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SCOK > SEC Filings for SCOK > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for SINOCOKING COAL & COKE CHEMICAL INDUSTRIES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SINOCOKING COAL & COKE CHEMICAL INDUSTRIES, INC.


14-May-2013

Quarterly Report


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

The following discussion and analysis of the results of our operations and financial condition for the three and nine months ended March 31, 2013 and 2012, should be read in conjunction with our financial statements and the notes thereto that are included elsewhere in this report. All monetary figures are presented in U.S. dollars, unless otherwise indicated.

Overview

We are a vertically-integrated coal and coke producer based in Henan Province, People's Republic of China ("China" or "PRC"). We use coal that we extract and buy to produce basic and value-added coal products including raw (unprocessed) coal, washed coal, medium coal and coal slurries (by-products of the coal-washing process), and coke products including chemical and metallurgical coke and coal tar (a by-product of the coke manufacturing process).

Our business operations are conducted through Henan Province Pingdingshan Hongli Coal & Coke Co., Ltd. ("Hongli"), a PRC company that we control by a series of contractual arrangements between Hongli and Pingdingshan Hongyuan Energy Science and Technology Development Co., Ltd. ("Hongyuan"). Hongyuan is a PRC company wholly-owned by Top Favour Limited, a British Virgin Island company and our wholly-owned subsidiary.

As of March 31, 2013, our coke related activities were carried out by Hongli's branch operation, Baofeng Coking Factory ("Baofeng Coking"), coal related activities by three of Hongli's subsidiaries, namely Baofeng Hongchang Coal Co., Ltd. ("Hongchang Coal"), Baofeng Shuangrui Coal Mining Co., Ltd. ("Shuangrui Coal") and Baofeng Xingsheng Coal Mining Co., Ltd. ("Xingsheng Coal"), and electricity generation by another Hongli subsidiary, Baofeng Hongguang Environment Protection Electricity Generating Co., Ltd. ("Hongguang Power"). Baofeng Shunli Coal Mining Co., Ltd. ("Shunli Coal"), the operator of Shunli coal mine and which we acquired in May 2011, was dissolved in July 2012, and we are in the process of transferring its mining rights and other assets to, and consolidating them, under Hongchang Coal.

The coal-related activities for the periods discussed below are those of Hongchang Coal only, although its mining operations were halted in September 2011. Our other coal mine companies have halted operations since the provincial-wide mining moratorium was imposed in June 2010. As of the date of this report, although we expect the mining moratorium will end sometime in 2013 calendar year, there can be no assurance as to exactly when the mining moratorium will be lifted, or when we can resume our mining operations, if at all.

We intend to transfer all coal related activities to the joint-venture established with Henan Province Coal Seam Gas Development and Utilization Co., Ltd. ("Henan Coal Seam Gas"), a state-owned enterprise and qualified provincial-level coal mine consolidator. The joint-venture, Henan Hongyuan Coal Seam Gas Engineering Technology Co., Ltd. ("Hongyuan CSG"), has been established, although our planned transfer of coal related activities to Hongyuan CSG has not been carried out as of the date of this report.

Our interests in Hongyuan CSG are held by Henan Zhonghong Energy Investment Co., Ltd. ("Zhonghong"), a company established in December 2010 and which equity interests are presently held on Hongli's behalf and for its benefits by three nominees pursuant to share entrustment agreements.

In April, 2013, we began leasing a coking facility from Pingdingshan Hongfeng Coal Processing and Coking, Ltd. for one year. The leased facility (the "Hongfeng plant") has an annual capacity of 200,000 metric tons and is approximately 3 miles from our existing plant. Trial production began at the Hongfeng plant near the end of April, and we believe that the skills we gain from operating its coke ovens will be invaluable for operating our 900,000 metric ton facility still under construction (the "new plant").

Results of Operations

Three and nine months ended March 31, 2013, as compared to three and nine months ended March 31, 2012

Overall, results of operations for the three months ended March 31, 2013 decreased by 17.26% to $13,903,951 as compared to the same period last year. Results of operations for the nine months ended March 31, 2013 decreased by 6.31% to $52,704,787 as compared to the same period last year.

On a macro level, management has observed the following trends, which may have a direct impact on our operations in the near future: (1) the coke market is showing some signs of recovery; and (2) as coking coal prices continue at historically high levels, gross margins for our coke products have remained low.

On a micro level, management has observed a strong demand from our customers for coke powder, and we accordingly made market purchases during the quarter in order to satisfy demand.

Revenue

For the three months ended March 31, 2013, revenue decreased by $2,900,106 or 17.26% as compared to the same period last year, due to decreased revenue from both coke and coal products. Revenue and quantity sold by product type for the 2012 and 2013 periods are as follows:

                                              Revenues
                                       Coke              Coal
                                     products          products           Total
Revenue
Three months ended March 31, 2012   $ 8,708,731      $  8,095,326      $ 16,804,057
Three months ended March 31, 2013     8,433,314         5,470,637        13,903,951
Decrease in $                       $  (275,417 )    $ (2,624,689 )    $ (2,900,106 )
Decrease in %                             (3.16 )%         (32.42 )%         (17.26 )%

Quantity sold (metric tons)
Three months ended March 31, 2012        38,674            54,203            92,877
Three months ended March 31, 2013        39,577            38,576            78,153
Increase (decrease)                         903           (15,627 )         (14,724 )
% Increase (decrease)                      2.33 %          (28.83 )%         (15.85 )%

60.65% of our three-month revenue came from coke products and 39.35% from coal products, as compared to 51.83% from coke products and 48.17% from coal products for the same period last year. The percentage changes reflect the limited amounts of coal products we had available for sale.

For the nine months ended March 31, 2013, revenue decreased by $3,547,937 or 6.31% as compared to the same period of last year, as a result of decreased coke, coal tar, raw coal, and washed coal revenues, offset by increased revenue from coke powder. Revenue and quantity sold by product type for the 2012 and 2013 periods as follows:

                                             Revenues
                                       Coke             Coal
                                     products         products           Total
Revenue
Nine months ended March 31, 2012   $ 28,647,194     $ 27,605,530      $ 56,252,724
Nine months ended March 31, 2013     28,802,268       23,902,519        52,704,787
Increase (decrease) in $           $    155,074     $ (3,703,011 )    $ (3,547,937 )
Increase (decrease) in %                   0.54 %         (13.41 )%          (6.31 )%

Quantity sold (metric tons)
Nine months ended March 31, 2012        121,494          191,009           312,503
Nine months ended March 31, 2013        146,713          159,291           306,004
Increase (decrease)                      25,219          (31,718 )          (6,499 )
% Increase (decrease)                     20.76 %         (16.61 )%          (2.08 )%

54.65% of our nine-month revenue came from coke products and 45.35% from coal products, as compared to 50.93% from coke products and 49.07% from coal products for the same period of last year. The percentage changes reflect the limited supply of coal products we had available for sale.

Coke products include finished coke (a key raw material for producing steel), coke powder (a smaller-grained coke that can be produced along with coke and used by non-ferrous metallurgical industry) and coal tar (a byproduct of the coke manufacturing process). Coal products include unprocessed metallurgical coal, processed or washed coal, and medium or mid-coal and coal slurries, which are by-products of the coal washing process and used primarily to generate electricity and for heating. As used in this discussion and analysis, unless otherwise indicated, "coke" includes both coke and coke powder, and "raw coal" includes both thermal and metallurgical coal that is unwashed and relatively unprocessed, as well as mid-coal and coal slurries.

Average selling price per metric ton for our four principal products for the three months ended March 31, 2013 and 2012 are as follows:

                                     Coke         Coal tar      Raw coal        Washed coal
Three months ended March 31, 2012   $   230      $      257     $      88      $         176
Three months ended March 31, 2013       212             258            58                177
Increase (decrease) in $            $   (18 )    $        1     $     (30 )    $           1
Increase (decrease) in %              (7.83 )%         0.39 %      (34.09 )%            0.57 %

Average selling price per metric ton for our four principal products for the nine months ended March 31, 2013 and 2012 are as follows:

                                     Coke         Coal tar      Raw coal        Washed coal
Nine months ended March 31, 2012   $    235      $      255     $      76      $         181
Nine months ended March 31, 2013        195             257            64                184
Increase (decrease) in $           $    (40 )    $        2     $     (12 )    $           3
Increase (decrease) in %             (17.02 )%         0.78 %      (15.79 )%            1.66 %

Generally, our selling prices are driven by a number of factors, including the particular composition and quality of the coal or coke we sell, their prevailing market prices locally and throughout China, as well as in the global marketplace, timing of sales, delivery terms, and our relationships with our customers and our negotiations of their purchase orders. Management believes that the changes in average selling prices period over period were primarily driven by market demand and quality of our products.

The average price of coke was calculated based on the weighted average price of coke and coke powder. The average price of raw coal was calculated based on the weighted average price of unprocessed coal, coal byproducts and mixed thermal coal. We note that the average selling prices for coal products are also influenced by changes in the coal mixtures (with different grades and heat content) that we sell to our customers.

Revenue and quantity sold of each coke product for the three months ended March 31, 2013 and 2012 are as follows:

                                          Coke products
                                       Coke          Coal tar          Total
Revenue
Three months ended March 31, 2012   $ 8,521,844      $ 186,887      $ 8,708,731
Three months ended March 31, 2013     8,083,768      $ 349,546        8,433,314
Increase (decrease) in $            $  (438,076 )    $ 162,659      $  (275,417 )
Increase (decrease) in %                  (5.14 )%       87.04 %          (3.16 )%

Quantity sold (metric tons)
Three months ended March 31, 2012        37,111          1,563           38,674
Three months ended March 31, 2013        38,220          1,357           39,577
Increase (decrease)                       1,109           (206 )            903
% Increase (decrease)                      2.99 %       (13.18 )%          2.33 %

The lower coke revenue for the three months ended March 31, 2013, mainly resulted from lower average selling price. Such lower price represents the higher percentage of coke sold during the period being coke powder (which is cheaper), whereas we did not sell any coke powder in the same period last year. The higher coal tar revenue was mainly due to higher average selling price, despite the decreased sales volume.

Revenue and quantity sold of each coke product for the nine months ended March 31, 2013 and 2012 are as follows:

                                          Coke products
                                       Coke          Coal tar           Total
Revenue
Nine months ended March 31, 2012   $ 27,116,487     $ 1,530,707      $ 28,647,194
Nine months ended March 31, 2013     27,714,728       1,087,540        28,802,268
Increase (decrease) in $           $    598,241     $  (443,167 )    $    155,074
Increase (decrease) in %                   2.21 %        (28.95 )%           0.54 %

Quantity sold (metric tons)
Nine months ended March 31, 2012        115,476           6,018           121,494
Nine months ended March 31, 2013        142,482           4,231           146,713
Increase (decrease)                      27,006          (1,787 )          25,219
% Increase (decrease)                     23.39 %        (29,69 )%          20.76 %

The higher coke revenue for the nine months ended March 31, 2013 resulted from higher sales volume contributed in large part by coke powder sales. The lower coal tar revenue for the same period reflected lower market demand despite a slightly higher selling price.

Revenue and quantity sold of each coal product for the three months ended March 31, 2013 and 2012 are as follows:

                                            Coal products
                                     Raw coal        Washed coal          Total
Revenue
Three months ended March 31, 2012   $ 1,342,559      $  6,752,767      $  8,095,326
Three months ended March 31, 2013       652,957         4,817,680         5,470,637
Decrease in $                       $  (689,602 )    $ (1,935,087 )    $ (2,624,689 )
Decrease in %                            (51.36 )%         (28.66 )%         (32.42 )%

Quantity sold (metric tons)
Three months ended March 31, 2012        15,778            38,425            54,203
Three months ended March 31, 2013        11,281            27,295            38,576
Decrease                                 (4,497 )         (11,130 )         (15,627 )
% Decrease                               (28.50 )%         (28.97 )%         (28.83 )%

Revenue and quantity sold of each coal product for the nine months ended March 31, 2013 and 2012 are as follows:

                                           Coal products
                                     Raw coal        Washed coal          Total
Revenue
Nine months ended March 31, 2012   $  4,876,089      $ 22,729,441      $ 27,605,530
Nine months ended March 31, 2013      2,886,244        21,016,275        23,902,519
Decrease in $                      $ (1,989,845 )    $ (1,713,166 )    $ (3,703,011 )
Decrease in %                            (40.81 )%          (7.54 )%         (13.41 )%

Quantity sold (metric tons)
Nine months ended March 31, 2012         65,254           125,755           191,009
Nine months ended March 31, 2013         44,858           114,433           159,291
Decrease                                (20,396 )         (11,322 )         (31,718 )
% Decrease                               (31.26 )%          (9.00 )%         (16.61 )%

The significantly lower raw coal revenue for the three and nine months ended March 31, 2013 resulted from limited supply available for sale, as well as decreased average selling price. Such decreased price for both the three and nine-month periods was mainly caused by the fallen price of mid-coal due to soft market demand. In addition, cheaper mid-coal and coal slurry made up a greater percentage of our total sales volume of raw coal for the nine-months ended March 31, 2013, as compared to the same period last year.

The lower washed coal revenue for the three and nine months ended March 31, 2013 resulted from lower sales volume despite a slightly increased average selling price. We intentionally cutback sales of washed coal in order to preserve sufficient inventory for the Hongfeng plant.

Cost of Revenue

Cost of revenue decreased by 16.60% for the three months ended March 31, 2013, from $14,166,799 to $11,815,066 as compared to the same period of last year, as a result of decreased sales volume across our coke tar, raw coal and washed coal products, offset by our increased cost to purchase coal.

Cost of revenue increased by 6.14% for the nine months ended March 31, 2013, from $43,122,271 to $45,770,689 as compared to the same period of last year, as a result of higher purchase cost of coal, offset by decreased sales volumes of coal tar, raw coal and washed coal.

Gross Profit

Gross profit for the three months ended March 31, 2013 was $2,088,885, a decrease of $548,373 or 20.79%, from $2,637,258 for the same period last year, as a result of lower revenue, offset by lower cost of revenue. Gross profit margin decreased by approximately 0.67% to 15.02%. Despite some earlier signs of a possible recovery in coke price, such signs have been inconsistent and coke price have remained depressed especially when compared to last year. The cost to purchase coal, on the other hand, remained high, thereby driving down our gross margin.

Gross profit margin for the nine months ended March 31, 2013 similarly declined, by approximately 10.19% to 13.16%. Gross profit was $6,934,098, a decrease of $6,196,355 or 47.19%, from $13,130,453 for the same period last year, as a result of lower total revenue with higher cost of revenue.

Operating Expenses

Operating expenses, which consist of selling expenses and general and administrative expenses, was $570,073 for the three months ended March 31, 2013, a decrease of $122,363 as compared to the same period last year. Selling expenses decreased by $6,584 or 15.10%, to $37,018 mainly due to lower expenditures in customer relation maintenance. General and administrative expenses decreased by $115,779 or 17.84%, to $533,055, mainly due to a decrease of approximately $134,000 in the expenses we incur as a public company, including approximately $78,000 for internal control consulting.

Operating expenses was $1,864,003 for the nine months ended March 31, 2013, a decrease of $287,086 as compared to the same period last year. Selling expenses decreased by $45,694 or 27.12% to $122,775, from lower entertainment and traveling expenses of approximately $19,000, and customer relation maintenance expense of approximately $20,000. General and administrative expenses decreased by $241,392 or 12.18%, to $1,741,228, mainly due to decrease of bad debt accrued expense of $362,544, internal control consulting fee of approximately $70,000, and office and rental expenses of approximately $55,000. In addition, we recognized a reduction of expenses of $230,000 on various over-accruals made during the prior nine-month period.

Other Income and Expense

Other income and expense includes financing income and expense (which consist of the net of interest and other financing expenses and income), income and expense not related to our principal operations, and change in fair value of warrants.

For the three months ended March 31, 2013, we had net other expenses of $609,315 from the following:

(1) We had interest income of $174,788 from an $8.0 million loan to an unrelated third party.

(2) We had interest expense of $819,489 from our loans with Bairui Trust Co., Ltd. ("Bairui Trust"), and $91,055 to Shanghai Pudong Development Bank ("SPDB").

(3) We had financing expense of $94,547 from the discounting of unmatured bank notes from our customers.

(4) We had dividend income of $219,838 from our investment in Pingdingshan Xinhua District Rural Cooperative Bank (the "Cooperative Bank").

(5) We had a gain in the fair value of warrants of $1,150.

(6) We did not capitalize any interest expense for construction in progress since construction at the new plant was halted during the period.

For the three months ended March 31, 2012, we had net other income of $49,182 from the following:

(1) We had bank interest income of $10,095 and interest income from loans to unrelated third parties of $212,488.

(2) We had interest expense of $684,945 to Bairui Trust, and $84,656 to SPDB. Additionally, as we capitalized $466,855 of interest into construction in progress $302,746 was recorded as interest expense for the period.

(3) We had other finance expense of $34,002 from discounting unmatured bank notes paid by our customers, and other bank charges.

(4) We had a gain in the fair value of warrants of $163,394

For the nine months ended March 31, 2013, we had net other expenses of $1,637,466 from the following:

(1) We had interest income of $605,889 from an $8.0 million loan to an unrelated third party.

(2) We had interest expense of $2,636,648 to Bairui Trust, and $292,961 to SPDB.

(3) We had finance expense of $257,914 from the discounting of unmatured bank notes from our customers.

(4) We had other income of $228,171, including approximately $220,000 in dividend income from our investment in the Cooperative Bank.

(5) We had a gain in the fair value of warrants of $715,997

(6) We did not capitalize any interest expense for construction in progress since construction at the new plant was halted during the period.

For the nine months ended March 31, 2012, we had net other income of $4,375,874 from the following:

(1) We had interest income of $999,883, from loans to unrelated third parties.

(2) We had interest expense of $2,036,358 to Bairui Trust, and 251,685 to SPDB. Additionally, as we had capitalized $1,254,275 of interest into construction in progress, $1,033,768 was recorded as interest expense for the period.

(3) We had other finance expense of $107,435 from the discounting of unmatured bank notes from our customers, and other bank charges.

(4) We had a gain in the fair value of warrants of $4,526,330.

Provision for Income Taxes

Provision for income taxes for the three months ended March 31, 2013 decreased by $171,624 to $404,717, due primarily to lower taxable income.

Similarly, provision for income taxes for the nine months ended March 31, 2013 decreased by $1,546,947 to $1,436,211.

Net Income

Net income for the three months ended March 31, 2013, including change in fair value of warrants, was $504,780, as compared to $1,417,663 for the same period last year.

Net income for the nine months ended March 31, 2013, including change in fair value of warrants, was $1,996,418, as compared to $12,372,080 for the same period last year.

We use non-GAAP adjusted net income to measure the performance of our business internally by excluding non-cash charges related to warrants, and believe that such non-GAAP financial measure allows us to focus on managing our business operating performance because such non-GAAP financial measure reflects our essential operating activities and provides a consistent method of comparison to historical periods. We believe that providing such non-GAAP financial measure is useful to investors for a number of reasons. The non-GAAP financial measure provides a consistent basis for investors to understand our financial performance in comparison to historical periods without variation of non-recurring items and non-operating related charges. In addition, it allows investors to evaluate the Company's performance using the same methodology and information that are used by our management. Non-GAAP financial measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment regarding which charges are excluded. However, we compensate for these limitations by providing the relevant disclosure of excluded charges.

The following table provides our adjusted net income and a reconciliation of such non-GAAP financial measure to our GAAP net income:

                                                Three months ended March 31,          Nine months ended March 31,
                                                   2013                2012              2013               2012
Net income                                    $       504,780      $  1,417,663     $     1,996,418     $ 12,372,080
Change in fair value of warrant liabilities             1,150           163,394             715,997        4,526,330
Adjusted net income                           $       503,630      $  1,254,269     $     1,280,421     $  7,845,750

Earnings per share - basic and diluted        $          0.02      $       0.07     $          0.09     $       0.59
Adjusted earnings per share - basic
and diluted                                   $          0.02      $       0.06     $          0.06     $       0.37

Weighted average number of common shares -
basic and diluted                                  21,121,372        21,090,948          21,121,372       21,090,948
Adjusted average number of common shares -
basic and diluted                                  21,121,372        21,090,948          21,121,372       21,090,948

Liquidity and Capital Resources



In summary, our cash flows are as follows:



                                                            Nine months ended
                                                                March 31,
                                                          2013             2012
Net cash provided by (used in) operating activities   $  5,250,949     $  (7,239,188 )
Net cash used in investing activities                   (8,655,078 )     (17,284,547 )
Net cash provided by financing activities                3,183,522         1,499,228

Net Cash Provided by (Used in) Operating Activities

Net operating inflow for the nine months ended March 31, 2013, was $5,250,949, excluding non-cash adjustments, resulting from: (1) approximately $3.7 million in decreased account receivables due to better customer credit control, (2) approximately $2.7 million in decreased supplier advances as a result of our inventory control, (3) $0.6 million in decreased prepayments due to inventory received within this quarter, and (4) $0.4 million in increased other payables and accrued liabilities. Such inflow was offset by: (1) $2.7 million increase in other receivables mainly due to a $3.2 million deposit to bid for a financial instrument from Pingdingshan Rural Credit Cooperative Union at an auction, (2) $0.4 million in increased note receivables, and (3) $0.4 million in decreased tax payables.

For the nine months ended March 31, 2012, net operating outflow was $7,239,188. Excluding non-cash adjustments, our cash outflow were mainly the result from:
(1) increased note receivables of approximately $1.57 million as we increased reliance on bank guaranteed notes from major customers over cash, (2) increased accounts receivable of approximately $3.51 million as we extended credit to major customers to maintain their business, (3) increase in other receivable of approximately $1.20 million as we have accrued interest receivable from a third party loan, (4) increased inventory of approximately $4.47 million to maintain sufficient level of washed coal for trading, (5) increased advances to suppliers of approximately $4.10 million to secure future inventory purchase, and (6) decreased tax payable of approximately $1.23 million as we paid off and accrued additional income tax and value-added tax.

Net Cash Used in Investing Activities

During the nine months ended March 31, 2013, we loaned $9.5 million to an unrelated party, which was repaid in full in April 8, 2013. We also loaned $0.35 million to another unrelated party, and received repayment of $1.2 million in loan principal from this same party. . . .

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