015 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting. Given the limitations of our accounting personnel, we need to take additional steps to insure that our financial statements are in accordance with US GAAP.
OTHER INFORMATION
The purchase of our common stock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described under the heading “Risk Factors” in Item 1A. of our 2014 Form 10-K and “Management's Discussion and Analysis of Financial Condition and Results of Operations” set forth in Item 2 of Part I of this report and our consolidated financial statements and related notes included in Item 1 of Part I of this report. Readers should carefully review those risks, as well as additional risks described in other documents we file from time to time with the Securities and Exchange Commission.
Except as otherwise disclosed in “Management's Discussion and Analysis of Financial Condition and Results of Operations” set forth in Item 2 of Part I of this report and our consolidated financial statements and related notes included in Item 1 of Part I of this report, there have been no material changes in the risk factors previously disclosed in the 2014 Form 10-K.
The following exhibits are filed with this amendment to this report:
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31.1
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
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31.2
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
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32.1
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Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema
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101.CAL
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XBRL Taxonomy Extension Calculation
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101.DEF
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XBRL Taxonomy Extension Definition
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101.LAB
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XBRL Taxonomy Extension Label
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101.PRE
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XBRL Taxonomy Extension Presentation
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ADAMANT DRI PROCESSING AND MINERALS GROUP
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Dated: May 15, 2015
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By:
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/s/ Changkui Zhu
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Changkui Zhu
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Chief Executive Officer
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