Attached files
file | filename |
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EX-31.2 - U.S. China Mining Group, Inc. | ex31_2.htm |
EX-32.2 - U.S. China Mining Group, Inc. | ex32_2.htm |
EX-32.1 - U.S. China Mining Group, Inc. | ex32_1.htm |
EX-31.1 - U.S. China Mining Group, Inc. | ex31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended June 30, 2011
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ______________ to _______________
Commission File Number 000-53843
U.S. CHINA MINING GROUP INC.
(Exact name of registrant as specified in its charter)
Nevada
(State of Incorporation)
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43-1932733
(I.R.S. Employer Identification No.)
|
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17890 Castleton Street, Suite 112
City of Industry, California
(Address of principal executive offices)
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91748
(Zip Code)
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(626) 581-8878
(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 ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer o Accelerated Filer o
Non-Accelerated Filer o Smaller Reporting Company x
Indicate by check mark whether the registrant is a shell company (as determined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of common stock outstanding as of August 5, 2011: 18,852,582
INDEX
Page Number
|
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PART I. Financial Statements
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||
1 | ||
1 | ||
2 | ||
3 | ||
4 | ||
22 | ||
30 | ||
30 | ||
PART II. Other Information
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31 | ||
31 | ||
31 | ||
31 | ||
32 |
PART I. FINANCIAL INFORMATION
U.S. CHINA MINING GROUP, INC. AND SUBSIDIARIES
|
||||||||
JUNE 30, 2011 (UNAUDITED) AND DECEMBER 31, 2010
|
||||||||
2011
|
2010
|
|||||||
ASSETS
|
||||||||
CURRENT ASSETS
|
||||||||
Cash & equivalents
|
$ | 45,629,643 | $ | 46,224,944 | ||||
Restricted cash
|
- | 220,217 | ||||||
Accounts receivable
|
- | 212,414 | ||||||
Other receivables, deposits and prepayments
|
5,936,855 | 35,795 | ||||||
Inventory
|
2,105,322 | 1,117,086 | ||||||
Total current assets
|
53,671,820 | 47,810,456 | ||||||
NONCURRENT ASSETS
|
||||||||
Goodwill
|
26,180,923 | 26,180,923 | ||||||
Prepaid mining rights, net
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14,795,041 | 15,646,300 | ||||||
Property and equipment, net
|
13,316,046 | 12,772,164 | ||||||
Construction in progress
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13,150,415 | 6,130,861 | ||||||
Deferred tax asset, net
|
74,955 | 184,432 | ||||||
Asset retirement cost, net
|
2,637,567 | 2,796,520 | ||||||
Total noncurrent assets
|
70,154,947 | 63,711,200 | ||||||
TOTAL ASSETS
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$ | 123,826,767 | $ | 111,521,656 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT LIABILITIES
|
||||||||
Accounts payable
|
$ | - | $ | 1,906,255 | ||||
Unearned revenue
|
946,855 | 178,380 | ||||||
Accrued liabilities and other payables
|
1,304,996 | 2,774,978 | ||||||
Taxes payable
|
1,311,507 | 3,339,830 | ||||||
Advance from shareholder
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- | 3,180,338 | ||||||
Total current liabilities
|
3,563,358 | 11,379,781 | ||||||
NONCURRENT LIABILITIES
|
||||||||
Long-term payable
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309,043 | 301,992 | ||||||
Asset retirement obligation, net of deposit for
mine restoration of $1,191,240 at 2011 and $1,164,062 at 2010,
respectively
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4,453,815 | 4,243,129 | ||||||
Total noncurrent liabilities
|
4,762,858 | 4,545,121 | ||||||
Total liabilities
|
8,326,216 | 15,924,902 | ||||||
CONTINGENCIES AND COMMITMENTS
|
||||||||
STOCKHOLDERS' EQUITY
|
||||||||
Series A Preferred Stock, $0.001 par value,
8,000,000 shares authorized, 400,000 shares
issued and outstanding
|
400 | 400 | ||||||
Common stock, $0.001 par value, 100,000,000
shares authorized, 18,852,582 and 14,932,582
shares issued and outstanding at June 30, 2011
and December 31, 2010, respectively
|
18,852 | 14,932 | ||||||
Additional paid in capital
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54,237,145 | 39,833,996 | ||||||
Statutory reserves
|
11,761,140 | 10,536,604 | ||||||
Accumulated other comprehensive income
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7,302,564 | 5,468,674 | ||||||
Retained earnings
|
42,180,450 | 39,742,148 | ||||||
Total stockholders' equity
|
115,500,551 | 95,596,754 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 123,826,767 | $ | 111,521,656 |
The accompanying notes are an integral part of the consolidated financial statements.
U.S. CHINA MINING GROUP, INC. AND SUBSIDIARIES
(UNAUDITED)
|
SIX MONTHS ENDED JUNE 30,
|
THREE MONTHS ENDED JUNE 30,
|
||||||||||||||||
2011
|
2010
|
2011
|
2010
|
||||||||||||||
Net sales
|
$ | 33,623,283 | $ | 22,524,065 | $ | 11,387,336 | $ | 9,965,946 | |||||||||
Cost of goods sold
|
20,868,336 | 13,816,910 | 7,324,833 | 6,091,287 | |||||||||||||
Gross profit
|
12,754,947 | 8,707,155 | 4,062,503 | 3,874,659 | |||||||||||||
Operating expenses
|
|||||||||||||||||
Selling
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1,915,559 | 565,467 | 1,555,911 | (361 | ) | ||||||||||||
General and administrative
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5,366,236 | 2,155,670 | 2,843,139 | 1,219,879 | |||||||||||||
Total operating expenses
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7,281,795 | 2,721,137 | 4,399,050 | 1,219,518 | |||||||||||||
Income (loss) from operations
|
5,473,152 | 5,986,018 | (336,547 | ) | 2,655,141 | ||||||||||||
Non-operating income (expenses)
|
|||||||||||||||||
Interest income
|
87,433 | 34,845 | 36,304 | 24,235 | |||||||||||||
Interest expense
|
(110,704 | ) | (174,368 | ) | (42,087 | ) | (88,697 | ) | |||||||||
Total non-operating expenses, net
|
(23,271 | ) | (139,523 | ) | (5,509 | ) | (64,462 | ) | |||||||||
- | - | ||||||||||||||||
Income (loss) before income tax
|
5,449,881 | 5,846,495 | (342,056 | ) | 2,590,679 | ||||||||||||
Provision (benefit) for income tax
|
1,787,043 | 1,888,486 | 84,390 | 757,971 | |||||||||||||
Net income (loss)
|
3,662,838 | 3,958,009 | (426,446 | ) | 1,832,708 | ||||||||||||
Other comprehensive income
|
|||||||||||||||||
Foreign currency translation gain
|
1,826,633 | 327,195 | 1,066,315 | 541,018 | |||||||||||||
Comprehensive income (loss)
|
$ | 5,489,471 | $ | 4,285,204 | $ | 639,869 | $ | 2,373,726 | |||||||||
Basic weighted average shares outstanding
|
18,722,637 | 14,932,582 | 18,852,582 | 14,932,582 | |||||||||||||
Diluted weighted average shares outstanding
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19,122,637 | 15,353,285 | 18,852,582 | 15,344,304 | |||||||||||||
Basic net earnings (loss) per share
|
$ | 0.20 | $ | 0.27 | $ | (0.02 | ) | $ | 0.12 | ||||||||
Diluted net earnings (loss) per share *
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$ | 0.19 | $ | 0.26 | $ | (0.02 | ) | $ | 0.12 |
* For the purpose of calculating diluted earnings per share, the preferred stock was excluded due to anti-dilution.
The accompanying notes are an integral part of the consolidated financial statements.
U.S. CHINA MINING GROUP, INC. AND SUBSIDIARIES
(UNAUDITED)
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2011
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2010
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|||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net income
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$ | 3,662,838 | $ | 3,958,009 | ||||
Adjustments to reconcile net income to net cash
|
||||||||
(used in) provided by operating activities:
|
||||||||
Depreciation and amortization
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2,217,405 | 1,661,167 | ||||||
Accretion of interest on asset retirement obligation
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110,430 | 101,727 | ||||||
Imputed interest
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3,848 | 72,514 | ||||||
Warrants expense
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250,703 | - | ||||||
Stock option compensation
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125,528 | 64,345 | ||||||
Changes in deferred tax
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112,574 | 200,280 | ||||||
(Increase) decrease in current assets:
|
||||||||
Accounts receivable
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215,064 | (22,992 | ) | |||||
Other receivables, deposits and prepayments
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(5,837,870 | ) | 3,735 | |||||
Inventory
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(951,931 | ) | (1,148,260 | ) | ||||
Increase (decrease) in current liabilities:
|
||||||||
Accounts payable
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(1,929,786 | ) | (354,490 | ) | ||||
Unearned revenue
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756,189 | (1,437,727 | ) | |||||
Accrued liabilities and other payables
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(1,515,178 | ) | 577,226 | |||||
Taxes payable
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(2,083,922 | ) | (47,899 | ) | ||||
Net cash (used in ) provided by operating activities
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(4,864,108 | ) | 3,627,635 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Change in restricted cash
|
222,964 | (122 | ) | |||||
Acquisition of property, plant & equipment
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(1,040,215 | ) | (1,864,165 | ) | ||||
Construction in progress
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(6,803,347 | ) | (864,861 | ) | ||||
Net cash used in investing activities
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(7,620,598 | ) | (2,729,148 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Advance from shareholders
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- | 525,777 | ||||||
Proceeds from issuance of common stock
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13,650,500 | - | ||||||
Repayment to shareholders
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(2,800,000 | ) | - | |||||
Net cash provided by financing activities
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10,850,500 | 525,777 | ||||||
EFFECT OF EXCHANGE RATE CHANGE ON CASH & EQUIVALENTS
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1,038,905 | 178,775 | ||||||
NET INCREASE (DECREASE) IN CASH & EQUIVALENTS
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(595,301 | ) | 1,603,039 | |||||
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD
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46,224,944 | 31,260,184 | ||||||
CASH & EQUIVALENTS, END OF PERIOD
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$ | 45,629,643 | $ | 32,863,223 | ||||
Supplemental Cash flow data:
|
||||||||
Income tax paid
|
$ | 2,414,172 | $ | 1,577,601 | ||||
Interest paid
|
$ | - | $ | - |
The accompanying notes are an integral part of the consolidated financial statements.
U.S. CHINA MINING GROUP, INC.
AND SUBSIDIARIES
JUNE 30, 2011 (UNAUDITED) AND DECEMBER 31, 2010
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
U.S. China Mining Group, Inc. (“SGZH” or the “Company”) was incorporated in Nevada on June 7, 2001. As described below, in April 2008 the Company completed a transaction with Xing An (defined below) which was accounted for as a reverse acquisition and the historical financial information contained herein is of Xing An. The Company is engaged in coal production by exploring, assembling, assessing, permitting, developing and mining coal properties in the People’s Republic of China (“PRC”). After obtaining permits from the Heilongjiang National Land and Resources Administration Bureau and Heilongjiang Province Coal Production Safety Bureau, the Company extracts coal from properties it has the right to mine, and sells most of the coal on a per ton basis for cash on delivery, primarily to power plants, cement factories, wholesalers and individuals for home heating.
On September 23, 2004, the Company acquired a 75% interest in Heilongjiang Tong Gong Kuang Ye You Xian Gong Si (“Tong Gong”), which owns the mining rights to a coal mine near Heihe City in Heilongjiang Province for 400,000 shares of its convertible preferred stock which, at the time of issuance, were convertible into 40,000,000 shares of common stock (The conversion ratio was amended to 1:10 on December 19, 2006, such that the 400,000 shares of convertible preferred stock were convertible into 4,000,000 shares of common stock). Effective January 7, 2008, the conversion ratio for the preferred stock was changed to 1-for-1 as a result of the 10-to-1 reverse stock split of issued and outstanding shares of common stock which was effective on that date. Additionally, Harbin Green Ring Biological Degradation Products Developing Co., Ltd. (“Harbin Green”), which owns the remaining 25% of Tong Gong, assigned its beneficial interests to the Company. As a result, the Company beneficially owns 100% of Tong Gong.
On December 31, 2007, the Company entered into a Stock Purchase Agreement (the “Agreement”) to acquire two PRC mining companies under common ownership: Heilongjiang Xing An Group Hong Yuan Coal Mine Co., Ltd. (“Hong Yuan”) and Heilongjiang Xing An Group Sheng Yu Mining Co., Ltd. (“Sheng Yu”) and with Hong Yuan sometimes collectively as “Xing An” for 400,000 Series A preferred shares and 6,932,582 common shares valued at the average stock price of SGZH stock two days before and two days after the Agreement date. This transaction was completed on April 4, 2008, and the Xing An shareholders received 8 million shares of SGZH common stock and $30 million, which was treated as a dividend pursuant to the accounting treatment applied to the transaction. As a result of the transaction Xing An shareholders then owned 53% of the combined company. For accounting purposes, the transaction was accounted for as a reverse acquisition of the Company by Xing An.
Because current PRC regulations restrict foreign ownership of any mining-related company to 90% of such company’s equity interest, the Company acquired 90% of the registered capital, being 90% of the outstanding equity interests, of each of Hong Yuan and Sheng Yu from their owners (the “Xing An Shareholders”). Concurrently with the acquisition, the Xing An Shareholders placed the beneficial interests to the remaining 10% equity interests of Xing An in trust for the benefit of the Company pursuant to a Trust Agreement. Under the terms of the Trust Agreement, all rights attached to the 10% equity interests are to be exercised by the trustee at the direction, and for the sole benefit, of the Company. Transfer of the 10% equity interests to the Company shall occur when permitted under applicable PRC regulations. At such time, if the trust is deemed to violate applicable PRC regulations or can no longer achieve its intended purpose, the trust shall terminate, and the 10% equity interests shall revert back to the Xing An Shareholders. Upon a review of the Company’s corporate structure, the Company determined that, in order to assure full compliance with current PRC law and regulation, the non-controlling equity interests in its subsidiaries should in each case be held by the other subsidiaries and not by the Company or in trust. Consequently, the 25% equity interest in Tong Gong, which had previously been structured as an assignment to the Company, has instead been assigned to and is held by the Xing An Companies and the 10% equity interest in the Xing An Companies is now held by Tong Gong and not by the Company in a trust.
Hong Yuan was incorporated in Heilongjiang Province on August 18, 2003, under the name Daxinganling Mohe County Hong Yuan Coal Mine Co., Ltd. Sheng Yu was incorporated in Heilongjiang Province on August 18, 2003, under the name Daxinganling Mohe County Sheng Yu Mining Co., Ltd. Each company produces coal for sale to utilities and industrial markets. Both mines are located in Mohe County, in the most northern regions of China, and are geologically joined. The Xing An shareholders acquired Hong Yuan on August 19, 2005 and Sheng Yu on May 8, 2005. From January 1, 2005 until these companies were acquired by Xing An’s shareholders, the mines these companies have mining rights to were not in operation.
On January 7, 2008, the Company amended its Articles of Incorporation to effect a 10-to-1 reverse stock split of its issued and outstanding shares of common stock and a proportional decrease of its authorized number of shares of common stock from 1,000,000,000 to 100,000,000 shares.
On June 8, 2010, the Company amended its Articles of Incorporation to change its name from Songzai International Holding Group, Inc. to U.S. China Mining Group, Inc. On July 1, 2010, the Company filed a Certificate of Amendment with the Secretary of State of the State of Nevada changing its name to “U.S. China Mining Group, Inc.”
The interim financial information presented in this Form 10-Q is not audited and is not necessarily indicative of the Company’s future consolidated financial position, results of operations or cash flows. The accompanying consolidated balance sheet as of December 31, 2010 was derived from audited financial statements included on Form 10-K, and the interim unaudited consolidated financial statements contained in this Form 10-Q were prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and on the same basis as the annual financial statements. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of June 30, 2011, its results of operations for the six months ended June 30, 2011 and 2010 and its cash flows for the six months ended June 30, 2011 and 2010 have been made. These financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto for the fiscal year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K filed with the SEC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of SGZH and its subsidiaries, Tong Gong and Xing An. All significant inter-company accounts and transactions were eliminated in consolidation.
Use of Estimates
In preparing financial statements in conformity with US generally accepted accounting principles (“US GAAP”), management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates.
Cash and Equivalents
For financial statement purposes, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At June 30, 2011 and December 31, 2010, the Company had restricted cash of $0 and $220,217, respectively, in the bank pledged for coal mine safety required by the Heilongjiang Board for Overseeing Safety Production.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Based on historical collection activity, the Company did not have any bad debt allowance at June 30, 2011 and December 30, 2010.
Inventory
Inventory consists of coal extracted from the ground that is available for delivery to customers, as well as extracted coal removed from the ground but not yet processed through a wash plant. Inventory is valued at the lower of average cost or market, cost being determined on a first in, first out method and including labor costs, all expenditures directly related to the removal of coal, and amortization of mining rights and asset retirement cost.
Prepaid Mining Rights
Prepaid mining rights represent the portion of the mining rights for which the Company has previously paid. Prepaid mining rights are expensed based on actual production volume during the period. See additional discussion in Note 6, “Prepaid Mining Rights.”
Goodwill
Goodwill is the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, goodwill is not amortized but is tested for impairment, annually or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds its fair value with the fair value of the reporting unit determined using discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.
On April 4, 2008, the Company completed the acquisition of 90% of Xing An pursuant to the Agreement for price determined by multiplying the number of shares of SGZH outstanding just prior to the transaction (400,000 Series A preferred shares and 6,932,582 common shares) by the average stock price of SGZH stock two days before and two days after the Agreement date. In connection with the transaction, the Xing An shareholders received 8 million shares of SGZH common stock and $30 million, which was treated as a dividend payable and recorded as a charge to retained earnings. The total consideration exceeded the fair value of the net assets acquired by $26,180,923, which was recorded as goodwill. As a result of the acquisition, the Xing An Shareholders owned 53% of the combined company. For accounting purposes, the acquisition of Xing An by SGZH is accounted for as a reverse acquisition of SGZH by Xing An. As of June 30, 2011 and December 31, 2010, the Company concluded there was no impairment to the goodwill.
Asset Retirement Cost and Obligations, Deposit for Mine Restoration
The Company uses Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations, codified in FASB ASC Topic 410. This Statement generally requires the Company’s legal obligations associated with the retirement of long-lived assets are recognized at fair value at the time the obligations are incurred. Obligations are incurred when development of a mine commences for underground mines or construction begins for support facilities, refuse areas and slurry ponds. The obligation’s fair value is determined using DCF techniques and is accreted over time to its expected settlement value. Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying amount of the related long-lived asset. Amortization of the related asset is calculated on a unit-of-production method by amortizing the total estimated cost over the salable reserves determined under SEC Industry Guide 7, multiplied by the production during the period. The Company reviews its asset retirement obligations at least annually and makes necessary adjustments for permit changes as granted by state authorities and for revisions of estimates of the amount and timing of costs. For ongoing operations, adjustments to the liability result in an adjustment to the corresponding assets. At June 30, 2011 and December 31, 2010, there were no adjustments for the asset retirement obligations.
Xing An voluntarily applied to Daxinganling District Environment Protection Bureau for the asset retirement obligation and is obligated to account for land subsidence, restoration, rehabilitation and environmental protection at a rate of RMB 1 per ton based on total reserves at the end of the useful lives of the mines.
From January 1, 2009, Xing An and Tong Gong were required by the local Environment Protection Bureau and Heilongjiang Province National Land and Resources Administration Bureau (“HPNLRAB’) to deposit RMB 18,886,500 ($2,765,632) and RMB 5,000,000 ($731,090), respectively, within a certain period of time to a bank account held by local mining authority for land subsidence, restoration and rehabilitation when the mine is fully depleted. At June 30, 2011, Xing An deposited RMB 5,665,950 ($875,510) and Tong Gong deposited RMB 2,043,280 ($315,730). See additional discussion in Note 12, “Asset Retirement Cost and Obligations.”
Environmental Costs
The PRC adopted environmental laws and regulations that affect the operations of the coal mining industry. The outcome of environmental liabilities under proposed or future environmental legislation cannot be reasonably estimated at present, and could be material. Under existing legislation, however, Company management believes there are no probable liabilities that will have a material adverse affect on the financial position of the Company.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Costs of mine development, expansion of the capacity of, or extending the life of our mine are capitalized and principally amortized using the units-of-production method over the actual tons of coal produced directly benefiting from the capital expenditure. Mobile mining equipment and other fixed assets are stated at cost and depreciated on a straight-line basis over the estimated useful lives of 10 to 15 years. Leasehold improvements are amortized over their estimated useful lives or the term of the lease, whichever is shorter. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.
The estimated useful lives for each category of fixed assets in years are as follows:
Plant and Machinery
|
10-15
|
|||
Motor Vehicles
|
5
|
|||
Building and Mining Structure
|
10-20
|
Mining structure includes the main and auxiliary mine shafts, underground tunnels, and other integrant mining infrastructure.
Depreciation for the mine shafts is provided to write off the cost of the mining structure using the units of production method based on salable reserves determined under SEC Industry Guide 7.
Impairment of Long-Lived Assets
Long-lived assets, which include property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, as of June 30, 2011 and December 31, 2010, there were no impairments of its long-lived assets.
Income Taxes
The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” codified in FASB ASC Topic 740, which requires recognition of deferred tax assets and liabilities for expected future tax consequences of events included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company follows FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”), codified in FASB ASC Topic 740. When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interests associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. At June 30, 2011 and December 31, 2010, the Company did not take any uncertain positions that would necessitate recording of a tax related liability.
Revenue Recognition
The Company’s revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Coal sales include sales of coal produced at Company operations and coal purchased from other coal mining companies. Sales are recognized when a formal arrangement exists, which is generally represented by a contract between the Company and the buyer; the price is fixed or determinable; title has passed to the buyer, which generally is at the time of delivery; no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.
When the Company purchases coal from other mining companies, its customers pick up the coal at those coal mines’ premises or the coal is shipped directly from other coal mining companies. Purchases and shipments of the coal from other mining companies are arranged at the same time. Sales of brokered coal are recognized at the time of delivery.
Sales represent the invoiced value of coal, net of value-added tax (“VAT”). All of the Company’s coal sold in the PRC is subject to a value-added tax of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product. The Company records VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.
Cost of Goods Sold
Cost of goods sold consists primarily of amortization of the mining rights, direct material, direct labor, depreciation of mining plant items such as the underground tunnel and the major mine well and related expenses, which are directly attributable to the production of coal. Write-down of inventory to lower of cost or market is also recorded in cost of goods sold.
Resource Compensation Fees
In accordance with the relevant regulations, a company engaged in coal production is required to pay a fee to the HPNLRAB for the depletion of coal resources. Tong Gong is required to pay mineral resource fees of RMB 3 per ton for its total production during the year; Xing An is required to pay resource fees at 1% of its total sales. The Company expenses such costs as G&A expense when incurred.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk consist primarily of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its customers’ financial condition and customer payment practices to minimize collection risk on its receivables.
The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy.
The Company has cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC. Cash in state-owned banks is not covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in these bank accounts.
Statement of Cash Flows
In accordance with SFAS No. 95, “Statement of Cash Flows,” (codified in FASB ASC Topic 230), cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
Basic and Diluted Earnings per Share (EPS)
Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares, warrants and stock options had been issued and if the additional common shares were dilutive. Diluted earnings per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding options and the if-converted method for the outstanding convertible preferred shares. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, convertible outstanding instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later). During the six and three months ended June 30, 2011, there was no diluted shared for options as a result of anti-dilutive feature. The following tables present a reconciliation of basic and diluted earnings per share:
Six Months Ended
June 30,
|
||||||||
2011
|
2010
|
|||||||
Net income
|
$
|
3,662,838
|
$
|
3,958,009
|
||||
Weighted average shares outstanding - basic
|
18,722,637
|
14,932,582
|
||||||
Effect of dilutive securities:
|
||||||||
Series “A” preferred stock
|
400,000
|
400,000
|
||||||
Options issued
|
-
|
20,703
|
||||||
Warrants issued
|
-
|
-
|
||||||
Weighted average shares
|
||||||||
Outstanding - diluted
|
19,122,637
|
15,353,285
|
||||||
Earnings per share – basic
|
$
|
0.20
|
$
|
0.27
|
||||
Earnings per share – diluted
|
$
|
0.19
|
$
|
0.26
|
Three Months Ended June 30,
|
||||||||
2011
|
2010
|
|||||||
Net income (loss)
|
$
|
(426,446)
|
$
|
1,832,708
|
||||
Weighted average shares outstanding - basic
|
18,852,582
|
14,932,582
|
||||||
Effect of dilutive securities:
|
||||||||
Series “A” preferred stock
|
400,000
|
400,000
|
||||||
Options issued
|
-
|
11.722
|
||||||
Warrants issued
|
-
|
-
|
||||||
Weighted average shares
|
||||||||
Outstanding - diluted
|
18,852,582
|
15,344,304
|
||||||
Earnings per share – basic
|
$
|
(0.02)
|
$
|
0.12
|
||||
Earnings per share – diluted *
|
$
|
(0.02)
|
$
|
0.12
|
* For the purpose of calculating diluted earnings per share, the preferred stock was excluded due to anti-dilution.
Fair Value of Financial Instruments
Certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and short-term debt, carrying amounts approximate their fair values due to their short maturities. ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial instruments held by the Company. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest.
Fair Value Measurements and Disclosures
ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels are defined as follows:
·
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
·
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
·
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
As of June 30, 2011 and December 31, 2010, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.
Foreign Currency Translation and Comprehensive Income (Loss)
The functional currency of Tong Gong and Xing An is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated into United States Dollars (“USD” or “$”) as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period.
Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet date.
The fluctuation of exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China (“PBOC”) or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the PBOC.
The Company uses SFAS No. 130 “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the six and three months ended June 30, 2011 and 2010 consisted of net income and foreign currency translation adjustments.
Registration Rights Agreement
The Company accounts for payment arrangements under a registration rights agreement in accordance with ASC Topic 825, “Financial Instruments,” which requires the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, be separately recognized and measured in accordance with ASC Topic 450, “Contingencies,”
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123” (codified in FASB ASC Topic 718 and 505). The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
Segment Reporting
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting, codified in FASB ASC Topic 280. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
SFAS 131, codified in FASB ASC Topic 280, has no effect on the Company’s financial statements as substantially all of its operations are conducted in one industry segment - coal mining.
New Accounting Pronouncements
In June 2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income. Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. In addition, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently assessing the effect that the adoption of this pronouncement will have on its financial statements.
In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. The Company adopted this ASU on January 1, 2011.
In December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted this ASU on January 1, 2011. As of June 30, 2011, the Company did not entered into any business combination transaction.
3. INVENTORY
Inventory, at June 30, 2011 and December 31, 2010, consisted of coal.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at June 30, 2011 and December 31, 2010:
2011
|
2010
|
|||||||
Building
|
$
|
5,294,194
|
$
|
5,173,404
|
||||
Mining structure
|
11,088,388
|
10,194,706
|
||||||
Production equipment
|
4,759,377
|
4,401,647
|
||||||
Office equipment
|
74,105
|
70,167
|
||||||
Vehicles
|
265,216
|
201,297
|
||||||
21,481,280
|
20,041,221
|
|||||||
Less: Accumulated depreciation
|
(8,165,234)
|
(7,269,057)
|
||||||
$
|
13,316,046
|
$
|
12,772,164
|
Depreciation for the six months ended June 30, 2011 and 2010 was $791,800 and $798,600, respectively.
Depreciation for the three months ended June 30, 2011 and 2010 was $374,800 and $388,100, respectively.
5. OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS
Other receivables were advances to employees for traveling and other business related expenses. Deposits mainly represented deposits to the government for certain mining certificates issued by the specific PRC authorities. Other receivables and deposits totalled $81,000 for the second quarter of 2011. Prepayments included payments of $1.28 million for land tax in the second quarter of 2011.
In addition to the above, on January 20, 2011, the Company signed an advance agreement with an individual owner of a coal mine located in Guizhou China. Pursuant to the agreement, the Company advanced a refundable RMB 30 million (approximately $4,575,000, the maximum amount provided under the agreement) to an escrow account to be used for improvements to this mine. In addition, the Company intends to undertake the acquisition of the mine from the individual owner if the owner can complete the necessary restructuring of the mine as appropriate for acquisition and the new mining company after the restructuring has received all government required permits for normal production. If the potential acquisition goes forward, the escrow amount will be treated as partial consideration. If not, the amount will be reimbursed to the Company.
6. PREPAID MINING RIGHTS
Prepaid mining rights are the portion of the mining rights for which the Company previously paid. The price is determined by the local mining bureau from which the Company acquired its mining rights, based in part on market price set by the Heilongjiang National Land and Resources Administration Bureau and in part on negotiations with the local mining bureau. The price is established at the time of payment, regardless of when production of the underlying coal occurs. The price for Tong Gong was RMB 8 ($1.17) per ton for 2010, 2009 and 2008 and RMB 3.09 ($0.43) per ton for 2005 through 2007; the price for Xing An was RMB 9 ($1.32) per ton for 2010, 2009 and 2008, RMB 6 ($0.85) per ton for 2006 and 2007, and RMB 4 ($0.50) per ton for 2005. For any mining rights granted prior to September 1, 2006, the Company is generally required to pay for the entire amount of coal underlying such mining rights within five years from the date such right is granted unless specific good cause exists for extension. Effective September 1, 2006, under the authority of the Heilongjiang Geology and Mineral Exploration Office, the Company has ten years to pay for the coal underlying any mining rights granted on or after such date.
If the Company decides to cease mining at a particular property, and the Company has already extracted all the coal underlying its mining rights, the government will take back that coal mine. If the Company decides to cease mining but has not extracted all coal it has already paid to extract (i.e. its prepaid mining rights), while the Company will not be entitled to a refund of the corresponding prepaid mining rights from the government, the Company can sell such unused prepaid mining rights to a third party.
The following table illustrates the grant dates of the Company’s mining rights and corresponding payment due dates:
Grant date of mining rights (1)
|
In Place Resources to which Mining
Rights Relate (in metric tons)(2)
|
Corresponding Due date for the
payment of mining rights
|
|||||||
Xing An
|
Tong Gong
|
Xing An
|
Tong Gong
|
Xing An
|
Tong Gong
|
||||
12/30/2004
|
4,649,700
|
12/30/2009
|
|||||||
4/1/2005
|
816,300
|
12/30/2010
|
|||||||
10/15/2005
|
13,520,700
|
9/30/2010
|
|||||||
3/1/2007
|
5,444,800
|
3/1/2017
|
|||||||
9/30/2007
|
1,500,000
|
9/30/2017
|
|||||||
Total
|
19,781,800
|
6,149,700
|
(1) Grant date is the date that the reserves appraisal report by government authorized mining engineers is filed with Heilongjiang Department of Land and Resources and the Company is approved for the total tons of coal it is legally allowed to extract based on the PRC reserves appraisal report.
(2) The Company’s mining rights are based on appraisals of in place resources conducted by the appropriate PRC authorities and are expressed as a maximum number of metric tons of coal in each mine which the Company is entitled to extract under related mining rights.
The Company’s prepaid mining rights consisted of the following at June 30, 2011 and December 31, 2010:
2011
|
2010
|
|||||||
Prepaid mining rights
|
$
|
26,600,890
|
$
|
25,993,978
|
||||
Less: Amortized portion
|
(11,805,849
|
)
|
(10,193,058
|
)
|
||||
Prepaid mining rights, net
|
$
|
14,795,041
|
$
|
15,646,300
|
The Company amortizes the mining rights by using total cost of mining rights (the sum of those for which the Company has paid and those for which the Company is still committed to pay) divided by total salable reserves determined under SEC Industry Guide 7, multiplied by production during the period. The cost of unpaid mining rights is assumed to be the same as the most current price per ton paid by the Company (RMB 8 ($1.17) per ton). Amortization was $1,203,600 and $793,600 for the six months ended June 30, 2011 and 2010, respectively. Amortization was $238,200 and $220,000 for the three months ended June 30, 2011 and 2010, respectively.
As of June 30, 2011 and December 31, 2010, the total quantity of coal the Company is legally allowed to extract under the mining rights of Xing An and Tong Gong was 25,931,500 tons (as per above table); however, as noted in the table above, this amount reflects the in place resources on which the mining rights are based and to which those mining rights extend. But these amounts, determined by the appropriate PRC authorities, do not coincide with the definition of proven and probable product reserves of SEC Industry Guide 7, which would be 8.28 million tons as of June 30, 2011. The Company paid for 25,165,295 tons at June 30, 2011, and is committed to pay for 766,205 tons of coal at RMB 8 ($1.17) per ton, or $897,589, which must be paid by September 30, 2017. The prepayment of mining rights is accounted for similar to a royalty agreement as neither the payment terms nor the price per ton is fixed.
7. CONSTRUCTION IN PROGRESS
Construction in progress is the amount paid for Xing An mines’ maintenance and retrofit project which commenced at the end of 2009. The project will take about 12 – 21 months to finish. The estimated cost for the retrofit was approximately $15.5 million; the Company has incurred $13.15 million as of June 30, 2011.
8. RELATED PARTY TRANSACTIONS
Lease from shareholder
Xing An leases its office and certain office equipment under long-term leases from a principal shareholder for approximately $1,800 (RMB 12,500) per month. The operating lease requires Xing An to pay certain operating expenses applicable to the leased premises.
Advance from shareholder
At December 31, 2010, the Company owed its CEO $3,180,338, for short-term advance as a result of this shareholder paying certain US headquarters’ G&A expenses for the Company. This short-term advance was payable upon demand with no collateral required. Imputed interest expense is charged at 6% on the amount due at the balance sheet date for the close of that period and is included as additional paid-in capital. The Company repaid $2.8 million to its CEO in January 2011, and the remaining $380,000 was waived by the CEO and accordingly, was recorded as additional paid in capital to the Company.
9. ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following at June 30, 2011 and December 31, 2010:
2011
|
2010
|
|||||||
Accrued liabilities
|
$
|
290,911
|
$
|
198,977
|
||||
Other payables
|
||||||||
Education and union outlays
|
166,792
|
145,488
|
||||||
Transportation infrastructure construction fee
|
539,508
|
1,171,922
|
||||||
Mine security special purpose fee
|
50,638
|
83,772
|
||||||
Deposit from constructor for quality assurance on mine shaft
maintenance
|
-
|
679,481
|
||||||
Coal price adjustment fund
|
50,638
|
167,545
|
||||||
Resource compensation fee
|
42,646
|
198,339
|
||||||
Others
|
163,863
|
129,454
|
||||||
Subtotal
|
1,014,085
|
2,576,001
|
||||||
Total
|
$
|
1,304,996
|
$
|
2,774,978
|
Accrued liabilities mainly represented accrued payroll, welfare and legal and audit expense. Transportation infrastructure construction fees was a fee for Tong Gong and Xing An levied by the provincial government at RMB 10 per ton based on sales volume; Coal mine security special purpose fee was a fee for Tong Gong levied by the local authority at RMB 10 per ton based on sales volume; Coal price adjusting fund was a fee for Tong Gong levied by the local authority at RMB 20 per ton based on sales volume.
10. TAXES PAYABLE
Taxes payable consisted of the following at June 30, 2011 and December 31, 2010:
2011
|
2010
|
|||||||
Income tax
|
$
|
177,263
|
$
|
1,790,990
|
||||
Value added tax
|
847,346
|
1,468,677
|
||||||
Resource tax
|
42,084
|
73,163
|
||||||
Other
|
244,814
|
7,000
|
||||||
Total
|
$
|
1,311,507
|
$
|
3,339,830
|
11. LONG TERM PAYABLE
Long term payable is a refundable deposit from an independent contractor who is responsible for the mining work at Tong Gong mine site. The Company outsourced Tong Gong mining work for 3 years, and the contractor was required to pay a deposit for mining safety assurance, which will be refunded to this contractor when the contract period expires.
12. ASSET RETIREMENT COST AND OBLIGATION
Xing An voluntarily applied to Daxinganling District Environment Protection Bureau for asset retirement obligation to get a tax deduction and is obligated to account for land subsidence, restoration, rehabilitation and environmental protection at a rate of RMB 1 ($0.15) per ton for total reserves at the end of the useful lives of the mines. These activities include reclaiming the pit, sealing portals at underground mines, and reclaiming and vegetating refuse areas.
Effective January 1, 2009, Xing An and Tong Gong were required by the local Environment Protection Bureau and HPNLRNB to deposit RMB 18,886,500 ($2,765,632) and RMB 5,000,000 ($731,090), respectively, within a period of time presently expected to be three to five years to a bank account held by local mining authority for land subsidence, restoration and rehabilitation when the mine is fully depleted. At June 30, 2011, Xing An deposited RMB 5,665,950 ($875,510), and Tong Gong deposited RMB 2,043,280 ($315,730).
The Company accounts for Xing An and Tong Gong’s asset retirement obligations in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations” (codified in FASB ASC Topic 410). The Company reviews the asset retirement obligation at least annually and makes necessary adjustments for permitted changes as granted by state authorities and for revisions of estimates of the amount and timing of costs. For ongoing operations, adjustments to the liability result in an adjustment to the corresponding asset.
Asset Retirement Cost at June 30, 2011 and December 31, 2010 was:
2011
|
2010
|
|||||||
Asset retirement cost
|
$
|
4,600,522
|
$
|
4,495,560
|
||||
Less: Accumulated amortization
|
(1,962,955
|
)
|
(1,699,040
|
)
|
||||
$
|
2,637,567
|
$
|
2,796,520
|
Amortization for asset retirement cost for the six months ended June 30, 2011 and 2010 was $221,900 and $161,100, respectively. Amortization for asset retirement cost for the three months ended June 30, 2011 and 2010 was $61,100 and $47,300, respectively.
Changes in Asset Retirement Obligation for the six months ended June 30, 2011 and for the year ended December 31, 2010 consisted of the following:
2011
|
2010
|
|||||||
Balance at Beginning of Period
|
$
|
4,243,129
|
$
|
4,060,461
|
||||
Accretion of interest expense
|
110,430
|
205,128
|
||||||
Deposit for mine restoration during the period
|
-
|
(149,683)
|
||||||
Foreign currency translation gain
|
100,256
|
127,223
|
||||||
Ending balance
|
$
|
4,453,815
|
$
|
4,243,129
|
13. DEFERRED TAX ASSET, NET
Deferred tax asset is the difference between the tax and book depreciation of mining shafts using unit-of-production method, amortization of mining rights for reserves under SEC Industry Guide 7, and amortization of asset retirement cost.
Deferred tax liability consisted of tax deductible safety and maintenance expenses for coal produced to be incurred in the future. It is deductible for tax purposes at a predetermined rate per ton of coal produced per year. For financial reporting purposes, this was recorded as an appropriation of retained earnings. As defined under USA GAAP, a liability for safety and maintenance expenses does not exist at the balance sheet date because there is no present obligation to transfer assets or to provide services as a result of any past transaction (see Note 16 – Statutory Reserves).
Deferred tax asset (liability) consisted of the following at June 30, 2011 and December 31, 2010:
2011
|
2010
|
|||||||
Deferred tax asset for amortization of mining rights, amortization of asset retirement cost and depreciation of assets using
unit-of-production method
|
$
|
2,428,357
|
$
|
2,205,616
|
||||
Deferred tax liability for statutory reserves for
Mine safety and maintenance expenses
|
(2,353,402
|
)
|
(2,021,184
|
)
|
||||
Net deferred tax asset
|
$
|
74,955
|
$
|
184,432
|
14. INCOME TAXES
The Company is subject to income taxes by entity on income from the tax jurisdiction in which each entity is domiciled.
U.S. China Mining Group, Inc., the US parent company was incorporated in Nevada and has net operating losses (“NOL”) for income tax purposes. The US parent company has NOL carry forwards for income taxes of approximately $4,941,000 at June 30, 2011, which may be available to reduce future years’ taxable income as NOLs can be carried forward up to 20 years from the year the loss is incurred. Management believes the realization of the benefits from these losses is uncertain due to the Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided for the US parent company.
Tong Gong is a Sino-foreign joint venture enterprise formed in the PRC subject to PRC income tax. According to the PRC government local tax bureau, Tong Gong was entitled to full income tax relief for two years commencing January 2005 and 15% for three years from 2007 to 2009. Effective January 1, 2008, the PRC government implemented new income tax rates with a maximum rate of 25%, under which Tong Gong is subject to a 12.5% income tax rate for 2008 and 2009, and 25% thereafter.
Effective February 13, 2009, Xing An became a foreign invested enterprise as a result of the reverse acquisition by the Company. Xing An is subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the six months ended June 30, 2011 and 2010:
2011
|
2010
|
|||||||
US statutory rates
|
34.0
|
%
|
34.0
|
%
|
||||
Tax rate difference
|
(10.9
|
)%
|
(10.0
|
)%
|
||||
Permanent difference on deferred tax
|
2.3
|
%
|
0.7
|
%
|
||||
Change tax rate on deferred tax
|
-
|
%
|
4.0
|
%
|
||||
Valuation allowance on US NOL
|
7.3
|
%
|
3.6
|
%
|
||||
Others
|
0.1
|
%
|
-
|
%
|
||||
Tax per financial statements
|
32.8
|
%
|
32.3
|
%
|
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended June 30, 2011 and 2010:
2011
|
2010
|
|||||||
US statutory rates
|
34.0
|
%
|
34.0
|
%
|
||||
Tax rate difference
|
1.5%
|
(10.2
|
)%
|
|||||
Permanent difference on deferred tax
|
(18.8)
|
%
|
0.9
|
%
|
||||
Change tax rate on deferred tax
|
-
|
%
|
-
|
%
|
||||
Valuation allowance on US NOL
|
(39.6)
|
%
|
4.5
|
%
|
||||
Others
|
(1.8)
|
%
|
-
|
%
|
||||
Tax per financial statements
|
(24.7)
|
%
|
29.2
|
%
|
The provisions for income tax for the six months ended June 30, 2011 and 2010 consisted of the following:
2011
|
2010
|
|||||||
Income tax expense - current
|
$
|
1,674,470
|
$
|
1,688,205
|
||||
Income tax expense (benefit) - deferred
|
112,573
|
200,281
|
||||||
Total income tax expense
|
$
|
1,787,043
|
$
|
1,888,486
|
The provisions for income tax for the three months ended June 30, 2011 and 2010 consisted of the following:
2011
|
2010
|
|||||||
Income tax expense - current
|
$
|
63,759
|
$
|
784,594
|
||||
Income tax expense (benefit) - deferred
|
20,631
|
(26,623)
|
||||||
Total income tax expense
|
$
|
84,390
|
$
|
757,971
|
15. MAJOR CUSTOMERS AND VENDORS
Two customers accounted for 82% and 16% of the Company’s sales for the six months ended June 30, 2011.
Four customers accounted for 53%, 24%, 12% and 11% of the Company’s sales for the six months ended June 30, 2010, respectively.
Two customers accounted for 74% and 26% of the Company’s sales for the three months ended June 30, 2011, respectively. Three customers accounted for 74%, 12% and 12% of the Company’s sales for the three months ended June 30, 2010, respectively. At June 30, 2011 and December 31, 2010, the total receivable balance due from these customers was $0 and $212,414, respectively.
There were no major vendors for the Company for the six months ended June 30, 2011 and 2010.
16. STATUTORY RESERVES
Pursuant to the corporate law of the PRC effective January 1, 2006, the Company is now only required to maintain one statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.
Surplus reserve fund
The Company is now required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.
The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
Common welfare fund
Common welfare fund is a voluntary fund that the Company can elect to transfer 5% to 10% of its net income, as determined under PRC accounting rules and regulations, to this fund. The Company did not make any contribution to this fund during the six months period ended June 30, 2011 and the year ended December 31, 2010.
This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation.
Non-Surplus reserve fund (Safety and Maintenance)
According to ruling No. 119 (2004) issued May 21, 2004, and amended ruling No. 168 (2005) on April 8, 2005 by the PRC Ministry of Finance (“MOF”) regarding “Accrual and Utilization of Coal Production Safety Expense” and “Criterion on Coal Mine Maintenance and Improvement”, the Company is required to accrue safety and maintenance expenses monthly to the cost of production. The amount of the accrual is determined based on management’s best estimates within the unit price range provided by MOF of PRC. Currently, Xing An accrues at RMB 8.7 ($1.27) per ton for safety expense and RMB 3 ($0.44) per ton for maintenance for the quantity of coal produced; and Tong Gong accrues at RMB 6 ($0.88) per ton for safety expense and RMB 8.7 ($1.27) per ton for maintenance for the quantity of coal produced. As defined under US GAAP, a liability for safety and maintenance expenses does not exist at the balance sheet date because there is no present obligation to transfer assets or to provide services as a result of any past transactions. Therefore, for financial reporting purposes, this reserve was recorded as an appropriation of retained earnings.
The statutory reserves were as follows as of June 30, 2011 and December 31, 2010:
2011
|
2010
|
|||||||
Statutory surplus reserve
|
$
|
3,221,531
|
$
|
3,187,265
|
||||
Safety and Maintenance reserve
|
8,539,609
|
7,349,339
|
||||||
Total statutory reserves
|
$
|
11,761,140
|
$
|
10,536,604
|
17. SHAREHOLDERS’ EQUITY
SHARES ISSUED THROUGH PRIVATE PLACEMENT
On January 7, 2011, U.S. China Mining Group, Inc. entered into a Securities Purchase Agreement with investors, pursuant to which the Company sold to the Investors, in a private placement transaction, 3,750,000 units at $4.00 per Unit. Each Unit is comprised of (i) one share of our common stock, par value $0.001 per share, and (ii) a five-year warrant (the “Investor Warrant”) to purchase 0.5 shares of our Common Stock at $6.80 per share. In connection with the closing of the Private Placement, we received net proceeds of $13,650,500 after payment of $1,349,500 of cash commissions to the Placement Agent, and other offering expenses and related costs in connection with the Private Placement. In addition, we issued to the Placement Agents five-year warrants to purchase 375,000 shares of our Common Stock, at $6.80 per share.
The Investor Warrants can be called by the Company for no consideration at any time after the shares of Common Stock underlying the Investor Warrants are registered for resale under an effective registration statement if the volume-weighted average trading price of the Common Stock for any 20 consecutive trading days equals or exceeds $12.00 per share and if the average trading volume during such 20-day period equals or exceeds 1,200,000. The Investor Warrants and Agent Warrants may be exercised in cash or pursuant to a cashless exercise; however the Investor Warrants may only be exercised by cashless exercise if the Warrant Shares have not been registered for resale in an effective registration statement within twelve (12) months of their issuance. The exercise price of the Investor Warrants and the Agent Warrants is subject to adjustment for stock splits, stock dividends, recapitalizations and the like.
The warrants are classified as equity instruments. The Company accounted for the warrants issued to the investors and placement agents based on the fair value method under ASC Topic 505. The fair value of the warrants was calculated using the Black Scholes Model and the following assumptions: estimated life of five years, volatility of 100%, risk free interest rate of 2.76%, and dividend yield of 0%. No estimate of forfeitures was made as the Company has a short history of granting options and warrants. The fair value of the warrants at grant date was $10,453,268.
In connection with the Private Placement, the Company, Placement Agent and the Investors entered into a Registration Rights Agreement on January 7, 2011. The Company has agreed to register for resale the total number of shares of Common Stock underlying the Units sold in the Private Placement (including such shares that are issuable upon the exercise of Investor Warrants and Agent Warrants), on a registration statement to be filed with the Securities and Exchange Commission (the “SEC”) on or prior to forty-five (45) days from the closing date of the Private Placement. The Company was to use its best efforts to have the registration statement declared effective within 150 days after the initial filing with the SEC or within 180 days if the registration statement is reviewed by the SEC. The Company shall also maintain the effectiveness of the registration statement until all of the securities covered by the registration statement may be sold by the investors under Rule 144 without any restriction (including volume restrictions).
In the event the registration statement has not been filed or declared effective within the prescribed time period or if the Company has failed to maintain the effectiveness of the registration statement as required, the Company shall pay to the Investors liquidated damages equal to 1.0% of the amount invested for each subsequent 30-day period until the registration statement becomes effective, up to a maximum of 10.0%, and prorated for any period of less than 30 days. On February 14, 2011, the Company filed registration statement with the SEC, which was declared effective as of 5:00 pm on March 24, 2011.
STOCK-BASED COMPENSATION PLAN
On March 11, 2011, the Company granted options to an employee under the Company’s 2009 stock option plan to purchase up to 50,000 shares of the Company’s common stock at $4.50 per share for 5 years. The options vest and become exercisable in two equal installments: the first six months from the option grant date and the second six months thereafter.
On March 10, 2009, the Company granted options to an independent director under the Company’s 2009 stock option plan to purchase up to 20,000 shares of the Company’s common stock at $6.30 per share for 5 years. The options vested and became exercisable in two equal installments: the first six months from the option grant date and the second six months thereafter. On March 3, 2010, the Company granted another 20,000 stock options to this director with exercise price of $9.30 per share and a term of 5 years. The options vested and become exercisable in two equal installments: the first six months from the option grant date and the second six months thereafter. On February 25, 2011, the Company granted another 20,000 stock options to this director with exercise price of $4.50 per share and a term of 5 years. The options vest and become exercisable in two equal installments: the first six months from the option grant date and the second six months thereafter.
Based on the fair value method under SFAS 123R (codified in FASB ASC Topic 718), the fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based upon market yields for US Treasury debt securities at a maturity near the term remaining on the option. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the historical volatility of the Company’s stock price. The expected life of an option grant is based on management’s estimate as no options have been exercised in the Plan to date. The fair value of each option grant to employees is calculated by the Black-Scholes method and is recognized as compensation expense over the vesting period of each stock option award. For stock options issued, the fair value was estimated at the date of grant using the following range of assumptions:
The options vested upon issuance and have a life of 5 years, with volatility of 100%, risk free interest rate of 3.76%, and dividend yield of 0%. No estimate of forfeitures was made as the Company has a short history of granting options.
The following table summarizes activities of these options:
Number
of
Shares
|
Average
Exercise
Price per Share
|
Weighted Average
Remaining
Contractual
Term in Years
|
||||||||||
Outstanding at January 1, 2010
|
75,000
|
5.61
|
4.19
|
|||||||||
Exercisable at January 1, 2010
|
65,000
|
|||||||||||
Granted
|
20,000
|
9.30
|
5.00
|
|||||||||
Exercised
|
-
|
-
|
-
|
|||||||||
Outstanding at December 31, 2010
|
95,000
|
6.39
|
3.40
|
|||||||||
Exercisable at December 31, 2010
|
85,000
|
|||||||||||
Granted
|
70,000
|
4.50
|
5.00
|
|||||||||
Exercised
|
-
|
-
|
-
|
|||||||||
Outstanding at June 30, 2011
|
165,000
|
$
|
5.59
|
3.65
|
||||||||
Exercisable at June 30, 2011
|
95,000
|
The Company recorded $125,528 and $64,345 of compensation expense for stock options during the six months ended June 30, 2011 and 2010, respectively. The Company recorded $89,188 and $35,260 of compensation expense for stock options during the three months ended June 30, 2011 and 2010, respectively. There were no options exercised during the six months ended June 30, 2011 and 2010.
WARRANTS ISSUED TO INVESTOR RELATIONS FIRMS
On April 19, 2010, the Company granted warrants to acquire 200,000 shares of the Company’s common stock, par value $0.001, at $9.50 per share to an investor relations (“IR”) firm. The warrants have a term of 5 years. The Company accounted for warrants issued to investor relations firm based on ASC 505-50 at each balance sheet and expense recorded based on the period elapsed at each balance sheet date, which is the date at which the counterparty’s performance is deemed to be completed for the period. The fair value of each warrant granted is estimated on the date of the grant using the Black-Scholes option pricing model under ASC 505-30-11 and is recognized as compensation expense over the service term of the investor relations agreement as it is a better matching of cost with services received. The warrants are classified as equity instruments and are exercisable into a fixed number of common shares. There is no commitment or requirement to change the quantity or terms based on conditions to the counterparty’s performance or market conditions. These warrants are non forfeitable. The fair value of the warrants was calculated using the following assumptions: estimated life of five years, volatility of 100%, risk free interest rate of 2.76%, and dividend yield of 0%. In January 2011, the Company terminated the IR service agreement with this IR firm, and accordingly, the unrecorded fair value of the warrants issued to this IR firm was fully expensed at termination date.
On January 18, 2011, the Company agreed to issue the warrants to another IR firm as follows:
For each six-month period, Warrants will be issued to purchase 20,000 shares at $6.00 per share. Warrants to purchase 20,000 shares for the first six months of service was issued by April 18, 2011 (the “Tranche 1 Warrant”) and will vest on July 18, 2011 and will expire on July 18, 2014. Warrants to purchase 20,000 shares for the second six months of service will be issued by October 18, 2011 and will vest on January 18, 2012 and will expire on January 18, 2015. Additionally, warrants to purchase 40,000 shares will be issued if the share price trades above $12 and the stock achieves an average daily trading volume (“ADTV”) of 50,000 for 30 days. These last warrants will be issued as soon as the milestone is met and will carry an exercise price of$6.80 and will vest immediately upon issuance and will expire three years from the date of issue. The Company accounted for warrants issued to this investor relations firm based on ASC 505-50 at each balance sheet date as described above. The warrants are classified as equity instruments and are exercisable into a fixed number of common shares. There is no commitment or requirement to change the quantity or terms based on conditions to the counterparty’s performance or market conditions. The fair value of the warrants for the Tranche 1 Warrant was calculated using the following assumptions: estimated life of five years, volatility of 100%, risk free interest rate of 2.76%, and dividend yield of 0%. The fair value of Tranche 1 Warrant to be issued at April 18, 2011 was $36,857.
The following table summarizes activity for the warrants to certain investor relations firms:
Number of
Shares
|
Average
Exercise
Price per Share
|
Weighed
Average
Remaining
Contractual
Term in Years
|
||||||||||
Outstanding at January 1, 2010
|
-
|
$
|
-
|
-
|
||||||||
Granted
|
200,000
|
9.50
|
5.00
|
|||||||||
Exercised
|
-
|
|||||||||||
Forfeited
|
-
|
|||||||||||
Outstanding at December 31, 2010
|
200,000
|
9.50
|
4.29
|
|||||||||
Exercisable at December 31, 2010
|
200,000
|
|||||||||||
Granted
|
-
|
|||||||||||
Exercised
|
-
|
|||||||||||
Forfeited
|
-
|
|||||||||||
Outstanding at June 30, 2011
|
200,000
|
9.50
|
4.04
|
|||||||||
Exercisable at June 30, 2011
|
200,000
|
9.50
|
3.79
|
The Company recorded $250,703 warrants expense during the six months ended June 30, 2011. There were no warrants exercised during the six months ended June 30, 2011.
18. CONTINGENCIES AND COMMITMENTS
The Company’s operations in the PRC are subject to considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company’s sales, purchases and expenses are denominated in RMB and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to effect the remittance.
For mining rights granted to the Company prior to September 1, 2006, the Company is required to pay for all of the coal underlying such mining rights within five years from the date such mining rights are approved by the HNLRAB unless specific good cause exists for extension. For mining rights granted on or after September 1, 2006, full payment is required within ten years. The Company’s operations may be suspended if it is not able to make full payments within such periods.
The Company leases its principal executive office in the United States, which headquarters some administrative staff and oversees its operations in the PRC. The lease agreement for this office is from September 1, 2008 to August 31, 2011, for annual rent of $57,516, and the Company has the option to renew this lease.
Our principal executive office in the PRC is located in the provincial capital of Harbin and is approximately 7,000 square feet. We have no written agreement or formal arrangement pertaining to the use of this office, as it is owned by Mr. Hongwen Li, our President and Chief Executive Officer, who is making the office available to us rent-free. This office houses our administrative and clerical staff. If necessary, we believe that we would be able to find replacement office space without unreasonable expense or delay.
The Company leases the office for Xing An in Jiagedaqi City and certain office equipment under long-term lease agreements with monthly payments of approximately $1,800 (RMB 12,500) expiring July 30, 2015. The operating lease agreements provide the Company pays certain operating expenses applicable to the leased premises.
The Company’s rental expense for the six months ended June 30, 2011 and 2010 was approximately $20,000 and $20,000, respectively. The Company’s rental expense for the three months ended June 30, 2011 and 2010 was approximately $20,000 and $20,000, respectively.
As of June 30, 2011, the future minimum annual lease payments required under operating leases, are as follows by years:
2012
|
$
|
31,186
|
||
2013
|
21,600
|
|||
2014
|
21,600
|
|||
2015
|
21,600
|
|||
2016
|
1,800
|
|||
Total
|
$
|
97,786
|
19. ACQUISITION OF LIUJIAQU COAL MINE
On May 19, 2010, the Company entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") to acquire the Erdos City Dongsheng District Liujiaqu Coal Mine ("Liujiaqu Coal Mine") located in the Inner Mongolia region of the PRC. The acquisition of Liujiaqu Coal Mine had not been completed as of June 30, 2011. The parties are reviewing the potential impact on the transaction of new municipal policy and requirements of Erdos City and have not scheduled a date for completion of the transaction. The Company did not make any deposit for this acquisition.
Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q and other reports filed by Registrant from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, Registrant’s management as well as estimates and assumptions made by Registrant’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to Registrant or Registrant’s management identify forward-looking statements. Such statements reflect the current view of Registrant with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the risks contained in the section of this report entitled “Risk Factors”) relating to Registrant’s industry, Registrant’s operations and results of operations, and any businesses that Registrant may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although Registrant believes that the expectations reflected in the forward-looking statements are reasonable, Registrant cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Registrant does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.
In this Form 10-Q, references to “we”, “our”, “us”, the “Company”, “SGZH” or the “Registrant” refer to U.S. China Mining Group, Inc.
OVERVIEW
We are a company engaged in coal production and sales by exploring, assembling, assessing, permitting, developing and mining coal properties in the People’s Republic of China (“PRC”). After obtaining permits from the Heilongjiang Province National Land and Resources Administration Bureau and the Heilongjiang Province Coal Production Safety Bureau, we extract coal from properties to which we have the right to mine capped amounts of coal, and then sell most of the coal on a per metric ton (“ton”) basis for cash on delivery, primarily to power plants, cement factories, wholesalers and individuals for home heating. We do not own the coal mines, but have mining rights to extract a capped amount of coal from a mine as determined by government authorized mining engineers and approved by the Heilongjiang Department of Land and Resources. Through the end of March 2008, our business consisted of the operations of Tong Gong coal mine in northern PRC, located approximately 175 km southwest of the city of Heihe in the Heilongjiang Province.
Pursuant to a stock purchase agreement that we entered into on December 31, 2007, on April 4, 2008, we added two coal mines to our operations when we completed the acquisition of two mining companies under common ownership in the PRC, Hong Yuan and Sheng Yu. In connection with that transaction, the Xing An shareholders received 8 million shares of SGZH common stock and $30 million in cash, which is treated as a dividend pursuant to the accounting treatment applied to the transaction. The purchase price was determined by multiplying the number of shares of SGZH outstanding just prior to the transaction (400,000 Series A preferred shares and 6,932,582 common shares) valued at the average stock price of SGZH stock two days before and two days after the Agreement date. After the closing of this acquisition transaction, the Xing An Shareholders then owned 53% of the combined company. Accordingly, for accounting purposes, the transaction is accounted for as a reverse acquisition of the Company by Xing An. Xing An operates two coal mines, the Hong Yuan and Sheng Yu mines, located in Mohe City in Heilongjiang Province.
On October 15, 2008, we paid $18 million of the dividend to the Xing An Shareholders in accordance with the terms of the Stock Purchase Agreement. We paid the remaining $12 million of the dividend to the Xing An Shareholders in April 2009.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which were prepared in accordance with US defined GAAP. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.
Basis of Presentations
Our financial statements are prepared in accordance with “US GAAP” and the requirements of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”).
Method of Accounting
We maintain our general ledger and journals with the accrual method of accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by us conform to US GAAP and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.
Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of SGZH and its subsidiaries, Tong Gong, and Xing An. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
In preparing financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates.
Accounts Receivable
The Company’s policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
Inventory
Inventory consists of coal extracted from the ground that is available for delivery to customers, as well as extracted coal which has been removed from the ground but not yet processed through a wash plant. Coal inventories are valued at the lower of average cost or market, cost being determined on a first in, first out method, and include labor costs and all expenditures directly related to the removal of coal.
Prepaid Mining Rights
Prepaid mining rights represent that portion of the mining rights for which the Company has previously paid. Prepaid mining rights are expensed based on actual production volume during the period.
Goodwill
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.
Asset Retirement Cost and Obligation
The Company uses Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations, codified in FASB ASC Topic 410. This Statement generally requires that the Company’s legal obligations associated with the retirement of long-lived assets are recognized at fair value at the time the obligations are incurred. Obligations are incurred at the time development of a mine commences for underground mines or construction begins for support facilities, refuse areas and slurry ponds. The obligation’s fair value is determined using DCF techniques and is accreted over time to its expected settlement value. Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying amount of the related long-lived asset. Amortization of the related asset is calculated on a unit-of-production method by amortizing the total estimated cost over the salable reserves determined under SEC Industry Guide 7, multiplied by the production during the period. The Company reviews its asset retirement obligation at least annually and makes necessary adjustments for permit changes as granted by state authorities and for revisions of estimates of the amount and timing of costs. For ongoing operations, adjustments to the liability result in an adjustment to the corresponding asset.
Property, Plant, and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Costs of mine development, expansion of the capacity of or extending the life of our mine are capitalized and principally amortized using the units-of-production method over the actual tons of coal produced directly benefiting from the capital expenditure. Mobile mining equipment and other fixed assets are stated at cost and depreciated on a straight-line basis over the estimated useful lives ranging from 10 to 15 years. Leasehold improvements are amortized over their estimated useful lives or the term of the lease, whichever is shorter. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are generally expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.
The estimated useful lives for each category of the property, plant and equipment are as follows:
Plant and Machinery
|
10-15 Years
|
Motor Vehicles
|
5 Years
|
Building and Mining Structure
|
10-20 Years
|
Mining structure includes the main and auxiliary mine shafts, underground tunnels, and other integrant mining infrastructure. Depreciation for the mine shafts is provided to write off the cost of the mining structure using the units of production method based on the salable reserves determined under SEC Industry Guide 7.
Revenue Recognition
The Company's revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104, codified in FASB ASC Topic 605. Coal sales revenues include sales to customers of coal produced at Company operations and brokered coal sales, where coal is purchased from other coal mining companies and sold at a higher rate to third parties. Sales revenue is recognized when a formal arrangement exists, which is generally represented by a contract between the Company and the buyer; the price is fixed or determinable; title has passed to the buyer, which generally is at the time of delivery; no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.
In brokered coal sales, the customers either pick up the coal directly from the other mining premises or the coal is shipped directly from the other coal mining premises. Purchases and shipments of the coal from other mining companies are arranged at the same time. Revenue of brokered coal is recognized at the time of delivery.
Sales revenue represents the invoiced value of coal, net of value-added tax (“VAT”). All of the Company’s coal sold in the PRC is subject to a value-added tax of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product. The Company records VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.
Cost of Goods Sold
Cost of goods sold consists primarily of amortization of the mining rights, direct material, direct labor, depreciation of mining preparation plants such as the underground tunnel and the major mine well and related expenses, which are directly attributable to the production of coal. Write-down of inventory to lower of cost or market is also recorded in cost of goods sold.
Foreign Currency Translation and Comprehensive Income (Loss)
The functional currency of Tong Gong and Xing An is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated into United States Dollars (“USD” or “$”) as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period.
Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet date.
The fluctuation of exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China (“PBOC”) or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the PBOC.
The Company uses SFAS No. 130 “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.
Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires use of the “management approach” model for segment reporting, codified in FASB ASC Topic 280. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
SFAS 131 has no effect on the Company’s financial statements as substantially all of its operations are conducted in one industry segment - coal mining.
Recent Accounting Pronouncements
In June 2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income. Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. In addition, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently assessing the effect that the adoption of this pronouncement will have on its financial statements.
In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. The Company adopted this ASU on January 1, 2011.
In December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted this ASU on January 1, 2011. As of June 30, 2011, the Company did not entered into any business combination transaction.
RESULTS OF OPERATIONS
Comparison of the six months ended June 30, 2011 and 2010
The following table sets forth the results of our operations for the six months ended June 30 in each of the years indicated as a percentage of net sales:
2011
|
2010
|
|||||||||||||||
$
|
% of Sales
|
$
|
% of Sales
|
|||||||||||||
Sales
|
33,623,283
|
100
|
%
|
22,524,065
|
100
|
%
|
||||||||||
Cost of Goods Sold
|
20,868,336
|
62
|
%
|
13,816,910
|
61
|
%
|
||||||||||
Gross Profit
|
12,754,947
|
38
|
%
|
8,707,155
|
39
|
%
|
||||||||||
Operating Expenses
|
7,281,795
|
22
|
%
|
2,721,137
|
12
|
%
|
||||||||||
Income from Operations
|
5,473,152
|
16
|
%
|
5,986,018
|
27
|
%
|
||||||||||
Other Expenses, net
|
(23,271)
|
-
|
%
|
(139,523)
|
(1)
|
%
|
||||||||||
Income tax
|
1,787,043
|
5
|
%
|
1,888,486
|
8
|
%
|
||||||||||
Net Income
|
3,662,838
|
11
|
%
|
3,958,009
|
18
|
%
|
Coal mining production, brokerage and sales at our three mines, in tons, for the periods indicated:
Tong Gong Coal Mine
|
||||||||||||||||||||||||
Salable Production (tons)
|
Brokerage (tons)
|
Sales (tons)
|
||||||||||||||||||||||
2011
|
2010
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||
Six months ended June 30
|
105,593
|
138,216
|
150,000
|
50,000
|
255,593
|
188,216
|
Xing An Coal Mines (Hong Yuan and Sheng Yu)
|
||||||||||||||||||||||||
Salable Production (tons)
|
Brokerage (tons)
|
Sales (tons)
|
||||||||||||||||||||||
2011
|
2010
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||
Six months ended June 30
|
439,291
|
148,818
|
-
|
189,975
|
417,987
|
291,395
|
Sales. Our revenues are derived from the sales of coal. During the six months ended June 30, 2011, we had sales of $33.62 million compared to $22.52 million for the 2010 period, an increase of approximately 49%. Since the end of 2009, Xing An Mines commenced mine maintenance and retrofit projects resulting in decreased production. The projects will take about 21 months to complete and the mines partially resumed production in November of 2010. These mine improvements will improve efficiencies, lower costs and greatly enhance our growth and profitability once completed. The average selling price per ton for the six months ended June 30, 2011 was $49.92 as compared to $47.2 for the 2010 period, an increase of 6%. Our total sales volume was 673,580 tons for the six months ended June 30, 2011, compared to 479,611 tons for the 2010 period, an increase of approximately 40%, resulting from Xing An Mines resuming partial production since November 2010.
Cost of Goods Sold. Cost of goods sold for the six months ended June 30, 2011 was $20.87 million, an increase of $7.05 million or approximately 51%, from $13.82 million for the 2010 period. Our total production for the six months ended June 30, 2011 was 544,884 tons, compared to 287,034 tons produced for the 2010 period, an increase of 257,850 tons. Cost of goods sold as a percentage of sales was 62% for the 2011 period, compared to 61% in the 2010 period. Our average cost per ton was $30.98 in the six months ended June 30, 2011, compared to $28.95 in the 2010 period. This slight increase was primarily attributable to overall inflation in China that caused us increased labor and certain material cost that we used for the mining.
Gross Profit. Gross profit was $12.75 million for the six months ended June 30, 2011 compared to $8.71 million for the 2010 period, an increase of $4.05 million. Our gross profit as a percentage of sales was approximately 38% and 39% for the six months ended June 30, 2011 and 2010, respectively. Our gross profit margin remains relatively stable.
Operating Expenses. Operating expenses totaled $7.28 million for the six months ended June 30, 2011 compared to $2.72 million for the 2010 period, an increase of $4.56 million or approximately 168%. The increase was attributable to 1) increase in transportation infrastructure construction fee for both Tong Gong and Xing An, which was a new fee levied by the provincial government starting in 2010 and charged at RMB 10 per ton based on sales volume; 2) coal mine security special purpose fee for Tong Gong, a new fee levied by the local authority starting in June of 2010 and charged at RMB 10 per ton based on sales volume; 3) coal price adjusting fund for Tong Gong, a new fee levied by the local authority starting in June of 2010 and charged at RMB 20 per ton based on sales volume; 4) largely increased land use tax for Xing An required by local tax authority from the second quarter of 2011, which was approximately $1.3 million; 5) largely increased machine accessories expenses including the expenditures for materials that used to fix machines and mining assets, which was approximately $1.29 million; 6) increased payroll and welfare expenses, and electricity fee as a result of overall price inflation in China; and 7) noncash expense of $250,703 for the fair value of warrants issued to the IR firm.
Net Income. Our net income for the six months ended June 30, 2011 was $3.66 million compared to net income of $3.96 million for the 2010 period, a decrease of $0.30 million. This was mainly attributed to the significant increase of our operating expenses. Net income as a percentage of sales decreased from 18% for the 2010 period to 11% for the 2011 period.
Comparison of the three months ended June 30, 2011 and 2010
The following table sets forth the results of our operations for the three months ended June 30 in each of the years indicated as a percentage of net sales:
2011
|
2010
|
|||||||||||||||
$
|
% of Sales
|
$
|
% of Sales
|
|||||||||||||
Sales
|
11,387,336
|
100
|
%
|
9,965,946
|
100
|
%
|
||||||||||
Cost of Goods Sold
|
7,324,833
|
64
|
%
|
6,091,287
|
61
|
%
|
||||||||||
Gross Profit
|
4,062,503
|
36
|
%
|
3,874,659
|
39
|
%
|
||||||||||
Operating Expenses
|
4,399,050
|
39
|
%
|
1,219,518
|
12
|
%
|
||||||||||
Income from Operations
|
(336,547)
|
(3)
|
%
|
2,655,141
|
27
|
%
|
||||||||||
Other Expenses, net
|
(5,509)
|
-
|
%
|
(64,462)
|
(1)
|
%
|
||||||||||
Income tax
|
84,390
|
(1)
|
%
|
757,971
|
8
|
%
|
||||||||||
Net Income
|
(426,446)
|
(4)
|
%
|
1,832,708
|
18
|
%
|
Coal mining production, brokerage and sales at our three mines, in tons, for the periods indicated:
Tong Gong Coal Mine
|
||||||||||||||||||||||||
Salable Production (tons)
|
Brokerage (tons)
|
Sales (tons)
|
||||||||||||||||||||||
2011
|
2010
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||
Three months ended June 30
|
42,959
|
49,310
|
75,000
|
50,000
|
117,959
|
99,310
|
Xing An Coal Mines (Hong Yuan and Sheng Yu)
|
||||||||||||||||||||||||
Salable Production (tons)
|
Brokerage (tons)
|
Sales (tons)
|
||||||||||||||||||||||
2011
|
2010
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||
Three months ended June 30
|
75,105
|
|
-
|
159,679
|
98,052
|
116,179
|
Sales. Our revenues are derived from the sales of coal. During the three months ended June 30, 2011, we had sales of $11.39 million compared to $9.97 million for the 2010 period, an increase of approximately 14%. Since the end of 2009, Xing An Mines commenced mine maintenance and retrofit projects resulting in decreased production. The projects will take about 21 months to complete and the mines partially resumed production in November of 2010. These mine improvements will improve efficiencies, lower costs and greatly enhance our growth and profitability once completed. The average selling price per ton for the three months ended June 30, 2011 was $52.37 as compared to $46.25 for the 2010 period, an increase of 13%. Our total sales volume was 216,011 tons for the three months ended June 30, 2011, compared to 215,489 tons for the 2010 period.
Cost of Goods Sold. Cost of goods sold for the three months ended June 30, 2011 was $7.32 million, an increase of $1.23 million or approximately 20%, from $6.09 million for the 2010 period. Our total production for the three months ended June 30, 2011 was 118,064 tons, compared to 49,310 tons produced for the 2010 period, an increase of 68,754 tons. Cost of goods sold as a percentage of sales was 64% for the 2011 period, compared to 61% in the 2010 period. Our average cost per ton was $33.71 in the three months ended June 30, 2011, compared to $28.27 in the 2010 period. This increase was primarily due to overall inflation in China.
Gross Profit. Gross profit was $4.06 million for the three months ended June 30, 2011 compared to $3.87 million for the 2010 period, an increase of $0.19 million. Our gross profit as a percentage of sales was approximately 36% and 39% for the three months ended June 30, 2011 and 2010, respectively.
Operating Expenses. Operating expenses totaled $4.40 million for the three months ended June 30, 2011 compared to $1.22 million for the 2010 period, an increase of $3.18 million or approximately 261%. The increase was attributable to 1) increase in transportation infrastructure construction fee for both Tong Gong and Xing An, which was a new fee levied by the provincial government starting in 2010 and charged at RMB 10 per ton based on sales volume; 2) coal mine security special purpose fee for Tong Gong, a new fee levied by the local authority starting in June of 2010 and charged at RMB 10 per ton based on sales volume; 3) coal price adjusting fund for Tong Gong, a new fee levied by the local authority starting in June of 2010 and charged at RMB 20 per ton based on sales volume; 4) largely increased land use tax of Xing An required by the local tax authority starting from the second quarter of 2011, which was approximately $1.3 million; 5) largely increased machine accessories expenses including the expenditures for materials that used to fix the machines and mining assets, which was approximately $1.29 million; and 6) increased payroll and welfare expenses, and electricity fee as a result of overall price inflation in China.
Net Income (loss). Our net loss for the three months ended June 30, 2011 was $0.43 million compared to net income of $1.83 million for the 2010 period, a decrease of $2.26 million. This was mainly attributed to the increase of our operating expense. Net income (loss) as a percentage of sales decreased from 18% for the 2010 period to (4)% for the 2011 period.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Comparison of the six months ended June 30, 2011 and 2010
As of June 30, 2011, we had cash and cash equivalents of $45.63 million. Our working capital was approximately $50.11 million. The ratio of current assets to current liabilities was 15.06:1 at June 30, 2011.
The following is a summary of cash provided by or used in each of the indicated types of activities during the six months ended June 30, 2011 and 2010:
2011
|
2010
|
|||||||
Cash provided by (used in):
|
||||||||
Operating Activities
|
$
|
(4,864,108)
|
$
|
3,627,635
|
||||
Investing Activities
|
$
|
(7,620,598)
|
$
|
(2,729,148
|
)
|
|||
Financing Activities
|
$
|
10,850,500
|
|
$
|
525,777
|
Net cash used in operating activities was $4.86 million for the six months ended June 30, 2011 as compared to net cash provided by operating activities of $3.63 million in the 2010 period. The increase in cash outflow resulted primarily from the payment on accounts payable, accrued liabilities, other payables and taxes payable; increase in other receivables outstanding which resulted from a deposit of $4.57 million to the potential acquisition target, and decrease of net income for 2011 period.
On January 20, 2011, we signed an advance agreement with an individual owner of a coal mine located in Guizhou China. Pursuant to the agreement, we advanced a refundable RMB 30 million (approximately $4,575,000, the maximum amount provided under the agreement) to an escrow account to be used for improvements to this mine. In addition, we intend to undertake the acquisition of the mine from the individual owner if the owner can complete the necessary restructuring of the mine as appropriate for acquisition and the new mining company after the restructuring has received all government required permits for normal production. If the potential acquisition goes forward, the escrow amount will be treated as partial consideration. If not, the amount will be reimbursed to us.
Net cash used in investing activities was $7.62 million for the six months ended June 30, 2011 as compared to $2.73 million in the 2010 period. During the six months ended June 30, 2011, we paid approximately $6.80 million for construction in progress for the Xing An mines retrofit, and $1.04 million for increasing of fixed assets. In the six months ended June 30, 2010, we paid approximately $1.86 million for completion of an office building of Xing An in Mohe City, and approximately $0.86 million for construction in progress for Xing An mines’ retrofit projects.
Net cash provided by financing activities was $10.85 million in the six months ended June 30, 2011 as compared to $0.53 million in 2010 period. The increase in cash inflow from financing activities for the 2011 period was primarily due to proceeds from an issuance of common stock of $13.65 million, partially offset by $2.8 million repayment of loan to shareholder, while in the 2010 period, we had $0.53 million of advances from a shareholder.
Based on our current expectations, we believe our cash and equivalents, and cash generated from operations will satisfy our working capital needs, and other liquidity requirements associated with our existing operations through the remainder of this year. We will continue to seek opportunities to expand our existing mining operations and acquire additional coal mining rights, and we expect to finance such acquisitions through the issuance of debt or equity securities. Failure to obtain such financing could have a material adverse effect on our plans for expansion.
We do not believe inflation has had a negative impact on our results of operations.
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.
The following tables summarize our contractual obligations as of June 30, 2011, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
|
Payments Due by Period
|
|||||||||||||||||||
|
Total
|
Less than 1
year
|
1-3 Years
|
3-5 Years
|
5 Years +
|
|||||||||||||||
|
||||||||||||||||||||
Contractual Obligations:
|
||||||||||||||||||||
Operating Leases
|
$
|
97,786
|
$
|
31,186
|
$
|
43,200
|
$
|
23,400
|
$
|
-
|
||||||||||
Mining Rights
|
897,589
|
-
|
-
|
-
|
897,589
|
|||||||||||||||
Total Contractual Obligations:
|
$
|
995,375
|
$
|
45,565
|
$
|
43,200
|
$
|
23,400
|
$
|
897,589
|
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Not applicable.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports 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 its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of June 30, 2011, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective at the reasonable assurance level.
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the three months ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
We are not aware of any material existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our current directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to us.
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form
10-K as of and for the year ended December 31, 2010.
We have not sold any equity securities during the period ended June 30, 2011 that were not previously disclosed in a current report on Form 8-K.
Exhibit No. | Description |
31.1
|
Section 302 Certification by the Corporation’s Chief Executive Officer. *
|
31.2
|
Section 302 Certification by the Corporation’s Chief Financial Officer. *
|
32.1
|
Section 906 Certification by the Corporation’s Chief Executive Officer. *
|
32.2
|
Section 906 Certification by the Corporation’s Chief Financial Officer. *
|
* Filed herewith.
Pursuant to the requirements of section 13 or 15(d) 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.
U.S. CHINA MINING GROUP, INC.
(Registrant)
|
|||
Date: August 15, 2011
|
By:
|
/s/ Hongwen Li
|
|
Hongwen Li
|
|||
Chief Executive Officer
|
|||
Date: August 15, 2011
|
By:
|
/s/ Xinyu Peng
|
|
Xinyu Peng
|
|||
Chief Financial Officer
|
|||
EXHIBIT INDEX
Exhibit No. | Description |
31.1
|
Section 302 Certification by the Corporation’s Chief Executive Officer. *
|
31.2
|
Section 302 Certification by the Corporation’s Chief Financial Officer. *
|
32.1
|
Section 906 Certification by the Corporation’s Chief Executive Officer. *
|
32.2
|
Section 906 Certification by the Corporation’s Chief Financial Officer. *
|
* Filed herewith.