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SCOK > SEC Filings for SCOK > Form 10-Q on 23-May-2014All Recent SEC Filings

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

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


23-May-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 nine months ended March 31, 2014 and 2013, 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, 2014, 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, 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 began at the Hongfeng plant 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 April 8, 2014, we renewed the lease for another year.

On December 9, 2013, we entered into a tripartite agreement with Fangda Special Steel Technology Co., Ltd. ("Fangda Steel"), China's largest automobile spring steel producer, and Henan Shenhuo Group ("Shenhuo Group"), one of the six largest state-owned coal enterprises in Henan Province (the "tripartite agreement"). Pursuant to the tripartite agreement, we supply 6,000 metric tons of grade II coke and 3,000 metric tons of clean coke to Fangda Steel each month. As of the date of this report, we have received 23,000 metric tons of coal from Shenhuo Group while delivering 36,000 metric tons of grade II coke to Fangda Steel. 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.

In December 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 manage its equipment as it lacks access to suppliers and customers. During the term of the agreement, we would receive an annual management fee as well as all operating income, but would also be liable for any resulting loss. We began utilizing the equipment for our operations in January 2014, but terminated the agreement at the end of that month due to insufficient technical personnel to operate the equipment.

Results of Operations

Three and nine months ended March 31, 2014, as compared to three and nine months ended March 31, 2013

Overall, results of operations for the three and nine months ended March 31, 2014 largely impacted by the decreased 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) there remains a glut of steam coal (used primarily by power plants) which continues to depress steam coal prices, impacting the overall Chinese coal market; and (2) the Chinese coke market continues to struggle with a limited demand from crude steel factories, while demand for high grade coke remains strong from specialized steel manufacturers.

Revenue

For the three months ended March 31, 2014, revenue decreased by $2,910,069 or 20.93% as compared to the same period last year, mainly from significant decrease in sales of coal products. Revenue and quantity sold by product type for the 2014 and 2013 periods are as follows:

                                               Revenues
                                         Coke             Coal
                                       products         products           Total
Revenue
Three months ended March 31, 2013    $  8,433,314     $  5,470,637      $ 13,903,951
Three months ended March 31, 2014      10,368,661          625,221        10,993,882
Increase (decrease) in $             $  1,935,347     $ (4,845,416 )    $ (2,910,069 )
Increase (decrease) in %                    22.95 %         (88.57 )%         (20.93 )%

Quantity sold (metric tons)
Three months ended March 31, 2013          39,577           38,576            78,153
Three months ended March 31, 2014          49,411           13,263            62,674
Increase (decrease) in metric tons          9,834          (25,313 )         (15,479 )
Increase (decrease) in %                    24.85 %         (65.62 )%         (19.81 )%

94.31% of our three-month revenue came from coke products and 5.69% from coal products, as compared to 60.65% from coke products and 39.35% from coal products for the same period last year.

For the nine months ended March 31, 2014, revenue decreased by $11,026,682 or 20.92% to $41,678,105 as compared to the same period of last year, likewise from decreased sales of coal products. Revenue and quantity sold by product type for the 2013 and 2014 periods as follows:

                                                Revenues
                                         Coke             Coal
                                       products         products             Total
Revenue
Nine months ended March 31, 2013     $ 28,802,268     $  23,902,519      $  52,704,787
Nine months ended March 31, 2014       35,698,944         5,979,161         41,678,105
Increase (decrease) in $             $  6,896,676     $ (17,923,358 )    $ (11,026,682 )
Increase (decrease) in %                    23.94 %          (74.99 )%          (20.92 )%

Quantity sold (metric tons)
Nine months ended March 31, 2013          146,713           159,291            306,004
Nine months ended March 31, 2014          168,175            64,162            232,337
Increase (decrease) in metric tons         21,462           (95,129 )          (73,667 )
Increase (decrease) in %                    14.63 %          (59.72 )%          (24.07 )%

85.65% of our nine-month revenue came from coke products and 14.35% from coal products, as compared to 54.65% from coke products and 45.35% from coal products for the same period of last year. The shifting percentages for both the three and nine-month periods reflect continuing efforts to adapt our operating strategy to market conditions. As coal demand remains weak due to oversupply of crude steel, we continue to curtail raw coal and washed coal trading activities to focus instead on sales of coke products such as under the tripartite agreement.

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, "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       Coal tar    benzene     Coke powder
Three months ended March 31, 2013   $   212     $     258    $   N/A     $       N/A
Three months ended March 31, 2014       198           320      1,045             138
Increase (decrease) in $            $   (14 )   $    62.5    $ 1,045     $       138
Increase (decrease) in %              (6.60 )%      24.03 %      N/A             N/A

Nine months ended March 31, 2013    $   195     $     257    $   738     $       164
Nine months ended March 31, 2014        207           319        837             165
Increase in $                       $    12     $      62    $    99     $         1
Increase in %                          6.15 %       24.12 %    13.41 %          0.61 %

Average selling price per metric ton for our 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 March 31, 2013     $        58      $         N/A     $           N/A      $         176
Three months ended March 31, 2014             N/A                 49                  33                N/A
Increase (decrease) in $              $       (58 )    $          49     $            33      $        (176 )
Increase (decrease) in %                      N/A                N/A                 N/A                N/A

Nine months ended March 31, 2013      $        64      $          49     $            42      $         184
Nine months ended March 31, 2014              N/A                 49                  39                167
Increase (decrease) in $              $       (64 )    $           0     $            (3 )    $         (17 )
Increase (decrease) in %                     (100 )%               0 %              (6.8 )%           (9.24 )%

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, timing of sales, delivery terms, and our relationships with our customers and negotiations of their purchase orders.

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 2014 are as follows:

                                              Coke                          Crude
                              Coke           powder         Coal tar       benzene          Total

Revenue
Three months ended March
31, 2013                   $ 8,083,768     $         -     $  349,546     $        -     $  8,433,314
Three months ended March
31, 2014                     9,400,942          35,075        711,750        220,893       10,368,660
Increase in $              $ 1,317,174     $    35,075     $  362,204     $  220,893     $  1,935,346
Increase in %                    16.29 %        100.00 %       103.62 %       100.00 %          22.95 %

Quantity sold (metric
tons)
Three months ended March
31, 2013                        38,220               -          1,357              -           39,577
Three months ended March
31, 2014                        46,800       1,184,075          2,196            210           49,411
Increase in metric tons          8,580       1,184,075            839            210            9,834
Increase in %                    22.45 %        100.00 %        61.83 %       100.00 %          24.85 %

Revenue and quantity sold of each coke product for the nine months ended March 31, 2013 and 2014 are as follows:

                                               Coke                           Crude
                               Coke           powder         Coal tar        benzene          Total

Revenue
Nine months ended March
31, 2013                   $  26,226,47     $ 1,149,000     $ 1,087,540     $  339,257     $ 28,802,268
Nine months ended March
31, 2014                     31,832,054       1,184,075       2,122,665        560,151       35,698,945
Increase in $              $  5,605,583     $    35,075     $ 1,035,125     $  220,894     $  6,896,677
Increase in %                     21.37 %          3.05 %         95.18 %        65.11 %          23.94 %

Quantity sold (metric
tons)
Nine months ended March
31, 2013                        135,030           6,992           4,231            460          146,713
Nine months ended March
31, 2014                        153,664           7,198           6,645            669          168,176
Increase in metric tons          18,634             206           2,414            209           21,463
Increase in %                      13.8 %          2.94 %         57.06 %         45.5 %          14.63 %

Higher coke revenue period-over-period for the three and nine-month periods resulted from sales to specialized steel producers such as Fangda Steel, while favorable market and pricing conditions contributed to higher coal tar and crude benzene revenues.

Revenue and quantity sold of each coal product for the Three months ended March 31, 2013 and 2014 are as follows:

                            Raw coal        Thermal Coal       Coal slurries      Washed coal          Total

Revenue
Three months ended March
31, 2013                   $  652,957      $            -     $             -     $  4,817,680      $  5,470,637
Three months ended March
31, 2014                            -             438,068             139,293                -           577,361
Increase (decrease) in $   $ (652,957 )    $      438,068     $       139,293     $ (4,817,680 )    $ (4,893,276 )
Increase (decrease) in %         (100 )%              N/A                 N/A          (100.00 )%         (89.45 )%

Quantity sold (metric
tons)
Three months ended March
31, 2013                       11,281                   -                   -           27,295            38,576
Three months ended March
31, 2014                            -               8,982               4,282                -            13,264
Increase (decrease) in
metric tons                   (11,281 )             8,982               4,282          (27,295 )         (25,312 )
Increase (decrease) in %         (100 )%              N/A                 N/A          (100.00 )%         (65.62 )%

Revenue and quantity sold of each coal product for the nine months ended March 31, 2013 and 2014 are as follows:

                             Raw coal         Thermal Coal       Coal slurries      Washed coal          Total

Revenue
Nine months ended March
31, 2013                   $  2,886,244      $      827,361     $       360,808     $ 21,016,275      $ 23,902,519
Nine months ended March
31, 2014                              -           1,270,161             502,164        4,206,836         5,979,161
Increase (decrease) in $   $ (2,886,244 )    $      442,800     $       141,356     $ (2,886,244 )    $ (2,886,244 )
Increase (decrease) in %        (100.00 )%            53.52 %             39.18 %         (13.73 )%         (12.08 )%

Quantity sold (metric
tons)
Nine months ended March
31, 2013                         44,858              17,061               8,680          114,433           159,291
Nine months ended March
31, 2014                              -              26,043              12,962           25,158            64,163
Increase (decrease) in
metric tons                     (44,858 )             8,982               4,282          (89,275 )         (95,128 )
Increase (decrease) in %        (100.00 )%            52.64 %             49.33 %         (78.02 )%         (59.72 )%

Lower revenues attributable to raw coal and washed coal period-over-period for both the three and nine-month periods reflected our shifting operational strategy in light of a continuing weak coal market. There were opportunities, however, to sell thermal coal and coal slurries, which we took advantage of in order to generate income and control inventory.

Cost of Revenue

Cost of revenue decreased by 27.68% for the three months ended March 31, 2014, from $11,815,066 to $8,545,142, and decreased by 25.55% from 45,770,689 to $34,076,508 for nine month ended March 31, 2014. The decrease for both the three and nine-month periods resulted from decreased coal product sales and decreased purchasing costs of coal, offset by increased coke product sales.

Gross Profit

Gross profit and gross profit margin for both the three and nine months ended March 31, 2014 improved from the same periods a year ago from sales of higher margin products such as crude benzene and coal tar.

Gross profit for the three months ended March 31, 2014 was $2,448,740, an increase of $359,855 or 17.23%, from $2,088,885 for the same period last year, and gross profit margin increased by approximately 15.02% to 22.55%.

Gross profit for the nine months ended March 31, 2014 was $7,601,597, an increase of $667,499 or 9.63%, from $6,934,098 for the same period last year, and gross profit margin increased by approximately 13.16% to 18.3%.

Operating Expenses

Operating expenses, which consist of selling expenses and general and administrative ("G&A") expenses, was $421,195 for the three months ended March 31, 2014, a decrease of $148,878 or 26.12% as compared to the same period last year. This was largely due to a decrease in G&A expenses, which decreased by $154,957 or 35.73%, to $342,598 from cost cutting measures which have reduced our consulting and public relationship fees as well as our payroll. Selling expenses, on the other hand, increased by $41,579 or 112.32% to $78,597 in connection with the tripartite agreement.

Operating expenses was $1,539,776 for the nine months ended March 31, 2014, a decrease of $324,227 or 17.39% as compared to the same period last year, mainly from reducing our G&A expenses, which decreased by $319,803 or 18.37%, to $1,421,425. Selling expenses only decreased slightly by $4,424 or 3.6%, to $118,351. On the other hand, we incurred bad debt expense of $89,298 for the nine month ended March 31, 2014 from forfeiting our lease deposit for an office in Beijing, which we did not have for the nine month ended March 31, 2013.

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, 2014, we had net other expense of $841,409 from the following:

(1) interest income from bank and loans to unrelated third parties of $58,895;

(2) interest expense of $872,615 from our loans with Bairui Trust Co., Ltd. ("Bairui Trust");

(3) banking expense of $27,689; and

(4) gain of $12 in the fair value of warrants.

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

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

(2) interest expense of $819,489 from our loans with Bairui Trust, and $91,055 from our lines of credit with Shanghai Pudong Development Bank ("SPDB");

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

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

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

In addition, 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, 2014, we had net other income of $2,714,896 from the following:

(1) interest income from bank and loans to unrelated third parties of 426,235;

(2) interest expense of $2,963,194 to Bairui Trust; and

(3) banking expense $177,949.

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

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

(2) interest expense of $2,636,648 from our loans with Bairui Trust, and $292,961 from our lines of credit with SPDB;

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

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

(5) gain of $715,997in the fair value of warrants.

In addition, we did not capitalize any interest expense for construction in progress since construction at the new plant was halted during the period.

Provision for Income Taxes

Provision for income taxes for the three months ended March 31, 2014 increased by $41,228 to $445,945, due primarily to higher taxable income from Hongli's operations.

Similarly, provision for income taxes for the nine months ended March 31, 2014 increased by $75,423 to $1,511,634.

Net Income

Net income for the three months ended March 31, 2014, including change in fair value of warrants, was $740,191, as compared to $504,780 for the same period last year.

Net income for the nine months ended March 31, 2014, including change in fair value of warrants, was $1,835,291, as compared to $1,996,418for the same period last year.

Liquidity and Capital Resources

As of March 31, 2014, our cash balance was $204,341, 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 March 31, 2014, we were slow in collecting our loans receivable and granted an extension as to their repayments as well as the related interest receivable. We also did not make a quarterly interest payment of approximately $2.12 million originally due on March 31, 2014 (now extended to February 28, 2015) to Bairui Trust in connection with our long term loan. Our monthly interest expense to Bairui Trust loan is $493,512, and the amount now due is approximately $2.92 million.

To improve our financial position, we are seeking support from our banks to finance the construction of the new plant, as we believe that the higher margin coke products it is designed to produce are necessary in light of market conditions and will be crucial for the future of our business. We may also be able to obtain lines of credit by pledging our mining rights as collateral once the mine consolidation schedule can be finalized. In addition, we are looking to improve collection from existing customers while seeking other opportunities such as the tripartite agreement to improve operating cash flow. In the meantime, we are continuing our efforts to increase sales of higher profit margin coke products. 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:

                                                          Nine months ended
                                                               March 31,
                                                         2014            2013
Net cash provided by (used in) operating activities   $ (751,873 )   $  5,250,949
Net cash used in investing activities                          -       (8,655,078 )
Net cash provided by financing activities                176,962        3,183,522

Net Cash Provided by (Used in) Operating Activities

Net operating outflows for the nine months ended March 31, 2014 mainly resulted from a combination of the following factors: (1) approximately $1.41 million in increased other receivables comprising mainly of interest receivable from Capital Paradise Limited; (2) approximately $2.22 million in increased coke inventory largely in connection with our obligations under the tripartite agreement; and (3) approximately $1.96 million in increased prepayment for raw coal in connection to our obligations under the tripartite agreement. These factors were offset by (1) $0.8 million in non-cash expenses; (2) 1.67 million in increased accounts payable relating to our obligations under the tripartite agreement; and (3) 0.75 million in increased other payable and accrued liabilities mainly from interest payable to Bairui Trust.

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 . . .

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