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, 2008. |
o | 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: 0-52549
RINO International Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA | 41-1508112 | |
(STATE OR OTHER JURISDICTION OF | (I.R.S. EMPLOYER IDENTIFICATION NO.) | |
INCORPORATION OR ORGANIZATION |
11 Youquan Road, Zhanqian Street, Jinzhou District
Dalian, People’s Republic of China 116100
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: +86-411-87661222
_______________
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 o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o
Non-accelerated filer x Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x
The number of shares of Common Stock of the Registrant, par value $.0001 per share, outstanding on November 10, 2008, was 25,000,000.
RINO INTERNATIONAL CORPORATION
Part I - Financial Information | 2 | ||
Item 1 - Financial Statements | 2 | ||
Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007 | 2 | ||
Consolidated Statements of Income and Other Comprehensive Income for the three-month and nine-month periods ended September 30, 2008 and 2007 (unaudited) | 3 | ||
Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2008 (unaudited) | 4 | ||
Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited) | 5 | ||
Notes to the Consolidated Financial Statements (unaudited) | 6 | ||
Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition | 28 | ||
Item 3 - Quantitative and Qualitative Disclosure about Market Risk | 38 | ||
Item 4 - Controls and Procedures | 41 | ||
Part II - Other Information | 41 | ||
Item 1A. Risk Factors | 41 | ||
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds | 46 | ||
Item 6 - Exhibits | 48 | ||
Signature Page | 49 |
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
September 30, 2008 | December 31, 2007 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 1,366,511 | $ | 7,390,631 | |||
Restricted cash | 1,024,951 | 1,000,000 | |||||
Accounts receivable | 50,549,827 | 19,222,133 | |||||
Notes receivable | 5,119,245 | 202,670 | |||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 118,150 | 2,818,122 | |||||
Inventories | 690,460 | 178,480 | |||||
Advances for inventory purchase | 23,998,295 | 12,092,202 | |||||
Other current assets and prepaid expenses | 1,215,893 | 1,174,464 | |||||
Total current assets | 84,083,332 | 44,078,702 | |||||
PROPERTY, PLANT AND EQUIPMENT, NET | 12,075,935 | 11,000,581 | |||||
OTHER ASSETS | |||||||
Accounts receivable (non-current) | 2,342,263 | 1,618,203 | |||||
Prepaid expenses (non-current) | 76,808 | 95,706 | |||||
Advances for equipment and construction material purchase | 7,300,869 | 3,751,343 | |||||
Prepayment for land use right | 457,042 | 428,301 | |||||
Intangible assets, net | 1,224,962 | 1,190,289 | |||||
Total other assets | 11,401,944 | 7,083,842 | |||||
Total assets | $ | 107,561,211 | $ | 62,163,125 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable | $ | 1,843,492 | $ | 2,534,858 | |||
Billings in excess of costs and estimated earnings on uncompleted contracts | 112,503 | - | |||||
Customer deposits | 4,018,785 | 116,214 | |||||
Liquidated damages payable | 2,116,708 | 1,000,000 | |||||
Other payables and accrued liabilities | 1,924,419 | 686,031 | |||||
Due to shareholder | 674,883 | 106,963 | |||||
Other taxes payable | 25,845 | 581,444 | |||||
Income tax payable | 894,904 | 5,970,794 | |||||
Value added tax payable | 4,453,106 | 2,989,365 | |||||
Short-term loan | 7,315,000 | - | |||||
Total current liabilities | 23,379,645 | 13,985,669 | |||||
REDEEMABLE COMMON STOCK ($0.0001 par value, 5,464,357 shares issued with conditions for redemption outside the control of the company) | 24,480,319 | 24,480,319 | |||||
COMMITMENTS AND CONTINGENCIES | - | - | |||||
SHAREHOLDERS' EQUITY | |||||||
Preferred Stock ($0.0001 par value, 50,000,000 shares authorized, none issued and outstanding) | - | - | |||||
Common Stock ($0.0001 par value, 10,000,000,000 shares authorized, 25,000,000 shares issued and outstanding as of September 30, 2008 and December 31, 2007) | 2,500 | 2,500 | |||||
Additional paid-in capital | 19,909,557 | 8,221,663 | |||||
Retained earnings | 27,762,359 | 11,376,163 | |||||
Statutory reserves | 5,988,170 | 2,109,539 | |||||
Accumulated other comprehensive income | 6,038,661 | 1,987,272 | |||||
Total shareholders' equity | 59,701,247 | 23,697,137 | |||||
Total liabilities and shareholders' equity | $ | 107,561,211 | $ | 62,163,125 |
The accompanying notes are an integral part of this statement.
2
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
Three months ended | Nine months ended | ||||||||||||
SEPTEMBER 30, | SEPTEMBER 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
REVENUES: | |||||||||||||
Contracts | $ | 43,575,844 | $ | 14,789,076 | $ | 92,060,717 | $ | 29,065,605 | |||||
Services | 1,305,292 | 2,849,885 | 6,482,958 | 17,066,298 | |||||||||
44,881,136 | 17,638,961 | 98,543,675 | 46,131,903 | ||||||||||
COST OF SALES | |||||||||||||
Cost of contracts | 23,298,573 | 8,838,709 | 51,144,465 | 18,147,939 | |||||||||
Cost of services | 848,959 | 1,328,688 | 3,341,128 | 5,265,797 | |||||||||
Depreciation | 165,889 | 140,867 | 486,145 | 399,681 | |||||||||
24,313,421 | 10,308,264 | 54,971,738 | 23,813,417 | ||||||||||
GROSS PROFIT | 20,567,715 | 7,330,697 | 43,571,937 | 22,318,486 | |||||||||
OPERATING EXPENSES | |||||||||||||
Selling, general and administrative expenses | 4,211,794 | 2,186,565 | 10,065,666 | 5,339,323 | |||||||||
Research and development | - | - | 267,817 | 681,136 | |||||||||
Stock compensation expense-shares placed in escrow | 5,832,960 | - | 11,665,920 | - | |||||||||
TOTAL OPERATING EXPENSES | 10,044,754 | 2,186,565 | 21,999,403 | 6,020,459 | |||||||||
INCOME FROM OPERATIONS | 10,522,961 | 5,144,132 | 21,572,534 | 16,298,027 | |||||||||
OTHER INCOME (EXPENSE), NET | |||||||||||||
Other income | 15,431 | 87 | 90,187 | 5,240 | |||||||||
Government grant | 15,863 | 47,036 | - | - | |||||||||
Interest income | 76,285 | 628 | 132,853 | 3,055 | |||||||||
Interest expense | (149,095 | ) | (178,278 | ) | (374,503 | ) | (489,233 | ) | |||||
Liquidated damage expense | (616,708 | ) | - | (1,116,708 | ) | - | |||||||
Other expenses | (7,623 | ) | (336 | ) | (39,536 | ) | (3,532 | ) | |||||
TOTAL OTHER INCOME (EXPENSES), NET | (665,847 | ) | (130,863 | ) | (1,307,707 | ) | (484,470 | ) | |||||
INCOME BEFORE PROVISION FOR INCOME TAXES | 9,857,114 | 5,013,269 | 20,264,827 | 15,813,557 | |||||||||
PROVISION FOR INCOME TAXES | - | 746,581 | - | 4,370,199 | |||||||||
NET INCOME | 9,857,114 | 4,266,688 | 20,264,827 | 11,443,358 | |||||||||
OTHER COMPREHENSIVE INCOME: | |||||||||||||
Foreign currency translation adjustment | 335,796 | 482,329 | 4,051,389 | 785,323 | |||||||||
COMPREHENSIVE INCOME | $ | 10,192,910 | $ | 4,749,017 | $ | 24,316,216 | $ | 12,228,681 | |||||
WEIGHTED AVERAGE NUMBER OF SHARES: | |||||||||||||
Basic | 25,000,000 | 17,899,643 | 25,000,000 | 17,899,643 | |||||||||
Diluted | 25,153,941 | 17,899,643 | 25,152,127 | 17,899,643 | |||||||||
EARNINGS PER SHARE: | |||||||||||||
Basic | $ | 0.39 | $ | 0.24 | $ | 0.81 | $ | 0.64 | |||||
Diluted | $ | 0.39 | $ | 0.24 | $ | 0.81 | $ | 0.64 |
The accompanying notes are an integral part of this statement.
3
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(UNAUDITED)
Common Stock | ||||||||||||||||||||||
Par Value $0.0001 | Additional | Retained Earnings | Accumulated other | |||||||||||||||||||
Number | Common | Paid-in | Statutory | Unrestricted | comprehensive | |||||||||||||||||
of shares | stock | capital | reserve | earnings | income | Totals | ||||||||||||||||
BALANCE, December 31, 2007 | 25,000,000 | $ | 2,500 | $ | 8,221,663 | $ | 2,109,539 | $ | 11,376,163 | $ | 1,987,272 | $ | 23,697,137 | |||||||||
Stock compensation expense-shares placed in escrow | 11,665,920 | 11,665,920 | ||||||||||||||||||||
Imputed interest on advances from a shareholder | 21,974 | 21,974 | ||||||||||||||||||||
Net income | 20,264,827 | 20,264,827 | ||||||||||||||||||||
Allocation to statutory reserve | 3,878,631 | (3,878,631 | ) | - | ||||||||||||||||||
Foreign currency translation gain | 4,051,389 | 4,051,389 | ||||||||||||||||||||
BALANCE, September 30, 2008 (Unaudited) | 25,000,000 | $ | 2,500 | $ | 19,909,557 | $ | 5,988,170 | $ | 27,762,359 | $ | 6,038,661 | $ | 59,701,247 |
The accompanying notes are an integral part of this statement.
4
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
2008 | 2007 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income | $ | 20,264,827 | $ | 11,443,358 | |||
Adjusted to reconcile net income to cash used in operating activities: | |||||||
Depreciation | 603,965 | 483,778 | |||||
Amortization | 48,972 | 39,180 | |||||
Imputed interest | 21,974 | 31,090 | |||||
Amortization of long term prepaid expense | 25,090 | 16,330 | |||||
Stock compensation expense - shares placed in escrow | 11,665,920 | - | |||||
Changes in operating assets and liabilities | |||||||
Accounts receivable | (29,979,156 | ) | (7,820,427 | ) | |||
Costs and estimated earnings in excess of billings on uncompleted contracts | 2,413,818 | (3,173,430 | ) | ||||
Inventories | (63,928 | ) | (33,498 | ) | |||
Other current assets and prepaid expenses | 39,658 | (492,896 | ) | ||||
Advances for inventory purchase | (10,826,678 | ) | (8,017,662 | ) | |||
Accounts payable | (851,537 | ) | (74,090 | ) | |||
Billings in excess of costs and estimated earnings on uncompleted contracts | 110,250 | 189,046 | |||||
Customer deposits | 3,816,435 | 10,007 | |||||
Liquidated damages payable | 1,116,708 | - | |||||
Other payables and accrued liabilities | 1,169,036 | 344,385 | |||||
Notes receivable | (4,804,195 | ) | (2,123,148 | ) | |||
Other taxes payable | (584,387 | ) | 357,910 | ||||
Value added tax payable | 1,229,207 | 1,581,692 | |||||
Income tax payable | (5,384,128 | ) | (503,559 | ) | |||
Deferred tax liabilities | - | 4,370,199 | |||||
Net cash used in operating activities | (9,968,149 | ) | (3,371,735 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchase of property and equipment | (902,594 | ) | (81,453 | ) | |||
Purchase of intangible assets | - | (378,856 | ) | ||||
(Increase) decrease in advances for construction material and equipment purchase | (3,231,748 | ) | 560,785 | ||||
Prepayment for land use right | - | (330,830 | ) | ||||
Net cash used in investing activities | (4,134,342 | ) | (230,354 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Payment on due to shareholder | (1,785,305 | ) | (3,076 | ) | |||
Proceeds from shareholder advances | 2,334,594 | - | |||||
Increase in restricted cash | (24,951 | ) | - | ||||
Proceeds from short-term loan | 7,168,500 | - | |||||
Net cash provided by (used in) financing activities | 7,692,838 | (3,076 | ) | ||||
EFFECT OF EXCHANGE RATE ON CASH | 385,533 | 78,036 | |||||
DECREASE IN CASH AND CASH EQUIVALENTS | (6,024,120 | ) | (3,527,129 | ) | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 7,390,631 | 3,604,350 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 1,366,511 | $ | 77,221 | |||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||
Cash paid during the period for: | |||||||
Interest | $ | 352,529 | 428,465 | ||||
Income taxes | $ | 5,384,128 | 503,559 |
The accompanying notes are an integral part of this statement.
5
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 1 – ORGANIZATION AND BUSINESS
RINO International Corporation (formerly known as “Jade Mountain Corporation” or “JMC”), (the “Company) was originally incorporated in 1984 as Applied Biometrics, Inc. in accordance with the laws of the State of Minnesota. In August 2000, the Company determined that it would be unable to complete the development of its primary product and ceased its ongoing business operations.
On December 27, 2006, the shareholders of JMC approved a proposal to re-domicile JMC from the State of Minnesota to the State of Nevada. JMC effected the re-domicile through a merger with a new Nevada corporation which was formed by JMC on September 12, 2006 solely and specifically for the purpose of effecting the re-domicile of JMC. At this time, JMC changed its name to Jade Mountain Corporation. During the first six months ended June 30, 2007, JMC ceased all business operations and disposed of all its assets, liabilities and operating activities. JMC has had no operations or significant assets since the year ended December 31, 2006.
Innomind Group Limited (“Innomind”) was incorporated in the British Virgin Islands (“BVI”) on November 17, 2006 as an investment holding company. Through its wholly owned subsidiary, Dalian Innomind Environment Engineering Co., Ltd. (“Dalian Innomind”) incorporated in the People’s Republic of China (“PRC”) as a wholly-owned foreign limited liability company on July 9, 2007. Innomind’s principal activities are the design, development, manufacture and installation of industrial equipment used mainly for environmental protection purposes in the PRC. In accordance with the business permit, Dalian Innomind’s right of operation expires on July 8, 2022 and is renewable on expiry.
Dalian Rino Environment Engineering Science And Technology Co., Ltd. (“Dalian Rino”) was incorporated in the PRC on March 5, 2003 as a limited liability company. On September 24, 2008, Dalian Rino formed Dalian Rino Environment Project Design Co., Ltd. (“Dalian Rino Design”) as a wholly-owned limited liability company. The business activities of Dalian Rino and Dalian Rino Design are the same with those of Dalian Innomind. In accordance with the business permit, Dalian Rino’s business permit expires on March 4, 2021 and is renewable. Dalian Rino Design’s right of operation expires on September 23, 2018 and is renewable.
On October 5, 2007, JMC consummated a Share Exchange Agreement (“the Agreement”) with the shareholders of Innomind pursuant to which JMC issued 17,899,643 shares of Common Stock, par value $0.0001 per share to the shareholders of Innomind for 100% equity interest in Innomind. Prior to the Agreement: (i) on July 16, 2007, the Company consummated a one (1) share for two hundred thousand (200,000) shares reverse split of its Common Stock, with fractional shares rounded up to the nearest whole number (the “Reverse Split”); and (ii) on August 31, 2007, the Company’s Board of Directors authorized a one hundred (100) shares for one (1) share forward split of the issued and outstanding shares of its Common Stock (the “Forward Split”). All share and per share amounts set forth in this Current Report as of dates on or after July 16, 2007, give effect to the Reverse Split and all share and per share amounts set forth in this Current Report as of dates after August 31, 2007, give effect to the Forward Split.
6
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
The merger of JMC and Innomind is being treated for accounting purposes as a capital transaction and recapitalization by Innomind (the “accounting acquirer”) and re-organization by JMC (the “accounting acquiree”). As a result, Innomind acquired the net assets of Jade Mountain at book value.
The financial statements have been prepared as if the re-organization had occurred retroactively. Accordingly, these financial statements include:
1) | The balance sheet consisting of the net assets of the accounting acquirer at historical cost and the net assets of the accounting acquiree at historical cost. |
2) | The statement of operations including the operations of the accounting acquirer for the periods presented and the operations of the accounting acquiree from the date of the transaction. |
On October 3, 2007, Dalian Innomind entered into a series of agreements (collectively known as the Restructuring Agreements) with Dalian Rino and the shareholders of Dalian Rino in which Dalian Innomind assumed the management of the business activities of Dalian Rino, making Dalian Rino a contractually controlled affiliate under EITF 97-2. As both companies were under common control before and after the consummation of the Restructuring Agreements on October 5, 2007, this was accounted for as a reorganization of entities under common control and consolidated financial statements were prepared as if the reorganization occurred at the beginning of the first period presented.
Effective May 9, 2008, Jade Mountain Corporation changed its name to “RINO International Corporation.” The board approved the name change and deemed it better reflected the direction and business of the Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements of RINO International Corporation reflect the activities of its 100% owned subsidiaries Innomind, Dalian Innomind, Dalian Rino, a contractually controlled affiliate of Dalian Innomind, and Dalian Rino Design, a 100% owned subsidiary of Dalian Rino (collectively, the “Company”). All inter-company balances and transactions have been eliminated in consolidation.
Basis of Presentation
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and are expressed in US dollars.
7
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
The Company has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2007 annual report filed on Form 10-K/A.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the Unites States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates used in preparing its financial statements are reasonable and prudent. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the financial statements, cash and cash equivalents include cash on hand, demand deposits with banks, and all highly-liquid investments with an original maturity of 3 months or less.
The cash held in escrow pursuant to the Board Escrow Holdback as described in Note 20 is accounted for as other current assets and is not shown as cash and cash equivalents on the balance sheet until such funds have been released from escrow pursuant to the terms of the Securities Purchase Agreement.
Restricted Cash
The Company records cash deposits in banks or other financial institutions subject to restrictions on the withdrawal or use of the funds as restricted cash.
Accounts Receivable
Accounts receivable represents amounts due from customers for products sales and services. The Company grants credit to customers without collateral. The Company’s management periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. The Company’s current accounts receivables are outstanding for less than one year and the Company has not experienced any loss from uncollected accounts receivable. The Company believes all receivables are fully collectible and therefore did not reserve an allowance for doubtful account as of September 30, 2008.
Inventories
Inventories are stated at the lower of cost (weighted average method) or market.
8
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
Property, Plant and Equipment
Property, plant, and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized while expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is provided on a straight-line basis, less estimated residual value over the assets’ estimated useful lives. The estimated useful lives are as follows:
Buildings | 30 Years |
Plant and machinery | 15 Years |
Motor vehicles | 10 Years |
Furniture, fixtures and equipment | 5 Years |
Intangible Assets
Intangible assets are stated at cost, less accumulated amortization and impairments. Land use rights are stated at cost, less accumulated amortization and are amortized over the term of the relevant rights of 50 years from the date of acquisition.
Other Long-Lived Assets
Long-lived assets and certain identifiable intangible assets are reviewed for impairment at least annually or more often whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the long-lived assets. As of September 30, 2008, the Company expected these assets to be fully recoverable.
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.” SFAS No. 157, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and payables qualified as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined as follows:
· | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
· | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
· | Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value. |
9
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
As of September 30, 2008, the short-term bank loan amounted to $7,315,000. In accordance with SFAS 157, the Company determined that the carrying value of these loans approximated the fair value using the level 2 inputs by comparing the stated loan interest rate to the rate charged by the Bank of China to similar loans, since no quoted market rate is available.
Carrying Value as of September 30, 2008 | Fair Value Measurements at September 30, 2008 Using Fair Value Hierarchy | ||||||||||||
Liabilities | Level 1 | Level 2 | Level 3 | ||||||||||
Short-term bank loans | $ | 7,315,000 | $ | 7,315,000 |
The Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with SFAS No. 157.
Revenue Recognition
Contracts - The Company enters into long-term fixed-price contracts with customers to manufacture and install industrial equipment. Revenue on long-term fixed-price contracts is recognized under the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”. Under the percentage-of-completion method, management estimates the percentage-of-completion based upon costs incurred to date as a percentage of the total estimated costs to the customer. When total cost estimates exceed revenues, the Company accrues for the estimated losses immediately. The use of the percentage-of- completion method requires significant judgment relative to estimating total contract revenues and costs, including assumptions concerning the length of time to complete the project, the nature and complexity of the work to be performed, and anticipated changes in estimated costs. Estimates of total contract revenues and costs are continuously monitored during the term of the contract, and recorded revenues and costs are subject to revision as the contract progresses. When revisions in estimated contract revenues and costs are determined, such adjustments are recorded in the period in which they are first identified.
Services - In addition to our specialty equipment sales, the Company uses heavy machining equipment to perform machining services for third parties. These engagements, numbering several hundred per year, are essentially piecework and are completed in usually less than one month. Accordingly, these heavy machinery contracts do not fall within the scope of SOP 81-1. Each machining engagement is governed by a separate contract, indicating existence of an arrangement. Revenue is recognized when service is performed, which is usually concurrent with delivery to the customer, the contract price is set by contract, and collectability is reasonably assured. Accordingly, these revenues are recognized under Staff Accounting Bulletin No. 104.
10
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
The Company also provides technical professional services to its customers based on a fixed-price time contract. The Company recognizes services-based revenue from all of its contracts when the services have been performed, the customers have approved the completion of the services and invoices have been issued and collectability is reasonably assured.
Government Grant
The Dalian municipal government also approved grants to the Company to encourage the high-technology industry. The grants are recognized as other income on receipt from the local government.
Shipping and Handling
Shipping and handling for raw materials purchased are included in cost of goods sold. Shipping and handling cost incurred for shipping of finished products to customers are included in selling expenses. Shipping and handling expenses for the three months ended September 30, 2008 and 2007 amounted to $217,657 and $40,133, respectively.
Shipping and handling expenses for the nine months ended September 30, 2008 and 2007 amounted to $385,219 and $265,848, respectively.
Research and Development Costs
Research and development (or “R&D”) expenses include salaries, material, contract and other outside service fees, facilities and overhead costs. Under the guidance of SFAS 2, “Accounting for Research and Development Costs”, the Company expenses the costs associated with the R&D activities when incurred.
Stock-based Compensation
Stock-based compensation is accounted for at fair value in accordance with SFAS 123(R) “Accounting for Stock-Based Compensation”. SFAS 123R requires that compensation cost relating to stock-based payment transactions be recognized in financial statements. That cost is measured based on the fair value of the equity or liability instruments issued on the grant date, and is recognized over the period during which a party is required to provide service in exchange for the award (typically the vesting period).
Income Taxes
The Company accounts for income taxes under the SFAS 109, “Accounting for Income Taxes”. Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period included the enactment date.
11
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s financial statements.
China Income Taxes
The Company’s subsidiaries are governed by the Income Tax Law of the People’s Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the Income Tax Laws).
Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
The key changes are:
a. | The new standard EIT rate of 25% replaces the 33% rate applicable to both DES and FIEs, except for High Tech companies that pay a reduced rate of 15%; |
b. | Companies established before March 16, 2007 continue to enjoy tax holiday treatment approved by local government for a grace period of either for the next 5 years or until the tax holiday term is completed, whichever is sooner. |
In addition, the new EIT also grants tax holidays to entities operating in certain beneficial industries, such as the agriculture, fishing, and environmental protection. Entities in beneficial industries enjoy a three-year period tax exempt and a three-year period with 50% reduction in the income tax rates.
Dalian Innomind and Rino are entities in the environmental protection industry, which is qualified for the tax exemption for three years and a 50% reduction for the following three years. As a result, Dalian Innomind and Rino enjoy a 100% tax exemption for the years 2008 through 2010 and a 50% income tax reduction for the years 2011 through 2013.
Foreign Currency Translation
JMC and Innomind maintain their accounting records in their functional currency in the United States dollars and Hong Kong Dollars, respectively, whereas Dalian Innomind and Dalian Rino maintain their accounting records in their functional currency, Chinese Renminbi (“RMB”).The reporting currency of the Company is the United States dollar.
12
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
Dalian Innomind and Dalian Rino assets and liabilities are translated into United States dollars at period-end exchange rates ($0.14630 and $0.13710 at September 30, 2008 and December 31, 2007, respectively). Dalian Innomind and Dalian Rino revenues and expenses are translated into United States dollars at weighted-average exchange rates for the periods ($0.14337 and $0.13064 for the nine months ended September 30, 2008 and 2007, respectively). Resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Items in the cash flow statement are translated at the average exchange rate for the period. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
As of September 30, 2008 and December 31, 2007, translation adjustments resulting from this process included in accumulated other comprehensive income in the consolidated statements of shareholders’ equity amounted to $6,038,661 and $1,987,272.
Earnings Per Share
Basic earnings (loss) per share is computed by dividing the net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the respective period presented in the accompanying financial statements.
Fully diluted earnings (loss) per share are computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock equivalents (primarily outstanding options and warrants).
Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company's net income (loss) position at the calculation date.
Segments
The Company designs and manufactures pollution control equipment and other equipment designed to reduce the resource intensity of steel production, effectively serving one segment. Accordingly, segment disclosure is not presented. Additional detail on the composition of revenues is presented in Note 18, Concentrations and Risks, below.
13
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income or cash flows as previously reported.
Recent Accounting Pronouncements
In September 2006, FASB issued SFAS 157, Fair Value Measurements. This statement defines fair value and establishes a framework for measuring fair value in generally accepted accounting principles (GAAP). More precisely, this statement sets forth a standard definition of fair value as it applies to assets or liabilities, the principle market (or most advantageous market) for determining fair value (price), the market participants, inputs and the application of the derived fair value to those assets and liabilities. The Company adopted SFAS No. 157 as of January 1, 2008 and the adoption resulted in enhanced disclosure of financial instruments but had no impact on the Company’s balance sheet or statement of income and other comprehensive income.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The SFAS 159 became effective for us on January 1, 2008. The Company chose not to elect the option to measure the fair value of eligible financial assets and liabilities.
In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable advance payments for goods or services that used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed. The Company adopted FSP EITF 07-3 and expensed the research and development as incurred.
In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company believes that the application of SFAS 160 will not have an impact on its consolidated financial statements.
14
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
In December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies to all transactions or other events in which an entity obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration. This statement replaces FASB Statement No. 141 and applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for some business combinations. The adoption of SFAS No. 141R will have an impact on the Company’s accounting for business combination, but the effect is dependent upon acquisition at that time.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement will not have an impact on the Company’s financial statements.
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement will not have an impact on the Company’s financial statements.
In June 2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of Statement of Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF No.07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard triggers liability accounting on all options and warrants exercisable at strike prices denominated in any currency other than the functional currency of the operating entity in China (Renminbi). EITF No. 07-5 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of adoption of EITF No. 07-5 on the Company’s consolidated financial statements.
15
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
In June 2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4 is to provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. Management is currently evaluating the impact of adoption of EITF No. 08-4.
On October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on our financial position or results for the quarter ended September 30, 2008.
NOTE 3 – RESTRICTED CASH
Restricted cash consisted of cash deposited in an escrow account and amounted to $1,024,951 and $1,000,000 as of September 30, 2008 and December 31, 2007, respectively.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
September 30, 2008 | December 31, 2007 | ||||||
(unaudited) | |||||||
Accounts receivable | $ | 50,549,827 | $ | 19,222,133 | |||
Less: allowance for doubtful accounts | - | - | |||||
Accounts receivable, net of allowance | 50,549,827 | 19,222,133 | |||||
Accounts receivable (non-current) | 2,342,263 | 1,618,203 | |||||
Less: allowance for doubtful accounts | - | - | |||||
Accounts receivable (non-current), net of allowance | $ | 2,342,263 | $ | 1,618,203 |
As of September 30, 2008 and December 31, 2007, the Company considered all accounts receivable collectable and, therefore, has not recorded an allowance for doubtful accounts. The Company’s equipment sales contracts allow the customer to retain 10% of the contract price for one year from the date of purchase. Accounts receivable as of September 30, 2008 and December 31, 2007 contain retained receivables of $2,342,263 and $1,618,203, respectively.
16
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 5 – INVENTORIES
As of September 30, 2008 and December 31, 2007, inventories consisted of raw material, work-in-process and supplies amounting to $690,460 and $178,480, respectively, and consisted of the following:
September 30, 2008 | December 31, 2007 | ||||||
(unaudited) | |||||||
Raw material | $ | 191,567 | $ | 118,444 | |||
Work-in-process | 434,242 | - | |||||
Low cost consumption supplies | 64,651 | 60,036 | |||||
Total | $ | 690,460 | $ | 178,480 |
For the periods ended September 30, 2008 and December 31, 2007, no provision for obsolete inventories was recorded by the Company.
NOTE 6 – NOTES RECEIVABLE
Notes receivable represents trade accounts receivable due from various customers where the customers’ banks have guaranteed the payment of the receivables. This amount is non-interest bearing and is normally paid within three to six months. The Company has the ability to submit request for payment to the customer’s bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee when it submits the early payment request. The Company had $5,119,245 and $202,670 outstanding as of September 30, 2008 and December 31, 2007, respectively.
NOTE 7 – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
“Costs and estimated earnings in excess of billings on uncompleted contracts” represent revenues recognized in excess of amounts billed pursuant to the percentage-of-completion method used to recognize revenue.
September 30, 2008 | December 31, 2007 | ||||||
(Unaudited) | |||||||
Contracts costs incurred plus recognized profits less recognized losses to date | $ | 118,150 | $ | 44,074,924 | |||
Less progress billings | - | 41,256,802 | |||||
Costs and estimated earnings in excess of billings | $ | 118,150 | $ | 2,818,122 |
17
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 8 – BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
“Billings in excess of costs and estimated earnings on uncompleted contracts” represent billings in excess of revenues recognized. As of September 30, 2008 and December 31, 2007, billings in excess of revenues recognized were $112,503 and $0 as follows:
September 30, 2008 | December 31, 2007 | ||||||
(Unaudited) | |||||||
Progress billings | $ | 112,503 | $ | - | |||
Less contracts costs incurred plus recognized profits less losses | - | - | |||||
Billings in excess of costs and estimated earnings | $ | 112,503 | $ | - |
NOTE 9 – PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant, and equipment at September 30, 2008 and December 31, 2007:
September 30, 2008 | December 31, 2007 | ||||||
(Unaudited) | |||||||
Buildings | $ | 3,865,472 | $ | 3,612,413 | |||
Equipment and machinery | 8,255,559 | 7,430,865 | |||||
Motor vehicles | 1,643,023 | 986,274 | |||||
Furniture and office equipment | 406,799 | 352,840 | |||||
Construction in progress | 6,749 | 6,307 | |||||
14,177,602 | 12,388,699 | ||||||
Less: accumulated depreciation | 2,101,667 | 1,388,118 | |||||
Property, plant and equipment, net | $ | 12,075,935 | $ | 11,000,581 |
Depreciation expense for the three months ended September 30, 2008 and 2007 was $214,412 and $170,724, respectively. For the three months ended September 30, 2008 and 2007, no interest was capitalized into construction in progress. Depreciation expense for the nine months ended September 30, 2008 and 2007 was $603,965 and $483,778, respectively. For the nine months ended September 30, 2008 and 2007, no interest was capitalized into construction in progress.
18
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 10 – INTANGIBLE ASSETS
The following is a summary of intangible assets at September 30, 2008 and December 31, 2007:
September 30, 2008 | December 31, 2007 | ||||||
(Unaudited) | |||||||
Land use rights | $ | 649,360 | $ | 605,669 | |||
Patents and licenses | 731,500 | 683,611 | |||||
1,380,860 | 1,289,280 | ||||||
Less: accumulated amortization | 155,898 | 98,991 | |||||
Intangible assets, net | $ | 1,224,962 | $ | 1,190,289 |
Amortization expense for the three months ended September 30, 2008 and 2007 amounted to $24,839 and $6,773, respectively. Amortization expense for the nine months ended September 30, 2008 and 2007 amounted to $48,972 and $39,180, respectively.
The Company paid $457,042 for land use rights; as of September 30, 2008, the Company had not obtained the title and therefore reports the payment as a long term prepaid in other assets.
NOTE 11 – LIQUIDATED DAMAGES PAYABLE
Registration Rights
Pursuant to the Securities Purchase Agreement entered into between the Company and a group of accredited investors (“Securities Purchase Agreement”) on October 5, 2007, the Company was obligated to make efforts to file a registration statement with the SEC to be declared effective by the SEC on or before March 3, 2008. After March 3, 2008 and for each 30-calender day period thereafter in which the registration statement fails to be declared effective, the Company shall pay liquidated damages to investors equal to 1% of the funds raised, or $244,803, subject to a cap of 10% of total funds raised, or total liquidated damages of $2,448,032.
On the date of the transaction, the Company determined that the registration statement would not be filed and declared effective within the required period and accrued $500,000 as liquidated damages payable. The liquidated damages was treated as financing cost at the inception and was recorded as a deduction from additional paid-in capital in accordance with the provisions of FSP EITF 00-19-2. This amount accrued is based on the penalties due between March 4, 2008 and May 3, 2008, the date before which the Company originally anticipated the registration statement would be declared effective. As of September 30, 2008, the registration statement has not been declared effective. Accordingly, the Company has recorded a total reserve of $1,698,195 as of September 30, 2008.
19
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
Independent Directors
Pursuant to the Securities Purchase Agreement, the Company’s Board of Directors must consist of a minimum of 5 members, a majority of whom must be “independent directors” as defined in NASDAQ Marketplace Rule 4200(a)(15) not later than 120 days after the date of the agreement. The Company was required to hold $1,000,000 in escrow (“Board Escrow Holdback”) and will only be released by the escrow agent upon receiving requisite written notice from the investor representatives when this requirement is met. Failing to comply with this requirement, the Company shall pay liquidated damages to investors equal to 1% of the funds raised, or $244,803, for each month or part of a month, pro rata, in which independent directors do not constitute a majority of the 5-member board.
On the date of the transaction, the Company determined that this requirement would not be met within the required period and accrued $500,000 as liquidated damages payable. The liquidated damages was treated as financing cost at the inception and was recorded as a deduction from additional paid-in capital in accordance with the provisions of FSP EITF 00-19-2. This amount accrued is based on the penalties due between December 8, 2007 to April 8, 2008 on or before which the Company originally anticipated the Board of Directors would consist of a minimum of 5 members with a majority being independent directors. The independent directors were seated on March 20, 2008, curing this delinquency. Total liquidated damages payable for the independent board member requirement therefore is $418,513. To date, no liquidated damages have been paid.
NOTE 12 – SHORT-TERM BANK LOANS PAYABLE
Short-term loan consisted of a loan of $7,315,000 as of September 30, 2008 from Shanghai Pudong Development Bank, with an effective annual interest rate of 7.47%, due January 28, 2009, and secured by the Company’s buildings, equipments, and land use rights. There was no short-term loan outstanding as of December 31, 2007.
Total interest expense on the bank loans for the three months ended September 30, 2008 and 2007 amounted to $127,121 and $145,926, respectively. Total interest expense on the bank loans for the nine months ended September 30, 2008 and 2007 amounted to $352,529 and $456,881, respectively.
NOTE 13 – INCOME TAXES
Income Taxes
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
RINO International Corporation was incorporated in the United States and has incurred a net operating loss for income tax purpose for the nine months ended September 30, 2008. The Company had loss carry forwards of $1,188,285 for U.S. income tax purposes available for offset against future taxable U.S. income expiring in 2027.
20
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
Management believes that the realization of the benefits from the loss carryforward appears uncertain due to the Company’s historical operating income and continuing losses. Accordingly, 100% valuation allowance has been provided and no deferred tax asset benefit has been recorded. The valuation allowance at September 30, 2008 was $404,017. The net change in the valuation allowance was an increase of $369,497.
Innomind was incorporated in the BVI and under current law of the BVI, income is not subject to income tax. Dalian Innomind and Dalian Rino were incorporated in the PRC and are subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. In 2007, Dalian Innomind was entitled to tax exemption granted to entities qualified as Foreign Invested Enterprise (“FIE”) so no provision for income tax was made.
Before July 2007, Dalian Rino was also qualified as Foreign Invested Enterprise (“FIE”). On July 12, 2007, Dalian Rino changed its license status from Foreign Invested Enterprise (“FIE”) to a domestic entity and was subject to an income tax rate of 33% for the period entitled to tax exemption. For the nine months ended September 30, 2007, provision of income tax amounted to $4,370,199.
Starting January 1, 2008, the new Enterprise Income Tax laws went effective. Under the new law, Dalian Innomind and Dalian Rino are entitled to a three-year income tax exemption and a 50% income tax reduction for the following three years, no provision for income tax was made for 2008.
The provision for income taxes differs from the amount computed by applying the statutory United States federal income tax rate to income before income taxes. The following table reconciles the statutory rates to the Company’s effective tax rate for the nine months ended September 30, 2008 and 2007:
2008 | 2007 | ||||||
U.S. Statutory rate | 34.0 | % | 34.0 | % | |||
Foreign income not recognized in USA | (34.0 | ) | (34.0 | ) | |||
China income taxes | 25.0 | 33.0 | |||||
China income tax exemption | (25.0 | ) | - | ||||
Effective income tax rate | 0.0 | % | 33.0 | % |
Value-Added Tax
Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value-added tax, VAT, in accordance with Chinese laws. The VAT standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product.
21
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
VAT on sales and VAT on purchases amounted to $13,642,041, and $9,859,471 for the three months ended September 30, 2008 and $4,210,353 and $2,742,008 for the three months ended September 30, 2007, respectively. VAT on sales and VAT on purchases amounted to $29,372,547, and $21,226,924 for the nine months ended September 30, 2008 and $7,587,524 and $5,447,697 for the nine months ended September 30, 2007, respectively. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent because the VAT taxes are not impacted by the income tax holiday. As of September 30, 2008 and December 31, 2007, the VAT payable amounted to $4,453,106 and $2,989,365, respectively.
NOTE 14 – REDEEMABLE COMMON STOCK
On October 5, 2007, the Company received $24,480,319 (or $21,253,722 net proceeds after deducting the offering expenses) from a group of accredited investors and issued 5,464,357 shares of restricted common stock at $4.48 per share. The Securities Purchase Agreement contained a transferrable provision such that if any governmental agency in the PRC takes action that adversely affects the Restructuring Agreements or the Share Exchange Agreement and the company doesn’t mitigate the adverse effect to the investors’ reasonable satisfaction within 60 days of the PRC action, then the company is required to pay liquidated damages in an amount equal to the initial investment without interest and the shareholder must return the shares acquired under the agreement. Consequently, the total amount of the gross proceeds has been excluded from permanent equity and recorded as redeemable common stock in accordance with Rule 5-02.28 of Regulation S-X and Section 211 of the Codification of Financial Reporting Policies. Although there is no fixed redemption requirement in any of the next five years, the entire amount of $24,480,319 could become redeemable in any of the next five years. These shares are included as outstanding common stock for purposes of earnings per share.
NOTE 15 – COMMON STOCK AND OTHER SHAREHOLDERS’ EQUITY
Statutory Reserves
The Company is required to make appropriations to the statutory surplus reserve based on the after-tax net income determined in accordance with the laws and regulations of the PRC. Prior to January 1, 2006, the appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the laws and regulations of the PRC until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the statutory public welfare fund are at 5% to 10% of the after tax net income determined by the Board of Directors. Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10 percent of net income after tax per annum, such contributions not to exceed 50 percent of the respective company’s registered capital.
22
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
The statutory reserve funds are restricted for use to set off against prior period losses, expansion of production and operation, or for the increase in the registered capital of the Company. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation.
As of September 30, 2008 and December 31, 2007, the Company appropriated $3,878,631 and $2,109,539 respectively to the reserves funds based on its net income in accordance with the laws and regulations of the PRC.
Common Stock and Warrants
Issuance of Common Stock in Private Placement
In connection with the private placement, 250,000 shares of common stock were issued to a consultant for advisory services. This expense is recorded as additional paid-in capital in the accompanying financial statements.
In connection with the private placement and pursuant to the Engagement Agreement Providing for Investment Banking Services, dated January 19, 2007 by and between the Company and the placement agent, the placement agent received the following compensation: (i) $80,000 cash as an engagement and documentation fee; (ii) $1,750,000 as a placement commission; (iii) 875,000 shares of Common Stock, and (iv) warrants to purchase 382,500 shares of Common Stock at an exercise price of $5.376 per share, exercisable within 6 years of the date of issue. The exercise price of the warrant is subject to adjustments under certain circumstances and the warrants permit cashless exercise by the holders. This expense is recorded as additional paid-in capital in the accompanying financial statements.
The warrants issued to the placement agent, qualify as permanent equity under EITF 00-19, the value of such warrants has created offsetting debit and credit entries to additional paid-in capital.
Warrants
Following is a summary of the warrant activity:
Number of Shares | ||||
Outstanding as of December 31, 2007 | 382,500 | |||
Granted | - | |||
Forfeited | - | |||
Exercised | - | |||
Outstanding as of September 30, 2008 | 382,500 |
23
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
Following is a summary of the status of warrants outstanding at September 30, 2008:
Outstanding Warrants | Exercisable Warrants | ||||||||||||||||
Exercise Price | Number of Shares | Average Remaining Contractual Life | Average Exercise Price | Number of Shares | Average Remaining Contractual Life | ||||||||||||
$ | 5.376 | 382,500 | 5 years | $ | 5.376 | 382,500 | 5 years | ||||||||||
Total | 382,500 | 382,500 |
Issuance of Common Stock to Former Chief Financial Officer of Dalian Rino
At the Closing of the Share Exchange Agreement and the private placement, the Company issued 20,000 shares of common stock to the former chief financial officer of Dalian Rino, in full satisfaction of Dalian Rino’s obligations to the former chief financial officer under a Compensation Agreement dated July 30, 2007. The shares were valued at market on the date of issuance, yielding an aggregate fair value of total $49,000. This expense was recorded as stock compensation expense.
NOTE 16 - EARNINGS PER SHARE
The following demonstrates the calculation for earnings per share for the three months and nine months ended September 30:
Three months ended September 30 | |||||||
2008 | 2007 | ||||||
Net income | $ | 9,857,114 | $ | 4,266,688 | |||
Adjustments for diluted EPS calculation | - | - | |||||
Adjusted net income for calculating EPS-diluted | $ | 9,857,114 | $ | 4,266,688 | |||
Weighted-average shares of common stock – Basic | 25,000,000 | 17,899,643 | |||||
Effect of dilutive securities: | |||||||
Warrants | 153,941 | - | |||||
Weighted-average shares of common stock – Diluted | 25,153,941 | 17,899,643 | |||||
Earnings per share: | |||||||
Basic | $ | 0.39 | $ | 0.24 | |||
Diluted | $ | 0.39 | $ | 0.24 |
24
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
Nine months ended September 30 | |||||||
2008 | 2007 | ||||||
Net income | $ | 20,264,827 | $ | 11,443,358 | |||
Adjustments for diluted EPS calculation | - | - | |||||
Adjusted net income for calculating EPS-diluted | $ | 20,264,827 | $ | 11,443,358 | |||
Weighted-average shares of common stock – Basic | 25,000,000 | 17,899,643 | |||||
Effect of dilutive securities: | |||||||
Warrants | 152,127 | - | |||||
Weighted-average shares of common stock – Diluted | 25,152,127 | 17,899,643 | |||||
Earnings per share: | |||||||
Basic | $ | 0.81 | $ | 0.64 | |||
Diluted | $ | 0..81 | $ | 0.64 |
NOTE 17 – RELATED PARTY TRANSACTIONS
The Company owed $674,883 and $106,963 to a shareholder as of September 30, 2008 and December 31, 2007, respectively, for advances made on an unsecured basis, payable on demand and interest-free. Imputed interest is charged per annum on the amount due at 8% and 7% for the periods ended September 30, 2008 and December 31, 2007, respectively. Total imputed interest recorded as additional paid-in capital amounted to $11,518 and $6,923 for the three months ended September 30, 2008 and 2007, respectively. Total imputed interest recorded as additional paid-in capital amounted to $21,974 and $31,090 for the nine months ended September 30, 2008 and 2007, respectively.
NOTE 18 – CONCENTRATIONS AND RISKS
Cash
Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the People’s Republic of China and with banks within the United States. Total cash deposited with these banks at September 30, 2008 and December 31, 2007 amounted to $1,364,149 and $7,390,631, respectively, of which only $5,000 are covered by FDIC insurance. In addition, as of September 30, 2008 and December 31, 2007, restricted cash of $1,024,951 and $1,000,000 (Note 3), respectively, are uninsured. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
Customers
The Company made sales to a small number of customers. During the three months ended September 30, 2008, no customer accounted for more than 10% of the Company’s total sales, and during the three months ended September 30, 2007, five customers accounted for 91% of the Company’s total sales. For the nine months ended September 30, 2008 and 2007, one major customer accounted for 10% of the Company’s total sales, and four major customers accounted for 67% of the Company’s total sales, respectively. At September 30, 2008, accounts receivable from those customers totaled $2,545,620.
25
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
PRC Risks
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the economy in the regions where the Company’s customers are located. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. Under existing PRC foreign exchange regulations, payment of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.
NOTE 19 – COMMITMENTS AND CONTINGENCIES
Employee Benefits
The full time employees of the Company are entitled to employee benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a Chinese government mandated multi-employer defined contribution plan. The Company is required to accrue for those benefits based on certain percentages of the employees’ salaries and make contributions to the plans out of the amounts accrued for medical and pension benefits. The total provisions and contributions made for such employee benefits were $19,112 and $19,333 for the three months ended September 30, 2008 and 2007, respectively. The total provisions and contributions made for such employee benefits were $56,425 and $42,860 for the nine months ended September 30, 2008 and 2007, respectively. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees.
26
RINO INTERNATIONAL CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS JADE MOUNTAIN CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
Capital Commitments
As of September 30, 2008 and December 31, 2007, the Company had firm purchase commitments for capital projects in progress of $9,243,541 and $750,844 respectively.
NOTE 20 – ESCROW ACCOUNTS
At the private placement closing, Zou Dejun and Qiu Jianping, who, through The Innomind Trust, together control 71.6% of the Company’s outstanding common stock, and are the founders of Dalian Rino - delivered to an escrow agent a total of 5,580,000 of their beneficially owned shares of common stock in order to secure the Company’s obligation under the Securities Purchase Agreement to deliver additional common stock to the private placement investors in the event the Company fails to achieve certain after-tax net income targets for fiscal years 2007 and 2008 (“Make Good Escrow Shares”). Those targets are $16,000,000 in after-tax net income (“ATNI”) for the fiscal year ended December 31, 2007, and $28,000,000 in after-tax net income for the fiscal year ending December 31, 2008. For purposes of the Make Good agreements only, no expense related to return of the shares from escrow would be charged against ATNI. If the Company had not achieved the 2007 net income target, Zou Dejun and Qiu Jianping would have been obligated to transfer 1,674,000 shares of their common stock to the private placement investors on a pro-rata basis. The 2007 net income target was achieved and the shares have been returned to Zou and Qiu as of September 30,2008. If the Company fails to achieve the 2008 net income target, Zou and Qiu must transfer to the investors the remaining 3,906,000 shares still in escrow.
No later than February 2, 2008, the Company’s Board of Directors was to consist of a minimum of 5 members, a majority of whom must be “independent directors” as defined in NASDAQ Marketplace Rule 4200(a)(15). This covenant was complied with on March 20, 2008. Until this covenant was complied with, the Company was required to hold $1,000,000 in escrow (“Board Escrow Holdback”). If for any reason or no reason the escrow agent did not receive requisite written notice from the investor representatives as to releasing this sum from escrow within 120 days after the private placement closing, the Company was required to pay liquidated damages of $244,803 per month (or partial month) until the default is cured. No liquidated damages have yet been paid as of September 30, 2008.
The cash held in escrow pursuant to the Board Escrow Holdback as described above will be accounted for as other current assets and will not be shown as cash or cash equivalents on the balance sheet until such funds have been released from escrow pursuant to the terms of the Securities Purchase Agreement. The shares held in escrow as Make Good Escrow Shares will not be accounted for on our books until such shares became releasable from escrow pursuant to the terms of the Securities Purchase Agreement. If any Make Good Escrow Shares are released to the company management or employees, the value of such shares at the time of release will be recorded as compensation expense with a corresponding offset to additional paid-in capital in accordance with SFAS 123(R) paragraph 11. As a result, the Company recognized $7,499,520 of compensation expense for the year ended December 31, 2007. Based on the performance for the nine months ended September 30, 2008, the Company believes it is more likely than not to achieve the 2008 after-tax net income target. Therefore the Company has accrued $11,665,920 of compensation expense for the nine months ended September 30, 2008. If any Make Good Escrow Shares are released to the Investors, no entry will be made. During the time such Make Good Escrow Shares are held in escrow, they will be accounted for as contingently issuable shares in determining the EPS denominator in accordance with SFAS 128.
27
Disclaimer Regarding Forward-looking Statements
Certain statements made in this report, and other written or oral statements made by or on behalf of RINO International Corporation, may constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995, which represent the expectations or beliefs of, including, but not limited to, statements concerning RINO International Corporation’s operations, performance, financial condition and growth. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed forward-looking statements. Without limiting the generality of the foregoing, when used in this report, the word “believes,” “expects,” “estimates,” “intends,” “will,” “may,” “anticipate,” “could,” “should,” “can,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. Examples of such statements in this report include descriptions of our plans and strategies with respect to developing certain market opportunities, our overall business plan, our plans to develop additional strategic partnerships, our intention to develop our products and platform technologies, our continuing growth and our ability to contain our operating expenses. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected, including those described under the caption “Risk Factors” in our Annual Report on Form 10-K, the risk factors described under Item 1A. Risk Factors of Part II of this report, and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.
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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes and the other financial information appearing in Part I, Item 1 and elsewhere in this report.
Except as otherwise specifically stated or unless the context otherwise requires, the "Company", "we," "us," "our," and the "Registrant" refer to (i) RINO International Corporation (formerly Jade Mountain Corporation), (ii) Innomind Group Limited (“Innomind”), a wholly-owned subsidiary of RINO International Corporation organized under the laws of the British Virgin Islands, Dalian Innomind Environment Engineering Co., Ltd. (“Dalian Innomind”), a wholly-owned subsidiary of Innomind organized under the laws of the People’s Republic of China (the “PRC”), Dalian RINO Environment Engineering Science and Technology Co., Ltd., a contractually controlled affiliate of Dalian Innomind organized under the laws of the PRC (“Dalian Rino”), and Dalian Rino Environment Project Design Co., Ltd. (“Dalian Rino Design”), a wholly-owned subsidiary of Dalian Rino.
Overview
The Company is engaged in designing, developing, manufacturing, and installing environmental protection and energy saving equipment for the Chinese iron and steel industry. Our customers are large, state-owned iron and steel companies. Our business operations are conducted throughout China.
China’s iron and steel companies have experienced robust growth during the last twenty years, following the expansion of China’s economy and industrial base, generally. Along with this growth, the iron and steel industry has produced large amounts of waterborne and airborne industrial waste and pollution, and as a consequence it faces increasingly stringent governmental mandates to reduce or eliminate sulphur dioxide emissions and untreated wastewater discharges. Failure to meet mandated emission and discharge standards can result in financial penalties.
Demand for our core product, the Lamella Wastewater System, increased 96.6% to $12.6 million for the nine-months ended September 30, 2008, as compared with the nine months ended September 30, 2007. For the nine months ended September 30, 2008, we recorded revenues related to 5 wastewater systems.
Our Desulphurization System, which we introduced in late 2006, utilizes proprietary technology we jointly developed with the Research Institute of the Chinese Academy of Sciences, and can reduce flue gas sulphur dioxide levels by over 90%. We anticipate strong demand from the iron and steel industry for the solutions that our Desulphurization System offers for airborne sulphur dioxide emissions. For the nine months ended September 30, 2008, we recorded revenues of $75.2 million, as compared to revenues of $20.7million for the nine months ended September 30, 2007. We recorded revenues related to 22 desulphurization contracts in the nine months ended September 30, 2008.
29
Starting in January 2007, we launched another new product, our Anti-Oxidation System that materially reduces oxidation loss in the production of hot rolled steel plate. Anti-oxidation is a long-sought solution in the iron and steel industry. We believe our Anti-Oxidation System, including coatings and spraying equipment is the only online system that prevents or reduces oxidation without needing to first cool down the steel slab. We anticipate that our Anti-Oxidation System will be an important driver of revenue growth. For the nine months ended September 30, 2008, we recorded revenues of $3.0 million anti-oxidation equipment and related coatings sales, as compared to revenues of $2.0 million for the nine months ended September 30, 2007. The increase in revenues largely reflects our increased pricing as the value of the anti-oxidation technology has been proven in commercial practice.
In addition to the foregoing, we provide machining services to third parties, utilizing our heavy machine tools’ idle time to generate contract manufacturing revenue. The revenue generated from our machining services fluctuates based on the level of our using our heavy machining equipment to produce more of our own products rather than for third-party contract work. For the three months ended September 30, 2007, revenues accounted for 5.8% of the total revenue as compared to 15.8% for the corresponding period in 2007, reflecting a higher level of our own production and reduced level of contractual work.
We also receive grants from the local government in Dalian, China, with amounts varying from year to year as rewards for our continued investment in new technologies. While being selected for these grants signals important government support for our technology development efforts, we believe the amounts of these grants are immaterial to our business. In the twelve months ended December 31, 2007, we received government grants of $228,430, or 0.4% of our total equipment and services sales revenue for the period. In the nine months ended September 30, 2008 and 2007, we received government grants of $307,385 and $122,802, respectively, totaling 0.3% and 0.3% of respective revenues for the nine months ended September 30, 2008 and 2007.
All of our products are custom-built to our customers’ specific requirements. We enter into fixed price equipment sales contracts with our customers that are performed in engineering, manufacturing, construction and installation phases. Equipment and components are engineered and manufactured primarily at our headquarter facilities. Generally, we fulfill our contracts within twelve months.
Our project-based revenue is affected directly by our customers’ capital budgets and their need to build new plants. Because our customers are state-owned-enterprises, their budgeting decisions are influenced by the Chinese central government’s environmental protection and pollution control policies, which presently are favorable to our business and products. We believe that such policy emphasis will continue for the foreseeable future.
The cost of revenue for our products includes direct materials, direct labor, and manufacturing overhead, with a significant portion allocable to materials costs, which are subject to fluctuation.
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Recent Developments
Departure of Certain Officer
On September 5, 2008, Bruce Richardson resigned from his positions as the Chief Financial Officer and Secretary of the Company to pursue other interests. The Company accepted Mr. Richardson’s resignation. Thereafter, Mr. Richardson’s duties have been assumed by Ms. Qiu Jianping and several managers pending the hiring of a replacement and the Company does not believe that Mr. Richardson’s departure will have an adverse impact on the Company’s operations.
New Products
Integrated Dust Catching System
In the first quarter of 2008, the Company commercialized and received initial purchase orders for a new integrated dust catching syste which removes up to 99% of the dust from sintering iron during the production process and complements its current desulphurization equipment.
The integrated dust catching system uses electric precipators to remove part of the dust load from flue gases, followed by a bag filtration system, which together achieve dust removal rates of up to 99%. The integrated dust catching system completes the treatment of sintering flue gases begun by the Company’s desulphurization equipment. Adoption of the integrated dust catching system is being driven in part by China’s regulatory pressure to reduce particulate emissions to as low as 30mg/cubic meter of flue gas, down from levels usually above 80mg/cubic meter. New Chinese regulations for dust content of flue gases in major cities will be comparable to those in place in the European Union. To date, the Company’s integrated dust catchers have been installed in several steelmaker in China. The Company anticipates the average selling price will be around US$2.0 million and the time from contract signing to final installation will equate to approximately two to three months.
Sludge Treatment System
In the 3rd quarter of 2008, the Company has successfully developed a new sludge treatment system through cooperation with the Dalian University of Technology.
The new sludge treatment system utilizes superheated steam to dehydrate municipal sludge which can be used as agricultural fertilizer, as a component in various construction materials or combined with coal to generate energy more efficiently with less pollution. Our sludge treatment system costs approximately 50% less than imported products and the costs of daily operation are approximately 45% less. The Chinese government recently implemented a new regulation that at least 60% of municipal wastewater has to be treated by 2010 and is expected to significantly increase the amount of municipal sludge produced from the wastewater treatment process in China in next several years. We estimate the profit to process one ton of municipal sludge varies between $12 and $19 depending on the steam source, and currently China generates approximately 27.8 million metric tons of municipal sludge annually which is comprised of approximately 80% water. The technology we use in the sludge treatment system can also be utilized to dehydrate oil sludge which can then be used in place of coal. We are located in northeastern China, which is the oil industry center and generates approximately 2 million tons of oil sludge annually. The profit to process one ton of oil sludge ranges between $39 and $44.
31
We have already installed and tested this system internally and the results confirm the functionality of our system in dehydrating multiple kinds of sludge. We will move forward with additional field trials and expect to commercialize this product during the first half of 2009.
Dalian University of Technology has made a patent application for this technology in China (Application number: 200710011115.0). We have agreed to pay an ongoing royalty of approximately 5% of sales to the university.
Formation of a Subsidiary
On September 24, 2008, Dalian Rino formed Dalian Rino Environment Project Design Co., Ltd. (“Dalian Rino Design”) as a wholly-owned subsidiary of Dalian Rino under the laws of PRC. Pursuant to its business license, Dalian Rino Design is permitted to engage in the same scope of business as that of Dalian Innomind. Among other business activities, Dalian Rino Design will focus primarily on research and development and technical design aspect of our business, which we expect will also enhance the company’s overall position and influence in the marketplace. In addition, the formation of Dalian Rino Design may enable us to potentially take advantage of certain preferential tax treatment under the PRC laws and regulations. Pursuant to Dalian Rino Design’s business permit, Dalian Rino Design’s right of operation expires on September 23, 2018 and is renewable.
Results of Operations
Three Months Ended September 30, 2008 And September 30, 2007.
Results of Operations
Net Sales
Net sales increased by $27.2 million to $44.9 million or 154.4% for the three months ended September 30, 2008, as compared to the three months ended September 30, 2007. The increase in the third quarter of 2008 was due to continued growth in demand in our waste water treatment and flue gas desulphurization product lines. The breakdown of the revenue growth is as follows:
32
For the three months ended September 30, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Net Sales 000 | % to Total | Net Sales 000 | % to Total | % Increase | ||||||||||||
Wastewater treatment equipment | $ | 4,410 | 9.8 | % | $ | 2,359 | 13.4 | % | 86.9 | % | ||||||
Flue gas desulphurization (including ancillary equipment) | 37,712 | 84.0 | % | 12,274 | 69.5 | % | 207.3 | % | ||||||||
Anti-oxidation equipment and coatings | 164 | 0.4 | % | 156 | 0.9 | % | 5.1 | % | ||||||||
Machining services | 2,595 | 5.8 | % | 2,783 | 15.8 | % | -6.8 | % | ||||||||
Services | - | - | % | 67 | 0.4 | % | -100.0 | % | ||||||||
Total Net Sales | $ | 44,881 | 100.0 | % | $ | 17,639 | 100.0 | % | 154.4 | % |
Wastewater treatment equipment. Our line of wastewater treatment continued to enjoy strong demand supported by increasingly strict environmental enforcement by the Chinese government. In the third quarter of 2008, we installed wastewater treatment equipment which generated sales revenue of $4.4 million. We have orders for approximately $12 million or 100 additional wastewater filtration canisters and related slurry and sludge handling equipment. Although we have a strong record of performance and profitability, we cannot guarantee that these contracts will be successfully executed or that we will be paid upon completion.
Flue Gas Desulphurization equipment. While most of China’s coal-burning electric plants have already installed desulphurization equipment, the clean-up of China’s iron sintering remains in its early phase. Accordingly, our flue gas desulphurization equipment continued to enjoy strong growth in the third quarter of 2008 as tightening environmental policies required increased reductions in emissions of sulfur dioxide. Increased activity in desulphurization of sintering operations has attracted competitors, including some international providers. As in the prior quarters of 2008, this has lead to increased time spent in the tendering and negotiation processes.
Anti-Oxidation Equipment. Our anti-oxidation equipment has achieved considerable technical success, outperforming our projected reductions in oxidation loss during heat processing of hot-rolled steel, one of China’s major steel categories. We installed three sets of anti-oxidation equipment for the nine month period ended September 30, 2007 and two sets of anti-oxidation equipment in the same respective period of 2008. During the third quarter of 2008 we have focused our sales efforts on desulphurization equipment, but we are planning increased sales activity of anti-oxidation equipment and coatings beginning in the third quarter of 2008. To this end, we have already exhibited our working anti-oxidation installations to approximately 30 of China’s steelmakers.
Machining services. Our machining services revenue declined 6.8% due in part to our using our heavy machining equipment to produce more of our own products rather than for third-party contract work, as indicated by the lower percentage of machining services to total revenues.
33
Cost of Sales
The cost of sales for the three months ended September 30, 2008 increased by $14.0 million to $24.3 million from $10.3 million for the three months ended September 30, 2007, largely due to increased sales. As a percentage of sales, the cost of sales decreased to 53.9% of revenue for the three months ended September 30, 2008 compared to 58.4% for the same period of 2007. This increase in gross profitability reflects in large part the effects of changes in product mix, with more of the revenues from higher margin contract recorded in the three months ended 2008 than the same period ended September 30, 2007. These contracts are generally related to the sale and installation of our equipment. The gross margin achieved in the three months ended September 30, 2008 is however within the historical range of the Company’s quarterly gross margins.
Operating Expense.
Operating expenses for the three months ended September 30, 2008 increased by $7.8 million to $10.0 million from $2.2 million for the same period ended September 30, 2007, an increase of 359.4%. The $7.8 million increase in our operating expenses was largely led by a $5.8 million charge for stock compensation expense related to the 2008 earnings targets or “Make Good” provision agreed upon in out Stock Purchase Agreement with investor in October, 2007. Our year-to-date performance indicates that we may achieve our 2008 make good earnings targets of after-tax net income of $28.0 million and earnings per share of $1.12, If we achieve these targets, 3,906,000 shares of our common stock that were issued to the Innomind Trust (with Mr. Zou Dejun, our founder, Chief Executive Officer and a director, and Ms. Qiu Jianping, our founder and Chairman of the Board, as its sole beneficiaries) and are currently held in escrow will be returned to the Innomind Trust, triggering a non-cash stock-based compensation charge of $17.5 million. We have allocated one-third of that amount to selling, general and administrative expenses in second quarter to better match revenues and expenses. The charges for depreciation and amortization increased as our asset base increased. The increase in operating expense was also partially due to the increase of selling, general & administrative expenses of approximately $1.2 million Dalian Innomind from $0.4 million for the three month period ended September 30, 2007 to $1.6 million for the same period in 2008 after Dalian Innomind was incorporated on July 9, 2007.
Other Income and Expense.
Other Income and Expense for the three months ended September 30, 2008 increased by $534,984 to $665,847 from $130,863, an increase of 409%. The increase in other income and expense was mainly due to the reserve of liquidated damage expense of $616,708 for the three month ended September 30, 2008 as a result of: (1) the Company’s failure to cause the registration statement filed with the SEC to be declared effective by the SEC on or before March 3, 2008; 2) the Company’s failure to meet the requirement under the security purchase agreement entered into in October 2007 that the Company’s Board of Directors must consist of a minimum of five members, a majority of whom must be “independent directors” as defined in NASDAQ Marketplace Rule 4200(a)(15) not later than 120 days after the date of the agreement. Interest income rose sharply to $76,285 from a low base as our cash balances increased after raising equity capital in October 2007, but the absolute amount of interest income remains immaterial. Interest expense fell to $149,095 for the three months ended September 30, 2008 from $178,278 for the quarter ended September 30, 2007 as the Company’s bank loan amounts were reduced.
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Nine Months Ended September 30, 2008 And September 30, 2007.
Results of Operations
Net Sales
Net sales increased by $52.4 million to $98.5 million or an increase of 113.6% for the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007. The increase in nine months of 2008 was due to continued growth in demand across our entire product lines, with the exception of our discontinued Services line, which involved provision of technical consulting on flue gas desulphurization. The breakdown of the revenue growth is as follows:
For the nine months ended September 30, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Net Sales 000 | % to Total | Net Sales 000 | % to Total | % Increase | ||||||||||||
Wastewater treatment equipment | $ | 12,623 | 12.8 | % | $ | 6,420 | 13.9 | % | 96.6 | % | ||||||
Flue gas desulphurization (including ancillary equipment) | 75,182 | 76.3 | % | 20,688 | 44.9 | % | 263.4 | % | ||||||||
Anti-oxidation equipment and coatings | 2,965 | 3.0 | % | 1,958 | 4.2 | % | 51.4 | % | ||||||||
Machining services | 7,773 | 7.9 | % | 7,660 | 16.6 | % | 1.5 | % | ||||||||
Services | - | - | % | 9,406 | 20.4 | % | -100.0 | % | ||||||||
Total Net Sales | $ | 98,544 | 100.0 | % | $ | 46,132 | 100.0 | % | 113.6 | % |
Cost of Sales
The cost of sales for the nine months ended September 30, 2008 increased by $31.2 million to $55.0 million from $23.8 million for the nine months ended September 30, 2007, largely due to increased sales. As a percentage of sales, the cost of sales rose to 55.7% for the nine months ended September 30, 2008 compared to 51.6% for the same period of 2007. The gross margin achieved in the nine months ended September 30, 2008 is however within the historical range of the Company’s gross margins.
Operating Expense.
Operating expenses for the nine months ended September 30, 2008 increased to $22.0 million from $6.0 million for the same period ended September 30, 2007, an increase of 265.4%. The $16.0 million increase in our operating expenses was largely led by a $11.7 million charge for stock compensation expense related to the 2008 Make Good as described above in this section of the report. The increase in operating expense was also partially due to the increase of selling, general & administrative expenses of approximately $4 million in Dalian Innomind from $0.4 million for the nine month period ended September 30, 2007 to $5.3 million for the same period in 2008, after Dalian Innomind was incorporated on July 9, 2007
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Other Income and Expense.
Other Income and Expense for nine months ended September 30, 2008 increased by $0.8 million to $1,3 million from $0.5 million, an increase of 170%. The increase in other income and expense was mainly due to the reserve of liquidated damage expense of $1.1 million as a result of: (1) the Company’s failure to file the registration statement with the SEC to be declared effective by the SEC on or before March 3, 2008; 2) the Company’s failure to meet the requirement by the Stock Purchase Agreement that the Company’s Board of Directors must consist of a minimum of five members, a majority of whom must be “independent directors” as defined in NASDAQ Marketplace Rule 4200(a)(15) not later than 120 days after the date of the agreement. Interest income rose sharply to $132,853 from a low base as our cash balances increased after raising equity capital in October 2007, but the absolute amount of interest income remains immaterial. Interest expense fell to $374,503 for the nine months ended September 30, 2008 from $489,233 for the period ended September 30, 2007, due to a reduced amount of bank debt financing as we applied collections of accounts receivable in the third and fourth quarters of 2007 to repay bank loans. All bank debt was repaid by year-end 2007, but we borrowed approximately $7.3 million from one commercial bank in China in January, 2008 with an effective interest rate of 7.47% due January 28, 2009.
Liquidity and Capital Resources
We have historically funded our working capital needs from operations, advance payments from customers, bank borrowings, and capital from shareholders. Our working capital requirements are influenced by the level of our operations, the numerical and dollar volume of our project contracts, the progress of our contract execution, and the timing of accounts receivable collections.
As of September 30, 2008, and December 31, 2007, the Company had firm purchase commitments of $9,243,541 and $750,844, respectively. As compared to December 31, 2007, our firm purchase commitments at September 30, 2008 increased by $8,492,697 for acquisition of equipments to be used for our expansion in production capacity.
In connection with our Stock Purchase Agreement with the investors entered into in October, 2007, we agreed to a provision which provides that in the event that the legal structure of our Company is challenged by Chinese authorities and we do not mitigate the adverse effect to the investors’ reasonable satisfaction within 60 days of the Chinese government action, then we are required to redeem the investors’ common stock for $24.4 million. Consequently, this amount has been excluded from permanent equity and recorded as redeemable common stock in accordance with Rule 5-02.28 of Regulation S-X and Section 211 of the Codification of Financial Reporting Policies. While we believe that the possibility of such a redemption is remote, we do not currently have adequate cash on hand for such a redemption and the requirement to pay this amount would result in our having to borrow funds or raise additional capital. There can be no assurance that loans or additional capital would be available, if necessary, or that they would be available on terms acceptable to us.
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Without a redemption, we believe that we have sufficient cash, along with projected cash to be generated by our business to support operations for at least the next 12 months.
Cash and Cash Equivalents
Cash and cash equivalents totaled $1.4 million as of September 30, 2008, as compared to $7.4 million as of December 31, 2007, representing a decrease of 81.5%. The decrease in cash and cash equivalents was attributable to increase in accounts receivable, advances made for inventory and construction material and equipment purchases, and decrease in income tax payable, partially offset by increased customer deposits and bank loans.
The following tables present our net cash flows for the nine months ended September 30, 2008 and for the same period ended September 30, 2007.
For the nine months ended September 30, | |||||||
US$ thousands | 2008 | 2007 | |||||
Cash used in operating activities | $ | (9,968 | ) | $ | (3,372 | ) | |
Cash used in investing activities | $ | (4,134 | ) | $ | (230 | ) | |
Cash provided by (used in) financing activities | $ | 7,693 | $ | (3 | ) |
Cash flow from operating activities
Net cash used in operating activities was $10.0 million for the nine months ended September 30, 2008 as compared to net cash used in operations of $3.4 million in the same period ended September 30, 2007. Increased net income, higher non-cash expenses, decrease in costs and estimated earnings in excess of billings on uncompleted contracts and an increase in customers deposits contributed to increased cash flows from operations. These increases to cash flow from operations were offset by increases in accounts receivable, advances for inventory purchases, notes receivable and decrease in income tax payable.
Accounts Receivable
During the nine months ended September 30, 2008, our accounts receivable rose to $50.5 million from $19.2 million at December 31, 2007. As a percentage of total assets, our accounts receivable rose to 47.0% at September 30, 2008, as compared to that of 30.9% at December 31, 2007. The level of our receivables reflects the combined effect of our growing revenues and our sales to a small number of large clients, which means that repayment or delay in repayment on even a single account can have a disproportionate effect on total receivables in any given period. Our growth in receivables is due largely to rising sales.
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As we sell almost exclusively to a few significant customers with established credit history with us, historically, we have not experienced collection issues, therefore we generally do not need to record a reserve for doubtful accounts.
Contracts in progress
Contracts in progress represent work in progress. During the nine months ended September 30, 2008, billings in excess of costs and estimated earnings on uncompleted contracts increased to $112,503 from $0 as of December 31, 2007. Costs and estimated earnings in excess of billings were decreased to $118,150 at September 30, 2008 from $2.8 million at December 31, 2007, as the Company became more current with its contract billing.
Advances for inventory purchase
Advances for inventory purchase are required to ensure timely delivery of raw materials needed to execute existing production contracts as well as to expand the business. Our advances for inventory purchase increased to $24.0 million at September 30, 2008, an increase of $11.9 million, from the $12.1 million recorded at December 31, 2007 as more orders of raw materials were placed for production.
Cash used in investing activities.
For the nine months ended September 30, 2008, net cash used in investing activities increased to $4.1 million as compared to $230,354 for the same period ended September 30, 2007. This increase primarily resulted from the advances for equipment and construction material purchase.
Cash provided by financing activities.
Our operations historically have been financed by capital contributions and loans from RINO’s founder, our $24.4 million private placement in October, 2007 and by short-term bank loans. For the nine months ended September 30, 2008, net cash provided by financing activities increased to $7.7 million as compared to cash used in financing of $3,076 for the same period ended September 30, 2007. This was principally the result of an increase in short-term bank loans and amounts due to related parties.
Contractual Obligations
As of September 30, 2008, and December 31, 2007, the Company had firm purchase commitments of $9,243,541 and $750,844, respectively. As compared to December 31, 2007, our firm purchase commitments at September 30, 2008 increased by $8,492,697 for acquisition of equipments to be used for our expansion in production capacity.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
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CRITICAL ACCOUNTING POLICIES
There have been no changes in our critical accounting policies or significant accounting estimates as disclosed in our 2007 Annual Report on Form 10-K, as amended, except the adoption of the following recent accounting pronouncements.
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.” SFAS No. 157, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and payables qualified as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined as follows:
· | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
· | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
· | Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value. |
As of September 30, 2008, the short-term bank loan amounted to $7,315,000. In accordance with SFAS 157, the Company determined that the carrying value of these loans approximated the fair value using the level 2 inputs by comparing the stated loan interest rate to the rate charged by the Bank of China to similar loans, since no quoted market rate is available.
Carrying Value as of September 30, 2008 | Fair Value Measurements at September 30, 2008 Using Fair Value Hierarchy | ||||||||||||
Liabilities | Level 1 | Level 2 | Level 3 | ||||||||||
Short-term bank loans | $ | 7,315,000 | $ | 7,315,000 |
The Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with SFAS No. 157.
On October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on our financial position or results for the quarter ended September 30, 2008.
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Disclosures About Market Risk. We may be exposed to changes in financial market conditions in the normal course of business. Market risk generally represents the risk that losses may occur as a result of movements in interest rates and equity prices. We currently do not use financial instruments in the normal course off business that are subject to changes in financial market conditions.
Currency Fluctuations and Foreign Currency Risk. Substantially all of our operations are conducted in the PRC, with the exception of our export business and limited overseas purchases of raw materials. Most of our sales and purchases are conducted within the PRC in Renminbi, which is the official currency of the PRC. As a result, the effect of the fluctuations of exchange rates is considered minimal to our business operations. Substantially all of our revenues and expenses are denominated in Renminbi. However, we use the United States dollar for financial reporting purposes. Conversion of Renminbi into foreign currencies is regulated by the People’s Bank of China through a unified floating exchange rate system. A 10% strengthening in the Chinese RMB against the U.S. dollar would have increased the other comprehensive income for the quarter ended March 31, 2008 by approximately $0.55 million. Although the PRC government has stated its intention to support the value of the Renminbi, there can be no assurance that such exchange rate will not again become volatile or that the Renminbi will not devalue significantly against the U.S. dollars. Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms, of our net assets and income derived from our operations in the PRC.
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Interest Rate Risk. We do not have significant interest rate risk, as our debt obligations are primarily short-term in nature, with fixed interest rates.
Credit Risk. We have not experienced significant credit risk, as most of our customers are long-term customers with superior payment records. Our receivables are monitored regularly by our credit managers.
(a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15e and 15d-15e) as of the end of the period covered by this report (the “Evaluation Date”), have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.
(b) Changes in internal controls over financial reporting. During the fiscal quarter covered by this quarterly report, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Because of the inherent limitations in all control systems no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Such limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes or intentional circumvention of the established process.
There have been no material changes to the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as amended, except for the following addition:
We may not have adequate internal accounting controls. While we have certain internal procedures in our budgeting, forecasting and in the management and allocation of funds, our internal controls may not be adequate.
We are constantly striving to improve our internal accounting controls. We hope to develop an adequate internal accounting control to budget, forecast, manage and allocate our funds and account for them. There is no guarantee that such improvements will be adequate or successful or that such improvements will be carried out on a timely basis. If we do not have adequate internal accounting controls, we may not be able to appropriately budget, forecast and manage our funds, we may also be unable to prepare accurate accounts on a timely basis to meet our continuing financial reporting obligations and we may not be able to satisfy our obligations under US securities laws.
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On May 30, 2008, management of the Company determined in consultation with the Company’s prior independent accountants that there were material errors in the presentation of current assets, concentration of risks related to the Company’s largest customers and cash flows related to the payment of deposits for the acquisition of property and equipment in the Company’s financial statements for the fiscal years ended December 31, 2007 and 2006 and that such financial statements should not be relied upon. As a result, the Company restated the financial statements in Amendment No.2 to the Annual Report on 10-K for the fiscal year ended December 31, 2007 (“2007 10-K”) which was filed with the SEC on June 11, 2008. On July 24, 2008, management of the Company determined in consultation with the Company’s current and prior independent accountants that there were also errors in the restated financial statements filed with Amendment No. 2 to the 2007 10-K as well as the Company’s unaudited financial statements as of March 31, 2008 and for the three months then ended which were filed with the SEC as part of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (the “March 2008 10-Q”) causing redeemable stock to be presented as permanent equity and that such financial statements should not be relied upon. As a result, the Company restated the financial statements contained in Amendment No.2 to the 2007 10-K by filing on August 4, 2008 Amendment No.3 to the 2007 10-K and also restated the financial statements contained in the March 2008 10-Q by filing on August 5, 2008 Amendment No. 1 to the March 2008 10-Q. The restatements had no effect on the income statement, including net income and earnings per share for the periods covered by the restated financial statements.
On September 5, 2008, Bruce Richardson resigned from his positions as the Chief Financial Officer and Secretary of the company to pursue other interests. The Company accepted Mr. Richardson’s resignation. Mr. Richardson’s duties will be assumed by Ms. Qiu Jianping and several managers pending the hiring of a replacement. Although the Company does not believe that Mr. Richardson’s departure will have an adverse impact on the Company’s operations, there is no guarantee that prior to the hiring of a new CFO, the Company’s internal accounting control will not be adversely affected. The Company has been aggressively seeking replacement of the CFO through international recruiting firms and is currently interviewing candidates. The Company expects to hire a new CFO in the near future.
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Our internal controls over financial reporting may not be effective, and our independent auditors may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of this assessment by our company's independent registered public accountants. The SEC extended the compliance dates for “non-accelerated filers,” as defined by the SEC. Accordingly, we believe that the annual assessment of our internal controls requirement will first apply to our annual report for the 2007 fiscal year and the attestation requirement of management's assessment by our independent registered public accountants will first apply to our annual report for the 2008 fiscal year. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. Based on our management’s assessment of our internal control over financial reporting, our management has concluded that our internal control was effective as of December 31, 2007 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. However, our internal control over financial reporting system has yet to be evaluated by an external auditor for the purposes of providing an attestation report required by Section 404 of the Sarbanes-Oxley Act of 2002. The Company restated its financial statements for the fiscal years ended December 31, 2007 and 2006 in Amendment No.2 to the Annual Report on 10-K for the fiscal year ended December 31, 2007 (“2007 10-K”) which was filed with the SEC on June 11, 2008. Thereafter, the Company restated the financial statements contained in Amendment No.2 to the 2007 10-K by filing on August 4, 2008 Amendment No.3 to the 2007 10-K and also restated the financial statements contained in the Quarterly Report on 10-Q for the quarter ended March 2008 by filing on August 5, 2008 Amendment No. 1 to the March 2008 10-Q. The restatements had no effect on the income statement, including net income and earnings per share for the periods covered by the restated financial statements. Since the resignation of Bruce Richardson as the Company’s Chief Financial Officer and Secretary on September 5, 2008, Ms. Qiu Jianping and several managers of the Company have been performing the duties of the Chief Financial Officer of the Company and the Company has been aggressively looking for a new CFO. Although the Company does not believe that Mr. Richardson’s departure will have an adverse impact on the Company’s operations, there is no guarantee that prior to the hiring of a new CFO, the Company’s internal accounting control will not be adversely affected. If, in the future, management identifies one or more material weaknesses, and/or our external auditors are unable to attest that our management’s report is fairly stated or to express an opinion on the effectiveness of our internal controls, this could result in a loss of investor confidence in our financial reports, have an adverse effect on our stock price and/or subject us to sanctions or investigation by regulatory authorities.
We may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain or hire such personnel in the future, our ability to improve our products and implement our business objectives could be adversely affected.
If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and senior technology personnel is intense, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or senior technology personnel, or attract and retain high-quality senior executives or senior technology personnel in the future. On September 5, 2008, Bruce Richardson resigned from his positions as the Chief Financial Officer and Secretary of the company to pursue other interests. The Company accepted Mr. Richardson’s resignation. Mr. Richardson’s duties will be assumed by Ms. Qiu Jianping and several managers pending the hiring of a replacement. Although the Company does not believe that Mr. Richardson’s departure will have an adverse impact on the Company’s operations, there is no guarantee that prior to the hiring of a new CFO, the Company’s internal accounting control will not be adversely affected. Although the Company has been aggressively seeking replacement of the CFO through international recruiting firms and is currently interviewing candidates, there is no guarantee that the Company will be able to hire a qualified new CFO in the near future. Any failure for us to attract or retain high-quality senior executives or senior technology personnel could materially and adversely affect our future growth and financial condition.
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Ambiguities in the merger and acquisition regulations implemented on September 8, 2006 relating to acquisitions of assets and equity interests of Chinese companies by foreign persons may present risks in our compliance status under the regulations.
On September 8, 2006, the Ministry of Commerce (“MOFCOM”), together with several other government agencies, promulgated a comprehensive set of regulations governing the approval process by which a Chinese company may participate in an acquisition of its assets or its equity interests and by which a Chinese company may obtain public trading of its securities on a securities exchange outside the PRC. Although there was a complex series of regulations in place prior to September 8, 2006 for approval of Chinese enterprises that were administered by a combination of provincial and centralized agencies, the new regulations have largely centralized and expanded the approval process to the MOFCOM, the State Administration of Industry and Commerce, the SAFE or its branch offices, the State Asset Supervision and Administration Commission, and the China Securities Regulatory Commission. Depending on the structure of the transaction as determined once a definitive agreement is executed, these regulations will require the Chinese parties to make a series of applications and supplemental applications to the aforementioned agencies. The merger and acquisition regulations set forth many specific requirements that have to be followed, but there are still many ambiguities in the meaning of many material provisions.
The restructuring transactions that were completed between Dalian Innomind and Dalian Rino in October 2007, in which Dalian Innomind acquired control over Dalian Rino’s business and operation through various agreements (collectively, the “Restructuring Agreement”) are structured in a manner such that consummation of such transactions would not bring these transactions within the regulatory scope of the September 8, 2006 regulations. However, due to the ambiguities in the meaning of many provisions, until there has been clarification either by pronouncements, regulation or practice, there is some uncertainty in the scope of the regulations. Moreover, the ambiguities give the regulators wide latitude in the enforcement of the regulations and the transactions to which they may or may not apply. Therefore, it is not inconceivable that future issuance of new regulations and pronouncement for the purposes of clarifying the application of September 30, 2006 regulations may retroactively make it apparent that the consummation of the transactions contemplated under the Restructuring Agreements are subject to September 8, 2006 regulations and failure to obtain approval required under the September 8, 2006 regulations may cause the PRC government to take actions that adversely affect the Restructuring Agreements including requiring us to unwind the Restructuring Agreements. If this occurs, and if we do not mitigate the adverse effect to the investors’ reasonable satisfaction within 60 days of such PRC government actions, then we are required, within 30 days from the date of a written demand from the investor, to pay liquidated damages in an amount equal to the initial investment without interest and the shareholder must return the shares acquired under the agreement. If we are obligated to pay liquidated damages of the entire investment amount, we would be forced to raise more capital or incur additional debt to satisfy such obligations and our liquidity will be materially and adversely affected. If we do not have sufficient liquidity to satisfy our short working capital requirements and long-term capital expenditure requirements, our operating results would be materially adversely affected which will likely adversely affect the value of our common stock.
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However, according to the legal opinion issued by the Company’s PRC counsel, the Restructuring Agreements and the organizational structure resulted thereunder are legal and enforceable under current PRC law and that changes to current law would need to be enacted in order for the PRC government or any of its entities to challenge the structure of the Company. Therefore, the Company believes that the chances of the restructuring structure being successfully challenged are remote.
The 5,464,357 shares issued in the October 5, 2007 private placement may be redeemable under the Securities Purchase Agreement
The Securities Purchase Agreement that the Company entered into in October 2007 pursuant to which the Company raised a gross proceeds of $24,480,319 (or $21,251,000 in net proceeds) from the sale of 5,464,357 shares of our common stock contained a transferable provision. Such provision provides that if any governmental agency in the PRC takes action that adversely affects the Restructuring Agreements or the Share Exchange Agreement that the Company entered into in September 2007, pursuant to which the Company acquired Innomind and its subsidiary Dalian Innomind, and the company doesn’t mitigate the adverse effect to the investors’ reasonable satisfaction within 60 days of the PRC action, then the company is required to pay liquidated damages in an amount equal to the initial investment without interest and the shareholder must return the shares acquired under the agreement. Consequently, the total amount of the gross proceeds has been excluded from permanent equity and recorded as redeemable common stock in accordance with Rule 5-02.28 of Regulation S-X and Section 211 of the Codification of Financial Reporting Policies. Although there is no fixed redemption requirement in any of the next five years, the entire amount of $24,480,319 could become redeemable in any of the next five years, in which case we would be forced to raise more capital or incur additional debt to satisfy the redemption obligations and our liquidity will be materially and adversely affected. If we do not have sufficient liquidity to satisfy our short-term working capital requirements and long-term capital expenditure requirements, our operating results would be materially and adversely affected which will likely adversely affect the value of our common stock.
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Instability and volatility in the financial markets could have a negative impact on the Company’s business, financial condition, results of operations and cash flows.
During recent months, there has been substantial volatility and a decline in financial markets due at least in part to the deteriorating global economic environment. In addition, there has been substantial uncertainty in the capital markets and access to financing is uncertain. Moreover, customer spending habits may be adversely affected by the current economic crisis. These conditions could have an adverse effect on the Company’s industry and business, including the Company’s financial condition, results of operations and cash flows.
To the extent that the Company does not generate sufficient cash from operations, it may need to incur indebtedness to finance plans for growth. Recent turmoil in the credit markets and the potential impact on the liquidity of major financial institutions may have an adverse effect on the Company’s ability to fund its business strategy through borrowings, under either existing or newly created instruments in the public or private markets on terms that the Company believes to be reasonable, if at all.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuance of Common Stock in Acquisition of Innomind
In a share exchange transaction that was signed on October 3, 2007 and closed on October 5, 2007 (the “Share Exchange”), the Company acquired Innomind, and through that acquisition also acquired Innomind’s wholly-owned subsidiary, Dalian Innomind, as well as some of the assets and the business of Dalian Innomind’s PRC affiliate, RINO. In the Share Exchange the Company issued 17,899,643 shares of our common stock (the “Control Shares”) to Zhang Ze, Innomind’s sole shareholder, in exchange for 10 shares of capital stock of Innomind, which represented all of the issued and outstanding shares of Innomind, which were owned by Zhang Ze. At the completion of that share exchange, Innomind became the Company’s wholly owned subsidiary. The Share Exchange was accomplished in reliance upon Section 4(2) of the Securities Act. Immediately after this Share Exchange, Zhang Ze placed the Jade Mountain shares he received in exchange for all his shares in Innomind into a Trust. The sole beneficiaries of this Trust are Zou Dejun and Qiu Jianping, the founders of Dalian Rino.
Issuance of Common Stock in Private Placement
On August 16, 2007, the Company issued 125 (12,500 post-forward split) common shares in a private placement for cash of $5,532. The Company relied on the exemption from registration provided under Section 4(2) of the Securities Act.
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On October 5, 2007, in a private placement through Douglas Financial, LLC, an NASD and SEC registered broker-dealer (“Douglas Financial”), we sold 5,464,357 shares of our common stock for $24,480,319 gross proceeds (or $21,250,109 net proceeds after deducting the offering expenses) under a Securities Purchase Agreement by and among the Company and a group of accredited investors (as defined under Rule 501(a) of Regulation D promulgated under the Securities Act) named therein dated as of September 27, 2007 (the “Securities Purchase Agreement”). In the private placement we sold the common stock and issued warrants in reliance upon the exemption from registration provided by Rule 506 of Regulation D promulgated under the Securities Act of 1933 and Section 4(2) of the Securities Act.
Under the Securities Purchase Agreement, we are required to register for resale each share of common stock sold therein as well as the shares of common stock underlying the above, placement agent warrants.
In connection with the private placement, 250,000 shares of common stock were issued to Chief Capital, Ltd., for advisory services. We relied on the exemption from registration provided by Regulation S of the Securities Act for such issuance.
In connection with the private placement and pursuant to the Engagement Agreement Providing for Investment Banking Services, dated January 19, 2007 by and between RINO and Douglas Financial, Douglas Financial, as placement agent, received the following compensation: (i) $80,000 cash as an engagement and documentation fee; (ii) $1,750,000 as a placement commission; (iii) 875,000 shares of our Common Stock, and (iv) warrants to purchase 382,500 shares of Common Stock at an exercise price of $5.376 per share, exercisable within 6 years of the date of issue. The exercise price of the warrant is subject to adjustments under certain circumstances and the warrants permit cashless exercise by the holders. We relied on the exemption from registration provided by Section 4(2) of the Securities Act for the issuance of common stock and warrants to Douglas Financials.
Issuance of Common Stock to Former Majority Shareholder
On August 8, 2007, the Company issued 2,950 (295,000 post-forward split) common shares to Glenn A. Little for cash of $14,750. The Company relied on the exemption from registration provided under Section 4(2) of the Securities Act.
On September 11, 2007, the Company issued 928 pre- Forward Split shares (or 92,800 shares post-Forward Split) of its common stock to Glenn A. Little (the “Little Shares”) for an aggregate of $4,168. At that time and immediately prior to the consummation of the Share Exchange, Mr. Little was the Company’s majority shareholder and its sole director and executive officer. The Company relied on the exemption from registration provided under Section 4(2) of the Securities Act.
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Issuance of Common Stock to Former Chief Financial Officer of RINO
At the Closing of the Share Exchange and the private placement, the Company issued 20,000 shares of common stock to Eric Gan (“Gan”), RINO’s former chief financial officer, in full satisfaction of RINO’s obligations to Gan under a Compensation Agreement dated July 30, 2007. The Company relied on the exemption from registration provided under Section 4(2) of the Securities Act.
(a) | Exhibits |
31.1 - Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 - Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.
RINO INTERNATIONAL CORPORATION | ||
Date: November 11, 2008 | BY: | /s/ Zou Dejun |
Zou Dejun | ||
Chief Executive Officer |
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INDEX TO EXHIBITS
EXHIBIT NUMBER | DESCRIPTION | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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