Attached files
file | filename |
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EX-31.1 - Puda Coal, Inc. | v202533_ex31-1.htm |
EX-31.2 - Puda Coal, Inc. | v202533_ex31-2.htm |
EX-32.1 - Puda Coal, Inc. | v202533_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
l0-Q
(Mark
One)
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2010
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For the
transition period from __________to _________
Commission
file number 333-85306
PUDA
COAL, INC.
|
||
(Exact
name of registrant as specified in its charter)
|
||
Delaware
|
65-1129912
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
No.)
|
426
Xuefu Street, Taiyuan, Shanxi Province, The People’s Republic of
China
|
030006
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
011
86 351 228 1302
|
(Registrant’s
telephone number, including area code)
|
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 o
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 o No o
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.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x (Do not check if
a smaller reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
As of the
latest practicable date, November 10, 2010, the issuer had 20,759,060 shares of
common stock outstanding.
TABLE
OF CONTENTS
Page
|
||||
PART
I. FINANCIAL INFORMATION
|
||||
Item
1. Financial Statements
|
||||
Consolidated
Balance Sheets as of September 30, 2010 (unaudited)
and
December 31, 2009
|
3-4 | |||
Unaudited
Consolidated Statements of Operations for the three and nine months
ended September 30, 2010 and 2009
|
5 | |||
Unaudited
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2010 and 2009
|
6 | |||
Notes
to Unaudited Consolidated Financial Statements
|
7-37 | |||
Item
2. Management’s Discussion and Analysis of Financial Condition
and
Results of Operations
|
38-45 | |||
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
46-47 | |||
Item
4. Controls and Procedures
|
47-48 | |||
PART
II. OTHER INFORMATION
|
||||
Item
1A. Risk Factors
|
48 | |||
Item
6. Exhibits
|
48 | |||
Signatures
|
49 | |||
Certifications
|
2
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
PUDA
COAL, INC.
CONSOLIDATED
BALANCE SHEETS
September
30, 2010 and December 31, 2009
(In
thousands of United States dollars)
Note(s)
|
September
30,
2010
|
December
31,
2009
|
||||||||||
(Unaudited)
|
||||||||||||
ASSETS
|
||||||||||||
CURRENT
ASSETS
|
||||||||||||
Cash
and cash equivalents
|
19 | $ | 80,076 | $ | 19,918 | |||||||
Accounts
receivable
|
36,577 | 25,340 | ||||||||||
Advances
to suppliers
|
||||||||||||
-
Related party
|
3 | - | 1,020 | |||||||||
-
Third parties
|
950 | 3,552 | ||||||||||
Inventories
|
4 | 15,068 | 22,531 | |||||||||
Total
current assets
|
132,671 | 72,361 | ||||||||||
PREPAYMENTS
|
- | 6,259 | ||||||||||
PROPERTY,
PLANT, EQUIPMENT AND MINING ASSETS
|
5 | 56,070 | 13,986 | |||||||||
LAND-USE
RIGHTS
|
6 | 3,958 | 3,945 | |||||||||
INVESTMENT,
AT COST
|
7 | 14,947 | 14,650 | |||||||||
TOTAL
ASSETS
|
$ | 207,646 | $ | 111,201 | ||||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||||
CURRENT
LIABILITIES
|
||||||||||||
Current
portion of long-term debt
|
||||||||||||
- Related party
|
3, 9 | $ | 1,300 | $ | 1,300 | |||||||
Accounts
payable
|
||||||||||||
-
Related party
|
3 | 492 | - | |||||||||
-
Third parties
|
7,732 | 4,839 | ||||||||||
Other
payables
|
||||||||||||
-
Related parties
|
3 | 1,480 | 1,031 | |||||||||
-
Third parties
|
2,812 | 2,650 | ||||||||||
Assets
acquisition price payable
|
8 | 8,514 | - | |||||||||
Accrued
expenses
|
696 | 1,076 | ||||||||||
Income
taxes payable
|
2,117 | 1,091 | ||||||||||
VAT
payable
|
301 | 1,135 | ||||||||||
Derivative
warrants
|
10, 20 | 2,326 | 7,620 | |||||||||
Total
current liabilities
|
27,770 | 20,742 | ||||||||||
LONG-TERM
LIABILITIES
|
||||||||||||
Long-term
debt
|
||||||||||||
-
Related parties
|
3, 9 | 41,397 | 6,500 | |||||||||
Total liabilities
|
69,167 | 27,242 |
3
PUDA
COAL, INC.
CONSOLIDATED
BALANCE SHEETS (Continued)
September
30, 2010 and December 31, 2009
(In
thousands of United States dollars)
Note(s)
|
September
30,
2010
|
December
31,
2009
|
||||||||||
(Unaudited)
|
||||||||||||
COMMITMENTS
AND CONTINGENCIES
|
11 | |||||||||||
STOCKHOLDERS’
EQUITY
|
||||||||||||
Preferred
stock, authorized 5,000,000 shares, par
value
$0.01, issued and outstanding None
|
- | - | ||||||||||
Common
stock, authorized 150,000,000 shares,
par
value $0.001, issued and outstanding
20,363,309 (2009:
15,828,863)
|
12 | 20 | 15 | |||||||||
Paid-in
capital
|
12 | 67,983 | 35,212 | |||||||||
Statutory
surplus reserve fund
|
1,366 | 1,366 | ||||||||||
Retained
earnings
|
56,371 | 37,233 | ||||||||||
Accumulated
other comprehensive income
|
12,739 | 10,133 | ||||||||||
Total
stockholders’ equity
|
138,479 | 83,959 | ||||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 207,646 | $ | 111,201 |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
PUDA
COAL, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
For
the three and nine months ended September 30, 2010 and 2009
(In
thousands of United States dollars, except per share data)
Note(s)
|
Three
months ended
September
30,
2010
|
Three
months ended
September
30,
2009
|
Nine
months
ended
September
30,
2010
|
Nine
months
ended
September
30,
2009
|
||||||||||||||||
NET
REVENUE
|
$ | 90,002 | $ | 56,106 | $ | 234,292 | $ | 153,817 | ||||||||||||
COST
OF REVENUE
|
80,395 | 50,731 | 202,338 | 140,969 | ||||||||||||||||
GROSS
PROFIT
|
9,607 | 5,375 | 31,954 | 12,848 | ||||||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||||||
Selling
expenses
|
859 | 655 | 2,347 | 1,765 | ||||||||||||||||
General
and administrative expenses
|
842 | 682 | 2,204 | 1,427 | ||||||||||||||||
TOTAL
OPERATING EXPENSES
|
1,701 | 1,337 | 4,551 | 3,192 | ||||||||||||||||
INCOME
FROM OPERATIONS
|
7,906 | 4,038 | 27,403 | 9,656 | ||||||||||||||||
INTEREST
INCOME
|
68 | 16 | 151 | 72 | ||||||||||||||||
INTEREST
EXPENSE - RELATED PARTIES
|
13 | (645 | ) | (127 | ) | (1,194 | ) | (396 | ) | |||||||||||
DERIVATIVE
UNREALIZED FAIR VALUE
LOSS
|
10, 14 | (195 | ) | (3,436 | ) | (65 | ) | (3,549 | ) | |||||||||||
INCOME
BEFORE TAXATION
|
7,134 | 491 | 26,295 | 5,783 | ||||||||||||||||
TAXATION
|
15 | (2,093 | ) | (1,112 | ) | (7,157 | ) | (2,559 | ) | |||||||||||
NET
INCOME / (LOSS)
|
5,041 | (621 | ) | 19,138 | 3,224 | |||||||||||||||
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||||||
Foreign
currency translation adjustment
|
1,898 | (42 | ) | 2,606 | (238 | ) | ||||||||||||||
COMPREHENSIVE
INCOME / (LOSS)
|
$ | 6,939 | $ | (663 | ) | $ | 21,744 | $ | 2,986 | |||||||||||
EARNINGS
/ (LOSS) PER SHARE
|
||||||||||||||||||||
-
BASIC
|
$ | 0.25 | $ | (0.04 | ) | $ | 0.99 | $ | 0.21 | |||||||||||
-
DILUTED
|
$ | 0.25 | $ | (0.04 | ) | $ | 0.97 | $ | 0.21 | |||||||||||
WEIGHTED
AVERAGE NUMBER OF SHARES
OUTSTANDING
-
BASIC
|
16 | 20,301,690 | 15,387,110 | 19,292,595 | 15,360,301 | |||||||||||||||
-
DILUTED
|
16 | 20,832,440 | 15,387,110 | 19,823,345 | 15,386,790 |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
PUDA
COAL, INC.
|
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the nine months ended September 30, 2010 and 2009
(In
thousands of United States dollars)
Nine
months ended
September
30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 19,138 | $ | 3,224 | ||||
Adjustments
to reconcile net income to net cash provided by
operating
activities
|
||||||||
Amortization
of land-use rights
|
66 | 65 | ||||||
Depreciation
|
1,263 | 1,258 | ||||||
Allowance
for doubtful debts
|
- | 46 | ||||||
Derivative
unrealized fair value loss
|
65 | 3,549 | ||||||
Stock
compensation
|
642 | 73 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Increase
in accounts receivable
|
(10,542 | ) | (15,187 | ) | ||||
Decrease
in other receivables
|
- | 7 | ||||||
Decrease
in advances to suppliers
|
3,652 | 2,677 | ||||||
Decrease/(increase)
in inventories
|
7,784 | (6,370 | ) | |||||
Increase
in accounts payable
|
3,232 | 1,161 | ||||||
Decrease
in accrued expenses
|
(320 | ) | (225 | ) | ||||
Increase/(decrease)
in other payables
|
539 | (248 | ) | |||||
Increase/(decrease)
in income tax payable
|
987 | (206 | ) | |||||
Decrease
in VAT payable
|
(842 | ) | (1,199 | ) | ||||
Net
cash provided by/(used in) operating activities
|
25,664 | (11,375 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of mining rights and mining assets
|
(27,219 | ) | (8,782 | ) | ||||
Increase
in construction in progress
|
(639 | ) | - | |||||
Net
cash used in investing activities
|
(27,858 | ) | (8,782 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Exercise
of warrants
|
5,122 | 150 | ||||||
Issue
of common shares
|
14,538 | - | ||||||
Increase
in registered capital of Shanxi Coal
|
7,041 | - | ||||||
Borrowings
from related party
|
35,391 | - | ||||||
Repayment
of long-term debt
|
(975 | ) | (975 | ) | ||||
Net
cash provided by/(used in) financing activities
|
61,117 | (825 | ) | |||||
Effect
of exchange rate changes on cash
|
1,235 | (246 | ) | |||||
Net
increase/(decrease) in cash and cash equivalents
|
60,158 | (21,228 | ) | |||||
Cash
and cash equivalents at beginning of period
|
19,918 | 39,108 | ||||||
Cash
and cash equivalents at end of period
|
$ | 80,076 | $ | 17,880 | ||||
Supplementary
cash flow information
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
- related parties
|
$ | 527 | $ | 396 | ||||
Income
taxes
|
$ | 6,172 | $ | 2,764 |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
The Company
Puda
Coal, Inc. (formerly Purezza Group, Inc.)(the “Company” or “Puda”) is a
corporation organized under Delaware Law and headquartered in Shanxi Province,
China. The Company was originally incorporated on August 9, 2001 in
Florida.
On July
15, 2005, the Company acquired all the outstanding capital stock and ownership
interests of Puda Investment Holding Limited (“BVI”) and BVI became a
wholly-owned subsidiary of the Company. In exchange, Puda issued to
the BVI members 1,000,000 shares of its Series A convertible preferred stock,
par value $0.01 per share, of the Company, which are convertible into
678,500,000 shares of Puda’s common stock. The purchase agreement provided that
the preferred shares would immediately and automatically be converted into
shares of Puda’s common stock (the “Mandatory Conversion”), following an
increase in the number of authorized shares of Puda’s common stock from
100,000,000 to 150,000,000, and a 10 to 1 reverse stock split of Puda’s
outstanding common stock (the “10-to-1 Reverse Split”). On
August 2, 2005, the authorized number of shares of common stock of the Company
was increased from 100,000,000 shares to 150,000,000 shares. On
September 8, 2005, Puda completed the 10-to-1 Reverse Split.
Effective
on July 30, 2009 (the “Effective Date”), the Company completed a reincorporation
from a Florida corporation to a Delaware corporation. Each issued and
outstanding share of common stock, par value $0.001 per share, of the
Florida-incorporated Company was automatically converted into 0.142857 issued
and outstanding share of common stock, par value $0.001 per share, of the
Delaware-incorporated Company (the “7-to-1 Share Conversion”). No
fractional shares were or will be issued in connection with the conversion;
instead, the Company rounded up the fractional share to the nearest whole
number. Any common shares exercised from the warrants or stock options which
were issued before the Effective Date were also subject to the conversion ratio
of 7 to 1. The total number of authorized shares of common stock and preferred
stock did not change as a result of the conversion. Although the
7-to-1 Share Conversion occurred on July 30, 2009, it was retroactively
reflected in the consolidated financial statements as if the reverse split was
effective from January 1, 2009.
BVI is an
International Business Company incorporated in the British Virgin Islands on
August 19, 2004 and it has a registered capital of $50,000. BVI has
not had any operating activities since its inception on August 19,
2004.
BVI, in
turn, owns all of the registered capital of Shanxi Putai Resources Limited
(formerly, Taiyuan Putai Business Consulting Co., Ltd.) (“Putai”), a wholly
foreign owned enterprise (“WFOE”) registered under the wholly foreign-owned
enterprises laws of the People’s Republic of China (“PRC”). Putai was
incorporated on November 5, 2004 and has a registered capital of
$20,000. Putai owns 90% of Shanxi Puda Coal Group Co., Ltd.
(formerly, Shanxi Puda Resources Co. Ltd.)(“Shanxi Coal”), a company with
limited liability established under the laws of the PRC.
7
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.
The Company (continued)
Shanxi
Coal was established on June 7, 1995. Shanxi Coal mainly processes
and washes raw coal and sells high-quality, low sulfur, refined coal from its
plants in Shanxi Province to industrial clients located mainly in Central and
Northern China. In September, 2009, the Shanxi provincial government
appointed Shanxi Coal as a consolidator of eight coal mines in Pinglu County,
Shanxi Province. In March 2010, Shanxi Coal received approval from the Shanxi
provincial government to acquire and consolidate four additional coking coal
mines in Huozhou County, Shanxi Province. As of September 30, 2010, Shanxi Coal
has completed the acquisition of two coal mines in Pinglu County (see Note 5).
The initial registered capital of Shanxi Coal was RMB 22.5 million ($2,717,000)
which was increased to RMB 500 million ($73,129,000) in May 2010 as a result of
the new guidelines enacted by the Shanxi provincial government that require the
registered paid-in-capital of coal mine consolidators to be at least RMB 200
million. The owners of Shanxi Coal were Putai (90%), Mr. Ming Zhao
(8%) and Mr. Yao Zhao (2%). In May 2010, Mr. Yao Zhao transferred his
2% ownership to Mr. Ming Zhao. Mr. Ming Zhao is the chairman and was
the president and chief executive officer of Puda until his resignation on June
25, 2008. Mr. Yao Zhao was the chief operating officer of Puda until
his resignation became effective on November 20, 2006. Mr. Ming Zhao and Mr. Yao
Zhao are brothers.
As of
September 30, 2010, the percentages owned by Mr. Ming Zhao and Mr. Yao Zhao in
the companies are as follows:
l
|
Puda
Coal, Inc.: Mr. Ming Zhao (approximately 37%); Mr. Yao Zhao (approximately
9%) held directly.
|
l
|
Puda
Investment Holding Limited: Mr. Ming Zhao (approximately 37%); Mr. Yao
Zhao (approximately 9%) held indirectly through
Puda.
|
l
|
Shanxi
Putai Resources Limited: Mr. Ming Zhao (approximately 37%); Mr. Yao Zhao
(approximately 9%) held indirectly through Puda and
BVI.
|
l
|
Shanxi
Puda Coal Group Co., Ltd.: Mr. Ming Zhao (10%) held directly, Mr. Ming
Zhao (approximately 33%) held indirectly through Puda, BVI and
Putai.
|
After the
above reorganization and as of September 30, 2010, the organizational structure
is as follows:
8
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
Summary of Significant Accounting Policies
(a)
Basis of Presentation and Consolidation
The
unaudited consolidated financial statements include Puda (Registrant and Legal
Parent), BVI, Putai and Shanxi Coal (Operating Company), collectively referred
to as “the Group.” Intercompany items have been eliminated.
The
accompanying unaudited consolidated financial statements as of September 30,
2010 and for the three and nine month periods ended September 30, 2010 and 2009
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and of
Regulation S-X. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to the Securities and Exchange Commission’s rules and
regulations. In the
opinion of management, these unaudited consolidated interim financial statements
include all adjustments and disclosures considered necessary to a fair statement
of the results for the interim periods presented. All adjustments are
of a normal recurring nature. The results of operations for the nine
months ended September 30, 2010 are not necessarily indicative of the results
for the full fiscal year ending December 31, 2010. The unaudited
consolidated interim financial statements should be read in conjunction with the
Company’s audited consolidated financial statements and notes thereto for the
year ended December 31, 2009 as reported in Form 10-K.
(b)
Use of Estimates
In
preparing unaudited consolidated financial statements in conformity with
accounting principles generally accepted in the United States, management is
required 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 unaudited consolidated financial statements and revenues and
expenses during the reported periods. Significant estimates include depreciation
and allowance for doubtful accounts receivable. Actual results could
differ from those estimates.
(c)
Cash and Cash Equivalents
The Group
considers all highly liquid investments with original maturities of three months
or less at the time of purchase to be cash equivalents. As of September 30, 2010
and December 31, 2009, the Group did not have any cash equivalents.
(d)
Allowance for Doubtful Accounts
The Group
recognizes an allowance for doubtful accounts to ensure accounts receivable are
not overstated due to uncollectability. An allowance for doubtful accounts is
maintained for all customers based on a variety of factors, including the length
of time the receivables are past due, significant one-time events and historical
experience. An additional reserve for individual accounts is recorded when the
Group becomes aware of a customer’s inability to meet its financial obligations,
such as in the case of bankruptcy filings or deterioration in the customer’s
operating results or financial position. If circumstances related to customers
change, estimates of the recoverability of receivables would be further
adjusted.
(e)
Inventories
Inventories
are comprised of raw materials and finished goods and are stated at the lower of
cost or market value. Substantially all inventory costs are determined using the
weighted average basis. Costs of finished goods include direct labor, direct
materials, and production overhead before the goods are ready for
sale.
9
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
Summary of Significant Accounting Policies (continued)
(f)
Property, Plant, Equipment and Mining Assets
Property,
plant and equipment are stated at cost. Depreciation is provided principally by
use of the straight-line method over the useful lives of the related assets.
Expenditures for maintenance and repairs, which do not improve or extend the
expected useful lives of the assets, are expensed to operations while major
repairs are capitalized.
Management
considers that the Group has a 10% residual value for buildings, and a 5%
residual value for other property, plant and equipment. The estimated useful
lives are as follows:
Buildings
and facilities
|
20
years
|
Machinery
and equipment
|
10
years
|
10
years
|
|
Office
equipment and others
|
10
years
|
Mine
works and reconstruction costs are capitalized and amortized by the units of
production method over estimated total recoverable proven and probable
reserves.
Amortization
of mining rights is provided by the units of production method over estimated
total recoverable proven and probable reserves.
Construction-in-progress
represents mine works under construction which mainly includes safety and
environmental studies, purchase of materials, and labor.
Construction-in-progress is not depreciated until amounts are transferred to
property when available for use.
The gain
or loss on disposal of property, plant, equipment and mining assets is the
difference between the net sales proceeds and the carrying amount of the
relevant assets, and, if any, is recognized in the unaudited consolidated
statement of operations.
(g)
Land-use Rights and Amortization
Land-use
rights are stated at cost, less amortization. Amortization of land-use rights is
calculated on the straight-line method, based on the period over which the right
is granted by the relevant authorities in Shanxi Province, PRC.
10
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
Summary of Significant Accounting Policies (continued)
(h) Investment
The Group
accounts for its equity investment, for which it does not possess the ability to
exercise significant influence, using the cost method under ASC 325
“Investments”. Significant influence generally does not exist if the
ownership interest in the voting stock of the investee is less than 20% and the
Group does not take part in the operational management of the
investee. Under the cost method of accounting, investments are
carried at cost and are adjusted only for other-than-temporary declines in
realizable value and additional investments. When the decline is
determined to be other-than-temporary, the cost basis for the investment is
reduced and a loss is realized in the unaudited consolidated statement of
operations in the period in which it occurs. When the decline is determined to
be temporary, the unrealized losses are included in the shareholders' equity
section in the consolidated balance sheets. The Group makes such
determination based upon a number of factors, including financial condition,
operating results, sales forecasts and earnings growth of the investee, broad
economic factors impacting the investee’s industry, and the Group's intent and
ability to retain the investment over a period of time, which is sufficient to
allow for any recovery in market value. Under the cost method of
accounting, dividend received is recognized as income (see Note 7).
(i)
Impairment of Long-Lived Assets
In
accordance with ASC 360 "Property, Plant, and Equipment", the Group evaluates
its long-lived assets to determine whether later events and circumstances
warrant revised estimates of useful lives or a reduction in carrying value due
to impairment. If indicators of impairment exist and if the value of the assets
is impaired, an impairment loss would be recognized.
(j)
Derivative Financial Instruments
Derivative
financial instruments are accounted for under ASC 815 “Derivatives and
Hedging”. Under ASC 815, all derivative instruments are recorded on
the balance sheet as assets or liabilities and measured at fair
value. Changes in the fair value of derivative instruments are
recorded in current earnings.
(k)
Income Taxes
The Group
accounts for income taxes under ASC 740 "Income Taxes". Under ASC
740, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
ASC 740, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date. The Group reviewed the differences between the tax bases
under PRC tax laws and financial reporting under US GAAP, and no material
differences were found, thus, there were no deferred tax assets or liabilities
as of September 30, 2010 and December 31, 2009.
ASC 740
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements and it prescribes a recognition threshold and
measurement attributable for the financial statements recognition and
measurement of a tax position taken or expected to be taken in a tax return. ASC
740 also provides guidance on derecognizing, classification, interest and
penalties, accounting in interim periods, disclosures and transitions. Interest
and penalties from tax assessments, if any, are included in general and
administrative expenses in the unaudited consolidated statements of
operations.
11
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
Summary of Significant Accounting Policies (continued)
(k)
Income Taxes (continued)
The Group
recognizes that virtually all tax positions in the PRC are not free of some
degree of uncertainty due to tax law and policy changes by the PRC government.
However, the Group cannot reasonably quantify political risk factors and thus
must depend on guidance issued by current PRC government officials.
Based on
all known facts and circumstances and current tax law, the Group believes that
the total amount of unrecognized tax benefits as of September 30, 2010 is not
material to its results of operations, financial condition or cash flows. The
Group also believes that the total amount of unrecognized tax benefits as of
September 30, 2010, if recognized, would not have a material effect on its
effective tax rate. The Group further believes that there are no tax positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Group’s results of operations, financial condition or
cash flows.
Under
current PRC tax laws, 10% withholding tax is imposed in respect to distributions
paid to foreign owners. As the Group has no intention to pay
dividends in the foreseeable future, no withholding tax on undistributed
earnings has been accrued as of September 30, 2010.
Under
current PRC tax laws, no tax is imposed in respect to distributions paid to
non-foreign owners
(l)
Revenue Recognition
Revenue
from goods sold is recognized when (i) persuasive evidence of an arrangement
exists, which is generally represented by a contract with the buyer; (ii) title
has passed to the buyer, which generally is at the time of delivery; (iii) the
price is agreed with the buyer; and (iv) collectability is reasonably
assured.
Net
revenue represents the invoiced value of products, less returns and discounts
and net of VAT.
(m)
Foreign Currency Transactions
The
reporting currency of the Group is the U.S. dollar. Shanxi Coal uses
its local currency, Renminbi, as its functional currency. Results of operations
and cash flow are translated at average exchange rates during the period, and
assets and liabilities are translated at the end of period exchange
rates. Translation adjustments resulting from this process are
included in accumulated other comprehensive income in stockholders’
equity. Transaction gains and losses that arise from exchange rate
fluctuations from transactions denominated in a currency other than the
functional currency are included in the results of operations as incurred. These
amounts are not material to the unaudited consolidated financial statements for
the three and nine months ended September 30, 2010 and 2009.
The PRC
government imposes significant exchange restrictions on fund transfers out of
the PRC that are not related to business operations. These restrictions have not
had a material impact on the Group because it has not engaged in any significant
transactions that are subject to the restrictions.
12
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
Summary of Significant Accounting Policies (continued)
(n)
Fair Value of Financial Instruments
ASC 825
“Financial Instruments”, requires disclosing fair value to the extent
practicable for financial instruments that are recognized or unrecognized in the
balance sheets. The fair value of the financial instruments disclosed
herein is not necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences of
realization or settlement.
For
certain financial instruments, including cash, accounts, related party
receivables and payables, other receivables, accounts payable, other payables
and accrued expenses, it was assumed that the carrying amounts approximate fair
value because of the near term maturities of such obligations. For long-term
debt, the carrying amount is assumed to approximate fair value based on the
current rates at which the Group could borrow funds with similar remaining
maturities.
(o)
Earnings Per Share
Basic
earnings per share is computed by dividing the earnings for the period by the
weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of
securities by including other potential common stock equivalents, including
stock options and warrants, in the weighted average number of common shares
outstanding for the period, if dilutive.
(p)
Accumulated Other Comprehensive Income
Accumulated
other comprehensive income represents the change in equity of the Group during
the periods presented from foreign currency translation
adjustments.
(q)
Share-Based Compensation Expense
ASC 718
“Compensation-Stock Compensation”, requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors including employee stock options and employee stock purchases based on
estimated fair values. ASC 718 requires companies to estimate the
fair value of share-based payment awards on the date of grant using an
option-pricing model. The value of awards that are ultimately expected to vest
is recognized as expense over the requisite service periods in the Group’s
unaudited consolidated statements of operations.
(r)
Asset Retirement Obligations
Under the
Shanxi Province local rules and regulations, the Group is required to make
payments for restoration, rehabilitation or environmental protection of the land
after the underground sites have been mined. Such costs are recognized in the
period in which the obligation is identified and is charged as an expense in
proportion to the coal extracted. No such costs were recognized
in the nine months ended September 30, 2010 as the coal mine operations have not
started.
(s)
Reclassifications
Certain
reclassifications have been made to prior period balances in order to conform to
the current period’s presentation.
13
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3.
Related Party Transactions
As of
September 30, 2010 and December 31, 2009, the Group had the following amounts
due from/to related parties:
September 30,
2010
|
December
31,
2009
|
|||||||
$’000
|
$’000
|
|||||||
Advance
to Shanxi Liulin Jucai Coal Industry Co., Limited (“Jucai Coal”), a
related company with a common owner
|
$ | - | $ | 1,020 | ||||
Accounts
payable to Jucai Coal
|
$ | 492 | $ | - | ||||
Other
payable to Shanxi Puda Resources Group Limited (“Resources Group”), a
related company with common owners
|
$ | 811 | $ | 795 | ||||
Other
payable to Mr. Ming Zhao, chairman and shareholder of Puda
|
669 | - | ||||||
Other
payable to Mr. Yao Zhao, shareholder of Puda
|
- | 236 | ||||||
$ | 1,480 | $ | 1,031 | |||||
Loan
payable to Resources Group
|
||||||||
-current
portion
|
$ | 1,300 | $ | 1,300 | ||||
Loan
payable to Resources Group
|
||||||||
-long-term
portion
|
5,525 | 6,500 | ||||||
Loan
payable to Mr. Ming Zhao
|
35,872 | - | ||||||
$ | 41,397 | $ | 6,500 |
The
balances, except for the loans payable to Resources Group and Mr. Ming Zhao, are
unsecured, interest-free and have no fixed terms for repayment.
The
balance payable to Resources Group of $811,000 includes $901,000 of professional
and regulatory charges related to the public listing paid by Resources Group on
behalf of the Company, netted against other receivables of $90,000 due from
Resources Group.
In 2001,
Shanxi Coal entered into agreements with Resources Group to lease an office and
certain equipment. In the three months ended September 30, 2010 and
2009, rental expenses paid to Resources Group were $40,000 and $40,000,
respectively. In the nine months ended September 30, 2010 and 2009, rental
expenses paid to Resources Group were $120,000 and $119,000, respectively (see
Note 11).
In the
three months ended September 30, 2010 and 2009, Shanxi Coal purchased raw coal
from Jucai Coal in the amounts of $8,272,000 and $4,039,000, respectively. In
the nine months ended September 30, 2010 and 2009, Shanxi Coal purchased raw
coal from Jucai Coal in the amounts of $19,004,000 and $11,122,000,
respectively.
14
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3.
Related Party Transactions (continued)
On
November 17, 2005, Shanxi Coal entered into a coal supply agreement with Jucai
Coal, pursuant to which Shanxi Coal has priority to Jucai Coal’s high grade
metallurgical coking coal supply over Jucai Coal’s other
customers. Under the terms of the agreement, Shanxi Coal receives a
discount of approximately RMB 30 (approximately $4) to RMB 50 (approximately $7)
per metric ton of coal from the price Jucai Coal charges to its other
customers.
On
November 17, 2005, Shanxi Coal entered into two conveyance agreements with
Resources Group. The two agreements transferred two new coal washing
plants, related land-use rights and coal washing equipment in Liulin County and
Zhongyang County, Shanxi Province. The Liulin County plant has an
annual clean coal washing capacity of 1.1 million metric tons while the
Zhongyang County plant has an annual clean coal washing capacity of 1.2 million
metric tons. The Liulin County plant started formal production in
December 2005. The Liulin County plant, land-use rights and related
equipment were purchased for a cost of $5,800,000. The Zhongyang
County plant started formal production at the end of March 2006. The
Zhongyang County plant, land-use rights and related equipment were purchased for
a cost of $7,200,000. Each conveyance agreement provides that the
purchase price paid by Shanxi Coal to Resources Group, which totals $13,000,000,
should be amortized over ten years from December 31, 2005 and bears interest at
a rate of 6% per annum payable quarterly. In the three months ended
September 30, 2010 and 2009, Shanxi Coal paid principal of $325,000 (2009:
$325,000) and interest of $107,000 (2009: $127,000) to Resources
Group. In the nine months ended September 30, 2010 and 2009, Shanxi
Coal paid principal of $975,000 (2009: $975,000) and interest of $336,000 (2009:
$396,000) to Resources Group. Shanxi Coal pledged the land use rights, plant and
equipment of the plants to Resources Group until such time when the purchase
price and interest thereupon is fully paid by Shanxi Coal to Resources
Group. If Shanxi Coal fails to pay the principal or interest of the
purchase price of the plants financed by Resources Group in full when due, the
properties acquired by Shanxi Coal, which have been pledged to Resources Group
as collateral, are revertible to Resources Group (see Notes 5, 6 and 9).
On
December 11, 2009, Shanxi Coal entered into mining rights and mining assets
transfer agreements for the acquisition of two coal mines in Pinglu County,
Shanxi Province. Shanxi Coal’s obligation for payment under the
agreements is guaranteed by Mr. Ming Zhao (see Note 5).
On May 7,
2010, Putai and Mr. Ming Zhao signed a loan agreement, pursuant to which, Putai
borrowed from Mr. Ming Zhao RMB 240 million ($35,872,000) . The loan is
unsecured and bears a 6% annual interest rate, in which the interest is payable
on a quarterly basis, subject to certain adjustments to be agreed upon by the
parties if such adjustments are necessary in light of the official interest rate
of the PRC, as specified in the agreement.. The term of the loan is 18 months
from May 7, 2010. If Putai does not pay off the principal and interest of the
loan on time in accordance with the agreement, Mr. Ming Zhao may require Putai
to pay off the loan immediately and charge an additional 5% interest on the
amount of loan that is not paid off on time. In addition, if the
interest rate under the agreement is adjusted according to the agreement and
Putai fails to pay interest at the adjusted rate, Mr. Ming Zhao may require
Putai to pay off the loan immediately. The loan was used by Putai to
increase the registered paid-in capital of Shanxi Coal. In the three
and nine months ended September 30, 2010, interest accrued on the loan amounted
to $538,000 and $858,000, respectively. As of September 30, 2010, the
balance of interest payable of $669,000 was included in other payables (see Note
9).
15
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.
Inventories
As of
September 30, 2010 and December 31, 2009, inventories consist of the
following:
September
30,
2010
|
December
31,
2009
|
|||||||
$’000
|
$’000
|
|||||||
Raw
materials
|
$ | 6,649 | $ | 9,671 | ||||
Finished
goods
|
8,419 | 12,860 | ||||||
Total
|
$ | 15,068 | $ | 22,531 |
There was
no allowance for losses on inventories as of September 30, 2010 and December 31,
2009.
16
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5.
Property, Plant, Equipment and Mining Assets
As of
September 30, 2010 and December 31, 2009, property, plant, equipment and mining
assets consist of the following:
September
30,
2010
|
December
31,
2009
|
|||||||
$’000
|
$’000
|
|||||||
Cost:
|
||||||||
Buildings
and facilities
|
$ | 5,555 | $ | 3,899 | ||||
Machinery
equipment
|
18,904 | 15,682 | ||||||
Motor
vehicles
|
116 | 114 | ||||||
Office
equipment and others
|
36 | 35 | ||||||
Mine
works
|
7,976 | - | ||||||
Mining
rights
|
29,989 | - | ||||||
Construction
in progress
|
639 | - | ||||||
63,215 | 19,730 | |||||||
Accumulated
depreciation:
|
||||||||
Buildings
and facilities
|
797 | 650 | ||||||
Machinery
equipment
|
6,306 | 5,063 | ||||||
Motor
vehicles
|
32 | 24 | ||||||
Office
equipment and others
|
10 | 7 | ||||||
Mine
works
|
- | - | ||||||
Mining
rights
|
- | - | ||||||
Construction
in progress
|
- | - | ||||||
7,145 | 5,744 | |||||||
Carrying
value:
|
||||||||
Buildings
and facilities
|
4,758 | 3,249 | ||||||
Machinery
equipment
|
12,598 | 10,619 | ||||||
Motor
vehicles
|
84 | 90 | ||||||
Office
equipment and others
|
26 | 28 | ||||||
Mine
works
|
7,976 | - | ||||||
Mining
rights
|
29,989 | - | ||||||
Construction
in progress
|
639 | - | ||||||
$ | 56,070 | $ | 13,986 |
Shanxi
Coal pledged the Liulin and Zhongyang coal washing plants and related equipment
to Resources Group until such time when the purchase price and interest thereon
is fully paid by Shanxi Coal. If Shanxi Coal fails to pay the
principal and interest of the purchase prices of these two plants financed by
Resources Group in full when due, the properties acquired by Shanxi Coal, which
have been pledged to Resources Group as the collateral, are revertible to
Resources Group (see
Notes 3 and 9).
17
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5.
Property, Plant, Equipment and Mining Assets (continued)
On June
25, 2010, Shanxi Coal closed a mining right and mining assets transfer agreement
dated December 11, 2009 with Pinglu County Da Wa Coal Industry Co., Ltd. (“Da Wa
Coal”), pursuant to which Shanxi Coal purchased from Da Wa Coal all its tangible
assets and coal mining right with respect to a coal mine located in Pinglu
County, Shanxi Province. As consideration, Shanxi Coal agreed to pay
Da Wa Coal an aggregate purchase price of RMB 190 million ($28,095,000) in cash,
of which RMB 46.6 million ($6.9 million) was for the tangible assets and RMB
143.4 million ($21.1 million) was for the mining right. Management estimates
that the total proven and probable reserve of Da Wa Coal is approximately 10.8
million metric tons by reference to the geological report dated August
2007. The report was prepared by a geological firm hired by the
seller. We have hired an independent geological firm to prepare an
updated report which is now in progress. As of September 30, 2010,
Shanxi Coal has paid RMB 152 million ($22,415,000). Shanxi Coal will pay the
remainder of the purchase price, RMB 38 million ($5,680,000) upon the one year
anniversary of completion of the transfer. Shanxi Coal’s obligation
for payment is guaranteed by Mr. Ming Zhao (see Note 8).
On June
25, 2010, Shanxi Coal closed a mining right and mining assets transfer agreement
dated December 11, 2009 with Pinglu County Guanyao Coal Industry Co., Ltd.
(“Guanyao Coal”), pursuant to which Shanxi Coal purchased from Guanyao Coal all
its tangible assets and coal mining right with respect to a coal mine located in
Pinglu County, Shanxi Province. As consideration, Shanxi Coal agreed
to pay Guanyao Coal an aggregate purchase price of RMB 94.80 million
($14,017,000) in cash, of which RMB 37.6 million ($5.6 million) was for the
tangible assets and RMB 57.2 million ($8.4 million) was for the mining
right. Management estimates that the total proven and probable
reserve of Guanyao Coal is approximately 7.4 million metric tons by reference to
the geological report dated March 2007. The report was prepared by a
geological firm hired by the seller. We have hired an independent
geological firm to prepare an updated report which is now in progress. As of September 30,
2010, Shanxi Coal has paid RMB 75.84 million ($11,183,000). Shanxi
Coal will pay the remainder of the purchase price, RMB 18.96 million
($2,834,000) upon the one year anniversary of completion of the transfer. Shanxi
Coal’s obligation for payment is guaranteed by Mr. Ming Zhao (see Note
8).
Da Wa
Coal and Guanyao Coal are both selling their coal mine assets and coal mining
rights to Shanxi Coal as a result of the Chinese government’s requirement to
close, consolidate and restructure smaller coal mines and the government’s
approval of Puda Coal as one of the few coal mine consolidators that have the
capacity to acquire and consolidate such coal mines. Da Wa Coal and
Guanyao Coal were closing their coal mine operations. Shanxi Coal is
merely acquiring the tangible assets and coal mining rights from them in their
liquidation process; Shanxi Coal is not acquiring or assuming any business,
customers, vendors, business partners, contracts, employees or goodwill from the
sellers, nor will Shanxi Coal assume any indebtedness or liabilities from them.
The Group accounted for these transactions as asset acquisitions. We
have completed the appraisals for the tangible assets but the appraisals of the
mining rights are still in progress. The valuations will be finalized within 12
months of the close of the acquisitions. When the valuations are
finalized, we will adjust the allocation of purchase price to individual
tangible assets and mining rights based on the relative fair
values. Depreciation on the tangible assets and amortization of
mining rights will not be started until the completion of the reconstruction
works, which are now in progress. The mining assets of Da Wa Coal
and Guanyao Coal will be eventually injected into two new companies, Shanxi
Pinglu Dajinhe Coal Co., Ltd. and Shanxi Pinglu Dajinhe Wujin Coal Co., Ltd,
respectively. The Shanxi government will approve the establishment
and registration of these two companies, which are wholly-owned subsidiaries of
Shanxi Coal, upon the completion of the reconstruction works. Shanxi
Coal was given transitional mining permits, which will expire in November
2011. After the establishment of the two new companies, the mining
permits will be renewed by Shanxi government. The property deeds for the
buildings will also be issued to the two companies.
18
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5.
Property, Plant, Equipment and Mining Assets (continued)
Depreciation
expense for the three months ended September 30, 2010 and 2009 was $418,000 and
$419,000, respectively. Depreciation expense for the nine months ended September
30, 2010 and 2009 was $1,263,000 and $1,258,000,
respectively. In the nine months ended September 30, 2010 and
2009, the amount included in cost of sales and general and administrative
expenses was $1,238,000 (2009: $1,234,000) and $25,000 (2009: $24,000),
respectively.
There was
no impairment in the value of property, plant and equipment for the three and
nine months ended September 30, 2010 and 2009.
6.
Land-use rights
September
30,
2010
|
December
31,
2009
|
|||||||
$’000
|
$’000
|
|||||||
Cost
|
$ | 4,383 | $ | 4,297 | ||||
Accumulated
amortization
|
425 | 352 | ||||||
Carrying
value
|
$ | 3,958 | $ | 3,945 |
Land-use
rights include $2,669,000 purchased from Resources Group which are located in
Liulin County, Shanxi Province and are amortized over fifty years up to August
4, 2055, and $1,656,000 purchased from Resources Group, which are located in
Zhongyang County, Shanxi Province and are amortized over fifty years up to May
20, 2055. Shanxi Coal pledged these land-use rights to Resources
Group until such time when the purchase price and interest thereon is fully paid
by Shanxi Coal (see Notes 3 and 9).
Amortization
expense for the three months ended September 30, 2010 and 2009 was $22,000 and
$21,000, respectively. Amortization expense for the nine months ended
September 30, 2010 and 2009 was $66,000 and $65,000,
respectively. The estimated aggregate amortization expense for the
five years ending December 31, 2010 (remaining three months), 2011, 2012, 2013
and 2014 amounts to approximately $22,000, $88,000, $88,000, $88,000 and
$88,000, respectively.
There was
no impairment in the value of intangible assets for the three and nine months
ended September 30, 2010 and 2009.
7. Investment,
at Cost
On May
14, 2009, Shanxi Coal entered into an agreement of share transfer with two
unrelated individuals to purchase their equity, constituting 18% ownership, in
Shanxi Jianhe Coal Industry Limited Company (“Jianhe Coal”) for an aggregate
purchase price of $14,947,000. The governmental registration of the share
transfer was completed on December 3, 2009 and the purchase price was fully
paid. In addition, under the agreement, the individual owning the
other 82% of Jianhe Coal, guaranteed Shanxi Coal first priority in the right to
purchase other shares of Jianhe Coal within the 24-month period following
execution of the agreement. Shanxi Coal will not take part in
the operational management of the coal mine but will be paid dividends
semiannually based on its 18% ownership in Jianhe Coal, and the dividends
declared each year will be no less than 80% of the annual net profits of Jianhe
Coal. No dividend was declared by Jianhe Coal for the nine months
ended September 30, 2010.
The
investment was recorded at cost and there was no impairment in the value of
investment for the three and nine months ended September 30, 2010 (see Note
2(h)).
19
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Assets
Acquisition Price Payable
The
amount represented the balance of the purchase price for Da Wa Coal of
$5,680,000 and Guanyao Coal of $2,834,000, which will be due on June 25, 2011,
the one year anniversary of completion of the transfer (see Note
5).
9.
Long-term Debt
September
30,
2010
|
December
31,
2009
|
|||||||
$’000
|
$’000
|
|||||||
Conveyance
loan
|
$ | 6,825 | $ | 7,800 | ||||
Loan
from Mr. Ming Zhao
|
35,872 | - | ||||||
42,697 | 7,800 | |||||||
Less:
current portion
|
(1,300 | ) | (1,300 | ) | ||||
Long-term
portion
|
$ | 41,397 | $ | 6,500 |
The
conveyance loan is seller-financed, payable over ten years from December 31,
2005 and bears interest at a rate of 6% per annum, payable
quarterly. In the three months ended September 30, 2010 and 2009,
Shanxi Coal paid principal of $325,000 (2009: $325,000) and interest of $107,000
(2009: $127,000) to Resources Group. In the nine months ended
September 30, 2010 and 2009, Shanxi Coal paid principal of $975,000 (2009:
$975,000) and interest of $336,000 (2009: $396,000) to Resources
Group. Shanxi Coal pledged the land-use rights and plant and
equipment until such time when the purchase price and interest thereon is fully
paid by Shanxi Coal to Resources Group (see Notes 3, 5 and 6).
The loan
from Mr. Ming Zhao is unsecured and bears a 6% annual interest rate, in which
the interest is payable on a quarterly basis. The term of the loan is 18 months
from May 7, 2010. In the three and nine months ended September 30, 2010,
interest accrued on the loan amounted to $538,000 and $858,000,
respectively. As of September 30, 2010, the balance of interest
payable of $669,000 was included in other payables (see Note 3).
The
future principal payments under the conveyance loan and the loan from Mr. Ming
Zhao as of September 30, 2010 are as follows:
Year Ending December
31,
|
$’000
|
|||
2010
(remaining three months)
|
$ | 325 | ||
2011
|
37,172 | |||
2012
|
1,300 | |||
2013
|
1,300 | |||
2014
|
1,300 | |||
Thereafter
|
1,300 | |||
$ | 42,697 |
20
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Derivative
Warrants
(a) On
November 18, 2005, the Company issued $12,500,000 8% unsecured convertible notes
due October 31, 2008 and related warrants to purchase shares of common stock of
the Company. The notes were convertible into common stock at $.50 per
share over the term of the debt. As of September 30, 2010, the notes
with an aggregate principal amount of $10,260,000 were converted into 2,931,429
shares (after adjusting for the 7-to-1 Share Conversion) of common stock, the
notes with an aggregate principal amount of $2,215,000 were redeemed upon
maturity, and the remaining note with principal amount of $25,000 will be paid
off upon the receipt of the original note from the investor. The
remaining note with principal amount of $25,000 is included in other payables in
the consolidated balance sheet as of September 30, 2010. The related warrants to
purchase 3,571,429 shares (after adjusting for the 7-to-1 Share Conversion) of
common stock, exercisable at $4.20 per share (after adjusting for the 7-to-1
Share Conversion), have a term of five years from the date of
issuance. As of September 30, 2010, 2,955,705 warrants (after
adjusting for the 7-to-1 Share Conversion) were exercised into 2,955,705 shares
(after adjusting for the 7-to-1 Share Conversion) of common stock.
Investors
were given "full ratchet" anti-dilution protection under the warrants, meaning
that the exercise price under the warrants will be adjusted to the lowest per
share price for future issuances of Puda's common stock should such per share
price be lower than the exercise price of the warrants, with
carve-outs for (i) issuance of shares of common stock in connection with the
exercise of the warrants, or (ii) the issuance of common stock to employees or
directors pursuant to an equity incentive plan approved by Puda's
stockholders. The exercise price of the warrants is also subject to
proportional adjustments for issuance of shares as payment of dividends, stock
splits, and rights offerings to shareholders in conjunction with payment of cash
dividends. Investors were also given registration rights in connection with the
resale of the common stock underlying the warrants, on a registration statement
to be filed with the SEC. Puda may redeem all, but not less than all,
of the warrants at $0.001 per share subject to 30 business days’ prior notice to
the holders of the warrants, and provided that (i) a registration statement is
in effect covering the common stock underlying the warrants, (ii) the closing
bid price of the common stock of Puda exceeds $2.50 per share on an adjusted
basis for at least 20 consecutive trading days (prior to the adjustment for the
7-to-1 share conversion) and (iii) the average daily trading volume of the
common stock exceeds 50,000 shares per day during the same period.
The
warrants require the Company to register the resale of the shares of common
stock upon exercise of these securities. The warrants are
freestanding derivative financial instruments. The Group accounts for
the fair value of these outstanding warrants to purchase common stock in
accordance with ASC 815 “Derivatives and Hedging,” which requires the Group to
account for the warrants as derivatives. Since the effective
registration of the securities underlying the warrants is an event outside of
the control of the Company, pursuant to ASC 815, the Group recorded the fair
value of the warrants as liabilities. The Group is required to carry
these derivatives on its unaudited consolidated balance sheet at fair value and
unrealized changes in the values of these derivatives are reflected in the
unaudited consolidated statement of operations as “Derivative unrealized fair
value loss”.
The
warrants are classified as a derivative liability because they embody an
obligation to issue a variable number of shares. This obligation is generated by
the Registration Rights described above. Warrants are being amortized
over the term of five years using the effective interest method. Upon
exercise, the pro rata percentage of the amount actually exercised in relation
to the total exercisable is multiplied by the remaining derivative liability,
and transferred to equity. The amount of derivative warrants
transferred to equity in the three months ended September 30, 2010 and 2009 was
$333,000 and $64,000, respectively. The amount of derivative warrants
transferred to equity in the nine months ended September 30, 2010 and 2009 was
$5,320,000 and $64,000, respectively.
21
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Derivative
Warrants (continued)
(b) In
conjunction with the issuance of the notes, the placement agent was issued five
year warrants, exercisable from November 18, 2005, to purchase 357,143 shares
(after adjusting for the 7-to-1 Share Conversion) of common stock of the Company
at an exercise price of $4.20 per share (after adjusting for the 7-to-1 Share
Conversion). The warrants issued to the placement agent have the same
terms and conditions as the warrants issued to the investors, including "full
ratchet" anti-dilution protection, proportional exercise price adjustments based
on issuances of stock as dividends and share splits, and Puda’s right to redeem
the warrants subject to an effective registration statement covering the
underlying shares of the placement agent’s warrant, and certain share price and
trading volume requirements. However, the warrants issued to the placement
agent, unlike the warrants issued to the investors, have a cashless exercise
feature. With a cashless exercise feature, the warrant holders have the option
to pay the exercise price of $4.20 (after adjusting for the 7-to-1 Share
Conversion) not in cash, but by reducing the number of common shares issued to
them. As with the warrants related to the notes, the placement agent
warrants are classified as a derivative liability and are freestanding
derivative financial instruments and contain Registration Rights and Late Filing
Penalties identical to those held by the investors. These warrants
are being amortized over the term of five years using the effective interest
method. Upon exercise, the pro rata percentage of the amount actually
exercised in relation to the total exercisable is multiplied by the remaining
derivative liability, and transferred to equity. The amount of
derivative placement agent warrants transferred to equity in the nine months
ended September 30, 2010 and 2009 was $39,000 and $nil,
respectively. As of September 30, 2010, 298,949 (after adjusting for
the 7-to-1 Share Conversion) placement agent warrants were exercised and
resulted in the issuance of 215,238 shares (after adjusting for the 7-to-1 Share
Conversion) of common stock.
22
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Derivative
Warrants (continued)
(c) The
derivative warrants as of September 30, 2010 and December 31, 2009:
September
30,
2010
|
December
31,
2009
|
|||||||
$000
|
$000
|
|||||||
Amount
allocated to note warrants
|
$ | 6,363 | $ | 6,363 | ||||
Placement
agent warrants
|
5,625 | 5,625 | ||||||
Less:
amount transferred to equity upon exercise of note warrants in
2006
|
(789 | ) | (789 | ) | ||||
Less:
amount transferred to equity upon exercise of placement
agent warrants in 2006
|
(882 | ) | (882 | ) | ||||
Less:
amount transferred to equity upon exercise of note
warrants in
2007
|
(1,527 | ) | (1,527 | ) | ||||
Less:
amount transferred to equity upon exercise of placement agent
warrants in 2007
|
(2,716 | ) | (2,716 | ) | ||||
Less:
change in fair value in 2005
|
(700 | ) | (700 | ) | ||||
Less:
change in fair value in 2006
|
(1,237 | ) | (1,237 | ) | ||||
Add:
change in fair value in 2007
|
343 | 343 | ||||||
Less:
change in fair value in 2008
|
(394 | ) | (394 | ) | ||||
Less:
amount transferred to equity upon exercise of note
warrants in
2009
|
(1,369 | ) | (1,369 | ) | ||||
Less:
amount transferred to equity upon exercise of placement agent
warrants in 2009
|
(133 | ) | (133 | ) | ||||
Add:
change in fair value in 2009
|
5,036 | 5,036 | ||||||
Less:
amount transferred to equity upon exercise of note
warrants in
2010
|
(5,320 | ) | - | |||||
Less:
amount transferred to equity upon exercise of placement agent
warrants in 2010
|
(39 | ) | - | |||||
Add:
change in fair value in 2010
|
65 | - | ||||||
$ | 2,326 | $ | 7,620 |
23
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Derivative
Warrants (continued)
The
following table shows (i) fair values of derivative instruments in our statement
of financial position as of September 30, 2010, and (ii) the effect of
derivative instruments on the statement of financial performance for the nine
months ended September 30, 2010 in accordance with Accounting Standards Update
(“ASU”) 2009-05 “Fair Value Measurements and Disclosure (Topic
820)”:
(i)
Fair values of derivative instruments
|
||||||
Liability
derivatives
|
||||||
September
30, 2010
|
||||||
Balance
sheet location
|
Fair
Value
|
|||||
$000
|
||||||
Derivatives
not designated as hedging instruments under
ASC 815
|
||||||
Derivative
warrants
|
Current
liabilities
|
$ | 2,326 | |||
Total
derivatives
|
$ | 2,326 |
(ii)
Effect of derivative instruments on the statement of
operations
|
||||||
Derivatives
not designated as hedging instruments under ASC
815
|
||||||
Nine
months ended September 30, 2010
|
||||||
Location
of loss recognized in income on derivatives
|
Amount
of loss recognized in income on derivatives
|
|||||
$000
|
||||||
Derivative
warrants
|
Derivative unrealized
fair value loss
|
$ | (65 | ) | ||
Total
|
$ | (65 | ) |
24
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11.
Commitments and Contingencies
As of
September 30, 2010, the Group leased office premises under the operating lease
agreement expiring on December 31, 2013.
The
future minimum lease payments under the above-mentioned lease as of September
30, 2010 are as follows:
Year Ending December
31,
|
$’000
|
|||
2010
(remaining three months)
|
$ | 40 | ||
2011
|
160 | |||
2012
|
160 | |||
2013
|
160 | |||
$ | 520 |
The above
future lease payments represent amounts payable to Resources Group (see Note
3).
In
September, 2009, the Shanxi provincial government appointed Shanxi Coal as a
consolidator of eight coal mines in Pinglu County. Shanxi Coal has the
government’s permission to acquire and consolidate the eight coal mines into
five, which could increase their total annual capacity from approximately 1.6
million to 3.6 million metric tons. As of September 30, 2010, Shanxi
Coal has completed the acquisitions Pinglu Phase I Project, Da Wa Coal and
Guanyao Coal (see Note 5). For the six coal mines in Phase II of the
Pinglu Project, Shanxi Coal has entered into an Investment Cooperation Agreement
on August 1, 2010 with Mr. Ming Zhao and Jianping Gao, an individual unrelated
to the Company (“Mr. Gao”). Pursuant to the Agreement, the parties
will purchase, consolidate and co-develop the six coal mines in Pinglu County,
Shanxi Province. Under the Agreement, Shanxi Coal, Mr. Zhao and Mr.
Gao will contribute 40%, 30% and 30%, respectively, of the total investment
needed for Phase II of the Pinglu Project. Shanxi Coal will be the
project manager. In addition, each of Mr. Zhao and Mr. Gao has agreed
to assign 5.5% of his respective voting rights in the project companies, which
will hold the coal mines after they are acquired, to Shanxi Coal to enable
Shanxi Coal to exercise full operating and management control of the project
companies. The parties will share the profits and bear the risks and
losses in connection with Phase II of the Pinglu Project, in each case based
upon the percentages of their equity ownership and limited by the amount of
investment contributed by each party. Shanxi Coal will only be
responsible for the other parties’ losses caused by Shanxi Coal’s fraud, gross
negligence or breach of material terms of the Agreement. The parties
further agree that, to the extent permitted by the Chinese law, at least 80% of
the audited annual net profits of the project companies established after the
coal mine acquisition will be distributed to the parties at a ratio that is
proportionate to their respective investment.
In March
2010, Shanxi Coal received an approval from the Shanxi provincial government to
acquire and consolidate four additional coking coal mines in Huozhou County,
Shanxi Province, including Jianhe Coal. Shanxi Coal has the government’s
permission to acquire and consolidate the four coal mines into one, which could
increase the total annual capacity of target coal mines from current accumulated
720,000 metric tons to 900,000 metric tons per year. As of September
30, 2010, Shanxi Coal has acquired 18% equity ownership of Jianhe Coal (see Note
7) but has not entered into any definitive agreements for the acquisition of the
other three coal mines.
As of
September 30, 2010 and December 31, 2009, the Group did not have any contingent
liabilities.
25
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12.
Common Stock and Paid-in Capital
Common
Stock
|
Paid-in
Capital
|
|||||||||||
No.
of shares
|
$000 | $000 | ||||||||||
Balance, January
1, 2010
|
15,828,863 | $ | 15 | $ | 35,212 | |||||||
Issue
of shares to directors/employees
|
28,475 | - | 115 | |||||||||
Issue
of common shares
|
3,284,000 | 3 | 14,535 | |||||||||
Increase
in registered capital of Shanxi Coal
|
- | - | 7,041 | |||||||||
Exercise
of note warrants
|
1,215,772 | - | 5,106 | |||||||||
Derivative
note warrants transferred to equity upon exercise
|
- | 2 | 5,320 | |||||||||
Exercise
of placement agent warrants
|
6,199 | - | 16 | |||||||||
Derivative
placement agent warrants transferred to equity upon
exercise
|
- | - | 39 | |||||||||
Stock-based
compensation
|
- | - | 599 | |||||||||
Balance,
September 30, 2010
|
20,363,309 | $ | 20 | $ | 67,983 |
On
February 18, 2010, the Company completed the offering and sale of 2,855,652
shares (the “Primary Shares”) of the Company’s common stock, par value $0.001
per share pursuant to an underwriting agreement with Brean Murray,
Carret & Co., LLC and Newbridge Securities Corporation (collectively, the
“Underwriters”) dated February 11, 2010. The Primary Shares were sold
to the public at a price of $4.75 per share. The Company granted the
Underwriters a 30-day option to purchase an aggregate of 428,348 additional
shares of common stock (the “Overallotment Shares”). On February 16,
2010, the Underwriters exercised the option in full. The offering of
the Overallotment Shares closed simultaneously with the closing of the offering
of the Primary Shares. The net proceeds to the Company were
$14,538,000 after deducting underwriting commissions and expenses associated
with the offering.
In May
2010, the registered capital of Shanxi Coal was increased from RMB 22.5 million
($2,717,000) to RMB 500 million ($73,129,000) as a result of the new guidelines
enacted by the Shanxi provincial government that require the registered
paid-in-capital of coal mine consolidators to be at least RMB 200
million. RMB 430 million ($63,371,000), or 90%, of the increased
capital was made by Putai, Shanxi Coal’s 90% shareholder and the Company’s
wholly-owned subsidiary. The remaining RMB 48 million ($7,041,000), or 10% of
the increased capital was made by Mr. Ming Zhao, who is Shanxi Coal’s 10%
shareholder.
13.
Interest Expense – Related Parties
Interest
expense for the three months ended September 30, 2010 includes a $538,000
interest payment for the 6% loan from Mr. Ming Zhao (2009: $nil), and a $107,000
(2009: $127,000) interest payment for the 6% loan from Resources Group for the
purchase of the Liulin and Zhongyang plants. Interest expense for the nine
months ended September 30, 2010 includes a $858,000 interest payment for the 6%
loan from Mr. Ming Zhao (2009: $nil), and a $336,000 (2009: $396,000) interest
payment for the 6% loan from Resources Group for the purchase of the Liulin
and Zhongyang plants.
26
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14.
Derivative Unrealized Fair Value Loss
Derivative
unrealized fair value loss of $195,000 in the three months ended September 30,
2010 (2009: $3,436,000) and derivative unrealized fair value loss of $65,000 in
the nine months ended September 30, 2010 (2009: $3,549,000) represented the
change in fair value of the derivative warrants (see Note 10).
15.
Taxation
No
provision for taxation has been made for Puda, BVI and Putai for the three and
nine months ended September 30, 2010 and 2009, as they did not generate any
taxable profits during these periods.
Pursuant
to the PRC Income Tax Laws, Shanxi Coal is subject to enterprise income tax at a
statutory rate of 25% for the three and nine months ended September 30, 2010 and
2009.
Details
of income taxes in the statements of operations are as follows:
Three
months ended
September
30,
2010
|
Three
months ended
September
30,
2009
|
Nine
months ended
September
30,
2010
|
Nine
months ended
September
30,
2009
|
|||||||||||||
$’000 | $’000 | $’000 | $’000 | |||||||||||||
Current
period provision
|
$ | 2,093 | $ | 1,112 | $ | 7,157 | $ | 2,559 |
A
reconciliation between taxes computed at the operating company’s statutory rate
of 25% and the Group’s effective tax rate is as follows:
Three
months ended
September
30,
2010
|
Three
months ended
September
30,
2009
|
Nine
months ended
September
30,
2010
|
Nine
months ended
September
30,
2009
|
|||||||||||||
$’000
|
$’000
|
$’000
|
$’000
|
|||||||||||||
Income
before taxation
|
$ | 7,134 | $ | 491 | $ | 26,295 | $ | 5,783 | ||||||||
Income
tax on pretax income at statutory rate
|
1,784 | 123 | 6,573 | 1,446 | ||||||||||||
Tax
effect of expenses that are not deductible
in determining taxable profits
|
146 | 1,194 | 249 | 1,269 | ||||||||||||
Effect
of different tax rates of companies operating
in other jurisdictions
|
(66 | ) | (351 | ) | (130 | ) | (387 | ) | ||||||||
Valuation
allowance
|
229 | 146 | 465 | 231 | ||||||||||||
Income
tax at effective rate
|
$ | 2,093 | $ | 1,112 | $ | 7,157 | $ | 2,559 |
27
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15.
Taxation (continued)
As at
September 30, 2010 and December 31, 2009, the Group had accumulated net
operating loss carryforwards of approximately of $8,532,000 and $6,938,000,
respectively, which are available to offset future taxable
income. Realization of the net operating loss carryforwards is
dependent upon future profitable operations. In addition, the
carryforwards may be limited upon a change of control in accordance with
Internal Revenue Code Section 382, as amended. Accordingly,
management has recorded a valuation allowance to reduce deferred tax assets
associated with the net operating loss carryforwards to zero at September 30,
2010 and December 31, 2009. The net operating loss
carryforwards expire in years 2015, 2021, 2022, 2023, 2024, 2025, 2026, 2027,
2028, 2029 and 2030 in the amounts of $857,000, $132,000, $394,000, $153,000,
$371,000, $287,000, $1,968,000, $1,341,000, $1,225,000 and $1,067,000 and
$737,000, respectively.
The Group
has no intention to distribute earnings in the foreseeable future, and therefore
no tax liability has been accrued on undistributed earnings.
At
September 30, 2010 and December 31, 2009, deferred tax assets consist
of:
September
30,
2010
|
December
31,
2009
|
|||||||
$’000 | $’000 | |||||||
Net
operating loss carryforwards
|
$ | 2,824 | $ | 2,359 | ||||
Less:
Valuation allowance
|
(2,824 | ) | (2,359 | ) | ||||
Net
|
$ | - | $ | - |
16. Basic and Diluted Weighted Average
Number of Shares
Three
months ended
September
30,
2010
|
Three
months ended
September
30,
2009
|
Nine
months ended
September
30,
2010
|
Nine
months ended
September
30,
2009
|
|||||||||||||
Basic
weighted average number of shares (after adjusting
for the 7-to-1 Share Conversion)
|
20,301,690 | 15,387,110 | 19,292,595 | 15,360,301 | ||||||||||||
Assumed
exercise of warrants
|
332,392 | - | 332,392 | - | ||||||||||||
Issuance
of directors/employees shares (after adjusting
for the 7-to-1 Share Conversion)
|
198,358 | - | 198,358 | 26,489 | ||||||||||||
Diluted
weighted average number of shares
|
20,832,440 | 15,387,110 | 19,823,345 | 15,386,790 |
The
7-to-1 Share Conversion on July 30, 2009 was retroactively reflected in the
calculation of weighted average number of shares as if the reverse split was
effective from January 1, 2009 (see Note 1).
28
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17.
Equity incentive plan
On
December 29, 2008, the shareholders of the Company approved a Puda Coal, Inc.
2008 Equity Incentive Plan (the “2008 Plan”). Any employee or
director of the Company is eligible to participate in the 2008 Plan and may be
granted stock awards and/or options (collectively, “Awards”) by the
administrator of the 2008 Plan, which is the Board of Directors, the
Compensation Committee or their delegates. The 2008 Plan became
effective upon its approval by the shareholders of the Company and will continue
in effect for a term of ten years unless terminated by the administrator of the
2008 Plan earlier. The aggregate number of shares of common stock
that may be issued pursuant to the Awards under the 2008 Plan is 714,286 shares
(after adjusting for the 7-to-1 Share Conversion). The aggregate
number of shares subject to the Awards under the 2008 Plan during any calendar
year to any one awardee will not exceed 7,143 shares (after adjusting for the
7-to-1 Share Conversion). The fair market value of the common stock
should be determined by the administrator of the 2008 Plan in good faith using a
reasonable valuation method in a reasonable manner in accordance with Section
409A of the Internal Revenue Code of 1986, as amended. Whenever
possible, the determination of fair market value should be based upon the
average of the highest and lowest quoted sales prices for such common stock as
of such date as reported in sources as determined by the
administrator.
A summary
of the restricted stock activity is as follows:
Restricted
Stock
|
Weighted-
Average Grant
Date
Price per
Share
|
Aggregated
Fair Market
Value
|
||||||||||
$ | ’000 | |||||||||||
Balance
at January 1, 2010
|
160,665 | $ | 7.11 | |||||||||
Granted
|
43,358 | |||||||||||
Vested
|
(12,347 | ) | $ | 6.99 | $ | 86 | ||||||
Balance
at September 30, 2010 (granted
but not yet vested)
|
191,676 | $ | 7.53 |
A summary
of share-based awards available for grant is as follows:
Restricted
Stock
|
||||
Balance
at January 1, 2010
|
503,088 | |||
Shares
reserved
|
- | |||
Granted
|
43,358 | |||
Balance
at September 30, 2010 (available
for grant)
|
459,730 |
29
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18.
Stock Compensation
On June
29, 2007, Puda entered into a director contract with Mr. Jianfei Ni. Pursuant to
the contract, in consideration of his service to the Company as an independent
director commencing on July 1, 2007, he will receive compensation in the form of
warrants to purchase 1,429 (after adjusting for the 7-to-1 Share Conversion)
shares of common stock of the Company per year. The term of the warrants is 5
years and the exercise price is $17.50 (after adjusting for the 7-to-1 Share
Conversion) per share. On December 29, 2008, Puda entered into an
amendment to the director’s contract dated June 29,
2007. Pursuant to the amendment, in consideration of his continued
service to the Company as an independent director, the annual stock compensation
will be $25,000 worth of shares of common stock, calculated based on the closing
sale price of the Company’s common stock on the grant date of August 11, 2008
and then on each anniversary date of the grant date. On August 10,
2010, the annual fee was increased to $5,000 cash plus stock compensation of
$32,000 worth of shares of common stock, calculated based on the closing sale
price of the Company’s common stock on the grant date of August 11, 2010 and
then on each anniversary date of the grant date. Such stock grants
are subject to the 2008 Plan.
On August
3, 2007, Puda entered into a director contract with Mr. Larry
Wizel. Pursuant to the contract, in consideration of his service to
the Company as an independent director commencing on August 3, 2007, he will
receive an annual fee of $40,000 in cash and 1,786 shares (after adjusting for
the 7-to-1 Share Conversion) of common stock of the Company. On
December 29, 2008, Puda entered into an amendment to the director’s contract
dated August 3, 2007. Pursuant to the amendment, in
consideration of his continued service to the Company as an independent
director, the annual fee will be $40,000 cash plus stock compensation of $25,000
worth of shares of common stock of the Company, calculated based on the closing
sale price of the Company’s common stock on the grant date of August 11, 2008
and then on each anniversary date of the grant date. On August 10,
2010, the annual fee was increased to $48,000 cash plus stock compensation of
$32,000 worth of shares of common stock of the Company, calculated based on the
closing sale price of the Company’s common stock on the grant date of August 11,
2010 and then on each anniversary date of the grant date. Such stock
grants are subject to the 2008 Plan.
On
October 9, 2007, Puda entered into a director contract with Mr. Mark
Tang. Pursuant to the contract, in consideration of his service to
the Company as an independent director commencing on October 9, 2007, he will
receive an annual fee of $40,000 in cash and 1,861 shares (after adjusting for
the 7-to-1 Share Conversion) of common stock of the Company. On
December 29, 2008, the Company entered into an amendment to the director’s
contract dated October 9, 2007. Pursuant to the amendment, in
consideration of his continued service to the Company as an independent
director, the annual fee will be $25,000 cash plus stock compensation of $15,000
worth of shares of common stock, calculated based on the closing sale price of
the Company’s common stock on the grant date of October 9, 2008 and then on each
anniversary date of the grant date. On August 10, 2010, the annual
fee was increased to $30,000 cash plus stock compensation of $25,000 worth of
shares of common stock, calculated based on the closing sale price of the
Company’s common stock on the grant date of October 9, 2010 and then on each
anniversary date of the grant date. Such stock grants are subject to
the 2008 Plan.
On August
11, 2008 and December 11, 2008, the Company granted Mr. Ming Zhao 2,857 and
5,715 shares (after adjusting for the 7-to-1 Share Conversion) of common stock,
respectively. The shares granted vested on the dates that are the
one-year anniversary of their respective grant dates. Such grants are subject to
the restricted stock unit grant agreements under the 2008 Plan.
On
November 6, 2009, the Company granted officers and employees 155,000 shares of
common stock. 40% of the shares granted will vest on the date that is
the one-year anniversary of the grant date, 30% of the shares granted will vest
on the date that is the two-year anniversary of the grant date,
and 30% of the shares granted will vest on the date that is the
three-year anniversary of the grant date. The shares are subject to
the restricted stock unit grant agreements under the 2008 Plan.
30
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18.
Stock Compensation (continued)
On August
10, 2010, the Company granted officers 30,000 shares of common stock, which will
be vested on the one-year anniversary of the grant date. Such grants
are subject to the restricted stock unit grant agreements under the 2008
Plan.
The stock
compensation expenses for the three and nine months ended September 30, 2010 and
2009 were as follows:
Three
months ended
September
30,
2010
|
Three
months ended
September
30,
2009
|
Nine
months ended
September
30,
2010
|
Nine
months ended
September
30,
2009
|
|||||||||||||
$’000 | $’000 | $’000 | $’000 | |||||||||||||
Stock
compensation
|
$ | 249 | $ | 40 | $ | 642 | $ | 73 |
19.
Concentrations and Credit Risk
The Group
operates principally in the PRC and grants credit to its customers in this
geographic region. Although the PRC is economically stable, it is
always possible that unanticipated events in foreign countries could disrupt the
Group’s operations.
At
September 30, 2010 and December 31, 2009, the Group has a credit risk exposure
of uninsured cash in banks of approximately $80,057,000 and $19,874,000,
respectively. The Group does not require collateral or other
securities to support financial instruments that are subject to credit
risk.
No
customer accounted for 10% or more of the total net revenue for the three and
nine months ended September 30, 2010 and 2009. The following customer
had balances of at least 10% of the total accounts receivable as of December 31,
2009, respectively:
September
30,
2010
|
December
31,
2009
|
|||||||||||||||
$’000 |
%
|
$’000 |
%
|
|||||||||||||
Customer
A
|
$ | - | - | $ | 2,542 | 10 |
20.
Fair Value Measurement
ASC 820
“Fair Value Measurements and Disclosures” introduces a framework for measuring
fair value and expands required disclosure about fair value measurements of
assets and liabilities. ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. ASC 820 also establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. There are three levels
of inputs that may be used to measure fair value:
31
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20.
Fair Value Measurement (continued)
Level 1 - Quoted prices in
active markets for identical assets or liabilities.
Level 2 - Observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs
that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
The Group
utilizes the income approach to measure fair value for its financial assets and
liabilities. The income approach includes option pricing models, such as
Black-Scholes (See Note 10).
Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
Fair
Value Measurement as of September 30, 2010
|
||||||||||||||||
Description
|
Total
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
$’000 | $’000 | $’000 | $’000 | |||||||||||||
Derivative
warrants
|
$ | 2,326 | - | $ | 2, 326 | - | ||||||||||
Total
|
$ | 2,326 | $ | - | $ | 2,326 | $ | - |
Unrealized
gains or losses on derivatives are recorded in unaudited consolidated statement
of operations as “Derivative unrealized fair value loss”.
21.
Segment Information
The
Company has two segments, coal washing business and coal mining
business. For the coal mining business, on May 14, 2009, the Company
acquired 18% equity ownership in Jianhe Coal (see Note 7) and on June 25, 2010,
the Company completed the acquisition of Da Wa Coal and Guanyao Coal (see Note
5). As of September 30, 2010, these coal mines are in the process of
reconstruction and production has not started. All revenues,
depreciation and amortization expenses for the three and nine months ended
September 30, 2010 in the unaudited consolidated statement of operations were
for coal washing business. The operating income, net income and total
assets of the two segments are as follows:
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
$’000 | $’000 | $’000 | $’000 | |||||||||||||
Operating
income
|
||||||||||||||||
-
Coal washing
|
$ | 8,748 | $ | 4,720 | $ | 29,607 | $ | 11,083 | ||||||||
-
Coal mining
|
- | - | - | - | ||||||||||||
-
Corporate (unallocated)
|
(842 | ) | (682 | ) | (2,204 | ) | (1,427 | ) | ||||||||
Total
|
$ | 7,906 | $ | 4,038 | $ | 27,403 | $ | 9,656 |
32
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
21.
Segment Information (continued)
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
$’000 | $’000 | $’000 | $’000 | |||||||||||||
Net
income
|
||||||||||||||||
-
Coal washing
|
$ | 6,353 | $ | 45 | $ | 22,049 | $ | 4,579 | ||||||||
-
Coal mining
|
(538 | ) | - | (858 | ) | - | ||||||||||
-
Corporate (unallocated)
|
(774 | ) | (666 | ) | (2,053 | ) | (1,355 | ) | ||||||||
Total
|
$ | 5,041 | $ | (621 | ) | $ | 19,138 | $ | 3,224 |
September
30,
2010
|
December
31,
2009
|
|||||||
$’000 | $’000 | |||||||
Total
assets
|
||||||||
-
Coal washing
|
$ | 141,135 | $ | 90,292 | ||||
-
Coal mining
|
66,141 | 20,909 | ||||||
Total
|
$ | 207,276 | $ | 111,201 |
22. Subsequent
Events
On
October 20, 2010, Shanxi Coal entered into a mining right and mining assets
transfer agreement with Pinglu County Samenzhen Xuhutuo Coal Mine Ltd.
(“Xuhutuo Coal”), pursuant to which Shanxi Coal will purchase from Xuhutuo Coal
all its tangible assets and coal mining right with respect to a coal mine
located in Pinglu County, Shanxi Province. As consideration, Shanxi
Coal will pay Xuhutuo Coal an aggregate purchase price of RMB 125 million
(approximately $18.77 million) in cash, of which RMB 20.66 million ($3.10
million) is for the tangible assets and RMB 104.34 million ($15.67 million) is
for the mining right and compensation to Xuhutuo Coal. The first installment of
RMB 62.5 million (approximately $9.39 million) was paid on November 10,
2010. A second installment in the amount of RMB 50 million
(approximately $7.51 million) will be due within 30 days after the assets
transfer is completed and the mining permits and property deeds are transferred.
The remainder of the purchase price of RMB 12.5 million (approximately $1.87
million) will be due six months after the mining permits and property deeds are
transferred. Xuhutuo Coal is one of the six coal mines co-developed
under the Investment Cooperation Agreement signed on August 1, 2010, pursuant to
which Shanxi Coal is responsible to contribute 40% of the total investment
needed for the consolidation and construction of Phase II of the Pinglu Project
(see Note 11).
33
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
22. Subsequent Events
(continued)
On
October 20, 2010, Shanxi Coal entered into a mining right and mining assets
transfer agreement with Pinglu County Daqi Coal Mine Ltd. (“Daqi Coal”),
pursuant to which Shanxi Coal will purchase from Daqi Coal all its tangible
assets and coal mining right with respect to a coal mine located in Pinglu
County, Shanxi Province. As consideration, Shanxi Coal will pay Daqi
Coal an aggregate purchase price of RMB 66.2 million (approximately $9.94
million) in cash, of which RMB 8.35 million ($1.25 million) is for the tangible
assets and RMB 57.85 million ($8.69 million) is for the mining right and
compensation to Daqi Coal. The first installment of RMB 33.1 million
(approximately $4.97 million) was paid on November 10, 2010. A second
installment in the amount of RMB 26.48 million (approximately $3.97 million)
will be due within 30 days after the assets transfer is completed and the mining
permits and property deeds are transferred. The remainder of the purchase price
of RMB 6.62 million (approximately $1 million) will be due six months after the
mining permits and properties deeds are transferred. Daqi Coal is one of the six
coal mines co-developed under the Investment Cooperation Agreement signed on
August 1, 2010, pursuant to which Shanxi Coal is responsible to contribute 40%
of the total investment needed for the consolidation and construction of Phase
II of the Pinglu Project (see Note 11).
On
October 28, 2010, Shanxi Coal entered into a mining right and mining assets
transfer agreement with Pinglu County Renling Coal Mine Ltd. (“Renling Coal”),
pursuant to which Shanxi Coal will purchase from Renling Coal all its tangible
assets and coal mining right with respect to a coal mine located in Pinglu
County, Shanxi Province. As consideration, Shanxi Coal will pay
Renling Coal an aggregate purchase price of RMB 205 million (approximately
$30.65 million) in cash, of which RMB 38.83 million ($5.80 million) is for the
tangible assets and RMB 166.17 million ($24.85 million) is for the mining right
and compensation to Xuhutuo Coal. The first installment of RMB 102.5 million
(approximately $15.33 million) was paid on November 10, 2010. A
second installment in the amount of RMB 82 million (approximately $12.26
million) will be due within 30 days after the assets transfer is completed and
the mining permits and property deeds are transferred. The remainder of the
purchase price of RMB 20.5 million (approximately $3.06 million) will be due six
months after the mining permits and property deeds are
transferred. Renling Coal is one of the six coal mines co-developed
under the Investment Cooperation Agreement signed on August 1, 2010, pursuant to
which Shanxi Coal is responsible to contribute 40% of the total investment
needed for the consolidation and construction of Phase II of the Pinglu Project
(see Note 11).
On
October 28, 2010, Shanxi Coal entered into a mining right and mining assets
transfer agreement with Pinglu County Donggou Coal Mine Ltd. (“Donggou Coal”),
pursuant to which Shanxi Coal will purchase from Donggou Coal all its tangible
assets and coal mining right with respect to a coal mine located in Pinglu
County, Shanxi Province. As consideration, Shanxi Coal will pay
Donggou Coal an aggregate purchase price of RMB 77.5 million (approximately
$11.59 million) in cash, of which RMB 9.13 million ($1.37 million) is for the
tangible assets and RMB 68.37 million ($10.22 million) is for the mining right
and compensation to Daqi Coal. The first installment of RMB 38.75 million
(approximately $5.80 million) was paid on November 10, 2010. A second
installment in the amount of RMB 31 million (approximately $4.64 million) will
be due within 30 days after the assets transfer is completed and the mining
permits and property deeds are transferred. The remainder of the purchase price
of RMB 7.75 million (approximately $1.15 million) will be due six months after
the mining permits and property deeds are transferred. Donggou Coal
is one of the six coal mines co-developed under the Investment Cooperation
Agreement signed on August 1, 2010, pursuant to which Shanxi Coal is responsible
to contribute 40% of the total investment needed for the consolidation and
construction of Phase II of the Pinglu Project (see Note 11).
34
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23.
Condensed Financial Information of Registrant
The
condensed financial information of Registrant includes the balance sheets as at
September 30, 2010 and December 31, 2009 and the statements of operations and
cash flows for the nine months ended September 30, 2010 and 2009.
Balance
Sheet-Parent Company Only
(In
thousands of United States dollars)
Note(s)
|
September
30,
2010
|
December
31,
2009
|
||||||||||
ASSETS
|
||||||||||||
CURRENT
ASSETS
|
||||||||||||
Cash
and cash equivalents
|
$ | 1,553 | $ | 1,576 | ||||||||
Total
current assets
|
1,553 | 1,576 | ||||||||||
INVESTMENTS
IN SUBSIDIARIES
|
98,766 | 78,184 | ||||||||||
TOTAL
ASSETS
|
$ | 100,319 | $ | 79,760 | ||||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||||
CURRENT
LIABILITIES
|
||||||||||||
Other
payable
|
$ | 55 | $ | 155 | ||||||||
Accrued
expenses
|
68 | 388 | ||||||||||
Derivative
warrants
|
10 | 2,326 | 7,620 | |||||||||
Total
current liabilities
|
2,449 | 8,163 | ||||||||||
STOCKHOLDERS’
EQUITY
|
||||||||||||
Preferred
stock, authorized 5,000,000 shares, par value
$0.01, issued and outstanding None
|
- | - | ||||||||||
Common
stock, authorized 150,000,000 shares, par value
$0.001, issued and outstanding 20,363,309 shares (2009:
15,828,863)
|
20 | 15 | ||||||||||
Paid-in
capital
|
132,441 | 104,729 | ||||||||||
Accumulated
deficit
|
(34,591 | ) | (33,147 | ) | ||||||||
Total
stockholders’ equity
|
97,870 | 71,597 | ||||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 100,319 | $ | 79,760 |
35
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23.
Condensed Financial Information of Registrant (continued)
Statement
of Operations-Parent Company Only
(In
thousands of United States dollars)
Nine
months ended
September
30,
|
||||||||||||
Note(s)
|
2010
|
2009
|
||||||||||
Revenue:
|
||||||||||||
Share
of earnings from investment in subsidiaries
|
$ | 20,582 | $ | 7,527 | ||||||||
Total
revenue
|
20,582 | 7,527 | ||||||||||
General
and administrative expenses
|
(1,379 | ) | (754 | ) | ||||||||
Income
from operations
|
19,203 | 6,773 | ||||||||||
Derivative
unrealized fair value loss
|
10(c),
14
|
(65 | ) | (3,549 | ) | |||||||
Net
income
|
$ | 19,138 | $ | 3,224 |
No cash
dividends were received from the subsidiaries for the nine months ended
September 30, 2010 and 2009.
36
PUDA
COAL, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23.
Condensed Financial Information of Registrant (continued)
Statement
of Cash Flows-Parent Company Only
(In
thousands of United States dollars)
Nine
months ended
September
30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 19,138 | $ | 3,224 | ||||
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||
Share
of earnings from investment in subsidiaries
|
(20,582 | ) | (7,527 | ) | ||||
Derivative
unrealized fair value loss
|
65 | 3,549 | ||||||
Stock
compensation
|
642 | 73 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Advance
to subsidiary
|
(18,600 | ) | 564 | |||||
Decrease
in other payable
|
(100 | ) | (102 | ) | ||||
Decrease
in accrued expenses
|
(246 | ) | (156 | ) | ||||
- | ||||||||
Net
cash used in operating activities
|
(19,683 | ) | (375 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Exercise
of warrants
|
5,122 | 150 | ||||||
Issue
of common shares
|
14,538 | - | ||||||
Net
cash provided by financing activities
|
19,660 | 150 | ||||||
Net
decrease in cash and cash equivalents
|
(23 | ) | (225 | ) | ||||
Cash
and cash equivalents at beginning of period
|
1,576 | 196 | ||||||
Cash
and cash equivalents/(bank overdrafts) at end of period
|
$ | 1,553 | $ | (29 | ) |
37
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking
Statements
The
following discussion may contain certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934 (the “Exchange Act”), which involve
substantial risks and uncertainties. These statements include the plans and
objectives of management for the future growth of Puda Coal, Inc. (“Puda Coal”
or the “Company”) and its subsidiaries. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
Puda Coal. Although Puda Coal believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by Puda Coal or any other person that the objectives and plans of
Puda Coal will be achieved.
The words
“we,” “us” and “our” refer to Puda Coal and its subsidiaries. The words or
phrases “would be,” “will allow,” “intends to,” “will likely result,” “are
expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or
similar expressions are intended to identify “forward-looking statements.”
Actual results could differ materially from those projected in the forward
looking statements as a result of a number of risks and uncertainties, including
but not limited to: (a) a limited amount of resources devoted to expanding our
business plan; (b) our failure to implement our business plan within the time
period we originally planned to accomplish; and (c) other risks that are
discussed in our Form 10-K filed on March 31, 2010, and incorporated herein by
reference or included in our previous filings with the Securities and Exchange
Commission.
Results
of Operations
Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009
Net
Revenue. Net revenue was $90,002,000 for the three months ended September 30,
2010, compared to $56,106,000 for the three months ended September 30, 2009, an
increase of $33,896,000, or 60%. The increase in revenue was primarily due to
increased tonnage sales of cleaned coal and increased selling
price. The tonnage sales of cleaned coal increased approximately
153,000 metric tons (MT), or 31%, from approximately 498,000 MT for the three
months ended September 30, 2009 to approximately 651,000 MT for the three months
ended September 30, 2010. Approximately $17,442,000 of the total revenue
increase in the three months ended September 30, 2010 is attributable to the
increase in tonnage sales of cleaned coal. The selling price of
cleaned coal increased approximately $24, or 21%, from approximately $114 per
ton for the three months ended September 30, 2009 to approximately $138 per ton
for the three months ended September 30, 2010. Approximately
$15,624,000 of the total revenue increase in the three months ended September
30, 2010 is attributable to the increase in selling price of cleaned
coal. The increase in tonnage sales and selling price were primarily
due to increased orders of cleaned coal from customers for the three months
ended September 30, 2010 as a result of continued recovery of steel
industries.
Cost of
Revenue. Cost of revenue was $80,395,000 for the three months ended September
30, 2010, compared to $50,731,000 for the three months ended September 30, 2009,
an increase of $29,664,000, or 58%. This was primarily due to
increased tonnage sales of cleaned coal and increased raw coal unit
cost. Approximately $14,994,000 of the increase in the total cost of
revenue in the three months ended September 30, 2010 is attributable to the
increase in tonnage sales of cleaned coal. The average unit cost of
raw coal increased $21, or 21%, from approximately $98 per ton for the
three months ended September 30, 2009 to approximately $119 per ton for the
three months ended September 30, 2010. Approximately $13,671,000 of
the increase in the total cost of revenue in the three months ended September
30, 2010 is attributable to the increase in raw coal unit cost.
38
Gross
Profit. Gross profit was $9,607,000 for the three months ended September 30,
2010, compared to $5,375,000 for the three months ended September 30, 2009, an
increase of $4,232,000, or 79%. Gross profit margins for the three months ended
September 30, 2010 and 2009 were 11% and 10%, respectively. Such increase in
gross profit margins was primarily due to an increase in average selling price
of cleaned coal, which slightly exceeded the increase in average raw coal unit
cost across the three months ended September 30, 2010.
Selling
Expenses. Selling expenses were $859,000 for the three months ended September
30, 2010, compared to $655,000 for the three months ended September 30, 2009.
This represents an increase of $204,000, or 31%, which was primarily due to the
increase in sales volume in the three months ended September 30,
2010.
General
and Administrative Expenses. General and administrative expenses
were $842,000 for the three months ended September 30, 2010, compared to
$682,000 for the three months ended September 30, 2009. This represents an
increase of $160,000, or 23%, which was primarily due to an increase in
stock compensation expenses and professional fees.
Income
from Operations. Income from operations was $7,906,000 for the three months
ended September 30, 2010, compared to $4,038,000 for the three months ended
September 30, 2009. The increase of $3,868,000, or 96%, was primarily
the result of an increase in gross profit of $4,232,000, which was
partially offset by an increase in operating expenses of $364,000.
Interest
Expense. Interest expense was $645,000 for the three months ended September 30,
2010, compared to $127,000 for the three months ended September 30,
2009. This represents an increase of $518,000, or 408%, primarily due
to an increase in interest payments for the 6% loan from Mr. Ming
Zhao.
Derivative
Unrealized Fair Value Loss. Derivative unrealized fair value loss was $195,000
for the three months ended September 30, 2010 and $3,436,000 for the three
months ended September 30, 2009, respectively, representing the change
in fair value of the warrants.
Income
Before Income Taxes. Income before income taxes was $7,134,000 for
the three months ended September 30, 2010, compared to $491,000 for the
three months ended September 30, 2009. The increase of $6,643,000, or 1,353%,
was primarily the result of an increase in operating profit of $3,868,000, and a
decrease in derivative unrealized fair value loss of $3,241,000, which were
partially offset by an increase in interest expense of $518,000 in the three
months ended September 30, 2010.
Income
Taxes. Income taxes were $2,093,000 for the three months ended September 30,
2010, compared to $1,112,000 for the three months ended September 30,
2009, an increase of $981,000, or 88%. Income tax was imposed by
the China Tax Bureau on income of Shanxi Coal, as calculated under Chinese GAAP
and tax rules. The increase was primarily the result of the increase
in operating profit of Shanxi Coal from $4,398,000 in the three months ended
September 30, 2009 to $8,394,000 in the three months ended September 30,
2010.
Net
Income. Net income was $5,041,000 for the three months ended September 30, 2010,
compared to net loss of $621,000 for the three months ended September 30, 2009,
an increase of $5,662,000, or 912%, mainly due to an increase in operating
profit of $3,868,000, and a decrease in derivative unrealized fair value loss of
$3,241,000, which were partially offset by an increase in income taxes of
$981,000, and an increase in interest expense of $518,000 in the three months
ended September 30, 2010.
Inflation
had no significant impact on the Company’s results of operations for the three
months ended September 30, 2010 and 2009.
39
Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009
Net
Revenue. Net revenue was $234,292,000 for the nine months ended September 30,
2010, compared to $153,817,000 for the nine months ended September 30, 2009, an
increase of $80,475,000, or 52%. The increase in revenue was primarily due to
increased tonnage sales of cleaned coal and increased selling
price. The tonnage sales of cleaned coal increased approximately
361,000 MT, or 26%, from approximately 1,394,000 MT for the nine months ended
September 30, 2009 to approximately 1,755,000 MT for the nine months ended
September 30, 2010. Approximately $40,071,000 of the total revenue increase in
the nine months ended September 30, 2010 is attributable to the increase in
tonnage sales of cleaned coal. The selling price of cleaned coal
increased approximately $22, or 20%, from approximately $111 per ton for the
nine months ended September 30, 2009 to approximately $133 per ton for the nine
months ended September 30, 2010. Approximately $38,610,000 of the
total revenue increase in the nine months ended September 30, 2010 is
attributable to the increase in selling price of cleaned coal. The
increase in tonnage sales and selling price were primarily due to increased
orders of cleaned coal from customers for the nine months ended September 30,
2010 as a result of continued recovery of steel industries.
Cost of
Revenue. Cost of revenue was $202,338,000 for the nine months ended September
30, 2010, compared to $140,969,000 for the nine months ended September 30, 2009,
an increase of $61,369,000, or 44%. This was primarily due to
increased tonnage sales of cleaned coal and increased raw coal unit
cost. Approximately $34,656,000 of the increase in the total cost of
revenue in the nine months ended September 30, 2010 is attributable to the
increase in tonnage sales of cleaned coal. The average unit cost of
raw coal increased $14, or 15%, from approximately $96 per ton for the nine
months ended September 30, 2009 to approximately $110 per ton for the nine
months ended September 30, 2010. Approximately $24,570,000 of the
increase in the total cost of revenue in the nine months ended September 30,
2010 is attributable to the increase in raw coal unit cost.
Gross
Profit. Gross profit was $31,954,000 for the nine months ended September 30,
2010, compared to $12,848,000 for the nine months ended September 30, 2009, an
increase of $19,106,000, or 149%. Gross profit margins for the nine months ended
September 30, 2010 and 2009 were 14% and 8%, respectively. Such increase in
gross profit margins was primarily due to an increase in average selling price
of cleaned coal, which exceeded the increase in average raw coal unit cost
across the nine months ended September 30, 2010.
Selling
Expenses. Selling expenses were $2,347,000 for the nine months ended September
30, 2010, compared to $1,765,000 for the nine months ended September 30, 2009.
This represents an increase of $582,000, or 33%, which was primarily due to the
increase in sales volume in the nine months ended September 30,
2010.
General
and Administrative Expenses. General and administrative expenses
were $2,204,000 for the nine months ended September 30, 2010, compared to
$1,427,000 for the nine months ended September 30, 2009. This represents an
increase of $777,000, or 54%, which was primarily due to an increase in
stock compensation expenses and professional fees.
Income
from Operations. Income from operations was $27,403,000 for the nine months
ended September 30, 2010, compared to $9,656,000 for the nine months ended
September 30, 2009. The increase of $17,747,000, or 184%, was primarily
the result of an increase in gross profit of $19,106,000, which was
partially offset by an increase in operating expenses of
$1,359,000.
Interest
Expense. Interest expense was $1,194,000 for the nine months ended September 30,
2010, compared to $396,000 for the nine months ended September 30,
2009. This represents an increase of $798,000, or 202%, primarily due
to an increase in interest payments for the 6% loan from Mr. Ming
Zhao.
Derivative
Unrealized Fair Value Loss. Derivative unrealized fair value loss was $65,000
for the nine months ended September 30, 2010 and $3,549,000 for the nine
months ended September 30, 2009, respectively, representing the change
in fair value of the warrants.
40
Income
Before Income Taxes. Income before income taxes was $26,295,000 for
the nine months ended September 30, 2010, compared to $5,783,000 for the
nine months ended September 30, 2009. The increase of $20,512,000, or 355%, was
primarily the result of an increase in operating profit of $17,747,000, and a
decrease in derivative unrealized fair value loss of $3,484,000, which were
partially offset by an increase in interest expense of $798,000 in the nine
months ended September 30, 2010.
Income
Taxes. Income taxes were $7,157,000 for the nine months ended September 30,
2010, compared to $2,559,000 for the nine months ended September 30,
2009, an increase of $4,598,000, or 180%. Income tax was imposed
by the China Tax Bureau on income of Shanxi Coal, as calculated under Chinese
GAAP and tax rules. The increase was primarily the result of the
increase in operating profit of Shanxi Coal from $10,087,000 in the nine months
ended September 30, 2009 to $28,596,000 in the nine months ended September 30,
2010.
Net
Income. Net income was $19,138,000 for the nine months ended September 30, 2010,
compared to $3,224,000 for the nine months ended September 30, 2009, an increase
of $15,914,000, or 494%, mainly due to an increase in operating profit of
$17,747,000, and a decrease in derivative unrealized fair value loss of
$3,484,000, which were partially offset by an increase in income taxes of
$4,598,000, and an increase in interest expense of $798,000 in the nine months
ended September 30, 2010.
Inflation
had no significant impact on the Company’s results of operations for the nine
months ended September 30, 2010 and 2009.
Business
Outlook
China’s
four trillion yuan economic stimulus package, which was put in place in 2009,
has encouraged steel-intensive infrastructure development projects such as the
construction of railway and motor vehicle manufacturing as well as real estate
projects. It has driven the demand for steel, which is expected to increase over
the next several years across infrastructure projects such as railroads, real
estate and automobile construction.
China is
expected to produce approximately 600 million MT of steel in 2010, roughly half
the world’s total output, according to China Coal Resource.
In
response to record high steel prices driven by the demand in the infrastructure
construction sector in China, the steel industry has begun increasing production
levels. We experienced improvement in tonnage sales and selling price
in 2010 as compared to 2009 levels as steel inventories decline and our
customers increase order volumes. We anticipate such year over year
demand increase will continue in the last quarter of 2010.
We expect
that such demand should provide significant opportunities for suppliers of
cleaned coking coal like Puda Coal. As a result, the management
believes the outlook for its coal washing operations is attractive, as the
Company has maintained a stable and increasing customer base and supply
tunnels.
It should
be noted, however, that the financial markets have recently experienced
unprecedented volatility, stress, illiquidity and disruption around the world
and may continue to experience difficulties. Many of our customers and suppliers
may encounter much uncertainty and risk due to the weakened business environment
and credit availability. As a result, these customers and suppliers may be
unable to satisfy their contract obligations, may delay payment, or may not
repay our credit advance to them, which could negatively affect our business and
financial performance. For further discussion see “Risk
Factors”.
The
Company is currently operating at approximately 65% utilization of its
production capacity and has the capacity to meet any reasonable increases in
future demand. In addition, the Company has taken steps to execute its strategy
of entering the coal mining business to increase profitability. On
May 14, 2009, Shanxi Coal entered into an agreement to purchase 18% ownership in
Shanxi Jianhe Coal Industry Limited Company (“Jianhe Coal”) for an aggregate
purchase price of RMB 100 million ($14,947,000). The
governmental registration of the share transfer was completed on December 3,
2009 and the purchase price was fully paid.
41
On
September 28, 2009, the Shanxi provincial government appointed Shanxi Coal as a
consolidator of eight coal mines in Pinglu County. Shanxi Coal has the
government’s permission to acquire and consolidate the eight coal mines into
five, which could increase their total annual capacity from approximately 1.6
million to 3.6 million metric tons.
On June
25, 2010, Shanxi Coal closed a mining right and mining assets transfer agreement
dated December 11, 2009 with Pinglu County Da Wa Coal Industry Co., Ltd. (“Da Wa
Coal”), pursuant to which Shanxi Coal purchased from Da Wa Coal all its tangible
assets and coal mining right with respect to a coal mine located in Pinglu
County, Shanxi Province of China. As consideration, Shanxi Coal
agreed to pay Da Wa Coal an aggregate purchase price of RMB 190 million
($28,095,000) in cash, of which RMB 46.6 million ($6.9 million) was for the
tangible assets and RMB 143.4 million ($21.1 million) was for the mining right.
Management estimates that the total proven and probable reserve of Da Wa Coal is
approximately 10.8 million metric tons by reference to the geological report
dated August 2007. The report was prepared by a geological firm hired by the
seller. We have hired an independent geological firm to prepare an
updated report which is now in progress. As of September 30, 2010,
Shanxi Coal has paid RMB 152 million ($22,415,000). Shanxi Coal will pay the
remainder of the purchase price, RMB 38 million ($5,680,000) upon the one year
anniversary of completion of the transfer. Shanxi Coal’s obligation
for payment is guaranteed by Mr. Ming Zhao.
On June
25, 2010, Shanxi Coal closed a mining right and mining assets transfer agreement
dated December 11, 2009 with Pinglu County Guanyao Coal Industry Co., Ltd.
(“Guanyao Coal”), pursuant to which Shanxi Coal purchased from Guanyao Coal all
its tangible assets and coal mining right with respect to a coal mine located in
Pinglu County, Shanxi Province of China. As consideration, Shanxi
Coal agreed to pay Guanyao Coal an aggregate purchase price of RMB 94.80 million
($14,017,000) in cash, of which RMB 37.6 million ($5.6 million) was for the
tangible assets and RMB 57.2 million ($8.4 million) was for the mining
right. Management estimates that the total proven and probable
reserve of Guanyao Coal is approximately 7.4 million metric tons by reference to
the geological report dated March 2007. The report was prepared by a
geological firm hired by the seller. We have hired an independent
geological firm to prepare an updated report which is now in
progress. As of September 30, 2010, Shanxi Coal has paid RMB 75.84
million ($11,183,000). Shanxi Coal will pay the remainder of the
purchase price, RMB 18.96 million ($2,834,000) upon the one year anniversary of
completion of the transfer. Shanxi Coal’s obligation for payment is guaranteed
by Mr. Ming Zhao.
“Coal
reserves” are defined by SEC Industry Guide 7 as that part of a mineral deposit
which could be economically and legally extracted or produced at the time of the
reserve determination. The reserve estimates were prepared using
industry-standard methodology to provide reasonable assurance that the reserves
are recoverable, considering technical, economic and legal limitations. There
are numerous uncertainties inherent in estimating quantities and values of
economically recoverable coal reserves. Many of these uncertainties
are beyond our control. As a result, estimates of economically recoverable coal
reserves are by their nature uncertain. Information about our reserves consists
of estimates based on engineering, economic and geological data.
We plan
to inject the mining assets of Da Wa Coal
and Guanyao Coal into two new companies, Shanxi Pinglu Dajinhe Coal Co., Ltd.
and Shanxi Pinglu Dajinhe Wujin Coal Co., Ltd, respectively, which will be
wholly-owned subsidiaries of Shanxi Coal upon the completion of the
reconstruction of the mines. Shanxi Coal was given transitional
mining permits, which will expire in November 2011. After the
establishment of the two new companies, Shanxi Coal will need to obtain renewals
for the mining permits and property deeds for the mining
facilities.
In March
2010, we received an approval by the Shanxi provincial government to acquire and
consolidate four additional coking coal mines in Huozhou County, Shanxi
Province, including Jianhe Coal. Shanxi Coal has the government’s permission to
acquire and consolidate the four coal mines into one, which could increase the
total annual capacity of target coal mines from the current accumulated 720,000
metric tons to 900,000 metric tons per year.
42
As part
of the Shanxi provincial government’s policies to consolidate and redevelop the
coal mining industry, new guidelines were enacted by the government in February
2010 to require the registered capital of coal mine consolidators to be at least
RMB200 million. The new requirement was adopted to ensure that coal mine
consolidators have sufficient financial strength to consolidate coal mines
efficiently and timely. In May 2010, the registered paid-in capital
of Shanxi Coal was increased from RMB 22.5 million ($ 2,717,000) to RMB 500
million ($73,129,000), 90% of which (RMB430 million) was funded by Shanxi
Coal’s 90% shareholder, Putai, and 10% of which (RMB48 million)
was funded by Shanxi Coal’s 10% shareholder, Mr. Ming
Zhao.
In order
to satisfy the capital injection, Putai entered into a loan agreement with Mr.
Ming Zhao on May 7, 2010. Under the agreement, Mr. Zhao agrees to
provide Putai with an unsecured loan in an aggregate principal amount of RMB240
million ($35,872,000). The loan has a maturity date of November 6,
2011 and bears an interest at a rate of 6% per annum, which is payable on a
quarterly basis, subject to certain adjustments to be agreed upon by the parties
if such adjustments are necessary in light of the official interest rate of the
PRC, as specified in the agreement. If Putai does not pay off
the principal and interest of the loan on time in accordance with the agreement,
Mr. Ming Zhao may require Putai to pay off the loan immediately and charge an
additional 5% interest on the amount of loan that is not paid off on
time. In addition, if the interest rate under the agreement is
adjusted according to the agreement and Putai fails to pay interest at the
adjusted rate, Mr. Ming Zhao may require Putai to pay off the loan
immediately.
On August
1, 2010, Shanxi Coal entered into an Investment Cooperation
Agreement with Mr. Ming Zhao and Jianping Gao, an individual
unrelated to the Company (“Mr. Gao”). Pursuant to the Investment
Cooperation Agreement, the parties will purchase, consolidate and co-develop the
six coal mines in Pinglu County, Shanxi Province (“Phase II of the Pinglu
Project”). Under the Investment Cooperation Agreement, Shanxi Coal,
Mr. Zhao and Mr. Gao will contribute 40%, 30% and 30%, respectively, of the
total investment needed for Phase II of the Pinglu Project. Shanxi
Coal will be the project manager. In addition, each of Mr. Zhao and
Mr. Gao has agreed to transfer 5.5% of his respective voting rights in the
project companies, which will hold the coal mines after they are acquired, to
Shanxi Coal to enable Shanxi Coal to exercise full operating and management
control of the project companies. The parties will share the profits
and bear the risks and losses in connection with Phase II of the Pinglu Project,
in each case based upon the percentages of their equity ownership and limited by
the amount of investment contributed by each party. Shanxi Coal will
be responsible for the other parties’ losses caused by Shanxi Coal’s fraud,
gross negligence or breach of material terms of the Investment Cooperation
Agreement. The parties further agree that, to the extent permitted by
the Chinese law, at least 80% of the audited annual net profits of the project
companies established after the coal mine acquisition will be distributed to the
parties at a ratio that is proportionate to their respective
investment.
On
October 20, 2010, Shanxi Coal entered into a mining right and mining assets
transfer agreement with Pinglu County Samenzhen Xuhutuo Coal Mine
Ltd. (“Xuhutuo Coal”), pursuant to which Shanxi Coal will purchase from
Xuhutuo Coal all its tangible assets and coal mining right with respect to a
coal mine located in Pinglu County, Shanxi Province of China. As
consideration, Shanxi Coal will pay Xuhutuo Coal an aggregate purchase price of
RMB 125 million (approximately $18.77 million) in cash, of which RMB 20.66
million ($3.10 million) is for the tangible assets and RMB 104.34 million
($15.67 million) is for the mining right and compensation to Xuhutuo Coal. The
first installment of RMB 62.5 million (approximately $9.39 million) was paid on
November 10, 2010. A second installment in the amount of RMB 50
million (approximately $7.51 million) will be due within 30 days after the
assets transfer is completed and the mining permits and property deeds are
transferred. The remainder of the purchase price of RMB 12.5 million
(approximately $1.87 million) will be due six months after mining permits and
property deeds are transferred. Xuhutuo Coal is one of the six coal mines
co-developed under the Investment Cooperation Agreement signed on August 1,
2010, pursuant to which Shanxi Coal is responsible to contribute 40% of the
total investment needed for the consolidation and construction of Phase II of
the Pinglu Project.
43
On
October 20, 2010, Shanxi Coal entered into a mining right and mining assets
transfer agreement with Pinglu County Daqi Coal Mine Ltd. (“Daqi Coal”),
pursuant to which Shanxi Coal will purchase from Daqi Coal all its tangible
assets and coal mining right with respect to a coal mine located in Pinglu
County, Shanxi Province of China. As consideration, Shanxi Coal will
pay Daqi Coal an aggregate purchase price of RMB 66.2 million (approximately
$9.94 million) in cash, of which RMB 8.35 million ($1.25 million) is for the
tangible assets and RMB 57.85 million ($8.69 million) is for the mining right
and compensation to Daqi Coal. The first installment of RMB 33.1 million
(approximately $4.97 million) was paid on November 10, 2010. A second
installment in the amount of RMB 26.48 million (approximately $3.97 million)
will be due within 30 days after the assets transfer is completed and the mining
permits and property deeds are transferred. The remainder of the purchase price
of RMB 6.62 million (approximately $1 million) will be due six months after the
mining permits and property deeds are transferred. Daqi Coal is one
of the six coal mines co-developed under the Investment Cooperation Agreement
signed on August 1, 2010, pursuant to which Shanxi Coal is responsible to
contribute 40% of the total investment needed for the consolidation and
construction of Phase II of the Pinglu Project.
On
October 28, 2010, Shanxi Coal entered into a mining right and mining assets
transfer agreement with Pinglu County Renling Coal Mine Ltd. (“Renling
Coal”), pursuant to which Shanxi Coal will purchase from Renling Coal all its
tangible assets and coal mining right with respect to a coal mine located in
Pinglu County, Shanxi Province of China. As consideration, Shanxi
Coal will pay Renling Coal an aggregate purchase price of RMB 205 million
(approximately $30.65 million) in cash, of which RMB 38.83 million ($5.80
million) is for the tangible assets and RMB 166.17 million ($24.85 million) is
for the mining right and compensation to Xuhutuo Coal. The first installment of
RMB 102.5 million (approximately $15.33 million) was paid on November 10,
2010. A second installment in the amount of RMB 82 million
(approximately $12.26 million) will be due within 30 days the assets transfer is
completed and the mining permits and property deeds are transferred. The
remainder of the purchase price of RMB 20.5 million (approximately $3.06
million) will be due six months after the mining permits and property deeds are
transferred. Renling Coal is one of the six coal mines co-developed
under the Investment Cooperation Agreement signed on August 1, 2010, pursuant to
which Shanxi Coal is responsible to contribute 40% of the total investment
needed for the consolidation and construction of Phase II of the Pinglu
Project.
On
October 28, 2010, Shanxi Coal entered into a mining right and mining assets
transfer agreement with Pinglu County Donggou Coal Mine Ltd. (“Donggou Coal”),
pursuant to which Shanxi Coal will purchase from Donggou Coal all its tangible
assets and coal mining right with respect to a coal mine located in Pinglu
County, Shanxi Province of China. As consideration, Shanxi Coal will
pay Donggou Coal an aggregate purchase price of RMB 77.5 million (approximately
$11.59 million) in cash, of which RMB 9.13 million ($1.37 million) is for the
tangible assets and RMB 68.37 million ($10.22 million) is for the mining right
and compensation to Daqi Coal. The first installment of RMB 38.75 million
(approximately $5.80 million) was paid on November 10, 2010. A second
installment in the amount of RMB 31 million (approximately $4.64 million) will
be due within 30 days after the assets transfer is completed and the mining
permits and property deeds are transferred. The remainder of the purchase price
of RMB 7.75 million (approximately $1.15 million) will be due six months after
the mining permits and property deeds are transferred. Donggou Coal
is one of the six coal mines co-developed under the Investment Cooperation
Agreement signed on August 1, 2010, pursuant to which Shanxi Coal is responsible
to contribute 40% of the total investment needed for the consolidation and
construction of Phase II of the Pinglu Project.
If the
Company is unable to manage coal mines successfully, it will not be able to grow
its business in the way that it currently expects. Also, in order to pursue such
acquisition opportunities, depending on the size of the coal mine acquisition,
the Company may need significant additional financing, which may not be
available to it on favorable terms, if at all. For further discussion see “Risk
Factors”.
Liquidity and Capital
Resources
Net cash
provided by operating activities was $25,664,000 for the nine months ended
September 30, 2010, compared to net cash used in operating activities of
$11,375,000 for the nine months ended September 30, 2009, an increase of
$37,039,000. This increase was primarily due to an increase in net income and a
decrease in working capital needs resulting from decreased accounts receivable
and decreased inventory.
44
Net cash
used in investing activities of $27,858,000 for the nine months ended September
30, 2010 was for the purchase of Da Wa Coal and Guanyao Coal. Net
cash used in investing activities of $8,782,000 for the nine months ended
September 30, 2009 was for the 18% equity purchase of Jianhe Coal.
Net cash
provided by financing activities of $61,117,000 for the nine months ended
September 30, 2010 includes the $35,391,000 loan from Mr. Ming Zhao, $14,538,000
from the sale of 3,284,000 shares of common stock, $7,041,000 increase of
registered capital of Shanxi Coal, and $5,122,000 from the exercise of warrants,
which were offset by $975,000 for the repayment of the long-term debt to
Resources Group. Net cash used in financing activities of $825,000 for the nine
months ended September 30, 2009 includes $975,000 for the repayment of long-term
debt to Resources Group, which was offset by $150,000 from the exercise of
warrants.
Our
principal on-going capital requirements are to finance our coal
washing operations, to fund the repayment of the loans to Mr. Ming Zhao and
Resources Group, with the combined outstanding loan balance of $42,697,000 as of
September 30, 2010, and to pay for the acquisition of coal mines and coal mining
assets.
Warrants
were issued in the November 2005 Private Placement. As of September
30, 2010, the outstanding number of warrants was 615,724 which are exercisable
at $4.20 per share into 615,724 shares of our common stock, or an
aggregate of $2,586,000. We believe that the likelihood of these warrants
being exercised increases as our stock price increases and decreases as our
stock price decreases, with a corresponding effect on the likelihood of
our realizing proceeds from their exercise.
Our
business is heavily dependent on our coal inventory. Because of certain
coal mining accidents, the Chinese government has been closing mines
throughout China. In addition, in Shanxi Province, the authorities are not
approving new mines that produce less than 900,000 MT output per year, are
closing mines that produce less than 300,000 MT per year and are
consolidating existing mines into larger mines with outputs between 300,000
MT and 900,000 MT. These activities may lead to increased competition for
coal and result in higher prices for the raw coal we purchase, increasing
our need for capital resources and reducing our gross profit margins if we are
not able to increase the selling price of our products sufficiently to offset
our increased costs.
On
February 18, 2010, we completed the offering and sale of 3,284,000 shares
(including 428,348 overallotment shares to underwriters), for net proceeds of
approximately $14.5 million. In May 2010, our wholly-owned
subsidiary, Putai, received a loan in the aggregate principal amount of RMB 240
million ($35.4 million) from Mr. Ming Zhao, which Putai used to increase the
registered paid-in capital of Shanxi Coal, its 90% subsidiary, to the level that
is required for coal mine consolidators by the Shanxi government. Our
cash balance was $80 million as of September 30, 2010. We believe that our
cash at hand will be adequate to satisfy our anticipated cash requirements for
our coal cleaning business, including requirements to maintain current
operations, complete projects already underway and achieve stated objectives or
plans, commitment for capital or other expenditure and other reasonably likely
future needs in the next twelve months. Cash requirements for
developing our coal mining strategy and long-term business needs,
including the funding of capital expenditure and debt service for
outstanding financings, are expected to be financed by a combination of
internally generated funds, the proceeds from the sale of our securities,
borrowings and other external financing sources, etc., although adequate
financing may not be available to us on acceptable terms when we need
it. Our belief concerning our liquidity is based on current
information. If the current information proves to be inaccurate, or if
circumstances change, we may not be able to meet our
cash needs.
45
Off-Balance
Sheet Arrangements
None.
Contractual
Obligations
The
contractual obligations presented in the table below represent our estimates of
future payments under fixed contractual obligations and commitments as of
September 30, 2010.
(In
thousand dollars)
Obligations
|
Total Ending
Balance
|
Less Than
One
Year
|
1-3 Years
|
3-5 Years
|
More than
5
Years
|
|||||||||||||||
Long
Term Debt Obligations
|
$
|
42,697
|
$
|
1,300
|
$
|
38,472
|
$
|
2,600
|
$
|
325
|
||||||||||
Operating
Lease Obligations
|
520
|
160
|
360
|
-
|
-
|
|||||||||||||||
Purchase
Obligations
|
8,514
|
8,514
|
-
|
-
|
-
|
|||||||||||||||
Total
|
$
|
51,731
|
$
|
9,974
|
$
|
38,832
|
$
|
2,600
|
$
|
325
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
Risk
Market
risk represents the risk of loss that may impact our financial position, results
of operations or cash flows due to adverse changes in market prices, including
interest rate risk, foreign currency exchange rate risk, securities market risk,
commodity price risk, and other relevant market rate or price risks. We do not
have any significant risks related to equity investments, securities markets or
derivative financial instruments as we do not have equity investments in
privately held companies other than our subsidiaries, securities markets or
derivative financial instruments. Nor do we have any significant interest rate
risk, as we do not have bank loans, and our promissory notes and loans from
related parties have fixed interest rates. We are exposed to foreign currency
exchange rate risk, commodity price risk and credit risk.
Although
our reporting currency is the U.S. dollar, the financial records of our
operating subsidiaries are maintained in their local currency, the RMB, which is
our functional currency. Approximately 100% of our revenues and 99%
of our costs and expenses for the nine months ended September 30, 2010
are denominated in RMB, with the balance denominated in U.S.
dollars. Approximately 99% of our assets were denominated in RMB as
of September 30, 2010. Assets and liabilities of our operating
subsidiaries are translated into U.S. dollars at the exchange rate at the
balance sheet date, their equity accounts are translated at the historical
exchange rate and their income and expense items are translated using the
average rate for the period. Any resulting exchange differences are
recorded in accumulated other comprehensive income or loss. We have
not reduced our exposure to exchange rate fluctuations by using hedging
transactions. While we may choose to do so in the future, the
availability and effectiveness of any hedging transactions may be limited and we
may not be able to successfully hedge our exchange rate
risks. Accordingly, we may experience economic losses and negative
impacts on earnings and equity as a result of foreign exchange rate
fluctuations. If the RMB depreciates against the U.S. dollar, the
value of our RMB revenues, earnings and assets as expressed in our U.S. dollar
financial statements will decline. We are subject to currency
fluctuations from our Chinese operations and fluctuations in the exchange rate
may negatively affect our expenses and results of operations, as well as the
value of our assets and liabilities. See Part I Item 1 of the Annual
Report on Form 10-K for the fiscal year ended December 31, 2009 under the
heading “Risk Factors.” During the nine months ended September 30,
2010, the foreign currency translation adjustment to our comprehensive income
was a $2.6 million gain, primarily as a result of the RMB appreciation against
the U.S. dollar in the period. An average appreciation (depreciation)
of the RMB against the U.S. dollar of 1% would increase (decrease) our net
income for the nine months ended September 30, 2010 by approximately $0.2
million based on our outstanding revenues, costs and expenses, assets and
liabilities denominated in RMB as of September 30, 2010. As of September
30, 2010, our accumulated other comprehensive income was $12.7
million.
46
Commodity
Price Risk
Our
operating profits may be negatively affected by fluctuations in the price of raw
coking coal. We are subject to short-term coal price volatility and may be
forced to purchase raw coking coal at higher prices and may be unable to pass
the cost increase of raw coal on to customers. This may adversely affect gross
margins and profitability. Our sales agreements with customers
generally contain provisions that permit the parties to adjust the contract
price of the cleaned coking coal upward or downward at specified times. For
example, we may adjust these contract prices because of increases or decreases
in the price of raw coal from our mining suppliers, general inflation or
deflation, or changes in the cost of producing raw or cleaned coking coal caused
by such things as changes in taxes, fees, royalties or the laws regulating the
mining, production, sale or use of coal. However, if we fail to agree on a price
with our customers under these provisions, many agreements permit the customers
to terminate the contract or refuse to buy all of the quantities contracted for.
In China, the purchase price of raw coal fluctuates up and down. The
average purchase price of our raw coal increased from about RMB 483 per MT in
the nine months ended September 30, 2009 to about RMB 558 per MT in the nine
months ended September 30, 2010. Top quality raw coking coal is critical for us
to maintain our operating efficiencies and to deliver cleaned coal to our
customers meeting their specifications. Since top quality raw coking coal is
limited in supply, its price tends to be volatile. A general rise in coking coal
prices also may adversely affect the price of, and demand for, coke and products
made with coke such as pig iron, steel and concrete. This may in turn lead to a
fall in demand for our products. An increase (decrease) in raw coal purchase
price of 5% could decrease (increase) our income from operations by
approximately $9.6 million for the nine months ended September 30, 2010. We
generally have not employed forward contracts or other financial instruments to
hedge commodity price risk.
Credit
Risk
We are
exposed to credit risk from our cash at bank and contract receivables. At
September 30, 2010, we had a credit risk exposure of cash at bank of
approximately $80 million. The credit risk on cash at bank is limited because
the bank in which our cash is deposited is a very reputable bank and it is not
reasonably expected to have significant credit risk. We do not require
collateral or other securities to support financial instruments that are subject
to credit risk. We grant credit to our customers subject to credit evaluations.
We periodically record a provision for doubtful collections based on an
evaluation of the collectibility of contract receivables by assessing,
among other factors, the customer's willingness or ability to pay, repayment
history, general economic conditions and our ongoing relationship with the
customers. We believe that our customers have a good payment history and
our accounts are current, and we currently do not have significant bad debt
provision.
ITEM
4. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) are controls and other procedures that are
designed to provide reasonable assurance that the information that we are
required to disclose in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
47
In
connection with the preparation of this quarterly report on Form 10-Q for the
fiscal quarter ended September 30, 2010, an evaluation was performed by our
management, with the participation of our CEO and CFO, of the effectiveness of
the design and operation of our disclosure controls and procedures as of the end
of the period covered by this quarterly report.
Based
upon that evaluation, our CEO and CFO concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures were
effective and provided reasonable assurance that the information required to be
disclosed in reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and are designed to ensure that information required to be disclosed in
those reports is accumulated and communicated to management, including our CEO
and CFO, as appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Control over Financial Reporting
During
the period covered by this quarterly report on Form 10-Q, there was no change in
our internal controls over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
1A. RISK FACTORS
Our
operations and financial results are subject to various risks and uncertainties
that could adversely affect our business, financial condition, results of
operations, cash flows, and trading price of our common stock. Please
refer to our Annual Report on Form 10-K for fiscal year 2009 and subsequent
quarterly reports on Form 10-Q for additional information concerning these and
other uncertainties that could negatively impact us. The risks
described in our Annual Report on Form 10-K and subsequent quarterly reports on
Form 10-Q are not the only risks facing us. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating
results.
ITEM
6. EXHIBITS
(a)
|
Exhibits
|
|
10.1
|
Mining
Right and Mining Assets Transfer Agreement with Pinglu County Samenzhen
Xuhutuo Coal Mine Ltd., incorporated by reference to Exhibit 10.1 to
current report on Form 8-K filed on October 25, 2010.
|
|
10.2
|
Mining
Right and Mining Assets Transfer Agreement with Pinglu County Daqi Coal
Mine Ltd., incorporated by reference to Exhibit 10.2 to current report on
Form 8-K filed on October 25, 2010.
|
|
10.3
|
Mining
Right and Mining Assets Transfer Agreement with Pinglu County Donggou Coal
Mine, incorporated by reference to Exhibit 10.3 to current report on Form
8-K filed on November 3, 2010.
|
|
10.4
|
Mining
Right and Mining Assets Transfer Agreement with Shanxi Pinglu Renling Coal
Industry Ltd., incorporated by reference to Exhibit 10.4 to current report
on Form 8-K filed on November 3, 2010.
|
|
31.1*
|
Certification
of Mr. Liping Zhu pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934, as amended.
|
|
31.2*
|
Certification
of Ms. Qiong Wu pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934, as amended.
|
|
32.1*
|
Certification
of Chief Executive Officer and Chief Financial Officer of Puda Coal,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
* Filed
herewith.
48
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
PUDA
COAL, INC.
|
||
By:
|
/s/
Liping Zhu
|
|
Liping
Zhu
|
||
President
and Chief Executive Officer
|
||
Date:
November 15, 2010
|
49