Attached files
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
AS
OF DECEMBER 31, 2009 AND JUNE 30, 2009
|
||||||||
|
ASSETS
|
||||||||
|
December
31,
|
June
30,
|
|||||||
|
2009
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
|
$ | 345,319 | $ | 278,399 | ||||
|
Notes
receivable
|
2,671,261 | 358,808 | ||||||
|
Accounts
receivable, trade, net
|
7,745,949 | 6,454,663 | ||||||
|
Other
receivables
|
207,647 | 225,288 | ||||||
|
Inventories
|
1,404,333 | 107,187 | ||||||
|
Advances
to suppliers
|
10,713,431 | 8,364,448 | ||||||
|
Total
current assets
|
23,087,940 | 15,788,793 | ||||||
|
PROPERTY,
PLANT AND EQUIPMENT, net
|
18,783,250 | 16,954,659 | ||||||
|
OTHER
ASSETS
|
||||||||
|
Prepayments
for construction
|
8,645,795 | 7,462,008 | ||||||
|
Intangible
- Land use rights, net
|
1,916,526 | 1,945,811 | ||||||
|
Intangible
- Mineral rights, net
|
3,680,262 | 5,233,992 | ||||||
|
Other
assets
|
102,690 | 102,550 | ||||||
|
Total
other assets
|
14,345,273 | 14,744,361 | ||||||
|
Total
assets
|
$ | 56,216,463 | $ | 47,487,813 | ||||
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts
payable, trade
|
$ | 611,800 | $ | 244,570 | ||||
|
Short
term loans - Bank
|
- | 2,219,475 | ||||||
|
Short
term loans - Others
|
513,450 | 1,098,750 | ||||||
|
Due
to related parties
|
225,495 | 259,033 | ||||||
|
Due
to shareholders
|
1,317,907 | 1,281,304 | ||||||
|
Other
payables and accrued liabilities
|
1,223,437 | 744,058 | ||||||
|
Customer
deposits
|
2,877,630 | 3,751,327 | ||||||
|
Taxes
payable
|
2,893,408 | 2,682,254 | ||||||
|
Total
liabilities
|
9,663,127 | 12,280,771 | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
SHAREHOLDERS'
EQUITY
|
||||||||
|
Common
share, $1.00 par value, 50,000 authorized, 10,000
and 1,000 issued and outstanding as of December 31, 2009 and June
30, 2009, respectively.
|
10,000 | 1,000 | ||||||
|
Additional
Paid-in capital
|
3,545,023 | 3,544,077 | ||||||
|
Statutory
reserves
|
1,628,204 | 1,127,710 | ||||||
|
Retained
earnings
|
40,537,633 | 29,754,451 | ||||||
|
Accumulated
other comprehensive income
|
832,476 | 779,804 | ||||||
|
Total
shareholders' equity
|
46,553,336 | 35,207,042 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 56,216,463 | $ | 47,487,813 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-1-
|
TOP
FAVOUR LIMITED AND SUBSIDIARIES
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
|
||||||||||||||||
|
FOR
THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2009 AND
2008
|
||||||||||||||||
|
(UNAUDITED)
|
||||||||||||||||
|
Three
months ended December 31,
|
Six months
ended December 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
REVENUE,
net
|
$ | 14,763,958 | $ | 11,354,470 | $ | 32,893,419 | $ | 20,322,400 | ||||||||
|
COST
OF REVENUE
|
8,736,811 | 6,961,240 | 17,805,876 | 11,314,679 | ||||||||||||
|
GROSS
PROFIT
|
6,027,147 | 4,393,230 | 15,087,543 | 9,007,721 | ||||||||||||
|
OPERATING
EXPENSES:
|
||||||||||||||||
|
Selling
|
108,718 | 134,410 | 303,995 | 361,081 | ||||||||||||
|
General
and administrative
|
222,759 | 228,069 | 454,598 | 673,111 | ||||||||||||
|
Total
operating expenses
|
331,477 | 362,479 | 758,593 | 1,034,192 | ||||||||||||
|
INCOME
FROM OPERATIONS
|
5,695,670 | 4,030,751 | 14,328,950 | 7,973,529 | ||||||||||||
|
OTHER
INCOME (EXPENSE), NET
|
||||||||||||||||
|
Finance
expense, net
|
(19,239 | ) | (430,784 | ) | (115,963 | ) | (634,910 | ) | ||||||||
|
Other
income (expense), net
|
- | (2,625 | ) | (189 | ) | 150,581 | ||||||||||
|
Total
other expense, net
|
(19,239 | ) | (433,409 | ) | (116,152 | ) | (484,329 | ) | ||||||||
|
INCOME
BEFORE INCOME TAXES
|
5,676,431 | 3,597,342 | 14,212,798 | 7,489,200 | ||||||||||||
|
PROVISION
(BENEFIT) FOR INCOME TAXES
|
940,132 | (353,245 | ) | 2,929,122 | 557,706 | |||||||||||
|
NET
INCOME
|
4,736,299 | 3,950,587 | 11,283,676 | 6,931,494 | ||||||||||||
|
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||
|
Foreign
currency translation adjustment
|
603 | 63,953 | 52,672 | 112,094 | ||||||||||||
|
COMPREHENSIVE
INCOME
|
$ | 4,736,902 | $ | 4,014,540 | $ | 11,336,348 | $ | 7,043,588 | ||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
-2-
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Retained
Earnings
|
other
|
|||||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-in
|
Contribution
|
Statutory
|
comprehensive
|
||||||||||||||||||||||||||||
|
Shares
|
Par
Value
|
capital
|
Receivable
|
reserves
|
Unrestricted
|
(loss)
income
|
Total
|
|||||||||||||||||||||||||
|
BALANCE,
July 1, 2008
|
1,000 | $ | 1,000 | $ | 3,044,803 | $ | (1,000 | ) | $ | 573,412 | $ | 13,340,814 | $ | 705,540 | $ | 17,664,569 | ||||||||||||||||
|
Net
income
|
- | - | - | - | - | 6,931,494 | - | 6,931,494 | ||||||||||||||||||||||||
|
Shareholder
contribution by forfeited imputed interest
|
- | - | 450,836 | - | - | - | - | 450,836 | ||||||||||||||||||||||||
|
Adjustment
for statutory reserve
|
- | - | - | - | 189,370 | (189,370 | ) | - | - | |||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | - | - | 112,094 | 112,094 | ||||||||||||||||||||||||
|
BALANCE,
December 31, 2008, (unaudited)
|
1,000 | $ | 1,000 | $ | 3,495,639 | $ | (1,000 | ) | $ | 762,782 | $ | 20,082,938 | $ | 817,634 | $ | 25,158,993 | ||||||||||||||||
| - | ||||||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 10,036,441 | - | 10,036,441 | ||||||||||||||||||||||||
|
Shareholder
contribution by forfeited imputed interest
|
- | - | 48,438 | 1,000 | - | - | - | 49,438 | ||||||||||||||||||||||||
|
Adjustment
for statutory reserve
|
- | - | - | - | 364,928 | (364,928 | ) | - | - | |||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | - | - | (37,830 | ) | (37,830 | ) | ||||||||||||||||||||||
|
BALANCE,
June 30, 2009
|
1,000 | $ | 1,000 | $ | 3,544,077 | $ | - | $ | 1,127,710 | $ | 29,754,451 | $ | 779,804 | $ | 35,207,042 | |||||||||||||||||
|
Net
income
|
- | - | - | - | - | 11,283,676 | - | 11,283,676 | ||||||||||||||||||||||||
|
Shareholder
cash contribution
|
9,000 | 9,000 | 946 | - | - | - | - | 9,946 | ||||||||||||||||||||||||
|
Adjustment
for statutory reserve
|
- | - | - | - | 500,494 | (500,494 | ) | - | - | |||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | - | - | 52,672 | 52,672 | ||||||||||||||||||||||||
|
BALANCE,
December 31, 2009, (unaudited)
|
10,000 | $ | 10,000 | $ | 3,545,023 | $ | - | $ | 1,628,204 | $ | 40,537,633 | $ | 832,476 | $ | 46,553,336 | |||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
-3-
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
FOR
THE SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008
|
||||||||
|
(UNAUDITED)
|
||||||||
| Six months ended December 31, | ||||||||
|
2009
|
2008
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
income
|
$ | 11,283,676 | $ | 6,931,494 | ||||
|
Adjustments
to reconcile net income to cash provided
by operating activities:
|
||||||||
|
Depreciation
|
1,325,430 | 952,954 | ||||||
|
Amortization
and depletion
|
1,592,165 | 993,112 | ||||||
|
Imputed
interest on shareholder and related party loans
|
- | 450,836 | ||||||
|
Change
in operating assets and liabilities
|
||||||||
|
Notes
receivable
|
(2,311,018 | ) | (633,223 | ) | ||||
|
Accounts
receivable, trade
|
(1,281,950 | ) | (3,053,449 | ) | ||||
|
Other
receivables
|
17,942 | 624,406 | ||||||
|
Inventories
|
(1,296,469 | ) | (1,975,461 | ) | ||||
|
Advances
to suppliers
|
(2,336,606 | ) | (866,147 | ) | ||||
|
Accounts
payable, trade
|
366,749 | (2,495,696 | ) | |||||
|
Other
payables and accrued liabilities
|
472,024 | (978,414 | ) | |||||
|
Customer
deposits
|
(878,460 | ) | 2,796,856 | |||||
|
Taxes
payable
|
213,551 | (2,221,302 | ) | |||||
|
Net
cash provided by operating activities
|
7,167,034 | 525,966 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchase
of property, plant and equipment
|
(3,130,138 | ) | (118,210 | ) | ||||
|
Prepayment
for construction
|
(1,173,120 | ) | - | |||||
|
Net
cash used in investing activities
|
(4,303,258 | ) | (118,210 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Shareholder
contribution
|
9,946 | - | ||||||
|
(Payments)
Proceeds on short-term loans Bank
|
(2,221,596 | ) | 943,009 | |||||
|
Payments
on short term loans - Others
|
(586,560 | ) | - | |||||
|
Proceeds(payments)
of loans from shareholders
|
34,840 | (145,800 | ) | |||||
|
Payments
of loans from related parties
|
(33,878 | ) | (2,002,478 | ) | ||||
|
Net
cash used in financing activities
|
(2,797,248 | ) | (1,205,269 | ) | ||||
|
EFFECT
OF EXCHANGE RATE ON CASH
|
392 | 24,328 | ||||||
|
INCREASE
(DECREASE) IN CASH
|
66,920 | (773,185 | ) | |||||
|
CASH,
beginning of period
|
278,399 | 4,705,129 | ||||||
|
CASH,
end of period
|
$ | 345,319 | $ | 3,931,944 | ||||
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid for income tax
|
$ | 2,940,950 | $ | 2,570,519 | ||||
|
Cash
paid for interest expense
|
$ | 79,067 | $ | 143,540 | ||||
|
NON-CASH
TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES
|
||||||||
|
$5,522,543
and $2,755,229 construction-in-progress transferred to property, plant and
equipment for the six months ended December 31, 2009 and 2008,
respectively
|
||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
-4-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Note
1 – Organization
Top
Favour Limited (“Top Favour”, or the “Company”) was incorporated in the British
Virgin Islands on July 2, 2008. Through its wholly-owned subsidiary
Pingdingshan Hongyuan Energy Science and Technology Development Co., Ltd.
(“Hongyuan”), which was formed on March 18, 2009, and the variable interest
entity (“VIE”), Henan Pingdingshan Hongli Coal & Coking Co., Ltd.
(“Hongli”), the Company produces and sells coal, coke, coal gas-generated
electricity, and other coking by-products in the People’s Republic of China
(“PRC” or "China").
Henan
Pingdingshan Hongli Coal & Coking Co., Ltd. (“Hongli”) was incorporated as a
trading and holding Company on June 5, 1996 under the laws of the
PRC. In addition to operating the Baofeng Coking Factory (“Baofeng
Coking”), Hongli sells coal and coke to its customers, many of whom are energy
trading companies that procure coking coals for steel manufacturers and chemical
refineries in China. Hongli has a registered capital of RMB 8,080,000
and is located in the city of Pingdingshan, Henan Province.
Baofeng
Coking is a division of Hongli and was established in May
2002. Hongli and Baofeng Coking are engaged in coal sales, mining,
washing and coke production using raw coal produced by its affiliate or
purchased from other coal vendors.
Baofeng
Hongchang Coal Co., Ltd. (“Hongchang Coal”) was formed in July 19, 2007 under
the laws of the PRC and is 100% owned by Hongli. Hongchang Coal owns
the coal mining rights over three underground coal mines and produces raw coal
that is suitable for coke producing and other industrial uses. Total proven coal reserves for the Company's mines as of July 2007 were
approximately 2,475,000 metric tons, of which the Company is permitted to
extract (by paying a mining license fee to the government) up to 300,000 metric
tons per year. Of the total proven reserves, an estimated 1.2 million
tons are recoverable according to Company and government records. The
majority of Hongchang Coal's products are used internally by Baofeng Coking and
Hongli.
Baofeng
Hongguang Power Co., Ltd. (“Hongguang Power”) was formed on August 1, 2006, and
is a 100% owned subsidiary of Hongli. Hongguang Power operates a 2 x
3000-kilowatt (kw) power plant and provides electricity to Baofeng Coking and
the Chinese national power grid which is generated from the coal gas emitted
from the coking process of Baofeng Coking. Hongguang is required
by the local government to sell its surplus electricity (in excess of what is
supplied to and consumed by Baofeng Coking) to the national power
grid.
Hongli
and its operating subsidiaries hold licenses necessary to operate the coal
mining, coal sales, coking and power plant businesses in China. PRC
law currently has limits on foreign ownership of these types of
companies. In order to comply with these foreign ownership
restrictions and in order for Top Favour to obtain control over Hongli’s PRC
operating entities, on March 18, 2009 Top Favour, through Hongyuan, entered into
contractual arrangements with Hongli on March 18, 2009 (“Contractual
Arrangements”). These Contractual Arrangements are comprised of a
series of agreements, including:
(1) a
Consulting Services Agreement, through which Hongyuan has the right to advise,
consult, manage and operate Hongli and its subsidiaries (“Operating Companies”),
collect, and own all of the respective net profits of the Operating
Companies;
(2) an
Operating Agreement, through which Hongyuan has the right to recommend director
candidates and appoint the senior executives of the Operating Companies, approve
any transactions that may materially affect the assets, liabilities, rights or
operations of the Operating Companies, and guarantee the contractual performance
by the Operating Companies of any agreements with third parties, in exchange for
a pledge by the Operating Companies of their respective accounts receivable and
assets;
-5-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
(3) a
Proxy Agreement, under which the shareholders of the Operating Companies have
vested their voting control over the Operating Companies to Hongyuan and will
only transfer their equity interests in the Operating Companies to Hongyuan or
its designee(s);
(4) an
Option Agreement, under which the shareholders of the Operating Companies have
granted Hongyuan the irrevocable right and option to acquire all of its equity
interests in the Operating Companies, or, alternatively, all of the assets of
the Operating Companies; and
(5) an
Equity Pledge Agreement, under which the shareholders of the Operating Companies
have pledged all of their rights, title and interest in the Operating Companies
to Hongyuan to guarantee the Operating Companies’ performance of their
respective obligations under the Consulting Services Agreement.
Since Top
Favour, Hongyuan and Hongli are under common control, the above operating
structure, including the foregoing contractual agreements has been
accounted for as a reorganization of entities and the consolidation of Top
Favour and Hongli has been accounted for at historical cost and prepared on the
basis as if the aforementioned exclusive agreements between Top Favour and
Hongli had become effective as of the beginning of the first period presented in
the Company’s consolidated financial statements. The Company’s
consolidated assets do not include any collateral for Hongli’s
obligations. The creditors of Hongli do not have recourse against Top
Favour and Hongyuan.
Note
2 – Summary of Significant Accounting Policies
Principles of
consolidation
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America. The consolidated financial statements include the financial
statements of the Company, its wholly-owned subsidiary Hongyuan, and its VIEs
(Hongli and its subsidiaries). All significant inter-company
transactions and balances between the Company, its subsidiaries and VIEs are
eliminated upon consolidation.
In
accordance with FASB’s accounting standard of consolidation of variable interest
entities, VIEs are generally entities that lack sufficient equity to finance
their activities without additional financial support from other parties or
whose equity holders lack adequate decision making ability. All VIEs
with which the Company is involved must be evaluated to determine the primary
beneficiary of the risks and rewards of the VIE. The primary
beneficiary is required to consolidate the VIE for financial reporting purposes.
As a result of these contractual arrangements (Note 1), Top Favour is obligated
to absorb a majority of the risk of loss from Hongli’s activities and Top Favour
is enabled to receive a majority of its expected residual
returns. Top Favour accounts for Hongli as a VIE and is the primary
beneficiary.
Use of
estimates
The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The more
significant areas requiring the use of management estimates and assumptions
relate to coal reserves that are the basis for future cash flow estimates and
units-of-production depletion calculations; asset impairments; valuation
allowances for deferred income taxes; reserves for contingencies and litigation
and the fair value and accounting treatment of certain financial
instruments. Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly
from these estimates. In addition, different assumptions or
conditions could reasonably be expected to yield different
results.
-6-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Management
has included all adjustments, consisting only of normal
recurring adjustments considered necessary to give a
fair presentation of operating results for the periods
presented. Interim results are not necessarily indicative the results
of a full year. The information included in the consolidated
financial statements should be read in conjunction with reports and statements
filed with the Securities and Exchange Commission.
Revenue
recognition
The
Company’s revenue recognition policies are in compliance with FASB’s accounting
standards. Coal and coke sales are recognized 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 of the Company exist
and collectability is reasonably assured. This generally occurs when
coal is loaded onto trains or trucks at one of the Company’s loading facilities
or at third party facilities.
Most of
the electricity generated by Hongguan Power is 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 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 products are sold to
the customer.
Shipping and handling
costs
Shipping
and handling costs related to costs of the raw materials purchased is included
in cost of revenues. Total shipping and handling costs amounted to
$4,109 and $33,396 for the three month periods, and $15,326 and $80,077 for the
six months ended December 31, 2009 and 2008, respectively.
Foreign currency translation
and other comprehensive income
The
reporting currency of the Company is the US dollar (USD). The
functional currency of the Company and its subsidiaries is the Chinese Renminbi
(RMB).
For the
subsidiaries whose functional currencies are other than the US dollar, all
assets and liabilities accounts were translated at the exchange rate on the
balance sheet date; shareholders’ equity is translated at the historical rates
and items in the statement of operations are translated at the average rate for
the year. Items in the cash flow statement are also translated at average
translation rates for the period, therefore, amounts reported on the statement
of cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheet. Translation adjustments resulting from
this process are included in accumulated other comprehensive income in the
statement of shareholders’ equity. The resulting
translation gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred.
-7-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
The
balance sheet amounts with the exception of equity at December 31, 2009 and June
30, 2009 were translated at the currency translation rates of RMB 6.82 and RMB
6.83 to USD $1, respectively. The average translation rates applied
to income and cash flow statement amounts for the three and six months ended
December 31, 2009 were at RMB 6.82 to USD $1, and for the three and six months
ended December 31, 2008 were at RMB 6.83 to USD $1.
Fair value of financial
instruments
Effective
January 1, 2008, the Company adopted the Financial Accounting Standard Board’s
(“FASB”) accounting standard regarding fair value of financial instruments and
related fair value measurements. Those accounting standards established a
three-level valuation hierarchy for disclosures of fair value measurement and
enhance disclosures requirements for fair value measures. The
carrying amounts reported in the accompanying consolidated balance sheets for
receivables, payables and short term loans qualify as financial instruments are
a reasonable estimate of fair value because of the short period of time between
the origination of such instruments, their expected realization and, if
applicable, the stated rate of interest is equivalent to rates currently
available. The three levels of valuation hierarchy are defined as
follows:
|
Level
1
|
Inputs
to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
|
|
Level
2
|
Inputs
to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the
assets or liability, either directly or indirectly, for substantially the
full term of the financial instruments.
|
|
Level
3
|
Inputs
to the valuation methodology are unobservable and significant to the fair
value.
|
The
Company did not identify any assets and liabilities that are required to be
presented on the consolidated balance sheets at fair value in accordance the
accounting standard.
The
accounting standard regarding the fair value option for financial assets and
financial liabilities became effective for the Company on July 1, 2008. The
accounting standard provides the Company with the irrevocable option to elect
fair value for the initial and subsequent measurement for certain financial
assets and liabilities on a contract-by-contract basis with the difference
between the carrying value before election of the fair value option and the fair
value recorded upon election as an adjustment to beginning retained earnings.
The Company chose not to elect the fair value option.
Cash
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents for cash
flow statement purposes. Cash includes cash on hand and demand deposits in
accounts maintained with banks within the PRC and in Hong Kong.
-8-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Accounts receivables,
trade
During
the normal course of business, the Company extends unsecured credit to its
customers. Management regularly reviews aging of receivables and changes in
payment trends by its customers, and records a reserve when management believes
collection of amounts due are at risk. Accounts considered
uncollectible are written off. For the three months and six months
ended December 31, 2009 and 2008, the Company did not write off any
uncollectible receivables. As of December 31, 2009 and June 30, 2009,
management did not reserve any allowance for doubtful accounts. The
Company regularly reviews the credit-worthiness of its customers and, based on
the results of the credit review, determines whether extended payment terms can
be granted to or, in some cases, partial prepayment is required from certain
customers.
Inventories
Inventories
are stated at the lower of cost or market, using the weighted average cost
method. Inventories consist of raw materials and supplies, work in
process, and finished goods. Raw materials mainly consist of coal
(mined and purchased), rail, steel, wood and additives used by the
Company. The cost of finished goods includes (1) direct costs of raw
materials, (2) direct labor, (3) indirect production costs, such as allocable
utilities costs, and (4) indirect labor related to production activities, such
as assembly and packaging.
Advances to
suppliers
The
Company advances monies to certain suppliers for the purchase of raw materials
and construction contracts. These advances are interest-free and
unsecured.
Property, plant and
equipment, net
Property,
plant and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to earnings as incurred, while additions, renewals and
betterments that extend useful life of property plant and equipment are
capitalized. When items of plant and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in
operations. Mine development costs are capitalized and amortized by
the units of production method over estimated total recoverable proven and
probable reserves. Depreciation of plant and equipment is provided
using the straight-line method for substantially all assets with estimated lives
as follows:
|
Estimated
Useful Life
|
|
|
Building
and plant
|
30-40
years
|
|
Machinery
and equipment
|
10-20
years
|
|
Other
equipment
|
5
years
|
|
Transportation
equipment
|
5-7
years
|
-9-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Construction-in-progress
includes direct costs of construction of mining tunnel
improvements. Interest incurred during the period of construction, if
material, is capitalized. All other interest is expensed as
incurred. Construction-in-progress is not depreciated until such time the
assets are completed and put into service. Maintenance, repairs and
minor renewals are charged to expense as incurred. Major additions
and betterment to property and equipment are capitalized.
Land use rights,
net
Costs to
obtain land use rights are recorded based on the fair value at acquisition and
amortized over 36 years, the contractual period of the rights. Under
the FASB’s accounting standard regarding treatment of goodwill and other
intangible assets, all goodwill and certain intangible assets determined to have
indefinite lives are not amortized but tested for impairment at least
annually. Intangible assets other than goodwill will be amortized
over their useful lives and reviewed at least annually for
impairment.
Intangible - mineral rights,
net
Mineral
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. The Company’s coal reserves are
controlled either through direct ownership which generally lasts until the
recoverable reserves are depleted.
Impairment of long - lived
assets
The
Company evaluates long-lived tangible and intangible assets for impairment, at
least annually, but more often whenever events or changes in circumstances
indicate that the carrying value may not be recoverable from its estimated
future cash flows, in accordance FASB’s accounting guidance regarding “Disposal
of Long-Lived Assets”. Recoverability is measured by comparing the
asset’s net book value to the related projected undiscounted cash flows from
these assets, considering a number of factors including past operating results,
budgets, economic projections, market trends and product development
cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss. Based on its
review, the Company believes that, as of December 31, 2009 and June 30, 2009,
there was no impairment of long-lived assets.
Income
taxes
Income
taxes are provided based on the liability method in respect of temporary
differences arising from differences between the carrying amount of assets and
liabilities in the financial statements, and the corresponding tax basis used in
the computation of assessable tax profit. In principle, deferred tax
liabilities are recognized for all taxable temporary differences, and deferred
tax assets are recognized to the extent that it is probable that taxable profit
will be available against which deductible temporary differences can be
utilized. Deferred tax is calculated at the tax rates that are
expected to apply to the period when the asset is realized or the liability is
settled. Deferred tax is charged or credited in the income statement,
except when it relates to items credited or charged directly to equity, in which
case the deferred tax is also dealt with in equity.
-10-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Effective
January 1, 2007, the Company adopted FASB’s accounting standard which indicates
a tax position is recognized as a benefit only if it is “more likely than not”
that the tax position would be sustained in a tax examination, with a tax
examination presumed to occur. The amount recognized is the largest
amount of tax benefit that has greater than a 50% likelihood of being realized
on examination. For tax positions not meeting the “more likely than
not” test, no tax benefit is recorded. The adoption had no effect on
the Company’s financial statements.
Chinese income
taxes
The
Company’s subsidiary and VIEs are operating in the PRC and are governed by the
income tax laws of the PRC concerning Foreign Investment Enterprises and Foreign
Enterprises, as well as various local income tax laws (“Income Tax
Laws”). Prior to January 1, 2008, Income Tax Laws of the PRC, the
Company’s subsidiaries and VIEs are generally subject to an income tax at an
effective rate of 33% (30% national income taxes plus 3% local income taxes) on
taxable income, which is based on the net income reported in the statutory
financial statements after appropriate tax adjustments. The statutory
rate has been changed to 25%, effective January 1, 2008.
Value added tax
(“VAT”)
Sales
revenue represents the invoiced value of goods, net of a value-added tax
(VAT). All of the Company’s coal and coke that is sold in the PRC is
subject to a Chinese value-added tax at a rate of 13% or 17% of the gross sales
price, respectively. This VAT may be offset by VAT paid by the
Company on raw materials and other materials included in the cost of producing
finished products. The Company recorded VAT payable and VAT
receivable net of payments in the consolidated financial
statements. The VAT tax return is filed to offset the payables
against the receivables.
Comprehensive
income
FASB’s
accounting standard regarding comprehensive income establishes requirements for
the reporting and display of comprehensive income, its components and
accumulated balances in a full set of general purpose financial
statements. This accounting standard defines comprehensive income to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, it also
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in
financial statements that are presented with the same prominence as other
financial statements. The Company’s only current component of
comprehensive income is the foreign currency translation
adjustment.
Related
parties
Parties
are considered to be related to the Company if the parties, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also
include principal owners of the Company, its management, members of the
immediate families of such principal owners and management, and other parties
with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own
separate interests.
-11-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Recently issued accounting
pronouncements
In
April 2009, the FASB issued an accounting standard that makes the
other-than-temporary impairments guidance more operational and improves the
presentation of other-than-temporary impairments in the financial
statements. This standard replaced the existing requirement that the
entity’s management assert it has both the intent and ability to hold an
impaired debt security until recovery with a requirement that management assert
it does not have the intent to sell the security, and it is more likely than not
it will not have to sell the security before recovery of its cost
basis. This standard provides increased disclosure about the credit
and noncredit components of impaired debt securities that are not expected to be
sold and also requires increased and more frequent disclosures regarding
expected cash flows, credit losses, and an aging of securities with unrealized
losses. Although this standard does not result in a change in the
carrying amount of debt securities, it does require that the portion of an
other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. On July 1, 2009,
the Company adopted this accounting standard, but it did not have a material
impact on its consolidated financial statements.
In
April 2009, the FASB issued an accounting standard that requires
disclosures about fair value of financial instruments not measured on the
balance sheet at fair value in interim financial statements as well as in annual
financial statements. Prior to this accounting standard, fair values
for these assets and liabilities were only disclosed annually. This
standard applies to all financial instruments within its scope and requires all
entities to disclose the method(s) and significant assumptions used to estimate
the fair value of financial instruments. This standard does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption, but in periods after the initial adoption, this standard
requires comparative disclosures only for periods ending after initial
adoption. On July 1, 2009, the Company adopted this accounting
standard, but it did not have a material impact on the disclosures related to
its consolidated financial statements.
In May
2009, the FASB issued an accounting standard to provide guidance on management’s
assessment of subsequent events. The new standard clarifies that
management must evaluate, as of each reporting period, events or transactions
that occur after the balance sheet date through the date that the financial
statements are issued or are available to be issued. Management must
perform its assessment for both interim and annual financial reporting
periods. This new guidance does not significantly change the
Company’s practice for evaluating such event and it is effective prospectively
for interim and annual periods ending after June 15, 2009 and requires
disclosure of the date subsequent events are evaluated through. The
Company has adopted this accounting standard.
In
June 2009, the FASB issued an accounting standard amending the accounting
and disclosure requirements for transfers of financial assets. This
accounting standard requires greater transparency and additional disclosures for
transfers of financial assets and the entity’s continuing involvement with them
and changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity
(“QSPE”). This accounting standard is effective for financial
statements issued for fiscal years beginning after November 15, 2009, and
the Company does not expect this standard to have a material effect on its
consolidated financial statements.
-12-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
In
June 2009, the FASB also issued an accounting standard amending the
accounting and disclosure requirements for the consolidation of variable
interest entities (“VIEs”). The elimination of the concept of a QSPE, as
discussed above, removes the exception from applying the consolidation guidance
within this accounting
standard. Further, this accounting standard requires a company to
perform a qualitative analysis when determining whether or not it must
consolidate a VIE. It also requires a company to continuously
reassess whether it must consolidate a VIE. Additionally, it requires
enhanced disclosures about a company’s involvement with VIEs and any significant
change in risk exposure due to that involvement, as well as how its involvement
with VIEs impacts the company’s financial statements. Finally, a
company will be required to disclose significant judgments and assumptions used
to determine whether or not to consolidate a VIE. This accounting
standard is effective for financial statements issued for fiscal years beginning
after November 15, 2009, and the Company does not expect this standard to
have a material effect on its consolidated financial statements.
In June
2009, the Financial Accounting Standards Board issued an accounting standard
which establishes the FASB Accounting Standards Codification™ (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification
does not change current U.S. GAAP, but is intended to simplify user access
to all authoritative U.S. GAAP by providing all the authoritative literature
related to a particular topic in one place. The Codification is
effective for interim and annual periods ending after September 15, 2009, and as
of the effective date, all existing accounting standard documents will be
superseded. The Codification is effective for the Company,
and accordingly, all current and subsequent public filings will reference
the Codification as the sole source of authoritative
literature.
In
August 2009, the FASB issued an Accounting Standards Update (“ASU”)
regarding measuring liabilities at fair value. This ASU provides
additional guidance clarifying the measurement of liabilities at fair value in
circumstances in which a quoted price in an active market for the identical
liability is not available. Under those circumstances, a reporting entity is
required to measure fair value using one or more of valuation techniques, as
defined. This ASU is effective for the first reporting period,
including interim periods, beginning after the issuance of this ASU, and the
adoption of this guidance did not have a material impact on the accompanying
consolidated financial statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share
lending arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from
basic and diluted earnings per share unless default of the share-lending
arrangement occurs, at which time the loaned shares would be included in the
basic and diluted earnings-per-share calculation. This ASU is
effective for fiscal years beginning on or after December 15, 2009, and
interim periods within those fiscal years for arrangements outstanding as of the
beginning of those fiscal years. The Company is currently evaluating
the impact of this ASU on its consolidated financial statements.
In
January 2010, the FASB issued ASU No. 2010-02 regarding accounting and
reporting for decreases in ownership of a subsidiary. Under this
guidance, an entity is required to deconsolidate a subsidiary when the entity
ceases to have a controlling financial interest in the
subsidiary. Upon deconsolidation of a subsidiary, and entity
recognizes a gain or loss on the transaction and measures any retained
investment in the subsidiary at fair value. In contrast, an entity is
required to account for a decrease in its ownership interest of a subsidiary
that does not result in a change of control of the subsidiary as an equity
transaction. This ASU clarifies the scope of the decrease in ownership
provisions, and expands the disclosures about the deconsolidation of a
subsidiary or de-recognition of a group of assets. This ASU is effective for
beginning in the
first interim or annual reporting period ending on or after December 31,
2009. The Company is currently evaluating the impact of this ASU,
however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial statements.
-13-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Note
3 – Enterprise-wide Reporting
Based on
qualitative and quantitative criteria established by the FASB accounting
standard regarding disclosures about segments of an enterprise and related
information, the Company considers itself, including coal mining, coking and the
sales of all products as a result of these business activities, to be operations
within one reportable segment. All of the Company’s products are sold
within the PRC. Major products and respective revenues are as
summarized as follows:
|
Three
months ended December
31,
|
Six months ended December 31, | ||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||
|
(Unaudited)
|
(Unaudited) | ||||||||||||||||
|
Coke
|
$ | 8,139,941 | $ | 8,930,810 | $ | 13,857,540 | $ | 17,331,819 | |||||||||
|
Coal
Tar
|
334,808 | 292,300 | 595,612 | 677,837 | |||||||||||||
|
Raw
Coal
|
6,289,209 | 2,131,360 | 11,411,338 | 2,312,744 | |||||||||||||
|
Washed
Coal
|
- | - | 7,028,929 | - | |||||||||||||
|
Total
|
$ | 14,763,958 | $ | 11,354,470 | $ | 32,893,419 | $ | 20,322,400 | |||||||||
Note
4 – Concentration and Credit Risk
The
Company’s operations are all carried out in the PRC. Accordingly, the
Company’s business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC economy. The Company’s operations in the
PRC are subject to specific considerations and significant risks not typically
associated with companies in North America and Western Europe. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Company’s results may
be adversely affected by changes in governmental policies with respect to laws
and regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
Financial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains balances at financial institutions
located in the PRC and Hong Kong. Balances at financial institutions
or state owned banks within the PRC are not covered by insurance. As
of December 31, 2009 and June 30, 2009, the Company had deposits which were not
covered by insurance for $258,665 and $5,679, respectively. The
Company has not experienced any losses in such accounts.
For the
six months ended December 31, 2009 and 2008, all of the Company’s sales were
generated in the PRC as well as account receivables. For the three
months ended December 31, 2009, 81.2% of the Company’s total revenues from three
major customers accounted individually of 40.6%, 28.1%, and 12.5%,
respectively. For the six months ended December 31, 2009, 87.5% of
the Company’s total revenues from the same three major customers accounted
individually of 25.4%, 50.5%, and 11.6%, respectively. Account
receivable balances with those three customers accounted for 46.1%, 49.8% and 0%
of the total account
receivables as of December 31, 2009, respectively. For the three
months ended December 31, 2008, 92.9% of the Company’s total revenues were from
five major customers accounted individually of 20.4%, 19.4%, 19.2%, 17.2% and
16.6%, respectively. For the six months ended December 31, 2008, 93.8% of the
Company’s total revenues were from the same five major customers accounted
individually of 27.3%, 19.5%, 17.2%, 9.7% and 20.0%,
respectively.
-14-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
For the
six months ended December 31, 2009 and 2008, all of the Company’s purchases of
raw materials were generated in the PRC as well as accounts
payable. For the three months ended December 31, 2009, one major
supplier provided 94.0% of the Company’s raw material purchase. For
the six months ended December 31, 2009, 90.4% of the Company’s raw material
purchases with each supplier individually accounting for 53.3%, 12.9%, 12.8% and
11.5%, respectively. As of December 31, 2009, there were no accounts
payable balances associated with those suppliers. For the three
months ended December 31, 2008, two major suppliers provided 95.2% of the
Company’ purchase of raw material with each supplier individually accounted for
49.1% and 46.1%, respectively. For the six months ended December 31,
2008, three major suppliers provided 76.8% of the Company’ purchase of raw
material with each supplier individually accounted for 37.0%, 20.5% and 19.3%,
respectively.
Note
5 – Notes Receivable
Notes
receivable represent trade accounts receivable due from various customers where
a customer’s bank has guaranteed payment of the receivable. This
amount is non-interest bearing and is normally paid within three to six
months. The Company is allowed to submit their request for payment to
the customer’s bank earlier than the scheduled payment date. However,
the early request will result in an interest charge and a processing
fee. Notes receivable were $2,671,261 and $358,808 as of December 31,
2009 and June 30, 2009, respectively.
Note
6 – Inventories
Inventories
as of December 31, 2009 and June 30, 2009 consisted of the
following:
|
December
31, 2009
(Unaudited)
|
June
30, 2009
|
|||||||
|
Raw
materials
|
$
|
1,190,949
|
$
|
31,994
|
||||
|
Finished
goods
|
213,384
|
75,193
|
||||||
|
Total
|
$
|
1,404,333
|
$
|
107,187
|
||||
Note
7 – Advances to suppliers
Advances
to suppliers are monies deposited or advanced to unrelated vendors for future
inventory purchases, which consist mainly raw coal purchases. Most of
the Company’s vendors require a certain amount of money to be deposited with
them as a guarantee that the Company will fulfill their purchases on a timely
basis and with favorable pricing.
Advances
to suppliers as of December 31, 2009 and June 30, 2009 amounted to $10,713,431
and $8,364,448, respectively.
-15-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Note
8 – Prepayments for construction
Prepayments
for construction are monies advanced to contractors or equipment suppliers
relating to the new coking factory and related facilities, which upon completion
is expected to have a coke production capacity of up to 900,000 tons per
year. Related facilities include those related to power generation
equipment to produce coal gas-generated power, and facilities to produce other
chemical refinery by-products.
Prepayments
for construction as of December 31, 2009 and June 30, 2009 amounted to
$8,645,795 and $7,462,008, respectively.
Note
9 – Property, Plant and Equipment, net
Property,
plant and equipment as of December 31, 2009 and June 30, 2009 consisted of the
following:
|
December
31, 2009
(Unaudited)
|
June
30, 2009
|
|||||||
|
Buildings
and improvements
|
$
|
10,033,739
|
$
|
10,020,060
|
||||
|
Mine
development cost
|
10,578,706
|
5,004,179
|
||||||
|
Machinery
and equipment
|
5,642,103
|
5,619,835
|
||||||
|
Other
Equipment
|
398,194
|
392,019
|
||||||
|
Total
|
26,652,742
|
21,036,093
|
||||||
|
Less
accumulated depreciation
|
(7,869,492)
|
(6,534,598)
|
|
|||||
|
Construction-in-progress
|
-
|
2,453,164
|
||||||
|
Total,
net
|
$
|
18,783,250
|
$
|
16,954,659
|
||||
Depreciation
expense for the three months ended December 31, 2009 and 2008 amounted to
$612,088 and $430,999, respectively, and amounted to $1,325,430 and $952,954 for
the six months ended December 31, 2009 and 2008,
respectively. Construction-in-progress at June 30, 2009 was
related to Hongchang Coal’s mining tunnel improvement project costing
approximately $5.42 million. This project was completed in August
2009.
-16-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Note
10 – Intangible – Land Use Rights, net
Land use
rights, net consisted of the following as of December 31, 2009 and June 30,
2009:
|
December
31, 2009
(Unaudited)
|
June
30, 2009
|
|||||||
|
Land
use rights
|
$
|
2,299,831
|
$
|
2,296,695
|
||||
|
Accumulated
amortization
|
(383,305
|
)
|
(350,884
|
)
|
||||
|
Total,
net
|
$
|
1,916,526
|
$
|
1,945,811
|
||||
Amortization
expense for the three and six months ended December 31, 2009 amounted to $15,961
and $31,922, respectively. For the three and six months and December 31, 2008
amounted to $15,937 and $31,874, respectively.
Amortization
expense for the next five years and thereafter is as follows:
|
Year
ended June 30,
|
||||
|
2010
|
$
|
31,922
|
||
|
2011
|
63,884
|
|||
|
2012
|
63,884
|
|||
|
2013
|
63,884
|
|||
|
2014
|
63,884
|
|||
|
2015
and thereafter
|
1,629,068
|
|||
|
Total
|
$
|
1,916,526
|
||
Note
11 – Intangible - Mineral Rights, net
Mineral
rights, net consisted of the following as of December 31, 2009 and June 30,
2009:
|
December
31, 2009
(Unaudited)
|
June
30, 2009
|
|||||||
|
Mineral
rights
|
$
|
13,119,717
|
$
|
13,101,831
|
||||
|
Accumulated
depletion
|
(9,439,455
|
)
|
(7,867,839
|
)
|
||||
|
Total,
net
|
$
|
3,680,262
|
$
|
5,233,992
|
||||
Depletion
expense for the three months ended December 31, 2009 and 2008 amounted to
$577,057 and $375,740, respectively. For the six months ended
December 31, 2009 and 2008, depletion expense amounted to $1,560,243 and
$961,238, respectively. Depletion expenses were charged to cost of
revenue.
-17-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Note
12 – Short-term Loans
Short-term
loans represent amounts due to various banks and individuals and are due either
on demand or normally within one year. These loans generally can be
renewed with the banks or the individual creditors.
The
Company had short-term bank loans amounting to $2,219,475 at June 30,
2009. Of these bank loan balances, $483,450 was guaranteed by a third
party, and the remaining balances was guaranteed by Hongguang
Power. The Company has paid off the bank loans as of December 31,
2009.
The
Company also borrowed short-term loans from a third party, which did not bear
any interest. As of December 31, 2009 and June 30, 2009, the loan
balances with this party were $513,450 and $1,098,750,
respectively.
Weighted
average interest rates for short term loans were 6.7% and 9.11% for the three
and six months ended December 31, 2009 respectively. Weighted average
interest rates were $8.89% for the three and six months ended December 31,
2008. Total interest expense on short term loans for the three months
ended December 31, 2009 and 2008 amounted to $19,933 and $390,250, respectively,
and were $116,657 and $594,376 for the six months ended December 31, 2009 and
2008, respectively.
Note
13 – Other payables and accrued liabilities
Other
payables mainly consisted of payables to various contractors incurred in
connection with the Company’s completed construction projects for the coal mines
and its power plant. These payables for the construction projects bear no
interest and are generally collateralized by the construction project in the
form of mechanic’s liens.
Accrued
liabilities mainly consisted of salary and utility expenses previously
incurred.
Other
payables and accrued liabilities consisted of the following as of December 31,
2009 and June 30, 2009:
|
December
31, 2009
(Unaudited)
|
June
30, 2009
|
|||||||
|
Construction
payables
|
$
|
586,800
|
$
|
-
|
||||
|
Other
payables and accrued liabilities
|
636,637
|
744,058
|
||||||
|
Total
|
$
|
1,223,437
|
$
|
744,058
|
||||
Note
14 – Taxes
Income
Tax
Effective
January 1, 2008, the New Enterprise Income Tax (“EIT”) law replaced the existing
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”)
in the PRC. The new standard EIT rate of 25% has replaced the 33%
rate previously applicable to both DES and FIEs. Companies established
before March 16, 2007 will continue to enjoy tax holiday treatment approved by
local government for a grace period of the next 5 years or until the tax holiday
term is completed, whichever is sooner. Pursuant to the PRC tax law,
net operating loss can be carried forward 5 years to offset future taxable
income.
-18-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
The PRC
does not allow consolidation or group filing for corporate income tax purposes.
Income and losses from members of the same consolidated group (for financial
reporting purposes) are not allowed to offset one another. Therefore, total
taxable income (loss) subject to actual PRC corporate tax within the
consolidated group does not necessarily equal to the consolidated net income
before income tax of the consolidated group. The PRC tax administration system
does not necessarily retroactively recognize or allow accounting adjustments
that are discovered and posted after the income tax returns are filed as
additional taxable income or deductions for the tax year to which such
post-filing accounting adjustments relate. The Company considers any
US GAAP adjustments to its financial statements made after the statutory tax
returns are filed to be permanent differences for the purpose of reconciling
differences of income tax provision and actual PRC income tax
liabilities.
Hongli,
Baofeng Coking, Hongchang Coal and Hongguang Power are subject to 25% enterprise
income tax rate. For the three and six months ended December 31,
2008, Baofeng Coking received an income tax exemption amounting to approximately
$2,100,000. The Baofeng taxing authority, who assesses corporate
income tax, also has discretionary authority to issue retroactive tax
exemptions. Accordingly, at December 31, 2009, the Company was unable
to determine whether it will or will not receive a tax exemption similar to
exemptions received in the past, for
the three and six months ended December 31, 2009. Pursuant to a
determination by the applicable local tax bureau, Hongchang Coal was subject to
a total income tax for the 12-month ended December 31, 2009 of approximately
$370,000, regardless its actual taxable income. However, as of
December 31, 2009 Hongchang Coal had not received any notice of adjustment
to its tax bill for the period ending December 31,
2009.
The
provision for income taxes consists of the following for the three and six
months ended December 31, 2009 and 2008:
|
Three
months ended
December
31,
|
Six
months ended
December
31,
|
|||||||||||||||
|
2009
(Unaudited)
|
2008
(Unaudited)
|
2009
(Unaudited)
|
2008
(Unaudited)
|
|||||||||||||
|
BVI
current income tax expense
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
PRC
current income tax expense (benefit)
|
940,132 | (353,245 | ) | 2,929,122 | 557,706 | |||||||||||
|
Total
provision (benefit) for income taxes
|
$ | 940,132 | $ | (353,245 | ) | $ | 2,929,122 | $ | 557,706 | |||||||
The
following table reconciles the statutory rates to the Company’s effective tax
rate for the three and six months ended December 31, 2009 and 2008:
|
Three
months ended
December
31,
|
Six
months ended
December
31,
|
|||||||||||||||
|
2009
(Unaudited)
|
2008
(Unaudited)
|
2009
(Unaudited)
|
2008
(Unaudited)
|
|||||||||||||
|
BVI
income tax
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
||||||||||||
|
PRC
income tax
|
25.00%
|
25.00%
|
25.00% |
25.00%
|
||||||||||||
|
China
income tax exemption
|
(8.89%
|
) |
(33.40%
|
) | (4.60% | ) | (18.20% | ) | ||||||||
| Other item (1) |
0.49%
|
(1.40%
|
) | 0.20% |
0.60%
|
|||||||||||
| Effective rate |
16.60%
|
(9.80% | ) |
20.60%
|
7.40%
|
|||||||||||
|
(1)
|
The
0.49% and 0.20% figures for the three and six months ended
at December 31, 2009, respectively, and (1.40%) and 0.60% figures for
the three and six months ended December 31, 2008, respectively, reflect
the effect of operating losses incurred by
Hongguang. Management believes the losses may not be recovered
through future operations.
|
Value Added
Tax
The
Company incurred VAT on sales and VAT on purchases in the PRC amounting to
$3,292,017 and $843,375 for the three months ended December 31, 2009, $2,047,569
and $737,285 for the three months ended December 31, 2008,
respectively.
VAT on
sales and VAT on purchases in PRC amounted to $6,608,364 and $2,521,353 for the
six months ended December 31, 2009, $3,995,243 and $1,762,295 for the six months
ended December 31, 2008, respectively.
Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
-19-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Taxes
Payable
Taxes
payable as of December 31, 2009 and June 30, 2009 consisted of the
following:
|
December
31, 2009
(Unaudited)
|
June
30, 2009
|
|||||||
|
VAT
|
$
|
621,436
|
$
|
502,867
|
||||
|
Income
tax
|
2,247,437
|
1,906,975
|
||||||
|
Others
|
24,536
|
272,412
|
||||||
|
Total
taxes payable
|
$
|
2,893,408
|
$
|
2,682,254
|
||||
Note
15 – Commitments and Contingencies
Lease
Commitment
The
Company leases its office space in downtown Pingdingshan under an operating
lease with a one year term, which expires on June 30, 2010. The lease
is generally renewable upon expiration and requires an upfront payment of the
annual rent in the amount of $6,328 upon execution of the lease.
Option to Acquire Land Use
Rights
Hongli
has an agreement with the Henan Province Pingdingshan Municipal Bureau of Land
and Resources on December 9, 2008 to permit Hongli to acquire land use rights
for up to 1,270,000 square meters of industrial-zoned vacant land in Baofeng
County. Per the agreement the total cost to acquire these land use rights
is $21,954,490 (or RMB 149,860,000), which rights would be effective for a 50
year period. Under the agreement, the Company may, but is not obligated
to, pay the foregoing amount to acquire the land use rights. Hongli may
acquire rights to all or any lesser portion of the land as it may elect, and the
total cost would be pro-rated accordingly. The Pingdingshan Municipal
Bureau of Land and Resources granted Hongli an extension of the option exercise
period November 2009, and accordingly Hongli may exercise its option to acquire
the aforesaid land use rights by making payment by the end of June 30,
2010. Hongli will not incur any penalty if it does not exercise its option
to acquire land use rights prior to June 30, 2010. As of December 31,
2009, Hongli had not made any payments to acquire the land use
rights.
Note
16 – Statutory Reserves
The laws
and regulations of the PRC require that before foreign invested enterprises can
legally distribute profits, they must first satisfy all tax liabilities, provide
for losses in previous years, and make allocations, in proportions determined at
the discretion of the board of directors, after fulfillment of the statutory
reserves. The statutory reserves include the statutory surplus
reserve fund and the common welfare fund.
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC Company Law, to the statutory surplus reserve fund until
such reserve balance reaches 50% of the Company’s registered
capital. The transfer must be made before distribution of any
dividends to shareholders. The surplus reserve fund is
non-distributable other than during liquidation and can be used to fund previous
years’ losses, if any, and may be utilized for business expansion or converted
into share capital by issuing new shares to existing shareholders in proportion
to their shareholdings or by increasing the par value of the shares currently
held by them, provided that the remaining reserve balance after such issue is
not less than 25% of registered capital.
The
common welfare fund is no longer required after 2006 in accordance with PRC
Company Law.
As of
December 31, 2009, the Company’s subsidiary Hongli and Hongchang’s statutory
surplus reserves both had reached 50% of the entity’s registered capital, and
accordingly, Hongguang did not make any further contribution to the statutory
reserve.
-20-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Hongchang
coal is required by the PRC government to reserve a certain amount for mine
maintenance based on the actual quantity of coal exploited.
The
component of statutory reserves and the future contributions required pursuant
to PRC Company Law are as follows as of December 31, 2009 and June 30,
2009:
|
December
31, 2009 (unaudited)
|
June
30, 2009
|
50%
of registered capital
|
Future
contributions required as of December 31, 2009
|
|||||||||||||
|
Hongli
|
$
|
548,204
|
$
|
548,204
|
$
|
548,204
|
$
|
-
|
||||||||
|
Hongguang
|
-
|
-
|
1,514,590
|
1,514,590
|
||||||||||||
|
Hongchang
(1)
|
218,322
|
25,208
|
206,535
|
-
|
||||||||||||
|
Statutory
surplus reserve
|
766,526
|
573,412
|
2,269,329
|
1,514,590
|
||||||||||||
|
Mine
maintenance reserve
|
861,678
|
554,298
|
-
|
-
|
||||||||||||
|
Total
statutory reserve
|
$
|
1,628,204
|
$
|
1,127,710
|
$
|
2,269,329
|
$
|
1,514,590
|
||||||||
|
(1)
|
the
difference between statutory reserve of $218,322 and 50% of registered
capital which amounts to $206,535, was due to the effect of changes in the
foreign currency exchange rate.
|
Note
17 – Related Party Transactions
The
Company has loans from Mr. Jianhua Lv, a majority shareholder, President and CEO
of the Company, and Mr. Liuchang Yang, Director and Vice President of Hongli.
Mr. Lv and Mr. Yang provided the funds for the Company’s acquisitions of the
coal mine, Baofeng Coking and to fund construction of the power plant. These
loans are unsecured, payable on demand and bear no interest.
The
Company had paid off prior loans from unrelated third parties incurred in
connection with the aforesaid business acquisitions before June 30,
2009.
The
Company imputed the interest on loans from Mr. Lv and Mr. Yang based on the
prevailing rate which was 8.89% for the three months and six months ended
December 31, 2008. Imputed interest on the loans from related parties
amounted $326,566 and $450,836 for the three and six months ended December 31,
2008, respectively. Imputed interest was transferred to additional
paid-in capital.
-21-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Payables
to Mr. Lv, and Mr. Yang as of December 31, 2009 and June 30, 2009 are as
follows:
|
Due
to
|
December
31, 2009
(Unaudited)
|
June
30, 2009
|
Term
|
Manner
of Settlement
|
||||||
|
Mr.
Jianhua Lv
|
$
|
1,317,907
|
$
|
1,281,304
|
Short
term
|
Cash
|
||||
|
Mr.
Liuchang Yang
|
225,495
|
259,033
|
Short
term
|
Cash
|
||||||
|
Total
|
$
|
1,543,402
|
$
|
1,540,337
|
||||||
Note
18 - Business combination
Transfer
of share ownership in Top Favour
On July
6, 2009, Top Favour issued 9,000 new ordinary shares to seventeen
parties. Mr. Jianhua Lv transferred his 1,000 shares to Honour
Express Limited, a British Virgin Islands international business company which
is solely owned by Mr. Shaohua Tan, a Singapore citizen. As a result
of the share issuance and share transfer, Top Favour then had 10,000 ordinary
shares outstanding, 51.03% of which was held by Honour Express
Limited.
Mr.
Shaohua Tan and Mr. Jianhua Lv further entered into a Call Option Agreement
(“Incentive Option Agreement”). To provide incentive to Mr. Lv in
connection with the development of Top Favour’s business, it was agreed that Mr.
Lv shall receive 100% shares of Honour Express within the next three years,
subject to certain contingencies as set forth in the Incentive Option
Agreement.
Under the
Incentive Option Agreement, Mr. Lv agreed to serve as CEO and Chairman of Top
Favour (or its successor) for not less than a 5 year period. In
anticipation of Mr. Lv’s continuous contributions to the Hongli Companies
including Top Favour, WFOE (Hongyuan), Hongli and its subsidiaries, and if the
companies meet certain revenue thresholds over the aforementioned time period,
Mr. Lv shall have the right and option to acquire the shares of Honor Express
Limited at nominal price (the “Option”).
In
addition, the Incentive Option Agreement also provides that Mr. Tan shall not
dispose any of the shares of Honor Express, or vote or dispose of the securities
held by Honour Express, without Mr. Lv’s consent.
Share
Exchange Agreement
On July
17, 2009, the Company entered into a Share Exchange Agreement among
Ableauctions, Top Favour, and the shareholders of Top Favour (the “Share
Exchange Agreement”), and Ableauctions.com, Inc. (“Ableauctions”), a Florida
corporation, the common stock of which was at such time quoted on NYSE
Amex. Under the Share Exchange Agreement, Ableauctions and the
Company agreed to a transaction in which Ableauctions would acquire all of the
equity interest of the Company (the “Acquisition”). The Acquisition
was consummated on February 5, 2010.
Under the
Share Exchange Agreement:
-22-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
|
(1)
|
the
Company’s shareholders agreed to transfer 100% of the issued and
outstanding capital stock of Top Favour to Ableauctions;
|
|
|
(2)
|
as
consideration for the acquisition of the Top Favour equity interests,
Ableauctions issued common stock to Top Favour’s shareholders; immediately
after the closing of the Share Exchange Agreement, the former shareholders
of Top Favour and the former shareholders of Ableauctions held
approximately 97% and 3% of the outstanding shares of Ableauctions,
respectively.
|
|
|
(3)
|
Ableauctions
agreed to adopt a plan of liquidation, under which it established a
liquidating trust for purposes of discharging outstanding liabilities and
distributing remaining assets of Ableauctions to its shareholders as of a
certain record date prior to the closing; at the closing, it was agreed
that Ableauctions would have no material liabilities, contingent or
otherwise, and no material assets.
|
The plan
of share exchange under the Share Exchange Agreement was subject to approval by
the shareholders of both companies, which requirement was fulfilled on December
30, 2009.
On
November 25, 2009, the Company, its majority shareholders, Ableauctions and
certain of the Ableauctions majority shareholders entered into the first
amendment to the Share Exchange Agreement to extend the deadline for closing of
the Acquisition under the Share Exchange Agreement to April 30,
2010.
On
December 30, 2009, the shareholders of Ableauctions approved the Acquisition and
the terms of the plan of liquidation of the pre-Acquisition business of
Ableauctions.
Note
19 – Subsequent events
Closing of Share Exchange
Transaction
On
February 5, 2010, the Acquisition was consummated, and as a result, the Company
(Top Favour Limited) became a wholly-owned subsidiary of Ableauctions.com, Inc.,
a Florida corporation, which was renamed as “SinoCoking Coal and Coke Chemical
Industries, Inc.” (the post-Acquisition entity is referred to as
“SinoCoking”).
The
closing of the Acquisition is treated as a reverse acquisition which results in
the legal acquirer, Ableauctions, being treated as acquired by Top Favour under
the acquisition method.
Liquidation of
Ableauctions.com Business
Immediately
prior to the Acquisition, Ableauctions distributed all of its pre-Acquisition
assets relating to the former Ableauctions business (after payment or assignment
of liabilities) to Able (U.S.) Liquidating Trust, a liquidating trust for the
benefit of the pre-Acquisition shareholders of Ableauctions.
Reverse Stock Split and Name
Change
On the
closing date of the Acquisition, Ableauctions effected a 1-for-20 reverse stock
split of its common stock and changed its name to “SinoCoking Coal and Coke
Chemical Industries Inc.”
-23-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
Quotation on
Exchange
On
February 8, 2010, SinoCoking’s common stock began quotation on the
Over-the-Counter Bulletin Board under the new stock symbol
“SCOK”. On February 18, 2010, SinoCoking’s common stock
commenced trading on the NASDAQ Capital Market under the symbol
“SCOK”.
Equity
Financing
Simultaneously
with the Acquisition, on February 5, 2010, immediately following the 1-for-20
reverse stock split and share exchange, SinoCoking executed a private placement
financing in which it sold and issued $7,085,352 of its units, at a purchase
price of $6.00 per unit, to 34 non-U.S. investors. Each unit consists
of one (1) share of common stock and a warrant for the purchase of 0.5 shares of
common stock with an exercise price of $12.00 per share. The investor
warrants are exercisable for a period of five years from the date of
issuance.
In
connection with the private placement financing, on February 5, 2010 SinoCoking
entered into a Securities Purchase Agreement with 34 non-U.S. investors, and
executed and delivered the investor warrants. SinoCoking issued a
total of 1,180,892 shares of common stock, and warrants for the purchase of an
additional 590,446 shares of common stock, to investors in the private
placement.
The
Company has performed an evaluation of subsequent events through the date the
financial statements were issued. Except for the above, no other
material subsequent events have occurred since December 31, 2009 that are
required to be recorded or disclosed.
-24-