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| CPSL > SEC Filings for CPSL > Form 10-Q on 19-Feb-2013 | All Recent SEC Filings |
19-Feb-2013
Quarterly Report
Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as "believe," "expect," "anticipate," "project," "target," "plan," "optimistic," "intend," "aim," "will" or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties include, among other things, factors such as: plans to expand our exports outside of China; plans to increase our production capacity and the anticipated dates that such facilities may commence operations; our ability to obtain additional funding for our continuing operations and to fund our expansion; our ability to meet our financial projections for any financial year; our ability to retain our key executives and to hire additional senior management; continued growth of the Chinese economy and industries demanding our products; our ability to secure at acceptable prices the raw materials we need to produce our products; political changes in China that may impact our ability to produce and sell our products in our target markets; general business conditions and competitive factors, including pricing pressures and product development; and changes in our relationships with customers and suppliers. You should carefully review the risk factors described in other documents we file from time to time with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K for our fiscal year ended June 30, 2012.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes that appear in Part I, Item 1, "Financial Statements," of this quarterly report. Our unaudited consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles. The following discussion and analysis covers the Company's unaudited consolidated financial condition at December 31, 2012 and June 30, 2012, the end of its prior fiscal year, and its unaudited consolidated results of operation for the three and six months ended December 31, 2012 and 2011.
Use of Terms
Except as otherwise indicated by the context, all references in this report to:
? "CPSL," "Company," "Group," "we," "us" or "our" are to China Precision Steel, Inc., a Delaware corporation, and its direct and indirect subsidiaries;
? "PSHL" are to our subsidiary Partner Success Holdings Limited, a BVI company;
? "Blessford International" are to our subsidiary Blessford International Limited, a BVI company;
? "Shanghai Blessford" are to our subsidiary Shanghai Blessford Alloy Company Limited, a PRC company;
? "Chengtong" are to our subsidiary Shanghai Chengtong Precision Strip Company Limited, a PRC company;
? "Tuorong" are to our subsidiary Shanghai Tuorong Precision Strip Company Limited, a PRC company;
? "China" and "PRC" are to the People's Republic of China;
? "BVI" are to the British Virgin Islands;
? "SEC" are to the United States Securities and Exchange Commission;
? "Securities Act" are to the Securities Act of 1933, as amended;
? "Exchange Act" are to the Securities Exchange Act of 1934, as amended;
? "RMB" are to Renminbi, the legal currency of China; and
? "U.S. dollar," "USD," "US$" and "$" are to the legal currency of the United States.
Overview of the Company's Business
We are a niche and high value-added steel processing company principally engaged in the manufacture and sale of high precision cold-rolled steel products, in the provision of heat treatment and in the cutting and slitting of medium and high-carbon hot-rolled steel strips. We use commodity steel to create a specialty premium steel. Specialty precision steel pertains to the precision of measurements and tolerances of thickness, shape, width, surface finish and other special quality features of highly engineered end-use applications.
We produce and sell precision ultra-thin and high strength cold-rolled steel products ranging from 7.5 mm to 0.03 mm. We also provide heat treatment and cutting and slitting of medium and high-carbon hot-rolled steel strips not exceeding 7.5 mm thickness. Our process puts hot-rolled de-scaled (pickled) steel coils through a cold-rolling mill, utilizing our patented systems and high technology reduction processing procedures, to make steel coils and sheets in customized thicknesses according to customer specifications. Currently, our precision products are mainly used in the manufacture of automobile parts and components, steel roofing, plane friction discs, appliances, food packaging materials, saw blades, textile needles, and micro electronics.
We conduct our operations principally in China through our wholly-owned operating subsidiaries, Chengtong and Shanghai Blessford, which are wholly owned subsidiaries of our direct subsidiary, PSHL. Most of our sales are made domestically in China; however, we began exporting during fiscal 2007 and our overseas market currently covers Indonesia, Thailand, the Caribbean, Nigeria, Ethiopia and Turkey. We intend to further expand into additional overseas markets in the future, subject to suitable market conditions and favorable regulatory controls.
To remodel our business to make it sustainable, we have implemented and will continue to implement a series of measures to cut cost and increase overall profitability. These measures include: (1) initiating additional sales and marketing efforts to expand our customer base and increase total demand; (2) strategizing our product mix to re-focus on our niche capabilities including the ultra-thin low-carbon and high-strength high-carbon products; (3) streamlining production and reducing the number of workers; (4) hiring professionals and technicians to improve production management and increase quality control; (5) continuing to carry out R&D to improve profitability of existing products and launch new high value-add products; and (6) improving working capital efficiency by increasing turnovers of advances to suppliers and accounts receivables. We will also continue to take appropriate actions to perform business and credit reviews of customers and suppliers with the downward pressure in the PRC economy which has caused many difficulties faced by businesses.
Second Quarter Financial Performance Highlights
During the three months ended December 31, 2012, similar to the first fiscal quarter, we largely reduced the production and sales of our loss-making low-carbon cold-rolled steel products as part of our strategies to streamline production, and gross loss for the three months ended December 31, 2012 decreased to $1,301,958 from $1,466,949 for the immediate prior quarter ended September 30, 2012. However, tightened credit and slowing growth in China continued to cause a slow turnover of our accounts receivable for the three months ended December 31, 2012, a trend that is strongly correlated to the experience of other companies in the coal and steel sectors in China during the past year.
During the three months ended December 31, 2012, we sold a total of 10,705 tons of products, a decrease of 29,202 tons from 39,907 tons a year ago, largely due to the decrease in sales of low-carbon cold-rolled steel products mentioned above. Our average cost per unit sold decreased 0.6% while average selling prices decreased 9.6% period-on-period, mainly due to increases in factory overhead and direct labor per unit sold as a result of the substantially reduced units sold. Decreased sales volume coupled with high costs led to a gross loss of $1,301,958 and a net loss of $10,884,505 for the three months ended December 31, 2012. Total company backlog as of December 31, 2012 was $6,417,455.
In June and July 2012, we defaulted on the repayment obligations of our short-term and long-term bank loans totaling $43,446,477. We are currently in discussions with our banks regarding the restructuring of these loans for repayment but have not yet agreed on specific terms. Any restructuring will be subject to approval by the banks' governing bodies, and to our ability to meet certain conditions and requirements that may be imposed by the banks. There can be no assurance that the Company will be able to successfully work out a repayment plan or otherwise fulfill its obligations under the loans. Each of the banks also have the right to take possession of the collateral (which collectively constitute substantial assets of the Company) granted in connection with their respective loan agreements, which action would have a material adverse impact on the Company. We have implemented and will continue to implement a series of measures, discussed above, to remodel our business to make it sustainable, and as part of the ongoing discussions with banks to potentially restructure our bank loans.
The Company has suffered a very significant loss in the period ended December 31, 2012. Operating cash flows have been adversely impacted by the slow turnover of our accounts receivable and although the Company has been renegotiating with its major suppliers to get a partial refund of our advances to suppliers, to date we have yet to receive any substantial refund due to the credit crunch in the Chinese steel industry. There can be no assurance that the Company will be able to generate sufficient positive cash flow from operations to address all of its cash flow needs, and to continue as a going concern.
The following are some financial highlights for the second fiscal quarter:
? Revenues: Our revenues were approximately $8.2 million for the quarter, a decrease of 75.7% from last year.
? Gross Margin: Gross margin was (15.9%) for the quarter, compared to (5.3%) last year.
? Loss from operations before tax: Loss from operations before tax was approximately $10.9 million for the quarter, compared to a loss of approximately $3.5 million last year.
? Net loss: Net loss was approximately $10.9 million for the quarter, compared to a net loss of approximately $3.5 million last year.
? Fully diluted loss per share: Fully diluted loss per share was $2.80 for the quarter, compared to a loss per share of $0.91 last year.
Results of Operations
The following table sets forth key components of our results of operations for the periods indicated, in USD and as a percentage of revenues.
Comparison of Three and Six Months Ended December 31, 2012 and 2011
Three Months Ended December 31, Six Months Ended December 31,
2012 2011 2012 2011
% of % of
Amount Revenues Amount % of Revenues Amount Revenues Amount % of Revenues
Revenues $ 8,164,267 100.0 $ 33,662,335 100.0 $ 14,121,027 100.0 $ 75,829,178 100.0
Cost of sales (including
depreciation and amortization) 9,466,225 115.9 35,461,052 105.3 16,889,934 119.6 77,566,125 102.3
Gross (loss) (1,301,958 ) (15.9 ) (1,798,717 ) (5.3 ) (2,768,907 ) (19.6 ) (1,736,947 ) (2.3 )
Selling and marketing expenses 25,063 0.3 40,185 0.1 54,336 0.4 108,489 0.1
Administrative expenses 401,797 4.9 932,480 2.8 844,412 6.0 1,226,556 1.6
Allowance for bad and doubtful debts 8,786,214 107.6 - 0.0 10,159,214 71.9 - 0.0
Depreciation and amortization expense 52,050 0.6 53,993 0.2 104,011 0.7 108,437 0.1
Total operating expenses 9,265,124 113.5 1,026,658 3.0 11,161,973 79.0 1,443,482 1.9
(Loss) from operations (10,567,082 ) (129.4 ) (2,825,375 ) (8.4 ) (13,930,880 ) (98.7 ) (3,180,429 ) (4.2 ) _
Other revenues 607,654 7.4 68,872 0.2 607,757 4.3 69,071 0.1
Interest and finance costs (925,077 ) (11.3 ) (808,650 ) (2.4 ) (1,783,665 ) (12.6 ) (1,478,578 ) (1.9 )
Total other (expense) (317,423 ) (3.9 ) (739,778 ) (2.2 ) (1,175,908 ) (8.3 ) (1,409,507 ) (1.9 )
(Loss) before income taxes (10,884,505 ) (133.3 ) (3,565,153 ) (10.6 ) (15,106,788 ) (107.0 ) (4,589,936 ) (6.1 )
Income tax (benefit)/expense - - (27,231 ) (0.1 ) - - 27,081 >0.1
Net (loss) $ (10,884,505 ) (133.5 ) $ (3,537,922 ) (10.5 ) $ (15,106,788 ) (107.0 ) $ (4,617,017 ) (6.1 )
Basic (loss) per share $ (2.80 ) $ (0.91 ) $ (3.89 ) $ (1.19 )
Diluted (loss) per share $ (2.80 ) $ (0.91 ) $ (3.89 ) $ (1.19 )
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Sales Revenues.
Sales volume decreased by 29,202 tons, or 73.2%, period-on-period, to 10,705 tons for the three months ended December 31, 2012, from 39,907 tons for the three months ended December 31, 2011 and as a result, sales revenues decreased by $25,498,068, or 75.7%, period-on-period, to $8,164,267 for the three months ended December 31, 2012, from $33,662,335 for the three months ended December 31, 2011. The decrease in sales revenues period-on-period is mainly attributable to the decrease in production and sales of our low-carbon cold-rolled products in an effort to reduce the sales of these loss-making products.
Sales by Product Line
A break-down of our sales by product line for the three months ended December
31, 2012 and 2011 is as follows:
Three Months ended December 31,
2012 2011 Year-on-
Year
Quantity % of Quantity % of Qty.
Product Category (tons) $ Amount Sales (tons) $ Amount Sales Variance
Low-carbon hard-rolled 1,202 842,901 10 6,492 4,767,830 14 (5,290 )
Low-carbon cold-rolled 5,840 4,513,375 55 26,671 21,235,838 63 (20,831 )
High-carbon hot-rolled 142 104,472 1 935 1,043,308 3 (793 )
High-carbon cold-rolled 2,909 2,544,079 31 5,513 6,087,955 18 (2,604 )
Subcontracting income 612 31,768 1 296 33,694 <1 316
Sales of scrap metal - 127,672 2 - 493,710 1 -
Total 10,705 8,164,267 100 39,907 33,662,335 100 (29,202 )
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During the three months ended December 31, 2012, domestic sales decreased across all product categories. Low-carbon cold-rolled steel products accounted for 55% of the current sales mix at an average selling price of $773 per ton for the three months ended December 31, 2012, compared to 63% of the sales mix at an average selling price per ton of $796 for the three months ended December 31, 2011. The decrease in sales in this category during the quarter was mainly due to streamlined production to reduce the sales of these loss-making products. Low-carbon hard-rolled steel products accounted for 10% of the current sales mix at an average selling price of $701 per ton for the three months ended December 31, 2012, compared to 14% of the sales mix at an average selling price per ton of $734 for the three months ended December 31, 2011, due to a decrease in demand in the export market during the period. High-carbon cold-rolled steel products accounted for 31% of the current sales mix at an average selling price of $875 per ton for the three months ended December 31, 2012, compared to 18% of the sales mix at an average selling price of $1,104 for the three months ended December 31, 2011. The products in this category are mainly used in the automobile industry and the decrease in sales volume period-on-period was a result of the slowing demand for automobiles in the PRC market. Subcontracting income revenues accounted for $31,678 or 1% of the sales mix for the three months ended December 31, 2012, a slight decrease from $33,694 for the three months ended December 31, 2011, due to reduced demand.
Three Months ended
December 31,
2012 2011 Variance
Average Selling Prices ($) ($) ($) (%)
Low-carbon hard-rolled 701 734 (33 ) (4 )
Low-carbon cold-rolled 773 796 (23 ) (3 )
High-carbon hot-rolled 736 1,116 (380 ) (34 )
High-carbon cold-rolled 875 1,104 (229 ) (21 )
Subcontracting income 52 114 (62 ) (54 )
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The average selling price per ton decreased to $763 for the three months ended December 31, 2012, compared to $844 last year, representing a decrease of $81, or 9.6%, period-on-period. This decrease was mainly due to decreases in general steel prices and therefore our selling prices during the quarter. Average selling prices decreased across all product categories during the three months ended December 31, 2012.
Sales Breakdown by Major Customer
2012 2011
% of % of
Customers $ Sales $ Sales
Shanghai Bayou Co., Ltd. 963,918 12 - * - *
Shanghai Shengdejia Metal Products
Co., Ltd. 857,380 11 3,116,965 9
Changshu Jiacheng Steel Plating
Co., Ltd. 843,656 10 2,722,828 8
Shanghai Changshuo Steel Co., Ltd. 763,178 9 5,112,565 15
Shanghai Wozi Jintian Blade Co.,
Ltd. 529,399 6 - *
Hangzhou Cogeneration Import &
Export Co., Ltd. - * - * 2,922,193 9
Steelforce Group N.V. - * - * 2,783,641 8
3,957,531 48 16,658,192 49
Others 4,206,736 52 17,004,143 51
Total 8,164,267 100 33,662,335 100
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* Not major customers for the relevant periods
Sales revenue generated from our top five major customers as a percentage of total sales was 48% for the three months ended December 31, 2012, as compared to 49% in 2011. The change in customer mix reflects management's continuous efforts in expanding our customer base and geographical coverage during the course of the quarter.
Cost of Goods Sold.
Cost of sales decreased by $25,994,827, or 73.3%, period-on-period, to $9,466,225 for the three months ended December 31, 2012, from $35,461,052 for the three months ended December 31, 2011. Cost of sales represented 115.9% of sales revenues for the three months ended December 31, 2012, compared to 105.3% for the three months ended December 31, 2011. Average cost per unit sold decreased to $884 for the three months ended December 31, 2012, compared to $889 for the three months ended December 31, 2011, representing a decrease of $5 per ton, or 0.6%, period-on-period.
2012 2011 Variance
($) ($) ($) (%)
Cost of goods sold
- Raw materials 7,438,121 32,385,680 (24,947,559 ) (77.0 )
- Direct labor 107,895 145,048 (37,153 ) (25.6 )
- Manufacturing overhead 1,920,209 2,930,324 (1,010,115 ) (34.5 )
9,466,225 35,461,052 (25,994,827 ) (73.3 )
Cost per unit sold
Total units sold (tons) 10,705 39,907 (29,202 ) (73.2 )
Average cost per unit sold ($/ton) 884 889 (5 ) (0.6 )
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The decrease in average per unit cost of sales is represented by the combined effect of:
? an increase in factory overhead per unit sold of $106, or 145.2%, from $73 for the three months ended December 31, 2011, to $179 for the three months ended December 31, 2012;
? an increase in direct labor per unit sold of $6, or 150.0%, from $4 for the three months ended December 31, 2011, to $10 for the three months ended December 31, 2012, offset by;
? a decrease in cost of raw materials per unit sold of $117, or 14.4%, from $812 for the three months ended December 31, 2011, to $695 for the three months ended December 31, 2012.
The cost of raw materials consumed decreased by $24,947,559, or 77.0%, period-on-period, to $7,438,121 for the three months ended December 31, 2012, from $32,385,680 for the three months ended December 31, 2011. This decrease was mainly due to a substantial decrease in total units sold during the three months ended December 31, 2012.
Direct labor costs decreased by $37,153, or 25.6%, period-on-period, to $107,895 for the three months ended December 31, 2012, from $145,048 for the three months ended December 31, 2011. Manufacturing overhead costs decreased by $1,010,115, or 34.5%, period-on-period, to $1,920,209for the three months ended December 31, 2012, from $2,930,324 for the three months ended December 31, 2011. The decrease was mainly attributable to the combined effect of a decrease in utilities of $501,657, or 63.3%, period-on-period, to $291,260 for the three months ended December 31, 2012, from $792,917 for the three months ended December 31, 2011, and a decrease in consumables of $216,141, or 48.6%, period-on-period, to $228,772 for the three months ended December 31, 2012, from $444,913 for the three months ended December 31, 2011.
Gross Profit
Gross profit in absolute terms increased by $496,759 or 27.6%, period-on-period, to a gross loss of $1,301,958 for the three months ended December 31, 2012, from a gross loss of $1,798,717 for the three months ended December 31, 2011. Gross profit margin decreased to (15.9%) for the three months ended December 31, 2012, from (5.3%) for the three months ended December 31, 2011. The decrease in gross profit margin is mainly attributable to a 9.6% period-on-period decrease in average selling prices.
Selling Expenses
Selling expenses decreased by $15,122, or 37.6%, period-on-period, to $25,063 for the three months ended December 31, 2012, from $40,185 for the three months ended December 31, 2011. The decrease was mainly attributable to lower transportation costs and traveling expenses period-on-period.
Administrative Expenses
Administrative expenses decreased by $530,683 or 56.9%, period-on-period, to $401,797 for the three months ended December 31, 2012, compared to $932,480 for the three months ended December 31, 2011. This was mainly due to a decrease in traveling expenses associated with attendance of investment conferences and legal and professional fees period-on-period.
Allowance for Bad and Doubtful Debts
Allowance for bad and doubtful debts increased by $8,786,214, or 100.0%, period-on-period. Allowance recognized for the three months ended December 31, 2012 was in the amount of $8,786,214 in accordance with our policy for allowance for doubtful accounts.
Loss from Operations
Loss from operations increased by $7,741,707, or 274%, period-on-period, to a loss of $10,567,082 for the three months ended December 31, 2012, from $2,825,375 for the three months ended December 31, 2011, as a result of the factors discussed above.
Other Income
Other income increased by $538,782, or 782.3%, to $607,654 for the three months ended December 31, 2012, from $68,872 for the three months ended December 31, 2011.
Interest Expense
Total interest expense increased by $116,427, or 14.4%, to $925,077 for the three months ended December 31, 2012, from $808,650 for the three months ended December 31, 2011, due to the accrued late payment penalty interest as a result of the loan default.
Income Tax
For the three months ended December 31, 2012, we recognized no income tax expense, compared to an income tax benefit of $27,231 for the three months ended . . .
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