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 June 30, 2012

¨	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: 0-54096

SMSA Treemont Acquisition Corp.

(Exact name of registrant as specified in charter)

Nevada		27-2969090
(State of incorporation)		(IRS Employer Identification No.)

Ruixing Industry Park

Dongping County

Shandong Province, 271509

People’s Republic of China

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 86-538-241-7858

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

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

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

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YES ¨ NO x

State the number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicable date: July 25, 2012, 13,294,497 shares of common stock

EXPLANATORY NOTE

In this report, unless the context otherwise requires, the terms “SMSA,” “the Company,” “we,” “us,” and “our” refers to the combined business of SMSA Treemont Acquisition Corp., its wholly-owned subsidiaries Xiangrui Pharmaceutical International Limited (“Xiangrui”) and Tai’an Yisheng Management & Consulting Co., Ltd., and its operating entity Shandong Xiangrui Pharmacy Co., Ltd. (“Shandong Xiangrui”). We are a Nevada holding company and conduct substantially all of our corn refinery business in China through Shandong Xiangrui.

On May 13, 2011, we entered into a Share Exchange Agreement (the “Exchange Agreement”) with Xiangrui and its sole shareholder Mr. Chongxin Xu. In connection the Exchange Agreement we issued 12,363,885 newly issued shares of our common stock to Mr. Xu, in exchange for all of the issued and outstanding capital stock of Xiangrui. The shares we issued to Mr. Xu constitute 93% of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Exchange Agreement. Prior to the Exchange Agreement, we were a shell company with nominal operations. For accounting purposes, the share exchange transaction was treated as a reverse acquisition with Xiangrui as the acquirer and SMSA as the acquired party. When we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of Shandong Xiangrui on a single entity basis unless the context suggests otherwise.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains forward-looking statements, which reflect our views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These forward-looking statements are identified by, among other things, the words “anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,” “targets” and similar expressions. Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism about future operating results and the development of our products, are forward-looking statements.

Forward-looking statements are subject to certain events, risks, and uncertainties that may be outside of our control. When considering forward-looking statements, you should carefully review the risks, uncertainties and other cautionary statements in this report as they identify certain important factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These factors include, among others, the risks described under Item 1A and elsewhere in this report, as well as in the other reports and documents we file with the SEC.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Except to the extent required by applicable securities laws, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I — FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

SMSA TREEMONT ACQUISITION CORP.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

CONTENTS

	Page
Independant Auditor's Report	2
Unaudited Condensed Consolidated Balance Sheet	3 - 4
Unaudited Condensed Consolidated Income Statement	5
Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity	6
Unaudited Condensed Consolidated Cash Flow Statement	7 -8
Notes to Unaudited Condensed Consolidated Financial Statements	9 - 25

INDEPENDENT AUDITORS’ REPORT

PCPAR[ 2012]-[B1114]

Board of Directors and Shareholders of

SMSA TREEMONT ACQUISITION CORP.

We have reviewed the accompanying consolidated balance sheet of SMSA Treemont Acquisition Corp. (the “Company”) and its subsidiaries (combined as the "Group") as of June 30, 2012, and the related statements of income, and cash flows for the period then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of the Company.

A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.

BDO China Shu Lun Pan Certified Public Accountants LLP

Shanghai, China

July 27, 2012

SMSA TREEMONT ACQUISITION CORP.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

	Notes		30 JUNE 2012		31 DECEMBER 2011
			US$		US$
ASSETS

Current Assets
Cash				2,934,597		653,138
Restricted Cash				13,280,842		7,141,837
Notes receivable		3		625,035		2,306,189
Accounts receivable, net		3		1,041,354		454,366
Inventories, net				2,474,473		2,592,703
Advances to third party suppliers				144,915		524,525
Other receivables				360,416		356,980
VAT paid in advance		4		968,985		-
Deferred tax assets		10		239,409		246,127

Total Current Assets				22,070,026		14,275,865

Non-current Assets
Long-term equity investment		5		476,622		-
Property, plant and equipment, net		6		32,897,685		23,563,105
Land use rights, net		7		2,444,290		2,477,367

Total Non-current Assets				35,818,597		26,040,472

TOTAL ASSETS				57,888,623		40,316,337

The accompanying notes are integral part of the financial statements.

SMSA TREEMONT ACQUISITION CORP.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)

	Notes		30 JUNE 2012			31 DECEMBER 2011
			US$			US$
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Short-term bank borrowings		8		14,624,737			11,665,000
Accounts payable to third parties				3,436,632			3,012,227
Notes payable		9		21,186,106			12,696,599
Advance from third party customers				838,299			355,159
Payroll and welfare payable				46,064			32,548
Accrued expenses				234,664			215,306
Amounts due to related parties		14		4,122,292			212,270
Income tax payable				219,822			872,912
VAT payable		4		-			220,171
Miscellaneous taxes payable		11		25,310			46,722
Amounts payable to constructors		12		2,652,883			716,168
Other payables to third parties				65,868			84,776

Total Current Liabilities				47,452,677			30,129,858

Non-current liabilities
Deferred tax liabilities		10		85,710			84,809

Total Non-current Liabilities				85,710			84,809

Total Liabilities				47,538,387			30,214,667

Shareholders' Equity
Common stock, $.0001 par value, 13,294,500 shares authorized, issued and outstanding				13,295			13,295
Additional paid−in capital				2,440,323			2,440,323
Statutory reserves		13		1,079,781			1,053,819
Accumulated other comprehensive income				(866,854	)		(961,005	)
Retained earnings				7,683,691			7,555,238

Total Shareholders’ Equity				10,350,236			10,101,670

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY				57,888,623			40,316,337

The accompanying notes are integral part of the financial statements.

SMSA TREEMONT ACQUISITION CORP.

UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENT

			THREE MONTHS ENDED 30 JUNE						SIX MONTHS ENDED 30 JUNE
	Notes		2012			2011			2012			2011
			US$			US$			US$			US$
Revenues
Cornstarch		16		17,010,860			16,572,603			33,964,537			29,723,798
Glucose		16		2,951,332			2,906,547			6,062,390			5,818,429
Others				41,745			30,087			82,965			88,846
Total Revenues				20,003,937			19,509,237			40,109,892			35,631,073
Cost of Sales
Cornstarch		16		16,752,958			14,697,383			32,199,689			25,871,925
Glucose		16		2,601,796			2,219,458			5,199,342			4,399,795
Others				63,983			30,533			178,419			89,292
Total Cost of Sales				19,418,737			16,947,374			37,577,450			30,361,012

Gross Profit				585,200			2,561,863			2,532,442			5,270,061

Operating expenses
Selling and distribution				572,762			247,862			1,087,661			541,383
General and administrative				197,774			371,567			403,544			488,014

Total Operating Expenses				770,536			619,429			1,491,205			1,029,397

Interest income				79,387			1,034			117,277			2,344
Interest expenses				597,223			223,345			835,814			398,519
Foreign exchange gain				155			-			508			-
Gain/(Loss) from disposals of fixed assets				45,539			-			(113,144	)		-
Other Income, net				36,983			(80,415	)		35,392			(121,704	)

Income/(Loss) Before Income Tax Expenses				(620,495	)		1,639,708			245,456			3,722,785

Income tax expenses		10		(166,455	)		404,798			91,041			951,304

NET INCOME				(454,040	)		1,234,910			154,415			2,771,481

Basic and diluted weighted average shares outstanding				13,294,500			13,294,500			13,294,500			13,294,500

Basic net earnings per share				(0.03	)		0.09			0.01			0.21

The accompanying notes are integral part of the financial statements.

SMSA TREEMONT ACQUISITION CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

	Common Stock		Additional Paid-in capital		Statutory reserves		Retained earnings			Accumulated other comprehensive loss			Total shareholders’ equity
	US$		US$		US$		US$			US$			US$
	(Note 1)

Balance as at 31 December 2011		13,295		2,440,323		1,053,819		7,555,238			(961,005	)		10,101,670

Net income		-		-		-		154,415			-			154,415
Foreign currency translation adjustment		-		-		-		-			94,151			94,151
Total comprehensive income		-		-		-		154,415			94,151			248,566

New shares issued		-		-		-		-			-			-
Appropriation of statutory reserve		-		-		25,962		(25,962	)		-			-
Contribution from shareholders		-		-		-		-			-			-

Balance as at 30 June 2012		13,295		2,440,323		1,079,781		7,683,691			(866,854	)		10,350,236

The accompanying notes are integral part of the financial statements.

SMSA TREEMONT ACQUISITION CORP.

UNAUDITED CONDENSED CONSOLIDATED CASH FLOW STATEMENT

	SIX MONTHS ENDED 30 JUNE
	2012			2011
	US$			US$
CASH FLOWS FROM OPERATING ACTIVITIES

Net income		154,415			2,771,481

Adjustment to reconcile net income to net cash provided by operating activities

Depreciation of property, plant and equipment		735,938			383,091
Amortization of land use rights		33,077			31,882
Allowance for doubtful accounts		18,865			-
Finance expense		835,306			398,519
Loss from disposals of fixed assets		113,144			48,518

Changes in operating assets and liabilities
Accounts receivable to third parties		(605,853	)		(628,954	)
Notes receivable		1,681,154			2,060,907
Advances to third party suppliers, net		379,610			406,352
Other receivables		(3,436	)		(189,295	)
VAT paid in advance		(968,985	)		-
Amounts due from related parties		-			(980,517	)
Inventories		118,230			(159,783	)
Accounts payable to third parties		424,405			582,436
Tax payable		(894,673	)		251,858
Advances from third party customers		483,140			179,912
Payroll and welfare payable		13,516			16,769
Other payables to third parties		(18,908	)		(923,159	)
Amounts due to related parties		3,910,022			90,922
Accrued expenses		19,358			26,246
Deferred tax assets		6,718			13,208
Deferred tax liabilities		901			(27,155	)
Net cash provided by operating activities		6,435,944			4,353,238

The accompanying notes are integral part of the financial statements.

SMSA TREEMONT ACQUISITION CORP.

UNAUDITED CONDENSED CONSOLIDATED CASH FLOW STATEMENT (CONTINUED)

	SIX MONTHS ENDED 30 JUNE
	2012			2011
	US$			US$
CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from disposal of property, plant and equipment		45,365			-
(Increase)/release of restricted cash		(6,139,005	)		226,494
Acquisition of long-term equity investment		(476,622	)		-
Purchases of property, plant and equipment		(8,292,312	)		(7,501,763	)

Net cash used in investing activities		(14,862,574	)		(7,275,269	)

CASH FLOWS FROM FINANCING ACTIVITIES

Bank loan repaid		(3,996,895	)	(5,349,520	)
Interest paid		(835,814	)	(398,519	)
Proceeds from additional paid-in capital		-		23,877
Proceeds from additional short-term bank borrowings		6,956,632		3,056,868
Increase of notes payable		8,489,507		1,545,213

Net cash (used in)/provided by financing activities		10,613,430		(1,122,081	)

Effect of foreign exchange rate changes		94,659		108,747
Net increase/ (decrease) in cash	2,281,459			(3,935,365	)

Cash, beginning of period		653,138		6,634,012

Cash, end of the period		2,934,597		2,698,647

Supplementary disclosure of cash flow information:
Interest expenses paid		835,814		398,519
Income taxes paid		736,512		713,393

The accompanying notes are integral part of the financial statements.

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS

1.	CORPORATE INFORMATION AND BASIS OF PRESENTATION

a)	Corporate Information

SMSA Treemont Acquisition Corp. (the “Company”) was originally incorporated in the State of Nevada on 3 May 2010 to effect the reincorporation of Treemont Management Services, Inc., a Texas corporation, mandated by the plan of reorganization as discussed below.

On 17 January 2007, Treemont Management Services, Inc. and its affiliated companies (collectively "SMS Companies”), filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. On 1 August 2007, the bankruptcy court confirmed the First Amended, Modified Chapter 11 Plan (the “Plan”), as presented by SMS Companies and their creditors. The effective date of the Plan was 10 August 2007.

Xiangrui Pharmaceutical International Limited (“Xiangrui”) was incorporated in the British Virgin Islands on 29 November 2010. Tai’an Yisheng Management & Consulting Co., Ltd (“WFOE”) was incorporated by Xiangrui on 6 May 2011 as a wholly foreign owned enterprise in China. Xiangrui is a holding company that has no operations or assets other than its ownership of all of the capital stock of the WFOE.

On 9 May 2011, the WFOE entered into a series of variable interest entity contractual agreements (the "VIE Agreements") with Shandong Xiangrui Pharmacy Co., Ltd., (“Shandong Xiangrui”), a PRC company and its shareholders. The VIE Agreements are comprised of a series of agreements, including an Exclusive Technical and Consulting Service Agreement, Management Fee Payment Agreement, Equity Interest Pledge Agreement, Exclusive Equity Interest Purchase Agreement, Operating Agreement and Proxy Agreement, through which the WFOE has the right to advise, consult, manage and operate the Company for an annual consulting services fee in the amount of the Company’s yearly net income before tax. In order to further reinforce the WFOE’s rights to control and operate the Company, the Company’s shareholders have entrusted their shareholder’s rights in the Company to a person designated by the WFOE.

As a result of entering the abovementioned agreements, the WFOE deems to control Shandong Xiangrui as a Variable Interest Entity as required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10 Consolidated of Variable Interest Entities.

On 12 May 2011, the Company issued to New Fortress Group, Ltd., 400,000 restricted shares of common stock at a price of $0.001 per share in consideration for in country due diligence services provided to the Company in connection with the evaluation of merits of the exchange transaction with Xiangrui. On 13 May 2011, the Company entered into the Share Exchange Agreement with Xiangrui and its sole shareholder, Mr. Xu. Pursuant to the Share Exchange Agreement the Company issued 12,363,885 newly created shares to Mr. Xu, and became the sole shareholder of Xiangrui. The shares the Company issued to Mr. Xu constitute 93% of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the share exchange.

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

1.	CORPORATE INFORMATION AND BASIS OF PRESENTATION (CONTINUED)

The following table illustrates the equity transactions of the Company during the year 2011.

	Common Stock
	Shares		Amount(US$)

Shares issued as of 31 December 2010		530,615		531
New shares issued		400,000		400
Recapitalization for reverse acquisition		12,363,885		12,364
Balance as of 31 December 2011		13,294,500		13,295

This transaction has been accounted as a reverse acquisition and recapitalization of the Company whereby Xiangrui is deemed to be the accounting acquirer (legal acquiree) and the Company the accounting acquiree (legal acquirer). The historical financial statements for periods prior to 13 May 2011 are those of consolidated results of Xiangrui and the Company.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a)	Principles of Consolidation

The accompanying consolidated financial statements include the financial statements of the Company, Xiangrui, the WFOE and Shandong Xiangrui (the “Group”).

All significant inter-company accounts and transactions have been eliminated in consolidation.

The Group has adopted FIN 46R which requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns.

b)	Basis of Preparation

The financial statements have been prepared and presented in accordance with the accounting principles generally accepted in the United States of America (US GAAP).

c)	Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in the financial statements include, but are not limited to, revenue recognition, allowance for doubtful accounts, provision for inventories, useful lives of property and equipment and intangible assets, income tax and tax related valuation allowance, and contingencies. Actual results could differ significantly from those estimates.

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

d)	Foreign Currency

The functional currency of the Group is Chinese Renminbi (RMB), as determined based on the criteria of FASB ASC 830 Foreign Currency Matters. The Group uses the U.S. dollar for financial reporting purposes.

The Group translates assets and liabilities into U.S. dollars using the applicable exchange rate quoted by the People’s Bank of China at the balance sheet date. The income and expenses items are translated using average rates during the reporting period. Adjustments resulting from the translation of financial statements from RMB into U.S. dollars are recorded in shareholders' equity as part of accumulated other comprehensive income – translation adjustments. The exchange rates used for the translation are listed below.

	Period end exchange rate	Year end exchange rate
	US$:RMB	US$:RMB

June 30, 2012	6.3249	N/A
December 31, 2011	N/A	6.3009

	Three months average	Six months average
	US$:RMB	US$:RMB

Second quarter of 2012	6.3130	N/A
First half of 2012	N/A	6.3061
Second quarter of 2011	6.4850	N/A
First half of 2011	N/A	6.5426

e)	Fair Value of Financial Instruments

The Group adopted ASC 820 Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value, and requires disclosures to be provided on fair value measurement.

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

●	Level 1 -	Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
●	Level 2 -	Include other inputs that are directly or indirectly observable in the marketplace; and
●	Level 3 -	Unobservable inputs which are supported by little or no market activity, therefore requiring an entity to develop its own assumptions.

The carrying values of cash and cash equivalents, accounts receivable, other current assets, accounts payable, other current liabilities, and amounts due to employees approximate their fair value due to their short-term maturities.

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash

The Group considers all cash on hand and demand deposits as cash.

g)	Restricted Cash

Restricted cash represents cash deposited at banks to secure the notes payable issued by the Group, which is underwritten by the bank.

h)	Notes and Accounts Receivable

Notes receivable represent bank notes which are paid by third party commercial banks when due and thus are believed to have low credit risk. Provisions are made against notes and accounts receivable for estimated losses resulting from the inability of collecting payments from our customers. The Group periodically assesses notes and accounts receivable balances to determine whether an allowance for doubtful accounts should be made based upon historical bad debt analysis, specific customer creditworthiness, and current economic trends. Notes and accounts receivable in the balance sheets are stated net of such provision, if any.

i)	Inventories

Inventories are stated at the lower of cost or net realizable value at balance sheet date. Cost of inventories is determined using the weighted average method. Provisions are made for excessive, slow moving and obsolete inventories as well as inventories whose carrying value exceeds their net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs and expenses and related taxes necessary to make the sale. Provision for inventories is determined on an individual item basis. Raw material costs are based on purchase costs while work-in-progress and finished goods comprise direct materials, direct labor and an allocation of manufacturing overhead costs.

j)	Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and are depreciated on a straight-line basis over the estimated useful lives, detailed as follows:

Estimated Category	Estimated useful life	Residual value			Annual depreciation rate

Buildings	20 years		5	%		4.75	%

Machinery	5-10 years		5	%		9.5%-19	%

Office equipments	5-10 years		5	%		9.5%-19	%

Vehicles	10 years		5	%		9.5	%

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

j)	Property, Plant and Equipment (continued)

Expenditures for major additions or improvements that extend the useful lives of property and equipment are capitalized as additions to the related assets. Expenditures for minor replacements, maintenance and repairs that do not improve or extend the lives of the assets are charged to expense when incurred. Retirement, sales and disposals of assets are recorded by removing the cost and accumulated depreciation, with any resulting gain or loss reflected in the statements of income.

All direct and indirect costs that are related to the construction of property and equipment and incurred before the assets are ready for their intended use are capitalized as construction in progress. Construction in progress is transferred to specific property and equipment accounts and commences depreciation when these assets are ready for their intended use. Interest costs are capitalized if they are incurred during the acquisition, construction or production of a qualifying asset and such costs could have been avoided if expenditures for the assets have not been made. Capitalization of interest costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Interest costs are capitalized until the assets are ready for their intended use. Capitalization of interest costs is suspended during extended periods in which activities related to the acquisition or construction of the qualifying assets are interrupted.

k)	Land Use Rights

Prepayments for land use rights represent amounts paid for the right to use land in China and are recorded at cost less accumulated amortization. Amortization is recorded on a straight-line basis over the terms of the respective land use rights agreements, which are 50 years.

l)	Investments

The Company applies FASB ASC 323 “Investments—Equity Method and Joint Ventures” in accounting for its equity investments. Under FASB ASC 323, the equity method of accounting is used for investments in entities in which the Company has the ability to exercise significant influence but does not own a majority equity interest or otherwise control. Cost method is used for investments over which the Company does not have the ability to exercise significant influence or control.

m)	Revenue Recognition

The Group recognizes revenue pursuant to ASC 605 Revenue Recognition, where persuasive evidence of an arrangement exists (demonstrated via contracts with purchasers), delivery has occurred, the seller's price is fixed or determinable and collectability is reasonably assured. This generally occurs when the customer receives the product or at the time title passes to the customer. Customers generally do not have the right to return products unless they are damaged or defective. The Group does not provide discounts for early payments or any other allowances on sales.

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

n)	Shipping and Handling Costs

Shipping and handling costs are included in selling expenses. The shipping and handling costs for the six-month period ended June 30, 2012 and 2011 were US$785,010 and US$317,347, respectively.

o)	Cost of Goods Sold

Cost of goods sold consists primarily of purchase costs of raw material, direct labor costs and overhead expenses attributable to production and machine depreciation.

p)	Advertising Expenditures

Advertising expenditures are expensed as incurred. There were no advertising costs incurred in the reporting period.

q)	Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220 Comprehensive Income requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Group has chosen to report comprehensive income in the Statements of Stockholders’ Equity. The Group’s other comprehensive income represents foreign currency translation adjustments.

r)	Income Taxes

The Group uses the accrual method of accounting to determine income taxes for the year. The Group has implemented Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Income tax liabilities computed according to the United States and People’s Republic of China (PRC) tax laws are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to accumulated depreciation, allowance for doubtful accounts as well as the potential impact of any net operating loss carryforwards and their potential utilization. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. A valuation allowance is created to evaluate deferred tax assets if it is more likely than not that these items will either expire before the Group is able to realize such tax benefit, or that future realization is uncertain.

The Group’s operation in the U.S. files income tax returns in the United States of America and various states, as appropriate and applicable. As a result of the Company’s bankruptcy action, the Company’s operation in the U.S. is no longer subject to U.S. federal, state and local, as applicable, income tax examinations by regulatory taxing authorities for any period prior to 1 August 2008. The Company does not anticipate any examinations of returns filed for periods ending after 1 August 2008.

All of Shandong Xiangrui’s operations are in China. According to relevant laws and regulations, the Company is subject to a statutory tax rate of 25 percent.

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

s)	Value-added Tax (VAT)

In accordance with the relevant tax laws of China, value-added taxes (VAT) are levied on the invoiced value of sales and are payable by the purchaser. The Company is required to remit the VAT it collects to the tax authority, but can deduct the VAT it has paid on eligible purchases. The difference between the amounts collected and paid is presented as the VAT refundable or payable balance on the balance sheets.

t)	Employee Benefits

Full-time employees of the Group participate in a government-mandated multi-employee defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Group to make contributions to the government for these benefits based on a specific percentage of the employees’ salaries up to a maximum of three times the average annual salary for the city in which the Group operates for the prior year. The Group has no legal obligation for any benefits beyond the contributions made.

u)	Impairment of Long-lived Assets

The Group evaluates its long-lived assets, including property and equipment for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360 Property, Plant and Equipment. When these events occur, the Group assesses the recoverability of long-lived assets by comparing the carrying amount of the assets to the expected future undiscounted cash flows resulting from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group recognizes an impairment loss based on the excess of the carrying amount of the assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available. No impairment of long-lived assets was recognized for any of the years presented.

v)	Government Grants

We receive grants from the government. The grants received from the government are recorded in the financial statements in accordance with the purpose and the nature of the grant, either as other income, a reduction of expenses, or a reduction of the cost of the capital investment. The benefit of grants is recorded when performance is complete and all conditions as specified in the agreement are fulfilled. Any refundable grant is accounted for as a liability.

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

w)	Income (Loss) per Share

Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the respective period presented in our accompanying financial statements.

Fully diluted earnings (loss) per share is 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 Group’s net income (loss) position at the calculation date.

As of 30 June 2012, the Group had no outstanding stock warrants, options or convertible securities which could be considered as dilutive for purposes of the loss per share calculation.

x)	Recently Issued Accounting Pronouncements

In May 2011, the FASB issued updated accounting guidance to amend existing requirements for fair value measurements and disclosures. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders’ equity. The guidance is effective for annual and interim periods beginning after December 15, 2011. The implementation of this guidance is not expected to have a material impact on the Group’s consolidated financial position, results of operations or cash flows.

In June 2011, the FASB issued guidance concerning the presentation of Comprehensive Income in the financial statements. Entities will have the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. The disclosure requirements are effective for annual and interim periods beginning after December 15, 2011 and should be retrospectively applied. The implementation of this guidance is not expected to have any impact on the Group’s consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued guidance on annual and interim goodwill impairment tests. An entity may now first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The implementation of this guidance is not expected to have any impact on the Company’s consolidated financial position, results of operations or cash flows.

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

3.	NOTES AND ACCOUNTS RECEIVABLE, NET

Accounts receivable is stated at net value. As of 30 June 2012, the allowance for doubtful accounts recorded by the Group amounted to US$ 890,620.

Notes receivable represent bank drafts that are non−interest bearing and due within six months. Such bank drafts have been arranged with third party financial institutions by certain customers to settle their purchases from us. The carrying amount of notes receivable approximate their fair values due to their short maturities.

4.	VAT PAID IN ADVANCE AND VAT PAYABLE

5.	LONG-TERM EQUITY INVESTMENT

On February 16, 2012, Shandong Xiangrui paid USD476,622 (RMB equivalent of 3,000,000) to establish Shandong Runyin Pawn Co., Ltd., in which Shandong Xiangrui’s investment represented for 10% of total voting rights. The investment in Shandong Runyin Pawn Co., Ltd. is accounted for using cost method. By the end of June 30 2012, Shandong Runyin Pawn Co., Ltd. has not commenced its business. The business scope of Shandong Runyin Pawn Co., Ltd. is provision of pawn loans secured by properties, real estates and other assets owned by individuals and legal entities.

6.	PROPERTY , PLANT AND EQUIPMENT, NET

	30 JUNE 2012			31 DECEMBER 2011
	US$			US$
Buildings		4,191,217			3,552,203
Machinery		11,443,935			13,052,509
Office equipment		28,549			25,316
Vehicles		93,329			65,650
Total		15,757,030			16,695,678
Less: Accumulated depreciation		(6,281,624	)		(7,059,879	)
Subtotal		9,475,406			9,635,799
Construction in progress		23,422,279			13,927,306
Property, plant and equipment, net		32,897,685			23,563,105

As of 30 June 2012, the Group pledged its building with net book value of US$1,078,491 to TaiAn City Commercial Bank, Dongpin Branch and US$823,756 to Bank of East Asia (China), Qingdao Branch to secure notes payable issued by the Company, which is underwritten by the bank.

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

6.	PROPERTY , PLANT AND EQUIPMENT, NET (CONTINUED)

Depreciation expenses for the three months ended 30 June 2012 and 2011 were $378,144 and $254,304 and for the six months ended 30 June 2012 and 2011 were $735,938 and $383,091, respectively.

In the first six months of 2012, the Group disposed of its machinery with net book value of US$158,509.

7.	LAND USE RIGHTS, NET

As of 30 June 2012, the Group pledged its land use rights with net book value of US$1,707,521 to China Everbright Bank, Jiaozhou Branch and US$737,419 to TaiAn City Commercial Bank, Dongpin Branch to secure notes payable issued by the Company, which is underwritten by the bank.

Land use rights are summarized as follows:

	30 JUNE 2012			31 DECEMBER 2011
	US$			US$
Land use rights, cost		2,766,860			2,766,860
Less: accumulated amortization		(322,570	)		(289,493	)
Land use rights, net		2,444,290			2,477,367

8.	BANK BORROWINGS

The Group had the following outstanding short-term loans with banks:

	30 JUNE 2012		31 DECEMBER 2011
	US$		US$
Rural Cooperative Bank of Dongping, Shandong		4,506,000		4,523,163
China Merchants Bank		948,631		1,587,075
Agricultural Development Bank		4,743,158		4,761,225
Bank of Communications		1,581,053		793,537
TaiAn City Commercial Bank		2,845,895		-
Total		14,624,737		11,665,000

The Group’s bank borrowings are RMB denominated loans with fixed interest rates ranging from 6.06% to 13.12%. Interest expense on bank borrowings for the three months ended 30 June 2012 and 2011 was $597,223 and $223,345 and for six months ended 30 June 2012 and 2011 was $835,814 and $398,519, respectively. All bank loans are due within one year from balance sheet date.

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

9.	NOTES PAYABLE

Notes payable represents short-term notes payable issued by financial institutions that entitle the supplier to receive the full face amount from the financial institutions at maturity, which generally ranges from three to six months from the date of issuance. The notes payable were secured by the Group’s restricted cash.

10.	INCOME TAXES

On 13 May 2011, income from the Company’s foreign subsidiaries became subject to U.S. income tax liability; however, this tax is deferred until foreign sourced income is repatriated to the Company from earnings and profits after foreign income taxes, which has not yet occurred.

All of Shandong Xiangrui’s operations are in the PRC, and in accordance with the relevant tax laws and regulations of PRC, the corporate income tax rate is 25%.

Income before taxes and the provision for taxes consists of the following:

	THREE MONTHS ENDED 30 JUNE
	2012			2011
	US$			US$
Income before taxes:
US Federal		-			-
US State		-			-
BVI		-			-
PRC		(620,495	)		1,639,708
Total income before taxes		(620,495	)		1,639,708

	THREE MONTHS ENDED 30 JUNE
	2012			2011
	US$			US$
Provision for income taxes:
Current:
US Federal		-			-
US State		-			-
BVI		-			-
PRC		(173,223	)		402,440
Current income taxes		(173,223	)		402,440

Deferred:
US Federal		-			-
US State		-			-
BVI		-			-
PRC		6,768			2,358
Deferred income taxes		6,768			2,358

Total provision for income taxes		(166,455	)		404,798

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

10.	INCOME TAXES (CONTINUED)

	SIX MONTHS ENDED 30 JUNE
	2012		2011
	US$		US$
Income before taxes:
US Federal		-		-
US State		-		(3,877	)
BVI		-		-
PRC		245,456		3,726,662
Total income before taxes		245,456		3,722,785

	SIX MONTHS ENDED 30 JUNE
	2012		2011
	US$		US$
Provision for income taxes:
Current:
US Federal		-		-
US State		-		-
BVI		-		-
PRC		83,422		965,251
Current income taxes		83,422		965,251

Deferred:
US Federal		-		-
US State		-		-
BVI		-		-
PRC		7,619		(13,947	)
Deferred income taxes		7,619		(13,947	)

Total provision for income taxes		91,041		951,304

A reconciliation for the provision for income taxes with amounts determined by applying the statutory income tax rate to income before income tax is as follows:

	THREE MONTHS ENDED 30 JUNE
	2012			2011
	US$			US$
Profit (loss) before income tax		(620,495	)		1,639,708
Corporate income tax rate		25	%		25	%
Computed tax at statutory rate		(155,124	)		409,927
Income exempted from taxation		(11,331	)		(5,129	)
Expenses not deductible for tax purposes		-			-
Provision for income taxes		(166,455	)		404,798

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

10.	INCOME TAXES (CONTINUED)

	SIX MONTHS ENDED 30 JUNE
	2012			2011
	US$			US$
Profit before income tax		245,456			3,722,785
Corporate income tax rate		25	%		25	%
Computed tax at statutory rate		61,364			930,696
Income exempted from taxation		-			(6,098	)
Expenses not deductible for tax purposes		29,677			26,706
Provision for income taxes		91,041			951,304

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Group’s deferred tax assets and liabilities are as follows:

	30 JUNE 2012		31 DECEMBER 2011
	US$		US$
Deferred tax assets
Allowance for doubtful accounts		239,409		246,127
Total deferred tax assets		239,409		246,127

Deferred tax liabilities
Depreciation of property, plant and equipments	85,710	84,809
Total deferred tax liabilities	85,710	84,809

Deferred assets are current assets while deferred liabilities are non-current liabilities. No valuation allowance was provided for deferred tax assets in the periods presented.

11.	MISCELLANEOUS TAXES PAYABLE

Miscellaneous tax payables mainly comprise local supplementary taxes that are levied as a percentage of the total income tax and VAT tax paid. Details of miscellaneous taxes payable are set forth in the following table:

	30 JUNE 2012		31 DECEMBER 2011
	US$		US$
Urban construction tax		-		18,728
Land use tax		15,849		15,909
Real estate tax		3,383		4,496
Stamp duty		2,471		2,852
Personal income tax payable on behalf of staffs		3,607		4,737

Total		25,310		46,722

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

12.	AMOUNTS PAYALBE TO CONSTRUCTORS

Amounts payable to constructors represents amounts payable to the Group’s construction service providers.

13.	STATUTORY RESERVES

According to Chinese laws, regulations and accounting standards, enterprises in China are required to set aside, at minimum, 10% of their respective after tax profits as a statutory reserve. After these reserves have reached 50% of the registered capital, appropriations to the reserve account are no longer required. These reserves are statutorily required in order to fund possible operating losses. The reserves are not distributable as cash dividends. Furthermore, at the discretion of our directors, a portion of our after-tax profits may be used for a discretionary reserve. The discretionary reserve, like the statutory reserve, cannot be distributed as dividends. The discretionary reserve could however be used for funding operating losses, business expansion or increasing registered capital. The Company provided 10% of the statutory reserve and 6% of the discretionary reserve upon distributable profit. Details of those reserves are presented as follows:

	30 JUNE 2012		31 DECEMBER 2011
	US$		US$

Statutory reserve		674,863		658,637
Discretionary reserve		404,918		395,182
Total		1,079,781		1,053,819

14.	RELATED PARTY TRANSACTIONS

The principal related parties with which the Group had transactions are listed as follows:

Name		Relationship

Shandong Runyin Bio-chemical Co., Ltd.		Affiliates under common control
Ruixing Group Co., Ltd.		Affiliates under common control
Shandong Xinrui Chemical Devices Co., Ltd.		Affiliates under common control
Shandong Runyin Pawn Co., Ltd.		Affiliate

For the six months ended 30 June 2012 and 2011, the Group engaged in the following significant related party transactions:

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

14.	RELATED PARTY TRANSACTIONS (CONTINUED)

(a) Utility (steam and electricity) supply

Steam supply received from

		SIX MONTHS ENDED 30 JUNE
		2012		2011
		US$		US$
Shandong Runyin Bio-chemical Co., Ltd.	(i)		1,917,806		982,686

Electricity supply received from

		SIX MONTHS ENDED 30 JUNE
		2012		2011
		US$		US$
Shandong Runyin Bio-chemical Co., Ltd.	(i)		2,070,788		998,990

(b) Raw materials purchased from

	SIX MONTHS ENDED 30 JUNE
	2012		2011
	US$		US$
Shandong Runyin Bio-chemical Co., Ltd.		739,381		1,362,750
Ruixing Group Co., Ltd.		10,133		-
		749,514		1,362,750

		SIX MONTHS ENDED 30 JUNE
		2012		2011
		US$		US$
Shandong Runyin Bio-chemical Co., Ltd.	(ii)		4,908		4,700

(d) Received service from

	SIX MONTHS ENDED 30 JUNE
	2012		2011
	US$		US$
Shandong Xinrui Chemical Devices Co., Ltd.		2,474		-

(e) Fixed assets purchased from

	SIX MONTHS ENDED 30 JUNE
	2012		2011
	US$		US$
Shandong Xinrui Chemical Devices Co., Ltd.		68,612		-

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

14.	RELATED PARTY TRANSACTIONS (CONTINUED)

(i)

In January 2009, the Group entered into a non-cancelable contract with Shandong Runyin Bio-chemical Co., Ltd. to secure the steam and electricity supply for the Company’s cornstarch and glucose production. The non-cancelable utility supply contract with Shandong Runyin Bio-chemical Co., Ltd. expires in December 2014 whose price was determined by reference to market price.

(ii)	In December 2008, the Group entered into a rental contract with Shandong Runyin Bio-chemical Co., Ltd. for leasing two plants. The lease contract has been renewed on an annual basis with yearly payment of US$9,000, which was determined by reference to market price.

As of 30 June 2012 and 31 December 2011, the Group had following balances with related parties:

(f) Amount due to related parties

	30 JUNE 2012		31 DECEMBER 2011
	US$		US$
Ruixing Group Co., Ltd.		300,835		212,270
Shandong Xinrui Chemical Devices Co., Ltd.		62,499		-
Shandong Runyin Bio-chemical Co., Ltd.		3,758,958		-
Total		4,122,292		212,270

Amounts due to related parties are unsecured, interest-free and repayable on demand.

15.	COMMITMENTS AND CONTINGENCIES

(a) Supply Commitment

In January 2009, the Group entered into a non-cancelable contract with Shandong Runyin Bio-chemical Co., Ltd. to secure the steam and electricity supply for Shandong Xiangrui’s cornstarch and glucose production. The non-cancelable utility supply contract with Shandong Runyin Bio-chemical Co., Ltd. expires in December 2014 with a price that approximates market price. The total amount of the contract per year would be determined by the actual quantity of utilities consumed by Shandong Xiangrui. Please refer to Note 14 for the actual value of supply consumed by the group in six months ended 30 June 2012 and 2011 respectively.

(b) Capital Purchase Commitment

As of 30 June 2012, the Group entered into non-cancellable contracts with some construction and machinery suppliers for the construction of the plant and purchase of the machinery with an amount of US$23,427,985.

The Group had no material contingent events during the reporting period.

SMSA TREEMONT ACQUISITION CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STAETMENTS (CONTINUED)

16.	SEGMENT AND GEOGRAPHIC INFORMATION

Business Segments

The main products of the Group are cornstarch and glucose, which have almost the same production process. Both are produced from corn as raw materials while the only minor difference is that glucose is further processed from cornstarch by simply mixing up a few auxiliaries. The two products are sold to the same type of customers using the same distribution method.

While the cost base is similar for the two products, the selling prices are independently determined by reference to their respective market price, which resulted in a different trend of gross profit margins of the two products as shown in the following table.

	SIX MONTHS ENDED 30 JUNE
	2012			2011
	US$			US$
Revenues
Cornstarch		33,964,537			29,723,798
Glucose		6,062,390			5,818,429
Cost of sales
Cornstarch		32,199,689			25,871,925
Glucose		5,199,342			4,399,795
GPM
Cornstarch		5	%		13	%
Glucose		14	%		24	%

We believe that the deviating of the gross profit margins of the two products as determined by market prices will continue in the future.

With a similar production process and raw materials and the same type of customers and distribution methods, the cornstarch and glucose production are not individually assessed when the Group’s chief operating decision maker reviews the operation results and makes resources allocation. Therefore, it is not practical, with respect to the two products, to separate the assets information and other profit and loss information which are believed to have no relevance to the decision-making of the Group’s economic activities.

Geographical Segments

All revenue is attributed to the revenue from China.

17.	SUBSEQUENT EVENTS

In the opinion of management, the Group had no significant subsequent events.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Statements in the following discussion and throughout this report that are not historical in nature are “forward-looking statements.” You can identify forward-looking statements by the use of words such as “expect,” “anticipate,” “estimate,” “may,” “should,” “intend,” “believe” and similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes. Please see “Special Note Regarding Forward Looking Statements” at the beginning of this report.

The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with our financial statements and related notes included elsewhere in this quarterly report.

(1) Overview

We are a corn processor in Shandong Province, China. We manufacture and distribute cornstarch, glucose, and other by-products through our direct and indirect subsidiaries in China. Our products are important ingredients for a wide range of industries, including food and beverages, animal nutrition, pharmaceuticals, textile and other industrial manufacturing industries.

Our customers are located primarily in mainland China. Approximately 83% of our products are comprised of corn starch or its by-products and approximately 17% of our products are comprised of glucose and its by-products. We sell products constituting approximately 90% of our revenues through our direct sales force, with the remaining 10% sold to distributors. Our principal customers purchase corn starch and glucose products for use in food and beverages as well as the pharmaceutical industries, which together constituted approximately 64% of our revenue for the six month period ended June 30, 2012. Our other corn-refined products are principally sold to the animal feed industry, which accounted for approximately 18% of our revenue for the six months ended June 30, 2012. Sales of our products to the industrial manufacturing sector accounted for approximately 18% of our revenue for the six months ended June 30, 2012.

As of June 30, 2012, we had an annual production capacity of 140,000 tonnes of cornstarch. We have invested about $9.3 million in new equipments during the first six months of 2012. The new production line has been operational since July 2012 and our annual capacity has been increased to 240,000 tonnes as of this filing date.

(2) Results of Operations

The information provided below relates to the combined enterprises after the acquisition of Xiangrui Pharmaceutical International Limited, a British Virgin Islands company and its direct and indirect subsidiaries (“Xiangrui”) pursuant to a share exchange agreement (the “Share Exchange Agreement”) dated as of May 13, 2011, among us, Xiangrui, and Mr. Chongxin Xu, the sole shareholder of Xiangrui, except that information relating to periods prior to May 13, 2011, the date of the reverse acquisition, only relate to Xiangrui unless otherwise specifically indicated.

Results of operations for the three months ended June 30, 2012 as compared with the three months ended June 30, 2011.

	Three months Ended
	June 30,
	(unaudited)
	2012			2011		$ Change		% Change
	(In thousands, except percentages)
Statement of operations data
Revenues		$	20,004		19,509		495		3	%
Cost of sales			19,419		16,947		2,472		15	%

Gross profit			585		2,562		-1,977		-77	%
Operating expenses
Selling and distribution expenses			573		248		325		131	%
General and administrative expenses			198		371		-173		-47	%

Total operating expenses			771		619		152		25	%

Income (Loss) from operations			-185		1,942		-2,217		-110	%
Interest income			79		1		78		7,800	%
Interest expenses			597		223		374		168	%
Other expenses, net			-82		80		-162		-203	%

Income(Loss) before income tax expenses			-620		1,640		-2,260		-138	%

Income taxes expenses			-166		405		-571		-141	%

Net income attributable to ordinary shareholders			-454		1,235		-1,689		-137	%

Revenues

Revenues increased by $0.5 million, or 3%, to $20 million in the three months ended June 30, 2012, from $19.5 million for the same period in 2011. The slight increase was primary due to increased sales volume. Sales volumes increased to 35,251 tonnes in the three months ended June 30, 2012, an increase of 1,530 tonnes from 33,721 tonnes compared to the same period in 2011. The selling price for corn starch and glucose remained stable during the reporting period.

Cost of Sales

Our cost of sales increased by $2.5 million, or 15%, to $19.4 million in the three months ended June 30, 2012, from $16.9 million for the same period in 2011. This increase was mainly due to an increase in the cost of raw materials, which due to an increase in the average purchase price of raw materials. The increase in the cost of corn kernels can be attributable to the nationwide strong demand for corn kernel and nationwide increase of food price in China. We anticipate that the market price for corn kernels will stabilize toward the year ends due to an increased supply of newly harvested corn kernels. The improved standard of living in China has resulted in a higher demand for poultry and meat, which results in a higher demand for animal feed. Corn is a major type of animal feed. Our profits and operating cash flows will be negatively impacted when the price of corn kernels increases and we are unable to increase the price of corn starch and glucose. The cost of corn kernels represents approximately 90% of our total cost of sales; therefore the price fluctuation of corn kernels will have a significant impact on our cost of sales and margins.

Gross Profits

Our gross profits decreased by $2 million, or 77%, to $0.5 million during the three months ended June 30, 2012, from $2.5 million for the same period in 2011. Gross profits from cornstarch decreased by $1.6 million, or 86%, to approximately $0.2 million in the three months ended June 30, 2012, from $1.8 million for the same period in 2011. Gross profits from glucose decreased by $0.3 million, or 49%, to approximately $0.3 million in the three months ended June 30, 2012, from $0.6 million for the same period in 2011. The decrease in gross profits was due to increased cost in corn kernel, but the company was not able to pass the increased cost to the customer. Gross profits as a percentage of revenues decreased by 10% to 3% during the three months ended June 30, 2012, as compared to 13.0% for the same period in 2011. The decrease is mainly due to increased cost of goods sold increasing at a faster rate than the selling price of our products.

Selling and Distribution Expenses

Selling and distribution expenses include freight, salaries and benefits for sales and marketing personnel, trave and advertising expenses. Our selling and distribution expenses increased by $0.3 million, or 131%, to $0.5 million during the three months ended June 30, 2012, from $0.2 million for the same period in 2011. The increase is mainly due to the increase of our sales staff salary and commission in 2012.

General and Administrative Expenses

General and administrative expenses are comprised of salary and benefits for administrative personnel, depreciation and amortization of non-production equipments and miscellaneous expenses unrelated to production. Our general and administrative expenses decreased by $0.17 million, or 46%, to $0.2 million during the three months ended June 30, 2012, from $0.37 million for the same period in 2011. The higher general and administrative expense in 2011 was mainly attributable to professional fees associated with consummation of the reverse merger which occured in May 2011.

Interest Expenses

Interest expenses are related to our bank borrowings, which are Renminbi denominated loans with fixed interest rates ranging from 6.06% to 13.12%. Our interest expenses increased by $0.37 million to $0.59 million during the three months ended June 30, 2012, from $0.22 million for the same period in 2011. The increase is mainly due to increased borrowing during the second quarter of 2012.

Income Before Income Tax Expenses

Income before income tax expenses decreased by $2.2 million, or 137%, to $0.6 million loss in the three months ended June 30, 2012, from $1.6 million profit for the same period in 2011. This decrease is mainly attributable to increased cost of goods sold and lower gross margin.

Income Tax Expenses

Our income tax expenses decreased by $0.57 million to $0.17 million credit during the three months ended June 30, 2012 as compared to the same period in 2011. The decrease in income tax expenses was mainly attributable to the decrease in income before income tax expenses in the three months ended June 30, 2012 as compared to the same period in 2011.

Net Income Attributable to Ordinary Shareholders

Our net income attributable to ordinary shareholders decreased by $1.6 million, or 137%, to $0.4 million loss in the three months ended June 30, 2012 from $1.2 million in the same period of 2011 as a result of the above factors.

Results of operations for the six months ended June 30, 2012 as compared with the six months ended June 30, 2011.

	Six Months Ended
	June 30,
	(unaudited)
	2012			2011		$ Change		% Change
	(In thousands, except percentages)
Statement of operations data
Revenues		$	40,109		35,631		4,478		12	%
Cost of sales			37,577		30,361		7,216		23	%

Gross profit			2,532		5,270		-2,738		-52	%
Operating expenses
Selling and distribution expenses			1,087		541		546		100	%
General and administrative expenses			403		488		-84		-17	%

Total operating expenses			1,491		1,029		461		44	%

Income from operations			1,041		4,240		-3,199		-75	%
Interest income			117		2		115		-4903	%
Interest expenses			835		398		437		109	%
Other expenses, net			77		121		-44		-36	%

Income before income tax expenses			245		3,722		-3,477		-93	%

Income taxes			91		951		-860		-90	%

Net income attributable to ordinary shareholders			154		2,771		-2,617		-94	%

Revenues

Revenues increased by $4.4 million, or 12%, to $40.0 million in the six months ended June 30, 2012, from $35.6 million for the same period in 2011. The increase was primarily due to an increase in sales volumes due to increased production capacity. Sales volumes increased to 70,465 tonnes in the six months ended June 30, 2012, an increase of 8,552 tonnes from 61,913 tonnes compared to the same period in 2011. The increase in sales volumes is mainly attributable to stable market demand for corn starch and glucose and the increase in our annual production capacity from 110,000 tonnes in first quarter of 2011 to 140,000 tonnes in 2012. The average selling price of our corn starch and glucose remained stable for the six months ended June 30, 2012 as compared to the same period in 2011.

Cost of Sales

Our cost of sales increased by $7.2 million, or 23%, to $37.5 million in the six months ended June 30, 2012, from $30.3 million for the same period in 2011. This increase was mainly due to an increase in the cost of raw materials, which was mainly due to an increase in the average purchase price of raw materials, and partly due to the increase in our sales volume.

Gross Profits

Our gross profits decreased by $2.7 million, or 52%, to $2.5 million during the six months ended June 30, 2012, from $5.2 million for the same period in 2011. Gross profits from cornstarch decreased by $2.1 million, or 54%, to approximately $1.8 million in the six months ended June 30, 2012, from $3.9 million for the same period in 2011. Gross profits from glucose decreased by $0.5 million, or 39%, to approximately $0.9 million in the six months ended June 30, 2012, from $1.4 million for the same period in 2011. The decrease in gross profits was mainly due to the increase in cost of good sold. Gross profits as a percentage of revenues decreased to 6% during the six months ended June 30, 2012, compared to 15% for the same period in 2011. The decrease in gross profit margin was mainly due to our inability to pass the increased cost of corn kernels to our customers while our cost of goods sold increased at a faster rate than the selling price of our products. In addition, increased regulation and enforcement of food safety laws has resulted in increased costs for compliance with the higher standard of food safety. [Wencai, please confirm our changes reflect what happened in Q2.

Selling and Distribution Expenses

Our selling and distribution expenses increased by $0.5, or 100%, to $1 million during the six months ended June 30, 2012, from $0.5 million for the same period in 2011. The increase is mainly due to the increase of our sales staff salary and commission in 2012.

General and Administrative Expenses

Our general and administrative expenses decreased by $0.01 million, or 17%, to $0.4 million during the six months ended June 30, 2012, from $0.48 million for the same period in 2011. This decrease was mainly because we did not pay professional fees incurred in connection with the reverse merger consummated in May 2011.

Interest Expenses

Our interest expenses increased by $0.40 million to $0.8 million during the six months ended June 30, 2012, from $0.4 million for the same period in 2011. This increase is mainly due to increased borrowings during 2012 and the increases in interest rates.

Income Before Income Tax Expenses

Income before income tax expenses decreased by $3.5 million, or 93%, to $0.2 million in the six months ended June 30, 2012, from $3.7 million for the same period in 2011. This decrease was mainly attributable to higher cost of goods sold and lower gross margin.

Income Tax Expenses

Our income tax expenses decreased to $0.09 million, or 90% from $0.9 million during the six months ended June 30, 2012, as compared to the same period of 2011. This decrease in income tax expenses was mainly attributable to the decrease in income before income tax expenses in the six months ended June 30, 2012, as compared to the same period in 2011.

Net Income Attributable to Ordinary Shareholders

Our net income attributable to ordinary shareholders decreased by $2.6 million, or 94%, to $0.15 million in the six months ended June 30, 2012, from $2.7 million for the same period in 2011 as result of the above factors.

(3) Liquidity and Capital Resources

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2012 was $.64 million, at an increase of $2.1 million from $4.3 million from operating activities for the same period in 2011. The increase in cash provided by operating activities is mainly attributable to increased amounts due to related party.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2012 was $14.8 million, at an increase of $7.6 million from $7.2 million used in investing activities for the same period in 2011. The increase in cash used in investing activities is mainly due to increased investment in purchase of property, Plant and Equipment and increase of restricted cash.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2012 was $10.6 million, as compared to $1.1 million used in financing activities for the same period in 2011. The increase in cash provided in financing activities is mainly due to increase of notes payable and increase short-term bank borrowing in the six months ended June 30, 2012, as compared to the same period in 2011.

Loans

We have financed our operations primarily through bank loans and operating income. We have a total of $14.6 million short-term loans outstanding as of June 30, 2012. The terms of each of these respective short-term loans are one year or six months. As of the date of this quarterly report, we have not defaulted on any of these loans.

Future Cash Commitments and Needs

We may require additional operating capital to run our new production line to expand our production capacity. The exact amount will be determined based on both the market demand for our products. We will carefully review our financial conditions and consider various financing options including internally generated cash, bank loans and additional equity financing. We expect that the proceeds from our operating cash flows and cash balances, together with credit lines available under bank loans, will be sufficient to meet our anticipated liquidity needs for the next twelve months.

(4) Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical information, information that is currently available to us and on various other assumptions that management believes to be reasonable under the circumstances. Actual results could vary from those estimates and we may change our estimates and assumptions in future evaluations. Changes in these estimates and assumptions may have a material effect on our financial condition and results of operations. We believe that these critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. For a discussion of our significant accounting policies and estimates, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” presented in our Current Report on Form 8-K/A filed on February 27, 2012.

(5) Recently Issued Accounting Pronouncements

See related disclosure at “Item 2 — Financial Statements — Notes to Condensed Consolidated Financial Statements — Note 2 Summary of Significant Accounting Policies — Recently issued accounting pronouncements.”

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Inflation

Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the consumer price index in China went down to 1.8% in July 2012 as compared to 3.3% in 2011. Although we have not in the past been materially affected by inflation, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.

Foreign Currency Exchange Risk

Substantially all of our revenues and expenses are denominated in Renminbi. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge our exposure to such risk. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment in our shares will be affected by the exchange rate between the U.S. dollar and the Renminbi because the value of our business is effectively denominated in Renminbi, while our shares will be traded in U.S. dollars.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the revised policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy resulted in a more than 20% appreciation of the Renminbi against the U.S. dollar in the following three years. Since July 2008, however, the Renminbi has traded within a narrow range against the U.S. dollar. As a consequence, the Renminbi has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. On September 20, 2011, the People’s Bank of China announced that the PRC government would further reform the Renminbi exchange rate regime and increase the flexibility of the exchange rate. It is difficult to predict how this policy may impact the Renminbi exchange rate. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert the Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us.

Interest Rate Risk

We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans, are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in the interest rates for our short-term bank loans renewed during the six months ended June 30, 2012.

Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

We are also exposed to interest rate risk relating to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We have not used derivative financial instruments in our investment portfolio. Interest earning instruments carry a degree of interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in market interest rates. However, our future interest income may fall short of expectations due to changes in market interest rates.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer (each a “Certifying Officer”), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15 promulgated under the Securities Exchange Act 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our Certifying Officers concluded that as of such date, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in our reports is recorded, processed, summarized and reported within the time periods specified by the SEC due to an inherent weakness in our internal controls over financial reporting. However, our Certifying Officers believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the respective periods presented.

Changes in Internal Controls

There were no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 1A.

RISK FACTORS

As a smaller reporting company, we are not required to provide disclosure under this item

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Exhibit No.		Description

31.1*		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2*		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1*		Section 1350 Certification of Chief Executive Officer

32.2*		Section 1350 Certification of Chief Financial Officer

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SMSA Treemont Acquisition Corp.

Dated: August 14, 2012	By:	/s/ Guo Wang
		Guo Wang
		Chief Executive Officer

Dated: August 14, 2012	By:	/s/ Wencai Pan
		Wencai Pan
		Chief Financial Officer

SMSA Treemont Acquisition Corp 10-Q