Attached files
file | filename |
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EX-31.1 - Hongli Clean Energy Technologies Corp. | v211676_ex31-1.htm |
EX-32.2 - Hongli Clean Energy Technologies Corp. | v211676_ex32-2.htm |
EX-31.2 - Hongli Clean Energy Technologies Corp. | v211676_ex31-2.htm |
EX-32.1 - Hongli Clean Energy Technologies Corp. | v211676_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
quarterly period ended December 31, 2010
¨
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
transition period from ___________ to ___________.
Commission
File Number 001-15931
SinoCoking Coal and Coke Chemical
Industries, Inc.
(Exact
name of issuer as specified in its charter)
Florida
(State or other jurisdiction of incorporation or
organization)
|
65-0420146
(I.R.S. employer identification number)
|
Kuanggong
Road and Tiyu Road 10th Floor,
Chengshi
Xin Yong She, Tiyu Road, Xinhua District,
Pingdingshan,
Henan Province, China 467000
(Address
of principal executive offices and zip code)
+86-3752882999
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.001 per
share
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every, Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
As of
February 11, 2011, the Registrant had 21,023,062 shares of common stock
outstanding.
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC.
TABLE OF
CONTENTS
Page
Number
|
||
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
3
|
|
PART
I. FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements
|
|
Consolidated
Balance Sheets as of December 31, 2010 (unaudited) and June 30,
2010
|
4
|
|
Consolidated
Statements of Income and Other Comprehensive Income for the Three and
Six Months Ended December 31, 2010 and 2009 (unaudited)
|
5
|
|
Consolidated
Statements of Shareholders' Equity
|
6
|
|
Consolidated
Statements of Cash Flows for the Six Months Ended December 31, 2010 and
2009 (unaudited)
|
7
|
|
Notes
to the Consolidated Financial Statements (unaudited)
|
8
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
40
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
52
|
Item
4.
|
Controls
and Procedures
|
53
|
PART
II. OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
55
|
Item
1A.
|
Risk
Factors
|
55
|
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
55
|
Item
3.
|
Defaults
Upon Senior Securities
|
55
|
Item
4.
|
Reserved
|
55
|
Item
5.
|
Other
Information
|
55
|
Item
6.
|
Exhibits
|
55
|
SIGNATURES
|
59
|
- 2
-
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
All
statements contained in this report, other than statements of historical facts,
that address future activities, events or developments, are forward-looking
statements, including, but not limited to, statements containing the words
“believe,” “anticipate,” “expect,” “project,” “may,” “might,” “will” and words
of similar import. These statements are based on certain assumptions
and analyses made by us in light of our experience and our assessment of
historical trends, current conditions and expected future developments as well
as other factors we believe are appropriate under the
circumstances. Whether actual results will conform to the
expectations and predictions of management, however, is subject to a number of
risks and uncertainties that may cause actual results to differ
materially. Such risks are in the section entitled “Risk Factors”
beginning on page 21 of our Annual Report on Form 10-K for the year ended
June 30, 2010 filed with the SEC on September 29, 2010.
Consequently,
all of the forward-looking statements made in this report are qualified by these
cautionary statements, and there can be no assurance that the actual results
anticipated by management will be realized or, even if substantially realized,
that they will have the expected consequences to or effects on our business
operations.
- 3
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
December 31,
|
June 30,
|
|||||||
2010
|
2010
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
|
$ | 4,958,570 | $ | 17,403,008 | ||||
Restricted
cash
|
27,629,000 | 22,902,000 | ||||||
Loans
receivable
|
2,069,485 | 2,513,308 | ||||||
Notes
receivable
|
180,747 | 1,045,830 | ||||||
Accounts
receivable, trade, net
|
15,912,667 | 5,304,684 | ||||||
Other
receivables
|
11,196,005 | 479,121 | ||||||
Other
receivables - related parties
|
- | 477,052 | ||||||
Inventories
|
2,062,284 | 2,261,816 | ||||||
Advances
to suppliers
|
9,873,028 | 5,509,780 | ||||||
Total
current assets
|
73,881,786 | 57,896,599 | ||||||
PLANT
AND EQUIPMENT, net
|
23,774,311 | 20,930,413 | ||||||
OTHER
ASSETS
|
||||||||
Prepayments
for land use rights
|
8,806,185 | 5,074,485 | ||||||
Prepayments
for mine acquisitions
|
16,708,007 | 8,858,398 | ||||||
Prepayments
for construction
|
14,398,366 | 16,789,806 | ||||||
Intangible
- land use rights, net
|
1,915,785 | 1,892,292 | ||||||
Intangible
- mineral rights, net
|
1,948,108 | 2,629,437 | ||||||
Other
assets
|
115,523 | 103,110 | ||||||
Total
other assets
|
43,891,974 | 35,347,528 | ||||||
Total
assets
|
$ | 141,548,071 | $ | 114,174,540 | ||||
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable, trade
|
$ | 528,187 | $ | 291,750 | ||||
Notes
payable
|
19,721,000 | 2,946,000 | ||||||
Short
term loans - bank
|
15,170,000 | 14,730,000 | ||||||
Short
term loans - others
|
- | 515,550 | ||||||
Other
payables and accrued liabilities
|
680,920 | 1,433,121 | ||||||
Other
payables - related party
|
291,031 | 51,381 | ||||||
Customer
deposits
|
133,293 | 106,830 | ||||||
Taxes
payable
|
2,457,227 | 1,229,019 | ||||||
Total
current liabilities
|
38,981,658 | 21,303,651 | ||||||
OTHER
LIABILITIES
|
||||||||
Warrant
derivative liability
|
29,282,791 | 30,436,087 | ||||||
Total
other liabilities
|
29,282,791 | 30,436,087 | ||||||
Total
liabilities
|
68,264,449 | 51,739,738 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Common
shares, $0.001 par value, 100,000,000 authorized,
|
||||||||
20,872,192
and 20,871,192 issued and outstanding as of
|
||||||||
December
31, 2010 and June 30, 2010, respectively
|
20,872 | 20,871 | ||||||
Additional
paid-in capital
|
79,706 | 67,269 | ||||||
Statutory
reserves
|
1,979,306 | 1,837,395 | ||||||
Retained
earnings
|
67,866,001 | 59,373,726 | ||||||
Accumulated
other comprehensive income
|
3,337,737 | 1,135,541 | ||||||
Total
shareholders' equity
|
73,283,622 | 62,434,802 | ||||||
Total
liabilities and shareholders' equity
|
$ | 141,548,071 | $ | 114,174,540 |
The
accompanying notes are an integral part of these consolidated financial
statements.
- 4
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND
OTHER COMPREHENSIVE INCOME
(UNAUDITED)
For the three months ended
|
For the six months ended
|
|||||||||||||||
December 31,
|
December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
REVENUE
|
$ | 16,745,332 | $ | 14,763,958 | $ | 29,753,794 | $ | 32,893,419 | ||||||||
COST
OF REVENUE
|
9,634,955 | 8,736,811 | 17,999,064 | 17,805,876 | ||||||||||||
GROSS
PROFIT
|
7,110,377 | 6,027,147 | 11,754,730 | 15,087,543 | ||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Selling
|
71,447 | 108,718 | 155,914 | 303,995 | ||||||||||||
General
and administrative
|
736,493 | 222,759 | 1,671,640 | 454,598 | ||||||||||||
Total
operating expenses
|
807,940 | 331,477 | 1,827,554 | 758,593 | ||||||||||||
INCOME
FROM OPERATIONS
|
6,302,437 | 5,695,670 | 9,927,176 | 14,328,950 | ||||||||||||
OTHER
INCOME (EXPENSE), NET
|
||||||||||||||||
Finance
expense, net
|
(513,106 | ) | (19,239 | ) | (570,056 | ) | (115,963 | ) | ||||||||
Other
expense, net
|
(52,689 | ) | - | (109,387 | ) | (189 | ) | |||||||||
Change
in fair value of warrants
|
(11,447,532 | ) | - | 1,472,143 | - | |||||||||||
Total
other income (expense), net
|
(12,013,327 | ) | (19,239 | ) | 792,700 | (116,152 | ) | |||||||||
INCOME(LOSS)
BEFORE INCOME TAXES
|
(5,710,890 | ) | 5,676,431 | 10,719,876 | 14,212,798 | |||||||||||
PROVISION
FOR INCOME TAXES
|
1,278,833 | 940,132 | 2,227,601 | 2,929,122 | ||||||||||||
NET
(LOSS) INCOME
|
(6,989,723 | ) | 4,736,299 | 8,492,275 | 11,283,676 | |||||||||||
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||
Foreign
currency translation adjustment
|
1,055,897 | 603 | 2,202,196 | 52,672 | ||||||||||||
COMPREHENSIVE
(LOSS) INCOME
|
$ | (5,933,826 | ) | $ | 4,736,902 | $ | 10,694,471 | $ | 11,336,348 | |||||||
WEIGHTED
AVERAGE NUMBER OF COMMON SHARE
|
||||||||||||||||
Basic
|
20,871,725 | 13,117,952 | 20,871,458 | 13,117,952 | ||||||||||||
Diluted
|
20,871,725 | 13,117,952 | 20,984,101 | 13,117,952 | ||||||||||||
EARNINGS
PER SHARE
|
||||||||||||||||
Basic
|
$ | (0.33 | ) | $ | 0.36 | $ | 0.41 | $ | 0.86 | |||||||
Diluted
|
$ | (0.33 | ) | $ | 0.36 | $ | 0.40 | $ | 0.86 |
The
accompanying notes are an integral part of these consolidated financial
statements.
- 5
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Retained earnings
|
other
|
||||||||||||||||||||||||||
Common Share
|
paid-in
|
Statutory
|
comprehensive
|
|||||||||||||||||||||||||
Shares
|
Par Value
|
capital
|
reserves
|
Unrestricted
|
income
|
Total
|
||||||||||||||||||||||
BALANCE,
June 30, 2009
|
13,117,952 | $ | 13,118 | $ | 3,531,959 | $ | 1,127,710 | $ | 29,754,451 | $ | 779,804 | $ | 35,207,042 | |||||||||||||||
Net
income
|
11,283,676 | 11,283,676 | ||||||||||||||||||||||||||
Adjustment
of statutory reserves
|
500,494 | (500,494 | ) | - | ||||||||||||||||||||||||
Foreign
currency translation adjustments
|
52,672 | 52,672 | ||||||||||||||||||||||||||
BALANCE,
December 31, 2009 (Unaudited)
|
13,117,952 | $ | 13,118 | $ | 3,531,959 | $ | 1,628,204 | $ | 40,537,633 | $ | 832,476 | $ | 46,543,390 | |||||||||||||||
Shares
and warrants issued in reverse merger recapitalization
|
405,710 | 406 | (406 | ) | - | |||||||||||||||||||||||
Shares
and warrants sold for cash
|
7,344,935 | 7,345 | 44,062,265 | 44,069,610 | ||||||||||||||||||||||||
Offering
costs related to shares and warrants sold
|
(12,015,273 | ) | (12,015,273 | ) | ||||||||||||||||||||||||
Warrants
issued reclassified to derivative liability
|
(35,578,543 | ) | (8,491,067 | ) | (44,069,610 | ) | ||||||||||||||||||||||
Cumulative
effect of reclassification of existing warrants
|
(631,002 | ) | (631,002 | ) | ||||||||||||||||||||||||
Fractional
shares due to the one-for-twenty reverse split
|
2,595 | 2 | (2 | ) | - | |||||||||||||||||||||||
Net
income
|
27,650,821 | 27,650,821 | ||||||||||||||||||||||||||
Adjustment
of Statutory reserve
|
209,191 | 307,341 | 516,532 | |||||||||||||||||||||||||
Imputed
interests on loans from related parties waived
|
67,269 | 67,269 | ||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
303,065 | 303,065 | ||||||||||||||||||||||||||
BALANCE,
June 30, 2010
|
20,871,192 | $ | 20,871 | $ | 67,269 | $ | 1,837,395 | $ | 59,373,726 | $ | 1,135,541 | $ | 62,434,802 | |||||||||||||||
Exercise
of warrants at $6.00
|
1,000 | 1 | 12,437 | 12,438 | ||||||||||||||||||||||||
Net
income
|
8,492,275 | 8,492,275 | ||||||||||||||||||||||||||
Adjustment
of statutory reserve
|
141,911 | 141,911 | ||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
2,202,196 | 2,202,196 | ||||||||||||||||||||||||||
BALANCE,
December 31, 2010 (Unaudited)
|
20,872,192 | 20,872 | 79,706 | 1,979,306 | 67,866,001 | 3,337,737 | 73,283,622 |
The
accompanying notes are an integral part of these consolidated financial
statements.
- 6
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(UNAUDITED)
For the six months ended
|
||||||||
December 31,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 8,492,275 | $ | 11,283,676 | ||||
Adjustments
to reconcile net income to cash
|
||||||||
(used
in) provided by operating activities:
|
||||||||
Depreciation
|
717,228 | 1,325,430 | ||||||
Amortization
and depletion
|
779,628 | 1,592,165 | ||||||
Bad
debt expense
|
31,324 | |||||||
Change
in fair value of warrants
|
(1,478,581 | ) | - | |||||
Warrants
granted for service
|
325,285 | - | ||||||
Reservation
of mine maintenance fee
|
141,911 | - | ||||||
Change
in operating assets and liabilities
|
||||||||
Notes
receivable
|
881,315 | (2,311,018 | ) | |||||
Accounts
receivable, trade
|
(10,274,564 | ) | (1,281,950 | ) | ||||
Other
receivables
|
(1,892,010 | ) | 17,942 | |||||
Inventories
|
262,624 | (1,296,469 | ) | |||||
Advances
to suppliers
|
(5,789,974 | ) | (2,336,606 | ) | ||||
Accounts
payable, trade
|
231,284 | 366,749 | ||||||
Other
payables and accrued liabilities
|
(780,044 | ) | 472,024 | |||||
Customer
deposits
|
22,882 | (878,460 | ) | |||||
Taxes
payable
|
1,171,547 | 213,551 | ||||||
Net
cash (used in) provided by operating activities
|
(7,157,870 | ) | 7,167,034 | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Principal
of loans receivable
|
(2,051,578 | ) | - | |||||
Repayment
of loans receivable
|
2,513,308 | - | ||||||
Payments
on equipment and construction-in-progress
|
(512,205 | ) | (3,130,138 | ) | ||||
Prepayment
on construction
|
(735,310 | ) | (1,173,120 | ) | ||||
Refunds
of construction prepayments
|
1,193,280 | - | ||||||
Prepayment
on land use rights
|
(3,520,176 | ) | - | |||||
Prepayments
on mine acquisitions
|
(7,458,000 | ) | - | |||||
Net
cash used in investing activities
|
(10,570,681 | ) | (4,303,258 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Shareholder
contribution
|
- | 9,946 | ||||||
Increase
in restricted cash
|
(4,474,800 | ) | - | |||||
Cash
proceeds from exercise of warrants
|
6,000 | - | ||||||
Cash
proceeds from notes payables
|
9,397,080 | - | ||||||
Repayments
to short-term loans
|
(522,060 | ) | (2,808,156 | ) | ||||
Proceeds
from related parties
|
710,189 | 962 | ||||||
Net
cash provided by (used in) financing activities
|
5,116,409 | (2,797,248 | ) | |||||
EFFECT
OF EXCHANGE RATE ON CASH
|
167,704 | 392 | ||||||
(DECREASE)
INCREASE IN CASH
|
(12,444,438 | ) | 66,920 | |||||
CASH,
beginning of period
|
17,403,008 | 278,399 | ||||||
CASH,
end of period
|
$ | 4,958,570 | $ | 345,319 | ||||
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
||||||||
Cash
paid for income tax
|
$ | 1,423,742 | $ | 2,940,950 | ||||
Cash
paid for interest expense
|
$ | 658,749 | $ | 79,067 | ||||
NON-CASH
TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES
|
||||||||
Notes
payables not delivered to payee
|
$ | 7,010,520 | $ | - | ||||
Transferred
from advances to suppliers to other receivable
|
$ | 1,652,321 | $ | - | ||||
Transferred
from Long-term prepayment to construction-in-progress
|
$ | 2,386,560 | $ | - |
The
accompanying notes are an integral part of these consolidated financial
statements.
- 7
-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Note
1 – Nature of business and organization
SinoCoking
Coal and Coke Chemical Industries, Inc. (“SinoCoking” or the “Company”) was
organized on September 30, 1996, under the laws of the State of Florida as “J.B.
Financial Services, Inc.” On July 19, 1999, the Company changed its name to
“Ableauctions.com, Inc.” On February 5, 2010, in connection with a share
exchange transaction as described below, the Company changed its name to
“SinoCoking Coal and Coke Chemical Industries, Inc.”
On
February 5, 2010, the Company completed a share exchange transaction with Top
Favour Limited (“Top Favour (BVI)”), and Top Favour (BVI) became a wholly-owned
subsidiary of the Company. In connection with the closing of the share exchange
transaction, all of the assets and liabilities of Ableauction.com, Inc’s former
business had been transferred to a liquidating trust, including the capital
stock of its former subsidiaries. After the share exchange transaction, Top
Favour (BVI)’s shareholders owned approximately 97% of the issued and
outstanding shares. The management members of Top Favour (BVI) became the
directors and officers of the Company. The share exchange transaction was
accounted for as a reverse acquisition and recapitalization and as a result, the
consolidated financial statements of the Company (the legal acquirer) is, in
substance, those of Top Favour (BVI) (the accounting acquirer), with the assets
and liabilities, and revenues and expenses, of the Company being included
effective from the date of the share exchange transaction. As the share exchange
transaction was accounted for as a reverse acquisition and recapitalization,
there was no gain or loss recognized on the transaction. The historical
financial statements for periods prior to February 5, 2010 are those of Top
Favour (BVI) except that the equity section and earnings per share have been
retroactively restated to reflect the reverse acquisition. See more details in
Note 3.
Top
Favour (BVI) 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 with a registered capital of $3,000,000 under the laws
of the People’s Republic of China (“PRC” or “China”), 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 PRC.
On
December 30, 2010, Hongli set up Henan Zhonghong Energy Investment Co., Ltd.
(“Zhonghong Investment”), a limited liability company under the PRC law, for the
purpose of engaging in coal mine acquisitions pursuant to a planned
joint-venture with a state-owned enterprise. The total registered capital of
Zhonghong Investment is approximately $1,500,000 (RMB 10,010,000), and as of
December 31, 2010, $455,100 (RMB 3,000,000) has been invested by Hongli, with
the balance of approximately $1,045,000 ( RMB 7,010,000) required to be invested
by December 20, 2015. The
equity interests of Zhonghong Investment are held by three nominees on behalf of
Hongli pursuant to share entrustment agreements. These nominees include Mr. Hui
Zheng, who is an officer of the Company, a Hongli employee, and an unrelated
party who serves as Zhonghong Investment’s general
manager.
- 8
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Note
2 – Summary of Significant Accounting Policies
Basis of
presentation
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 of results for
a full year. The information included in this Form 10-Q should be read
in conjunction with information included in the 2010 annual report on Form 10-K
for the fiscal year ended June 30, 2010.
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 subsidiaries – Top Favour (BVI) and Hongyuan, and
its VIEs – Hongli and its subsidiaries, including Zhonghong Investment. All
significant inter-company transactions and balances between the Company, its
subsidiaries and VIEs are eliminated upon consolidation.
In
accordance with the Financial Accounting Standards Board’s (“FASB”) accounting
standard for 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 a company is involved must
be evaluated to determine the primary beneficiary of the risks and rewards of
each VIE. The primary beneficiary of each VIE is required to consolidate such
VIE for financial reporting purposes. As a result of these Contractual
Arrangements, Top Favour (BVI) is the primary beneficiary of Hongli and its
subsidiaries because it is obligated to absorb a majority of the risk of loss
from their activities, and is able to receive a majority of their expected
residual returns.
ASC 810
addresses whether certain types of entities referred to as variable interest
entities, or VIEs, should be consolidated in a company’s consolidated financial
statements. These Contractual Arrangements entered into between Top Favour (BVI)
and Hongli through Hongyuan 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;
|
|
(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
|
- 9
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
|
(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 (BVI), Hongyuan and Hongli (including its subsidiaries) are under common
control, the Company’s corporate structure (including the Contractual
Arrangements) has been accounted for as a reorganization of entities, and the
consolidation of Top Favour (BVI), Hongyuan, Hongli and Hongli’s subsidiaries
has been accounted for at historical cost and prepared on the basis as if the
Contractual Agreements between Top Favour (BVI) and Hongli (through Hongyuan)
had become effective as of the beginning of the first period presented in the
accompanying consolidated financial statements.
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 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.
Stock-based
compensation
The
Company records share-based compensation expense based upon the grant date fair
value of share-based awards. The value of the award is principally recognized as
expense ratably over the requisite service periods. The Company uses the
Black-Scholes Merton (“BSM”) option-pricing model, which incorporates various
assumptions including volatility, expected life and interest rates to determine
fair value. The Company’s expected volatility assumption is based on the
historical volatility of Company’s stock. The expected life assumption is
primarily based on the simplified method of the terms of the options. The
risk-free interest rate for the expected term of the option is based on the
U.S. Treasury yield curve in effect at the time of grant.
Stock
compensation expense is recognized based on awards expected to
vest. GAAP requires forfeitures to be estimated at the time of grant
and revised in subsequent periods, if necessary, when actual forfeitures differ
from those estimates. There were no estimated forfeitures as the
Company has a short history of issuing options.
Revenue
recognition
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
and coke is loaded onto trains or trucks at one of the Company’s loading
facilities or at third party facilities. Coal and coke sales represent the
invoiced value of goods, net of a value-added tax (VAT), sales discounts and
actual returns at the time when product is sold to the
customer.
- 10
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Most, if
not all, of the electricity generated by Hongguang Power is typically used
internally by Baofeng Coking. Surplus electricity generated by
Hongguang Power is supplied to the national power grid as mandated by the local
utilities board. The value of the surplus electricity supplied, if
any, is calculated based on actual kilowatt-hours produced and
transmitted and at a fixed rate determined under contract.
Shipping and handling
costs
Shipping
and handling costs related to goods sold are included in selling expense.
Total shipping and handling costs amounted to $0 for the three and six
months ended December 30, 2010, and $4,109 and $15,326 for the three and six
months ended December 31, 2009, respectively.
Foreign currency translation
and other comprehensive income
The
reporting currency of the Company is the US dollar. The functional currency of
the Company and Top Favour (BVI) is the US dollar, whereas the functional
currency of its subsidiaries and VIEs in the PRC is the Chinese Renminbi
(RMB).
For the
subsidiaries and VIEs 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 period. 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 transaction 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. For the three and six months ended December 31, 2010 and
2009, the transaction gains and losses were not significant.
The
balance sheet amounts, with the exception of equity, at December 31, 2010 and
June 30, 2010 were translated at RMB 6.59 to $1 and RMB 6.79 to $1,
respectively. The average translation rates applied to income and cash flow
statement amounts for the three months ended December 31, 2010 and 2009 were at
RMB 6.65 to $1 and RMB 6.82 to $1, respectively, and at RMB 6.70 to $1 and RMB
6.82 to $1 for the six months ended December 31, 2010 and 2009,
respectively
Fair value of financial
instruments
The
Company uses the FASB’s 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:
- 11
-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
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
following table sets forth by level within the fair value hierarchy, those
financial assets and liabilities of the Company that were accounted for at fair
value on a recurring basis as of December 31, 2010:
|
Carrying Value at
December 31, 2010
|
Fair Value Measurement at
December 31, 2010
|
||||||||||||||
Level 1
|
Level 2
|
Level 3
|
||||||||||||||
Warrant
liability(unaudited)
|
$
|
29,282,791
|
$
|
—
|
$
|
$
|
29,282,791
|
The
Company’s warrants are not traded in an active securities market; therefore, the
Company estimated the fair value of its warrants using the Cox-Ross-Rubinstein
binomial model on December 31, 2010 and June 30, 2010, as
follows:
December 31,
2010
|
June 30, 2010
|
|||||||
(Unaudited)
|
||||||||
Number
of shares exercisable
|
4,125,609
|
4,076,609
|
||||||
Exercise
price
|
$
|
6.00-48.00
|
$
|
6.00-48.00
|
||||
Stock
price
|
$
|
11.97
|
$
|
12.30
|
||||
Expected
term(year)
|
4.10-6.28
|
4.61-6.78
|
||||||
Risk-free
interest rate
|
1.57-2.46
|
%
|
1.63-2.38
|
%
|
||||
Expected
volatility
|
80
|
%
|
80
|
%
|
Due to
the short trading history of the Company’s common stock, the expected volatility
is based primarily on other similar public companies’ historical volatilities,
which are traded on United States stock markets. Historical volatility was
computed using daily pricing observations for recent periods that correspond to
the term of the warrants. The Company believes this method produces an
estimate that is representative of the Company’s expectations of future
volatility over the expected term of these warrants. The Company currently has
no reason to believe future volatility over the expected remaining life of these
warrants is likely to differ materially from historical volatility. The
expected life is based on the remaining term of the warrants. The risk-free
interest rate is based on U.S. Treasury securities according to the remaining
term of the warrants.
In
addition to assets and liabilities that are recorded at fair value on a
recurring basis, the Company is required to record assets and liabilities at
fair value on a non-recurring basis. Generally, assets are recorded
at fair value on a non-recurring basis as a result of impairment
charges. For the three and six months ended December 31, 2010 and
2009, there were no impairment charges.
- 12
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
The
Company did not identify any other assets and liabilities that are required to
be presented on the consolidated balance sheets at fair value.
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 state owned banks within the PRC and with banks in Hong
Kong and in the United States of America.
Restricted
cash
Restricted
cash represent amounts set aside by the Company in accordance with the Company’s
debt agreements with certain financial institutions. These cash amounts are
designated for the purpose of paying down the principal amounts owed to the
financial institutions, and these amounts are held at the same financial
institutions with which the Company has debt agreements in the PRC. Due to the
short-term nature of the Company’s debt obligations to these banks, the
corresponding restricted cash balances have been classified as current in the
consolidated balance sheets.
Accounts receivables, trade,
net
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. 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.
Other
receivables
Other
receivables mainly include advances to employees for general business purpose
and other short term non-traded receivables from unrelated parties, primarily as
unsecured demand loans, with no state interest rate or due date. Management
regularly reviews aging of receivables and changes in payment trends and records
a reserve when management believes collection of amounts due are at risk.
Accounts considered uncollectible are written off.
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 in the Company’s
operations. The cost of finished goods included (1) direct costs of
raw materials, (2) direct labor, (3) indirect production costs, such as
allocable utilities cost, and (4) indirect labor related to the production
activities, such as assembling and packaging. Management compares the cost of
inventories with the market value and an allowance is made for writing down the
inventory to its market value, if lower than cost. On an ongoing basis,
inventories are reviewed for potential write-down for estimated obsolescence or
unmarketable inventories equal to the difference between the costs of
inventories and the estimated net realizable value based upon forecasts for
future demand and market conditions. When inventories are written-down to the
lower of cost or market, it is not marked up subsequently based on changes in
underlying facts and circumstances. As of December 31, 2010 and June 30,
2010, management believed that no allowance for inventory valuation was deemed
necessary.
- 13
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Advances to
suppliers
The
Company advances money to certain suppliers for raw material purchases and in
connection with construction contracts. These advances are interest-free and
unsecured.
Plant and equipment,
net
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 the useful life are capitalized. When items
of plant and equipment are retired or otherwise disposed, 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
|
20
years
|
Machinery
and equipment
|
10-20
years
|
Other
equipment
|
1-5
years
|
Transportation
equipment
|
5-7
years
|
Construction-in-progress
(“CIP”) includes direct costs of construction for the Company’s new coking
factory. Interest incurred during the period of construction, if material, is
capitalized. For the three and six months ended December 31, 2010, $94,963
and $140,120 in interest was capitalized into CIP, respectively. For the three
and six months ended December 31, 2009, no interest was capitalized into
CIP. All other interest is expensed as incurred. CIP 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 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 quarterly 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 tones. The Company’s coal reserves
are controlled through direct ownership which generally lasts until the
recoverable reserves are depleted.
- 14
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
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 with the 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 December 31, 2010 and June 30, 2010,
there was no impairment of long lived assets.
Asset retirement cost and
obligations
The
Company adopted the accounting standard to account for the asset retirement cost
and obligations to retire tangible long-lived assets. This standard generally
requires that the Company’s legal obligations associated with the retirement of
long-lived assets are recognized at fair value at the time the obligations are
incurred. Obligations are incurred at the time development of a mine commences
for underground mines or construction begins for support facilities, refuse
areas and slurry ponds. If an entity has a conditional asset retirement
obligation, a liability should be recognized when the fair value of the
obligations can be reasonably estimated.
The
obligation’s fair value is determined using discounted cash flow techniques and
is accreted over time to its expected settlement value. Upon initial recognition
of a liability, a corresponding amount is capitalized as part of the carrying
amount of the related long-lived asset. Amortization of the related asset is
calculated on a unit-of-production method by amortizing the total estimated cost
over the salable reserves as determined under Securities and Exchange Commission
(“SEC”) Industry Guide 7, multiplied by the production during the
period.
Asset
retirement costs generally include the cost of reclamation (the process of
bringing the land back to its natural state after completion of exploration
activities) and environmental remediation (the physical activity of taking steps
to remediate, or remedy, any environmental damage caused).
In May
2009, Henan Province’s Bureau of Finance and Bureau of Land and Resource issued
Regulations for Mine Environment Control and Environment Recovery which require
mining companies to file an Evaluation Report Regarding Mining Environmental
Impact (“Evaluation Report”) before December 31, 2010. The corresponding
authorities will determine whether to approve the Evaluation Report after
performing on-site investigation, and the asset retirement obligation will be
determined by the authorities based on the approved filing.
The
Company did not record such asset retirement obligation as of December 31, 2010
and June 30, 2010 because the Company did not have sufficient information to
reasonably estimate the fair value of such obligation. The range of time over
which the Company may settle the obligation is unknown and cannot be reasonably
estimated. In addition, the settlement method for the obligation cannot be
reasonably determined. The amount of the obligation to be determined by the
government authorities is affected by several factors, such as the extent of
remediation required in and around the mining area, the methods to be used to
remediate the mining site, and government grants which may or may not be
credited to the mining companies.
- 15
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
The
Company will recognize the liability in the period in which sufficient
information is available to reasonably estimate its fair value.
Income
taxes
Income
taxes provided 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 probably 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 related to items credited or charged directly to
equity, in which case the deferred tax is also dealt with in
equity.
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
being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. Penalties and interest incurred related to underpayment of income tax
are classified as income tax expense in the period incurred. No
significant penalties or interest relating to income taxes have been incurred
during the three and six months ended December 31, 2010 and 2009. GAAP
also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures and
transition.
Chinese income
taxes
The
Company’s subsidiary and VIEs operating in the PRC are governed by the income
tax laws of the PRC and various local income tax laws, and are
generally subject to an income tax at a statutory rate of 25% of taxable income,
which is based on the net income reported in the statutory financial statements
after appropriate tax adjustment.
Value added
tax
Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s coal and coke products that are sold in
the PRC are subject to a Chinese VAT at a rate of 17% of the gross sales
price. This VAT may be offset by VAT paid by the Company on raw
materials and other materials included in the cost of producing its 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.
Warrant derivative
liability
A
contract is designated as an asset or a liability and is carried at fair value
on a company’s balance sheet, with any changes in fair value recorded in a
company’s results of operations. The company then determines which
options, warrants and embedded features require liability accounting and records
the fair value as a derivative liability. The changes in the values of these
instruments are shown in the accompanying consolidated statements of operations
and other comprehensive income as “change in fair value of
warrants”.
- 16
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Due to
the reverse merger on February 5, 2010 (Note 1), the Company adopted the
provisions of an accounting standard regarding instruments that are indexed to
an entity’s own stock. This accounting standard specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to a company’s own stock and (b) classified in stockholders’ equity
in the statement of financial position, would not be considered a derivative
financial instrument. It provides a new two-step model to be applied
in determining whether a financial instrument or an embedded feature is indexed
to an issuer’s own stock and thus able to qualify for the scope exception within
the standards. As a result of the adoption of this accounting
standard, all warrants issued by the Company after the February 5, 2010 reverse
acquisition were recorded as derivative liability because their strike price is
denominated in US dollar, a currency other than the Company’s functional
currency, the RMB.
Similarly,
warrants issued prior to February 5, 2010 and previously treated as equity
pursuant to the derivative treatment exemption are no longer afforded equity
treatment because their strike price is also denominated in US dollar and can no
longer be considered indexed to the Company’s own stock. As such, all future
changes in the fair value of these warrants will be recognized currently in
earnings until such time as they are exercised or expire. The Company has
reclassified the fair value of these warrants, $631,002, from equity to
liability status as if they were treated as a derivative liability at February
5, 2010.
Earnings per
share
The
Company reports earnings per share in accordance with the provisions of FASB’s
related accounting standard. This standard requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock. Dilution is computed by applying the treasury stock method.
Under this method, option and warrants were assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), and as if funds
obtained thereby were used to purchase common stock at the average market price
during the period.
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 statement that is presented with
the same prominence as other financial statements. The Company's only current
component of comprehensive income is the foreign currency translation
adjustments.
- 17
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
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.
Recently issued accounting
pronouncements
In April
2010, the FASB issued ASU 2010-13, “Compensation—Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades,” or ASU
2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an
employee share-based payment award with an exercise price denominated in
currency of a market in which a substantial porting of the entity’s equity
securities trades should not be considered to contain a condition that is not a
market, performance, or service condition. Therefore, an entity would not
classify such an award as a liability if it otherwise qualifies as equity. The
amendments in this Update are effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15,
2010. The Company is currently evaluating the impact of this ASU;
however, the Company does not expect the adoption of this ASU will have a
material impact on its consolidated financial statements.
In July
2010, the FASB issued ASU 2010-20 which amends “Receivables” (Topic 310). ASU
2010-20 is intended to provide additional information to assist financial
statement users in assessing an entity’s risk exposures and evaluating the
adequacy of its allowance for credit losses. The disclosures as of the end of a
reporting period are effective for interim and annual reporting periods ending
on or after December 15, 2010. The disclosures about activity that occurs during
a reporting period are effective for interim and annual reporting periods
beginning on or after December 15, 2010. The amendments in ASU 2010-20
encourage, but do not require, comparative disclosures for earlier reporting
periods that ended before initial adoption. However, an entity should provide
comparative disclosures for those reporting periods ending after initial
adoption. While ASU 2010-20 will not have a material impact on our consolidated
financial statements, we expect that it will expand our disclosures related to
Loans receivable.
In
December 2010, the FASB issued ASU 2010-28 which amend “Intangibles- Goodwill
and Other” (Topic 350). The ASU modifies Step 1 of the goodwill impairment test
for reporting units with zero or negative carrying amounts. For those reporting
entities, they are required to perform Step 2 of the goodwill impairment test if
it is more likely than not that a goodwill impairment exists. An entity should
consider whether there are any adverse qualitative factors indicating that
impairment may exist. The qualitative factors are consistent with the existing
guidance in Topic 350, which requires that goodwill of a reporting unit be
tested for impairment between annual tests if an event occurs or circumstances
changes that would more likely than not reduce the faire value of a reporting
unit below its carrying amount. ASU 2010-28 is effective for fiscal years, and
interim periods within those years beginning after December 15, 2010. Early
adoption is not permitted. The Company is currently evaluating the impact of
this ASU; however, the Company does not expect the adoption of this
ASU will have a material impact on its consolidated financial
statements.
- 18
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
In
December 2010, the FASB issued ASU 2010-29 which address diversity in practice
about the interpretation of the pro forma revenue and earnings disclosure
requirements for business combinations (Topic 805). This ASU specifies that if a
public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. This ASU also
expands the supplemental pro forma disclosures under Topic 805 to include a
description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the
reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2010. Early adoption is permitted. The Company is currently evaluating the
impact of this ASU and expected the adoption of this ASU will have an
impact on its future business combinations.
Note
3 - Business reorganization
As
described in Note 1, on February 5, 2010, the Company (then known as
Ableacutions.com, Inc) completed a share exchange transaction with Top Favour
(BVI), and Top Favour (BVI) became a wholly-owned subsidiary of the Company. In
connection with the closing of the share exchange transaction, all of the assets
and liabilities of Ableauction.com, Inc.’s former business were transferred to a
liquidating trust, including the capital stock of its former subsidiaries. On
the closing date of the share exchange transaction, the Company issued
13,117,952 shares of its common stock to Top Favour (BVI)’s shareholders in
exchange for 100% of the capital stock of Top Favour (BVI). Prior to the share
exchange transaction, the Company had 405,710 shares of common stock issued and
outstanding. After the share exchange transaction, the Company had 13,523,662
shares of common stock outstanding, and Top Favour (BVI)’s shareholders owned
approximately 97% of the issued and outstanding shares. Acquisition-related
costs incurred to effect the business combination, including finder’s
fee and advisory, legal, accounting, valuation, and other professional and
consulting fees, were $1,127,612 and accounted for as expense as of June 30,
2010.
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 operating
within one reportable segment. All of the Company’s products are sold within the
PRC. Major products and their respective revenues for the three and
six months ended December 31, 2010 and 2009 are summarized as
follows:
Three months ended December 31,
|
Six months ended December 31,
|
|||||||||||||||
2010
(unaudited)
|
2009
(unaudited)
|
2010
(unaudited)
|
2009
(unaudited)
|
|||||||||||||
Coke
|
$ | 8,732,427 | $ | 8,139,941 | $ | 17,441,572 | $ | 13,857,540 | ||||||||
Coal
Tar
|
806,932 | 334,808 | 1,222,770 | 595,612 | ||||||||||||
Raw
coal
|
2,852,070 | 6,289,209 | 5,515,662 | 11,411,338 | ||||||||||||
Washed
coal
|
4,353,903 | - | 5,573,790 | 7,028,929 | ||||||||||||
Total
|
$ | 16,745,332 | $ | 14,763,958 | $ | 29,753,794 | $ | 32,893,419 |
- 19
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Note
5 – 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’s 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. Balances at financial
institutions located in Hong Kong may, from time to time, exceed Hong Kong
Deposit Protection Board insured limits. As of December 31, 2010 and
June 30, 2010, the Company had cash deposits, including restricted cash, which
were not covered by insurance of $32,489,917 and $39,791,148, respectively. The
Company has not experienced any losses in such accounts as of December 31,
2010.
For the
three and six months ended December 31, 2010 and 2009, all of the Company’s
sales and account receivables were generated in the PRC.
For the
three months ended December 31, 2010, 87.2% of the Company’s total revenue was
from three major customers who individually accounted for 53.3%, 21.9%, and
12.0% of total revenue respectively. For the six months ended December 31, 2010,
91.3% of the Company’s total revenue was from the same three major customers who
individually accounted for 50.4%, 25.3%, and 15.6% of total revenue,
respectively. Accounts receivable of these three customers were 52.1%, 27.4%,
and 9.7% of the total accounts receivable balance at December 31, 2010,
respectively. For
the three months ended December 31, 2009, 81.2% of the Company’s total revenue
was from three major customers who individually accounted for 40.6%,
28.1%, and 12.5% of total revenue respectively. For the six months ended
December 31, 2009, 87.5% of the Company’s total revenue was from three major
customers who individually accounted for 25.4%, 50.5%, and 11.6% of total
revenue respectively.
Note
6 – Loans receivable
Separately
on March 22, May 8 and August 1, 2010, the Company loaned the same third-party
company $1,013,308, $1,500,000, and $1,000,000, respectively. These loans are
due on demand, are unsecured, and carry an annual interest rate of 3%.
$2,513,308 was repaid as of December 31, 2010.
On
September 27, 2010, the Company loaned $1,069,485 (RMB 7,050,000) to another
unrelated company. This loan is due on March 26, 2011, is unsecured, and carries
an annual interest rate of 5%.
- 20
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
As of
December 31, 2010 and June 30, 2010, loans receivables amounted to $2,069,485
and $2,513,308, respectively.
Note
7 – Notes receivable
Notes
receivable represent trade accounts receivable due from various customers which
payments are guaranteed by their banks. The amount is non-interest bearing and
normally paid within three to nine months. The Company may request a bank for
payment in advance of scheduled payment date. However, such early request will
incur an interest charge and a processing fee. Notes receivable amounted to
$180,747 and $1,045,830 as of December 31, 2010 and June 30, 2010,
respectively.
Note
8 - Accounts receivable, trade, net
Accounts
receivable as of December 31, 2010 and June 30, 2010 consisted of the
following:
December 31,
2010
(Unaudited)
|
June 30,
2010
|
|||||||
Accounts
receivable
|
$
|
15,912,667
|
$
|
5,304,900
|
||||
Allowance
for bad debt
|
-
|
216
|
||||||
Accounts
receivable, trade, net
|
$
|
15,912,667
|
$
|
5,304,684
|
For the
three and six months ended September 30, 2010 and 2009, the Company did not
write off any uncollectible receivables. As of December 31, 2010 and
June 30, 2010, management recorded a reserve for allowance for doubtful accounts
of $0 and $216, respectively.
Note
9 – Other receivables
Other
receivables as of December 31, 2010 and June 30, 2010 consisted of the
following:
December 31,
2010
(Unaudited)
|
June 30,
2010
|
|||||||
Receivables
related to notes payable
|
$ | 9,405,400 | $ | - | ||||
Prepayment
to be refunded due to cancellation of contracts
|
1,680,458 | 209,166 | ||||||
Receivables
from an unrelated company
|
- | 154,381 | ||||||
Advances
to employees
|
110,147 | 115,574 | ||||||
Other receivables
|
$ | 11,196,005 | $ | 479,121 |
The
Company obtained $11,832,600 (RMB78 million) in notes payable from a bank, of
which notes amounting to $7,129,900 were held by the Company and not delivered
to the payee as of December 31, 2010. In addition, the Company paid
$2,275,500 (RMB15 million) to an unrelated company in December 2010 as
collateral for this unrelated company to apply for bank notes of $4,551,000
(RMB30,000,000) on behalf of the Company. As of December 31, 2010, no bank notes
were issued under such arrangement.
- 21
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
The
Company cancelled coal purchase agreements with two vendors during the quarter
ended September 30, 2010, and in December 2010, the Company temporarily
cancelled its monthly purchase order with Zhengzhou Coal Group.
$1,680,458 of the Company’s prepayment to the Zhengzhou Coal Group was
refunded in January 2011. As of December 31, 2010 and June 30, 2010, balance of
prepayment to be refunded amounted to $1,680,458 and $209,166,
respectively.
The
Company advanced money to a vendor without interest. Receivables from this
vendor amounted to $0 and $154,381 at December 31, 2010 and June 30, 2010,
respectively.
For the
three and six months ended December 31, 2010 and 2009, the Company wrote off
$31,324 and $0 in uncollectible receivables. Management believes all
other receivables were collectible as of December 31, 2010 and June 30,
2010.
Note
10 – Inventories
Inventories
as of December 31, 2010 and June 30, 2010 consisted of the
following:
December 31,
2010
(Unaudited)
|
June 30,
2010
|
|||||||
Raw
materials
|
$
|
389,560
|
$
|
157,717
|
||||
Work
in process
|
520,681
|
587,886
|
||||||
Supplies
|
69,868
|
21,744
|
||||||
Finished
goods
|
1,082,175
|
1,494,469
|
||||||
Total
|
$
|
2,062,284
|
$
|
2,261,816
|
Advances
to suppliers are money deposited with or advanced to unrelated vendors for
future inventory purchases, mainly of raw coal. Most of the Company’s vendors
require a certain amount of money to be deposited with them as a guarantee that
the Company will receive its purchases on a timely basis and with favorable
pricing.
Advances
to suppliers as of December 31, 2010 and June 30, 2010 amounted to $9,873,028
and $5,509,780, respectively.
Note
12 – Prepayments
Prepayment for land use
rights
Prepayment
for land use rights is money advanced for land use rights to expand the site of
the Company’s new coking factory. As of December 31, 2010, prepayment for land
use rights amounted to $8,806,185 paid to residents who previously occupied the
land, and the prepayment is not refundable. The land use rights are expected to
be acquired by June 2011 at an estimated cost of $10,627,000 (RMB 70,
050,000).
- 22
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Prepayment for mine
acquisitions
As of
December 31, 2010, the Company prepaid $12,157,007 in the aggregate
in connection with ongoing coal mine acquisitions, including
$6,089,007 (RMB40,138,477) to four potential targets to access and examine their
books and records, and $6,068,000 (RMB40,000,000) to two companies for which the
Company has entered into acquisition agreements (see Note 23). No acquisition
was completed as of December 31, 2010.
Additionally,
in December 2010, the Company deposited $4,551,000 (RMB 30,000,000) with Henan
Province Coal Seam Gas Development and Utilization Co., Ltd., a state-owned
enterprise and qualified provincial-level mine consolidator, in connection with
a planned joint venture for the purpose of acquiring coal mines within Henan
Province (see Note 1 regarding Zhonghong Investment).
As of
December 31, 2010 and June 30, 2010, prepayment for mine acquisitions amounted
to $16,708,007 and $8,858,398, respectively.
Prepayment for
construction
Prepayment
for construction includes money advanced to contractors and equipment
suppliers in connection with the new coking factory under
construction.
In
addition, the Company made prepayment of approximately $1.2million (RMB 8
million) during the year ended June 30, 2010 to improve the existing mining
tunnel at the Company’s
mine. As of December 31, 2010, this project had not commenced.
The total
contract price of construction for the new coking factory and the tunnel
improvement amounted to approximately $36.4 million. Prepayments for
construction, as of December 31, 2010 and June 30, 2010, amounted to $14,398,366
and $16,789,806, respectively.
Note
13 –Plant and equipment, net
Plant and
equipment as of December 31, 2010 and June 30, 2010 consisted of the
following:
December 31,
2010
(unaudited)
|
June 30,
2010
|
|||||||
Buildings
and improvements
|
$
|
10,375,720
|
$
|
10,074,777
|
||||
Mine
development cost
|
10,961,891
|
10,643,945
|
||||||
Machinery
and equipment
|
5,847,890
|
5,678,274
|
||||||
Other
equipment
|
539,651
|
482,716
|
||||||
Total
|
27,725,152
|
26,879,712
|
||||||
Less
accumulated depreciation
|
(10,800,652
|
)
|
(9,779,099
|
)
|
||||
Construction-in-progress
|
6,849,811
|
3,829,800
|
||||||
Total,
net
|
$
|
23,774,311
|
$
|
20,930,413
|
Depreciation
expense amounted to $303,534 and $612,088 for the three months ended December
31, 2010 and 2009, respectively, and $717,228 and $1,325,430 for the six months
ended December 31, 2010 and 2009, respectively
- 23
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Construction-in-progress
(“CIP”) at December 31, 2010 refers to the ongoing construction of the new
coking factory. No depreciation is provided for CIP until such time the assets
are completed and placed into service.
Total in CIP
|
Estimate cost to
|
Estimated
|
Estimated
|
||||||||||
Project
|
as of 12/31/2010
|
Complete
|
Total Cost
|
Completion Date
|
|||||||||
New
coking factory
|
$
|
6,849,811
|
$
|
42,331,189
|
$
|
49,181,000
|
June 2011
|
Note
14 – Intangible – land use rights, net
“Land use
rights, net” consisted of the following as of December 31, 2010 and June 30,
2010:
December 31,
2010
(Unaudited)
|
June 30,
2010
|
|||||||
Land
use rights
|
$
|
2,378,216
|
$
|
2,309,237
|
||||
Accumulated
amortization
|
(462,431
|
)
|
(416,945
|
)
|
||||
Total
land use rights, net
|
$
|
1,915,785
|
$
|
1,892,292
|
Amortization
expense for the three and six months ended December 31, 2010 amounted to $16,376
and $32,478, respectively, and $15,961 and $31,922 for the three and six months
ended December 31, 2009, respectively.
Amortization
expense for the next five years and thereafter is as follows:
Year ended June 30,
|
Amortization
Expense
|
|||
2011
|
$
|
33,031
|
||
2012
|
66,062
|
|||
2013
|
66,062
|
|||
2014
|
66,062
|
|||
2015
|
66,062
|
|||
Thereafter
|
1,618,506
|
|||
Total
|
$
|
1,915,785
|
Note
15 – Intangible - mineral rights, net
“Mineral
rights, net” consisted of the followings as of December 31, 2010 and June 30,
2010.
December 31,
2010
(unaudited)
|
June 30,
2010
|
|||||||
Mineral
rights
|
$
|
13,566,879
|
$
|
13,173,377
|
||||
Accumulated
depletion
|
(11,618,771
|
)
|
(10,543,940
|
)
|
||||
Total,
net
|
$
|
1,948,108
|
$
|
2,629,437
|
- 24
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Depletion
expense for the three and six months ended December 31, 2010 amounted to
$376,731 and $747,150, respectively, and $577,057 and $1,560,243 for the three
and six months ended December 31, 2009, respectively. Depletion expense was
charged to cost of revenue in the period incurred using unit-of-production
method.
Note
16 – Notes payable
Notes
payable represent secured credit extended by banks. When purchasing raw
materials, the Company often issues a short-term note payable in lieu of cash to
the vendor based on such credit. Such short-term note payable is guaranteed by
the bank from which credit it is based for its complete face value through
a letter of credit, and matures within three to six months of
issuance.
Each bank
requires the Company to deposit 50% of the notes payable balance at the bank as
a guarantee deposit, which is classified on the balance sheet as restricted
cash. In addition, the notes payables are guaranteed either by the Company’s
Chief Executive Officer, Hongli or an unrelated company. The bank also charges a
processing fee based on 0.05% of the face value of the note. Notes payable as of
December 31, 2010 consisted of the following:
Issuing bank
|
Amount
|
From
|
To
|
Restricted
cash
|
Other guarantee
|
|||||||
Shanghai
Pudong Development bank (1)
|
$ | 3,034,000 |
12/01/2010
|
2/28/2011
|
$ | 1,517,000 |
Hongli
and CEO
|
|||||
Pingdingshan
Rural Cooperative Bank(1)
|
4,551,000 |
7/2/2010
|
1/2/2011
|
2,275,500 |
An
un-related company
|
|||||||
Pingdingshan
Rural Cooperative Bank(1)
|
4,551,000 |
7/22/2010
|
1/22/2011
|
2,275,500 |
An
un-related company
|
|||||||
Pingdingshan
Rural Cooperative Bank
|
4,551,000 |
8/18/2010
|
2/18/2011
|
2,275,500 |
An
un-related company
|
|||||||
Pingdingshan
Rural Cooperative Bank
|
3,034,000 |
8/27/2010
|
2/27/2011
|
2,275,500 |
An
un-related company
|
|||||||
Total
|
$ | 19,721,000 | $ | 10,619,000 |
(1)
|
In
January 2011, the Company repaid matured notes of
$12,136,000.
|
On
January 7, 2011, Hongli entered into a Bank Acceptance Agreement with
Pingdingshan Rural Cooperative Bank and obtained a line of credit of $30.3
million (RMB 200 million) (see Note 28). The Company’s notes payable issued
based on its credit arrangement with this bank that were outstanding as of such
date counted against this credit line. As of December 31, 2010, the Company had
$16,687,000 of such notes payable outstanding.
As of
December 31, 2010 and June 30, 2010, total notes payable amounted to $19,721,000
and $2,946,000, respectively, and the corresponding restricted cash was
$10,619,000 and $5,892,000, respectively.
- 25
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Note
17 – 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.
Short-term loans -
Bank
The
Company had short-term bank loans of $15,170,000 and $14,730,000 in the
aggregate at December 31, 2010 and June 30, 2010, respectively.
On May
30, 2010, Hongyuan entered a one-year loan agreement with a local bank to borrow
$15,170,000 (RMB 100 million) with annual interest rate of 4.301%,
or 90% of the interest rate of the same-term bank loan announced by
the People’s Bank of China, which was 4.779% at the time of signing the loan
agreement and at December 31, 2010. This bank loan matures on May 30,
2011, and collateral was pledged by Top Favour (BVI) through a bank deposit
with the same bank of $17,010,000 with annual interest rate of 1.3%. The
loan was also guaranteed by the Company’s Chief Executive
Officer.
In
connection with this one-year bank loan, on May 15, 2010, the Company entered
into a forward currency exchange contract with a local bank. Pursuant to the
agreement, the Company was able, at its option, to exchange $20,000,000 into RMB
at the exchange rate at $1 to RMB6.7 on October 31, 2010. The Company did not
execute such option.
Weighted
average interest rate was 4.99% and 6.70% for the three months ended December
31, 2010 and 2009, respectively. Total interest expense on short-term loans for
the three months ended December 31, 2010 and 2009 amounted to $188,081 and
$19,933, respectively, of which $94,963 and $0 was capitalized into CIP,
respectively.
Weighted
average interest rate was 4.94% and 9.11% for the six months ended December 31,
2010 and 2009, respectively. Total interest expense on short-term loans for the
six months ended December 31, 2010 and 2009 amounted to $411,306 and $116,657,
respectively, of which $140,120 and $0 was capitalized into CIP,
respectively.
Note
18 – Other payables and accrued liabilities
Other
payables mainly consisted of customer deposits to be returned, and accrued
liabilities mainly consist of salaries, utilities, professional fees and other
general and administrative expenses incurred.
Other
payables and accrued liabilities consisted of the following as of December 31,
2010 and June 30, 2010:
December
31,2010
(unaudited)
|
June 30, 2010
|
|||||||
Customer
deposits to be returned
|
$
|
-
|
$
|
823,241
|
||||
Accrued
liabilities
|
680,920
|
609,880
|
||||||
Total
|
$
|
680,920
|
$
|
1,433,121
|
- 26
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Note
19 – Taxes
Income
tax
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.
SinoCoking
is subject to the United States federal income tax provisions. Top Favour (BVI),
however, is a tax-exempt company incorporated in the British Virgin Islands, and
conducts all of its business through its subsidiaries and VIEs, namely,
Hongyuan, Hongli, Baofeng Coking, Hongchang Coal, Hongguang Power and Zhonghong
Investment.
Hongyuan,
Hongli, Baofeng Coking, Hongchang Coal, Hongguang Power and Zhonghong Investment
are subject to 25% enterprise income tax rate in China.
As
approved by the local tax bureau, Hongchang Coal owed total income tax of
approximately $382,000 for each of the 12-month periods ended December 31, 2010
and 2009, irrespective of the actual taxable income during these
periods.
The
estimated tax savings for the three months ended December 31, 2010 and 2009 due
to the foregoing preferential tax treatment amounted to $402,047 and
$517,531, respectively. If statutory income tax had been applied, the
Company would have had to increase basic and diluted loss per share from $0.33
to $0.35 for the three months ended December 31, 2010, and decrease basic and
diluted earnings per share from $0.36 to $0.32 for the three months ended
December 31, 2009.
The
estimated tax savings for the six months ended December 30, 2010 and 2009 due to
the foregoing preferential tax treatment amounted to $562,665 and $695,344,
respectively. If statutory income tax had been applied, the Company would
have had to decrease basic and diluted earnings per share from $0.41 and $0.40,
respectively, to $0.38 for the six months ended December 31, 2010, and decreased
basic and diluted earnings per share from $0.86 to $0.81 for the six months
ended December 31, 2009.
The
provision for income taxes consisted of the following for the three and six
months ended December 31, 2010 and 2009:
- 27
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
For the three months ended
December 31,
|
For the six months ended
December 31,
|
|||||||||||||||
2010
(unaudited)
|
2009
(unaudited)
|
2010
(unaudited)
|
2009
(unaudited)
|
|||||||||||||
US
current income tax expense
|
$ | - | $ | - | $ | - | $ | - | ||||||||
BVI
current income tax expense
|
- | - | - | - | ||||||||||||
PRC
current income tax expense
|
1,278,833 | 940,132 | 2,227,601 | 2,929,122 | ||||||||||||
Total
provision for income taxes
|
$ | 1,278,833 | $ | 940,132 | $ | 2,227,601 | $ | 2,929,122 |
The
following table reconciles the statutory rates to the Company’s effective tax
rate for the three and six months ended December 31, 2010 and 2009:
Three months ended
December 31,
|
Six months ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||
U.S.
Statutory rate
|
34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | ||||||||
Foreign
income not recognized in U.S.A
|
(34.0 | )% | (34.0 | )% | (34.0 | ) % | (34.0 | ) % | ||||||||
BVI
income tax
|
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
PRC
income tax
|
25.0 | % | 25.0 | % | 25.0 | % | 25.0 | % | ||||||||
China
income tax exemption
|
(6.0 | )% | (8.9 | )% | (5.0 | ) % | (4.6 | ) % | ||||||||
Other
item
|
(41.4 | )% (1) | 0.5 | % (2) | 0.8 | % (3) | 0.2 | % (2) | ||||||||
Effective
rate
|
(22.4 | ) % | 16.6 | % | 20.8 | % | 20.6 | % |
(1)
|
Mainly
represents loss on change in fair value of warrants of $11,447,532, which
did not provide a tax benefit to the
Company.
|
(2)
|
Mainly
represents operating losses incurred by Hongguang Power and Hongchang Coal
for such periods. Management believes such losses may not be
recovered through future
operations.
|
(3)
|
Mainly
represents gain on change in fair value of warrants of $1,472,143 which
was not subject to income tax.
|
SinoCoking
is incorporated in the U.S. and has incurred a net operating loss for income tax
purposes for 2010. As of December 31, 2010, the estimated net operating loss
carryforwards for U.S. income tax purposes was approximately $1,299,000 which
may be available to reduce future years’ taxable income. These
carryforwards expire, if not utilized, beginning in 2010 and will continue
through 2030. Management believes that the realization of the benefits arising
from this loss appears to be uncertain due to the Company’s limited operating
history and continuing losses for U.S. income tax purposes. Accordingly, the
Company has provided a 100% valuation allowance at December 31, 2010. The
valuation allowance at December 31, 2010 was approximately $442,000. Management
reviews this valuation allowance periodically and makes adjustments as
necessary.
- 28
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $24.4 million as of December 31, 2010, which was included in
consolidated retained earnings and will continue to be reinvested in its
operations in the PRC. Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
Value added
tax
The
Company incurred VAT on sales and VAT on purchases in the PRC amounting to
$3,318,650 and $1,885,137 for the three months ended December 31, 2010,
respectively, and $3,292,017 and $843,375 for the three months ended December
31, 2009, respectively.
The
Company incurred VAT on sales and VAT on purchases in the PRC amounting to
$5,978,296 and $3,301,456 for the six months ended December 31, 2010,
respectively, and $6,608,364 and $2,521,353 for the six months ended December
31, 2009, respectively.
Sales and
purchases are recorded net of VAT collected and paid, as the Company acts as an
agent for the government. VAT is not impacted by income tax
holiday.
Taxes
payable
Taxes
payable as of December 31, 2010 and June 30, 2010 consisted of the
following:
December 31,
2010
(unaudited)
|
June 30,
2010
|
|||||||
VAT
|
$
|
526,436
|
$
|
59,848
|
||||
Income
tax
|
1,563,135
|
723,966
|
||||||
Others
|
367,656
|
445,205
|
||||||
Total
taxes payable
|
$
|
2,457,227
|
$
|
1,229,019
|
Note
20 – Private placement equity financing
Contemporaneously
with the reverse acquisition on February 5, 2010, and immediately following a
1-for-20 reverse stock split, the Company sold and issued 1,180,892 units to 34
non-U.S. investors in a private placement financing, at a purchase price of
$6.00 per unit for gross proceeds of $7,085,352,. Each unit consists of one
share of common stock and a warrant (“Investor Warrants”) to purchase 0.5 shares
of common stock with an exercise price of $12.00 per whole share. The Investor
Warrants are exercisable for a period of five years from the date of
issuance.
On March
11, 2010, the Company sold and issued 6,164,043 units to both U.S. and non-U.S.
investors in a subsequent closing of the private placement financing, at a
purchase price of $6.00 per unit for gross proceeds of approximately $37
million. The warrants issued in connection with this closing
(“Callable Investor Warrants”), in addition to features identical to the
Investor Warrants, are callable at the Company’s election six months after the
date of issuance if the Company’s common stock trades at a price equal to at
least 150% of the exercise price (or $18.00 per share) with an average trading
volume of at least 150,000 shares of common stock (as adjusted for any stock
splits, stock dividends, combination and the like) per trading date for at least
10 consecutive trading days, and the underlying shares of common stock are
registered.
- 29
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
In
connection with the foregoing, the Company entered into a registration rights
agreement with the U.S. investors under with the Company agreed to file a
registration statement to register the common shares issued to the U.S.
investors and the common shares underlying their Callable Investor Warrants
within 60 days after March 11, 2010. The Company agreed to use its
best efforts to have this registration statement declared effective by the SEC
within 120 days, subject to certain exceptions. The Company also agreed to
undertake commercially reasonable efforts to register the common shares issued
to the non-U.S. investors in both closings as well as the common shares
underlying the warrants held by such investors. The registration statement was
filed with SEC on May 11, 2010 and was declared effective by the SEC on
September 13, 2010.
Madison
Williams & Company, LLC (“Madison Williams”), and Rodman & Renshaw, LLC,
acted as joint placement agents in connection with the March 11, 2010 closing.
Under its agreement with the placement agents, the Company agreed to pay a cash
fee equal to 7% of the aggregate gross proceeds attributable to the U.S.
investors, plus reimbursement of fees and expenses, and reasonable fees and
expenses of the placement agents’ legal counsel. In addition, the Company agreed
to issue warrants (“Callable Agent Warrants”) to purchase up to 250,000 common
shares, with an exercise price of $6.00 per share. The Company also issued
117,163 callable warrants to Madison Williams on March 18, 2010, with an
exercise price of $12.00 per share, in connection with the March 11, 2010
closing. Warrants issued to the placement agents contain terms and provisions
otherwise similar to the terms of the Callable Investor Warrants. The
Company used the Cox-Ross-Rubinstein binomial model to value the warrants issued
to the placement agents, which amounted to $9,751,886. Including cash payment of
$2,188,391 received by the placement agents, $3,524,206 of the total
amount paid to the placement agents was capitalized, and $8,491,067 charged to
retained earnings.
The
following table summarizes the securities issued and expenses incurred in
connection with this equity financing.
# of shares of
underlying
common stock
|
Value
|
|||||||
Investor
warrants @ $12.00 per share
|
590,446
|
$
|
11,898,728
|
|||||
Callable
investor warrants @ $12.00 per share
|
3,082,027
|
72,324,038
|
||||||
Total
warrants to investors
|
3,672,473
|
84,222,766
|
||||||
Gross
cash proceeds from equity financing $44,069,610
|
||||||||
Gross
cash proceeds allocated to warrants
|
(44,069,610
|
)
|
||||||
Exceeded
amount charged to current period expense
|
$
|
40,153,156
|
||||||
Common
stock issued to investors
|
7,344,935
|
$
|
-
|
|||||
Callable
agent warrants @ $6.00 per share
|
250,000
|
$
|
6,791,519
|
|||||
Callable
agent warrants @ $12.00 per share
|
117,163
|
2,960,363
|
||||||
7%
cash fee paid to placement agents
|
2,188,391
|
|||||||
Legal
fee in connection with equity financing
|
75,000
|
|||||||
Total
issuance costs
|
12,015,273
|
|||||||
Less
beginning balance in paid in capital
|
(3,524,206
|
)
|
||||||
Remaining
amount of issuance costs charged to retained earnings
|
$
|
8,491,067
|
- 30
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Note
21 – Capital transactions
Stock
split
On
February 5, 2010, the Company effected a 1-for-20 reverse split of its
outstanding common shares. All references to shares and per-share
data for all periods presented in the consolidated financial statements have
been adjusted to give effect to this stock split.
Issuance of capital
stock
Immediately
before the closing of the reverse acquisition described in Note 3, the Company
had 405,710 shares of common stock outstanding on February 5, 2010.
In
connection with the reverse acquisition, the Company issued 13,117,952 shares of
common stock on February 5, 2010.
In
connection with the equity financing described in Note 20, the Company issued
1,180,892 and 6,164,043 shares of common stock to investors at the
first closing date on February 5, 2010 and the second closing date at March, 11,
2010, respectively.
The
Company issued 2,593 round-up shares of common stock in connection with the
reverse acquisition and the equity financing.
Options
2002
Stock Option Plan for Directors
In 2002,
the Company’s board of directors (the “Board”) adopted a 2002 Stock Option Plan
for Directors (the “Directors Plan”). The purpose of the Directors Plan is to
attract and retain the services of experienced and knowledgeable individuals to
serve as its directors. On the date the Directors Plan was adopted, the total
number of shares of common stock subject to it was 11,057. This number of shares
may be increased on the first day of January of each year so that the common
stock available for awards will equal 5% of the common stock outstanding on that
date, provided, however, that the number of shares included in the Directors
Plan may not exceed more than 10% of all shares of common stock outstanding. The
Directors Plan is administered by the Board, or any committee that may be
authorized by the Board. The grant of an option under the Directors Plan is
discretionary. The exercise price of an option must be the fair market value of
the common stock on the date of grant. An option grant may be subject to vesting
conditions. Options may be exercised in cash, or with shares of the common stock
of the registrant already owned by the person. The term of an option granted
pursuant to the Directors Plan may not be more than 10 years.
2002
Consultant Stock Plan
In 2002
the Board adopted a 2002 Consultant Stock Plan (the “Consultants Plan”). The
purpose of the Consultants Plan is to be able to offer consultants and others
who provide services to the registrant the opportunity to participate in the
registrant’s growth by paying for such services with equity awards. The
Consultants Plan is administered by the Board, or any committee that may be
authorized by the Board. Persons eligible for awards under the Consultants Plan
may receive options to purchase common stock, stock awards or stock restricted
by vesting conditions. The exercise price of an option must be no less than 85%
of the fair market value of the common stock on the date of grant. An option
grant may be subject to vesting conditions. Options may be exercised in cash, or
with shares of the common stock of the registrant already owned by the person or
with a fully recourse promissory note, subject to applicable law. The term of an
option granted pursuant to the Consultants Plan may not be more than 10
years.
- 31
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
1999
Stock Option Plan
In 1999
the Board adopted a 1999 Stock Option Plan (the “Option Plan”). The purpose of
the Option Plan is to enable the Company retain the services of employees and
consultants and others who are valuable to the registrant and to offer
incentives to such persons to achieve the objectives of the registrant’s
shareholders. The total number of shares of common stock subject to the Option
Plan is 45,417. The Option Plan is administered by the Board, or any committee
that may be authorized by the Board. Employees eligible for awards under the
Option Plan may receive incentive options to purchase common stock. If a
recipient does not receive an incentive option, he or she will receive a
non-qualified stock option. The exercise price of an option must be no less than
the fair market value of the common stock on the date of grant, unless the
recipient of an award owns 10% or more of the registrant’s common stock, in
which case the exercise price of an incentive stock option must not be less than
110% of the fair market value. An option grant may be subject to vesting
conditions. Options may be exercised in cash, or with shares of the common stock
of the registrant already owned by the recipient of the award. The term of an
option granted pursuant to the Option Plan may not be more than five years if
the option is an incentive option granted to a recipient who owns 10% or more of
the registrant’s common stock, or 10 years for all other recipients and for
recipients of non-qualified stock options.
On
February 5, 2010, the completion date of the reverse acquisition described in
Note 3, there were options exercisable for 11,124 shares of the Company’s common
stock outstanding as follows:
(1)
|
Under
the Directors Plan, there were options exercisable for 4,792 common
shares. Options exercisable for 1,666 common shares were granted on
October 11, 2002, with exercise price of $36.00 per share and on
expiration date of October 15, 2012. Options exercisable for 3,126 common
shares were granted on November 16, 2004, with exercise price of $96.00
per share and an expiration date of November 16,
2014.
|
(2)
|
Under
the Option Plan, there were outstanding options exercisable for 6,332
common shares. Options exercisable for 6,059 common shares were granted on
November 14, 2004, with exercise price of $96.00 per share and expire on
November 14, 2014. Options exercisable for 273 common shares were granted
on May 2, 2003, with an exercise price of $60.00 per share and expired on
May 2, 2010.
|
These
outstanding options were fully vested before the reverse acquisition completed
on February 5, 2010, and through December 31, 2010, no additional options were
granted.
Outstanding
and exercisable options at December 31, 2010 are as follows:
Outstanding Options
|
Exercisable Options
|
||||||||||||||
Number of
Options
|
Average
Remaining
Contract Life
|
Average
Exercise Price
|
Number of
Options
|
Average
Remaining
Contractual Life
|
Average
Exercise Price
|
||||||||||
10,851
|
3.61
years
|
$
|
87.00
|
10,851
|
3.61
years
|
$
|
87.00
|
- 32
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
A summary
of changes in options activity is presented as follows:
Options
|
||||
Outstanding,
June 30, 2009
|
-
|
|||
Granted
|
11,124
|
|||
Forfeited
|
273
|
|||
Exercised
|
-
|
|||
Outstanding,
June 30, 2010
|
10,851
|
|||
Granted
|
-
|
|||
Forfeited
|
-
|
|||
Exercised
|
-
|
|||
Outstanding,
December 31, 2010 (unaudited)
|
10,851
|
Warrants
In
connection with the equity financing described in Note 20, the Company issued
warrants exercisable for 4,039,636 common shares. In addition, the Company had
warrants exercisable for 36,973 common shares outstanding on February 5, 2010
(“Existing Warrants”).
On July
1, 2010, the Company granted callable warrants exercisable for 50,000 common in
exchange for consulting service (“Consultant Warrants”). These warrants expire
on July 1, 2015 with exercise price of $20.00. The fair value of these warrants
was $325,285, and was charged to general and administrative expense for the six
months ended December 31, 2010.
On
November 12, 2010, warrants exercisable for 1,000 common shares were exercised
at $6.00 per share. The fair value of these warrants on the exercise
date was $6,438.
The
Company adopted the provisions of an accounting standard regarding instrument
that are indexed to an entity’s own stock. This accounting standard
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the entity’s own stock and (b) classified
in stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument. It provides a new
two-step model to be applied in determining whether a financial instrument or an
embedded feature is indexed to the entity’s own stock and thus able to qualify
for the scope exception within the standards.
As a
result, the Existing Warrants, previously treated as equity pursuant to the
derivative treatment exemption, are no longer afforded equity treatment because
their strike price is denominated in US dollar, a currency other than the
Company’s functional currency, the RMB, and therefore cannot
be considered indexed to the Company’s own stock. As such, all future
changes in the fair value of these warrants will be recognized currently in
earnings until such time as they are exercised or expire. The Company
reclassified the fair value of the Existing Warrants, $631,002, from equity
to liability status as if these warrants were treated as a derivative liability
at February 5, 2010.
- 33
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
As of
December 31, 2010 and June 30, 2010, warrants that were exercisable for
4,125,609 and 4,076,609 common shares, respectively, were recorded as derivative
instruments. The value of warrant liabilities was $29,282,791 and $30,436,087 at
December 31, 2010 and June 30, 2010, respectively. The decrease of fair value of
warrants was $1,153,296, of which $1,472,143 was recorded as gain on change in
fair value of warrants, $6,438 in relation to the 1,000 warrants exercised on
November 12, 2010 was recorded to the additional paid in capital, and $325,285
(the fair value of the Consultant Warrants at their issuance date ) was charged
to general and administrative expense.
A summary
of changes in warrant activity is presented as follows:
Existing
Warrants
@ $48.00 (1)
|
Investor
Warrants
@ 12.00 (2)
|
Callable
Investor/Agent
Warrants
@ $12.00
(3)(6)
|
Callable
Agent
Warrants
@ 6.00
(4)(6)
|
Consultant
Warrants
@ 20.00
(5)(6)
|
Total
|
||||||||||||||||
Outstanding,
June 30, 2009
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
Granted
|
36,973
|
590,446
|
3,199,190
|
250,000
|
-
|
4,076,609
|
|||||||||||||||
Forfeited
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Exercised
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
Outstanding,
June 30, 2010
|
36,973
|
590,446
|
3,199,190
|
250,000
|
4,076,609
|
||||||||||||||||
Granted
|
-
|
-
|
-
|
-
|
50,000
|
50,000
|
|||||||||||||||
Forfeited
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Exercised
|
-
|
-
|
-
|
1,000
|
-
|
1,000
|
|||||||||||||||
Outstanding,
December 31, 2010 (unaudited)
|
36,973
|
590,446
|
3,199,190
|
249,000
|
50,000
|
4,125,609
|
|
(1)
|
The
warrants underlying 36,973 common shares are exercisable at any time until
April 9, 2017 and with remaining contractual term of 6.28 years as of
December 31, 2010.
|
|
(2)
|
The
warrants underlying 590,446 common shares are exercisable at any time
until February 5, 2015, with remaining contractual term of 4.10 years as
of December 31, 2010.
|
|
(3)
|
The
warrants underlying 3,082,027 and 117,163 common shares are exercisable at
any time until March 11, 2015 and March 18, 2015, respectively, with
remaining contractual term of 4.19 and 4.21 years as of December 31, 2010,
respectively.
|
|
(4)
|
The
warrants underlying 249,000 common shares are exercisable until March
11, 2015, with remaining contractual term of 4.19 years as of December 31,
2010.
|
|
(5)
|
The
warrants underlying 50,000 common shares are exercisable until
July 1, 2015, with remaining contractual terms of 4.50 years as of
December 31, 2010
|
|
(6)
|
These
warrants are exercisable for a period of five years from the date of
issuance, and are callable at the Company’s election six months after the
date of issuance if the Company’s common stock trades at a price equal to
at least 150% of the exercise price with an average trading
volume of at least 150,000 shares of common stock (as adjusted for any
stock splits, stock dividends, combination and the like) per trading date
for at least 10 consecutive trading days and the underlying shares of
common stock are registered.
|
- 34
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Note
22 – Earnings per Share
The
following is a reconciliation of the basic and diluted earnings per share
computation for the three and six months ended December 31, 2010 and
2009:
For the three months ended
December 31,
|
For the six months ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Net income
(loss) for earnings per share
|
$ | (6,989,723 | ) | $ | 4,736,299 | $ | 8,492,275 | $ | 11,283,676 | |||||||
Weighted
average shares used in basic computation
|
20,871,725 | 13,117,952 | 20,871,458 | 13,117,952 | ||||||||||||
Diluted
effect of warrants
|
- | - | 112,643 | |||||||||||||
Weighted
average shares used in diluted computation
|
20,871,725 | 13,117,952 | 20,984,101 | 13,117,952 | ||||||||||||
Earnings
(loss) per share - Basic
|
$ | (0.33 | ) | $ | 0.36 | $ | 0.41 | $ | 0.86 | |||||||
Earnings
(loss) per share – Diluted
|
$ | (0.33 | ) | $ | 0.36 | $ | 0.40 | $ | 0.86 |
As of
December 31, 2010, the Company had warrants and option exercisable for 4,136,460
common shares in the aggregate. For the three months ended December 31, 2010,
all outstanding options and warrants were excluded from the diluted earnings per
share calculation due to the net loss incurred for the period. For the six
months ended December 31, 2010, all outstanding options were excluded
from the diluted earnings per share calculation due to the anti-dilution feature
while warrants exercisable for 249,000 common shares were included in the
diluted earnings per share calculation using treasury
method. As the Company had no warrants and options outstanding
on December 31, 2009, there was no dilutive effect on the earnings per share
calculation for the three and six months ended December 31, 2009.
Note
23- Coal mine acquisition
On August
10, 2010, Hongli entered two equity purchase agreements to acquire 60% of equity
interests of Baofeng Shuangrui Coal Co., Ltd., which operates Shuangrui Coal
Mine, and Baofeng Xingsheng Coal Co., Ltd., which operates Xingsheng Coal Mine,
for total consideration of approximately $12.7 million (RMB84million). The coal
mines, located in Baofeng County, Henan Province, are similar in size, each with
2 million metric tons of estimated coal reserves. Each mining company’s annual
coal production is currently 150,000 metric tons.
Pursuant
to its agreements with their owners, Hongli agreed to a purchase price of $6.2
million (RMB42million) in cash for each company, payable as
follows:
(1) $1.5
million (RMB 10 million) of refundable deposit paid prior to signing the
agreement to examine the mining company’s books and records, which amount was
applied to the purchase price after signing the agreement;
(2)
$1.8 million (RMB12 million) within 30 business days from August 10,
2010;
- 35
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
(3)
|
$0.8
million (RMB 5million) within 20 business days from the completion of the
transfer of equity interests to
Hongli;
|
(4)
|
$0.8
million (RMB5million) within six months from the completion of the
transfer of equity interests to
Hongli;
|
(5)
|
The
remaining balance within one year from the completion of the transfer of
equity interests to Hongli;
|
(6)
|
If
total annual output is less than 150,000 metric tons, Hongli is entitled
to an additional 10% of equity interests;
and
|
(7)
|
If
coal reserves are less than 2 million metric tons, Hongli is entitled to
an additional 10% of equity
interests.
|
As of
December 31, 2010, the Company has prepaid refundable deposit of $6,068,000 (RMB
40 million) in connection with these two acquisitions pursuant to the above
schedule. As of December 31, 2010, these two acquisitions had not been
completed.
Note
24 – Commitments and contingencies
Lease
agreement:
The
Company entered into a lease agreement to lease three office units in Beijing
from June 15, 2010 to June 14, 2013 with monthly lease payment of $21,707
(RMB145,529) and monthly management fee of $3,831 (RMB25,681).
The
Company is also leasing an office place in Pingdingshan from October 1,
2010 to September 30, 2011 with monthly lease payment of $2,017
(RMB13,520).
For the
three and six months ended December 31, 2010, lease expense was $83,310 and
$159,276, respectively. For the three and six months ended December 31, 2009,
lease expense was $5,338 and $10,675, respectively.
As of
December 31, 2010, total future minimum lease payments for the unpaid portion
under the operating leases were as follows:
Year ended June 30,
|
Amount
|
|||
2011
|
$ | 165,326 | ||
2012
|
312,502 | |||
2013
|
306,452 | |||
Total
|
$ | 784,280 |
Purchase
commitment
The
Company entered into several contracts with contractors and equipment suppliers
in connection with the new coking facility under construction. As of December
31, 2010, the total contract amount was approximately $36,400,000. The Company
had make payments for approximately of $21,250,000 as of December 31, 2010, and
the remaining $15,150,000 will be paid based on the progress of
construction.
- 36
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Discounting of bank
notes
On
November 28, 2010, Hongli entered into an agreement with Pingdingshan
YongXinKang Trading Ltd, an un-related company (“YXK”). Pursuant to
the agreement, YXK agrees to assist the Company with discounting
$4.5million (RMB30 million) of notes at the discount rate of 5%. If YXK cannot
transfer the notes successfully or collect money when the notes mature, YXK is
entitled to exercise a right of recourse and Hongli is liable for the face value
of the notes, plus a 1% penalty interest.
Application of notes
payable
On December 29, 2010,
Hongli entered into an agreement with an unrelated company, Baofeng County
Honghao Coking Ltd (“Honghao”). Pursuant to the agreement, Hongli agrees to
deposit approximately $2.3 million (RMB 15million) into Honghao’s bank account
as collateral, and Honghao agrees to obtain bank notes of approximately $4.5
million (RMB 30million) from a bank on behalf of Hongli. Honghao will charge
Hongli 0.5% of the face value of the bank notes as processing fees, and is
entitled to exercise a recourse rights against Hongli if Hongli is not able to
repay the notes at maturity. As of December 31, 2010, $2.3million was deposited
into Honghao’s bank account, but no bank notes were issued under such
arrangement. (See Note 9)
Registered
capital
As
described in Note 1, the remaining unpaid registered capital of Zhonghong
Investment, approximately $1,045,000 (RMB7,010,000), has to be invested by
December 20, 2015.
Increase of registered
capital in Hongli
In order
for Hongli to retain its coal trading license, the local government is requiring
Hongli to increase its registered capital. To facilitate the
retention of the coal trading license, the shareholders of Hongli satisfied the
required payments for Hongli’s increased registered capital of $2,946,000 (RMB
20,000,000) effectively on August 26, 2010. Hongli is in the process
of registering the increased registered capital with the appropriate government
authority. Once such registration is completed, Top Favour (BVI),
through Hongyuan, and the shareholders of Hongli will amend the Contractual
Arrangements so that the Company can control the additional equity of Hongli
represented by the increased registered capital.
Note
25 – Statutory reserves
The laws
and regulations of the PRC require that before foreign invested enterprise can
legally distribute profits, it 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, for the statutory reserves. Statutory
reserves include a statutory surplus reserve fund and an enterprise expansion
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
its 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 the registered
capital.
- 37
-
SINOCOKING
COAL AND COKE CHEMICAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
The
enterprise expansion fund may be used to acquire plant and equipment or to
increase working capital to expend on production and operation of the business.
No minimum contribution is required
As of
December 31, 2010, Hongli and Hongchang Coal’s statutory surplus reserves
reached 50% of their respective registered capital, while Hongguang
Power and Zhonghong Investment did not make any contribution to their
respective statutory reserve due to net operating losses.
Hongchang
Coal is also required by the PRC government to reserve for safety and
maintenance expense to the cost of production based on the actual quantity of
coal exploited. The reserve amount is determined within the unit
price range provided by the Ministry of Finance of the PRC. Currently, Hongchang
Coal reserves for safety expense and maintenance expense at RMB 6
per metric ton and RMB 8.5 per metric ton,
respectively.
The
component of statutory reserves and the future contributions required pursuant
to the PRC Company Law are as follows as of December 31, 2010 and June 30,
2010:
December 31,
2010
(unaudited)
|
June 30, 2010
|
50% of
registered
capital
|
Future
contributions
required as of
December 31,
2010
|
|||||||||||||
Hongli
|
$
|
548,204
|
$
|
548,204
|
$
|
548,204
|
$
|
-
|
||||||||
Hongguang
|
-
|
-
|
1,514,590
|
1,514,590
|
||||||||||||
Hongchang
|
218,361
|
218,361
|
218,361
|
-
|
||||||||||||
Hongyuan
|
-
|
-
|
1,500,000
|
1,500,000
|
||||||||||||
Zhonghong | - | - | 759,259 | 759,259 | ||||||||||||
Statutory
surplus reserve
|
766,565
|
766,565
|
4,540,414
|
3,773,849
|
||||||||||||
Mine
reproduction reserve
|
1,212,741
|
1,070,830
|
-
|
-
|
||||||||||||
Total
statutory reserve
|
$
|
1,979,306
|
$
|
1,837,395
|
$
|
4,540,414
|
$
|
3,773,849
|
Note
27 – Related party transactions
Other
receivables from related parties at December 31, 2010 and June 30, 2010 amounted
to $0 and $477,052, respectively. Balance at June 30, 2010 represented advanced
funds of $418,410 to Mr. Hui Zheng, a Director and Vice President of the
Company, to perform business and acquisition developments activities on behalf
the Company, and the over repayment of $58,642 to Mr. Liuchang
Yang, also a Director and Vice President of the Company.
The
Company received funds from the Company’s Chief Executive Officer, Mr. Jianhua
Lv, who is also the Chairman and a majority shareholder. Payables to Mr. Lv
amounted to $291,031 and $51,381 at December 31, 2010 and June 30, 2010,
respectively. Those payables were interest free, due on demand and will be
settled by cash payment.
- 38
-
SINOCOKING COAL AND COKE CHEMICAL
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
(UNAUDITED)
Note
28 – Subsequent events
On
January 7, 2011, Hongli entered into a Bank Acceptance Agreement (the
“Agreement”) with Pingdingshan Rural Cooperative Bank (the “Bank”). Pursuant to
the Agreement, the Bank granted Hongli a $30.3 million (RMB 200 million) line of
credit. For each issuance of note against the credit line, Hongli is required to
deposit cash equal to 50% of the face value of the note into its account with
the Bank as security. Hongli can determine the date and amount of the note based
on its funding requirements for its business operations and ongoing
construction.
- 39
-
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion and analysis of the results of our operations and financial
condition for the three and six months ended December 31, 2010 and 2009, should
be read in conjunction with our financial statements, and the notes to
those financial statements that are included elsewhere in this
report. All monetary figures are presented in U.S. dollars, unless
otherwise indicated.
Forward-Looking
Statements
The
statements in this discussion that are not historical facts are “forward-looking
statements.” The words “may,” “will,” “expect,” “believe,” “anticipate,”
“intend,” “could,” “estimate,” “continue”, the negative forms thereof, or
similar expressions, are intended to identify forward-looking statements,
although not all forward-looking statements are identified by those words or
expressions. Forward-looking statements by their nature involve substantial
risks and uncertainties, certain of which are beyond our control. Actual
results, performance or achievements may differ materially from those expressed
or implied by forward-looking statements depending on a variety of
important factors, including, but not limited to, weather, local, regional,
national and global coke and coal price fluctuations, levels of coal and coke
production in the region, the demand for raw materials such as iron and steel
which require coke to produce, availability of financing and interest rates,
competition, changes in, or failure to comply with, government regulations,
costs, uncertainties and other effects of legal and other administrative
proceedings, and other risks and uncertainties. We are not undertaking to
update or revise any forward-looking statement, whether as a result of new
information, future events or circumstances or otherwise.
Overview
SinoCoking
Coal and Coke Chemical Industries, Inc. (the “Company”) is a vertically
integrated coal and coke producer based in Henan Province, People’s Republic of
China (“PRC” or “China”). We use coal from both of our own mines and that
of third-party mines to produce basic and value-added coal products
including raw (unprocessed) coal, thermal coal, washed metallurgical 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).
We are
engaged in the coal energy business through our wholly-owned subsidiary Top
Favour Limited, a company incorporated under the laws of the British Virgin
Islands (“Top Favour”), which is a holding company that, through its wholly
owned subsidiary Pingdingshan Hongyuan Energy Science and Technology Development
Co., Ltd. (“Hongyuan”), controls Henan Province Pingdingshan Hongli Coal &
Coke Co., Ltd. (“Hongli”), a coal and coal-coke producer in Henan
Province in the central region of the PRC. Hongli produces coke, coal,
coal byproducts and electricity through its branch operation, Baofeng Coking
Factory (“Baofeng Coking”), and its wholly owned subsidiaries, Baofeng Hongchang
Coal Co., Ltd. (“Hongchang Coal”) and Baofeng Hongguang Environment Protection
Electricity Generating Co., Ltd. (“Hongguang Power”), which we refer to
collectively as the “Baofeng Subsidiaries.” We refer to Hongli and Baofeng
Subsidiaries collectively as “Hongli Group.” Top Favour controls Hongli
Group through contractual arrangements with Hongli Group and its owners.
These contractual arrangements provide for management and control rights, and in
addition entitle Top Favour to receive the earnings and control the assets of
Hongli Group. Other than the interests in these contractual arrangements,
neither Top Favour nor Hongyuan has any equity interests in Hongli
Group. We refer to Top Favour, Hongyuan and Hongli Group collectively as
“SinoCoking.”
Top
Favour became our wholly owned subsidiary pursuant to a share exchange agreement
entered into on July 17, 2009 and subsequently amended in November
2009, under which the Company agreed to acquire 100% of the issued and
outstanding shares of capital stock of Top Favour, and in exchange, the Company
agreed to issue up to approximately 13.2 million shares of common stock to the
former shareholders of Top Favour. This transaction, which closed on
February 5, 2010, was accounted for as a reverse acquisition, with the Company
as the legal acquiror and Top Favour the accounting acquiror. The
assets and liabilities outstanding of the Company prior to the reverse
acquisition were disposed of prior to its closing.
- 40
-
On
December 30, 2010, Hongli set up Henan Zhonghong Energy Investment Co., Ltd.
(“Zhonghong Investment”), a limited liability company under the PRC law for the
purpose of engaging in coal mine acquisitions pursuant to a planned
joint-venture with Henan Province Coal Seam Gas Development and Utilization Co.,
Ltd. (“Henan Coal Seam Gas”), a state-owned enterprise and qualified
provincial-level mine consolidator. The planned joint-venture, which has the
support of the provincial government, may also explore coal gas development
opportunities. The total registered capital of Zhonghong Investment is
approximately $1,500,000 (RMB 10,010,000), and as of December 31, 2010, Hongli
has invested $455,100 (RMB 3,000,000), with the balance of approximately
$1,045,000 (RMB 7,010,000) required to be invested by December 20, 2015.
Zhonghong Investment’s equity interests are presently held on Hongli’s behalf
and for its benefits by three nominees pursuant to share entrustment
agreements,
including Mr. Hui Zheng, our vice president of operations, an employee of
Hongli, and an unrelated party who also serves as Zhonghong Investment’s general
manager.
Critical Accounting Policies
Our
management’s discussion and analysis of our financial condition and results of
operations are based on our financial statements that have been prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our
estimates and assumptions. We base our estimates on historical experience
and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
While our
significant accounting policies are described in Note 2 to our financial
statements, we believe that the following accounting policies are the most
critical to aid you in fully understanding and evaluating this management
discussion and analysis:
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.
Estimate of recoverable coal
reserves. SinoCoking capitalizes its mineral rights 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 recoverable coal. The
Hongchang Mine was acquired in 2005 for a book value of $13,102,000 with
estimated total recoverable coal of 1,215,000 metric tons ($10.78 per metric
ton). If the estimated recoverable coal reserves were to increase or
decrease, future depletion expense would decrease or increase
accordingly.
Estimate of asset
impairment. 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 with the
Financial Accounting Standard Board’s (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, and market trends. 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,
2010, there was no impairment of long lived assets.
- 41
-
Estimate of valuation allowances for
deferred income taxes. 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 being presumed to
occur. The amount recognized is the largest amount of tax benefit that has
a greater than 50% likelihood of being realized on examination. For tax
positions not meeting the “more likely than not” test, no tax benefit is
recorded. SinoCoking is incorporated in the United States and has incurred
a net operating loss for as of December 31, 2010, which may be available to
reduce future years’ taxable income. Management believes that the
realization of the benefits arising from this loss appears to be uncertain
due to the Company’s limited operating history and continuing losses for U.S
income tax purposes. Accordingly, the Company has provided a 100%
valuation allowance at December 31, 2010 and June 30, 2010. The Company’s
management reviews this valuation allowance periodically and makes adjustments
as necessary.
Estimate of reserves for
contingencies and litigation. From time to time, the
Company may be involved in legal matters arising in the ordinary course of
business. Management currently is not aware of any legal matters or
pending litigation that would have a significant effect on the Company’s
consolidated financial statements as of December 31, 2010.
Estimate of the fair value and
accounting treatment of certain financial instruments. The Company
uses the FASB’s 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’s warrants are not traded in an active securities market; therefore, the
Company estimates the fair value of its warrants using the
Cox-Ross-Rubinstein binomial model on the issuance dates and December 31, 2010
using the Level 3 valuation hierarchy.
Due to
the short trading history of the Company’s stock, expected volatility is based
primarily on other similar public companies’ historical volatilities, which are
traded on United States stock markets. Historical volatility was computed
using daily pricing observations for recent periods that correspond to the term
of the warrants. The Company believes this method produces an estimate
that is representative of the Company’s expectations of future volatility over
the expected term of these warrants. The Company currently has no reason
to believe future volatility over the expected remaining life of these warrants
is likely to differ materially from historical volatility. The expected
life is based on the remaining term of the warrants. The risk-free
interest rate is based on U.S. Treasury securities according to the remaining
term of the warrants.
Revenue
Recognition
The
Company recognizes revenue from the sale of coal and coke, its principal
products, at the date of shipment to customers when a formal arrangement exists,
the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability
is reasonably assured. This generally occurs when coal or coke is
loaded onto trains or trucks at one of the Company’s loading facilities or at
third party facilities. Accordingly, management is required to apply its
own judgment regarding collectability based on its experience and knowledge of
its current customers, and thus exercise a certain degree of
discretion.
- 42
-
Hongguang
Power generates electricity which is mostly used internally by Baofeng
Coking. The accounting effect of this activity is that the Company
includes the cost of production of electricity in its overall operating
costs. Any surplus electricity generated by Hongguang Power is required by
local regulation to be supplied and sold to the national power grid. The
value of the surplus electricity would be calculated based on actual
kilowatt-hours produced and transmitted and at a fixed rate determined under
contract.
Accounts
Receivables
During
the normal course of business, the Company extends short-term unsecured credit
to its customers; however, collection normally occurs within 90 days.
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. The Company regularly reviews the creditworthiness 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.
In the
past two fiscal years, based on management’s judgment regarding collectability,
and based on its judgment no reserve for uncollectable accounts has been
made. If the composition and nature of SinoCoking’s customer base were to
significantly change, if the Company began to extend longer term credit to its
customers, if conditions became apparent that prompt management to question the
collectability of accounts receivable, or any combination of these or other
similar factors arise, then this could oblige management to establish a reserve
for uncollectible accounts, which would have an adverse effect of the value of
reported accounts receivable.
Intangible - Mineral
Rights
Mining
and mine assets are a significant portion of SinoCoking’s business, and its use
of the “units-of-production” method of amortization has important effects
on how its mining activities and assets are reported. Under this method,
the tonnage of actual coal extracted, as a percentage of estimated recoverable
coal, is used to calculate depletion expense for a given period. The
remainder of estimated recoverable coal in the ground is reported as an
intangible asset on the Company’s balance sheet, also based on the percentage of
estimated recoverable coal that remains in the ground. See also our
discussion of estimates of recoverable coal above in “Use of
Estimates.”
For the
three and six months ended December 31, 2010, a total of 34,098 and 65,743
metric tons of coal were extracted from the Hongchang Mine, respectively,
which represent 2.8 % and 5.4% of the mine’s total estimated recoverable
coal, respectively. The Company recorded a depletion expense of $376,731
and $747,150 in the three and six months ended December 31, 2010,
respectively.
Recently
Issued Accounting Pronouncements
In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial porting of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company is currently evaluating the impact of this ASU; however,
the Company does not expect the adoption of this ASU will have a material
impact on its consolidated financial statements.
- 43
-
In July
2010, the FASB issued Accounting Standards Update 2010-20 which amends
“Receivables” (Topic 310). ASU 2010-20 is intended to provide additional
information to assist financial statement users in assessing an entity’s risk
exposures and evaluating the adequacy of its allowance for credit losses. The
disclosures as of the end of a reporting period are effective for interim and
annual reporting periods ending on or after December 15, 2010. The disclosures
about activity that occurs during a reporting period are effective for interim
and annual reporting periods beginning on or after December 15, 2010. The
amendments in ASU 2010-20 encourage, but do not require, comparative disclosures
for earlier reporting periods that ended before initial adoption. However, an
entity should provide comparative disclosures for those reporting periods ending
after initial adoption. While ASU 2010-20 will not have a material impact on our
consolidated financial statements, we expect that it will expand our disclosures
related to Loans receivable.
In
December 2010, the FASB issued Accounting Standards Update 2010-28 which amend
“Intangibles- Goodwill and Other” (Topic 350). The ASU modifies Step 1 of the
goodwill impairment test for reporting units with zero or negative carrying
amounts. For those reporting entities, they are required to perform Step 2 of
the goodwill impairment test if it is more likely than not that a goodwill
impairment exists. An entity should consider whether there are any adverse
qualitative factors indicating that impairment may exist. The qualitative
factors are consistent with the existing guidance in Topic 350, which requires
that goodwill of a reporting unit be tested for impairment between annual testes
if an event occurs or circumstances changes that would more likely than not
reduce the faire value of a reporting unit below its carrying amount. ASU
2010-28 is effective for fiscal years, and interim periods within those years
beginning after December 15, 2010. Early adoption is not permitted. The Company
is currently evaluating the impact of this ASU; however, the Company does not
expect the adoption of this ASU will have a material impact on its
consolidated financial statements.
In
December 2010, the FASB issued Accounting Standards Update 2010-29 which address
diversity in practice about the interpretation of the pro forma revenue and
earnings disclosure requirements for business combinations (Topic 805). This ASU
specifies that if a public entity presents comparative financial statements, the
entity should disclose revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year had occurred as of
the beginning of the comparable prior annual reporting period only. This ASU
also expands the supplemental pro forma disclosures under Topic 805 to include a
description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the
reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2010. Early adoption is permitted. The Company is currently evaluating the
impact of this ASU and expected the adoption of this ASU will have an
impact on its future business combinations.
Three
and Six Months Ended December 31, 2009 Compared to Three and Six Months Ended
December 31, 2010
General. With coal
production throughout Henan Province significantly affected by the ongoing
consolidation initiative throughout the three and six months ended December 31,
2010, coal supply remained tight during these periods. Since the shutdown of
mining operations in late June 2010 in connection with an industry-wide safety
inspection prompted by the consolidation initiative, some mines (including our
Hongchang Mines) were allowed to resume operations in late 2010, albeit at only
50% capacity. Coupled with the seasonal spike in heating demand, however, such
limited resumption of coal production did not alleviate the coal supply
situation, which we believe will continue until consolidation ends and coal
outputs can resume at pre-consolidation levels.
Based on
currently available information from the provincial government, the
consolidation initiative that began in late 2009 is expected to conclude by the
end of March 2011. Through Zhonghong Investment, we are currently exploring an
opportunity to participate in the consolidation initiative under a joint-venture
with Henan Coal Seam Gas and may ultimately carry out and complete our
previously announced acquisitions under the framework of this joint-venture in
lieu of proceeding on our own. As of the date of this report, however, no such
decision has been made and the joint-venture has not been
finalized.
Revenues. Our
revenues for the three months ended December 31, 2010 increased by $1,981,374,
or 13.42%, from a year ago, helped by the prices of coke and coal products
largely driven up by the coal supply situation. 56.97% of the
revenues for the 2010 period came from coke products and 43.03% from coal
products, as compared to 57.40% from coke products and 42.60% from the coal
products for the same period a year ago. Our revenues for the six
months ended December 31, 2010, however, decreased by $3,139,625, or 9.54%, from
a year ago, despite higher coke and coal prices and more coke sales, primarily
due to the sharp drop in coal sales. 62.73% of the revenues for the 2010
period came from coke products and 37.27% from coal products, as compared to
43.94% from coke products and 56.06% from coal products for the same period a
year ago.
- 44
-
Revenues
from and quantity of products sold for the three months ended December 31, 2009
and 2010, categorized by product type (coke products and coal products), are as
follows:
Revenues
|
||||||||||||
Coke
Products
|
Coal Products
|
Total
|
||||||||||
Revenues
|
||||||||||||
Three
Months Ended December 31, 2009
|
$ | 8,474,749 | $ | 6,289,209 | $ | 14,763,958 | ||||||
Three
Months Ended December 31, 2010
|
9,539,359 | 7,205,973 | 16,745,332 | |||||||||
Increase
(decrease) in US$
|
$ | 1,064,610 | $ | 916,764 | $ | 1,981,374 | ||||||
%
Increase (decrease) in US$
|
12.56 | % | 14.58 | % | 13.42 | % | ||||||
Quantity
Sold (metric tons)
|
||||||||||||
Three
Months Ended December 31, 2009
|
40,806 | 103,069 | 143,875 | |||||||||
Three
Months Ended December31, 2010
|
40,020 | 62,951 | 102,970 | |||||||||
Increase
(decrease)
|
(786 | ) | (40,118 | ) | (40,905 | ) | ||||||
%
Increase (decrease)
|
(1.93 | )% | (38.92 | )% | (28.43 | )% |
Revenues
from and quantity of products sold for the six months
ended December 31, 2009 and 2010, categorized by product type (coke
products and coal products), are as follows:
Revenues
|
||||||||||||
Coke Products
|
Coal Products
|
Total
|
||||||||||
Revenues
|
||||||||||||
Six
Months Ended December 31, 2009
|
$ | 14,453,152 | $ | 18,440,267 | $ | 32,893,419 | ||||||
Six
Months Ended December 31, 2010
|
18,664,343 | 11,089,451 | 29,753,794 | |||||||||
Increase
(decrease) in US$
|
$ | 4,211,191 | $ | (7,350,816 | ) | $ | (3,139,625 | ) | ||||
%
Increase (decrease) in US$
|
29.14 | % | (39.86 | )% | (9.54 | )% | ||||||
Quantity
Sold (metric tons)
|
||||||||||||
Six
Months Ended December 31, 2009
|
72,619 | 245,032 | 317,651 | |||||||||
Six
Months Ended December 31, 2010
|
80,342 | 115,806 | 196,147 | |||||||||
Increase
(decrease)
|
7,723 | (129,226 | ) | (121,504 | ) | |||||||
%
Increase (decrease)
|
10.63 | % | (52.74 | )% | (38.25 | )% |
Coke
products include finished coke, a key raw material for producing steel, and coal
tar, a byproduct of the coke manufacturing process which can be used for various
industrial applications. Coal products include washed and raw coal,
which is used by customers primarily for electricity generation and heating
applications. As used in this discussion and analysis, the “raw coal”
category includes both thermal coal that is unwashed and relatively unprocessed,
and coal washing byproducts such as coal slurry.
Generally,
our sale prices are driven by a number of factors, including the particular
composition and quality of the coal or coke we sell, their prevailing market
prices locally and throughout China, as well as in the global marketplace,
timing of sales, delivery terms, and our relationships with our customers and
our negotiations of their purchase orders. For the three and
six months ended December 31, 2010, however, the coal supply situation was a
key, if not the determinative, factor for our sale prices during these
periods.
Average
sale prices per metric ton for our four principal product categories during the
three months ended December 31, 2009 and 2010 are as
follows:
- 45
-
Average Sale Prices
|
Coke
|
Coal Tar
|
Raw Coal
|
Washed Coal
|
||||||||||||
Three
Months Ended December 31, 2009
|
$ | 206 | $ | 214 | $ | 62 | $ | - | ||||||||
Three
Months Ended December 31, 2010
|
238 | 241 | 74 | 180 | ||||||||||||
Increase
(decrease) in US$
|
$ | 32 | $ | 27 | $ | 12 | $ | 180 | ||||||||
%
Increase (decrease)
|
15.58 | % | 12.79 | % | 18.72 | % | - |
Average
sale prices per metric ton for our four principal product categories during the
six months ended December 31, 2009 and 2010 are as follows:
Average Sale Prices
|
Coke
|
Coal Tar
|
Raw Coal
|
Washed Coal
|
||||||||||||
Six
Months Ended December 31, 2009
|
$ | 202 | $ | 202 | $ | 60 | $ | 126 | ||||||||
Six
Months Ended December 31, 2010
|
232 | 240 | 66 | 173 | ||||||||||||
Increase
(decrease) in US$
|
$ | 30 | $ | 38 | $ | 6 | $ | 47 | ||||||||
%
Increase (decrease)
|
14.74 | % | 18.99 | % | 9.47 | % | 37.25 | % |
While
improving coke demand during the three months ended September 30, 2010 partly
explains the increase in coke price for the six months ended December 31, 2010,
coke price did not falter in the three months ended December 31, 2010 despite a
softening coke market during that time. Rather, with limited coal
availability, we reflected the increased cost of buying coal to produce
coke in our sale price.
On the
other hand, the increase in coal tar’s sale price for the three and six months
ended December 31 2010 generally reflected improved market condition for the
product for these periods. Coal tar pricing is affected by a variety of
factors, as it can be used by different industries as raw material,
including chemical, agricultural fertilizer and construction material
industries
The
average price of raw coal is calculated based on the weight of unprocessed coal,
coal byproducts from coal washing process, and mixed thermal coal. In general,
average selling prices for our coal products are heavily influenced by changes
in the mixtures of coals (with different compositions and heat content) sold to
customers. The coal supply situation during the three and six months ended
December 31, 2010, however, made coal more expensive, irrespective of
composition or heat content.
Coke
product revenues for the three months ended December 31, 2009 and
2010 are as follows:
Coke Products
|
||||||||||||
Coke
|
Coal Tar
|
Total
|
||||||||||
Revenues
|
||||||||||||
Three
Months Ended December 31, 2009
|
$
|
8,139,941
|
$
|
334,808
|
$
|
8,474,749
|
||||||
Three
Months Ended December 31, 2010
|
8,732,427
|
806,932
|
9,539,359
|
|||||||||
Increase
(decrease) in US$
|
592,486
|
472,124
|
1,064,610
|
|||||||||
%
Increase (decrease)
|
7.28%
|
141.01%
|
12.56%
|
|||||||||
Quantity
Sold (metric tons)
|
||||||||||||
Three
Months Ended December 31, 2009
|
39,254
|
1,552
|
40,806
|
|||||||||
Three
Months Ended December 31, 2010
|
36,677
|
3,343
|
40,020
|
|||||||||
Increase
(decrease)
|
(2,577)
|
1,791
|
(602)
|
|||||||||
%
Increase (decrease)
|
(6.56)%
|
115.40%
|
(1.50)%
|
- 46
-
Coke
product revenues for the six months ended December 31, 2009 and 2010 are as
follows:
Coke Products
|
||||||||||||
Coke
|
Coal Tar
|
Total
|
||||||||||
Revenues
|
||||||||||||
Six
Months Ended December 31, 2009
|
$ | 13,857,540 | $ | 595,612 | $ | 14,453,152 | ||||||
Six
Months Ended December 31, 2010
|
17,441,572 | 1,222,770 | 18,664,343 | |||||||||
Increase
(decrease) in US$
|
3,584,032 | 627,158 | 4,211,191 | |||||||||
%
Increase (decrease)
|
25.86 | % | 105.30 | % | 29.14 | % | ||||||
Quantity
Sold (metric tons)
|
||||||||||||
Six
Months Ended December 31, 2009
|
69,670 | 2,949 | 72,619 | |||||||||
Six
Months Ended December 31, 2010
|
75,254 | 5,088 | 80,342 | |||||||||
Increase
(decrease)
|
5,584 | 2,139 | 7,723 | |||||||||
%
Increase (decrease)
|
8.01 | % | 72.53 | % | 10.63 | % |
Despite a
drop in sales volume of 6.56% period over period principally from weakening coke
demand, higher average sale price increased coke revenues for the three
months ended December 31, 2010 by 7.28% from a year ago. Reduced national
railway capacity for transportation of coke, diverted to ensure coal supply for
power and heating during the winter season, also affected our coke sales volume.
The higher coke revenues for the six months ended December 31, 2010
benefitted from the higher average sale price period over period as well as
higher sales volume from improved market during the three months ended September
30, 2010.
Coal tar
revenues improved for both the three and six months ended December 31, 2010 from
a year ago from higher sale price and volume driven by improved
market conditions for the industries that use this product.
Coal
product revenues for the three months ended December 31, 2010 and
2009 are as follows:
|
Coal Products
|
|||||||||||
Raw Coal
|
Washed Coal
|
Total
|
||||||||||
Revenues
|
||||||||||||
Three
Months Ended December 31, 2009
|
$ | 6,289,209 | $ | 0 | $ | 6,289,209 | ||||||
Three
Months Ended December 31, 2010
|
2,852,070 | 4,353,903 | 7,205,973 | |||||||||
Increase
(decrease) in US$
|
(3,437,139 | ) | 4,353,903 | 916,764 | ||||||||
%
Increase (decrease) in US$
|
(54.65 | )% | 14.58 | % | ||||||||
Quantity
Sold (metric tons)
|
||||||||||||
Three
Months Ended December 31, 2009
|
103,069 | 0 | 103,069 | |||||||||
Three
Months Ended December31, 2010
|
38,746 | 24,205 | 62,951 | |||||||||
Increase
(decrease)
|
(64,323 | ) | 24,205 | (40,118 | ) | |||||||
%
Increase (decrease)
|
(62.41 | )% | - | (38.92 | )% |
Coal
product revenues for the six months ended December 31, 2010 and 2009 are as
follows:
Coal Products
|
||||||||||||
Raw Coal
|
Washed Coal
|
Total
|
||||||||||
Revenues
|
||||||||||||
Six
Months Ended December 31, 2009
|
$ | 11,411,338 | $ | 7,028,929 | $ | 18,440,267 | ||||||
Six
Months Ended December 31, 2010
|
5,515,661 | 5,573,790 | 11,089,451 | |||||||||
Increase
(decrease) in US$
|
(5,895,677 | ) | (1,455,139 | ) | (7,350,816 | ) | ||||||
%
Increase (decrease) in US$
|
(51.67 | )% | (20.70 | )% | (39.86 | )% | ||||||
Quantity
Sold (metric tons)
|
||||||||||||
Six
Months Ended December 31, 2009
|
189,110 | 55,922 | 245,032 | |||||||||
Six
Months Ended December 31, 2010
|
83,497 | 32,309 | 115,806 | |||||||||
Increase
(decrease)
|
(105,613 | ) | (23,613 | ) | (129,226 | ) | ||||||
%
Increase (decrease)
|
(55.85 | )% | (42.22 | )% | (52.74 | ) |
- 47
-
Our raw
coal sales sharply decreased, both in terms of revenue and volume, for the three
and six months periods ended December 31, 2010, as compared to the same periods
of 2009, as we had limited amount of coal available to sell, even with the
limited resumption of operations at our Hongchang Mines in late 2010. In the
past, we would engage in coal trading when prices are stable at seasonally high
levels, or at levels that are considered above historical norms, such as during
the three months ended September 30, 2009. However, because of the coal supply
situation during the entire six-month period ended December 31, 2010, we could
not source enough raw coal to engage in coal trading at our previous
levels.
.
On the
other hand, we increased our washed coal sales for the three months periods
ended December 31, 2010 significantly from a year ago, when we were
stockpiling our inventory in anticipation of increasing coke production and thus
did not sell any. Given the weak demand for coke during the 2010
period, we shifted our washed coal inventory into the market to take
advantage of high sale price created by the tight coal supply. Management
however, does not anticipate, doing so will impact our coking operations in
the near term.
Cost of Revenue. Cost of
revenue increased to $9,634,955 for the three months ended December 31,
2010, from $8,736,811 a year ago. The increase was primarily due to
the increased cost of obtaining coal, and the washed coal sales which we
did not do a year ago. Cost of revenue increased to $17,999,064 for the six
months ended December 31, 2010, from $17,805,876 a year ago, driven also by the
increased cost to obtain coal, as well as by increased coke sales.
Gross Profit. Gross
profit increased from $6,027,147 for the three months period ended December
31, 2009, to $7,110,377 a year later from increased revenues for both coal and
coke products, despite decrease in overall sales volume and increase in
cost of revenue period over period. Gross profit for the six months ended
December 31, 2010, however, decreased to $11,754,730, from $15,087,543 a year
ago, as increase in sales of coke products could not make up for the significant
decrease in sales of coal products throughout the 2010 period.
Gross
profit as a percentage of revenue, or gross margin, for all product categories
increased to 42.46% for the three months ended December 31, 2010, from 40.82%
for the same period of 2009, benefiting from the increase in sale
prices. For the six month period ended December 31, 2010, gross margin
across all product categories decreased to 39.51% from 45.87% a year ago despite
higher sale prices period over period, driven down largely by the increase in
the cost of obtaining coal during the 2010 period.
Operating
Expenses. Operating expenses, which consisted of selling expenses
and general and administrative expenses, increased by $476,463 and
$1,068,961 for the three and six month periods ended December 31,
2010, respectively, as compared to the same periods in 2009. These
increases reflect auditing and legal fees incurred to comply with our
reporting obligations as a U.S. public company, as well as travel and accrued
salary expenses of our senior officers.
Other Income and
Expense. Other income and expense includes finance expense, income
and expense not directly related to the Company’s main operations, and change in
fair value of warrants.
Finance
expense increased by $493,867 from $19,239 for the three months ended
December 31, 2009 to $513,106 a year later. The increase was mainly due to bank
processing fees of $223,740 for the short-term notes that we issue to pay
our vendors in lieu of cash, and bank loan interest expense of $93,118, after
capitalizing $94,963 into construction-in-progress for the period ended December
31, 2010. Finance expense for the six months ended December 31, 2010, as
compared to the same period of 2009, increased to $570,056, from $115,963. The
increase was the effect of bank processing fees of $223,740 for our
short-term notes, and bank loan interest of $271,186,
after capitalizing $140,120 into the construction-in-progress for the
six months ended December 31, 2010.
- 48
-
We had
other expense of $52,689 for the three months ended December 31, 2010, for a
fine that we paid for not timely renewing the safety production license of our
coking plant, which expired in December 2010. We expect to complete the license
renewal by March 2011, during which time management does not expect our coking
operation to be impacted. We did not have other income or expense in
the same three-month period of 2009. Other expense increased by $109,198 from
$189 in the six months ended December 31, 2009 to $109,387 in the same period in
2010. In addition to the fine paid for the nonrenewal of the safety production
license, we incurred a currency translation loss of $57,181.
Change in
fair value of warrants amounted to $11,447,532 of loss and $1,472,143 in gain
for the three and six months ended December 31, 2010, respectively. We had no
such loss or gain for the same periods in 2009. Because our functional
currency is the RMB, our warrants cannot be considered indexed to our own common
stock and, as such, all future changes in the fair value of our warrants will be
recognized in earnings and recorded as derivative instruments.
Provision for Income
Taxes. Provision for income taxes increased by $338,701 for the
three months ended December 31, 2010, as compared to the same period in
2009, from higher gross profit and hence higher taxable income period
over period. Provision for income taxes decreased by $701,521 for the six
months ended December 31, 2010, as compared to the same period in 2009,
also from change in gross profit period over period.
Net (loss) income. Including the change in
fair value of warrants, we report net loss of $6,989,723 for the three months
ended December 31, 2010, as compared to net income of $4,736,299 a year ago, a
decrease of $11,726,022, and net
income of $8,492,275 and $11,283,676 for the six months ended December 31, 2010
and 2009, respectively, a decrease of $2,791,401.
We use
non-GAAP adjusted net (loss) income to measure the performance of the Company’s
business internally by excluding non-cash charges related to warrants, and
believes that the non-GAAP adjusted financial measure allows the Company to
focus on managing business operating performance because the measure reflects
the Company’s essential operating activities and provides a consistent method of
comparison to historical periods. We believe that providing this non-GAAP
measure is useful to investors for a number of reasons. The non-GAAP measure
provides a consistent basis for investors to understand our financial
performance in comparison to historical periods without variation of
non-recurring items and non-operating related charges. In addition, it allows
investors to evaluate the Company’s performance using the same methodology and
information as that used by the Company’s management. Non-GAAP measures are
subject to inherent limitations because they do not include all of the expenses
included under GAAP and because they involve the exercise of judgment regarding
which charges are excluded from the non-GAAP financial measure. However, the
Company compensate for these limitations by providing the relevant disclosure of
the items excluded.
The
following table provides a non-GAAP financial measure and a reconciliation of
that non-GAAP measure to the GAAP net (loss) income.
Three months ended December 31,
|
Six months ended December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
(loss) income
|
$ | (6,989,723 | ) | $ | 4,736,299 | $ | 8,492,275 | $ | 11,283,676 | |||||||
Change
in fair value of warrant liabilities
|
11,447,532 | - | (1,472,143 | ) | - | |||||||||||
Adjusted
net income
|
$ | 4,457,809 | $ | 4,736,299 | $ | 7,020,132 | $ | 11,283,676 | ||||||||
(Loss)
earnings per share - basic
|
$ | (0.33 | ) | $ | 0.36 | $ | 0.41 | $ | 0.86 | |||||||
(Loss)
earnings per share - diluted
|
$ | (0.33 | ) | $ | 0.36 | $ | 0.40 | $ | 0.86 | |||||||
Adjusted
earnings per share - basic
|
$ | 0.21 | $ | 0.36 | $ | 0.34 | $ | 0.86 | ||||||||
Adjusted
earnings per share - diluted
|
$ | 0.21 | $ | 0.36 | $ | 0.33 | $ | 0.86 | ||||||||
Weighted average
number of common shares - basic
|
20,871,725 | 13,117,952 | 20,871,458 | 13,117,952 | ||||||||||||
Weighted average
number of common shares - diluted
|
20,871,725 | 13,117,952 | 20,984,101 | 13,117,952 | ||||||||||||
Adjusted average
number of common shares - basic
|
20,871,725 | 13,117,952 | 20,984,101 | 13,117,952 | ||||||||||||
Adjusted average
number of common shares - diluted
|
20,952,823 | 13,117,952 | 20,984,101 | 13,117,952 |
- 49
-
Excluding
non-cash expenses, adjusted net income for the three months ended December 31,
2010 and 2009 was approximately $4.5 million and $7.0 million, respectively, or
$0.21 and $0.34 basic earnings per share for the three months ended December 31,
2010, respectively, and $0.21 and $0.33 diluted earnings per share for the six
months ended December 31, 2010, respectively.
Liquidity
and Capital Resources
In
summary, our cash flows are as follows:
Six months ended December 31
|
||||||||
2010
|
2009
|
|||||||
Net
cash provided by (used in) operating activities
|
$
|
(7,157,870)
|
$
|
7,167,034
|
||||
Net
cash provided by (used in) investing activities
|
(10,570,681)
|
(4,303,258)
|
||||||
Net
cash provided by (used in) financing activities
|
$
|
5,116,409
|
$
|
(2,797,248)
|
Net
Cash Provided by Operating Activities
Net cash
used in operating activities for the six months ended December
31, 2010 was $7,157,870 as compared to net cash provided by operating
activities of $7,167,034 for the same period ended December 31,
2009.
During
the six months ended December 31, 2010, cash inflows mainly resulted from an
increase of tax payables in the amount of $1,171,547, and the decrease of
$881,315 in note receivables. The cash inflows were offset
by the following: (1) increase in accounts receivable of approximately $10.3
million, (2) increase in other receivables of approximately $1.9
million, and (3) increase in prepayment to suppliers of
approximately $5.8 million. Our accounts receivable increase was
caused by credit tightening measures taken by the government near the end of
2010 to control inflation, which impacted Chinese steel factories that rely
heavily on their bank credit lines. The increase in other receivables is
largely accounted for by the approximately $1.7 million in receivables from
Zhengzhou Coal Group. During the three months ended December 31, 2010, we
temporarily cancelled our purchase orders with Zhengzhou Coal Group due to
its inability to meet our coal requirements. We increased prepayment to
suppliers in order to ensure adequate coal inventory through
the Chinese New Year holiday in early February.
Net
Cash Used in Investing Activities
Net cash
used in investing activities for the six
months ended December 31, 2010 increased to
$10,570,681 from $4,303,258 for the same period in
2009. The primary use of funds for the 2010 period was
approximately $7.5 million of deposits in connection with coal mine
acquisitions, approximately $3.5 million for purchase of additional
land use rights to expand the site of our new coking plant
still under construction, and prepayments and payments of
approximately $1.3 million to contractors and equipment vendors in
connection with the new coking plant. We received approximately $1.2
million in refund from one of our contractors.
Net
Cash provided by Financing Activities
Net cash
provided by financing activities for the six month period
ended December 31, 2010 was $5,116,409, as compared to $2,797,248 used the
same period in 2009. We received cash proceeds of approximately $9.4
million through the discounting of bank notes. We used approximately
$4.5 million in cash as deposit in with banks in connection with
outstanding notes. We also repaid loan owed to an unrelated third
party in the amount of approximately $552,000, and received $710,189 from two of
our officers.
- 50
-
Capital
Resources
Funding
for our business activities has historically been provided by cash flow from
operations, short-term bank loan financing, and loans from individuals including
from our major shareholder Mr. Lv, and Mr. Liuchang Yang, who is a director of
the Company.
We also
have arrangements with certain banks pursuant to which we are able to issue
short-term notes to pay our vendors, secured against our deposits with the banks
of 50% of the face value of the notes as well as guarantee from Mr. Lv, Hongli
or an unrelated third party. In addition, the banks subject us to a diligence
review each time we issue a note. As of December 31, 2010, we had such
arrangements with two banks, Shanghai Pudong Development Bank and Pingdingshan
Rural Cooperative Bank (“Pingdingshan Cooperative”), and had issued notes of
approximately $19.7 million in the aggregate, secured by our deposits of
approximately $10.6 million with these banks. On January 7, 2011, we entered
into an agreement with Pingdingshan Cooperative, pursuant to which we obtained a
$30.3 million line of credit. While we are still require to deposit 50% of the
face value of the notes issued under this credit line, the diligence review is
waived so long as the aggregate amount of notes issued are within the credit
line limit. Notes issued pursuant to our previous arrangement with Pingdingshan
Cooperative that were outstanding at January 7, 2011 counted against the credit
line.
In
addition, on December 29, 2010, we entered into an agreement with Baofeng County
Honghao Coking Ltd (“Honghao”), an unrelated third-party, pursuant to which
Honghao agrees to obtain bank notes of approximately $4.5 million from a bank on
our behalf. Under this agreement, we deposited approximately $2.3 million into
Honghao’s bank account as collateral. As of December 31, 2010, no bank notes
were issued under this arrangement.
In
January 2011, in connection with our temporary cancellation of purchase order
with Zhengzhou Coal Group in December 2010, we also took back approximately $1.7
million of our prepayments with the company in order to increase our working
capital.
Our
business plan involves growing our business through (1) expansion and
modernization of our production facilities and achieving greater energy
efficiency while also lessening any environmental impact; (2) recapturing more
coking by-products for refinement into useful industrial chemicals, and
production of more high value-added chemical products; (3) acquisition of other
coal mines to source raw materials, including through the planned Joint venture
with Henan Coal Seam Gas; (4) strategic cooperation with Zhengzhou Coal
Industry Group in order to indirectly control the coal resource and also secure
the Company’s internal material requirements and stable supply for coal product
trading; and (5) purifying and selecting level 10 washed coal, which is
highly demanded in the market from the 2 million metric tons of raw coal
provided by Zhengzhou Coal, in order to increase the Company’s product
categories, secure sufficient raw coal material for the 900,000 metric tons
coking facility still under construction, and increase the our
profitability.
Of the
foregoing, the two major initiatives that we have initiated and that are
expected to require capital resources are:
1.
|
New Coking
Facility. On March 3, 2010, we announced that we began
construction of our new coking facility to be located beside our current
facilities in Pingdingshan City. Because the new facility will
share the electricity, water and heating systems of our existing
facilities, we are revising our previously estimated cost for the new
facility from $70 million to $60 million, including the cost of acquiring
additional land use rights to expand the site of the new facility,
estimated at $10.6 million. Construction is expected to be completed by
the end of June 2011, and production immediately thereafter. On October
12, 2010, Pingdingshan Cooperative extended by one year its non-binding
letter of intent to loan us up to RMB 300 million (approximately $45
million) for construction of this facility. Loan would be subject to
approval of our loan application, which had not been submitted as of
December 31, 2010.
|
2.
|
Mine Acquisitions. In
February 2010, we announced our plans to acquire private coal mines in
Henan Province. In August 2010, we entered into two
agreements to acquire two coal mine companies in Baofeng County, and have
paid approximately $6.1 million in refundable deposit in connection with
these acquisitions as of December 31, 2010. Between May and September,
2010, we also paid refundable deposits of approximately $6.1 million in
the aggregate to four additional potential targets in order to access and
examine their books and records. In December 2010, we also created
Zhonghong Energy in anticipation of a planned joint-venture with Henan
Coal Seam Gas, a state-owned enterprise and a qualified mine consolidator
to engage in coal mine acquisition. No acquisition was completed as of
December 31, 2010. We may elect to complete our two acquisitions in
progress and four potential acquisitions under the framework of our
joint-venture with Henan Coal Seam Gas, although no decision has been made
as of the date of this report.
|
- 51
-
Our
management presently anticipates that our recent equity issuance, access to
credit and cash flow from operations will provide sufficient capital resources
to pursue and complete the construction of our new coking facility and proposed
mine acquisitions. We intend to utilize existing cash, cash flow from
operations and bank loans to finance the cash portion of the consideration to be
paid for our acquisitions. We may consider the issuance of additional debt
and/or equity securities in order to finance our mine acquisitions. Any
future facility expansion and acquisitions will require additional financing
and/or equity capital and will be dependent upon the availability of financing
arrangements and capital at the time.
We have
not experienced any material losses since inception relating to accidents or
other similar events. Please refer to the risk factor entitled “We may
suffer losses resulting from industry-related accidents and lack of insurance”
of our annual report on Form 10-K for the fiscal year ended June 30,
2010.
Capital
Expenditures
During
the six months period ended December 31, 2010, we had capital expenditures of
$12.23 million, as compared to $4.3 million for the same period in
2009. These capital expenditures were made partly in connection with the
new coking facility currently under construction, including land use rights to
expand the site for the new facility, and partly in connection with our
acquisition efforts. Specifically, we expended
approximately $3.52 million toward acquiring land use rights to expand the
site of our new coking plant, approximately $7.46 million for mine
acquisitions, and approximately $1.25 million in construction-related
expenditures for our new coking facility. The increase in capital
expenditures for the six-month period ended December 31, 2010 as compared to the
same period in 2009 was mainly due to land redevelopment expenditures and mine
acquisitions, partially offset by a refund of construction related
prepayment. Continued high levels of capital expenditures are anticipated
through the completion of the new coking facility, which we anticipate to
complete by June 2011.
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
Company does not use derivative financial instruments and has no foreign
exchange contracts. The Company’s financial instruments consist of cash and
cash equivalents, trade accounts receivable, accounts payable and long-term
obligations. The Company generally considers investments in highly liquid
instruments purchased with a remaining maturity of 90 days or less at the date
of purchase to be cash equivalents. However, in order to manage the
foreign exchange risks, the company may in the future engage in hedging
activities to manage its financial exposure related to currency exchange
fluctuation. In these hedging activities, the Company might use
fixed-price, forward, futures, financial swaps and option contracts traded in
the over-the-counter markets or on exchanges, as well as long-term structured
transactions when feasible. Currently the Company does not engage in any of
these types of currency hedging transactions.
Interest Rates. The
Company’s exposure to market risk for changes in interest rates relates
primarily to its short-term obligations. Accordingly, fluctuations in
applicable interest rates would not have a material impact on the fair value of
these securities. At December 31, 2010, the Company had approximately $32.6
million in cash. A hypothetical 10% increase or decrease in applicable interest
rates would not have a material impact on the Company’s earnings or loss, or the
fair market value or cash flows of these instruments.
Foreign Exchange
Rate. All of the sales and inputs of the Company are transacted in
Renminbi (“RMB”). As a result, changes in the relative values of U.S.
Dollars and RMB affect the company’s reported levels of revenues and
profitability as the results are translated into U.S. Dollars for reporting
purposes. However, since the Company conducts its sales and purchases
inputs in RMB, fluctuations in exchange rates are not expected to significantly
affect financial stability, or gross and net profit margins. The Company
does not currently expect to incur significant foreign exchange gains or losses,
or gains or losses associated with any foreign operations.
- 52
-
Commodity Prices. The
Company is a coal and coke producer, and as discussed elsewhere in this report,
its business is affected by prevailing market prices for coal and
coke. However, the Company does not currently engage in any hedging
activities, such as futures, forwards, or options contracts, with respect to any
of its inputs or the products it sells.
Off-Balance
Sheet Arrangements
The
Company has not entered into any derivative contracts that are indexed to its
shares and classified as shareholder’s equity or that are not reflected in its
consolidated financial statements. Furthermore, the Company does not have any
retained or contingent interest in assets transferred to an unconsolidated
entity that serves as credit, liquidity or market risk support to such
entity. The Company does not have any variable interest in any
unconsolidated entity that provides financing, liquidity, market risk or credit
support to the Company or engages in leasing, hedging or research and
development services with the Company.
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable
interest in any unconsolidated entity that provides financing, liquidity, market
risk or credit support to us or engages in leasing, hedging or research and
development services with us.
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
Regulations
under the Securities Exchange Act of 1934 (the “Exchange Act”) require public
companies to maintain “disclosure controls and procedures,” which are defined as
controls and other procedures that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer’s management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
The
Company conducted an evaluation, with the participation of its Chief Executive
Officer and its Chief Financial Officer, of the effectiveness of its disclosure
controls and procedures as of December 31, 2010. Based on that evaluation,
its Chief Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2010, the Company’s disclosure controls and procedures were not
effective due to the material weaknesses described in the “Management’s Report
on Internal Control over Financial Reporting” section below.
Notwithstanding
management’s assessment that our internal control over financial reporting was
ineffective as of December 31, 2010 due to the material weaknesses described in
the “Management’s Report on Internal Control over Financial Reporting” section
below, we believe that the consolidated financial statements included in this
Quarterly Report on Form 10-Q correctly present our financial condition, results
of operations and cash flows for the fiscal periods covered thereby in all
material respects.
Management’s
Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the
Exchange Act as a process designed by, or under the supervision of, the issuer’s
principal executive and principal financial officers and effected by the
issuer’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America and
includes those policies and procedures that:
- 53
-
|
●
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
issuer;
|
|
●
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America and that
receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the issuer;
and
|
|
●
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the issuer’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. All internal control
systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and
presentation. Because of the inherent limitations of internal control,
there is a risk that material misstatements may not be prevented or detected on
a timely basis by internal control over financial reporting. However, these
inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this risk.
As of the
end of its most recent fiscal year, management as then constituted assessed the
effectiveness of its internal control over financial reporting based on the
criteria for effective internal control over financial reporting established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting
such assessments. Based on that evaluation, management concluded that, as
of December 31, 2010, such internal control over financial reporting was not
effective because of the material weakness described below.
A
material weakness is a control deficiency, or combination of control
deficiencies, that result in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis.
A
significant deficiency is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe than a material
weakness; yet important enough to merit attention by those response
The
specific material weaknesses identified by its Chief Executive Officer and Chief
Financial Officer are described as follows:
a)
|
Inadequate U.S. GAAP expertise
- The current staff in the accounting department remains
inexperienced in applying the United States generally accepted accounting
principles (“U.S. GAAP”) standard and they were primarily engaged in
ensuring compliance with PRC accounting and reporting requirement for our
operating subsidiaries. The staff needs substantial training to
meet the higher demands of being a U.S. public company. The
current staff’s accounting skills and their understanding as to how to
fulfill the requirements of U.S. GAAP-based reporting, including their
skills related to subsidiary financial statements consolidation, is
inadequate and resulted in a number of audit adjustments identified by our
independent auditors.
|
b)
|
Inadequate internal audit
resources - The Company lacks qualified resources to perform the
internal audit functions properly. In addition, the scope and
effectiveness of the Company’s internal audit function are yet to be
developed. We are committed to establishing the internal audit
functions but due to the limited qualified resources in the region, we
were not able to hire sufficient internal audit resources to perform the
internal audit functions properly.
|
c)
|
Inadequate control on corporate
governance - During this fiscal year, we made certain material
amount of purchases and a short term third party loan without proper
preapproval process in accordance with the internal control policy over
cash disbursements.
|
- 54
-
Management’s
Remediation Initiatives
In order
to remediate this weakness, we are increasing the number of our accounting staff
and professionals, and we also plan to hire an experienced financial adviser who
is familiar with U.S. GAAP. We are also planning to hire professionals to
help the Company implement a more efficient internal control system over
financial reporting using COSO internal control framework. Until we are
able to hire additional employees to remediate this weakness, management chose
to address the above-described weaknesses by reporting more frequently to its
audit committee and by having members of its audit committee review the
Company’s control procedures on a regular basis. In addition, we are planning to
use an Enterprise Resource Planning (“ERP”) system to improve our financial and
internal control system. We have already started due diligence work with
UFIDA, Chinese largest ERP system provider, and we expect to install and
implement an efficient ERP system in the near future.
Changes
in Internal Control over Financial Reporting
Other
than the changes described above, there have been no changes in its internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15 (f) under the Exchange Act) during the quarter ended December 31, 2010
that have materially affected, or are reasonably likely to materially affect,
its internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM 1.
|
LEGAL
PROCEEDINGS.
|
None
ITEM1A.
|
RISK
FACTORS.
|
Smaller
reporting companies such as the Company are not required to disclose the
information set forth under this item.
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
|
None.
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES.
|
None
ITEM 4.
|
(REMOVED
AND RESERVED.)
|
ITEM 5.
|
OTHER
INFORMATION.
|
None
ITEM 6.
|
EXHIBITS
|
No.
|
Description
|
|
2.1
|
Share
Exchange Agreement dated July 17, 2009 between Ableauctions.com, Inc.,
Abdul Ladha and Hanifa Ladha and Top Favour Limited and the shareholders
of Top Favour Limited (13)
|
|
2.2
|
First
Amendment to the Share Exchange Agreement between Ableauctions.com, Inc.,
Abdul Ladha and Hanifa Ladha and Top Favour Limited and the shareholders
of Top Favour Limited dated November 25, 2009
(17)
|
- 55
-
3.1
|
Articles
of Incorporation, as amended (incorporated by reference to Exhibits 3.1,
3.2, 3.3, 3.4 and 3.5 of the Registration Statement on Form 10-SB)
(1)
|
|
3.2
|
Articles
of Amendment to Articles of Incorporation (2)
|
|
3.3
|
Bylaws
(Incorporated by reference to Exhibit 3.6 of the Registration Statement on
Form 10-SB) (1)
|
|
4.1
|
Specimen
Stock Certificate of SinoCoking Coal and Coke Chemical Industries, Inc.
(2)
|
|
10.1
|
1999
Stock Option Plan (Incorporated by reference to Exhibit 4.2 of the
Registration Statement on Form S-8 (4)
|
|
10.2
|
2002
Stock Option Plan for Directors (3)
|
|
10.3
|
2002
Consultant Stock Plan (5)
|
|
10.4
|
Joint
Venture Agreement dated July 28, 2006 between Stanford Development
Corporation, Canitalia Industries Ltd. and 44991 B.C. Ltd.
(6)
|
|
10.5
|
Employment
Agreement dated April 1, 2002 between Abdul Ladha and the
Company**
|
|
10.6
|
Securities
Purchase Agreement dated April 9, 2007 (7)**
|
|
10.7
|
Warrant
Agreement dated April 9, 2007 (7)**
|
|
10.8
|
Letter
Agreement between Axion Investment Corp. and Royal Bank of Canada
(8)
|
|
10.9
|
Development
Agreement dated October 6, 2008 between the Company, Abdul Ladha, Overture
Development Corporation, Surrey Central City Holdings Ltd. and Bullion
Reef Holdings Ltd. (9)**
|
|
10.10
|
First
Amendment dated October 22, 2008 to Development Agreement dated October 6,
2008 (10)**
|
|
10.11
|
Second
Amendment dated October 27, 2008 to Development Agreement dated October 6,
2008 (11)**
|
|
10.12
|
Third
Amendment dated January 13, 2009 to Development Agreement dated October 6,
2008 (12)**
|
|
10.13
|
License
Agreement dated May 15, 2009 between the Company and iCollector
Technologies Ltd. and ABC Live Auction World Ltd. (15)
|
|
10.14
|
License
Agreement dated June 1, 2009 between the Company and RapidFusion, Inc. and
Pacific Amber Technologies, Inc. (15)
|
|
10.15
|
Voting
Agreement dated July 17, 2009 between Abdul Ladha and Hanifa Ladha and Top
Favour Limited (13)
|
|
10.16
|
Sample
indemnity agreement between Ableauctions.com, Inc. and each of its
directors (14)
|
|
10.17
|
Agreement
establishing the Able (U.S.) Liquidating Trust (15)
|
|
10.18
|
Agreement
establishing the Able (U.S.) Distribution Trust (15)
|
|
10.19
|
Agreement
establishing the Able (Canada) Distribution Trust (15)
|
|
10.20
|
Transfer
and Assignment of Assets and Assumption of Liabilities
(15)
|
|
10.21
|
Form
of Securities Purchase Agreement (Regulation S) (2)
|
|
10.22
|
Form
of Warrant dated February 5, 2010 (Regulation S) (2)
|
|
10.23
|
Form
of Director’s Offer and Acceptance Letter (2)
|
|
10.24
|
Form
of Officer’s Offer and Acceptance Letter (2)
|
|
10.25
|
Consulting
Services Agreement (2)
|
|
10.26
|
Operating
Agreement (2)
|
|
10.27
|
Equity
Pledge Agreement (2)
|
|
10.28
|
Option
Agreement (2)
|
|
10.29
|
Voting
Rights Proxy Agreement (2)
|
|
10.30
|
Lease
Agreement (2)
|
|
10.31
|
Form
of Warrant dated March 11, 2010 (Regulation S) (18)
|
|
10.32
|
Form
of Securities Purchase Agreement (Regulation D) (18)
|
|
10.33
|
Form
of Registration Rights Agreement (18)
|
|
10.34
|
Form
of Warrant dated March 11, 2010 (Regulation D) (18)
|
|
10.35
|
Placement
Agent Agreement (18)
|
|
10.36
|
Equity
Interests Transfer Agreement between Henan Province Pingdingshan Hongli
Coal & Coke Co., Ltd. on the one hand, and Dongping Wu, Xiaoling Zhao
and Dianqing Li on the other, for the Shuangrui Equity Interests dated as
of August 10, 2010 (20)
|
|
10.37
|
Equity
Interests Transfer Agreement between Henan Province Pingdingshan Hongli
Coal & Coke Co., Ltd. on the one hand, and Mingxun Du and Xingling Li
on the other, for the Xingsheng Equity Interests dated as of August 10,
2010 (20)
|
|
14
|
Code
of Ethics (16)
|
|
21.2
|
Subsidiaries
of SinoCoking Coal and Coke Chemical Industries, Inc.
(15)
|
|
31.1
|
Certification
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
*
|
- 56
-
31.2
|
Certification
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. *
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
*
|
** Denotes
an agreement with management.
(1)
|
Incorporated
by reference to the Form 10-SB filed by the Company with the Securities
and Exchange Commission on November 18,
1999.
|
(2)
|
Incorporated
by reference to the Current Report on Form 8-K filed by the Company with
the Securities and Exchange Commission on February 8,
2010.
|
(3)
|
Incorporated
by reference to the Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002 filed by the Company with the Securities and Exchange
Commission on March 27, 2003.
|
(4)
|
Incorporated
by reference to the Form S-8 Registration Statement filed by the Company
with the Securities and Exchange Commission on June 13,
2003.
|
(5)
|
Incorporated
by reference to the Form S-8 Registration Statement filed by the Company
with the Securities and Exchange Commission on May 8,
2002.
|
(6)
|
Incorporated
by reference to the Quarterly Report on Form 10-QSB for the period ended
September 30, 2006 filed by the Company on November 13,
2006.
|
(7)
|
Incorporated
by reference to the Current Report on Form 8-K filed by the Company with
the Securities and Exchange Commission on April 11,
2007.
|
(8)
|
Incorporated
by reference to the Current Report on Form 8-K filed by the Company with
the Securities and Exchange Commission on July 30,
2007.
|
(9)
|
Incorporated
by reference to the Current Report on Form 8-K filed by the Company with
the Securities and Exchange Commission on October 9,
2008.
|
(10)
|
Incorporated
by reference to the Current Report on Form 8-K filed by the Company with
the Securities and Exchange Commission on October 23,
2008.
|
(11)
|
Incorporated
by reference to the Current Report on Form 8-K filed by the Company with
the Securities and Exchange Commission on November 3,
2008.
|
(12)
|
Incorporated
by reference to the Current Report on Form 8-K filed by the Company with
the Securities and Exchange Commission on January 15,
2009.
|
(13)
|
Incorporated
by reference to the Current Report on Form 8-K filed by the Company with
the Securities and Exchange Commission on July 17,
2009.
|
(14)
|
Incorporated
by reference to the registration statement on Form S-1 filed by the
Company with the Securities and Exchange Commission on July 2,
2002.
|
(15)
|
Incorporated
by reference to the registration statement on Form 10-K filed by the
Company with the Securities and Exchange Commission on March 31,
2010.
|
- 57
-
(16)
|
Incorporated
by reference to the Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2003 filed by the Company on March 30,
2004.
|
(17)
|
Incorporated
by reference to the Form 8-K Current Report filed by the Company with the
Securities and Exchange Commission on November 25,
2009.
|
(18)
|
Incorporated
by reference to the Form 8-K Current Report filed by the Company with the
Securities and Exchange Commission on March 15,
2010.
|
(19)
|
Incorporated
by reference to the registration statement on Form S-1 filed by the
Company with the Securities and Exchange Commission on May 11,
2010.
|
(20)
|
Incorporated
by reference to the Form 8-K Current Report filed by the Company with the
Securities and Exchange Commission on August 10,
2010.
|
- 58
-
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
February 16, 2011
|
SINOCOKING
COAL AND COKE
CHEMICAL
INDUSTRIES, INC.
|
|
By:
|
/s/ Jianhua Lv
|
|
Jianhua
Lv
|
||
Chief
Executive Officer
|
||
(Principal
Executive Officer)
|
||
By:
|
/s/ Zan Wu
|
|
Zan
Wu
|
||
Chief
Financial Officer
|
||
(Principal
Financial and Accounting
Officer)
|
- 59
-