China Gengsheng Minerals (CHGS) 10-Q 2013 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:September 30, 2013

OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission File Number:001-34649

CHINA GENGSHENG MINERALS, INC.
(Exact Name of Registrant as Specified in Its Charter)

NEVADA	91-0541437
(State or Other jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
CHINA GENGSHENG MINERALS, INC.
No. 88 Gengsheng Road, Dayugou Town, Gongyi, Henan Province P.R. China	451271
(Address of Principal Executive Offices)	(Zip Code)

(86) 371-64059863
(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 [X]     No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]     No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer [   ]	Accelerated Filer                      [   ]
Non-Accelerated Filer   [   ]	Smaller Reporting Company   [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]     No [X]

As of November 19, 2013, there were 26,803,044 shares of Common Stock of the Company, $0.001 par value,outstanding.

Table of Contents

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.	1
Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012	1
Consolidated Statements of Operations and Comprehensive Loss for the Three Months and Nine MonthsEnded September 30, 2013 and 2012 (Unaudited)	3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited)	4
Notes to the Consolidated Financial Statements (Unaudited)	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.	21
Item 3. Quantitative and Qualitative Disclosure About Market Risk.	38
Item 4. Controls and Procedures.	38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.	38
Item 1A. Risk Factors.	38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	38
Item 3. Defaults Upon Senior Securities.	38
Item 4. Mine Safety Disclosures.	38
Item 5. Other Information.	38
Item 6. Exhibits.	38
SIGNATURES

China GengSheng Minerals, Inc.
Consolidated Balance Sheets

		September 30,
		2013		December 31,
		(Unaudited)		2012
ASSETS
Current assets:
Cash and cash equivalents	$	2,124,877	$	5,408,309
Restricted cash		36,553,484		20,113,452
Trade receivables, net		48,304,537		55,811,468
Bills receivable		4,153,097		9,913,668
Other receivables and prepayments, including related parties, net		16,059,702		16,466,252
Advances to senior management		32,560		9,005
Inventories, net		14,092,132		12,971,168
Deferred tax assets, net of valuation allowance		216,256		210,544
Total current assets		121,536,645		120,903,866
Investment in a non-consolidated entity		993,174		1,040,492
Property, plant and equipment, net		36,124,888		36,425,004
Land use rights, net		4,012,193		4,035,948
TOTAL ASSETS	$	162,666,900	$	162,405,310
LIABILITIES AND EQUITY
Current liabilities:
Trade payables	$	26,187,317	$	23,808,926
Bills payable		13,426,930		13,995,550
Other payables and accrued expenses, including related parties		7,213,423		7,561,146
Deferred revenue - Government grants		1,212,616		649,612
Provision of warranty		76,981		100,570
Income taxes payable		169,396		166,719
Non-interest-bearing loans, including related parties		9,440,944		6,760,465
Collateralized short-term bank loans		66,888,008		65,196,883
Loans from a third party		5,698,000		3,170,000
Deferred tax liabilities		525,910		513,524
TOTAL LIABILITIES		130,839,525		121,923,395
COMMITMENTS AND CONTINGENCIES

1

China GengSheng Minerals, Inc.
Consolidated Balance Sheets (Cont’d)

		September 30,
		2013			December 31,
		(Unaudited)			2012
EQUITY
CHGS STOCKHOLDERS' EQUITY
Preferred stock par value - $0.001 per share; authorized 50,000,000 shares, none            issued and outstanding		-			-
Common stock par value - $0.001 per share; authorized 100,000,000 shares, 26,803,044            shares issued and outstanding		26,803			26,803
Additional paid-in capital		28,197,310			28,197,310
Statutory and other reserves		8,110,972			8,110,972
Accumulated other comprehensive income		8,749,981			7,994,358
Accumulated deficit		(13,385,356	)		(3,997,894	)
Total China GengSheng Minerals, Inc. stockholders' equity		31,699,710			40,331,549
NONCONTROLLING INTEREST		127,665			150,366
TOTAL EQUITY		31,827,375			40,481,915
TOTAL LIABILITIES AND EQUITY	$	162,666,900		$	162,405,310

See accompanying notes to the consolidated financial statements.

2

China GengSheng Minerals, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)

		Three months ended						Nine months ended
		September 30,						September 30,
		2013			2012			2013			2012
Sales	$	14,599,946		$	23,626,721		$	41,009,314		$	56,957,599
Cost of goods sold		(11,721,181	)		(18,503,171	)		(33,513,372	)		(46,063,149	)
Gross profit		2,878,765			5,123,550			7,495,942			10,894,450
Operating expenses
General and administrative expenses		1,788,216			1,692,502			5,253,506			5,358,592
Research and development expenses		402,179			307,632			1,049,550			706,911
Selling expenses		2,091,967			3,598,525			5,801,084			8,869,668
Total operating expenses		4,282,362			5,598,659			12,104,140			14,935,171
Loss from operations		(1,403,597	)		(475,109	)		(4,608,198	)		(4,040,721	)
Other (expenses) income
Government grant income		57,276			163,597			131,382			548,911
Guarantee income		80,670			141,765			273,115			443,051
Guarantee expenses		(1,045	)		(136,940	)		(154,090	)		(373,748	)
CHGS’s share of net loss of a non-consolidated entity		(25,078	)		(24,293	)		(75,267	)		(32,860	)
Interest income		345,426			185,982			868,286			424,931
Other income (expenses)		(27,046	)		1,153			(81,801	)		44,997
Finance costs		(2,065,795	)		(1,989,431	)		(5,258,766	)		(5,689,561	)
Total other expenses		(1,635,592	)		(1,658,167	)		(4,297,141	)		(4,634,279	)
Loss before income taxes and noncontrolling interest		(3,039,189	)		(2,133,276	)		(8,905,339	)		(8,675,000	)
Income taxes		(37,499	)		(59,170	)		(516,633	)		(273,536	)
Net loss before noncontrolling interest		(3,076,688	)		(2,192,446	)		(9,421,972	)		(8,948,536	)
Net (income) loss attributable to noncontrolling interest		3,587			(8,047	)		34,510			41,441
Net loss attributable to Company’s common stockholders	$	(3,073,101	)	$	(2,200,493	)	$	(9,387,462	)	$	(8,907,095	)
Net loss before noncontrolling interest	$	(3,076,688	)	$	(2,192,446	)	$	(9,421,972	)	$	(8,948,536	)
Other comprehensive income
Foreign currency translation adjustments		223,244			(86,017	)		755,623			174,425
Comprehensive loss		(2,853,444	)		(2,278,463	)		(8,666,349	)		(8,774,111	)
Comprehensive loss attributable to noncontrolling Interest		(7,174	)		(7,964	)		(57,211	)		(15,914	)
Comprehensive loss attributable to Company’s    common Stockholders	$	(2,860,618	)	$	(2,286,427	)	$	(8,723,560	)	$	(8,790,025	)
Net loss per share - Basic and diluted    attributable to Company’s common stockholders	$	(0.11	)	$	(0.08	)	$	(0.33	)	$	(0.33	)
Weighted average common shares outstanding -    Basic and diluted		26,803,044			26,803,044			26,803,044			26,803,044

See accompanying notes to the consolidated financial statements.
3

China GengSheng Minerals, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended September 30,
		2013			2012
Cash flows from operating activities
Net loss before noncontrolling interest	$	(9,421,972	)	$	(8,948,536	)
Adjustments to reconcile net loss before noncontrolling interest to net cash provided by operating activities:
Depreciation		2,373,327			2,235,742
Amortization of land use rights		82,789			55,020
CHGS’s share of net loss of a non-consolidated entity		75,267			32,860
Deferred taxes		(620	)		12,133
(Gain) loss on disposal of property, plant and equipment		(25,197	)		115,523
Guarantee expenses		154,090			373,748
Guarantee income		(273,115	)		(443,051	)
Allowance for doubtful accounts		738,667			767,839
Exchange gain		(235,176	)		(57,580	)
Changes in operating assets and liabilities:
Restricted cash		(4,708,666	)		11,197,678
Trade receivables		7,787,429			(11,233,245	)
Bills receivable		6,643,539			(276,043	)
Other receivables and prepayments		2,256,417			(2,875,714	)
Advances to senior management		(23,225	)		361,764
Inventories		(765,836	)		2,064,488
Trade payables		1,841,020			6,981,173
Provision of warranty		(26,220	)		(112,409	)
Bills payable		(1,581,054	)		515,417
Other payables and accrued expenses		305,961			(132,397	)
Income taxes payable		(1,839	)		(147,482	)
Net cash provided by operating activities		5,195,586			486,928
Cash flows from investing activities
Payments for acquisition of an investment		-			(790,500	)
Payments for acquisition of property, plant and equipment		(1,228,963	)		(1,776,235	)
Net cash used in investing activities		(1,228,963	)		(2,566,735	)
Cash flows from financing activities
Government grant received		543,370			357,306
Restricted cash		(11,127,123	)		(31,866,636	)
Proceeds from bank loans		99,004,642			52,199,687
Repayment of bank loans		(99,081,979	)		(22,654,149	)
Proceeds from non-interest-bearing loans		11,743,811			1,153,235
Repayment of non-interest-bearing loans		(10,861,722	)		(1,247,110	)
Proceeds from third party loans		5,677,000			3,162,000
Repayment of third party loans		(3,244,000	)		-
Net cash provided by (used in) financing activities		(7,346,001	)		1,104,333

4

China GengSheng Minerals, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended September 30,
		2013			2012
Effect of foreign currency translation on cash and cash equivalents		95,946			10,350
Net change in cash and cash equivalents		(3,283,432	)		(965,124	)
Cash and cash equivalents - beginning of period		5,408,309			3,594,361
Cash and cash equivalents - end of period	$	2,124,877		$	2,629,237
Supplemental disclosure of cash flow information:
Interest paid	$	4,913,863		$	4,203,589
Income taxes paid	$	519,416		$	345,896
Non-cash investing and financing activities:
Proceeds from disposal of property, plant and equipment settled by offsetting trade payables	$	121,286		$	88,538
Acquisition of Yili YiQiang Silicon Limited by offsetting deposit for acquisition of a non-consolidated entity	$	-		$	1,096,898

See accompanying notes to the consolidated financial statements.

5

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

1.	Basis of presentation
	Basis of presentation
	The unaudited consolidated financial statements and related notes of the Company and its subsidiaries have been prepared in accordance accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim period have been made. Interim results presented are not necessarily indicative of the results that might be expected for the full fiscal year. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2012, included in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on April 15, 2013.
	Certain reclassifications have been made to prior period financial statements to conform with current period’s presentation.
2.	Corporate information
	The Company was originally incorporated on November 13, 1947, in accordance with the laws of the State of Washington as Silver Mountain Mining Company. On August 20, 1979, the Articles of Incorporation were amended to change the corporate name of the Company to Leadpoint Consolidated Mines Company. On August 15, 2006, the Company changed its state of incorporation from Washington to Nevada by means of a merger with and into a Nevada corporation formed on May 23, 2006, solely for the purpose of effectuating the reincorporation and changed its name to Point Acquisition Corporation. On June 11, 2007, the Company changed its name to China Minerals Technologies, Inc. and on July 26, 2007, the Company changed its name to China GengSheng Minerals, Inc. On March 4, 2010, the Company’s common stock began trading on the NYSE MKT LLC (formerly the American Stock Exchange) under the symbol CHGS. Prior to March 4, 2010, the Company’s common stock traded on the Over-the-Counter Bulletin Board under the symbol CHGS.OB.
	Currently the Company has the following eight subsidiaries:

Company name	Place/date of incorporation or establishment	The Company's effective ownership interest	Common stock/ registered capital	Principal activities
GengSheng International Corporation ( “GengSheng International” )	The British Virgin Islands (the “BVI”)/ November 3, 2004	100%	Ordinary shares :- Authorized: 50,000 shares of $1 each Paid up: 100 shares of $1 each	Investment holding
Henan GengSheng Refractories Co., Ltd. ( “Refractories” )	The People's Republic of China (the “PRC”)/ December 20, 1996	100%	Registered capital of $12,089,879 fully paid up	Manufacturing and selling of refractory products
Henan GengSheng High-Temperature Materials Co., Ltd. ( “High-Temperature” )	PRC/ September 4, 2002	89.33%	Registered capital of $1,246,300 fully paid up	Manufacturing and selling of functional ceramic products

6

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

2. Corporate information (Cont’d)

Company name	Place/date of incorporation or establishment	The Company's effective ownership interest	Common stock/ registered capital	Principal activities
Smarthigh Holdings Limited ( “Smarthigh” )	BVI/ November 5, 2004	100%	Ordinary shares :- Authorized: 50,000 shares of $1 each Paid up: 100 shares of $1 each	Investment holding
Zhengzhou Duesail Fracture Proppant Co., Ltd. ( “Duesail” )	PRC/ August 14, 2006	100%	Registered capital of $2,800,000 fully paid up	Manufacturing and selling of fracture proppant products
Henan GengSheng Micronized Powder Materials Co., Ltd. ( “Micronized” )	PRC/ March 31, 2008	100%	Registered capital of $5,823,000 fully paid up	Manufacturing and selling of fine precision abrasives
Guizhou Southeast Prefecture GengSheng New Materials Co., Ltd. ( “Prefecture” )	PRC/ April 13, 2004	100%	Registered capital of $141,840 fully paid up	Manufacturing and selling of corundum materials
Henan Yuxing Proppant Co., Ltd. (“Yuxing”)	PRC/ June 3, 2011	100%	Registered capital of $3,086,000 fully paid up	Manufacturing and selling of fracture proppant products

3.	Description of business
	The Company is a holding company whose primary business operations are conducted through its subsidiaries located in the PRC’s Henan Province. Through its operating subsidiaries, the Company produces and markets a broad range of monolithic refractory, functional ceramics, fracture proppants, fine precision abrasives, and corundum materials.
	The principal raw materials used in the products are several forms of aluminum oxide, including bauxite, processed AI2O3and calcium aluminates cement, and other materials, such as corundum, magnesia, resin and silica, which are primarily sourced from suppliers located in the PRC. The production facilities of the Company, other than the Prefecture’s sub-processing factory located in Guizhou, are also located in Henan Province.
	Refractories products allow steel makers and other customers to improve the productivity and longevity of their equipment and machinery. Functional ceramic products mainly include abrasive balls and tiles, valves, electronic ceramics and structural ceramics. Fracture proppant products are used to reach trapped pockets of oil and natural gas deposits, which lead to higher productivities of oil and natural gas wells. Due to their heat-resistant qualities and ability to function under thermal stress, refractories serve as components in industrial furnaces and other heavy industrial machinery. Corundum materials are a major raw material for producing monolithic refractory. Fine precision abrasive is used for slicing the solar-silicon bar and polishing the equipment surface. The Company’s customers include some of the largest steel and iron producers located in 25 provinces in the PRC, as well as other countries in Asia and Europe.

7

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

4.	Summary of significant accounting policies
	Basis of consolidation
	The Company applies the guidance of Topic 810“Consolidation”of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8 the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.
	The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
	Concentrations and credit risk
	Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, trade, bills and other receivables. As of September 30, 2013 and December 31, 2012, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC and Hong Kong, which management believes are of high credit quality. With respect to trade and other receivables, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade and other receivables and maintains an allowance for doubtful accounts of trade and other receivables.
	Regarding bills receivable, they are undertaken by the banks to honor the payments at maturity and the customers are required to place deposits with the banks equivalent to a certain percentage of the bills amount as collateral. These bills receivable can be sold to any third party at a discount before maturity. The Company does not maintain allowance for bills receivable in the absence of bad debt experience and the payments are undertaken by the banks.
	During the reporting periods, sales to the following customers represented 10% or more of the Company’s consolidated sales:

		Three months ended				Nine months ended
		September 30,				September 30,
		2013		2012		2013		2012
CNPC Changqing Oilfield	$	3,632,893	$	-	$	6,328,214	$	-
Shangdong Steel Co., Ltd. Rizhao Subsidiary		1,236,493		3,059,573		5,634,290		7,504,693
Fushun New Steel Co., Ltd.		1,229,836		1,831,414		4,249,864		4,817,575
Jilin Petroleum Group Company Ltd.		235,065		6,271,021		572,343		7,579,405
	$	6,334,287	$	11,162,008	$	16,784,711	$	19,901,673

During the reporting periods, no customer represented 10% or more of the Company’s trade receivables.

Fair value of financial instruments

ASC 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which fair value option was not elected. The fair value of collateralized borrowings are estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangement. The carrying amount of financial assets and liabilities approximate their fair value due to short maturities.

8

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

4.	Summary of significant accounting policies (Cont’d)
	Recently issued accounting pronouncements
	Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the consolidated financial statements.
5.	Restricted cash and bills payable

		September 30,		December 31,
		2013		2012
Bank deposits held as collateral for bills payable (Note 5a)	$	4,726,084	$	2,168,082
Bank deposits held as collateral for bank loans (Note 14)		31,827,400		17,945,370
	$	36,553,484	$	20,113,452

Notes:

a)

The Company is requested by certain suppliers to settle amounts owed to such suppliers by the issuance of bills through banks for which the banks undertake to guarantee the Company’s settlement of these amounts at maturity. These bills are interest free and usually mature within six months from the date of issuance. As collateral security for the banks’ undertakings, the Company is required to pay the bank charges as well as maintain deposits with such banks in amounts equal to 20%, 50% or 100% of the bills’ amounts issued.

b)

Bills payable amounted to $13,426,930 and $13,995,550 as of September 30, 2013 and December 31, 2012, respectively.

6. Trade receivables, net

		September 30,			December 31,
		2013			2012
Trade receivables	$	51,851,486		$	58,542,915
Allowance for doubtful accounts		(3,546,949	)		(2,731,447	)
	$	48,304,537		$	55,811,468

An analysis of the allowance for doubtful accounts for the interim period ended September 30, 2013 and 2012 is as follows:

		Nine months Ended
		September 30,
		2013		2012
Balance at beginning of period	$	2,731,447	$	2,046,820
Addition of doubtful accounts expense, net		738,667		456,892
Translation adjustments		76,835		9,103
Balance at end of period	$	3,546,949	$	2,512,815

9

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

7.	Bills receivables
	Bills receivable represents bank undertakings that essentially guarantee the payment of amounts owed by our customers to us. The undertakings are provided by banks upon receipt of collateral deposits from the customers. Bills receivable can be sold by us at a discount before maturity.
	As of September 30, 2013, the balance of bills receivable was $4,153,097 with maturities ranging from 15 days to 6 months. As of December 31, 2012, the balance of bills receivable was $9,913,668.
8.	Other receivables and prepayments, net and advances to senior management

		September 30,			December 31,
		2013			2012
Government grant receivables (Note 8a)	$	409,735		$	398,913
Loans to third parties (Note 8b)		1,505,769			1,532,455
Value added tax and other tax recoverable		403,974			569,886
Deposits for purchase of raw materials		2,392,688			2,145,583
Other deposit		1,427,658			1,140,410
Prepayment		3,799,479			874,873
Other receivables		698,999			489,653
Related party advances (Note 8c)		7,295,001			11,138,593
		17,933,303			18,290,366
Allowance for doubtful accounts		(1,873,601	)		(1,824,114	)
	$	16,059,702		$	16,466,252
Advances to senior management (Note 8b)	$	32,560		$	9,005

An analysis of the allowance for doubtful accounts for the interim period ended September 30, 2013 and 2012 is as follows:

		Nine months Ended
		September 30,
		2013		2012
Balance at beginning of period	$	1,824,114	$	757,217
Addition of doubtful debt expenses, net		-		310,947
Translation adjustments		49,487		3,367
Balance at end of period	$	1,873,601	$	1,071,531

10

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

8.	Other receivables and prepayments, net and advances to senior management (Cont’d)
	Notes :
	a)	As of September 30, 2013, government grant receivables represented incentive bonus of $409,735 from the local government for good performance by Refractories. The Company is currently evaluating the collectability and timing of the receipt of the grants.
	b)	The loans to third parties represent the loans to third party entities which have business connections with the Company. The amounts are interest-free, unsecured and repayable on demand.
		The advances to senior management were mainly for travel and other expenses in the ordinary course of business.
	c)	The amounts represent staff drawings for handling sourcing and logistic activities for the Company in the ordinary course of business and staff advances of $1,302,400 and $6,355,850 used as collateral for the Company’s loans and bills payable related to financing activities as of September 30, 2013 and December 31, 2012, respectively.

9. Inventories, net

		September 30,			December 31,
		2013			2012
Raw materials	$	4,740,247		$	4,327,856
Work-in-progress		8,267,717			2,249,471
Finished goods		1,238,359			6,543,959
		14,246,323			13,121,286
Allowance for obsolete inventories		(154,191	)		(150,118	)
	$	14,092,132		$	12,971,168

	No allowance for obsolete inventories was recognized in the cost of goods sold during the three months and nine months ended September 30, 2013 and 2012.
10.	Investment in a non-consolidated entity
	The Company paid RMB 15 million (equivalent to $2.37 million) in August 2010 to acquire 24.5% equity interest in Yili YiQiang Silicon Limited ("Yili"), a company established in the PRC and engaged in manufacturing and trading of silicon carbide. The acquisition was completed on May 28, 2012.

		September 30,			December 31,
		2013			2012
Investment in a non-consolidated entity, beginning balance	$	1,040,492		$	1,092,041
Less: CHGS’s share of net loss of a non-consolidated entity		(75,267	)		(59,143	)
Translation adjustments		27,949			7,594
Investment in a non-consolidated entity, ending balance	$	993,174		$	1,040,492

11

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

11. Property, plant and equipment

		September 30,			December 31,
		2013			2012
Costs:
Buildings	$	26,160,572		$	25,669,609
Plant and machinery		16,519,804			15,289,765
Furniture, fixture and equipment		1,878,732			1,670,067
Motor vehicles		2,773,365			2,369,478
		47,332,473			44,998,919
Accumulated depreciation		(13,496,723	)		(10,848,175	)
Impairment charge		-			(223,539	)
Construction in progress		2,289,138			2,497,799
Property, plant and equipment, net	$	36,124,888		$	36,425,004

(i) During the reporting periods, depreciation is included in:

		Nine months Ended
		September 30,
		2013		2012
Cost of goods sold and overhead of inventories	$	1,727,179	$	1,659,864
General and administrative expenses		646,148		575,878
	$	2,373,327	$	2,235,742

	During the nine months ended September 30, 2013, property, plant and equipment with carrying amounts of $95,996 were disposed for consideration of $121,193 to offset trade payable balances, resulting in a gain of $25,197. During the nine months ended September 30, 2012, property, plant and equipment with carrying amounts of $204,061 were disposed for consideration of $88,538 to offset a trade payable balance, resulting in a loss of $115,523.
(ii)	Construction in progress
	Construction in progress mainly comprises capital expenditure for construction of the Company’s new offices and factories.
(iii)	Impairment charge
	The management believed that there was an indication of impairment related to the buildings, machinery and equipment, and construction in progress at Prefecture as of December 31, 2012. Based on the impairment review performed by the management, an impairment loss was recognized in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2012.

12

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

12. Other payables and accrued expenses, including related parties

		September 30,		December 31,
		2013		2012
Accrued audit fee	$	-	$	90,135
Other accrued expenses		198,701		216,273
Value added tax and other tax payables		2,361,270		2,979,263
Sales receipts in advance		1,290,115		392,898
Salaries payable		1,355,462		1,360,136
Staff welfare payable (Note 12a)		161,718		196,048
Advances from staff, including related parties		383,847		869,196
Freight charges payable		-		3,833
Guarantee liability (Note 19b)		96,940		210,690
Other payables		1,365,370		1,242,674
	$	7,213,423	$	7,561,146

Note:

a) Staff welfare payable represents accrued staff medical, industry injury claims, labor and unemployment insurances. All of which are third parties insurance and the insurance premiums are based on certain percentages of salaries. The obligations of the Company are limited to those premiums contributed by the Company.

13.	Non-interest-bearing loans, including related parties
	The loans represent interest-free and unsecured loans from the Company’s associates and are repayable on demand. The balance of non-interest-bearing loans as of September 30, 2013 and December 31, 2012 included loans from related parties. Details of non-interest-bearing loans as of September 30, 2013 and December 31, 2012 are as follow.

		September 30,		December 31,
		2013		2012
Loans from third parties	$	7,210,558	$	3,827,141
Loans from employees		2,212,471		2,774,824
Loan from Mr. Shunqing Zhang, the Chairman and CEO		17,915		158,500
Total non-interest-bearing loans	$	9,440,944	$	6,760,465

13

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

14. Collateralized short-term bank loans

		September 30,		December 31,
		2013		2012
Bank loans repayable within 1 year	$	66,888,008	$	65,196,883

The above bank loans are denominated in RMB and carry average interest rates at 6.40% (2012: 6.11%) per annum with maturity dates ranging from 8 days to twelve months.

The bank loans as of September 30, 2013 were secured by the following:

(a)	Guarantees executed by business associates up to the amount of $21,978,000;
(b)	Land use rights with carrying amount of $4,012,193;
(c)	Bank deposits of $31,827,400 (Note 5); and
(d)	Bills issued by banks.

15.	Loans from a third party
	The loans are interest-bearing at 24% per annum from an unrelated company. They were guaranteed by Mr. Shunqing Zhang, the Chairman and CEO of the Company and another employee of the Company. These loans are payable no later than November 15, 2013 and November 30, 2013.
16.	Finance costs

		Three months ended				Nine months ended
		September 30,				September 30,
		2013		2012		2013		2012
Interest expenses	$	1,142,500	$	825,010	$	3,073,728	$	2,568,233
Bills discounting charges		923,295		1,164,421		2,185,038		3,121,328
	$	2,065,795	$	1,989,431	$	5,258,766	$	5,689,561

17.	Income taxes
	UNITED STATES
	The Company is incorporated in the United States of America (“U.S.”) and is subject to U.S. tax law. No provisions for income taxes have been made as the Company has no U.S. taxable income for reporting periods. The applicable income tax rate for the reporting periods is 34%. The Company has not provided deferred tax on undistributed earnings of its non-U.S. subsidiaries as of September 30, 2013, as it is the Company's current policy to reinvest these earnings in non-U.S. operations.
	BVI
	GengSheng International and Smarthigh were incorporated in the BVI and are not subject to income taxes under the current laws of the BVI.

14

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

17.	Income taxes (Cont’d)
	PRC
	The PRC’s legislative body, the National People’s Congress, adopted the unified Corporate Income Tax Law (“CIT Law”) on March 16, 2007. This new tax law replaces the then separate income tax laws for domestic enterprises and foreign-invested enterprises and became effective on January 1, 2008. Under the new tax law, a unified income tax rate is set at 25% for both domestic enterprises and foreign-invested enterprises. However, there will be a transition period for enterprises, whether foreign-invested or domestic, that are currently receiving preferential tax treatments granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and will transit into the new tax rate over a five year period beginning on the effective date of the CIT Law. Enterprises that are currently entitled to exemptions for a fixed term will continue to enjoy such treatment until the exemption term expires. Preferential tax treatment will continue to be granted to industries and projects that qualify for such preferential treatments under the new tax law.
	Pursuant to the income tax rules and regulations of the PRC, provision for PRC income tax of the PRC subsidiaries is calculated based on the following rates:

		Period ended September 30,
	Note	2013	2012
Refractories	(a)	15.0%	15.0%
High-Temperature	(a)	15.0%	15.0%
Duesail	(a)	15.0%	12.5%
Prefecture		25.0%	25.0%
Micronized		25.0%	25.0%
Yuxing		25.0%	25.0%

Note:

(a) Entities entitled to a tax holiday in which they are fully exempted from the PRC enterprise income tax for 2 years starting from their first profit-making year after netting off accumulated tax losses, followed by a 50% reduction in the PRC enterprise income tax for the next 3 years (“tax holidays”). Any unutilized tax holidays will continue until expiry while tax holidays were deemed to start from January 1, 2008, even if the entity was not yet making profit after netting off its accumulated tax losses. Duesail is in the fifth year of tax holidays in 2013. Refractories was in the third year of tax holidays in 2009 and starting from the fiscal year 2011, Refractories is subject to enterprise income tax at unified rate of 15% for three years due to its engagement in an advanced technology industry and has passed the inspection of the provincial high-tech item. The relevant authority granted it a certificate during 2011. Starting from the fiscal year 2011, High-Temperature is subject to enterprise income tax at unified rate of 15% for three years due to its engagement in an advanced technology industry. The relevant authority granted it a certificate during 2011.

In July 2006, the FASB issued ASC 740-10-25. This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The Company adopted this ASC 740-10-25 on January 1, 2007. Under the new CIT Law which became effective on January 1, 2008, the Company may be deemed to be a resident enterprise by the PRC tax authorities. If the Company was deemed to be resident enterprise, the Company may be subject to the CIT at 25% on the worldwide taxable income and dividends paid from the PRC subsidiaries to their overseas holding companies may be exempted from 10% PRC withholding tax. Except for certain immaterial interest income from bank deposits placed with financial institutions outside the PRC, all of the Company’s income is generated from the PRC operations. Given the immaterial amount of income generated from outside the PRC and the PRC subsidiaries do not intend to pay dividends for the foreseeable future, the management considers that the impact arising from resident enterprise on the Company’s financial position is not significant. The management evaluated the Company's tax positions and considered no provision for uncertainty in income taxes is necessary as of September 30, 2013 and December 31, 2012.

15

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

18.	Net loss per common share
	During the reporting periods, all the potential dilutive shares were not included in the computation of diluted net loss per common share because they were anti-dilutive. Accordingly, the basic and diluted net loss per common share are the same.
19.	Commitments and contingencies
	(a)	The Company’s operations are subject to the laws and regulations in the PRC relating to the generation, storage, handling, emission, transportation and discharge of certain materials, substances and waste into the environment, and various other health and safety matters. Governmental authorities have the power to enforce compliance with their regulations, and violators may be subject to fines, injunctions or both. The Company must devote substantial financial resources to ensure compliance and believes that it is in substantial compliance with all the applicable laws and regulations.
		The Company is currently not involved in any environmental remediation and has not accrued any amounts for environmental remediation relating to its operations. Under existing legislation, management believes that there are no probable liabilities that will have a material adverse effect on the financial position, operating results or cash flows of the Company.
	(b)	The Company guaranteed the following debts of third parties, which is summarized as follows:

		September 30,		December 31,
		2013		2012
Guaranteed amount	$	20,350,000	$	30,939,200

In accordance with ASC 460, the Company recognized a liability arising from guarantees given for the debts granted to third parties by financial institutions.

An analysis of the guarantee liability is as follows:

		September 30,			December 31,
		2013			2012
Balance at beginning of period/year	$	210,690		$	309,858
Recognized as expenses for the period/year		154,090			461,578
Recognized as income for the period/year		(273,115	)		(562,847	)
Translation adjustments		5,275			2,101
Balance at end of period/year	$	96,940		$	210,690

The fair value of such guarantees is determined by reference to fees charged in an arm’s length transaction for similar services.

16

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

19.	Commitments and contingencies (Cont’d)
	Guarantees as of September 30, 2013 are further analyzed as below:

	Term loan		Interest										Estimated
	draw down	Expiration	rate (per				Principal				Outstanding		maximum
Guarantee	date	date	annum)		Loan principal		repaid		Outstanding		interest		exposure
Business associates	8/27/2012	8/26/2015	11.664%		1,628,000		-		1,628,000		366,774		1,994,774
	10/26/2012	10/25/2013	6.160%		3,256,000		-		3,256,000		18,683		3,274,683
	11/23/2012	11/22//2013	6.160%		3,256,000		-		3,256,000		34,069		3,290,069
	1/12/2013	1/11/2014	8.640%		8,140,000		-		8,140,000		215,806		8,355,806
	6/8/2013	6/6/2014	6.000%		3,256,000		-		3,256,000		138,090		3,394,090
	6/29/2013	6/25/2014	11.520%		814,000		-		814,000		69,366		883,366
				$	20,350,000	$	-	$	20,350,000	$	842,788	$	21,192,788

	Notes:
	During the period, the Company has acted as guarantor for bank loans granted to certain business associates. Certain of these associates also provided guarantees for bank loans to the Company (Note 14). None of our directors, director nominees or executive officers is involved in normal operation or investing in the business of the guaranteed business associates. All the business associates have a healthy record to pay back loans in a timely manner, in the People’s Bank of China’s (Central Bank of China) credit rating system.
	All the above guarantees have no recourse provision that would enable the Company to recover from third parties of any amounts paid under the guarantees and any assets held either as collateral or by third parties that the Company can obtain or liquidate to recover all or a portion of the amounts paid under the guarantees.
	If the third parties fail to perform under their contractual obligation, the Company will make future payments including the contractual principal amounts, related interest and penalties.
(c)	As of September 30, 2013, the Company had capital commitments of $1,222,286 in connection with the construction of new office buildings and workshops; and $307,338 in connection with the purchase of machinery, which were not contracted for and provided in these financial statements.
(d)	In accordance with the PRC tax regulations, the Company’s sales are subject to value added tax (“VAT”) at 17% upon the issuance of VAT invoices to its customers. When preparing these consolidated financial statements, the Company recognized revenue when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to and accepted by customers, and made full tax provision in accordance with relevant national and local laws and regulations of the PRC.
	The Company follows the practice of reporting its revenue for PRC tax purposes when invoices are issued. In the local statutory financial statements prepared under PRC GAAP, the Company recognized revenue on an “invoice basis” instead of when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to and accepted by customers. Accordingly, despite the fact that the Company has made full tax provision in the consolidated financial statements, the Company may be subject to a penalty for the deferred reporting of tax obligations. The exact amount of penalty cannot be estimated with any reasonable degree of certainty. The management considers it is very unlikely that the tax penalty will be imposed.

17

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

20.	Defined contribution plan
	The Company has a defined contribution plan for all qualified employees in the PRC. The employer and its employees are each required to make contributions to the plan at the rates specified in the plan. The only obligation of the Company with respect to the retirement plan is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in the future years. The defined contribution plan contributions were charged to the consolidated statements of operations and comprehensive loss. The Company contributed $483,073 and $345,910 for the nine months ended September 30, 2013 and 2012, respectively.
21.	Segment information
	The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company's chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company's reportable segments. Management, including the chief operating decision maker, reviews operating results solely by the revenue of monolithic refractory products, industrial ceramic products, fracture proppant products, fine precision abrasives and operating results of the Company. As such, the Company has determined that it has four operating segments as defined by ASC 280, “Segment Reporting”: refractories, industrial ceramic, fracture proppant and fine precision abrasives.
	Adjustments and eliminations of inter-company transactions were not included in determining segment (loss) profit, as they are not used by the chief operating decision maker.

Three months ended September 30,
(unaudited)
		Refractories						Industrial ceramic					Fracture proppant					Fine precision abrasives						Total
		2013			2012			2013			2012		2013			2012		2013			2012			2013			2012
Revenue from external customers	$	8,173,820		$	9,251,050		$	268,647		$	573,505	$	5,201,077		$	12,839,151	$	956,402		$	963,015		$	14,599,946		$	23,626,721
Segment (loss) profit	$	(1,617,227	)	$	(2,495,736	)	$	(33,622	)	$	75,420	$	(157,580	)	$	1,798,780	$	(1,151,470	)	$	(1,459,580	)	$	(2,959,899	)	$	(2,081,116	)

Nine months ended September 30,
(Unaudited)
		Refractories						Industrial ceramic						Fracture proppant					Fine precision abrasives						Total
		2013			2012			2013			2012			2013			2012		2013			2012			2013			2012
Revenue from external customers	$	25,676,665		$	30,808,842		$	814,054		$	1,434,303		$	12,877,459		$	18,058,353	$	1,641,136		$	6,656,101		$	41,009,314		$	56,957,599
Segment (loss) profit	$	(4,527,902	)	$	(5,129,084	)	$	(323,442	)	$	(388,385	)	$	(535,551	)	$	1,154,927	$	(3,072,168	)	$	(3,978,550	)	$	(8,459,063	)	$	(8,341,092	)
		September			December			September			December			September			December		September			December			September			December
		30, 2013			31, 2012			30, 2013			31, 2012			30, 2013			31, 2012		30, 2013			31, 2012			30, 2013			31, 2012
Segment assets	$	79,068,041			80,170,355		$	3,750,556		$	3,778,461		$	45,723,080		$	44,524,087	$	32,595,425		$	31,709,484		$	161,137,102		$	160,182,387

18

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

21.	Segment information (Cont'd)
	Segment information by products for the three months ended September 30, 2013 and 2012

																Fine
		Monolithic				Pre-cast		Ceramic		Ceramic		Wearable		Fracture		precision
		materials1		Mortar		roofs		tubes2		cylinders3		ceramic valves		proppant		abrasives		Total
Three months ended September 30, 2013 (Unaudited)
Revenue	$	4,884,612	$	454,522	$	2,834,686	$	238,203	$	12,969	$	17,475	$	5,201,077	$	956,402	$	14,599,946
Three months ended September 30, 2012 (Unaudited)
Revenue	$	5,475,652	$	415,939	$	3,359,459	$	464,637	$	100,362	$	8,506	$	12,839,151	$	963,015	$	23,626,721

Segment information by products for the nine months ended September 30, 2013 and 2012

																Fine
		Monolithic				Pre-cast		Ceramic		Ceramic		Wearable		Fracture		precision
		materials1		Mortar		roofs		tubes2		cylinders3		ceramic valves		proppant		abrasives		Total
Nine months ended September 30, 2013 (Unaudited)
Revenue	$	15,786,225	$	1,416,656	$	8,473,784	$	700,573	$	77,267	$	36,214	$	12,877,459	$	1,641,136	$	41,009,314
Nine months ended September 30, 2012 (Unaudited)
Revenue	$	18,249,483	$	452,167	$	12,107,192	$	1,158,810	$	256,011	$	19,482	$	18,058,353	$	6,656,101	$	56,957,599

¹Castable, coating, and dry mix materials & low-cement and non-cement castables generally refer as Monolithic materials.
²Ceramic plates, tubes, elbows, and rollers generally refer as Ceramic tubes.
³Ceramic cylindsers and plugs comprehensively refer to Ceramic cylinders.

Reconciliation is provided for unallocated amounts relating to corporate operations which are not included in the segment information.

		Three months ended						Nine months ended
		September 30,						September 30,
		2013			2012			2013			2012
Total consolidated revenue	$	14,599,946		$	23,626,721		$	41,009,314		$	56,957,599
Total loss for reportable segments	$	(2,959,899	)	$	(2,081,116	)	$	(8,459,063	)	$	(8,341,092	)
Unallocated amounts relating to operations:
General and administrative expenses		(79,351	)		(52,136	)		(446,337	)		(302,237	)
Other income/ (expenses)		61			(24	)		61			(31,671	)
									��
Loss before income taxes and noncontrolling interest	$	(3,039,189	)	$	(2,133,276	)	$	(8,905,339	)	$	(8,675,000	)

19

China GengSheng Minerals, Inc.
September 30, 2013 and 2012
Notes to Consolidated Financial Statements
(Unaudited)

21. Segment information (Cont'd)

		September 30,		December 31,
		2013		2012
Assets
Total assets for reportable segments	$	161,137,102	$	160,182,387
Other receivables		733,140		737,866
Cash and cash equivalents		796,658		1,485,057
	$	162,666,900	$	162,405,310

All of the Company's long-lived assets are located in the PRC. Geographic information about the revenues, which are classified based on customers, is set out as follows:

		Three months ended				Nine months ended
		September 30,				September 30,
		2013		2012		2013		2012
PRC	$	14,210,795	$	23,174,222	$	39,763,489	$	55,707,865
United States		-		-		-		82,671
Others		389,151		452,499		1,245,825		1,167,063
Total	$	14,599,946	$	23,626,721	$	41,009,314	$	56,957,599

22.	Subsequent events
	The Company evaluated all events or transactions that occurred after the balance sheet date through the date when the consolidated financial statements were issued to determine if they must be reported. The Management of the Company determined that there were no material recognizable or subsequent events or transactions to be disclosed.

20

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements:

The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains forward-looking statements. Unless the context requires otherwise, references to “we”, “us”, “our”, “the Registrant”, or the “Company” refer to China GengSheng Minerals, Inc. and its subsidiaries. The words or phrases “would be,” “will allow,” “expect to,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” or similar expressions are intended to identify forward-looking statements. Such statements include those concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general economic conditions in China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under “Liquidity and Capital Resources.” Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

Conventions

In this Form 10-Q, unless indicated otherwise, references to:

• “China GengSheng Minerals”, “we”, “us”, “our”, the “Registrant” or the “Company” refer to the combined business of China GengSheng Minerals, Inc., a Nevada corporation (formerly, China Minerals Technologies, Inc.) and its wholly-owned BVI subsidiary, GengSheng International Corporation, or GengSheng International, GengSheng International’s wholly-owned BVI subsidiary, Smarthigh Holding Limited, or Smarthigh and GengSheng International’s wholly-owned Chinese subsidiary, Zhengzhou Duesail Fracture Proppant Co. Ltd., or Duesail, and Duesail’s wholly-owned subsidiary, Henan Yuxing Proppant Co., Ltd., or Yuxing and GengSheng International’s wholly-owned Chinese subsidiary, Henan GengSheng Refractories Co., Ltd., or Refractories, and Refractories’s majority-owned subsidiary, Henan GengSheng High-Temperature Materials Co., Ltd., or High Temperature, and Refractories’s wholly-owned subsidiary, Henan GengSheng Micronized Powder Materials Co., Ltd., or Micronized, and Henan GengSheng's wholly-owned subsidiary, Guizhou Southeast Prefecture GengSheng New Materials Co., Ltd, or Prefecture;

• “Powersmart” or “GengSheng International” refer to GengSheng International Corporation, a BVI company (formerly, Powersmart Holdings Limited) that is wholly-owned by China GengSheng Minerals;

• “Securities Act” refers to the Securities Act of 1933, as amended, and “Exchange Act” refer to Securities Exchange Act of 1934, as amended;

• “China” and “PRC” refer to the People's Republic of China, and “BVI” refers to the British Virgin Islands;

• “RMB” refers to Renminbi, the legal currency of China; and

• “U.S. dollar,” “$” and “US$” refers to the legal currency of the United States. For all U.S. dollar amounts reported, the dollar amount has been calculated on the basis that RMB1 = $0.1585 for its December 31, 2012 audited balance sheet, and RMB1 = $0.1628 for its September 30, 2013 unaudited balance sheet, which were determined based on the currency conversion rate at the end of each respective period. The conversion rates of RMB1 = $0.1622 is used for the consolidated statement of income and comprehensive income and consolidated statement of cash flows for the third quarter of 2013, and RMB1 = $0.1581 is used for the consolidated statement of income and comprehensive income and consolidated statement of cash flows for the third quarter of 2012; both of which were based on the average currency conversion rate for each respective quarter.

Overview of Company

We are a Nevada holding company operating in the materials technology industry through our subsidiaries in China. We develop, manufacture and sell a broad range of mineral-based, heat-resistant products capable of withstanding high temperatures, saving energy and boosting productivity in industries such as steel and oil. Our products include refractory products, industrial ceramics, fracture proppants and fine precision abrasives.

Currently, we conduct our operations in China through our wholly owned subsidiaries, Henan GengSheng Refractories Co., Ltd. (“Refractories”), Zhengzhou Duesail Fracture Proppant Co., Ltd. (“Duesail”), Henan GengSheng Micronized Powder Materials Co., Ltd. (“Micronized”), Guizhou Southeast Prefecture GengSheng New Materials Co., Ltd. (“Prefecture”) and Henan Yuxing Proppant Co., Ltd., 21 (“Yuxing”), and through our majority owned subsidiary, Henan GengSheng High-Temperature Materials Co., Ltd. (“High-Temperature”). Through our wholly owned BVI subsidiary, GengSheng International, and its wholly owned Chinese subsidiary, Refractories, which has an annual production capacity of approximately 127,000 tons, we manufacture refractories products. We manufacture fracture proppant products through Duesail, which has an annual production capacity of approximately 66,000 tons, and Yuxing, which has designed annual production capacity of approximately 60,000 tons. We manufacture fine precision abrasives products through Micronized, which has designed annual production capacity of approximately 22,000 tons. Through our majority owned subsidiary, High-Temperature, which has an annual production capacity of approximately 150,000 units, we manufacture industrial and functional ceramic products.

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We sell our products to over 300 customers in the iron, steel, oil, glass, cement, aluminum, chemical and solar industries located in China and other countries in Asia, Europe and North America. Our refractory customers are companies in the steel, iron, petroleum, chemical, coal, glass and mining industries. Our fracture proppant products are sold to oil and gas companies. Our industrial ceramics are used in the utilities and petrochemical industries. Our fine precision abrasives are marketed to solar companies and optical equipment manufacturers. Our largest customers, measured by percentage of our revenue, mainly operate in the steel industry and oil industry. Currently, most of our revenues are derived from the sale of our monolithic refractory products and fracture proppants products to customers in China.

Our principal executive offices are located at No. 88 Gengsheng Road, Dayugou Town, Gongyi, Henan, People’s Republic of China 451271 and our telephone number is (86) 371-6405-9863.

Corporate Structure

We conduct our operations in China through our wholly owned subsidiaries Refractories, Duesail, Yuxing, Micronized and Prefecture and through our majority owned subsidiary, High-Temperature.

The following chart reflects our organizational structure as of the date of this report.

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Corporate History

We were originally incorporated under the laws of the State of Washington, on November 13, 1947, under the name Silver Mountain Mining Company. From our inception until 2001, we operated various unpatented mining claims and deeded mineral rights in the State of Washington, but we abandoned these operations entirely by 2001. On August 15, 2006, we changed our domicile from Washington to Nevada when we merged with and into Point Acquisition Corporation, a Nevada corporation. From about 2001 until our reverse acquisition of Powersmart on April 25, 2007, which is discussed in the next section entitled "Acquisition of Powersmart and Related Financing", we were a blank check company and had no active business operations. On June 11, 2007, we changed our corporate name from "Point Acquisition Corporation" to "China Minerals Technologies, Inc." and subsequently changed our name again to "China GengSheng Minerals, Inc." on July 26, 2007.

Acquisition of Powersmart and Related Financing

On April 25, 2007, we completed a reverse acquisition transaction through a share exchange with GengSheng International Corporation (formerly, Powersmart Holdings Limited) whereby we issued to the sole shareholder of Powersmart Holdings Limited, Shunqing Zhang, 16,887,815 shares of China GengSheng Minerals, Inc. common stock, in exchange for all of the issued and outstanding capital stock of Powersmart. By this transaction, Powersmart became our wholly owned subsidiary and Mr. Zhang became our controlling stockholder.

On April 25, 2007, we also completed a private placement financing transaction pursuant to which we issued and sold 5,347,594 shares of our common stock to certain accredited investors for $10 million in gross proceeds.

On January 4, 2011, the Company and certain institutional investors entered into a securities purchase agreement pursuant to which the Company sold to such investors an aggregate of 2,500,000 shares of common stock at a price of $4.00 per share for aggregate gross proceeds to the Company of $10,000,000. The shares of common stock were issued pursuant to a prospectus supplement dated as of January 10, 2011, which was filed with the Securities and Exchange Commission in connection with a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-165486), which became effective on April 28, 2010, and the base prospectus dated as of April 28, 2010 contained in such registration statement.

Our Products

The following table set forth sales information about our product mix in each of the second quarter of 2013 and 2012, and the first nine months of 2013 and 2012.

(All amounts, other than percentages, in thousands of U.S. dollars)

		Three Months Ended September 30						Nine Months Ended September 30
		2013			2012			2013			2012
			Percentage			Percentage			Percentage			Percentage
			of net			of net			of net			of net
		Revenue	revenues		Revenue	revenues		Revenue	revenues		Revenue	revenues
Refractories	$	8,174	56.0%	$	9,251	39.2%	$	25,677	62.6%	$	30,809	54.1%
Industrial Ceramics		269	1.8%		573	2.4%		814	2.0%		1,434	2.5%
Fracture Proppants		5,201	35.6%		12,840	54.3%		12,877	31.4%		18,059	31.7%
Fine Precision Abrasive		956	6.6%		963	4.1%		1,641	4.0%		6,656	11.7%
	$	14,600	100.0%	$	23,627	100.0%	$	41,009	100.0%	$	56,958	100.0%

Refractories

Our largest product segment is the refractories segment, which accounted for approximately 56.0% of total revenue in the third quarter of 2013. Our refractory products have high-temperature resistance and can function under thermal stress that is common in many heavy industrial production environments. Because of their unique high-temperature resistant qualities, the refractory products are used as linings and key components in many industrial furnaces, such as steel production furnaces, ladles, vessels, and other high-temperature processing machines that must operate at high temperatures for a long period of time without interruption. The majority of our customers are in the iron, steel, cement, chemical, coal, glass, petro-chemical and nonferrous industries.

We provide a customized solution for each order of our monolithic refractory materials based on customer-specific formulas. Upon delivery to customers, the monolithic materials are applied to the inner surfaces of our customers’ furnaces, ladles or other vessels to improve the productivity of that equipment. The product benefits our customers as it lowers the overall cost of production and improves financial performance. The reasons that the monolithic materials can help our customers improve productivity, lower production costs and achieve stronger financial performance include the following: (i) monolithic refractory castables can be cast into complex shapes which are unavailable or difficult to achieve by alternative products such as shaped bricks; (ii) monolithic refractory linings can be repaired, and in some cases, even reinstalled, without furnace cool-down periods or steel-production interruptions, and therefore improve the steel makers’ productivity; (iii) monolithic refractories can form an integral surface without joints, enhancing resistance to penetration, impact and erosion, and thereby improving the equipment’s operational safety and extending their useful service lives; (iv) monolithic refractories can be installed by specialty equipment either automatically or manually, thus saving construction and maintenance time as well as costs; and (v) monolithic refractories can be customized to specific requirements by adjusting individual formulas without the need to change batches of shaped bricks, which is a costly procedure. Our refractory products and their features are described as follows:

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• Castable, coating, and dry mix materials. Offerings within this product line are used as linings in containers such as a tundish used for pouring molten metal into a mold. The primary advantages of these products are speed and ease of installation for heat treatment.
• Low-cement and non-cement castables. Our low-cement and non-cement castable products are typically used in reheating furnaces for producing steel. These castable products are highly durable and can last up to five years.
• Pre-cast roofs. These products are usually used as a component of electric arc furnaces. They are highly durable, and in the case of our corundum-based, pre-cast roof, products can endure approximately 160 to 220 complete operations of furnace heating.

We also have a production line for pressed bricks, which is a type of “shaped” refractory, for steel production. The annual designed production capacity of our shaped refractory products is approximately 15,000 metric tons.

Finally, we provide a full-service option to our steel customers, which include refractory product installation, testing, maintenance, repair and replacement. Refractory product sales are often enhanced by our on-site installation and technical support personnel. Our installation services include applying refractory materials to the walls of steel-making furnaces and other high temperature vessels to maintain and extend their lives. Our technical service staff assure that our customers can achieve their desired productivity objectives. They also measure the refractory wear at our customer sites to improve the quality of maintenance and overall performance of our customers’ equipment. Full-service customers contributed approximately 39.2% of the Company’s total sales in the first nine months of 2013, compared with 35.2% in the same period of 2012. We believe that these services, together with our refractory products, provide us a strategic advantage for profits.

Industrial Ceramics

Industrial Ceramics accounted for approximately 1.8% of the total revenue in the third quarter of 2013. Our industrial ceramic products, including abrasive balls and tiles, valves, electronic ceramics and structural ceramics, are components for a variety of end products such as fuses, vacuum interrupters, electrical components, mud slurry pumps, and high-pressure pumps. Such end use products are used in the electric power, electronic component, industrial pump, and metallurgy industries.

Fracture Proppants

Fracture Proppants accounted for approximately 35.6% of the total revenue in the third quarter of 2013. Our fracture proppant products are very fine ball-like pellets, used to reach pockets of oil and natural gas deposits that are trapped in the fractures under the ground. Oil drillers inject the pellets into those fractures, squeezing out the trapped oil or natural gas, which leads to higher yield. Our fracture proppant products are available in several different particle sizes (measured in millimeters). They are typically used to extract crude oil and natural gas, which increases the productivity of crude oil and natural gas wells. These products are highly resistant to pressure. In October 2007, our fracture proppant products were recognized by China National Petroleum Corporation (the “CNPC”), China Petroleum & Chemical Corporation (the “Sinopec”) and China National Offshore Oil Corporation (the “CNOOC”) as their supplier of fracture proppant products for their oil and gas-drilling operation.

Fine Precision Abrasives

Fine Precision Abrasives accounted for approximately 6.6% of our total revenue in the third quarter of 2013. Fine precision abrasives are used for producing a super-fine, super-consistent finish on certain products. A high-strength polyester backing provides a uniform base for a coating of micron-graded mineral particles that are uniformly dispersed for greater finishing efficiency. Our fine precision abrasives are made from silicon carbide (“SiC”). They are ultra-fine, high-strength pellets with uniform shape, and they are used for surface-polishing and slicing of precision instruments such as solar panels. Currently, the type of abrasives that we produce is in high demand among solar-energy companies. Solar energy companies use fine precision abrasives to cut silicon bars and to polish equipment surfaces so that they can be smooth and reflective. Our products can be utilized in a broad range of areas including machinery manufacturing, electronics, optical glass, architecture, industry development, semiconductor, silicon chip, plastic and lens.

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Summary of Business Operations in Third Quarter of 2013

Our financial performance in the third quarter of 2013 is summarized as follows:

• Sales revenue decreased by approximately $9.0 million, or 38.2%, to approximately $14.6 million in the third quarter of 2013, from approximately $23.6 million for the same period in 2012.

• Gross profit decreased by approximately $2.2 million or 43.8%, to approximately $2.9 million in the third quarter of 2013, from approximately $5.1 million for the same period in 2012. Gross profit margin was 19.7% in the third quarter of 2013, compared with 21.7% for the same period of 2012. The decrease in gross profit margin was primarily due to the lower gross profit margin in our refractories segment as the cost of production increased and the declined gross profit margin in our fracture proppants segment as lower sales price impacted us negatively in the third quarter of 2013. Net loss increased by approximately $873,000 to approximately $3.1 million in the third quarter of 2013, from a net loss of approximately $2.2 million for the same period in 2012.

• Our consolidated balance sheet (unaudited) as of September 30, 2013 included current assets of approximately $121.5 million and total assets of approximately $162.7 million.

Uncertainties that Affect our Financial Condition

Continued Industry Consolidation of Steel Makers Further Squeezed Our Profit in Refractories Segment

Although the crude steel output in China reached a new record of approximately 717 million metric tons in 2012, the steel industry still faces overcapacity and weak demand from both domestic and international market. In addition, the PRC government’s continued policy to close small to mid-sized steel makers reduced the overall demand for refractories. As revenue from our refractories segment accounted for a large portion of our total sales revenue and many of our customers are in the steel industry, the continued industry consolidation of steel makers have a deep impact on us and further reduced our profit in the refractories segment.

Considerable Increase in Raw Material Prices and Decrease in Gross Profit Margin

While the overall inflation in China started to ease in 2013, the increase in raw materials prices, labor costs and fuel and utilities costs continued to impact us. Also, in a fragmented market, the selling price of our products could not keep pace with the increase in raw materials prices.

Increase in Financing Costs Further Limited Our Ability to Expand Business

The unfavorable payment term offered by our customers strained our working capital needs, and as a result significantly increased our financing costs, as banks charged higher interest rates when we discounted more bills receivables to meet our working capital needs.

Uncertainties Facing Our Fracture Proppants Segment

Starting from 2012, more and more Chinese manufacturers of fracture proppants products started to sell their products directly in the U.S. market. Since our sales of fracture proppants products in the U.S. market were mainly through wholesalers and distributors, the change in the market condition made it nearly impossible for us to continue sales in the U.S. market while still maintaining a reasonable profit margin. As a result, our sales in the U.S. market were discontinued in 2012. We are currently selling all our fracture proppants products to oil drillers in the domestic market.

Deteriorating Market for Our Fine Precision Abrasives Segment

China’s solar industry is experiencing severe challenge with many large solar panel manufacturers struggling to survive. As a supplier of solar-energy companies, we are facing remarkable uncertainties in maintaining our current customers. If we cannot continue our sales of fine precision abrasives products to solar industry we may have to reduce selling price significantly to stay competitive, and this will affect our revenue negatively and we may ultimately need to discontinue our production.

Results of Operations

Comparison of Three-Month Periods Ended September 30, 2013 and 2012

The following table summarizes the results of our operations during the three-month periods ended September 30, 2013 and 2012, respectively, and provides information regarding the dollar and percentage increase or (decrease) during the three-month periods ended September 30, 2013 and 2012.

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(All amounts, other than percentages, in U.S. dollars)

	Three-Month Period			Three-Month Period
	Ended September 30, 2013			Ended September 30, 2012
			As a			As a
	Dollars in		percentageof	Dollars in		percentage of
Statement of operations data:	thousands		net revenues	thousands		net revenues
Sales	14,600		100.0%	23,627		100.0%
Cost of goods sold	11,721		80.3%	18,503		-78.3%
Gross profit	2,879		19.7%	5,124		21.7%
Operating expenses
General & administrative expenses	1,789		12.3%	1,693		7.2%
Research and development expenses	402		2.8%	308		1.3%
Selling expenses	2,092		14.2%	3,599		15.2%
Total operating expenses	4,283		29.3%	5,600		23.7%
Loss from operations	(1,404	)	-9.6%	(476	)	-2.0%
Government grant income	57		0.4%	164		0.7%
Guarantee income	80		0.6%	142		0.6%
Guarantee expenses	-		0%	(137	)	-0.6%
Share of net loss of a non-consolidated entity	(25	)	-0.2%	(24	)	-0.1%
Interest income	345		2.4%	186		0.8%
Other income (expenses)	(26	)	-0.2%	1		0.0%
Finance costs	(2,066	)	-14.2%	(1,989	)	-8.4%
Loss before income taxes and noncontrolling interest	(3,039	)	-20.8%	(2,133	)	-9.0%
Income taxes	(38	)	-0.3%	(59	)	-0.3%
Noncontrolling interest	4		0.0%	(8	)	0.0%
Net loss attributable to Company’s common stockholders	(3,073	)	-21.1%	(2,200	)	-9.3%

	Three-Month		Three-Month
	Period Ended		Period Ended		Dollar ($)
	September 30,		September 30,		Increase		Percentage
Dollars in thousands	2013		2012		(Decrease)		Change
Sales	14,600		23,627		(9,027	)	-38.2%
Cost of goods sold	11,721		18,503		(6,782	)	-36.7%
Gross profit	2,879		5,124		(2,245	)	-43.8%
Operating expenses
General & administrative expenses	1,789		1,693		96		5.7%
Research and development expenses	402		308		94		30.5%
Selling expenses	2,092		3,599		(1,507	)	-41.9%
Total operating expenses	4,283		5,600		(1,317	)	-23.5%
Loss from operations	(1,404	)	(476	)	(928	)	195.0%
Government grant income	57		164		(107	)	-65.2%
Guarantee income	80		142		(62	)	-43.7%
Guarantee expenses	-		(137	)	137		-100%
Share of net loss of a non-consolidated entity	(25	)	(24	)	(1	)	4.2%
Interest income	345		186		159		85.5%
Other income (expenses)	(26	)	1		(27	)	-2,700.0 %
Finance costs	(2,066	)	(1,989	)	(77	)	3.9%
Loss before income taxes and noncontrolling interest	(3,039	)	(2,133	)	(906	)	42.5%
Income taxes	(38	)	(59	)	21		-35.6%
Noncontrolling interest	4		(8	)	12		-150.0%
Net loss attributable to Company’s common stockholders	(3,073	)	(2,200	)	(873	)	39.7%

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The average conversion rates between RMB and U.S. dollar used for the consolidated statements of operations and comprehensive loss increased approximately 2.6% during the reporting period of 2013 compared with the reporting period of 2012. As substantially all of our revenues and most expenses are denominated in RMB, the appreciation in the value of RMB relative to the U.S. dollar affected our financial results reported in the U.S. dollar terms without giving effect to any underlying change in our business or results of operations.

Sales. Sales revenue decreased approximately $9.0 million, or 38.2% to approximately $14.6 million in the third quarter of 2013, from approximately $23.6 million in the same period of 2012. Excluding foreign currency translation, the revenue decreased 40.7% compared with the same period of 2012. Our sales revenue is currently generated from sales of our mineral-based products, primarily our refractory products, fracture proppant products, fine precision abrasives products and industrial ceramic products. The decrease was primarily attributable to the decreased sales from our fracture proppant products and refractories products.

In our refractory segment, we sold 15,819 metric tons of refractory products in the third quarter of 2013, a 22.1% decrease compared with 20,299 metric tons sold in the same period of 2012. The revenue from our refractory products decreased by approximately $1.1 million, or 11.6% to approximately $8.2 million in the third quarter of 2013 from approximately $9.3 million in the same period of 2012. Excluding foreign currency translation, the revenue decreased 15.5% compared with the same period of 2012. In the third quarter of 2013, the average selling price was $517 per metric ton, an increase of 13.4% compared with the average selling price of $456 in the third quarter of 2012. The increase in average selling price in the third quarter of 2013 resulted from our increased sales of customized refractory products which usually have higher selling prices.

In our fracture proppant segment, we sold 25,633 metric tons of fracture proppant products in the third quarter of 2013, compared with 38,855 metric tons sold in the same period of 2012. The decrease in sales volume was primarily due to the lower demand from one of our major customers. Revenue was approximately $5.2 million in the third quarter of 2013, a decrease of 59.5% compared with approximately $12.8 million in the same period of 2012. Excluding foreign currency translation, the revenue decreased 61.0% compared with the same period of 2012. Average selling price decreased to $203 per metric ton in the third quarter of 2013, compared with $330 per metric ton in the same period of 2012. The decrease in average selling price was the result of oversupply of fracture proppant products in the domestic market in the third quarter of 2013.

In our industrial ceramics segment, sales revenue was approximately $269,000 in the third quarter of 2013 compared with approximately $573,000 in the same period of 2012 as demand for our industrial ceramics products continued to decline.

In our fine precision abrasives segment, we realized sales of 356 metric tons in the third quarter of 2013, generating revenue of approximately $956,000. We sold 421 metric tons of fine precision abrasives products for approximately $963,000 in the same period of 2012. The decrease in sales revenue was a result of weak demand for our fine precision abrasives products under current market condition and lower sales to a major customer.

Cost of goods sold. Our cost of goods sold is primarily comprised of the cost of raw materials, components, labor and overhead. Our cost of goods sold decreased approximately $6.8 million, or 36.7%, to approximately $11.7 million in the third quarter of 2013 from approximately $18.5 million in the same period of 2012. Excluding foreign currency translation, our cost of goods sold decreased 39.3% compared with the same period of 2012. As a percentage of net revenue, the cost of goods sold increased by 2.0% to 80.3% in the third quarter of 2013 from 78.3% in the same period of 2012. The decrease in cost of goods sold was mainly attributable to the decreased sales in refractory segment as we terminated some unprofitable full-service contracts and the lower sales revenue in our fracture proppant segment in the third quarter of 2013.

Gross profit. Our gross profit decreased approximately $2.2 million, or 43.8% to approximately $2.9 million in the third quarter of 2013, compared with approximately $5.1 million in the same period of 2012. Gross profit as a percentage of net revenues was 19.7% in the third quarter of 2013, as compared with 21.7% in the same period of 2012. The decrease in gross profit was primarily attributable to the lower sales revenue across all segments and the decreased gross margin resulting from our inability to reduce labor and overhead costs.

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General and administrative expenses.Our general and administrative expenses consist of the expenses associated with staff and support personnel who manage our business activities and professional fees paid to third parties. Our general administrative expenses increased approximately $96,000 or 5.7% to approximately $1.8 million in the third quarter of 2013, compared with approximately $1.7 million in the same period in 2012. Excluding foreign currency translation, our general and administrative expenses increased approximately 1.3% compared with the same period of 2012. As a percentage of net revenue, general and administrative expenses increased to 12.3% in the third quarter of 2013, compared with 7.2% in the same period in 2012.

Research and development expenses.Our research and development expenses increased to approximately $402,000 in the third quarter of 2013, compared with approximately $308,000 in the same period in 2012. The increase was primarily attributable to more research and development activities in the third quarter of 2013.

Selling expenses.Our selling expenses include sales commissions, expenses of advertising and promotional materials, transportation expenses, benefits of sales personnel, after-sale support services and other sales related expenses. Selling expenses decreased by approximately $1.5 million, or 41.9% to approximately $2.1 million in the third quarter of 2013, compared with approximately $3.6 million in the same period in 2012. Excluding foreign currency translation, our selling expenses declined 44.2% compared with the same period of 2012. As a percentage of net revenue, our selling expenses decreased to 14.3% in the third quarter of 2013, as compared with 15.2% in the same period in 2012. The decrease in selling expenses was primarily attributable to the decrease in after-sales service expenses as we terminated several unprofitable full-service contracts in our refractory segment and lower transportation expenses as we sold fewer fracture proppant products in the third quarter of 2013.

Government grant income. Our government grant income was approximately $57,000 in the third quarter of 2013 compared with approximately $164,000 in the same period in 2012.

Share of net loss of a non-consolidated entity.Share of net loss of a non-consolidated entity was approximately $25,000 in the third quarter of 2013, compared with approximately $24,000 in the same period in 2012. Equity in net loss of a non-consolidated entity was related to our investment in Yili YiQiang Silicon Limited (“Yili”).

Interest income.Our interest income was approximately $345,000 in the third quarter of 2013, an increase of approximately $159,000 compared with approximately $186,000 for the same period of 2012 as more bank deposits are used as collateral for loans in the third quarter of 2013.

Finance costs.Our finance costs increased by approximately $77,000, or 3.9% to approximately $2.1 million in the third quarter of 2013, compared with approximately $2.0 million in the same period in 2012. Excluding foreign currency translation, our finance costs stayed flat compared with the same period in 2012.

Loss before income taxes and non-controlling interests. Our loss before income taxes and non-controlling interest was approximately $3.0 million in the third quarter of 2013, compared with approximately $2.1 million in the same period of 2012. The increase was primarily attributable to the increased loss from operations in the third quarter of 2013.

Income taxes.Our income taxes were approximately $38,000 in the third quarter of 2013, a decrease of approximately $21,000 from approximately $59,000 in the same period of 2012. Despite a net loss, as certain of our PRC subsidiaries recognized taxable income in China, we still incurred income taxes for the third quarter of 2013.

Net loss.Our net loss in the third quarter of 2013 was approximately $3.1 million, an increase of approximately $873,000 from approximately $2.2 million in the same period in 2012. The decrease was attributable to the factors described above.

Comparison of Nine-Month Periods Ended September 30, 2013 and 2012

The following table summarizes the results of our operations during the nine-month periods ended September 30, 2013 and 2012, respectively, and provides information regarding the dollar and percentage increase or (decrease) during the nine-month periods ended September 30, 2013 and 2012.

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(All amounts, other than percentages, in U.S. dollars)

	Nine-Month Period			Nine-Month Period
	Ended September 30, 2013			Ended September 30, 2012
			As a			As a
	Dollars in		percentage of	Dollars in		percentage of
Statement of operations data:	thousands		net revenues	thousands		net revenues
Sales	41,009		100.0%	56,958		100.0%
Cost of goods sold	33,513		81.7%	46,063		-80.9%
Gross profit	7,496		18.3%	10,895		19.1%
Operating expenses
General & administrative expenses	5,254		12.8%	5,359		9.4%
Research and development expenses	1,049		2.6%	707		1.2%
Selling expenses	5,801		14.2%	8,870		15.6%
Total operating expenses	12,104		29.5%	14,936		26.2%
Loss from operations	(4,608	)	-11.2%	(4,041	)	-7.1%
Government grant income	131		0.3%	549		1.0%
Guarantee income	273		0.7%	443		0.8%
Guarantee expenses	(154	)	-0.4%	(374	)	-0.7%
Share of net loss of a non-consolidated entity	(75	)	-0.2%	(33	)	-0.1%
Interest income	868		2.1%	425		0.8%
Other income (expenses)	(81	)	-0.2%	45		0.1%
Finance costs	(5,259	)	-12.8%	(5,689	)	-10.0%
Loss before income taxes and noncontrolling interest	(8,905	)	-21.7%	(8,675	)	-15.2%
Income taxes	(517	)	-1.3%	(273	)	-0.5%
Noncontrolling interest	35		0.1%	41		0.1%
Net loss attributable to Company’s common stockholders	(9,387	)	-22.9%	(8,907	)	-15.6%

	Nine-Month		Nine-Month
	Period Ended		Period Ended		Dollar ($)
	September 30,		September 30,		Increase		Percentage
Dollars in thousands	2013		2012		(Decrease)		Change
Sales	41,009		56,958		(15,949	)	-28.0%
Cost of goods sold	33,513		46,063		(12,550	)	-27.3%
Gross profit	7,496		10,895		(3,399	)	-31.2%
Operating expenses
General & administrative expenses	5,254		5,359		(105	)	-2.0%
Research and development expenses	1,049		707		342		48.4%
Selling expenses	5,801		8,870		(3,069	)	-34.6%
Total operating expenses	12,104		14,936		(2,832	)	-19.0%
Loss from operations	(4,608	)	(4,041	)	(567	)	14.0%
Government grant income	131		549		(418	)	-76.1%
Guarantee income	273		443		(170	)	-38.4%
Guarantee expenses	(154	)	(374	)	220		-58.8%
Share of net loss of a non-consolidated entity	(75	)	(33	)	(42	)	127.3%
Interest income	868		425		443		104.2%
Other income (expenses)	(81	)	45		(126	)	-280.0%
Finance costs	(5,259	)	(5,689	)	430		-7.6%
Loss before income taxes and noncontrolling interest	(8,905	)	(8,675	)	(230	)	2.7%
Income taxes	(517	)	(273	)	(244	)	89.4%
Noncontrolling interest	35		41		(6	)	-14.6%
Net loss attributable to Company’s common stockholders	(9,387	)	(8,907	)	(480	)	5.4%

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Sales. Sales revenue decreased approximately $16.0 million, or 28.0% to approximately $41.0 million in the nine months ended September 30, 2013, from approximately $57.0 million in the same period of 2012. Excluding foreign currency translation, the revenue decreased 29.8% compared with the same period of 2012. The decrease was primarily attributable to the decreased sales from all of our operating segments in the nine months ended September 30, 2013.

In our refractory segment, we sold 58,929 metric tons of refractory products in the nine months ended September 30, 2013 compared with 63,284 metric tons sold in the same period of 2012. The revenue from our refractory products decreased approximately $5.1 million, or 16.7% to approximately $25.7 million in the nine months ended September 30, 2013 from approximately $30.8 million in the same period of 2012. Excluding foreign currency translation, the revenue decreased 18.8% compared with the same period of 2012. In the nine months ended September 30, 2013, the average selling price was $436 per metric ton, a decrease of 10.5% compared with the average selling price of $487 in the nine months ended September 30, 2012. The decrease in average selling price resulted from our decreased sales of customized refractory products which usually have higher selling prices.

In our fracture proppant segment, we sold 56,178 metric tons of fracture proppant products in the nine months ended September 30, 2013, compared with 57,558 metric tons sold in the same period of 2012. The decrease in sales volume was primarily due to the lower demand from one of our major customers in 2013. Revenue was approximately $12.9 million in the nine months ended September 30, 2013, a decrease of 28.7% compared with approximately $18.1 million in the same period of 2012. Excluding foreign currency translation, the revenue decreased 30.5% compared with the same period of 2012. Average selling price decreased to $229 per metric ton in the nine months ended September 30, 2013, compared with $314 per metric ton in the same period of 2012. The decrease in average selling price was primarily attributable to the increased sales of low-grade products and generally lower market price for fracture proppant products in the nine months ended September 30, 2013.

In our industrial ceramics segment, sales revenue was approximately $814,000 in the nine months ended September 30, 2013 compared with approximately $1.4 million in the same period of 2012 as demand for our products declined in 2013.

In our fine precision abrasives segment, we realized sales of 696 metric tons in the nine months ended September 30, 2013, generating revenue of approximately $1.6 million. We sold 2,476 metric tons of fine precision abrasives products for approximately $6.7 million in the same period of 2012. The decrease in sales revenue was a result of weak demand for our fine precision abrasives products under current market condition and declined sales to a major customer.

Cost of goods sold.Our cost of goods sold decreased approximately $12.6 million, or 27.3% to approximately $33.5 million in the nine months ended September 30, 2013 from approximately $46.1 million in the same period of 2012. Excluding foreign currency translation, our cost of goods sold decreased 29.1% compared with the same period of 2012. As a percentage of net revenues, the cost of goods sold increased slightly to 81.7% in the nine months ended September 30, 2013 from 80.9% in the same period of 2012. The decrease in cost of goods sold was in line with the decrease in sales revenue.

Gross profit. Our gross profit decreased approximately $3.4 million, or 31.2% to approximately $7.5 million in the nine months ended September 30, 2013 from approximately $10.9 million in the same period of 2012. Excluding foreign currency translation, our gross profit decreased 32.9% compared with the same period of 2012. Gross profit as a percentage of net revenues decreased slightly to 18.3% in the nine months ended September 30, 2013 compared with 19.1% in the same period of 2012.

General and administrative expenses.Our general administrative expenses decreased 2.0% to approximately $5.3 million in the nine months ended September 30, 2013 from approximately $5.4 million in the same period of 2012. Excluding foreign currency translation, our general administrative expenses decreased 4.4% compared with the same period of 2012. As a percentage of net revenues, general administrative expenses increased to 12.8% in the nine months ended September 30, 2013 as compared with 9.4% in the same period in 2012.

Research and development expenses.Our research and development expenses increased to approximately $1.0 million in the nine months ended September 30, 2013, compared with approximately $707,000 in the same period in 2012 due to more research and development activities incurred in the nine months ended September 30, 2013.

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Selling expenses.Selling expenses decreased by approximately $3.1 million, or 34.6% to approximately $5.8 million in the nine months ended September 30, 2013, compared with approximately $8.9 million in the same period in 2012. Excluding foreign currency translation, our selling expenses decreased by 36.3% compared with the same period of 2012. As a percentage of net revenues, our selling expenses decreased to 14.1% in the nine months ended September 30, 2013, as compared with 15.6% in the same period in 2012. The decrease in selling expenses was primarily attributable to the decrease in after-sales service expenses and transportation expenses as we terminated several unprofitable full-service contracts in our refractory segment in the nine months ended September 30, 2013.

Government grant income. Our government grant income was approximately $131,000 in the nine months ended September 30, 2013 compared with approximately $549,000 in the same period in 2012.

Share of net loss of a non-consolidated entity.Share of net loss of a non-consolidated entity was approximately $75,000 in the nine months ended September 30, 2013, compared with approximately $33,000 in the same period in 2012. Share of net loss of a non-consolidated entity was related to our investment in Yili.

Interest income.Our interest income was approximately $868,000 in the nine months ended September 30, 2013, an increase of approximately $443,000 from approximately $425,000 in the same period of 2012 as more bank deposits are used as collateral for loans during the period.

Finance costs.Our finance costs decreased by approximately $430,000, or 7.6% to approximately $5.3 million in the nine months ended September 30, 2013, compared with approximately $5.7 million in the same period of 2012. The decrease was primarily attributable to a decrease of approximately $936,000 in bills discounting charges which was partially offset by an increase of approximately $506,000 in interest expense. Excluding foreign currency translation, our finance costs decreased 9.9% compared with the same period of 2012.

Loss before income taxes and non-controlling interests. Our loss before income taxes and non-controlling interest increased 2.7% to approximately $8.9 million in the nine months ended September 30, 2013, compared with approximately $8.7 million in the same period of 2012. Excluding foreign currency translation, our loss before income taxes and non-controlling interest stayed flat compared with the same period of 2012.

Income taxes.Our income taxes were approximately $517,000 in the nine months ended September 30, 2013, an increase of approximately $244,000 from approximately $273,000 in the same period of 2012. Despite a net loss, as certain of our PRC subsidiaries recognized taxable income, we still incurred income taxes in the nine months ended September 30, 2013.

Net loss.Our net loss in the nine months ended September 30, 2013 was approximately $9.4 million, an increase of approximately $480,000, or 5.4% from approximately $8.9 million in the same period of 2012. Excluding foreign currency translation, our net loss increased by 2.7% compared with the same period of 2012. The increase was attributable to the factors described above.

Liquidity and Capital Resources

As of September 30, 2013, we had cash and cash equivalents of approximately $2.1 million and restricted cash of approximately $37.9 million. Our current assets were approximately $121.5 million and our current liabilities were approximately $130.8 million as of September 30, 2013 which resulted in a current ratio of approximately 0.93. Total stockholders’ equity as of September 30, 2013 was approximately $31.8 million.

We believe that we can meet the cash requirements for the next twelve months. Although the cash flows from operating activities are not expected to improve significantly, we are confident that we can still get short-term loans from local banks. We expect the good relationship with local banks will continue as we never incurred late payments of principles and interests.

The following table sets forth a summary of our cash flows for the periods indicated:

	Nine Months ended September 30,
Dollars in thousands	2013		2012
Net cash provided by operating activities	5,196		487
Net cash used in investing activities	(1,229	)	(2,567	)
Net cash (used in) / provided by financing activities	(7,346	)	1,104
Net cash outflows/inflows	(3,283	)	(965	)

Operating Activities

Net cash provided by operating activities was approximately $5.2 million in the nine months ended September 30, 2013, compared with net cash provided by operating activities of approximately $487,000 in the same period of 2012. The increase in net cash provided by operating activities was primarily due to the decrease in trade receivables and bills receivable which was partially offset by the increase in restricted cash and the increase in inventories in the nine months ended September 30, 2013.

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Investing Activities

Net cash used in investing activities in the nine months ended September 30, 2013 was approximately $1.2 million, a decrease of approximately $1.4 million from net cash used in investing activities of approximately $2.6 million in the same period in 2012. The decrease in net cash used in investing activities in the nine months ended September 30, 2013 was primarily due to fewer activities related to our construction of manufacturing and administrative facilities.

Financing Activities

Net cash used in financing activities was approximately $7.3 million in the nine months ended September 30, 2013, compared with net cash provided by financing activities of approximately $1.1 million in the same period of 2012. The increase in net cash used in financing activities was primarily due to the increase in restricted cash which was used as collateral for bank loans in the nine months ended September 30, 2013.

Loan Facilities

We secured new loans totaling approximately $99.0 million from banks for our working capital needs and we repaid approximately $99.1 million in bank loans in the nine months ended September 30, 2013. As a result, the balance of all our bank loans and bank borrowings as of September 30, 2013 was approximately $66.9 million, which includes short-term bank loans of approximately $32.7 million and bank borrowings secured by bank deposits of approximately $34.2 million. As of September 30, 2013, all our loans due were paid off.

As of September 30, 2013, the details of all our short-term bank loans and bank borrowings are as follows:

All amounts, other than percentages, are in U.S. dollar.

No	Type	Contracting Party	Valid Date	Duration	Amount
1	Facility Bank Loan	Shanghai Pudong Development Bank Village Bank	2012-10-15 to 2013-10-14	1 year	$439,560
2	Facility Bank Loan	City Credit Cooperatives in Gongyi	2012-12-26 to 2013-12-25	1 year	$2,930,400
3	Facility Bank Loan	Zhengzhou Bank	2013-01-07 to 2014-01-06	1 year	$4,884,000
4	Facility Bank Loan	Pingdingshan Bank	2013-03-28 to 2014-03-28	1 year	$1,391,940
5	Facility Bank Loan	Luoyang Bank	2013-04-10 to 2014-04-09	1 year	$3,256,000
6	Facility Bank Loan	Agricultural Bank of China	2013-05-08 to 2014-05-07	1 year	$1,628,000
7	Facility Bank Loan	Bank of China	2013-05-14 to 2014-05-13	1 year	$1,302,400
8	Facility Bank Loan	Kunlun Bank	2013-05-31 to 2014-05-30	1 year	$1,628,000
9	Facility Bank Loan	Shanghai Pudong Development Bank Village Bank	2013-06-24 to 2014-06-24	1 year	$732,600
10	Facility Bank Loan	China CITIC Bank	2013-06-26 to 2014-06-26	1 year	$2,279,200
11	Facility Bank Loan	China CITIC Bank	2013-06-27 to 2014-06-26	1 year	$1,465,200
12	Facility Bank Loan	China CITIC Bank	2013-06-28 to 2014-06-27	1 year	$976,800
13	Facility Bank Loan	Shanghai Pudong Development Bank Village Bank	2013-08-22 to 2014-08-21	1 year	$814,000
14	Facility Bank Loan	Shanghai Pudong Development Bank Village Bank	2013-08-22 to 2014-08-21	1 year	$407,000
15	Facility Bank Loan	Pingdingshan Bank	2013-08-23 to 2014-02-22	6 months	$814,000
16	Facility Bank Loan	Pingdingshan Bank	2013-08-27 to 2014-02-26	6 months	$1,628,000

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17	Facility Bank Loan	Industrial and Commercial Bank of China	2013-08-31 to 2014-02-21	6 months	$2,360,600
18	Facility Bank Loan	Shanghai Pudong Development Bank Village Bank	2013-09-2 to 2014-02-25	6 months	$814,000
19	Facility Bank Loan	Shanghai Pudong Development Bank	2013-09-11 to 2014-09-10	1 year	$2,930,400
20	Bank Borrowing	Puyang Commerical Bank	2013-04-08 to 2013-10-08	6 months	$1,628,000
21	Bank Borrowing	Puyang Commerical Bank	2013-04-12 to 2013-10-11	6 months	$814,000
22	Bank Borrowing	Puyang Commerical Bank	2013-04-24 to 2013-10-23	6 months	$814,000
23	Bank Borrowing	Shanghai Pudong Development Bank Village Bank	2013-05-03 to 2013-10-26	6 months	$81,400
24	Bank Borrowing	Puyang Commerical Bank	2013-05-21 to 2013-11-20	6 months	$814,000
25	Bank Borrowing	Puyang Commerical Bank	2013-05-22 to 2013-11-22	6 months	$814,000
26	Bank Borrowing	Puyang Commerical Bank	2013-05-24 to 2013-11-23	6 months	$814,000
27	Bank Borrowing	Puyang Commerical Bank	2013-05-27 to 2013-11-24	6 months	$814,000
28	Bank Borrowing	Puyang Commerical Bank	2013-05-28 to 2013-11-28	6 months	$814,000
29	Bank Borrowing	Puyang Commerical Bank	2013-05-29 to 2013-11-29	6 months	$814,000
30	Bank Borrowing	Shanghai Pudong Development Bank Village Bank	2013-06-05 to 2013-11-29	6 months	$113,960
31	Bank Borrowing	Puyang Commerical Bank	2013-06-05 to 2013-12-04	6 months	$814,000
32	Bank Borrowing	Shanghai Pudong Development Bank Village Bank	2013-06-07 to 2013-12-06	6 months	$814,000
33	Bank Borrowing	Shanghai Pudong Development Bank Village Bank	2013-06-08 to 2013-12-06	6 months	$814,000
34	Bank Borrowing	Shanghai Pudong Development Bank Village Bank	2013-06-08 to 2013-12-07	6 months	$814,000
35	Bank Borrowing	Shanghai Pudong Development Bank Village Bank	2013-06-08 to 2013-12-08	6 months	$814,000
36	Bank Borrowing	Shanghai Pudong Development Bank Village Bank	2013-06-13 to 2013-12-08	6 months	$1,628,000
37	Bank Borrowing	Nanyang Bank	2013-06-17 to 2013-12-14	6 months	$1,628,000
38	Bank Borrowing	Shanghai Pudong Development Bank Village Bank	2013-06-19 to 2013-12-14	6 months	$1,628,000
39	Bank Borrowing	Nanyang Bank	2013-07-04 to 2013-12-18	6 months	$1,628,000
40	Bank Borrowing	Puyang Commerical Bank	2013-07-08 to 2014-01-05	6 months	$976,800
41	Bank Borrowing	Puyang Commerical Bank	2013-07-10 to 2014-01-10	6 months	$814,000
42	Bank Borrowing	Puyang Commerical Bank	2013-08-09 to 2014-02-08	6 months	$1,139,600
43	Bank Borrowing	Agricultural Bank of China	2013-08-13 to 2013-12-30	5 months	$148,148
44	Bank Borrowing	Puyang Commerical Bank	2013-08-13 to 2014-02-12	6 months	$1,628,000
45	Bank Borrowing	Puyang Commerical Bank	2013-09-04 to 2014-03-03	6 months	$1,628,000
46	Bank Borrowing	Puyang Commerical Bank	2013-09-10 to 2014-03-09	6 months	$1,628,000
47	Bank Borrowing	Industrial and Commercial Bank of China	2013-09-11 to 2014-03-05	6 months	$814,000
48	Bank Borrowing	Puyang Commerical Bank	2013-09-13 to 2014-03-12	6 months	$4,884,000
49	Bank Borrowing	Puyang Commerical Bank	2013-09-17 to 2014-03-16	6 months	$1,628,000

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We have facility bank loans of approximately $32.7 million, with maturity dates ranging from October 14, 2013 to September 10, 2014 and bank borrowings secured by bank deposits of approximately $34.2 million. We will also consider refinancing debts. However, we cannot provide assurance that we will be able to refinance any of our debts on terms favorable to us in a timely manner.

Below is a brief summary of the payment obligations under material contracts to which we are a party:

On October 15, 2012, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Shanghai Pudong Development Bank Village Bank of Gongyi (“SPDVB”), whereby SPDVB has agreed to loan approximately $440,000 (RMB 2.7 million) to Refractories for a term of one year, at an interest rate of 6.56% per year on all outstanding principal.

On December 26, 2012, our subsidiary, Duesail, entered into a short term working capital loan agreement with City Credit Cooperatives in Gongyi (“CCCG”), whereby CCCG has agreed to loan approximately $2.9 million (RMB18 million) to Duesail for a term of one year, at an interest rate of 11.81% per year on all outstanding principal.

On January 7, 2013, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Zhengzhou Bank (“ZB”), whereby ZB has agreed to loan approximately $4.9 million (RMB 30 million) to Refractories for a term of one year, at an interest rate of 7.80% per year on all outstanding principal.

On March 28, 2013, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Pingdingshan Bank (“PB”), whereby PB has agreed to loan approximately $1.4 million (RMB 8.55 million) to Refractories for a term of one year, at an interest rate of 6.60% per year on all outstanding principal.

On April 10, 2013, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Luoyang Bank (“LYB”), whereby LYB has agreed to loan approximately $3.3 million (RMB 20 million) to Refractories for a term of one year, at an interest rate of 7.22% per year on all outstanding principal.

On May 8, 2013, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Agricultural Bank of China (“ABC”), whereby ABC has agreed to loan approximately $1.6 million (RMB 10 million) to Refractories for a term of one year, at an interest rate of 8.53% per year on all outstanding principal.

On May 14, 2013, our subsidiary, Duesail, entered into a short-term working capital loan agreement with Bank of China (“BC”), whereby BC has agreed to loan approximately $1.3 million (RMB 8 million) to Duesail for a term of one year, at an interest rate of 7.86% per year on all outstanding principal.

On May 31, 2013, our subsidiary, Duesail, entered into a short-term working capital loan agreement with Kunlun Bank, (“KB”), whereby KB has agreed to loan approximately $1.6 million (RMB 10 million) to Duesail for a term of one year, at an interest rate of 8.70% per year on all outstanding principal.

On June 24, 2013, our subsidiary, Refractories, entered into a short-term working capital loan agreement with SPDVB, whereby SPDVB has agreed to loan approximately $733,000 (RMB 4.5 million) to Refractories for a term of one year, at an interest rate of 6.06% per year on all outstanding principal.

On June 26, 2013, our subsidiary, Micronized, entered into a short-term working capital loan agreement with China CITIC Bank (“CITIC”), whereby CITIC has agreed to loan approximately $2.3 million (RMB 14 million) to Micronized for a term of one year, at an interest rate of 6.60% per year on all outstanding principal.

On June 27, 2013, our subsidiary, Refractories, entered into a short-term working capital loan agreement with CITIC, whereby CITIC has agreed to loan approximately $1.5 million (RMB 9 million) to Refractories for a term of one year, at an interest rate of 6.60% per year on all outstanding principal.

On June 28, 2013, our subsidiary, Refractories, entered into a short-term working capital loan agreement with CITIC, whereby CITIC has agreed to loan approximately $977,000 (RMB 6 million) to Refractories for a term of one year, at an interest rate of 6.60% per year on all outstanding principal.

On August 22, 2013, our subsidiary, Refractories, entered into a short term working capital loan agreement with SPDVB, whereby SPDVB has agreed to loan approximately $814,000 (RMB5 million) to Refractories for a term of one year, at an interest rate of 8.46% per year on all outstanding principal.

On August 22, 2013, our subsidiary, Duesail, entered into a short-term working capital loan agreement with SPDVB, whereby SPDVB has agreed to loan approximately $407,000 (RMB 2.5 million) to Duesail for a term of one year, at an interest rate of 8.40% per year on all outstanding principal.

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On August 23, 2013, our subsidiary, Duesail, entered into a short-term working capital loan agreement with PB, whereby PB has agreed to loan approximately $814,000 (RMB 5 million) to Duesail for a term of six months, at an interest rate of 6.16% per year on all outstanding principal.

On August 27, 2013, our subsidiary, Refractories, entered into a short-term working capital loan agreement with PB, whereby PB has agreed to loan approximately $1.6 million (RMB 10 million) to Refractories for a term of six months, at an interest rate of 6.16% per year on all outstanding principal.

On August 31, 2013, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Industrial and Commercial Bank of China (“ICBC”), whereby ICBC has agreed to loan approximately $2.4 million (RMB 14.5 million) to Refractories for a term of six months, at an interest rate of 8.40% per year on all outstanding principal.

On September 2, 2013, our subsidiary, Duesail, entered into a short-term working capital loan agreement with SPDVB, whereby SPDVB has agreed to loan approximately $814,000 (RMB 5 million) to Duesail for a term of six months, at an interest rate of 7.84% per year on all outstanding principal.

On September 11, 2013, our subsidiary, Refractories, entered into a short-term working capital loan agreement with Shanghai Pudong Development Bank (“SPDB”), whereby SPDB has agreed to loan approximately $2.9 million (RMB 18 million) to Refractories for a term of one year, at an interest rate of 6.60% per year on all outstanding principal.

Statutory Reserves

Under PRC regulations, all our subsidiaries in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC GAAP. In addition, these companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves until the balance of the reserves reaches 50% of their registered capital. The statutory reserves are not distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year losses.

Special Reserve

Before the reorganization, a former subsidiary of Refractories, Gongyi GengSheng Refractories Co., Ltd., was entitled to a special tax concession (“Tax Concession”) because it employed the required number of disabled staff according to the relevant PRC tax rules. In particular, this Tax Concession exempted the subsidiary from paying enterprise income tax. However, these tax savings can only be used for future development of its production facilities or welfare matters, and cannot be distributed as cash dividends. Accordingly, the same amount of tax savings was set aside and taken to special reserve which is not available for distribution. This reserve as maintained by the subsidiary has been combined into Refractories upon the reorganization and is subject to the same restrictions in its usage.

Restrictions on net assets also include the conversion of local currency into foreign currencies, tax withholding obligations on dividend distributions, the need to obtain State Administration of Foreign Exchange approval for loans to a non-PRC consolidated entity and the covenants or financial restrictions related to outstanding debt obligations. We did not have these restrictions on our net assets as of September 30, 2013 and December 31, 2012.

The following table provides the amount of our statutory reserves, special reserve, the amount of restricted net assets, consolidated net assets, and the amount of restricted net assets as a percentage of consolidated net assets, as of September 30, 2013 and December 31, 2012.

		As of		As of
		September 30,		December 31,
		2013		2012
Statutory reserves	$	4,554,936	$	4,554,936
Special reserve		3,556,036		3,556,036
Total restricted net assets	$	8,110,972	$	8,110,972
Consolidated net assets	$	31,699,710	$	40,331,549
Restricted net assets as percentage of consolidated net assets		25.6%		20.1%

Total restricted net assets accounted for approximately 25.6% of our consolidated net assets as of September 30, 2013. As our subsidiaries usually set aside only 10% of after-tax net profits each year to fund the statutory reserves and are not required to fund the statutory reserves when they incur losses, we believe the potential impact of such restricted net assets on our liquidity is limited.

Accounts Receivable and Bills Receivable

Accounts receivable represents amounts due to us by our customers on the sale of products or services on credit.

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Bills receivable represents bank undertakings that essentially guarantee the payment of amounts owed by our customers to us. The undertakings are provided by banks upon receipt of collateral deposits from the customers. Bills receivable can be sold by us at a discount before maturity.

The following is the aging analysis for accounts receivable as of September 30, 2013 and December 31, 2012:

		As of		As of
		September 30,		December 31,
		2013		2012
Due within 1 year	$	39,257,055	$	49,553,183
Due from 1 to 2 years		7,430,857		4,821,849
Due from 2 to 3 years		2,064,251		2,521,481
Due over 3 years		3,099,323		1,646,402
Total	$	51,851,486	$	58,542,915

The following is the aging analysis for bills receivable as of September 30, 2013 and December 31, 2012:

		As of		As of
		September 30,		December 31,
		2013		2012
Due within 6 months	$	4,153,097	$	9,913,668
Total	$	4,153,097	$	9,913,668

We generally provide our customers in the refractories segment with a payment period of 90 days and our customers in the fine precision abrasives segment with a payment period of 180 days. As there are many producers in the refractories and fine precision abrasives market competing with us, we find it difficult to change these payment terms. The payment term for our other segments varies by customers.

We noted that turnover days of accounts receivable in our refractories segment increased in the nine months ended September 30, 2013 due to the macro economic situation. However, we are usually willing to continue the relationship with our customers in the refractory segment and allow for additional time for them to make payments. In the meantime, since most of our large customers are state-owned steel producers and our products are essential for their daily operations, we have not seen a significant increase of risk related to the collection of accounts receivables.

Critical Accounting Policies

Basis of consolidation

The Company applies the guidance of Topic 810“Consolidation”of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8 the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.

The consolidated financial statements include all accounts of the Company and its consolidated subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

Use of estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 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 periods. These accounts and estimates include, but are not limited to, the valuation of trade receivables, other receivables, inventories, deferred income taxes, provision of warranty, the estimation on useful lives of property, plant and equipment and the impairment of long-lived assets. Actual results could differ from those estimates.

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Allowance for doubtful accounts

The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance. The Company considers the historical level of credit losses and applies percentages to aged receivable categories. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.

The Company’s general provisioning policy is to record an allowance equivalent to 5% of trade receivables due from 1 to 2 years, 40% of trade receivables due from 2 to 3 years and 90% of trade receivables due over 3 years. Additional specific provision is made against trade receivables to the extent which they are considered to be doubtful.

Bad debts are written off when identified. The Company does not accrue interest on trade receivables.

Investment in a non-consolidated entity

Investment in an entity over which the Company does not have control, but has significant influence, is accounted for using the equity method of accounting. The Company’s investment in Yili YiQiang Silicon Limited ("Yili") is reported in the consolidated balance sheets as investment in a non-consolidated entity.

Impairment of long-lived assets

Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets.

During the reporting periods, the Company has not identified any indicators that would require testing for impairment.

Financial guarantee issued

The Company has acted as guarantor for bank loans granted to certain local authorities and certain business associates. The Company assessed its obligation under this guarantee pursuant to the provision of ASC 460 “Guarantee”. The Company recognized in its consolidated financial statements a liability for that guarantee at fair value at the date of inception and recognized as an expense in profit or loss immediately. The amount of guarantee liability is amortized in profit or loss over the term of the guarantee as income from financial guarantees issued.

Revenue recognition

Pure products sales - Sales revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to and accepted by customers, the sales price is fixed or determinable and collection is reasonably assured.

Products sales with installation, testing, maintenance, repair and replacement - This kind of contract is signed as a whole such that all of these services are provided for one fixed fee, and it does not separate the components of products, installation, testing, maintenance, repair and replacement. After delivery of products/materials to customers, the Company will do the installation and testing works, which takes one to two days, before acceptance and usage by customers. The product life cycle is very short and can normally be used for 80 cycles of production by customers (about two to three days). Thereafter the customers will need maintenance, repair and replacement of the Company’s materials. For each maintenance, repair and replacement, the Company will supply materials and do the installation and testing works again, which are regarded as separate sales by the Company. In other words, the Company will have sales to this kind of customer every couple of days. This kind of sales revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the installation and testing works are completed and after acceptance by customers, the sales price is fixed or determinable and collection is reasonably assured.

Revenue from sales of the Company’s product represents the invoiced value of goods, net of the value-added tax (“VAT”). The Company’s products that are sold in the PRC are subject to VAT at a rate of 17 percent of the gross sales price. The VAT may be offset by VAT paid by the Company on raw materials, other materials or costs included in the cost of producing the Company’s products.

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Stock-based compensation

The Company adopted the provisions of ASC 718, which requires the use of the fair value method of accounting for share-based compensation. Under the fair value based method, compensation cost related to employee stock options or similar equity instruments which are equity-classified awards, is measured at the grant date based on the value of the award and is recognized over the requisite service period, which is usually the vesting period. ASC 718 also requires measurement of cost of a liability-classified award based on its current fair value.

Recently issued accounting pronouncements

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer, Mr. Shunqing Zhang, and our Interim Chief Financial Officer, Ms. Weina Zhang, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2013. Based on our assessment, Mr. Zhang and Ms. Zhang determined that, as of September 30, 2013, our disclosure controls and procedures were effective.

Changes in Internal Control

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None for the period covered by this report.

ITEM 1A. RISK FACTORS.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

We have not sold any equity securities during the fiscal quarter ended September 30, 2013.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

There were no defaults upon senior securities during the fiscal quarter ended September 30, 2013.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.

(a)          Exhibits

Exhibit No.	Description
2.1	Share Exchange Agreement, dated April 25, 2007, among the Registrant, Gengsheng International and Shunqing Zhang [Incorporated by reference to Exhibit 2.1 to the Registrant’s current report on Form 8-K filed on April 27, 2007, in commission file number 0-51527].
3.1	Articles of Incorporation of the Registrant as filed with the Secretary of State of the State of Nevada on May 22, 2006 [Incorporated by reference to Exhibit 3i.1 to the Registrant’s current report on Form 8-K filed on October 10, 2006, in commission file number 0-51527].
3.2	Articles of Merger of the Registrant as filed with the Secretary of State of the State of Nevada on August 15, 2006 [Incorporated by reference to Exhibit 3i.2 to the Registrant’s current report on Form 8-K filed on October 10, 2006, in commission file number 0-51527].
3.3	Certificate of Amendment to Articles of Incorporation as filed with the Secretary of State of the State of Nevada [Incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed on December 13, 2006, in commission file number 0-51527].
3.4	Certificate of Correction as filed with the Secretary of State of the State of Nevada on April 17, 2007 [Incorporated by reference to Exhibit 3.4 to the Registrant’s current report on Form 8-K filed on April 27, 2007, in commission file number 0-51527].
3.5	Amended and Restated Bylaws of the Registrant, adopted on May 23, 2006 [Incorporated by reference to Exhibit 3.5 to the Registrant’s current report on Form 8-K filed on April 27, 2007, in commission file number 0-51527].
4.1	Form of Registration Rights Agreement, dated April 25, 2007 [Incorporated by reference to Exhibit 4.1 to the Registrant’s current report on Form 8-K filed on April 27, 2007, in commission file number 0-51527].
4.2	Lock-up Agreement, dated April 25, 2007, by and between Shunqing Zhang and the Registrant [Incorporated by reference to Exhibit 4.2 to the Registrant’s current report on Form 8-K filed on April 27, 2007, in commission file number 0-51527].
4.3	Form of Common Stock Purchase Warrant [Incorporated by reference to Exhibit 4.3 to the Registrant’s current report on Form 8-K filed on April 27, 2007, in commission file number 0-51527].
31.1	Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase*
101.DEF	XBRL Taxonomy Extension Definition Linkbase*
101.LAB	XBRL Taxonomy Extension Label Linkbase*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase*

*Filed herewith.
**Furnished herewith.

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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 hereunto duly authorized.

	CHINA GENGSHENG MINERALS, INC.
Date: November 19, 2013	By: /s/ Shunqing Zhang
	Shunqing Zhang
	Chief Executive Officer and Chairman
Date: November 19, 2013	By: /s/ Weina Zhang
	Weina Zhang
	Interim Chief Financial Officer

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