Annec Green Refractories Corpor (OTC:ANNC)

ANNEC GREEN REFRACTORIES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
Revenues		$	7,000,772			$	17,061,559			$	12,623,730			$	20,680,974
Cost of revenues			5,196,473				10,606,480				8,054,742				12,900,591
Gross profit			1,804,299				6,455,079				4,568,988				7,780,383
Operating expenses:
Sales and marketing			1,517,093				2,151,424				2,929,480				3,254,680
General and administrative			2,244,421				1,086,016				25,436,577				2,658,364
Total operating expenses			3,761,514				3,237,440				28,366,057				5,913,044
Income (loss) from operations			(1,957,215	)			3,217,639				(23,797,069	)			1,867,339
Other income (expense):
Interest income			1,067,573				176,304				1,186,742				305,722
Interest expense			(904,173	)			(1,176,211	)			(2,028,950	)			(2,181,397	)
Non-operating income			260,549				-				348,208				-
Non-operating expenditure			(192,507	)			-				(227,235	)			-
Other income, net			26,803				33,369				53,817				104,217
Total other income (expense)			258,245				(966,538	)			(667,418	)			(1,771,458	)
Income (loss) before provision for income taxes			(1,698,970	)			2,251,101				(24,464,487	)			95,881
Provision for income taxes			298,690				92,150				322,045				98,568
Net income (loss)			(1,997,660	)			2,158,951				(24,786,532	)			(2,687	)
Other comprehensive income (loss):
Foreign currency translation adjustment			67,427				622,819				(69,073	)			852,799
Comprehensive income (loss)			(1,930,233	)			2,781,770				(24,855,605	)		$	850,112
Net income (loss) per share-basic and dilutive		$	(0.10	)		$	0.11			$	(1.24	)		$	-
Shares used in computing net loss per share-basic and dilutive			19,995,701				19,995,701				19,995,701				19,995,701

Managment Discussion and Analysis

Revenues

We operate in two reportable segments, Zhengzhou Annec and Beijing Annec: (1) Zhengzhou Annec segment manufactures and sells a variety of refractory bricks and kits of pre-assembled hot-air ovens, and provides EPC services for blast furnace and hot blast stove; and (2) Beijing Annec segment designs and builds blast furnaces and hot-air stoves on a contract basis and uses subcontractors throughout the construction process. In addition, Beijing Annec also sells a variety of machines and equipment which are required as part of the entire blast furnace and hot-air stove package. Beijing Annec purchases these machines and equipment from outside vendors and generally sell them at cost plus a small mark-up.

Revenues for the three months ended June 30, 2014 were $7,000,772 compared to $ 17,061,599 for the three months ended June 30, 2013. Revenues for the three months ended June 30, 2014 decreased by $10,060,827 or 59%, primarily as a result of an decrease in sales of new orders for Zhengzhou Annec. Beijing Annec did not generate any revenue for the three months ended June 30, 2014 and 2013 as there was no order for its technology services or product from iron and steel manufacturers. Zhengzhou Annec experienced a decrease in orders because of the decline in the demand from the iron and steel industry in 2014. The Company decided to develop new product and markets to improve results of operation, such as tracking and developing markets of functional materials and environment-friendly products, development of the international market. In addition, the Company also intends to maintain contact with current customers, and improve quantity of shipment according to the customer’s payment ability.

Management Discussion and Analysis

Revenues
 
The Company has two reportable segments: Zhengzhou Annec and Beijing Annec. They operate in different geographical areas of China and employ separate management and sales teams. The Zhengzhou Annec segment primarily manufactures and sells a variety of refractory bricks and kits of pre-assembled hot-air ovens. In 2011, Zhengzhou Annec began to enter into contracts to design and build furnaces and stoves. These projects are generally for a term of one year or less. The Beijing Annec segment designs and builds blast furnaces and hot-air stoves on a contract basis and uses subcontractors throughout the construction process. Beijing Annec’s contracts are generally for projects with a term of one year or longer. The Beijing Annec segment purchases substantially all of its bricks and related products from Zhengzhou Annec. In addition, Beijing Annec also sells a variety of machines and equipment which are required as part of the entire blast furnace and hot-air stove package. Beijing Annec did not generate any revenue during 2013.We purchase these machines and equipment from outside vendors and generally sell them at cost plus a small mark-up.
 
Revenues for 2013 were $41,539,221 compared to $84,758,095 for 2012. Revenues for 2013 decreased by $43,218,874, or 51%, primarily as a result of a decrease in new orders. Revenues for Zhengzhou Annec for 2013 decreased by $35,208,023 or 46 %, to $41,539,221 from $76,747,244 for 2012. The decrease in sales of refractory products by Zhengzhou Annec was mainly due to a decrease in the number of orders during 2013. Zhengzhou Annec experienced a decrease in orders because of decline in demand for Iron and steel in 2013. Revenues for Beijing Annec for 2013 decreased by $8,010,851, or 100 %, to $8,010,851 from $0 for 2012. The decrease in sales in Beijing Annec was mainly due to a decrease in orders completed in 2013. Beijing Annec did not have any new orders during 2013. It currently has no project in process.

Liquidity Requirements

 

 

"Although we continue to explore opportunities for raising capital, we have no funding commitments in place at this time and we can give no assurance that such capital will be available on favorable terms, or at all. Even if we are successful in raising additional funds, there is no assurance regarding the terms of any additional investment and any such investment or other strategic alternative would likely substantially dilute or eliminate the interests of our shareholders."

 

 

Second Quarter 2013 Results

 

ANNEC GREEN REFRACTORIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2013				2012				2013				2012
Revenues		$	17,061,559			$	17,884,034			$	20,680,974			$	33,734,005
Cost of revenues			10,606,480				10,393,274				12,900,591				20,670,630
Gross profit			6,455,079				7,490,760				7,780,383				13,063,375
Operating expenses:
Sales and marketing			2,151,424				3,219,462				3,254,680				6,380,751
General and administrative			1,086,016				1,328,102				2,658,364				2,922,369
Total operating expenses			3,237,440				4,547,564				5,913,044				9,303,120
Income from operations			3,217,639				2,943,196				1,867,339				3,760,255
Other income (expense):
Interest income			176,304				65,545				305,722				162,733
Interest expense			(1,176,211	)			(996,960	)			(2,181,397	)			(2,276,862	)
Other (expense) income, net			33,369				(29,101	)			104,217				(30,444	)
Total other income (expense)			(966,538	)			(960,516	)			(1,771,458	)			(2,144,573	)
Income before provision for income taxes			2,251,101				1,982,680				95,881				1,615,682
Provision for income taxes			92,150				487,598				98,568				513,510
Net income (loss)			2,158,951				1,495,082				(2,687	)			1,102,172
Other comprehensive income:
Foreign currency translation adjustment			622,819				92,209				852,799				326,564
Comprehensive income		$	2,781,770			$	1,587,291			$	850,112			$	1,428,736
Net income (loss) per share-basic and dilutive		$	0.11			$	0.07			$	*			$	0.06
Shares used in computing net loss per share-basic and dilutive			19,995,701				19,995,701				19,995,701				19,995,701

The reason for the three months ended June 30, 2013 decreased by $ 822,435 or 4.6%, primarily as a result of a decrease in sales and new orders for Zhengzhou Annec and no revenues from Beijing Annec. The decrease in sales of refractory products by Zhengzhou Annec was mainly due to a decrease in number of orders during the three months ended June 30, 2013. Zhengzhou Annec experienced a decrease in orders because of decline in demand for iron and steel industry products in 2013. In the first quarter of 2013, the Company decided to develop new product and markets to improve results of operation, such as tracking and developing markets of functional materials and environment-friendly products, development of the international market. In addition, the Company also intends to maintain contact with current customers, and improve quantity of shipment according to the customer’s payment ability. The following table shows product sales of Zhengzhou Annec from existing and new customers during the three months ended June 30, 2013, and 2012:

	Amount (US$) 2013		Amount (US$) 2012
Existing customers		4,876,628		17,858,879
New customers		12,184,931		25,155

 

 

 

 

Management Plans

 

Management Plans In the first half year of 2013, global economy is in depression, overcapacity and weak demand in China’s steel industry results in insufficient payment collection and decreased orders of the company. Notwithstanding the negative market conditions, the company’s position in the industry was improved. For example, the Company became a refractory supplier of the world’s biggest 5800m3 hot blast stove (Jiangsu Shagang Huasheng project of ironmaking), and is expected to enter into the world’s biggest EPC system integration contract of Taisu (two 4350m3 NIPPON STEEL of Japan external-combustion stove, with shipments of approximately 40 thousand Tons). The management believes that environmental reform and industrial upgrade will be the key for steel industry to improve profitability and for refractory industry to improve competitiveness. In the second half year of 2013 the management intends to implement the following measures related to technological innovation, human resource and marketing strategy to increase the company's operating capacity:

 

 

 

1. Adjust employee compensation structure, reinforce the elimination system to improve employee’s productivity.

 

2. Strengthen payment collection and optimize financing structure to mitigate financial risks.

 

3. Focus on R&D and development of existing technologies to provide the Company with competitive edge.

 

4. Continue marketing efforts for functional refractory product and expand overseas market.

ANNEC GREEN REFRACTORIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

		Three Months Ended
		March 31,
		2012				2011
		(Unaudited)				(Unaudited)
Revenues		$	15,849,971			$	13,058,029
Cost of revenues			10,277,356				7,573,416
Gross profit			5,572,615				5,484,613
Operating expenses:
Sales and marketing			3,161,289				2,097,887
General and administrative			1,594,267				1,352,130
Total operating expenses			4,755,556				3,450,017
Income from operations			817,059				2,034,596
Other income (expense):
Interest income			97,188				98,835
Interest expense			(1,279,902	)			(603,775	)
Other income (expense), net			(1,343	)			135,066
Total other income (expense)			(1,184,057	)			(369,874	)
Income (loss) before provision for income taxes			(366,998	)			1,664,722
Provision for income taxes			25,912				261,871
Net income (loss)		$	(392,910	)		$	1,402,851
Other comprehensive income (loss)
Foreign currency translation adjustment			234,353				160,416
Comprehensive income (loss)		$	(158,558	)		$	1,563,267
Net income (loss) per share-basic and dilutive		$	(0.02	)		$	0.07
Shares used in computing net income (loss) per share-basic and dilutive			19,995,701				19,995,701

 

Revenues for the three months ended March 31, 2012 was $15,849,971 compared to $13,058,029 for the three months ended March 31, 2011. Revenues for the three months ended March 31, 2012 increased by $2,791,942, or by 21%. We had no revenues from Beijing Annec for the three months ended March 31, 2012 and 2011 because no new contract were entered into and no project was completed during the respective periods. In June Beijing Annec will receive revenue. Revenues for Zhengzhou Annec for the three month ended March 31, 2012, increased by $2,791,942 or 21%, to $15,849,971 from $13,058,029 for the three months ended March 31, 2011. Beijing Annec had no revenue. The increase in sales of refractory products by Zhengzhou Annec was mainly due increased in number of orders. The existing customers increased their demand and Zhengzhou Annec obtained new customers in first three months of ended March 31, 2012 compared to March 31, 2011, as set forth below:

 

Type of Customers’ Sales		Amount (US$)
Existing customer		$	8,357,002
New customer		$	7,474,298

Net income decreased 5.8% to $3.2 million versus $3.4 million for Q3 2011 due to the increased selling expenses in this quarter. Mr. Fuchao Li, Chairman, commented, "We are very pleased to report a 39.2% increase in revenues for the third quarter of 2011 compared to the same period of 2010. Our strategy is to increase our presence in overseas markets while consolidating market share based on established distribution channels in China in 2011." Mr. Li continued to comment: "In efforts to increase our revenues, we continue to explore opportunities and continue negotiations with prospective M&A targets. Meanwhile we will take measures to decrease our selling expenses so as to increase our net income."

On 02/11/2011 ANNC became a public entity via a reverse merger transaction.

Company Snapshot:

Refractory and technology-based company that designs, develops, produces, and markets refractory products.

Industry Snapshot:

In general, refractory materials are inorganic, non-metallic, materials that can withstand temperatures of more than 1,580°C, with specific high temperature mechanical properties and high stability. Refractory materials are an important supporting material for iron and steel thermodynamic equipment, non-ferrous metals, and building materials, and are used in the chemical and electrical power industries. According to Luoyang Institute of Refractories, 70% of the world's refractories are used for smelting of iron and steel, 17% for building materials, 4% for chemical industry, 3% for non-ferrous metals industry, and 6% for other industry. In China, the consumption of refractories for the iron and steel industry is approximately 65%.

Post Merger Share Calculation: adjusted for 1-for-14.375 reverse split.

•       775,652: Pre reverse merger outstanding shares  
• 19,220,000 : Newly issued shares of Common Stock

GeoTeam® best effort calculation of total post reverse merger shares assuming full conversions:  19,995,652

Financial Snapshot: December Year End

2010 vs. 2009

• Revenues:$ TBA million vs $32.4 million 
• Adjusted Net Income: $TBA million vs. $2.4 million 

Six Months 2011 vs 2010

• Revenues: $37.3 million vs. $23.8 million
• Adjusted Net Income: $2.8 million vs. $1.3 million 

Pro Forma Valuation:  TBA

• Trailing EPS:
• Trailing P/E:

Recent Reverse Merger

Mr. Fuchao Li, Chairman, commented, "We are very pleased to report a 53.2 percent increase in revenues and a 19.3 percent increase in net income for the second quarter of 2011 compared to the same period of 2010. Our strategy is to increase our presence in overseas markets while consolidating market share based on established distribution channels in China in 2011." In the second quarter of 2011, one of the Company's R&D programs was awarded the first prize of Zhengzhou progress prize in scientific and collective technology, another R&D program was honored with a scientific achievement second prize by Henan industry and information technology.

We believe our cash and accounts receivable are adequate to satisfy our working capital needs and sustain our ongoing operations for the next twelve months. However, even if we believe that our cash reserves are sufficient to sustain operations, we must raise additional capital by the sale of our securities and/or financing in order to implement our strategic growth plans which include increasing our product line, promoting our design and engineering services, improving our products, and the potential acquisitions of mines and other refractory companies. We have had preliminary discussions for additional investments by existing and prospective investors.