Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SCOK > SEC Filings for SCOK > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for SINOCOKING COAL & COKE CHEMICAL INDUSTRIES, INC.

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


14-Nov-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 months ended September 30, 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 (mid-coal) and coal slurries (by-products of the coal-washing process), and coke products including metallurgical coke, coke powder and byproducts of the coke manufacturing process such as coal tar and crude benzol.

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 September 30, 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 mines 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 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, we do not know 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. Production at the Hongfeng plant commenced in August, 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

Results of operations for the three months ended September 30, 2013 were nearly identical 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) although coke demand has been improving, the Chinese steel industry is still working through an oversupply of crude steel, which may take some time absent any sudden, sharp uptick in the economy; and (2) the slower Chinese economy, along with an oversupply of mid-coal starting in early 2013, will continue to keep mid-coal prices down.

Revenue

Revenue decreased by $86,224 or 0.49% to $17,475,970 as compared to the same period a year ago due to lower revenue from coal products, although revenue from coke products improved. Revenue and quantity sold by product type are as follows for the periods indicated:

                                                  Revenues
                                            Coke             Coal
                                          Products         Products           Total
Revenue
Three months ended September 30, 2012   $  9,587,718     $  7,974,476      $ 17,562,194
Three months ended September 30, 2013     12,776,121        4,699,849        17,475,970
Increase (decrease) in $                $  3,188,403     $ (3,274,627 )    $    (86,224 )
% increase (decrease)                          33.26 %         (41.06 )%          (0.49 )%

Quantity sold (metric tons)
Three months ended September 30, 2012         49,291           56,243           105,534
Three months ended September 30, 2013         58,274           36,763            95,037
Increase (decrease) in quantity                8,983          (19,480 )         (10,497 )
% increase (decrease)                          18.22 %         (34.64 )%          (9.95 )%

73.11% of the revenue came from coke products and 26.89% from coal products, as compared to 54.59% from coke products and 45.41% from coal products for the same period a year ago. The percentage changes reflect improved market conditions for coke, as well as our lack of coal resource due in large part from the continuing inactivity at our mines.

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 and crude benzol (byproducts 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.

Average selling price per metric ton for our products are as follows for the periods indicated:

                     Average Selling Price of Coke Products



                                                                          Crude
                                           Coke         Coal Tar         Benzene        Coke Powder
Three months ended September 30, 2012   $      199     $       255     $       N/A     $         172
Three months ended September 30, 2013   $      220     $       314     $       345     $         172
Increase in $                           $       21     $        59     $       345     $           0
% increase                                   10.55 %         23.14 %           N/A %               0 %

                     Average Selling Price of Coal Products



                                          Raw Coal         Mid-coal         Coal Slurries        Washed Coal
Three months ended September 30, 2012   $           0              61      $            51      $         175
Three months ended September 30, 2013   $           0     $        48      $            41      $         166
Decrease in $                           $           0     $       (13 )    $           (10 )    $          (9 )
% decrease                                          0 %        (21.31 )%            (19.61 )%           (5.61 )%

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 period over period primarily reflect changes in domestic market conditions.

Revenue and quantity sold of each coke product are as follows for the periods indicated:

                                 Coke Products



                                  Coke         Coke Powder        Coal Tar       Crude Benzol         Total
Revenue
Three months ended
September 30, 2012            $  7,270,893     $  1,949,344      $  367,481     $            0     $  9,587,718
Three months ended
September 30, 2013            $ 11,261,070     $    840,709      $  605,348     $       68,994     $ 12,776,121
Increase (decrease) in $      $  3,990,177     $ (1,108,635 )    $  237,867     $       68,994     $  3,188,403
% increase (decrease)                54.88 %         (56.87 )%        64.73 %              N/A            33.26 %

Quantity Sold (metric tons)
Three months ended
September 30, 2012                  36,524           11,324           1,443                  0           49,291
Three months ended
September 30, 2013                  51,261            4,884           1,929                200           58,274
Increase (decrease) in
quantity                            14,737           (6,440 )           486                200            8,983
% increase (decrease)                40.35 %         (56.87 )%        33.68 %              N/A            18.22 %

The higher coke revenue resulted from market demand that exceeded last year's level.

The lower coke powder revenue resulted from market demand that were lower than last year's level.

The higher coal tar revenue resulted from increased coal tar production from the Hongfeng plant.

Revenue and quantity sold of each coal product are as follows for the periods indicated:

                                 Coal Products



                                Raw Coal         Mid-coal        Coal Slurry       Washed Coal          Total
Revenue
Fiscal 2012                   $           0     $  649,938      $     274,523      $  7,050,015      $  7,974,476
Fiscal 2013                   $           0     $  375,608      $     158,471      $  4,165,770      $  4,699,849
Decrease in $                 $           0     $ (274,330 )    $    (116,052 )    $ (2,884,245 )    $ (3,274,627 )
% decrease                                0 %       (42.21 )%          (42.27 )%         (40.91 )%         (41.06 )%

Quantity Sold (metric tons)
Fiscal 2012                               0         10,703              5,353            40,187            56,243
Fiscal 2013                               0          7,777              3,828            25,158            36,763
Decrease                                  0         (2,926 )           (1,525 )         (15,029 )         (19,480 )
% decrease                                0 %       (27.34 )%          (28.49 )%         (37.40 )%         (34.64 )%

The lack of raw coal revenue is a result of the ongoing mining moratorium. While we currently anticipate the moratorium to end sometime in the first half of calendar 2014, there cannot be any assurance as to the exact timing. Demands for all other coal products were also soft, resulting in lower revenue from coal products overall.

Cost of Revenue

Cost of revenue decreased by 8.14%, from $15,652,938 to $14,378,669, mainly because we sold less coal products and the price of washed coal that we buy for coking became cheaper. Such decrease was offset by the increased cost of coke revenue attendant with selling more coke products.

Gross Profit

Gross profit was $3,097,301, an increase of $1,188,045 or 62.23%, from $1,909,256 for the same period a year ago, as cheaper washed coal translated into increased gross margin for coke products. As a result, gross profit margin increased by approximately 6.85% to 17.72%.

Operating Expenses

Operating expenses, which consist of selling expenses and general and administrative expenses, was $644,455, a decrease of $25,954 or 3.87% as compared to the same period a year ago. Selling expenses decreased by $2,707 or 6.21%, to $40,874. General and administrative expenses decreased by $23,247 or 3.71%, to $603,581 from lower costs of consulting services relating to internal control and investor relations.

Other Income and Expense

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

For the three months ended September 30, 2013, we had net other expense of $658,205 from the following:

(1) $778,767 interest expense from loans with Bairui Trust Co., Ltd. ("Bairui Trust");

(2) Finance expense of $62,543;

(3) Interest income of $183,093; and

(4) Change in fair value of warrants of $12.

For the three months ended September 30, 2012, we had net other expense of $197,678 from the following:

(1) Finance expense of $72,244;

(2) Interest expense of $1,021,604 from loans with Bairui Trust and short-term loans with Shanghai Pudong Development Bank ("SPDB");

(3) Interest income of $222,640 from loan receivable to third parties; and

(4) Change in fair value of warrants of $673,530.

Provision for Income Taxes

Provision for income taxes period over period increased by $252,501 to $633,757, due primarily to the increased taxable income.

Net Income

Net income, including change in fair value of warrants, was $1,160,884, as compared to $659,913 for the same period last year.

Liquidity and Capital Resources



In summary, our cash flows are as follows:



                                                Three months ended
                                                   September 30
                                               2013            2012
Net cash used in operating activities       $ (565,804 )   $ (1,878,098 )
Net cash used in investing activities       $        0     $    (34,075 )
Net cash provided by financing activities   $        0     $     33,201

Net Cash Used in Operating Activities

Net operating outflows for the three months ended September 30, 2013 resulted from a combination of the following factors:

(1) Other receivable increased by approximately $1.3 million. We deposited $1,628,000 in an interest-bearing account to bid for a financial instrument issued by Pingdingshan Rural Credit Cooperative Union, which yielded approximately $319,000 in interest during the period.

(2) Other payables and accrued liabilities increased by approximately $1.1 million. We paid off accrued interest of $852,030 to Bairui Trust, and also paid other accrued service charges of approximately $226,000.

(3) We increased advances to suppliers and other prepayments in order to acquire more resources to operate the Hongfeng plant.

(4) Increased coke sales resulted in a decrease of $753,639 in inventory.

Net operating outflows for the three months ended September 30, 2012 resulted from a combination of the following factors:

(1) Decreases in accounts receivables and other receivables, along with the decrease in advances to our suppliers and prepaid expense were the main factors which contributed to the cash inflow from our operating activities. During the period, we improved our collections in our accounts receivable and other receivables. In addition, we used some of our bank guaranteed notes on hand to pay advances to our suppliers, and resulted in a significant decrease in advances to suppliers. Because of the decline in coal prices, we reduced the volume in each coal purchase order in order to decrease our cost for purchasing coal materials, and such action also resulted in a decrease in advances to suppliers.

(2) Significant collections in note receivables, as well as an increase in inventories, were also key causes of our operating outflow. We made significant collections in note receivables from our customers during the period, and immediately endorsed and used them as payments to our vendors and contractors on our construction projects, which significantly increased our operating outflow. We increased washed coal inventory during the period because we believe that coal prices may rise during the winter time, and thus we can trade some of the inventory for profit.

Net Cash Used in Investing Activities

For the three months ended September 30, 2013, we had no cash flow from investing activities.

For the three months ended September 30, 2012, net cash used in investing activities was mainly due to a $350,000 loan to an unrelated third party with an interest rate of 7.0% and a repayment of prior loan of $316,500 from the same party.

Net Cash Provided by Financing Activities

For the three months ended September 30, 2013, we had no cash flow from financing activities.

For the three months ended September 30, 2012, net cash provided by financing activities resulted from of a $33,201 loan from our Chairman Mr. Jianhua Lv. We had notes payable in amount of $1,581,000 that matured, and such notes were paid when due from restricted cash.

Capital Resources

Funding for our business activities has historically been provided by cash flow from operations, short-term bank loan financing, and loans from our Chairman.

We also have arrangements with certain banks pursuant to which we are able to issue short-term notes to pay our vendors, secured against our deposits with the banks of 50% or 100% of the face value of the notes as well as guarantees from our Chairman, Hongli and/or unrelated third party. We currently have such arrangements with SPDB. Under our arrangements with SPDB, we are subject to a diligence review for each note issued, and SPDB charges us a processing fee based on 0.05% of the face value of each note.

On April 2, 2011, Hongli entered into a loan agreement with Bairui Trust, pursuant to which Bairui Trust agreed to loan Hongli RMB 360 million (approximately $58.2 million), of which RMB 180 million was due on April 2, 2013, and RMB 180 million on April 2, 2014, with annual interest rate of 6.3%. Bairui Trust made the loan to Hongli on April 3, 2011. On November 30, 2011, Hongli entered into a supplemental agreement with Bairui Trust to amend the terms such that RMB 30 million (approximately $4.7 million) would be due on October 2, 2012, RMB 100 million (approximately $16.2 million) on April 2, 2013, RMB 50 million (approximately $8.1 million) on October 2, 2013, and RMB 180 million (approximately $29.1 million) on April 2, 2014. We made the October 2, 2012 payment on December 25, 2012, including outstanding interest charge for late payment. We repaid $3.1 million (RMB 20 million) on April 3, 2013, and entered into another supplemental agreement with Bairui Trust on April 23, 2013 to extend the due date for the remaining $13.1 million (RMB 80 million). Of such remaining principal, the due date for $3.3 million (RMB 20 million) has been extended to December 2, 2013 with an annual interest rate of 6.3% starting from April 23, 2013. The due date for $4.9 million (RMB 30 million) has been extended to January 2, 2014 with an annual interest rate of 6.3% starting from April 23, 2013. The due date for $4.9 million (RMB 30 million) has been extended to February 2, 2014 with an annual interest rate of 6.3% starting from April 23, 2013. Between April 3, 2013 and April 23, 2013, Bairui Trust charged a 9.45% annual interest rate on the entire $13.1 million outstanding.

On October 1, 2013, the parties executed an extension agreement for the remaining balance of approximately $50.5 million (RMB 310 million) with a 9.9% interest rate as follows:

Loan Amount       Loan Amount       Extended Loan
  (in USD)         (in RMB)         Repayment Date         New Interest Rate Period
$  8,140,000       50,000,000     October 2, 2016     October 3, 2013 - October 2, 2016
   3,256,000        20,000,000     December 2, 2016   December 3, 2013 - December 2, 2016
   4,884,000        30,000,000     January 2, 2017     January 3, 2014 - January 2, 2017
   4,884,000        30,000,000     February 2, 2017   February 3, 2014 - February 2, 2017
  29,304,000       180,000,000      April 2, 2017        April 3, 2014 - April 2, 2017
$ 50,468,000      310,000,000

As discussed in Note 1 to the financial statements included in the Annual Report, our auditors included an emphasis paragraph in their opinion concerning our going concern uncertainty as of June 30, 2013. Such issue was alleviated when we obtained the foregoing extensions.

Our business plan involves growing our business through: (1) expanding our current production capacity and product mix through the Hongfeng plant, and completing our new coking plant when market conditions improve; (2) expanding the market for our clean coke product produced at the Baofeng plant; (3) capturing more coke by-products for refinement into useful industrial chemicals, and producing more high value-added chemical products when we complete our new coking plant; and (4) acquiring other coal mines and building long term strategic relations with other mining operators to source raw coal. Of the foregoing, the following is expected to require capital resources:

New Coking Facility. We intend to use existing cash, cash flow from operations, bank loans, collection of our loan receivables, along with other finance arrangements such as extending our long term loan from Bairui Trust, to complete the construction of our new coking facility. Due to ongoing market conditions, however, we have once again slowed down constriction, but plan to resume at full pace if and when market improves.

Coal Mine Safety Improvement Projects. The total estimated cost for government-mandated safety upgrades is approximately $31.5 million. We will be responsible for approximately 70% of the total estimated cost, approximately $22.0 million, under the structure of our joint-venture with Henan Coal Seam Gas. We also intend to use our line of credit from PRCB to complete these projects. These projects have not commenced as of the date of this Report, although we currently expect to complete them sometime in first half 2014.

During the three months ended September 30, 2013, we had no capital expenditures.

Our management presently anticipates that the proceeds from our prior equity issuance, access to credit and cash flow from operations will provide sufficient capital resources to pursue and complete the construction of our new coking plant. Any future facility expansion and acquisitions will require additional financing and/or equity capital and will be dependent upon the availability of financing arrangements and capital at the time.

We have not experienced any material losses since inception relating to accidents or other similar events. See "Risk Factors - We may suffer losses resulting from industry-related accidents and lack of insurance" in the Annual Report.

Off-balance Sheet Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. Other than warrants liability, we have not entered into any derivative contracts that are indexed to its shares and classified as shareholder's equity or that are not reflected in its consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

Critical Accounting Policies

Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in Note 2 to our financial statements elsewhere in this report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:

Revenue recognition

We recognize revenue from the sale of coal and coke, our principal products, at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations on our part exist and collectability is reasonably assured. This generally occurs when coal or coke is loaded onto trains or trucks at one of our loading facilities or at third-party facilities. Accordingly, management is required to apply its own judgment regarding collectability based on its experience and knowledge of its current customers, and thus exercise a certain degree of discretion.

Most, if not all, of the electricity generated by Hongguang Power is typically used internally by Baofeng Coking. Supply of surplus electricity generated by Hongguang Power to the national power grid is mandated by the local utilities board. The value of the surplus electricity supplied, if it exists, is calculated based on actual kilowatt-hours produced and transmitted and at a fixed rate determined under contract.

Coal and coke sales represent the invoiced value of goods, net of a value-added tax ("VAT"), sales discounts and actual returns at the time when product is sold to the customer.

Accounts receivables, trade

During the normal course of business, we extend unsecured credit not exceeding three months to our customers. Management regularly reviews aging of receivables and changes in payment trends by its customers, and records allowance when management believes collection of amounts due are at risk. Accounts receivables are considered past due after three months from the date credit was granted. Accounts considered uncollectible after exhaustive efforts to collect are written off. We regularly review the credit worthiness of our customers and, based on the results of such credit review, determine whether extended payment terms can be granted to or, in some cases, partial prepayment is required from certain customers. No allowance for doubtful accounts is considered necessary at the balance sheets dates.

Intangible assets - mining rights, net

Mining rights are capitalized at fair value when acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as depletion expense using the units-of-production method over the estimated proven and probable recoverable tons. Our coal reserves are controlled through direct ownership by our VIEs which generally last until the recoverable reserves are depleted.

Impairment of long-lived assets

. . .

  Add SCOK to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SCOK - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.