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 19-Feb-2014All Recent SEC Filings

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

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


19-Feb-2014

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 six months ended December 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 December 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 mine 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 2013, 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").

On December 9, 2013, we entered into a tripartite agreement with Fangda Special Steel Technology Co., Ltd. ("Fangda"), China's largest automobile spring steel producer, and Henan Shenhuo Group ("Shenhuo"), one of the six largest state-owned coal enterprises in Henan Province (the "Tripartite Agreement"). According to the terms of the agreement, we will supply 6,000 metric tons of grade II coke and 3,000 metric tons of clean coke to Fangda each month. As of the date of this report, we have received 23,000 metric tons of coal from Shenhuo while delivering 36,000 metric tons of grade II coke to Fangda. Management currently estimates that we will require an additional 367,000 metric tons of washed coal in order to hit our targeted amount of grade II coke available for delivery by the end of fiscal year 2014.

On December 18, 2013, we entered into an agreement with Jiyuan Tianlong Coking Co., Ltd. ("Jiyuan Tianlong"), an unrelated third party coke producer in Jiyuan City, Henan, to entrust us with the management of Jiyuan Tianlong's equipment from December 18, 2013 to December 17, 2018, as Jiyuang Tianlong lacks access to suppliers and customers. During the term of the agreement, we will receive an annual management fee of approximately $16,370 (RMB 100,000) as well as all operating income, but are also liable for any resulting loss. At the end of the term or earlier termination of the agreement, the equipment will revert to Jiyuan Tianlong unless we decides to acquire Jiyuan Tianlong for a price based upon an independent third party appraisal value. We began utilizing the equipment for our operations in January 2014.

Results of Operations

Three and six months ended December 31, 2013, as compared to three and six months ended December 31, 2012

Overall, results of operations for the three months ended December 31, 2013 was significantly less than the same period last year, mainly due to a decrease in sales of coal products.

On a macro level, management has observed the following trends, which may have a direct impact on our operations in the near future: (1) a glut of steam coal (used primarily by power plants) has caused sharp decrease in steam coal prices; resulting in an overall downturn in the Chinese coal market, (2) coke market continues to struggle with a limited demand from crude steel factories, while demand for high grade coke remains strong from special steel manufacturers.

Revenue

For the three months ended December 31, 2013, revenue decreased by $8,030,389 or 37.81% to $13,208,253, as compared to the same period a year ago. Such decrease was mainly due to a significant decrease in sales of coal products. Such decreased sales reflected ongoing weak market demand, despite winter generally being a high coal consumption season. Revenue and quantity sold by product type for 2012 and 2013 are as follows:

                                                 Revenues
                                           Coke             Coal
                                         Products         Products           Total
Revenue
Three months ended December 31, 2012   $ 10,781,236     $ 10,457,406      $ 21,238,642
Three months ended December 31, 2013     12,554,163          654,090        13,208,253
Increase (decrease) in $               $  1,772,927     $ (9,803,316 )    $ (8,030,389 )
Increase (decrease) in %                      16.44 %         (93.75 )%         (37.81 )%

Quantity sold (metric tons)
Three months ended December 31, 2012         57,854           64,471           122,325
Three months ended December 31, 2013         60,490           14,136            74,626
Increase (decrease)                           2,636          (50,335 )         (47,699 )
% increase (decrease)                          4.56 %         (78.07 )%         (38.99 )%

95.05% of our three-month revenue came from coke products and 4.95% from coal products, as compared to 50.76% from coke products and 49.24% from coal products for the same period a year ago. The shifting percentages reflect changes to our operating strategy in order to adapt to market conditions. As current coal demand is very weak due to over capacity of crude steel, we temporarily stopped raw coal and washed coal trading. On the other hand, we have just established stable business relationship with one of China's best-known special steel manufacturers, and we expect sales of coke and coke powder to this customer to steadily rise.

For the six months ended December 31, 2013, revenue decreased by $8,116,613 or 20.92% to $30,684,223, as compared to the same period a year ago. Such decrease was also mainly attributable to decreased sales of coal products. Revenue and quantity sold by product type are as follows for the 2012 and 2013 periods as follows:

                                                Revenues
                                         Coke             Coal
                                       products         products            Total
Revenue
Six months ended December 31, 2012   $ 20,368,954     $  18,431,882      $ 38,800,836
Six months ended December 31, 2013     25,330,284         5,353,939        30,684,223
Increase (decrease) in $             $  4,961,330     $ (13,077,943 )    $ (8,116,613 )
Increase (decrease) in %                    24.36 %          (70.95 )%         (20.92 )%

Quantity sold (metric tons)
Six months ended December 31, 2012        107,137           120,714           227,851
Six months ended December 31, 2013        118,764            50,899           169,663
Increase (decrease)                        11,627           (69,815 )         (58,188 )
% Increase (decrease)                       10.85 %          (57.84 )%         (25.54 )%

82.55% of our six-month revenue came from coke products and 17.45% from coal products, as compared to 52.50% from coke products and 47.50% from coal products for the same period of last year. Again, we changed our operating strategy in response to market conditions, resulting in the shifting percentages of our revenue composition.

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 the non-ferrous metallurgical industry) and coal tar (a byproduct of the coke manufacturing process). Coal products include unprocessed metallurgical coal, processed or washed coal, 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 principal coke products are as follows for the periods indicated:

                     Average Selling Price of Coke Products



                                                                    Crude        Coke
                                        Coke         Coal Tar      Benzene      Powder
Three months ended December 31, 2012   $   207      $      257     $    N/A     $   137
Three months ended December 31, 2013       201             320        1,040         146
Increase (decrease) in $               $    (6 )    $       63     $    N/A     $     9
Increase (decrease) in %                 (2.90 )%        24.51 %        N/A %      6.57 %

Six months ended December 31, 2012     $   203      $      257     $    N/A     $   150
Six months ended December 31, 2013         210             317          738         164
Increase (decrease) in $               $     7      $       60     $    N/A     $    14
Increase (decrease) in %                  3.45 %         23.35 %        N/A %      9.33 %

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

                     Average Selling Price of Coal Products



                                          Raw Coal          Thermal Coal        Coal Slurries        Washed Coal
Three months ended December 31, 2012   $           114     $           61      $            51      $         195
Three months ended December 31, 2013               N/A                 49                   42                N/A
Increase (decrease) in $               $           N/A     $          (12 )    $            (9 )    $         N/A
Increase (decrease) in %                           N/A %           (19.67 )%            (17.65 )%             N/A %

Six months ended December 31, 2012     $           114     $           61      $            51      $         186
Six months ended December 31, 2013                 N/A                 48                   42                166
Increase (decrease) in $               $           N/A     $          (13 )    $            (9 )    $         (20 )
Increase (decrease) in %                           N/A %           (21.31 )%            (17.65 )%          (10.75 )%

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. Average prices of 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 December 31, 2013 and 2012 are as follows:

                                                            Coke                          Crude
                                           Coke            Powder         Coal Tar       Benzene         Total
Revenue
Three months ended December 31, 2012   $  7,964,793     $  2,445,930      $ 370,513     $       0     $ 10,781,236
Three months ended December 31, 2013     11,170,042          308,291        805,567       270,263       12,554,163
Increase (decrease) in $               $  3,205,249     $ (2,137,639 )    $ 435,054     $ 270,263     $  1,772,927
Increase (decrease) in %                      40.24 %         (87.40 )%      117.42 %         N/A            16.44 %

Quantity sold (metric tons)
Three months ended December 31, 2012         38,526           17,887          1,441             0           57,854
Three months ended December 31, 2013         55,602            2,108          2,520           260           60,490
Increase (decrease)                          17,076          (15,779 )        1,079           260            2,636
% Increase (decrease)                         44.32 %         (88.22 )%       74.88 %         N/A             4.56 %

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

                                                            Coke                            Crude
                                           Coke            Powder          Coal Tar        Benzene         Total
Revenue
Six months ended December 31, 2012     $ 15,235,686     $  4,395,274      $   737,994     $       0     $ 20,368,954
Six months ended December 31, 2013       22,431,112        1,149,000        1,410,915       339,257       25,330,284
Increase (decrease) in $               $  7,195,426     $ (3,246,274 )    $   672,921     $ 339,257     $  4,961,330
Increase (decrease) in %                      47.23 %         (73.86 )%         91.18 %         N/A            24.36 %

Quantity sold (metric tons)
Six months ended December 31, 2012           75,051           29,212            2,874             0          107,137
Six months ended December 31, 2013          106,863            6,992            4,449           460          118,764
Increase (decrease)                          31,812          (22,220 )          1,575           460           11,627
% increase (decrease)                         42.39 %         (76.06 )%         54.80 %         N/A            10.85 %

Higher coke and coal tar revenues period-over period for both the three- and six-month periods resulted from increased coke and coal tar production capacity, while lower coke powder sales resulted from smaller purchase orders from our customers.

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

                                                        Thermal         Coal            Washed
                                        Raw Coal         Coal         Slurries           Coal             Total
Revenue
Three months ended December 31, 2012   $  601,402      $ 500,721      $ 206,703      $  9,148,580      $ 10,457,406
Three months ended December 31, 2013            0        451,753        202,337                 0           654,090
Increase (decrease) in $               $ (601,402 )    $ (48,968 )    $  (4,366 )    $ (9,131,441 )    $ (9,803,316 )
Increase (decrease) in %                     (100 )%       (9.78 )%       (2.11 )%           (100 )%         (93.75 )%

Quantity sold (metric tons)
Three months ended December 31, 2012        5,283          8,219          4,018            46,951            64,471
Three months ended December 31, 2013            0          9,284          4,852                 0            14,136
Increase (decrease)                        (5,283 )        1,065            834           (46,951 )         (50,335 )
% Increase (decrease)                        (100 )%       12.95 %        20.76 %            (100 )%         (78.07 )%

Revenue and quantity sold of each coal product for the six months ended December 31, 2013 are as follows for the periods indicated:

                                                         Thermal           Coal            Washed
                                        Raw Coal          Coal           Slurries           Coal               Total
Revenue
Six months ended December 31, 2012     $  601,402      $ 1,150,659      $  481,226      $  16,198,595      $  18,431,882
Six months ended December 31, 2013              0          827,361         360,808          4,165,770          5,353,939
Increase (decrease) in $               $ (601,402 )    $  (323,298 )    $ (120,418 )    $ (12,032,825 )    $ (13,077,943 )
Increase (decrease) in %                     (100 )%        (28.10 )%       (25.02 )%          (74.28 )%          (70.95 )%

Quantity sold (metric tons)
Six months ended December 31, 2012          5,283           18,992           9,371             87,138            120,714
Six months ended December 31, 2013              0           17,061           8,680             25,158             50,899
Increase (decrease)                        (5,283 )          1,861            (691 )          (61,980 )          (69,815 )
% increase (decrease)                        (100 )%         (9.84 )%        (7.37 )%          (71.13 )%          (57.84 )%

Lower revenues for raw coal and washed coal period-over-period for both the three and six-month periods reflected our strategy change in response to a very weak coal market, as discussed earlier. Also, as we have been purchasing washed coal, the volume of raw coal that we processed correspondingly decreased, which resulted in decreased thermal coal and coal slurries sales.

Cost of Revenue

Cost of revenue for the three months ended December 31, 2013 decreased by 39.07%, from $18,302,685 to $11,152,697, while cost of revenue for the six months ended December 31, 2013 decreased by 24.81%, from $33,955,623 to $25,531,366. The decrease for both the three and six-month periods resulted from decreased sales of coal products and decreased purchasing costs of coal, offset by increased coke products sales.

Gross Profit

Gross profit for the three months ended December 31, 2013 was $2,055,556, a decrease of $880,401 or 29.99%, from $2,935,957 for the same period a year ago. However, because we stopped engaging in coal trading (which tends to be a low margin business), gross profit margin increased by approximately 1.74% to 15.56%.

Gross profit for the six months ended December 31, 2013 was $5,152,857, an increase of $307,644 or 6.35%, from $4,845,213 for the same period a year ago. As a result, gross profit margin increased by approximately 4.31% to 16.79%.

Operating Expenses

Operating expenses, which consist of selling and general and administrative ("G&A") expenses, was $515,000 for the three months ended December 31, 2013, a decrease of $108,521 or 17.4% as compared to the same period a year ago. Selling expenses decreased by $2,422 or 5.74%, to $39,754. G&A expenses decreased by $106,099 or 18.25% to $475,246, mainly due to a $25,016 reduction in consulting fees, as well as a $79,198 reduction in public relationship fees.

Operating expenses was $1,159,455 for the six months ended December 31, 2013, a decrease of $134,475 or 10.39% as compared to the same period a year ago. Selling expenses decreased by $5,129 or 5.98%, to $80,628. G&A expenses decreased by $129,346 or 10.71%, to $1,078,827, mainly due to a $62,757 reduction in consulting fees, as well as a $146,132,198 reduction in public relationship fees. While the Company had bad debt expense of $89,348 for the six months ended December 31, 2013, there was none for the six months ended December 31, 2012.

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 expenses not related to our principal operations, and changes in fair value of warrants.

For the three months ended December 31, 2013, we had net other expenses, net of $1,215,812 from the following:

(1) Interest income of $184,247 from Ziben Tiantang's loan receivable;

(2) Interest expense of $1,311,812 from our loan with Bairui Trust Co., Ltd. ("Bairui Trust"); and

(3) Other finance expenses of $87,717 for bank transaction fees.

For the three months ended December 31, 2012, we had net other expenses, net of $830,473, from the following:

(1) Financing expenses of $880,123, taking into account both $208,461 of interest income from our loan to Ziben Tiantang, and $997,461 of interest expense for our loans from Bairui Trust and Shanghai Pudong Development Bank ("SPDB"); and

(2) Changes in fair value of warrants of $41,317 of gain.

For the six months ended December 31, 2013, we had other expenses, net of $1,873,487 from the following:

(1) Interest income of $367,340 from Ziben Tiantang's loan receivable;

(2) Interest expense of $2,090,597 from our loan with Bairui Trust; and

(3) Other finance expenses of $150,260 for bank transaction fees.

For the six months ended December 31, 2012, we had other expenses, net of $1,028,151, due to the following:

(1) Financing expense of $1,751,331, taking into account both interest income of $431,101 from our loan to Ziben Tiantang, and $2,019,065 of interest expense for our loans from Bairui Trust and SPDB; and

(2) Changes in fair value of warrants of $714,847 of gain.

Provision for Income Taxes

Provision for income taxes for the three months ended December 31, 2013 decreased by $218,306 to $431,932 due primarily to our decreased profits.

Provision for income taxes for the six months ended December 31, 2013 increased by $34,195 to $1,065,689.

Net Income

As a result of the foregoing, especially our lower coal revenue, net loss for the three months ended December 31, 2013, including change in fair value of warrants, was $106,658, as compared to $831,725 of net income for the three months ended December 31, 2012.

Likewise, net income for the six months ended December 31, 2013, including change in fair value of warrants, was $1,054,226, as compared to $1,491,638 for the same period last year.

Liquidity and Capital Resources

As of December 31, 2013, our cash balance was $87,328, which was not sufficient for future operations. Our financial statements have accordingly been prepared in accordance with U.S. GAAP on a going concern basis. The going-concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial statements. Our ability to continue as a going concern depends upon the liquidation of our current assets. In addition to our low cash position at December 31, 2013, we were slow in collecting our loans receivable and granted an extension as to their repayment as well as the related interest receivable. We also did not make a quarterly interest payment of approximately $1.5 million originally due in January 2014 (now extended to February 28, 2014) to Bairui Trust in connection with our long term loan.

In an effort to improve its financial position, we are trying to obtain new loans from banks and to increase sales of higher profit margin coke and coke by-products. We continue to wait for the mine consolidation schedule to finalize. If the schedule should finalize by next year, we may be able to obtain lines of credit by pledging our mining rights as collateral. Management believes that if successfully executed, the foregoing actions would enable us to continue as a going-concern.

As discussed in Note 1 to the financial statements included in our Form 10-K for the fiscal year ended June 30, 2013, we also reported liquidity and going concern issues as of June 30, 2013.

In summary, our cash flows are as follows:

                                                           Six months ended
                                                              December 31
                                                         2013            2012
Net cash provided by (used in) operating activities   $ (763,780 )   $  3,448,166
Net cash provided by investing activities                      -          786,923
Net cash used in financing activities                    (66,160 )     (6,306,715 )

Net Cash Provided by (Used in) Operating Activities

Net operating outflows for the six months ended December 31, 2013 resulted from a combination of the following factors: (1) increase in accounts receivable of approximately $4.0 million; (2) decrease in advances to suppliers of approximately $2.0 million; (3) increase in inventory of approximately $0.5 million; (4) increase in accounts payable of approximately $1.5 million; and (5) increase in other receivable of approximately $1.5 million. The changes in accounts receivable, advances to suppliers, and inventory and accounts payable were mainly due to the Tripartite Agreement, which resulted in increased coke production and sales. Other receivable increased when we made an additional deposit of approximately $1.6 million in connection with an auction. The auction is being held by Pingdingshan Rural Credit Cooperative Union of certain non performing assets, including mining rights. The deposit allows us to bid at the auction, and will be applied to our purchase price if we win. Otherwise the deposit will be returned to us before December 31, 2014.

Net cash provided by operating activities for the six months ended December 31, 2012 mainly resulted from (1) decrease in advances to suppliers of approximately $4.4 million, and (2) increase in accounts receivable of approximately $2.9 million. Advances to suppliers decreased due to the receipts of our inventories during the last three months of the period. Accounts receivable increased as we extended credit terms to our major customers.

Net Cash Provided by Investing Activities

For the six months ended December 31, 2013, we had no cash flow from investing activities.

For the six months ended December 31, 2012, we received approximately $1.1 million in loan repayments from an unrelated third party, but also lent that same party approximately $350,000 in additional funds.

. . .

  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.